Business Context and Reporting Period
Company: Lululemon Athletica Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 3, 2008 (Fiscal Year 2007)
Business Overview: Lululemon is a designer and retailer of technical athletic apparel, primarily yoga-inspired, sold through a vertical retail strategy. As of the period end, the company operated 81 stores (71 corporate-owned, 10 franchise) across Canada, the United States, Australia, and Japan. The company recently completed its Initial Public Offering (IPO) in July 2007.
Key Financial Metrics
| Metric | Fiscal 2007 (Ended Feb 3, 2008) | Fiscal 2006 (Ended Jan 31, 2007) |
|---|---|---|
| Net Revenue | $274.7 million | $148.9 million |
| Gross Profit | $146.3 million | $76.0 million |
| Gross Margin | 53.3% | 51.0% |
| Income from Operations | $50.1 million | $16.2 million |
| Net Income | $30.8 million | $7.7 million |
| Diluted EPS | $0.45 | $0.12 |
| Cash and Cash Equivalents | $53.3 million | $16.0 million |
| Operating Cash Flow | $38.1 million | $25.4 million |
| Capital Expenditures | $35.2 million | $13.3 million |
| Long-Term Debt | $0 | $0 |
Note: Fiscal 2006 results included a one-time $7.2 million litigation settlement charge.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 84.5% year-over-year, driven by a 34% increase in comparable store sales, the opening of 28 new corporate-owned stores, and the acquisition of three franchise stores in Calgary.
- Profitability: Income from operations increased 209.2% to $50.1 million. This surge was primarily due to higher gross profit and the absence of the $7.2 million lawsuit settlement charge recorded in the prior year.
- Store Economics: Corporate-owned stores open for at least one year averaged sales of approximately $1,700 per square foot, up from $1,400 in the prior period.
- Geographic Mix: U.S. revenue contribution grew to 19.4% of total net revenue from 11.7% in the prior year, while Canada's share decreased from 87.1% to 79.5%.
- Stock-Based Compensation: Expense increased to $5.9 million from $2.6 million due to the reassessment of fair value for options granted prior to the IPO.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Expansion: The company plans to open approximately 35 additional stores in the U.S. and Canada in fiscal 2008, with an estimated capital expenditure of $18 million to $21 million for these openings.
- Strategy: Focus remains on growing the corporate-owned store base, increasing brand awareness through grassroots marketing, and expanding product categories (men's apparel, accessories).
- Japan Operations: Management announced plans to discontinue operations in Japan due to disproportionate management attention required relative to revenue contribution (less than 1.5% of fiscal 2007 revenue).
- E-Commerce: A retail website is expected to launch in late 2008 or early 2009.
Risks and Contingencies:
- Supply Chain: Reliance on third-party manufacturers (60% in China) and limited long-term contracts create risks regarding capacity, quality, and raw material costs.
- Currency: Significant exposure to fluctuations between the Canadian and U.S. dollars. A 10% depreciation of the Canadian dollar would have reduced income from operations by approximately $5.4 million in fiscal 2007.
- Legal: A former executive officer filed a lawsuit alleging wrongful dismissal; the company is vigorously defending the claim.
- Seasonality: The business is highly seasonal, with approximately 39% of gross profit generated in the fourth quarter.
Investor Verification Checklist
- Comparable Store Sales Sustainability: Verify if the 34% comparable store sales growth is sustainable as the store base expands and the company enters new markets.
- Japan Exit Strategy: Monitor the timeline and financial impact of discontinuing Japan operations.
- Capital Expenditure Execution: Track the ability to open the planned 35 new stores in fiscal 2008 within the estimated budget.
- Inventory Management: Review inventory levels ($39.1 million) relative to sales velocity to assess risk of markdowns or write-offs.
- Stock-Based Compensation: Assess the impact of the $18.4 million in unrecognized stock-based compensation expense on future earnings.