So what: Specifically, though Lululemon easily exceeded analysts' estimates on both revenue (up 16% to $453 million) and earnings (down 2% to $0.34 per share) in fiscal Q2, and issued fiscal Q3 revenue guidance above expectations, management suggested earnings per share for the current quarter would be $0.35 to $0.37, well below consensus estimates for $0.43 per share. As a result -- and keeping in mind inventories also skyrocketed 55% year over year -- some analysts speculated lululemon will be forced to incur significant markdowns in the near -term to bring inventory back in line with actual sales growth.
Now what: As I argued in my post-earnings article last month, however, I'm not convinced investors should be up in arms over that "weak" guidance. For one, Lululemon CEO Laurent Potdevin insisted during the subsequent conference call that "the short-term gross margin pressure that we are experiencing is not a result of higher markdowns or quality issues." Rather, Potdevin says, that pressure is due to Lululemon's decision to invest in a "scalable, complex platform at a time when we are growing internationally and we have added resources to the team."
What's more, CFO Stuart Haselden noted inventory growth was especially elevated on a year-over-year basis due to timing, as the company was "significantly under-inventoried" in last year's fiscal Q2. What's more, he stated Lululemon remains on track with regard to its outlook on inventory levels as provided during its quarterly call in June -- a report to which, by the way, investors had an overwhelmingly positive reaction.
In the end, for investors willing to take advantage of the market's mistake, I think this is a great opportunity to consider opening or adding to a position in Lululemon Athletica.
