Shares of Lululemon (LULU) slipped in morning trading after the company reported quarterly earnings roughly in line with analysts expectations and weak guidance for the third quarter and fiscal year. Following the report, analyst commentary was mixed, with a downgrade from Morgan Stanley and Deutsche Bank forecasting "a tougher road ahead," though some analysts said the company's second half results can beat expectations.
WHAT'S NEW: After the market close yesterday, Lululemon reported second quarter adjusted earnings per share of 38c on revenue of $514.5M, roughly in line with analysts' expectations of 38c and $515.47M, respectively. Total comparable sales, including comparable store sales and direct to consumer, rose 4% year-over-year in the quarter, or 5% on a constant dollar basis, the company said. Lululemon also provided an outlook for the third quarter, guiding for Q3 EPS in the range of 42c-44c, at the low end of analysts' estimates of 44c, on revenue of $535M-$545M, above estimates of $541.78M. Total comparable sales growth for the quarter is seen in the mid-single digits on a constant dollar basis. The athleisure company also updated its outlook for fiscal 2016, raising the low end of its normalized EPS view 2c to $2.07-$2.15 from $2.05-$2.15 and revising its FY16 revenue view to $2.325B-$2.35B from $2.305B-$2.345B. Lululemon also reaffirmed its FY16 total comparable sales growth view to mid-single digits on a constant dollar basis. Analysts expect the company to report FY16 EPS of $2.15 on revenue of $2.34B.
BEARISH VIEW: Following the earnings report, Morgan Stanley analyst Kimberly Greenberger downgraded Lululemon to Equal Weight from Overweight and cut her price target on the shares to $70 from $74. The analyst said that the company's comps are decelerating and that traffic continues to be a headwind. Greenberger added that, should comps stay in the mid-single digit range, SG&A expenses may continue to outpace sales growth, limiting the positive earnings revisions required to support an upward revision to the firm's price target. In addition, Deutsche Bank analyst Dave Weiner maintained a Hold rating on the stock with a $65 price target, saying that the selloff in Lululemon shares after the quarterly report reflects the high bar the company currently faces. The analyst noted that, with shares up 46% year-to-date, "every line item had to be perfect to satisfy investors." Weiner also said that ongoing SG&A deleverage is concerning as it could offset gross margin expansion and derail operating margin recovery and said he sees a "tougher road" ahead for shares.
BULLISH VIEW: On the other hand, Oppenheimer analyst Anna Andreeva also weighed in, and said that Lululemon's supply chain and efficiency initiatives are "finally bearing fruit," paving the way for the first year of much anticipated margin expansion in five years. The analyst did, however, note that Q2 comps didn't improve, but that the stock is still her favorite athletic play with earnings growth accelerating into the second half of 2016 and 2017. In addition, Cowen analyst Oliver Chen said the selloff in shares presents a compelling buying opportunity. Chen said that, despite a "minor" comp miss, results for Q2 were "solid" and that gross margin came in "significantly" ahead of expectations. The analyst noted that margins are set to expand further as benefits from improved supply chain are realized. RBC Capital still thinks the company's 2H16 results can beat expectations and KeyBanc is upbeat on Lululemon's fundamentals.
PRICE ACTION: In late morning trading, Lululemon fell 9.12% to $69.67.
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