September 11, 2014 / 1:28 PM / 4 years ago

Lululemon raises outlook as profit beats, but store traffic slips

TORONTO (Reuters) - A jump in online sales helped yogawear chain Lululemon Athletica Inc (LULU.O) report a higher-than-expected quarterly profit on Thursday, mitigating some of the damage from a series of mishaps last year, while spurring it to increase its full-year earnings forecast and pushing its stock higher.

People walk past a store of yogawear retailer Lululemon Athletica in downtown Vancouver June 11, 2014. REUTERS/Ben Nelms

Lululemon shares jumped as much as 18.5 percent to $45.49 on Nasdaq. The stock had fallen more than 40 percent in the last 18 months following an embarrassing recall of yoga pants that were deemed too see-through.

Since then, the Canadian company has worked to improve quality and solve supply-chain problems. It has also faced increased competition, addressed executive departures, fought lawsuits and sought to soothe disgruntled customers after controversial comments by founder Chip Wilson about some women’s bodies being unsuitable for Lululemon yoga pants.

“The results ... today are beginning to reflect the ongoing work that is being done across our entire organization,” Chief Executive Laurent Potdevin told analysts on a conference call. “And our sales and bottom line for the quarter finished slightly ahead of plan.”

In a push to revive the sales growth that once made it an investor darling, the company has been stepping up expansion both in North America and abroad. Executives said the company, which now operates 270 stores, plans to open its first men’s-only store, in New York City, and its first full-line Asian store, in Singapore, before yearend.

It recently opened some 90 showrooms, or test boutiques that are slimmed-down versions of its established stores, a quarterly record.

Chief Financial Officer John Currie said its Asian showrooms were doing “much better” than the showrooms it opened in the United States several years ago. That U.S. push had led to a long stretch of double-digit sales growth.

“I am a little bit cautious, in terms of wanting to see them grow at a prudent rate ... but I know the international story is the one that many investors have been eager to hear more about,” said Liz Dunn, an analyst at Macquarie Research.

She said the jump in its shares may be partly due to a large number of short sellers closing out positions.

The changes made by the Vancouver, British Columbia-based company to its forecasts were marginal. It said it now expects full-year adjusted earnings of $1.72-$1.77 a share, up from its previous forecast of $1.71-$1.76. It also increased the lower end of its revenue forecast to $1.78 billion from $1.77 billion.

Analysts, on average, had expected full-year earnings of $1.74 a share on revenue of $1.78 billion, according to Thomson Reuters I/B/E/S.

Because the company cut its earnings forecasts last quarter, the changes are not as impressive, said Brian Sozzi, chief executive of research firm Belus Capital Advisors.

“The market likes it, but I think when you drill into this quarter you’re still left with the impression that the company’s battling tons of competitive threats,” he said, adding that he was concerned by declining product margins.

The retailer’s gross profit margin was 50.5 percent in the second quarter, ended Aug. 3. It said it expects increased efficiency to push that toward the mid-50s by 2016.

The yoga gear market, a space Lululemon largely created, is now also occupied by big-name competitors such as Under Armour Inc (UA.N), Nike Inc (NKE.N), and Gap Inc’s (GPS.N) Athleta retail banner, which have all expanded into the area with lower-priced products, while trendy, niche rivals have also emerged.

Lululemon’s total comparable sales, which include comparable store sales and online sales, were flat in the second quarter on a constant-dollar basis.

Online sales revenue rose 30 percent, but comparable store sales decreased 5 percent as traffic fell. Comparable U.S. store sales were up slightly in the low, single digits, while Canada was down in the mid-single digits, CFO Currie said.

Net income fell to $48.7 million, or 33 cents per share, from $56.5 million, or 39 cents per share, a year earlier. Revenue was $390.7 million.

Analysts on average had expected earnings of 29 cents a share on revenue of $376.8 million.

Additional reporting by Sneha Banerjee, Euan Rocha and Allison Martell; Editing by Sriraj Kalluvila, Jeffrey Hodgson, Alden Bentley and Peter Galloway

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