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Why Lululemon Athletica is Upbeat about Future Performance

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Lululemon Athletica’s (LULU) upwardly revised outlook

Lululemon Athletica (LULU) saw both higher traffic and conversion in stores in the United States and Canada in 1Q16. This continued into 2Q16.[1. According to comments by Stuart Haselden, CFO of Lululemon Athletica] The positive comps trend and good response to new lines have led the retailer (XRT)(RTH) to revise its guidance upwards for fiscal 2016.

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Revenue guidance

For fiscal 2016, Lululemon expects its revenue to come in at $2.0 billion to 2.05 billion, up ~11% to 14% year-over-year. LULU’s earlier guidance had projected 9% to 13% growth, with revenue falling in the range $1.97 billion to $2.02 billion. The company’s planning to open 60 new stores this year. Of these, up to eight will be located in Asia and Europe. Twenty new Ivivva stores are also included in the new store count for the year.

In 2Q16, the company’s projecting revenue of $440 million to $445 million. That’s about 14.3% to 15.7% over 1Q15 levels. Revenue growth should come from new store openings and sales traction at existing stores. Same-store sales growth is expected to come in at the high single digits in constant-currency terms.

The company plans to open 18 new stores in 2Q16, including five Ivivva stores.[2. According to comments by Stuart Haselden]

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Cost headwinds

However, as we discussed in Part 5, cost headwinds are likely to affect the company’s freight, occupancy costs, and supply chain. The US dollar is also likely to act as a drag on earnings.

Margins are also likely to be negatively affected by the product recall in June 2015. This recall isn’t factored in to Lululemon’s guidance for the quarter.

Higher freight costs are also likely drag on earnings for peers Nike (NKE) and Under Armour (UA). UA also revised its 2015 guidance upwards at its Q2 earnings release. Nike, which won the apparel sponsorship rights for the NBA starting in 2017, will release its 1Q earnings for fiscal 2016 in the latter half of September.

Earnings per share

Lululemon’s diluted earnings per share (or EPS) are expected in the range $1.86 to $1.91 in fiscal 2016. Earlier, LULU had projected a diluted EPS of $1.85 to $1.90, compared to $1.89 in fiscal 2015. This includes an upwardly revised adverse impact of $0.06 per share due to the higher US dollar compared to $0.04 per share estimated earlier.

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