Cowen Equity Research recently raised its price target on Lululemon (LULU) to $250 from $225.53 and is bullish on the company as a whole. Consistent innovation, luxury-like brand positioning, and a community-based model are enhancing the brand’s durability, the analysts noted.
“Lulu’s ability to flow newness, innovation — and to both men’s and women’s — creates a very consistent, market share opportunity and in a very large total addressable market. Also, because they’re so premium, from a price point standpoint, they generate the highest return on capital of any company in the sector,” Cowen’s John Kernan tells Yahoo Finance.
“There is a lot to like about Lulu ... I think people are underestimating their long-term capital potential,” Kernan said.
During a meeting with Lululemon management at the company’s newest 20,000-square-foot store in Chicago, Kernan said the retailer’s curation skills were on full display. The store boasts a yoga studio, men’s and women’s locker rooms, memberships, and a restaurant, among other amenities.
Cowen said the Chicago store is key to the company’s growth because 10% of its store base could follow a similar format by 2023.
Follow in Nike’s footsteps
Cowen is so bullish on Lululemon that it believes that the athletic-wear brand could one day follow in the footsteps of global sportswear leader Nike (NKE).
“Just from a valuation corporate valuation standpoint, we looked at the cash flow multiples at Nike valued and Adidas (ADDYY) and VF Corp (VFC) and, compared it to what Lulu could be valued at someday. That helps us arrive at a much larger market cap opportunity over time.”
According to Cowen’s model and 44% return on invested capital, Lulu has a path to $1 billion in annual free cash flow.
Cowen believes that if the same valuation were applied to Lulu as Nike, the company’s stock would be worth at least $300 per share.
“The brand is certainly scaling at a rapid rate. Loyalty with Lulu with consumers is about as high as it gets among the companies that we cover.”
Reggie Wade is a writer for Yahoo Finance. Follow him on Twitter at @ReggieWade.