Lululemon Expected To Slip Below Range In Debut Thursday

Analyst Mark Rosen of Accountability Research has initiated coverage on yogawear retailer Lululemon Athletica in advance of its initial public offering Thursday with a target price of US$14.40, below its expected IPO range of US$15-US$17 and amid industry concerns that the stock might be a “shooting star.”

“The potential fad characteristics of Lululemon are perhaps the largest unquantifiable risks to the company, since fashion preferences may start to rotate away from yoga wear,” the analyst said in a note to clients. “However, we believe the company’s position at the high-end of the athletic apparel market, and tangible product innovations, will continue to resonate with repeat buyers and new markets.”

The analyst notes the company cannot control fashion trends but has embarked on several initiatives to grow its base of consumers buying the brand for athletic uses beyond yoga and expanding its accessories category. Skeptics might be comforted by Lululemon’s sales of $1,400 per square foot at retail outlets open at least a year, he added, “a figure that likely leads the apparel retail industry. In short, the company is doing many things right.”

He estimates revenue growth of 47% in fiscal 2007, and 43% in fiscal 2008, with diluted per share earnings of 23¢ and 37¢ respectively. His peer group analysis derives a value of US$14 per share for Lululemon, based on 38 times per share earnings estimates for fiscal 2008.