lululemon athletica inc. LULU has been on growth trajectory, backed by its focus on product innovation and international growth. Also, the company is benefiting from solid progress on the Power of Three strategic plan, which aims at doubling sales in the men’s and digital categories, and quadrupling revenues in the international unit by 2023.
These factors have collectively contributed to solid share price trend in the past one year. The company has gained 55.4%, against the industry’s decline of 13.2%. Furthermore, the stock has performed well against the Consumer Discretionary sector’s decrease of 2.3% and the S&P 500 Index’s rally of 7%
Factors Favoring the Stock
lululemon is on track with the Power of Three strategic plan. This five-year plan focuses on three core objectives — product innovation, augmenting omni-guest experiences and market expansion. Going forward, the company is optimistic about the innovation 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 store base and enhance shopping experience.
Apart from launching new assortments in the core men and women’s categories, its product innovation plan also focuses on testing new genres. The company has identified several new areas and it can test the same to offer innovative solutions to guests. A category wherein it is carrying out tests is the self-care line, which includes products such as deodorants, moisturizers and shampoo. Additionally, it intends to tap into customers’ growing preference for athleisure by launching new product lines related to activities like yoga, running and training. Expansion of office luggage and travel bags, and continued partnerships are some of the other product-related initiatives.
Also, the company is keen on enhancing omni-channel guests’ experience. It is looking for new and exciting ways to connect with customers, as clear from the testing of its loyalty program. It has also expanded online only size and color offerings for both men and women, which is a testament to its efforts to attract digital guests. Moreover, it is gaining from the buy online pickup in-store capability in North America. The company has also improved mobile point-of-sale capabilities to help guests complete their purchases from anywhere in the store.
Headwinds in the Story
Though the aforementioned factors make us optimistic about the stock’s potential, there are some hurdles in its path. lululemon’s strong international market presence exposes it to unfavorable currency movements due to a strong U.S. dollar. Also, the company is likely to witness impacts from the outbreak of coronavirus in China, given its operations in the region.
The company temporarily closed 38 stores in China on Feb 21 in response to the coronavirus outbreak since Feb 3, 2020. The company also stated that it is monitoring the effect of current situation and will provide an update on financial and operational impacts from the coronavirus outbreak on its fourth-quarter results.
Coming to currency headwinds, net revenues for third-quarter fiscal 2019 included a $6.8-million impact from unfavorable currency rates. Further, gross margin expansion was partly offset by 20 bps negative currency impact. Going forward, the strong U.S. dollar rates may continue to have a bearing on the company’s top and bottom lines.
The near-term picture for the company’s growth track may appear bleak on the concerns arising in China. However, the company remains confident about the long-term growth opportunities in China. Its diversified business and operating model in other key regions keep it well placed to navigate the impact of the coronavirus condition. Moreover, this Zacks Rank #2 (Buy) player’s strategies bode well.
3 Other Stocks to Consider
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Ralph Lauren Corporation RL has a long-term earnings growth rate of 9.6% and carries a Zacks Rank #2.
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