The Gap Inc. (GPS), Ralph Lauren Corp (RL): Lululemon Athletica inc. (LULU) Is Far From Being A Lemon

On Thursday, Lululemon Athletica inc. (NASDAQ:LULU) reported mixed fourth-quarter and full fiscal year 2012 results. Although the specialty retailer was able to deliver 16% comparable store growth (year-over-year), the earnings release was clouded by the company’s recent recall of its black yoga pants due to the material being too sheer. This ultimately prompted some analysts to downgrade the stock due to this apparent weakness in the company’s ability to control its supply chain/quality control. Though this error on behalf of Lululemon has the ability to tarnish its brand in the eyes of some, and will cost the company up to $17 million, this is not the time to completely abandon the retailer. This is still a disciplined and highly profitable retailer that has shown a clear ability to grow its operation and provide a unique shopping experience to customers. The company’s full year highlights are as follows:

Net revenue for the fiscal year increased 37%.

Comparable stores sales for fiscal 2012 increased by 16% on a constant dollar basis, resulting in $2,058 annual sales per square foot for comparable stores for fiscal 2012.

Gross profit for fiscal 2012 increased by 34% to $762.8 million, from $569.4 million in fiscal 2011.

Income from operations increased by 31% to $376.4 million, from $287.0 million in fiscal 2011.

Diluted earnings per share in fiscal 2012 increased 46% to $1.85 on net income of $270.6 million, compared to diluted earnings per share of $1.27 on net income of $184.1 million in fiscal 2011.

These results illustrate the success Lululemon Athletica inc. (NASDAQ:LULU) has had building customer loyalty, while simultaneously driving both revenue and earnings in tandem. Although it’s now time for investors to look toward the company’s fiscal year 2013, it’s important to keep these results in focus as they illustrate Lululemon’s potential.

Looking toward 2013

Although Lululemon Athletica inc. (NASDAQ:LULU) cut its first quarter and full year outlook, in large part due to the yoga pants recall, the company is still projecting strong results as a result of the company’s long-term strategy. In the first quarter of 2013, the company expects comparable store sales to increase between 5% and 8% (down from 11%), and diluted earnings per share between $0.28 and $0.30 (down from FY12 first quarter results of $0.32). These declines and Lululemon’s misstep in not controlling the quality of one of its most popular items is nothing to scoff at, but it’s ultimately not time to call the retailer a “lemon.” Lululemon has been successful because of its incredible ability to break the conventions of retail and truly cater to its customers in a local fashion. Through operating stores in a manner that levies substantive power to the store manager, its stores operate to best serve the neighborhood or city at hand. This has resulted in higher-than-average comparable store growth, profitability and customer loyalty/retention. This strategy places Lululemon in a strong position to bring its successes in America to Asia and Europe. This future growth potential — that lies beyond the misstep within its yoga pants line — illustrates the long-term strength of Lululemon.