Lululemon Athletica Inc. – Improvement Shown But More Needed

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Lululemon Athletica inc. (NASDAQ:LULU) reported earnings results that beat Wall Street‘s estimates, and analysts at Janney Capital Markets say the company’s management should be commended. However, they’re remaining on the sidelines until more data points which show that stabilization is really occurring come in.

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Lululemon’s results

On Thursday, Luluelemon Athletica posted second quarter earnings of 33 cents per share, compared to Wall Street’s estimate of 29 cents. Management had provided guidance of between 28 cents and 30 cents per share. The company also beat in sales, as comparable sales were flat, compared to the Retail Metrics consensus of a decline of 2.9%.

In their report dated Sept. 11, 2014, Janney analysts Adrienne Tennant and Gabriella Carbone said Lululemon was able to beat estimates because of strong performance in its fall transitional products. Company management pulled forward some of its products from the third quarter to driver stronger July sales.


Lululemon Athletica management execute

The analysts believe that Luluelemon’s management should be commended because they delivered better results at the top line and also “a much cleaner inventory position.” The company had $177 million at the end of the second quarter, which was about an 8% increase year over year and lower than the 13% increase in total sales.

The Janney team notes that Lululemon came very close to positively inflecting in its IM spread, which they define as “the difference between the change in total sales and the change in average total inventory measured in basis points.” They believe the company will post a positive inflection in the third quarter.

Easing of pressure points

Because of the cleaner inventory heading into the second half of the year, the analyst think the company’s margin pressures will begin to ease. They do still have concerns about Lululemon’s merchandise mix strategy, however, which involves increasing seasonal product penetration.

As a result, they want to see continued success in this strategy going forward. They believe margins on merchandise may be pressured as the company shifts to more seasonal products. One thing they point out though is that seasonal items are the ones that drive traffic and conversion. Back on the other side, however, they say Lululemon could face greater markdown risks and gross margin pressures if it cannot consistently deliver products that “resonate with customers.”

Remaining Neutral-rated on Lululemon Athletica

The Janney team said they would remain on the sidelines with Lululemon for a number of reasons at this point though. First, there’s the gross margin pressure they mentioned, and second, they say there’s the possibility of continual negative comparable store sales in the next few quarters. They also cite “deleverage on higher fixed costs to support infrastructure and supply chain” and greater threats from competition.

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