* Q2 EPS $0.39 vs $0.26 year-earlier
* Net revenue up 33 pct at $282.6 million
* Same-store sales rise 15 percent
* Shares rise
By Allison Martell
TORONTO, Sept 7 Canadian yogawear retailer
Lululemon Athletica Inc reported higher quarterly
profit and boosted its outlook on Friday, while vowing to push
back against cheaper knock-offs that could threaten its
The typically volatile stock rose nearly 8 percent on Friday
morning after the company posted the results, which were in line
with analysts expectations excluding the impact of a
lower-than-expected tax rate.
Founded in 1998, Lululemon made yoga apparel fashionable
with its signature $98 pants, but it now faces rising
competition from heavyweight brands at lower prices.
"While others may try to mimic parts of our business, it is
impossible to copy a personality," said Chief Executive
Christine Day on a conference call with analysts and investors.
Day said the company has an intellectual property portfolio
to protect its "classic styles," and acknowledged a patent suit
the company filed in August against PVH Corp's Calvin
Klein and manufacturer G-III Apparel Group Ltd.
"When we see attempts to mirror our product we will take the
necessary steps to protect our assets," she said.
Lululemon's colorful, form-hugging clothes are ubiquitous in
Canada, especially among affluent young women, and the brand is
becoming increasingly popular in the United States.
But it trades at a premium, 46 times earnings based on
Thursday's close, while Nike trades at 21 times earnings, and
recently any sign that its growth might slow has spooked
Lululemon's rivals are expanding. Gap Inc opened 11
standalone Athleta stores last quarter, bringing its total to
22. The banner features workout gear and free in-store fitness
classes, like the free yoga classes that helped build
Lululemon's gross profit margin fell to 55.1 percent in the
second quarter ended July 29, from 57.5 percent last year,
partly because of "increased innovation and function" in its
"They have had to make their product more complex to
essentially maintain their market share versus more rivals
coming into the marketplace," said independent retail analyst
Quality is key to Lululemon's business - the company has
said that it competes with rivals like Nike Inc and
Under Armour Inc by offering better-quality products.
From early on, the buzz was that Lululemon pants would last
forever. But on Friday's call, Day addressed some recent quality
In July, Lululemon posted a note to customers on Facebook
acknowledging that it was working to solve problems with dye
bleeding from some of its brightly colored products.
"When guests felt we were not owning up we reacted
appropriately to ensure that our guests were heard," said Day.
Omar Saad, an analyst at International Strategy & Investment
Group, was impressed with Lululemon's same-store sales, and
gross margin that he said was higher than consensus.
"We would be buyers of Lululemon shares following this
morning's earnings release given our belief that the uncertainty
that has plagued the stock coming out of last quarter is quickly
lifting," he said in a note to clients, referring to the quality
GAINS ON TAX ADJUSTMENTS
Lululemon's operating margin was 24.8 percent in the
quarter, down from 28.0 percent last year and just short of the
company's target of 25 percent.
Same-store sales, a key measure for retailers, rose 15
percent on a constant-dollar basis, less than the 20 percent
growth posted in the same quarter last year.
The Vancouver-based company raised its forecast for
full-year net revenue to $1.345 billion to $1.360 billion, up
from last quarter's forecast of $1.32 billion to $1.34 billion.
Lululemon said it expects full-year earnings per share from
$1.76 to $1.81, up from its previously forecast $1.55 to $1.60.
Inventory rose to $125.4 million by the end of the quarter,
compared with $88.9 million a year earlier. The company's
products sold faster than it could restock in much of 2011,
holding back sales, and in recent quarters its inventory has
been much higher year-over-year.
For the current quarter, Lululemon forecast earnings of 34
to 36 cents a share.
Net income rose to $57.2 million, or 39 cents a share, from
$38.4 million, or 26 cents, a year earlier.
Earnings were boosted by a lower effective tax rate, thanks
in part to a $7.2 million adjustment that reversed taxes
provided for in two previous quarters.
Excluding the tax adjustment, which the company said was
based on a management review of the impact of intercompany
pricing agreements, earnings came in at 34 cents a share.
At the company's previously estimated tax rate, earnings
would have been 31 cents a share, in line with analysts' average
estimate. Net revenue increased 33 percent to $282.6 million,
compared with average estimate of $282.8 million.
Shares rose 7.9 percent to C$72.73 on Friday morning on the
Toronto Stock Exchange.