JPMorgan's Athleisure Switcheroo: Focused On Nike, Not Lululemon

JPMorgan’s Matthew R. Boss maintained Overweight ratings for Nike Inc and Lululemon Athletica inc. LULU. The analyst added Nike to the U.S. Equity Analyst Focus List as a Growth Strategy pick, while removing Lululemon from the list.

Nike

The price target for the company has been raised from $67.50 to $72. Recent field and channel checks point to continued top-line strength in North America, with inventory levels and markdown activity remaining rational.

Analyst Mathew Boss noted that investors are worried about the company’s inventory levels remaining heavy followed by gross margin contraction.

Nike is expected to post 3Q EPS of $0.49 which is expected to increase to $0.52 in 4Q. “Looking ahead, we are modeling multi-year low-double-digit revenue growth (at the higher-end of mgmt’s HSD-LDD long-term target) with our gross margin bottoms-up build pointing to 350bps of expansion the next 5 years (70bps/year),” Boss added.

Related Link: High Expectations For Nike Earnings

The analyst believes that management’s goal to return to peak GPM of 46.3 percent, previously achieved in 2010, is reasonable given improved innovation, product cost reduction, expansion of higher margin DTC and pricing power.

Every 10 basis point of incremental annual GPM expansion equates to 60 bps of EPS growth CAGR, positioning Nike’s multi-year bottom line in the mid-teens.

Lululemon Athletica

The price target for Lululemon is at $66. Boss believes that the company is poised to achieve a top line of $4 billion by FY19, versus nearly $1.8 billion recorded in FY14.

Lululemon’s revenue growth is expected to be driven by its mid-teens footage growth, mid-digit same store sales, a push into newer categories and the ongoing growth in its ecommerce business. The company’s strong domestic presence and the untapped international opportunity are also positives.

The company’s margins are, however, likely to remain under pressure given the need for ongoing supply chain investments and spending in support of the international/omni channel and brand building. The analyst noted that management’s inventory roadmap calls for aggregate inventory growth in line with revenue growth by the end of 1Q16.

Lululemon’s shares have appreciated 20 percent, versus a 5 percent gain in the SPX since then company’s addition to the Analyst Focus List on 9/10.