Lululemon (LULU): Can Growth Plans Battle Currency Woes?

Lululemon Athletica Inc.’s LULU ship has been sailing on the back of its strong financial results and strategic growth efforts. Shares of the company have surged 26.3% on a year-to-date basis, further highlighting its solid momentum.

Lululemon recently posted impressive first-quarter fiscal 2016 results, wherein earnings met our estimate, while sales surpassed the same. Moreover, both top and bottom lines improved year over year.

While earnings gained from sustained top-line momentum, better-than-expected gross margin and efficient inventory management, revenues were fuelled by strong comparable store sales (comps) growth as well as expansion of the company’s store base. Further, management provided an encouraging outlook for the second quarter as well as the fiscal year, as it expects this optimism to continue, underscoring Lululemon’s solid prospects.

Coming to the company’s inherent strength and growth strategies, it is one of the leading yoga-inspired athletic apparel and accessories retailers, with operations across North America. The company boasts a solid market position supported by its superior product designs and premium pricing.

We are impressed with the company’s favorable demographic and secular trends that ensure top-line growth over the longer term. Also, Lululemon’s strategy for 2020 bodes well, per which, it aims to double its revenues to about $4 billion and more than double its earnings by 2020.

To achieve these targets, the company outlined four distinct growth strategies, including product innovation, building store fleet in North America, digital business as well as international expansion. Clearly, these plans position the company well for sustained growth and improved profitability over the next five years.  

While these factors augur well for Lululemon, it remains prone to unfavorable currency movements, which also impacted quarterly performance. Despite the heartening fiscal 2016 outlook, the company’s results are expected to be hurt by currency fluctuations. Evidently, management expects SG&A deleverage in the fiscal year, partially due to currency movements, which again poses a concern.

Zacks Rank

Lululemon currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Delta Apparel Inc. DLA, with a Zacks Rank #1 (Strong Buy) and Perry Ellis International Inc. PERY, with a Zacks Rank #2 (Buy). Another well-ranked stock in the related apparel/shoe industry is The Children's Place, Inc. PLCE, with a Zacks Rank #2.

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