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Lululemon (LULU) Stock is Rising Today: Here's Why

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On Monday, shares of athleisure giant Lululemon Athletica Inc. (LULU - Free Report) are rising, up about 2.5% in morning trading after Bank of America Merrill Lynch raised its rating on the company.

BofA upgraded Lulu shares to a Buy rating from Underperform, saying the retailer is taking away key sales from rivals like Nike (NKE - Free Report) and Under Armour (UAA - Free Report) . The firm also raised its price target for the company to $70 from $49, representing a 20% upside from Friday’s close.

Analyst Rafe Jadrosich said Lululemon is "gaining share from saturated competitors. We believe weakness in Nike and Under Armour North America apparel sales creates share gain opportunity for lululemon," he wrote in a note to clients. "Nike and Under Armour have suffered from a lack of innovation, over-distribution in moderate channels, and heavy promotions.”

Jadrosich cites some of Lulu’s customer-favorite products like its Enlite bra, Nulux fabric, and Wunder Under fabric, and believes these will help drive sales growth going forward. He also predicts comparable store sales growth to increase 1%-5% in the July quarter from the negative 1% reported in the April quarter.

"Lululemon's fabric and product innovation appears robust, in our view," wrote Jadrosich. "We believe lulu will increase its assortment of Jacquard (specialized knitted and dyed nylon yarn that allows designers to form unique textured patterns), which will carry higher average selling prices and is difficult to replicate."

Lulu In-Depth

Year-to-date, LULU stock has fallen about 13%, and like many of its retail peers, it has been hit hard by the growth of e-commerce and changing consumer shopping habits. However, Lululemon has yet to fall into the discount trap, and the company rarely runs store promotions, a factor that sets them apart from other athletic retailers.

When customers visit a Lulu store, then, they are there for a reason. Lululemon has a very loyal base, and even though today, with almost every apparel brand boasting their own in-house athleisure collection, customers return to Lulu. Their logo still resonates with a large swath of exercising consumers, no matter the price.

LULU shares are currently a #2 (Buy) on the Zacks Rank, and the company sits in a fairly high-ranking industry as well; Textile-Apparel is in the top 38% of all 265 industries ranked on the Zacks Industry Rank, and has returned about 4.5% so far this year. Sales at Lululemon are expected to grow about 9% for the current year, with earnings projected to rise 8.8% for the same time frame.

LULU, though, is not a cheap stock, and its P/E is nearly 25, much higher than that of its industry’s 16.04. And if you look at the past 12 months, while the company’s valuation has decreased somewhat, Lulu’s P/E has hovered around the low-to-mid 20s. This may deter some investors, but Lululemon is still the king of (expensive) athleisure and athletic, everyday wear, and this title should continue to work in the retailer’s favor.

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