Why lululemon athletica Inc. Shares Won't Bounce Anytime Soon

Does this analyst make a good case? Or is it just more noise from Wall Street?

Jun 13, 2014 at 11:43AM

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of lululemon athletica (NASDAQ:LULU) slipped slightly this morning after Wedbush downgraded the yoga gear retailer from outperform to neutral.

So what: Along with the downgrade, analyst Corinna Freedman lowered her price target to $40 (from $64), representing about 7% worth of upside to yesterday's close. So while momentum traders might be attracted to Lululemon's sharp earnings-related pullback yesterday, Freedman's call could reflect a sense on Wall Street that the company's growth prospects are just too limited to trigger a significant rebound.

Now what: According to Wedbush, Lululemon's risk/reward trade-off is pretty balanced at this point. "LULU beat our top-line estimate by $7.4m, beat our comp expectation by 50 bps, beat our GM assumption by 40 bps and beat our EPS estimate by 1c, which validated our improved outlook during the Q based on our channel checks," Freedman noted. "This was overshadowed by yet another trim to FY guidance and complicated further by a sequential slowdown in comps, which erodes our confidence in guidance that we previously viewed as a sufficiently low bar." Of course, with Lululemon shares now off more than 50% from their 52-week high and trading at a PEG just above 1, those near-term concerns might provide patient Fools with a solid long-term opportunity. 

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Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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