Why Lululemon Athletica Inc. Stock Plunged Today

By Markets Fool.com

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What happened

Shares of lululemon athletica Inc. (NASDAQ: LULU) closed down 10.6% Friday after the yoga and athletic-apparel specialist released stronger-than-expected fiscal second-quarter 2016 results.

So what

Quarterly revenue grew 14% year over year (15% at constant currencies), to $514.5 million, driven by both new locations and total comparable-sales growth of 4% (5% at constant currencies). That translated to a 12.5% increase in net income, to $53.6 million, and 14.7% growth in net income per share, to $0.39. Excluding a $1.9 million net income tax recovery and a $0.3 million related net interest expense, diluted earnings per share were $0.38.

For perspective, both the top and bottom lines came in near the high end of Lululemon's guidance provided last quarter, which called for revenue of $505 million to $515 million, including total comparable sales growth in the mid-single digits, and diluted earnings per share of $0.36 to $0.38.

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What's more, Lululemon CEO Laurent Potdevin noted that this quarter marked "an important inflection in our gross margin and earnings performance."

Potdevin elaborated, "Our progress in the second quarter, especially in gross margin and inventory, marks the beginning of our recovery in profitability and sustainable long-term growth."

To be fair, it's evident the market was hoping for more. Though we don't usually pay close attention to Wall Street's short-term demands, analysts' consensus estimates predicted the same earnings of $0.38 per share, but on slightly higher revenue of $515.5 million.

Now what

Lululemon also increased its full-year guidance and now expects fiscal 2016 revenue of $2.325 billion to $2.35 billion, with diluted earnings per share of $2.11 to $2.19, or $2.07 to $2.15 adjusted for tax and interest items recognized during the first half of the year. By contrast, Lululemon's previous guidance called for revenue of$2.305 billion to $2.345 billion, and earnings of$2.08 to $2.18, or $2.05 to $2.15 adjusted for tax and interest items.

Here again, however, Wall Street was already looking for both full-year revenue and earnings near the high ends of Lululemon's new guidance ranges.

That's not to say Lululemon isn't once again under-promising with the intention of over-delivering. And it's worth keeping in mind that shares of Lululemon are still up more than 30% year to date even after today's drop. But in the end, while the market's reaction may not indicate as much, this was a solid quarter in which Lululemon delivered exactly as it promised. And I think patient, long-term investors should be more than happy with where the company stands today.

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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.