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Lululemon Athletica Has Talked Growth, But Can It Execute?

When Lululemon Athletica Inc. posts first quarter results in a few weeks, investors will be watching for updates regarding the firm’s new three-pillar approach to growth, and whether the brand can sustain the trajectory promised in March when it provided quarterly guidance.

That three-pillar strategy was disclosed on April 24 at the firm’s Investor Day presentation to Wall Street analysts. Company executives, including chief executive officer Calvin McDonald, said revenue growth over the next five years will come from a focus that will double both men’s and digital sales, and quadruple international revenues.

But it also isn’t ignoring its well-established women’s business, nor will it ignore its store formats in North America. In fact, the company plans to open a 25,000 square-foot experiential store in Lincoln Park in Chicago this July. The space will be complete with yoga studios, a meditation space, healthy juice and food, and areas for community gatherings.

In March, investors feared a possible deceleration before the brand disclosed fourth quarter results. But then results were posted along with first quarter guidance, which allayed those fears. Kimberly Greenberger, equity analyst at Morgan Stanley, said at the time, that because the company saw “opportunities for improvement in supply chain, IT infrastructure, omni capabilities, digital commerce, and product development,” it would likely be able to see further margin expansion.

But it was the company’s Investor Day presentation that had some analysts, like Jefferies’ Randal J. Konik believing that Lululemon will continue to innovate in new categories where it makes sense. Current whitespace categories for the brand include footwear and skincare. The company said more details would be forthcoming regarding its footwear plans, and that it has already dipped its toe in beauty through a very small selection of products aimed at its “sweatlife” lifestyle positioning.

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Meanwhile, brand awareness seems to remain a powerful driver for new consumers to the brand.

According to a YouGov survey last month, male consumers between ages 18 to 49 have become more interested in buying an item from Lululemon. The latest survey from YouGov indicated that the interest has risen to 13 percent, compared with just 5 percent for the same age group back in 2016. The data shows the range for women is 15 percent, relatively stable for the same time periods. The YouGov study also said women account for 63 percent of the consumer group between ages 18 to 45, with men accounting for the balance, at 37 percent.

Earlier this month, Canaccord Genuity Research disclosed the results of its second proprietary athletic apparel brand perception survey, noting that Lululemon’s fashion and style perception has been growing significantly among millennial women between ages 25 to 34, with 31 percent ranking it a leader in those areas, compared to 20 percent the year prior.

With promising growth opportunities ahead, analysts are either “neutral” on the stock as they await execution results, or have the shares rated at “outperform.”

Instinet’s Simeon A. Siegel, who has a “neutral” rating on shares of Lululemon, said the company’s goals stated in the Investor Day presentation were “in line with bullish expectations.” Management, he said, “put forward exciting goals, without citing specific levels and, interestingly, despite posting industry leading comps, the metric wasn’t mentioned once.”

While Siegel thinks there’s no question that growth lies ahead, whether those goals are realized falls to management’s ability to execute. There’s also a concern that incremental growth comes at structurally lower margins in the international component and in new categories.

Cowen & Co.’s John Kernan and Telsey Advisory Group’s Dana Telsey both have “outperform” ratings on shares of Lululemon.

Kernan said the roadmap from Investor Day suggests a $30 billion-plus valuation and stock price of $240, but that’s also dependent on management’s ability to unleash Lululemon’s full potential to become an experiential brand. Product innovation, new product categories and services that include a membership loyalty program currently in pilot-testing mode, could all help the brand achieve its lofty goals.

Telsey has a target price for the shares at $200, based, in part, on the experience and depth of the management team’s deep bench, a flexible store base expansion program, and strong cash flow generating potential in the five year plan.