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Lululemon (LULU) Could Deliver Margin Inflection, Say Morgan Stanley; Rating Upgrades to Overweight

September 21, 2015 6:33 AM EDT
Get Alerts LULU Hot Sheet
Price: $459.57 --0%

Rating Summary:
    32 Buy, 11 Hold, 3 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 9 | Down: 7 | New: 39
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(Updated - September 21, 2015 10:42 AM EDT)

Morgan Stanley upgraded Lululemon Athletica Inc. (NASDAQ: LULU) from Equalweight to Overweight with a price target of $68. Analyst Kimberly C Greenberger sees favorable risk/reward, as analysis shows margins could inflect in 2016.

"Our analysis suggests LULU could deliver an EBIT margin inflection in 2016, supporting a return to 20% EPS growth. Our 2016 forecast is predicated on a modest but achievable +100 bps GM improvement coupled with +MSD comps," said Greenberger.

"With the stock down 5% YTD and down 30% over the past three years, double-digit EPS growth in 2016 should allow LULU to return to outperformance, supporting our upgrade to OW. We see a compelling entry point and attractive risk/reward, but acknowledge our call could prove early given still elevated inventory levels (total +59% 2Q15)," continued the analyst.

Greenberger added, "Our 2015e 48.4% GM is ~850 bps below 2011’s peak (~57%). Part of the decline stems from necessary investments in supply chain and quality control, occupancy & D&A deleverage and adverse F/X, while other pressures should be transitory including air freight, logistics expenses, and elevated markdowns associated with the West Coast port strike, and product surcharges and cancellation fees from operating with a disorganized buying calendar. We don't expect LULU will ever return to peak GM, but our analysis suggests LULU should be able to recapture 200-300 bps of lost margin over the next 2-3 years."

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 $52.91 yesterday.

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