Lululemon's stock keeps falling. But one analyst says the market is wrong.

By Tomi Kilgore

BofA sees more than 40% upside in Lululemon's stock as 'tremendous' growth potential is being mispriced

Lululemon Athletica Inc. investors are suffering through the longest losing streak for the yoga-gear maker's stock in a year, but BofA Securities tried to reassure them by saying the market is mispricing the shares of the "best-in-class retailer."

The stock (LULU) slumped 0.6% in afternoon trading, and was headed for the lowest close since March 2023.

It has tumbled 15.5% amid a seven-session losing streak, which would be the longest such streak since the nine-day stretch that ended June 1, 2023.

The selloff was highlighted by Wednesday's 7.2% drop, after the company said its long-time chief product officer, Sun Choe, had resigned.

BofA's Lorraine Hutchinson said Choe's departure after seven years with the company is surely disappointing, but it wasn't related to a problem with a product. And Hutchinson was encouraged that the company chose to elevate the "successful team" Choe had built rather than back-fill the position from outside.

Hutchinson reiterated her buy rating on the stock, saying current prices are reflecting strong growth potential, particularly internationally.

While she cut her price target to $430 from $530, her new target still implied about 44% upside from current levels.

Hutchinson noted there are only 21 consumer discretionary stocks in the S&P 500 with sales growth in the high-single-digit percentage range or better. She said those stocks trade at an average valuation of 16-times enterprise value (EV)-to-Ebitda (earnings before interest, taxes, depreciation and amortization), while Lululemon's stock trades at 12.5 times.

Lululemon reported in late-March fiscal 2023 sales that rose 18.6% from the year before, including 15.6% growth in the fourth quarter.

"We think [Lululemon] is seeing a disproportionate impact from slowing North America (NA) sales growth and the stock is not reflecting its tremendous global growth opportunities and strong margin profile," Hutchinson wrote in a note to clients.

For fiscal 2023, the company said Americas revenue increased 12% and international revenue rose 54%, compared with 29% growth for Americas revenue in 2022 and 35% growth for international. Americas revenue represented 79% of total revenue last year, after representing 84% of the 2022 total.

Meanwhile, gross margin improved by 2.9 percentage points in 2023, after decreasing by 2.3 percentage points in 2022.

Hutchinson believes fiscal 2024 revenue growth in North America will slow to the low-single-digit percentage range. But she expects international revenue growth to "remain robust, particularly in China," with the share of total revenue rising to 35% from 21% last year.

The company is slated to report fiscal first-quarter results on June 5.

Hutchinson said there is a risk that Lululemon could lower its fiscal 2024 revenue growth guidance of 10% to 11% - she expects growth of 9.4% - but given how far the stock has fallen, she believes that cut has already been priced in.

Lululemon's stock has tumbled 41.8% year to date, while the Consumer Discretionary Select Sector ETF XLY has slipped 2.6% and the S&P 500 index SPX has gained 10.7%.

-Tomi Kilgore

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05-23-24 1427ET

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