lululemon athletica inc. Form 10-Q Summary
Reporting period: The provided filing is for the quarter ended May 1, 2022, compared with the quarter ended May 2, 2021. Although the request identifies “2021 Q1,” the filing text clearly covers fiscal 2022 first quarter. The filing was signed June 2, 2022.
Business Context
lululemon designs, distributes, and sells technical athletic apparel, footwear, accessories, and MIRROR in-home fitness equipment and subscriptions. Products are sold through company-operated stores, e-commerce, outlets, temporary locations, wholesale accounts, and licensing arrangements. The company operated 579 stores at May 1, 2022, compared with 574 at January 30, 2022.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $1.613 billion | $1.226 billion | +31.6% |
| Gross profit | $870.4 million | $700.3 million | +24.3% |
| Gross margin | 53.9% | 57.1% | Down 320 basis points |
| Income from operations | $260.3 million | $193.8 million | +34.3% |
| Operating margin | 16.1% | 15.8% | Up 30 basis points |
| Net income | $190.0 million | $145.0 million | +31.1% |
| Diluted EPS | $1.48 | $1.11 | +33.3% |
| Cash flow from operating activities | $(243.3) million | $214.1 million | Decrease of $457.4 million |
| Capital expenditures | $111.4 million | $64.2 million | +73.4% |
Revenue growth was driven by company-operated stores, direct-to-consumer sales, new stores, and comparable-sales gains. Company-operated store revenue increased 36.3% to $731.6 million, while direct-to-consumer revenue increased 32.3% to $721.3 million. Total comparable sales increased 28%, comparable store sales increased 24%, and direct-to-consumer revenue increased 32%.
Gross margin contracted primarily because of higher air freight costs and supply-chain disruption. Selling, general and administrative expenses increased 22.4% to $607.9 million but declined to 37.7% of revenue from 40.5%. The operating margin improvement also benefited from the absence of $7.7 million of MIRROR acquisition-related expenses recorded in the prior-year quarter.
Liquidity, Balance Sheet, and Debt
- Cash and cash equivalents were $649.0 million at May 1, 2022, down from $1.260 billion at January 30, 2022.
- Inventories increased to $1.275 billion from $966.5 million, contributing significantly to negative operating cash flow.
- Working capital excluding cash and cash equivalents was $447.3 million.
- The company had $396.9 million of capacity under its committed revolving credit facility.
- The $400.0 million unsecured North America revolving facility matures December 14, 2026. No borrowings were outstanding, other than $3.1 million of letters of credit.
- The company was in compliance with its revolving-credit covenants at May 1, 2022.
- Cash used in financing activities included $232.6 million for repurchases of 0.7 million shares, compared with $83.8 million for 0.3 million shares in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, net income, and diluted EPS increased substantially year over year.
- Gross margin declined 320 basis points because of air freight, distribution, and foreign-currency pressures.
- Operating cash flow shifted from a $214.1 million inflow to a $243.3 million outflow, principally due to inventory growth, income-tax payments, and accrued compensation changes.
- Capital expenditures increased to $111.4 million, reflecting investments in technology, business systems, corporate offices, new stores, remodels, and the footwear launch.
- The company completed the prior $641.2 million repurchase authorization and initiated a new $1.0 billion authorization. The remaining authorization was $954.8 million at May 1, 2022.
- Foreign-currency translation and hedging activity reduced comprehensive income to $169.2 million from $188.6 million despite higher net income.
Outlook, Commentary, Risks, and Unusual Items
Management stated that cash balances, operating cash flow, and available revolving-credit capacity should be adequate for liquidity and capital-expenditure needs for at least the next 12 months. The filing does not provide a clear numerical full-year revenue or earnings guidance figure.
- COVID-19 caused temporary closures at certain stores and at a third-party distribution center in China. Management expects disruption, transportation delays, port congestion, and elevated freight costs to continue through 2022.
- Supply-chain disruption, higher air freight, wage inflation, raw-material costs, and transportation costs could pressure future gross and operating margins.
- Inventory increased materially, creating risk of excess inventory, markdowns, write-downs, or lower margins if demand weakens.
- Foreign-currency exposure remains significant. The filing states that a 10% appreciation of the U.S. dollar against the Canadian dollar would have reduced first-quarter operating income by approximately $26.6 million, assuming the movement occurred consistently throughout the quarter.
- The MIRROR business remains subject to execution, subscriber-retention, technology, product-defect, integration, and profitability risks.
- DISH Technologies and affiliates have asserted patent-infringement claims involving MIRROR fitness devices and streaming technology. The International Trade Commission investigation was ongoing, while related Delaware litigation was stayed.
- A trademark case involving Aliign Activation Wear was decided in lululemon’s favor at the district court level, but the plaintiff appealed.
- Subsequent to quarter-end, the company sold an administrative office building and expects to recognize a $10.2 million pretax gain in the second quarter of 2022.
- The company expects its effective tax rate may increase in fiscal 2023 absent additional transactions by exchangeable shareholders, due to potential Canadian withholding taxes on unremitted earnings.
Investor Verification Checklist
- Verify that the intended comparison is fiscal Q1 2022, not fiscal Q1 2021, because the filing period is May 1, 2022.
- Assess whether higher inventory growth is supported by demand or could lead to markdowns and margin pressure.
- Monitor gross margin for continuing effects from freight, supply-chain, wage, raw-material, and foreign-currency costs.
- Review operating cash flow conversion and the funding impact of capital expenditures and share repurchases.
- Track China store and distribution-center disruptions and broader COVID-19 effects.
- Evaluate the financial and operational exposure from the pending DISH patent litigation and the MIRROR business.
- Review the effect of Canadian withholding-tax uncertainty and the expired U.S.-Canada advance pricing arrangement on future tax rates.