Buy Lululemon, a 'rare name with momentum', Wells Fargo says in upgrade

Published Fri, Jan 6 20238:26 AM EST

It's time for investors to buy shares of Lululemon Athletica , according to Wells Fargo. Analyst Ike Boruchow upgraded the athletics apparel and accessories stock to overweight, calling the it a defensive and "rare name with momentum" poised to outperform on the top line this year. "LULU's top-line resilience in the past few years has been nothing short of stunning, with 2022E's topline expected to be essentially double 2019 levels," he wrote in a note to clients Friday. "We expect the company's top line can remain more resilient across our softlines space" as it benefits from innovation, store expansions and continues positioning itself as a full-price direct-to-consumer brand. Shares of Lululemon gained about 2% before the bell Friday. Boruchow also upped the bank's price target on shares to $380 from $360, meaning they could gain almost 17% from Thursday's close. The stock fell more than 18% in 2022. Boruchow said that Lululemon's valuation looks reasonable and offers a "compelling entry point" for investors, with multiples trading well below their historic average over the past few years. He also cited easing freight pressures and better margin visibility as another catalyst for Lululemon going forward. "With freight now expected to be a +50bp tailwind in FY22, we expect it can remain a tailwind looking to FY23, lending optimism for [gross margin] expansion into next year," he wrote. "With LULU not a markdown-driven model, we see more visibility than most on the margin front looking to next year." In the same note, Boruchow downgraded shares of Ulta Beauty to underweight, saying tat he expects demand to dwindle following a steady stream of growth. Costs pressures will likely also mount as Ulta revamps supply chains and ups IT investments. He trimmed the bank's price target to $400 a share, implying 18% downside from Thursday's close. The stock outperformed in 2022, rising nearly 14%. Shares dipped about 2% before the bell Friday. — CNBC's Michael Bloom contributed reporting