Analyst: Lululemon Can't Outrun The Competition

Amid an industrywide coverage initiation, Bernstein analyst Jamie Merriman has placed a Market Perform rating on Lululemon Athletica inc. LULU with a $66 price target.

While the athleisure innovator faced a challenging start to 2017 from issues largely stemming from e-commerce, “we believe the company has corrected course and will see improving comps across the remainder of the year,” said Merriman.

Why Lululemon Stands Apart

Although Bernstein is bullish on the entire industry, the firm remains concerned about increasing competition as the space becomes more crowded.

“Given the growth in the segment, athletic apparel has attracted plenty of new entrants, both startups who offer athletic apparel specifically and from traditional fashion retailers like H&M hoping to benefit from the category growth,” said Merriman.

Brands looking to capitalize on a segment that the company helped pioneer, albeit doing so with more competitive price points than Lululemon, which remains an aspirational brand.

Some of Lululemon's biggest growth opportunities come from International expansion and from its growing men’s line. North America currently makes up 93 percent of company revenues in 2016, despite a growing appetite for sportswear in China. Merriman believes that revenue growth will continue to be supported by store growth both in North America and International.

Another concern surrounding Lululemon is its mixed identity between the company’s messages and how consumers view the company’s products.

Customer Preferences And Performance Vs. Fashion

Lululemon maintains that every product starts with performance, but according to a Bernstein survey, 40 percent of consumers suggest the primary reason they buy Lululemon products is fashion.

Those following the industry know that performance has been out of style for some time, but luckily for the company, consumers see Lululemon as a fashion-first brand.

Merriman expects the company’s growth to slow from the double-digit growth it has become accustomed to over the last decade, and is forecasting five-year, 9-percent sales CAGR.