Lululemon (LULU) Stock Moving Up the Charts: Time to Hold?

Lululemon Athletica Inc. LULU has been benefiting from progress on its strategy for 2020 and focus on ivivva’s remodeling. Moreover, solid third-quarter results and recent strong holiday season sales have raised the company’s expectations for 2018 and beyond. These factors have driven the company’s shares, outperforming the industry lately.

Shares of Lululemon surged 33.8%, surpassing the industry’s growth of 15.9% in the past three months. Let’s analyze the pros and cons of this Zacks Rank #3 (Hold) company.

A Solid Holiday Season Suggests More Growth

Latest on Lululemon’s list of achievements was a splendid holiday season show. The company delivered strong sales this holiday season driven by accelerating trends across all parts of its businesses. Also, the company looks forward to its business strength and current trends that are likely to sustain throughout 2018 and beyond. This led to raised revenues and earnings forecast for fourth-quarter fiscal 2017.

The company now anticipates fourth-quarter net revenues in the range of $905-$915 million compared with $870-$885 million anticipated earlier. Also, it envisions earnings to lie in a band of $1.24-$1.26 per share while adjusted earnings per share (excluding effects of restructuring ivivva operations) are anticipated in the range of $1.25-$1.27. This marks a considerable improvement from the previously projected earnings of $1.18-$1.21 per share and adjusted earnings of $1.19-$1.22 per share.

Estimates Trend Up

Driven by the solid holiday sales, the Zacks Consensus Estimate for the current quarter and fiscal years witnessed an uptrend in the last seven days. Estimate for the fourth quarter and fiscal 2017 improved by 2 cents  to $1.26 per share and $2.52 per share, respectively. Moreover, estimate for fiscal 2018 moved up by 4 cents to $2.98 per share.

Sturdy Surprise Trend

Lululemon’s robust surprise trend can be attributed to the advancement of its strategy for 2020 along with its focus on ivivva’s remodeling. While third-quarter fiscal 2017 results marked the company’s third consecutive earnings beat, sales topped estimates for the eighth straight quarter. Results were fueled by consumers’ favorable response to Lululemon’s product innovations, solid direct-to-consumer (DTC) sales, focus on supply chain initiatives and commitment to its long-term strategy. Additionally, comps growth was aided by strength in e-commerce.

Strategy for 2020 & Ivivva Remodeling

Lululemon is on track with the strategic endeavors for 2020, which is likely to double revenues to about $4 billion and more than double its earnings. In order to achieve these targets management had outlined four distinct growth strategies such as product innovation, building store fleet in North America, expanding digital business and international expansion.

The company expects e-commerce channel to account for over one-third of its sales by 2020. Moreover, its international business, including e-commerce, is likely to account for nearly 20-25% of the total sales by 2020. Thus, Lululemon believes it is well-positioned for persistent growth and improved profitability over the next five years.

Simultaneously, the company is focused on remodeling of iviva, its activewear brand, into an e-commerce focused business with only eight iviva stores operating across North America. Also, it revealed plans to close about 40 of the total 55 iviva stores and convert nearly half of the remaining stores into lululemon branded stores. Notably, this strategy will enable the company to continue offering the brand to its young patrons, globally. The company anticipates the strategy to be accretive to productivity, comps and earnings throughout fiscal 2017.

E-commerce Growth

Lululemon has been putting lot of efforts to enhance e-commerce retailing channels through new product category innovations and improvements in websites. Driven by its efforts to deliver an enhanced digital experience, DTC comps surged 26% (an increase of 25% in constant dollars) in third-quarter fiscal 2017. Comps growth at DTC stemmed from double-digit increases in traffic and transactions, alongside solid conversions this year. Furthermore, the company anticipates these process developments to aid double-digit growth for digital business in the fourth quarter, and into 2018 and beyond.

Bottom Line

While all is well with the company, Lululemon expects to record a significant income tax charge in the fourth quarter related to a one-time deemed repatriation tax on foreign earnings. Further, rise in competition has been a threat to company margins. Nonetheless, the company’s strategies and earnings trend point to more uninterrupted growth for the company ahead.

Do Textile-Apparel Stocks Grab Your Attention? Check These

Interested investors may consider G-III Apparel Group LTD. GIII, Tailored Brands Inc. TLRD and Columbia Sportswear Company COLM. While G-III Apparel and Tailored Brands flaunts a Zacks Rank #1 (Strong Buy), Columbia Sportswear carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel delivered an average positive earnings surprise of 6% in the trailing four quarters. It has a long-term earnings growth rate of 15%.

Tailored Brands pulled off an average positive earnings surprise of 7.7% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 16.5%.

Columbia Sportswear delivered an average positive earnings surprise of 14.3% in the trailing four quarters. It has a long-term earnings growth rate of 9.9%.

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