Lululemon Athletica Shapes Up, But Is Growth Back for Good?

Source: lululemon athletica.

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Yoga-apparel specialist lululemon athletica reported its fiscal second-quarter earnings this morning, and the company impressed shareholders with strong results and an optimistic look forward for the remainder of the year. After all the issues the retailer has struggled through, though, it might take more than a single quarter's positive report to reassure long-term investors that lululemon is back on track for good.

Why investors loved lululemon athletica's report

The headline news that most people following lululemon will focus on involves how much the company managed to beat expectations. Revenue climbed by 13% year-over-year to almost $391 million, easily topping the $377 million that most investors were looking for from lululemon. Similarly, earnings per share came in at $0.33 per share, beating EPS estimates by $0.04.

Moreover, lululemon also raised its own guidance for the remainder of the year. In the current quarter, lululemon now expects to see sales of $420 million to $425 million, which should translate to a modest rise in total comparable sales. Similarly, full-year revenue expectations of $1.78 billion to $1.8 billion are at the high end of what investors were looking for, and lululemon's new guidance for adjusted EPS of $1.72 to $1.77 is a penny higher than its previous view.

CEO Laurent Potdevin focused on lululemon's strategic shifts to explain the retailer's results. In Potdevin's words, "We are pleased to be on track with the implementation of our strategic road map, and are starting to see the results of our work across product, brand and international expansion." In particular, lululemon's efforts to go beyond workout apparel have given customers items they can wear casually, especially through its new &go line that came out earlier this year. Combined with expanding its geographical footprint and offering men's clothing, lululemon isn't leaving any growth opportunities untapped in its effort to bounce back.

Girls-wear concept store ivivva athletica is part of lululemon's growth strategy. Image source: lululemon.

Has lululemon athletica found its growth pose?

Despite the largely positive report, some aspects of lululemon's quarter still show that the company has further to go before it can put its troubled recent past behind it. Total comparable sales were flat compared to year-ago levels, and store-based comps actually fell 5% even after adjusting for currency impacts. The fact that lululemon was able to make up for those poor showings with a 30% jump in direct-to-consumer sales, which include the company's growing e-commerce presence, is encouraging in some ways, but lululemon clearly hasn't overcome its brick-and-mortar challenges completely at this point.

Moreover, investors will want to keep their eyes on troubling drops in lululemon's margins. Gross margins fell 3.5 percentage points to 50.5%, while operating margins plunged 5.5 percentage points to 17.4%. The need to compress margins in order to win back customers isn't surprising, but it still serves as a reminder to investors of how hard it's fighting to regain the confidence of its core shoppers.

Source: lululemon.

For its part, lululemon acknowledges that it hasn't fully achieved all of its goals. Potdevin noted that "there is still much to be done" as lululemon aims to redouble its efforts on developing innovative products to woo customers back into stores. In particular, lululemon's Whitespace team is focused on working with the company's heralded outside ambassadors to coordinate new-product development with the business ethic and ideals that made lululemon so distinctive in its early days, and Potdevin expects its efforts to bear fruit well into the future.

Given the response of the stock, most investors don't appear to have any major concerns about the pace of lululemon's turnaround. Lululemon shares soared in premarket trading immediately after the announcement, rising 14% as of 8:30 a.m. EDT. Given how far lululemon stock has dropped, a bounce of that magnitude isn't unreasonable, but lululemon will have to deliver on its promise to stay on track with its strategic plan if it wants to sustain today's share-price gains.

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