Lululemon profit rises, boosts outlook

Canadian yogawear retailer Lululemon Athletica Inc (LLL.TO) reported a higher quarterly profit and boosted its outlook on Friday, but margins fell and sales growth in established stores eased.

Excluding the impact of a lower-than-expected tax rate, results were in line with analyst expectations, and Lululemon's U.S.-listed stock edged down 1.3 percent to $67.70 in the premarket.

Lululemon's typically volatile stock trades at a premium, 46 times earnings based on Thursday's close, and in recent quarters any sign that its muscular growth might slow has spooked markets.

But analyst Omar Saad of International Strategy & Investment Group was impressed with Lululemon's same-store sales, and gross profit margin that he said was higher than consensus.

"We would be buyers of Lululemon shares following this morning's earnings release given our belief that the uncertainty that has plagued the stock coming out of last quarter is quickly lifting," he said in a note to clients, referring to quality concerns that several analysts have mentioned in recent notes.

Founded in 1998, Lululemon made yoga apparel fashionable with its signature $98 pants. The company's colorful, form-hugging clothes are ubiquitous in Canada, especially among affluent young women, and the brand is becoming increasingly popular in the United States.

But it faces plenty of competition at lower price points from companies like Nike Inc (NKE.N) and Under Armour Inc (UA.N).

Gross profit margin fell to 55.1 percent in the second quarter ended July 29, from 57.5 percent last year, and operating margin was 24.8 percent, down from 28.0 percent last year and just short of the company's target of 25 percent.

Same-store sales, a key measure for retailers, rose 15 percent on a constant-dollar basis, less than the 20 percent growth posted in the same quarter last year.

The Vancouver-based company raised its forecast for full-year net revenue to $1.345 billion to $1.360 billion, up from last quarter's forecast of $1.32 billion to $1.34 billion. Lululemon said it expects full-year earnings per share from $1.76 to $1.81, up from its previously forecast $1.55 to $1.60.

GAINS ON TAX ADJUSTMENTS

Inventory rose to $125.4 million by the end of the quarter, compared with $88.9 million a year earlier. The company's products sold faster than it could restock in much of 2011, holding back sales, and in recent quarters its inventory has been much higher year-over-year.

For the current quarter, Lululemon forecast earnings of 34 to 36 cents a share. Analysts, on average, are expecting 33 cents a share, according to Thomson Reuters I/B/E/S.

Net income rose to $57.2 million, or 39 cents a share, from $38.4 million, or 26 cents, a year earlier.

Earnings were boosted by a lower effective tax rate, thanks in part to a $7.2 million adjustment that reversed taxes provided for in two previous quarters.

Excluding the tax adjustment, which the company said was based on a management review of the impact of intercompany pricing agreements, earnings came in at 34 cents a share.

At the company's previously estimated tax rate, earnings would have been 31 cents a share, in line with analysts' average estimate. Net revenue increased 33 percent to $282.6 million, compared with average estimate of $282.8 million.

(Reporting by Allison Martell; Editing by Frank McGurty)