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Cowen raises Lululemon PT to $280, says most full-price brand in the sector

On Thursday, Cowen provided investors an update on athletics brands and retailers. The firm has an outperform rating on Lululemon, Nike, and Adidas, and is more neutral on peers VFC, Puma and Under Armour. For Lululemon specifically, the firm found that Google search trends are showing the biggest acceleration in history. The Final Round panel discusses the state of "athleisure" amid coronavirus.

Video Transcript

MYLES UDLAND: All right, welcome back to The Final Round here on Yahoo Finance. Myles Udland with you in New York. It's time now for our Call of The Day. Today, we're looking at Cowen's, the latest note on the athleisure space. A couple of names they like, a couple of names that they don't. I think no surprise here for the folks who have been following this trade over the last couple of years. Lulu outperform rating here from Cowen, raising their price target on the stock to $280 per share.

The firm writes that their checks show Lulu being the most full price brand in the sector. In other words, Lulu is doing the least amount of discounting. I think most of their customers have been trained to often expect there to be no discounting at their stores, on their website. And Dan Roberts, in this environment when, I guess, we're never going to go to the office ever, again, why would you buy anything that-- you know, I've heard people call jeans hard pants now. So I guess what Lulu sells are soft pants, and why would anyone want to have anything different?

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DAN ROBERTS: Athleisure, athleisure, athleisure. And as you mentioned, none of this is surprising. I mean, I wrote six weeks ago, and I'm saying that was oppression. You could see the writing on the wall if you follow this industry, but I wrote six weeks ago that Nike was much better suited to survive coronavirus and weather the storm than Adidas and Under Armor. And you didn't mention yet, but in this note, Adidas and Under Armor are not faring so well as Lulu, Nike, and actually, some positivity here around Puma, which may be a surprise to people.

But for a little Lululemon and Nike, especially, I mean, the e-commerce has just been so strong, and that has continued. For Nike, the story has been apps. And the last time we heard from Nike on its earnings call, of course, the China numbers were bad, because that hadn't reopened yet. But they were pointing to the fact that app usage on its retail apps in China-- and there are multiple Nike apps. --was up like 80% during coronavirus.

I'm sure that they've seen the same in the US now while retail stores are closed. And then for Lululemon, this Cowen note mentions that Google Trend searches for Lulu have accelerated the most that they've ever seen in one period. So goodness gracious, as if Lulu wasn't hot enough already, a lot more people are looking to buy Lulu. And then as you mentioned, you expect Lulu to be an expensive, premium brand. And I wrote about this recently, but Under Armor, for example, the branches isn't resonating anymore.

And a big problem is the discounting, and Melody and I were discussing this, I think, earlier in the week. But this was an interesting nugget in the Cowen note on Under Armor. Pricing on Amazon is not in sync with underarm.com, so one more issue in terms of discounting here and there.

And it just makes the brand not feel premium, and Kevin Plank already three years ago said on an earnings call, we really need to become a premium full priced brand. But it didn't do that. It hasn't done it. Lulu has always been a premium full price brand. You're willing to pay for it through the nose because of the quality. Most people.

JEN ROGERS: And to the point that they don't discount, I mean, they have that one little place on the website called we made too much. And throughout this whole pandemic going on Lulu, I mean, they've been sold out of many categories at whole price throughout this. So they really haven't been discounting to the extent that we saw in the most recent economic data even. Remember what we saw with clothing that came out there. I thought what was interesting and struck me about this note is the investments that companies made in going digital are really paying off in this environment.

So we used to talk about the loyalty and the digital play at Lulu trying to make themselves employee more like the Starbucks in terms of digital or more like Dunkin' with their loyalty. Those investments that they made not knowing that COVID was coming are making them right now accelerate much more than their peers, and the stock, it's basically flat for the year. But think about the environment that they're in and this price target here to 250. I mean, it seems pretty reasonable.

MELODY HAHM: I'm also fascinated. And Jen, I don't know how you feel about this. But I think women have sort of pivoted to athleisure a long time ago in the workplace, where you could kind of get away with stretchy black pants and not see them as yoga pants. Whereas guys have not been able to fully make that transition.

I do wonder if this period of time, as Myles wears that shirt for however many days in a row, I wonder if that ends up becoming the new trend. Because even when you look at our guests, they're still dressing up, right? Of course, they're wearing sweat pants on the bottom, but how do you translate that to the office environment? How do you translate that to actual in-person business meetings? And if that sort of trend continues, then I do think the upside is really unlimited for companies, like Lulu, if you can make that sort of transition.

JEN ROGERS: Yeah, I do wonder to your point, Melody, what the next is going to look like. So in the note, they talk about the average selling price being good, but we've talked with Myles many times before about the ABC pants. So Myles, ABC pants are expensive. Men seem to like them, but do they need those now? Like are they doing well? Is Lulu doing well? Because to Melody's point, it's more down the athleisure road than ABC pants, which you could just wear and look like in pants.

MYLES UDLAND: Well, but ABC pants, let's be clear. They are athletic pants. I mean, when you wear them, you are not-- there's no mistaking that this is an athletic material. So I think that, if people had held off on adopting that-- and maybe the lesson here is for-- like Nike you should take some of their combat pro gear and try to find a way to engineer a five pocket pant. That's all the ABC pant is. A five pocket pant out of something that has a little bit of stretch. There is a way to make that not look-- tacky is not the right word. But not make it look weird, and I think that probably is something that consumers are certainly going to be more friendly about going forward.

JEN ROGERS: So it sounds like he would go for a run on your ABC pants.

MYLES UDLAND: When I want to get dressed up these days, that's what I wear. And sometimes, I have to wear a belt with those.

MELODY HAHM: And one other thought just because I am that person who's being served the Instagram ads for every other athleisure startup right now, whether it's Bandier, or Carbon 38, or Bala. I mean, it's honestly unlimited right now. And if you look at the other accounts that are like the one that you're being served, it's like, I could spend five hours just scrolling through those. And it's not a cheap price target, right?

Most of them are comparable to Lululemon, if not more expensive. And a lot of the items on the site are being sold out, so perhaps this is kind of tied into our stay at home trade stocks that we always talk about, where it is the Peloton's. And you want to look good, and you want to feel good, even in your own mini bubble just for that 30 minutes of fleeting pleasure, I suppose.

DAN ROBERTS: I was just about to mention Peloton too. It's a good point, Melody. In some ways, they're similar, Lulu and Peloton. Because they're brands where people are used to paying a lot, but they're pleased and happy to do it.

And maybe at some point that changes, but you just hear so often from the satisfied customers, I'm no pentagon guy. I don't know about that. But in terms Lululemon, sometimes I'm even embarrassed when you pay so much for the products. But in my experience, the products are just really good quality.

MYLES UDLAND: Yeah, the male version of those startups, Melody, is there's a Myles Apparel is one of those startups. Very expensive. Mac Weldon is another one that advertised. Although they're kind of bigger than a startup, but it's kind of in that same vein of the ways we all get micro targeted on our own feeds. So I'm guessing Dan gets a bunch of like book and coffee ads and stuff.