Business Context and Reporting Period
Company: Lululemon Athletica Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 2, 2008 (Thirteen and Thirty-Nine Weeks)
Business Overview: Designer and retailer of technical athletic apparel, primarily sold through corporate-owned and franchised stores in Canada and the United States. As of November 2, 2008, the company operated 98 corporate-owned stores and 9 franchised stores globally. The company discontinued its operations in Japan during the period, classifying them as discontinued operations.
Key Financial Metrics
| Metric (USD) | 13 Weeks Ended Nov 2, 2008 | 39 Weeks Ended Nov 2, 2008 |
|---|---|---|
| Net Revenue | $87.0 million | $249.6 million |
| Gross Profit | $41.9 million | $127.4 million |
| Gross Margin | 48.1% | 51.1% |
| Operating Income | $13.1 million | $40.5 million |
| Net Income (Continuing Ops) | $8.8 million | $29.6 million |
| Net Income (Total) | $8.8 million | $28.4 million |
| Diluted EPS (Total) | $0.13 | $0.40 |
| Cash and Equivalents | $52.0 million | $52.0 million (Ending Balance) |
| Working Capital (excl. cash) | $8.7 million | N/A |
| Debt Outstanding | $1.5 million | $1.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 34% year-over-year for the quarter ($87.0M vs $64.9M) and 50% for the 39-week period ($249.6M vs $165.9M). Growth was driven by new store openings (34 in the US, 4 in Canada) and comparable store sales growth of 13% for the 39-week period, though comparable sales declined 2% in the most recent quarter.
- Margin Compression: Gross margin decreased 6.6 percentage points to 48.1% for the quarter (from 54.7% prior year) and 2.2 percentage points to 51.1% for the 39-week period. This was primarily due to increased product costs, higher occupancy costs from new stores, and increased depreciation.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 24% for the quarter and 47% for the 39-week period, largely due to employee compensation for new store openings and corporate expansion.
- Discontinued Operations: The company recorded a net loss of $1.1 million from discontinued operations (Japan) for the 39-week period, compared to a loss of $0.6 million in the prior year. Operations in Japan were fully wound down by the end of the period.
- Cash Flow: Net cash provided by operating activities increased significantly to $29.2 million for the 39-week period (from $11.1 million prior year), driven by higher net income and changes in working capital. Cash used in investing activities increased to $35.6 million due to capital expenditures for new stores and software implementation.
Guidance, Outlook, and Risks
- Economic Outlook: Management expects the challenging global economic climate and reduced consumer spending to negatively impact sales growth and gross margins in the fourth quarter of fiscal 2008 and fiscal 2009.
- Currency Impact: The depreciation of the U.S. dollar relative to the Canadian dollar (approx. 7% in the quarter) negatively impacted reported results. A stronger Canadian dollar reduces revenue when translated to USD. The company does not currently hedge foreign currency risk.
- Seasonality: The business is highly seasonal, with a disproportionate amount of sales occurring in the fourth fiscal quarter (holiday season).
- Strategic Focus: The company is focusing on growth in the United States (planning to open five stores in Q4) and developing an e-commerce business, while having exited the Japanese market.
- Risk Factors: Key risks include the ability to manage rapid growth, locate suitable store sites, maintain brand image, and the impact of general economic conditions on consumer spending for non-essential items.
Investor Verification Checklist
- Comparable Store Sales Trend: Verify the shift from 13% growth over 39 weeks to a 2% decline in the most recent quarter to assess demand sustainability.
- Gross Margin Trajectory: Monitor the 6.6 percentage point drop in gross margin to determine if cost pressures (product, occupancy, depreciation) are structural or temporary.
- Currency Exposure: Assess the impact of the USD/CAD exchange rate on future earnings, given the lack of hedging and significant Canadian revenue base.
- Capital Expenditure Run Rate: Review the $30 million in capital expenditures for the 39-week period against cash flow generation to ensure liquidity remains sufficient for expansion plans.
- Discontinued Operations Closure: Confirm that all costs related to the Japan exit have been fully accrued and no further liabilities remain.