Wear Yoga Pants, Get Rich

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It's not a surprise when lululemon athletica (NAS: LULU) posts another blowout quarter.

Investors have come to expect scintillating growth from the 147-unit retail chain of upscale fitness apparel, and this morning offered up more of the same.

Net revenue climbed 39% to $212.3 million, fueled by expansion, a 93% spike in consumer-direct online sales, and a whopping 20% gain in comparable-store sales. Earnings soared 76% to $38.4 million -- or $0.26 a share. The bottom line benefited from the company's change of heart in repatriating some of its unremitted earnings, thus lowering its effective tax rate. However, there are no smoke and mirrors here. Gross and operating margins widened nicely on a pre-tax basis.

Analysts figured that Lululemon would only earn $0.23 a share on $206.4 million in net revenue, but what else is new? The ritzy retailer for rich people that sweat has made a sport out of humbling the prognosticators.

Let's go over how Lululemon's performance stacked up against Wall Street's targets over the past four quarters on a split-adjusted basis.

QuarterEPSEstimatedDifference
Q3 2010$0.18$0.1339%
Q4 2010$0.32$0.2910%
Q1 2011$0.22$0.1916%
Q1 2011$0.26$0.2313%

Source: Thomson Reuters.

The bad news for Lululemon shareholders is that the company's near-term guidance isn't as hot as its $98 yoga pants. Its outlook calls for a profit of $0.22 to $0.24 a share on $225 million to $230 million in revenue. Analysts were perched at the high end, expecting a profit of $0.24 a share on $229.4 million. But that's not what's worrying investors this morning -- they know that Lululemon is overly conservative with its guidance. Notice how sequential revenue is forecasted to move higher, while profitability is pegged to move lower. As great as Lululemon is, margin contraction can be a real party pooper.

This doesn't mean that customers aren't still flocking to Lululemon. The chain sees comps continuing to grow in the double digits. It'll just be earning less money on every sale.

To be fair, it was probably going to be hard to top this fiscal second quarter. Divide earnings of $38.4 million by the $212.3 million in revenue and you get net margins of 18.1%. How many retailers do you know that can pocket more than $0.18 on every dollar they ring up?

The projected growth in sales also shouldn't dissuade investors from the thesis that luxury retailers are doing surprisingly well in this otherwise iffy climate. You've already seen that in the recent wave of earnings reports. Upscale jeweler Tiffany (NYS: TIF) , pricey denim designer True Religion (NAS: TRLG) , and athletic apparel specialist Under Armour (NYS: UA) have blown past analyst profit targets in recent quarters. The same can be said for Coach (NYS: COH) and UGG maker Deckers Outdoor (NAS: DECK) .

I would be more concerned about Lululemon's top line slipping than the margin contraction suggested by its guidance for the current quarter, which makes today's 4% dip at the open a buying opportunity.

Do you know a hotter retailer? Prove it! Top Lululemon in the comment box below.

At the time this article was published The Motley Fool owns shares of Under Armour, lululemon athletica, and Coach.Motley Fool newsletter serviceshave recommended buying shares of Coach, lululemon athletica, and Under Armour. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz isn't cut out for yoga, and he does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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