Business Context and Reporting Period
Company: Lululemon Athletica Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 3, 2008 (13 weeks) and 26 weeks ended August 3, 2008.
Business Overview: Designer and retailer of technical athletic apparel, primarily sold through corporate-owned and franchise stores in Canada and the United States. As of August 3, 2008, the company operated 80 corporate-owned stores and 12 franchise stores globally. The company discontinued operations in Japan during this period.
Key Financial Metrics
| Metric | 13 Weeks Ended Aug 3, 2008 | 26 Weeks Ended Aug 3, 2008 |
|---|---|---|
| Net Revenue | $85.5 million | $162.4 million |
| Gross Profit | $44.4 million | $85.5 million |
| Gross Margin | 51.9% | 52.6% |
| Operating Income | $15.5 million | $27.5 million |
| Net Income (Continuing Ops) | $12.3 million | $20.8 million |
| Net Income (Total) | $11.1 million | $19.6 million |
| Diluted EPS (Total) | $0.16 | $0.27 |
| Cash and Equivalents | $43.7 million (as of Aug 3, 2008) | N/A |
| Operating Cash Flow | N/A | $11.1 million |
| Capital Expenditures | N/A | $19.3 million |
Debt and Liquidity: The company had no borrowings outstanding under its $20 million uncommitted revolving credit facility as of August 3, 2008. Working capital (excluding cash) was $28.0 million.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 47.6% year-over-year for the quarter and 59.2% for the 26-week period. This was driven by a 18% comparable store sales increase in the quarter and 22% for the 26-week period, alongside new store openings (22 in the U.S. and 5 in Canada since the prior year).
- Profitability: Net income from continuing operations more than doubled, rising 123% for the quarter and 124% for the 26-week period compared to the prior year.
- Margin Compression: Gross margin decreased 1.2 percentage points to 51.9% for the quarter due to increased occupancy costs, depreciation, and mark-downs, though it improved slightly to 52.6% for the 26-week period.
- Discontinued Operations: The company recorded a net loss of $1.2 million from discontinued operations (Japan) for the quarter, reflecting the closure of stores and associated shut-down costs.
Outlook, Risks, and Unusual Items
- Guidance and Strategy: Management plans to open 22 stores in the U.S. during the third and fourth fiscal quarters of 2008. The company is focusing on U.S. growth and e-commerce development following the exit from Japan.
- Tax Benefit: In the second quarter, the company determined it was "more likely than not" to realize deferred tax assets in the U.S., resulting in the recording of approximately $5.0 million in deferred tax assets (including excess tax benefits from stock options).
- Legal Proceedings: A former employee, Brian Bacon, filed a lawsuit claiming wrongful termination and breach of contract regarding stockholder-sponsored awards. The company believes the claim is without merit.
- Risk Factors: Key risks include the ability to manage rapid growth, locate suitable store sites, maintain brand image, and manage foreign currency exchange fluctuations (specifically the impact of a strengthening U.S. dollar on Canadian revenue).
- Unusual Items: The company implemented a new inventory subledger system, requiring changes to internal controls. Additionally, the company provided a $2.2 million AUD credit facility to its Australian franchise partner.
Investor Verification Checklist
- Comparable Store Sales Sustainability: Verify if the 18-22% comparable store sales growth is sustainable given the rapid expansion and potential market saturation.
- Japan Exit Costs: Confirm that all shut-down costs related to the Japan operations have been fully accrued and no further liabilities remain.
- Inventory Levels: Monitor inventory build-up ($43.4 million) relative to sales to ensure no significant future mark-downs are required.
- Foreign Exchange Exposure: Assess the impact of currency fluctuations, as 71.8% of revenue is generated in Canada but reported in U.S. dollars.
- Capital Expenditure Burn: Review the $19.3 million in capital expenditures for the 26-week period against cash flow generation to ensure liquidity remains sufficient for planned store openings.