Lululemon shares tumble 10% as Wall St pokes holes in yoga pants maker's results

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

The Lululemon skeptics won out this quarter.

Shares of the Canadian athletic wear maker shed 10 percent in early trading Friday, hours after the company reported a comparable-sales miss and weak guidance. That put it on pace for its biggest daily decline since December, when its shares fell 13 percent.

With the stock up some 46 percent ahead of the announcement, Lululemon's shares were priced for perfection. Analysts had long been anticipating the company's return to both gross margin growth and profits per share during the second quarter. It delivered both.

Yet, even as its 5 percent comparable-sales gain offered a bright spot in a tough quarter for retail — outpacing the growth at juggernauts such as TJX — it fell shy of analysts' 5.8 percent consensus estimate.

The company likewise issued third-quarter sales guidance of $535 million to $545 million, compared with a Thomson Reuters forecast for $542 million. Its earnings per share guidance of between 42 cents and 44 cents also came in soft, as Wall Street expected the top end of that range, according to Thomson Reuters.

"Lululemon gave the bears what they were looking for," Wells Fargo analyst Ike Boruchow told investors.

The yoga wear maker noted a traffic decline in the second quarter, and those challenges extended into the current three-month period. So with the company's sales in the second half competing against robust gains last year, when its women's pants assortment was reworked, some analysts doubt the company will be able to keep up its recent momentum.

CEO Laurent Potdevin responded to their concerns by saying Lululemon continues to update this product line and noting that the category keeps logging double-digit sales gains. Its work-in-progress sport bra and tank top categories also improved and recorded gains during the quarter.

Similar to last year's pants relaunch, Lululemon is in the midst of overhauling its tops assortment, including looser-fitting tanks. Likewise, its men's business continues to grow. Pointing to these new products, international opportunities and improvements to its supply chain, Potdevin reiterated the company's goals to double its 2015 revenue and earnings by 2020.

"Our progress in the second quarter, especially in gross margin and inventory, marks the beginning of our recovery in profitability and sustainable long term growth," the CEO said.

Indeed, the second quarter marked the first time in more than two years that the company's gross margin expanded. This metric had been weighed down by inefficient sourcing and logistics, including an over-reliance on air freight. It had also been pressured by excess inventories that led to additional markdowns.

The retailer managed to tighten the number of discounts it offered during the second quarter and said its gross margin improvement has continued into the current three-month period.

Lululemon earned an adjusted 38 cents per share in its fiscal second quarter, on revenue of $515 million. Those results were in line with analysts expectations, according to Thomson Reuters forecasts. They also marked an increase from the prior-year-quarter, with earnings per share rising by 4 cents.

"Despite Lululemon's improvement in profitability, we remain on the sidelines as weak traffic trends will likely continue to weigh on the comps going into the back half," BMO Capital Markets analyst John Morris said.