Why Lululemon (LULU) Received a Price Cut From Credit Suisse

Tickers in this article: LULU

NEW YORK ( TheStreet) -- Lululemon received a target price cut on Friday as it battles its public image woes.  Credit Suisse lowered its target price on signs of eroding customer loyalty. The investment firm downwardly revised its price to $46 from $53 and reiterated it as "neutral."

By early afternoon, Lululemon shares had tumbled 5.4% to $50.06.

In a note on Friday, analyst Christian Buss said, "Communication missteps continue to drive core customers to disassociate with the brand. As a result, we believe that erosion of productivity at mature stores (49% of total) will delay a comp rebound, margins may suffer as the new management team seeks to reengage customers, and earnings power falls short of consensus expectations."

Buss noted increasingly negative public commentary on Lululemon across the internet and social media as indicative of the shift. Research shows 34% of internet comments posted are negative from 22% a year earlier.

"Given our concerns regarding longer-term brand momentum, we are increasingly convinced that a comp rebound will likely be delayed, eCommerce growth will likely slow, and margins will likely take a hit as the company has to reinvest to regain the trust of its customers," said Buss.

Over fiscal 2014 ending January, Buss anticipates comparable-store sales growth of 3%, revenue of $1.813 billion and 6% earnings growth to $2.01 a share.

Analysts surveyed by Thomson Reuters anticipate Lululemon's per-share earnings of $2.20 and revenue of $1.84 billion.

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TheStreet Ratings team rates LULULEMON ATHLETICA INC as a Hold with a ratings score of C+. The team has this to say about their recommendation:

"We rate LULULEMON ATHLETICA INC (LULU) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and impressive record of earnings per share growth. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • LULU's revenue growth has slightly outpaced the industry average of 17.0%. Since the same quarter one year prior, revenues rose by 20.0%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • LULU has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 6.48, which clearly demonstrates the ability to cover short-term cash needs.
  • The gross profit margin for LULULEMON ATHLETICA INC is rather high; currently it is at 57.26%. Regardless of LULU's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, LULU's net profit margin of 17.40% compares favorably to the industry average.
  • Net operating cash flow has significantly decreased to $23.88 million or 51.98% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • LULU has underperformed the S&P 500 Index, declining 24.98% from its price level of one year ago. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last twelve months; and it could be down again in the next twelve. Naturally, a bull or bear market could sway the movement of this stock.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.