4 Reasons Lululemon Has 25% Upside

Lululemon Athletica inc. LULU shares are up almost 5 percent after analysts at Wells Fargo upgraded the stock to Outperform from Market Perform. The firm said "several key negative catalysts are now behind" the company: A tough third quarter, conservative views on the holidays, a "de-risked" first quarter and a "pushed out" margin target.

4 Reasons For 25% Upside

"Put simply, we believe that meaningful improvements to the company’s previously-inefficient supply chain should begin taking hold in 2016," senior analyst Ike Boruchow said. These benefits are expected to include lower product costs, fewer markdowns and a reduced reliance on air freight. A "secular shift" to athleisure is an added macroeconomic bonus.

Going forward, Boruchow expects a valuation range on Lululemon shares between $64 and $66 per share -- the stock presently trades near the $52 range. On a forward P/E basis, this represents a premium to Lululemon peers but slightly below the stock's historical average forward P/E of 30x.

The analyst, lastly, thinks Lululemon has a "significant margin recapture opportunity" on the back of a strategy that extends beyond its core women's market to male customers. Management, he added, expects 350-400 basis points of gross margin improvements over the next year and a half.