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Lululemon Tells Investors Why Profitability Rose Again in 2019

By Demitri Kalogeropoulos – Apr 3, 2020 at 11:00AM

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The apparel chain boosted gross margin for a fourth straight year despite higher tariffs.

lululemon athletica (LULU 1.24%) recently closed out an impressive fiscal year highlighted by surprisingly strong sales growth. Profitability expanded for a fourth straight year even as the sports apparel specialist dealt with rising tariff rates and increased labor costs.

In a conference call with Wall Street analysts, CEO Calvin McDonald and his team went over a few standout trends from 2019 while giving a few reasons they're optimistic that the business can rebound following the COVID-19 disruption now stifling economic growth. Below are a few highlights from that discussion with investors.

A yoga class holding a pose.

Image source: Getty Images.

An update on current trends

"Broadly speaking, and similar to many of our peers, we are seeing virus-related impact on performance across our markets," McDonald said.

Lululemon's fiscal year ran through Feb. 2, which includes the holiday shopping season but doesn't include the peak coronavirus mitigation efforts in China the following weeks or the U.S. closures that began in mid-March. Since then, the retailer has noted a sharp drop in sales tied to store closures in both markets.

Executives expressed confidence, just as rival Nike did recently, that trends will start returning to normal soon. Most of its stores are open in China again, for example. "We are not yet back to pre-closing numbers," McDonald said about that country, "but the business is getting stronger week by week."

Another strong quarter

"Our quarter-four results demonstrate that our guest responded incredibly well to our product this holiday," McDonald said.

The retailer's backward-looking statistics were solid across the board. Sales growth edged past management's upgraded outlook thanks to a healthy mix of growth both in stores and online over the holiday shopping season. Lululemon saw encouraging demand for its core products, in addition to its launches in new lines like menswear and outerwear.

Profitability improved as this pipeline of releases more than offset extra pressure from rising costs and higher tariff rates. Gross margin ticked up by 0.7 percentage points to 58% of sales, marking the fourth consecutive year of improvements on this score.

Navigating the storm

"The underlying health of our business is strong, which provides us with many levers to successfully manage through this period," McDonald said.

Lululemon has plenty of financial flexibility heading into the retailing disruption that's gripping the North American market right now. Cash on the books was over $1.1 billion, with immediate access to an additional $600 million of liquidity from its credit line. "We believe we have the flexibility and nimbleness to adapt and manage," CFO Patrick Guido said.

Still, the consumer giant is taking some steps to preserve capital and protect cash flow, including by delaying inventory orders and reviewing its store remodeling and opening plans.

For the short term, Lululemon sees its robust online platform helping blunt the pain of a weekslong shutdown of its U.S. retailing network. Looking further out, management is optimistic that the industry has a long runway for growth as consumers continue to prioritize comfort and innovation in their exercise apparel. "We solve sweaty problems for athletes," McDonald said, "and we do not believe the current situation will change the trend toward people wanting to live an active and healthy lifestyle."

Demitrios Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

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