Goldman Sachs On Lululemon: 'Valuation Looks Stretched'

Lululemon Athletica inc. LULU reported a largely in-line quarter for 1Q16, with inventory and gross margins improving sequentially.

Goldman Sachs’ Lindsay Drucker Mann maintains a Sell rating on the company, with a price target of $48.

“Valuation looks stretched to us at 34X the midpoint of guidance for a business where we see decelerating comp sales momentum operating in a very choppy retail backdrop,” Mann mentioned.

Comps

Lululemon reported robust comp growth of 8 percent, ahead of the consensus, while quarter-to-date comp trends appear to have sustained the same momentum.

“We believe much of the comp strength in recent quarters was been driven by price increases on bottoms, which LULU will lap in 3Q16, setting up a tougher backdrop to maintain comp sales momentum,” the analyst said.

Related Link: Here's Why Morgan Stanley Likes Lululemon's Report

Gross Margins

Gross margins were also better than expected in 1Q, rising despite increased inventory due to a 40bps increase in product margins, which in turn was due to lower freight and raw material costs.

Management has guided to gross margin expansion in 2Q, with the growth rising in 2H, benefiting from the flow through of sourcing initiatives.

However, SG&A was worse than expected, rising 32 percent during the quarter, as Lululemon continued to deleverage on higher fixed costs. Management expects this trend to persist through 2016.

The FY16, FY17 and FY18 have been lowered to reflect higher deleverage from increased SG&A.