Piper Sandler upgraded its stock rating on Lululemon Athletica to “Overweight” due partly to the brand’s momentum with teens, as noted in its 44th Semi-Annual Generation Z Survey.

“LULU gained significant mindshare in our Fall 2022 TSWT Survey, underpinning the aspirational nature of the brand and its ability to attract a new generation of consumers,” said Abbie Zvejnieks in a note.

The Gen Z Survey identified that Lululemon had reached the No. 2 favorite apparel brand overall among teens, with mindshare in its fall 2022 teen survey increasing 171 basis points year-over-year and 151 basis points sequentially versus its spring 2022 survey. Lululemon’s ranking improved among males to the No. 6 spot from No. 9 in Piper’s spring survey.

Within the athletic apparel ranking among upper-income teens, Lululemon retained its No. 2 position overall but moved to the No. 1 spot among upper-income females, outranking Nike for the first time. 

Piper Sandler’s survey also concluded that Lululemon continues as the No. 1 new brand female teens wear, and leggings/Lululemon was the No. 1 fashion trend among upper-income females, ahead of crop tops, jeans and Nike.

In social media checks, Zvejnieks said, “customers resonate with new products such as the Scuba Half-Zip, and we think these checks, along with the survey results, solidify LULU’s brand positioning.”

Other factors contributing to Piper’s upgrade on LULU include potential outperformance in FW22 outerwear and stable promotional intensity.

Zvejnieks wrote that due to a colder winter and better in-stock levels, Piper sees an opportunity for outerwear to show a 240 basis point revenue growth in the 2022 third quarter.

She noted that according to Planalytics, in October 2021, the outlook for October 2022 is expected to be favorable for Fall/Winter categories, including boots and winterwear, following the warmest weather in the Eastern North Central and Northeast regions in more than 60 years in October 2021.

LULU in F/W 2021 had lean outerwear and second-layer stock due to supply chain delays, providing another tailwind for the category this winter. 

Zvejnieks wrote, “Our store checks point to a solid outerwear offering available early in the season, which includes key social media hits including the Fleece Scuba Half-Zip and the Wunder Puff collection.”

Finally, Zvejnieks noted that Piper’s promotional tracker showed “relatively flat promotional intensity” for LULU despite a broader promotional environment. Zvejnieks added, “We do not think LULU will have to react to NKE’s increased promotional activity as much as peers due to the stronger brand positioning and more affluent customer base.”

Piper’s previous LULU stock rating was “Neutral.” It raised its price target to $350 from $320.

Shares of Lululemon closed Monday at $297.65, up $8.87, in over-the-counter trading. The stock began the year at $391.45, and its 52-week range is between $251.51 and $485.83.

The upgrade comes as Lululemon, on September 1, raised its outlook for the year as sales and earnings in the second quarter easily topped the company’s guidance. 

Lululemon’s earnings on an adjusted basis grew 33 percent as a comp gain of 23 percent offset gross margin pressures.

For 2022, the updated outlook for LULU calls for the following:

  • Net revenue ranging from $7.865 billion to $7.940 billion, representing a three-year compound annual growth rate of approximately 26 percent. Previous guidance called for revenue in the range of $7.610 billion to $7.710 billion;
  • Reported EPS in the range of $9.82 to $9.97 for the year, up from $9.42 to $9.57 previously; and
  • Adjusted EPS in the range of $9.75 to $9.90, up from $9.35 to $9.50 previously.

Jim Duffy, an analyst at Stifel, reiterated his “Buy” rating and raised his price target to $400 from $381 on its earnings report. Duffy wrote, “We expect LULU to sustain strong growth by both adding additional new consumers to the franchise and continuing expanded uptake of the offering to increase revenue per customer. We see multiple years of mid-teens plus revenue growth and margin expansion complemented by share repurchases afforded by the capital efficient business model.”

John Kernan at Cowen maintained his “Outperform” rating and hiked his price target to $531 from $512 on the earnings beat. Kernan wrote that “The brand is showing remarkable strength and outpacing all peers in a tough macro.”

After the earnings news, Simeon Siegel at BMO Capital Markets reiterated his “Market Perform” rating at a $304 price target. Siegel wrote, “Love the brand, but fear potential implications of growing inventory/GM/Cash questions.”

Photo courtesy Lululemon