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A Troubling New Trend at Lululemon?

If you thought the worst was over for lululemon athletica (NASDAQ: LULU  ) this year, think again. 

On Thursday, shares of Lululemon fell by 5.4%, even after the yoga apparel specialist told investors net second-quarter revenue increased 22% from the same year-ago period to $344.5 million. That result was helped by solid comparable-store sales growth of 8%.

lululemon stock

Image source: Lululemon.

But despite higher revenue, Lululemon's net income actually fell 1.2% over the same period to $56.5 million, or 16.4% of sales, and remained flat on a per-share basis at $0.39 per diluted share. Curiously enough, those numbers actually beat analysts' average estimates, which called for earnings of $0.35 per share on sales of $342.99 million.

Still, the company issued weak revenue and earnings guidance for the remainder of the year, telling investors to expect full fiscal 2013 revenue to come in the range of $1.625 billion to $1.635 billion, with diluted 2013 earnings per share of $1.94 to $1.97.

For reference, analysts were expecting full-year 2013 earnings of $1.99 per share on sales of $1.67 billion.

So what gives?
If you're wondering what happened, look no further than March's see-through pants debacle, which involved a massive recall of Lululemon's popular black Luon bottoms, and called for the return of around 17% of all bottoms sold in its stores.

According to management on Thursday's earnings conference call, while the problem was technically corrected in early June, its fallout caused late deliveries of the company's fall products, leaving them with summer product still on the floor through all of August.

In short, those delays are expected to continue negatively impacting the timing of Lululemon's product deliveries through the remainder of the year.

This too shall pass
But does this mean Lululemon is suddenly a terrible business? Absolutely not.

Remember, management also referred to its current pain as "short term," and even after taking a hit from selling less of its higher-margin black Luon bottoms, Lululemon still expects gross margin to come in the range of 53% to 54% for all of 2013.

For those of you keeping track, remember gross margin for fellow athletic apparel maker Under Armour  (NYSE: UA  ) rose by 240 basis points year over year last quarter to just 48.3%.

Then there's Nike (NYSE: NKE  ) , which earlier this week became one of three elite companies to join the Dow Jones Industrial Average and touted its strong gross margin expansion last quarter of 110 basis points to 43.9%.

What's more, Lululemon CFO John Currie expressed confidence during the Q&A portion of Thursday's call that, given the temporary nature of the company's current challenges "there's no reason to change [his] longer-term outlook on the 55% gross margin and 25% operating margin," especially as the company continues to grow and expand internationally.

Then again, despite those solid margins, it's also easy to understand investors' reservations for stepping into shares of Lululemon, especially while they're currently trading at a premium of 35.3 times last year's earnings and 25.6 times next year's estimates.

But, really, that's not astronomically higher than the much slower-growing -- albeit much more stable -- Nike shares, which currently sit at 25.1 times last year's earnings and 19.7 times next year's estimates.

In the meantime, Under Armour's recent winning streak has pushed its own stock to all-time highs with trailing and forward P/E ratios of 64.7 and 43.8, respectively. And while I'm not complaining as a longtime Under Armour shareholder myself, Lululemon's high-ish valuation suddenly looks all that much more compelling.

As a result, when Lululemon's current troubles eventually abate and net earnings resume their upward climb, I'm still convinced patient, long-term Lululemon shareholders stand to be handsomely rewarded over the long run.

These companies' international expansion also serve as a good reminder that profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

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  • Report this Comment On September 13, 2013, at 6:44 PM, plange01 wrote:

    turns out to be a buying opportunity for lulu! as usual when it drops!

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