Business Context and Reporting Period
Company: Lululemon Athletica Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 2, 2009 (Thirteen and Twenty-Six Weeks)
Business Overview: Designer and retailer of technical athletic apparel, primarily yoga-inspired, sold through corporate-owned stores, franchises, and e-commerce channels. As of August 2, 2009, the company operated 104 corporate-owned stores and 11 franchise stores, primarily in Canada and the United States.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Aug 2, 2009 | 26 Weeks Ended Aug 2, 2009 |
|---|---|---|
| Net Revenue | $97,721 | $179,401 |
| Gross Profit | $45,164 | $80,188 |
| Gross Margin | 46.2% | 44.7% |
| Income from Operations | $14,332 | $24,185 |
| Net Income | $9,244 | $15,762 |
| Diluted EPS | $0.13 | $0.22 |
| Cash and Cash Equivalents | $83,797 | $83,797 |
| Operating Cash Flow (26 weeks) | N/A | $29,130 |
| Capital Expenditures (26 weeks) | N/A | $(5,344) |
Liquidity & Debt: The company reported cash and cash equivalents of $83.8 million. There were no borrowings outstanding under its $20 million uncommitted revolving credit facility as of August 2, 2009. Working capital (excluding cash) was $23.7 million.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 14% ($12.2 million) for the quarter and 10% ($17.0 million) for the 26-week period compared to the prior year. Growth was driven by new store openings and the launch of e-commerce, partially offset by a decline in comparable store sales (2% for the quarter, 5% for 26 weeks).
- Margin Compression: Gross margin decreased to 46.2% (quarter) and 44.7% (26 weeks) from 51.9% and 52.6% respectively in the prior year. This was attributed to strategic pricing initiatives, unfavorable foreign exchange rates (Canadian dollar weakness), and increased fixed costs from new stores.
- Profitability: Net income decreased 25% for the quarter and 24% for the 26-week period. Operating income declined 8% and 12% respectively, driven by higher SG&A expenses (quarter) and lower gross profit (26 weeks).
- Segment Performance: Corporate-owned store revenue grew, while franchise revenue declined due to the reacquisition of franchise stores. The "Other" segment (e-commerce, wholesale) saw significant growth (234% for the quarter) due to the e-commerce launch.
Outlook, Risks, and Management Commentary
- Management Commentary: Management noted that the challenging global economy and a weak Canadian dollar negatively impacted results. However, they highlighted strong cash flow generation and a solid balance sheet. Cost reduction and efficiency initiatives implemented in the prior fiscal year are expected to continue benefiting results.
- Guidance: The filing does not provide specific numerical financial guidance for the remainder of fiscal 2009.
- Risks: Key risks include the ability to sustain performance in a volatile economy, manage growth effectively, and mitigate the impact of foreign currency fluctuations. The company does not currently hedge foreign currency risk.
- Legal Proceedings: Two class-action lawsuits were filed in California regarding employee compensation (unreimbursed clothing costs, meal/rest breaks). Management intends to vigorously defend these matters and does not believe they will have a material adverse effect.
- Discontinued Operations: The company fully wound up its Japan operations in the prior fiscal year; there were no revenues or losses from discontinued operations in the current period.
Investor Verification Checklist
- Comparable Store Sales: Verify the trend of comparable store sales declines (-2% Q2, -5% YTD) and management's strategy to reverse this.
- Foreign Exchange Impact: Assess the sensitivity of future earnings to the Canadian/US dollar exchange rate, given the lack of hedging.
- Gross Margin Recovery: Monitor if strategic pricing and sourcing initiatives can stabilize gross margins, which have compressed significantly.
- Legal Exposure: Track the status of the California class-action lawsuits regarding employee wages and benefits.
- Capital Allocation: Review the reduction in capital expenditures (down $15.8 million YTD) and its impact on future store expansion plans.