NEW YORK (TheStreet) -- Investors rejoiced over Lululemon's (LULU) better-than-expected second-quarter earnings, which hinted that the beleaguered yoga-apparel brand finally was turning around amid investments in people, processes and more compelling merchandise.
But investors who are buying into this notion could end up motionless on their yoga mats given three key aspects to Lululemon's second-quarter performance.
Watch the video below to see why Jim Cramer says Deckers is better than Lululemon:
Read More: Why Best Buy May be Apple's Biggest Fan
Lululemon reported second-quarter EPS of 33 cents, 4 cents higher than consensus forecasts. Lululemon's bottom line also surpassed its own guidance of 28 cents to 30 cents a share it provided in June. Total comparable-store sales, which include direct-to-consumer (online) sales, were unchanged in the quarter compared to guidance which called for a decrease in the low- to mid-single digits percentage range. Comparable-store sales at physical locations declined 5%, and net revenue for Lululemon's online business rose 29%.
Excluding one-time items, Lululemon now anticipates fiscal year 2014 earnings of $1.72-$1.77 a share, up marginally from previously provided guidance of $1.71-$1.76 a share. Wall Street was expecting profit of $1.74 a share.
Investors should be hesitant when thinking Lululemon has its operational house in order and is back on the attack against new foes in the female athletic apparel including Gap's (GPS) Athleta brand, Under Armour (UA) and Nike (NKE) . That was evident in the company's 10-Q filing with the Securities and Exchange Commission, which was issued Thursday.
Lululemon's gross profit margins have declined year over year in three of the last four quarters. The culprit for the pressure is intense competition in the marketplace -- weak profit margins on the products being sold in stores and online. Lululemon's product margins dropped 260 basis points year over year in the quarter as a result of a "higher mix of lower margin seasonal offerings and increased costs," according to the filing. In the first quarter, the company's product margins plunged 310 basis points, with the reasoning the same.
Despite the company's investments in product design and production processes following its black luon pant scandal of 2013, waning product margins suggest consumers continue to choose competitor's offerings and that to drive sales, especially online, sharper price points are being required.
Same-store sales at Lululemon's physical locations declined 5% in the second quarter, more than the 4% fall in the first quarter. The company has now posted three straight quarters of declining sales at its brick-and-mortar stores, indicating that Athleta's advances into Lululemon's markets and Dick's Sporting Goods (DKS) increasingly selling the latest from Nike and Under Armour, are yanking traffic and sales from the brand.
Back in June, Lululemon marked down its fiscal year 2014 EPS guidance to $1.71 to $1.76 from $1.80 to $1.90. Even though the company beat by 4 cents in the second quarter, it still didn't raise its fiscal year 2014 guidance by the magnitude of the outperformance (it only raised it by 1 cent a share). In other words, Lululemon is acknowledging that it will likely continue to have pressured product margins as it seeks to broaden its range of merchandise and invests in more approachable price points.
For a richly valued brand such as Lululemon, the margins on its products need to be expanding and its guidance needs to be raised.