It hasn't been a great year for apparel companies such as TheGap, American Eagle Outfitters, and Nike as they struggle to attract discretionary spending, particularly from the sizable but cash-strapped millennial generation.
But one company seems to have clicked: Lululemon Athletica (LULU) - Get Report . Vancouver-based Lululemon, best known for its stylish yoga wear for women, should continue to find favor among customers, as well as producing attractive profits for investors. This is despite concerns that former chairman Chip Wilson expressed in a recent open letter that Lululemon had "lost its way" and was ceding market opportunity to competitors.
Lululemon has been at the forefront of the hot "Athleisure," wear fashion trend, in which comfortable workout gear can double for exercise and general use. The company has also responded quickly to new challengers, including Nike, Under Armour, The Gap and H&M, in the female sportswear space by moving into menswear. Lululemon's first-quarter sales rose 17% year-over-year, to $496 million with menswear recording a 21% increase from last year. The company expects revenue from menswear to touch $1 billion by 2020.
Lululemon has also expanded into Europe and Asia with new stores opening in South Korea, Singapore, Hong Kong, Japan, Switzerland, and London.
To be sure, Lululemon revenues dipped slightly, and the company missed analysts' expectations on earnings per share in the first quarter. Lululemon has gained close to 34% this year, better than Nike, Gap and Under Armour, which have been in negative territory. But in his letter, Wilson pointed out that Lululemon was trailing Nike and Under Armour since 2013. That's when the company recalled black yoga pants because they were see-through. Investors subsequently filed a class action suit against the company for failing to disclose the defect. The combination of events sent the stock into a tailspin.
Early this year, Lululemon denied Wilson, who owns about 14% of the company's shares, the opportunity to speak at its annual investors' meeting. It held the meeting as a webcast.
Comparable sales, improving gross margins, and a better grip on inventory have also helped Lululemon set a strong foundation for the year ahead, making it a great investment pick if you're looking in the retail space.
Total comparable sales, including same-store and direct-to-consumer sales, increased by 6% (8% on a constant dollar basis).
Lululemon even managed to clear out inventories without margins suffering. This quarter quarter marked the first since a disastrous port-strike last year that the company's inventory build grew on pace with sales. For the rest of the year, the company expects inventory growth to be lower than its forward sales trends. All this offers evidence of the power of the "athleisure wear trend.
Moreover, analysts are bullish on the stock.
Nomura has reiterated its "Buy" rating on the stock, with an increased target price of $75, while Jefferies and Wells Fargo upgraded the stock to a "Buy" and "Outperform," respectively, earlier this year.
Some analysts still see a further upside of 20% for the stock over the next 12-month period. That would make some comfortable profits for investors. Now is a great time to get in on this trend-setting stock.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.