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Lululemon stock surges as much as 16% as it posts stronger outlook, pivots from Mirror

It bought Mirror in June 2020 for $500 million, but sales have been below expectations

A Lululemon store in Pittsburgh is shown on Wednesday, Jan. 12, 2022. Shares of Lululemon Athletica Inc. climbed more than 10 per cent in early trading after the company reported its net revenue for its fourth quarter rose 30 per cent compared with a year ago.THE CANADIAN PRESS/AP/Gene J. Puskar
Lululemon's stock surged as much as 16 per cent on Wednesday after the company issued an outlook that surpassed analyst expectations and signalled a pivot away from its home-fitness platform Mirror. (THE CANADIAN PRESS/AP/Gene J. Puskar) (Associated Press)

Lululemon's (LULU) stock surged as much as 16 per cent on Wednesday after the company issued a 2023 outlook that surpassed analyst expectations and signalled a pivot away from its home-fitness platform Mirror.

The Vancouver-based company, which reports its financial results in U.S. dollars, said on Tuesday that it expects sales for the 2023 fiscal year to grow by approximately 15 per cent and be in the range of $9.3 billion to $9.41 billion. Diluted earnings per share for the year are expected to be in the range of $11.50 to $11.72. Analysts had expected a revenue increase of 13 per cent, and earnings per share average of $11.27.

"(Fourth-quarter) results should quickly revive the Lululemon bull case," Wells Fargo analyst Ike Boruchow wrote in a note to clients following the release of the company's fourth-quarter results on Tuesday. He says the company's strong first quarter, conservative full-year outlook and "meaningful" progress on inventory clearance are helping bolster the bull case.

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"Their holiday miss was likely the bottom," he wrote.

Lululemon was one of many retailers grappling with bloated inventory levels and an inflationary environment that put pressure on sales. Inventory levels were up 85 per cent in the third quarter compared to last year, but shrunk to 50 per cent in the fourth quarter. Lululemon's chief financial officer Meghan Frank says the company expects inventory levels to be up between 30 and 35 per cent throughout 2023.

"Our inventory growth will continue to moderate while we maintain our full-price selling model, and we remain well-positioned to fulfil guest demand," Frank said on a conference call with analysts on Tuesday.

The company also announced it will shift its at-home fitness offering from being focused on its hardware – that being its Mirror technology – to offering a new app that will allow users to access Lululemon's digital fitness content.

"We are evolving the model from being focused on hardware only to offering content through a digital and app-based solution as well," CEO Calvin McDonald said on the conference call.

"We're not eliminating the hardware, but we are adding an app feature that will allow a guest to sign up and pay a lower monthly subscription fee and acts the same content without having to purchase the hardware."

Lululemon purchased connected fitness technology company Mirror in June 2020 for $500 million, but sales have been below the company's expectations. The company began selling the Mirror in October 2021 for $1,895 plus a monthly $49 subscription. Pricing for the Mirror now starts at $1,245. Lululemon posted a $442.7 million post-tax impairment charge on its Mirror business in the fourth quarter.

"The overall at-home fitness space remains challenged," Frank said.

Boruchow says the pivot from focusing on hardware to a digital app is a "smart, strategic shift" for Lululemon.

The company says total sales in the fourth quarter increased 30 per cent on a yearly basis to $2.8 billion. On an adjusted basis, Lululemon earned $4.40 per diluted share in the fourth quarter, up from $3.37 per diluted share during the same period last year.

Shares of Lululemon were up 13 per cent as at 12:55 p.m. ET on Wednesday, trading for $363.14.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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