Business Context and Reporting Period
Lululemon Athletica Inc. designs, distributes, and sells athletic apparel, accessories, and in-home fitness products and subscriptions through company-operated stores, e-commerce, outlets, temporary locations, wholesale, licensing, and MIRROR. The filing is a Form 10-K for the 52-week fiscal year ended January 30, 2022, referred to as fiscal 2021, compared primarily with the 52-week year ended January 31, 2021. Although the request metadata references 2020 Q4, the supplied filing is not a quarterly filing and reports fiscal 2021 results.
At year-end, Lululemon operated 574 company-operated stores in 17 countries, compared with 521 stores a year earlier. Women’s products represented 67% of fiscal 2021 revenue and North America represented 85%.
Financial Performance and Position
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net revenue | $6.257 billion | $4.402 billion | +42.1% |
| Gross profit | $3.609 billion | $2.464 billion | +46.5% |
| Gross margin | 57.7% | 56.0% | +170 bps |
| Income from operations | $1.333 billion | $820.0 million | +62.6% |
| Operating margin | 21.3% | 18.6% | +270 bps |
| Net income | $975.3 million | $588.9 million | +65.6% |
| Diluted EPS | $7.49 | $4.50 | +66.4% |
| Cash flow from operations | $1.389 billion | $803.3 million | +$585.8 million |
- Company-operated store revenue increased 70.1% to $2.821 billion, primarily reflecting widespread store closures and restrictions during fiscal 2020.
- Direct-to-consumer revenue increased 21.6% to $2.778 billion, or 20% on a constant-dollar basis, and represented 44.4% of total revenue.
- International revenue increased 53%, while North American revenue increased 40%.
- Cash and cash equivalents were $1.260 billion at year-end. Working capital excluding cash and cash equivalents was negative $50.4 million.
- Inventory increased 49% to $966.5 million, with units up 33%. The inventory provision was $38.0 million.
- Total capital expenditures were $394.5 million. Fiscal 2021 capital expenditures included $189.6 million for company-operated stores, $81.7 million for direct-to-consumer operations, and $123.2 million for corporate and other activities.
- The company had no borrowings outstanding under its $400.0 million unsecured revolving credit facility, other than $3.0 million of letters of credit. Available capacity was $397.0 million.
Material Changes Versus the Prior Comparable Period
- Results benefited substantially from the recovery of store operations after COVID-19-related closures and restrictions in fiscal 2020. Most stores were open throughout fiscal 2021, although some locations remained temporarily closed.
- Gross margin expanded due primarily to occupancy and depreciation leverage, distribution and product-department leverage, and favorable foreign exchange. These benefits were partly offset by higher air freight costs and supply-chain disruption.
- SG&A increased 38.3% to $2.225 billion, reflecting higher employee costs, distribution and credit-card fees, digital marketing, technology, professional fees, and head-office costs. Fiscal 2020 included $37.1 million of payroll subsidies; no such subsidies were recognized in fiscal 2021.
- Direct-to-consumer operating margin declined because higher air freight and distribution-center costs pressured gross margin and operating expenses grew with the business.
- MIRROR revenue decreased within the Other category, while MIRROR-related acquisition expenses increased to $41.4 million from $29.8 million. MIRROR goodwill was $362.5 million and no impairment was recorded.
- Lululemon repurchased 2.2 million shares for $812.6 million in fiscal 2021, compared with 0.4 million shares for $63.7 million in fiscal 2020. The remaining authorization at January 30, 2022 was $187.4 million; subsequent repurchases through March 23, 2022 completed the program.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected approximately 70 new company-operated stores in fiscal 2022, with growth concentrated in Asia and the United States.
- Fiscal 2022 capital expenditures were expected to range from $600 million to $625 million. New distribution centers in Delta, British Columbia and Los Angeles were expected to become operational in fiscal 2022 and fiscal 2023, respectively.
- Management stated that cash, operating cash flow, and available revolver capacity should satisfy liquidity and capital expenditure needs for at least the next 12 months.
- Management expected supply-chain disruption, port congestion, reduced freight capacity, increased air freight use, and elevated freight costs to continue through fiscal 2022. Inventory growth was expected to exceed revenue growth.
- Key risks include COVID-19 resurgences, supply-chain concentration and disruption, inflation in labor, freight and raw-material costs, inventory obsolescence, changing consumer preferences, intense athletic-apparel competition, international expansion, foreign-exchange volatility, cybersecurity and privacy incidents, and the ability to make MIRROR profitable.
- The company faces ongoing patent litigation brought by DISH Technologies and related parties concerning internet-streaming-enabled fitness devices. The ITC investigation was ongoing and related Delaware litigation was stayed pending the ITC proceeding. The company intends to defend the matter vigorously.
- An Aliign Activation Wear trademark lawsuit was decided in Lululemon’s favor at the district court level, but the plaintiff appealed.
- The company disclosed $944.8 million of minimum operating lease commitments, $993.5 million of purchase obligations, $43.2 million of remaining transition-tax payments, and $24.3 million of deferred MIRROR consideration as of January 30, 2022. Signed but not yet commenced distribution-center leases added $379.7 million of commitments not included in the lease table.
- The company noted potential future increases in its effective tax rate because of Canadian subsidiary earnings, repatriation considerations, and the expiration and renegotiation of its U.S.-Canada advance pricing arrangement.
Most Important Facts for Investors to Verify
- Confirm that the relevant period is fiscal 2021, not 2020 Q4, and distinguish recovery-driven store growth from underlying comparable performance; full-year comparable-store metrics were not provided because COVID-19 distorted fiscal 2020 comparisons.
- Assess whether inventory growth of 49% and expected inventory growth above revenue growth create future markdown, obsolescence, or working-capital risk.
- Monitor gross-margin sensitivity to air freight, port congestion, labor inflation, raw materials, tariffs, and foreign exchange.
- Evaluate MIRROR’s revenue trajectory, subscriber growth, profitability assumptions, and the $362.5 million goodwill balance.
- Review the capital allocation impact of planned capital expenditures, new distribution centers, store expansion, and share repurchases.
- Track the DISH patent litigation, potential remedies affecting MIRROR devices, and any related legal or impairment exposure.
- Verify the company’s liquidity against lease, purchase, tax, deferred-consideration, and distribution-center commitments.