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Lululemon's Earnings Fail to Impress

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Things went from bad to worse in a heartbeat for lululemon athletica (NASDAQ: LULU  ) . The company reported its third-quarter earnings this morning, and the market was not impressed with the outlook -- and for good reason. All the growth seems to have slipped away from this growth company, and Lululemon now expects the year to end on a relatively low note.

Lululemon's mediocre third quarter
Things didn't go badly in the third quarter, but they weren't great, either. The athletic apparel company increased comparable-store sales by 5%, which was in line with its own expectations and slightly better than many other retailers. Unfortunately, the increase in comparable-store sales came at the expense of gross margin, which fell slightly. Promotions apparently ran slightly heavier this year than last.

Even so, gross margin was still healthy at 53.9%, which was ahead of the year-to-date position of 52.4%. Excitement about an improvement has to be tempered with the fact that Lululemon's whole operation was put under pressure earlier this year by product quality issues and shortages.

Overall, investors gave the third quarter only a passing glance due to Lululemon's fourth-quarter outlook. Even the higher-than-expected earnings per share result wasn't enough to rescue the brand, and the stock fell 10% in early trading.

The bad news ahead
Lululemon's biggest problem is that it doesn't see the year ending on a good note. Exiting CEO Christine Day cited macro and execution issues as dragging the company down in the fourth quarter. That led the company to forecast flat comparable-store sales and a mere 4% to 7% increase in earnings per share from the fourth quarter of 2012.

The market is clearly comparing that to the increased guidance that rival Under Armour (NYSE: UA  ) gave in its third quarter. The brand updated its outlook to the upper end of its previous guidance, now expecting to increase revenue by 23% -- Lululemon expects an increase of just 10% to 11%.

Under Armour was one of the big winners when Lululemon stumbled earlier this year, and the continued trouble at Lululemon with its new pilling issue is only going to help. Under Armour has built a strong women's line around its Armour Bra, and the chance to pull over disaffected customers from Lululemon can help it grow that base.

Lululemon's potential
While the end of the year looks a bit dire, Lululemon is finally setting itself up for potential success in 2014. The brand recently announced the hiring of a new CEO, one with good retail and sports credentials. At the same time, it announced that loose-lipped founder Chip Wilson would step down as chairman. All it needs to do now is fix its product issues and make things right with its core customers. Lululemon needs to re-prove itself to consumers and investors in 2014; it will no doubt be glad to have 2013 in the rearview mirror.

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