lululemon athletica inc. LULU displayed significant growth over the years, on the back of robust quarterly performances, which testify its smooth progress on the strategy for 2020. The company’s growth strategy mainly focuses on digital and international expansion, enabling it to deliver on targets for 2020 and boost shareholder value.
Clearly, the stock of this yoga-inspired retailer has surged 91.2% in the past year, significantly outperforming the industry’s growth of 16.8%. Moreover, this Zacks Rank #1 (Strong Buy) stock has gained about 16.7% since reporting stellar fourth-quarter fiscal 2018 results on Mar 27. Notably, the company’s fiscal fourth quarter marked the eighth consecutive earnings beat while sales topped estimates for the 13th straight quarter.
The fiscal fourth-quarter results reflected a solid holiday season, backed by positive response to merchandise assortments along with continued investments to drive business growth. 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 first quarter and fiscal 2019.
Let’s now delve deeper and find out factors that are likely to help retain the uptrend in lululemon’s stock.
Factors Narrating lululemon’s Growth Potential
As part of efforts its 2020 strategy, lululemon is focused on enhancing the e-commerce retailing channel, and investing in the innovation of product categories and bringing improvements to its website. As a result, traffic at e-commerce sites rose more than 30% while conversion increased in a low single digit. Direct-to-consumer (DTC) comps surged 37% (or an increase of 39% in constant dollars) in the fiscal fourth quarter. E-commerce contributed $344 million or nearly 30% to total sales in the fiscal fourth quarter.
Moreover, e-commerce penetration reached 26% in fiscal 2018, ahead of the targeted 25% for fiscal 2020. With continued progress on e-commerce strategy, it remains on track to deliver $4 billion in revenues by 2020.
The company also has an unmatched level of opportunity to expand square footage and enhance business globally. It remains focused on expanding operations outside the United States and Canada, particularly in the underpenetrated Europe and Asia markets. This is evident from total market growth of more than 70% and nearly 60% recorded in Asia and Europe, respectively, in the fiscal fourth quarter. Particularly, the company witnessed solid e-commerce growth in China, wherein revenues improved 140% in the fiscal fourth quarter and 150% for fiscal 2018. Apart from China, lululemon’s growth efforts in Asia were quite evident from the opening of its first store in Osaka, Japan, and its first airport store in Hong Kong.
In Europe, the company’s brand is resonating well with customers. It attracted guests in Berlin with a new store in the Mitte district. Additionally, it opened the first store in Amsterdam. Moreover, lululemon plans to expand digital reach in international markets with the launch of local sites in Japan, France and Germany. Overall, the company plans to expand the international base by opening 25-30 stores in fiscal 2019.
These efforts place the company on track to attain the target of doubling revenues to about $4 billion, with earnings growth of more than double. Further, it expects e-commerce to account for more than one-third of sales by 2020.
Notably, in fiscal 2018, the company accomplished three of the targets for fiscal 2020, two years ahead of the plan. Operating margin in fiscal 2018 was 21.5%, gross margin was just over 55% and e-commerce penetration improved to 26% (a notch higher than the targeted 20-25% penetration by 2020). This clearly shows that lululemon is likely to successfully deliver on its goals for fiscal 2020, reflecting consistent growth and improved profitability. The company is likely to provide additional growth plans for the next five years at its Analyst Meet to be held in April 2019.
Clearly, this Vancouver-based athletic apparel company has significant momentum left, driven by growth efforts and strong position in the market. This view is further supported by its impressive long-term earnings growth rate of 18% and a Growth Score of A.
Other Top-Ranked Stocks From the Same Industry
G-III Apparel Group, LTD. GIII has an expected long-term earnings growth rate of 15%. Moreover, it currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Columbia Sportswear Company COLM, also a Zacks Rank #1 stock, has an expected long term earnings growth rate of 10.9%.
Ralph Lauren Corporation RL carries a Zacks Rank #2 (Buy) at present and has expected long-term earnings growth rate of 10.3%.
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