For Immediate Release
Chicago, IL – April 3, 2019 – Zacks Equity Research Lululemon Athletica LULU as the Bull of the Day, Avon Products AVP as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Caterpillar CAT and Boeing BA.
Here is a synopsis of all four stocks:
Bull of the Day:
The retail world is evolving and for companies who have failed to adapt to the changing landscape, it’s been a painful stretch of disappointing earnings, store closures and in some cases – bankruptcy.
For those companies that have simultaneously figured out how to generate brand loyalty and navigate the modern marketplace of online and in-person selling, these are the best of times.
Lululemon Athletica definitely has it figured out right now.
LULU’s most recent quarterly report was one of those true blowouts, and the sharp rally in the shares to new all-time highs is evidence that investors loved what LULU management had to say.
Not only did they beat the Zacks Consensus Earnings Estimate, turning in a net of $1.85/share vs. an expected $1.74/share, as well as $1.2B in revenue – a 26% increase over the year ago period – they also reported an increase in same store sales and gross margins, raised 2019 guidance for earnings and revenues and announced additional share buyback plans.
The same-store sales number is impressive because Lululemon opened 14 new locations during the quarter and didn’t close any stores. Not only have the new stores been performing well, the stores that have been open for more than a year are also continuing to sell more product than ever.
Recently, we’ve seen same-store sales numbers rising at some retailers because they’re closing underperforming locations. Bringing up the same-store number while growing is a much more impressive feat.
Another problem area we’ve seen lately with some retailers is that although sales might be holding steady or even increasing, it’s due to discount pricing that erodes gross margins.
Even more impressive than the raw sales number from LULU is the fact that they also increased gross margins by 110 basis points. Management’s earnings presentation credited “lower product costs and a favorable mix of higher margin product, and lower markdowns.”
That’s a diplomatic way of saying that LULU customers are willing to pay full price for LULU’s garments. There’s big enough demand for the comfortable and attractive clothes that they don’t have to rely on discounts to move excess merchandise. It’s quite the opposite, in fact. Many of Lulu’s most popular items sell out quickly when they are first introduced, adding to the brand cache and encouraging customers to move quickly rather than waiting for discounts.
In full-year 2018, LULU increased sales by 70% in Asia and 55% in Europe, also an impressive achievement in today’s retail clothing environment. Consumer tastes around the world are notoriously fickle. The hottest look in one global region is often out of fashion in another.
Lululemon is hot everywhere.
LULU issued guidance for both fiscal Q1 and full-year 2019 that was above previous expectations, resulting in a slew of positive analyst revisions and a Zacks Rank #1 (Strong Buy).
The company expects to earn $0.68-0.70/share in Q1 and $4.48-4.55/share in fiscal 2019, nearly $1/share higher than previous estimates. In response, all 14 of the analysts included in our calculations have increased their full-year estimates in the past 7 days, and the consensus of $4.62/share now stands even a bit above the high end of the company’s own range.
The improvement in results will come from strategic investments in LULU’s digital platform and supply chain improvements as well as a renewed focus on developing products for the half of the population that’s not already wearing Lululemon – men.
While the garments from the company that invented the “athleisure” category have been popular with women for years, until now they’ve been somewhat of a niche brand for men. The company is planning to change that as well with the addition of NFL Quarterback Nick Foles as a brand ambassador and an increased range of garments intended for males.
Bear of the Day:
Today’s “Bull of the Day” detailed the successes of a clothing manufacturer and retailer that is not only surviving but thriving in the digital age, by selling products with huge consumer demand, strong brand cache and an innovative strategy.
The “Bear of the Day” today is headed in the opposite direction.
Founded in 1886 as the “California Perfume Company,” Avon Products has been selling fragrances and beauty products through independent representatives for over 130 years.
For decades, the “Avon Lady,” as the company’s independent representatives were commonly known, was a ubiquitous presence in American neighborhoods and homes, selling wares that were quite popular and not readily available through other channels.
Avon was also the beneficiary of some unintended good luck when it was discovered in the 1970’s that its “Skin So Soft” line of moisturizing cosmetics also functioned as excellent – and pleasant smelling – insect repellent.
During the golden years for Avon, its multi-level marketing structure was very effective and many of the company’s representatives earned a healthy living selling fairly unique and in-demand products.
Times have changed however, and while Avon boasts more than 6 million independent sales representatives – second only to the undisputed MLM king, Amway – many of them sell only a miniscule amount of product to family and friends (who presumably would be buying similar products somewhere anyway.)
As is common in Multi-Level Marketing enterprises, Avon representatives commonly complain that the only way to make significant profit in the program is by recruiting new reps rather than actually selling product.
Claims that the company is a “pyramid scheme” are completely untrue – Avon sells actual physical products and its business practices are entirely legitimate – but the model does have obvious limitations as there is a finite number of people who are willing to become representatives.
Due to enormous competition in the health/wellness and beauty products industries, revenues and earnings at Avon have been steadily declining for several years. Whereas once Avon held near-monopoly power over the markets for cosmetics, customers now have countless options for similar products at every price-point, from deeply discounted cosmetics sold at grocery and drug stores all the way to very high-end options that boast about the quality of their raw materials, the ethics of their manufacturing and testing practices and most recently, even cannabidiol (CBD) extracts in their products.
Though earnings have been consistently disappointing and estimates have been declining – resulting in a Zacks Rank #5 (Strong Sell) - Avon shares are up over 85% so far in 2019, due mostly to rumors (that have been confirmed by Avon on its investor relations website) that the company is in talks to be acquired by Brazilian cosmetics giant Natura.
Investing in a company that is performing well on its own and therefore might be a takeover candidate is a fundamentally sound idea. Investing in a company who’s only hope is a buyout is simply gambling.
With a current market price under $3/share and a potential deal on the horizon, it doesn’t make much sense to be short Avon – there’s too little to gain and too much to lose.
Positive Manufacturing Numbers Put Caterpillar, Boeing as Zacks Rank Buys
Monday offered the markets strong manufacturing numbers for both the US's and China's economies, boosting international equity markets, and easing concerns over a global economic slowdown. S&P 500 is up 1.2% this week, the London Exchange index: FTSE 100 rallied 1.7%, and the Shanghai SE index traded up 2.7% this week. These optimistic March manufacturing results have lifted the US’s biggest exporters including Caterpillar, which has seen 3.3% gains so far this week, and Boeing which has rallied 2.8% in trading this week.
Below you can see that China’s manufacturing index had been trailing down for the last year leading investors to believe that the Chinese economy was on track for a downturn. The positive March manufacturing results puts optimism back into the Chinese economy and its investors.
Caterpillar is the world’s leading manufacturer of construction and mining equipment. CAT posted top-line revenue of $54.7 billion with 59% of that coming from outside the US, making them very sensitive to international economic changes as well as any geopolitical adjustments. The trade war with China (23% of CAT’s revenue from Asia) along with concerns about a global economic slowdown has caused this stock to trade effectively sideways for the last 52 weeks. Despite all of these impending anxieties, Caterpillar grew its top-line by over 20% and it’s adjusted bottom-line by 66%. CAT is expected to grow its EPS by 9.09% in 2019 and another 8.55% in 2020.
Right now could be a great buying opportunity for this international steamroller. CAT is trading at one of its lowest P/E multiples since 2013, positioning this security to be a shrewd buy. One thing that you should consider before investing in CAT, is the potential of an economic slowdown both domestically and internationally as well as the possibility of the China trade deal going south. With a 1.47 beta this stock is quite susceptible to outside pressures. Caterpillar offers a 2.45% dividend yield, adding a small safeguard for an investor. If China and the US are able to come to a favorable trade agreement and the world economy can keep its head above water, I believe that CAT would see substantial gains – Zacks Rank #2 (Buy).
Boeing is the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. BA is the top US exporter, supporting commercial and government customers in more than 150 countries. Making them also susceptible to geopolitical issues and global economic fragility.
BA has been in the news quite a bit recently with their 737 MAX airplane experiencing two devastating crashes. The cause of the accidents has been determined to be an issue with its stall prevention system, pushing the plane’s nose down. BA took a nosedive after the most recent crash, because of implied systemic problems with the aircraft, dropping over 11% in 2 days. This issue is being resolved as we speak and Boeing is hoping to have these planes back in the air in the coming weeks.
This drop has given investors an opportunity to get into this aerospace behemoth at a discount. BA is currently trading at 18x forward earnings which is one of the lowest multiples this stock has seen since mid-2017. With expected EPS growth north of 25% this multiple is more than equitable. Earnings estimates keep getting pushed further and further up by analysts, bumping this stock into Zacks Rank #1 (Strong Buy).
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