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lululemon (LULU) Up More Than 18% in 3 Months: More Room to Run?

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lululemon athletica inc. (LULU - Free Report) has been gaining from robust business trends combined with brand strength in the athletic apparel space as well as continued growth in e-commerce operations. This led to better-than-expected first-quarter fiscal 2021 results, wherein revenues and earnings improved year over year. Also, growth across all categories, channels and geographies, led by continued e-commerce expansion and a rebound in in-store sales remained an upside.

Consequently, shares of this Zacks Rank #3 (Hold) company have gained 18.8% in the past three months, outperforming the industry’s growth of 7.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A Brief Introspection

Continued momentum in the e-commerce channel remains a growth driver for lululemon. The company has been witnessing robust traffic trends, driven by both new and existing customers as well as positive customer responses for its enhancements on e-commerce sites and the mobile app. As a result, comps in its digital channel surged 50% year over year in first-quarter fiscal 2021. This in turn boosted the company’s overall direct-to-consumer revenues which grew 55% year over year and represented 44.4% of total revenues. Looking ahead, the company expects to cater to the growing online demand driven by accelerated e-commerce investments and omni-channel capabilities such as curbside pickups, same-day deliveries and BOPIS (buy online pick up in store).

On a two-year CAGR basis, e-commerce sales are anticipated to increase 55% in the fiscal second quarter. Also, it expects e-commerce sales to increase modestly in the fiscal third and fourth quarters. Consequently, it expects e-commerce sales growth in high-single digits for fiscal 2021.

Similarly, other companies gaining from sustained online shows include PVH Corp (PVH - Free Report) , Steven Madden (SHOO - Free Report) and Crocs (CROX - Free Report) . PVH Corp.’s revenues in digital channels skyrocketed 95% year over year in first-quarter fiscal 2021, accounting for nearly 25% of total revenues. Crocs delivered a 75.3% increase year over year in digital sales in first-quarter 2021, marking the 16th successive quarter of double-digit growth. Also, Steven Madden’s e-commerce revenues surged 89% year over year in the first quarter of 2021.

Coming back to lululemon, its brick-and-mortar sales are on the road to recovery as consumers returned to stores for shopping. In the fiscal first quarter, revenues at company-operated stores advanced 106% year over year. On a two-year CAGR basis, sales in the store channel increased 3%. Additionally, in-store productivity improved 88% from the comparable fiscal 2019 levels. With store traffic gaining traction, the company remains focused on investments to enhance the in-store experience. Some notable efforts include, virtual waitlist, mobile POS and appointment shopping, reduced time of waiting in the line to enter the store, and benefit of returns, exchanges and purchase of gift cards without entering the store. In second-quarter fiscal 2021, the company expects flat in-store sales on a two-year CAGR basis.

Driven by retained business momentum in the fiscal second quarter, management raised its view for fiscal 2021. It anticipates net revenues of $5.83-$5.91 billion compared with $5.55-$5.65 billion stated earlier. This includes the contribution of $250-$275 million from the MIRROR buyout. Adjusted earnings per share are now expected to be $6.73-$6.86 compared with $6.30-$6.45 mentioned earlier. This includes a modest dilution of 3-5% related to the MIRROR acquisition. The gross margin for fiscal 2021 is projected to expand 150-120 bps year over year, compared with the previously mentioned 100-150 bps expansion.

For second-quarter fiscal 2021, the company expects net sales of $1.3-$1.33 billion, indicating a two-year CAGR growth of 21-23%. Adjusted earnings are anticipated to be $1.10-$1.15 per share, whereas it reported 74 cents in the prior-year quarter and 96 cents in second-quarter fiscal 2019. Gross margin is envisioned to expand from the last year’s COVID-impacted quarter and increase 30-50 bps from second-quarter fiscal 2019 on the back of higher e-commerce sales along with occupancy cost leverage and rent reductions.

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Apart from these, lululemon remains on track with its five-year Power of Three plan, which focuses on three core objectives - product innovation, augmenting omni-guest experiences and market expansion. Notably, the company is witnessing a positive consumer response for its merchandise. The company remains optimistic about all the innovations it plans to bring in its assortments for both men and women. Driven by these plans, it foresees sales growth in the low-teens over the next five years. lululemon also expects some annual benefits from this plan, that include a modest gross margin improvement, 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 about 6-8% of sales.

Wrapping Up

Although these above-mentioned initiatives bode well for the company, higher airfreight expenses and SG&A costs are likely to put pressure on the gross margin in the fiscal second quarter. It expects SG&A expenses for the fiscal second quarter to deleverage 400 bps compared with the second quarter of fiscal 2019, due to higher depreciation expenses stemming from accelerated investments to support the e-commerce business and COVID-related costs. For fiscal 2021, the company anticipates a year-over-year SG&A deleverage of 30-50 bps, driven by the consolidation of MIRROR for the year and investment in MIRROR brand building.

Nevertheless, we expect the company’s positive prospects to boost growth and help keep its stellar show on. Topping it, a VGM Score of B and a long-term growth rate of 18.3% raise optimism in the stock.

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