lululemon Stock Continues to Surge: What's Behind the Rally?

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lululemon athletica inc.LULU is a lucrative pick at the moment as the stock has displayed unmatched momentum lately, having surged 41.3% in the last three months. Notably, the company also significantly outperformed 11.6% growth recorded by the industry . This increase mainly came on the back of synergies from product innovation, international expansion and digital acceleration, which collectively reflect the strength of the company's business.

lululemon's shares have been surpassing the broader market (S&P 500) since the end of 2013 and are currently trading at a level that has taken the valuation multiple near a five-year high. However, there are enough reasons to expect a solid upside for this yoga-inspired apparel specialist, given its niche market positioning, innovative product lines, store growth and earnings outlook.

Furthermore, the uptrend in the company's estimates is reflective of the optimism on the stock. In the last 30 days, the Zacks Consensus Estimate of 49 cents and $3.21 for the second quarter and fiscal 2018 moved north by a penny and 2 cents, respectively. Management envisions earnings per share of 46-48 cents for the second quarter and $3.10-$3.18 for the fiscal.

Growth Catalysts

lululemon remains committed to its strategy for 2020, which revolves around four distinct growth strategies, including product innovation, building store fleet in North America, broadening digital business and international expansion.

Digital Expansion

Notably, lululemon's e-commerce retailing channel is its key growth engine. Investments in the website and mobile app helped it improve traffic and conversion rates, as evident from 60% growth in e-commerce sales (24.3% of total sales) in first-quarter fiscal 2018. With continued progress on e-commerce strategy, the company is on track to deliver $4 billion in total revenues by 2020, with e-commerce accounting for more than one-third of sales.

Growth in the e-commerce business, which scores high on marginality compared with traditional stores, should also prove accretive to margins. The inter-linking of the company's e-commerce and store business, through the 'ship from store' and 'buy-online pick-up in-store' functionalities, should take the company's business to the next level.

International Growth

The stock also presents a long-term buying opportunity, backed by its international growth potential and strength in the athleisure category. lululemon has significant scope to expand square footage and enhance business globally, particularly in the underpenetrated European and Asian markets. Recent trends reveal that growth in Asia is well ahead of expectations while Europe is lagging targets. Notably, comps in Asia increased more than 50% in the fiscal first quarter against double-digit comps growth in Europe. The company targets nearly 14% increase in global square footage in fiscal 2018 and plans to add 20-30 international stores. It expects international business, including e-commerce, to account for nearly 20-25% of total sales by 2020.

North America Holds Potential

Alongside international, the company also sees immense opportunity in North America, both in terms of sales productivity and store growth. Though the market may seem mature, lululemon expects to execute a healthy number of real estate projects through 2018. Additionally, the co-located strategy provides an opportunity for the expansion of square footage, as well as guest experience, by making way for new product categories such as Men's and potentially shoes.

Innovation Mantra

Moreover, the introduction of innovative products has been a winning strategy for lululemon. Men's category presents a significant growth opportunity, with the potential to expand product lines into the office travel category. The Men's business is on track to exceed the target of at least 25% market penetration. Further, opportunities to expand in the footwear (shoes) line are shoring up, evident from the recent studies, which suggest that guests are interested in buying shoes at lululemon stores.

Bottom Line

The abovementioned factors clearly indicate that lululemon has significant growth potential in the days ahead. This is also evident from this Zacks Rank #1 (Strong Buy) stock's Momentum Score of B and long-term earnings growth rate of 13.4%.

Looking for More Trending Picks? Look at These

Some other top-ranked stocks in the same industry are Delta Apparel, Inc. DLA , G-III Apparel Group, LTD. GIII and Under Armour, Inc. UAA , each carrying a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Delta Apparel has pulled off an average positive earnings surprise of 71.2% in the last four quarters. The company has long-term earnings growth rate of 15%.

G-III Apparel, with an impressive earnings growth rate of 15%, delivered an average positive earnings surprise of 190.8% in the trailing four quarters.

Under Armour has long-term earnings growth rate of 20.7%. Further, the company delivered an average positive earnings surprise of 16.5% in the last four quarters.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: LULU , GIII , DLA , UAA

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