At Lululemon, how can sales be up while gross margin is down?

Copyright: micchaelpuche / 123RF Stock Photo

Founded in 1988, Lululemon Athletica Inc. (LULU) is an athletic apparel company headquartered in Canada. Lululemon has helped to popularize the ubiquitous yoga pants in the U.S. While it has experienced some sales declines due to a recall of yoga pants in 2013 for being too sheer, Lululemon has revamped its product line to update the clothing to reflect more current trends, such as patterned yoga pants rather than solid-color yoga pants.

Recently, an article in the Wall Street Journal carried the headline “Lululemon Sales Rise, Gross Margin Declines” (Wall Street Journal, September 10, 2015.)

Questions

1. How is gross margin (also known as gross profit) calculated?
2. If sales increase, what would you ordinarily expect to happen to gross margin?
3. Examine the statements of operations for Lululemon as given in the article. Is the Wall Street Journal headline referring to dollars or percentages?
4. What do you know about expenses at Lululemon during 2015 based on the Wall Street Journal headline?
5. What possible reasons might there be for this situation to have occurred at Lululemon?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

• Student handout (pdf) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)

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