Business Context and Reporting Period
Company: Lululemon Athletica Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 2, 2010 (First Quarter of Fiscal 2010)
Business Overview: Designer and retailer of technical athletic apparel, primarily sold through corporate-owned stores, direct-to-consumer channels (e-commerce), and franchises. As of May 2, 2010, the company operated 114 corporate-owned stores and 14 franchise stores across Canada, the United States, and Australia.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Revenue | $138.3 million | $81.7 million |
| Gross Profit | $74.4 million | $35.0 million |
| Gross Margin | 53.8% | 42.9% |
| Operating Income | $32.5 million | $9.9 million |
| Net Income | $19.6 million | $6.5 million |
| Diluted EPS | $0.27 | $0.09 |
| Cash from Operations | $12.6 million | $2.8 million |
| Cash and Equivalents (End of Period) | $173.6 million | $59.3 million |
| Working Capital (excl. cash) | $19.0 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 69% year-over-year, driven by a 35% increase in comparable store sales (constant currency), new store openings (4 net new corporate stores in Q1), and the rapid expansion of the direct-to-consumer segment (up 952%).
- Margin Expansion: Gross margin improved by 1,090 basis points to 53.8%. This was attributed to improved product costing, strong sell-through minimizing markdowns, a strengthening Canadian dollar reducing foreign exchange impacts on costs, and operating leverage.
- Expense Growth: Selling, general, and administrative (SG&A) expenses rose 66% to $41.9 million, primarily due to increased employee costs, e-commerce launch costs, and professional fees. However, SG&A as a percentage of revenue decreased slightly to 30.3%.
- Tax Provision: The effective tax rate increased to 40.0% from 34.4%, largely due to a $2.1 million deferred tax liability recorded for undistributed earnings of foreign subsidiaries.
Outlook, Risks, and Management Commentary
- Guidance and Strategy: Management expects to open 8 to 11 additional stores in the remainder of fiscal 2010, with estimated capital expenditures of $4.5 million to $6.5 million for these openings. The direct-to-consumer channel is a key growth driver, expected to exceed 10% of net revenue in future years.
- Subsequent Event: On May 12, 2010, the company increased its investment in its Australian franchise partner from 13% to an 80% controlling interest, resulting in consolidation of the Australian operations.
- Legal Proceedings: Two class-action lawsuits regarding California labor laws (wage reimbursement for uniforms and meal/rest breaks) have reached tentative settlement agreements pending final court approval.
- Risk Factors: Key risks include foreign currency exchange fluctuations (significant revenue exposure in Canada), reliance on third-party suppliers for fabrics (specifically Luon), potential disruptions to information systems, and the challenges of managing rapid growth and brand reputation.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 35% constant currency comparable store sales growth rate.
- Foreign Exchange Sensitivity: Assess the impact of a potential weakening Canadian dollar on future revenue and operating income (a 10% depreciation estimated to reduce operating income by ~$2.0 million).
- Inventory Management: Monitor inventory levels ($50.8 million) relative to sales velocity to ensure no significant write-downs are required.
- Legal Settlements: Confirm the final terms and financial impact of the pending California labor class-action settlements.
- Capital Expenditures: Track actual spending against the $4.5M-$6.5M estimate for new store openings in the remainder of the fiscal year.