A list of stock prices rising and declining in value
Markets

Lululemon Guides Margins Lower in Earnings Update

Lululemon ( LULU ) reported earnings last week. Things to note:

  • Revenues rose 15%, and net income rose 11%.
  • Comparable store sales increased 5% and 10% on a "constant dollar" basis.

Funny thing is management of retail companies love the "constant dollar" comparisons when the ball falls in their park. I've yet to see one report inventory increases on a constant dollar basis. Cash from operating activities fell 6% because inventories rose a staggering 37% year over year. Gross margins fell from 50.86% to 48.4%. Management said the following:

We are in fact seeing inventory levels rebalance with sales now that we are deep into Q1, so we remain confident that our inventories will be well aligned with forward sales at the end of the quarter. (Source: Q1 Transcripts)

Warning! GuruFocus has detected 3 Warning Sign with PFE. Click here to check it out.

PFE 15-Year Financial Data

The intrinsic value of PFE

Peter Lynch Chart of PFE

Warning! GuruFocus has detected 2 Warning Signs with BLT. Click here to check it out.

BLT 15-Year Financial Data

The intrinsic value of BLT

Peter Lynch Chart of BLT

Warning! GuruFocus has detected 1 Warning Sign with RYI. Click here to check it out.

RYI 15-Year Financial Data

The intrinsic value of RYI

Peter Lynch Chart of RYI

Warning! GuruFocus has detected 1 Warning Sign with TRKK. Click here to check it out.

TRKK 15-Year Financial Data

The intrinsic value of TRKK

Peter Lynch Chart of TRKK

Warning! GuruFocus has detected 4 Warning Signs with LULU. Click here to check it out.

LULU 15-Year Financial Data

The intrinsic value of LULU

Peter Lynch Chart of LULU

Gross margins are not going to stay stable while inventories move in line with sales. The problem Lululemon faces is secular. They are getting undercut by competitors selling the same apparels for lower prices. Although Lululemon is forced to cut prices, they are attempting to keep that to a minimum for brand image purposes. One of two things will happen:

  • Gross margins fall.
  • Inventories rise.

Since management says that inventories are in-line with sales, we should expect a fall in gross margins, and voila:

We anticipate gross margin to be approximately 47%. The factors driving this are continued improvements in product margins as we benefit from lower airfreight usage and improved initial merchandise margins. (Source: Q1 Transcripts)

They guided gross margins down to 47% from 51.4% last year! The only way to keep gross margins stable is to pile inventories. The only way to push down inventories is for gross margins to fall. The stock rose 10% after earnings. I'm going to add January 2018 puts to the portfolio. These puts will make up 1%. This means that Lululemon puts will now make up 1.5% of the portfolio. Hopefully the markets do not open with too much volatility.

Read More:

About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

LULU

Other Topics

Stocks

Latest Markets Videos