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Lululemon Athletica Inc. (LULU - Analyst Report), a leading yoga-inspired athletic apparel and accessories retailer, posted better-than-expected fourth-quarter fiscal 2012 results with earnings per share of 75 cents, ahead of the Zacks Consensus Estimate of 74 cents. Quarterly earnings also increased 47.1% from 51 cents earned in the year-ago comparable quarter, primarily driven by robust sales growth along with improved margins.

Quarter in detail

Lululemon’s quarterly revenue of $485.5 million was up 30.7% from $371.5 million in the comparable year-ago quarter and inched past the Zacks Consensus Estimate of $485.0 million. Revenue growth in the quarter mainly rode on a 10% upside in comparable-store sales and a 56% increase in Direct-to-Consumer revenue. Direct-to-Consumer revenue of $78.3 million in the fourth quarter represented about 16.1% of total revenue.

Gross profit during the quarter increased 31% to $274.5 million from the prior-year quarter. Gross margin expanded 20 basis points to 56.5% compared with 56.3% in the fourth quarter of fiscal 2011 primarily due to improved product margin and lower occupancy and depreciation expenses as a percentage of sales.

Selling, general & administrative (SG&A) expenses increased 31.1% to $121.9 million compared with $93.0 million in the same period of fiscal 2011, while as a percentage of sales it remained flat year over year at 25.1%. The dollar increase in SG&A expenses was mainly due to higher compensation and operating costs related to new store openings.

During the quarter, the company’s operating income increased 31.4% to $152.6 million compared with $116.1 million a year ago, primarily driven by strong top-line growth. Consequently, operating margin improved 20 basis points to 31.4%.

We believe that Lululemon’s strong performance in the fourth quarter was attributable to its unparalleled execution, robust community engagement, attractive product and continued strength in direct-to-consumer business.

Balance Sheet

Lululemon, which competes with New York & Co. (NWY - Snapshot Report), Abercrombie & Fitch Co. (ANF - Analyst Report) and Ascena Retail Group Inc. (ASNA - Snapshot Report), exited fiscal 2012 with cash and cash equivalents of $590.2 million, up 44.2% from fiscal 2011 level. Inventories at the end of the fiscal year summed up to $155.2 million versus $104.1 million in fiscal 2011. Stockholders' equity came in at $887.3 million. In addition, the company is free from any long-term debts.

Lululemon exited fiscal 2012, ended Feb 3, 2013, with cash flow from operating activities of $280.1 million compared with $203.6 million at the end of fiscal 2011.

During the fourth quarter, the company opened 10 new stores, bringing the total store count to 211 stores in North America and Australia at the end of fiscal 2012.

Management Guidance

On Mar 18, Lululemon recalled its black Luon pants and crops from stores and its website. The company noted that the products that were shipped to stores on Mar 1 had quality related issues, and thus had to be recalled.

Management stated that the product recall would significantly hurt its top and bottom line in the first quarter of fiscal 2013. Consequently, Lululemon lowered its sales forecast for the quarter. The company now expects its comparable-store sales (comps) to increase between 5% and 8%, down from the previous projection of 11%.

Following the recall, this Zacks Rank #4 (Sell) company lowered its sales forecast range to $333–$343 million from its earlier projected range of $350–$355 million. Moreover, the company is expecting to report first-quarter fiscal 2013 earnings in between 28 cents and 30 cents per share.  The product recall is likely to negatively affect Lululemon’s first-half fiscal 2013 earnings per share by 11–12 cents.

For fiscal 2013, the company is expecting revenue to come in the band of $1.615 billion to $1.640 billion and earnings are anticipated to remain in between $1.95 and $1.99 per share.

Lululemon designs, manufactures, and distributes athletic apparel for women and men. The company offers a line of apparel and accessories, including fitness pants, shorts, tops, and jackets designed for athletic pursuits, such as yoga, dance, running, and general fitness under the lululemon athletica brand name. Its fitness-related accessories comprise an array of items, such as bags, socks, underwear, yoga mats, instructional yoga DVDs, water bottles, and headbands. The company sells its products through a chain of corporate-owned and operated retail stores, independent franchises and a network of wholesale accounts.

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