Turnarounds are always difficult to pull off, and for yoga-apparel specialist lululemon athletica (NASDAQ: LULU), the challenge was greater than most. After a quality-control controversy that threatened to destroy the brand, Lululemon worked hard to restore its reputation and regain the trust and support of its loyal customer base. That process took years. But now, the retailer is stronger than ever, and investors have shared in huge financial rewards from a rising stock price.
Coming into Thursday's fiscal third-quarter financial report, Lululemon investors wanted to see signs of continuing growth coming into the key holiday season. The yoga retailer's results were solid, but guidance for the coming quarter wasn't as strong as most had hoped, and that called into question whether valuations for the stock have gotten a bit too high.
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A nice stretch for Lululemon
Lululemon's fiscal third-quarter results had plenty of good signs. Revenue was higher by 21% to $747.7 million, which was better than the roughly $724 million that most of those following the stock had anticipated. Net income jumped 60% to $94.4 million, and even after making some allowances for one-time impairments in the year-earlier quarter, adjusted earnings of $0.75 per share were up a third from year-ago levels and topped the consensus forecast among investors for $0.70 per share on the bottom line.
Looking more closely at the financial statements, Lululemon showed fundamental strength. Total comparable sales were higher by 17%, with a 6% rise in comps at its brick-and-mortar locations accompanied by a 44% leap in direct-to-consumer sales. Currency impacts were a mild headwind, costing the retailer about a percentage point of revenue and comps.
As we've seen in past quarters, expense management played a key role in boosting Lululemon's results. Gross margin climbed more than 2 percentage points from year-ago levels on an adjusted basis, and adjusted operating margin was higher by nearly a full percentage point. Also, one thing to keep in mind is that as a Canadian company, Lululemon hasn't seen much benefit from the dramatic reduction in U.S. tax rates, and so its bottom-line growth is due almost solely to organic gains in corporate efficiency.
Lululemon did move more assertively on the expansion front than it has during most of the past year. The retailer opened 11 new stores during the period, and it now boasts more than 1.35 million square feet of retail space in its brick-and-mortar network.
CEO Calvin McDonald kept the results in perspective: "Lululemon has achieved a high level of success over the past year and has established a solid foundation to continue to build our future." McDonald noted his excitement at just how well received Lululemon's product lines have been and how positively customers have responded to the company's efforts to build out a better digital experience.
Can Lululemon keep extending itself?
The company remains optimistic. In McDonald's words, "I look forward to what's ahead for our brand as we strive to exceed the expectations of our guests."
Updates to Lululemon's full-year guidance were generally positive. The company boosted its estimates for total revenue, now expecting $3.235 billion to $3.245 billion, which is fully above the previous range provided. Earnings of $3.65 to $3.68 per share on an adjusted basis would be $0.15 to $0.20 higher than it projected three months ago.
However, those boosts largely reflect the strong performance in the third quarter, and near-term expectations for the fourth quarter weren't quite as rosy. Revenue of $1.115 billion to $1.125 billion would be just about exactly what most of those following the stock were already expecting, and earnings of $1.64 to $1.67 per share almost perfectly surround the current $1.65 consensus forecast among investors.
Perhaps because of what was seen as tepid guidance, investors seemed less than excited about the release overall, and the stock fell between 2% and 3% in after-hours trading following the announcement. Yet with the yoga retailer largely sustaining its pace of growth, it's in position to exceed its own expectations and deliver the strong results that shareholders have come to rely on from the company.
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