Recent performance

Lululemon (LULU) exceeded analysts’ earnings expectations in each of the first three quarters of fiscal 2018. The company’s gross and operating margin also expanded in the first three quarters of the year.

After a strong holiday season, on January 14, Lululemon upgraded its earnings guidance for the fiscal 2018 fourth quarter to the range of $1.72–$1.74 compared to its previous expectation of $1.64–$1.67.

Lululemon’s Profitabilty: Do Analysts Expect Continued Improvement?

In December, Lululemon reported a 33.9% rise in its adjusted EPS to $0.75 in the third quarter of fiscal 2018, which ended on October 28, 2018. The significant rise in the company’s bottom line was the result of strong top line growth, margin expansion, and lower taxes.

Lululemon’s gross margin expanded 240 basis points to 54.4% in the fiscal 2018 third quarter mainly driven by higher product margins resulting from a favorable product mix, lower markdowns, and lower inventory provisions. Lululemon’s operating margin increased ~440 basis points to 18.2%, and its adjusted operating margin expanded 80 basis points in the quarter. Its adjusted operating margin excludes the impact of the $21 million in asset impairment and restructuring costs it recorded in the third quarter of fiscal 2017.

Profitability expectations

For the fourth quarter, analysts expect Lululemon’s adjusted EPS to rise 30% year-over-year to $1.73.

Lululemon expects its gross margin to expand in fiscal 2018 as a result of continued improvements in its product margin and its leverage on occupancy and other fixed costs in addition to its strong sales growth. Lululemon continues to invest in its distribution network to drive a further rise in its product margin.

We’ll look at analysts’ expectations for Lululemon’s current and next fiscal years in the last part of this series.

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