By Sam Boughedda
Cowen analyst John Kernan told investors in a research note Tuesday that following a recent meeting with Lululemon Athletica Inc (NASDAQ:LULU) management in New York City, they believe confidence is high and the company's valuation is "compelling."
"Confidence is high and we think they feel confident in Q2 and Fiscal Year guidance. Inventory +74% y/y is a key focus among investors along with innovation in new categories along with International growth given the plan to 4x the business. Stock now trading at 25x FY23E EPS with high teens EPS CAGR potential," said Kernan, who has an Outperform rating and $505 price target on Lululemon shares.
Kernan added: "We're modeling gross margin to be 56.6% for FY22. Our FY22 gross margin forecast is in line with the consensus estimate and modestly above management's guidance. Management is guiding Q2:22 gross margin -200bps y/y, including 120bps headwind from air freight, and down -120bps to -150bps for FY22. We assume the business recovers roughly half that headwind; 75bps in FY23. Our EPS estimates are fairly in line with consensus for FY22 and FY23."
The analyst said Lululemon reiterated its goal to quadruple international revenue by 2026 relative to the FY21 base of $957 million, with a large portion of the sales growth expected to come from China, which they estimate will account for over 50% of all international revenue by 2026.
Kernan said the stock has "de-rated to 24x FY2E EPS vs the five-year average of 37x despite durability of growth that remains high (high-teens EPS CAGR) and sustaining industry-leading ROIC (55%). Our $505 price target is 45x FY23E EPS."