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Lululemon Athletica Inc. (NASDAQ: LULU) has achieved robust growth over 2015-2018 (ending January), with the company’s revenue increasing by a whopping 59% and expenses following a similar trend resulting in steady profits for the company.Lululemon is expected to continue its growth trajectory in FY 2019 with revenues increasing by 19% while expenses in dollar terms are expected to go up by 17% driven by growth across all operating heads. This should result in Lululemon’s earnings margin (i.e. revenues less all expenses, expressed as a percentage of revenues) to expand by 110 basis points from 14.7% in 2018 to an expected 15.8% in 2019. - representing an increase of 28% in Lululemon’s earnings.
Total Expenses were $2.8 Billion, with Cost of sales of $1.5 billion, and $1.1 Billion in Operating Expenses
Breakdown of Lululemon's Total Expenses (2018):
Total: $2.8 Bil
Cost of Sales $1.5 Bil (52%)
Operating Expenses $1.1 Bil (40%)
Income tax expense $0.2 Bil (8.3%)
Other expense -$0.01 Bil (-0.3%)
Lululemon's Total Expenses Have Increased From $1.8 Billion in 2015 to $2.8 Billion in 2018
% change in Total expenses
Lululemon’s total expenses have increased by 56% since 2015, going up from $1.8 billion to $2.8 billion in 2018 and are expected to go up by 17% in 2019. Operating expenses have been the largest contributor to this increase, with the operating expenses increasing from $628 million in 2015 to more than $1.1 billion in 2018.The company is expected to add $480 million to total expenses in dollar terms in 2019 likely to be driven by $270 million increase in the cost of sales.However, the company’s total expenses as % revenue are projected to decrease by 110 basis points, from 85.3% in 2018 to 84.2% in 2019.
1. Cost of Sales:
Cost of Sales have increased from $1.1 Bil in 2015 to $1.5 Bil in 2018 mainly due to robust revenue growth. As revenues have grown at a faster rate than the cost of sales, the Gross Profit Margin has expanded from 48.4% to over 55% over the same period
Cost of Sales
The cost of sales includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, and rent & occupancy costs for company-operated stores. COGS is the largest expense driver, accounting for nearly half of the company’s total expenses in 2018.COGS have increased by 38.4% over the last few years, increasing from $1.1 billion in 2015 to $1.46 billion in 2018 primarily as a result of strong revenue growth.Higher revenues, lower product costs, a favorable mix of higher-margin products, and lower markdowns have helped Lululemon’s gross margin expand by 680 basis points over the same time period. Moreover, a decrease in occupancy and depreciation costs as a percentage of revenue have also aided in the gross margin expansion.We expect COGS to grow by 18.3% in 2019, representing a gross margin figure of 55.4%.
2. Operating Expenses :
Lululemon’s operating expenses include selling, general and administrative expenses. Operating expenses have increased from $628 Mil in 2015 to $1.1 Bil in 2018. Operating expense as % of revenue has increased from 30.5% in 2015 to nearly 33.8% in 2018
SG&A expenses as % of total revenue
Lululemon’s operating expenses have increased 77% since 2015, increasing from $628 million to $1.1 billion in 2018 led by an increase in operating channels, as well as an increase in the head office costs.Additionally, operating expenses as % of revenues are also on the rise, increasing from 30.5% in 2015 to nearly 33.8% in 2018. This metric increased to 35.6% in 2017 due to asset & impairment restructuring charges of $38.5 million incurred in connection with the restructuring of the company’s ivivva operations.We expect total operating expenses to increase by 18% to cross $1.8 billion in 2019, representing 33.6% of total revenues of $3.9 billion.
3. Non-Operating Expense (Income) :
Lululemon's Non-Operating Expenses Have decreased From $1 million in 2015 to -$9 million in 2018 mainly due to higher interest income, partially offset by higher interest expense
* Please note that the company does not disclose its interest income and expense separately
Non-Operating Expense (Income)
Non-Operating Expense (Income) as % of revenue
4. Income Tax Expense:
Lululemon's Income Tax Expense has steadily increased over the last few years, going up from $102 million in 2015 to around $231 million in 2018. The tax rate was unusually high in 2017 due to the enactment of the US Tax Reform
Income tax expense
Effective tax rate
Lululemon's income tax expense has steadily increased over the last few years, going up from $102 million in 2015 to around $231 million in 2018. The tax rate figure was unusually high in 2017 mainly due to an additional provisional income tax expense of $58.9 million incurred due to the enactment of the US Tax reform.The effective tax rate is expected to be around 28% in FY 2019.
Our Complete Set Of Analysis On Lululemon