September 11, 2008 / 12:18 PM / 10 years ago

Lululemon profit jumps as retail chain expands

OTTAWA (Reuters) - Lululemon Athletica Inc defied a tough retail market and reported a sharp jump in quarterly profit on Thursday, crediting an expansion of its chain of yoga-inspired clothing stores.

A buddha statue sits at the entrance of Lululemon Athletic, a yoga clothing store, as a women shop with her dog in San Francisco, California, in this March 31, 2006 file photo. REUTERS/Kimberly White/Files

Lululemon’s earnings more than doubled, topping analyst expectations, as revenues rose by 48 percent, sending its shares surging in Toronto and New York.

Sales at stores opened at least a year, an important measure of growth in retailing known as comparable store sales, rose 13 percent on a constant-dollar basis, or 18 percent including the impact of currency exchange.

“Thirteen percent comparable store sales before currency adjustment is just amazing in this environment,” said ThinkPanmure analyst Suzanne Price.

“When women find something that makes them ... feel better about their bodies in the clothes they’re wearing, that withstands any economic effect.”

Profit rose to $11.1 million, or 16 cents a share, in the 13 weeks ended August 3, partly lifted by a lower tax rate. That is up from $5.1 million, or 7 cents, in the same period last year.

Revenue in the company’s second quarter rose 48 percent to $85.5 million, fueled by new stores. In the past 12 months, the company has expanded the number of stores it operates by about 50 percent.

Analysts had forecast earnings of 13 cents a share before items on average and revenue of $88.2 million, according to Reuters Estimates.

RBC Capital Markets analysts Howard Tubin and Tal Woolley said the results were generally ahead of expectations as the company recorded lower-than-expected operating expenses.

Shares roared 14.4 percent higher on Nasdaq and gained 15.3 percent on the Toronto Stock Exchange.

Lululemon, which modestly cut its full-year profit forecast in June because of expansion costs, repeated its 2008 earnings estimate of 68 cents to 71 cents. It sees revenue of $380 million to $385 million.

The company also said it plans to add 35 stores a year for the next three to five years.

For its third quarter, the Vancouver, British Columbia-based company plans to open 15 stores and sees earnings of 11 cents to 13 cents a share, compared with a profit of 11 cents a share in the year-earlier period.

During the second quarter, gross margin fell by 1.2 percentage points to 51.9 percent, reflecting costs to open stores in the second and third quarters. Higher production, merchandising and distribution costs pinched gross margin.

With a “challenging retail environment in the U.S.,” Lululemon is chasing better lease deals and lower construction costs, CEO Christine Day said a conference call.

It will also test two temporary outlet stores in the United States as part of a plan to rejig its clothing clearance strategy to reduce handling costs and empty stores faster.

In the second half of 2009, the company also plans to launch an e-commerce Web site.

The company closed three stores in Japan during the quarter and ended the period with 92 stores, up from 60 at the same time last year.

A stock market darling, Lululemon took a hit last year when a Canadian government agency ordered it to remove tags touting the therapeutic benefits of fabric containing seaweed after a newspaper reported that lab tests disputed the claims.

“There is something people just don’t believe about (Lululemon’s success) because retailers are doing so badly,” said Price. “It more has to do with the stock price itself: how can any retailer justify a multiple, which is relatively high compared to others, in an environment where retail’s doing so badly.”

($1=$1.07 Canadian)

Additional reporting by Jennifer Kwan in Toronto; Editing by Frank McGurty

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