With an over 50% annual return, lululemon athletica (NASDAQ: LULU) was one of the best-performing stocks on the market in 2018. But if you believe the management team, its gains could just be getting started. The yoga-inspired clothing specialist has set its sights on developing a global sales base well beyond the North American region that it previously focused on. CEO Calvin McDonald and his team are also aiming to expand its offerings into entirely new product categories, and extend the brand with more men's apparel options.
These strategies should help propel the company toward its medium-term target of $4 billion of annual revenue by 2020. However, more than a few things will have to go right in 2019 if it's going to hit that goal.
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A strong holiday season
Lululemon usually announces its fourth quarter results in late March. That report, which covers the key holiday shopping period, will also include management's first detailed outlook for fiscal 2019.
Investors have some good reasons to be optimistic about what they'll hear at that time. After all, lululemon's growth pace surpassed expectations in each of the last three quarters, capped by a 21% spike in Q3. The company cited robust customer traffic, both in its physical stores and online, for boosting results in the period. A packed pipeline of product releases helped support those metrics, and should continue to do so.
While revenue growth is important -- the top line is expected to jump 20% to $1.1 billion -- analysts will also be keeping a close eye on profitability. Gross margin has been climbing steadily for the last few quarters, and management predicts it will continue rising. Any disappointment on that front would be a major warning flag.
Lululemon's aggressive expansion plans will require it to succeed at more than simply delivering premium apparel products to yoga fans. In the near term, its major growth efforts center around innovations like pop-up seasonal stores, and an aggressive e-commerce push that aims to take its digital sales channels well beyond the 25% of revenues they now provide.
Longer term, lululemon is looking to gain a foothold in key overseas markets like China. In parallel, it's moving into new product categories -- and recent successes with new outerwear offerings suggest that this strategy could pay big dividends over time.
Looking further out
At this point, lululemon's outlook is positive for the coming quarters, but not yet concrete. The company has said it hopes to cross $4 billion in annual sales by 2020, and that goal doesn't look like a stretch given that sales likely exceeded $3.2 billion in 2018. Executives say the profitability expansion, which includes a 7 percentage-point improvement in gross margin since 2015, is just starting, too. In fact, CFO Patrick Guido told investors to look for profit margins to keep rising for at least the next couple of years.
Any number of stumbling blocks could get in the way of the retailer reaching its broad targets, including an economic slowdown. Lululemon also remains susceptible to quality control issues, and investors only have to look back a couple of years to see the harm that a failure on that front can inflict on its brand and earnings power. The risks are amplified by the fact that the stock is up sharply, and is priced at a premium relative to more established companies like Nike.
Still, nothing in its last few quarterly reports indicates trouble ahead for lululemon. Instead, its recent record of booming online sales volumes, rising profit margins, and successful expansion moves suggest that the coming year will look a lot like 2018 for the business.
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