Lululemon Stock Rose 10.7% on Upbeat Fiscal 4Q16: What’s Next?
Lululemon’s profitability
Lululemon Athletica’s (LULU) profitability declined in fiscal 2016. The company’s gross and operating profit grew (IWP) more slowly than sales. Gross profit grew 9% to $997 million, while operating income declined 2% to $369 million.
Margin pressures
LULU’s gross margin declined by 2.5 percentage points to 48.4% in the year, while its operating profit margin declined 3 percentage points to 17.9%. The company experienced higher occupancy costs, depreciation, and staff costs. This was a result of new store openings and higher discounting activity, largely as a result of the West Coast ports impasse. An adverse forex (foreign exchange) environment also negatively affected the company’s results.
In the fourth quarter, gross profit rose 14.3% year-over-year, while operating income increased by 5.8%. The company incurred higher SG&A (selling, general, and administrative) expenses relating to both brick-and-mortar and e-commerce sales. It also had higher head office costs and supply chain investments. All these reduced the operating income margin.
How have other apparel peers performed?
Lululemon’s EBITDA (earnings before interest, taxes, depreciation, and amortization) margin in the trailing 12-month period came in at 21.5%. In comparison, Under Armour (UA) earned 12.9% and VF Corporation (VFC) earned 15.6%. L Brands (LB), Hanesbrands (HBI), and The Gap (GPS) earned 21.8%, 12.2%, and 13.5%, respectively. Lululemon’s premium and innovative products have been instrumental in earning higher margins compared to other apparel peers over the years.
Outlook
Despite the decline in profitability in the last fiscal year, Lululemon is expecting improved margins in fiscal 2017 and beyond. The company expects improvements in its gross margin from fiscal 2Q17 onward on lower freight and product costs and other factors. For more on the company’s profitability guidance through 2020, please read Part 6 of this series.
In the next part of the series, we’ll analyze projections for fiscal 2017.
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