Will Lululemon (LULU) Disappoint This Earnings Season? - Analyst Blog

Lululemon Athletica Inc. LULU, a leading yoga-inspired athletic apparel and accessories retailer, is slated to report its first-quarter fiscal 2014 results on Jun 12, 2014. In the last quarter, it posted a positive surprise of 4.17%. Let's see how things are shaping up for this announcement.

Factors Influencing the Upcoming Results

Lululemon's upcoming results appears to be in troubled waters as the problems related to the Black Luon issue persists and the controversial comments from its founder is still fresh in the investors' memory. Though the company has regained confidence under the new leadership, we believe that the company's results require time to recover. 

This was reflected in the company's cautious outlook for the first quarter of fiscal 2014 and the full year. For the first quarter, the company projected earnings in the range of 31-33 cents per share, which is in line with the prior-year quarter earnings of 32 cents per share.

Moreover, the company expects gross margin to be under pressure in the quarter, coming in the 50% – 51% range, due to higher costs related to the mix shift to seasonal products. While occupancy and depreciation are expected to be flat, product and supply costs are expected to deleverage due to the investments made to enhance operations.

Additionally, the company projected higher selling, general & administrative expenses as a percentage of sales compared with last year due to investments and headcount made in 2013 as well as execution of strategic initiatives in 2014.

For fiscal 2014, Lululemon expects earnings in the range of $1.80–$1.90 per share, which is below $1.91 reported in fiscal 2013.

Earnings Whispers?

Our proven model does not conclusively show that Lululemon is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, #2 or #3 for this to happen. This is not the case here, as you will see below.

Positive Zacks ESP: Lululemon currently has an Earnings ESP (Expected Surprise Prediction) of +3.13%. This is because the Most Accurate estimate stands at 33 cents per share, while the Zacks Consensus Estimate is pegged at 32 cents.

Zacks Rank #4 (Sell): Lululemon's Zacks Rank #4 makes surprise prediction difficult despite a positive ESP. We caution against stocks with a Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat:

SYNNEX Corp. SNX has an Earnings ESP of +0.73% and a Zacks Rank #2 (Buy).

BlackBerry Ltd BBRY has an Earnings ESP of +14.29% and a Zacks Rank #3 (Hold).

United Natural Foods Inc. UNFI has an Earnings ESP of +2.70% and a Zacks Rank #3.

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