11:22 AM EDT, 08/28/2024 (MT Newswires) -- Lululemon Athletica's ( LULU ) 2024 challenges, including recent product-quality issues with their "Breeze Through" leggings line, are expected to lead to a downward revision of earnings per share guidance when the company reports its fiscal Q2 results Thursday, Wedbush said in a note Wednesday.

"Our hope is that a guidance revision becomes a "clearing event", and that once numbers are appropriately re-set, investors will once again focus on the company's compelling growth opportunities (International, Men's), exceptionally strong cash flow generation (well over $1 billion annually) and fortress balance sheet," Wedbush said.

Wedbush has revised its fiscal Q2 earnings per share forecast for the athletic apparel retailer to $2.79 from $2.97, the fiscal 2024 EPS estimate to $13.66 from $14.38, and the fiscal 2025 EPS outlook to $14.53 from $16.00, according to the note.

On a positive note, discounting has been well-controlled, with "Made Too Much" items down over 30% year over year for 16 weeks. This suggests solid gross margin trends, assuming no major inventory write-downs related to the "Breeze Through" leggings.

Wedbush said that the company has been handling the discounting situation quite effectively recently, adding that the quantity of items marked as "Made Too Much" on the website's "Made Too Much" section has dropped year over year for 16 consecutive weeks.

Lately, the count of discounted items on the site has been decreasing by more than 30% year over year. Therefore, without any inventory write-downs related to Breeze Through, Wedbush believes the overall gross margin trends are strong.

Wedbush has an outperform rating on Lululemon and lowered its price target to $324 from $400.

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