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Lululemon's Strategies on Track: Should You Hold the Stock?

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Lululemon Athletica Inc. (LULU - Free Report) has been doing well on its strategic growth efforts and impressive surprise history. This designer and manufacturer of yoga-inspired athletic products have seen its stock price rise 8.2% year-to-date and about 10% in the past year.

Lululemon holds a significant position in the market due to its superior product designs and premium pricing. Additionally, it has an edge over its competitors on grounds of innovation as its superior pricing allows it to experiment with fabric and designs. Moreover, we remain impressed with the company’s favorable demographic and secular trends that ensure top-line growth over the longer term.

Further, the company has an unmatched level of long-term growth opportunity in the industry based on its potential to expand square footage and enhance its business globally as well as through the expansion of its ivivva model. While the Canadian market seems mature, we believe there remains scope to expand across the U.S. as well as in the under-penetrated European and Asian markets. Additionally, we believe the company’s recent venture into the men’s category holds promise. Since its 2013 announcement of opening men’s stores, the company has opened one men’s only store in Soho, Manhattan.

Coming to the company’s growth strategies, Lululemon’s strategy for 2020 bodes well, per which, it aims to double its revenues to about $4 billion and more than double its earnings by 2020. To achieve these targets, the company outlined four distinct growth strategies, including product innovation, building a store fleet in North America, digital business as well as international expansion. Clearly, these plans position the company well for sustained growth and improved profitability over the next five years.

Further, the company’s splendid surprise history adds to its bull points as its top and bottom lines for second-quarter fiscal 2016 improved year over year. Additionally, earnings met estimates while sales marginally surpassed. While the quarter marked the company’s third consecutive sales beat, Lululemon’s earnings have either outperformed or matched our estimates for nearly seven years now except for a miss in third-quarter fiscal 2015.

Further, management raised its earnings and sales guidance for fiscal 2016, alongside issuing an encouraging outlook for the third quarter with expectations of gross margin expansion in the second half of the fiscal. Together, these factors underscore the company’s strong prospects, thereby instilling confidence among investors.

However, the company’s otherwise strong stock price movement was hurt due to the fading popularity of athleisure wear, as the denims are back in vogue as new styles and patterns attract shoppers. This trend is likely to hurt many other retailers as was evident from Nike Inc’s (NKE - Free Report) recent pull back in future orders. Others in list that may be impacted include Foot Locker Inc. (FL - Free Report) and Under Armour Inc. .

Coming back to Lululemon, the company remains prone to unfavorable currency movements, which also played spoilsport in the second quarter. Despite a heartening outlook, any prevalence of these currency woes can hurt results. Stiff competition from other players also remains a headwind.

Lululemon currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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