Lululemon's Earnings Preview: What Wall Street's Saying

NEW YORK (TheStreet) - Wall Street is waiting to see if Lululemon (LULU) has finally been able to put its troubles behind it. They will get some answers when the yoga apparel maker reports quarterly results on Thursday.

Lululemon has seen shares sink 22% this year as it faces intense competition from Nike (NKE) and Under Armour (UA) . This follows a dismal 2013 in which the retailer had to recall its Luon pant, one of its most popular products, over complaints that the material being used to make it was too sheer. Sales have been suffering since then.

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Analysts expect Lululemon to post earnings of 38 cents a share for its fiscal third quarter, 16% lower than earnings in the year-earlier quarter. Sales are expected to rise 12% to $425 million, according to Thomson Reuters. Here's what analysts had to say going into the quarter:

Paul Lejuez, Wells Fargo Securities (Upgraded to Outperform, $50-$54 valuation range)

We are upgrading LULU from Market Perform to Outperform. Over the years, we have always viewed LULU as an attractive sq ft growth story, but product/sourcing issues and management turnover made us less confident in the company's ability to execute its store growth plans. Now with much of the work on the supply chain in process or complete and with merchandise margins seemingly near an inflection point, we believe the underlying growth story will come into greater focus. We are raising our 2015E from $1.88 to $2.06 and our valuation range from $38-42 to $50-54.

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David Weiner, Deutsche Bank (Hold, $40 PT)

Into 3Q results, the primary investor focus will again be on the company's comp and whether trends have inflected positive, as guidance suggested. While we acknowledge the brand's strong product line-up and its potential long-term opportunities, we remain cautious on the stock in the face of what we believe are still weak comps and elevated SG&A spend this year (and perhaps next year as well). Coupled with valuation at ~26x/~22x FY15/16 P/E, these factors keep us at HOLD.

What we're listening for on the call (1) Have comps improved with more seasonal product? Management attributed weakness in 1H to a suboptimal assortment, but forecasted improvement in 2H on the arrival of more seasonal product. Now that a better assortment may be in place, 3Q's comp performance will shed light on whether 1H's weakness was indeed product-related or more a result of the heightened competitive environment. (2) Commentary on early holiday selling & expectations for 4Q: We are curious to hear how early holiday selling commenced, particularly as full-year guidance implies that comps will accelerate in 4Q from 3Q. Our Black Friday survey suggested traffic was positive, while average consumer spending and inventory trends were more mixed. (3) Update on CFO search: Recall that CFO John Currie will be retiring in June. The company detailed on the last call that it was halfway through its vetting process, so we expect to hear an update on Thursday's call.

Matthew McClintock, Barclays (Overweight, $55 PT)

We strongly believe that 3Q14 results could mark the inflection point in the LULU story: We forecast a 1.8% comp increase, which would mark the first sequential acceleration in comp store sales trends for the company since 2Q13. Aside from our in-store checks, which were positive during the quarter, we remain particularly impressed by comScore data where unique visitors were up 37% y/y (the best result in well over a year). We believe the flow of fashion product has improved and are encouraged by what appears to be accelerating acceptance of the men's assortment. While we believe LULU can achieve and even slightly exceed its comp store sales plan this quarter, significant upside may be limited given the pull forward of product into 2Q from 3Q due to an overwhelming positive response to transitional merchandise in July. That being said, we believe the company's ability to deliver higher levels of comp sales will improve over the next several quarters.

We believe LULU represents one of the best risk/reward cases across our coverage for 2015. We reiterate our Overweight rating on the shares of LULU.

Camilo Lyon, Canaccord Genuity (Hold, $42 PT)

 We are anticipating an inline quarter - we are modeling a comp of 2% and EPS of 38c, both consistent with consensus. Despite challenges we believe LULU continues to face stemming from a less than optimal mix of core and seasonal product, supply chain inefficiencies, and increasing competition from UA and NKE, we believe it manufactured optical stability in its sales growth much like it did last quarter. Specifically, we believe the spot US online warehouse sale helped LULU generate an incremental ~$2M in sales that likely resulted in total DTC growth of 30%. We estimate the strength of 30% DTC growth was enough to offset another quarter of negative store comps (we are modeling a -5% comp). Given the traffic issues most specialty retailers are facing, we would not be surprised if LULU finally succumbed to negative traffic too. This in conjunction with what we believe was a subpar Black Friday (in our store visits we noticed a higher number of clearance racks vs. last year) leads us to believe Q4 guidance could underwhelm. With supply chain issues yet to be resolved, we maintain our HOLD rating.

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TheStreet Ratings team rates LULULEMON ATHLETICA INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate LULULEMON ATHLETICA INC (LULU) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. 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, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had subpar growth in net income."

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 16.4%. Since the same quarter one year prior, revenues rose by 13.4%. 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 6.39, which clearly demonstrates the ability to cover short-term cash needs.
  • Net operating cash flow has increased to $53.01 million or 15.75% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 1.98%.
  • The gross profit margin for LULULEMON ATHLETICA INC is rather high; currently it is at 53.99%. 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, LULU's net profit margin of 12.47% compares favorably to the industry average.
  • LULULEMON ATHLETICA INC's earnings per share declined by 15.4% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, LULULEMON ATHLETICA INC increased its bottom line by earning $1.91 versus $1.85 in the prior year. For the next year, the market is expecting a contraction of 7.3% in earnings ($1.77 versus $1.91).

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-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

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