On paper, Lululemon Athletica inc. (NASDAQ:LULU) had a solid second quarter, notes analyst of Canaccord. True, in Lulu’s second quarter, the company yielded 39c in EPS, beating out both consensus and the analyst’s estimate of 35c. Meanwhile, the athletic apparel giant posted a total comp of 7%, outclassing the analyst’s prediction of 4%, with gross margin of +218bps topping Lyon’s forecast of +150bps. Moreover, men’s and women’s pants sales grew by 20%, while the online warehouse sale brought in a roughly $12.3 million to Lulu’s total comp as well as a bump of 14% to e-commerce growth. However, these strong numbers may not add up in contributing to a turnaround for the struggling company.
As such, the analyst reiterates a Sell rating while lifting the price target from $41 to of $43, representing a 30% decline from where the shares last closed. (To watch Lyon’s track record, click here)
Lyon points to five areas of concern, which would indicate a continued slowing of growth: “First, LULU raised full year EPS by only ~6c despite the 4c Q2 beat to $2.35-$2.42 from $2.28-$2.38. Second, gross margin is expected to be flattish in both Q3 and Q4 despite Q3 comp guidance of MSD (implying a Q4 comp of ~2%). The inability to lever occupancy is a mounting concern. Third, while not specifically addressed on the call, we find it odd that LULU is having a 3rd warehouse sale in two quarters – inventory perhaps is not as healthy as stated. Fourth, LULU is relaunching its website before the holidays which could create unforeseen problems. Fifth, high expectations for outerwear seem unfounded after two unsuccessful seasons and stiff competition from incumbents like GOOS, North Face [owned by VF Corp (VFC)] and Patagonia among others. Taking these company specific factors coupled with stiff external factors such as the denim trend shift, the highly promotional athletic apparel environment, and the iPhone 8 launch, we believe the risk/ reward is highly skewed to the downside both from a slowing EPS growth function and multiple contraction from ~25x forward NTM P/E.”
Moreover, the analyst underlines concerning factors, which could work against the company, including the loss of two executive vice presidents in the Brand and Community and People and Culture departments, as well as the additional decline in international sales and store traffic. Looking ahead, management is placing third quarter EPS guidance at 50-52c, which is in-line with consensus, while raising 2017 EPS guidance from $2.28-$2.38 to $2.35-$2.42.
TipRanks analytics exhibit LULU as a Sell. Out of 19 analysts polled by TipRanks in the last 3 months, 8 are bullish, 1 is bearish, while 10 are sidelined on Lululemon stock. With an upside potential of 2%, the stock’s consensus target price stands at $62.89.