LULU

Lululemon Guides Margins Lower in Earnings Update

A list of stock prices rising and declining in value Credit: Shutterstock photo

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:

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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:

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.

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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.

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