Lululemon up 11% as investors buy into turnaround

Lululemon shares jumped nearly 11 percent on Tuesday, as signs of a sustained turnaround at the athletic wear firm started to take shape.

The yoga-centric brand, which over the past few quarters has seen revenues improve following a series of public relations blunders and fashions that missed the mark, not only topped Wall Street's sales and earnings expectations, but also saw trends accelerate toward the end of the first quarter.

Those trends have continued their momentum in the current quarter, causing management to raise its full-year sales and earnings forecasts.

A Lululemon Athletica store in Pasadena, California.
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A Lululemon Athletica store in Pasadena, California.

Still, challenges facing the retailer in the current period include working through the aftermath of port delays on the West Coast, which have left Lululemon with bloated inventories, putting it at risk for heightened markdowns.

"They've done a very good job getting the women's business back on track," FBR Capital Markets analyst Susan Anderson told CNBC. "The concern we have is the pressure that it's going to add to the margins."

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That pressure stems from the brand's more high-fashion product mix, which is costlier to produce and more prone to missing the mark with fickle consumers.

So far, though, this trendier merchandise has turned more of the store's visitors into buyers. On a call with investors following its first-quarter results, CEO Laurent Potdevin noted that the company's sales trends improved as its fresh inventory—which had been held up due to the port delays—hit the floor in mid-April.

The brand is also poised for growth from its expansion overseas, and in its fast-growing men's and children's categories. During the quarter, the 19 percent comparable-sales gain in its men's unit, as well as the 29 percent boost at its children's Ivivva label, outpaced its companywide 6 percent same-store sales growth.

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"The women's business is still nicely positive but I think the real growth is coming now from the men's business," said Anderson, who has a "perform" rating and $65 price target on the stock.

Lululemon is looking for ways to ramp up these two high-growth categories. Over the past year, it has opened 13 new Ivivva stores, including seven in the most recent quarter. Potdevin added that the firm is eyeing opportunities to expand its men's footprint, including additional standalone stores in certain markets. Currently, the firm only has one dedicated men's shop in New York City.

But Potdevin said he is "most excited" about the potential to put men's and women's merchandise in the same location, because its "female guest still shops a lot for him."

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Despite a pickup in momentum, one challenge facing the athleticwear firm is heightened inventory levels stemming from the West Coast port delays. Management said it would work through this late merchandise by waiting to put two-thirds of it on the selling floor (at full price) in the second half, and sending the other third to outlets and warehouse sales.

Investors appear to be on board with the brand's turnaround story, with the company's shares up an impressive 45 percent over the past year.

"We believe the Lululemon story is unfolding favorably," Guggenheim Securities analyst Howard Tubin said.

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