Thursday, April 13, 2017

A current AIM International Fund holding: Lululemon (LULU) by Justin Amakil. "Worthy of a second look - LULU should hold in a steady position versus their competitors"

Lululemon Athletica Inc. (LULU, $49.43): “LULU seeks to prosper under key management initiatives”  By: Justin Amakil, 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.

  • Lululemon Athletica Inc. (NYSE: LULU) is an athletic retail company with an assortment of healthy lifestyle inspired apparel. It also operates under the brand Ivivva, which caters to youth active sportswear. Since its inception, LULU has expanded to 406 stores.
  • Despite a 23.4% decrease in stock price, management has identified key issues and are very optimistic for 2017.
  • The company seeks to expand upon its products assortment to offer increased variety and promote sales.
  • Expansion in both domestic and international markets seek to create further upside, despite recent losses and a slow start to Q1.
Key points:
The biggest downturn of LULU saw a 20% in their stock price after 4Q16 earnings were released; however, management has strong confidence for the rest of 2017. CEO Laurent Potdevin has claimed the company has identified key issues pertaining to its poor earnings report in Q4 and have been taking drastic measures to resolve them. 

Potdevin has also claimed that he hasn’t been looking forward to any other year for LULU as much as 2017. It looks to expand upon its product development with an assortment of new healthy lifestyle inspired products. As customers move online, LULU seeks to implement strong ecommerce strategies to help grow, including a mobile application that will drive sales in this sector.

LULU also plans to buy back as much shares as it possibly can at these lower prices under their current limitations. A $100 million stock repurchase program was initiated December of 2016, allowing the company to receive about 1.5% of its current market cap of $6.62 billion. Regardless, management looks to do as much as it can regarding repurchases.

The company has a very distinctive physical footprint, positioning itself in high quality shopping centers in populations where people are willing to spend above $100 for pieces of apparel.  Potdevin has mentioned that the company’s square footage is going to expand by 12% in 2017 along with 28 new stores domestically and 15 more internationally. He is extremely confident in international growth as he plans to expand the global brand.

What has the stock done lately?
LULU recently released its 4Q16 earnings statement and took a big hit of 23.4% to its stock price. It beat analyst’s expectations of $783.5 million as it reported $790 million in revenue and 17% YoY growth, but fell $0.01 short of its earnings forecast. Comparable store sales increased 8%, beating analyst’s expectations of 5.3% in Q4. 

There was a 14% increase in comp over the previous year’s Q4 in the women’s bottoms category. What stood out more was the 20% comp that the men’s department produced in Q4. Men’s apparel at the company is often overlooked, but if it can reach the achievement of women’s apparel, LULU will surely exceed its market cap of $6.62 billion.

LULU is up nearly 5% this week vs. the Russell 2000 Index

Past Year Performance:
LULU’s net revenue rose 14% from $2.1 in 2015 to $2.3 billion in 2016. Gross profit rose 20% to $1.2 billion, mainly due to enhanced average retail prices and reduced product costs. Total comparable sales rose 6% in 2016 as well as comparable store sales by 4%. Its gross margin went up 280 basis points, reaching 51.2% compared to the likes of its competitors Nike (45%), Under Amour (46.4%), and Columbia Sportswear (46.7%).

 Source: FactSet

My Takeaway

Even though LULU has taken a bit of a hit as of late, it still has potential as management has recognized the key issues with the company and is doing all the right steps to improve upon it. They are going to expand their product variety. 

Men’s apparel has seen 20% growth in YoY and its brand Ivivva is also up 28% YoY. LULU will continue to expand upon its stores internationally especially in China, where Potdevin has claimed the company has been “on fire”. Even though competition from the likes of Nike and Under Armour pose a threat as they grow market share and grow sales moving forward, LULU should still remain up to par with its competitors since management is actively taking steps to improve upon the company.

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