Lululemon Athletica Inc. was upgraded to outperform from sector perform at RBC Capital Markets where analyst Howard Tubin sees a compelling entry point into the stock.
“While Lululemon hit some speedbumps in 2013, we believe the bulk of the bad news is in the rear-view mirror,” he said in a note to clients, calling the company one of the most compelling growth stories around.
The analyst highlighted the yoga apparel retailer’s new senior leadership team, a brand that remains strong, and the 43% decline in the stock from its 52-week high.
Mr. Tubin has been on the sidelines with regard to Lululemon shares since its chief producer officer, Sheree Waterson, left the company last spring. Since that downgrade, the company’s CEO resigned, it has faced further inventory issues related to its sheer pant problem, and business slowed to the point that comparable same-store sales will may be negative in the fourth quarter of 2013.
While the analyst has not met with Lululemon’s new CEO, Laurent Potdevin, he has spent time with the chief product officer, Tara Poseley.
“We believe Ms. Poseley has a strong understanding of the importance of melding function and fashion within the merchandise assortments. In addition, we believe she views Lulu’s ‘culture’ as vital and she will strive to keep it intact,” Mr. Tubin said.
The analyst’s confidence in the brand partially stems from a recent RBC survey of 350 women who have bought and/or worn Lululemon merchandise, which demonstrated that the brand has not suffered meaningfully due to last year’s sheer pant issue. He said the results indicate that consumers’ views on garment quality has not changed in the past two years and there is little change in future buying plans.
Mr. Tubin also pointed out that current analyst estimates reflect a more realistic earnings scenario for 2014, with sentiment on the stock no longer overwhelmingly positive. He noted that there are currently 3 Sells, 15 Holds and 11 Buys on Lululemon.
“This implies plenty of capacity for upgrades as the story begins to unfold more positively (in our opinion) over the coming quarters,” the analyst said.
Source: Financial Post