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lululemon (LULU) Dips 13.3% in 3 Months: What Lies in 2022?

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lululemon athletica inc. (LULU - Free Report) is currently facing headwinds related to supply-chain woes and the Omicron variant of Coronavirus. Speaking of supply-chain issues, the company has been witnessing challenges, driven by congestion at ports and reduced airfreight capacity. The ongoing issues at ports and reduced airfreight capacity have not only led to delays but also resulted in increased freight costs.

These factors impacted margins to some extent in third-quarter fiscal 2021. Gross margin growth was partly offset by a 50-bps decline in the product margin. The company’s gross margin guidance for fiscal 2021 includes 150-200 bps of higher airfreight expenses. Also, it envisions a negative impact of 450 basis points from airfreight costs due to congestion and capacity constraints in the fiscal fourth quarter.

The company recently lowered its fiscal fourth-quarter guidance to reflect the impacts of the Omicron variant. It predicts fourth-quarter fiscal 2021 revenues at the lower end of the previously stated range of $2.125-$2.165 billion. Earnings per share (on a reported basis) are also expected to be at the low-end of the earlier mentioned $3.24-$3.31. Adjusted earnings per share are anticipated to be at the low-end of the $3.25-$3.32 mentioned earlier.

Alongside these, higher SG&A costs, stemming from the consolidation of MIRROR’s results and increased investments, remain concerning. SG&A expenses for the fiscal fourth quarter are envisioned to deleverage 200-250 bps on a two-year basis. The deleverage mainly relates to higher depreciation due to accelerated investments to support the e-commerce business in 2020 and 2021, the consolidation of MIRROR’s results this year, and increased investments in brand-building for its growth initiative.

Driven by the factors, shares of this Zacks Rank #3 (Hold) company have lost 13.3% in the past three months compared with the industry’s decline of 6.5%.

 

Zacks Investment ResearchImage Source: Zacks Investment Research

 

Brighter Side of the Story

Strength in LULU’s products, particularly the athletic and leisurewear brands, remains an upside. A solid start to the holiday season also bodes well. The company has been witnessing a rebound in brick-and-mortar sales, driven by an increase in store traffic. Management pointed out that in-store productivity outpaced the fiscal 2019 levels and reflected sustained momentum throughout 2021.

The company continues to remain focused on investments to enhance the in-store experience. It is leveraging its stores to facilitate omni-channel capabilities, including the buy online pick up in store (BOPUS) and ship-from-store services. It has implemented several strategies to improve the guest experience and reduce wait time. These include virtual waitlists, mobile POS and appointment shopping, which will reduce the time of waiting in line to enter the store as well as allow customers to complete transactions like returns, exchanges and purchase of gift cards without entering the store.

On the online front, the company is on track with accelerated e-commerce investments, including building transactional omni functionality and increasing fulfillment capabilities. The company continues to strengthen omni-channel capabilities such as curbside pickups, same-day deliveries and BOPUS. It is enhancing its mobile app in a bid to offer curbside pickup service and train its store associates to help customers speed up transactions. Free online digital educator service for people who can't make it into the stores also bodes well. Management plans to boost online category offerings and creative content.

lululemon is progressing well with its five-year Power of Three plan, which aims at doubling sales in the men’s and digital categories, and quadrupling sales in the international unit by 2023. The five-year plan focuses on three core objectives — product innovation, augmenting omni-guest experiences and market expansion. The company is witnessing positive consumer responses to its merchandise. Going forward, it remains optimistic about the innovations it plans to bring to its assortments for both men and women.

As a result, the company earlier anticipated delivering sales growth in the low-teens in the next five years (ending 2023). 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.

Conclusion

Although the ongoing supply-chain headwinds and the rise of Omicron cases remain headwinds, we believe that brand strength, a revival in brick-and-mortar stores and continued strength in the e-commerce channel are likely to provide some cushion to the stock and help it get back on track in 2022.

The Zacks Consensus Estimate for LULU’S fiscal 2022 sales and earnings per share (EPS) suggests year-over-year growth of 18.1% and 20.2%, respectively. The consensus mark for fiscal 2021 earnings has moved 0.1% north over the past 30 days to $7.75. Also, a long-term earnings growth rate of 18.3% drives optimism.

Stocks to Consider

Some better-ranked stocks from the Consumer Discretionary sector are Delta Apparel (DLA - Free Report) , Guess (GES - Free Report) and Oxford Industries (OXM - Free Report) .

Delta Apparel currently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 95.5% on average. The DLA stock has rallied 27.9% in the past three months. You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Delta Apparel's current financial year’s sales and earnings per share suggests growth of 11.6% and 9.4%, respectively, from the year-ago period's reported numbers.

Guess currently flaunts a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 97% on average. Shares of GES have gained 12.7% in the past three months.

The Zacks Consensus Estimate for Guess’ current financial year’s sales suggests year-over-year growth of 38.6%. The consensus mark for GES’ earnings per share is pegged at $2.97, indicating a substantial improvement from a loss of 7 cents reported in the year-ago period.

Oxford Industries currently sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 96.7%, on average. Shares of OXM have gained 13.1% in the past year.

The Zacks Consensus Estimate for Oxford Industries’ current financial year’s sales and earnings suggests growth of 51.4% and 522.7%, respectively, from the year-ago period's reported numbers.