Lululemon's Current Challenges Are Largely Self-Inflicted, But Still Fixable

Lululemon Athletica inc. LULU announced its Q1 guidance short of expectations. The current challenges appear “fixable and largely self-inflicted” and the company’s execution could improve in Q2 and beyond, Wedbush’s Morry Brown said in a report.

While reiterating an Outperform rating on lululemon, Brown reduced the price target from $81 to $64. The EPS estimates for 2017 and 2018 have been lowered from $2.74 to $2.38 and from $3.20 to $2.79, respectively, to reflect lower sales projections and associated deleverage of fixed costs.

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Challenges Are Fixable

Lululemon announced disappointing outlook for the quarter, projecting a low-single-digit decline in same-store sales, versus 7 percent growth in Q4. Although the guidance missed expectations, Brown pointed out that:

• The majority of the Q1 downside “appears largely self-inflected,” and therefore seems “fixable,” given almost no Spring colors in the company’s current assortment throughout February and March.
• All key metrics below the top-line continue to be on track, including “continued expansion of merchandise margin and disciplined expense control,” the analyst wrote. He expects product margins to expand by 300 basis points in Q1, similar to the robust gains in the back half of 2016.
• Lululemon’s initiatives planned for Q2 and into the back half of the year are “likely to bear fruit.”
• The stock is down more than 18 percent in Thursday's pre-market hours.