Can Lululemon Athletica (LULU) regain the trust of shoppers and Wall Street in 2016?
On Monday, the Canadian-based retailer of yoga and athletic wear started the New Year with upgrades from Jefferies (to Buy) and Wells Fargo (to Outperform), as well as a raised price target from J.P. Morgan (to $66 from $55).
As of midday trading on Monday, shares of Lululemon are up 6.3% while the S&P 500 is down 2.3%.
"On days like today, you see the true value of a company," Jim Cramer told Real Money, noting Lululemon's gains against the falling S&P 500. Cramer added that investors should keep in mind the two upgrades and raised price target -- even if they don't act today.
In a survey conducted by J.P. Morgan, Lululemon was voted as the second most likely "turnaround story" in 2016, gaining 29% of the vote. Dollar Tree (DLTR) held the top spot, with 30% of the vote.
There is a another reason investors may want to take a second look at Lululemon -- that has little to do with the sale of its popular yoga pants, according to J.P. Morgan. Many of the provisions contained in Lululemon's standstill agreement with Advent International, a New York-based private equity firm, expire on Feb 7. The agreement commenced in August 2014 after Advent purchased 50% of founder Chip Wilson's shares, which made Advent the largest shareholder in Lululemon with a 15.6% stake.
The provisions that expire in February prohibit Advent from acquiring additional shares of Lululemon, announcing a public takeover bid, and initiating a merger/consolidation transaction. Advent will still be prohibited from voting to elect or remove existing board members until the company's 2016 annual meeting, which will occur in June or July.
When provisions expire next month, Advent could be empowered to make moves to unlock Lululemon's growth potential. Matthew Boss, an analyst with J.P. Morgan, noted that Dow Chemical's (DOW) merger with DuPont (DD) was announced just one day before Third Point's standstill agreement with Dow expired.
Indeed, Boss also sees growth opportunities for Lululemon -- whether or not they are prompted by Advent exclusively. International markets represent an untapped opportunity for the brand, as international sales account for only 6% of the company's revenue, Boss said. The company can also make significant strides in its online business, which currently accounts for less than 20% of its sales.
Still, the road to a bright 2016 may not be easy. There is no doubt that Lululemon has faced significant problems in recent years. In December, the company acknowledged that its margins were hurt by high markdowns prompted by low traffic and high inventory. This caused Lululemon to cut its fiscal year 2015 guidance to the $1.81 to $1.84 range, from $1.87 to $1.92.
The brand also faced problems following a recall of its pants in 2013 and reputational damage spurred by comments then-chairman Chip Wilson made in a November 2013 interview on Bloomberg. Shares of the company fell to $37 in June 2014 from its high of $81 in June of the previous year, amid its own production and PR problems plus the advent of newer entrants in the athleisure space.
However, with these problems behind it, Lululemon could be looking at a strong 2016.
