Lululemon's Q2 Didn't Impress Everyone Amid Doubts About The Future

Reviewing Lululemon Athletica inc. LULU's second-quarter results, Buckingham Research Group said uncertainty surrounding comp growth and gross margin upside keeps it on the sidelines.

The firm reiterated its Neutral rating and a $55 price target on the shares of the company.

In early trading, shares of Lululemon Athletic were seen surging up 7.42 percent at $61.82.

Analysts Kelly Halsor and John Steger noted that the company's top line notably beat their expectations, with comps up 7 percent and gross margin expanding 220 basis points. The analysts attributed the top line outperformance to product innovation and a stronger marketing campaign, and the margin beat to the sale of an online warehouse, which would not repeat in the second half of 2017.

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However, due to a lack of follow through to the bottom line, the analysts noted that the earnings per share exceeded expectations by a modest 5 cents.

Buckingham Research said it will remain on the sidelines for now, as it believes the company might have to spend more money or sacrifice merchandise margin to drive sales growth.

The firm feels the company needs at least a mid-single-digit comp to leverage fixed costs. Given the limited leeway for merchandise margin improvement in the second-half, the firm said the Lululemon Athletica's path to sustainable top line and margin expansion remains unclear.

"Without visibility to mid-to HSD comp growth and/or additional GM upside, we see limited upside to the stock from here, while downside will also likely be limited near-term as risk to EPS downside remains low," the firm said.