4 Reasons Why lululemon (LULU) Must Be in Your Portfolio

lululemon athletica inc. LULU has been an investors’ favorite for long, courtesy of its consistent earnings record. The company’s second-quarter fiscal 2018 results marked a continuation of this trend, driven by broad-based growth across all categories, channels and geographies. Moreover, the company’s progress on its strategy for 2020, with a stringent focus on digital and international growth, bodes well.

Notably, this Vancouver-based athletic apparel company has gained a whopping 148.3% in a year, outperforming the industry’s rally of 33.4%.

Let’s take a look at the factors that are likely to keep lululemon on the growth path going ahead.

Strategy for 2020 on Track

lululemon is progressing well with its strategy for 2020, by which it aims to double its revenues to about $4 billion and more than double its earnings. To achieve these targets, management outlined four distinct growth strategies — product innovation, development of the store fleet in North America, digital business expansion and international expansion.

E-commerce Drives Sales

With more and more customers turning to online portals, lululemon is strongly focused on enhancing the e-commerce retailing channel, investing in innovation of product categories and bringing improvements to its website. It expects this channel to account for over one-third of its sales by 2020. Notably, its digital business continues to gain from the site re-launch in the third quarter of fiscal 2017, delivering a double-digit increase in conversion rate in second-quarter fiscal 2018.

Driven by the ongoing strength in e-commerce, traffic at the company’s site improved more than 20%. This led e-commerce comps to surge 48% (an increase of 47% in constant dollars) in the fiscal second quarter.

Further, the expansion of omni-channel capabilities complements its digital strategies. As part of this, the company caters in-store demand from e-commerce inventory. Moreover, its ‘ship from store’ capability is gaining traction. It is also on track to roll out the ‘buy-online pick-up in-store’ functionality in the second half of fiscal 2018.

Potential for International Expansion

With regard to international expansion, the company remains committed to expanding its store base overseas and expects its international business, including e-commerce, to account for nearly 20-25% of total sales by 2020. It remains focused on expanding operations outside the United States and Canada, particularly in the underpenetrated European and Asian markets.

As part of its expansion in Asia, the company introduced WeChat store in China in the fiscal second quarter, and is on track to launch e-commerce sites in Korea and Japan in late fiscal 2018. In Europe, its brand is resonating well with customers. It opened its first store in Sweden. The company also attracted guests in London, with another successful Sweatlife festival. Overall, it plans to expand the international base by opening 20-25 international stores in fiscal 2018.

Robust Q2 Performance, Strong FY18 View

Second-quarter fiscal 2018 results marked its sixth consecutive earnings beat and 11th straight positive sales surprise. The results reflected broad-based growth across all categories, channels and geographies. The company also witnessed significant comps growth driven by traffic growth across channels, led by the success of its strategy to acquire guests. Notably, guest acquisition increased 30% in the fiscal second quarter, significantly driving traffic growth across channels.

lululemon athletica inc. Price, Consensus and EPS Surprise

lululemon athletica inc. Price, Consensus and EPS Surprise | lululemon athletica inc. Quote

The company expects the momentum from the first and second quarters of fiscal 2018 to continue in the fiscal third quarter. Consequently, management provided a solid view for the fiscal third quarter and raised its guidance for fiscal 2018. lululemon envisions earnings of 65-67 cents per share for the fiscal third quarter. Earnings for the fiscal are now projected to be $3.45-$3.53 per share compared with the previous guidance of 3.10-$3.18.

Bottom Line

Backed by these efforts and robust surprise trend, the company looks well-positioned for persistent growth and improved profitability over the next five years. Further, this Zacks Rank #1 (Strong Buy) company’s long-term impressive earnings growth rate of 19.2% and a Growth Score of A support our view.

Looking for More Trending Picks?

Some other top-ranked stocks in the same industry are Columbia Sportswear Company COLM, Ralph Lauren Corp. RL and Michael Kors Holdings Limited KORS, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Columbia Sportswear pulled off an average positive earnings surprise of 79.3% in the last four quarters. The company has long-term earnings growth rate of 10.8%.

Ralph Lauren, with an impressive earnings growth rate of 9.6%, delivered an average positive earnings surprise of 7.2% in the trailing four quarters.

Michael Kors has long-term earnings growth rate of 6.3%. Further, the company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average beat of 35.7%.

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