Lululemon owners breathing easier

The decline of Lululemon

Athletica Inc., it seems, was greatly exaggerated.

As recently as last week, the Vancouver-based retailer had been hit with a downgrade from one analyst and a price target cut from another, amid warnings that its signature soft yoga wear was being edged out by denim, retro-leisure and cheaper substitutes.

Concern that Lululemon’s momentum was lagging had been growing since secondquarter results in September met earnings estimates but fell short on revenue, knocking the company’s shares from a peak of US$80.65 in August to the mid fifties last month.

But on Thursday they rebounded in a big way, jumping more than 20 per cent intraday — the most since 2008 — before closing up US$9 at US$68.64.

The move came on the heels of a third-quarter earnings beat announced Wednesday and driven by a 28 per cent jump in quarterly profits and a bullish outlook for the new year.

“Lululemon top-line results showed significant upside surprise relative to expectations, as our concerns regarding a lack of strong response to new women’s tops product were clearly offset by strength in other areas and benefits from the supply chain restructuring,”

Credit Suisse analyst Christian Buss told clients after the earnings surprise. He bumped its price target to US$64 from $53, while keeping the company’s rating at neutral.

Thursday’s sharp move marked the latest turn in Lululemon’s tumultuous journey in recent years.

The shares of what was then an investor darling peaked at US$82.28 in June 2013 before a series of missteps — including a major recall of defective yoga pants, the surprise resignation of then-CEO Christine Day and inappropriate comments by founder Chip Wilson — sent them plunging.

They bottomed at US$37.25 in June of the following year.

This year things were looking up again. Shares jumped 11 per cent following first quarter earnings in June, as the firm earned praise for its turnaround efforts, including international expansion plans and experimentation with new store formats.

But the company failed to follow-up on those expectations in September, leading to another sell-off.

On Dec. 2, Canaccord Genuity analyst Camilo Lyon downgraded Lululemon from hold to sell, slashing its price target to $44 from $65.

“The category headwinds facing LULU that we highlighted last quarter appear to be stiffening,” he told clients in a note, citing concerns including rising instore inventory, and a slew of markdowns online and “an evolving fashion shift away from athleisure to denim.”

Wednesday’s results, however, have prompted several analysts to changed their tone. Analysts at Evercore ISI and Bank of America upgraded their prices dramatically to $80 and $70, respectively, from $50.

“We view Q3 as a much needed win for the bulls (as it had seemed like a fairly binary event heading in), and it shows the resiliency of the LULU brand and growth opportunities that management is capitalizing on,” said Wells Fargo Securities analyst Ike Boruchow in a note on Wednesday evening.

Credit Suisse cited encouraging numbers such as a gross margin expansion that was larger than expected, and inventories on 12 per cent sales growth “suggest that operational turnaround initiatives remain on track.

Guidance also looks solid with comps expected to remain up mid-single digits. This suggests that many of our concerns about slowing top-line trends were misplaced.”

For others, however, Lululemon’s third-quarter earnings beat was not convincing enough.

Canaccord Genuity’s Lyon did not change Lululemon’s rating from sell, but raised his target price slightly to US$47 from US$44.

“While Q3 was better than we anticipated, we did not see anything that would alter our thesis, particularly as we expect the denim trend to materialize in a greater way next year,” he told clients in a note on Thursday.