Bernstein Questions The Sustainability Of Lululemon's Momentum

Lululemon Athletic inc. LULU reported a "home run" earnings report Thursday, but Bernstein questions the sustainability of the athletic apparel maker's momentum.

The Analyst

Bernstein's Jamie Merriman maintains a Market-Perform rating on Lululemon's stock with a price target lifted from $80 to $99.

The Thesis

Lululemon's "stellar" first-quarter print marks a "strong" start to the fiscal year with a 20-percent EPS beat, Merriman said in a research report.

At the same time, Lululemon's stock is now trading at 31.7x next 12 months' P/E, which is more than one standard deviation above its five-year historical average PE and a "significant" premium to the market, the analyst said. 

Four main concerns exist for Lululemon beyond 2018 that investors may want to consider before becoming aggressive on the stock, Merriman said:

• Despite a low double-digit space growth, comp store sales growth remain "relatively low."
• Ongoing investment in the e-commerce business is still required.
• Fashion risk, as around 40 percent of customers "shop the brand for fashion first."
• Ongoing competition in the athletic apparel space.

Lululemon's stock should continue trading at an above average multiple in the near term, given ongoing momentum in e-commerce and margin expansion, Merriman said. From a discounted cash flow perspective, Lululemon needs to show a topline compounded annual growth rate of 11 percent and expand operating margin to 25 percent by 2027 to warrant a stock price north of $100 — a scenario that right now appears to be "unlikely," according to Bernstein. 

Price Action

Shares of Lululemon Athletica were rallying more than 15 percent to $120.98 at the time of publication Friday. 

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