Lululemon (LULU) PT Cut to $45 at Canaccord Geunity, Sees Red Flags
Canaccord Genuity maintained a Hold rating on Lululemon Athletica Inc. (NASDAQ: LULU), and cut the price target to $45.00 (from $52.00), following the company's 3Q earnings report. LULU's adjusted EPS of 35c missed consensus 37c estimate mainly due to elevated expense growth partly offset by lower tax rate. Traffic declined in the last few weeks of October and continued that trend until Thanksgiving. To Canaccord, this indicates that the consumer is responding when LULU ramps up promotions. Canaccord remains cautious on the stock as incremental discounting will weigh on the product margin recovery over the next two quarters and execution risk remains high.
Analyst Camilo Lyon commented, "LULU's Q3 adjusted EPS of 35c missed our/consensus 36c/37c estimate mainly due to elevated expense growth partly offset by lower tax rate. Total comp of +9% was driven by store comps (+6% cc); however, e-commerce growth (+21% cc) decelerated meaningfully from Q2 (+35%). FX continued to be a headwind (-$24.7M impact on revenue) and is expected to intensify further in Q4. Traffic declined in the last few weeks of October and continued that trend until Thanksgiving. To us, this indicates that the consumer is responding when LULU ramps up promotions. Inventory was again elevated (+56%), partly due to higher in-transit inventory as LULU is reducing air-freight usage in favor of more ocean-freight transit. While this transit shift should benefit gross margins, we are concerned that lead times could be extended from an already lengthy ~9 months, thus reducing LULU's ability to be nimble around changing fashion/demand trends. In addition, the company's target of recapturing 300bps of FX-neutral product margin in 2016 has been pushed out to 2017 as the supply chain efforts are taking longer to implement. Taking it together, we remain cautious on the stock as incremental discounting will weigh on the product margin recovery over the next two quarters and execution risk remains high. We are lowering our PT to $45 from $52."
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Shares of Lululemon Athletica Inc. closed at $45.32 yesterday.