Despite a surge in stock prices and unexpectedly high revenue for lululemon athletica inc., the company had a disproportionate increase in expenses this past quarter.

Lululemon’s administrative expenses increased more than its revenue, according to the financial statement from the third quarter. The statement, released on Dec. 7, 2016, shows an increase in revenue by 13 per cent, but administrative expenses increased by 18 per cent.

Expenses growing faster than revenue can be a potential red flag for investors.

While a difference of five per cent does not sound like much, it means that it is costing lululemon more to do business than what the company is bringing in.

As seen in the financial statement, 34 per cent of its revenue went into administrative expenses, which include staff wages for the stores and head office, running the head office, and marketing the brand.

Lululemon opened 35 new stores this quarter, mostly in the United States. These new stores require new staff, and that staff requires wages, benefits and bonuses. Along with the staff for the stores themselves, lululemon needed to expand its head offices in order to ensure these new stores had proper management.

Both of these expenses comprise about half of the administrative expenses in the financial statement.

According to Carleton University business professor Michael McIntyre, these are an expected expenditure when a company opens new stores. The staff both in the stores and in the head offices must increase if the stores are increasing in numbers.

McIntyre said that it is not uncommon for newly opened stores to drain a company’s revenue in the inaugural stages. The expenses to operate these new stores are equal to mature, longer-established stores, McIntyre said, but the sales are not typically as strong as those established stores.

Lululemon is putting its unique flare into these new stores. The company prides itself on what it calls community feel, as seen in the company’s mission statement. CEO Laurent Potdevin said in a press release that the company strives for an “unparalleled guest experience.”

As these new stores have been rolling out around the world, they have included smoothie booths, art installations and lounge areas. Lululemon is turning away from the showroom style clothing store and pressing for a place where customers can hang out and relax.

This community feel that the company puts into its stores translates into a fairly unique expense in lululemon’s financial statement called community costs.

As can be seen in the financial statement, community costs are lumped together with other professional expenses. As McIntyre said, this innovation has a cost, in execution but particularly in planning. They would have needed to bring in marketing experts to build this community experience, he said.

The company denied to comment on how much of the $8 million was put into community costs, and denied to comment on how that $8 million was divided up overall.

McIntyre is not overly concerned about this increase in administrative costs. He says that the company is big enough to experiment with things like smoothie booths and art installations in the stores.

“It may work, it may not,” he said. Either way, he said, they will probably be fine.

Investors similarly do not seem concerned about this increase in expenses. Lululemon stocks were down during the fall when the retail market in the U.S. went through a slump.

On Dec. 7, 2016, however, the financial statement was released and it reported better results than even the company had predicted. Lululemon’s stocks jumped from 59.50 to 70.25 the next day and have remained around the same price since.

Fall slump by rachellevymclaughlin on TradingView.com

“Our entire team is excited about the momentum in the business,” said Potdevin in a press release. “We look forward to 2017 and advancing our long-term goals.”

In other words, the company is not planning on discontinuing its growth any time soon. It is so far working in its favour.

McIntyre warns, however, that it is important to keep an eye on expense increases, especially when they are disproportionate to the revenue increases. They can spell bad news for the company and investors.

Featured image from Mike Mozart, flickr Creative Commons.