Jan 12, 2015
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Lululemon forecast signals turnaround moves bearing fruit

Jan 12, 2015

Lululemon Athletica Inc issued a robust forecast for the current quarter on Monday that topped market expectations and lifted its shares as strong holiday sales signaled the Canadian yogawear maker's comeback efforts may be paying off.

Shares jumped nearly 9 percent on the outlook, which forecast an increase in comparable store sales of 6 to 7 percent, roughly double analysts' expectations.

Such a result would mark the second straight quarter of accelerated same-store sales, a trend analysts attributed to an expansion of product variety and increased traffic.

"(We) are increasingly optimistic that most of the negative noise is now behind the name ... as the company rebounds from self-inflicted wounds," analyst Sharon Zackfia of William Blair & Co said in a client note.

Lululemon's fortunes started to plunge nearly two years ago just as major competitors were moving into a market it once dominated.

The company was hit first by a high-profile recall of a line of signature yoga pants that customers complained were too see-through. The fallout included top executive departures.

The damage was then compounded when founder Chip Wilson said some women's bodies are unsuitable for Lululemon yoga pants, comments that enraged customers. He later apologized.

Lululemon has since worked to improve quality and solve supply-chain problems, while laying the groundwork for faster international growth. It has also expanded its offerings to include more seasonal selections and more fashionable gear that can be worn outside the gym or yoga studio.

The Vancouver-based company, which operates roughly 290 stores, had strong sales of both seasonal and core items ahead of Christmas, analysts said.

"We view this as evidence of both consumer appetite for the brand and execution toward turnaround efforts," Stifel analyst Jim Duffy said in a research note.

Still, 2015 is expected to be an investment year, and some analysts question the sustainability of Lululemon's same store sales growth.

Stern Agee analyst Sam Poser said heavy spending on global expansion will limit earnings growth for the foreseeable future, as could the shift toward lower-margin fashion items.

Lululemon estimated revenue of $595 million-$600 million ($US) for its fourth quarter ending Feb. 1, up from the $570 million-$585 million it forecast earlier. It raised its profit forecast to 71-73 cents per share from 65-69 cents.

Analysts, on average, had expected profit of 69 cents a share on revenue of $584.7 million, according to Thomson Reuters I/B/E/S.

1 USD = 0.66 GBP

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