Lululemon Athletica Inc. — Form 10-K Summary
Reporting period: The filing is the Form 10-K for the 52-week fiscal year ended January 29, 2017, identified as fiscal 2016. The request metadata references “2015 Q4,” but the source filing is for fiscal 2016; it includes unaudited fourth-quarter comparisons for fiscal 2016 and fiscal 2015.
Business Context
Lululemon designs, distributes, and sells premium healthy-lifestyle athletic apparel and accessories under the lululemon and ivivva brands. Revenue is generated primarily through company-operated stores and direct-to-consumer e-commerce, with additional outlet, showroom, temporary-location, wholesale, warehouse, and licensing revenue.
- 406 company-operated stores at January 29, 2017, up from 363 one year earlier; 43 net new stores were added during fiscal 2016.
- International operations included stores in Australia, Europe, China, Hong Kong, Singapore, South Korea, New Zealand, Puerto Rico, and Switzerland.
- Direct-to-consumer revenue represented 19.3% of fiscal 2016 revenue; other channels represented 8.0%.
Financial Performance
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net revenue | $2.344 billion | $2.061 billion | +14% |
| Gross profit | $1.200 billion | $997.2 million | +20% |
| Gross margin | 51.2% | 48.4% | +280 basis points |
| Income from operations | $421.2 million | $369.1 million | +14% |
| Operating margin | 18.0% | 17.9% | +10 basis points |
| Net income | $303.4 million | $266.0 million | +14% |
| Diluted EPS | $2.21 | $1.89 | +17% |
- Company-operated store revenue increased 12% to $1.704 billion.
- Direct-to-consumer revenue increased 13% to $453.3 million.
- Other revenue increased 31% to $186.7 million.
- Total comparable sales increased 6%, or 7% on a constant-dollar basis. Comparable store sales increased 4%, or 5% on a constant-dollar basis.
- SG&A increased 24% to $778.5 million, rising to 33.2% of revenue from 30.5%, reflecting store and head-office employee costs, technology, marketing, distribution, and foreign-exchange revaluation losses.
- The reported effective tax rate was 28.2%, compared with 27.8%; excluding specified tax and related-interest adjustments, the rates were 30.7% and 29.5%, respectively.
Fourth-Quarter Information
For the unaudited fourth quarter of fiscal 2016, revenue was $789.9 million, compared with $704.3 million in the fourth quarter of fiscal 2015. Operating income was $196.6 million versus $166.3 million, and net income was $136.1 million versus $117.4 million. Diluted EPS was $0.99 versus $0.85.
Cash Flow, Liquidity, and Debt
- Operating cash flow was $385.1 million, up from $298.7 million.
- Capital expenditures were $149.5 million, primarily for stores, digital capabilities, information technology, systems, and corporate facilities.
- Cash and cash equivalents were $734.8 million at year-end, compared with $501.5 million at the prior year-end.
- Working capital excluding cash and cash equivalents was $186.4 million.
- The Company had $149.2 million of available capacity under its $150.0 million unsecured revolving credit facility; only $0.8 million of letters of credit was outstanding and there were no other borrowings.
- The facility matures December 15, 2021, is subject to financial covenants, and the Company reported compliance with those covenants.
- Fiscal 2017 capital expenditures were expected to range from $170 million to $175 million.
- Fiscal 2016 financing cash outflows included $29.3 million of share repurchases. A new $100 million repurchase authorization remained substantially available at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated through store expansion, comparable-store improvement, and continued e-commerce growth.
- Gross margin recovered materially from the prior-year decline, driven primarily by lower product costs, improved average retail prices, and lower raw-material commitment costs.
- Operating income returned to growth for the first time in three years, although SG&A grew faster than revenue.
- Cash generation improved substantially as inventory purchases were aligned with forward sales trends.
- Foreign-exchange revaluation losses increased to $8.3 million from a $12.0 million gain in fiscal 2015, primarily related to U.S.-dollar cash and receivables held by Canadian subsidiaries.
- Foreign-currency translation produced a $36.7 million increase in accumulated other comprehensive income, compared with a $64.8 million loss in fiscal 2015.
- The Company finalized an Advance Pricing Arrangement with U.S. and Canadian tax authorities, producing a further $10.7 million net tax recovery in fiscal 2016 and related interest expense of $1.7 million.
Outlook, Risks, and Unusual Items
Management’s fiscal 2017 priorities were product innovation, digital and omni-channel capabilities, North American store optimization, and accelerated international expansion, particularly through store growth in Asia. Management expected SG&A to increase as the Company invested in stores, e-commerce, technology, and long-term growth.
- Key risks include intense competition, premium pricing pressure, changing consumer preferences, inventory forecasting, product quality and recall exposure, and dependence on a limited supplier and manufacturing base.
- Five manufacturers produced approximately 63% of fiscal 2016 products, while approximately 40% of raw materials were produced by a single manufacturer. The Company generally has no long-term supply contracts.
- Approximately 75% of products were produced in South East Asia, South Asia, or China, exposing the Company to labor, trade, tariff, transportation, political, currency, and regulatory risks.
- Foreign-exchange volatility is material; the Company historically did not hedge currency exposure.
- Non-cancelable operating lease commitments totaled $518.6 million, and product purchase obligations totaled $176.3 million at year-end.
- Cash of $559.5 million was held outside the United States, and approximately $852.3 million of Canadian subsidiary earnings were treated as indefinitely reinvested; estimated U.S. taxes upon repatriation were approximately $38.4 million.
- Pending legal matters included a wage-and-hour class action in New York. A previously disclosed derivative lawsuit was dismissed, and the dismissal was affirmed on appeal in February 2017.
- The Company recognized $4.5 million of previously unredeemed gift-card balances as revenue during fiscal 2016.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of January 29, 2017.
Investor Verification Checklist
- Verify that the intended comparison is fiscal 2016 versus fiscal 2015 rather than “2015 Q4,” because the filing’s annual reporting period ended January 29, 2017.
- Review the sustainability of the 280-basis-point gross-margin improvement and whether product-cost benefits persist.
- Track SG&A growth, general corporate expenses, and foreign-exchange revaluation losses relative to revenue growth.
- Assess comparable-store sales, e-commerce growth, international store productivity, and returns on planned fiscal 2017 capital expenditures.
- Monitor inventory levels, markdowns, write-offs, and supplier concentration.
- Review the effect of lease commitments, future lease-accounting changes, and the $100 million share-repurchase program on liquidity and per-share results.
- Evaluate tax exposure related to transfer pricing, foreign earnings, and potential repatriation.