LULU Stock: Three Reasons to Be Bullish on Lululemon Athletica Inc.

LULU StockLululemon Athletica inc. (NASDAQ:LULU) stock has rebounded nicely since the company guided lower and reported weaker-than-expected third-quarter earnings in early December. That caused LULU stock to plummet 12% on the trading day, but since the start of the year, the stock has gained some momentum, up about 15%.

With the yoga apparel retailer scheduled to report earnings tomorrow, LULU stock is set to climb higher. Here are three things that investors will be looking for from Lululemon that could send the stock soaring.

Margin Improvement

When Lululemon reported earnings in December, the company said that inventory was starting to climb, which forced Lululemon to apply deep discounts to its products, causing margins to decline. But it wasn’t for a lack of demand for its products. Rather, the company ran into some unexpected supply chain problems at its trading ports in the first quarter of 2015 that the company, of which it is still feeling the effects.

The company is still trying to clear about 1.1 million units of excess inventory. Lululemon said it expects to have the problem fully rectified by the end of the first quarter in 2016. So, how does Lululemon plan to solve its inventory problems?

The company is expanding RFID technology to all of its North American stores. The technology will allow Lululemon to match sales with its inventory effortlessly. 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 also contribute to improving margins.

Growth in Men’s Business

Lululemon products are not just for women anymore. Since the company’s inception, its strategy was to focus on women interested in athletic apparel, specifically yoga gear. However, the company is lessening this focus and in 2013, the company introduced a men’s athletic line. There are already a few men’s only stores in Canada and the first U.S. store is set to launch sometime this year.

Lululemon’s men’s business is now the company’s fastest growing product segment. In the latest quarter, same-store sales growth of men’s products grew 24% in the latest quarter over the previous year.

The company’s management is confident that its men’s products will eventually become a $1.0-billion business. (Source: “Two Surprising Factors Are Driving Growth For Lululemon,” Forbes, July 13, 2015.)

Online Growth

Lululemon’s e-commerce business is starting to take off and it should provide a boost to revenues in the next few quarters ahead. Global online sales increased 16% in the latest quarter over the previous year to $89.3 million.

Online sales now account for about 18.6% of total company revenue. Compare this to about four years ago when the company’s online sales accounted for only about seven percent of total revenue and it’s clear that the online business is a more than viable segment for the company.

Online sales also have the added benefit of higher gross margins. When Lululemon sells its products to a retailer, it does so at wholesale prices. The company’s online channel allows Lululemon to recoup the spread between wholesale and retail prices, leading to higher margins.

Also, there are operational benefits with e-commerce that result in cost savings, such as only having to ship products from a distribution center to the customer.

The Bottom Line on LULU Stock

With operational efficiencies working towards improving overall margins, men’s products expanding, and online sales taking off, LULU stock might be set for a bullish run. Investors might want to take a look at Lululemon Athletica inc.