Dec 7, 2012
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Lululemon plans expansion, sees slower sales growth

Dec 7, 2012

Lululemon Athletica Inc said on Thursday it would aggressively expand its chain of yoga shops in Europe and Asia, providing new avenues for growth even as its stellar performance in North America loses some luster.

Shares of the Vancouver-based retailer rose more than 5 percent after the news, which came as a counterweight to Lulu's warning earlier on Thursday that it expected sales growth at established stores to slow sharply in the current quarter. Third-quarter results, however, came in stronger than expected.

Lululemon, with 201 stores in North America and Australia, will soon open its first full store in Asia, selecting Hong Kong for the debut.

Featuring pricey, fashionable athletic clothing for young women, Lulu will also start testing the market in up to 15 countries over the next two years, Chief Executive Christine Day said during a conference call.

"I think that the world is really available to them. I think it's a concept that translates well globally," said Canaccord Genuity analyst Camilo Lyon before Day's comments.

That said, Lulu appears to be headed for a speed bump in its current markets. The company said it expected same-store sales to grow "in the high single digits" in the fourth quarter ending late January - much slower than a 26 percent jump a year earlier. Profit margins also narrowed while inventories rose.

"They will tend to guide very conservatively - they are almost like the Apple of specialty apparel," said Brian Sozzi, chief equities analyst at NBG Productions, unfazed by the outlook. "They beat their guidance pretty nicely today."

Shares of Lululemon were up 5.4 percent in midday trading on the Toronto Stock Exchange, at C$71.74. On Nasdaq, the stock was at $72.24, up 5.3 percent, after falling as much as 4.1 percent in premarket trading following the earnings news.


The company has posted robust growth in recent years, thanks in part to its push into the United States.

The potential for a repeat of this success in Europe and Asia has underpinned analysts' optimism, even though Lulu shares trade at a steep multiple to its earnings.

Lululemon tends to move slowly in new markets, recruiting "ambassadors" - local fitness instructors and athletes - to promote the brand, and running free yoga classes out of a showroom before committing to a full store. It uses its showrooms - small stores with limited product and opening hours - to test new markets.

"Based on the success of both Hong Kong showrooms, we are actively looking to secure real estate for a store in that market," Day said.

The company plans to open a second showroom in London next year, as well as more showrooms elsewhere in Europe and Asia, "pre-seeding" in up to 15 markets over the next two years.

Lululemon's e-commerce division, one aspect of its push overseas, is already driving sales.

The company recently launched websites serving Hong Kong, Singapore, Britain and the European Union. Direct-to-consumer revenue rose 89 percent to $45.1 million in the third quarter, growing to 14.3 percent of revenue from 10.4 percent a year earlier.

It is also hiring for its international business, searching for showroom managers and bringing on a new senior executive. Barbara Le Marrec comes from Starbucks Corp where she headed up operations in Japan.

The company said it has opened third-party logistics and distribution centers in Hong Kong and Rotterdam. Along with Britain and Hong Kong, Singapore and Germany are high-priority markets.


Net income for the third quarter ended October 28, rose to $57.3 million, or 39 cents a share, from $38.8 million, or 27 cents a share, a year earlier. Analysts, on average, had expected 37 cents a share.

Net revenue grew 37 percent to $316.5 million, ahead of the average analysts' forecast of $305.3 million.

For the fourth quarter, Lulu expects revenue of $475 million to $480 million. Analysts, on average, forecast $490.5 million, according to Thomson Reuters I/B/E/S. The company sees earnings per share of 71 to 73 cents, below the average estimate of 75 cents.

Canaccord's Lyon, who recently placed a "buy" rating on Lululemon, said the company's outlook for sales growth was conservative, and that inventory, up 27 percent over the previous year, had lagged sales growth of 37 percent.

Lulu said inventory was $164.7 million at the end of the quarter.

Gross profit margin fell to 55.4 percent of revenue from 55.8 percent last year, and operating margin slipped to 25.5 percent from 25.9 percent.

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