FBR Keeps 'Underperform' Rating on lululemon (LULU); Promotions, Light Traffic Should Hamper Rest of 2016

September 2, 2016 6:19 AM EDT
Get Alerts LULU Hot Sheet
Price: $57.77 --0%

Rating Summary:
    23 Buy, 12 Hold, 8 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 0 | Down: 0 | New: 0
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FBR & Co. affirms lululemon athletica (NASDAQ: LULU) with an Underperform rating and $40 price target following Q2 results reported on Thursday night.

The firm commented, Results reflect +5% constant-currency comps (+4%, including F/X), versus FBR's/consensus' +5.0%/+5.4%, and EBIT margin contraction of –32 bps, versus FBR's/consensus' –70 bps/–16 bps. Management raised the low end of full-year guidance to $2.07–$2.15, from $2.05–$2.15, implying 20+% EPS growth in 2H, compared to flat EPS in 1H16 and earnings deterioration in 2014 and 2015. Management reiterated full-year comp guidance of +MSD; however, we believe comps could weaken throughout 2016 due to: (1) cycling elevated promotional events in 2015; (2) cycling increases in women's bottom pricing; (3) women's tops not being as big a driver as pants, (4) declining traffic. Management indicated that traffic declined in 2Q, offset by increases in AUR and UPT, and that these metrics have continued into 3Q. In addition to comps slowing from +HSD/+LDD to +MSD, and potentially +LSD, LULU's EBIT margin remains well below management's long-term target of low 20%. We believe LULU's current teens margin structure is the new norm, and we reiterate Underperform.

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