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How Lululemon Keeps Bouncing Back

Next Monday, lululemon athletica (NASDAQ: LULU  ) will release its latest quarterly results. Already, though, investors have put a lot of confidence in the yoga-retailer’s recovery from its see-through yoga-pant controversy just a few months ago.

Lululemon has taken full advantage of the soaring interest in athletic apparel in recent years, catering to the high-end yoga market by appealing largely to women. With the stock having hit all-time highs recently, the retailer needs to demonstrate that its growth trajectory is intact, and that shoppers have stayed loyal despite the setback. Let’s take an early look at what’s been happening with Lululemon over the past quarter, and what we’re likely to see in its quarterly report.

How will Lululemon’s earnings fare this quarter?
Analysts had to mark down Lululemon’s earnings prospects substantially in recent months, with estimates for the April quarter down by almost a third, and a greater than $0.25 per share markdown for results for the full fiscal year. Nevertheless, the stock has vaulted higher, jumping 17% since early March.

The big news for Lululemon during the quarter was undoubtedly its voluntary recall of its black Luon yoga pants after finding that the material was too transparent for customers’ taste. Lululemon’s quick response to the embarrassing situation helped it make the best of the incident, but the episode raised concerns about how fast the company can grow without losing quality control and other key elements of its past success.

Yet, Lululemon has faced other challenges, as well. Largely lost in the yoga-pant controversy was its fourth-quarter report in March, which revealed that growth slowed substantially. A gain in same-store sales of 10% was dramatically lower than that seen in past quarters, and, with expectations that April-quarter comps will slow even further, investors justifiably sent the stock lower.

Competition is also an important consideration. Rival Gap (NYSE: GPS  ) has seen a lot of success lately with its general retail business, but one big component of its growth strategy involves its Athleta athletic-apparel stores. Meanwhile, Under Armour (NYSE: UA  ) has targeted yoga clothes as part of its overall plan to increase sales to women. Those retailers haven’t yet done much to capitalize on the situation, but Lululemon’s missteps could eventually give Gap and Under Armour the openings they need to make gains in the space.

In Lululemon’s quarterly report, watch for how well the company is able to put the yoga-pant episode behind it and, instead, emphasize its plans for future growth. Investors shouldn’t penalize the stock for the recall, but you should be aware that the share price puts the onus on Lululemon to demonstrate its ability to return to its former growth glory.

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