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Are Lululemon Management's Expectations Too High?

Lululemon LULU: Ahead Of Q3, Management Expectations Could Be Too High

Lululemon Athletica inc. LULU 0.54% shares have declined 25 percent since the company reported its Q2 results, with investor concerns related not only to the Q3 results but also the potential for disappointing Q4 guidance.

Deutsche Bank’s Dave Weiner maintains a Hold rating on the company, while lowering the price target from $65 to $62.

Expectations Too Aggressive?

Weiner explained that the cautious stance was partly due to the analysis of Lululemon Athletica’s Black Friday holiday sales, which implied good traffic at the company’s stores but weak consumer spend and high inventories.

“More importantly longterm, though the brand's global growth potential is robust, mgmt.’s implied ~$4.00 EPS power plan is aggressive we believe, with risk that lulu needs to talk that down in to Jan.’s ICR conference,” the analyst mentioned.

Some Concerns

Ahead of the Q3 results, Weiner stated quarter-to-date comp trends would prove critical, given the 2015 holiday season had been strong, while investor reads in 2016 regarding the brand’s current top-line trajectory since the end of October have been mixed.

“In our view, mgmt. needs to guide 4Q SSS within striking range of +MSD or investors will question if FY18 consensus needs to be reduced,” the analyst went on to say.

Weiner also noted that Lululemon Athletica’s promotions had increased 22 percent of website SKUs during the pre-holiday week of November 14–21, as compared to 12 percent in 2015.

Although management expects the H2 markdowns to normalize, the analyst expressed concern regarding risk to the level of stabilization, pointing out that while gross margin has been trending according to plan so far in 2016, operating margin has disappointed.

Dec 2016Canaccord GenuityDowngradesHoldSell
Nov 2016Credit SuisseDowngradesOutperformNeutral
Sep 2016Goldman SachsMaintainsSell

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