Lululemon Athletica Inc. LULU is a leading name in the yoga-inspired athletic apparel and accessories space. The company occupies a significant position in the market due to its superior product designs and premium pricing.
Lululemon has an edge over its competitors on the basis of innovation as the company’s superior pricing allows it to experiment with fabric and designs. Moreover, we remain impressed with the company’s favorable demographic and secular trends that ensure top-line growth over the long 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 the company’s performance in the coming days. Further, the company is facing threats from leading brands, like Gap Inc. GPS, Nike Inc. NKE, Nordstrom Inc. JWN, L Brands and Under Armour, as well as other private and boutique brands which are looking to capture market share in the female yoga, running, dancing and stylish casual compression pant product lines.
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