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Lululemon Athletica Inc.: LULU Stock Is a CLEAR Buy

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The demise of Lululemon Athletica Inc. ( LULU ), the champion of the athleisure trend, would appear to be greatly exaggerated.

Lululemon Athletica inc.: LULU Stock image

Source: m01229 via Flickr

LULU stock was up nearly 10% on Wednesday morning following fourth-quarter earnings that beat analyst expectations.

Lululemon delivered a 17% year-over-year increase on the top line to $704.3 million on the back of a 5% bump in same-store sales on a constant-dollar basis. Analysts expected Q4 revenue of $693.1 million. On the bottom line, LULU earned 85 cents per share, which was 9% higher YoY and a nickel better than the Wall Street consensus.

Victories all around? You bet.

Don't Believe the Lululemon Bear Story

Media will try to spin the 2016 EPS guidance as a negative - between $2.05 and $2.15 per share compared to $2.16 from analysts - but have none of it. Adjusted diluted 2015 earnings came to $1.86, so if Lululemon hits the lower end of its guidance for 2016. it would mean EPS year-over-year growth of 10%.

That's not bad considering the intensity of the competition in the athleisure business. Everyone and their dog is trying to be a player in this arena.

How many companies globally do you know that are generating $2.3 billion annually from what is essentially women's workout wear? Not many.

Up here in Canada where I'm located, and where LULU is based, articles routinely appear touting the next great brand to supplant the company's hold on athleisure wear.

The truth is you're more likely to see LULU gobbled up by one of its bigger competitors - Under Armour Inc ( UA ), Nike Inc ( NKE ) or VF Corp ( VFC ) - than you are to see it stumble.

Sure, detractors of LULU stock can point to margin compression in fiscal 2015 - gross margins declined by 250 basis points and operating margins by 300 basis points - but Lululemon has been busy fixing its supply chain (never an easy task) while also investing in new stores and a more robust e-commerce operation.

LULU began fiscal 2015 with 302 stores. By the end of the year, it had 363 open - a 20% increase of its retail footprint year-over-year, most of which were in the U.S. Lululemon hasn't even begun to scratch the surface internationally.

On the e-commerce front it saw a 30% constant-dollar increase in 2015. Its direct-to-consumer business now accounts for 19.5% of its overall revenue - a 160-basis-point bump from a year earlier. Lululemon CEO Laurent Potdevin's omnichannel efforts are bearing fruit in a big way.

Buy LULU Stock Now

To top off its fiscal year, Lululemon announced that it bought back 5 million of its shares in 2015 at an average price of $55.27 per share. The midpoint of LULU stock between the high and low in 2015 was $56.57 .

Anytime a company can keep the price paid below that midpoint they're doing a reasonable job allocating capital.

Potdevin believes he has the right team in place; I couldn't agree more. There's nothing in today's report that says avoid LULU stock.

Quite the opposite, actually.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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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.


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

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