Customers of lululemon athletica (NASDAQ:LULU) might be able to regulate their breathing better than most, but you can bet investors in the yoga apparel specialist were holding their breath going into its fiscal second-quarter report last Thursday. Shareholders quickly exhaled, however, when Lululemon stock jumped as much as 18% after it said revenue increased 13% year over year, to $390.7 million, which translated to a 15% decline in adjusted earnings of $0.33 per share.
That might not sound impressive, but Lululemon itself only expected revenue of $375 million to $380 million, and earnings per share in the range of $0.28 to $0.30. Analysts, on average, were only modeling revenue of $376.8 million, and earnings of $0.29 per share.
In addition, Lululemon narrowed its full-year revenue guidance to a range of $1.78 billion to $1.80 billion, which should result in adjusted earnings per share of $1.72 to $1.77. That's "only" in line with what analysts were expecting, but marked a significant improvement over the stubbornly weak guidance lululemon has turned in with each of its past two quarterly reports.
Why these "blah" results are so good
Going into the announcement, Lululemon shares had also fallen by 45% from the previous year following a slew of negative business developments. Most notably, that included the extended inventory fallout of last year's pants recall, the subsequent resignation of its visionary CEO, Christine Day, and a potential proxy battle from its outspoken founder and former chairman, Chip Wilson.
But now, the effects of the old recall have all but disappeared, Lululemon has a promising new CEO in Laurent Potdevin, and the proxy fight was averted last month after Wilson and Lululemon agreed to a compromise that culminated in the sale of half his massive stake for $845 million.
What's more, last week, Potdevin added: "We are pleased to be on track with the implementation of our strategic road map, and are starting to see the results of our work across product, brand and international expansion. While there is still much to be done, we are making meaningful progress on building a scalable foundation for our next phase of global growth[...]."
Lululemon's "investment year" is almost over
Why is this significant? Because, back in March -- and much to impatient investors' chagrin -- Potdevin insisted "2014 is an investment year with an emphasis on strengthening our foundation, reigniting our product engine, and accelerating sustainable and controlled global expansion." Given all the past troubles Lululemon has weathered, investors are rightly happy to see any signs of progress in its long-term plans before 2014 comes to a close.
Even so, Potdevin's admission that there's "still much to be done" is spot on: Total comparable-store sales were flat for the quarter -- a performance hurt by a 5% decline in core comps, and helped by a 30% jump in its higher-margin direct-to-consumer sales. Not surprisingly, Lululemon says it will continue investing to expand its outperforming DTC business to help offset any continued weakness in core comps. What's more, Potdevin noted they're still working to expand Lululemon's kid-centric Ivivva business, which continued to perform well, with incredible comparable-store sales growth of 36%.
Lululemon also has several new international opportunities in its sights, including a second store soon to open in Chelsea, London, its entry into Singapore's Ion Mall in Q4, its first location in Hong Kong in early 2015, and plans to build another 20 stores in Europe and Asia by the end of 2017. In addition, Potdevin says, Lululemon is currently in discussions with potential partners to help it enter the Middle East by the end of 2015.
Despite signs of progress, Lululemon investors know all too well that such plans can be thwarted by unforeseen challenges. But assuming Lululemon has learned from its past mistakes -- and with shares still down around 35% during the past year -- I'm convinced patient investors who buy now could be handsomely rewarded when this solidly profitable company returns to form.