Investors had high expectations for lululemon athletica (NASDAQ:LULU) heading into its third-quarter earnings report. The apparel retailer had trounced management's sales expectations in each of its prior announcements in 2019, and Wall Street was expecting more of the same this week.

Lululemon didn't disappoint. Last Wednesday, the yoga-inspired clothing specialist again revealed strong sales growth that sets it up for a banner holiday shopping season.

Let's jump right in.

A yoga class in session.

Image source: Getty Images.

Stretching past those expectations

Lululemon's prior outlook called for sales to land at about $885 million this quarter, but investors have been used to the company outperforming on that metric, and so they were expecting revenue closer to $900 million. The company easily beat those expectations, with revenue jumping to $916 million to mark a 23% increase year over year.

That impressive growth was driven by a healthy mix of sales growth at existing stores (up 11%), surging e-commerce demand (up 30%), and an expanding store base. These gains imply robust customer traffic growth across all of Lululemon's selling channels, along with market share wins in core product categories and new niches like outerwear. "We're proud of the continued momentum in our business," CEO Calvin McDonald said in a press release.

Financial strength

Given the sharp run-up in the stock this year, investors were looking for anything that might suggest weakening operating trends. Yet there was nothing in Lululemon's finances to indicate such a slowdown.

In fact, gross profit margin rose again, ticking up to 55% of sales from 54% a year ago. Management has warned over the last few months that profitability might dip slightly because of rising tariff costs and extra freight expenses around those tariff disruptions. That hasn't happened, though.

The stronger finances trickled all the way to the bottom line, with operating profit jumping 29% to $176 million, or 19% of sales. Operating margin was 18% of sales a year earlier.

The outlook keeps rising

Investors knew coming into this report that Lululemon's holiday season forecast would capture most of Wall Street's attention and the company delivered in this area. Management predicted sales of about $1.3 billion, which was consistent with expectations heading into the announcement.

The retailer raised its full-year growth outlook for the third consecutive quarter, meanwhile, and now sees sales landing between $3.895 billion and $3.91 billion compared to a prior range of $3.8 billion to $3.84 billion. Comparable-store sales should rise by a mid-teen percentage, executives said, in contrast to the low-teen percentage they had forecast back in September.

The quick expansion pace, combined with improving profit margin, should deliver earnings of as much as $4.78 per share in 2019, up from $3.61 per share last year and significantly above the $4.55 per share forecast that Lululemon initially projected in late March. The steadily climbing outlook across key sales and profit metrics is a sure sign that the chain is building momentum and winning market share in the quickly expanding athleisure apparel industry.

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