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Lululemon gives investors everything they want—almost

A customer looks at athletic apparel inside a Lululemon store.
Xaume Olleros | Bloomberg | Getty Images

What earnings miss?

Investors quickly looked past Lululemon's fiscal first-quarter shortfall on Wednesday, as it announced earnings per share that fell a penny short of Wall Street's consensus forecast.

Instead, analysts honed in on what many said could be a turning point for the athletic wear company: Three key metrics — comparable sales, gross margin and inventories — met or topped expectations.

Shares of Lululemon on Wednesday rose more than 3 percent on the progress, and management's comments that the current quarter is off to a strong start. Meanwhile, although the brand maintained its full-year earnings guidance, it lifted its expectations regarding revenue.

"[The] quarter missed by a penny on higher foreign exchange expenses, which doesn't matter," Jefferies analyst Randal Konik told investors. "What matters is brand demand remains strong, gross margin recovery is on track and inventories are now in line."

What shoppers want

Lululemon's first-quarter comparable-sales beat was driven by continued strength in men's, as well as its women's bottoms business. The company recently rejiggered its entire women's pants assortment, which has helped that category outpace the company's overall sales trends.

Lululemon is now shifting its focus to its women's tops assortment, which CEO Laurent Potdevin said logged another positive comparison during the three-month period.

While these trends speak to solid demand for the label in an increasingly competitive athletic wear environment, analysts were equally as bullish on Lululemon's ability to clear through excess inventories while preserving most of its gross margin. The first quarter marked the first time since last year's port-strike disruptions that the brand's inventory build grew roughly in line with its sales.

Lululemon had been grappling with an influx of product due to delayed deliveries from last spring, which CFO Stuart Haselden said the company has finally worked through. Further, the company said it expects its inventory growth to be lower than its forward sales trends during the second quarter and for the remainder of the year.

Bearish investors had been keeping a close eye on Lululemon's inventory levels because a surplus of product could force its hand into discounts. Although the company's gross margin did contract during the first quarter, partly due to a lift in promotional activity, it came in better than expected. That recovery has continued into the second quarter, Potdevin said.

"In terms of the key metrics we were looking for in the quarter, we got everything we wanted and then some," Guggenheim Securities analyst Howard Tubin said.

Still, the retailer's results were far from perfect. Thanks to a strong U.S. dollar and investments into its supply chain and technology, Lululemon's selling, general and administrative costs were significantly higher than expected. This dented the company's profits, which contracted by 4 cents a share on an adjusted basis.

Lululemon's digital sales trends also slowed, though they still grew at a double-digit pace. But perhaps more importantly, the company will face a tough road for the remainder of the year, as its sales comparisons become more difficult.

For the year, Lululemon reiterated its forecast for diluted earnings per share between $2.05 and $2.15. However, it raised its revenue forecast to $2.305 billion to $2.345 billion, up from $2.285 billion to $2.335 billion.

Shares of Lululemon are up more than 30 percent this year.