Lululemon Athletica Inc. Earnings: Are the Worst of Times Over?

On Thursday, lululemon athletica (NASDAQ: LULU  ) will release its quarterly report, and shareholders have seen no relief from more than a year of struggles. Rivals Gap (NYSE: GPS  ) and Under Armour (NYSE: UA  ) have taken full advantage of Lululemon's miscues with its product recall early last year, and so far, Lululemon hasn't been able to convince investors that its turnaround efforts will recapture the customer loyalty that drove its early success.

Lululemon athletica essentially created the yoga-apparel niche, and for years, customers were willing to pay premium prices for what they perceived as high-quality merchandise. But the now-infamous sheer-pant controversy created doubt in the reliability of the Lululemon brand, and since then, the company has done a poor job of handling the setback. That has opened the door to Gap, Under Armour, and others to develop their own yoga lines, but can Lululemon bounce back? 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.


Source: Lululemon.

Stats on lululemon athletica

Analyst EPS Estimate

$0.33

Change From Year-Ago EPS

3.1%

Revenue Estimate

$376.04 million

Change From Year-Ago Revenue

8.8%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Lululemon earnings still grow?
Investors have suffered a substantial crisis of confidence in their views on Lululemon earnings, cutting April-quarter estimates by almost 20% and reducing their projections for this fiscal year and next by between 10% and 15%. The stock has continued to struggle, falling 8% since early March.

Lululemon's earnings report last quarter seemed to satisfy investors, although it left a lot of uncertainty about whether a turnaround was solidly in place for the yoga retailer. Revenue grew 7% from the year-ago quarter, but same-store sales fell by 2%. Moreover, Lululemon's guidance for the April quarter was weak, as revenue, earnings, and comps were all well short of expected levels. Yet even with these troubles, the stock soared.

Source: Lululemon.

Part of the reason for the optimism is the fact that Lululemon has new leadership in the form of CEO Laurent Potdevin. Potdevin has acknowledged that Lululemon's mistakes have allowed Gap's Athleta concept and Under Armour to get some of Lululemon's traditional market share. Rather than dwelling on the controversial comments of Lululemon's former chairman, who seemingly tried to lay blame on customers for the shortcomings of the company's products, Potdevin is looking to reignite Lululemon's innovative spirit to one-up Gap, Under Armour, and other would-be entrants into the space. The recent &go line of clothes is just one example of the sort of new products that could make customers forget about past mistakes.

In addition, some believe that Lululemon shares are so cheap that the company has become a viable acquisition target. Last month, one research firm suggested that a major player in the outdoor-apparel market could be a perfect fit for Lululemon, combining forces to complement each other's offerings. Yet the trouble with any takeover would be keeping Lululemon's corporate culture, which has led to strong relationships not just with customers but also between the company and its employees. Tampering with that success could be the last straw for an already weakened Lululemon.

In the Lululemon earnings report, watch to see how well sales of &go and other new products like men's clothing lines and beach gear are doing. Only by combining a return to its roots with efforts at novel paths to greater growth can Lululemon get back on track with its original high-growth trajectory.

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