Lululemon 'Paid' You To Buy December Dip As Gross Margins Tank Stock: Why Analysts Remain Bullish After Q3

Zinger Key Points
  • Analysts weigh in on Lululemon after third quarter earnings and pressure on gross margins.
  • Concerns over future gross margin pressure and the overall retail segment raises concerns for the company’s share price ahead.

Athletic apparel company Lululemon Athletica LULU reported third-quarter financial results Thursday after market close.

Analysts are updating their takes on the company after the earnings report and guidance for the fourth quarter.

The Lululemon Analysts: Bank of America analyst Lorraine Hutchinson had a Buy rating and raised the price target from $400 to $415.

BMO Capital Markets analyst Simeon Siegel had a Market Perform rating and a price target of $304.

Raymond James analyst Rick Patel had a Strong Buy rating and a price target of $438.

Telsey analyst Dana Telsey had an Outperform rating and a price target of $470.

KeyBanc Captial Markets analyst Noah Zatzkin had an Overweight rating and a price target of $375.

Related Link: Lululemon Stock Leaps Lower On Q3 Results, What's Going On? 

The Analyst Takeaways: Bank of America's Hutchinson said Lululemon provided an “encouraging read on holiday sales.” The analyst raised the price target on shares and highlighted the company having its best Black Friday in company history.

“We remain comfortable with LULU’s elevated inventory and expect markdowns will remain well controlled due to the high core mix, robust demand trends and seasonally fresh product assortment,” Hutchinson said.

The analyst said production efficiencies have returned to pre-COVID-19 pandemic levels and gross margin expansion could happen.

Another area of growth could come from the international segment, according to the analyst, with revenue up 41% year-over-year for the segment.

“We think international represents one of the largest growth opportunities for the company, particularly in China.”

Bank of America also shared Lululemon has a history of guiding conservatively for fourth-quarter financial results and then raising guidance later in January, as reported by Carl Quintanilla.

“You’ve historically been paid to defend the December dip and own it into the January raise,” Bank of America said.

BMO Capital Markets's Siegel said Lululemon had a solid quarter.

“LULU’s a clearly powerful brand and, versus the rest of retail, this was a solid report, with strong revenue growth understandably offset by gross margin pressures,” Siegel said.

Seigel said concerns over future gross margin pressure and the overall retail segment raised concerns for the company’s share price ahead.

Raymond James' Patel also pointed to gross margin pressure for the company being a key going forward.

“The gross margin percent miss and still-elevated inventory may create sentiment overhang,” Patel said.

The analyst said the company’s international, digital and men’s segments were all areas of strength. Strong global demand could provide a strong setup for the stock in 2023, Patel said.

Telsey said Lululemon beat earnings per share for the quarter and raised guidance, which could offset pressure put on gross margins by investors.

“LULU delivered yet another impressive quarter with better-than-expected topline growth despite ongoing macro and inflationary pressures that continue to weigh on retailers and consumers,” Telsey said.

Lululemon could navigate the challenging retail market better than competitors according to KeyBanc Captial Markets' Zatzkin.

“Long term, we continue to see opportunity in product innovation and international growth, and remain confident in management’s ability to execute on its Power of Three x2 plan,” Zatzkin said.

Zatzkin said Lululemon’s rebranding of Mirror into Studio and a pilot launch of a two-tier membership program could be a positive for the company.

LULU Price Action: Lululemon Athletica shares are down 11.51% to $331.40 on Friday.

Read Next: Apple Analyst's 9 Gift Recommendations For 2022 Holiday Season; Tesla's $30K EV And 2 More Items In 2023 Wishlist

Photo: Courtesy Lululemon

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Posted In: Analyst ColorEarningsNewsPrice TargetReiterationAnalyst RatingsTrading Ideasapparel stocksathletic apparelathletic apparel retailersBank of AmericaBMO CapitalDana TelseyKeyBancLorraine HutchinsonNoah ZatzkinRaymond JamesRetail StocksRick PatelSimeon SiegelTelsey
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