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Will Lululemon’s Cash Registers Keep Ringing in 2Q16?

Phalguni Soni

Lululemon Athletica in 2Q16: Will the Activewear Firm Outperform?

(Continued from Prior Part)

Lululemon Athletica’s 2Q16 results: Revenue analysis

Lululemon Athletica (LULU), which declares its 2Q16 results on September 10, is expecting sales in the range of $440 million to $445 million in the quarter. That’s 12.6% to 13.9% higher than its levels in 2Q15. Same-store sales growth is projected in the high single digits in constant-currency terms.

Competitors L Brands (LB) and The Gap (GPS) have posted mixed results in their last respective reported quarters. LB reported 4% comps growth in the 13 weeks that ended on August 1. The Gap, in contrast, reported a 2% decline in store comps in the second quarter.

LB and The GPS together constitute ~2% of the portfolio holdings in the SPDR S&P Retail ETF (XRT) and ~0.5% of the holdings in the iShares Russell Mid-Cap ETF (IWR).

Product recall

In June, LULU recalled over 300,000 women’s tops with drawcords in the United States and Canada, The hard tip at the end of the drawcord could snap back on the wearer’s face upon pulling and cause injury. Most of these tops sold prior to 2014, according to a notice by LULU.

Implications of a recall

This was LULU’s second product recall. It came after the infamous black Luon pants recall in 2013. In March 2013, the company was forced to recall its black Luon pants due to the fabric being too sheer. This resulted in lower sales and surplus inventory and millions of dollars of losses to the company. The issue affected about 17% of all bottoms stocked for women. Same-store sales grew just 2% in fiscal 2014 compared to 13% in fiscal 2013.

And while the current recall may not affect the company’s financials to the same extent, frequent recalls may dilute the brand’s equity in the face of ever-increasing competition.

1Q16 performance

That being said, LULU’s sales performance was particularly strong in 1Q16. The next article of this series discusses these results.

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