March 22, 2012 / 11:39 AM / in 6 years

UPDATE 4-Lululemon profit rises, outlook disappoints

* Q4 EPS $0.51 vs $0.38 year earlier

* Same-stores sales up 26 percent

* Inventory at $104.1 mln, vs $57.5 mln

* Margins hurt by costs, more discounting

By Allison Martell

March 22 (Reuters) - Lululemon Athletica Inc on Thursday offered a disappointing full-year profit outlook for its chain of trendy yogawear shops, offsetting a surge in quarterly earnings and sales, and leaving its shares little changed.

The Vancouver-based retailer’s profit in the three months ended Jan. 29 climbed 34 percent, slightly more than expected, while sales in established stores rose 26 percent.

The results were slightly ahead of a revised forecast the company had given in January after a stronger-than-expected holiday shopping season.

Even so gross profit margin tightened to 56.3 from 58.5 percent a year earlier, due to higher raw material costs and discounting to reduce stocks of unsold merchandise. Inventory at the end of the quarter stood at $104.1 million, up from $57.5 million a year earlier.

“Lululemon needed to just blow the earnings results out of the way, which was going to be hard” given January’s forecast, said Brian Sozzi, chief equities analyst at NBG Productions, explaining the market’s lukewarm response.

SUCCESS STORY Lululemon, one of Canada’s most successful retailing exports, has expanded rapidly in the United States. Its clothing and gear, ubiquitous in Canada and increasingly popular south of the border, inspires fierce brand loyalty, with bloggers breathlessly documenting every product launch.

The typically volatile stock was up 0.5 percent at C$73.91 in early trading on the Toronto Stock Exchange on Thursday.

The stock has risen more than 50 percent this year, and in recent quarters any sign that the company’s growth might slow has spooked investors.

The market appears to have picked up such a signal when Lululemon announced a new full-year earnings forecast $1.50 to $1.57 a share. That fell short of the $1.61 that analysts had forecast.

Lulu also forecast full-year revenue of $1.3 billion to $1.325 billion, in line with analysts’ earlier estimate of $1.308 billion.

INVENTORY REVERSAL

Sozzi said the inventory growth over and above sales at established stores - or same-store sales - would likely raise concerns that margins could deteriorate further in the first half of the year.

The decline in margins reversed a trend that prevailed for much of 2011, when inventories were low.

Last year, Lulu’s premium yoga pants and other products sold faster than it could restock, which meant most products were sold at full price, but also held back overall sales.

The company has said several times that its now-higher inventory would help it better meet demand.

RBC Capital Markets analyst Tal Woolley said inventory was high, but noted it was still boosting sales.

“We believe this build is allowing (Lululemon) to maximize its business, play ‘catch-up’ less with product, and focus more on product development and innovation,” he said in a note to clients.

BY THE NUMBERS

For its fiscal fourth quarter ended Jan. 29, net income rose to $73.5 million, or 51 cents a share, from $54.8 million, or 38 cents, a year earlier. Analysts, on average, had expected earnings of 49 cents a share, according to Thomson Reuters I/B/E/S.

Total revenue rose 51.4 percent to $371.5 million, higher than analysts had expected, while same-store sales, a key measure for retailers, climbed 26 percent.

In January, the company said it expected same-store sales to rise more than 20 percent.

At the end of the quarter Lululemon had 174 stores in Canada, the United States and Australia, up from 165 at the beginning of the period.

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