What to Expect When Lululemon Reports 3Q Earnings

The Vancouver-based yoga apparel company Lululemon Athletica is scheduled to report third-quarter earnings on Thursday, December 12. Over the past year, Lululemon has dealt with its fair share of quality control issues with its performance apparel. For example, its Luon pants fabric turned out to be see-through and it had to be recalled as a result.

Lululemon's latest issues involved customers complaining about yoga pants pilling and seams unraveling. Fortunately, Lululemon reported solid second-quarter results for fiscal 2013. This week we will see how Lululemon's third-quarter earnings wrapped up and whether or not it, too, experienced top and bottom-line growth.

Likely performance in the third quarter
Based on the company's own words from its second-quarter earnings release, Lululemon is unlikely to meet Wall Street estimates, let alone beat estimates of $0.44 a share. Lululemon has lowered its guidance for the third quarter as well as its full-year projection based on the company's fall apparel and accessories arriving late to stores.

In fact, when Lululemon lowered its own EPS estimate to $0.39-$0.41 and predicted revenue of $370 million-$375 million, its stock price fell after the market close as investors questioned the company's strength and lack of confidence. On the other hand, Lululemon still expects same-store sales to increase in the third quarter as it is confident that the Luon pants setback is a thing of the past. Lululemon is taking a cautious approach nonetheless, realizing that its competition is following close behind.

Athletic apparel wars
The Gap  brand Athleta is Lululemon's most direct competitor. Athleta sells women's athletic apparel as well as performance gear. Both retailers also offer yoga classes to customers and discounts to yoga instructors. Gap recently reported its third-quarter earnings on November 21, beating Wall Street estimates by $0.01 with earnings jumping 14.3% to $0.72 a share over the same period in 2012, and total revenue increasing by 2.9%.

Gap has experienced solid growth over the past year and a half due to the company cutting operating costs by 5.6% over the past year. In addition, Gap, Inc has been aggressively opening Athleta stores near or within the same facilities that hold Lululemon stores. In its most recent third quarter, in fact, Gap opened 15 Athleta stores for a total of 61 stores at the end of the quarter.

Lululemon, on the other hand, opened just half as many stores in its most recent quarter, with eight stores opened in both the first and second quarter of fiscal 2013 which brought its total store count to 226. All in all, Athleta is on a roll with seven positive quarters of same-store sales growth, and Lululemon had better watch out as Athleta continues to model Lululemon's business practices and increase its store count. 

Foolish takeaway
Shareholders should expect Lululemon to come close to or meet Wall Street's third-quarter estimates. It is doubtful that the company will beat estimates due to the late delivery of fall merchandise to its stores. Having said that, Foolish investors should stay focused on the long term. Let's not forget that Lululemon's customers still love the company's products. Shareholders should remain hopeful about the company's long-term growth despite minor setbacks.

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Editor's note: A previous version of this article stated that Athleta also sells men's apparel. The Fool regrets the error.

The article What to Expect When Lululemon Reports 3Q Earnings originally appeared on Fool.com.

Fool contributor Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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