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Canaccord Genuity Downgrades Lululemon Athletica to ‘Sell’

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Price movement

Lululemon Athletica (LULU) has a market cap of $7.6 billion. It fell 2.2% to close at $55.31 per share on December 2, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -4.6%, -3.6%, and 5.4%, respectively, on the same day.

LULU is trading 2.9% below its 20-day moving average, 4.8% below its 50-day moving average, and 16.4% below its 200-day moving average.

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Related ETF and peers

The iShares Edge MSCI USA Quality Factor ETF (QUAL) invests 0.13% of its holdings in Lululemon Athletica. The YTD price movement of QUAL was 5.1% on December 2.

The market caps of Lululemon Athletica’s competitors are as follows:

  • Nike (NKE) — $84.0 billion
  • Gap (GPS) — $9.7 billion

LULU’s rating

On December 2, 2016, Canaccord Genuity downgraded Lululemon Athletica’s rating from “hold” to “sell.” It set the stock’s price target at $44.00 per share.

According to analyst Camilo Lyon, “While we respect the company and the infrastructure work management has done to improve its supply chain processes (which has led to significant gross margin recapture), the category headwinds facing LULU that we highlighted last quarter appear to be stiffening.”

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Lyon also said, “Specifically, we believe the combination of (1) a tough pant wall comparison and the inability to comp last year’s gains, (2) rising in-store inventory levels coupled with an increasing breadth of markdowns online, and (3) an evolving fashion shift away from athleisure to denim will lead to moderating comps and EBIT margin compression now through 2018.

“Given these mounting concerns, we believe LULU’s premium valuation of 23x P/E is subject to multiple compression, thus slanting the stock’s risk/reward distinctly negative.”

Performance of Lululemon Athletica in 2Q16

On September 1, 2016, Lululemon Athletica (LULU) reported 2Q16 net revenues of $514.5 million, a rise of 13.6% from net revenues of $453 million it reported in 2Q15.

LULU’s net income and EPS (earnings per share) rose to $53.6 million and $0.39, respectively, in 2Q16, compared to $47.7 million and $0.34, respectively, in 2Q15. It reported adjusted EPS of $0.38 in 2Q16, a rise of 11.8% over 2Q15.

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Cash and inventories

LULU’s cash and cash equivalents rose 6.8%, and its inventories fell 2.4% between 4Q15 and 2Q16. Its current ratio rose to 4.9x, and its debt-to-equity ratio fell to 0.22x in 2Q16, compared to 4.1x and 0.28x, respectively, in 4Q15.

During 2Q16, the company repurchased 0.2 million shares of its common stock at an average price of $63.65 per share.

Projections

Lululemon (LULU) made the following projections for 3Q16:

  • net revenues of $535 million–$545 million based on total comparable sales in the mid-single digits on a constant dollar basis
  • EPS of $0.42–$0.44

The company made the following projections for fiscal 2016:

  • net revenues of $2.3 billion–$2.4 billion based on total comparable sales in the mid-single digits on a constant dollar basis
  • EPS of $2.11–$2.19 or $2.07–$2.15 when normalized for tax and interest adjustments made during 1Q16 and 2Q16

Next, we’ll take a look at Hormel Foods (HRL).

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