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Lululemon's Long-Term Strategies Bode Well: What's Ahead?

Zacks Equity Research

Yoga-inspired athletic apparel retailer, Lululemon Athletica Inc. LULU has been doing well in the past one month driven by the solid top and bottom line performance in first-quarter fiscal 2017, along with its ongoing efforts to strengthen online business. Further, the recently announced ivivva remodeling and its strategy for 2020 bode well. Further, this Zacks Rank #3 (Hold) stock is supported by a long-term earnings growth rate of 12.6% and a Growth Style Score of “A”, which justifies growth prospects.

Notably, Lululemon’s shares substantially outpaced the broader industry in the past one month. The stock gained a solid 15.1%, while the Zacks categorized Textile – Apparel industry grew 5.9%. The company’s stock performance in the past month also marks a significant recovery from the dismal year-to-date trends, which stemmed from weak comps and eCommerce growth since Mar 2017.

What’s Driving the Stock?

Following weak results in fourth-quarter fiscal 2016 due to slowed eCommerce sales trends, the company put in due efforts to build upon eCommerce sales. This helped the company post sales and earnings beat in first-quarter fiscal 2017, while results also improved year over year.

Lululemon has the ability to drive impressive top-line growth by focusing on the eCommerce retailing channel and investing in the innovation of new product categories. Driven by efforts to deliver an enhanced digital experience, the company passed the 2 million subscribers mark and created highest ever engagement online alongside increased conversion. Consequently, eCommerce comps in first-quarter fiscal 2017.

Furthermore, eCommerce comps have improved in the low-double digits range so far in the fiscal second quarter, leading the company to provide solid comps guidance for the second quarter and fiscal 2017. With further strengthening of eCommerce business, the company guided eCommerce comps growth in the low to mid-teens range for the fiscal second quarter.

Moreover, the company has an unmatched level of long-term growth opportunity based on its potential to expand square footage and enhance business globally. The company remains focused on expanding operations outside the U.S. and Canada, particularly in the underpenetrated European and Asian markets. Then company sees significant near-term opportunity in the Asian markets as its recently opened stores in Japan and China are resonating well with customers. Notably, its stores in China have outperformed all store metrics and are on track to rake in a $1,600 in annual sales per square foot.

Driven by this optimism, the company plans to expand international base with the opening of 50 new stores in fiscal 2017. Further, it expects to generate $1 billion revenues from international locations in the next few years.

Moreover, the company is poised to benefit from the ivivva remodeling. Lululemon plans to evolve ivivva – its activewear brand, into an eCommerce focused business with only eight ivivva stores operating across North America. The company plans to close about 40 of the total 55 ivivva stores and convert nearly half of the remaining stores into Lululemon branded stores. The company will also shut down 16 ivivva showrooms and other temporary stores, in order to streamline corporate infrastructure. It expects these closures to be completed by the end of third-quarter fiscal 2017. This strategy will enable it to continue offering the brand to its young patrons globally. While the company expects to incur restructuring costs for this move throughout fiscal 2017, it anticipates the strategy to be accretive to productivity, comps and earnings.

Last but not the least, the company is on track to double revenues to about $4 billion and more than double its earnings by 2020. This is likely to be achieved through the company’s focus on product innovation, building store fleet in North America, expanding digital business and international expansion. Notably, the company expects its eCommerce business to account for over one-third of its sales and international business (including eCommerce) to contribute 20–25% of the total sales by 2020.

Possible Deterrents

While the company delivered solid fiscal first quarter results, overall company comps declined 1% on both reported and constant-dollar basis in first-quarter fiscal 2017, with in-store comps down 2% and flat direct-to-consumer sales. While the company’s efforts to build upon eCommerce sales are paying off, in-store comps continue to be weak due to the soft traffic trends in the retail sector. This is likely to have a bearing on the company’s otherwise strong comps guidance for second-quarter and fiscal 2017. Further, the company tweaked its revenue forecast for fiscal 2017.

Bottom Line

While the weak comps trend and a tweaked revenue forecast remain concerns for the company, we believe its growth efforts and focus on building upon eCommerce growth can aid in countering these headwinds. Moreover, the company’s strategies suggest that it is on track to deliver sustainable growth over the long term. So, we believe holding on to the stock is a good idea at the moment.

Stocks to Consider

Better-ranked stocks in the same industry include G-III Apparel Group, Ltd. GIII, Guess' Inc. GES and PVH Corp. PVH. While G-III Apparel sports a Zacks Rank #1 (Strong Buy), both Guess' and PVH Corp. carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel, with long-term earnings per share growth rate of 15%, has surged 26.4% in the last three months.

Guess’ has increased 11.6% in the last three months. The stock has a long-term growth rate of 17.5%.

PVH Corp. has witnessed a 10.7% growth in the last three months. The stock has a long-term growth rate of 11.2%.

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