lululemon athletica inc. LULU is one of the investor favorite stocks in the Textile - Apparel industry, courtesy of sound fundamentals as well as merchandising policies and investments to achieve growth across sales channels. The Power of Three strategic plan — which aims at doubling sales in the men’s and digital categories, and quadrupling sales in the international unit by 2023 — is also aiding the company’s results.
The company’s bull run can be attributed to its stellar surprise history, which continued in second-quarter fiscal 2019. Sales and earnings surpassed estimates and improved year over year in the reported quarter. This marked its 10th consecutive bottom-line beat while the top line surpassed estimates for the 15th straight quarter. Results were bolstered by positive response to merchandise assortments along with continued investments to drive business growth. Moreover, solid comparable sales (comps) and store additions boosted performance. (Read: lululemon Tops Q2 Earnings & Sales Estimates, Stock Up)
Further, lululemon is likely to witness strong momentum across the business while executing growth strategies in the future. Consequently, management provided a solid view for the third quarter and raised the guidance for fiscal 2019 despite the anticipated impacts of tariff increases and airfreight costs.
These positives have aided the stock to outperform the industry year to date. The company has surged 63.4% compared with the industry’s growth of 16.8% during the same period.
The Zacks Rank #2 (Buy) stock has also comfortably outperformed the Consumer Discretionary sector and the S&P 500 Index that grew 7.8% and 0.7%, respectively. Further, the stock hit a 52-week high of $204.44 on Sep 6.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Looking more closely at the broader industry, we note that shares of this Vancouver, Canada-based company have outpaced its peers. Notably, the Guess Inc. GES has witnessed a decline of 8.9% in the year-to-date period while Delta Apparel Inc. DLA and Crocs Inc. CROX have gained 36.4% and 8%, respectively.
Let’s delve deeper and find out reasons that are placing lululemon ahead of its peers.
Factors Aiding Stock Growth
The company is benefiting from strength in its Women’s business. Further, it is poised to deliver robust growth over the next several years, backed by its venture in the men’s line as well as digital and international expansion. From the product standpoint, the company is looking for opportunities to expand beyond athleisure wear.
One category, which the company is testing, is self-care, which includes products such as deodorants, moisturizers and shampoo. Tests for the category were rolled out in 50 stores and online in mid-June 2019. Consumer response to innovations in the self-care category looks encouraging so far. Moreover, management has a strong pipeline of product launches lined up under the category in fiscal 2019.
Additionally, the company intends to tap into customers’ growing preference for athleisure by launching new product lines related to activities like yoga, running and training. Expansion of office luggage and travel bags, and continued partnerships are some of the other product-related initiatives. It expects to witness adequate growth potential in the outerwear category. Therefore, the company plans to introduce waterproof wool this fall. It also relaunched the Metal Vent collection under the ‘Science of Feel’ approach.
Furthermore, the company is looking for new and exciting ways to connect with customers, as clear from the testing of its loyalty program. It has expanded its online-only size and color offerings for men and women, which is a testament to its efforts to attract digital guests. Moreover, it expanded the “buy online pick up in store” capability across all stores in North America, reflecting an improvement from 150 stores at the end of the first quarter. The company also improved its mobile point-of-sale capabilities to help guests complete their purchases from anywhere in the store.
Driven by such prudent efforts, it delivered strong comps across channels during second-quarter fiscal 2019. Total comps, including comparable store sales and direct-to-consumer (DTC) sales, advanced 15% and rose 17% in constant dollars. Speaking solely of the digital channel, comps improved 31% in constant dollar.
During the fiscal second quarter, e-commerce sales contributed nearly 25% to total revenues. Consistent rise in comps indicates growth in traffic and conversion rates across stores as well as online. Management plans to roll out new features across its digital ecosystem to boost consumer engagement.
Moreover, lululemon has already built a strong customer base in the United States and Canada, where it sees growth potential in years ahead. Additionally, the company is poised to boost international revenues by executing expansion plans in China, Asia Pacific and EMEA, which are its key growth regions. Of these, it is poised for impressive growth in China in fiscal 2019.
The company recorded nearly 68% market share growth in China in the fiscal second quarter. Growth in China was a key contributor to the 33% increase in revenues in the Asia Pacific region in the reported quarter. In Europe, the company delivered 35% market share growth in the fiscal second quarter.
These apart, we believe there is still momentum left in the stock of this leading yoga and athleisure apparel company as it has a long-term impressive earnings growth rate of 18.2% and a VGM Score of B.
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