Lululemon Earnings Preview: LULU Stock Holders Should Beware the Guidance

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Lululemon Athletica inc. (NASDAQ:LULU), the athletic retailer behind the popular line of women’s yoga pants, is reporting fourth-quarter 2015 results on Thursday before the bell. And given recent inventory problems at the company, LULU stock could be primed for a selloff.

Lululemon athletica inc LULU Stock Earnings Preview Beware the GuidanceThe apparel company’s stock has been on a tear in the last year, with LULU stock up 33%, nearly doubling the Nasdaq’s 17% rise over the same period.

I very much doubt that outperformance will continue much longer, as the company faces a confluence of risks staring down investors going into Lululemon earnings on Thursday.

Expectations vs. Reality

Wall Street expects earnings per share to fall by 2 cents, from 75 cents to 73 cents, in the three months ended Jan. 31. Analysts are calling for revenue around $598 million in the quarter, a 14.9% year-over-year increase.

But the real threat to the LULU stock price in the wake of its upcoming earnings announcement is less about its most recent quarter and more about what management expects from this next fiscal year. That’s because Lululemon is uncharacteristically dealing with a clothing retailer’s nightmare: inventory issues.

Specifically, LULU overproduced.

Over the weekend, Lululemon admitted its miscalculation. A banner on its site reads: “We made too much. We made a little extra product, want to take it off our hands? *It’s yours for keeps (no returns, no exchanges).”

The message appears in both the men’s and women’s sections of its website, showing the company truly did go all-out on the production front.

Wall Street reacted swiftly to the flood of deeply discounted merchandise, and LULU stock lost 3% on Monday.

Analysts Already Cutting Estimates

Analysts weren’t shy about revising their LULU stock price projections lower. Canaccord Genuity cut its price target from $58 per share to $55 per share, maintaining its “Hold” rating on the stock. Noting that physical store checks also reflected deep discounts ranging from 20% to 50%, analyst Camilo Lyon reduced his LULU fiscal 2016 EPS estimate from $2.08 to $1.96, and cut his estimate for same-store sales growth from 5.2% to 2.6%.

This paints a very grim picture for LULU stock, which still is valued like a growth stock despite what will likely be a fourth straight year of decelerating revenue growth come Thursday. Even ignoring Lululemon’s inventory problems and using Canaccord’s previous $2.08 fiscal 2016 EPS estimate, LULU shares trade at 30 times forward earnings, or a roughly 60% premium to the Nasdaq-100’s forward P/E of 19.

That’s not to mention the competitive pressures facing LULU stock. Big boys Under Armour Inc (NYSE:UA) and Nike Inc (NYSE:NKE) are both increasingly going after the female demographic in an effort to grow sales and gobble up Lululemon’s market share.

Nike opened its first women’s-only store in November, and Under Armour has been spending major dough on ad campaigns with a female focus.

One positive note for LULU: the company has managed to beat earnings estimates for a remarkable five straight years. That’s certainly a nice thing to see, but when there are fundamental growth problems afoot as there are here, it’s little consolation for investors.

LULU stock is a high-risk play for Thursday, and I think there’s a strong likelihood we’ll see management guide lower in its earnings call.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/lululemon-earnings-preview-lulu-stock-holders-should-beware-the-guidance/.

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