Lululemon rally pauses on results, though observers look ahead
Lululemon Athletica Inc.’s nearly 140-per-cent rally since midmarch took a step back on Friday after the retailer’s mixed first-quarter results. Analysts mostly defended the strong brand and said it would bounce back in a post-pandemic world.
The company said second-quarter inventory levels may increase by even more than the 41 per cent seen at the end of last quarter and that earnings won’t grow until the fourth quarter. Yet it posted better-than-expected gross margin in the first period and said there was strong online growth in April and so far this quarter.
“Lulu remained profitable even through the COVID pandemic,” said Dana Telsey at Telsey Advisory. “Outsized digital growth” speaks to the strong demand for the brand, while “showcasing the benefits of the company’s investments in its capabilities.” She rates the stock outperform, and has a price target of US$360.
The shares fell 3.5 per cent in New York Friday. Still, they are up about 29 per cent this year, faring better than most apparel retailers, which have been among the hardest hit during the coronavirus pandemic.
Telsey points out that Lulu didn’t take any writedowns or provisions during the first quarter or cancel any orders. It has “worked to reflow deliveries for the second half of the year with inventories on hand and its revised demand forecast.”
While the elevated inventory position is a concern, the company is planning for the long term, with pay protection for employees, honouring vendor commitments, paying rent and maintaining year-earlier capex levels. These efforts “should leave the company well-positioned to return to growth in relatively short order,” Tesley said.
RBC Capital Markets’ Kate Fitzsimons said that while store recovery on top of the inventory issues are likely to be “near-term overhangs, we are buyers of Lulu shares given category tailwinds, market share opportunities, strong digital infrastructure, and strong balance sheet.”
Lulu had its first revenue miss since 2016 in this “most unusual quarter against elevated expectations,” Fitzsimmons said. At the same time it had its biggest market share gains in the athletic category in years, which “affirm our view that structural tailwinds for Lulu will be at the brand’s back POSTCOVID-19.”
Productivity in the 60 per cent of stores open is currently at 75 per cent. “While we expect investors were maybe looking for more, we note the team is messaging to a slower stores productivity recovery into 2H20 given strong comparisons and capacity/traffic restrictions in a social-distancing world, Fitzsimmons added.