Lululemon Athletica Inc. Form 10-K Summary
Reporting period: The provided filing is the Annual Report on Form 10-K for the 52-week fiscal year ended January 31, 2016, referred to as fiscal 2015. The request metadata identifies “2014 Q4,” but the filing is not a 2014 quarterly report. The fourth-quarter fiscal 2015 results are included as unaudited quarterly information.
Business context
Lululemon designs, distributes, and retails premium technical athletic apparel and accessories under the lululemon athletica and ivivva athletica brands. Sales are generated primarily through company-operated stores and direct-to-consumer e-commerce, supplemented by outlets, showrooms, wholesale, warehouse sales, temporary locations, and licensing arrangements.
At January 31, 2016, the Company operated 363 company-operated stores, up from 302 at February 1, 2015. Direct-to-consumer sales represented 19.5% of fiscal 2015 revenue, compared with 17.9% in fiscal 2014.
Financial performance and liquidity
<>| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net revenue | $2.061 billion | $1.797 billion | +15% |
| Gross profit | $997.2 million | $914.2 million | +9% |
| Gross margin | 48.4% | 50.9% | -250 bps |
| Income from operations | $369.1 million | $376.0 million | -2% |
| Operating margin | 17.9% | 20.9% | -300 bps |
| Net income | $266.0 million | $239.0 million | +11% |
| Diluted EPS | $1.89 | $1.66 | +14% |
| Cash flow from operations | $298.7 million | $314.4 million | -5% |
| Capital expenditures | $143.5 million | $119.7 million | +20% |
| Cash and cash equivalents | $501.5 million | $664.5 million | -25% |
Revenue growth was driven by 61 net new stores and strong e-commerce performance. Total comparable sales increased 5% on a reported basis and 10% in constant dollars. Direct-to-consumer revenue increased 25% reported and 30% in constant dollars.
Gross margin declined because of higher occupancy and depreciation costs, unfavorable foreign exchange effects on product costs, and increased markdowns and discounts. Selling, general and administrative expense increased 17% to $628.1 million, or 30.5% of revenue, as the Company invested in stores, headquarters, supply chain, digital marketing, and technology.
Net income benefited from lower income tax expense. The effective tax rate was 27.8%, compared with 37.6% in fiscal 2014; excluding specified tax and related interest adjustments, the rates were 29.5% and 28.8%, respectively.
The Company had no debt borrowings outstanding at year-end, apart from $1.6 million of letters of credit, under unsecured revolving credit facilities providing up to $15.0 million of availability. Management stated that cash, operating cash flow, and available borrowings were sufficient for anticipated liquidity and capital requirements for at least the next 12 months.
Fourth-quarter fiscal 2015
| Metric | Q4 fiscal 2015 | Q4 fiscal 2014 |
|---|---|---|
| Net revenue | $704.3 million | $602.5 million |
| Gross profit | $354.5 million | $310.0 million |
| Income from operations | $166.3 million | $157.2 million |
| Net income | $117.4 million | $110.9 million |
| Diluted EPS | $0.85 | $0.78 |
Material changes versus the prior comparable period
- Revenue increased 15%, but operating income declined 2% as cost growth outpaced gross-profit growth.
- Store revenue increased 12% to $1.516 billion, while reported comparable store sales declined less than 1%; comparable store sales increased 4% in constant dollars.
- Direct-to-consumer revenue increased 25% to $401.5 million and increased from 17.9% to 19.5% of total revenue.
- Inventory increased to $284.0 million from $208.1 million, principally to support new stores, higher sales, and delivery timing.
- Operating cash flow decreased $15.7 million, while capital expenditures increased $23.8 million.
- The Company repurchased approximately 5.0 million shares for $274.2 million in fiscal 2015, compared with 3.7 million shares for $147.4 million in fiscal 2014.
- Cash declined by $163.0 million, reflecting share repurchases, capital spending, operating working-capital needs, and foreign exchange effects.
- Accumulated other comprehensive loss increased primarily because of foreign currency translation, including a $63.2 million impact from the change in the U.S. dollar relative to the Canadian dollar.
Outlook, commentary, risks, and unusual items
Management’s fiscal 2016 priorities were to strengthen the women’s category, particularly tops; continue men’s product development and store expansion; invest in customer relationship management, analytics, digital marketing, and a new North American website; expand selectively in international markets; and build a scalable supply-chain and operating infrastructure. Fiscal 2016 capital expenditures were expected to range from $150 million to $155 million, and SG&A was expected to increase.
Material unusual items included a net $7.4 million income-tax benefit related to transfer-pricing and foreign-tax-credit adjustments, partially offset by $3.5 million of related net interest expense. The Company was negotiating a bilateral Advance Pricing Agreement with the IRS and CRA and expected the outcome to require a distribution of up to $156.0 million from a Canadian subsidiary to the U.S. parent. The final tax outcome remained subject to tax-authority review; management disclosed potential additional tax benefits of up to approximately $10 million.
Key risks include brand and product-quality exposure, reliance on a limited supplier and manufacturing base, inventory forecasting and markdown risk, intense athletic-apparel competition, foreign currency volatility, international expansion, cybersecurity and information-system disruptions, long-term lease commitments, raw-material and labor-cost inflation, trade restrictions, tax audits and transfer-pricing disputes, and litigation. Five manufacturers produced approximately 65% of products, while approximately 40% of raw materials were produced by a single manufacturer.
The filing reports a derivative lawsuit concerning alleged fiduciary-duty breaches related to 2013 stock trades and a New York wage-and-hour class action seeking unspecified damages. The Company intended to defend both matters and could not predict related legal expenses, settlements, or damages.
Most important facts for investors to verify
- Confirm that the intended comparison is fiscal 2015 versus fiscal 2014, rather than “2014 Q4,” because the filing covers the year ended January 31, 2016.
- Assess whether revenue growth from new stores and e-commerce can offset continued gross-margin pressure and higher corporate expenses.
- Review inventory growth, markdown rates, and working-capital trends for potential future margin or cash-flow effects.
- Monitor the final Advance Pricing Agreement, tax audits, expected intercompany distribution, and any resulting effective-tax-rate changes.
- Evaluate foreign-exchange sensitivity, particularly the effect of further U.S. dollar appreciation against the Canadian dollar.
- Verify the pace and returns of planned store expansion, international openings, website investments, and the $150 million–$155 million fiscal 2016 capital-spending plan.
- Review the status and potential financial exposure of the disclosed derivative, employment, and other legal proceedings.