Wedbush Quiet Ahead of lululemon athletica (LULU) 4Q Print
Wedbush analyst, Morry Brown, highlighted Lululemon Athletica Inc. (NASDAQ: LULU) as a top pick for 2016 and expects strong top-line momentum to continue throughout the year, with significant gross margin recovery opportunity beginning in 2Q16. A return to margin expansion should quiet skepticism, generate upside to consensus EPS forecasts, and lift shares throughout the year. However the analyst doesn't have a perspective on 4Q.
The stock reaction will largely hinge on management’s 1Q GM guidance. The analyst views margin guidance as less a read on operating trends, and more about management positioning the cadence of 1H16 (additional markdowns in 1Q would hurt 1Q margins, but also drive lower end of quarter inventories and better 2Q gross margins).
The upside scenario for LULU into 4Q EPS assumes that any potential negative data points are already known – primarily, high inventory levels at 4Q end (partially driven by shift to ocean freight) and the previously guided 1Q GM decline.
The bear case into 4Q is that 1Q margins disappoint. Consensus assumes GM declines 60 bps in 1Q16. It is possible that executives guide 1Q margins below consensus, to increase the likelihood the company ends 1Q with clean inventories and improving margin positioning into 2Q16 (when the company is responsible for its first YOY increase in 8 quarters).
The firm maintained an Outperform rating and $72 price target.
For an analyst ratings summary and ratings history on Lululemon Athletica Inc. click here. For more ratings news on Lululemon Athletica Inc. click here.
Shares of Lululemon Athletica Inc. closed at $60.89 yesterday.