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Is Lululemon ready to put itself up for sale?

By Angela Gonzalez-Rodriguez

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Business |ANALYSIS

Rumours about a potential sale of Lululemon Athletica have surrounded the yoga inspired apparel for months now. With the likes of Wells Fargo and Jefferies agreeing on the company’s potential for 2016, a sale good be a good option for potentially interested bidders.

Analysts have speculated the company could be a takeover target, though it has been hard to peg an acquirer, reports ‘Fortune’. Nike and Under Armour have both traditionally sold more apparel and shoes to men, but are trying to address the women’s market as well, what makes of them a highly potential bidder.

“Buying Lululemon would not be a substitute for building a branded women’s business,” wrote Sterne Agee CRT analyst Sam Poser in a note to clients. “Neither Nike or Under Armour can be a true global athletic brand without its own branded women’s business.”

FashionUnited takes a look at what analysts have to say about the potential of Lululemon, as well as of its challenges and opportunities in the coming month.

Lululemon is undergoing a 360 reform to be more attractive and gain market share

Analysts at Trefis highlight in a note to clients that “First and foremost, Lululemon is trying to make changes to its supply chain which may help it lower costs and improve inventory management.”

On a recent earnings call, CFO Stuart Haseldon said that the brand was "improving our demand planning being able to look forward and have a more reliable estimate of our production requirements that we can take to our suppliers to deliver more consistent production requirements, reducing the amount of cancellations that we’ve seen and as well late stage change orders."

This is one of the main points for discussion for all of those following the company’s ups and downs. “Last year, the athleisure giant was forced to markdown a large portion of its products as sales suffered. An effective supply chain can help reduce such occurrences. Furthermore, sales could increase by targeting a larger target audience – men and kids. This is relatively untapped in comparison to their business geared towards women,” sums up Trefis in this regard.

In a similar vein, Wells Fargo expects the company to do a lot better this year as the company seeks to improve its supply chain, which had caused several inefficiencies in the previous few quarters. Jefferies agrees on the how the retailer has the potential to widen its margins this time around, and this could help drive earnings in the quarters to come.

Expiration of Lululemon’s deal with Advent open up doors to new ventures

“However, the biggest positive for Lululemon this year is the expiration of its standstill agreement with private equity firm Advent in February. This could definitely enable the company to pursue new growth opportunities, which were until now hampered by the agreement,” recalls Trefis analysis team.

On the same note, J.P. Morgan analyst Matthew Boss stresses that the conclusion of the agreement will enable Advent (the largest stakeholder in Lululemon with a 15.6 percent stake) to make moves to increase its growth potential.

“The expiration of the deal will prohibit the private equity firm from buying additional stock in the company or announcing a public takeover bid. It will further prohibit the company from ‘initiating a merger/consolidation transaction’,” concludes Trefis analysis report.

Collective Investor Co also assesses the potential for Lululemon, as well as the likeliness of entering new ventures and welcoming new partners. “Lululemon is one of very few stocks to be significantly higher than December 31's close price. International growth, Ivivva, and the men's range should keep revenue growing by double-digits percentages for many years,” the investment firm explains to ‘Seeking Alpha’.

“This year very few stocks have been in the green, but Lululemon Athletica Inc. (NASDAQ:LULU), which closed the year at 52.47 dollars, finds itself up almost 4.5 percent at 54.79 dollars during these turbulent times. We look to see if it can maintain this performance and be a good investment for us this year,” sums up Collective Investor.

Market saturation and completion from established players, main challenges

On the downside, there are a few big picture factors that can hurt Lululemon in the near future, such as the close to saturation point that the yoga apparel niche is approaching. “The maturation of the yoga trend could potentially hurt the company’s top-line prospects moving forward, as Lululemon is primarily yoga-focused,” notes Trefis.

Increased competition from established companies including Nike, Reebok and Under Armor, poses another challenge, as they have access to biggest budgets than Lululemon does.

But ultimately, Wells Fargo believes that despite any problems that have troubled Lululemon over the past few years, the company has something going for it. "Put simply, [Lululemon] is one of the strong brands in the growth athleticwear category," the firm wrote in a research note.

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