Weak Traffic Trends Keep BMO Analysts Sidelined On Lululemon

Lululemon Athletica inc. LULU's near 10 percent decline Friday morning doesn't represent an attractive buying opportunity, at least according to John Morris of BMO Capital Markets.

In a research report, Morris argued that Lululemon's second-quarter reported earnings per share of $0.38 was in line with the Street's estimate, but a 4 percent comp reading was short of the 6 percent expected.

Morris expanded that Lululemon reported a lower-than-expected comp as higher AUR (average unit revenue) and UPT (units per transaction) were partially offset by "sluggish traffic trends" that persisted throughout the quarter. As such, the analyst needs to see traffic improve heading into the holiday season before he can become more constructive on the stock.

Related Link: Lululemon Tumbles After Revenue Miss, Lower Guidance

Morris added that Lululemon's product margins improved by 360 basis points in the quarter due to lower product costs and lower markdowns but were slightly offset by foreign exchange headwinds and occupancy deleverage. The company itself noted that a gross margin inflection continued into the third quarter but at a slower pace.

The analyst also revised his fiscal 2016 earnings per share estimate lower to $2.14 from a previous $2.17 to account for weak traffic trends.

Bottom line, Morris stated that investors should "remain on the sidelines" as weak traffic trends are expected to continue to weigh on the company's comps in the back half of the year.

Shares remain Market Perform rated with an unchanged $64 price target and are now "fully priced" following the post earnings selloff.

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