MKM On Lululemon: 'Expect Recovery, Buy On Weakness'

Lululemon Athletica inc. LULU reported strong fourth-quarter results, but announced disappointing guidance for the first quarter. The issues hurting the company appear to be “self-inflicted” and a recovery is likely in the near term, MKM Partners’ Roxanne Meyer said in a report.

While reiterating a Buy rating on Lululemon, Meyer recommended to Buy shares on weakness. She reduced the price target from $90 to $75 and lowered the EPS estimate for 2017 from $2.72 to $2.34.

Q4 Review

The analyst commented that Q4 was “a non-event,” with the company reporting its EPS at $1.00, versus the Street’s estimate of $1.01. Comps came in marginally better than expected, at 6 percent.

“Versus our model, higher than expected sales and gross margin were offset by higher SG&A (FX and reinvestment),” Meyer wrote.

Buy On Weakness

The outlook for Q1 was below expectations, and could exert pressure on Lululemon’s shares in the near term and limit upside through Q2, even with a recovery in comps, the analyst mentioned.

This would represent “an attractive entry point” for the following reasons:

• The comp shortfall was due to “a self-inflicted fashion issue we view as temporary.”
• The long-term story remains unchanged and there are incremental catalysts that could drive comp upside in 2017.
• Meyer expressed optimism in the company being able to generate mid-single-digit comp growth and more than 20 percent EBIT margins in the longer term.

Lululemon's Current Challenges Are Largely Self-Inflicted, But Still Fixable

Lululemon Crushed Following 'Slow Start' To The Year _______ Image Credit: By André Karwath aka Aka - Own work, CC BY-SA 2.5, via Wikimedia Commons