Lululemon Athletica’s Price Target Lifted by Morgan Stanley, But Rated Equal-Weight as Valuation Appears Stretched

Lululemon Athletica‘s, an athletic apparel retailer domiciled in Delaware, price target was raised to $320 from $306 but gave the stock ‘Equal-Weight’ rating as valuation appears stretched, according to Morgan Stanley equity analysts, who also said that they revised 2H20 guidance on compelling long-term growth opportunities and the company’s advantaged positioning in a COVID-19 affected world.

On Tuesday, the healthy lifestyle-inspired athletic apparel company reported net revenue of $902.9 million in the second quarter of fiscal 2020, an increase of 2% compared to the second quarter of fiscal 2019. On a constant dollar basis, net revenue increased 3%. Direct to consumer net revenue surged 155% to $554.3 million from a year earlier. However, company-operated stores’ net revenue declined 51% to $287.2 million.

As a result of the COVID-19 pandemic, all the Lululemon Athletica’s stores in North America, Europe, and certain countries in Asia Pacific were temporarily closed during the first quarter of fiscal 2020. The company began reopening its retail locations in these markets during the second quarter of fiscal 2020.

“We leave our 2020e EPS unchanged at $4.01, as better-than-expected 2H20 topline and GM guidance is offset by higher 2H20 SG&A spend as Lululemon Athletica (LULU) invests in select growth initiatives and supports MIRROR,” Morgan Stanley’s equity analyst Kimberly C Greenberger said.

“We slightly improve our 5Y forecast on LULU’s better-than-expected 1H20 results and compelling long-term growth opportunities (international, digital, and product innovation), resulting in a 14.4% 5Y EPS CAGR vs. 12.9% prior.”

Morgan Stanley’s target price under a bull-case scenario is $417 and $100 under the worst-case scenario. Lululemon Athletica had its price target increased by BMO Capital Markets from $192.00 to $228.00. The brokerage currently has a ‘market perform’ rating on the apparel retailer’s stock.

Several other equity analysts have also updated their stock outlook. BTIG Research decreased their price target on Lululemon Athletica to $449 from $460 and set a buy rating. JP Morgan Chase & Co. lifted their target price to $387 from $380 and gave the stock an overweight rating. Citigroup lifted their target price for the stock to $400 from $340. At last, Susquehanna Bancshares lifted their target price to $426 from $360 and gave the stock a positive rating.

Thirty analysts forecast the average price in 12 months at $372.97 with a high forecast of $449.00 and a low forecast of $228.00. The average price target represents a 16.55% increase from the last price of $320.00. From those 30 equity analysts, 19 rated ‘Buy’, 11 rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

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

“Lululemon Athletica 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 risks: 1) Faster global activewear market growth. 2) Innovation strategy traction/acceleration. 3) Market share gains. 4) Successful international expansion. 5) Ongoing outsized comp strength. 6) Better-than-feared COVID-19 impact/potential. 7) Recession – highlighted by Morgan Stanley.

Downside risks: 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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