Lululemon shares rally on restructuring of girls' stores

TORONTO (Reuters) - Lululemon Athletica Inc LULU.O shares rallied as much as 16 percent on Friday as investors responded to better-then-expected quarterly results and news that it would close most of the stores in its girls apparel unit.

People walk past a store by yogawear retailer Lululemon Athletica in New York City, U.S., March 30, 2017. REUTERS/Brendan McDermid

The stock rose $6.11 to $55.78 in Nasdaq trade after touching as high as $56.85 on the news, which came out after markets closed on Thursday.

The company’s shares regularly post big moves after quarterly results. In March they dropped more than 23 percent the day after it posted a disappointing outlook for the first quarter.

The yoga-wear maker said it would close nearly all of its 55 unprofitable Ivivva stores for girls. It also said it recovered after a disappointing start to the quarter as it introduced new products and fabrics.

Evercore ISI analyst Omar Saad said in a note to clients that new products should help sales, pointing to Enlite, a high-end sports bra introduced in early May that sells for $98, or about twice the price of other Lululemon bras. It has become the company’s top-selling bra, even though it is primarily sold online, according to Lululemon.

Strong demand for Enlite shows that women are willing to a pay a premium for quality, innovative sports apparel, said Saad.

Some analysts cautioned that it could be difficult to keep momentum going, pointing to declines in traffic at Lululemon’s physical stores and intensifying competition from lower-priced competitors.

“To get (new shoppers) indoctrinated into the brand, the store has to be major part of that,” said Susquehanna Financial Group analyst Sam Poser, who is “neutral” on the stock.

He said the stores need to take steps to drive new traffic, including offering bolder color selections for men and holding more special events such as yoga classes.

Andrew Burns, an analyst with D.A. Davidson & Co, said Lululemon remains a healthy brand but noted its sales per square foot, a key financial measure for investors, have declined from a peak of $1,894 in 2013 to $1,521 last year.

Burns, who has a “neutral” recommendation on the stock, said the elevated sales per square foot figures are unsustainable, particularly with increased competition.

Reporting by Solarina Ho; Editing by Jim Finkle and Cynthia Osterman