Lululemon Athletica Inc. annual report, FY2010

Lululemon Athletica Inc. Form 10-K Summary

Period covered: Fiscal year ended January 30, 2011, generally a 52-week year. The supplied filing is not a 2009 Q4 filing; it is the fiscal 2010 annual report, with quarterly information for fiscal 2010 and fiscal 2009.

Business Context

Lululemon designs and sells premium technical athletic apparel and accessories through corporate-owned stores, e-commerce, phone sales, franchisees and wholesale accounts. Its primary markets are Canada, the United States and Australia. At January 30, 2011, the company operated 137 branded stores, including 133 corporate-owned and four franchised stores.

Corporate-owned stores: 133, compared with 110 at January 31, 2010.
Direct-to-consumer sales represented 8.1% of revenue, compared with 4.0% in fiscal 2009.
Canada contributed 52% of revenue, the United States 46%, and Australia and Hong Kong 2%.

Financial Performance

Metric	Fiscal 2010	Fiscal 2009	Change
Net revenue	$711.7 million	$452.9 million	+57%
Gross profit	$394.9 million	$223.1 million	+77%
Gross margin	55.5%	49.3%	+620 bps
Income from operations	$180.4 million	$86.5 million	+108%
Operating margin	25.4%	19.1%	+630 bps
Net income attributable to Lululemon	$121.8 million	$58.3 million	+109%
Diluted EPS	$1.69	$0.82	+106%
Cash flow from operating activities	$180.0 million	$118.0 million	+53%

Comparable-store sales increased 37%, or 30% excluding foreign-exchange effects. Corporate-owned stores generated $591.0 million of revenue, direct-to-consumer revenue increased 214% to $57.3 million, and other revenue increased 54% to $63.3 million.

Selling, general and administrative expenses, including impairment and lease-exit costs, increased 57% to $214.6 million but remained 30.1% of revenue. The effective tax rate was 33.3%, compared with 32.8% in fiscal 2009.

Cash Flow, Liquidity and Capital Structure

Cash and cash equivalents were $316.3 million at January 30, 2011, compared with $159.6 million a year earlier.
Working capital excluding cash was a deficit of $12.4 million.
Cash used in investing activities was $42.8 million, including $30.4 million of property and equipment purchases and $12.5 million for franchise acquisitions.
Cash provided by financing activities was $13.7 million, primarily from stock-option exercises and related tax benefits.
The company had no borrowings outstanding under its CDN$20.0 million uncommitted revolving credit facility. Letters of credit and guarantees reduced availability by approximately $1.5 million.
Operating lease minimum payments totaled $249.0 million, including $177.0 million due through fiscal 2015 and $72.5 million thereafter. Contingent rent and other executory costs are excluded.
No cash dividends were declared or anticipated in the foreseeable future.

Material Changes Versus Fiscal 2009

Revenue growth accelerated substantially, driven by 37% comparable-store sales growth, new stores, reacquired franchises and e-commerce expansion.
Gross margin expanded by 620 basis points because of operating leverage, improved product costing, a higher direct-to-consumer mix and favorable Canadian-dollar effects.
The company increased its investment in the Australian business from 13% to 80%, obtained control, and recognized a $1.8 million gain on remeasurement of its previously held interest. The acquisition added $15.8 million of revenue from the acquisition date through year-end and created $3.9 million of non-controlling interest.
Ten franchised stores were reacquired during fiscal 2010, including nine in Australia and one in Canada, reducing the relative importance of the franchise channel.
Two corporate-owned stores were closed and the company recorded $1.8 million of impairment and lease-exit costs.
Goodwill and intangible assets increased to $27.1 million from $8.1 million, primarily reflecting acquisitions and foreign-currency effects.
Inventory increased to $57.5 million from $44.1 million, while inventory write-offs increased to $1.0 million from $0.8 million.

Guidance, Outlook and Risks

Management expected to open approximately 25 to 30 stores in fiscal 2011, including 20 to 25 lululemon and two ivivva stores in North America and three lululemon stores in Australia.
Fiscal 2011 capital expenditures were expected to total $110 million to $115 million, including $15 million to $19 million for approximately 25 to 30 new stores.
Management expected direct-to-consumer revenue to exceed 10% of total revenue in future fiscal years.
Management stated that operating cash flow and available borrowings were expected to fund liquidity needs and capital expenditures for at least the next 24 months, subject to demand and other business risks.
Key risks include dependence on consumer spending, rapid growth and execution, comparable-store sales volatility, substantial non-cancelable leases, foreign-exchange exposure, raw-material and labor-cost inflation, reliance on third-party manufacturers, supply-chain concentration, e-commerce and information-system disruptions, competition, brand reputation and international expansion.
Approximately 60% of products were manufactured in China, and approximately 69% were produced by the five largest manufacturing suppliers. The company generally had no long-term supply agreements.
A former employee filed a putative class action alleging unpaid off-the-clock work. The court dismissed the claims without prejudice on February 24, 2011, and allowed an amended complaint; management denied the allegations and intended to defend the matter.
After year-end, in March 2011, the company purchased its Vancouver executive and administrative office building for $65.1 million plus acquisition-related costs.

Investor Verification Checklist

Confirm the applicable period: the filing covers fiscal 2010 ended January 30, 2011, not 2009 Q4.
Reconcile reported revenue and comparable-store sales growth with store additions, reacquired franchises, currency effects and e-commerce growth.
Assess whether the 55.5% gross margin is sustainable after normalizing favorable currency effects and product-cost improvements.
Review the planned $110 million to $115 million fiscal 2011 capital program and its effect on store productivity and cash generation.
Monitor inventory growth, markdowns, write-offs and supplier concentration.
Evaluate lease commitments, contingent rent and the effect of the office-building purchase on future liquidity.
Review the Australian acquisition, non-controlling interest and related goodwill for integration and impairment risks.
Track foreign-exchange sensitivity, particularly the disclosed estimated $11.3 million operating-income impact from a 10% Canadian-dollar depreciation.
Follow the employment-related litigation and any amended complaint or settlement.