Plenty of companies are clearly taking the cost-cutting approach to their business models in search for efficiencies and margin improvement. Lululemon (NASDAQ:LULU) appears to be one such company, with news of Lululemon layoffs sending shares of LULU stock higher on the day.
The company announced plans to shut down its Washington distribution center after also previously announcing plans to add a new warehouse in L.A. and bolster its footprint around the U.S. The company did note that some employees will likely shift to other locations, but 128 individuals will unfortunately be let go.
This move comes at an interesting time for Lululemon, as business remains strong, and the company has shown a focus on growth in recent quarters. Let’s dive into what to make of this announcement and why LULU stock is up on the news.
Lululemon Layoffs Send Shares Higher
According to recent reports, Lululemon filed a WARN notice with Washington state’s Employment Security Department on Thursday, signaling its plans to shutter this distribution facility and engage in layoffs. Like many retailers looking to enhance margins and focus their efforts on their most profitable locations, this move appears to have taken the market somewhat by surprise.
This year, LULU stock has been on a downward trajectory, losing more than 30% of its value since the start of the year. Management appears to have gotten the message — that investors want to see financial discipline in addition to growth. It’s certainly not a growth-at-all-costs market anymore, and these layoff headlines are becoming more common as a result.
The company noted that it took on “a review of our current infrastructure and the evolution of our fulfillment strategy,” which ultimately led to this decision. Lululemon noted that this was one of the company’s smaller fulfillment centers, and existing volumes can be serviced from other locations.
Overall, the market appears to view this streamlining of operations as a net positive for the company. However, I think that bottom-line growth will likely matter more for the retailer as investors look for greater returns on capital and a less-elevated multiple.
That said, at 28 times trailing earnings, this stock is certainly not expensive for the growth it provides. After this announcement, I think Lululemon deserves a spot on investor watch lists.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
