Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Under Armour Inc (UA), NIKE, Inc. (NKE): A Troubling New Trend at Lululemon Athletica inc. (LULU)?

If you thought the worst was over for Lululemon Athletica inc. (NASDAQ:LULU) this year, think again.

On Thursday, shares of Lululemon Athletica inc. (NASDAQ:LULU) fell by 5.4%, even after the yoga apparel specialist told investors net second-quarter revenue increased 22% from the same year-ago period to $344.5 million. That result was helped by solid comparable-store sales growth of 8%.

lululemon stock

Image source: Lululemon.

But despite higher revenue, Lululemon Athletica inc. (NASDAQ:LULU)’s net income actually fell 1.2% over the same period to $56.5 million, or 16.4% of sales, and remained flat on a per-share basis at $0.39 per diluted share. Curiously enough, those numbers actually beat analysts’ average estimates, which called for earnings of $0.35 per share on sales of $342.99 million.

Still, the company issued weak revenue and earnings guidance for the remainder of the year, telling investors to expect full fiscal 2013 revenue to come in the range of $1.625 billion to $1.635 billion, with diluted 2013 earnings per share of $1.94 to $1.97.

For reference, analysts were expecting full-year 2013 earnings of $1.99 per share on sales of $1.67 billion.

So what gives?

If you’re wondering what happened, look no further than March’s see-through pants debacle, which involved a massive recall of Lululemon Athletica inc. (NASDAQ:LULU)’s popular black Luon bottoms, and called for the return of around 17% of all bottoms sold in its stores.

According to management on Thursday’s earnings conference call, while the problem was technically corrected in early June, its fallout caused late deliveries of the company’s fall products, leaving them with summer product still on the floor through all of August.

In short, those delays are expected to continue negatively impacting the timing of Lululemon Athletica inc. (NASDAQ:LULU)’s product deliveries through the remainder of the year.

This too shall pass

But does this mean Lululemon is suddenly a terrible business? Absolutely not.

Remember, management also referred to its current pain as “short term,” and even after taking a hit from selling less of its higher-margin black Luon bottoms, Lululemon still expects gross margin to come in the range of 53% to 54% for all of 2013.

For those of you keeping track, remember gross margin for fellow athletic apparel maker Under Armour Inc (NYSE:UA)  rose by 240 basis points year over year last quarter to just 48.3%.

Then there’s NIKE, Inc. (NYSE:NKE), which earlier this week became one of three elite companies to join the Dow Jones Industrial Average and touted its strong gross margin expansion last quarter of 110 basis points to 43.9%.

What’s more, Lululemon CFO John Currie expressed confidence during the Q&A portion of Thursday’s call that, given the temporary nature of the company’s current challenges “there’s no reason to change [his] longer-term outlook on the 55% gross margin and 25% operating margin,” especially as the company continues to grow and expand internationally.

Then again, despite those solid margins, it’s also easy to understand investors’ reservations for stepping into shares of Lululemon, especially while they’re currently trading at a premium of 35.3 times last year’s earnings and 25.6 times next year’s estimates.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.