Macquarie Still Bearish On Lululemon, Says It's Waiting For This

Macquarie's Laurent Vasilescu maintained an Underperform rating for Lululemon Athletica inc. LULU, with a price target of $39. He said that the 56 percent y/y increase in Lululemon's inventories so far is a cause for concern and may restrict the company's profitability. Although the company expects its 1Q16 inventory levels to come in-line with the sales trends, it needs to focus on inventory turn, analyst Laurent Vasilescu said. He believes that Lululemon should focus on its excess inventory as of 3Q15 rather than talking about 1.1 million units identified in 1Q15. Lululemon expects the markdowns to clear out the excess inventories to exert pressure on its gross margins. "To resolve the inventory by 1Q16 – we calculate 60bps of markdowns for 4Q15 and 230bps of markdowns for 1Q16," the Macquarie report stated. Lululemon needs flattish inventory growth in 1Q16 to see the resolution of the inventory issue. The company's 10K for last year had $190MM of off-balance-sheet product purchase obligations to manufacturers. Vasilescu said that prior 10Ks did not have these obligations, and March's 10K would reveal whether these obligations have continued in 2016.