Robust Store and Online Traffic to Aid lululemon (LULU)
Despite higher costs and supply-chain disruptions, lululemon (LULU) looks well-poised on the back of solid demand in stores and online as well as its Power of Three plan.
lululemon athletica inc. LULU has been gaining from robust business fundamentals, brand strength (particularly in the athletic apparel space) and continued growth in the e-commerce space. It is also witnessing a rebound in brick-and-mortar stores, driven by improved footfall.
In the second quarter of fiscal 2021, revenues at company-operated stores advanced 142% year over year. Management pointed out that in-store productivity was in line with comparable fiscal 2019 levels and reflected an improvement from 88% productivity in first-quarter fiscal 2021.
The company continues to remain focused on investments to enhance the in-store experience. It is leveraging its stores to facilitate omni-channel capabilities, including buy online pickup in store and ship from store.
LULU has implemented several strategies, including virtual waitlist, mobile POS and appointment shopping, to improve the guest experience and reduce wait time. The functionalities will allow customers to complete transactions like returns, exchanges and purchase of gift cards without entering the store. In fiscal 2021, lululemon expects to open 45-55 stores, including 35-40 stores in international markets.
On the online front, LULU has been making accelerated e-commerce investments, including building transactional omni functionality and increasing fulfillment capabilities, to capture the growing online demand. 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. Management also plans to boost online category offerings and creative content.
Driven by the factors, lululemon expects strong business momentum in the second half of fiscal 2021. For fiscal 2021, LULU expects net revenues of $6.19-$6.26 billion compared with $5.83-$5.91 billion stated earlier. The fiscal 2021 sales view assumes phased reopening of the factories used for sourcing 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. The company also forecasts net sales of $1.4-$1.43 billion for third-quarter fiscal 2021. 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.
Consequently, shares of this Zacks Rank #2 (Buy) company have gained 10.1% in the past three months compared with the industry’s growth of 2.9%.
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The company’s five-year Power of Three plan also bodes well. LULU earlier anticipated delivering sales growth in the low-teens in the next five years (ending 2023) through the execution of this plan.
lululemon 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.
Headwinds to Overcome
lululemon continues to reel under elevated costs. In second-quarter fiscal 2021, SG&A expenses of $541.3 million increased 53.4% year over year. As a percentage of sales, SG&A expenses declined 180 bps year over year but increased 130 bps on a two-year basis to 37.3%. The decline was mainly due to a higher top line than the COVID-impacted second-quarter fiscal 2020.
The company expects SG&A expenses for the third quarter of fiscal 2021 to deleverage 300-350 bps due to accelerated investments to support the e-commerce business in 2020 and 2021, consolidation of MIRROR’s results this year, and increased investments in brand-building for its growth initiative. For fiscal 2021, lululemon anticipates a year-over-year SG&A deleverage of 10-30 bps.
Alongside this, LULU 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. Recently, some of the factories in Vietnam, which are used to source lululemon’s products, have closed due to another wave of COVID-19 outbreaks in the region. This has delayed product deliveries in recent months.
The ongoing issues at the ports and reduced airfreight capacity have not only led to delays but also resulted in increased freight costs. These factors are likely to affect margins in the third quarter and fiscal 2021. The company’s gross margin guidance for third-quarter fiscal 2021 includes a 200-bps impact, including a 150-200 bps negative impact of additional freight costs in fiscal 2021.
We believe that brand strength, revival in brick-and-mortar stores and continued strength in the e-commerce channel are likely to keep its stellar show on. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at $7.51 per share, indicating an increase of 0.1% in the past 30 days. Also, a long-term earnings growth rate of 20% drives optimism.
Here's How Other Stocks Fared
We have highlighted some other top-ranked stocks from the broader Consumer Discretionary space, namely Steven Madden SHOO, Gildan Activewear GIL and Spectrum Brands SPB.
Gildan Activewear currently sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 85%, on average. Shares of GIL have gained 8% in the past three months.
The Zacks Consensus Estimate for Gildan Activewear's current financial-year sales and earnings per share suggests growth of 4.5% and 24.4%, respectively, from the year-ago period's reported numbers. The Zacks Consensus Estimate for GIL's 2021 earnings is pegged at $2.38 per share, which increased 12.3% in the past 30 days.
Steven Madden presently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 41.9%, on average. Shares of SHOO have rallied 21.1% in the past three months.
The Zacks Consensus Estimate for Steven Madden's current financial-year sales and earnings suggests growth of 50% and 170.4% from the year-ago period's reported numbers, respectively. The Zacks Consensus Estimate for SHOO's 2021 earnings is pegged at $2.35 per share, which increased 11.9% in the past 30 days.
Spectrum Brands, a Zacks Rank #2 stock at present, has a trailing four-quarter earnings surprise of 54.2%, on average. The SPB stock has gained 30% in the past three months.
The Zacks Consensus Estimate for Spectrum Brands's current financial-year sales and earnings per share suggests declines of 33% and 95% from the year-ago period's reported figures. However, the Zacks Consensus Estimate for SPB's 2021 earnings is pegged at $5.01 per share, which increased 13.6% in the past 30 days.
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