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The Fundamentals behind Lululemon’s Elevated Inventory

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Analyzing Lululemon Athletica’s inventory spike in 2Q16

Lululemon Athletica (LULU) saw inventories surge ~55% year-over-year to $280 million in 2Q16. The inventory turnover ratio slipped from 4.7x to 4.2x as a result. The increase was concerning because of the company’s historic policy of keeping inventory levels low in order to avoid reduced price sales and keep margins high.

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Industry comparisons

Despite the increase in inventories in 2Q16, LULU’s inventory turnover ratio is much higher than its apparel peers Columbia Sportswear (COLM), Under Armour (UA), and Adidas (ADDYY). They reported inventory turnover ratios of 2.3x, 2.3x, and 2.8x, respectively, in their last quarters. Nike (NKE) reported an inventory turnover ratio of 4.0x.

LULU’s vertically integrated model gives it an advantage over other sportswear competitors such as Nike (NKE), Columbia Sportswear (COLM), VF Corporation (VFC), and Under Armor (UA). LULU’s inventory management is one of the best in the industry (XLY) (XRT), comparable to fast-fashion retailers such as Inditex (ITX.MC) and Hennes & Mauritz (or H&M) (HNNMY).

Reasons for the spike

LULU’s higher inventory situation was a result of several factors. The company increased stock levels to fuel store expansion. As we saw in part 2 of this series, LULU opened 66 new stores over the year compared to 2Q15. LULU also experienced growth of 29.5% in its direct-to-consumer channel.

The company also received shipments that had been delayed for several quarters due to the West Coast ports logjam. LULU had already warned of this issue in its 1Q16 earnings call. Chief financial officer Stuart Haselden mentioned in the call that higher discounting was likely, and as a result, about a third of its inventory received late in 2Q16 and 3Q16 would be affected.

Haselden also mentioned that LULU was underinventoried in 2Q15 with no commensurate increase in its stock position from the previous quarter. This skewed year-over-year comparisons in 2Q16.

The next article discusses Lululemon’s profitability drivers.

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