Lululemon Athletica Inc. annual report, FY2022

Lululemon Athletica Inc. — Form 10-K Summary

Reporting period: The provided filing is the Form 10-K for the 52-week fiscal year ended January 29, 2023, referred to as fiscal 2022, compared with fiscal 2021 ended January 30, 2022. This does not correspond to “2021 Q4” in the request metadata; the filing presents annual results, with selected fourth-quarter information.

Business Context

Lululemon designs, distributes, and retails technical athletic apparel, footwear, accessories, and connected-fitness products and subscriptions. Sales are generated through company-operated stores, direct-to-consumer e-commerce, outlets, wholesale, licensing and supply arrangements, recommerce, temporary locations, and lululemon Studio.

655 company-operated stores operated in 18 countries at January 29, 2023, up from 574 stores a year earlier.
North America represented 84% of fiscal 2022 revenue; women's products represented 65%.
Direct-to-consumer revenue represented 45.6% of total revenue, compared with 44.4% in fiscal 2021.
The company launched its “Power of Three ×2” growth plan, focused on product innovation, guest experience, and market expansion.

Financial Performance

Metric	Fiscal 2022	Fiscal 2021	Change
Net revenue	$8.111 billion	$6.257 billion	+29.6%
Gross profit	$4.492 billion	$3.609 billion	+24.5%
Gross margin	55.4%	57.7%	(230) basis points
Income from operations	$1.328 billion	$1.333 billion	(0.4%)
Operating margin	16.4%	21.3%	(490) basis points
Net income	$854.8 million	$975.3 million	(12.4%)
Diluted EPS	$6.68	$7.49	(10.8%)
Cash flow from operations	$966.5 million	$1.389 billion	(30.4%)
Capital expenditures	$638.7 million	$394.5 million	+61.9%

Revenue and Comparable Sales

Company-operated store revenue increased 29.3% to $3.648 billion.
Direct-to-consumer revenue increased 33.2% to $3.700 billion.
Other revenue increased 16.0% to $762.6 million.
Total comparable sales increased 25%, including a 16% increase in comparable store sales and a 33% increase in direct-to-consumer revenue. On a constant-dollar basis, the increases were 28%, 19%, and 35%, respectively.
Sales per square foot increased to $1,580 from $1,443.

Margins and Profitability

Gross margin declined primarily because of higher markdowns, unfavorable sales mix, increased damages and shrink, distribution and product-department costs, and foreign exchange effects. The decline included an 80-basis-point impact from a $62.9 million provision against lululemon Studio hardware inventory.

Fiscal 2022 operating income included $407.9 million of impairment charges for lululemon Studio goodwill, intangible assets, and property and equipment. Including the $62.9 million hardware inventory provision, total pre-tax lululemon Studio charges were $470.8 million, or $442.7 million after tax. Excluding these charges and other specified items, adjusted operating income increased 30% to $1.789 billion and adjusted diluted EPS increased to $10.07 from $7.79.

Cash Flow, Balance Sheet, Debt, and Liquidity

Cash and cash equivalents were $1.155 billion at January 29, 2023, compared with $1.260 billion a year earlier.
Operating cash flow declined due mainly to working-capital investment, including a $510.5 million inventory cash outflow.
Inventory increased 50% to $1.447 billion; inventory units increased 58%. Inventory provisions totaled $124.6 million, including the $62.9 million lululemon Studio hardware provision.
Capital expenditures were $638.7 million, including $303.7 million for company-operated stores, $57.1 million for direct-to-consumer operations, and $277.9 million for corporate and other activities.
The company had a $400 million unsecured revolving credit facility maturing December 14, 2026. There were no borrowings outstanding, other than $6.5 million of letters of credit, and the company was in compliance with its covenants.
Available capacity under the committed revolving credit facility was reported at $393.5 million.
Working capital excluding cash and cash equivalents was $512.4 million.
The company repurchased 1.4 million shares for $444.0 million during fiscal 2022. Remaining authorization under the $1 billion repurchase program was $743.8 million at January 29, 2023.
The company stated that cash, operating cash flow, and available revolver capacity should meet liquidity and capital requirements for at least the next 12 months.

Material Changes Versus Fiscal 2021

Revenue growth remained strong, but profitability declined on a GAAP basis because of lululemon Studio impairment and inventory charges, higher operating expenses, inflation, wage increases, foreign exchange, and prior supply-chain disruption.
The effective tax rate increased to 35.9% from 26.9%, mainly because certain lululemon Studio impairment costs were nondeductible and because of additional U.S. state and Canadian withholding-tax accruals.
Cash from operations decreased by $422.6 million, while capital expenditures increased by $244.2 million.
Goodwill declined from $386.9 million to $24.1 million after a $362.5 million lululemon Studio goodwill impairment.
Net revenue growth was balanced across stores and digital channels, with 81 net new company-operated stores opened, including 49 outside North America.
Fiscal 2022 stock repurchases were materially lower than fiscal 2021, when the company repurchased 2.2 million shares for $812.6 million.

Guidance, Outlook, Risks, and Unusual Items

Management expected to open 45 to 50 new company-operated stores in fiscal 2023 and forecast capital expenditures of $660 million to $680 million.
Management expected inventory growth to exceed revenue growth in the first half of fiscal 2023, but to more closely track revenue growth in the second half.
Lululemon Studio is being repositioned away from emphasis on in-home hardware toward digital, app-based fitness services. A new lower-cost app offering was expected to launch in summer 2023.
Management cited weakening demand for connected-fitness hardware, lower-than-expected holiday hardware sales, and higher-than-expected customer acquisition costs as the reasons for revising the Studio strategy.
Supply-chain disruptions, freight costs, labor shortages, wage inflation, raw-material costs, foreign exchange, inflation, and potential economic weakness could pressure margins and demand.
International sourcing remains concentrated: five vendors manufactured 56% of products, and five fabric suppliers produced 56% of fabrics. The largest product manufacturer represented 15% of production and the largest fabric supplier 21%.
Key risks include brand and product quality, competition, inventory forecasting, international expansion, cybersecurity and privacy, climate and supply-chain disruption, tariffs and trade restrictions, tax changes, and litigation.
The company settled patent litigation involving DISH Technologies and MIRROR in February 2023 for an immaterial amount.
Operating lease commitments totaled $1.174 billion, with an additional $632.0 million of committed distribution-center leases not yet commenced.
Management disclosed that the effective tax rate is expected to increase in fiscal 2023 absent changes in Canadian reinvestment levels or paid-up capital.

Most Important Facts for Investors to Verify

Whether the strong core apparel and digital growth can offset the continuing losses, inventory exposure, and strategic transition of lululemon Studio.
Whether inventory growth moderates as projected and whether further markdowns or provisions reduce gross margin.
Whether gross and operating margins recover as air-freight costs decline and supply-chain conditions improve.
Execution of the Power of Three ×2 plan, including store openings, international expansion, men's products, footwear, and digital growth.
The effect of inflation, wage rates, foreign exchange, tariffs, freight costs, and consumer discretionary spending on future profitability.
Future cash requirements for new stores, distribution centers, technology investments, leases, and share repurchases.
The expected fiscal 2023 increase in the effective tax rate and the status of the U.S.-Canada advance pricing arrangement.
Potential additional losses or liability associated with litigation, product defects, cybersecurity incidents, supply-chain concentration, and unrecognized inventory risks.