Lululemon Could Post Another Blowout Quarter

 | Mar 21, 2017 | 9:03 AM EDT
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Since last summer, it's been nothing but downward dog for Lululemon Athletica (LULU) . The company is scheduled to report fourth quarter and year-end fiscal 2016 earnings on March 29. Can LULU stretch to new heights?

LULU shares are 22% off their 52-week high. The stock would have been lower, but a last-minute holiday surge popped it from the mid $50s to the low $60s.

There were two recent events that saved the stock from going lower. First, on Dec.7, the company reported a strong third quarter -- which nobody thought LULU could do -- and second, a month later, management raised the lower end of guidance.

Fiscal third-quarter diluted earnings per share were $0.50, $0.07 better than expected. Revenue rose 13.5% from the same period of 2015, to $544.4 million. While the top line number was impressive, it's the gross margin that seems to have raised interest in the stock. Third-quarter gross margin jumped 420 basis points to 51.1% and that was on top of a second-quarter jump of 260 basis points.

If the rebound in gross margin continues into the fourth quarter, the stock will start to move higher. Right now, the consensus gross margin estimate is 53.7%, or 340 basis points over last year. On the third-quarter call, management said they were expecting gross margins to increase 300 to 350 basis points in the fourth quarter.

Gross margin is being supported by fewer markdowns, higher prices and better inventory management, which is helping the company to get better pricing from its vendors.

On Jan. 9, the company raised the lower end of guidance. It now sees fourth-quarter earnings between $0.99 and $1.01 per share, compared with $0.96 to $1.01 before. Analysts are looking for earnings of $1.00. Total net revenue is now expected to range from $775 million to $785 million on a comparable sales increase in the mid single digits.

If LULU can get some SG&A leverage in the form of slightly lower operating expenses, the company could surprise to the upside. Bigly. Last year, operating expenses were 23.1%, but should be down to 17.5%, which would boost operating margins by 200 basis points.

If I'm right, instead of earning $1 per share (per the analyst consensus), LULU has an opportunity to report a blowout fourth quarter. Playing around with the model, it's easy to see that LULU could report $1.15 (especially with a little help from the current share buyback).

A $0.15 blowout on top of last quarter's strong report could launch the stock into the low $80s. I think LULU is about to stretch to new heights.

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