Why Lululemon (LULU) Was Upgraded

Tickers in this article: LULU

NEW YORK (TheStreet) -- Lululemon was upgraded to "outperform" from "sector perform" by RBC Capital Friday.

The firm set a price target of $56 for the clothing retailer.

"While Lululemon hit some speedbumps in 2013, we believe the bulk of the bad news is in the rear-view mirror," analyst Howard Tubin wrote in a note to investors.

Tubin also highlighted the retailer's new leadership team, its strong brand, and the 43% decline of the stock from its 52-week high.

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Separately, TheStreet Ratings team rates LULULEMON ATHLETICA INC as a Hold with a ratings score of C+. TheStreet Ratings 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 16.6%. 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's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 33.79%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, LULU is still more expensive than most of the other companies in its industry.
  • You can view the full analysis from the report here: LULU Ratings Report