Wells Fargo Upgrades Lululemon Athletica On Sustained Momentum; Downgrades Ulta Beauty On Demand Slowdown
Lululemon’s topline resilience in the past few years has been nothing short of stunning, with 2022E’s topline expected to be essentially double 2019 levels, the analyst said.
The company’s topline could remain more resilient as the model benefits from ongoing innovation focus across categories, full-price, DTC brand positioning, and store expansion and international white-space opportunities.
Despite LULU’s gross margins up +100 basis points in the past 3 years, the model has navigated ~200 basis points of freight pressure in the past two years, particularly as the company prioritized air freight in an effort to feed better consumer demand, said the analyst.
With freight now expected to be a +50 basis point tailwind in FY22, the analyst expects it can remain a tailwind looking to FY23, lending optimism for GM expansion into next year.
Boruchow said Lululemon’s valuation appears reasonable with a compelling entry point.
Based on the analyst’s demand overshoot analysis, the major worry is that demand trends simply have nowhere to go but down. Margins are likely to end 2022 at ~16%, the analyst added.
While management has clearly made strides to improve the model over the past several years, the analyst believes that in the face of a slowing topline, ULTA will see margins normalize back to their 13-14% target.
Along with increased/normalized promo intensity, ULTA has guided to a shift in IT investment spend, primarily cloud integration, into 2H2023, the analyst said.
The investment is part of Project SOAR announced at the company’s October FY21 analyst day, including $160-180M to be invested over the next few years to revamp the company’s supply chain, and includes projects to support the company’s expanding e-commerce focus.
As Project SOAR ramps past its start in FY22, we’d expect the rate of investment to increase in FY23 and beyond, the analyst said.
Price Action: ULTA shares are trading lower by 0.81% at $485.00 on the last check Friday.