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Lululemon Silences Skeptics With an Impressive Holiday Season

By Steve Symington - Jan 13, 2016 at 8:00AM

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Think Lululemon's premium image is in trouble? Think again.

It's OK, lululemon athletica (LULU 1.49%) investors; you can exhale now.

The yoga apparel specialist increased its fourth-quarter 2015 guidance late Monday, effectively dispelling concerns over its performance during the crucial holiday season. Shares of lululemon rose as much as 12% in early trading before closing up around 4% as a result.

More specifically, Lululemon now anticipates fourth-quarter revenue in the range of $690 million to $695 million, representing year-over-year growth of roughly 15%, or 19% on a constant-currency basis. That should translate to diluted earnings per share of $0.78 to $0.80, good for a slight increase from earnings of $0.78 per share in the same year-ago period.

Analysts, on average, were anticipating earnings would stay flat from last year on revenue of just $678.3 million. To their credit, however, Lululemon did disappoint Wall Street last month by issuing weak guidance for revenue between $670 million and $685 million, and earnings per share of $0.75 to $0.78. Both ranges were well below consensus estimates at the time, which called for revenue of $690 million and earnings of $0.86 per share.

In short, had Lululemon more accurately predicted its holiday-quarter performance at last month's call, it would have exceeded expectations on revenue but still fallen short on the bottom line.

"A very successful holiday season"
Lululemon CEO Laurent Potdevin elaborated on the new guidance:

We had a very successful holiday season driven by strong execution in stores and online during the key holiday weeks. Sales for the fourth quarter are exceeding expectations, and gross margin rates and expenses remain in line with prior guidance. We are looking forward to 2016 and will enter the year with a very strong leadership team across the company that is relentlessly driving our strategic priorities and long-term vision.

For perspective, during last quarter's call management told investors to expect gross margin in the range of 49% to 50%, which will mark a solid continued expansion from the 46.9% and 46.8% gross margins Lululemon achieved in the second and third quarters of last year, respectively.

This should also settle analysts' concerns in recent quarters that Lululemon's gross margin pressure was possibly the result of either higher markdowns or ongoing quality issues that previously plagued the company. If waning consumer interest in Lululemon's premium brand image forced it to continue marking down its high-priced products, it would almost certainly have negative repercussions for Lululemon's ability to support growth while maintaining the superior margins to which investors have become accustomed. 

To the contrary, according to Potdevin this past September, that margin pressure stemmed primarily from investments to build a "scalable, complex platform" to support Lululemon's international growth ambitions. Meanwhile, the company pushed forward with plans to sell much of its excess inventory -- incurred after a port disruption in the first quarter -- with little to no markdown risk.

But Lululemon isn't set to release its fiscal fourth-quarter 2015 results until later in March. So why spill the beans now?

More than anything, Lululemon management was set to give a presentation Tuesday evening to analysts and investors at this year's ICR conference in Florida. So it helps to offer the latest information on your company's efforts to achieve sustained, profitable growth on a global scale. Of course, it helps if those efforts are succeeding. And if Lululemon's new guidance is any indication, investors can rejoice knowing that seems to be the case.

Steve Symington owns shares of Lululemon Athletica. The Motley Fool owns shares of and 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.

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