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Will Strong Sales Growth Propel LULU’s Future Earnings?

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Lululemon Athletica: Management guidance for fiscal 2Q17 and fiscal year 2017

Lululemon Athletica (LULU) posted adjusted earnings per share (or EPS) of $0.30 in fiscal 1Q17, a decline of 11.8% compared to $0.34 earned in fiscal 1Q16.

Despite strong sales growth (IWP) in the quarter, the company’s earnings and profitability declined largely on higher SG&A (selling, general, and administrative) expenses incurred, as we discussed in Part 4 of this series. LULU also missed the Wall Street analyst consensus on EPS as a result.

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SG&A costs

Higher SG&A costs are expected to be featured in LULU’s results for the remainder of the year. However, the company expects the sales momentum to continue. It also expects its profitability to increase at the gross margin level, as we discussed earlier in the series.

According to management guidance, Lululemon Athletica (LULU) expects its adjusted EPS to grow to $2.05–$2.15 in fiscal 2017, up by 10.1%–15.5% from its EPS of $1.86 from the previous year. In fiscal 2Q17, the company expects to earn adjusted EPS between $0.36–$0.38, implying a growth rate of 5.9%–11.8%.

Market leader Nike (NKE) also expects to generate margin expansion of 50 basis points in fiscal 2016, but it also expects higher headwinds on the SG&A front.

Guidance

Lululemon Athletica’s guidance assumes a slightly higher tax rate compared to the prior year and no share repurchases in fiscal 2017. However, investors should note that LULU has occasionally diverted excess cash toward share buybacks. This could provide some upside to its EPS, should further buybacks come about.

In fiscal 1Q17, the company repurchased 0.2 million shares, averaging $65.01 per share. The stock was trading at $72.32 on June 9, a 52-week high.

According to the Wall Street analyst consensus, LULU’s EPS is expected to come in at $0.38 in fiscal 2Q17, tending toward the high end of the company’s guidance range. That implies a projected growth rate of 11.8%.

In contrast, Adidas (ADDYY) is expected to grow its EPS by about 14.7% in 2Q16, according to estimates. VF Corporation (VFC) expects to grow its 2016 EPS by 5% on a reported basis and by 11% on a currency-neutral basis.

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