Lululemon Athletica shares climbed today after analysts from at least two firms explained why they see strong potential for the yoga apparel retailer in 2016. Analysts at both Jefferies and Wells Fargo upgraded the stock and predict that this year will bring a rebound for the embattled company. Following the upgrades, shares of Lululemon Athletica rose by as much as 6.69% to $55.97 per share. The stock plunged last month after management provided a bleak outlook for 2016.
Lululemon Athletica upgraded to Buy at Jefferies
Jefferies analyst Randal Konik upgraded his price target on Lululemon Athletica from Hold to Buy and set a price target of $70 per share. He sees several areas of potential upside which he expects to demonstrate that the company is on track for a “sustainable recovery.” In particular, he sees big opportunities in the area of margins, which he expects to expand this year. He doesn’t believe the current consensus estimates for Lululemon’s earnings this year reflect any amount of margin expansion.
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Despite maturation in the women’s fitness apparel category the Jefferies analyst also sees multiple potential areas of growth for the retailer, including expansion outside the U.S., extending some of its product lines, and online sales. He believes Lululemon Athletica’s brand is strong and apparently recovered from the damage done by past mistakes.
Lululemon looks beyond women’s apparel
The analyst estimates that men’s apparel now makes up about 15% of the retailer’s sales and expects to see further expansion in this area as it becomes another area of focus. He also believes children’s apparel presents even more opportunities.
Other positives for the apparel chain include declines in freight costs and changes in its supply system which should cut down on merchandise problems. The company is cutting down its use of air freight as well, which previously was used to deliver approximately 40% of its merchandise. He also believes Lululemon Athletica will no longer have to offer deep discounts on its products to clear out inventory. Further, he thinks that Wall Street’s expectations have been reset and expects the retailer to beat consensus estimates.
Wells Fargo upgrades Lululemon Athletica too
Analyst Ike Boruchow from Wells Fargo upgraded Lululemon Athletica from Neutral to Outperform and echoed the margin-related comments made by Konik. He estimates that the improvements the retailer made in its supply chain will raise its margins by 1.2% over the next couple of years. According to Bloomberg, supply chain woes marked by inefficient distribution and high costs were ultimately to blame for the problems that resulted in the retailer not getting the right merchandise into its stores. Use of air freight for deliveries costs four times more than ocean shipping, estimates Boruchow.
The analyst said the company is currently working to fix these problems and has also managed to reduce the raw material waste from the production of its clothing. He added that the retail chain has also improved its planning tools, which should help it manage and plan its inventory channels better. The analyst called Lululemon Athletica’s previous inventory management “subpar,” resulting in more and more inventory building up in the channels which required deep discounts to move it out.
Boruchow believes that the improved planning tools will help the apparel maker reduce the amount of order cancellations and changes made in the late stages. Last year customers were complaining that Lululemon’s prices were too high, and the Wells Fargo analyst said part of the issue was related to the delays and cancellations, plus the payments the company had to make to its fabric suppliers.
Other improvements to boost the Lululemon brand
For example, in addition to the merchandising problems, the Lululemon Athletica brand took a hit because of design issues. The apparel manufacturer recalled more than 300,000 shirts last year because of design issues with the drawstrings. It recalled yoga pants in 2013 because they were too easy to see through – a very serious problem that the brand is still recovering from.
Recently Lululemon Athletica bought on Lee Holman as creative director, which should help the company deal with the serious design flaws, notes Boruchow.