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File photo from 2010 of a Lululemon clothing store in Vancouver. (LAURA LEYSHON For The Globe and Mail)
File photo from 2010 of a Lululemon clothing store in Vancouver. (LAURA LEYSHON For The Globe and Mail)

Lululemon shares droop on downgrade; RBC says HBC is a buy Add to ...

Inside the Market's roundup of some of today's key analyst actions

Shares in Lululemon Inc. are down more than 5 per cent this morning after Credit Suisse downgraded the stock on worries about sluggish comparable-store sales growth and pressure on margins amid discounting of products sold online.

Credit Suisse lowered its rating to “neutral” from “outperform” and cut its price target to $80 (U.S.) from $86.

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With comparable store sales growth in Canada in the third quarter only in the low single-digits, Credit Suisse is concerned that it was too optimistic for sustained double-digit growth at these stores that are facing increasing competition.

Credit Suisse also said its analysis suggests the company’s e-commerce site significantly ramped up discounted apparel at the end of December. By the end of last month, close to 20 per cent of its apparel was on sale, compared to only 8 per cent in mid-December, according to Credit Suisse.

While Lululemon has successfully fended off competition in the past thanks to its strong brand and unique cross-sportswear apparel, Credit Suisse sees long term risks to its competitive position and pricing power as other retailers ramp up their activewear offerings.

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Hudson’s Bay Co. shares are still trading below their initial public offering price of $17, but the stock is finding some notable fans of late.

In mid-December, the influential Barron’s magazine said investors should take another look at the iconic Canadian retailer, noting its success with turning around the Lord & Taylor brand. It also suggested that the company only needs to boost its revenue per square foot by 5 per cent to obtain a 10 per cent boost in annual cash flows.

Today, RBC Dominion Securities initiated coverage on HBC with an enthusiastic “outperform” rating and $21 price target.

Analyst Tal Woolley believes HBC has above average growth prospects and cited four reasons for his bullish stance:

1. A unique and low-cost retail footprint and focused strategy to drive sales productivity; 2. A focus on driving sales through ongoing investments in key merchandise categories; 3. Solid free cash flow to reinvest in the stores, pay off debt and continue to pay a dividend; and 4. Potential for additional returns to shareholders through the monetization of its extensive real estate portfolio.

But what about the new competition soon to arrive from the likes of Target and Nordstrom?

“There is no question that U.S. competitive intensity is increasing, but we view this as a constant threat for all retailers in Canada going back decades,” Mr. Woolley said in a research note. “We believe Hudson’s Bay and Lord & Taylor have identified the correct, available gaps in the market, taking them further away from mass discounters as competition in Canada and lower-tier players in the U.S.. We also note that HBC’s management team will be the only one in Canada that has any experience competing against Nordstrom as they have done effectively with Lord & Taylor in the US.”

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities

Follow on Twitter: @eyeonequities

 
Security Price Change
HBC-T Hudson's Bay Co. 16.74 0.05
0.30 %
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