Business Context and Reporting Period
Lululemon Athletica Inc. designs, manufactures, and distributes premium athletic apparel through corporate-owned stores, e-commerce, and wholesale, franchise, showroom, and outlet channels. The filing is a Form 10-Q for the thirteen weeks ended April 29, 2012, compared with the thirteen weeks ended May 1, 2011. The request metadata identifies “2011 Q1,” but the filing reports fiscal 2012 first-quarter results. Fiscal 2012 is a 53-week year ending February 3, 2013.
At April 29, 2012, the company operated 180 corporate-owned stores: 112 in the United States, 49 in Canada, 18 in Australia, and one in New Zealand. Net revenue was generated 60% in the United States, 35% in Canada, and 5% outside North America.
Key Financial Metrics
| Metric | Q1 Fiscal 2012 | Q1 Fiscal 2011 | Change |
|---|---|---|---|
| Net revenue | $285.7 million | $186.8 million | Up 53% |
| Gross profit | $157.3 million | $109.7 million | Up 43% |
| Gross margin | 55.0% | 58.7% | Down 370 basis points |
| Income from operations | $73.1 million | $51.7 million | Up 41% |
| Operating margin | 25.6% | 27.7% | Down 210 basis points |
| Net income attributable to Lululemon | $46.6 million | $33.4 million | Up 40% |
| Diluted earnings per share | $0.32 | $0.23 | Up $0.09 |
| Net cash provided by operating activities | $16.0 million | $5.7 million | Up $10.3 million |
| Capital expenditures | $12.7 million | $74.8 million | Down $62.1 million |
Direct-to-consumer revenue increased 179% to $38.4 million and represented 13.5% of revenue, compared with 7.4% in the prior-year quarter. Corporate-owned store revenue increased 46% to $228.8 million, supported by a 24% comparable-store sales increase and new-store contributions.
Cash and cash equivalents were $424.3 million at April 29, 2012, compared with $409.4 million at January 29, 2012. Working capital excluding cash was $62.9 million. Inventories were $107.7 million, and total liabilities were $97.2 million. No borrowings were outstanding under the company’s CDN$20.0 million uncommitted revolving credit facility. Letters of credit and guarantees totaled $1.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger comparable-store sales, 42 net new stores since the prior-year quarter, and significant e-commerce growth.
- Gross margin declined primarily because of higher labor and raw-material costs, product complexity and innovation costs, inflation, and non-recurring input tax credits recognized in the prior-year period.
- Selling, general and administrative expenses increased 45% to $84.2 million, although SG&A as a percentage of revenue improved to 29.4% from 31.0%.
- Operating margin declined despite higher operating income because gross-margin pressure and increased corporate and employee costs partly offset revenue growth.
- Operating cash flow improved, while investing cash use fell sharply because the prior-year period included approximately $65.1 million for the purchase of the company’s principal executive and administrative offices.
- The company reacquired four remaining franchised stores; these stores are now included in the corporate-owned stores segment.
- The U.S. share of revenue increased to 60% from 51%, while the Canadian share declined to 35% from 45%, partly reflecting foreign-exchange translation effects and U.S. growth.
The filing contains an apparent cost-of-goods-sold discrepancy: the consolidated statements show $128.4 million, while the MD&A table shows $127.4 million for fiscal 2012. The filing text does not reconcile this difference.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific numerical quarterly or full-year revenue or earnings guidance in the provided filing text. Management expects to continue investing in stores, information technology, e-commerce, international expansion, and infrastructure. Management stated that cash from operations and available revolver capacity should meet liquidity and capital-expenditure needs for at least the next 24 months.
- Management views e-commerce as an increasingly important, higher-margin growth channel and plans further investment in country-specific websites and international expansion.
- The business is seasonal, with a substantial portion of operating profit historically generated in the fourth fiscal quarter; first-quarter results are therefore not necessarily indicative of full-year performance.
- Key risks include consumer discretionary spending, competition, pricing and product-cost inflation, raw-material availability, supplier concentration, overseas manufacturing and trade restrictions, inventory forecasting, information-system disruptions, distribution interruptions, lease obligations, and dependence on brand reputation and product innovation.
- Foreign exchange remains material: management estimated that a 10% depreciation of the Canadian dollar against the U.S. dollar would have reduced first-quarter operating income by approximately $5.1 million; the comparable Australian-dollar sensitivity was approximately $0.1 million. The company did not hedge these exposures.
- Stock-based compensation expense was $3.9 million, with $27.5 million of unrecognized compensation cost expected to be recognized over a weighted-average period of 2.4 years.
- The company reported no legal proceeding that management believed would materially adversely affect its financial position or results of operations. Disclosure controls were assessed as effective.
Investor Verification Items
- Confirm the correct reporting period: the filing is for Q1 fiscal 2012, not Q1 fiscal 2011.
- Reconcile the $1.0 million difference between cost of goods sold reported in the financial statements and the MD&A table.
- Assess whether gross-margin pressure from labor, raw materials, inflation, and product complexity persists.
- Evaluate the sustainability of 24% comparable-store sales growth and the rapid expansion of e-commerce revenue.
- Monitor inventory growth, product availability, markdown exposure, and working-capital requirements as the store base expands.
- Review Canadian- and Australian-dollar exposure and the absence of foreign-exchange hedging.
- Verify the company’s stated liquidity outlook, revolver availability, capital-expenditure plans, and seasonal concentration of annual profit.