Lululemon Athletica Inc. Form 10-Q Summary
Reporting period: The provided filing is for the quarter ended August 4, 2019, representing fiscal 2019 second quarter, not 2018 Q2 as indicated in the request metadata. Results are compared primarily with the quarter ended July 29, 2018; comparable-sales metrics use a one-week-shifted comparison because fiscal 2018 contained a 53rd week.
Business Context
Lululemon designs, distributes, and sells athletic apparel and accessories through company-operated stores, e-commerce, outlets, temporary locations, wholesale accounts, and licensing arrangements. The company operated 460 stores at August 4, 2019, compared with 440 at February 3, 2019, and opened 45 net new stores since the prior-year second quarter.
Financial Performance and Liquidity
| Metric | Q2 FY2019 | Q2 FY2018 | Change |
|---|---|---|---|
| Net revenue | $883.4 million | $723.5 million | Up 22% |
| Gross profit | $485.8 million | $396.2 million | Up 23% |
| Gross margin | 55.0% | 54.8% | Up 20 basis points |
| Income from operations | $168.0 million | $134.2 million | Up 25% |
| Operating margin | 19.0% | 18.5% | Up 50 basis points |
| Net income | $125.0 million | $95.8 million | Up 31% |
| Diluted EPS | $0.96 | $0.71 | Up $0.25 |
- For the first two quarters, revenue was $1.666 billion, up 21%; gross margin was 54.5% versus 54.0%; operating income was $296.8 million, up 24%; and net income was $221.6 million, up 30%.
- Q2 total comparable sales increased 15%, or 17% on a constant-dollar basis. Comparable store sales rose 10%, while direct-to-consumer revenue increased 30%, or 31% on a constant-dollar basis.
- Q2 revenue consisted of company-operated stores of $583.8 million, direct-to-consumer revenue of $217.6 million, and other revenue of $82.0 million.
- Q2 SG&A increased 21% to $317.8 million but declined to 36.0% of revenue from 36.2%. Growth reflected higher store and corporate staffing, distribution, technology, professional-fee, brand, and incentive-compensation costs.
- For the first two quarters, operating cash flow was $50.0 million versus $210.0 million in the prior-year period. The decline primarily reflected higher inventory purchases, income-tax payments, prepaid assets, and changes in accounts payable.
- Capital expenditures were $135.8 million for the first two quarters, compared with $84.0 million previously. Financing cash outflows were $171.0 million, including $165.1 million for repurchases of 1.0 million shares.
- Cash and cash equivalents were $623.7 million at August 4, 2019, down from $881.3 million at February 3, 2019. Working capital excluding cash was $156.7 million.
- The company had a $400.0 million unsecured revolving credit facility, $398.2 million of available capacity, no borrowings outstanding, and $1.8 million of letters of credit.
- Lease adoption under ASC 842 resulted in recognition of $657.0 million of right-of-use assets and $698.5 million of lease liabilities at August 4, 2019. The company reported no cumulative earnings adjustment on adoption.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by new stores, higher store traffic and conversion, increased website traffic, and growth in wholesale and temporary locations.
- Gross-margin expansion reflected lower product costs, favorable product mix, and lower markdowns, partly offset by distribution, product, occupancy, depreciation, and foreign-exchange costs.
- Direct-to-consumer growth was strong, but its segment operating margin declined because of higher variable costs, professional fees, employee costs, technology spending, and lower conversion rates and transaction values.
- The effective tax rate declined to 26.4% from 29.5% in Q2 and to 26.4% from 29.7% for the first two quarters, primarily due to GILTI-related guidance, additional foreign tax credits, and stock-based compensation deductions.
- Foreign-currency translation losses were substantially lower than in the prior-year period. Accumulated other comprehensive loss was $228.0 million at August 4, 2019.
- Share repurchases decreased from $406.2 million in the first two quarters of fiscal 2018 to $165.1 million in fiscal 2019. The remaining authorization was $335.6 million at August 4, 2019, with repurchases expected to continue through January 2021.
Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide a clear numerical revenue, earnings, or margin guidance range. Management stated that cash, operating cash flow, and available revolver capacity should meet liquidity and capital requirements for at least the next 12 months.
- Results are seasonal, with a substantial portion of annual operating profit historically generated in the fourth quarter due to holiday sales.
- Key risks include brand and product-quality issues, intense competition, demand forecasting and excess inventory, supplier and manufacturing concentration, tariffs and trade restrictions, foreign-exchange volatility, international expansion, cybersecurity and information-technology disruptions, lease obligations, tax-law changes, and litigation.
- Outstanding legal matters include a New York wage-and-hour class action and a Delaware derivative lawsuit concerning alleged fiduciary-duty breaches and the former chief executive's separation agreement. Management believes current proceedings will not have a material adverse effect, but potential damages are unspecified.
- The company uses forward currency contracts for Canadian-dollar and Chinese-yuan exposure. A 10% appreciation of the U.S. dollar against the Canadian dollar would have reduced first-half operating income by approximately $1.2 million, based on the filing's sensitivity analysis.
Investor Verification Checklist
- Verify that the intended reporting period is Q2 fiscal 2019, ended August 4, 2019, rather than 2018 Q2.
- Assess whether strong comparable-store and e-commerce growth can continue as the store base expands and digital conversion and transaction values remain under pressure.
- Review the substantial reduction in operating cash flow and the effects of inventory, tax payments, capital expenditures, and working-capital timing.
- Evaluate the impact of ASC 842 lease liabilities, approximately $698.5 million at quarter-end, on future fixed obligations and store economics.
- Monitor remaining share-repurchase authorization, cash balances, and the pace of capital spending relative to internally generated cash.
- Follow developments in tariffs, Brexit-related trade arrangements, foreign exchange, supply-chain concentration, and the disclosed legal proceedings.