Why Lululemon Earnings Might Not Stretch Higher

lululemon athletica (LULU 1.31%) will release its quarterly report on Thursday, and for the first time in a long while, investors aren't comfortable in their assessment of the company's future potential. Although most expect the yoga retailer's rapid sales growth to continue, Lululemon earnings could dip from year-ago levels due to some unusual circumstances that the company has faced recently.

For years, Lululemon's capacity for unfettered growth seemed invulnerable to any obstacles. Yet with its infamous recall of its Luon yoga-pant line earlier this year, the company's sterling reputation took its first crack in its armor, and competitors have looked to take advantage by bolstering their own presence in the popular women's athletic apparel segment. Let's take an early look at what's been happening with Lululemon over the past quarter and what we're likely to see in its report.

Stats on Lululemon

Source: Yahoo! Finance.

Will Lululemon earnings feel the burn this quarter?
Analysts have restored their confidence about Lululemon earnings lately, boosting their July quarter estimates by $0.02 per share and their full-year projections by a penny per share. Yet the stock has fallen back from its spring highs, losing more than 10% since early June.

Nearly all of those losses came in the wake of Lululemon's first-quarter earnings report. On the financial front, the news seemed good, as same-store sales rose 7%, rebounding from recall-related concerns. Yet despite 21% higher overall revenue, earnings were largely flat from year-ago levels. Even worse, CEO Christine Day announced she would leave the company, raising the added difficulty of a leadership change even as Lululemon already faces the challenges of helping its business bounce back.

Moreover, even after the recall, Lululemon still faces some concerns about whether its business is back up to snuff. Complaints about post-recall orders have come in, raising new questions about quality control and emboldening both Nike (NKE 0.19%) and Under Armour (UAA 1.64%) to take steps toward poaching Lululemon's customers. Under Armour's Studiolux Quattro collection represents a clear attempt to mimic the success that Lululemon achieved in wooing female customers, and Nike has a strong set of endorsement partnerships with female athletes that help drive sales.

Another potential area of controversy stems from the fact that Lululemon hasn't offered plus-size active clothing. With lines topping out at size 12, the company falls short of Gap's (GPS 5.59%) Athleta line, which gives customers up to size 20 options for activewear.

More competition is starting to come into Lululemon's niche. Athleta has been around for a while but has started coming into its own in the wake of Lululemon's problems, with a smart strategy of locating its stores near existing Lululemon locations. More recently, Fifth & Pacific's (KATE) Juicy Couture has come out with plans to start a yoga line next year as part of a broader initiative to establish a lifestyle collection.

In the Lululemon earnings report, watch to see how the company's CEO search is progressing and what steps it's taking to clamp down on quality control. Without solid growth that tops expectations, Lululemon's stock could see more downside in the remainder of the year.

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