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Lululemon (LULU) Down After Q4 Earnings: Is it Temporary?

Zacks Equity Research

Yoga-inspired athletic apparel company, Lululemon Athletica Inc. LULU seems to be hit hard by the earnings lag reported in fourth-quarter fiscal 2016 and the bleak outlook for first-quarter fiscal 2017. Though the company surpassed the top line and bottom line in fiscal fourth quarter, management stated that comparable store sales (comps) remained soft thus far in the fiscal first quarter mainly due to weak store footfall and lower eCommerce conversion rates.

Evidently, shares of Lululemon dropped 21.4% since the earnings release on Mar 29. Further, the stock lost 19.8% year to date, significantly wider than the Zacks categorized Textile-Apparel Manufacturing industry’s decline of 7.1%.

Moreover, the investors’ loss of confidence in the stock is evident from the negative estimate revisions in the last 30 days primarily on account of the soft outlook. The Zacks Consensus Estimate for fiscal first quarter, fiscal 2017 and fiscal 2018 declined 11 cents, 25 cents and 36 cents, respectively, to 28 cents, $2.33 and $2.63, in the last 30 days.

Further, the current Zacks Consensus Estimate of 28 cents for fiscal first quarter reflects a 5.6% decline from the prior-year quarter.

More on the Slump

As we can clearly see, the key reason for the decline in share price and estimates following the earnings is the company’s soft outlook. Management stated that it began fiscal 2017 on a soft note, due to unfavorable merchandise assortment and issues related to visual merchandising, which weighed on online sales. This, in turn, led to weak comps trend for the fiscal first quarter so far. Of late, Lululemon has also been failing to meet customers’ demand of offering variety in color and range.

Moreover, the company has been grappling with severe competition from sportswear big-wigs like Nike Inc. NKE and Under Armour Inc. UAA, which emerged as rivals by expanding in the athleisure space.  Apart from this, e-tailer Amazon.com Inc. AMZN is also extending its activewear offerings, thus intensifying the competition. All these factors, along with the sluggish mall traffic in the overall retail space and wavering demand for athletic wear, reduced traffic for the company (both in store and online).

Is this Temporary?

Likely so, because Lululemon expects its strategies on product assortment improvements, website enhancements and acceleration of omni-channel model to strengthen eCommerce and store trends. Based on these growth drivers, the company envisions fiscal 2017 sales to range from $2.55–$2.60 billion, based on low single-digits comps growth on a constant dollar basis.

Also, the company remains committed toward achieving its goal of doubling revenues to about $4 billion and more than double its earnings by 2020. In line with these plans, Lululemon is progressing on its four distinct growth strategies, including product innovation, building store fleet in North America, strengthening digital business and international expansion.

Moreover, the company remains keen on expanding store base overseas and anticipates its international business, including eCommerce, to account for nearly 20–25% of the total sales by 2020. We believe that there remains room to expand across the U.S. and in the underpenetrated European and Asian markets as well. Thus, the company seems well positioned for continuous growth and improved profitability, going forward.

Lululemon currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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