Why Strong Product Margins Drove Lululemon’s Profits in 2Q17



Evaluating Lululemon Athletica’s 2Q17 earnings performance

Lululemon Athletica (LULU) reported a 2.6% YoY (year-over-year) rise in 2Q17 earnings per share (or EPS) when it reported its results on August 31.

Adjusted diluted EPS, excluding Ivivva restructuring costs, stood at 39 cents during the quarter—4 cents more than Wall Street expectations—and exceeded the upper end of management’s $0.33–$0.35 guidance range.

While discussing the company’s 2Q17 performance, Laurent Potdevin, CEO of Lululemon commented, “Our performance reflects the growing global consumer response to Lululemon’s unique position as the leading brand that defines an active, mindful lifestyle. Through continuing to deliver category-defining product innovation, we are creating experiences that our guests, both existing and new, desire. This strong brand momentum reinforces my confidence in our long-term strategy.”

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Gross margin continues to improve

The gross margin improved by 178 basis points to 51.2% of sales during the quarter. After normalizing for Ivivva restructuring costs, it was up 220 by basis points and stood higher than management’s 100-basis-point improvement expectation.

This was the fifth consecutive quarterly jump in the company’s gross margin. As in the last several quarters, the increase was mainly driven by higher product margins, which rose by 260 basis points during the quarter. Offsetting this increase were higher markdowns and a rise in expenses relating to occupancy, depreciation, and the supply chain.

As a result of consistent improvement in margins, LULU has higher gross margins than the other leading sportswear players. The company has a trailing-12-month gross margin of 51.5%, compared to 44.6% for Nike (NKE), 45.8% for Under Armour (UAA), and 46.6% for Columbia Sportswear (COLM).

Encouraged by its solid second-quarter performance, management raised its guidance for the full fiscal year. Read the next part of this series to learn more.

ETF investors seeking to add exposure to LULU can consider the PowerShares Russell Midcap Pure Growth Portfolio (PXMG), which invests 1.55% of its portfolio in LULU.


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