Update: Lululemon's Margins Are Under Pressure But The Long-Term Outlook Looks Good

| About: Lululemon Athletica (LULU)
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Summary

The company announced third quarter earnings, recording impressive growth in revenues.

As we expected, the margins of the company are under pressure.

As the company expands its products portfolio, the pressure on margins should ease and revenues should show stable and consistent growth.

Lululemon Athletica (NASDAQ:LULU) announced its third quarter earnings - the company reported impressive growth in revenues. Revenues for the third quarter recorded year-over-year growth of 10%. At the end of the third quarter the last year, the company reported $379.9 million in revenues, which has gone up to $419.4 million. Gross margin, however, has come down slightly on year-over-year basis - Lululemon had gross margin of around 53.9% for the third quarter last year, which has come down to 50.3%. Further, the net income also came down due to weaker gross margins - the company reported net income of $60.5 million, or 42 cents per share, which is down around 8% from $66.1 million, or 45 cents per share, in the same period last year.

Despite a fall in net margins of the company, Lululemon increased its full-year profit guidance. The company now expects per share profit of around $1.74 - $1.78, which is up from previous estimates of $1.72 - $1.77 per share. The total same-store sales, which include comparable store sales and online sales, rose by around 3% during the third quarter on a constant-dollar basis. Also, the company trimmed its full-year sales guidance due to the combined impact of West Coast port delays, a lower Canadian dollar, and delayed store openings.

As we expected, the margins of the company remain under pressure due to the supply issues faced in the past and the launch of the new products. The company has been focusing on diversifying its customer base as well as its revenues in terms of products. This will result in slight deterioration in margins in the short term. However, in the long term, diversification in revenues should ensure consistent and sustainable growth. We believe that Lululemon will continue to grow as the market for athletic apparel is a niche right now and the blend of fashion industry will enable it to grow strongly in the future.

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