Analyst Stretches Lululemon's Price Target After Meeting With New CEO

Lululemon Athletica inc. LULU has been on a upward trajectory this year that should continue, Cowen said Tuesday following a meeting with CEO Calvin McDonald. 

The Analyst 

Cowen analyst John Kernan maintained an Outperform rating  on Lululemon and raised the price target from $175 to $185.

The Thesis

Kernan said he left a meeting with McDonald impressed with the CEO's passion for the brand from a guest’s perspective. (See the analyst's track record here.) 

“He views the brand not only through transactions but also experiences, with "memorable," "shareable" and "repeatable" as foundations for the future of the relationship with the guest,” Kernan said. 

Cowen expects continued evolution in Lululemon's personalization, checkout, search and loyalty initiatives and in its social media presence. 

The CEO will take a trip to Asia as growth outside of North America accelerates, Kernan said; only 12 percent of sales come from outside the continent now.

Lululemon’s price to earnings has expanded from 22x to 42x in the past 12 months, but a cycle of estimate revisions and a 19-percent EPS CAGR is supporting more upside, the analyst said. 

Cowen is modeling scenarios that would take the athletic apparel brand's market cap from $27 billion to $34 billion within three to four years.

Menswear is a considerable opportunity for Lululemon, where sales are on track for $643 million in 2018 and tracking ahead of management’s 2020 goal of $1 billion.

Lululemon continues to separate itself from the competition through the highest-quality product, consistent cycles of innovation and newness augmented by connections with the community through a best-in-class in store experience, Kernan said. 

Lululemon is able to maintain sector-leading operating margins thanks to its ability to sell products at full price and its lack of marketing — a key expense for most athletic apparel competitors at up to 5-7 percent of sales, the analyst said. 

Price Action

Lululemon shares were up 0.14 percent at $161.87 at the time of publication Tuesday. 

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