On Monday, Wells Fargo replaced Lululemon with Nike as its “Top Defensive Pick” among its stock coverage in the active lifestyle space. It also downgraded Lululemon and raised its price target on Nike.
Ike Boruchow wrote, “We simply believe the recovery characteristics and self-help story now beginning at NKE make for a more compelling long idea into 2024. With the potential for upside to Street and multiple, NKE now checks all the right boxes for investors as we shift into 2024.”
Wells Fargo kept its “Overweight” rating on Nike while raising its price target to $125 from $120. On Monday, shares of Nike closed at $115.15, up $1.67 on the day. Shares have traded between $88.66 and $131.31 over the last 52 months.
Boruchow also raised his EPS estimate above Wall Street’s on increasing confidence that Nike will deliver an EPS beat in its fiscal second quarter ended November 30 with “a greater emphasis on improving profitability as drivers to the rally.”
Boruchow said Wells Fargo’s revenue estimate remains below full-year revenue guidance as the financial services company’s recent industry checks with manufacturers and Chinese retail partners “point to a still subdued global demand backdrop” in China. However, the analyst believes investors will reward Nike for better-than-expected margins on lower product costs and improved closeout margins.
“We believe a tweaked FY rev guide is somewhat expected, while the story is simply much more about margins today. Transitory margin headwinds (FX, freight, liquidation) are set to flip in the right direction for NKE—new contracts negotiated close to pre-COVID levels, while improved FP [full-price] sales will likely come in 2H [second half]. Structural margin drivers (such as NKE direct margin improvement) to also fuel upside,” wrote Boruchow.
Wells Fargo lowered its rating on Lululemon to “Equal Weight” from “Overweight” and kept its price target at $445. Shares slid Monday by $5.85 to $460.76. The stock’s 52-week range is between $286.58 and $467.63.
Boruchow said Wells Fargo is “taking our chips off the table following a solid run YTD” by Lululemon. He noted that Wells Fargo upgraded Lululemon in January 2023 after the retailer reported weaker-than-expected fourth-quarter results on confidence that the retailer’s inventory would normalize post-holiday, margins would rebound on a “material freight recapture,” strong growth overseas, specifically China, would fuel better-than-expected revenues in 2023, and Lululemon’s valuation would revert to historical high-multiple norms. Boruchow wrote, “Simply put, these factors have played out—likely driving the stock’s outperformance in 2023.”
Boruchow is recommending “defensive/quality names,” which include Ross Stores and Nike, as well as “high-beta/recovery names,” with his top pick being Gap, Inc. Boruchow wrote of Lululemon, “LULU’s fundamentals have been impressive the past 24 months—and, as such, they don’t have any “easy” P&L lines to play with (except for SG&A, which we don’t believe the market will reward). At the same time, valuation is no longer cheap—with multiples back in line with history.”
Photo courtesy Reuters
