Lululemon Athletica Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended May 5, 2019, compared with the quarter ended April 29, 2018. The request metadata identifies “2018 Q1,” but the filing is for fiscal 2019 Q1. Fiscal 2018 had a 53rd week; comparable-sales comparisons use a shifted 13-week period ended May 6, 2018.
Business context
Lululemon designs, distributes, and sells athletic apparel and accessories through company-operated stores, e-commerce, outlets, temporary locations, wholesale accounts, showrooms, and licensing arrangements. The company operated 455 stores at May 5, 2019, versus 440 at February 3, 2019, across North America, Asia-Pacific, Europe, and other markets.
Financial performance and key metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net revenue | $782.3 million | $649.7 million | 20% |
| Gross profit | $421.7 million | $344.7 million | 22% |
| Gross margin | 53.9% | 53.1% | +80 bps |
| Income from operations | $128.8 million | $104.3 million | 23% |
| Operating margin | 16.5% | 16.1% | +40 bps |
| Net income | $96.6 million | $75.2 million | 29% |
| Diluted EPS | $0.74 | $0.55 | Increase |
| Effective tax rate | 26.4% | 29.9% | Lower |
- Revenue growth was driven by new stores, higher comparable-store sales, and strong e-commerce performance. Reported total comparable sales increased 14%, comparable-store sales increased 6%, and direct-to-consumer revenue increased 33%. On a constant-dollar basis, the increases were 16%, 8%, and 35%, respectively.
- Company-operated store revenue increased 17% to $506.4 million; direct-to-consumer revenue increased 33% to $209.8 million; and other revenue increased 12% to $66.0 million.
- Gross-margin expansion primarily reflected lower product costs, favorable product mix, and lower markdowns, partly offset by higher distribution and product-department costs, foreign exchange effects, and occupancy and depreciation costs.
- Selling, general and administrative expense increased 22% to $292.9 million and rose to 37.4% of revenue from 37.0%, reflecting higher store labor, distribution, digital marketing, technology, professional fees, and stock-based compensation costs.
Cash flow, liquidity, debt, and balance sheet
- Cash used in operating activities was $62.8 million, compared with $35.8 million of operating cash flow in the prior-year quarter. The change primarily reflected income-tax payments, incentive-compensation payments, and increased inventory purchases.
- Cash used in investing activities was $63.9 million, including $68.4 million of capital expenditures, versus $34.3 million used in the prior-year quarter.
- Cash used in financing activities was $170.3 million, primarily reflecting $163.5 million used to repurchase 1.0 million shares.
- Cash and cash equivalents were $576.2 million at May 5, 2019, down from $881.3 million at February 3, 2019. Working capital excluding cash was $92.4 million.
- The company had no borrowings under its $400 million unsecured revolving credit facility and had $398.3 million of available capacity, excluding $1.7 million of outstanding letters of credit.
- Inventories increased to $443.0 million from $404.8 million at fiscal year-end. The company adopted ASC 842 on February 4, 2019, recognizing $627.0 million of right-of-use assets and $664.9 million of lease liabilities at May 5, 2019.
Material changes, outlook, and risks
- Management stated that cash balances, operating cash flow, and available revolver capacity are expected to meet liquidity and capital requirements for at least the next 12 months. The filing does not provide a new formal annual revenue or earnings guidance range.
- The company continued international expansion, opening 44 net new lululemon-branded stores since the comparable prior-year quarter, including 21 in North America, 13 in Asia, seven in Europe, and three in Australia/New Zealand.
- Seasonality remains significant: operating profit is historically concentrated in the fourth fiscal quarter, while expenses are more evenly distributed across the year.
- Foreign currency remains a material exposure. The company uses forward contracts to hedge selected Canadian dollar and Chinese yuan exposures; first-quarter foreign exchange and derivative activity produced a net $0.9 million loss in selling, general and administrative expense.
- Key disclosed risks include brand and product-quality risks, intense competition, reliance on suppliers and offshore manufacturing, inventory forecasting, consumer discretionary demand, cybersecurity and information-technology disruptions, international expansion, tariffs and trade restrictions, tax-law changes, foreign exchange volatility, long-term leases, and litigation.
- Pending matters include an employment-related class action in New York and a derivative action alleging fiduciary-duty breaches related to alleged workplace conduct and the former CEO’s separation agreement. Management believes current proceedings will not have a material adverse effect, but outcomes are uncertain.
- The company adopted new lease accounting without restating comparative periods. This materially increased reported assets and liabilities but had no cumulative earnings adjustment on adoption.
Investor verification checklist
- Verify that comparable-sales growth is evaluated using the shifted calendar comparison necessitated by fiscal 2018’s 53rd week.
- Assess whether strong e-commerce growth can continue while direct-to-consumer operating margin declined to 37.5% from 39.4% at the segment level.
- Monitor inventory growth, markdown provisions, product costs, and future gross-margin sustainability.
- Reconcile the decline in cash with operating working-capital needs, $68.4 million of capital expenditures, and $163.5 million of share repurchases.
- Review the effect of ASC 842 on lease liabilities, leverage metrics, occupancy costs, and future cash commitments.
- Track international store productivity, foreign exchange effects, supplier concentration, tariffs, and other global sourcing risks.
- Review the status and potential exposure from the disclosed employment and derivative litigation.