02:26 PM EDT, 08/26/2024 (MT Newswires) -- Lululemon Athletica ( LULU ) has the potential to deliver an earnings beat and a guidance raise in its upcoming results amid "lower-quality" drivers, though the company is likely to remain a "show-me" story in the near term, Morgan Stanley said in a note e-mailed Monday.

The athletic apparel and footwear company is scheduled to report its fiscal second-quarter results Thursday. Morgan Stanley projects earnings at $3 a share, compared with Wall Street's expectations for $2.94. Second Measure data indicate the company's US credit card sales likely fell 3% year over year in the quarter, following a 4% decline in the prior three-month period, the brokerage said in a note to clients.

"While not an inspiring result in aggregate, it suggests US trends have not necessarily gotten worse (quarter on quarter)," Morgan Stanley said. The firm expects China could represent revenue upside for Lululemon rather than a headwind. "Altogether, while (second-quarter) top-line results may not change the broader narrative, we think they can come in better than consensus forecasts."

The company's shares were up 1.7% in Monday afternoon trade.

For the ongoing quarter, the brokerage expects EPS of $2.83, above the Street's $2.71 estimate. For the full year, Morgan Stanley said the Street's $14.08 EPS outlook indicates the company could lower its guidance from its current range of $14.27 to $14.47. "Street EPS estimates suggest a (full-year) guidance cut is imminent, pointing to high skepticism in (management's) ability to correct recent inventory/innovation missteps (and) re-accelerate core market growth," the firm said. Morgan Stanley said it is looking for $14.37.

The Street expects downside to full-year guidance across various other metrics, including sales, with the underperformance seen concentrated in the second half of the year, according to the note. Morgan Stanley said it sees that outlook as "overly bearish" as the company likely has many tailwinds and levers in the period that it can pull to meet and/or surpass its current full-year guidance.

"While we admit that many of these EPS buffers would likely be perceived as lower-quality, (and) do little to debunk the bear thesis -- which hinges on Americas sales trends -- we nonetheless suspect they enable (full-year) EPS guidance to remain intact throughout the year, (and) perhaps even prove beat-able," the brokerage wrote.

Lululemon could increase its EPS guidance by $0.05 if it achieves second-quarter results in line with Morgan Stanley's expectations, according to the firm. "Unfortunately, even if (second-quarter) results come in better (and Lululemon) raises (full-year) EPS guidance, we suspect (Lululemon) will remain a 'show-me' story while its core (North America) market sales results remain challenged," the firm wrote. "This likely makes for a range-bound stock near-term."

Morgan Stanley lowered its price target on the Lululemon stock to $329 from $404 "on trimmed out-year sales expectations" while the brokerage reiterated its overweight rating. The company's "potentially compelling (second-half) rate-of-change-story, credible historical track record (and) still-attractive overall positioning" indicate the risk and reward skews to the upside from here, according to the note.

Price: 271.33, Change: +2.78, Percent Change: +1.04