Lululemon Athletica Inc. (LULU), a Canada based yoga-inspired athletic apparel company, experienced one of the best financial results in its history with strong fourth-quarter 2010 results. The company has witnessed a consistent sales growth and margin expansion throughout its four quarters of fiscal 2010.

Lululemon reported robust fourth-quarter 2010 earnings of 64 cents a share, up 60.0% from the year-ago figure of 40 cents and handily beating the Zacks Consensus Estimate of 57 cents. The robust earnings growth was primarily driven by strong top-line growth and improved margins achieved through disciplined management and operational efficiencies.

Financial Details

The company’s 28.0% increase in comparable-store sales and 152.0% rise in Direct-to-Consumer revenue aided the 52.8% year-over-year increase in fourth-quarter 2010 total revenue, which climbed to $245.4 million from $160.6 million reported in the year-ago quarter. Total revenue beats the Zacks Consensus Estimate of $239.0 million.

Gross profit for the quarter came in at $143.5 million and increased 65.7% year over year, reflecting a high double-digit growth in top line. Gross margin improved 460 basis points to 58.5% compared with 53.9% in the prior period, primarily due to reduced cost of goods sold. Operating income for the quarter was $71.3 million compared with $41.4 million a year ago while operating margin expanded 330 basis points to 29.1%, reflecting operational efficiencies achieved by the company.

Cash and cash equivalents at the end of the fiscal almost doubled to $316.3 million and stockholders’ equity came in at $394.3 million. The company is free from long-term debts. Cash flow from operating activities for fiscal 2010 came in at $180.0 million compared with $118.0 million in the prior year.

Store Update

In the reported quarter, Lululemon opened five stores and closed two stores and ended the quarter with 133 total stores.

First-Quarter and Fiscal 2011 Outlook

Management estimates that existing store upgrades and new store openings have the potential to generate net revenues of $175.0 to $180.0 million for the first quarter of fiscal 2011. Comps are expected to be in the low double-digit for the said quarter. For full fiscal 2011, revenue is expected to be in between $885.0 million and $900.0 million.

The company expects its earnings for the first quarter of fiscal 2011 to be in the range of 36 cents to 38 cents per share, while for fiscal 2011 it will be between $1.90 and $2.00 per share.

Our Take

We believe that Lululemon’s strategic initiatives coupled with better inventory management and e-commerce business will enhance both the top and bottom-lines. However, the company faces intense competition from national and regional competitors such as Nike Inc. (NKE) and Under Armour Inc. (UA) which may dent its future performance.

Currently, Lululemon maintains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Moreover, we retain a long-term ‘Neutral’ recommendation on the stock.

 
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