Lululemon earnings preview: Eyeing athleisure demand, inventory trends
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Lululemon Athletica (NASDAQ:LULU) is due to announce its fourth quarter earnings results after the closing bell on Tuesday, with eyes on athleisure demand post-pandemic.
Analysts expect the Canadian apparel retailer to post $4.26 in earnings per share on $2.7B in revenue. Analysts have revised EPS estimates downward a net of 10 times in the past 90 days, while revenue expectations have conversely been hiked a net of 20 times. The adjustments have come largely following the companyâs pre-announced guide in early January.
The company has exceeded EPS estimates in 8 consecutive quarters, rising above revenue expectations in 7 of those reports.
Lululemon has become a battleground stock as of late. According to Seeking Alpha surveys, 21 analysts hold a Buy rating on the stock, 8 analysts rate it at Hold, and 4 analysts assign the stock a Sell rating, with a number of downgrades coming in 2023. Seeking Alphaâs Quant team also rate the stock at Hold.
Analysts at Wells Fargo, Citi, and Raymond James reiterated bullishness ahead of the results, with the former two highlighting an attractive entry point ahead of the print. 
âGiven the negativity priced into LULU, we think it's important to note how much of a discount the name is trading at relative to history (LULU at ~30% discount to multi-year average multiples). Net/net, the stock is cheap today (trading near 2017 lows), something we are not seeing in other high-quality names under coverages (ULTA, TJX, ROST, BURL, NKE)âwhich are all essentially trading at premiums to multiyear average multiples.â
Meanwhile, analysts at Redburn, Bernstein, and Jefferies are taking a more cautious tack. Both Redburn and Bernstein recently initiated Sell ratings on the stock, arguing the valuation remains elevated, amplifying downside risk.
âWith pent-up demand running out, a more cautious North American consumer, higher promotions, and new categories too small to offset a softer core business, it's time for that reality check,â Bernstein analyst Aneesha Sherman told clients in late January.
Sherman also advised that margins are likely to contract from their historically elevated levels amid a highly promotional retail environment. In her view, margins were âmaxed outâ amid the pandemic and are due to come back down, especially amid questions on inventory levels.
The Q3 report indicated inventory levels had leapt over 80% year over year to position for holiday quarter sales, putting pressure on the company to sell a great deal of merchandise in the quarter. Analysts expect inventory to end Q4 at $1.51B, down modestly from the Q3 peak. Gross margins are expected to tick in at 57.3% as compared to 55.9% in Q3.
Seeking Alpha contributors remain narrowly bullish on the name, with 3 of 4 articles published in the month of March recommending the stock. Year to date, only one contributor has advised a Sell rating.
âWhile there could be some near-term bumps given the macro environment, if you have a long-term view, I'd be a buyer of the stock and then buy more if they have an earnings (guidance) hiccup,â Seeking Alpha contributor Geoffrey Seiler wrote ahead of the results. âRisk-averse investors may be better off waiting until after it reports its Q4 results.â
Read more on the earnings expectations for Lululemon.