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Lululemon Getting In Shape, Though Challenges Remain

Yoga apparel retailer Lululemon Athletica released second quarter 2014 earnings Thursday that were in line with Wall Street expectations. The company increased guidance for the remainder of the year by one penny per share, which buoyed its stock price in pre-market and early trading.

Total net sales for the three-month period ended August 3 rose an impressive 13 percent to $391 million from $345 million in the second quarter of fiscal 2013, helped by growing sales of more fashion-oriented product, much of which is worn as streetwear, and by a reinvigorated core bottoms product line.

CEO Laurent Potdevin said in a statement, “We are pleased to be on track with the implementation of our strategic road map, and are starting to see the results of our work across product, brand and international expansion.”

Comparable store sales, or sales at physical stores open at least a year fell by 5 percent, though online sales jumped 30 percent. Total comparable sales for the quarter were flat compared to the second quarter of 2013. Online sales at Lululemon were $63.5 million, or 16.2% of total company revenues, an increase from $49 million, or 14.3% of total sales last year. For the first half of the year, total comps were up 1 percent.

On the earnings conference call Thursday morning, management indicated that traffic increased by mid-single digits in the quarter, driven by a significant pickup in July, but said that sales conversion has declined.

The company, which put the yogawear category on the map, is no doubt feeling increasing competitive pressure from Gap Inc.’s Athleta and by athletic apparel juggernauts Nike and UnderArmour, all of which are in hot pursuit of share in the growing athleisure, or workout-as-streetwear, market.

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Gross margin fell 350 basis points from 54 percent last year to 50.5% in the current year period, pressured by the higher mix of lower-margin fashion items. The company is taking steps to improve efficiency and lower product costs, including opening a new distribution center, but warned that these initiatives would not fully impact gross margin until 2016.

SG&A expense was $129 million, or 33.1% of sales, compared to $107 million, or 31.1% of sales in the corresponding period last year due primarily to higher store and technology expenses. In the remainder of the year, the company plans to increase marketing expenses to drive traffic into stores.

Net income declined 13.8% to $48.7 million, or $0.33 per share, from $56.5 million, or $0.39 per share, in the year-ago period.

Lululemon operated 270 stores as of August 3, an increase of seven new stores in the quarter, and 44 new stores since the second quarter of 2013, including its first Asian store in Singapore and its first store carrying just men’s product in the Soho neighborhood of New York City.

The company has increased its earnings per share guidance for the fiscal year to $1.72-$1.77, based on a full-year sales estimate of $1.78 billion-$1.8 billion and a total comp increase in the low single digits.

Once one of the highest-flying apparel retailers in the business, Lululemon has spent the last year and a half recovering from a series of missteps. In early 2013 it recalled its Luon yoga pants for being see-through. Last year, company founder Chip Wilson was ousted as board chairman after making derogatory comments about overweight customers. Last month, Wilson sold half of his 28 percent stake in the firm to private equity firm Advent for $845 million.

The stock price has declined 24 percent so far this year, and has plunged 40 percent from its peak level of over $81 per share reached in June 2013.