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What Drove Lululemon’s Margins in Q4?

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Gross margin

Lululemon’s (LULU) revenues increased 25.7% to $1.17 billion, while the adjusted EPS rose 39.1% to $1.85 in the fourth quarter, which ended on February 3. The company’s fourth-quarter revenues and adjusted EPS beat analysts’ expectations of $1.15 billion and $1.74, respectively.

In the fourth quarter, Lululemon’s gross margin expanded by 100 basis points to 57.3%. Excluding one-time items, the company’s adjusted gross margin increased by 110 basis points. The rise in the company’s fourth-quarter gross margin was driven by the higher product margin resulting from lower product costs, a favorable product mix, and lower markdowns. The gross margin also benefitted from leverage in occupancy and depreciation expenses due to strong revenue growth. However, higher supply chain costs and currency headwinds weighed on the gross margin in the fourth quarter.

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Lululemon’s operating margin expanded by 80 basis points to 28.4% in the fourth quarter. On an adjusted basis, Lululemon’s operating margin increased by 60 basis points to 28.4% in the fourth quarter from 27.8% in the fourth quarter of 2017. The operating margin benefitted from the strong improvement in the company’s gross margin. The increase was offset by higher expenses associated with the company’s growth investments.

Fiscal 2018 margins and outlook

Lululemon’s gross margin increased by 240 basis points to 55.2% in fiscal 2018 on a reported basis. The gross margin rose by 210 basis points on an adjusted basis. The company’s operating margin expanded by 430 basis points to 21.5% on a reported basis and by 250 basis points on an adjusted basis.

Lululemon expects a modest expansion in its fiscal 2019 gross margin due to a continued improvement in its product margin and leverage on occupancy and other fixed costs. The operating margin is expected to improve in fiscal 2019. The company expects its SG&A expenses to leverage modestly due to strong revenues.

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