Lululemon Athletica Inc. Form 10-K Summary
Reporting period: The supplied filing is the Form 10-K for the 52-week fiscal year ended February 2, 2014, referred to as fiscal 2013. The requested period metadata states “2012 Q4,” but the filing covers the full fiscal year and includes unaudited quarterly information. Fiscal 2012 ended February 3, 2013 and contained 53 weeks.
Business Context
Lululemon designs and sells premium technical athletic apparel and accessories under the lululemon athletica and ivivva athletica brands. Products are sold through corporate-owned stores, e-commerce, showrooms, outlets and limited wholesale accounts, primarily in the United States, Canada, Australia and New Zealand.
- Corporate-owned stores increased to 254 from 211 at the prior year-end, including 171 in the United States, 54 in Canada, 25 in Australia and four in New Zealand.
- Direct-to-consumer sales represented 16.5% of fiscal 2013 revenue, compared with 14.4% in fiscal 2012.
- The company opened 43 net new corporate-owned stores during fiscal 2013 and operated 7,622 employees at year-end.
Financial Performance and Liquidity
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net revenue | $1.591 billion | $1.370 billion | Up 16% |
| Gross profit | $840.1 million | $762.8 million | Up 10% |
| Gross margin | 52.8% | 55.7% | Down 290 bps |
| Income from operations | $391.4 million | $376.4 million | Up 4% |
| Operating margin | 24.6% | 27.5% | Down 290 bps |
| Net income attributable to lululemon | $279.5 million | $270.6 million | Up 3% |
| Diluted EPS | $1.91 | $1.85 | Up $0.06 |
| Cash flow from operating activities | $278.3 million | $280.1 million | Down $1.8 million |
| Capital expenditures | $106.4 million | $93.2 million | Up $13.2 million |
- Cash and cash equivalents were $698.6 million at February 2, 2014, compared with $590.2 million a year earlier.
- Working capital excluding cash was $130.7 million.
- Total assets were $1.250 billion and stockholders’ equity was $1.097 billion.
- The company had no borrowings outstanding under its $15.0 million unsecured demand revolving credit facilities, excluding issued letters of credit.
- Letters of credit and guarantees totaled approximately $1.1 million.
- The company paid no cash dividends and does not anticipate paying dividends in the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by 43 net new stores, 33% growth in direct-to-consumer revenue to $263.1 million, and 7% total comparable sales growth excluding the fiscal 2012 53rd week.
- Comparable store sales increased 2%, versus 16% in fiscal 2012, excluding the extra week.
- Corporate-owned store revenue increased 13% to $1.229 billion, while direct-to-consumer revenue increased 33% and other revenue increased 20% to $99.1 million.
- Gross margin declined primarily because of lower product margins, higher markdowns and inventory provisions, and a $17.5 million charge associated with the withdrawal of certain black Luon products.
- Fiscal 2013 inventory write-offs totaled $30.2 million, including the $17.5 million black Luon charge, compared with $6.4 million in fiscal 2012.
- Foreign currency translation reduced comprehensive income by $89.2 million, compared with a $0.5 million translation loss in fiscal 2012.
- Fiscal 2013 operating cash flow was broadly stable despite higher net income, partly because of changes in taxes payable and accrued compensation.
- The company purchased a 307,000-square-foot distribution center in Columbus, Ohio, expected to begin operations in fiscal 2014.
Guidance, Outlook, Risks and Unusual Items
Management described fiscal 2014 as an “investment year” focused on rebuilding the brand experience, strengthening product quality and the supply chain, improving guest and community engagement, and supporting long-term growth. Planned fiscal 2014 capital expenditures were $105 million to $110 million, including approximately $35 million for about 42 new stores. Management also planned up to 39 new North American stores, two new Australian stores and two other international stores.
- Management expects selling, general and administrative expenses to increase as the company adds personnel, systems and infrastructure.
- Key risks include product quality failures, brand damage, inaccurate demand forecasting, excess inventory, supply-chain concentration and reliance on third-party manufacturers.
- Approximately 63% of fiscal 2013 products were produced by the top five manufacturers, and approximately 30% of fabric usage consisted of Luon obtained substantially from one supplier.
- Approximately 67% of products were produced in South or Southeast Asia and 23% in China, exposing the company to labor, tariff, trade, transportation, political and currency risks.
- A 10% depreciation of the Canadian dollar relative to the U.S. dollar would have reduced fiscal 2013 operating income by approximately $0.8 million; a comparable Australian dollar depreciation would have reduced operating income by approximately $0.3 million.
- Minimum operating lease payments totaled $350.2 million, including $70.9 million due in fiscal 2014.
- Several shareholder, derivative and books-and-records lawsuits related to the black Luon issue, executive changes, disclosures and insider stock trades were pending. The company disputed the claims, but stated that defense costs, settlements or judgments could materially affect liquidity and earnings.
- The company hired Laurent Potdevin as chief executive officer in January 2014 and disclosed additional executive transition-related bonus and option awards approved in February 2014.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of February 2, 2014.
Most Important Facts to Verify
- Confirm that the relevant filing period is fiscal 2013, ended February 2, 2014, rather than 2012 Q4.
- Assess whether the gross-margin decline and the $17.5 million Luon-related charge were isolated or indicative of continuing product-quality and inventory risks.
- Monitor comparable store sales, store productivity and the sustainability of 33% direct-to-consumer growth.
- Review inventory levels, markdowns, obsolescence provisions and supply-chain concentration.
- Evaluate the planned $105 million to $110 million fiscal 2014 capital program and associated store expansion commitments.
- Track the outcome and potential financial exposure from shareholder and securities litigation.
- Consider foreign-exchange sensitivity, particularly the increasing proportion of revenue generated in the United States and the translation impact on Canadian operations.