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lululemon athletica Scares Investors About a Potential Holiday Slowdown

By Dan Caplinger – Sep 1, 2016 at 6:38PM

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The yoga-apparel retailer posted solid results, but its outlook is less clear.

Image source: lululemon athletica.

Yoga-apparel retail specialist lululemon athletica (LULU 0.50%) has come a long way in the past couple of years. After facing a potentially catastrophic quality-control issue, the company had to work hard in order to restore customer confidence and loyalty, and it took a long time for Lululemon to make its way back toward a faster growth trajectory.

Coming into Thursday's fiscal second-quarter financial report, Lululemon investors were optimistic that the retailer would sustain the impressive growth rates that they've come to expect, once again. Lululemon's results were solid, but some of its outlook for the remainder of the fiscal year called into question the strength of the yoga-specialist's recovery. Let's look more closely at how Lululemon did, and whether another slowdown could be in its future.

Lululemon moves in the right direction

Lululemon's fiscal second-quarter results gave investors most of what they were hoping to see. Sales were up 14%, to $514.5 million, which more or less matched the consensus forecast among investors. Net income climbed 12%, to $53.6 million, and after accounting for some one-time items, adjusted earnings of $0.38 per share matched what investors were looking for from the company.

Lululemon's numbers weren't exactly stunning in all respects. Total comparable sales were up 4%, which was down from 6% in the previous quarter. Comparable-store sales, which exclude direct-to-consumer results, rose at a more modest 3%, and currency impacts cost Lululemon a percentage point on both measures. Direct-to-consumer revenue climbed by just 6%, although the retailer said that an extraordinary online warehouse sale in last year's period made year-over-year comparisons more difficult.

Lululemon's margin figures were also mixed. Gross profits posted a nice rebound, climbing by more than two-and-a-half percentage points, to 49.4%, on a jump of a fifth in gross profit. However, the increase in operating income was slower than Lululemon's sales gains, and that cost the company about three-tenths of a percentage point on operating margin, to 14.4%.

CEO Laurent Potdevin tried to put Lululemon's successes in the context of a longer-term turnaround for the retailer. "Our progress in the second quarter," Potdevin said, "especially in gross margin and inventory, marks the beginning of our recovery in profitability and sustainable long-term growth."

Why aren't investors happy about Lululemon's future?

Yet the big problem in many shareholders' minds came from Lululemon's outlook for the near future. The company said that it expects sales for the fiscal third quarter to come in between $535 million and $545 million, with the presumption that total comparable sales will rise by mid-single-digit percentages after adjusting for currency impacts. Earnings guidance for $0.42 to $0.44 per share leaves open the possibility of worse performance on the bottom line than investors want to see.

Lululemon's full-year guidance was also mixed. The yoga specialist actually increased its revenue expectations slightly, now predicting sales of $2.325 billion to $2.35 billion. Adjusted earnings guidance of $2.07 to $2.15 per share similarly suggests that Lululemon will, at best, meet the consensus forecast among those following the stock. For investors wanting to see signs of strong momentum entering the holiday season, the yoga-apparel retailer appeared especially reticent in its unwillingness to be more optimistic about the rest of the fiscal year.

Store growth remains a key part of Lululemon's overall long-term strategy, but the pace of that growth slowed during the second quarter. Lululemon opened just six stores during the quarter, down from 11 in the first quarter. However, square footage climbed to nearly 1.12 million square feet, and Lululemon boasted 379 store locations as of July 31.

Lululemon investors weren't happy about the results, sending the stock down more than 8% in after-hours trading following the announcement. If the retailer can outperform its uninspiring guidance, then shareholders might forgive Lululemon eventually. Yet with the stock having climbed by nearly half since the beginning of the year, anything less than perfection for Lululemon justified at least a modest pullback in the share price.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica. 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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