Lululemon Athletica inc’s (NASDAQ:LULU) comps are likely to slow going ahead, Goldman Sachs’ Lindsay Drucker Mann said in a report. She maintained a Sell rating on the company, while reducing the price target from $48 to $46.
The comp sales estimate for 2017 has been reduced to +3 percent, and the EPS forecast has been lowered from $2.36 to $2.28, versus the current consensus expectation of $2.51.
Five Near-Term Risks
Mann enumerated five risks to the company’s business for the medium term, which the market seems to be underappreciating:
- Although Lululemon has a strong brand equity, the specialty model “tends to be prone to outsized volatility.”
- The company’s inventory turnover is decelerating versus its specialty peers, which adds to margin risk.
- Over the past few years, Lululemon’s comps and margins have been driven by price increases, leaving the company “competitively vulnerable.”
- Traffic has been weakening.
- There has been a slowdown in Lululemon’s online business, despite the company’s substantial investments in marketing and infrastructure.
“We expect store traffic will remain negative while the tailwind from pricing fades, and see downside risk that traffic weakens further as LULU’s core customers branch out into alternative brands,” Mann wrote. She added that Lululemon may need to implement new processes to clear out excess inventory more efficiently, and this could have an adverse impact on merchandise margins.
“Lastly, LULU is spending to grow its international business to 25% of sales in 5 years. This, combined with other topline investments, has led to a mid-to-high single digit SG&A leverage point, which is a comp run rate we don’t believe is realistic,” the analyst commented.
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