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Lulu Raises Outlook for 4Q

Zacks Equity Research

Expecting higher revenue in the fourth quarter, Lululemon Athletica Inc. (NasdaqGS:LULU - News) has recently raised its fourth-quarter 2011 earnings guidance range. Currently, the yoga-inspired athletic apparel company forecasts its earnings for the fourth quarter of fiscal 2011 to be in the range of 47 to 49 cents per share instead of its previous guidance of 40 to 42 cents.

Lululemon is expecting earnings growth of approximately 47% to 53% from the prior-period earnings of 32 cents per share, up from its previous forecasted range of 25% to 31%. The current Zacks Consensus Estimate stands at 49 cents per share, which is at the higher end of the company’s guidance range.

As per management, the existing store upgrades and new store openings have the potential to generate net revenues of $358 to $363 million for the fourth quarter of fiscal 2011 compared with $327 to $332 million guided earlier. The company also anticipates comps to grow in the range of low-to-mid twenties for the upcoming fourth quarter, instead of the previously forecasted growth range of low-to-mid teens.

Lululemon’s holiday sales were also encouraging as the company successfully lured the shoppers with its bright color palette offerings during the season. Moreover, the momentum continues with the new spring product offerings.

A Great Performance Through 3Q

The first three quarters of fiscal 2011 have been a great success for the company. During the first three quarters of fiscal 2011, the company’s rising comparable and direct-to-consumer sales have positively influenced its quarterly performance. Comparable and direct-to-consumer sales in the first quarter jumped 16% and 51%, resulting in a rise of approximately 63% in earnings per share.

During the second quarter, Lululemon’s earnings per share surged approximately 73%, primarily driven by a rise of 20% and 93% in comparable and direct-to-consumer sales, respectively. The momentum continued in the third quarter as Lululemon reported a rise of 50% in third-quarter 2011 earnings on the heels of strong growth in comparable and e-commerce sales of 16% and 71%, respectively.

Our Take

We believe that Lululemon's continued focus on introducing technical athletic products made from innovative and diversified fabrics such as yoga pants and tops will further enhance its market proposition. Further, the company’s continuous strategic investments to expand its global footprint while evaluating the performance of existing stores will further boost both its top and bottom lines.

The company currently competes with retailers such as Nike Inc. (NYSE:NKE - News) and Under Armour Inc. (NYSE:UA - News), which intend to grab market share in active wear or lifestyle consumer products. Moreover, the athletic apparel industry is characterized by rapidly changing customer preferences and technology. We believe that Lululemon’s continuous focus on product innovation will keep it ahead of its competitors.

Currently, Lululemon maintains a Zacks #2 Rank, which translates into a short-term Buy rating. Moreover, we are retaining our long-term Outperform recommendation on the stock.

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