lululemon athletica inc. — Form 10-K Summary
Reporting period: The supplied filing is the annual report for the 52-week fiscal year ended February 2, 2020, referred to as fiscal 2019. The requested metadata identifies “2018 Q4,” but the filing text clearly relates to fiscal 2019 and includes fourth-quarter fiscal 2019 results. Fiscal 2018 contained 53 weeks.
Business context
Lululemon designs, distributes, and retails premium athletic apparel and accessories for women and men through company-operated stores, e-commerce, outlets, temporary locations, wholesale accounts, and license and supply arrangements. At year-end, the Company operated 491 stores in 17 countries, compared with 440 stores in the prior year. Direct-to-consumer revenue represented 28.6% of fiscal 2019 revenue.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net revenue | $3.979 billion | $3.288 billion | +21% |
| Gross profit | $2.223 billion | $1.816 billion | +22% |
| Gross margin | 55.9% | 55.2% | +70 bps |
| Income from operations | $889.1 million | $705.8 million | +26% |
| Operating margin | 22.3% | 21.5% | +80 bps |
| Net income | $645.6 million | $483.8 million | +33% |
| Diluted EPS | $4.93 | $3.61 | +37% |
| Cash flow from operations | $669.3 million | $742.8 million | Down $73.5 million |
| Capital expenditures | $283.0 million | $225.8 million | +25% |
Revenue growth was driven by new stores, higher comparable-store sales, and e-commerce momentum. Total comparable sales increased 17%, comparable-store sales increased 9%, and direct-to-consumer revenue increased 35%. Men’s product revenue increased 34%.
As of February 2, 2020, cash and cash equivalents were $1.094 billion, inventories were $518.5 million, total assets were $3.281 billion, and total liabilities were $1.329 billion. The Company had no borrowings outstanding under its revolving credit facilities other than $1.8 million of letters of credit. Available capacity under the committed North American revolving credit facility was $398.2 million.
Cash flow from operations declined primarily because of higher inventory purchases, tax payments, and changes in accounts payable and other working-capital accounts. The Company repurchased 1.1 million shares for $173.4 million during fiscal 2019, leaving $327.3 million authorized under its $500 million repurchase program at year-end. The Company does not anticipate paying cash dividends in the foreseeable future.
Material changes versus the prior comparable period
- Revenue increased 21%, with international revenue growth of 32% and North American growth of 20%.
- The store base increased by 51 net locations, including 32 outside North America; square footage grew 18%.
- Direct-to-consumer revenue increased to 28.6% of revenue from 26.1%.
- Gross margin benefited from lower product costs, favorable product mix, and lower markdowns.
- SG&A increased 20% but declined as a percentage of revenue to 33.5% from 33.8%.
- The effective tax rate decreased to 28.1% from 32.4%. Fiscal 2018 included $31.2 million of discrete tax expenses related primarily to U.S. tax reform and repatriation of foreign earnings.
- ASC 842 lease accounting was adopted on February 4, 2019. At year-end, the Company reported $689.7 million of right-of-use lease assets and $740.0 million of lease liabilities.
- Fiscal 2019 included no asset impairment or restructuring charges; fiscal 2017 included significant ivivva restructuring costs.
Guidance, outlook, risks, and unusual items
Management stated that the Power of Three plan remained focused on product innovation, omni-channel guest experience, and market expansion. Planned store growth in fiscal 2020 was expected to be concentrated in Asia and the United States. The filing does not provide a clear numerical fiscal 2020 revenue or earnings guidance range.
The COVID-19 pandemic emerged after the balance-sheet date. Mainland China stores were temporarily closed in February 2020, and in March 2020 stores in North America, Europe, Malaysia, and New Zealand, along with the Sumner, Washington distribution center, were temporarily closed. Management anticipated a material adverse impact on fiscal 2020 financial position, results of operations, and cash flows, but could not estimate the duration or severity. Management stated that liquidity appeared sufficient based on cash balances and available revolving-credit capacity.
Key ongoing risks include dependence on third-party suppliers and concentrated sourcing, international expansion, tariffs and trade restrictions, foreign-exchange volatility, inventory obsolescence and markdowns, competition, consumer discretionary spending, store leases, cybersecurity and information-technology disruptions, product quality and recalls, legal proceedings, and changing tax rules. Five manufacturers produced approximately 56% of products, and the largest single manufacturer produced approximately 17%.
The filing identifies legal proceedings involving wage-and-hour allegations and a derivative fiduciary-duty lawsuit. Management believes routine proceedings and disclosed matters will not have a material adverse effect, although outcomes are uncertain. Inventory was $518.5 million net of a $22.1 million provision for lower net realizable value; inventory valuation was identified as the critical audit matter.
Important facts for investors to verify
- Confirm that the applicable period is fiscal 2019 ended February 2, 2020, not 2018 Q4.
- Assess the actual fiscal 2020 effects of COVID-19 store and distribution-center closures, including demand, inventory, margins, and cash flow.
- Review the sustainability of 35% direct-to-consumer growth and the impact of continued international store expansion.
- Monitor inventory growth, the $22.1 million inventory provision, markdown exposure, and supply-chain concentration.
- Evaluate liquidity after lease obligations, capital expenditures, share repurchases, and the $53.3 million remaining one-time transition-tax payable.
- Review foreign-exchange sensitivity, including the filing’s estimate that a 10% appreciation of the U.S. dollar against the Canadian dollar would have reduced fiscal 2019 operating income by approximately $4.6 million.
- Read the full disclosures on the wage-and-hour class action, derivative litigation, tariffs, cybersecurity, and supplier compliance.