Near-Term Execution On Inventory, Price Increases Carrying Lululemon, To Goldman's Surprise

Lululemon Athletica inc. LULU reported upbeat 4Q results on March 30. Goldman Sachs’ Lindsay Drucker Mann maintained a Sell rating for the company, while raising the price target from $43 to $48.

What The Results Say

Lululemon reported its 4Q EPS ahead of the GS and consensus expectations as well as management’s guidance. “Incremental data points were overall more positive for the story: comps are running better, gross margins were “less bad”, and excess inventory is being worked down,” analyst Lindsay Drucker Mann wrote.

Comps are likely to be more challenging for the company in the second half of the year. Moreover, higher competition in women’s athletic apparel is likely to limit store productivity and margins longer-term. Nonetheless, the 4Q results suggest that “near-term execution on inventory and price increases is carrying the business better than we had expected,” Mann commented.

Key Points

• Comp growth came in at 11 percent, driven by both traffic and pricing. “We believe LULU is benefiting from the combination of price increases on core items as well as the disposition of its large inventory overhang,” the analyst said.
• Lower pressure on gross margins, with price increases and the company’s cost efficiency programs.
• Guidance appears conservative, since Lululemon has projected 1Q comps decelerating towards mid-single digits.
• 5-year targets seem aggressive, as the company expects to double revenues with margins above 20 percent

Estimates Raised

The Goldman Sachs estimates for FY16, FY17 and FY18 have been raised from $1.98 to $2.10, from $2.29 to $2.38 and from $2.57 to $2.63, respectively.