Lululemon Athletica Inc. shares gained 6.5 percent after Wells Fargo & Co. upgraded the stock, predicting that improvements the company has made to its supply chain should lower costs, reduce discounts and boost profit margins.
Ike Boruchow, a Wells Fargo analyst in New York, raised his rating on Lululemon to outperform, the equivalent of a buy, from a neutral recommendation. The Vancouver-based company made enhancements to its supply chain last year that could help boost margins 1.2 percent in the coming year, he said.
Lululemon had suffered from an inefficient distribution and bloated costs, hampering efforts to get the right clothes into stores. It’s now working to fix that, Boruchow said. The company also has reduced raw material waste and improved its planning tools to better forecast how much inventory it needs.
“Inventory management was subpar,” Boruchow said. As a result, Lululemon was “left with increasing amounts of excess inventory each year, requiring incremental markdowns to clear.”
Lululemon’s stock rose to $55.86 in New York on Monday, the biggest gain in more than a month. The increase follows a 6 percent drop in 2015, its third straight year of declines.
Chief Executive Officer Laurent Potdevin, who took the helm almost two years ago, also is reducing the use of air freighting, which Lululemon relied on for about 40 percent of its goods. That delivery method is four times as expensive as ocean shipping, according to Boruchow.