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Lululemon is a brand still on the rise, Citi says in upgrade

Key Points
  • On Wednesday Citi upgraded Lululemon to buy from neutral, saying the company has improving fundamentals and stand-out growth prospects.
  • The company reported Q3 earnings on December 6 that topped analyst estimates, but Q4 guidance was light.
  • The stock has soared 56% year-to-date through Wednesday's close, but it has sold off in the last two months, falling 25% from its 52-week high on October 1.

Lululemon started the year on a high note, but shares have stumbled in the past few months alongside the broader market. But Citi believes the stock's recent pullback creates an attractive entry point to buy the stock.

On Wednesday the firm upgraded the stock to buy, saying the company's fundamentals remain strong and that the stock has been unfairly punished by the broader market decline.

"In recent months fears of a macro slowdown have taken the winning brands down with the rest of the group, seemingly painting all with the same brush. LULU has been a victim, yet is a story of improving fundamentals and stand-out growth prospects, and now at a much lower price," analyst Paul Lejuez wrote in a note to clients.

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Citi: Buy Lululemon

Shares of Lululemon have soared 56% this year, hitting an all-time intraday high of $164.79 on October 1. But since then the stock has dropped 25%, meaning it is now trading in bear market territory.

The company reported third quarter earnings on December 6 that topped analyst estimates for both EPS and revenue. Guidance was light, however, which has put further downward pressure on the stock.

Investitute co-founder and Lululemon shareholder Pete Najarian believes the sell-off is overdone. He highlighted strong Q3 same-store sales -- an 18% increase versus 13.8% expected by analysts -- as evidence that the brand remains strong.

Aureus Asset Management CEO Karen Firestone echoed this point, saying the company has created a loyal following.

"I think it's a great brand. They've been able to carve out this niche where they have people that are devoted to Lululemon...I don't think it's a bad call here," she said on Wednesday's "Halftime Report."

"We don't own it, but we've owned it in the past and we might own it again," she added.

Shares of Lululemon are down 20% over the last three months, and the stock currently trades at 28.8X forward earnings.