UPDATE 5-Lululemon shares fall as inventories stretched

Thu Mar 17, 2011 2:38pm EDT

* Q4 adjusted EPS $0.64 vs forecast $0.57

* Revenue up 53 pct; same-store sales up 28 pct

* Strong Q4 sales to result in unmet demand in Q1

* Shares down 5.5 percent in Toronto (Adds analyst, executive comments. In U.S. dollars unless noted)

By S. John Tilak

TORONTO, March 17 (Reuters) - Yoga and athletic-wear retailer Lululemon Athletica Inc LLL.TO (LULU.O), whose shares have more than doubled in the past year on phenomenal growth, said on Thursday it is not able to meet demand in the current quarter, sending its shares down 5.5 percent.

Huge demand for such products as its nearly $100 stretchy yoga pants during the holiday season -- which led to Lululemon reporting a better-than-expected fourth-quarter profit -- has shrunk inventory, the Vancouver-based specialty clothier said.

The inventory problems as well as a muted financial outlook and expectations of cost pressures in 2011 overshadowed its robust results and pushed Lululemon's stock C$4.38 lower to C$75.35 on the Toronto Stock Exchange on Thursday afternoon.

That is down C$9 from the record high of C$84.36 it hit last month. It has more than doubled in the last 52 weeks,

The investor response showed how expectations for Lululemon, which has topped profit estimates for several quarters, have increased to a point where even a small hiccup will not be met kindly.

"Given a positive streak of outperformance and increased guidance over the past few quarters, we believe investors have become accustomed to this trend," Morningstar analyst Zoe Tan said.

Lululemon has had to spend more on air freight to boost stock at stores, and analysts expect it to invest more on technological and management systems to cope with the growth.

"I'm optimistic that (the inventory situation) will be largely rectified as we exit the first quarter," William Blair analyst Sharon Zackfia said. "It may be dampening results somewhat, but they're still putting up some of the best sales results in all of retail."

A top concern has been whether Lululemon can sustain momentum. It forecast 2011 revenue growth of 24 percent to 26.5 percent. Analysts were looking for growth of 26 percent. Revenue surged 57 percent in fiscal 2010.

Lululemon forecast first-quarter earnings of 36 cents to 38 cents a share, compared with an average analyst forecast of 36 cents.

Mark Schultz, portfolio manager at the MTB Mid-Cap Growth Fund, said he was not worried about Lululemon's inventory troubles. He said he would be more concerned if the company was experiencing weak demand.

"I don't see anything in the quarter that is inconsistent with a company that is on a very strong growth trajectory. The numbers are very solid," Schultz said.

Earnings for the quarter to Jan. 30 rose 93 percent to $55 million, or 76 cents a share, from a year-earlier $28.5 million, or 40 cents a share.

Excluding items, Lululemon earned 64 cents a share, beating the average analyst forecast by 7 cents, according to Thomson Reuters I/B/E/S.

Revenue jumped 53 percent to $245.4 million, above analysts' expectations of $239.3 million.

Sales at stores open for at least a year, a key measure for retailers, rose 28 percent.

EXPANSION

After blazing a trail in Canadian yoga studios and gyms, Lululemon has moved aggressively into the United States, where it now operates 82 stores. That compares with 44 in Canada.

It is looking to open 30 stores this year, Chief Financial Officer John Currie said on a conference call with analysts. Lululemon also aims to boost e-commerce sales.

The company, whose premium-priced apparel is known for fashion and function, is benefiting from people seeking active and healthier lifestyles in an improving economy.

"Consumers of all ages are looking to live a healthier lifestyle. That favors the activewear market," said Marshal Cohen, chief industry analyst at retail market researcher NPD Group. "But it's clearly going to breed competition. Everybody's going to say, 'Hey, they're getting growth. We should find a way to open a similar business and try to get some of that growth'."

Athletic wear companies such as Nike (NKE.N), Adidas (ADSGn.DE) and Under Armour (UA.N), as well as other retailers such as Limited Brands Inc LTD.N-owned Victoria's Secret are selling yoga wear. Gap Inc (GPS.N) recently opened its first Athleta store specializing in women's activewear.

($1=$0.99 Canadian) (Reporting by S. John Tilak; Editing by Lisa Von Ahn, Dave Zimmerman and Peter Galloway)

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