Downward dog? Lululemon offers a disappointing holiday outlook

December 11, 2014, 1:48 PM UTC
Pedestrians walk past a Lululemon Athletica store in New York
Pedestrians walk past a Lululemon Athletica store in New York, March 19, 2013. The Taiwanese supplier behind the see-through yoga pants recalled by Lululemon Athletica Inc said on Tuesday it followed design specifications and the Canadian retailer had merely misjudged customer tastes. REUTERS/Lucas Jackson (UNITED STATES - Tags: BUSINESS FASHION TEXTILE LOGO) - RTR3F771
Photograph by Lucas Jackson — Reuters

Lululemon Athletica’s third-quarter net income dropped nearly 9% as the athletic-gear maker reported weaker gross profit margins. Sales growth for the period wasn’t as strong as the company had projected. Here’s what else you need to know about the company’s earnings report.

What you need to know: Lululemon’s results were a mixed bag, with a few key red flags that should raise some concerns. For example, gross margin slid to 50.3% from 53.9% a year ago, coming after a similar year-over-year decline that was reported for the second quarter. That’s problematic for Lululemon (LULU), which often commands lofty price points for its yoga and running gear.

Lululemon also trimmed its full-year sales target as it issued a fourth-quarter view that missed Wall Street’s expectations. That could be due to some tough competition during the critical holiday season, though Lululemon said some of the sales outlook was affected by West Coast port delays, a lower Canadian dollar and some delayed store openings.

The big number: Net revenue jumped 10% to $419.4 million for the latest quarter, though profit for the period slipped to 42 cents a share from 45 cents a year ago. The net income results were better than Lululemon had projected, while the sales growth wasn’t as strong as the company had hoped for. Total comparable sales, which include sales at stores and direct-to-consumer sales, rose 3% during the quarter ended November 2. Analysts had projected a 2.1% increase, according to a survey conducted by Consensus Metrix.

What you might have missed: While Lululemon has reported a double-digit increase in sales for all three quarters of this year, almost all of that growth came from new store openings, not from a stronger performance at existing locations. Athletic gear makers are broadly benefiting from increased spending on athletic apparel — gear that is used for trips to the gym, and also worn more casually as day-to-day attire. But Lululemon is also asking its customers to spend more for its items, and that premium-price strategy comes at a time when other retailers like H&M and Forever 21 have added more athletic-inspired apparel to their collections.

Lululemon has a few key opportunities for growth. The retailer sells far more gear to women, and is thus focused on expanding its men’s business, which could potentially reach $1 billion in annual revenue in the next few years.

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