Lululemon Athletica Inc. (NASDAQ: LULU) announced its Q3 results with an EPS $0.42, down from $0.45 a year earlier but still comfortably ahead the Street estimate by 10.5%. Revenue totaled $419.4 million, falling short of the $424 million forecast by 1%, but up 10% from $379.9 million in the same quarter of last year. Given its better-than-expected results, shares increased 4% the day after the earnings release as the market views the turnaround story is progressing. However, I believe the long-term profitability of the company remains uncertain given its high expenditures and limited brand influence over the increased global competition.
Online Inventory witnessed difference between Men's and Women's products. In terms of the online full price apparel in-stock rates, the company saw the men's product down 7% to 73.5% compared to the same period of last year. But the Women's was not lucky enough as the inventory was even slightly higher over the same time frame. Specifically speaking, the inventory of Women's colored products increased to 75.8% in November, acting as the main concern compared to the inventory of basic, black apparel. In my view, the company was not dedicated enough to fashion design in colored products, and eventually it will erode the profitability of the company.
Brand power needs more time commitment. By leveraging the ivivva brand that is designed for young girls, LULU intends to regain its brand momentum through tailoring products to meet their preference. In this quarter, the store traffic continues to build, which indicates the customer-centric strategy is on the right track. However, North America's new store productivity raised my concerns as it implied loyal customers may start to switch gears, in my view. So, given the fast changing demand from current and prospective customers, the company needs to put more effort in its customer re-engagement plans.
Cost control remains at the heart of margin improvement. Given the lower profits on sales, cost control should be given priority. Although the company has already decreased its online promotional activity with average discounted merchandise of 2.3%, down 1.2% compared with the same quarter of 2013, I expect the merchandise margin will be absorbed by the high spending on expansion. Currently, LULU has investment plans including 1) the global expansion in Europe and Asia; 2) marketing campaigns especially for ivivva, and 3) improvement of omni-channel capability, an integrated system that offers customers better shopping experience.
Overall, the Q3 results of LULU provided a positive signal to the market but I'm not fully convinced that the turnaround story is progressing given that 1) the online inventory is still under pressure, especially for the Women's colored apparel; 2) customer re-engagement requires more time commitment; and finally 3) the investment plans put a constraint on margin improvement. So I would hold my current position until more information about its new fiscal year becomes available.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.