Lululemon Athletica Inc. — Form 10-Q Summary
Reporting period: The filing covers the thirteen weeks ended May 1, 2011, the first quarter of fiscal 2011, compared with the thirteen weeks ended May 2, 2010. Fiscal 2011 ends January 29, 2012. The company designs, manufactures and distributes premium athletic apparel through corporate-owned stores, e-commerce, franchises and wholesale accounts in Canada, the United States and Australia.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net revenue | $186.8 million | $138.3 million | +35% |
| Gross profit | $109.7 million | $74.4 million | +48% |
| Gross margin | 58.7% | 53.8% | +490 basis points |
| Income from operations | $51.7 million | $32.5 million | +59% |
| Operating margin | 27.7% | 23.5% | +420 basis points |
| Net income attributable to lululemon | $33.4 million | $19.6 million | +70% |
| Diluted earnings per share | $0.46 | $0.27 | +$0.19 |
| Cash flow from operations | $5.7 million | $12.6 million | -$6.9 million |
| Capital expenditures | $74.8 million | $5.9 million | +$68.9 million |
Cash and cash equivalents were $260.9 million at May 1, 2011, compared with $316.3 million at January 30, 2011. Working capital excluding cash was $30.1 million. Cash declined by $55.4 million during the quarter, principally because of capital expenditures, including the $65.1 million purchase of the company’s principal executive and administrative offices. Financing activities provided $8.2 million, and foreign-currency translation increased cash by $5.6 million.
The company had no borrowings outstanding under its uncommitted CDN$20.0 million revolving credit facility. Letters of credit and guarantees totaled $1.5 million. Management stated that cash from operations and available borrowings should meet liquidity and capital expenditure requirements for at least the next 24 months, although future discretionary investments could require external financing.
Material changes versus the prior comparable period
- Revenue growth was driven by a 19% comparable-store sales increase, 25 net new corporate-owned stores opened since the prior comparable quarter, and 51% growth in direct-to-consumer revenue.
- Corporate-owned store revenue increased 35% to $156.5 million; direct-to-consumer revenue increased 51% to $13.8 million; and other revenue increased 21% to $16.5 million.
- Gross margin benefited from strong spring merchandise sell-through, fewer markdowns and discounts, favorable foreign exchange, operating leverage and a non-recurring adjustment related to input tax credits. Raw-material and labor cost pressure was noted.
- SG&A increased 38% to $58.0 million and rose to 31.0% of revenue from 30.3%, reflecting business expansion, wage increases, Australian operations, headquarters investment and e-commerce infrastructure costs.
- Effective income tax rate declined to 36.3% from 40.0%, primarily because of revised plans for repatriating unremitted Canadian subsidiary earnings.
- Cash flow from operations decreased despite higher earnings, primarily because of increased income-tax payments. Inventory increased to $64.4 million from $57.5 million at January 30, 2011.
- Property and equipment increased to $144.9 million from $71.0 million, principally reflecting the administrative-office purchase and other capital investments.
- The company increased its corporate-owned store count to 138 from 133 at January 30, 2011 and operated 142 total stores, including four U.S. franchise stores.
Outlook, commentary, risks and unusual items
- Management emphasized continued investment in stores, employees, infrastructure, e-commerce and working capital while maintaining spending discipline.
- For the remainder of fiscal 2011, the company expected to open up to 22 additional lululemon stores and one ivivva store in North America, plus two lululemon stores in Australia. It estimated $14 million to $16 million of fiscal 2011 capital expenditures for those additional stores.
- The e-commerce platform was brought partly in-house and updated during the quarter. Management views direct-to-consumer sales as an important growth channel and an opportunity to increase international brand awareness.
- Results are seasonal, with a historically significant portion of revenue and operating income generated in the fourth quarter. First-quarter results are not necessarily indicative of full-year performance.
- Key risks include consumer spending and economic conditions, foreign exchange volatility, raw-material and labor cost inflation, reliance on third-party suppliers and manufacturing in Asia, supply-chain and distribution disruptions, e-commerce and information-system failures, long-term store leases, competition, brand reputation, inventory forecasting and new-store execution.
- A 10% depreciation of the Canadian dollar against the U.S. dollar would have reduced first-quarter operating income by approximately $4.6 million; a comparable Australian-dollar depreciation would have reduced operating income by approximately $0.4 million. The company did not hedge these exposures.
- The company reported no material legal proceedings and stated that disclosure controls and procedures were effective as of May 1, 2011.
Most important facts for investors to verify
- Whether strong comparable-store sales and 58.7% gross margin were sustained after the quarter, particularly once the non-recurring tax-credit adjustment and favorable foreign exchange effects are excluded.
- Whether planned store openings generated expected returns and whether the $14 million to $16 million expansion capital budget remained sufficient.
- Whether e-commerce infrastructure changes improved growth and service levels without creating material disruption or additional costs.
- Whether inventory growth and the provision to reduce inventory to market value, which was $4.9 million at May 1, 2011, indicate any future markdown risk.
- The effect of Canadian- and Australian-dollar movements, raw-material costs, Chinese manufacturing and labor costs, and transportation or trade restrictions on future margins.
- The company’s significant operating lease commitments: $188.0 million through January 31, 2016 and approximately $81.4 million thereafter.
- Whether operating cash flow recovers after the quarter’s unusually high tax payments and whether future capital spending can be funded without debt or equity financing.