Lululemon Athletica Inc. Earnings: What to Expect Thursday

The yoga-apparel specialist has fallen on hard times lately. Will Lululemon bounce back?

Mar 25, 2014 at 2:15PM

On Thursday, lululemon athletica (NASDAQ:LULU) will release its quarterly report, and investors have remained concerned about the yoga-apparel retailer's ability to bounce back from adversity. Even after demonstrating its ability to thrive from its niche in an industry in which rivals Nike (NYSE:NKE) and Under Armour (NYSE:UA) have grabbed up big growth prospects by appealing to the widest possible group of customers, lululemon has had difficulty convincing investors that it has resolved its quality-control issues from last year once and for all.

Until recently, lululemon athletica was a prime example of how attacking industry leaders by appealing to a certain high-demand segment of the market could be immensely successful. By identifying yoga as a promising niche, Lululemon worked hard to build a dominant presence with yoga instructors and their pupils. Yet when its now-infamous see-through pants debacle hit, Lululemon faced a new chapter in its history, and it's still working to restore customer loyalty and confidence in its aftermath. Meanwhile, Under Armour, Gap (NYSE:GPS), and other competitors are trying to jump in and take advantage of Lululemon's miscues. Let's take an early look at what's been happening with lululemon athletica over the past quarter and what we're likely to see in its report.

Lulu
Source: lululemon athletica.

Stats on lululemon athletica

Analyst EPS Estimate

$0.72

Change From Year-Ago EPS

(4%)

Revenue Estimate

$515.89 million

Change From Year-Ago Revenue

6.3%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can lululemon athletica earnings surprise on the upside?
Analysts have marked down their estimates on Lululemon earnings in recent months, reducing January-quarter estimates by almost 10% and slashing $0.20 per share from their full-year fiscal 2015 projections. The stock has kept falling, with a drop of 16% just since mid-December.

We've already gotten a sense of how Lululemon's February quarter went, and the news that the company shared back in January wasn't good. At that time, the retailer cut its sales guidance by about 4%, with a new range of $513 million to $518 million representing a reduction of $22 million from its previous guidance. Earnings estimates also fell by $0.07 per share, with January traffic figures in particular weighing on Lululemon even after its holiday period had looked solid.

Quality-control issues that led to the recall of its Luon pants last year caused Lululemon considerable difficulty. But more recently, co-founder Chip Wilson reignited controversy over the incident, suggesting that its customers' body types were responsible for the problems Lululemon had with making high-quality clothes. Despite Wilson's apology and resignation from his role as chairman of the board, Lululemon still hasn't emerged from all the fallout.

Now, though, Lululemon is trying to move to a more mainstream set of clothing options. Its &go line of casual clothes is designed as a bridge between gym-wear and ordinary clothes. If it's successful, it could work well as a challenge to Gap's Athleta concept, especially by giving shoppers a reason to visit stores even after they've established a full wardrobe of workout gear.

One interesting question is whether Lululemon can appeal to male customers. Under Armour has used Lululemon's yoga niche as an entry point to woo female customers, finding a way to discard its own past niche and reach across gender lines. If Lululemon can do the same in the opposite direction, then it could go a long way toward reversing its recent growth slowdown. Another potential growth area is in its ivivva athletica concept, which focuses on girls' athletic clothing.

In the Lululemon earnings report, watch to see how new CEO Laurent Potdevin does in finding a new direction forward after former CEO Christine Day's departure. With so many issues at the executive level, Lululemon needs a strong leader to step up and carry the brand's potential to new heights.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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