Goldman Sachs analyst Michelle Tan named lululemon (LULU) to the firm’s Conviction Buy list today, as the company’s growth potential is still exciting, and it appears to have returned to more normal inventory levels. Shares are up 8.2% this afternoon.
Early in the year, lululemon was running short of inventory, but the company increased its inventory significantly by the end of the third quarter. Of course, some investors then got worried about inventory building up. In general, Tan thinks investors should pounce on the stock while the market continues to debate the inventory issue.
“[W]e believe normalizing inventory levels create a meaningful 2012 sales opportunity that is not factored in to consensus expectations while concerns over this inventory growth is depressing consensus margin estimates more than we believe will prove appropriate,” Tan writes.
And she argues that a fat multiple shouldn’t scare investors away.
“Not only do we see upside to EPS, but at 29 times we believe LULU�s current multiple offers a very attractive entry point as it reflect a sharp discount to best-in-class growth peers and LULU�s historical average P/E.”
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