lululemon athletica inc. — Form 10-Q Summary
Reporting period: The provided filing is for the thirteen weeks ended May 3, 2015, lululemon’s first quarter of fiscal 2015, compared with the thirteen weeks ended May 4, 2014. The request metadata identifies “2014 Q1,” but the source filing clearly reports fiscal 2015 first-quarter results.
Business Context
Lululemon designs, distributes, and retails technical athletic apparel and accessories through company-operated stores, e-commerce, showrooms, wholesale accounts, outlets, and warehouse sales. It operated 316 company-operated stores at May 3, 2015, compared with 302 at February 1, 2015, across the United States, Canada, Australia, New Zealand, the United Kingdom, and Singapore.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net revenue | $423.5 million | $384.6 million | +10% |
| Gross profit | $205.9 million | $195.7 million | +5% |
| Gross margin | 48.6% | 50.9% | -230 bps |
| Income from operations | $68.0 million | $69.8 million | -3% |
| Operating margin | 16.1% | 18.2% | -210 bps |
| Net income | $47.8 million | $19.0 million | +152% |
| Diluted EPS | $0.34 | $0.13 | + $0.21 |
| Cash flow from operations | $20.9 million | $71.0 million | -$50.0 million |
| Capital expenditures | $27.9 million | $25.4 million | +$2.5 million |
Net income benefited substantially from the absence of the $30.9 million tax expense recorded in Q1 FY2014 for repatriation of foreign earnings. Excluding that item, diluted EPS was $0.34 in both periods. The effective tax rate was 30.3% in Q1 FY2015 and 30.1% in Q1 FY2014 excluding the repatriation-related tax expense.
Revenue mix: Company-operated stores generated $314.1 million, or 74.2% of revenue. Direct-to-consumer revenue was $83.6 million, or 19.7%, up 27% reported and 31% in constant dollars. Other revenue was $25.8 million, down 15% due principally to the absence of the prior-year warehouse sale and lower outlet sales.
Liquidity and balance sheet: Cash and cash equivalents were $655.9 million at May 3, 2015, versus $664.5 million at February 1, 2015. Working capital excluding cash was $173.4 million. Inventories increased to $236.5 million from $208.1 million, primarily to support new stores and e-commerce growth and to accommodate delayed deliveries. The company had no borrowings outstanding under its $15.0 million aggregate revolving credit facilities, excluding letters of credit and guarantees. Letters of credit and guarantees totaled $0.9 million.
Material Changes Versus Prior Comparable Period
- Revenue grew 10%, driven by 53 net new company-operated stores and strong e-commerce growth.
- Total comparable sales increased 2% reported and 6% in constant dollars.
- Comparable store sales declined 5% reported and 1% in constant dollars, primarily because West Coast port congestion delayed spring product deliveries and reduced conversion and units per transaction.
- Gross margin declined 230 basis points due to higher occupancy and depreciation, increased air freight, unfavorable foreign exchange, and higher product and supply-chain costs. A 100-basis-point improvement in product margin partly offset these pressures.
- Operating income declined despite higher gross profit because selling, general, and administrative expenses increased 9% to $137.8 million. Employee costs increased $8.0 million, and net foreign exchange losses increased $3.0 million.
- Operating cash flow fell to $20.9 million, primarily because inventory purchases increased substantially.
- The company repurchased 282,802 shares for $18.8 million during the quarter under its $450 million authorization, leaving approximately $283.8 million available at May 3, 2015. An additional 368,000 shares were repurchased for $23.3 million through June 4, 2015.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear quantitative earnings or revenue outlook in the supplied text. Management stated that existing cash, operating cash flow, and available revolver capacity were expected to meet liquidity and capital expenditure needs for at least the next 12 months.
- Retail seasonality is significant, with a substantial portion of annual operating profit historically generated in the fourth quarter.
- Foreign exchange remains a material risk. Management estimated that a 10% appreciation of the Canadian dollar against the U.S. dollar would have reduced first-quarter operating income by approximately $3.0 million.
- Supply-chain disruption, including port congestion, delayed product deliveries during the quarter. The company relies on external suppliers and manufacturing sources, with significant supplier concentration and no long-term supply contracts.
- Product quality, brand reputation, competition, consumer discretionary spending, raw-material costs, international expansion, technology systems, leases, regulatory compliance, and intellectual-property matters remain identified risks.
- Shareholder litigation and books-and-records proceedings related to the 2013 sheer Luon product issue, former executive matters, and stock trades remained disclosed. Several claims or appeals had been dismissed, but the company stated that adverse settlements or judgments could exceed insurance coverage and affect liquidity.
- Management concluded that disclosure controls and procedures were effective as of May 3, 2015, and reported no material change in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Confirm that the intended period is Q1 FY2015, not Q1 FY2014, because the supplied filing is dated for the quarter ended May 3, 2015.
- Assess whether inventory growth and delayed deliveries create future markdown, working-capital, or gross-margin risk.
- Monitor whether e-commerce growth can offset weakness in comparable store sales and continued store expansion costs.
- Evaluate the sustainability of the reported $0.34 diluted EPS after excluding the prior-year repatriation tax comparison.
- Track foreign exchange effects, air freight costs, occupancy deleverage, and product margin trends.
- Review subsequent share repurchases and the remaining authorization, as well as the status and potential exposure of disclosed litigation.