June 3, 2008 / 7:51 PM / in 10 years

Lululemon optimistic on U.S. growth plans

TORONTO (Reuters) - Lululemon Athletica LLL.TO LULU.O is confident in its plan to sink deeper roots into the U.S. market, the yoga wear retailer’s incoming CEO said on Tuesday, even though expansion costs forced it to lower its profit forecast, pulling down its stock as much as 10 percent.

Christine Day, who takes over as chief executive at the end of June, said the company, known for its trendy yoga clothing and philosophical slogans, is being “prudently cautious” about its growth strategy amid concerns that a sluggish U.S. economy could hurt consumer spending.

“I think being new in the marketplace, being in the forefront of a market niche that’s not really been well-developed has helped us,” said Day in a phone interview.

Lululemon cut its outlook when it released its quarterly results after the bell on Monday to between 68 cents and 71 cents a share, down from its previous forecast of 70 to 72 cents.

The revision sent its stock down C$1.99, or 6.1 percent, to C$30.65 on the Toronto Stock Exchange, after earlier falling as far as C$29.20. In New York, it slipped $1.78, or 5.5 percent, to $30.44.

The company cited the cost of the strategic plans for expansion, as well as the cost of hiring more staff, as the reason for the revised outlook, even as it said strong sales helped it more than double its quarterly profit.

RBC Capital Markets wrote in a research note that, despite the lowered guidance, “everything is moving in the right direction.”

“With gross margins continuing to rise in a tough environment in the U.S., strong same-store sales growth, and strong new store opening performance, we believe the Lululemon story remains sound,” wrote analyst Howard Tubin.

The Vancouver-based company has plans to add 35 new stores in North America this year with just three of those in its native Canada, leaving the vast majority of new stores in the United States. At the end of May, it had 39 stores south of the border, versus 42 in Canada.

In addition, Lululemon plans to grow by 35 stores a year for the next three to five years and has already opened seven new locations since the start of the fiscal year.

“I think we still have the advantage of being new and I think that’s helping us in the States,” said Day.

Analyst Vivian Ma with Oppenheimer & Co wrote in a note that they expect Lululemon to outperform its sector in both sales and earnings growth over the next 12 months.

“We believe that reinvestments into the business are necessary to ensure ongoing success in Lululemon’s store expansion in the U.S. and recommend long-term investors to buy shares on weakness.”

Lululemon went public last summer at C$18 a share and within months had reached a high of C$58.77. However, its stock has tumbled since then, in part due to worries over the outlook for consumer spending.

The stock was also rocked last year when the company was ordered by Canada’s Competition Bureau to remove tags that advertised therapeutic benefits from fabric containing seaweed. A New York Times report highlighted lab tests that disputed the company’s claims.

($1=$1.01 Canadian)

Reporting by Leah Schnurr; editing by Rob Wilson

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