Lululemon Athletica Inc. Form 10-Q Summary
Reporting period: Quarter and first three quarters ended October 31, 2021, compared with periods ended November 1, 2020. The request metadata identifies “2020 Q3,” but the filing text is for fiscal 2021 third quarter. Fiscal 2021 is a 52-week year ending January 30, 2022.
Business Context
Lululemon designs, distributes, and sells athletic apparel and accessories through company-operated stores, direct-to-consumer e-commerce, outlets, temporary locations, wholesale accounts, licensing arrangements, and MIRROR connected-fitness products and subscriptions. The company operated 552 stores at October 31, 2021, up from 521 at January 31, 2021. Most stores were open during the first three quarters of fiscal 2021, although certain locations experienced temporary closures or restrictions related to COVID-19.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | First 3 Quarters 2021 | First 3 Quarters 2020 |
|---|---|---|---|---|
| Net revenue | $1.450 billion | $1.117 billion | $4.128 billion | $2.672 billion |
| Gross profit | $829.4 million | $627.4 million | $2.372 billion | $1.451 billion |
| Gross margin | 57.2% | 56.1% | 57.5% | 54.3% |
| Income from operations | $257.9 million | $204.9 million | $742.8 million | $362.1 million |
| Operating margin | 17.8% | 18.3% | 18.0% | 13.5% |
| Net income | $187.8 million | $143.6 million | $540.8 million | $259.1 million |
| Diluted EPS | $1.44 | $1.10 | $4.14 | $1.98 |
| Operating cash flow | Not separately provided | Not separately provided | $658.1 million | $85.4 million |
- Third-quarter revenue increased 29.8%; constant-dollar revenue increased 28%.
- First-three-quarter revenue increased 54.5%; constant-dollar revenue increased 51%.
- Third-quarter total comparable sales increased 27%, comparable store sales increased 32%, and direct-to-consumer revenue increased 23%.
- First-three-quarter direct-to-consumer revenue increased 25%, or 22% in constant dollars.
- Third-quarter net income increased 30.7%, while first-three-quarter net income increased 108.7%.
- Third-quarter effective tax rate was 27.2%, compared with 29.7%; first-three-quarter effective tax rate was 27.2%, compared with 28.5%.
Liquidity, Cash Flow, Debt, and Capital Allocation
- Cash and cash equivalents were $993.6 million at October 31, 2021, compared with $1.151 billion at January 31, 2021.
- Working capital excluding cash was $199.7 million. Current assets were $2.311 billion and current liabilities were $1.118 billion.
- Operating cash flow was $658.1 million for the first three quarters, versus $85.4 million in the comparable period.
- Capital expenditures were $267.0 million, versus $170.8 million in the prior-year period, primarily reflecting investments in stores, distribution centers, information technology, and business systems.
- Financing cash outflows were $523.2 million, including $491.3 million for repurchases of 1.4 million common shares.
- The North America revolving facility had $400 million of commitments, with $396.9 million of capacity reported as available. There were no borrowings outstanding, other than $3.1 million of letters of credit. The facility matures June 6, 2023.
- The company reported compliance with its credit-facility covenants. Total letters of credit and letters of guarantee were $4.2 million.
- The remaining stock-repurchase authorization was $508.7 million at October 31, 2021. The authorization was increased to $641.2 million on October 1, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue growth benefited from stores being open for more of the period, easier comparisons against COVID-19 closures and restrictions in 2020, increased store traffic, new stores, and continued e-commerce growth.
- Company-operated-store revenue increased 38.2% in the third quarter and 83.1% for the first three quarters. The company opened 37 net new stores since the third quarter of 2020, including 25 in Asia Pacific.
- Gross margin expanded 110 basis points in the third quarter and 320 basis points year to date. Benefits came from occupancy and depreciation leverage, lower markdowns, and favorable foreign exchange, partly offset by higher air-freight costs.
- Third-quarter operating margin declined 50 basis points because selling, general and administrative expense and acquisition-related expenses grew faster than revenue. Year-to-date operating margin increased 450 basis points.
- Selling, general and administrative expense increased 32.4% in the quarter and 48.8% year to date, driven by higher head-office, employee, technology, marketing, distribution, and store operating costs. No government payroll subsidies were recognized in fiscal 2021, compared with $37.0 million in the first three quarters of fiscal 2020.
- MIRROR acquisition-related expenses increased to $24.1 million in the third quarter and $39.9 million year to date. Third-quarter MIRROR-related after-tax costs reduced diluted EPS by $0.18.
- Inventory increased to $943.9 million from $647.2 million at January 31, 2021, reflecting growth and supply-chain timing considerations.
Guidance, Outlook, Commentary, and Risks
- The filing does not provide a clear numerical revenue or earnings forecast for the full year in the supplied text.
- Management expected transportation disruption, port congestion, delayed inventory receipts, increased freight costs, and greater use of air freight to continue at least through the end of 2021.
- Management stated that cash, operating cash flow, and available revolver capacity should meet liquidity and capital-expenditure requirements for at least the next 12 months.
- The business is seasonal, with a significant portion of annual revenue and operating profit historically generated in the fourth quarter. Fiscal 2020 generated approximately 56% of full-year operating profit in the fourth quarter.
- Key risks include COVID-19 resurgences and store restrictions, supply-chain disruption, freight and labor-cost inflation, inventory markdowns, foreign-exchange volatility, competition, cybersecurity and privacy risks, product defects, international expansion, and the ability to integrate and grow MIRROR profitably.
- A pending DISH Technologies and Sling TV patent dispute involving MIRROR remains under investigation by the U.S. International Trade Commission; related Delaware litigation is stayed. DISH seeks potential exclusion and cease-and-desist orders, as well as damages. The company intends to defend the matter.
- An appeal remained pending in a trademark case brought by Aliign Activation Wear after Lululemon prevailed on summary judgment.
- The company disclosed that its advance pricing arrangement with the IRS and Canada Revenue Agency expired at the end of 2020 and that renewal negotiations were ongoing. The outcome could affect the effective tax rate.
- The filing states that insufficient exchangeable-shareholder transactions and continued Canadian earnings could result in Canadian withholding taxes on certain future repatriations.
Most Important Facts to Verify
- Confirm that the intended filing is fiscal 2021 Q3, not fiscal 2020 Q3, because the supplied filing covers the period ended October 31, 2021.
- Assess whether revenue comparisons are distorted by the significant COVID-related store closures and restrictions in the 2020 comparison period.
- Monitor inventory growth, delayed receipts, air-freight usage, port congestion, and their potential effects on gross margin and markdowns.
- Evaluate the sustainability of the 57.5% year-to-date gross margin and 18.0% operating margin as cost pressures and normal seasonal patterns return.
- Review MIRROR subscriber, revenue, profitability, integration, goodwill, and potential impairment trends; the supplied filing does not provide a clear standalone MIRROR profitability figure.
- Track the DISH patent litigation, the Aliign appeal, tax-authority negotiations, and possible Canadian withholding-tax exposure.
- Consider the effect of $491.3 million of year-to-date share repurchases on liquidity, share count, and capital-allocation flexibility.