Lululemon's Earnings Are Masked by Its Newest Expansion Project

High-end and trendy yoga-apparel maker lululemon athletica (LULU -1.26%) recently released its fourth-quarter and fiscal-year earnings. Investors were pleased with the company's fairly solid revenue and comparable-store sales performance for the year. Also well received were fourth-quarter earnings per share results, which beat estimates by $0.03. But these were not the main reasons for the company's stock jumping 6.2% to $51.20 in aftermarket trading on Thursday, March 27.

Ultimately, the CEO's announcement to expand operations abroad pushed the share price higher. Investors hope that Lululemon has a real plan of action in place that will lead to stronger growth, success, and better publicity going forward.

Results were not too shabby 
Fourth-quarter highlights revealed a 7% increase in revenue to $521 million from $485.5 million in the fourth quarter of FY 212.While the company's fourth-quarter 2013 gross profit rose 2%, helped by total net sales gains, in the fourth quarter of FY 2013, the company's gross profit margin fell by 3% to 53.5% from 56.5% in the fourth quarter of fiscal 2012. What this means for investors is that while the company's overall profitability grew it was because of sales gains, not because it made more money per item sold.

Earnings per share were flat at $0.75, as net income increased by only 1% to $109.7 million from $109.4 million in year-ago quarter. Lululemon did, however, report solid fiscal-year results. Revenue rose 16% versus fiscal 2012 to $1.6 billion. In addition, comparable-store sales increased 4% for the year. Net income inched up 3% from $270.6 million to $279.5 million. What is probably most impressive is that Lululemon was able to complete fiscal 2013 with $698.6 million in cash and cash equivalents compared to having $590.2 million at the close of fiscal 2012.

Lululemon, nevertheless, has been in the news for more than just its recent earnings release, and this time, the publicity is a good thing for the company.

Recent moves and future plans
Before its earnings announcement, Lululemon introduced customers to its newest clothing line "&go" along with announcing its plans to expand operations internationally for the benefit of the company's future consistent growth and product success. The clothing line "&go" appears to already be a huge hit with customers as many of the clothing line's open-back tanks, sundresses, and pants have already sold out online.

While this newest line could mean an increase in profits, the company's plan to expand further into Europe and Asia could transform the company in its entirety as the emergence of new target markets begins to takes notice of the stores' trendy yoga apparel and gear. Lululemon's CEO released comments about this expansion, noting that the demand is present abroad despite 95% of the company's current sales coming from Canada and the United States.

Lululemon's expansion will consist of opening showrooms to the public, with several already present in Germany, Singapore, the Netherlands, and China. These showrooms will showcase Lululemon's products on a limited scale in order to get people hooked on one or more particular items. This will give the company time to pinpoint the best locations with the highest consumer spending potential before establishing actual stores. Clearly Lululemon is not only making plans to expand, but is doing this in a way that allows them to maximize the opportunity.



The competition is getting fierce
For Lululemon's competitors Macy's (M -2.03%) and The Gap, (GPS 0.55%), this expansion could mean taking different steps of their own to keep their overseas customers in Europe and Asia from becoming loyal customers at Lululemon. For instance, Macy's has over 800 stores in North America with no locations in Asia and Europe.  Despite their lack of stores overseas, Macy's international sales make up a majority of their online retail sales with Macy's shipping its products to over 100 countries. The Gap, on the other hand, has 375 locations overseas.

In a phone interview on Thursday, Lululemon CEO Laurent Potdevin made the comment that Lululemon is particularly interested in opening showrooms and later, stores in Western Europe.   Although Macy's has no stores in Western Europe nor anywhere else outside of North America, a portion of their online retail sales do come from several of the Western European countries. The Gap, whose Athleta brand competes directly with Lululemon more so than with Macy's, also has no store locations in Western Europe. The fact that Macy's has no stores in Europe and Asia with The Gap operating in only a handful of Eastern European countries, and only one in Asia, could mean a drop in sales for these two companies as Lululemon attempts to expand its operations in these parts and lure international consumers to its products. Time will tell if this expansion helps or hurts Lululemon's sales per square footage.

Foolish takeaway
Lululemon's earnings for its latest quarter may not have been stellar, but the company held its own and comments by the companies' new CEO were more than enough to send the shares higher.

To Foolish investors who believe in the Lululemon story and its expansion plans, the stock's recent pullback may prove to be a blessing in disguise as it could be a great opportunity to invest in the company. Time will tell if the company's plans will work, but for now it seems that the market is willing to give the yoga-active wear retailer the benefit of the doubt.