Credit Suisse Previews Lululemon Q1 Earnings, Says Top-Line An "Incremental Risk"

Credit Suisse says Lululemon Athletica inc.

continues to be well set up for an earnings turnaround as suggested by the brokerage's analysis of pricing, inventory, and brand sentiment data. Lululemon, an apparel retailer, is set to report its first quarter results on June 8 and Credit Suisse expects earnings of $0.32, a penny above the consensus estimate of $0.31. Despite maintaining an Outperform rating on the stock, the brokerage is concerned on the top-line. "[W]ith the company having to lap strength in its pants refresh in 2H with new tops product, and consensus comp estimates already ahead of company guidance, top-line has become an area of incremental risk," analyst Christian Buss wrote in a note. That said, Credit Suisse's analysis of 100,000 product SKUs throughout the quarter reveals that lululemon has maintained its "best-in-class pricing discipline" as it carefully manages down inventories and begins to refresh spring/summer product. Other than outsized markdown intensity in the Men's Outerwear, the analyst said there has been low discounting despite a February product transition and continued elevated inventory levels. "The low discounting supports our thesis that LULU will be able to translate supply chain efficiencies into gross margin improvement and earnings power," Buss noted. While modeling for a positive inflection in gross margin in the second quarter 2016, the analyst expects 200bp in gross margin recapture over the next five years to 50.2 percent of revenues. In addition, Buss said the brokerage's sentiment tracker suggests that lululemon is seeing an increased level of positive sentiment (due to pant refresh), but a decreasing number of mentions. "While we view the 2016 multiple re-rating as warranted, further near-term upside to earnings and shares will require strong performance of new fashion items in late 2Q/early 3Q, suggesting a pause in momentum until visibility improve," Buss highlighted. At the time of writing, shares of Lululemon Athletica rose 1.82 percent to $66.21. Buss has a price target of $76.