Morgan Stanley Stays Equalweight On Lululemon, Says 'Bull Case Necessary To Make Stock Attractive'

In a report published Thursday, Morgan Stanley analyst Kimberly Greenberger commented on Lululemon Athletica inc.'s (NASDAQ: LULU) fourth quarter results, noting that conviction in a Bull case is necessary to make the stock attractive.Greenberger noted that Lululemon's "robust" eight percent combined comp outpaced its previously announced six to seven percent comp guidance, helping to drive an earnings per share of $0.78 in the quarter. The analyst continued that "most encouraging" was the positive traffic in the fourth quarter that carried into the first quarter while both conversion and average unit revenue showed sequential improvements.However, Greenberger stated that gross margin "disappointed" as it fell 210 basis points to 51.5 percent due to some temporary headwinds including airfreight to mitigate port disruptions and currency. In addition, the analyst argued that the first quarter guidance may be based on "pragmatism rather than conservatism" as the company's sales trends are short of expectations. However, given the stock's five percent rise on Thursday, investors appear to give the company a "pass."Greenberger's "base case" and "very reasonable" scenario assumes a 2015 earnings per share of $1.90, based on a 4.6 percent comp, 49.7 percent gross margin and 30.8 percent SG&A. The analyst is assuming 2016 comps grow approximately five percent, gross margin recovers 180 basis points to 51.5 percent and EBIT margins expands 100 basis points yielded an earnings per share of $2.25. "Lululemon currently trades at 29x our '16 EPS estimates, a 38 percent premium to Softlines' average. Softlines' multiples currently trade at five year highs and levels we haven't seen since the late 1990s/early 2000s," Greenberger wrote. She continued: "While we believe Lululemon's 10.5 percent earnings compounded annual growth rate (versus. our sector's +mid-single digit average) justifies some premium given Lululemon's strong brand in a favorable category (athletic apparel +high-single digits growth versus one to two percent apparel industry growth), historical average 30s P/E was based upon 40 percent+ earnings per share growth."Shares remain Equal-weight rated with a price target raised to $56 from a previous $42