Business Context and Reporting Period
Company: Lululemon Athletica Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 1, 2009 (Thirteen and Thirty-Nine Weeks)
Business Overview: Designer and retailer of technical athletic apparel sold through corporate-owned stores, franchises, and e-commerce channels. As of November 1, 2009, the company operated 106 corporate-owned stores (41 in Canada, 65 in the US) and 13 franchised stores (8 in Australia, 5 in North America).
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Nov 1, 2009 | 39 Weeks Ended Nov 1, 2009 |
|---|---|---|
| Net Revenue | $112,891 | $292,292 |
| Gross Profit | $56,338 | $136,526 |
| Gross Margin | 49.9% | 46.7% |
| Operating Income | $20,926 | $45,111 |
| Net Income | $14,068 | $29,830 |
| Diluted EPS | $0.20 | $0.42 |
| Cash and Equivalents | $101,832 | $101,832 |
| Operating Cash Flow (39 weeks) | N/A | $51,494 |
| Capital Expenditures (39 weeks) | N/A | ($9,024) |
Liquidity & Debt: The company reported cash and cash equivalents of $101.8 million. There were no borrowings outstanding under its $20 million uncommitted revolving credit facility as of November 1, 2009. Working capital (excluding cash) was $24.8 million.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 30% ($25.8 million) for the quarter and 17% ($42.7 million) for the 39-week period compared to the prior year. Growth was driven by new store openings and the launch of the e-commerce channel.
- Comparable Store Sales: Comparable store sales increased 10% in the quarter (11% including currency effects) but remained flat for the 39-week period (down 6% including currency effects).
- Segment Performance:
- Corporate-Owned Stores: Revenue increased 26% for the quarter and 14% for the 39 weeks.
- Other (E-commerce/Wholesale): Revenue surged 128% for the quarter and 146% for the 39 weeks, largely due to the Q1 2009 e-commerce launch.
- Franchises: Revenue declined 14% for the quarter and 28% for the 39 weeks due to the reacquisition of three franchised stores in the prior year.
- Profitability: Operating income increased 60% for the quarter and 11% for the 39 weeks. Gross margin improved to 49.9% in the quarter but declined to 46.7% for the 39 weeks, impacted by unfavorable foreign exchange rates and increased fixed costs.
Guidance, Outlook, and Risks
Management Commentary: Management noted that while the global economy showed signs of improvement, the difficult economic situation for consumers persists. They do not expect their rate of growth to significantly change for the remainder of the fiscal year. Cost reduction and efficiency initiatives implemented in fiscal 2008 are expected to continue impacting results positively.
Risks and Contingencies:
- Legal Proceedings: Two class-action lawsuits are pending in California regarding employee wages, meal breaks, and uniform costs. One settlement is in negotiation; the other is being vigorously defended. Management does not believe these will have a material adverse effect.
- Foreign Exchange: A significant portion of revenue is generated in Canada. A 10% appreciation of the USD against the CAD would have reduced operating income by approximately $3.6 million for the 39-week period. The company does not currently hedge currency risk.
- Seasonality: A significant portion of income is historically recognized in the fourth fiscal quarter due to holiday sales.
Investor Verification Checklist
- Store Count & Expansion: Verify the net addition of 3 corporate-owned stores (106 total) and the strategic shift from franchising to corporate ownership.
- E-commerce Impact: Assess the sustainability of the "Other" segment growth, which contributed significantly to revenue increases following the Q1 2009 launch.
- Foreign Exchange Sensitivity: Monitor the CAD/USD exchange rate, as it materially impacts reported revenue and gross margins given the company's Canadian operations.
- Legal Settlements: Track the resolution of the California class-action lawsuits regarding employee compensation and uniform costs.
- Inventory Management: Review inventory levels ($52.1 million) relative to sales to ensure no significant write-downs are required given the economic climate.