Improved gross margin
Lululemon (LULU) impressed investors with double-digit growth in its sales as well as earnings in the first quarter of fiscal 2019, which ended on May 5. The company also saw improved margins in the first quarter—even amid an uncertain macro environment and a challenging retail space.
Lululemon’s gross margin expanded by 80 basis points on a year-over-year basis to 53.9% in the first quarter. The gross margin improvement was driven by a 190 basis point rise in its product margin, resulting from lower products costs, a favorable product mix, and lower markdowns. Factors that hurt the first-quarter gross margin included investments in product development and supply chain, higher occupancy and depreciation expenses, and currency headwinds.
Operating margin expansion
The company’s first-quarter operating margin expanded by 40 basis points to 16.5% as the favorable impact of an improved gross margin was partially offset by investments to support growth.
Lululemon expects its second-quarter gross margin to be flat to up modestly on a year-over-year basis. The company expects new tariffs and additional airfreight costs to have a 20 to 25 basis points adverse impact on full-year fiscal 2019 gross margin. The company expects higher airfreight costs in fiscal 2019, as it will be flying products ahead of the anticipated port congestion in Asia owing to pending tariff increases.
Lululemon still expects its gross margin to expand modestly in fiscal 2019 due to continued improvements in its product margin. The company expects the negative impact of tariffs and airfreight to be more prominent in the second half of fiscal 2019, especially in the third quarter.