Lululemon Athletica

Lululemon Athletica Could Hit Record High of $404 on Improved Outlook; $500 in Best Case

Lululemon Athletica’s shares could hit a fresh record high of $404, representing a more than 13% increase from the last price, on compelling long-term growth opportunities and the apparel retailer’s advantaged positioning in a COVID-19 affected world.

Last week, the healthy lifestyle inspired athletic apparel company for yoga said its net revenue for the third quarter of the fiscal year 2020 increased 22% $1.1 billion and net income for the period rose to $143.6 million. Lululemon reported adjusted earnings of $1.16 per share, beating the Wall Street consensus estimate of 88 cents and surged over 20% from earnings of 96 cents in the same quarter last year.

“While overall this (Q3) was a solid beat with better FQ4 top-line guidance, the stock is flat to slightly down in the after-market, likely due to elevated expectations more than anything else. In our view, Lululemon Athletica (LULU) is successfully taking share and is poised to continue doing so in FQ4,” said Camilo Lyon, equity analyst at BTIG.

“As we look to next year, we see LULU benefiting from the reopening of its retail stores of which many were closed for effectively half of 2020 as well as from continued secular tailwinds both in category (athletic) and channel (digital), while prepping for category extensions(footwear coming in 2023) on which LULU is well positioned to optimize. We reiterate our BUY rating and raise our price target to $453,” Lyon added.

In November, while almost all of the company’s retail locations have remained open, it has experienced some temporary closures and is currently operating with tighter capacity restrictions in certain markets.

Lululemon Athletica’s shares closed 1.05% higher at $356.07 on Tuesday; the stock is up over 50% so far this year.

Lululemon Athletica Stock Price Forecast

Seventeen equity analysts forecast the average price in 12 months at $404.82 with a high forecast of $500.00 and a low forecast of $275.00. The average price target represents a 13.69% increase from the last price of $356.07. From those 17 analysts, 13 rated “Buy”, four rated “Hold” and none “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $381 with a high of $481 under a bull-case scenario and $125 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the apparel retailer’s stock.

“We raise our price target to $381 (up from prior $356) on an improved near and medium-term outlook. We update our model for the significant 3Q20 beat ($1.16 vs. Street 87c), and improve our 4Q20 expectations on raised guidance and encouraging 4QTD trends (revised 4Q20 EPS $2.48 vs. $2.39 prior). This lifts our 2020e EPS to $4.59 from $4.21 prior (vs. Street at $4.56). We also improve our medium-term forecast on a better-than-expected 2020e base year, resulting in a 9% average increase to our annual 2021e-2025e EPS estimates,” noted Kimberly Greenberger, equity analyst at Morgan Stanley.

“We also slightly raise our terminal EBIT margin expectations across cases (base 24.0% to 25.0%, bull 26.0% to 27.0%, and bear 22.0% to 23.0%). All in, these changes increase our price target, which represents the average of our DCF-derived base and bull cases, to $381 from $356 prior. Our bull case, base case, and bear case increase to $481, $281, and $125, respectively (vs. $449, $262, and $117 prior). Our price target equates to 56x 2021e P/E, at the high end of LULU’s L5Y range (19-56x).”

Several other analysts have also upgraded their stock outlook. Lululemon Athletica had its price target raised by Deutsche Bank to $402 from $396. They currently have a buy rating on the apparel retailer’s stock. Bank of America reissued a buy rating and issued a $390 target price. Stifel Nicolaus boosted their target price to $445 from $365 and gave the company a buy rating. At last, Citigroup boosted their target price to $400 from $340.

Analyst Comments

“Expanded eComm capabilities, improved supply chain, better inventory management, and product initiatives led to enviable ’18-’19 performance and a robust return to pre-COVID-19 levels in 3Q20, making +mid-high-teens comps seem normal. Still, current valuation appears extreme, so we stay Equal-weight,” Morgan Stanley’s Greenberger added.

“Compelling long term and post-COVID-19 growth opportunity driven by three factors: international expansion (maybe less evident in ‘20e given COVID-19 outbreak), digital growth, and product innovation. Lululemon Athletica (LULU) dominates the NA athletic yoga apparel category due to its unique brand positioning and fashionable products, and its athleisure focus is further advantaged in a COVID-19 affected world.”

Upside and Downside Risks

Risks to Upside: 1) Faster global activewear market growth. 2) Innovation strategy traction/acceleration Market share gains. 3) Successful international expansion. 4) Ongoing outsized comp strength. 5) Better-than-feared COVID-19 impact/potential recession – highlighted by Morgan Stanley.

Risks to Downside: 1) Competitive risk. 2) Global athleisure trend slowdown. 3) Limited international expansion/brand traction. 4) FX volatility. 5) Slowing comp. 6) Worse-than-feared COVID-19 impact/potential recession.

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