The Exchange

Is Lululemon’s Hot Stretch Slowing?

The Exchange

By Jennifer Kwan, Insight Blog, Y!Finance Canada

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Lululemon Athletica Inc (LULU), known for its body-hugging yoga gear,  posted hearty gains in quarterly profit and revenue, but signaled sales growth would slow by year's end. What does this mean for the future of the $100 yoga pant?

Lululemon said on Thursday it expects fourth-quarter net revenue to be in the range of $475 million to $480 million, with same-store sales rising in the high single digits, compared to growth of 26 percent in the same period last year. That initially sent the stock sharply lower in premarket trade as investors glommed on to the tweaked outlook.

But that disappointment quickly subsided and by mid-afternoon the stock was up more than 6 percent at $72.42 on the Toronto Stock Exchange.

That's typical of knee-jerk, "Lululemon mania," said Brian Sozzi, chief equities analyst at New-York based NBG Productions, explaining the pre-market move. He noted the market then largely shrugged off that guidance, which most view as conservative.

"You immediately think whatever guidance they put out there for the fourth quarter is going to be beat probably pretty handily," he said.

"Lululemon continues to thwart the competition pretty successfully," he added. "They are thwarting their competition by not lowering prices. They're very much maintaining their premium brand positioning."

The Vancouver-based retailer said on Thursday it earned $57.3-million, or 39 cents a share, in the quarter, up from $38.8-million or 27 cents a year earlier. It said same-store sales, a key measure for the retail industry, rose 18 percent. Sales climbed 37 per cent to $316.5-million, the company said.

Christine Day, Lululemon's chief executive, also highlighted the company's international push, which is now entering a phase of more "on the ground" development. For example, Day said based on the success of its Hong Kong showrooms the company is actively looking for real estate there.

"Overall, we intend to go deeper in showrooms in Europe and Asia over the next 24 months and we will begin pre-seeding activities in up to 15 countries over the next two years," she said in a conference call with analysts. Lululemon usually moves slowly into new markets and uses showrooms to test them.

In the end, the market shrugged off the downtrodden outlook, and the market largely expects consumers will continue to stretch those dollars to purchase Lululemon gear.

"They're the best fitting pants on the market and you pay for that," said Jennifer Black, chief executive of independent research firm Jennifer Black & Associates. "I don't know what other pants that are going to make you look that good."

In a note ahead of the earnings, Black characterized Lululemon as a status symbol.

"LULU is a status symbol and its exclusivity with high demand product will perpetuate that view for a long time to come. Lululemon is a strong company with significant growth ahead," she wrote.

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