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NEW YORK (TheStreet) - Investors cheered Lululemon Athletica (LULU) - Get Free Report shares on Thursday, following the yoga wear maker's better-than-expected third-quarter earnings, despite it tempering Wall Street expectations for the fourth quarter.

The Vancouver-based apparel retailer reported quarterly net income of $60.5 million, or 42 cents a share, down 8.5% from last year's quarter but ahead of consensus earnings expectations of 38 cents a share. Lululemon's sales, while up 10% year over year to $419 million, were softer than analysts' had expected.

The company forecasted fourth-quarter revenue to range between $570 million and $585 million, below analysts' expectations of $597 million. Lululemon attributed the guidance to "West Coast port delays, a lower Canadian dollar, and delayed store openings." It expects EPS between 65-69 cents a share, below consensus estimates of 72 cents, according to Thomson Reuters.

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Shares were trading up 9.5% to $51.1, with more than 12.9 million shares changing hands, at last check. Here's what analysts said.

Edward Yruma, KeyBanc Capital Markets (Buy)

lululemon athletica inc. reported 3Q14 EPS of $0.42, ahead of our $0.38 estimate. The 3% comp (including ecommerce) was about 200 bps stronger than we had modeled, and we think provides evidence that new product is resonating with consumers. This marks the second consecutive quarterly EPS beat, and we think signifies a more predictable financial model.

The company did not flow through the entire 3Q beat and only increased annual guidance slightly (from $1.72-$1.77 to $1.74-$1.78), citing the impact of port delays, unfavorable currency, and delayed store openings. Nevertheless, the forecast still provides for a continuation of low single-digit comps, which we view positively in light of the sub-optimal in-store inventory levels. We continue to believe that the company has largely put its period of operational difficulty behind it and earnings will begin to grow in 2015.

Camilo Lyon, Canaccord Genuity (Hold; $42 PT)

LULU reported Q3 EPS of 42c vs. our consensus EPS estimate of 38c. Relative to our model, the beat was largely driven by a sharp reduction in expenses (+5c), lower share count (+1), and taxes (+2c) partially offset by weaker sales (-1c) and lower gross margin (-1c). Total comps including DTC were +3% vs. our +2% estimate, however, stores are still experiencing negative comps (-3%). As we previewed, we believe the online warehouse sale during the quarter helped them generate incremental comp growth as DTC was up 27%, but at the expense of gross margin as it came in at 50.3% vs. our 51% estimate. SG&A dollar growth of 15.7% was dramatically lower than our 26% estimate and was the lion share of the Q3 upside. Given the sharp reduction in expenses we are curious as to its sustainability. Despite the optically better EPS, overall this was a low quality beat as store comps remain negative and margins were below our expectations. Moreover, Q4 sales/EPS guidance is below our estimate by $15M and 2c-6c, respectively. Given the recent run in the stock we would expect it to trade down on this report as clear evidence of a sustained turn in the business has yet to materialize. We maintain our HOLD rating.

Paul Lejuez, Wells Fargo Securities (Outperform; $50-$54 valuation range)

Overall, FQ3 showed steady progress, with comps up 3% (vs flat in FQ2) and merchandise margin significantly less of a drag. While LULU tempered sales guidance for FQ4, it was not based on a more-cautious view of holiday sales, but rather on other factors such as FX and the West Coast port delays. We continue to believe that the athletic category/"neighborhood" is so strong it creates a tailwind for LULU and others for years to come and we believe LULU remains one of the nicer houses (stronger players) in the space with est. 10+% sq.ft. growth over the next several years, even if it needs a little touch-up work here and there.

Christian Buss, Credit Suisse (Neutral; $47 PT)

3Q results and quarter-to-date commentary indicate sequential topline improvement, but we remain concerned about the long-term gross margin profile of the business. With a rising expense base and sales mix shifting towards lower margin fashion items, a return to historical peak gross margin will likely prove challenging. And though topline trends are getting healthier, management continues to struggle with productivity metrics in mature stores, suggesting that margin recovery may be delayed relative to investor expectations. We raise our TP to $47 from $42.

Productivity in mature markets like Canada and coastal U.S. cities (50% of the store base) appear to remain under pressure, with Canadian sales down 4.3% in 3Q versus down 1.7% in 2Q. This suggests a potential change in the long-term store productivity model and margin profile of the business given the exceptionally high productivity of lululemon's stores (>$2000/square foot-plus at fully mature stores.) However, Canadian SSS have improved sequentially, down low-single digit in 3Q versus down mid-single digit in 2Q. We note that stores likely need to generate a positive mid-single digit SSS to begin leveraging fixed expenses. As a result, we expect lagging productivity to drive deleverage through the remainder of 2014 and limit margin recovery in 2015.

Andrew Burns, D.A. Davidson (Neutral; $56 PT)

We view 3Q results and outlook as continued progress. While the revenue and gross margin performance was below our expectation, this was primarily due to the CAD deprecation late in the quarter. The topline currency translation impact was mostly offset by lower SG&A, which reduced expenses $3.4 million. All in, our earnings outlook is little changed; 3Q upside is offset by reduced 4Q expectations. We believe both the currency headwind and impact from the West Coast port delays are temporary issues. Looking forward, we expect LULU to retain its position as a premium athletic brand, but expect an ever-growing list of competitors to make the environment increasingly competitive. We continue to believe that international growth investments, more complex product mix (lower product margins), and peaking store productivity levels will weigh on earnings growth potential into 2015.

Randal Konik, Jefferies (Hold; $45 PT)

Improved demand trends are a step in the right direction but ongoing supply chain issues continue to give us pause. Further, internal infrastructure challenges are being compounded by external pressure from an increasingly crowded "athleisure" market. LULU continues to benefit from strong secular trends, though we need to see more by way of sustained supply chain and product improvement before becoming more constructive. Reiterate Hold, PT to $45.

TheStreet Ratings team rates LULULEMON ATHLETICA INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate LULULEMON ATHLETICA INC (LULU) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had subpar growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite its growing revenue, the company underperformed as compared with the industry average of 16.4%. Since the same quarter one year prior, revenues rose by 13.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • LULU has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 6.39, which clearly demonstrates the ability to cover short-term cash needs.
  • Net operating cash flow has increased to $53.01 million or 15.75% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 1.98%.
  • The gross profit margin for LULULEMON ATHLETICA INC is rather high; currently it is at 53.99%. Regardless of LULU's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, LULU's net profit margin of 12.47% compares favorably to the industry average.
  • LULULEMON ATHLETICA INC's earnings per share declined by 15.4% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, LULULEMON ATHLETICA INC increased its bottom line by earning $1.91 versus $1.85 in the prior year. For the next year, the market is expecting a contraction of 7.3% in earnings ($1.77 versus $1.91).

- Written by Laurie Kulikowski in New York.

Follow @LKulikowski