Lululemon's Q2: Even If There's A Beat, The Stock Is Still A Sell

One of the remaining notable companies to report their earnings report is Lululemon Athletica inc. LULU. The fashion retailer is scheduled to report its earnings after Thursday's market close, and even if the company impresses investors in the quarter, Canaccord Genuity's Camilo Lyon won't be turning bullish.

Lyon maintains a Sell rating on Lululemon's stock with an unchanged $41 price target heading into the print. In fact, the analyst is expecting the company to report upside to its earnings and comp expectations but this will prove to be a low-quality beat.

Lululemon oversaw two warehouse sales events that resulted in higher sales but lower margins, the analyst explained. A physical warehouse sale was held in Dallas and an online warehouse sale was held in the U.S. and Canada. On top of that, checks on lululemon.com reveal "elevated levels" of markdowns, which merely adds to the case against owning he stock.

The athletic and apparel industry is undergoing a shift away from athletic themed items and more toward denim, which will impair Lululemon's ability to consistently generate comp growth, the analyst added. This shift will likely become apparent if management offers soft third quarter comp guidance and leaves its full year low-single-digit comp growth unchanged.

"Given that we expect Q2 results to look good, we would use any strength on the print as an opportunity to sell," the analyst concluded.

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