Deutsche Bank Sees Limited Upside Ahead For Lululemon

Although there seems to be “much to like” about Lululemon Athletica inc. LULU, its valuation suggests “limited upside ahead,” Deutsche Bank’s Paul Trussell said in a report. He maintains a Hold rating on the company, while raising the price target from $64 to $65.

Lululemon is a strong brand that “appears to be immune to the wider malaise gripping the retail industry,” Trussell mentioned. He added, however, the stock valuation did not seem compelling, and there were uncertainties around the company’s international expansion and margin recovery prospects.

Limited Upside

Since lululemon already has nearly 350 stores in North America, its growth depends on international expansion. However, the company’s growth in Europe has been muted. Management had previously indicated plans to open 20 stores each in Europe and Asia by the end of 2017, “but has backtracked from that plan,” Trussell pointed out.

At the ICR Conference, management had indicated that while solid gross margin expansion could continue through the first half of 2017, the pace may slow in the second half and beyond. “The deceleration is problematic because we see heavy SG&A investments ahead,” the analyst commented.

The EPS estimate for fourth-quarter 2016 has been raised from $0.98 to $1.00 to incorporate the company’s ICR update. The EPS estimate for FY 2017 has been revised up from $2.47 to $2.56, reflecting higher comps and greater operating margin expansion.

Related Link: Lululemon Stands Out At Retail's Biggest Conference