Cowen Cuts Price Target on Lululemon Athletica (LULU) as Stock Reacts Negatively Following 2Q

Cowen reiterated an Outperform rating on Lululemon Athletica Inc. (NASDAQ: LULU), and cut the price target to $62.00 (from $74.00), as stock negatively reacts to a combination of lower GM and elevated inventory. Management was adamant that the pressure was not structural in nature, and reiterated their focus on creating a solid foundation to support their long-term growth initiatives. Analyst Oliver Chen would wait for the dust to settle and then step in.

Chen commented, "We believe most of the pressure on the stock post 2Q EPS was driven by investors focusing on the -370bp of gross margin erosion during the quarter. The decline was made up of: -110bp of product margin decline (~1/2 related to cost variances due to port slowdown & ~1/2 related to selling mix - more men's w/lower GM, & raw material liabilities), 30bp on higher markdowns, 50bp due to higher air freight costs, 70bp deleverage on FX, & 110bp of deleverage from occupancy & depreciation. Mgmt was adamant that the pressure was not structural in nature, and reiterated their focus on creating a solid foundation to support their long-term growth initiatives. Going forward, mgmt did guide 3Q gross margin to be ~47.0%, which is a -330bp decline vs. 3Q14, as product margin pressures will persist, driven by similar influences as 2Q. Additionally, air freight will remain a headwind to GM in 3Q (though sequentially better vs. 2Q) before subsiding in 4Q. Mgmt believes 4Q GM will be sequentially better vs. 3Q due to leverage in fixed COGS & improvements in air freight, though will still erode vs. LY."

For an analyst ratings summary and ratings history on Lululemon Athletica Inc. click here. For more ratings news on Lululemon Athletica Inc. click here.

Shares of Lululemon Athletica Inc. closed at $64.05 yesterday.

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