Lululemon Athletica (NASDAQ:LULU) shares dropped nearly 11% this morning after the company issued a weak outlook December 12, despite third quarter earnings.
The retailer downgraded its expected annual net revenue to $1.605 to $1.610 billion, down from $1.625 to $1.635 billion in its previous outlook.
This forecast represents an expected growth rate of 15% for the 2012-13 year, much lower than the 37% posted over the 2011-12 fiscal year. In 2012, Lululemon's net revenue was $1.4 billion, up from $1.0 billion in 2011.
"We experienced a soft start to our fourth quarter," Lululemon CFO John Currie said.
Following its US$17.5-million recall of its signature black Luon pants earlier this spring, the company has continued to struggle with supply issues.
Increased quality measures have forced the company to reject certain styles, resulting in uneven product flow and in some cases cancellation of purchase orders, Currie said.
"We know that any sales lost in the fourth quarter resulting from this increased focus on quality is a smart investment for the long-term health of the business," Currie said.
The company also reported slower traffic in its retail stores, even though comparable stores sales this quarter rose 5%.
"Our best guess is that this is a result of a combination of causes," Currie said, citing a difficult macro-retail backdrop. "But it would be naïve to think that the company's specific issues that we've been dealing with this year from the Luon setbacks, to the recent negative PR issues, have not also had some impact," Currie said.
Net revenue for the first three quarters of this year rose 21% to $1,070.2 million from $884.9 million in the same period last year.
Compared with last year, this quarter's total net revenue rose 20% from $379.9 million from $316.5 million in the third quarter of fiscal 2012. Lululemon reported profits of $66.1 million, or earnings of $0.45 cents per share, compared with $57.3 million, or $0.39 per share over last year.
Direct-to-consumer sales in increased 37% to $62 million this quarter, 16.3% of overall sales compared with 14.3% a year ago.
Gross profit as a percentage of net revenue decreased to 53.9% for the quarter from 55.4% this time last year.
"This so far has been a year of challenges, learning, and growth for Lululemon," outgoing CEO Christine Day said. "We are proud of our third quarter results, with sales in line with our expectations and earnings ahead of our guidance and rebounding to a double digit growth rate."
