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Will Competition Weigh on lululemon's (LULU) Q3 Earnings?

lululemon athletica inc. LULU is slated to report third-quarter fiscal 2017 results on Dec 6. The question lingering in investors’ minds is whether this yoga-inspired athletic apparel retailer will be able to deliver positive earnings surprise in the to-be-reported quarter.

In the trailing four quarters, the company has outperformed the Zacks Consensus Estimate by an average of 8.5%. Also, it has pulled off positive earnings surprise of 11.4% in the previous quarter. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The Zacks Consensus Estimate for the quarter under review is pegged at 52 cents, reflecting a year-over-year growth of 10.3%. However, the estimate has been stable in the last 30 days. Further, analysts polled by Zacks expect revenues of $611.4 million, up about 12.3% from the year-ago quarter.



So far this year, lululemon’s share price has increased 3.6% compared with the Consumer Discretionary sector’s growth of 13.5%.

Factors Influencing the Quarter

lululemon is not immune to the challenges in the retail sector, which include stiff competition and volatile consumer spending patterns. In fact, the rise in competition has been a threat to the company’s margins lately. Management had earlier projected fiscal third-quarter gross margin to remain in line with the year-ago period level. While gross margin improved in second-quarter fiscal 2017, it was somewhat negated by higher markdowns stemming from the online warehouse sale.

Further, the company anticipates SG&A expense to deleverage about 50 basis points in the fiscal third quarter, mainly related to the ongoing endeavors being undertaken to expand e-commerce business. However, third-quarter revenues are forecasted in the range of $605-$615 million, with constant dollar comps expected to improve in mid-single digits. Also, lululemon envisions normalized earnings (excluding the impact from iviva’s restructuring) for the quarter to lie in a band of 50-52 cents per share.

We note that lululemon is well on track with its strategy for 2020. Through this plan the company aims to double its revenues to about $4 billion and more than double its earnings. Therefore, management had outlined four distinct growth strategies including product innovation, building store fleet in North America, expanding digital business and international expansion. Meanwhile, lululemon’s e-commerce growth initiatives and ivivva remodeling seem to bode well.

What the Zacks Model Unveils?

Our proven model does not show that lululemon is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 

lululemon has an Earnings ESP of -0.50% and Zacks Rank #4 (Sell). This combination makes our surprise prediction impossible. As it is we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat.

Dollar General Corporation DG has an Earnings ESP of +1.46% and Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zumiez Inc. ZUMZ has an Earnings ESP of +0.69% and Zacks Rank #2.

The Kroger Co. KR has an Earnings ESP of +3.33% and Zacks Rank #3.

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Zumiez Inc. (ZUMZ): Free Stock Analysis Report
 
lululemon athletica inc. (LULU): Free Stock Analysis Report
 
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Kroger Company (The) (KR): Free Stock Analysis Report
 
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