Wedbush Cuts Target On lululemon To $56 Amid 'Inventory Overhang'

• Shares of Lululemon Athletica inc. LULU are down 29 percent in the last three months and trading close to their 52-week low of $43.14.
• Wedbush’s Morry Brown maintained an Outperform rating on the company, while reducing the price target from $78 to $56.
• Although inventory overhang is likely to keep shares range-bound in the near term, meaningful growth opportunities and the company’s strong brand equity cannot be ignored, Brown stated.

lululemon’s margin recovery is likely to be delayed, as the sustained high inventory levels are expected to continue exerting pressure on gross margins into 1Q16, analyst Morry Brown mentioned. This could keep shares range bound in the near term.

The company’s inventory was up 56 percent in 3Q, similar to the 55 percent increase in 2Q, and is likely to increase in 4Q as well. “While some of 4Q’s increase is related to in transit inventory (as the company shift toward ocean freight and away from air freight), margins are likely to remain down YOY into 1Q16,” Brown wrote.

While the inventory overhang and timing of margin recovery remain concern areas, lululemon is poised to record meaningful growth, both domestically and internationally. The company’s strengths lie in its strong brand equity, with pricing power and margin opportunity throughout its supply chain once it passes the “current inventory bulge,” the analyst said.

The EPS estimates for 2015, 2016 and 2017 have been reduced from $1.95 to $1.79, from $2.47 to $2.19 and from $2.86 to $2.74, respectively.