Why Lululemon Is In 'Penalty Box' In Short Term, But Remains One Of The 'Highest Quality Companies' Globally: 3 Analysts On Retailer's Guidance

Athletic apparel company Lululemon Athletica LULU provided new guidance Monday ahead of the ICR Conference. The retailer sees fourth-quarter revenue coming in ahead of previously announced estimates, but the earnings per share range was tightened on margin concerns.

Analysts are sizing up what it means for the company and shares.

The Lululemon Analysts: Raymond James analyst Rick B. Patel has a Strong Buy rating and $438 price target. 

BMO Capital analyst Simeon Siegel has a Market Perform rating and $304 price target. 

Telsey analyst Dana Telsey has an Outperform rating and lowered the price target from $470 to $425.

Related Link: There's No Real Competition In The Athleisure Space, Why This Investor Bough Lululemon Stock 

The Lululemon Takeaways: Raymond James maintains a Strong Buy rating but notes the new outlook from Lululemon could put the stock in the “penalty box” in the near-term.

“We continue to believe that LULU has one of the strongest growth algorithms in Global Brands,” Patel said.

Patel said the gross margin guidance from Lululemon is “disappointing,” but added the company's long-term potential is intact.  

“We see the pre-announcement-driven sell-off as an opportunity to own one of the highest quality companies among global brands.”

Siegel is cautious on Lululemon after the updated guidance.

“Revenues drive multiple, but margins drive revenues,” Seigel said. “Quality of sales erode before actual sales.”

Siegel said there have been concerns for Lululemon over the last fiscal year and questions continue to come up. 

“ICR inventory color will matter and LULU’s a clearly a strong brand with a strong Wall Street fan base, but, we fear brand saturation questions are becoming hard to ignore.”

Siegel told investors that Lululemon has not raised guidance at ICR in four years. The company has a history of beating sales and EPS estimates from ICR, the analyst said.

“Should we applaud attempts to grab new customers, or ask whether they are hitting brand saturation, which is generally followed by dilution on stretched-revenues, leading early adopters to new emerging brands?”

Telsey said items to watch at ICR from Lululemon are markdowns, supply chain investments and inventory levels.

“We expect investors will be focused on Q4’s gross margin given its somewhat sizable underperformance vs. prior expectations,” Tesley said.

Telsey said inventory was up 85% over the last two quarters.

“LULU continues to outpace the overall retail industry as customers respond favorably to its innovative products and brand positioning, resulting in strong omni-channel traffic and double-digit revenue growth in the fourth quarter.”

Telsey lowered the price target on shares, but sees the company as well-positioned for the long term with several growth opportunities.

LULU Price Action: Lululemon shares are up 0.64% to $300.56 on Tuesday. Shares of the athletic apparel company are down 13.5% over the last year and have traded between $251.51 and $410.70.

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