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How Lululemon is avoiding China tariff trouble

Daniel Roberts

Lululemon last week delivered the kind of earnings report that investors dream about. The athleisure brand beat expectations in its second quarter on every possible metric: revenue ($883.4 million vs $846.8 million expected), earnings (96 cents per share vs. 89 cents expected), and same-store sales (up 15% vs 12.2% expected). North America sales were up 21% and its menswear is growing like crazy, up 35%, outpacing women’s apparel.

But a more macroeconomic takeaway came on its earnings call: amid industrywide concerns in the apparel business over Trump tariffs, Lululemon (LULU) is nimbly avoiding trade war pitfalls.

Just 6% of Lululemon’s finished goods are currently susceptible to U.S. tariffs on imports from China. “That percentage is down considerably, given how we have diversified our vendor base,” said CFO P.J. Guido on the call. And here’s the key line: “We've never had more flexibility than we do today in our supply chain. So going forward, we do not expect it to be a big impact to the business.”

According to research firm Panjiva, Lululemon has recently moved more production out of China, to places like Vietnam and Cambodia.

Guido also noted that Lululemon increased its use of air freight “as a hedge against potential port congestion related to China tariffs,” and that its gross profit margin rose 20% in the second quarter anyway.

U.S. tariffs on Chinese imports, Guido reiterated, is “an issue that we feel is highly manageable for us.”

A woman passes by a Lululemon Athletica real store in New York City, U.S., March 30, 2017. REUTERS/Brendan McDermid

Lululemon is set to actually expand its footprint in China this year.

The company plans to open 15 stores in China by the end of 2019, which would nearly double its store count there since the end of 2018, CEO Calvin McDonald said on the call. The brand’s Asia-Pacific revenues grew 33% in Q2, driven by 68% growth in China.

Lululemon shares are up 60% so far this year.

Lululemon shares in 2019

Daniel Roberts is the sports business writer at Yahoo Finance. Follow him on Twitter at @readDanwrite.

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