Lululemon getting into shape for fall: analyst
Lululemon Athletica Inc. may not be out of the woods yet, but an improving product flow into its stores, coupled with signs of better inventory and markdown management online, should provide some relief for investors.
Howard Tubin, an analyst at RBC Capital Markets, expects the apparel retailer will report negative comparable same-store sales when it reports secondquarter earnings before the market opens on Thursday.
However, he believes the return of new, innovative and differentiated products into Lululemon stores during the next several quarters will lead to improved sales and share price gains.
“We believe there is a lot of ‘good’ going on at Lululemon in terms of process changes, assortment changes, and long-term growth drivers,” Mr. Tubin said in a research note. “However, the full benefit and impact from these new initiatives may take some time to be fully realized.”
The improved product offerings are expected to emerge this fall, but the analyst noted that the full impact of design elements by Lululemon’s new product chief Tara Poseley will likely be felt next spring. Ms. Poseley has prioritized the introduction of seasonally relevant capsule collections.
“We believe the newest assortments do a fine job of providing seasonal touches to the store, creating a very wear-now, relevant collection,” Mr. Tubin said, reiterating an outperform rating and US$52 price target on Lululemon shares. “The entry point remains attractive.”
The stock is down approximately 35% this year, trading around US$39 after hitting a 52-week high of US$78 in October 2013.
Credit Suisse said it sees signs that management’s continuing efforts to streamline its go-to-market processes and become more efficient across all aspects of product development and distribution are working.
The firm’s analysis of more than 3,200 stock keeping units on Lululemon’s website suggests things have significantly improved since June.
Analyst Christian Buss noted that online in-stock apparel levels and SKU counts across genders have fallen, while full-priced selling has climbed.
“While encouraged by these changes, we continue to see risk to revenue growth and deleverage of fixed expense as mature stores operating at very high productivity are struggling to stabilize their comps, suggesting that a turn in earnings power is not imminent,” he told clients, reiterating a neutral rating and US$38 target price on Lululemon shares.
Mr. Buss also noted that Lululemon opened 14 temporary pop-up stores across the U.S. between May and August
The analyst warned that the lower markdown rate and decreased level of apparel on sale online may be the result of clearance activity being redirected to the pop-up stores, as visits to standard stores show a high availability of discounted products.
“We remain concerned that consumer demand for Lululemon product has structurally shifted, holding back comp recovery in 2014,” he said, noting that guidance is for low single-digit comparables including e-commerce for the full year. “As a result, we believe that store productivity and margins could remain under pressure even with resolution of supply chain issues, holding back earnings growth.”