Business Context and Reporting Period
Lululemon athletica inc. designs and retails premium technical athletic apparel and accessories under the lululemon athletica and ivivva athletica brands. The filing is a Form 10-K for the 52-week fiscal year ended February 1, 2015, referred to as fiscal 2014. The user-specified “2013 Q4” does not match the filing period; the filing includes unaudited fourth-quarter fiscal 2014 results.
The company operated 302 corporate-owned stores at year-end, compared with 254 one year earlier, and generated revenue through corporate-owned stores, e-commerce, outlets, showrooms, wholesale, warehouse sales and temporary locations.
Financial Metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Net revenue | $1.797 billion | $1.591 billion | +13% |
| Gross profit | $914.2 million | $840.1 million | +9% |
| Gross margin | 50.9% | 52.8% | Down 190 bps |
| Income from operations | $376.0 million | $391.4 million | Down 4% |
| Operating margin | 20.9% | 24.6% | Down 370 bps |
| Net income | $239.0 million | $279.5 million | Down 15% |
| Diluted EPS | $1.66 | $1.91 | Down $0.25 |
| Cash flow from operations | $314.4 million | $278.3 million | +13% |
| Capital expenditures | $119.7 million | $106.4 million | +13% |
| Cash and cash equivalents | $664.5 million | $698.6 million | Down $34.2 million |
Fourth-quarter fiscal 2014 revenue was $602.5 million, gross profit was $310.0 million, operating income was $157.2 million and net income was $110.9 million. The fourth quarter generated approximately 42% of full-year operating profit, highlighting the company’s retail seasonality.
- Corporate-owned store revenue increased 10% to $1.348 billion and represented 75.0% of total revenue.
- Direct-to-consumer revenue increased 22% to $321.2 million and represented 17.9% of total revenue, versus 16.5% in fiscal 2013.
- Other-channel revenue increased 29% to $127.8 million and represented 7.1% of total revenue.
- Total comparable sales increased 1%, or 3% on a constant-dollar basis. Comparable store sales declined 3%, or 1% on a constant-dollar basis.
- Inventory was $208.1 million at year-end, compared with $188.8 million a year earlier.
- Total stockholders’ equity was $1.090 billion. The filing reports no outstanding borrowings other than $0.6 million of letters of credit under $15.0 million unsecured revolving facilities.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by 48 net new stores and continued e-commerce traffic growth, while comparable store productivity weakened.
- Gross margin declined because of product mix, higher product costs, increased air freight, supply-chain and product-department expenses, fixed-cost deleverage and unfavorable foreign exchange effects. Lower inventory provisions and markdowns partially offset these pressures.
- Selling, general and administrative expenses rose 20% to $538.1 million, increasing to 30.0% of revenue from 28.2%. Higher employee, store, distribution, e-commerce, head-office and strategic-investment costs were key contributors.
- The effective tax rate increased to 37.6% from 29.6%, including a $33.7 million tax expense related to repatriation of $473.7 million of foreign earnings to fund share repurchases. Excluding that item, the tax rate was 28.8% and diluted EPS was $1.89.
- The company repurchased 3.7 million shares for $147.4 million during fiscal 2014 under a $450 million authorization extending through June 2016.
- Foreign currency translation produced a $105.3 million loss in accumulated other comprehensive income, compared with an $89.2 million loss in fiscal 2013.
Cash Flow, Liquidity and Commitments
- Operating cash flow of $314.4 million exceeded capital expenditures of $119.7 million, producing positive pre-financing cash generation of approximately $194.7 million.
- Financing cash outflows were $149.1 million, primarily reflecting share repurchases. The company expects fiscal 2015 capital expenditures of $130 million to $135 million.
- Management believes cash, operating cash flow and available revolving credit will meet liquidity and capital requirements for at least the next 12 months.
- Minimum operating lease commitments totaled $395.5 million, including $82.3 million due in fiscal 2015. Product purchase obligations totaled $189.7 million, all due in fiscal 2015.
- The company does not pay cash dividends and expects to retain funds for operations and expansion.
Outlook, Management Commentary and Risks
Management stated that fiscal 2014 investments in product quality, supply chain, distribution, product assortment and guest experience were intended to strengthen the business foundation. The company expected to substantially complete this foundational work in fiscal 2015 and increase investment in innovation to support sustainable global growth.
- Planned growth areas include additional U.S. stores, international expansion, men’s apparel, ivivva athletica and e-commerce. The company opened its first stores in the United Kingdom and Singapore and entered a five-year Middle East license and supply agreement; no franchised locations were operating at year-end.
- Management expected selling, general and administrative expenses to continue increasing as infrastructure, administrative personnel and store operations expand.
- Key risks include brand and product-quality damage, supply-chain concentration, lack of long-term supplier contracts, rising product and labor costs, air freight and port disruptions, inventory forecasting errors, intense competition, discretionary consumer spending, international execution, foreign exchange volatility, cybersecurity and information-system interruptions.
- Approximately 63% of fiscal 2014 products were produced by the top five manufacturing suppliers; approximately 59% were produced in Southeast Asia, 23% in South Asia and 11% in China. Approximately 30% of fabric usage consisted of Luon fabric sourced from two suppliers.
- The company disclosed shareholder and derivative litigation relating to the 2013 sheer Luon product issue, executive changes and historical stock trading. Several claims had been dismissed but appeals or related proceedings remained pending. Potential legal expenses, settlements or judgments could materially affect liquidity, although the company stated it could not estimate the amounts.
- A 10% depreciation of the Canadian dollar against the U.S. dollar, relative to fiscal 2014 exchange rates, would have reduced fiscal 2014 operating income by approximately $2.2 million, based on the company’s sensitivity analysis.
Important Facts for Investors to Verify
- Confirm that the relevant period is fiscal 2014, ended February 1, 2015, rather than “2013 Q4,” and distinguish audited annual figures from unaudited quarterly data.
- Assess whether future store growth and e-commerce expansion can offset declining comparable-store sales and continued SG&A growth.
- Monitor gross-margin recovery, product costs, air freight, inventory provisions and markdown levels.
- Reconcile reported EPS of $1.66 with management’s $1.89 adjusted figure excluding the one-time repatriation tax expense.
- Evaluate the sustainability of share repurchases relative to planned capital expenditures, lease commitments and international expansion.
- Review the status and potential financial exposure of the pending litigation and related indemnification obligations.
- Verify supplier concentration, sourcing geography, foreign-exchange exposure and the company’s ability to maintain product quality and availability.
- Confirm the effect of the new revenue-recognition and stock-compensation accounting standards identified in the filing as future adoption requirements.