January 12, 2015 / 12:21 PM / 4 years ago

Lululemon forecast signals turnaround moves bearing fruit

(Reuters) - Lululemon Athletica Inc (LULU.O) 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.

Yogawear retailer Lululemon Athletica Inc's logo is pictured at its store in downtown Vancouver June 11, 2014. REUTERS/Ben Nelms

Shares, which have soared about 75 percent since June, jumped nearly 9 percent on the outlook, which forecast an increase in comparable store sales of 6 to 7 percent, roughly double analysts’ expectations. Analysts attributed the rise to increased traffic and more product variety.

Some of the stock’s jump was likely due to short-covering, according to Thomson Reuters StarMine, but StarMine’s data also showed analysts’ sentiment has warmed notably. Fourteen of 34 analysts now recommend buying it, against just nine three months ago.

“I think it’s sustainable. What was encouraging is it seems to be led by traffic,” said Liz Dunn at Talmage Advisors. “The biggest worry a lot of people had was that the consumer was so turned off by some of the ... (problems) that they had abandoned the brand. The improvement in traffic tells a different story.”

Lululemon’s fortunes started plunging two years ago just as major competitors were moving into the market it once dominated.

A high-profile recall of its signature yoga pants for being too see-through led to top executive departures. The damage was compounded when founder Chip Wilson said not all women are suited to wear Lululemon.

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

“They seem to be executing better than we were previously expecting and we’re very happy to see that,” said Thornburg Investment Management portfolio manager Charlie Wilson. Thornburg owns about 2.8 million shares, just over 2 percent.

“Overall, we think there’s still a very long runway in front of them in terms of their growth opportunities.”

The Vancouver-based company also said it expects operating margins to trough in 2015 and go back up in 2016, earlier than some had expected.

Lululemon estimated revenue of $595 million-$600 million 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.

Additonal reporting by Shubhankar Chakravorty and Dan Burns; Editing by Joyjeet Das, Jeffrey Hodgson and Peter Galloway

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