Will Lululemon's Growth Plans Help it Survive Forex Woes?

Lululemon Athletica Inc. LULU is one of the leading yoga-inspired athletic apparel and accessories retailer with operations across North America. The company occupies a significant position in the market due to its superior product designs and premium pricing.

Lululemon works with yogis and athletes in local communities to carry out continuous research and obtain product feedback. Moreover, we remain impressed with the company’s favorable demographic and secular trends that ensure top-line growth over the longer term.

Further, Lululemon’s focus on eCommerce retailing channel and investments in innovative product categories bode well. We also believe that the company has an unmatched level of long-term growth opportunity in the industry based on its potential to expand square footage and extend its business globally.

Coming to expansion, we believe there is scope for Lululemon to expand across the U.S. as well as in the underpenetrated European and Asian markets. However, the Canadian market seems mature. Expanding its footprint in Europe and Asia, Lululemon has recently opened stores in Singapore, Hong Kong, Germany, Netherlands, Sweden, Switzerland and France. Further, the company is set to explore the Middle East and has concrete plans of opening two stores in Dubai by the end of fiscal 2015.

Moreover, Lululemon posted solid second-quarter fiscal 2015 results on Sep 10, wherein both the top and bottom lines exceeded its own guidance while improving year over year. Following a strong second quarter, Lululemon raised its sales and earnings guidance for fiscal 2015 as it sees immense potential in its initiatives that include investing in innovations, product introductions and enhancing customer experience.

However, the company’s margins were impacted by greater airfreight expenses incurred to counter port delays at the West Coast, weakening of Australian and Canadian currencies, occupancy deleverage, and higher markdowns. Further, the company expects airfreight costs, occupancy and depreciation deleverage, and adverse currency translations to remain headwinds in the third quarter of fiscal 2015. Moreover, the company’s outlook for the third quarter lagged expectations, leading to a downtrend in estimates.

Given the abovementioned pros and cons, we remain somewhat cautious about this Zacks Rank #3 (Hold) company’s performance in the coming days.

Stocks that Warrant a Look

Some better-ranked stocks in the same industry include Perry Ellis International Inc. PERY, Columbia Sportswear Company COLM and Oxford Industries Inc. OXM. While Perry Ellis International and Columbia Sportswear carry a Zacks Rank #1 (Strong Buy), Oxford Industries holds a Zacks Rank #2 (Buy).

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