What happened

Shares of Lululemon Athletica (LULU -7.43%) were doing a downward dog today after the yoga apparel retailer posted a solid third-quarter earnings report, but guidance came up a bit short.

As a result, the stock was down 13.6% as of 2:19 p.m. EST.

So what

Lululemon posted strong results in the third quarter as comparable sales jumped 22%, and overall revenue rose 28% to $1.86 billion, which beat estimates at $1.81 billion.

The apparel company continues to expand successfully abroad as revenue was up 41% internationally, but it faced some headwinds on the cost side with gross margin down by 130 basis points to 55.9%.

On the bottom line, earnings per share increased from an adjusted figure of $1.62 in the quarter a year ago to $2.00, edging out the consensus at $1.97.

CFO Meghan Frank said,

We are proud to have delivered another quarter of strong sales and earnings growth, despite an operating environment that remains dynamic. These results illustrate the strength and differentiation of our omni operating model and position us well to deliver ongoing value for our stakeholders.

Exercise class with particpants in athletic wear.

Image source: Getty Images.

Now what

What cooled off the stock was concerns about the company's inventory and weaker-than-expected guidance heading into the key holiday quarter.

Like other retailers, Lululemon's inventory levels have become inflated, jumping 85% from a year ago to $1.7 billion, though management said in the press release that it believes it is well positioned to support expected revenue growth in the fourth quarter.

It called for revenue of $2.61 billion to $2.66 billion, up 23.5% from the quarter a year ago but slighltly below analyst estimates at $2.63 billion. On the bottom line, it expects adjusted earnings per share of $4.20 to $4.30, which compares to the consensus at $4.30.

It's hard to fault Lululemon for such a small guidance miss, but the stock is expensive at a price-to-earnings ratio of 40, and analysts expect difficult comparisons next year. Given the high expectations, it's understandable the stock is taking a step down today.