Lululemon Athletica is poised for a potential earnings surprise and a possible upwards revision of guidance in its forthcoming financial report, driven by various underlying factors that may not align with quality metrics. According to insights shared by Morgan Stanley in a recent communication, the athletic apparel and footwear giant is set to unveil its fiscal second-quarter results on Thursday.
Analysts project an earnings figure of $3 per share, surpassing Wall Street’s anticipations of $2.94. However, recent data from Second Measure indicates a concerning trend, revealing a 3% decline in the company’s U.S. credit card sales year-over-year during the latest quarter, following a more substantial 4% drop in the previous three-month period. Despite these figures, Morgan Stanley pointed out that this performance shouldn’t be viewed as alarmingly negative overall; rather, it suggests that U.S.
market trends have not worsened in a quarter-over-quarter analysis. Furthermore, the firm identifies potential revenue growth from the Chinese market for Lululemon, considering it more advantageous than detrimental. According to their assessment, while the top-line results for the second quarter may not shift the overall narrative on the company, they predict that these results could outperform the consensus forecasts. In Monday's afternoon trading session, shares of Lululemon saw an uptick of 1.7%.
Looking ahead to the ongoing quarter, Morgan Stanley anticipates an EPS of $2.83, outperforming the Street’s estimate of $2.71. Observing the broader yearly scale, the firm notes that the Street currently projects an EPS outlook of $14.08, hinting that Lululemon might need to adjust its guidance down from its existing projections of $14.27 to $14.47.
Analysts highlight a growing skepticism around management’s capacity to rectify recent inventory and product innovation missteps, as well as restore growth in core markets. Despite this, Morgan Stanley estimates an earnings per share target of $14.37, implying that a revision in the guidance might be necessary, but not extreme. The broader consensus seems to indicate a likely decline in full-year guidance across multiple metrics, particularly sales figures, which are expected to exhibit underperformance concentrated in the latter half of the year.
Nonetheless, Morgan Stanley regards this outlook as excessively pessimistic, positing that the company possesses several favorable conditions and operational advantages that could allow it to meet, if not exceed, its current annual guidance. It is important to note that while Morgan Stanley does acknowledge that many of these expected earnings per share improvements might be perceived as stemming from lower-quality sources, they believe these enhancements could preserve the integrity of full-year EPS guidance throughout the upcoming year.
Moreover, there is potential for Lululemon to augment its EPS guidance by an additional $0.05 if it aligns its second-quarter performance with Morgan Stanley’s forecasts. However, the analysts suggest that, even with better-than-expected results and a raised full-year EPS guidance, Lululemon may find itself in a tenuous position, continuing to be seen as a 'show-me' stock, primarily while it grapples with challenges in its core North American markets. This operational dynamic suggests that Lululemon’s stock may remain relatively stable in the near term.
In an adjustment to its market evaluation, Morgan Stanley has reduced its target price for Lululemon shares to $329 from a previous $404, underlining it with a continued overweight rating. The company's narrative showcases a potentially dynamic change-rate story for the second half of the fiscal year, paired with a credible historical performance and appealing market positioning, suggesting that future risks and rewards may favor investors looking at the upside from this juncture..