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Lululemon (LULU) Jumps on JPMorgan 'Overweight' Rating

NEW YORK (TheStreet) -- Lawsuits and PR blunders aside, Lululemon (LULU - Get Report) is a buy at JPMorgan which initiated coverage of the athletic apparel designer with an "overweight" and 12-month price target of $84. That's a big change for a company that had to fight off bad publicity linked to its see-through black yoga pants.

Shares were jumping on the ratings debut, gaining 4.4% to $69.87.

"The Lulu story is evolving from a double-digit comp and North American unit expansion story to one of a slightly more mature, global growth retailer," wrote JPMorgan retail analysts Brian Tunick and Kate Fitzsimons in a research report.

The analysts predict compound annual growth through to 2017 in the high teens, spurred by 150 additional retail fronts, early stages of international expansion and increasing ecommerce sales. Operating margin is also expected to grow to between 26% and 27%, higher than management's goal of 25%.

"We believe that the shares of Lulu deserve a premium valuation given its niche, premium positioning, top- and bottom-line growth potential, strong margins, and now, margin recovery story," said Tunick and Fitzsimons.

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The vote of confidence comes as a surprise after the Vancouver-based business' turbulent year. In March, the retailer recalled its primary product, black yoga pants, after customer complaints the material was too sheer. A related lawsuit has been brought against the company by the Louisiana Sheriffs' Pension & Relief Fund, which holds around $1.3 million in stock.

Then, on June 10., Chief Executive Christine Day announced her unexpected resignation, causing shares to plummet 17.5% the following day. The Board has yet to find a replacement.

Most recently, founder Chip Wilson stirred controversy when he blamed women's bodies for pilling occurring on yoga pants. Speaking with Bloomberg on Friday, Wilson said, "Quite frankly, some women's bodies just actually don't work for it."

Year to date, shares have declined 8.1%, compared to the S&P 500's 23.75% gain.

TheStreet Ratings team rates Lululemon Athletica INC as a Buy with a ratings score of B+. The team has this to say about their recommendation:

"We rate Lululemon Athletica INC (LULU) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7%. Since the same quarter one year prior, revenues rose by 21.9%. 
  • LULU has no debt to speak of, resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 6.16, which clearly demonstrates the ability to cover short-term cash needs.
  • Lululemon Athletica reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. However, we feel it is poised for EPS growth in the coming year. During the past fiscal year, Lululemon Athletica INC increased its bottom line by earning $1.85 a share vs. $1.27 a share in the prior year. This year, the market expects an improvement in earnings ($1.96 vs. $1.85).
  • The gross profit margin for Lululemon Athletica INC is rather high; currently it is at 57.48%. Regardless of LULU's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, LULU's net profit margin of 16.38% compares favorably to the industry average.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Textiles, Apparel & Luxury Goods industry and the overall market, Lululemon Athletica's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.

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