Lululemon Athletica Inc. Form 10-K Summary
Reporting period: The provided filing is the Form 10-K for the fiscal year ended January 29, 2012, covering fiscal 2011 and comparisons with fiscal 2010 and fiscal 2009. The request metadata references “2010 Q4,” but the filing text corresponds to fiscal 2011; fourth-quarter fiscal 2011 results are separately disclosed.
Business Context
Lululemon designs and sells premium technical athletic apparel and accessories under the lululemon athletica and ivivva athletica brands. Sales are generated primarily through corporate-owned stores, e-commerce, wholesale accounts, showrooms and warehouse sales in North America, Australia and New Zealand.
- Corporate-owned stores increased to 174 at January 29, 2012, from 133 at January 30, 2011.
- The company reacquired its four remaining U.S. franchised stores and no longer operated franchised stores at year-end.
- The company operated 155 stores in North America, 18 in Australia and one in New Zealand.
- Fiscal 2011 included 52 weeks; the fiscal year ends on the Sunday closest to January 31.
Financial Performance
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net revenue | $1,000.8 million | $711.7 million | +41% |
| Gross profit | $569.3 million | $394.9 million | +44% |
| Gross margin | 56.9% | 55.5% | +140 bps |
| Income from operations | $287.0 million | $180.4 million | +59% |
| Operating margin | 28.7% | 25.4% | +330 bps |
| Net income attributable to lululemon | $184.1 million | $121.8 million | +51% |
| Diluted earnings per share | $1.27 | $0.85 | +49% |
| Effective tax rate | 36.1% | 33.3% | +280 bps |
- Comparable-store sales increased 22% in fiscal 2011, compared with 37% in fiscal 2010.
- Corporate-owned store revenue increased 38% to $817.3 million.
- Direct-to-consumer revenue increased 85% to $106.3 million and represented approximately 11% of total revenue, versus 8% in fiscal 2010.
- Direct-to-consumer operating margin increased to 41.5% from 24.4%, partly because e-commerce operations were brought in-house.
- Selling, general and administrative expense increased 32% to $282.3 million, but declined to 28.2% of revenue from 30.1%.
Fourth-Quarter Fiscal 2011
| Metric | Q4 Fiscal 2011 | Q4 Fiscal 2010 | Change |
|---|---|---|---|
| Net revenue | $371.5 million | $245.4 million | +51% |
| Gross profit | $209.0 million | $143.5 million | +46% |
| Income from operations | $116.1 million | $71.3 million | +63% |
| Net income attributable to lululemon | $73.5 million | $54.8 million | +34% |
| Diluted earnings per share | $0.51 | $0.38 | +34% |
The fourth quarter generated approximately 37% of full-year gross profit, reflecting the company’s significant holiday-seasonality.
Cash Flow, Liquidity and Debt
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Operating cash flow | $203.6 million | $180.0 million |
| Investing cash flow | $(122.3) million | $(42.8) million |
| Financing cash flow | $15.4 million | $13.7 million |
| Capital expenditures | $116.9 million | $30.4 million |
| Cash and cash equivalents at year-end | $409.4 million | $316.3 million |
| Inventory at year-end | $104.1 million | $57.5 million |
- Capital spending rose primarily because of 41 store openings, information technology investments and the $65.1 million purchase of the company’s principal executive and administrative offices.
- Management expected fiscal 2012 capital expenditures of approximately $70 million to $75 million, including approximately $25 million for about 37 new stores.
- The company had no borrowings outstanding under its CDN$20 million revolving credit facility at year-end.
- Letters of credit and guarantees totaled approximately $1.5 million.
- Management stated that cash from operations and available credit were expected to fund liquidity and capital needs for at least the next 24 months.
- Total minimum operating-lease payments were $270.8 million, including $46.0 million due in fiscal 2012.
Material Changes and Unusual Items
- Revenue mix shifted toward the United States: 53% of fiscal 2011 revenue versus 46% in fiscal 2010; Canada declined to 43% from 52%.
- The company acquired control of its Australian business in fiscal 2010 and retained a non-controlling interest. Fiscal 2011 included $0.9 million of net income attributable to non-controlling interests.
- The company reacquired four franchised stores in fiscal 2011 for approximately $5.7 million plus working-capital adjustments.
- No impairment or lease-exit charge was recorded in fiscal 2011; fiscal 2010 included approximately $1.8 million of such charges.
- Inventory write-offs increased to $3.1 million from $1.0 million in fiscal 2010.
- Stock-based compensation expense increased to $10.3 million from $7.3 million.
- The effective tax rate increased because a greater share of earnings was generated in the United States and because of non-deductible stock-based compensation.
Outlook, Commentary and Risks
Management emphasized continued store expansion, e-commerce development, international growth, information-technology investment, product innovation and expansion of men’s and youth offerings. Planned fiscal 2012 expansion included up to 30 U.S. stores, two Canadian ivivva stores and approximately five stores in Australia and New Zealand.
- Key risks include discretionary consumer spending, intense competition, premium pricing pressure, raw-material and labor-cost inflation, inventory forecasting, supply-chain concentration and overseas manufacturing.
- Approximately 49% of fiscal 2011 products were manufactured in China and approximately 41% in South and Southeast Asia; the top five manufacturers produced approximately 67% of products.
- Foreign-exchange exposure is significant. A 10% depreciation of the Canadian dollar against the U.S. dollar would have reduced fiscal 2011 operating income by approximately $15.4 million; the comparable Australian-dollar sensitivity was approximately $0.4 million.
- The company does not routinely hedge foreign-currency or interest-rate exposure.
- Seasonality, long-term non-cancelable store leases, supply disruptions, intellectual-property limitations and international expansion risks could materially affect future results.
- Management reported no legal proceeding expected to have a material adverse effect and stated that disclosure controls and internal control over financial reporting were effective.
Investor Verification Checklist
- Verify that the intended comparison is fiscal 2011 versus fiscal 2010, rather than “2010 Q4,” because the supplied filing is dated for the year ended January 29, 2012.
- Reconcile reported revenue growth with comparable-store sales, new-store additions, foreign-exchange effects and the rapid growth of e-commerce.
- Monitor inventory growth, inventory write-offs and markdown risk relative to revenue growth.
- Assess whether gross-margin gains can be sustained despite raw-material, labor, freight and foreign-exchange pressures.
- Evaluate the returns and execution risks associated with planned store openings, international expansion and technology investments.
- Review lease commitments, supply-chain concentration and the lack of long-term supplier contracts.
- Consider the potential effect of a stronger U.S. dollar, higher U.S. taxable income and future tax audits on earnings and cash flow.