Lululemon Athletica Inc. didn’t let COVID-19 slow it down, making moves in categories including menswear and shoes that landed the athletic company on the Goldman Sachs Conviction List.
“Lululemon extended its leadership position during COVID-19 in the digital channel, and we believe the company is better positioned following the pandemic to be a market leader in a secularly growing active/casual marketplace,” analysts wrote.
Goldman Sachs /zigman2/quotes/209237603/composite GS -1.32% initiated a group of companies in the apparel and brands sector in a Wednesday report. The SPDR S&P Retail ETF /zigman2/quotes/206947004/composite XRT +0.14% has gained 48.1% for the year to date, outpacing the benchmark S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.91% , which is up 16.5% for the period.
Lululemon shares rose 1.7% in Wednesday trading and have gained 8.3% for 2021 so far. Goldman Sachs rates Lululemon stock buy with a $447 price target.
The reopening momentum won’t last forever. Analysts advise investors to stay selective when choosing companies in the sector.
“Past sector headwinds are currently acting as sequential tailwinds, with consumer traffic returning to stores, wholesale orders improving, and the industry realizing reduced promotionality,” the report said.
“We anticipate these will normalize. We are also closely watching incremental headwinds from rising costs of freight, inflating and raw material input costs, and supply chain disruptions.”
With that in mind, analysts call Lululemon /zigman2/quotes/204011506/composite LULU +0.03% their “top idea.”
“We see emerging tailwinds from accelerating men’s, international, membership, footwear, and long-term opportunity from Mirror to drive durable outperformance,” Goldman said.
Lululemon announced in June 2020 that it would acquire Mirror, an in-home fitness company that created an interactive workout platform, for $500 million. Analysts see the acquisition as a way for Lululemon to enhance customer engagement.
The company is also adding expanded sizing and heading to new markets, which will also broaden its customer base.
Goldman is optimistic about the active and outdoor categories, denim and premium and luxury categories.
Yeti Inc. /zigman2/quotes/206430919/composite YETI -1.46% was initiated at buy with a $113 price target, with innovation, consumer demand and international moves pumping up growth potential.
And Gap Inc. /zigman2/quotes/206554267/composite GPS +0.62% was started at neutral with a $35 price target, as strong core brands, Old Navy and Athleta, work in tandem with massive shifts at the company like store closures, selling non-core assets, and more.
“We believe Athleta has a credible opportunity to gain market share in global activewear, fueled by investments in size inclusivity, hero products, and strategic expansion into everyday wear,” Goldman said.
Goldman thinks more people will also be wearing jeans in the coming months, with buy ratings for both Levi Strauss & Co. /zigman2/quotes/204763189/composite LEVI -0.78% (price target $36) and Wrangler parent Kontoor Brands Inc. /zigman2/quotes/212177228/composite KTB -0.81% (price target $69). Both companies have also improved their business models with digital and brand investments.
Goldman is not so upbeat about VF Corp. /zigman2/quotes/206706147/composite VFC +0.58% and bed-in-a-box company Casper Sleep Inc. /zigman2/quotes/216229741/composite CSPR -0.20% . Both are rated sell.
“This is driven by several near-term normalizing forces we expect post the reopening period, including normalizing momentum at the Vans brand, tougher compares at The North Face in North America following a successful First Responder Program , and more limited near-term capital allocation optionality following the company’s acquisition of Supreme,” Goldman says about VF Corp, which has a price target of $79.
Analysts are cautious about Casper’s brand momentum, and think the company’s expansion into other retailers comes with gross margin risk. Casper has a $7 price target.
Casper stock tumbled 7.3% in Wednesday trading while VF Corp. stock edged down 1.8%.