Thursday, April 6, 2017

A current AIM International Equity Fund holding: Lululemon Athletica (LULU) by Grant Runnoe. “Souring on Lululemon - It Doesn't Fit the AIM Fund Anymore"

Lululemon Athletica Inc. (LULU, $50.52): “Lululemon Heading Toward a Lemon?
By: Grant Runnoe, AIM Student at Marquette UniversityImage result for Lululemon logo
 Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

  • Lululemon Athletica Inc. (NASDAQ:LULU) is a designer, distributor and retailer, predominately targeting women consumers along with an emerging focus on men and female youth.
  • The company classifies their brand as healthy life style inspired athletic apparel with products of pants, bras, shorts and jackets designed for athletic activities such as yoga and running.
  • The company is comprised of two brands: Lululemon, which contains 351 stores in 12 countries holding a major presence in United States (245), Canada (51) and Australia (27). The second brand, Vivva, is contains stores in only 2 countries the United States (45) and Canada (13).
  • LULU missed earnings on 3/29/17, which lead to a one day 23.44% decline in the stock price, hitting a 52-week low.  
  •  Q4 2016 Net revenue has increased 12% YoY to $789.9 million from $704.3 million
  • In Q3 2016, LULU announced a share repurchase program, indicating the intent to buy up to $100 million of its common shares outstanding.
  • Looking ahead in 2017, management has indicated that they are planning to introduce a mobile app in Q2 2017.
  • Management announced that sales have been flat for Q1 2017 with the potential for a same store sales decline.
Key points:
Management’s Q4 2016 earnings call was optimistic. LULU conveyed encouraging news with plans to introduce new and innovative products, which include an expanded clothing line (specifically bras in Q2 and jackets in the back half of 2017), a mobile app (expected to be introduced in Q2), as well as CRM enhancements in Q3. Management also indicated that they plan to expand into China, which they see as an enormous growth opportunity. One must ponder if these ideas are “seller’s talk” or if these innovations will propel the company ahead.

Competition in the athletic wear is fierce. Brands such as Nike, Under Amour and Adidas often take the spotlight. A new rival, Ivy Top, co-founded by Beyoncé, has entered the market and has begun to generate traffic and support. Management has indicated that store traffic has slowed in brick and mortar and ecommerce channels. Furthermore, management has insinuated a slow start to sales in Q1. Within the earnings call management spoke towards this poor performance and believed it was due to product colors, of which they have a plan to fix.

A major concern moving forward is sales growth. A key driver as to why the stock has plummeted is due to management’s projection of a flat sale in Q1. Both retail segments of e-commerce and physical store sales have been dampened early in the first quarter, 2017. Former founder of LULU, ­­Chip Wilson, has even been a harsh critic of management as of late. He has indicated that he feels that “there is a long-term issue with Lululemon” raising concerns over artificially keeping the stock price high by cutting expenses.  Nevertheless, management has plans to revitalize the company.

What has the stock done lately?
LULU is in the spot light as of late. The company beat earnings for the first time since 2013 in 3Q16, during the holiday season. Recall, 2013 is when the company ran into issues with the quality of their materials as their yoga pants were see through. This past quarter Q4 2017, The Street expected earnings of $1.01 and the company reported $0.99. Compounding the earnings miss with management indicating that Q1 sales will be flat the stock plummeted 23.44% from $66.30 to $50.76. Before the earnings call the stock showed slight volatility in trailing 3 months floating in between $62.82 - $69.90.

Past Year Performance:
Following LULU’s earnings call on March 30th 2017, the stock price hit a 52-week low. The stock has been volatile ranging from 50.52-81.81 in the past calendar year. The stock was on a climb from May to August during the outdoor season topping at $80.65. During Q3 the price dipped only to climb once again during the holiday season.

Source: FactSet

My Takeaway
Lululemon Athletica Inc. was pitched to the AIM International Portfolio at a price of $66.00 on April 25, 2016 with a target price of $76.63. The stock currently trades at $50.76 as of March 30, 2017 resulting in a ­­­23.09% loss. Following Q4 earnings management is feeling the pressure from its investors to increase growth. They provided color as to how they will progress forward with their plans to re-initiate growth. Some items include, expanding clothing lines, introducing a mobile app as well as expanding globally. Retail, however, is a tricky industry. As LULU found out first hand, aspects such as the fabric quality and the choice of colors for the products must correlate to the customer’s wishes. Also, trends of athletic-leisurewear must continue for growth in LULU to accumulate. Until management can initiate and prove their turn around ideas LULU will remain on a watch list and, as of 3/30/17, I am placing a sell of LULU for the AIM International Equity Fund.

 Source: FactSet


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