Shares of lululemon athletica (NASDAQ:LULU) popped more than 17% on Thursday after the yoga-apparel maker delivered better than expected results for its second quarter. This was a major win for the retailer, which has struggled lately due to a string of mishaps, including product recalls, that left the stock trading near its 52-week low leading up to these results. Here are three reasons why this was a big win for Lululemon today, and how investors should play the stock going forward.
Low expectations pay off
Analysts had really low expectations for Lululemon heading into the company's fiscal second quarter. For the period ended Aug. 3, Lulu generated earnings per share of $0.33, which topped the consensus analyst estimate for profit of just $0.29 a share in the quarter. While it is encouraging that Lululemon delivered on already low expectations, investors should keep in mind that the $0.33 profit was still down more than 15% from earnings of $0.39 a year ago.
Nevertheless, the market was also pleasantly surprised by the 13% rise in Lulu's revenue in the second quarter, to $390.7 million, significantly better than the $376.8 million that Wall Street expected. The good news was topped off with the niche retailer raising its full-year guidance by a penny. Lululemon now expects fiscal 2014 earnings in the range of $1.72 to $1.77 per share.
Importantly, raising its annual forecast by a penny should still give Lululemon room to top this guidance down the road. After all, it achieved full-year EPS of $1.91 in fiscal 2013 -- the same year the company was forced to pull more than 17% of its luon products from store shelves.
A short squeeze at its best
Another reason shares of Lululemon soared today was because of the insanely high short interest in the stock. More than 32% of Lululemon's shares are currently sold short. This means a significant portion of investors bet against the stock heading into the earnings release this morning.
One factor that contributed to the company's strong quarter was management's ability to reduce inventories while at the same time maintaining sales growth. Moreover, short-sellers in this name should be cautious going forward. The recent trend of swapping jeans for fashionable active wear like the products Lululemon makes could further boost the retailer's bottom line in the quarters to come.
Renewed investor confidence
The stock's rally today proves that investor confidence is slowly returning to Lululemon. It also reinforces the notion that the retailer's turnaround plan is succeeding. This worked in the stock's favor today, but Lululemon is still in the early stages of a rebound and retail comebacks take time.
With that in mind, a few things could act as catalysts for lululemon athletica in the months ahead. For starters, the company has new leadership with the arrival of CEO Laurent Potdevin, who took over for Christine Day in January. Under his direction, the brand has already refreshed its product cycle and is bringing items to market faster than ever before.
Additionally, the initial response for Lululemon's new fall products has been overwhelmingly positive. The brand's Lab Night Tights, for example, are already sold out online in most sizes. The same goes for some of other new items, including the Full-On Luxtreme and Studio Pant styles. Ultimately, these prove Lululemon hasn't lost customers' interest.
What you need to know
Low expectations, a high short interest in the stock, and renewed investor confidence made Lululemon one of today's biggest winners. However, the company still has a distance to run and hurdles to leap before we can call it a comeback.
Tamara Rutter owns shares of Lululemon Athletica. The Motley Fool recommends Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.