Thanks to a mid-quarter update in January, investors already knew lululemon athletica (LULU 0.58%) had a fantastic holiday season. But there were still some key profitability and inventory concerns heading into its full fourth-quarter announcement in late March, especially after peer Nike reported declining sales in its most recent quarter.

Lululemon's report eased those worries while giving shareholders an encouraging outlook for the fiscal year ahead.

Let's take a closer look.

Yoga students holding a pose.

Image source: Getty Images.

Sales gains

Lululemon's store base continued to struggle under the weight of customer-traffic limits and reduced hours in some locations. But the chain's booming digital division easily offset that challenge.

Sales jumped 20% after adjusting for currency exchange shifts, landing just a bit higher than the upgraded outlook management issued on Jan. 11. Sales at existing stores fell 29% due to COVID-19 pressures, but the digital segment rose 94%.

The chain mostly avoided the shipping issues that forced Nike to report temporarily weak sales and spiking inventory over the holiday season. Shoppers responded enthusiastically to Lululemon's seasonal product launches, and the supply chain held up through the demand spike. "Our teams reacted quickly to ensure we met the evolving needs of our guests," CFO Meghan Frank said in a press release.

Cash and profits

The direct-to-consumer business shot up to 52% of total sales compared to 33% a year ago. That shift had a positive impact on profit margins since these e-commerce sales are more profitable.

Despite extra spending on the online platform, gross profit margin rose to 59% of sales from 58% a year ago, and adjusted operating margin jumped to 27% of sales from 24%. These wins allowed earnings to land at $2.52 per share, up 11% in Q4.

On the downside, Lululemon reported a big jump in inventory holdings that normally would be a bad sign for profitability over the coming quarters. But this boost appears to be a temporary challenge brought on by COVID-19 customer-traffic pressures. Management's outlook implies that the chain will not be forced to cut prices to keep this inventory moving through its system.

The $5.6 billion sales year   

Speaking of the outlook, Lululemon reinstated a detailed annual forecast for the first time since the pandemic started. Executives predict that sales will reach $5.6 billion in 2021, equating to a 25% increase. That's even better than the 22% spike the company achieved in 2019 before the pandemic disrupted the business and slowed growth to 11% this past year.

Sure, part of that spike has to do with the fact that Lululemon is expecting a massive year-over-year rebound compared to its sales slump in mid-2020. First-quarter revenue should be over $1 billion compared to the $652 million the company logged during the start of retailing shutdowns a year ago.

But Lululemon's outlook shows how the company sailed through that crisis and is now targeting record sales gains in the new fiscal year. Shareholders should be thrilled with that performance, which puts the retailer at the top of the growing athleisure industry.