Lululemon's Q3 Should Silence Skeptics; Wedbush Raises Target To $81

Wedbush’s Morry Brown believes the strong Q3 results reported by Lululemon Athletica inc. LULU indicate the company would have higher earnings power in 2017 and 2018.

Brown maintained an Outperform rating on the company, while raising the price target from $70 to $81, while adding the stock to the Wedbush Best Ideas List.

Fundamentals On Track

“LULU’s fundamentals remain firmly on track, with performance across all key line items tracking ahead of expectations for 3Q, along with several callouts from management that bode well for earnings power in the coming years,” the analyst explained.

Brown also noted that same-store sales trends and pricing power continued to be strong, while gross margin gains were higher through H1 2017 than previously expected.

In addition, the analyst believes that “SG&A is now expected to leverage in 2017, removing a potential earnings headwind.”

Concerns Overdone

Brown also pointed out that heading into the quarter, there had been questions regarding the increased markdowns, both online and in stores.

However, the market appears to have read these markdowns incorrectly, given that management stated two key reasons for higher markdowns:

“(1) not lapping LY’s Boston warehouse sale in October;"

"(2) improved omni-channel capabilities, including ship-from-store, which has allowed the company to clear goods more efficiently and at higher margins.”

The stock was up more than 15 percent Thursday morning.