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Lululemon Reaches Above Q3 Earnings Estimate, but Relaxes Q4 Guidance

Yoga-inspired activewear retailer Lululemon Athletica inc. (LULU) announced financial results for the third fiscal quarter on Thursday that exceeded Wall Street expectations, but lowered guidance for the current quarter due to West Coast port delays and currency fluctuations.

For the three months ended Nov. 2, revenue increased 10 percent to $419.4 million from $379.9 million in the prior year period. A surge in online sales more than made up for a slight decline in comps at brick-and-mortar stores. Online revenue increased to $77.2 million, or 18.4% of total company revenues, from 16.3% of revenues in the third quarter of fiscal 2013. The company’s new distribution center in Columbus, Ohio is reportedly bringing online delivery times to just under two days in the U.S.

Total comparable sales, which include online sales, increased by 3 percent on a constant dollar basis, with a 3 percent decline for stores more than offset by a 27 percent increase in e-commerce sales.

During the quarterly earnings conference call with analysts, CEO Laurent Potevin remarked that much work was done during the quarter to build a foundation on which future innovation and success will be built. A strategic rebalance of women’s product involving the brands signature “pant wall” and a cohesive fall weather layering collection, met with considerable success in the period. The expanded assortment in men’s product resulted in an 11 percent comp increase in the category.

Gross profit for the quarter increased 3 percent to $211 million, or 50.3% of net revenue for the quarter, down 360 basis points from the third quarter of 2013. The company’s revamped product includes more printed, patterned and embellished products, which incur higher product costs that can’t necessarily be passed along to consumers.

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Net income was $60.5 million, or $0.42 per diluted share, compared to $66.1 million, or $0.45 per share in the prior year’s third quarter, handily beating prior guidance of $0.36 per share.

For the fiscal year-to-date, revenue increased 12 percent to $1.19 billion from $1 billion last year. Total comparable sales increased 1 percent for the first three quarters on a constant dollar basis.

During the quarter, the company opened a 5,700-square-foot flagship store in Santa Monica Calif., its biggest to date, and a stand-alone men’s store in New York City’s Soho that opened on Black Friday, a day that was very strong for the company.

Lululemon ended the third quarter of fiscal 2014 with $633.6 million in cash and cash equivalents (compared to $600.7 million at the end of the same period last year) and 289 stores.

The company expects revenue of $570 million to $585 million in the fourth quarter, lower than previously thought due to the combined impact of West Coast port delays, a lower Canadian dollar, and delayed store openings. Diluted earnings per share are expected to be in the range of $0.65 to $0.69 for the quarter, shy of analyst expectations of a $0.72 per share profit.

Regarding the quarter’s results, Potdevin said, “I am pleased that our third quarter results demonstrated sequential improvements as the quarter progressed, with all key facets of our business – brand, guest experience, and product – contributing to our momentum.” He continued, “I am confident that our strong team, coupled with strategic investments into our core business areas, have already made a positive impact and place us on a strong trajectory for further global growth.”