Wedbush Adds lululemon athletica to 'Best Ideas List'

• Lululemon Athletica inc. LULU shares have gained 17 percent year-to-date, and are trading close to their 52-week high of $70.
• Wedbush’s Morry Brown maintained an Outperform rating for the company, with a price target of $78.
• Brown has added the company to the Best Ideas List, citing SSS momentum, margin recovery and earnings upside.

Analyst Morry Brown believes that Lululemon Athletica’s 2Q results would be positively received and boost the shares. The company is expected to report comps at or above the high-end of its guidance.

Although gross margin may be at the lower end of the guidance range of 4849 percent, this would be due to currency headwinds, which are “well known,” Brown said, while adding, “SSS will carry more weight than transitory FX shifts.”

Adding Lululemon Athletica to the Best Ideas List, Brown commented that the thesis for the company remains unchanged, centering on:

1. Expectations of same-store sales momentum continuing throughout this year
2. Likelihood of “margin recovery story” taking hold in 2016 and beyond
3. Upside to earnings in the back half of this year, driven by “our confidence in continued momentum in the fundamentals.”

Lululemon Athletica has recently launched a new pant wall and has “selectively” hiked prices on some pants. The analyst believes the new pant wall may boost the company’s 2H sales, and the price hikes could boost AUR and margins.

“Our 2015 EPS estimate of $2.02 stands well above consensus at $1.93. Our channel checks continue to note positive traffic and sell through as well as successful price increases on seasonal items,” Brown added.