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Jefferies Sees Room for Price Increases at Lululemon (LULU)

January 25, 2016 7:51 AM

Jefferies analyst, Randal Konik, sees a margin expansion opportunity through higher AUR at Lululemon Athletica Inc. (NASDAQ: LULU). The analyst is already ahead of street consensus for FY'18 but a 10% ticket increase to tops and bras could contribute up to $0.40 to EPS.

Based on Jefferies' pricing survey, LULU positions within the mid-tier athletic apparel category. However, the unique combination of both high fashion and high function, leads the analyst to believe the company can take price up, especially in women's tops and bras, to be more in line with higher-end fashion peers.

Assuming 10% ticket increases in both tops and bras, which they estimate would drive an overall AUR increase of ~3.5%, gross margin would benefit by ~170 bps, with a potential flow through of $0.40 to EPS. This provides cushion to the firm's already above-consensus FY'18 estimates.

LULU raised select prices in conjunction with its September 2015 pant-wall restage. Pushback from the consumer has not been evident in sales performance, as bottoms outpace the rest of the business and Google Search Interest continues to climb higher.

Additionally, he has done more work around the product margin opportunity, and continues to see a visible path to recapturing at least 300 bps through improved operations.

No change to Buy rating or $71 PT which is based on an average of 26x FY'18 EPS and 15.5x EV/EBITDA, essentially in line with historical averages and LULU's high-growth peers.

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 $58.03 yesterday.

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