Morgan Stanley Reviews Lululemon's Q2 Results

Lululemon Athletica inc. LULU beat Q2 expectations and raised its guidance. Although comps were “likely below the buyside bar,” the company recorded “standout” gross margins, Morgan Stanley’s Kimberly C Greenberger said in a report. She maintained an Overweight rating on the company, with a price target of $74.

Lululemon reported its Q2 EPS at $0.38, in-line with the MS and Street expectations. Sales came in at $515 million, up 13.6 percent.

Comp Performance

Lululemon achieved 5 percent comp, marginally below the MS estimate of 6 percent and Street expectation of 5.8 percent. “While comps hit the mid-point of guidance, this was likely below the buyside bar as outlined in our 2Q preview,” analyst Greenberger commented.

Standout Gross Margin

Lululemon generated 260bps of gross margin expansion, significantly higher than the MS and Street estimate of 120bps. “LULU delivered the hoped for GM inflection, more than doubling both MSe/Street estimates,” Greenberger wrote.

Other Matrices

SG&A spend rose 23.9 percent, to 35 percent of sales, and outpaced sales growth. The higher-than-expected increase in SG&A mainly reflects “an acceleration of key investments in merchandising operations, CRM capabilities and brand strategy,” the Morgan Stanley report stated.

Inventory was down 1.2 percent y/y at the end of the quarter, while inventory per square foot was down 15 percent.

Management raised the lower-end of its FY16 EPS guidance from $2.05-$2.15 to $2.07-$2.15.

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