8/12/2019 Lululemon 4Q13 Preview

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Lululemon: 4Q13 Preview3/24/2014

Companies mentioned:

Lululemon (LULU) - $49.30

Why Read?

Brief preview of Lululemons 4Q13 earnings and FY14 estimates.

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!Comparable store sales trending down:On January 13

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, LULU lowered its 4Q13 guidanceto negative low to mid single digits from flat on their 3Q13 call. This is below their implied+MSD (+7%) implied guide from their 2Q13 call. Quite the drop in just 4 months time. Thiswould be LULUs first negative comparable store sales result since the recession and we seegreater downside to guidance/next years estimate as it is likely the new CEO, LaurentPotdevin, sandbags FY14 guidance. We are currently forecasting a -2.0% comp in 4Q13 and+0.4% in FY14.

! Supply chain issues adding to gross margin pressure and holding back sales: FormerCEO Christine Day was nice enough to leave LULU while the supply chain is still on shakyfeet. Lululemon has been switching some key suppliers and shifting their production regions.We expect that new CEO Laurent Potdevin will declare FY14 an investment year, setting a

goal to actually fix the supply chain and sandbagging guidance well below current analystestimates. Were fine with this if supply chain improvements actually materialize, as thegrowing pains need to be addressed but if improvement in the supply chain does not occurtibi non placet.

! Channel Checks:We visited numerous stores during 1Q14 and found traffic to be in line andconversion in line but observed low inventories in key drivers, especially the black Astropants, which could affect average ticket. We expect management to spin this positively,focusing on the untapped demand, but you can have the best product in the world and notmake any money if you dont have the product on the shelves to sell to customers. Supplymatters.

! Estimates:We are currently forecasting $521.3mn in sales and $0.76 EPS for 4Q13E versusmanagement guidance of $513.0-$518.0mn in sales and EPS of $0.71-$0.73 (consensus:$516.8mn and $0.72 EPS). For FY14E we are forecasting $1.75bn in sales and $2.01 EPSversus consensus of $1.83bn and $2.19 EPS. We expect to see a partial reversal in grossmargins as we lap the negative impacts from this years product and markdown impactsthough we expect pressure to remain. We expect slightly positive impacts from supply chainleverage, fixed cost leverage, and lapping rush airfreight charges as we enter FY14.

8/12/2019 Lululemon 4Q13 Preview

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