Lululemon Athletica Inc. Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended July 31, 2022, compared with August 1, 2021. Although the request metadata identifies “2021 Q2,” the filing is for fiscal 2022 second quarter. Fiscal 2022 is a 52-week year ending January 29, 2023.
Business Context
Lululemon designs, distributes, and sells technical athletic apparel, footwear, accessories, and MIRROR connected fitness products and subscriptions through company-operated stores, e-commerce, outlets, wholesale, licensing, recommerce, and temporary locations. The company operated 600 stores at July 31, 2022, compared with 574 at January 30, 2022.
Financial Performance
| Metric | Second Quarter 2022 | Second Quarter 2021 | Change |
|---|---|---|---|
| Net revenue | $1.868 billion | $1.451 billion | +28.8% |
| Gross profit | $1.055 billion | $843 million | +25.3% |
| Gross margin | 56.5% | 58.1% | -160 bps |
| Income from operations | $401.2 million | $291.0 million | +37.9% |
| Operating margin | 21.5% | 20.1% | +140 bps |
| Net income | $289.5 million | $208.1 million | +39.1% |
| Diluted EPS | $2.26 | $1.59 | +42.1% |
For the first two quarters, revenue was $3.482 billion, up 30.1%; gross profit was $1.926 billion, up 24.8%; operating income was $661.6 million, up 36.4%; and net income was $479.5 million, up 35.8%. Year-to-date gross margin declined to 55.3% from 57.6%, while operating margin increased to 19.0% from 18.1%.
- Second-quarter total comparable sales increased 23%, or 25% on a constant-dollar basis. Comparable store sales increased 16%, and direct-to-consumer revenue increased 30%.
- Second-quarter revenue grew 29% in company-operated stores, 30% in direct-to-consumer, and 20% in other channels.
- Revenue growth was broad-based geographically: United States revenue increased to $1.278 billion, Canada to $268.6 million, and revenue outside North America to $321.3 million.
- Women’s product revenue was $1.206 billion, men’s product revenue was $461.3 million, and other categories were $201.4 million.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $498.8 million at July 31, 2022, down from $1.260 billion at January 30, 2022.
- Year-to-date operating cash flow was negative $145.6 million, compared with positive $499.8 million in the prior-year period, primarily because inventory increased by $510.6 million and other working-capital items used cash.
- Year-to-date capital expenditures were $256.1 million, compared with $144.5 million in the prior-year period. Investing cash outflow was $224.9 million.
- Year-to-date share repurchases totaled $358.0 million for 1.1 million shares. The company had $829.5 million remaining under its $1.0 billion repurchase authorization at July 31, 2022.
- Inventory was $1.462 billion, up 51% from January 30, 2022 and up 85% from August 1, 2021. Unit inventory increased 64% year over year.
- The company had no borrowings outstanding under its $400 million unsecured revolving credit facility, other than $5.2 million of letters of credit. Available capacity was $394.8 million, and the company was in compliance with its covenants.
- Working capital excluding cash and cash equivalents was $681.1 million. Management stated that available cash, operating cash flow, and revolving-credit capacity should meet liquidity and capital requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings increased substantially, supported by higher store traffic, new stores, e-commerce growth, and international expansion. The company opened 66 net new stores since the second quarter of 2021.
- Gross margin declined because of higher air freight and distribution costs, increased markdowns, unfavorable foreign exchange, and higher product costs. Occupancy and depreciation leverage partially offset these pressures.
- SG&A increased 22.3% in the second quarter and 22.4% year to date, driven by headcount and wage growth, technology, brand and community spending, distribution costs, credit card fees, and professional fees. SG&A as a percentage of revenue nevertheless declined.
- The second quarter included a $10.2 million pretax gain on the sale of an administrative office building. The prior-year quarter included $8.1 million of MIRROR acquisition-related expenses; no such expenses were recorded in 2022.
- Operating cash flow deteriorated materially because of inventory accumulation and unfavorable working-capital movements, while capital expenditures and share repurchases increased.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear numerical financial guidance update. Management expects supply disruptions to continue through 2022 and into 2023 and expects inventory growth to exceed revenue growth in 2022. The business remains seasonally weighted toward the fourth quarter, which historically produces a substantial portion of annual operating profit.
- COVID-19 caused temporary closures of stores and a PRC distribution center, with localized closures continuing as resurgences occur. Supply-chain disruption, port congestion, freight inflation, and increased air freight remain significant risks.
- Inflation in freight, wages, raw materials, and other operating costs could pressure gross and operating margins if not offset by pricing or productivity improvements.
- Elevated inventory increases the risk of markdowns, write-downs, excess working capital, and weaker future cash flow.
- MIRROR revenue declined within the “Other” category, and the company may not achieve the expected growth, synergies, or profitability from the acquisition.
- DISH Technologies litigation concerning patents for internet-streaming fitness devices remained under investigation by the International Trade Commission; related Delaware litigation was stayed. The company intends to defend the matter vigorously.
- The company remains exposed to foreign-exchange volatility, consumer discretionary spending, international expansion, supplier concentration, tariffs and trade restrictions, cybersecurity and privacy incidents, product defects, competition, and legal and regulatory proceedings.
- A 10% appreciation of the U.S. dollar against the Canadian dollar, assuming other factors remained constant, would have reduced first-half operating income by approximately $23.4 million.
Important Facts for Investors to Verify
- Whether inventory growth moderates and whether markdowns or provisions materially affect future gross margin.
- Whether supply-chain, freight, wage, and raw-material inflation persists and pressures product margin.
- Whether operating cash flow returns to positive levels as inventory and working capital normalize.
- Progress and profitability of MIRROR, including the effect of declining MIRROR revenue and the pending DISH patent matter.
- Future store openings, international comparable sales, direct-to-consumer conversion, and the sustainability of the reported comparable-sales growth.
- Utilization of the remaining $829.5 million share-repurchase authorization and its effect on liquidity and share count.
- Potential changes to the effective tax rate, including Canadian withholding-tax exposure and the renewal of the U.S.-Canada advance pricing arrangement.