Lululemon Is Controversial, But Its Growth Potential Is Nearly Unmatched In Retail

• Lululemon Athletica inc. LULU shares have declined 17 percent in the past month, and are trading around the mid-point of their 52-week range of $37.86 - $70.00.
• Oppenheimer’s Anna Andreeva maintained an Outperform rating for the company, with a price target of $75.
• Lululemon’s sales momentum accelerated in 2Q15, and was not driven by promotions, Andreeva said, adding that the gross margin miss appears to be transient.

Analyst Anna Andreeva said that Lululemon’s sales momentum accelerated in 2Q15. While the Women’s category built momentum, the Men’s category comped 31 percent.

Although Lululemon’s gross margin in the second quarter was short of the guidance by 220bps, the miss appears to be “more transient,” resulting from higher-than-expected product costs and fx impact, Andreeva said.

Port related surcharges and raw materials liability caused the weaker product margin. Lululemon has projected product margin to improve by 300 bps in 2016.

Andreeva expects nearly two-thirds of the 220bps GM decline this year to be “recoverable” next year, with infrastructure investments rolling off, improving B&O deleverage and normalizing markdowns.

“Multi-year growth/margin story unchanged, in our view, knee-jerk dislocation in shares today big buying opportunity (31% of the float traded today),” the Oppenheimer report stated.

“Importantly, near-term noise doesn't change longer term picture, in our view, and expectations are now re-set. LULU remains one of our favorite growth ideas in best category in retail with '16 EPS poised to inflect (still believe $2.40-$2.50 bull case realistic for next year),” Andreeva added.