Jefferies Downgrades Lululemon to Underperform (LULU)
August 30, 2010 10:11 AM
Jefferies & Company is out with a research report this morning, where it downgrades shares of Lululemon Athletica (NASDAQ: LULU) to Underperform, from Hold; it also lowered its price target to $30.00, from $38.00.
The Jefferies analysts said that, due to cautious comments in the retail sector, they believe that risks in the higher-end consumer are elevated, which LULU operates in. they also noted that the company is facing tough comps in the next few months.
The analysts also added that the company has a history of inventory risk and that the company's recent reinvestment in inventory may have come at the wrong time. They said, “We believe elevated inventory risk combined with inflationary cost pressures and decelerating SSS places more pressure on GM% than expected. Our revised estimates call for ~100 bps of GM compression over the next 18 months.”
As for valuation, the analysts noted, “Earnings and Multiple Risk. LULU trades at 25x (cons) 2011 EPS of $1.42. We believe there is both multiple and EPS risk. Our $30 PT is based on a revised 2011 EPS estimate that is 12% below the Street but at the existing 25x multiple (which could prove too rich). This is a hefty premium to the group but below history.”
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