Lululemon Athletica inc. Jumps After Price Target Increase

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Lululemon Athletica inc. Jumps After Price Target Increase
By WestportWiki (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Lululemon Athletica shares have outperformed the markets since the company updated its fourth quarter guidance, but analysts from at least one firm think the stock can move even higher. The retail chain has been struggling to repair the damage done to its brand by poor merchandising decisions and other mistakes, but the last earnings report offered a sign that it may have turned a corner and put the problems behind it.

Lululemon price target to $69

Shares of Lululemon Athletica climbed 2.04% to close the regular trading day on Thursday at $57.09 per share. The stock has risen by about 20% since the company’s earnings report last month. Recently management updated their guidance, exuding confidence as the yoga apparel brand saw higher than expected sales and strong improvement in comparable sales. The new guidance now includes results from a successful holiday shopping season and follows a disappointing guidance that was issued in early December with the third quarter earnings report.

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As a result of the improved expectations, Susquehanna analyst Thomas Filandro raised his price target from $59 to $60 per share and reiterated his Positive rating on the stock.

Lululemon Athletica management remains focused

The analyst said he’s encouraged by management’s focus on important initiatives, especially based on what looks like improvements in the company’s financial situation. Among the initiatives is product innovation, which he said continues to be the biggest priority as Lululemon must keep and grow its position within the premium fitness apparel market. Management is also planning to grow the amount of square footage in the stores by the double digits for right now.

Further, Lululemon Athletica continues to invest in its DTC distribution channel, which is particularly important because this was one area of weakness that attributed to the damage of its brand. When pairing these investments with new capability developments, Filandro said the stage is set for the performance of this channel to speed up.

The DTC channel has high margins as well, which makes improving its performance an important key for growth. The analyst noted that LTM DTC sales hit about $370 million and made up approximately 19% of the retail brand’s total revenue. It also generated a 42% EBIT margin.

International and margin expansion

Another area of focus for Lululemon Athletica is international expansion, and management is executing on this initiative by opening stores in Asia and Europe. The company had four Asian stores and six European stores at the end of the third fiscal quarter.

Filandro also sees opportunities in the area of gross margins as he expects to see about 300 basis points of improvement on product margins off the 2014 pre-foreign exchange base. He added that sequential improvement on this metric demonstrates that product margins are stabilizing as Lululemon moves past port-related costs and instead uses air freight for more of its shipping.

Lululemon Athletic is scheduled to release its next earnings report in March.

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