What to Look for in Lululemon Earnings

Lululemon Athletica Inc. (NASDAQ: LULU) is set to release its fiscal third-quarter financial results after the markets close on Wednesday. Thomson Reuters has consensus estimates of $0.43 in earnings per share (EPS) and $540.23 million in revenue. The same period of last year reportedly had EPS of $0.35 and $479.69 million in revenue.

After the company reported its fiscal second-quarter results, Merrill Lynch reiterated an Underperform rating and raised its price objective to $52 from $50. Management commented that traffic headwinds continued into the early fiscal third quarter. The brokerage firm continues to see risk in the second half same-store sales that could fall at the low end of mid-single digits.

Also management believes gross margin expansion will moderate in fiscal 2017, given rising competition in athletic apparel and occupancy deleverage. Further operating margin expansion could be limited by ongoing investments (especially in international) with high-single digit comps needed to leverage expenses.

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In terms of the investment rationale, Merrill Lynch believes that Lululemon is one of the best square-foot growth stores in retail with strong brands and innovative products. Overall the firm believes that this has been a highly successful strategy; however, Merrill Lynch expects same-store sales to decelerate against difficult comparisons as competition in the athletic apparel market continues to increase. The firm also sees risks to operating margins given ongoing investments to support international expansion.

Prior to the release of the earnings report, a few other analysts weighed in on the stock as well:

• Deutsche Bank has a Hold rating with a $62 price target.
• Cowen has a Buy rating with a $72 price target.
• Credit Suisse has a Neutral rating with a $53 price target.
• Canaccord Genuity has a Sell rating with a $44 price target.
• DA Davidson has a Hold rating with a $63 price target.
• Susquehanna has a Buy rating with a $77 price target.
• Morgan Stanley reiterated an Equal Weight rating.
• Jefferies has a Hold rating with a $61 price target.

Excluding Wednesday’s move, Lululemon has performed more or less in line with the market, with the stock up about 9% year to date.

Shares of Lululemon were trading up over 3% at $59.28 on Wednesdsay, with a consensus analyst price target of $66.70 and a 52-week trading range of $44.62 to $81.81.

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