BofA Highlights Lululemon's Menswear Business, Store Flexibility Ahead of Q4 Print

Lululemon Athletica inc. LULU will report fourth-quarter earnings after the close Tuesday, its first quarterly print after longtime CEO Laurent Potdevin stepped down in February due to workplace conduct issues, something sportswear competitor Nike Inc NKE is also dealing with.

The Analyst 

Bank Of America Merrill Lynch’s Rafe Jadrosich maintains a Buy rating on Lululemon with a $90 price target.

The Thesis

Lululemon has carved out a niche in the sportswear world and continues to be a leader in premium athletic apparel.

BofA's Jadrosich said he expects the company’s momentum from 2017 will continue into 2018, and the firm is modeling same-store sales growth of 8.6 percent. (See the analyst's track record here.)

The analyst projects 20-percent-plus EPS growth in 2018 supported by mid-single digit comps, 46 new stores, with 15 being international, acceleration in operating margin expansion and benefits from a 53rd week.

BofA's forecast does not include any benefits from tax reform or buybacks, which the could drive even more upside, Jadrosich said.

Innovation Drives 2018 Outlook

Recent store checks show that Lululemon’s new fabric innovations, Everlux and Nulu, are driving strong sell-through in the women’s pant category, Jadrosich said. 

“We have also seen an influx in new prints, patterns, and colors over the last several months. We believe LULU is still in the early stages of integrating new fabrics and prints into its assortments, and the strong trends for LULU’s newest innovation bode well for 2018."

Men’s Business Continues To Grow

While Lululemon has long had a female-oriented image, its menswear category is increasingly contributing to sales. The mens business now makes up 19 percent of sales. BofA projects strong double-digit growth in the mens pants category, supported by the expansion of the ABC pant offering with more styles.

“Our checks indicated impressive sell-through of the ABC pant in-store and online,” Jadrosich said. 

Lululemon’s mens business is driving higher store traffic, the analyst said. 

Agile Store Setup Creates Growth Opportunity

Lululemon's locals concept — smaller stores ranging from 1,000-2,000 square feet — is allowing the company to open stores in smaller markets, according to BofA. 

“LULU has been positively surprised by the densification opportunity and success of new formats including the 12 co-located women’s/men’s (5,000-6,000 sq. ft.) stores opened in 2017,” Jadrosich said. 

Expect Lulu To Look Externally For New CEO 

Jadrosich said he expects Lululemon to look outside for the next CEO.

“We believe LULU will target a CEO with a global consumer leadership background and experience with premium brands. Despite recent management turnover, we believe Lululemon is well positioned to recruit strong talent given its strong brand momentum, global underpenetration and control of its distribution." 

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Lululemon Is Gaining Men's Approval, China Is Growing Rapidly

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Photo via Wikimedia.