Why Shareholders Are Happy With lululemon athletica Inc.'s Mixed Third Quarter

By Markets Fool.com

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Another quarter, another post-earnings spike for stockholders oflululemon athletica . Unlike last quarter's solid beat on both the top and bottom lines, however, lululemon's results were technically mixed this time around.

The numbers
Nonetheless, shares of the yoga apparel specialist jumped more than 10% early today after it announced that third-quarter revenue climbed 10% year over year, to $419.4 million. That figure was bolstered by 3% growth in total comparable-store sales, including a 27% spike in direct-to-consumer revenue. Meanwhile, lululemon's earnings per share declined roughly 7% to $0.42, aided by its expenditure of almost $73 million to repurchase 1.8 million shares of common stock during the quarter. Analysts had expected lululemon to achieve lower earnings of $0.38 per share, but on slightly higher revenue of $424.8 million.

For the current quarter, lululemon expects low single-digit growth in comps to result in net revenue of $570 million to $585 million, along with earnings per share in the range of $0.65 to $0.69. The midpoint of both ranges sits below Wall Street's expectations for fiscal fourth-quarter earnings of $0.72 per share and sales of $593.5 million.

On one hand, that meant lululemon also had to lower its full fiscal 2014 revenue guidance to a range of $1.765 billion to $1.780 billion, compared to its previous guidance for $1.780 billion to $1.800 billion. On the other hand, it simultaneously boosted its full-year guidance for earnings per share to a range of $1.53 to $1.57, or $1.74 to $1.78 accounting for a nonrecurring tax adjustment from early this year from the repatriation of foreign earnings to fund the share repurchase program. Previously, lululemon projected those two per-share earnings ranges to be $1.51 to $1.56, and $1.72 to $1.77, respectively. Analysts, on average, had modeled 2014 revenue of $1.79 billion and earnings of $1.77 per share, both of which are again above the midpoint of lululemon's guidance.

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Why investors are rejoicing
Apart from lululemon's strength in third-quarter earnings, it initially doesn't seem there's much to like about this report. So why the 10% pop?

First, to explain its revenue weakness, lululemon pointed to a combination of West Coast port delays, a lower Canadian dollar, and delayed store openings. Nothing here raises significant red flags relating to problems underlying lululemon's actual business. That's a great thing, considering the slew of challenges lululemon has worked to overcome, from buttoning up its supply chain after last year's massive black Luon bottoms recall, to resolving a potential proxy battle with its brash, outspoken founder and now-former chairman, Chip Wilson.

In addition, while lululemon's 3% comparable-store sales growth seems modest, it's a marked sequential improvement over last quarter's flat comps. For the first three quarters of the year, total comparable-store sales growth sits at roughly 1%.

"I am pleased that our third quarter results demonstrated sequential improvements as the quarter progressed," said lululemon CEO Laurent Potdevin in a press release, "with all key facets of our business-brand, guest experience, and product- contributing to our momentum."

Next, lululemon shareholders have grown accustomed to receiving stubbornly light guidance from the company. That has the been the case for each of its past three quarters, during which management placed outsized emphasis on using 2014 as an "investment year" to build a stable foundation for profitable worldwide growth. Again, given lululemon's past challenges, investors are right to be happy that the guidance shows even a little progress toward achieving that goal.

In the end, as long as lululuemon continues taking steps in the right direction given its already solidly profitable business, I'm happy to continue holding tight to my shares.

The article Why Shareholders Are Happy With lululemon athletica Inc.'s Mixed Third Quarter originally appeared on Fool.com.

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