We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
lululemon athletica inc. (LULU - Free Report) is one stock that has been trending up the charts even in the COVID-ridden market, owing to its resilient online business as well as strong fundamentals. The e-commerce business, which has gained more prominence due to consumers’ shift to online purchases amid the pandemic, has been a key contributor to retaining its positive earnings trend in the past few quarters. Moreover, the reopening of stores and the recent MIRROR buyout are expected to aid the top line in the second half of fiscal 2020.
However, management expects a decline in adjusted earnings for the third quarter, before increasing modestly in the fourth quarter. Also, lululemon expects deleverage in SG&A expenses in the back half of fiscal 2020. This may keep margins under pressure.
Year to date, this Zacks Rank #3 (Hold) stock has gained 46.3% against the industry’s 10.8% decline.
Factors Driving the Upside Story
The coronavirus pandemic has transformed the retail industry, putting e-commerce in the forefront as consumers’ preference is shifting to online shopping. lululemon’s second-quarter fiscal 2020 results reflected strong direct-to-consumer (e-commerce) revenues, which offset the significant decline in revenues at company-operated stores. The company’s direct-to-consumer sales through its website and app jumped 155% on a reported basis and 157% in constant dollars in the fiscal second quarter. Notably, e-commerce revenues contributed $554.3 million or 61.4% of total sales in the fiscal second quarter, whereas it contributed 24.6% in the year-ago quarter.
The company’s e-commerce business benefited from a healthy mix of new guests, existing e-commerce guests and historically retail-only guests now shopping online. Notably, e-commerce sales increased more than 130% in China and more than 160% in Europe in the fiscal second quarter.
The company expects to capture the growing online demand and ensure robust shopping experience through its accelerated e-commerce investments this year. It has been investing in developing sites, building transactional omni functionality and increasing fulfillment capabilities. Although the company planned these investments for the next two years, the sudden acceleration in e-commerce demand has led to prioritizing and pulling forward these investments.
In second-quarter fiscal 2020, lululemon reported better-than-expected top and bottom lines. On a constant-dollar basis, revenues increased 3%. Its top line primarily benefited from strong e-commerce revenues, offset by significant decline in revenues at company-operated stores. Its retail business is gaining from the accelerated expansion of e-commerce and digital sweat offerings. Its products crafted with technical innovation and performance fabrics are likely to continue aiding results due to the rise in work from home and versatile lifestyle, owing to the pandemic.
Moreover, management expects the recent MIRROR buyout to improve its at-home fitness offerings. Although management remains cautiously optimistic about the second half of fiscal 2020, it believes 2020 will be an inflection point for the company and the retail industry, given the shift in trends to working and sweating at home with an increased focus on healthy living.
With the easing of coronavirus-led restrictions, lululemon reopened nearly 97% of its stores across the globe. The reopened stores are operating at 75% of last year’s volume, on average. While the company expects productivity for the reopened stores to remain consistent with the current levels through the rest of the fiscal, it expects sequential top-line growth in the fiscal third and fourth quarters. Moreover, physical stores are a crucial part of the company’s ecosystem. It is not only highly productive from sales perspective but also facilitates e-commerce transactions through its ship-from-store and buy online pickup in store capabilities.
Although the company did not provide guidance for fiscal 2020, it expects the revenue trend to improve sequentially in the second half. Including the MIRROR buyout, it expects total revenues to increase in mid to high-single digits in the fiscal third quarter and in the high-single to low-double digits in the fourth quarter. The revenue growth expectations for the second half are based on the current productivity level of 75% at reopened stores and assume no increment in the quarters ahead. In the digital business, revenues are expected to remain higher than the pre-pandemic levels of 20-30% growth.
However, digital sales in the fiscal second half are likely to be moderate compared with the second quarter of fiscal 2020 as the majority of the company-operated stores have reopened. Nonetheless, it expects the MIRROR buyout to contribute more than $150 million to revenues in fiscal 2020.
COVID Effects to Persist
Despite the top-line gains, the company continues to be pressed with soft gross margins due to increased distribution center-related costs and higher markdowns, which are more than offsetting the leverage in product team costs, decline in occupancy and depreciation expenses. Further, higher SG&A expenses are weighing on operating margin and the bottom line.
In the second half of fiscal 2020, the company expects gross margin to improve relative to the first half. However, gross margin in the fiscal third quarter is expected to decline on a year-over-year basis. Meanwhile, gross margin for the fiscal fourth quarter is likely to be flat to modestly up compared with the prior-year quarter. The gross margin view includes savings in non-merchandise expenses of $40 million.
Further, it expects continued SG&A expenses deleverage in the back half of fiscal 2020 primarily due to investments in select growth initiatives — particularly digital, and as store traffic remains below the last year’s levels. Further, the MIRROR buyout will contribute to SG&A expense deleverage in the fiscal third and fourth quarters.
Consequently, it expects adjusted earnings to decline 10-15% in the fiscal third quarter and increase modestly in the fiscal fourth quarter. Including the MIRROR buyout, adjusted earnings are likely to decline 15-20% in the fiscal third quarter and reflect a modest decline in the fiscal fourth quarter. For fiscal 2020, the company expects the MIRROR acquisition to be modestly dilutive to earnings at less than 5%.
Wrapping Up
While the company is optimistic about the momentum in business due to robust e-commerce trends and the reopening of the majority of stores, some impacts of the coronavirus outbreak are likely to persist. However, the company’s expected long-term earnings growth rate of 20% and a Growth Score of B indicate that the stock is in for more upside in the future.
Duluth Holdings Inc. (DLTH - Free Report) delivered an earnings surprise of 94.3%, on average, in the trailing four quarters. It presently has a Zacks Rank #2 (Buy).
Ralph Lauren Corporation (RL - Free Report) , also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 4.8%.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.
Image: Bigstock
Here's Why lululemon (LULU) Stock Shows Promise Despite Woes
lululemon athletica inc. (LULU - Free Report) is one stock that has been trending up the charts even in the COVID-ridden market, owing to its resilient online business as well as strong fundamentals. The e-commerce business, which has gained more prominence due to consumers’ shift to online purchases amid the pandemic, has been a key contributor to retaining its positive earnings trend in the past few quarters. Moreover, the reopening of stores and the recent MIRROR buyout are expected to aid the top line in the second half of fiscal 2020.
However, management expects a decline in adjusted earnings for the third quarter, before increasing modestly in the fourth quarter. Also, lululemon expects deleverage in SG&A expenses in the back half of fiscal 2020. This may keep margins under pressure.
Year to date, this Zacks Rank #3 (Hold) stock has gained 46.3% against the industry’s 10.8% decline.
Factors Driving the Upside Story
The coronavirus pandemic has transformed the retail industry, putting e-commerce in the forefront as consumers’ preference is shifting to online shopping. lululemon’s second-quarter fiscal 2020 results reflected strong direct-to-consumer (e-commerce) revenues, which offset the significant decline in revenues at company-operated stores. The company’s direct-to-consumer sales through its website and app jumped 155% on a reported basis and 157% in constant dollars in the fiscal second quarter. Notably, e-commerce revenues contributed $554.3 million or 61.4% of total sales in the fiscal second quarter, whereas it contributed 24.6% in the year-ago quarter.
The company’s e-commerce business benefited from a healthy mix of new guests, existing e-commerce guests and historically retail-only guests now shopping online. Notably, e-commerce sales increased more than 130% in China and more than 160% in Europe in the fiscal second quarter.
The company expects to capture the growing online demand and ensure robust shopping experience through its accelerated e-commerce investments this year. It has been investing in developing sites, building transactional omni functionality and increasing fulfillment capabilities. Although the company planned these investments for the next two years, the sudden acceleration in e-commerce demand has led to prioritizing and pulling forward these investments.
In second-quarter fiscal 2020, lululemon reported better-than-expected top and bottom lines. On a constant-dollar basis, revenues increased 3%. Its top line primarily benefited from strong e-commerce revenues, offset by significant decline in revenues at company-operated stores. Its retail business is gaining from the accelerated expansion of e-commerce and digital sweat offerings. Its products crafted with technical innovation and performance fabrics are likely to continue aiding results due to the rise in work from home and versatile lifestyle, owing to the pandemic.
Moreover, management expects the recent MIRROR buyout to improve its at-home fitness offerings. Although management remains cautiously optimistic about the second half of fiscal 2020, it believes 2020 will be an inflection point for the company and the retail industry, given the shift in trends to working and sweating at home with an increased focus on healthy living.
With the easing of coronavirus-led restrictions, lululemon reopened nearly 97% of its stores across the globe. The reopened stores are operating at 75% of last year’s volume, on average. While the company expects productivity for the reopened stores to remain consistent with the current levels through the rest of the fiscal, it expects sequential top-line growth in the fiscal third and fourth quarters. Moreover, physical stores are a crucial part of the company’s ecosystem. It is not only highly productive from sales perspective but also facilitates e-commerce transactions through its ship-from-store and buy online pickup in store capabilities.
Although the company did not provide guidance for fiscal 2020, it expects the revenue trend to improve sequentially in the second half. Including the MIRROR buyout, it expects total revenues to increase in mid to high-single digits in the fiscal third quarter and in the high-single to low-double digits in the fourth quarter. The revenue growth expectations for the second half are based on the current productivity level of 75% at reopened stores and assume no increment in the quarters ahead. In the digital business, revenues are expected to remain higher than the pre-pandemic levels of 20-30% growth.
However, digital sales in the fiscal second half are likely to be moderate compared with the second quarter of fiscal 2020 as the majority of the company-operated stores have reopened. Nonetheless, it expects the MIRROR buyout to contribute more than $150 million to revenues in fiscal 2020.
COVID Effects to Persist
Despite the top-line gains, the company continues to be pressed with soft gross margins due to increased distribution center-related costs and higher markdowns, which are more than offsetting the leverage in product team costs, decline in occupancy and depreciation expenses. Further, higher SG&A expenses are weighing on operating margin and the bottom line.
In the second half of fiscal 2020, the company expects gross margin to improve relative to the first half. However, gross margin in the fiscal third quarter is expected to decline on a year-over-year basis. Meanwhile, gross margin for the fiscal fourth quarter is likely to be flat to modestly up compared with the prior-year quarter. The gross margin view includes savings in non-merchandise expenses of $40 million.
Further, it expects continued SG&A expenses deleverage in the back half of fiscal 2020 primarily due to investments in select growth initiatives — particularly digital, and as store traffic remains below the last year’s levels. Further, the MIRROR buyout will contribute to SG&A expense deleverage in the fiscal third and fourth quarters.
Consequently, it expects adjusted earnings to decline 10-15% in the fiscal third quarter and increase modestly in the fiscal fourth quarter. Including the MIRROR buyout, adjusted earnings are likely to decline 15-20% in the fiscal third quarter and reflect a modest decline in the fiscal fourth quarter. For fiscal 2020, the company expects the MIRROR acquisition to be modestly dilutive to earnings at less than 5%.
Wrapping Up
While the company is optimistic about the momentum in business due to robust e-commerce trends and the reopening of the majority of stores, some impacts of the coronavirus outbreak are likely to persist. However, the company’s expected long-term earnings growth rate of 20% and a Growth Score of B indicate that the stock is in for more upside in the future.
Looking for Favorable Stocks? Check These
Crocs, Inc. (CROX - Free Report) delivered an earnings surprise of 191.8%, on average, in the trailing four quarters. The company sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Duluth Holdings Inc. (DLTH - Free Report) delivered an earnings surprise of 94.3%, on average, in the trailing four quarters. It presently has a Zacks Rank #2 (Buy).
Ralph Lauren Corporation (RL - Free Report) , also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 4.8%.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.
Click here for the 6 trades >>