Lululemon's Prospects Remain Fit

Athletic apparel maker Lululemon Athletica Inc LULU reported fourth-quarter results that came in better than expected but were overshadowed by management's outlook of higher investments in 2021.

The Lululemon Analysts: Wells Fargo analyst Ike Boruchow maintains a Hold rating on Lululemon's stock with an unchanged $330 price target.

Telsey Advisory Group analyst Dana Telsey maintains at Outperform, $440 price target.

BofA Securities analyst Lorraine Hutchinson maintains at Buy, price target lowered from $425 to $410.

KeyBanc Capital Markets analyst Matthew DeGulis maintains at Sector Weight, no assigned price target.

4 Key Takeaways: Lululemon reported "strong" fourth-quarter results and management offered a "great deal of color" on its outlook for the full year 2021, Boruchow wrote in a note. The four key takeaways from the report and management's guidance include:

1. Despite ongoing COVID-19 pandemic challenges, Lululemon ended 2020 on a strong note, including a 20% comp growth, 92% e-commerce growth and 13% EPS growth.
2. Lululmeon's in-home fitness business Mirror generated revenue of $170 million in 2020 versus expectations of $150 million. Management intends on investing in the business by adding new studios in 2021 so the unit's performance in 2021 will now be 3% to 5% dilutive to earnings versus an original outlook of modestly accretive. This is likely why full-year EPS was guided at $6.30 to $6.45 versus the consensus estimate of $6.71.
3. 2021 is off to a good start as management expects first-quarter sales to be higher by 40% versus 2019 levels. But the company will face difficult compares in the second and third quarter and EPS could fall short of consensus estimates in both quarters.
4. The online channel is expected to grow in 2021 after strong momentum in 2020.

Related Link: PreMarket Prep Stock Of The Day: Lululemon (Also on Benzinga's YouTube Channel.)

Telsey — Topline Trends Remain Strong: Lululemon continues to benefit from "impressive" demand trends as fourth-quarter results exceeded management's mid-January update, Telsey wrote in a note. First-quarter sales and earnings guidance was also guided ahead of expectations.

While the full-year outlook fell short of expectations, the underperformance is mostly coming from increased investments in Mirror, the analyst wrote. Management deserves the benefit of the doubt as it has a track record of successfully investing in long-term growth initiatives.

BofA — Store Sales Will Rebound: Lululemon's management guided for first-quarter store sales to come in flat to slightly down from 2019 levels and this marks a "nice uptick" from down 29% in the fourth quarter, Hutchinson wrote in a note. Physical retail sales should continue rebounding as the reopening process progresses.

The company is guiding for 40 to 50 net new store openings in 2021, 30 to 35 of which will be outside of the U.S. At the same time, management's lower store investments will help support gross margin, but the higher digital investment will add to SG&A.

Wells Fargo — Valuation Concerns: Lululemon faces a large opportunity ahead from its attire business while the Mirror platform continues to expand, DeGulis wrote in a note. But the stock is trading at 43 times 2022 estimated EPS versus 29 times for the apparel group. The premium valuation is "fair," but warrants a neutral stance on the stock.

LULU Price Action: Shares of Lululemon were trading lower by 2% Wednesday afternoon at $310.80.

(Photo: Lululemon)