NEW YORK (TheStreet) -- Wall Street is wondering whether Lululemon Athletica (LULU) has any tricks up its sleeve that will help reverse the stock's downward spiral when the Vancouver-based yoga apparel retailer reports fiscal-second quarter results on Thursday. Analysts remain concerned that the company has not done enough to spruce up its product assortment that would inspire any significant sales growth.
The women's activewear category has become increasingly competitive with rival Under Armour (UA) , Gap's (GPS) Athleta, Nike (NKE) , VF Corp. (VFC) and more fashion-forward companies like H&M all playing in the space. Lululemon has not been able to regain the traction it had following its yoga pant recall in March 2013.
Lululemon's same-store sales growth, a measure that explains how sales in stores open at least a year are faring, is expected to fall 3.5%, according to estimates tallied by Thomson Reuters.
Analysts' consensus estimate is calling for Lululemon's quarterly profit to decline approximately 25% from last year to 29 cents a share. Though revenue is expected to rise 9% to $377 million, according to Thomson Reuters.
Shares of Lululemon have fallen 34% this year compared to Under Armour, which has seen its shares surge 65% in the same time period. Here's what analysts are saying about Lululemon's earnings.
Faye Landes, Cowen & Co. (Market Perform; $38 PT)
We are forecasting in-line Q2 results, with comps of (3%) on a constant currency basis, as LULU proceeds through its "transitional" year. Lack of fashion newness likely hurt results in the Q. We think LULU's lofty valuation reflects an unrealistic expectation of a sharp rebound in operating margins, but with short interest at 23%, even a whiff of good news or change may drive the stock higher.
This morning we published a companion note, sharing results from the Cowen Consumer Tracking Survey that indicate that LULU's core customer base, affluent women, still has a tight bond with the brand. Translating that bond into sales may have been, and may continue to be, tough given a notable lack of newness at LULU stores, and more fashion at competitors who are outflanking LULU both from below (e.g., Athleta, Gap Fitness) and above (e.g., Sweaty Betty and Lole), but it is encouraging to see that the brand's core constituency still likes LULU.
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Camilo Lyon, Canaccord Genuity (Hold; $42 PT)
LULU will report Q2 EPS on Thursday, September 11. We are modeling EPS of $0.29, in line with consensus. We believe our comp estimate of -4% inclusive of e-commerce could still prove to be high given the continued challenges LULU is working through to improve its product flow, overall fashion quotient, and conversion issues. In terms of gross margin, we believe there is little upside risk to our estimate of 50.5% given the generally promotional retail environment and mix of lower margin fashion product. In our opinion, the issue with LULU is that the assortment for the most part remains stale with only brief pops of newness. As such, it will be important to see how traffic was sustained during the quarter. Recall traffic was up last quarter but conversion was down, clearly indicating customers wanted to buy but were not inspired to do so. While we believe the brand remains relevant and has long-term growth opportunities (e.g., international, men's, ivivva), there are likely to be more fits and starts in the interim. We remain at HOLD largely due to the extended duration of when we expect to see a re-acceleration in comps, mid-2015.
Christian Buss, Credit Suisse (Neutral; $38 PT)
We remain concerned that consumer demand for lululemon product has structurally shifted, holding back comp recovery in 2014. Our model suggests that 2014 mature store-level comps are likely to remain down double-digits excluding the benefit from lapping of luon ($45M benefit to revenue, 4% contribution to store comps), inclusion of eCommerce into the comp (5% contribution to comps), and contribution from maturing stores entering the comp base (7-9% contribution to comps.) Guidance is for low single digit comps including eCommerce for the full year. As a result, we believe that store productivity and margins could remain under pressure even with resolution of supply chain issues, holding back earnings growth. We now expect sustained top-line growth in the teens, OM compression to 20% from a peak of 28%, earnings growth in the mid-teens, and five-year earnings power of roughly $3.20. This suggests long-term equity value in the $50's. Discounted back by the company's cost of capital, this implies a 12-month target price of $38, suggesting the stock is trading near fair value.
TheStreet Ratings team rates LULULEMON ATHLETICA INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate LULULEMON ATHLETICA INC (LULU) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and a generally disappointing performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 11.5%. Since the same quarter one year prior, revenues rose by 11.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- LULU has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 7.20, which clearly demonstrates the ability to cover short-term cash needs.
- The gross profit margin for LULULEMON ATHLETICA INC is rather high; currently it is at 54.13%. Regardless of LULU's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 4.93% trails the industry average.
- Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 44.31%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 59.37% compared to the year-earlier quarter. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Textiles, Apparel & Luxury Goods industry. The net income has significantly decreased by 59.9% when compared to the same quarter one year ago, falling from $47.28 million to $18.98 million.
- You can view the full analysis from the report here: LULU Ratings Report
--Written by Laurie Kulikowski in New York.