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Lululemon's holiday strategy includes opening over 50 seasonal stores

Lululemon Athletica Inc. will operate over 50 seasonal locations during the holiday season with the intent to engage its existing customers, attract new ones and test out markets for possible permanent stores.

"These locations afford us [the] opportunity to engage with guests and communities where we don't have a year-round physical presence, while also testing these markets for a potential permanent store in a very low-cost effective manner," the company's CEO Calvin McDonald said during a Dec. 11 post-earnings call.

McDonald added that about 30% of transactions in its seasonal stores are from new customers. Post-holiday, the company could either transform the seasonal locations to permanent stores or reopen the temporary locations on ad hoc basis.

Over the Thanksgiving weekend, Lululemon had a "record performance," according to McDonald. The company's performance over that weekend was driven by growth in its core products, while markdowns were used to clear its inventory, McDonald said. Despite the highly promotional environment, the company said it had lower markdowns in the third quarter, which contributed to a 120-basis-point increase in product margin for the third quarter.

In after-hours trading, the company's shares were down 4.3% to $223.25. The company raised its full-year outlook for diluted EPS to a range of $4.75 to $4.78 from its previous guidance range of $4.63 to $4.70. Lululemon continues to expect a 4 cent to 5 cent negative impact from tariffs and incremental airfreight costs on its full-year gross margin.

For the fourth quarter, the company expects diluted EPS to be between $2.10 and $2.13. Comparable sales for the fourth quarter are projected to increase in the low double digits on a constant-dollar basis. The company's expectation for comparable sales includes the impact of six fewer shopping days between Thanksgiving and Christmas.

McDonald also updated analysts on the performance of its new experiential stores in Lincoln Park, Chicago, and the Mall of America in Minnesota. McDonald said the stores are performing well and are seeing an increase in traffic from the company's "high-value" customers, who are embracing its services such as the fitness classes.

"That's also translating into shopping as we're seeing very healthy conversion and growing of share of wallet as well as attracting and building new guests," McDonald said.

The company plans to open about 50 stores in 2019, which includes about 30 stores in its international markets.

McDonald also said the protests in Hong Kong have had a minimal impact on Lululemon's overall business and the company continues to monitor the situation.