Analysts at the Bank of America Corp (NYSE:BAC) (BoA) see a potential upside to both sales and margins for Lululemon Athletica (NASDAQ:LULU) when the athletic apparel company reports its second quarter financial results on Thursday, August 31.
“We expect a continuation of balanced growth across products, gender, and channels will drive confidence that the playbook of diversified growth remains intact,” the analysts wrote in a note to clients.
“While we expect China to lead the growth, we are confident that newness and innovation will lead to strong sales in North America.”
The analysts expect continued outsized growth in China, which represents 18% of Lululemon’s store base and 12% of sales as of 1Q 2023, despite a choppier macroeconomic outlook.
“The macro picture in China has deteriorated, but LULU is underpenetrated versus other athletic brands and we expect this catch-up to offset weaker economic conditions,” they wrote.
“As China continues to scale, we expect the margin profile will exceed LULU's most profitable region (North America).”
For 2Q, they forecast earnings per share (EPS) of $2.51, in line with guidance, and sales growth of 15.7% over the year-ago quarter’s $1.87 billion.
They also expect gross margin expansion of 220 basis points and selling, general, and administrative expenses deleverage of 220 basis points.
Wall Street analysts, on average, expect Lululemon to report EPS of $2.53 on revenue of $2.17 billion.
The BoA analysts added that Lululemon stock remains the “highest quality growth story” in their coverage.
They repeated their ‘Buy’ rating on the stock with a price target of $450.
“Over the past eight years, LULU has traded at a 6 times premium (on price-to-earnings ratio) to Nike; this currently sits at 2.5 times,” they wrote. “As the company continues to track above its medium terms sales algorithm and deliver on margin expansion, we expect the multiple will continue to rerate higher.”
Lululemon shares traded at US$375.96 on Wednesday afternoon ahead of its results. The stock is up 17.1% in the year to date.
- Updated with share price movement -
Contact the author at emily.jarvie@proactiveinvestors.com
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