Playing Good Cop/Bad Cop With Lululemon Athletica

Lululemon Athletica (LULU) is set to report earnings on Thursday and analysts are twisting themselves into the most difficult of yoga poses trying to predict the outcome.

Bloomberg News

RBC Capital Market’s Howard Tubin and Courtney Willson think Lululemon is “reaching the inflection point.” They explain why:

While comps will likely be negative in 2Q, we are starting to see new, innovative, and differentiated product again flowing into stores. As the balance within the assortment skews more toward this new and compelling product over the next several quarters, we expect the comp trend to improve and share price appreciation to return…

We believe there is a lot of ‘good’ going on at Lululemon in terms of process changes, assortment changes, and long-term growth drivers. However, the full benefit and impact from these new initiatives may take some time to be fully realized. Beginning this fall, we should start to see a better balance of core versus new/innovative/seasonal product in stores. Next, the Spring 2015 assortments will have the full impact of design elements by Tara Poseley (the new product chief). Beyond that, the complete benefit from recent and pending process changes, should be seen later in 2015 and 2016…

The entry point remains attractive. In terms of the shares, they have traded off their 52-week high of $78 to $39 currently (down 34% YTD 2014). In addition, the PE on forward earnings, which averaged 28x in 2013 and 26 over the prior two-years, is now just 18x our 2015 EPS estimate.

JPMorgan’s Brian Tunick and Kate Fitzsimons aren’t so sure:

Near-term, we see elevated risk in shares of Lululemon, as the 2H14 guidance of positive comps appears aggressive, in our view, particularly in 3Q14 when lulu faces a still-tough 11% compare (including ecommerce). While the Lululemon global growth story could one day prove one to own, the shares are likely to remain volatile in the medium term as assortments are rebalanced and investments pressure margins (particularly with negative store comps)…We are also reducing our 3Q14/2014/2015 estimates on the name.

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Shares of Lululemon are little changed at $39.15 at 1:53 p.m. today.