Bloomberg News

Lululemon Drops as Analyst Cuts Rating, Target: Vancouver

January 04, 2013

Lululemon Athletica Inc. (LLL), the Canadian yoga-wear retailer, lost the most since November as Credit Suisse Group AG downgraded the stock, citing a sales slowdown.

Shares of the athletic goods company declined 4.2 percent to $71.95 at market close in New York, the biggest one-day drop since Nov. 14. Shares of Vancouver-based Lululemon advanced 63 percent in 2012.

Sales growth in the country’s mature stores shows signs of slowing while margin pressure is a “distinct risk”, Christian Buss, based at Credit Suisse in New York, said. Buss, who defines mature stores as five years or older, cut the company’s rating to neutral, the equivalent of a hold, from outperform. He also lowered his target to $80 a share from $86.

“New and winter product lines appear to have stretched outside of the company’s comfort zone,” Buss wrote in his note to clients today. Repricing, broader discounts, and higher markdown levels are higher than “historically seen” and add risk to the company’s ability to drive sales, he wrote.

“Stores that are that old are not going to be coughing up double digits forever -- it’s normal,” John Kernan, an analyst at Cowen & Co. LLC, said in a phone interview from New York. “The company is discounting, but on the other hand they’re driving foot traffic. When they filled up the discount rack with product this season, word of mouth in New York city spread like wildfire and the stores were jammed.”

Kernan, who rates the stock a buy, said he doesn’t see any risk to earnings in 2013.

“Lulu will be fine,” Kernan said. “The company’s problem is that it doesn’t have a lot of room to move margins higher. They’ve been able to reach the operating margin that no one else in retail has been able to replicate ever for a significant period of time. They have to be perfect in everything they do.”

The 201-store company said sales at company-owned locations jumped 36 percent to $712.1 million in the nine months ended Oct. 28, according to its latest quarterly filing. About 43 percent of the company’s revenue in 2012 came from sales in Canada.

To contact the reporter on this story: Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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