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Lululemon Athletica Gets Back in Growth Form

By Dan Caplinger – Mar 30, 2016 at 11:01AM

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The yoga-apparel retailer reported a strong holiday quarter, easing the worries of nervous investors.

Image source: Lululemon Athletica.

Businesses that focus on athletic apparel have done extremely well over the past several years, and yoga-retail specialist Lululemon Athletica (LULU 1.09%) played a major role in driving interest in the space. Even as Under Armour (UAA 1.60%) and other broad-based athletic footwear and apparel companies experienced dramatic growth by catering to wide audiences, Lululemon showed the value of targeting a specific niche within the athletic-wear community.

Yet coming into its fiscal fourth-quarter financial report, Lululemon investors were nervous that the holiday season might not have gone as well as they had hoped. Those fears came to naught, however: Lululemon's results were better than most expected, pointing to the successful turnaround efforts that the company has made. Let's look more closely at what Lululemon said about its holiday quarter and what to expect from it in the future.

Stretching to strong results
Lululemon's fiscal fourth-quarter results gave investors much of what they'd missed in recent periods. Revenue jumped 17% to $704.3 million, easily topping the 15% growth rate that most investors were expecting to see. Net income rose 6% to $117.4 million, and that worked out to earnings of $0.85 per share, a nickel better than the consensus forecast of analysts following the stock.

Several of the retailer's performance metrics looked fairly strong. Total comparable sales rose 11% on a constant-dollar basis, with comparable-store sales rising 5% and direct-to-consumer revenue jumping by a third, excluding currency impacts. The impact of the strong U.S. dollar cost Lululemon about four percentage points on its comps and five percentage points on total revenue figures.

However, not everything in Lululemon's report was favorable. Margins remained under pressure, with gross profits falling by more than a percentage point to 50.3% and operating margins falling a more substantial 2.5 percentage points to 23.6%. A big rise in overhead expenses also held back bottom-line growth to a slower rate than sales, which reflects the ongoing challenges Lululemon has faced in keeping costs under control.

CEO Laurent Potdevin was very pleased with the company's performance. "Our Q4 results are a reflection of our ability to deliver a truly unique experience to our guests," he said, and "we made bold moves across the organization, elevating design and innovation and developing our infrastructure to position us for the future."

What's ahead for Lululemon Athletica?
Even with that enthusiasm, Lululemon Athletica hasn't completely solved all of its problems. The retailer's guidance was somewhat mixed. For the fiscal first quarter, the estimated sales range of $483 million to $488 million is in line with analysts' expectations, and Lululemon expects mid-single-digit growth in comparable sales in constant-dollar terms. Earnings of $0.28 to $0.30 per share would be well below the current $0.37 per share consensus estimate.

Similar issues exist with the full-year guidance. The yoga-apparel specialist expects sales of $2.285 billion to $2.335 billion, which is at the lower end of current analysts' estimates. Earnings of $2.05 to $2.15 per share would also represent a potential shortfall from the consensus forecast right now, which rests at the top end of that range.

The disappointing factor in Lululemon's results is that they haven't matched up to what peers in the industry are delivering. Under Armour grew revenues by a whopping 31% in its holiday quarter, boosting earnings per share by nearly 20%, and is offering a 2016 outlook that includes increases to net revenue and operating income of more than 20% each. Lululemon might not have that much growth potential compared to Under Armour, but it certainly has room for improvement.

Despite any concerns about the future, Lululemon investors were happy with its results, sending the stock up 8% in the first hour of trading following the announcement. As long as the yoga-wear retailer remains on an upward trajectory in its business results, the stock should have room to run higher as well.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Under Armour. 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.

Stocks Mentioned

Lululemon Athletica Stock Quote
Lululemon Athletica
$385.99 (1.09%) $4.17
Under Armour Stock Quote
Under Armour
$10.14 (1.60%) $0.16

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