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Here’s Why Shares of Lululemon Are Climbing

March 30, 2016, 4:06 PM UTC
Lululemon Removes Some Of Its Popular Yoga Pants From Stores For Being Too See Through
A sign is displayed on a Lululemon Athletica store in Pasadena, Calif.
Photograph by Kevork Djansezian—Getty Images

If you want to understand why the shares of Lululemon Athletica were soaring Wednesday, look no further than its fourth-quarter results. On Wednesday, the Canadian yogawear maker issued fiscal fourth-quarter results that exceeded Lululemon’s (LULU) expectations — and said it would grow revenue from about $2.1 billion in 2015 to more than $4 billion over the next five years and more than double earnings as well.

The news sent shares up nearly 10% on Wednesday.

Those ambitious targets come as Lululemon and other athletic apparel makers like Nike (NKE) and Under Armour (UA) benefit from the “athleisure” trend – a term that signifies increased acceptance of wearing clothes meant for working out for day-to-day occasions. Nike and Under Armour also each unveiled strong long-term growth targets this past fall.

Lululemon Chief Executive Laurent Potdevin said the apparel retailer’s 2020 targets would rely on four key pillars.

  • Product innovation. Specifically, two key areas that the company’s design team would work hard on. Women’s athletic performance gear, especially the top’s business to match the strength of Lululemon’s tights. It also wants to expand the men’s business, which grew 24% in the fourth quarter and could hit $1 billion in revenue by 2020. Sales of gear to men only accounts for around 16% of Lululemon’s total business but it is outpacing overall revenue growth.
  • Store expansion. Lululemon opened 61 net new stores in fiscal 2015, and it wants to keep growing. The company’s executives hinted that it is tinkering with several new real estate formats, with more details to come later this year. But generally, the plan is to continue to build larger formats in big cities and high-traffic retail centers, while also mulling smaller formats when it fits the market.
  • E-commerce. The retailer said it hopes that the e-commerce business – which has grown by over 20% each year since launching in 2009. Like Nike and Under Armour, Lululemon talks about digital engagement as part of a broader branding opportunity. But unlike Nike and Under Armour, which each recently gave more details about how they plan to engage with social fitness, Lululemon executives didn’t give a lot of specifics about this initiative. Potdevin said “As our guests increasingly engage with us online, this channel will continue to grow rapidly and will likely account for 25% of our business by 2020.”
  • International. Lululemon opened eight new stores outside of North America in fiscal 2015 and expects to open 11 this year. It sees further expansion abroad in future years. The company specifically touted opportunities in Europe and Asia. It also projected the international business would add to earnings by the end of 2017.

Lululemon’s rosy long-term targets comes after it reported a 17% increase to fourth quarter revenue, totaling $704.3 million. Same-store sales jumped 11% and earnings per-share totaled 85 cents. All of those figures were above expectations. Outlook targets for the current fiscal year, however, were a bit soft.

The apparel retailer is facing a more challenging business environment as Nike and Under Armour aim to expand their women’s offerings. Gap’s (GPS) Athleta business is also a direct threat, as are new lines backed by celebrities including Kate Hudson and Carrie Underwood. All of these components make it tougher for Lululemon to continue to post strong growth, though the retailer’s executives say a keen focus on branding and product innovation will be differentiators.

Lululemon executives also indicated that gross margins – already lofty because of the high price points it commands – will soon become a key tailwind. “We see much of the margin recovery happening by 2018, with more modest improvements through 2020,” Chief Financial Officer Stuart Haselden told analysts.