Lululemon Athletica (LULU 1.74%) stock was down 7.5% in Thursday's after-hours trading session after the athletic-apparel and shoe retailer released its report for the third quarter of fiscal 2022 (which ended Oct. 30). The market's negative initial reaction can be attributed to fiscal fourth-quarter guidance (at the midpoints of the ranges) coming in lower than Wall Street had expected for both revenue and earnings.

On the positive side, the company's fiscal third-quarter results were strong and beat the analyst consensus estimates for the top and bottom lines. These beats led management to raise its full-year revenue and earnings outlooks.

Consumers are cutting back on many discretionary products in this high-inflation environment but keep spending on Lululemon's products, which skew toward the higher end. That's likely because consumers in higher-income levels are typically less affected by challenging macro conditions. 

Lululemon's key numbers 

Metric Fiscal Q3 2021 Fiscal Q3 2022 Change
Revenue $1.45 billion $1.86 billion 28%
GAAP operating income $257.9 million $352.4 million 37%
GAAP net income $187.8 million $255.5 million 36%
Adjusted net income $211.3 million $255.5 million 21%
GAAP earnings per share (EPS) $1.44 $2.00 39%
Adjusted EPS $1.62 $2.00 23%

Data source: Lululemon. GAAP = generally accepted accounting principles. Fiscal Q3 2022 ended Oct. 30.

Investors should focus on the adjusted numbers, which exclude one-time items.

Revenue surged 31% year over year in constant currency. Revenue growth was driven by a 14% year-over-year increase in company-operated same-store sales (17% in constant currency) and a 31% jump in direct-to-consumer (DTC) revenue (34% in constant currency). DTC sales accounted for 41% of total sales in the quarter, slightly up from 40% in the year-ago period.

Revenue growth was robust across all regions, with 26% and 41% increases in North America and internationally, respectively. Lululemon opened 23 net new company-operated stores during the quarter, ending the period with 623 stores. 

Wall Street was looking for adjusted EPS of $1.97 on revenue of $1.81 billion. So Lululemon surpassed both expectations. The company also beat its own guidance, which was for adjusted EPS of $1.90 to $1.95 and revenue of $1.780 billion to $1.805 billion.

Lululemon ended the period with $352.6 million in cash and cash equivalents, down from $994 million in the year-ago quarter. The decline was driven by an approximate $798 million increase in inventory, relative to the year-ago period, to support what management expects to be hardy holiday demand.

Guidance issued for fourth quarter and raised for full year 

Going into the report, Wall Street had been modeling for Q4 adjusted EPS of $4.30 on revenue of $2.65 billion. So Lululemon's outlook (at the midpoints) came in lower than analysts had been expecting on both top and bottom lines.

Metric Prior Guidance Current Guidance Annual Growth Implied by Current Guidance*
Fiscal Q4 revenue N/A $2.605 billion to $2.655 billion 22% to 25%
Fiscal Q4 adjusted EPS N/A $4.20 to $4.30 25% to 28%
Fiscal 2022 revenue $7.865 billion to $7.940 billion $7.944 billion to $7.994 billion 27% to 28%
Fiscal 2022 adjusted EPS $9.75 to $9.90** $9.87 to $9.97**  27% to 28%

Data source: Lululemon. Fiscal Q4 2022 ends Jan. 29, 2023. *Calculations by author. **Excludes the gain on the sale of an administrative office building.

Another great quarter

In short, Lululemon turned in another fantastic quarter. As I wrote last quarter, "While other retailers continue to blame high inflation and persistent global supply chain woes for their subpar or poor results, Lululemon continues to churn out robust quarterly earnings reports." Indeed, the company's stock remains a top pick for people seeking growth.

Investors shouldn't be concerned that the fourth-quarter revenue and earnings guidance (at the midpoints) was lighter than Wall Street had expected. It seems likely that management is being extra conservative because of the considerable uncertainty in the macroeconomic environment. More importantly, one quarter is just one quarter, and long-term investors should not place too much emphasis on such a brief period.