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Why Lululemon (LULU) Remains a Buy

NEW YORK (TheStreet) -- International Strategy & Investment Group (ISIG) is betting on big growth for Lululemon (LULU). Analyst Omar Saad reiterated a "strong buy" rating and target price of $80.

ISIG is the latest to throw its weight behind the stock, despite the company facing a barrage of lawsuits, PR blunders and executive uncertainty. In addition to bad publicity and litigation related to its see-through black yoga pants, Lululemon has made little progress in its search for a new CEO. On June 10., Chief Executive Christine Day announced her unexpected resignation, causing shares to plummet 17.5% the following day.

The investment firm said since Day's resignation, the stock has significantly underperformed and is trading at a discount. To get the company back to its performance during the first half of the year, the Board needs to take proactive measures to bring stability to the executive team, it added.

"The first step should be to address the role of Chairman and Founder Chip Wilson, who appears to be operating without clear delineation of the Chairman's duties and responsibilities, which in turn may be having a negative impact on the company's public relations and brand image," wrote Saad. "The perception of his involvement in the business may be hindering the search for a new CEO."

"A strong CEO and management team is by far the most pressing need this company has right now, and we think it far outweighs the much publicized product and supply chain issues."

Two weeks ago, JPMorgan (JPM) initiated coverage of the stock with an "overweight" rating and 12-month price target of $84. The analysts predict annual growth through to 2017 in the high teens, spurred by 150 additional retail fronts, early stages of international expansion and increasing ecommerce sales. 

By midday, shares had gained 1% to $70.12. Year to date, the stock has tumbled 8.2%. 

TheStreet Ratings team rates Luluemon Athletica Inc as a Buy with a ratings score of B+. The team has this to say about its recommendation:

"We rate Luluemon Athletica Inc (LULU) a BUY. This is driven by a number of strengths, 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 sub par growth in net income."

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

  • The revenue growth came in higher than the industry average of 6.9%. Since the same quarter one year prior, revenues rose by 21.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
  • LULU has no debt to speak of therefore 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.
  • Luluemon Athletica Inc reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, Luluemon 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 versus $1.85).
  • The gross profit margin for Luluemon 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, Luluemon Athletica Inc's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.

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