Barclays Has 'Increasing Conviction' In Lululemon's Gross Margin Turnaround

Credit Suisse equity research analysts have reiterated an Outperform rating on Lululemon Athletica inc. LULU commenting that they have "increasing conviction" in a gross margin turnaround.

The research firm has a target price of $59 on the stock.The move follows lululemon's third quarter earnings in their latest apparel report released on Thursday.

Gross Margin Turnaround

Credit Suisse noted that Lululemon's management delivered specific updates regarding progress of their supply chain initiatives, and reiterated their confidence in promising gross margin recovery from improvements in cost reductions, air freight levels, and a new design calendar.

"We believe that even modest gains in product margin, specifically from the reduction of air freight and FOB cost improvements, could translate into meaningful upside to current consensus estimates for FY16," the firm noted.

Related Link: Lululemon's Gross Margins Are Its Biggest Problem; Bernstein Downgrades Stock

Credit Suisse analysts forecast that gross margin recovery is expected to improve sequentially, and then positively take in effect by 2Q16. Analysts at the firm remain confident that Lululemon will deliver significant return in revenues, despite partially meeting its goal of reaching 300bp of product margin expansion which has been delayed into FY17.

Key supply Chain Initiatives Established

Credit Suisse believes Lululemon's supply chain initiatives will begin to take hold. Key indicators such as update on the reduction of air freight usage, cost improvements, better raw material management, and a streamlined design calendar have shown Lululemon to be working toward fixing its supply chain. "Particularly, the reduction in air freight usage to below 25% of product by the end of FY15 is encouraging," the firm commented.