Cautious Sentiment In Lululemon May Be Overdone Ahead Of Q3 Earnings

Cowen’s Oliver Chen believes a large part of the pressure being faced by Lululemon Athletica inc. LULU recently has been driven by fears regarding comps and margin due to higher-than-expected discounting.

Chen maintains an Outperform rating on the company, while lowering the price target from $80 to $72.

Some Caution Needed

The analyst believes it would be “prudent for investors to have some caution into 3Q print on Wed, & incoming client sentiment seems to largely prefer to profit from caution.”

This is because traffic might have slowed in the first half of November, while markdown levels appear high at the clearance stores and online.

Chen recommends buying the stock on potential weakness on Wednesday, in case the results disappoint.

The Silver Linings

At the same time, the analyst also pointed toward some positives, such as the robust traffic in September/October and the markdown levels being in line with expectations and lower than the same period a year ago.

Chen also believes Lululemon has been using its online store more strategically in 2016, especially the “We Made Too Much” sale section, “given improved omnichannel integration.”

This means that while the individual SKU counts might have risen in the clearance section online, the inventory levels are unlikely to be too deep.

In addition, not only has the fuller price non-clearance stores recorded clearance in line with the year ago levels, but the company has successfully sold through racks of products.

Shortly after Monday's opening bell, Lululemon was seen up 1.34 percent at $56.05.