Business Context and Reporting Period
lululemon athletica inc. designs, distributes, and retails technical athletic apparel, footwear, and accessories through company-operated stores, e-commerce, outlets, wholesale, re-commerce, temporary locations, and license arrangements. This Form 10-K covers the 52-week fiscal year ended January 28, 2024, referred to as fiscal 2023, with comparisons to fiscal 2022 ended January 29, 2023. The filing is not a 2022 fourth-quarter filing, although it notes that fiscal fourth-quarter seasonality is significant. Fiscal 2024 will contain 53 weeks.
The company operated 711 company-operated stores at year-end, compared with 655 a year earlier, and generated revenue across the Americas, China Mainland, and Rest of World segments.
Financial Performance and Position
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Net revenue | $9.619 billion | $8.111 billion | 18.6% increase |
| Gross profit | $5.609 billion | $4.492 billion | 24.9% increase |
| Gross margin | 58.3% | 55.4% | Up 290 basis points |
| Income from operations | $2.133 billion | $1.328 billion | 60.5% increase |
| Operating margin | 22.2% | 16.4% | Up 580 basis points |
| Net income | $1.550 billion | $854.8 million | 81.4% increase |
| Diluted earnings per share | $12.20 | $6.68 | 82.6% increase |
| Cash flow from operations | $2.296 billion | $966.5 million | Increase of $1.330 billion |
| Capital expenditures | $651.9 million | $638.7 million | Increase of $13.2 million |
Adjusted, non-GAAP results excluding lululemon Studio-related charges and, for 2022, a building-sale gain were adjusted gross margin of 58.6%, adjusted operating margin of 23.2%, adjusted net income of $1.622 billion, and adjusted diluted EPS of $12.77 in 2023. Management reported adjusted diluted EPS growth of 27%.
- Americas revenue was $7.632 billion, up 11.9%.
- China Mainland revenue was $963.8 million, up 67.2%.
- Rest of World revenue was $1.024 billion, up 42.9%.
- Comparable sales increased 13%, or 14% on a constant-dollar basis.
- Company-operated store revenue increased 21% to $4.411 billion; e-commerce revenue increased 17% to $4.311 billion.
- Women’s products represented 64% of revenue, men’s products 23%, and other categories 13%.
Year-end cash and cash equivalents were $2.244 billion, compared with $1.155 billion in the prior year. Inventory declined 9% to $1.324 billion and included a $141.5 million provision, including a $63.0 million provision against lululemon Studio Mirror inventory.
The company had no borrowings outstanding under its $400.0 million unsecured revolving credit facility, aside from $6.3 million of letters of credit. Available capacity was $393.7 million. Total liabilities were $2.860 billion, substantially consisting of lease liabilities and operating obligations rather than funded debt.
Material Changes Versus the Prior Comparable Period
- Revenue growth remained broad-based, but Americas growth moderated relative to the prior year while international markets accelerated, particularly China Mainland.
- Gross margin improved primarily because of lower freight costs, reduced air freight usage, lower duty costs, and higher product margin. These benefits were partly offset by foreign exchange, occupancy deleverage, distribution costs, inventory provisions, and shrink.
- Operating margin benefited from stronger gross margin and materially lower lululemon Studio-related impairment and restructuring charges. Fiscal 2023 included $98.2 million of pretax lululemon Studio charges, compared with $470.8 million in fiscal 2022.
- Fiscal 2023 lululemon Studio charges included a $23.7 million inventory obsolescence provision, $44.2 million of asset impairments, and $30.3 million of restructuring costs. The company ceased selling the Mirror and new digital content subscriptions in December 2023 and shifted digital fitness content to Peloton.
- SG&A increased 23.2% to $3.397 billion, driven by headcount and wage growth, marketing, depreciation, technology, professional fees, and higher channel-related costs.
- Cash generation improved substantially as net income increased and working-capital movements, particularly inventory, accounts payable, and prepaid expenses, were favorable.
- The company repurchased 1.5 million shares for $558.7 million in fiscal 2023, compared with 1.4 million shares for $444.0 million in fiscal 2022. Approximately $1.2 billion remained authorized for repurchases at year-end.
- Foreign exchange reduced reported revenue growth by $89.8 million. Constant-dollar revenue growth was 20% versus reported growth of 19%.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects 2024 capital expenditures of approximately $690 million to $710 million, principally for stores, distribution centers, technology, and systems.
- Management believes cash, operating cash flow, and available revolving-credit capacity will meet liquidity and capital requirements for at least the next 12 months.
- Management expects inventory to decline year over year during the first half of 2024 and increase during the second half.
- Growth priorities include product innovation, men’s products, international expansion, new stores, omni-channel capabilities, brand awareness, and the Peloton partnership.
- Management expects most company-operated store openings in 2024 to be in China Mainland. The filing does not provide a specific revenue or earnings guidance range.
- Key risks include discretionary consumer demand, inflation and wage pressure, foreign exchange, competition, inventory forecasting and markdowns, international expansion, supply-chain concentration, tariffs and trade restrictions, cybersecurity and privacy, climate-related disruption, legal proceedings, and lease obligations.
- Approximately 55% of products were manufactured by the top five vendors and 52% of fabrics came from the top five fabric suppliers. The company has no long-term contracts with most suppliers or manufacturers.
- Future minimum operating lease commitments totaled $1.645 billion, including $299.6 million for distribution-center leases committed but not yet commenced. Purchase obligations totaled $688.9 million.
- Legal proceedings are described as routine, with immaterial provisions recorded; management believes their ultimate resolution will not materially affect consolidated financial statements.
- The company reported effective disclosure controls and effective internal control over financial reporting, with no material changes during the fourth quarter.
Most Important Facts for Investors to Verify
- Confirm that the relevant reporting period is fiscal 2023 ended January 28, 2024, rather than 2022 Q4.
- Reconcile GAAP results with adjusted results, particularly the $98.2 million pretax lululemon Studio charges and related tax effects.
- Assess whether international growth, especially China Mainland and Rest of World, can offset moderating Americas traffic and revenue growth.
- Monitor gross-margin sustainability as freight benefits normalize and wage, raw-material, occupancy, duty, and foreign-exchange pressures continue.
- Evaluate inventory quality and markdown risk, including the $141.5 million inventory provision and remaining Mirror inventory exposure.
- Review cash deployment among capital expenditures, new distribution centers, store expansion, and share repurchases.
- Assess supplier concentration, geopolitical and trade exposure, and the lack of long-term supply contracts.
- Review lease commitments, planned distribution-center openings, and the company’s compliance with revolving-credit covenants.