Lululemon Athletica Inc. Form 10-Q Summary
Reporting period: The provided filing covers the thirteen and thirty-nine weeks ended October 31, 2010, compared with November 1, 2009. Although the request metadata identifies “2009 Q3,” the filing itself is the third quarter of fiscal 2010. Fiscal 2010 ends January 30, 2011. Results are unaudited and subject to retail seasonality.
Business context
Lululemon designs, manufactures and distributes athletic apparel through corporate-owned stores, e-commerce, franchises, wholesale accounts, showrooms and outlets. At October 31, 2010, it operated 130 corporate-owned stores and four franchise stores, compared with 110 and 14, respectively, at January 31, 2010. Its primary markets were Canada, the United States and Australia.
- Third-quarter revenue mix: Canada approximately 52%, United States approximately 45%, and other markets approximately 3%.
- Reportable segments: corporate-owned stores, direct to consumer, and other.
- Direct-to-consumer sales represented 7% of first-three-quarter revenue, up from 2.9% in the comparable period.
Financial performance
| Metric | 13 weeks ended Oct. 31, 2010 | 13 weeks ended Nov. 1, 2009 | 39 weeks ended Oct. 31, 2010 | 39 weeks ended Nov. 1, 2009 |
|---|---|---|---|---|
| Net revenue | $175.8 million | $112.9 million | $466.3 million | $292.3 million |
| Gross profit | $96.8 million | $56.3 million | $251.5 million | $136.5 million |
| Gross margin | 55.1% | 49.9% | 53.9% | 46.7% |
| SG&A expense | $54.5 million | $35.4 million | $142.4 million | $91.4 million |
| Operating income | $42.4 million | $20.9 million | $109.1 million | $45.1 million |
| Net income attributable to Lululemon | $25.7 million | $14.1 million | $67.1 million | $29.8 million |
| Diluted EPS | $0.36 | $0.20 | $0.93 | $0.42 |
- Third-quarter revenue increased 56%; first-three-quarter revenue increased 60%.
- Third-quarter operating margin increased to 24.1% from 18.5%; first-three-quarter operating margin increased to 23.4% from 15.4%.
- Comparable-store sales increased 32% including foreign exchange in the quarter and 39% for the first three quarters; constant-currency increases were 29% and 31%, respectively.
- Third-quarter direct-to-consumer revenue increased 203% to $14.0 million; first-three-quarter revenue increased 285% to $32.8 million.
Cash flow, liquidity and capital structure
| Metric | 39 weeks ended Oct. 31, 2010 | 39 weeks ended Nov. 1, 2009 |
|---|---|---|
| Cash provided by operating activities | $87.9 million | $51.8 million |
| Cash used in investing activities | $34.4 million | $10.2 million |
| Cash provided by financing activities | $7.9 million | $(0.03) million |
| Increase in cash | $65.2 million | $45.0 million |
| Cash and cash equivalents at period end | $224.8 million | $101.8 million |
- Working capital excluding cash was $22.7 million at October 31, 2010.
- No borrowings were outstanding under the CDN$20 million uncommitted revolving credit facility, excluding letters of credit and guarantees.
- Letters of credit and guarantees totaled $1.5 million.
- Capital expenditures were $22.0 million, versus $9.0 million in the comparable period; investing cash use also included $12.5 million for franchise acquisitions.
- Future minimum operating lease payments totaled $215.2 million through January 31, 2015 and approximately $72.4 million thereafter.
Material changes and unusual items
- The company increased its ownership of lululemon Australia from 13% to 80% on May 12, 2010, obtaining control and consolidating the business. The acquired business contributed $8.9 million of revenue and $1.0 million of operating income from acquisition through October 31, 2010.
- Remeasurement of the previously held Australian interest generated a $1.8 million gain included in other income.
- The company reacquired a franchised store in Saskatoon for $6.6 million and reacquired nine Australian franchise stores as part of its vertical retail strategy.
- Goodwill and intangible assets increased to $26.5 million from $8.1 million at January 31, 2010, primarily reflecting acquisitions and foreign-currency effects.
- Inventory increased to $73.0 million from $44.1 million, reflecting business expansion and working-capital investment. Operating cash flow was partly offset by a $24.0 million inventory increase.
- The effective tax rate increased to 38.9% in the quarter and 39.7% for the first three quarters, primarily because of deferred tax liabilities on undistributed foreign earnings outside reinvestment plans.
- The company repurchased 10,452 shares during the quarter under its share repurchase program.
Outlook, commentary and risks
- Management stated that strong cash flow, liquidity and the balance sheet provide flexibility to invest in stores, people and infrastructure while maintaining discretionary-spending discipline.
- Management expected to open four additional stores during the remainder of fiscal 2010, with estimated related capital expenditures of approximately $2.4 million to $2.5 million. The filing does not provide formal revenue or earnings guidance.
- Management expected cash from operations and available credit capacity to meet liquidity and capital-expenditure needs for at least the next 24 months, subject to demand and other risks.
- Retail seasonality is significant, with the fourth quarter historically contributing a substantial portion of annual operating income.
- Key risks include macroeconomic pressure on discretionary spending, foreign-exchange exposure, supply-chain and raw-material constraints, reliance on third-party manufacturers, inventory forecasting, store expansion execution, e-commerce and information-system disruptions, competition, brand and intellectual-property risks, and substantial lease obligations.
- A 10% depreciation of the Canadian dollar relative to the U.S. dollar would have reduced first-three-quarter operating income by approximately $6.6 million based on the filing’s sensitivity analysis; the company did not hedge foreign-currency exposure.
- A former employee filed a putative class action alleging off-the-clock work and unpaid compensation. The company denied the allegations and stated that management did not believe current proceedings would materially affect financial position or results.
- Management concluded that disclosure controls and procedures were effective as of October 31, 2010, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify the reporting-period discrepancy: the source filing is for fiscal 2010 third quarter, not 2009 third quarter.
- Assess the sustainability of the 53.9% year-to-date gross margin, including the effects of foreign exchange, product mix, e-commerce growth and potential markdowns.
- Reconcile comparable-store sales growth with new-store contributions, acquisitions and currency effects.
- Monitor inventory growth, the inventory valuation provision of $4.1 million, and holiday-season sell-through.
- Review the financial impact and integration progress of the Australia and Saskatoon acquisitions, including goodwill and non-controlling interest.
- Evaluate exposure to Canadian-dollar movements, since the company does not hedge foreign-currency risk.
- Review the unpaid-wage class action, lease commitments, supplier concentration and planned store openings for potential liquidity or margin effects.