Product Margin Improvement to Enhance Lululemon’s 2Q17 Margins



What to expect from Lululemon’s earnings

Lululemon Athletica (LULU), which will be reporting its 2Q17 results on August 31, is expected to post EPS (earnings per share) of $0.35 or ~7.9% YoY (year-over-year).

During the first quarter, Lululemon posted earnings of $0.32 per share and beat the consensus by $0.04. The earnings beat was largely driven by better product margins and higher sales.

The gross margin improved by 110 basis points during the quarter mainly due to operational efficiency in supply chain processes, lower F&B costs, and higher average unit retails. However, ivivva inventory provisions partially offset the gain.

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Improving gross margins

Lululemon’s gross margin has increased during the last four consecutive quarters. The company has seen a sharp improvement in its product margins due to its supply chain initiatives such as sourcing and logistic structure upgrading.

Management expects the product margins to improve more in 2Q17. However, the increase will likely be partially offset by rising occupancy and depreciation costs. The gross margin for the quarter (after normalizing for ivivva restructuring) will likely increase by ~100 basis points.

Restructuring plan

Lululemon announced its restructuring plan for the ivivva segment in June. Under this plan, it decided to close its brick and mortar stores and only operate through the digital channel. It’s important to note that ivivva is Lululemon’s activewear brand for girls. The company’s restructuring is expected to be complete by 3Q17.

The plan’s pre-tax costs are expected to be $50 million–$60 million in fiscal 2017. The company recognized $17.7 million of the costs in 1Q17.

ETF investors seeking to gain exposure to Lululemon can consider the PowerShares Russell Midcap Pure Growth Portfolio (PXMG), which invests 1.5% of its portfolio in the company.

In the next part, we’ll discuss the company’s stock performance and valuations.


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