Jefferies Upgrades Lululemon, Calls Tiffany & Co Best Idea For 2016

• Lululemon Athletica inc. LULU shares are down 15 percent since July 4, while shares of Tiffany & Co. TIF have lost 21 percent.
• Jefferies’ Randal J. Konik upgraded the rating for Lululemon to Buy, while raising the price target to $70. He maintained a Buy rating and a price target of $100 for Tiffany.
• Both companies face good margin opportunity, Konik stated.

Lululemon

There are “convincing signs” of a “sustainable recovery,” in view of the healthy top-line trends and a clear roadmap to margin expansion, analyst Randal Konik said. He believes there is significant margin opportunity for Lululemon, which is not reflected in the current consensus estimates. Jefferies’ FY18 EPS estimate is about 8 percent above the Street’s expectations.

Konik believes Lululemon is “a multi-pronged growth story.” He explained that with the North American women’s business approaching maturity, there could be several levers to accelerate sales growth in the medium term. These include international expansion, product category extensions and e-commerce.

Lululemon’s brand is strong and sustainable, while the sector backdrop remains favorable, the analyst commented. He believes that expectations have been appropriately reset, and the company may even beat these.

Lululemon’s shares are down 6 percent year-to-date, and there appears to be room for the stock to appreciate. Konik expects the shares to be driven by “a combination of multiple expansion and upward earnings revisions.”

Tiffany

Konik commented that Tiffany was a “rare opportunity to get a high quality company at a discount.” He added that this stock was “our best new idea for calendar 2016.”

Tiffany represents a compelling long-term story, given its brand strength, pricing power and leverage to a growing luxury sub-sector and rising global wealth. Konik believes that the company has several levers to reaccelerate sales and could return to EPS growth backed by margin tailwinds.

Increased penetration of higher-margin fashion jewelry could drive an estimated 100 bps of gross margin expansion in the next 2-3 years. Significant deflation in input costs should boost gross margin by 300+ bps, “with benefits likely beginning in 2H’17 and flowing well into FY’18,” the analyst wrote.

Moreover, 80 percent of Tiffany’s SG&A is fixed, which should allow the company to benefit from significant expense leverage as its top-line recovers.

“As fundamentals stabilize and the trajectory of earnings becomes clearer, we believe investors with a longer time horizon and a willingness to ride out some near-term bumps, almost entirely related to FX, will be nicely rewarded,” the report added.