Analysts at major Wall Street firms are comfortable picking up shares of Lululemon Athletica (LULU) as its international aims appear meritorious.
Shares of the stock are up about 3% in Thursday morning trading, building on an over 40% gain year to date as sales surge and a break into menswear progresses incredibly successfully.
However, the company's expansion beyond its North American home base could actually offer the most upside as it grows rapidly.
"Our five-year vision details our path to double our men's business, double our digital business and quadruple our international business during this time," CEO Calvin McDonald said.
The progress so far has already been remarkable, especially in Asian nations with growing middle classes, eager to spend on more upscale apparel.
"China in particular is on track to post impressive growth this year," Stuart Haselden, COO and VP of International told analysts on Wednesday. "In Q1, our China team delivered nearly 70% market growth and entered three new cities with strong store openings in Chongqing, Xi'an and Xiamen...we remain on track to open 10 to 15 stores in China this year."
The strength in China, bolstered by Alibaba's (BABA) Tmall and Tencent's (TCEHY) WeChat providing further saturation in the market, is key as many worry about trade retaliations against U.S. and Canadian companies in the region.
E-commerce revenues in China grew 100% in the quarter, while APAC revenues overall leapt about 40%, driving international sales 39% higher year over year.
"International results were strong, with China a particular standout," RBC Capital Markets analyst Kate Fitzsimons said. "European results were also strong with 40% gain and double digit comp across all channels, with certainly a pickup in European momentum in recent quarters an additional bright spot as the brand recognition gains critical mass."
With the company aiming to open up to 10 stores in Europe and 15 stores in China, the sales momentum from the bricks-and-mortar operation should continue in the coming quarters.
"With lulu's brand still having a place domestically and International an untapped opportunity (just 6% today), our top-line build points to $4 billion by FY20 (vs. ~$2.0B in FY15)," J.P. Morgan analyst Matthew Boss wrote in a note to clients.
He cited international expansion as his key factor for top-line growth, aided by positive data from menswear and comparable sales. Based on the bullish outlook abroad, he moved his price target to $200 from $197 and retained the stock as a key name on his "analyst focus list."
Still, he warned that the growth outside of its staple regions will not be without hiccups.
"This comes with risk given the execution and focus needed to efficiently open mid-teens square footage while supporting mid-single-digit comp growth through product innovation," Boss said. "With the need for ongoing supply chain investments, and spending in support of the international and omnichannel and brand building, margins are likely to remain under pressure."
Of course, expansion across different countries also adds the impact of foreign exchange that can become a headwind and is out of management's control.
With an extremely high valuation, any significant issues could have a much greater impact than they would have on comparable retailers. That could lead to some volatility as the name comes toward its five-year bull target.
"It all comes down to an individual's risk tolerance," Real Money contributor David Butler said following the earnings release. "Being a value man, I find the price tag is too rich for my blood. But names certainly seem to be outpacing more value-oriented plays in recent years. So, I'm going to step outside of my comfort zone and call Lululemon a decent long-term buy."