Analyst: Lululemon's Luxury-Like Positioning Can Stretch Company To A $40B Market Cap

Amid all the retail woes apparel companies are seeing, the narrative simply doesn't apply to Lululemon Athletica Inc. (NASDAQ: LULU). The retailer's shares are up nearly 81% year to date.

The LULU Analyst

Cowen analyst John Kernan reiterates an Outperform rating on the stock and raised his price target from $235 to $250.

The Thesis

In a note on Tuesday, Kernan says lululemon has a path to $1 billion in annual free cash flow, “with durability of growth being enhanced by consistent innovation, luxury-like brand position and a community-based model.”

Google trends show Lululemon’s search is up 31% year-over-year on a three-month basis, suggesting digital trends remain robust, said Kernan.

The brands men’s business is targeting $1.4 billion in revenue, a source of upside, but the analyst says growth beyond 2019 suggests a moderation in run rate.

On the women’s side of the business, Cowen is estimating current global apparel retail equivalent sales of $4.3 billion for lululemon, putting the segment in line with Nike Inc (NYSE: NKE) and adidas (AG) (ADR) (OTC: ADDYY) current global women’s apparel businesses.

Kernan says the brands 10% same store-sales growth target could prove to be conservative in fiscal year 2020.

The analyst says the stock remains a top idea on a multi-year basis, as the brand is capitalizing on a major international opportunity, with 60% of new store growth through 2023 originating outside of North America.

All in, the Kernan says if the company can sustain a Nike-like free cash flow multiple, he sees a path to a $40 billion market cap. Lululemon’s market cap currently sits just north of $29 billion.

There is still no word on the company's proposed footwear-line. 

Lululemon Price Action

Shares of Lululemon were trading down 1.04% at $223.70 at time of publication.

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