Global Expansion to Benefit Lululemon Athletica inc. (LULU)

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Lululemon Athletica inc. (NASDAQ:LULU) appears to have bucked the trend that most retailers witnessed in the last quarter, including the holiday season. The company has avoided giving excessive discounts to its customers, which was wider in the industry to attract consumers in the face of growing online sales. The retailer is focused on selling lifestyle products apart from being just apparel. The company also unveiled its flagship store again in New York City underscoring the brand importance in the community. Though it was able to achieve above the market rate growth through the launch of fresh store openings apart from a redesigned e-commerce platform, it remains to be seen whether these things will reflect in the fourth quarter results. The company is also focusing on global expansion to gain in the upcoming periods.

Guidance Boosted

One of the positive factors for Lululemon Athletica inc. (NASDAQ:LULU) was that it was able to boost its guidance from the earlier projected level. For instance, the company guided its earnings to be 75 – 78 cents a share and revenue between $670 and $685 million for the fourth quarter that ended in January. The retailer predicted mid-single-digit combined comparable store sales in the same period. Now, the company is looking for earnings of 78 – 80 cents a share while projecting revenue of $690 – $695 million. The retailer is also looking for high-single-digit comparable store sales in the fourth quarter.

As a result of increasing the fourth quarter outlook, Lululemon Athletica inc. (NASDAQ:LULU)’s forecast for the fiscal year ended January also got a boost. The company has increased its earnings forecast to $1.81- $1.83 a share from $1.78 – $1.81 a share. Similarly, revenue outlook was increased to $2.045 – $2.050 billion from $2.025 – $2.040 billion. However, there was no change in the estimation of high single-digit comparable store sales for the same period. Analysts are expecting the company to deliver either higher end results or slightly above that in both the fourth quarter and fiscal year.

Key To Revenue Growth

Lululemon Athletica inc. (NASDAQ:LULU) appears to be clear-cut in its strategies to achieve growth in different metrics. One of the growth areas is high single-digit comparable store sales while planning to add 62 new stores in the fourth quarter to take the total number of stores to 364. As a result, the total square footage would see a growth of 20%. At the same time, the retailer is also focusing on the e-commerce growth by projecting mid-20s+ uptick. The company expects to achieve it by delivering +mid-20s growth in Men’s section while predicting plus mid-single digit growth in respect of women wears.

Focus On International Markets

Another focus area for Lululemon Athletica inc. (NASDAQ:LULU) is tapping the global market. The company is eyeing the markets of Europe, as well as, the Asia where it is engaged in an active expansion. For any American firm, Europe is a natural extension of its market and the first region to get attracted after the United States. As far as Asia is concerned, China and Japan assumes importance because of the size of the markets. The company’s CEO, Laurent Potdevin, has stressed the importance of focusing on the global expansion if it is serious in its long-term growth objectives.

Lululemon Athletica inc. (NASDAQ:LULU) has already initiated the global expansion and unveiled its shop-in-shop by aligning with Alibaba Group Holding Ltd (NYSE:BABA)-operated Tmall, a web shopping portal. On the very first day of its launch in the early period of the fourth quarter, it attracted 165,000 unique visitors. That suggested that the company’s brand could gain from a leading Chinese platform to establish the brand awareness there. Aside from the two major markets, the retailer expanded in fresh markets like South Korea. Interestingly, the reports suggested that the region performed above the expectations level. There are 83 showrooms, which are mostly in the emerging markets to offer market-specific data so as to expand it further in e-commerce and in-store format.

Operating Efficiency

Lululemon Athletica inc. (NASDAQ:LULU) is also concentrating on improving the operational efficiency. For that purpose, the company plans to leverage product innovation, square footage growth, ecommerce or digital, and global to boost its revenue while deleveraging foreign exchange. Similarly, the company indicated its intention to improve its gross margin by leveraging air freight enhancement, logistics and duties, and improved costing. The retailer is focused on deleveraging occupancy and depreciation, which should be better than the preceding year. The apparel firm is also keen on leveraging its core business to improve the results from selling, general and administration. Its RFID technology would also monitor the inventory level as the distribution would see an enhancement in operational efficiency.

Valuation

Lululemon Athletica inc. (NASDAQ:LULU)’s current profit earnings are 34.1 times compared to the industry average of 23.8 times and S&P 500’s 17.7 times. Similarly, it enjoys a premium of price to book ratio of 7.6 times versus 5.8 times the industry currently enjoys. In every metric, its valuation suggested a premium compared to the industry average and the broader index. Even the forward PE ratio is also higher than the rest. However, the stock is trading below the five-year average PE, Price to Book, Price to Sales and Price to cash flow. Meanwhile, JPMorgan Chase & Co (NYSE:JPM) has removed the stock from its focus list though it retained the price objective of $66 with an Overweight rating.

Conclusion

Lululemon Athletica inc. (NASDAQ:LULU) will continue to see an uptick in its sales and earnings growth driven by digital and on-store expansion at the international levels. However, the valuation is higher compared to the industry average and the S&P 500 index at the current levels. Therefore, it is better to wait until the fourth quarter results are announced on March 30 to make the fresh call.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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