Oppenheimer Is Bullish On Lululemon Ahead Of Q3 Earnings

Lululemon Athletica inc. LULU has a growing men’s apparel category and is guiding to reach $1 billion in international sales by 2020 — and while the athleticwear retailer isn’t immune to sector pressures, it has positive comp opportunities, according to Oppenheimer.

Lululemon is up 5 percent off its August lows and is not rallying with other retail stocks, analyst Anna Andreeva said in a Monday note.

Oppenheimer’s checks reveal the company’s product is “improving,” and there’s been a positive customer response to Everlux fabric, the men’s “Strength To Be” advertising campaign, Andreeva said.

The company has been unfairly knocked for its warehouse sales, according to Oppenheimer: Lululemon doesn’t view them as revenue drivers, but rather as a means of clearing inventory profitably — and the sales are crowd-pleasers.

Oppenheimer maintains an Outperform on lululemon with a $68 price target.

Lululemon’s third-quarter guidance for “relatively flat” gross margins “looks conservative," Andreeva said.

International Growth, Mostly In Asia 

The firm assumes that two-thirds of lululemon’s new square footage will come from overseas markets, Andreeva said.

Oppenheimer projects lululemon will open 30 stores annually, with two-thirds of those in Asia.

The firm models e-commerce penetration at 30 percent, above the company’s 25-percent goal. This takes into consideration China’s e-commerce penetration, which is double that of the U.S., Andreeva said.

Lululemon’s Supply Chain

The yoga pants manufacturer has mostly cleaned up the front of its design and production process, lessening its dependence on air freight, according to Oppenheimer.

While the product cycle remains long — eight to nine months — the changes drove product margins, Andreeva said.

Lululemon is speeding up its production process, including fabric platforming and the moving of a factory partner from Sri Lanka to Haiti, the analyst said.

Looking Forward

After a weak 2016 holiday season, Lululemon holds an opportunity in jackets and outerwear, with new merchandising lead Sun Choe’s first assortment launching this month, Andreeva said.

The company has fewer international openings on the horizon, with two new stores in the Asian market expected in the fourth quarter of 2017, according to Oppenheimer, and an easier compare.

Oppenheimer is projecting an upside to the Street’s gross margin estimate of 20 basis points.

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