Saturday, March 8, 2014

Lululemon Athletica: What’s With All the Positivity?

It’s been a painful 12 months for shares of Lululemon Athletica (LULU)–but is the stock working out the kinks? It could be, as another pair of analysts sent good vibes its way.

For starters, Oppenheimer upgraded Lululemon’s shares to Outperform from Perform, citing the possibility of a pickup in sales growth in the quarters ahead. Then along came William Blair’s Sharon Zackfia and team, who see  sales accelerating in the months ahead. They explain:

While we believe much of 2013 for lululemon can be best characterized as self-inflicted pain (sheer luon, unexpected CEO resignation, ill-worded televised chairman comments), it is worth noting that lululemon is still likely to easily outperform the vast majority of retail in 2013, with an approximate 4% brick-and-mortar comp gain and an approximate 10% comp gain including e-commerce. With some encouraging early data points on customer reception of spring product, we see the potential for comps to begin improving as early as the first quarter and view the stock as a compelling risk/reward opportunity from current levels of 22 times our 2014 estimate.

Still, Lululemon Athletica faces a big challenge from the Gap’s (GPS) Athleta brand. Belus Capital’s Brioan Sozzi explains:

One way to win an already bloody war?  Find a new tactic that will surprise the entity being fought with such crazy effort.  In many respects, that's precisely what Gap's more rugged activewear brand Athleta has begun to execute on in its heated battle with the calmer, yoga centric Lululemon.  How so?  By offering very unique in-store workout classes each day, week after week.  Whereas Lululemon, according to its website "every week, Lululemon stores and showrooms push aside their products, unroll yoga mats, and turn their space into instant yoga studios", Athleta's scheduled class differentiation keeps its stores exciting.  Most importantly, it brings in consistent traffic of folks with likely different personal preferences, meaning the company has the opportunity to show that its products are more versatile compared to Lululemon.  More versatility, more value in the mind of the consumer.

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Nomura's Robert Drbul initiated Lululemon as a Buy on Feb. 13, while RBC upgraded the company on Feb. 7 and Citigroup upgraded Lululemon on Feb. 6.

Shares of Lululemon have gained 0.8% to $51.47 at 3:31 p.m., while the Gap is little changed at $42.33. Nike (NKE) has risen 0.3% to $75.32, while Under Armour (UA) has jumped 1.4% to $107.51. Maybe it wasn’t the uniforms after all.

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