lululemon athletica inc. Form 10-Q Summary
Reporting period: The supplied filing is for the quarter and first three quarters ended October 28, 2018, representing fiscal 2018 Q3, not 2017 Q3. Prior comparable periods ended October 29, 2017. The company designs, distributes, and sells healthy-lifestyle athletic apparel through company-operated stores, e-commerce, outlets, temporary locations, wholesale accounts, and licensing arrangements. It operated 426 company-operated stores at quarter-end versus 404 at January 28, 2018.
Financial performance and position
| Metric | Q3 FY2018 | Q3 FY2017 | First 3 quarters FY2018 | First 3 quarters FY2017 |
|---|---|---|---|---|
| Net revenue | $747.7 million | $619.0 million | $2.121 billion | $1.720 billion |
| Gross profit / margin | $406.8 million / 54.4% | $322.0 million / 52.0% | $1.148 billion / 54.1% | $876.3 million / 50.9% |
| Income from operations / margin | $135.9 million / 18.2% | $85.6 million / 13.8% | $374.4 million / 17.7% | $199.7 million / 11.6% |
| Net income / margin | $94.4 million / 12.6% | $58.9 million / 9.5% | $265.3 million / 12.5% | $138.9 million / 8.1% |
| Diluted EPS | $0.71 | $0.43 | $1.97 | $1.02 |
| Cash flow from operations | Not separately provided | Not separately provided | $316.9 million | $131.3 million |
Q3 revenue increased 21%, while constant-dollar revenue increased 22%. Total comparable sales increased 17%, or 18% in constant dollars; comparable store sales increased 6%, and direct-to-consumer revenue increased 44%. For the first three quarters, revenue increased 23%, total comparable sales increased 19%, and direct-to-consumer revenue increased 51%.
At October 28, 2018, cash and cash equivalents were $703.6 million, inventories were $496.0 million, and total assets were $1.981 billion. Total liabilities were $574.3 million and stockholders’ equity was $1.407 billion. The company had no borrowings under its revolving credit facility, other than $1.2 million of letters of credit, and reported approximately $398.8 million of available facility capacity. Working capital excluding cash and cash equivalents was $216.2 million.
First-three-quarter investing cash outflows were $165.9 million, including $156.7 million of capital expenditures. Financing cash outflows were $406.4 million, primarily reflecting $414.3 million used to repurchase 3.4 million common shares. Cash declined by $286.9 million from the beginning of the fiscal year, including a $31.5 million unfavorable foreign-exchange effect.
Material changes versus the prior comparable period
- Q3 operating income increased 59%, and first-three-quarter operating income increased 87%. Excluding prior-year ivivva restructuring charges, Q3 operating income increased 26% and first-three-quarter operating income increased 53%.
- Q3 gross margin expanded 240 basis points to 54.4%; first-three-quarter gross margin expanded 320 basis points to 54.1%. Management attributed the improvement primarily to lower product costs, favorable product mix, fewer markdowns, and lower inventory provisions.
- Direct-to-consumer revenue grew faster than store revenue, increasing its share of Q3 revenue to 25.3% from 21.2%. Company-operated store revenue increased 12%, supported by new stores and comparable-store growth.
- SG&A increased 26% in Q3 and 21% for the first three quarters, reflecting higher employee, distribution, credit-card, packaging, digital marketing, technology, and corporate costs. SG&A as a percentage of revenue increased in Q3 but declined for the first three quarters.
- The prior-year period included $22.2 million of Q3 and $45.4 million of first-three-quarter pre-tax ivivva restructuring-related costs. No comparable charges were recorded in FY2018. The company had closed 48 of 55 ivivva stores in August 2017 and now operates ivivva primarily online.
- The company recorded an additional $5.2 million of income-tax expense in Q3 related to the provisional U.S. Tax Cuts and Jobs Act transition tax. The company expected further tax-reform accounting adjustments could materially affect future tax expense and effective tax rates.
- The company adopted ASC 606 revenue recognition guidance on January 29, 2018 using the modified retrospective method. Management reported no change to the statement of operations and substantially unchanged revenue timing and amounts; the principal balance-sheet effect was gross presentation of sales-return assets and liabilities.
Guidance, outlook, commentary, and risks
Management stated that cash, operating cash flow, and available revolving-credit capacity should be adequate for liquidity needs and capital expenditures for at least the next 12 months. The filing does not provide a clear numerical revenue or earnings guidance range. Fiscal 2018 is a 53-week year and the business is seasonal, with a substantial portion of annual operating profit historically generated in the fourth quarter.
The company will adopt ASC 842 lease accounting on February 4, 2019. It expects a significant increase in balance-sheet assets and liabilities from recognizing operating lease right-of-use assets and obligations, but does not expect a material effect on net income or cash flows.
- Key operating risks include brand or product-quality damage, intense competition, changing consumer preferences, demand-forecasting errors, excess inventory, and pressure on product costs and selling prices.
- The company relies on international suppliers and concentrated fabric and manufacturing sources, exposing it to tariffs, trade restrictions, labor disruptions, transportation interruptions, quality problems, and raw-material cost inflation.
- International expansion and foreign-currency movements may affect reported revenue, expenses, equity, and operating income. The company held substantial foreign-exchange forward contracts and reported $4.3 million of net foreign-exchange and derivative losses in the first three quarters.
- E-commerce, information-technology, cybersecurity, privacy, data-protection, and distribution-center disruptions could reduce sales and damage the brand.
- Pending matters include a New York wage-and-hour class action and a California lawsuit alleging sexual assault, harassment, retaliation, and related claims seeking $3.0 million. Management intends to defend both matters and states that current proceedings are not expected to have a material adverse effect, although outcomes remain uncertain.
Important facts for investors to verify
- Confirm the period designation: the supplied document is fiscal 2018 Q3, despite the request metadata identifying 2017 Q3.
- Assess how much earnings growth reflects underlying operations versus the absence of FY2017 ivivva restructuring charges and the related tax recovery.
- Monitor inventory growth to $496.0 million and working-capital effects, particularly because operating cash flow benefited from a $129.6 million increase in accounts payable while inventory consumed $177.9 million of cash.
- Evaluate the sustainability of gross-margin expansion, direct-to-consumer growth, and comparable-sales performance through the seasonally important fourth quarter.
- Track the remaining $184.7 million authorization under the $600 million share-repurchase program and its effect on cash balances and share count.
- Verify the eventual impact of ASC 842, U.S. tax-reform adjustments, GILTI accounting, foreign-exchange movements, pending litigation, and supply-chain or tariff developments.