lululemon (LULU) Sinks; Credit Suisse Cuts Rating on Lower Comps, Margins

January 4, 2013 8:06 AM EST
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lululemon athletica (Nasdaq: LULU), the clothing manufacturer with the most mystifying name around, is lower Friday following a downgrade by Credit Suisse earlier.

Credit Suisse moved its rating from Outperform to Neutral while trimming its price target from $86 down to $80. The firm cited slowing comparable-store sales growth momentum in Canada as well as further margin pressure.

Mature store comps may come in the low single-digit growth range for third-quarter 2012. The outlook highlights lululemon's challenges in driving incremental sales in these highly productive mature stores (Canada stores doing ~$3,000/sq ft vs. U.S’s ~$2,000.) Credit Suisse's previous outlook of double-digit comp gains called for high single-digit growth in mature stores, which account for 59 percent of lululemon's total.

Credit Suisse also evaluated about 2,500 SKUs at lululemon's e-commerce site and noted a "significant increase" in discounted apparel toward the end of December. At the end of last month, about 20 percent of apparel was discounted, from eight percent since the middle of December and an average of 10 percent since June. Average markdown rose by about eight points since June to 38 percent in December. The firm notes that the actions "indicate that new and winter product lines have stretched outside of the company’s comfort zone, resulting in re-pricing actions, broader discounting, and higher markdown levels than they have historically seen."

There is an increased long-term risk as well with activewear gaining further shelf space across retail channels and competitors adjusting offerings and pricing to steal some of lululemon's share, Credit Suisse notes. Specifically, Credit Suisse sees the lululemon hype ebbing, leading to fewer customers willing to pay the 25 percent to 50 percent premium and Gap, Inc.'s (NYSE: GPS) Athleta brand gaining traction with its lower price points.

Credit Suisse adjusted numbers for FY13: revs from $1.76 billion to $1.73 billion, EPS from $2.40 to $2.29, and comps from 12.5 percent to 9.7 percent.

Shares of lululemon are down over 3 percent early Friday.

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 $75.09 yesterday.

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