FBR Downgrades Lululemon, Sees 20% Downside

• In a report issued Monday, FBR analyst Susan Anderson downgraded shares of Lululemon Athletica inc. (NASDAQ: LULU) to Underperform.
• Anderson trimmed her price target from $55 to $42. The new target implies a ~20 percent potential downside from the stock’s latest closing price of $52.50.
• The firm does see some positives in the company, but experts pointed out a few issued that will likely weigh on gross margins considerably.

In a recent report, FBR downgraded Lululemon to Underperform from Market Perform. While the analysts believe the company has a robust women's customer base that it has been consistently gaining traction in the men’s segment, and that its kid's products have potential, "the elevated inventories, supply chain issues, mix shift, and fixed-cost de-leverage will likely weigh more on GM than expected."

Related Link: Let's Demystify Lululemon

Over the past few weeks, the firm's checks have shown substantially higher clearance levels in-store and online. While the analysts think "TG/BF sales were very strong," their checks indicated most clients are buying the considerable amounts of clearance available in stores

Consequently, Anderson decided to lower her fourth quarter gross margin estimate to -290 bps (from –20 bps and consensus at –69 bps) and her 2016 gross margin estimate to +22 bps (consensus of +180 bps). The firm also reduced its EPS estimates for the fourth quarter to $0.76 (from $0.86), for 2015, to $1.80 (from $1.90), and for 2016 to $2.13 (from $2.29).

Shares of Lululemon were down 5.5 percent at $49.55 early Monday afternoon.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.