Lululemon Surges: What Wall Street's Saying

NEW YORK (TheStreet) -- Lululemon Athletica (LULU)  puledl a rabbit out of its hat on Thursday by surprising Wall Street with better-than-expected quarterly earnings, but analysts remain skeptical.

Lululemon reported net income fell 14% to $48.7 million, or 33 cents a share, for the fiscal second quarter, compared income of $56.5 million, or 39 cents a share, a year earlier. Revenue rose 13% to $390.7 million. Both top and bottom line results beat consensus estimates. The Vancouver-based yoga apparel company said comparable sales were flat for the Aug. 3-ending quarter. Same-store sales declined 5% in the quarter while e-commerce sales jumped 30%.

Shares surged 14% to $43.88 following the results, but the "relief rally" was likely driven by a "short squeeze," says Citigroup analyst Oliver Chen. More than 25 million shares changed hands on Thursday, more than seven times the stock's average daily trading volume.

Read More: 3 Reasons Why Lululemon Is Still a Downward Dog

Lululemon said it expects third-quarter net revenue in the range of $420 million to $425 million, assuming comparable sales growth in the "low single digits." Per share earnings are forecast to be between 36 cents and 38 cents a share, excluding the potential for share repurchases.

Here's what analysts said on Thursday.

Adrienne Tennant, Janney Capital Markets (Neutral; $44 fair value estimate)

The company was able to beat expectations due to strong performance in fall transitional product that the company pulled forward from 3Q14 to drive sales in July. We commend management for delivering improving top-line results as well as a much cleaner inventory position. ... Given the much cleaner inventory position moving into the back half, we believe there will be an easing of margin pressure; however, we still have concerns regarding the company's merchandise mix strategy of increasing the penetration of seasonal product and look to see ongoing success with this strategy on a consistent basis.

Read More: Can Lululemon Regain its Shining Star Status?

Paul Lejuez, Wells Fargo Securities (Market Perform; $38-$42 PT)

On an absolute basis FQ2 was not good, but it came in slightly above guidance, and with expectations seemingly very low going into it, the stock looks like it will be up significantly. Still, we do not believe this quarter is anything that gives us confidence to say LULU is on a straight path to recovery. We continue to expect many more bumps along the road as competition intensifies in the category and LULU strives to find the right balance between basics and fashion.

Faye Landes, Cowen & Co. (Market Perform; $38 PT)

This morning LULU reported Q2 results that were above our, and consensus, expectations. Despite Q2 EPS exceeding forecasts, LULU only raised its FY14 EPS guidance slightly before the impact of any possible share buyback. Still the results and guidance are likely better than expectations.

Read More: Lululemon Is Surging Because Chip Wilson Did This

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.

Read More: Lululemon Is No Bargain for PE

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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