Lululemon raises profit forecast, shares jump

Lululemon Athletica expects profit and sales in the current quarter to top earlier forecasts after holiday shoppers flocked to its shops to snap up the trendy yoga wear that have made the company a runaway retail success story.

Shares of the Vancouver-based retailer jumped 15 percent on Tuesday after the fresh forecast, which validated the optimism of observers who had thought the company's earlier sales forecast was too conservative.

Sales at established stores, a key measure for retailers, are now expected to rise more than 20 percent in its fiscal fourth quarter ending January 29. That's further evidence the company has addressed the problem of inadequate inventories at its 165 stores in North America and Australia.

Lululemon has twice forecast that same-store sales growth would slow to the low to mid-teens in percentage terms, raising fears that the company's meteoritic rise could start to peter out.

Lululemon did not get sucked into the vortex that was the excessive discounting within the specialty apparel sector, independent retail analyst Brian Sozzi said.

They had a lot of people pouring through their doors, like Macy's did ... but I think they drove a higher quality customer to the store, and were able to maintain that price point.

The company's clothing and gear, which is increasingly targeted at runners as well as yogis, is ubiquitous in Canada and, increasingly, in the United States. It inspires fierce brand loyalty, with bloggers breathlessly documenting every product launch.

It has also been a market darling, with the shares rising 39 percent last year despite a second-half slump.

Two things really set (Lululemon) apart and support its long term success: the maniacal product focus and the fact that the company is creating a market that didn't really exist before, wrote Macquarie analyst Liz Dunn in a research note.

INVENTORY PROBLEM

The company sees diluted earnings per share in a range of 47 to 49 cents in its fourth quarter, up from its previous forecast range of 40 to 42 cents a share.

Revenue is seen between $358 million and $363 million, up from expectations of $327 million to $332 million and well ahead of $245 million in the fourth quarter a year earlier.

While Sozzi said the new forecast should alleviate concerns that Lululemon's earnings growth could fall off a cliff, he cautioned that growth will slow some, as the company is coming off of two years of runaway expansion.

The company's dilemma has been its premium yoga pants and other products were selling faster than it could restock its store shelves.

It was plagued by low inventory for most of 2011 as it struggled to meet strong demand. But in the third quarter inventory rose sharply.

Last week Goldman Sachs analyst Michelle Tan said the stock had been weighed down unfairly by margin concerns now that the company had restocked. She wrote in a research note that stronger inventory could drive further sales growth.

I always want specialty retailers managing inventory more to margin rather than to sales growth, but this company, they took a bold bet, said Sozzi. If you have a good product, you have a lot of inventory that the customer wants, you can put up a really nice quarter.

Last week the company said that founder and Chief Innovation and Branding Officer Chip Wilson would step down from his executive position, but remain chairman of the board.

The stock was up 15.3 percent at C$63.07 on the Toronto Stock Exchange on Tuesday morning. On the NASDAQ the shares were up 13.1 percent.

($1 = 1.0266 Canadian dollars)