Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL) has taken a hit this year after it was forced to recall its Luon brand, but it is still growing rapidly as a high-quality luxury sporting wear brand. Citi analyst Oliver Chen thinks that Lululemon Athletica is still a buy, as it has created a profitable market niche that it continues to dominate, with room for expansion into men’s apparel.
Lululemon Athletica recalls yoga pants
Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL) had to recall its yoga pants last March for being too sheer, bringing on a wave of bad press and a fair amount of litigation, but the brand could still have long-term appeal. Lululemon Athletica has been an innovator with fabrics, and despite this misstep, there is no reason to believe fashionable yogis won’t come around in the future.
Chen expects the Luon recall to lower Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL)’s annual by $40 million to $45 million, about 3 percent of 2012 revenues, and he has lowered his guidance accordingly. However, Chen still thinks the company is a good long-term prospect. “LULU has capitalized on fabric innovation in the women’s athletic apparel market & created niche in the community & in the market amongst competitors,” he writes. “We see sustainable brand and product differentiation combined with a favorable valuation relative to our view of growth.”
Potential to expand sales
Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL) has the potential to expand sales through store growth and improved e-commerce sales, and by selling in more categories, notably men’s apparel. “Men’s product grew to 13.2 percent revenue share from 12 percent and we remain encouraged by the adaptive abilities of Felix Del Toro as he continues to make improvements in styling and fit,” writes Chen. “Lululemon Athletica continues to view menswear as major growth opportunity, and anticipate opening standalone menswear locations by 2016.”
Chen applies a multiple of 30x to a July, 2015 EPS of $2.66 to get a target price of $80. The target would be higher, but Chen is worried about supply chain problems (there have been product delays of more than three weeks this year) and the effect of Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL)’s transition to new management, though he has expressed optimism about the management team that has been assembled so far.