Lululemon Continues Hot Streak With Strong Q2 Results

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Lululemon Athletica ( LULU ) has built a reputation for delivering consistently strong financial growth, and the clothier added to that reputation Friday with better-than-expected second-quarter earnings.

The designer of high-end yoga and athletic apparel posted Q2 profit of 34 cents a share, up 31% from the prior year and 3 cents above analysts' views. The bottom line benefited from a lowered tax rate based on early-quarter adjustments.

Revenue for the quarter rose 33% from a year earlier to $282.6 million, matching estimates. Same-store sales gained 15%.

Lululemon's stock price spiked 10% to a four-month high intraday before closing up 12.4% to 77.14. Shares have risen more than 40% since the beginning of August. They have more than quadrupled over the last two years.

"We continue to strive for the right balance between strong growth and maintaining our market leader focus on execution, innovation and investments in infrastructure and while doing so delivered another strong quarter," Lululemon Chief Executive Christine Day said in a statement.

The company's 31% earnings growth rate was actually the slowest quarterly rate in three years. It had grown profit at least 50% the previous 10 quarters. Sales have risen at least 30% over the last dozen quarters.

Not A Fad

That kind of consistency has helped calm worries that Lululemon is little more than a hot fashion fad. Defenders say the company's success is more the result of strong operations and fresh merchandising.

"Our (Q2) store checks revealed frequent new product drops that helped maintain strong traffic trends and drive sales," D.A. Davidson analyst Andrew Burns noted in a recent report. "New bolder colors and unique prints are helping to keep the merchandise mix exciting. Prints, including dots, mirage and beachy floral, were an excellent contrast to the core solid color product."

On the design side, Lululemon has gained renown for its innovative use of fabrics and technology. Its Luon fabric is designed to wick away moisture, move with the body and reduce irritation. Its Silverescent brand incorporates silver directly into the fabric to reduce odors.

The popularity of these and other brands has helped Lululemon become one of the fastest-growing names in the specialty retail sector.

The company ended last quarter with 189 stores in North America and Australia, up from 174 at the beginning of the year.

Analysts figure the number of stores can eventually grow to more than 600 -- half in North America, and half overseas.

For now, the vast majority of its stores are located in the U.S. and Canada. But earlier this year, Lululemon opened showrooms in London and Hong Kong. Other likely international growth markets include Japan, Australia, New Zealand and Western Europe.

In North America, much of Lululemon's growth is expected to come from outside its core urban markets such as New York, Los Angeles, Chicago and Boston.

Meanwhile, Lululemon continues to grow its online sales. Direct-to-consumer revenue rose 91% from the previous year to $35.4 million, or 12.5% of the total. That was up from 8.8% of the total during the second quarter of 2011.

Lululemon guided third-quarter earnings of 34 cents to 36 cents a share vs. analysts forecasts for 33 cents. It sees Q3 revenue of $300 million to $305 million, with same-store sales in the low- to mid-teens.

The company also raised its full-year earnings guidance to a range of $1.76 to $1.81 a share from prior guidance of $1.55 to $1.60. It forecast full-year revenue of $1.35 billion to $1.36 billion vs. prior guidance of $1.32 billion to $1.34 billion.

"Our store checks in August suggest an early fall emphasis on outerwear, which appears to have a greater presence in stores compared to the third quarter of 2011," analyst Burns noted.

Lululemon might also see increased competition in coming quarters. The company competes against some of the best-known and most successful names in apparel, includingUnder Armour ( UA ),Gap (GAP),Nike ( NKE ) andPVH ( PVH ) .

Emerging Competition

None of its rivals has managed to match Lululemon's success at the higher end of the athletic apparel market, analysts say.

But that hasn't stopped a growing number of companies from trying to get a bigger piece of the market by offering lower prices on similar designs.

CEO Day addressed the prospect of rising competition on a conference call with analysts Friday, saying "while others may try to mimic parts of our business, it is impossible to copy a personality."

Lululemon is also making it hard to copy its styles. In August it filed a patent lawsuit claiming PVH's Calvin Klein brand and manufacturerG-III Apparel ( GIII ) ran afoul of three patents on the design of its yoga pants.

"When we see attempts to mirror our product we will take the necessary steps to protect our assets," Day said on the conference call.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: GIII , LULU , NKE , PVH , UA

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