Lululemon Attempts Transformation From Yoga Apparel To Fast Fashion

| About: Lululemon Athletica (LULU)


Lululemon launching new fast fashion brand &Go.

Shares down nearly 50% from 52 week highs.

Strong third quarter earnings.

Lululemon (NASDAQ:LULU) management and investors would love to forget the disastrous 2013 that saw the company post weakened sales growth and negative press mentions that harmed the company's brand. With these events behind the company, Lululemon is ready to forge ahead and has a brand new brand to help build sales.

Lululemon has quietly rolled out &Go, a new collection of fast fashion branded clothing. The line includes sundresses, pants, and tank tops and will be available in Lululemon's 250+ stores and online. The &Go tagline found on Lululemon's site is as follows:

"Every minute counts. You're out the door at daybreak and moving until midnight. You Don't have time for a wardrobe that keeps forcing you to change. You're busy living. We get it."

The launch of &Go comes as Lululemon continues to feel pressure from other companies launching yoga apparel. Gap's (NYSE:GPS) Athleta brand is one of many that is turning into a real rival with lower price points than Lululemon. The launch of this lifestyle brand and casual clothes could set Lululemon apart and get people back in stores shopping again. The real risk and downside here is the price, with dresses costing around $198 and shirts ranging around $58. However, the current customers at Lululemon seem okay with shelling out up to $100 for a pair of yoga pants, so I don't see price being a huge issue.

In the third quarter, Lululemon saw strong growth. Total revenue increased 20% to $379.9 million. Growth was led by same store sales increase of 5% and an increase of 37% in the company's direct to consumer business segment. Direct to consumer made up 16.3% of the third quarter revenue and continues to be one of the company's key growth metrics.

The new brand could provide a meaningful change of heart for investors. Back in January, Lululemon updated its guidance and is now forecasting sales below previous forecasted numbers. Fort the fourth quarter, Lululemon expects revenue of $513 to $518 million, down from a prior range of $535 to $540 million. Earnings per share estimates were also forecasted down to a range of $0.71 to $0.73, from a previous range of $0.78 to $0.80. Management said, "since the beginning of January, we have seen traffic and sales trends decelerate meaningful."

Shares of Lululemon were down 20% in 2013 and sit off another 16% in 2014. Shares now trade around $49, which is near the bottom of the company's 52 week range ($44.32 to $82.50). It's hard to believe that shares now trade for almost half of what they traded for in the last year.

According to Yahoo Finance, estimates for the company are $1.84 billion in fiscal 2015 revenue, an increase of 16%. Earnings per share estimates come in at $2.20 for fiscal 2015. A look at analysts' take on Lululemon paints a mixed picture. Analysts like Janney Capital and Credit Suisse remain bearish due to weak same store sales and competition. However, RBC Capital, Wells Fargo, and Oppenheimer are all still bullish, citing a beaten down stock and Midwest expansion.

I see shares of Lululemon being one of the turnarounds for 2014. I think shares will regain some momentum as the launch of &Go is picked up by news outlets. A positive launch and positive same stores sales growth in the first quarter could send shares to the $60 level. I am bullish on shares of Lululemon going forward.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LULU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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