By: Grant Runnoe, AIM Student at
Marquette University
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.
Summary
- 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
