Will Lululemon (LULU) Q1 Earnings Disappoint Estimates?

Lululemon Athletica Inc. (NASDAQ:LULU) is slated to release first-quarter fiscal 2016 results on Jun 8. Last quarter, the company delivered a positive earnings surprise of 6.3%.

In the trailing four quarters, the company has reported in-line results in two and positive earnings surprise in one quarter, while in the remaining one quarter, earnings lagged estimates. Lululemon has delivered an average positive surprise of 0.2% in the last four quarters. Let’s see how things are shaping up for this announcement.

Factors Influencing this Quarter

Going into fiscal 2016, Lululemon remains confident of resuming earnings growth driven on the back of continued top-line momentum, gross margin expansion and efficient inventory management. As a result, the company provided an encouraging guidance for fiscal 2016. For the first quarter, Lululemon expects revenues in the range of $483–$488 million, with constant dollar comps growth in the mid-single digits range. Lululemon anticipates earnings in the band of 28–30 cents per share, compared with 34 cents in the year-ago quarter.

Also, the company’s four newly formulated growth strategies that target to double revenues to about $4 billion and more than double earnings by 2020, demonstrate prospects for long-term growth.

However, the company remains prone to unfavorable currency movements, which are expected to hurt results throughout fiscal 2016. Management expects modest SG&A deleverage in the year, which is partially accountable to currency movements. This raises concerns for the company’s performance during the year.

Earnings Whispers

Our proven model does not conclusively show that Lululemon is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below:

Zacks ESP: Earnings ESP for Lululemon is currently -3.23%. This is because the Most Accurate estimate of 30 cents is below the Zacks Consensus Estimate of 31 cents.

Zacks Rank: Lululemon currently has a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s ESP of -3.23% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies you may want to consider as our model shows that these have the right combination of elements:

Nike Inc. (NYSE:NKE) , expected to report earnings on Jun 23, has an Earnings ESP of +2.08% and a Zacks Rank #3.

Fastenal Company (NASDAQ:FAST) , expected to report earnings on Jul 12, has an Earnings ESP of +4.17% and a Zacks Rank #3.

Aaron's Inc. (NYSE:AAN) , expected to report earnings on Jul 22, has an Earnings ESP of +1.75% and a Zacks Rank #3.

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