Business Context and Reporting Period
Lululemon designs, distributes, and sells athletic apparel and accessories through company-operated stores, e-commerce, outlets, wholesale, licensing, and supply arrangements. The filing is a Form 10-Q for the quarter ended November 1, 2020, covering fiscal 2020. The request metadata identifies “2019 Q3,” but the filing’s stated reporting period is 2020 Q3.
The company operated 515 stores at November 1, 2020, compared with 491 at February 2, 2020. The July 7, 2020 acquisition of MIRROR, an in-home fitness equipment and digital-content business, was consolidated beginning on the acquisition date.
Key Financial Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | First 3 Quarters FY2020 | First 3 Quarters FY2019 |
|---|---|---|---|---|
| Net revenue | $1.117 billion | $916.1 million | $2.672 billion | $2.582 billion |
| Gross profit | $627.4 million | $505.0 million | $1.451 billion | $1.413 billion |
| Gross margin | 56.1% | 55.1% | 54.3% | 54.7% |
| Income from operations | $204.9 million | $175.8 million | $362.1 million | $472.6 million |
| Operating margin | 18.3% | 19.2% | 13.5% | 18.3% |
| Net income | $143.6 million | $126.0 million | $259.1 million | $347.6 million |
| Diluted EPS | $1.10 | $0.96 | $1.98 | $2.65 |
For Q3, total comparable sales increased 19%, direct-to-consumer revenue increased 94%, and comparable store sales decreased 17%. Direct-to-consumer revenue represented 42.8% of quarterly revenue versus 26.9% in the prior-year quarter.
For the first three quarters, cash provided by operating activities was $85.4 million, compared with $95.1 million in the prior-year period. Investing cash outflow was $616.5 million, including $452.6 million for the MIRROR acquisition and $170.8 million of capital expenditures. Financing cash outflow was $81.4 million, including $63.7 million of share repurchases. Cash and cash equivalents declined to $481.6 million from $1.094 billion at February 2, 2020.
At November 1, 2020, inventories were $771.0 million, compared with $518.5 million at fiscal year-end. Total assets were $3.628 billion and stockholders’ equity was $2.163 billion.
Material Changes Versus the Prior Comparable Period
- Q3 revenue grew 22%, primarily from a COVID-19-related shift to online shopping, while company-operated store revenue declined 12%.
- Q3 gross margin expanded 100 basis points because of lower occupancy and depreciation costs as a percentage of revenue and favorable foreign exchange, partly offset by higher air freight costs and markdowns.
- Q3 operating margin declined 90 basis points because SG&A increased to 36.8% of revenue, while MIRROR generated $8.5 million of acquisition-related expenses and $2.2 million of intangible-asset amortization.
- First-three-quarter revenue increased only 4%, as a 105% increase in direct-to-consumer revenue largely offset a 37% decline in company-operated store revenue.
- First-three-quarter operating income declined 23% and net income declined 25%, reflecting store closures, reduced operating hours and occupancy restrictions, higher distribution and digital marketing costs, MIRROR-related costs, and increased corporate expenses.
- Goodwill increased from $24.2 million to $386.6 million, primarily from $362.5 million recognized in the MIRROR acquisition. Acquired intangible assets had a provisional fair value of $85.0 million.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that COVID-19 materially adversely affected first-three-quarter results and was expected to continue affecting operations, demand, supply chains, liquidity, and financial position. Almost all stores were open during Q3, but certain markets subsequently experienced temporary closures and tighter capacity restrictions.
- Management remained confident in long-term growth opportunities and the Power of Three plan, and stated that available cash and revolving-credit capacity were sufficient for liquidity needs.
- The MIRROR purchase price was approximately $500 million, including $57.1 million of deferred consideration tied to continuing employees over vesting periods of up to three years. The purchase-price allocation remained provisional.
- As of November 1, 2020, the company had $481.6 million of cash and $697.3 million of capacity under committed revolving facilities. No borrowings were outstanding, although $2.7 million of letters of credit were issued.
- On December 4, 2020, the company gave notice to terminate its $300 million 364-day revolving facility effective December 11, 2020, reducing committed capacity to approximately $397.3 million.
- The company recognized $37.0 million of government payroll subsidies during the first three quarters, recorded as a reduction of SG&A. It also recognized $5.5 million of COVID-19-related lease concessions.
- The principal risks include further COVID-19 disruption, supply-chain and freight constraints, excess inventory and markdown exposure, e-commerce and distribution-system dependence, foreign-exchange volatility, cybersecurity and privacy risks, international expansion, and the ability to integrate and achieve profitability from MIRROR.
- Pending legal matters included a California PAGA employment action and a trademark-infringement action. Management intended to defend both matters and stated that current proceedings were not expected to have a material adverse effect.
- The $500 million share-repurchase authorization was paused in March 2020 and restarted September 22, 2020. The board increased the remaining authorization from $263.6 million to $500 million on December 1, 2020.
Investor Verification Checklist
- Verify the filing period: the document reports Q3 fiscal 2020, not Q3 fiscal 2019.
- Assess whether the extraordinary shift toward e-commerce can persist after store traffic and operating restrictions normalize.
- Monitor inventory growth, provision for inventory markdowns, freight costs, and return allowances.
- Review MIRROR’s revenue, subscription growth, profitability, integration costs, deferred employee consideration, and potential goodwill or intangible-asset impairment.
- Confirm post-December 11, 2020 liquidity after termination of the $300 million credit facility.
- Evaluate the sustainability of margins excluding COVID-19 wage subsidies, lease concessions, acquisition-related costs, and other unusual items.
- Track subsequent COVID-19 closures, capacity restrictions, supply-chain interruptions, foreign-exchange effects, and related legal or regulatory developments.