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Here's Why Hold Strategy is Apt for lululemon (LULU) Stock Now

lululemon athletica inc. LULU is well-placed for growth, owing to positive response for its products, improved store productivity and continued digital momentum. A rebound in brick-and-mortar sales, driven by an increase in store traffic as consumers returned to stores for shopping, also bodes well. The company’s robust business fundamentals combined with strong brand positioning in the athletic apparel space are likely to be key drivers.

However, lululemon has been witnessing supply-chain challenges, driven by the pandemic-led factory closures, congestion at ports and reduced airfreight capacity, which are likely to impact its business in the second half of fiscal 2021. It also continues to witness higher SG&A expenses.

Driven by the above-mentioned factors, shares of lululemon have rallied 34.4% in the year-to-date period compared with the industry’s growth of 25.2%. The Zacks Rank #3 (Hold) stock has also comfortably outperformed the Consumer Discretionary sector’s decline of 4.5% and the S&P 500 index’s growth of 26.3%.

 

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In the past 30 days, the company’s estimates for fiscal 2021 and 2022 earnings per share have been unchanged. For fiscal 2021, its earnings estimates are pegged at $1.38 per share, suggesting 19% growth from the year-ago period.

Factors Supporting Growth

lululemon’s business momentum can be attributed to the revival of brick-and-mortar stores, driven by improved footfall, as well as the continued expansion in the e-commerce channel. Top-line growth continues to reflect strength across all categories, channels and geographies. The company is witnessing a rebound in brick-and-mortar sales, driven by an increase in-store traffic as consumers have been returning to stores for shopping.

In the fiscal second quarter, revenues at company-operated stores advanced 142% year over year and 9% on a 2-year CARG basis to $695.1 million. It continued to witness strong traffic trends, which increased more than 150% from the last year. Management pointed out that in-store productivity was in line with the comparable fiscal 2019 levels and reflected an improvement from 88% productivity in first-quarter fiscal 2021.

lululemon is well-placed to capture the growing online demand and ensure a robust shopping experience through its accelerated e-commerce investments this year. It has been investing in developing sites, 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 (buy online pick up in store). It is enhancing features like search, browse, checkout, personalization and payment methods across online platforms. The company plans to boost online category offerings and creative content.

Its five-year Power of Three plan also bodes well. The company earlier anticipated delivering sales growth in the low-teens in the next five years (ending 2023) through the execution of this plan. It 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.

lululemon provided expectations for the third quarter and raised its view for fiscal 2021. Management noted that its strong business momentum continued in the second half of fiscal 2021. Despite the headwinds related to COVID-19, including supply-chain disruptions, the company raised its guidance for fiscal 2021. Its financial position also keeps it on track to exceed targets under its Power of Three growth strategy.

For third-quarter fiscal 2021, the company expects net sales of $1.4-$1.43 billion, indicating two-year CAGR growth of 24-25%. Adjusted earnings are anticipated to be $1.33-$1.38 per share, whereas it reported $1.16 in the prior-year quarter and 96 cents in third-quarter fiscal 2019.

For fiscal 2021, it now expects net revenues of $6.19-$6.26 billion compared with $5.83-$5.91 billion stated earlier. The sales guidance implies a 2-year CAGR of 25%, higher than the 3-year CARG of 19%, leading up to 2020. It is significantly ahead of the low-teens CAGR targeted in the Power of Three growth plan. The fiscal 2021 sales view assumes the phased reopening of the factories used to source products in Vietnam in mid-September. Adjusted earnings per share are expected to be $7.38-$7.48 compared with $6.73-$6.86 mentioned earlier. This includes a modest dilution of 3-5% related to the MIRROR acquisition.

Near-Term Hurdles

The company’s near-term outlook is mainly hampered by the ongoing supply-chain headwinds and factory closures in some regions. On its last reported quarter’s earnings call, management noted that some of the Vietnam factories, which used to source lululemon’s products, have closed due to another wave of COVID-19 outbreak. This has delayed deliveries of products in recent months. The factors impacted the company’s margins to some extent in second-quarter fiscal 2021.

lululemon also continues to face headwinds related to capacity constraints and supply-chain challenges at ports and reduced air freight capacity. On a 2-year CAGR basis, inventory grew 26%. The company continues to anticipate further delayed inventory receipts, owing to issues related to port congestions and COVID-19 impacts in some regions.

At the end of third-quarter fiscal 2021, lululemon expects inventory levels to increase 15-20% from that reported in third-quarter fiscal 2020. The company is witnessing some delayed inventory receipts due to congestion at ports and the recent COVID-related closures of certain factories in Southern Vietnam. While the expected inventory level is enough to support its revenue projection, it is lower than the initially targeted levels due to supply-chain challenges.

The company’s gross margin guidance for third-quarter fiscal 2021 includes a 200-bps impact of higher airfreight costs, owing to port congestions and capacity constraints. The gross margin view for fiscal 2021 consists of an estimated 150-200-bps negative impact of additional freight costs compared with a 50-bps impact mentioned earlier.

Better-Ranked Stocks to Bet On

Gildan Activewear GIL has a long-term earnings growth rate of 28%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hanesbrands HBI, with a Zacks Rank #2 (Buy) at present, has a long-term earnings growth rate of 8.5%.

PVH Corp PVH, also a Zacks Rank #2 stock at present, has a long-term earnings growth rate of 59%.


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