Morgan Stanley Isn't Buying Lululemon's Hype, Raises Price Target

Kimberly Greenberger of Morgan Stanley maintained an Equal-weight rating on shares of Lululemon Athletica inc. LULU with a price target raised to $42 from a previous $39 following the company's Q3 print on Thursday. According to Greenberger, Lululemon was able to “muscle” a $0.04 EPS beat on lower-than-expected SG&A expenses and a better tax rate. However, the analyst points out that total sales of $419 million fell light of the $420 million to $425 million guidance and gross margins dipped 353 basis points year-over-year to 50.3 percent, 70 basis points short of management's guidance. “Management reiterated confidence it can return to 55 percent gross margin, but structurally higher costs leave the burden of improvement on merchandise margin returning to near historic peak,” Greenberger wrote. The analyst adds that 230 basis points of the third quarter's gross margin decline are “irreversible” without at least a mid-single digit store comp, a “high bar” to achieve. Bottom line, according to Greenberger, Lululemon is seeing increased competition in the athletic apparel space and that “deep” product investments may be necessary.