There Are Still Plenty Of Risks Ahead For Lululemon

Lululemon Athletica inc. (NASDAQ: LULU) reported strong Q3 results, with the EPS beating expectations, driven by improved gross margin and comps and partly offset by higher SG&A deleverage.

Jefferies’ Randal J. Konik maintains a Hold rating on the company, while raising the price target from $61 to $64.

Risks Ahead

“Despite mixed reads starting 4Q, the company expects to maintain a MSD comp trend, coupled with GM expansion. Looking beyond F'17, we see risk to top-line and GM as the athleisure trend plateaus and pricing power fades,” Konik mentioned.

The analyst expressed caution regarding the decelerating momentum in athleisure, a situation that was being worsened by a rise in denim, margin recovery likely to have mostly played out and challenging compares in the near term.

The Good And The Bad

For Q3, Lululemon Athletica reported 7 percent comparable sales, driven by both comparable store sales and DTC growth.

“Top-line was solid, but next quarter presents a more challenging +11 percent compare, while traffic continues to track down slightly, making LULU reliant on driving AUR,” Konik stated.

Gross margins for the quarter came in at 51.1 percent, ahead of the guidance and the consensus, driven by product margins and FX benefit, offset by investments in design.

According to the Jefferies report, “Leveraging their omni-channel capabilities, LULU strategically cleared slow-moving in-store merchandise at higher margins on their website's clearance section.”

Long-term growth appears to be on track, although this already seems priced into the stock.

At last check, shares of Lululemon were up 15.39 percent in Thursday's pre-market session and seen trading at $69.05.