Lululemon Athletica Inc. 10-K Summary
Reporting period: The supplied filing is the Form 10-K for the 53-week fiscal year ended February 3, 2013, referred to as fiscal 2012. The request metadata identifies 2011 Q4, but the filing also provides unaudited fourth-quarter comparisons for fiscal 2012 and fiscal 2011.
Business Context
Lululemon designs and sells premium technical athletic apparel and accessories under the lululemon athletica and ivivva athletica brands. Products are sold primarily through corporate-owned stores, e-commerce, wholesale accounts and showrooms in North America, Australia and New Zealand. At year-end, the company operated 211 corporate-owned stores, compared with 174 a year earlier.
Financial Performance and Key Metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Net revenue | $1,370.4 million | $1,000.8 million | Up 37% |
| Gross profit | $762.8 million | $569.4 million | Up 34% |
| Gross margin | 55.7% | 56.9% | Down 120 basis points |
| Income from operations | $376.4 million | $287.0 million | Up 31% |
| Operating margin | 27.5% | 28.7% | Down 120 basis points |
| Net income attributable to Lululemon | $270.6 million | $184.1 million | Up 47% |
| Diluted EPS | $1.85 | $1.27 | Up 46% |
| Cash flow from operations | $280.1 million | $203.6 million | Up 38% |
Fiscal 2012 revenue growth reflected 16% comparable-store sales growth excluding the 53rd week, 37 new corporate-owned stores and strong e-commerce growth. Corporate-owned stores generated $1,090.2 million of revenue, direct-to-consumer revenue increased 86% to $197.3 million, and direct-to-consumer sales represented 14% of total revenue versus 11% in fiscal 2011.
Cost pressures from labor and raw materials, greater product complexity, and higher markdowns reduced gross margin. Selling, general and administrative expenses increased 37% to $386.4 million but remained 28.2% of revenue. The effective tax rate declined to 28.8% from 36.1%, primarily due to revised intercompany pricing arrangements.
At February 3, 2013, cash and cash equivalents were $590.2 million, inventories were $155.2 million, total assets were $1.05 billion and stockholders’ equity was $887.3 million. The company had no borrowings outstanding under its CDN$20.0 million revolving credit facility. It reported $1.4 million of guarantees and letters of credit and no other material off-balance-sheet arrangements.
Fourth-Quarter Comparison
| Metric | Fiscal 2012 Q4 | Fiscal 2011 Q4 |
|---|---|---|
| Net revenue | $485.5 million | $371.5 million |
| Gross profit | $274.5 million | $209.0 million |
| Income from operations | $152.6 million | $116.1 million |
| Net income attributable to Lululemon | $109.4 million | $73.5 million |
| Diluted EPS | $0.75 | $0.51 |
Material Changes Versus the Prior Comparable Period
- Revenue increased 37%, supported by store expansion, positive comparable-store sales and rapid e-commerce growth.
- The store base increased by 37 locations, with the largest expansion in the United States.
- Direct-to-consumer revenue increased from 10.6% to 14.4% of total revenue and generated a 42.1% segment operating margin versus 41.6% previously.
- Gross margin declined 120 basis points because of higher product costs, supply-chain and product-development expenses, and increased markdowns.
- Cash flow from operations increased $76.5 million to $280.1 million, while cash increased $180.7 million to $590.2 million.
- The company purchased the remaining non-controlling interest in its Australian subsidiary for $26.0 million, eliminating the non-controlling interest.
- Capital expenditures declined to $93.2 million from $122.3 million, primarily because fiscal 2011 included the $65.1 million purchase of the Vancouver headquarters.
Guidance, Outlook, Risks and Unusual Items
- Management planned to open up to 38 stores in North America, including three ivivva stores, and approximately five stores in Australia and New Zealand during fiscal 2013.
- Fiscal 2013 capital expenditures were expected to range from $90 million to $95 million, including approximately $30 million for about 43 new stores.
- Management cited strong cash generation, a solid balance sheet and sufficient liquidity to fund expected needs for at least the next 24 months.
- In mid-March 2013, after the balance-sheet date, the company identified shipments of women’s black Luon bottoms that did not meet technical specifications. Affected products were removed from stores and websites. Management expected lost revenue, replacement costs and inventory write-downs to negatively affect fiscal 2013 results.
- Material risks include brand and product-quality damage, inventory forecasting errors, increasing labor and raw-material costs, reliance on third-party manufacturers, concentration among suppliers, foreign-exchange exposure, competitive pressure, international expansion, long-term store leases and information-system disruptions.
- The company disclosed two California class-action lawsuits involving alleged labor-code violations and the collection of customer information. Damages were unspecified, and management stated that it intended to vigorously defend both matters.
- Foreign-currency sensitivity was significant: a 10% depreciation of the Canadian dollar against the U.S. dollar was estimated to reduce fiscal 2012 operating income by approximately $28.0 million.
- The company paid no dividends and did not expect to pay dividends in the foreseeable future.
Important Facts for Investors to Verify
- Confirm the intended period: the filing is fiscal 2012, ended February 3, 2013, rather than a 2011 Q4 filing.
- Assess the fiscal 2013 financial impact of the Luon product-quality issue, including lost sales, replacement expenses and inventory write-downs.
- Monitor whether comparable-store sales and e-commerce growth remain strong as the store base expands.
- Evaluate the sustainability of gross margins given higher sourcing costs, markdowns and product complexity.
- Review supplier concentration, manufacturing-country exposure and the absence of long-term manufacturing commitments.
- Track the outcomes and potential costs of the two California class-action lawsuits and ongoing transfer-pricing tax audits.
- Reconcile planned store openings and capital expenditures with cash generation, lease commitments and liquidity.