The Zacks Textile - Apparel industry has shown immense strength lately, benefitting from brand enhancement initiatives alongside accelerated investment in the digital realm and international expansion. One stock within this promising industry, which holds the potential to outpace the market, is lululemon athletica inc.LULU . This Vancouver-based yoga apparel company is poised to gain from the progress of its strategy for 2020, with a stringent focus on digital and international growth.
Notably, the Textile - Apparel industry currently carries a Zacks Industry Rank #34, which places it in the top 13% of more than 250 Zacks industries, indicating solid near-term prospects. Further, the industry significantly outpaced the broader Zacks Consumer Discretionary Sector and the S&P 500 index. Stocks in the industry rallied 28.5% in a year compared with 0.6% gain for the broader sector and 5.1% for the S&P 500.
On the other hand, lululemon has displayed exorbitant growth of 113.2% in the past year, marking a huge outperformance compared with the industry's growth as well as the market at large. Additionally, this Zacks Rank #1 (Strong Buy) company's impressive long-term earnings growth rate of 19.2% and a Growth Score of A justify its growth potential.
Let's delve deeper and find out why lululemon is apt for playing the momentum in its industry.
Strategy for 2020 Aids Quarterly Results
lululemon is well on track with its strategy for 2020. With the help of this strategy, it aims to double its revenues to about $4 billion and more than double its earnings. To achieve these targets, management outlined four distinct growth strategies - including product innovation, building the store fleet in North America, expanding digital business and international expansion.
Driven by the progress on its strategy for 2020, the company delivered a robust second-quarter fiscal 2018, with sales and earnings surpassing estimates and improving year over year. While this marked its sixth consecutive earnings beat, sales topped estimates for 11 straight quarters. Strong fiscal second-quarter results reflected broad-based growth across all categories, channels and geographies.
The company notes that the momentum from first and second quarters of fiscal 2018 is continuing to the fiscal third quarter. Consequently, management provided a solid view for the fiscal third quarter and raised its guidance for fiscal 2018. For third-quarter fiscal 2018, lululemon anticipates revenues of $720-$730 million, with constant-dollar comps expected to increase in the low-teens range. It envisions earnings of 65-67 cents per share.
The company now projects revenues of $3.185-$3.235 billion compared with $3.04-$3.075 billion projected earlier. The guidance is based on comps growth of low teens on a constant-dollar basis versus the prior forecast of high-single-digit comps growth. Earnings for the fiscal are now projected to be $3.45-$3.53 per share compared with 3.10-$3.18 mentioned previously.
E-commerce Growth Favorable
lululemon is strongly focused on enhancing the e-commerce retailing channel and investing in the innovation of product categories and bringing improvements to its website. Notably, the company's digital business continues to gain from the site re-launch in the third quarter of fiscal 2017, delivering a double-digit increase in conversion rate in second-quarter fiscal 2018.
Traffic at the company's site improved more than 20%, driving e-commerce comps to surge 48% in the fiscal second quarter. Additionally, the company held an online warehouse sale in the quarter, excluding which DTC comps improved by a whopping 66% (up 65% in constant dollars). With continued progress on e-commerce strategy, the company remains on track to deliver $4 billion in revenues by 2020.
International Expansion on Target
We believe that lululemon has an unmatched level of long-term growth opportunity in the industry, based on its potential to expand square footage and enhance business globally. It remains focused on expanding operations outside the United States and Canada, particularly in the underpenetrated European and Asian markets. This is evident from 50% comps growth in Asia in the fiscal second quarter, led by more than 200% of comps growth in China. Moreover, comps increased in double digits in Europe.
With regard to expansion plans in Asia, the company introduced WeChat store in China in the fiscal second quarter. It is on track to launch e-commerce sites in Korea and Japan in late fiscal 2018. In Europe, the company's brand is resonating well with customers while it opened the first store in Sweden. It also attracted guests in London, with another successful Sweatlife festival. Overall, the company plans to expand its international base by opening 20-25 international stores in fiscal 2018.
Backed by these efforts, the company looks well-positioned for persistent growth and improved profitability over the next five years.
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