Lululemon Athletica inc.’s (LULU) Q2 Results Could Translate to Good Opportunity to Sell: Canaccord

Here's Why Even If LULU Yields a Q2 Beat, This Analyst Continues to Sound the Alarm

Analyst Camilo Lyon of Canaccord is out with a bearish report on Lululemon Athletica inc. (NASDAQ:LULU) ahead of second quarter earnings due this Thursday. Though Lyon would not be surprised to see a decent quarterly performance from Lulu, as far as he assesses the fading athletic apparel giant, all robust qualities spotted in the results should add up to one larger compelling chance to sell the stock at an advantageous price.

While the analyst notes that the giant should be serving up a beat to the table with EPS of 39c to 40c on a 6% to 7% comp, solidly ahead of Lyon’s own and consensus expectations calling for 35c in EPS and a 4% comp, “we believe the quality of the beat could be in question as the company held two warehouse events that likely drove incremental sales but at lower gross margins.” Additionally, Lyon predicts net revenues for the second quarter will hit at or even top the high end of Lulu management’s guide looking for a range between $565 million to $570 million. However, the analyst warns that changing fashion trends could put a damper on any potential forthcoming beat.

Consider that the company’s recent online warehouse sale, which featured discounts between 20% – 75%, proved that even when the Lulu team attempts to pander to its consumer base, sportswear is starting to lose its appeal among both female and male consumers. The sale event struggled even into its second day and ended up garnering only a 39% sell out on women’s wear and 38% in the men’s department. By Saturday morning, the company had already replenished its inventory, revealing there was still inventory in bulk waiting behind-the-scenes for the sale, argues Lyon.

Pointing his finger towards the “changing fashion trend toward denim at the expense of athletic apparel,” Lyon underscores “that the trend shift away from athletic and toward denim facing LULU will impair its ability to generate consistent comp growth. We believe this dynamic could manifest in soft Q3 comp guidance of +LSD and no change to the year’s +LSD outlook. Given that we expect Q2 results to look good, we would use any strength on the print as an opportunity to sell.” Furthermore, says the analyst “not only did we see a continued resurgence of denim at the Project trade show two weeks ago, we also met with premium denim companies that are getting deeper and broader orders from department stores as sell-thrus are robust.” In other words: this spells trouble for Lulu.

Looking ahead, Lyon sees “multiple data points supporting our thesis that the fashion trend is shifting away from athletic apparel to denim, thus putting LULU’s comps at risk of slowing materially over the next 4-6 quarters and its P/E multiple re-rating lower.”

As such, pessimistic as ever on the giant, even ahead of what could be a strong quarterly showing, the analyst maintains a Sell rating on LULU with a target price of $41.00 representing a 32% drop below current trading levels. (To watch Lyon’s track record, click here)

TipRanks analytics exhibit LULU as a Buy. Out of 17 analysts polled by TipRanks in the last 3 months, 7 are bullish, 1 is bearish, while 9 are sidelined on Lululemon stock. With an upside potential of 7%, the stock’s consensus target price stands at $63.00.


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