Christmas Channel Checks Paint Lululemon A Loser, American Eagle A Winner, Analyst Says

• Shares of Lululemon Athletica inc. LULU are up 1 percent in the last three months, while American Eagle Outfitters AEO shares have lost 3 percent.
• FBR’s Susan Anderson maintained an Outperform rating on American Eagle and an Underperform rating on lululemon.
• A continued competitive and promotional environment is expected to help separate the winners from the losers in the industry, Anderson stated.

Analyst Susan Anderson mentioned that traffic in stores in the Washington D.C. area during the Holiday weekend was down y/y, although apparel stores fared better with consumers snapping up deals.

“The majority of retailers under our coverage retained flattish regular-price promos YOY, with teen/young adult faring the best, followed by missy/children's, then contemporary,” Anderson wrote.

The analyst believes that Holiday 2015 ended up being more promotional than expected, partly due to weather conditions. This is also likely to further separate the winners and losers in the segment.

Anderson recommended adopting a selective approach and favoring players like Hanesbrands Inc. HBI, Ascena Retail Group Inc ASNA and Under Armour Inc UA for the 4Q Holiday season, while mentioning that Luluemon, Abercrombie & Fitch Co. ANF and Gap Inc GPS could be under pressure.

Luluemon

Although the company had a huge Boxing Day clearance sale, the number of items on sale were significantly higher than last year. While traffic was strong, most customers were buying clearance items, the analyst pointed out.

“This will likely help to drive strong sales in 4Q but will likely affect the gross margin more than expected,” the FBR report noted, adding that the company’s two planned physical warehouse sales are also expected to restrict gross margins.

“We also still expect elevated inventories, supply chain issues, mix shift, and fixed-cost de-leverage to weigh on GM into 2016,” Anderson said. She added that luluemon’s new normal operating margin is likely to be in the mid-teens.

American Eagle Outfitters

Anderson believes that the company is one of the specialty retail winners for Holiday 2015. American Eagle had flat lower y/y promos and has lower clearance so far in 4Q15.

“With good promo control and, now, the cotton tailwind coming in 4Q15, there is likely upside, we believe, to the gross margin/EPS,” the report stated.