Lululemon Shapes Up Its Financial Results

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There are signs of life again at lululemon athletica (LULU). Shares of the retailer of high-end yoga apparel opened sharply higher on Thursday after it posted better-than-expected quarterly results. Offering up a rosier near-term outlook also isn't hurting. The encouraging report comes at a welcome time for roughed-up investors. The stock was closing in on another three-year low ahead of the financial results.

Net sales climbed 13 percent to $390.7 million in Lululemon's fiscal second quarter, comfortably ahead of the mere 9 percent advance that analysts were forecasting. The path down the income statement wasn't as kind. Margins contracted, leading to a dip in operating profits. At the bottom of the income statement we see net income sliding 14 percent to $48.7 million, or $33 cents a share. The good news for investors is that Wall Street was bracing for an even larger drop, targeting earnings of just 29 cents a share for the period.

Investors are cheering the news. It certainly beats the 16 percent plunge that the stock suffered the day it posted its fiscal first-quarter results three months ago. Given everything that the 270-store chain has gone through since early last year, shareholders will take the relative victory over the absolute one.

Sheer Madness

For a few years it seemed as if Lululemon was the belle of the mall. Affluent shoppers didn't have a problem spending $100 for a pair of yoga pants or other workout essentials. Sales per square foot and comparable-store sales were off the charts, and that's a big deal for landlords who collect rent based on what a tenant is making and benefit from what Lululemon does to attract well-to-do customers to the mall itself.

Sentiment started to show signs of turning in 2011. Printing "Who is John Galt?" on shopping bags may have delighted fans of Ayn Rand's "Atlas Shrugged," but it proved polarizing, alienating those who disagree with Rand's political ideals. Founder Chip Wilson made the call to pay tribute to the novel that helped shape his philosophy when he was young and his corporate vision as he got older. There was also the tragic 2011 incident in which a Lululemon employee at a Maryland store brutally murdered her manager after the store closed for the night.

However, the clear tipping point at Lululemon had to be the recall of its black Luon yoga pants last year. Quality-control checks failed to realize that the proprietary pants that it was selling in March 2013 were too sheer. They were see-through in some cases when they were stretched, and that's a problem given the wide gamut of yoga poses. The recall stung more than any of the 2011 events because it devalued the quality of the actual product. These were $100 pants, after all. Under a flurry of controversy, the chain's popular CEO stepped down.

Then there was Wilson. The founder and chairman's John Galt stunt wasn't the only thing that backfired. He was known for making controversial comments, but then he went too far in addressing the struggle to grow sales in the aftermath of the recall. He called out some of the retailer's more full-figured shoppers.

"Some women's bodies just actually don't work for it," he told Bloomberg TV in light of the pilling problem that its yoga pants were having. "It's really about the rubbing through the thighs, how much pressure is there." It was the last straw. The board persuaded him to step down as chairman.

Down the Stretch

There was plenty to like in Thursday morning's report. Sales are growing, and inventory levels are back in control. More important, Lululemon easily surpassed its own guidance issued three months ago when it was forecasting a profit of no more than 30 cents a share on $375 million to $380 million in revenue. Lululemon also boosted its outlook for the balance of the year, a welcome break from having had to lower its guidance in previous quarters.

Things still aren't where they need to be to call this a turnaround. Comparable-store sales declined 5 percent for the quarter. It was new sales and a spike in consumer-direct orders that fueled overall revenue higher. However, Lululemon does see that getting better in the current quarter. Things could be bottoming out here, and given all of the things that have happened over the past year and change, it's a yoga pose worth appreciating.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica. Try any of our Foolish newsletter services free for 30 days. Check out our free report on high-yielding dividend stocks.
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