Business Context and Reporting Period
Company: lululemon athletica inc., designer, distributor, and retailer of athletic apparel, accessories, and MIRROR in-home fitness products and subscriptions. The filing is a Form 10-Q for the quarter ended May 2, 2021 (fiscal 2021 first quarter), compared with the quarter ended May 3, 2020. The request metadata identifies “2020 Q1,” but the filing itself reports fiscal 2021 Q1.
The company operated 523 stores at May 2, 2021, compared with 521 at January 31, 2021. MIRROR, acquired July 7, 2020 for $452.6 million net of cash acquired, has been consolidated since acquisition.
Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $1.226 billion | $652.0 million | +88% |
| Gross profit | $700.3 million | $334.4 million | +109% |
| Gross margin | 57.1% | 51.3% | +580 bps |
| Income from operations | $193.8 million | $32.8 million | +492% |
| Operating margin | 15.8% | 5.0% | +1,080 bps |
| Net income | $145.0 million | $28.6 million | +406% |
| Diluted EPS | $1.11 | $0.22 | +405% |
| Cash flow from operations | $214.1 million | $(121.2) million | +$335.4 million |
Revenue growth reflected stores reopening after COVID-19 closures in the prior-year quarter, continued digital demand, new stores, and MIRROR revenue. Company-operated store revenue increased 106% to $536.6 million; direct-to-consumer revenue increased 55% to $545.1 million, or 50% on a constant-dollar basis; and other revenue increased 262% to $144.8 million. Constant-dollar total revenue growth was 83%.
SG&A increased 66% to $496.6 million but declined to 40.5% of revenue from 46.0%. Gross margin benefited from occupancy and depreciation leverage, lower markdowns and inventory provisions, and foreign exchange, partly offset by higher air freight costs. The effective tax rate increased to 25.3% from 15.6%.
At May 2, 2021, cash and cash equivalents were $1.180 billion, inventories were $732.9 million, and working capital excluding cash was $108.9 million. Total liabilities were $1.690 billion, consisting primarily of lease liabilities and operating liabilities; the filing reports no conventional borrowings outstanding under the revolving facilities other than $2.7 million of letters of credit. The company had $397.3 million of capacity under its committed North America facility.
Material Changes Versus the Prior Comparable Period
- Revenue, profitability, margins, and operating cash flow increased substantially as the prior-year quarter was heavily affected by COVID-19 store closures.
- Direct-to-consumer revenue remained strong, but management expects its fiscal 2021 growth rate to moderate compared with fiscal 2020.
- Gross margin expanded 580 basis points, while operating margin expanded 1,080 basis points.
- Acquisition-related expenses increased to $7.7 million from $2.0 million, primarily due to $7.2 million of MIRROR-related compensation. MIRROR intangible-asset amortization was $2.2 million versus $23,000.
- No government payroll subsidies were recognized in Q1 2021, compared with $14.3 million in Q1 2020.
- Capital expenditures increased to $64.2 million from $52.1 million, primarily due to direct-to-consumer distribution-center investments.
- The company repurchased 269,517 shares for $83.8 million, compared with 369,000 shares for $63.7 million in the prior-year quarter. Remaining authorization was $416.2 million at May 2, 2021.
Outlook, Commentary, Risks, and Unusual Items
Management stated that cash balances, operating cash flow, and available revolver capacity should fund liquidity and capital needs for at least the next 12 months. The company remains subject to retail seasonality, with a significant portion of operating profit historically generated in the fourth quarter.
COVID-19 continued to cause temporary store closures, occupancy restrictions, reduced operating hours, supply-chain disruption, and changes in consumer behavior. Further resurgences or variants could affect stores, distribution centers, demand, staffing, and discretionary spending.
Key risks include supply-chain and freight-cost pressures, inventory forecasting, inflation, foreign-currency volatility, cybersecurity and privacy exposure, competition, international expansion, long-term lease commitments, and the ability to integrate and achieve profitability from MIRROR. The company reported $2.9 million of net foreign exchange and derivative losses in SG&A for the quarter.
DISH Technologies and affiliates filed patent-infringement complaints against MIRROR and other fitness companies in federal court and at the International Trade Commission, seeking injunctive, exclusion, and monetary relief. The company intends to defend the matter vigorously. Management believes routine legal proceedings are not expected to have a material adverse effect, but the ultimate outcome of the DISH matter is uncertain.
The company was in compliance with its revolving-credit covenants, and management concluded that disclosure controls and procedures were effective as of May 2, 2021.
Important Facts for Investors to Verify
- Whether the unusually strong year-over-year results normalize after removing the prior-year COVID-19 comparison effects.
- The sustainability of direct-to-consumer growth and the expected moderation in its growth rate.
- MIRROR revenue, subscriber trends, integration costs, profitability, and potential impairment exposure.
- Inventory growth, product margin trends, air freight costs, markdowns, and inventory provisions.
- The financial and operational impact of COVID-19, supply-chain disruption, inflation, tariffs, and foreign-exchange movements.
- The status and potential exposure from the DISH patent litigation and ITC investigation.
- Remaining share-repurchase authorization, lease obligations, and available liquidity under the revolving facilities.