What Lululemon's New Guidance Means

lululemon athletica (NASDAQ: LULU  ) shares were off yesterday, finishing down 4%, after the company revised guidance below analyst expectations but above its previous projections. For the fourth quarter, it expects revenue at the high end of its previously announced range of $475 million to $480 million, and EPS of $0.74, above the $0.71 to $0.73 it expected before.

Wall Street, however, was looking for sales of $489 million and earnings of $0.74 a share.

The real rub came with the same-store sales update, which management now believes will only be in the high-single-digit range, considerably below the comps figure we've become accustomed to seeing from Lululemon. The company has posted same-store sales increases of at least 15% for more than two years, so the drop-off to the single digits likely rattled some investors.

The market reaction seems to be reassuring, as the stock gained throughout the day, adding back nearly 5% over the course of the session. This is not the sell-off we've seen with other growth stocks such as Chipotle Mexican Grill, which dropped more than 20% after missing sales estimates. In addition, CEO Christine Day had nothing but positive things to say in the release, noting that the holiday calendar was compressed this year. She also pointed out that gross margin was ahead of projections, and the company was entering 2013 in a "clean inventory position."

For investors, there are two key takeaways here:

First, it's important to remember that holiday sales were weak across the retail sector. Fears of the fiscal cliff killed consumer confidence, making a significant dent in Christmas shopping. High-end retailers also seem to have a rough go of it, as Tiffany earlier reported flat same-store sales for the holiday season. The coming quarters will tell if the slowdown in Lululemon's comps was simply a macroeconomic pullback or a trend indicative of the company's stores reaching maturity.

Second, online sales have become a more significant piece of its revenue picture. In the third quarter of 2012, e-commerce grew 89% to contribute 14.3% of Lululemon's sales. If e-commerce growth remains strong, the drop in same-store sales may just be an indication that some of those sales are transferring to the online channel. We'll find out when Lululemon reports earnings, expected at the beginning of March.

Finally, while a decline in same-store sales is never a good thing, 15% is a level nearly impossible to sustain. Eventually, stores mature and that figure moderates. Lululemon's key growth opportunities are in its ability to penetrate new markets both in North America and overseas, in Europe and Asia. Comparable sales offers a revealing window into the brand's growing popularity in established markets, but the consumer response in European and Asian markets will be equally telling for investors.


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