Lululemon Athletica Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the quarter and first three quarters ended October 29, 2017, compared with October 30, 2016. The request metadata identifies “2016 Q3,” but the filing itself is the fiscal 2017 third-quarter Form 10-Q.
Business Context
Lululemon designs, distributes, and sells athletic apparel and accessories through company-operated stores, e-commerce, outlets, showrooms, wholesale accounts, and other channels. As of October 29, 2017, the company operated 388 company-operated stores, including 381 lululemon stores and seven ivivva stores, compared with 406 total stores at January 29, 2017.
The company substantially completed a restructuring of its ivivva business during the quarter, closing 48 of 55 ivivva company-operated stores and shifting the brand primarily toward e-commerce.
Financial Metrics
| Metric | Q3 Fiscal 2017 | Q3 Fiscal 2016 | First 3 Quarters Fiscal 2017 | First 3 Quarters Fiscal 2016 |
|---|---|---|---|---|
| Net revenue | $619.0 million | $544.4 million | $1.720 billion | $1.554 billion |
| Gross profit | $322.0 million | $278.4 million | $876.3 million | $771.7 million |
| Gross margin | 52.0% | 51.1% | 50.9% | 49.6% |
| Income from operations | $85.6 million | $93.0 million | $199.7 million | $224.5 million |
| Operating margin | 13.8% | 17.1% | 11.6% | 14.4% |
| Net income | $58.9 million | $68.3 million | $138.9 million | $167.2 million |
| Diluted EPS | $0.43 | $0.50 | $1.02 | $1.22 |
Quarterly revenue increased 14%, while constant-dollar revenue increased 12%. Total comparable sales increased 8%, or 7% in constant dollars. Comparable store sales increased 2%, or 1% in constant dollars, while direct-to-consumer revenue increased 26%, or 25% in constant dollars.
For the first three quarters, revenue increased 11%, or 10% in constant dollars. Total comparable sales increased 5%, or 4% in constant dollars. Direct-to-consumer revenue increased 18%.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $650.1 million at October 29, 2017, compared with $734.8 million at January 29, 2017.
- Operating cash flow was $131.3 million for the first three quarters, compared with $98.7 million in the prior-year period.
- Capital expenditures were $107.1 million, resulting in investing cash outflows of $120.1 million.
- Financing cash outflows were $100.7 million, including $99.3 million used to repurchase 1.8 million shares.
- Inventory increased to $396.9 million from $298.4 million at fiscal year-end.
- The company had $148.9 million of available capacity under its $150.0 million unsecured revolving credit facility and no borrowings outstanding other than $1.1 million of letters of credit.
- Management stated that cash, operating cash flow, and available revolving-credit capacity should be adequate for liquidity and capital requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by new lululemon stores, higher e-commerce traffic and transaction values, and growth in outlets and other channels. The company opened 46 net new lululemon stores since the comparable prior-year quarter.
- Gross margin expanded by 90 basis points in the quarter and 130 basis points year to date, primarily from favorable product mix, lower product costs, and foreign exchange benefits, partly offset by higher markdowns and restructuring-related costs.
- GAAP operating income declined 8% in the quarter and 11% year to date because of ivivva restructuring charges and higher selling, general, and administrative expenses.
- GAAP net income declined 14% in the quarter and 17% year to date. Adjusted diluted EPS was $0.56 in the quarter versus $0.47 in the prior-year quarter, and $1.26 year to date versus $1.15.
- SG&A increased 16% in the quarter and 17% year to date, with higher employee, digital marketing, website, brand, technology, and operating-location costs.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide a clear quantitative full-year revenue or earnings guidance figure.
- The ivivva restructuring produced $45.4 million of pre-tax costs in the first three quarters, including $19.9 million of lease termination costs, $11.6 million of long-lived asset impairments, $8.8 million recorded in cost of goods sold, $4.0 million of employee-related costs, and other costs. Remaining lease termination liabilities were $12.2 million.
- The company expects the restructuring benefits and costs to depend on landlord negotiations, sales and inventory assumptions, execution timing, employee effects, and potential claims.
- Retail seasonality is significant: management historically generates a substantial portion of annual operating profit in the fourth quarter, with approximately 47% of fiscal 2016 operating profit earned in that quarter.
- Foreign exchange remains a material risk. The company had $50.0 million of net-investment hedge notionals and $40.0 million of other forward-contract notionals outstanding. Management estimated that a 10% depreciation of the U.S. dollar against the Canadian dollar would have reduced first-three-quarter operating income by approximately $4.4 million.
- Key risks include brand and product reputation, intense athletic-apparel competition, supplier and raw-material concentration, consumer discretionary spending, inventory forecasting, e-commerce and information-technology disruptions, international expansion, tariffs and trade restrictions, leases, tax changes, litigation, and restructuring execution.
- A New York wage-and-hour class action remains pending; plaintiffs seek unspecified damages, and the company intends to defend the matter.
- On November 29, 2017, the board authorized a new $200 million share-repurchase program expected to run for two years.
- The company adopted new stock-compensation accounting in fiscal 2017 and expects future adoption of revenue and lease accounting standards; the filing states that the revenue standard was not expected to materially affect the amount or timing of revenue recognition, while lease adoption is expected to significantly increase reported assets and liabilities.
Important Facts for Investors to Verify
- Confirm the requested period: the filing supplied is fiscal 2017 Q3, not fiscal 2016 Q3.
- Assess underlying operating performance excluding the $45.4 million ivivva restructuring charge, while considering whether restructuring costs or benefits may recur.
- Monitor inventory growth, markdown exposure, and the $4.8 million ivivva inventory valuation provision.
- Evaluate whether strong e-commerce growth can offset modest comparable-store sales and store-traffic pressure.
- Review fourth-quarter seasonality and any subsequent full-year guidance issued after this filing.
- Track cash generation after capital expenditures and share repurchases, as well as utilization and covenant compliance under the revolving facility.
- Assess foreign-exchange sensitivity, supplier concentration, lease obligations, pending litigation, and the financial effects of future lease-accounting adoption.