Lululemon May Have Finally Reached Major Inflection Point In Q2

Camilo Lyon of Canaccord Genuity is expecting Lululemon Athletica inc. (NASDAQ: LULU) to report "solid" second-quarter results in its earnings report on September 1. However, the near-term positive view is overshadowed by a difficult bottom half of the year.

Lyon is expecting Lululemon to earn $0.41 per share in the second quarter on revenue of $534.6 million driven by a stronger-than-expected comps gain at 9 percent.

Lyon noted three factors to support a strong comps gain: 1) an "outsized" contribution from women's bottoms (35 percent of the sales mix); 2) tops comp'd positive in the first quarter, and the momentum likely continued in the second quarter due to an expanded assortment; and 3) new silhouettes in the seamless collection and strength in pants resulted in a high-single-digit to low-double-digit contribution from the men's category.

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Lyon added that the second quarter will also mark a positive inflection point in gross margins, which the company has been working on over the past few years. As such, the analyst is projecting a gross margin expansion of 170 basis points in the quarter, which is above the company's own guidance of 120 basis point expansion.

Cautious Post Q2

Looking past the second quarter, Lyon cautioned that he is becoming "weary" heading into the bottom half of the year. The analyst highlighted a "very difficult" comparison in bottoms, a tank wall relaunch that will be "driven by fit variation rather than technical innovation), a now "well-understood" gross margin recapture opportunity as well as a 33x P/E multiple that "leaves little room for error."

As such, the analyst maintains a Hold rating and unchanged $70 price target because of a risk to reward profile that is "tilting downward."

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