Why This Analyst Is Cautious On Lululemon, Carter's

DA Davidson is cautious on Lululemon Athletica inc. LULU and Carter’s, Inc. CRI, according to a Tuesday note.

The Analyst And Rating:

DA Davison's John Morris maintains a Neutral rating on Lululemon and lowered his price target on Lululemon from $180 to $175.

Morris maintains a Neutral rating on Carter’s and lowered his price target from $105 to $91.

The Thesis

DA Davidson’s summer report calls for increased caution on Lululemon and Carter’s, and both names could be poised for a sell-off.

Morris says both names are showing an inflection in higher markdown depth that could dampen merchandise margins relative to expectations.

With Lululemon, the analyst says the company’s pricing architecture is not as robust as before and promotions are becoming more of a regular occurrence, and that upside to EPS is diminished.

“And yet, the stock’s premium to growth has widened to 65% over its long-term growth rate of 20%. We believe the stock’s multiple is likely to narrow as investors realize the earnings surprise upside is fast receding,” Morris wrote in the note.

The analyst also sees risk to Carter’s second-quarter merchandise margin, given reads of deeper promotions. Morris says the average price of SKU’s on markdown has declined by around 15%. As a result, the analyst lowered his gross margin estimates by 40 basis points and trimmed his second quarter earnings estimate from 80 cents to 78 cents.

Overall, Morris says the headwinds continue for brand apparel companies, but he continues to prefer Urban Outfitters, Inc. URBN as a solid value name with potential upside for the Fall Back-To-School season.

Price Action

Lululemon shares were down 0.45% Wednesday, trading at $185.01. Carter’s shares were flat Wednesday morning. The stock is down 2% over the last five days.

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