Lululemon Athletica inc. (LULU) Recovery in the Next 5 Years?

Limited Brands, Inc. (NYSE:LTD) hopes to transition the pink brand into its own separate retail stores. The pink yoga branded pants are sold at a much lower average retail price when compared to Lululemon, giving women an entry-level option. Yoga came back in style because of Lululemon Athletica inc. (NASDAQ:LULU). Pink is planning to capitalize on Yoga-apparel at the low end. Not only that, the company’s management team believes it can further maximize profitability through remodeling the Victoria’s Secret stores.

Analysts believe these measures will work out over the long term. Analysts anticipate 10.1% average growth in earnings over the next five years. The company has a generous 2.4% dividend yield. The valuation is a little rich at a 19.5 earnings multiple.

But there’s always the possibility of future earnings surprises based on a sudden improvement in consumer sentiment paired with a reduction in share buybacks, with the cash put toward investment into a greater number of store openings in emerging markets. Also, if conditions in the European economic zone were to improve, it is highly likely that Limited Brands, Inc. (NYSE:LTD) will increase the rate of store openings in Europe. The company currently plans to open eight additional stores in Canada, two stores in the Middle East, and three additional stores in the United Kingdoms. The company currently has 126 international stores at the end of the first quarter and plans to open an additional 74 by the end of fiscal year 2013.

Conclusion

Fashion retailers have periods when investment is prioritized rather than maximization of net income through cost-cutting initiatives. Investors shouldn’t bail out of these company’s because of slight misses due to the need to invest into operations, product shortages, or an increase in staffing levels in order to meet the level of service expected.

The loss of the CEO will be felt, but going forward the company had a planned exit for the CEO. So it is likely that the business will continue to meet performance expectations so as long as the board has groomed a strong contender for the position.

Lululemon Athletica inc. (NASDAQ:LULU) has a proven business model and following the investment period it is highly probably that the company will be able to report substantial improvements in earnings growth. Investors should also look to diversify by adding Limited Brands, Inc. (NYSE:LTD) to their portfolio in order to even out the mix of Yoga-driven growth. Investors should also include Macy’s, Inc. (NYSE:M)because high-end fashion should also include brands like Calvin Klein, Ralph Lauren Corp (NYSE:RL), The North Face, and Levi’s.

Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica.

The article Lululemon Recovery in the Next 5 Years? originally appeared on Fool.com.

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