Lululemon Stock (LULU) Rises on Strong Guidance: Turnaround Gaining Momentum

By Markets Fool.com

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Source: lululemon

Lululemon stock rose 6.7% during trading Monday, as investors applauded the company's strong performance during the key holiday quarter and its increased guidance for the fourth quarter of fiscal 2014. Lululemon issued a press release Monday morning. Let's take a look at the latest announcement from lululemon and what it could mean for investors going forward.

The good news
For the fourth quarter of fiscal 2014, which ends on Feb. 1, 2015, lululemon is now expecting sales in the range of $595 million to $600 million on the back of an increase of between 6% and 7% in comparable sales on a constant currency basis. Management was previously expecting sales of between $570 million and $585 million, based on a low single digits increase in constant currency comparable sales.

Management expects earnings per share of between $0.71 and $0.73 in Q4 versus a previous guidance of $0.65 to $0.69 per share. The increase in both sales and earnings guidance is quite substantial, and it includes the seasonally crucial holiday period.

CEO Laurent Potdevin sounded quite pleased with the company's performance and its potential for a continued strength in the coming year. Potdevin said in the press release:

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Backed by improving trends and strong holiday results, we are entering 2015 in very good shape. Our guests are responding positively to both the women's and men's product assortment, and with the build-out of our senior leadership team near completion, I feel confident in our ability to execute on our growth strategies.

The context
Lululemon is in the midst of a turnaround; the company is trying to recover from quality issues with some of its product and public relations mistakes which have materially affected performance during 2013 and 2014. In March of 2013, the company had to recall 17% of the yoga pants it had in stock because of excessive sheerness. This was a big blow to lululemon's reputation, especially coming from a company selling premium-priced products and focused on quality as a main differentiating factor.

Making things worse, quality problems persisted for quite some time, and many clients felt that the company was not providing an adequate response to their complaints. Adding insult to injury, founder and former chairman Chip Wilson made some remarkably inadequate comments insinuating that women's bodies may be to blame for the problems with the company's products, which understandably produced even more anger.

These mistakes forced lululemon to restructure its management team and operations, and financial performance has been generally uninspiring over the last couple of years. The last earnings report provided some reasons for optimism, though: Total sales during the quarter ended on Nov. 2 increased 10% to $419.4 million on the back of a 3% increase in comparable-store sales.

The latest announcement from lululemon confirms that the turnaround is not only in place, but also gaining momentum, and this is indisputably good news for investors in lululemon stock.

The future
Lululemon is clearly making big improvements, and the company seems to be on track to accelerating sales and earnings growth in the middle term. According to Potdevin, 2015 will be a year of consolidation and investing for growth, and lululemon will benefit from expanding profitability in 2016:

Building on our current momentum, our team is relentless in driving the business forward. With that, over the coming year, we will complete the critical foundational business improvements already under way while also making disciplined, strategic investments in our brand, product, guest experience and international expansion efforts, with the expectation that we will begin to see operating margin leverage in 2016.

Competition is perhaps the biggest risk to watch over the coming years. Players such as Nike and Under Armour are actively expanding into women's products, so lululemon is facing rising competitive pressure.

Trevor Edwards, President of Nike Brands, said during the company's conference call that the women's business is delivering "incredible momentum," and he believes NIke is on track to not only achieving, but perhaps even surpassing its target of $7 billion in revenues from women's products by 2017. Needless to say, considering factors such as brand recognition, scale, and global presence, Nike is major competitor to watch.

Under Armour is also aggressively expanding into women's products. The company's "I Will What I Want" marketing campaign, featuring renowned ballerina Misty Copeland and supermodel Gisele Bundchen, was a remarkable success. Under Amour's women's business is worth around $500 million, less than half the size of its men's business, but CEO Kevin Plank believes Under Armour's women's segment has the potential to be as big or bigger than its men's category.

Lululemon is proving that it can overcome its difficulties. Over the coming quarters it will need to demonstrate that it can continue on the track to recovery while fending off competitors such as Nike and Under Armour, among others.

The article Lululemon Stock (LULU) Rises on Strong Guidance: Turnaround Gaining Momentum originally appeared on Fool.com.

Andrs Cardenal has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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.