Lululemon Beats Expectations in 3Q

Lululemon Athletica Inc. (LULU - Snapshot Report), a leading yoga-inspired athletic apparel and accessories retailer, posted better-than-expected third-quarter 2012 results with earnings per share of 39 cents, ahead of the Zacks Consensus Estimate of 37 cents. Quarterly earnings also increased 44.4% from 27 cents earned in the year-ago quarter.

The company’s strong performance in the third quarter was attributed to its unparalleled execution, robust community engagement, attractive product and continued strength in e-commerce business.

Quarter in detail

Lululemon’s quarterly revenue of $316.5 million was up 37% from $230.2 million in the year-ago quarter. Moreover, quarterly revenue also surpassed the Zacks Consensus Estimate of $305 million. Revenue growth in the quarter mainly rode on an 18% upside in comparable-store sales and 89% surge in Direct-to-Consumer revenue. Direct-to-Consumer revenue of $45.1 million in the third quarter represented about 14.3% of total revenue.

Gross profit during the quarter increased 36% to $175.3 million from the prior-year quarter. However, gross margin contracted 40 basis points to 55.4% compared with 55.8% in the prior quarter, primarily due to increased cost of goods sold as a percentage of total revenue.

Operating income increased 35% to $80.6 million compared with $59.7 million a year ago while operating margin contracted 40 basis points to 25.5%.

Balance Sheet

Lululemon exited the third quarter of 2012 with cash and cash equivalents of $439.4 million, an improvement of 58.7% from the end of the third quarter of 2011. Inventories at quarter end summed up to $164.7 million versus $129.2 million last year. Stockholders' equity came in at $767.8 million. Besides, the company is free from any long-term debts.

As of the nine months ended October 28, 2012, cash flow from operating activities was $113.2 million compared with $53.5 million at the end of the prior-year period.

During the third quarter, the company opened 12 new stores, bringing the total store count to 201 stores in North America and Australia at the end of the quarter.

Management Guidance

For fourth quarter 2012, management estimates to generate net revenues of $475 to $480 million. Comps are expected to rise in the high single-digits range in constant currency for the upcoming quarter. Therefore, the company expects fourth quarter earnings in the range of 71 cents to 73 cents per share. The company also guided shares outstanding of 145.9 million and a tax rate of 29.4% in the fourth quarter.

For fiscal 2012, management expects revenue in the range of $1.360 billion to $1.365 billion. Based on this assumption, the company anticipates earnings between $1.81 and $1.83 per share for fiscal 2012. Moreover, the company anticipates shares outstanding of 145.8 million and a tax rate of 29.0%.

Our Take

We believe that Lululemon's strategic initiatives coupled with e-commerce business will boost both its top and bottom lines.

Lululemon mainly competes with Nike Inc. (NKE - Analyst Report) and Under Armour Inc. (UA - Snapshot Report). The company has a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Currently, we are retaining our long-term ‘Outperform’ recommendation on the stock.