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Lululemon Athletica's 4Q16 Earnings: What You Can Expect

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Part 3
Lululemon Athletica's 4Q16 Earnings: What You Can Expect PART 3 OF 5

Why Lululemon’s Gross Margin Could Drive 4Q16 Earnings Growth

What to expect from LULU’s 4Q16 earnings

Lululemon Athletica (LULU), which should report its fourth-quarter results on March 29, is projected to post a ~19% YoY jump in earnings per share. Wall Street post an average EPS estimate of $1.01 for the fourth quarter. Higher sales, along with an improved gross margin, are likely to bring about this improvement.

The company beat Wall Street during the third quarter of 2016 after missing the consensus in the first quarter and reporting in-line earnings in the second quarter. Earnings per share rose 11.7% YoY during 9M16 (the first nine months of 2016) to $1.15 per share.

Why Lululemon&#8217;s Gross Margin Could Drive 4Q16 Earnings Growth

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Operational efficiency improves gross margin

The company’s second and third quarters were marked by significant improvement in gross margins. Its gross margin was up 420 basis points in Q3 after improving 260 basis points in Q2. This improvement was largely driven by operational efficiencies in sourcing, logistics, and supply chain processes.

Lululemon’s gross margin is currently one of the best in the sportswear/athleticwear segment. It has a trailing-12-month gross margin of 49.8%, which is higher than Nike (NKE) at 45.4%, Columbia Sportswear (COLM) at 46.7%, and Under Armour (UAA) at 46.4%.

Fourth quarter to show further improvement in gross margin

For the fourth quarter, Wall Street predicts a further 340-basis-point improvement in gross margin, which is likely to land at 53.7%. Management expects a 300-to-350-basis-point improvement.

During the third quarter earnings call, CFO Stuart Haselden said, “The gross margin inflection that began in Q2 and Q3 is now extending into Q4. For the fourth quarter, we anticipate gross margin to increase by approximately 300 basis points to 350 basis points over Q4 of last year. The improvements in our supply chain efficiencies and product costing that accounted for the Q3 gross margin expansion are the same factors now driving these improvements in Q4.”

ETF investors seeking to add exposure to LULU can consider the First Trust Consumer Discretionary Alpha DEX ETF (FXD), which invests 0.27% of its portfolio in LULU.

Read the next part of this series to learn about the company’s stock performance and dividend policy.

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