LULU Stock: Here’s Why Lululemon Athletica inc. Could Soar in 2016

LULU StockUpside for LULU Stock in 2016

Yoga wear retailer Lululemon Athletica inc. (NASDAQ:LULU) earned $117.4 million in the fourth quarter. This is six percent higher than the company’s earnings for the same period of 2015. These results have pushed Lululemon stock almost 11% higher and back to $67.00, a level the company has not seen since November 2013. At that time, an apparent design flaw that made some yoga pants too transparent sent LULU stock diving.

Lululemon’s latest results suggest the company has fully recovered from the embarrassing marketing incident—or disaster. Indeed, Lululemon stock has gained some 15% since the start of 2016. After the strong earnings, LULU stock is set to climb higher. Profits for the quarter ended January 31 amounted to $0.85 per share, decidedly better than the $0.79 per share from last year.

However, the big number to watch was revenue. The Vancouver-based company said its revenues had climbed to nearly $704.3 million. That is 17% more than a year ago, and it is the main indicator of Lululemon’s growth potential. Not surprisingly, Lululemon’s guidance for the next quarter and for the full year is in line with expectations. However, LULU stock investors should note that its recent quarterly results trounced expectations. Therefore, the company seems to prefer under-promising and over-delivering.  

While some may argue it’s time to sell LULU stock to lock in some of the gains, investors may want to hang on as Lululemon could set a new record high. The company ran into some unexpected supply chain problems at its trading ports in the first quarter of 2015 that have created an artificial inventory excess.

Lululemon expects to have the problem fully rectified by the end of the first quarter in 2016. It is adding more RFID technology, such that it will better manage sales and inventory. The company said that about eight percent of all e-commerce revenue for the third quarter, which provides higher margins, came from the ability to access incoming inventory using the technology.

Lululemon is also in the process of switching more of its product shipments from air to sea, which will help lower costs and contribute to improving margins.

As well, the brand is not just for women anymore. Men are buying more of its athletic apparel and there are even men’s only stores in Canada. American men won’t have to wait long as such a store will open sometime this year. The men’s product line is Lululemon’s fastest growing segment. The company’s management suggests that the line is slated to become a billion-dollar business. (Source: “Two Surprising Factors Are Driving Growth For Lululemon,” Forbes, July 13, 2015.)

Moreover, Lululemon has developed a new and stronger version of its trademark “Luon” fabric, using more technology to improve quality. In this case, its Whitespace product development lab in Vancouver tests the products’ ability to withstand sweat and laundering. Lululemon has also developed a newer soft and light tights fabric called “Nulu.” (Source: “Lululemon Athletica Inc. earnings beat expectations as new focus on efficiency and innovation pays off,” The Financial Post, March 30, 2016.)

Lululemon’s e-commerce is also growing quickly. Online sales now account for about 18.6% of total company revenue. That’s more than twice as much as just four years ago. E-commerce results in cost savings because distribution centers deliver goods directly to the customer.

This and the new men’s line business will surely deliver revenue surprises of the bullish kind over the next year for LULU stock.