Morgan Stanley: Lululemon Satisfies Necessary Condition For Growth With Expense Guidance

Lululemon Athletica inc. LULU reported fourth-quarter results Tuesday that not only marked its best quarterly comp and flow-through in five years, but satisfied a necessary condition for continued growth, according to Morgan Stanley.

The Analyst

Morgan Stanley's Kimberly Greenberger maintains an Equal-weight rating on Lululemon Athletica's stock with a price target lifted from $73 to $82.

The Thesis

Lululemon's Q4 report made it clear that it ended 2017 with momentum that should be sustainable through at least the first quarter, Greenberger said in a research report. The analyst highlighted the following:

• "Significant" growth in online sales.
• Slightly positive store traffic in all regions.
• Strength in multiple categories.

Perhaps more important to Lululemon's story is the company's guidance for SG&A leverage, which hasn't been seen since 2012, Greenberger said. SG&A leverage guidance is a "necessity" for not only the EPS algorithm, but to support the stock's 25x calendar 2019 P/E multiple, the analyst said. 

Lululemon indicated it needs only a low- to mid-teens total sales growth figure to lever SG&A, which could be realistic as the company laps a onetime digital acceleration cost from 2017, according to Morgan Stanley. But the company will also realize more efficiencies in its cost structure, as was seen in Q4, when Lululemon realized a 60-basis-point leverage due to more efficient spend in the home office and store channel.

Greenberger said she expects a 30-basis-point SG&A leverage in 2018; 2019 should offer a "more normalized test" for management's ability to leverage SG&A over the longer term, the analyst said. 

Price Action

Shares of Lululemon Athletica were trading lower by 0.47 percent at the time of publication Monday. 

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