Business Context and Reporting Period
Lululemon designs, distributes, and sells athletic apparel and accessories through company-operated stores, direct-to-consumer channels, outlets, wholesale accounts, licensing arrangements, and MIRROR in-home fitness products and subscriptions. This Form 10-Q reports the quarter and first two quarters ended August 1, 2021, compared with the corresponding periods ended August 2, 2020. The filing is therefore a fiscal 2021 second-quarter report, not a 2020 Q2 report. The company operated 534 stores at quarter-end, versus 521 at January 31, 2021.
Key Financial Metrics
| Metric | Quarter Ended August 1, 2021 | Prior-Year Quarter | First Two Quarters 2021 | Prior-Year Period |
|---|---|---|---|---|
| Net revenue | $1.451 billion | $902.9 million | $2.677 billion | $1.555 billion |
| Revenue growth | 61% | — | 72% | — |
| Gross profit | $842.7 million | $489.5 million | $1.543 billion | $823.9 million |
| Gross margin | 58.1% | 54.2% | 57.6% | 53.0% |
| Income from operations | $291.0 million | $124.4 million | $484.9 million | $157.2 million |
| Operating margin | 20.1% | 13.8% | 18.1% | 10.1% |
| Net income | $208.1 million | $86.8 million | $353.0 million | $115.4 million |
| Diluted EPS | $1.59 | $0.66 | $2.70 | $0.88 |
| Cash flow from operations | Not separately provided | Not separately provided | $499.8 million | $60.1 million |
Revenue, Profitability, Cash Flow, Debt, and Liquidity
- Revenue mix: Second-quarter company-operated store revenue increased 142% to $695.1 million; direct-to-consumer revenue increased 8% to $597.4 million; and other revenue increased 157% to $158.1 million. First-half revenue growth was 125% for stores, 26% for direct-to-consumer, and 199% for other channels.
- Digital performance: Direct-to-consumer revenue increased 4% on a constant-dollar basis in the quarter and 22% for the first two quarters. The prior-year quarter included a $43.3 million online warehouse sale that was not repeated.
- Margins: Quarterly gross margin expanded 390 basis points, while first-half gross margin expanded 460 basis points. Management attributed the improvement primarily to occupancy and depreciation leverage, distribution-center and product-department leverage, and favorable foreign exchange, partly offset by higher air freight costs and inventory provisions.
- Expenses: Quarterly SG&A increased 53% but declined to 37.3% of revenue from 39.1%. No government payroll subsidies were recognized in 2021, compared with $21.2 million in the prior-year quarter and $35.5 million in the prior-year first half.
- Cash flow and capital spending: First-half operating cash flow was $499.8 million. Capital expenditures were $144.5 million, and investing cash usage was $201.5 million. Financing cash usage was $290.8 million, including $254.9 million for share repurchases.
- Cash and working capital: Cash and cash equivalents were $1.170 billion at August 1, 2021, compared with $1.151 billion at January 31, 2021. Working capital excluding cash was reported at $123.9 million.
- Debt and liquidity: The company had no borrowings outstanding under its $400 million North America revolving facility, other than $2.8 million of letters of credit. Available committed capacity was $397.2 million. The China facility had no borrowings or guarantees outstanding, other than 1.3 million Chinese Yuan of letters of credit. The company stated that liquidity should be adequate for at least the next 12 months.
- Inventory: Inventory increased to $789.8 million from $647.2 million at January 31, 2021, including a $41.1 million provision to reduce inventory to net realizable value.
Material Changes Versus the Prior Comparable Period
- Results benefited substantially from most stores being open during 2021, whereas almost all stores were temporarily closed for a significant portion of the 2020 periods because of COVID-19.
- Store productivity at open stores in the second quarter was in line with the second quarter of 2019, according to management, although store traffic remained below pre-pandemic levels.
- MIRROR contributed to other-channel revenue and expenses. The acquisition generated $8.1 million of acquisition-related expenses in the quarter and $15.8 million year to date; MIRROR-related intangible-asset amortization was $2.2 million in the quarter and $4.4 million year to date.
- First-half operating cash flow increased by $439.7 million year over year, while investing cash usage declined because the prior-year period included the $452.6 million MIRROR acquisition.
- Share repurchases increased to 0.8 million shares costing $254.9 million in the first half, compared with 0.4 million shares costing $63.7 million in the prior-year period. Remaining authorization at August 1, 2021 was $245.1 million.
- Foreign currency effects remained material. First-half constant-dollar revenue growth was 67%, compared with reported growth of 72%. Foreign currency and derivative-related losses recorded in SG&A totaled $7.9 million for the first half.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Outlook: The filing does not provide a clear quantitative full-year revenue, earnings, or margin guidance figure. Management expected direct-to-consumer growth to continue in 2021, but at a slower year-over-year rate than in 2020.
- COVID-19 and supply chain: Management expected transportation disruption, port congestion, delayed inventory receipts, and elevated freight costs to continue at least through the end of 2021. Resurgences or new variants could cause store or distribution-center closures and reduce discretionary spending.
- Seasonality: Retail apparel seasonality makes the fourth quarter especially important; the company historically generates a significant portion of annual operating profit during the holiday period.
- MIRROR: The company warned that expected benefits and synergies may not materialize, that MIRROR may not achieve profitability, and that the business faces hardware, software, subscription, cybersecurity, competition, and integration risks. Goodwill associated with MIRROR was $362.5 million at acquisition.
- Legal contingency: DISH Technologies and related entities alleged patent infringement involving internet-streaming fitness devices, including MIRROR. The ITC investigation was ongoing, and the related Delaware litigation was stayed pending the ITC outcome. The company intends to defend the matter vigorously.
- Other risks: Key risks include supply-chain concentration and disruption, freight and raw-material inflation, changing consumer preferences, competition, cybersecurity and privacy compliance, foreign exchange, tariffs and trade restrictions, tax uncertainty, lease commitments, and brand or product-quality damage.
- Controls: Management concluded that disclosure controls and procedures were effective at August 1, 2021, with no reported material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the intended reporting period: the supplied filing is for fiscal 2021 second quarter, ended August 1, 2021, despite the request metadata identifying “2020 Q2.”
- Assess how much of the exceptional year-over-year growth reflects reopening comparisons against COVID-19-affected 2020 results versus underlying demand and store expansion.
- Monitor inventory growth, inventory provisions, freight costs, port congestion, and potential future markdown pressure.
- Evaluate MIRROR revenue, subscription growth, profitability, integration progress, goodwill impairment exposure, and the outcome of the DISH patent proceedings.
- Review the company’s lack of quantitative guidance in this filing and its dependence on fourth-quarter seasonality.
- Track the remaining $245.1 million repurchase authorization, capital expenditures, cash generation, and the company’s ability to maintain substantial liquidity without debt borrowings.
- Consider the effects of foreign exchange, tariffs, tax-law changes, and the renewal of the expired U.S.-Canada advance pricing arrangement on future margins and tax rates.