A Tough Q3 Retail Environment Won't Hurt Lululemon

Lululemon Athletica inc. LULU is scheduled to report its Q3 2016 results on December 7. Although the company faced a tough retail environment, the quarterly results are likely to meet expectations and the guidance would likely be reiterated, DA Davidson's Andrew Burns said in a report.

Burns maintained a Neutral rating on lululemon, with a price target of $63.

Q3 Preview

Burns projected quarterly comps of 6.1 percent, with revenue at $543.0 million and EPS of $0.44. These estimates are higher than consensus comps, revenue and EPS expectations of 5.1 percent, $540.9 million and $0.43, respectively.

The gross and operating margin estimates are at 49.4 percent and 15.8 percent, respectively. “Gross margin inflection and improved execution should help LULU navigate shifting retail and apparel cross-currents,” the analyst wrote.

Lululemon faced a challenging retail environment during the quarter, with competition from “an increasingly crowded athleisure category” as well as October being unseasonably warm. Year-over-year gross margin expansion, contribution from new stores and continued brand momentum are likely to have helped the company, Burns stated.

Guidance

“While we view LULU's current product offering as compelling, post-Black Friday store checks reveal elevated clearance activity, which could weigh on 4Q gross margin performance. Overall, we believe LULU's product offering, operational improvements and strong consumer interest will be sufficient to fulfill a full-year earnings guidance reiteration,” the analyst stated.