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Here's Why lululemon (LULU) Dipped Despite Upbeat Forecast

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lululemon athletica inc. (LULU - Free Report) provided upbeat guidance for fourth-quarter fiscal 2020 after witnessing a robust performance in the holiday season. The company now expects sales and earnings to be at the higher end of the previously issued range. It earlier predicted sales growth of mid-to-high teens and adjusted earnings growth of mid-single digits for fourth-quarter fiscal 2020. The revised view came just ahead of the ICR Conference to be held soon.

The company’s revised guidance reflects strong holiday season sales, driven by ongoing investments in its brand and robust demand during the period. Also, its investments in digital capabilities, including the recent buyout of at-home fitness company MIRROR, aided sales in the quarter. Earlier, lululemon predicted the MIRROR buyout to contribute more than $150 million to revenues in fiscal 2020. Further, the company is confident about the execution of its Power of Three growth plan, which should aid growth in 2021.

However, shares of lululemon did not react positively to the upbeat guidance. Probably, the revised view did not meet analysts’ expectations, who are used to seeing strong beats by the company. Notably, shares of the Zacks Rank #3 (Hold) company dipped 1% on Jan 11, after the news.

Overall, shares of lululemon have gained 47.5% in the past year compared with the industry’s growth of 11.1%.



Going forward, the company expects to capture the growing online demand through its accelerated e-commerce investments. It has been investing in developing sites, building transactional omni functionality and increasing fulfillment capabilities. Although the company planned these investments over the next two years, the sudden acceleration in e-commerce demand beyond expectations led to prioritizing and pulling forward these investments.

The company’s direct-to-consumer revenues through its website and app jumped 94% on a reported basis and 93% in constant dollars in the fiscal third quarter. Notably, direct-to-consumer revenues contributed 42.8% of total sales in the fiscal third quarter, whereas its contribution was 26.9% 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.

Moreover, lululemon is on track with its five-year Power of Three growth plan, which aims at doubling sales in the men’s and digital categories, and quadrupling sales in the international unit by 2023. This five-year plan focuses on three core objectives — product innovation, augmenting omni-guest experiences and market expansion.

Going forward, the company remains optimistic about the innovations it plans to bring in its assortments for both men and women. Management plans to keep investing in strategies to maintain customer footfall, including efforts to augment the store base and enhancing shopping experiences.

Driven by these plans, the company earlier anticipated delivering sales growth in the low-teens in the next five years. lululemon also expects some annual benefits of this plan, which include modest gross margin improvement, a slight reduction in SG&A costs, operating growth in excess of sales growth, earnings per share growth equal to or more than operating income growth, and capital expenditure of 6-8% of sales.

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