Bernstein Questions The Sustainability Of Lululemon's Momentum

Lululemon Athletic inc. LULU reported a "home run" earnings report Thursday, but Bernstein questions the sustainability of the athletic apparel maker's momentum.

The Analyst

Bernstein's Jamie Merriman maintains a Market-Perform rating on Lululemon's stock with a price target lifted from $80 to $99.

The Thesis

Lululemon's "stellar" first-quarter print marks a "strong" start to the fiscal year with a 20-percent EPS beat, Merriman said in a research report.

At the same time, Lululemon's stock is now trading at 31.7x next 12 months' P/E, which is more than one standard deviation above its five-year historical average PE and a "significant" premium to the market, the analyst said.

Four main concerns exist for Lululemon beyond 2018 that investors may want to consider before becoming aggressive on the stock, Merriman said:

Despite a low double-digit space growth, comp store sales growth remain "relatively low."
Ongoing investment in the e-commerce business is still required.
Fashion risk, as around 40 percent of customers "shop the brand for fashion first."
Ongoing competition in the athletic apparel space.

Lululemon's stock should continue trading at an above average multiple in the near term, given ongoing momentum in e-commerce and margin expansion, Merriman said. From a discounted cash flow perspective, Lululemon needs to show a topline compounded annual growth rate of 11 percent and expand operating margin to 25 percent by 2027 to warrant a stock price north of $100 — a scenario that right now appears to be "unlikely," according to Bernstein.