Here’s why lululemon (LULU) took a dip despite optimistic forecasts
lululemon Athletica inc. LULU provided an optimistic outlook for the fourth quarter of fiscal 2020 after witnessing a strong performance during the holiday season. The company now expects sales and profits to be in the upper end of the previously released range. He earlier predicted mid-to-high teen sales growth and mid single-digit adjusted earnings growth for the fourth quarter of fiscal 2020. The revised view came just before the ICR conference which will be held soon.
The company’s revised forecast reflects strong sales over the holiday season, driven by continued investments in its brand and strong demand during the period. Additionally, its investments in digital capabilities, including the recent takeover of home fitness company MIRROR, helped sales in the quarter. Previously, lululemon predicted that the buyout of MIRROR would contribute more than $ 150 million to fiscal 2020 revenue. Additionally, the company is confident in executing its Power of Three growth plan, which is expected to support growth in 2021.
However, lululemon’s shares did not react positively to the bullish forecast. Probably, the revised view did not meet the expectations of analysts, who are used to seeing strong beats from the company. Notably, shares of Zacks Rank # 3 (Hold) company fell 1% on January 11, after the news broke.
Overall, shares of lululemon have gained 47.5% in the past year compared to industry growth of 11.1%.
Going forward, the company expects to capture the growing online demand through its accelerated investments in e-commerce. He has invested in site development, building omni-transactional functionality, and increasing execution capabilities. Although the company has planned these investments over the next two years, the sudden acceleration in e-commerce demand beyond expectations has led to prioritizing and pushing these investments forward.
The company’s direct-to-consumer revenue through its website and app jumped 94% in published data and 93% in constant dollars in the fiscal third quarter. Notably, direct revenue to consumers contributed 42.8% of total sales in the fiscal third quarter, while its contribution was 26.9% in the previous year quarter. The company’s e-commerce business has benefited from a healthy mix of new customers, existing e-commerce guests and guests historically reserved for retailers now shopping online.
In addition, lululemon is on the right track with its Power of Three five-year growth plan, which aims to double sales in the human and digital categories, and quadruple sales in the international unit by 2023. This five-year plan focuses on three main goals: product innovation, increasing omni-guest experiences, and market expansion.
Going forward, the company remains optimistic about the innovations it plans to make in its ranges for men and women. Management plans to continue investing in strategies to maintain customer traffic, including efforts to increase the store base and improve shopping experiences.
Driven by these plans, the company earlier predicted sales growth among teens over the next five years. lululemon also expects some annual benefits from this plan including modest improvement in gross margin, slight reduction in selling and administrative expenses, operating growth above sales growth, growth in earnings per share equal to or greater than the growth in operating profit and capital expenditure of 6 -8% of sales.
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