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Lululemon Athletica Builds Momentum Going Into the Holidays

By Dan Caplinger - Updated Dec 6, 2017 at 11:55PM

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Find out what the yoga-apparel retailer's latest financial report said.

It takes effort to sustain success, and lululemon athletica (LULU -3.10%) has learned the hard way that it takes a lot longer to build a strong reputation than to lose it. After having developed an enviable business model with loyal customers, controversial product problems led to near disaster for the yoga-apparel specialist. Only years later has the company been able to reverse the damage those incidents caused, and now, those who follow Lululemon hope that it has put the episode behind it entirely.

Coming into Wednesday's fiscal third-quarter financial report, Lululemon investors were expecting to see impressive revenue gains that would filter down to its bottom line. Lululemon's results exceeded those expectations, and the retailer is confident that its holiday season will reflect its extensive efforts to improve its business. Let's take a closer look at Lululemon and what its latest results say about the future.

Lululemon store location from outside, with a few passers-by on a fairly quiet street.

Image source: lululemon athletica.

Another good result for Lululemon

Lululemon's fiscal third-quarter results were solid across the board. Revenue climbed 14% to $619 million, with growth accelerating from earlier quarters and topping the 12% rate that most investors had expected to see. GAAP net income was down from year-ago levels due to expenses connected with internal restructuring, but adjusted earnings of $0.56 per share topped the consensus forecast among those following the stock by $0.04.

Lululemon's rebound showed how customers have come back to the brand. Comparable sales were up 8%, with most of the gains coming from a 26% jump in direct-to-consumer net revenue. Yet even when you focus solely on stores, a 2% rise in comparable-store sales was nevertheless better than what Lululemon saw early in the year. Also, in a reversal from the past several years, foreign currency impacts actually helped the company's results, adding about two percentage points to sales and a single percentage point to the retailer's comps.

Operationally, Lululemon also kept finding ways to improve. Gross margin climbed almost a full percentage point to 52%, and despite a substantial rise in overhead expenses, operating margin would have improved slightly had it not been for the ivivva-related restructuring charges.

The extent of Lululemon's internal strategic moves was evident in its store counts for the quarter. The company closed 50 stores during the quarter, most of which were ivivva locations. With only 17 new locations opened, total stores in the Lululemon network were down 33 to 388 by the end of the quarter. Gross square footage also declined, sinking below the $1.2 million mark.

CEO Laurent Potdevin was pleased with the success that Lululemon has achieved. "Our teams powerfully delivered robust results across both store and digital channels this quarter," Potdevin said, "driving a further acceleration in our business." The CEO pointed to the company's "unique position as the global brand defining an active, mindful lifestyle" as driving strong earnings results for the retailer.

What's ahead for lululemon athletica?

Lululemon is also enthusiastic about its future. In Potdevin's words, "As we start the holiday season, I'm energized by our momentum, and we are increasing guidance to reflect this performance."

That guidance will prove instrumental in helping investors assess Lululemon's true progress in fiscal 2017. For the fiscal fourth quarter, Lululemon anticipates $870 million to $885 million in revenue, with adjusted earnings of $1.19 to $1.22 per share. For the full year, the retailer set new top-line guidance at between $2.59 billion and $2.605 billion, up between $25 million and $60 million from what it said three months ago. Full-year adjusted earnings of $2.45 to $2.48 per share would be higher by about $0.06 to $0.10 per share from previous projections, showing the continued forward momentum that the yoga retailer is enjoying.

Lululemon investors were happy with the results, and the stock climbed 6% in after-hours trading following the announcement. Shareholders shouldn't expect that Lululemon will have put all of its issues behind it for good, but the company is still doing a good job of avoiding some of the pressures that its peers in the athletic apparel space have suffered, and future growth looks likely in fiscal 2018 and beyond.

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