Lululemon Downgraded to Strong Sell on Dismal Outlook - Analyst Blog

On Jun 21, 2014, Zacks Investment Research downgraded the leading yoga-inspired athletic apparel and accessories retailer, Lululemon Athletica Inc. LULU to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Lululemon has witnessed sharp downward estimate revisions over the last 60 days. The primary reason behind this was the company's dismal outlook for the second quarter and fiscal 2014.

Though the company's first-quarter fiscal 2014 results were strong, the company came up with a disappointing forecast for the second quarter and slashed its fiscal 2014 guidance as it focuses on transitioning from the demerits of last year's product recall as well as growing its international presence.

For fiscal 2014, Lululemon slashed its revenue range to $1.77–$1.80 billion from $1.77–$1.82 billion projected earlier. Comparable-store sales (comps) are now expected to grow in the low-single digit range as against the low to mid-single digit range anticipated previously. Moreover, Lululemon lowered its adjusted earnings guidance range to $1.71–$1.76 per share for the fiscal from $1.80–$1.90 per share projected earlier.

For the second quarter, the company anticipates earnings in the 28–30 cents per share range which is much lower than the year-ago comparable quarter's earnings of 39 cents per share.

The company's soft guidance triggered a downtrend in the Zacks Consensus Estimate, as analysts became less constructive on the stock's future performance. The Zacks Consensus Estimate fell 17.1% to 29 cents per share for second-quarter fiscal 2014, 7.4% to $1.74 for fiscal 2014 and 9.5% to $2.01 for fiscal 2015 in the past 60 days.

Other Stocks That Warrant a Look

Not all apparel stocks are performing as disappointingly as Lululemon. Some better-ranked stocks in the sector include Citi Trends, Inc. CTRN that has a Zacks Rank #1 (Strong Buy), along with Foot Locker, Inc. FL and The Men's Wearhouse, Inc. MW, both carrying a Zacks Rank #2 (Buy).

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