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Can Lululemon Athletica Maintain Its Margins in Fiscal 4Q16?

Phalguni Soni

Earnings Preview: What to Expect from Lululemon Athletica in 4Q16

(Continued from Prior Part)

Lululemon Athletica: Profitability expectations in the fourth quarter

Lululemon Athletica’s (LULU) gross margins have been down in the first three quarters of the current fiscal year. The decline is partly due to higher product and transportation costs resulting from the fallout of the West Coast ports impasse. As a result, the company’s also tried to offload surplus inventory via more discount sales than usual—something the retailer usually avoids due to inventory management.

In fiscal 4Q16, LULU expects its gross margin to come in between 49%–50%. However, while gross margins are expected to improve quarter-over-quarter, they’re still likely to be down year-over-year. In fiscal 4Q15, LULU earned a gross margin of 51.5%.

Operating income drivers

SG&A (selling, general, and administrative) costs are also likely to rise. Foreign exchange or forex factors are expected to drive higher SG&A expenditure during the quarter. Plus, the company expects that higher costs on digital and marketing investments, costs associated with new store rollouts, and ongoing investments in supply chain and inventory management will take a toll on fourth-quarter operating income.

How does Lululemon’s profitability compare with rivals?

Despite declining profitability for several quarters now, Lululemon is still more profitable than most of its peers. Lululemon’s operating income margin of 18.4% in the trailing-12-month period compares to 9.7% for The Gap (GPS), 18.0% for L Brands (LB), 10.4% for Hanesbrands (HBI), 13.4% for VF Corporation (VFC), and 10.7% for Columbia Sportswear (COLM). LULU’s profitability is also higher than the overall S&P 500 Consumer Discretionary Sector Index (XLY)(FXD)(VCR) and the S&P 500 Index (SPY)(IVV), which average 10.9% and 11.9%, respectively.

While some of these companies have faced challenging quarters lately, LULU’s premium positioning and inventory management let it charge higher prices and earn higher margins than competitors.

LULU, GPS, LB, and HBI together make up 0.79% of the iShares Russell Mid-Cap ETF (IWR).

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