Wedbush Says Lululemon Results Are Strong

Lululemon Athletica inc. (NASDAQ: LULU) reported robust Q2 results, with strong SSS and margins turning positive, despite a challenging environment, Wedbush’s Morry Brown said in a report. He reiterated an Outperform rating on the company, while raising the price target from $82 to $84.

Lululemon reported 2Q SSS at +5 percent, slightly missing the consensus estimate of +6 percent. Excluding the online warehouse sale in 2Q15, SSS would have been +7 percent, implying a 400 bps sequential increase, which was better than most peers, analyst Brown mentioned.

The company’s 2Q gross margin improved 260 bps, handsomely beating the consensus expectations. This “paves the way for further 2H leverage, with margins now planned in the +200-250 bps range,” Brown added.

Signs Of Strength

The analyst commented that Lululemon’s 2Q results highlight the company’s “ability to generate strong comp sales growth despite a challenging external environment...The long promised gross margin inflection has now taken hold, with continued margin gains planned for 2H and into 2017.”

The company announced its 3Q EPS guidance at $0.42-$0.44, in-line with consensus expectations. “LULU’s ability to buck the retail trend with positive comps is driven by its pricing power, technological advancements, and customer engagement,” Brown noted. He reduced the EPS estimates, however, for 2016, 2017 and 2018 from $2.20 to $2.16, from $2.73 to $2.65 and from $3.09 to $3.05, respectively, to reflect a slightly higher SG&A spend.

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