Business Context and Reporting Period
Company: Lululemon Athletica Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: January 31, 2010 (Fiscal 2009)
Business Overview: Designer and retailer of technical athletic apparel, primarily yoga-inspired, operating through a vertical retail strategy. As of January 31, 2010, the company operated 124 stores (110 corporate-owned, 14 franchise) primarily in Canada and the United States, with a growing direct-to-consumer e-commerce channel.
Key Financial Metrics
| Metric | Fiscal 2009 (2010) | Fiscal 2008 (2009) | Change |
|---|---|---|---|
| Net Revenue | $452.9 million | $353.5 million | +28.1% |
| Gross Profit | $223.1 million | $179.1 million | +24.6% |
| Gross Margin | 49.3% | 50.7% | -1.4% |
| Income from Operations | $86.5 million | $56.6 million | +52.8% |
| Net Income | $58.3 million | $39.4 million | +48.0% |
| Diluted EPS | $0.82 | $0.55 | +49.1% |
| Cash and Cash Equivalents | $159.6 million | $56.8 million | +180.8% |
| Operating Cash Flow | $118.0 million | $46.4 million | +154.3% |
| Comparable Store Sales Growth | 9.0% | 0.0% | N/A |
Debt and Liquidity: The company had no outstanding borrowings under its $20.0 million revolving credit facility as of January 31, 2010. Working capital (excluding cash) was a deficit of $1.8 million, but total cash and cash equivalents were $159.6 million.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 9% increase in comparable store sales (up from 0% in 2008) and the addition of 7 net new corporate-owned stores in North America.
- Segment Performance: Corporate-owned store revenue increased 25% to $393.5 million. The "Other" segment (including e-commerce) grew 106% to $44.9 million, largely due to the launch of the retail website in fiscal 2009.
- Margin Compression: Gross margin decreased 1.4% primarily due to unfavorable foreign exchange impacts (strengthening Canadian dollar) and increased product costs/markdowns.
- Impairment Costs: Provision for impairment and lease exit costs dropped significantly from $4.4 million in 2008 to $0.4 million in 2009, reflecting fewer store closures and asset write-downs.
- Discontinued Operations: The company fully wound up operations in Japan in fiscal 2008; no discontinued operations were reported in fiscal 2009.
Guidance, Outlook, and Risks
Management Outlook: Management expects growth rates to slow compared to historical highs due to the larger store base and challenging economic conditions. The company plans to open approximately 12 to 15 additional stores in fiscal 2010 in the U.S. and Canada, with estimated capital expenditures of $27 million to $30 million.
Key Risks and Contingencies:
- Economic Conditions: Volatility in the global economy and reduced consumer spending on non-essential items could negatively impact sales.
- Foreign Exchange: A significant portion of revenue is generated in Canadian dollars. A 10% depreciation of the Canadian dollar against the U.S. dollar would have resulted in approximately $11.2 million in lost operating income in fiscal 2009.
- Supply Chain: Reliance on third-party manufacturers (75% in China) exposes the company to raw material cost fluctuations and potential disruptions.
- Legal Proceedings: Two class-action lawsuits regarding California labor laws (wage and hour violations) were filed in 2009. The company has agreed to general settlement terms, pending court approval.
- Brand Reputation: Success depends heavily on maintaining the premium brand image; negative publicity or failure to innovate could erode market share.
Investor Verification Checklist
- Comparable Store Sales Sustainability: Verify if the 9% comparable store sales growth can be maintained in a slowing retail environment.
- Foreign Exchange Exposure: Monitor the CAD/USD exchange rate, as a weakening Canadian dollar significantly impacts reported revenue and operating income.
- Legal Settlement Costs: Confirm the final financial impact of the pending California labor law class-action settlements.
- E-commerce Margins: Assess the profitability of the rapidly growing e-commerce channel, which saw a 106% revenue increase but also higher administrative costs.
- Inventory Levels: Review inventory turnover and write-down risks, given the company's reliance on seasonal demand and the potential for excess inventory if demand forecasts are inaccurate.