Focus, lululemon athletica (Nasdaq: LULU). Focus.
The popular chain of high-end yoga gear produced monstrous growth in its latest quarter, but rained on its own parade by hosing down its profit guidance.
lululemon saw fiscal first-quarter profits more than double to $0.12 a share, with revenue soaring by 75% to $78.2 million. Wall Street was looking for earnings of $0.12 a share on $71.8 million. The company behind the namesake yoga-apparel mall shops blew away analysts, but only on the top line. In other words, its net margins clocked in lower than what Mr. Market was expecting.
That's not fatal. Gross margins improved during the period. Operating margins contracted slightly, which may be a surprise since comps were up a jaw-dropping 28%. One would think milking so much more out of its selling space would have a strong impact on beefing up operating margins.
However, lulu's doozy came in its outlook. The company is now looking to earn $0.68 a share to $0.71 a share this year, just below its original per-share range of $0.70 to $0.72. Despite reducing its profit guidance, it's beefing up its revenue target by $10 million, to $380 million to $385 million.
It's not a mixed forecast. If investors see higher revenue and lower earnings, they mutter "falling margins" and back away.
lululemon still bears watching. You can't ignore a company improving sales at the individual store level by 28% in this fickle environment. Even if you account for the appreciation of Canadian currency versus the stateside buck, same-unit sales were still up a sharp 15% on a constant dollar basis.
What's lululemon's secret? It's not just the niche. Yoga masters like Liz Claiborne's (NYSE: LIZ) prAna, VF's (NYSE: VFC) Lucy, and instructional DVD maker Gaiam (Nasdaq: GAIA) aren't setting Wall Street on fire.
The company just happens to have a stranglehold on affluent soccer moms with money to burn on fitness apparel. This may not make lululemon the next Nike (NYSE: NKE) -- or even the next Under Armour (NYSE: UA) -- but Peter Lynch would be the first to tell you that you don't bet against where the mall crowds are forming.
As long as the comps keep clocking in strong, today's stock-price dip on the margin crunch will prove as temporary as a yoga pose.
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