What does it take to send the shares of Lululemon Athletica Inc. surging? Not a spike in revenue, earnings or profit margins, but rather a bullish nod from Goldman Sachs.
Analyst Michelle Tan argued in a note on Wednesday that the yoga-wear retailer “offers one of the most compelling stories in retail” and the stock was added to Goldman Sachs’ “Conviction List” of best ideas.
That’s just one view, of course, but it was weighty enough to send the shares 8.9 per cent higher in Toronto, marking its biggest one-day move in more than four months.
The upgrade by Goldman Sachs doesn’t represent an extraordinarily shift in outlook, though.
Ms. Tan left her target price unchanged, at $64 (U.S.). While that represents an upside of about 36 per cent from Tuesday’s close, it is the same target the analyst had on the stock back in September.
The same goes for her recommendation, which was left with the ambiguous-sounding “buy/neutral.”
Still, the addition to Goldman Sachs’ Conviction List does seem to have some heft, judging from at least one other move. Chipotle Mexican Grill Inc. – a restaurant chain – was also tapped on Wednesday, a move that coincided with the shares rising 2.2 per cent.
In the case of Lululemon, the new-found appreciation for the stock comes at a rocky time for the company. In early December, it said that it could be forced to hold clearance sales because of swelling inventories. It also warned of lower profit margins and failed to meet third-quarter revenue projections from analysts – eroding confidence in Lululemon as a premium brand, even as it has thrived during recent weak economic conditions.
The share price also endured a tumultuous year in 2011, rising as much as 80 per cent in the first half of the year and sliding as much as 25 per cent soon after hitting its peak in July.
However, Ms. Tan argued that brand momentum is working in Lululemon’s favour and particularly liked the fact that the company enjoyed strong year-over-year growth in Google Trends – essentially gauging consumer interest using Google searches – during the holiday season.
“We believe consensus margin expectations already more than capture the impact of inventory normalization,” Ms. Tan said in her note. “Even if cost pressures and normalizing markdown rates reverse all the product margin gains Lululemon has seen since 2008, a detailed breakdown of drivers suggests fixed cost leverage is an offset that is underappreciated in consensus margins.”