lululemon athletica inc. Form 10-Q Summary
Reporting period: The supplied filing is for the thirteen and twenty-six weeks ended July 31, 2016, compared with August 2, 2015. The request metadata identifies “2015 Q2,” but the filing itself is fiscal 2016 second quarter. Financial statements are unaudited and presented under U.S. GAAP.
Business Context
Lululemon designs, distributes, and sells athletic apparel and accessories through company-operated stores, e-commerce, outlets, showrooms, wholesale accounts, warehouse sales, temporary locations, and licensing arrangements. The company operated 379 stores at July 31, 2016, up from 363 at January 31, 2016, across the United States, Canada, Australia, the United Kingdom, New Zealand, Singapore, Hong Kong, Germany, Puerto Rico, South Korea, and Switzerland.
Key Financial Metrics
| Metric | Q2 FY2016 | Q2 FY2015 | Change |
|---|---|---|---|
| Net revenue | $514.5 million | $453.0 million | Up 14% |
| Gross profit | $254.2 million | $212.0 million | Up 20% |
| Gross margin | 49.4% | 46.8% | Up 260 basis points |
| Income from operations | $74.0 million | $66.6 million | Up 11% |
| Operating margin | 14.4% | 14.7% | Down 30 basis points |
| Net income | $53.6 million | $47.7 million | Up 12% |
| Diluted EPS | $0.39 | $0.34 | Up $0.05 |
For the first 26 weeks, revenue increased 15% to $1.010 billion, gross profit increased 18% to $493.3 million, and gross margin increased to 48.8% from 47.7%. Operating income declined 2% to $131.5 million, while net income increased 4% to $99.0 million. The first-half operating margin fell to 13.0% from 15.4%.
- Q2 company-operated store revenue increased 12% to $381.4 million; comparable store sales increased 3%, or 4% in constant dollars.
- Q2 direct-to-consumer revenue increased 6% to $87.4 million, or 7% in constant dollars.
- Total comparable sales increased 4%, or 5% in constant dollars.
- Q2 selling, general and administrative expense increased 24% to $180.2 million and rose to 35.0% of revenue from 32.1%.
- Cash and cash equivalents were $535.4 million at July 31, 2016, compared with $501.5 million at January 31, 2016.
- Working capital excluding cash was $229.9 million. The filing reports no borrowings outstanding under the $15.0 million revolving credit facilities, excluding letters of credit.
- Letters of credit and letters of guarantee totaled $1.5 million.
Cash Flow, Capital Allocation, and Liquidity
- First-half operating cash flow was $100.0 million, compared with $32.2 million in the prior-year period.
- Capital expenditures were $71.3 million, compared with $65.1 million, including $19.7 million for a Vancouver land parcel.
- Financing cash outflows were $23.9 million, including $28.6 million for repurchases of 0.4 million shares.
- The $450 million share repurchase program was completed during the second quarter of fiscal 2016.
- Cash increased $33.9 million during the first half, including a $29.0 million favorable exchange-rate effect.
- Management believes cash, operating cash flow, and available revolving-credit capacity will satisfy liquidity and capital expenditure needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth benefited from 43 net new company-operated stores opened since the prior-year second quarter and increased comparable store sales.
- Gross margin expanded primarily because of lower product costs, lower raw-material commitment costs, and fewer markdowns and discounts.
- Operating leverage weakened: SG&A grew faster than revenue, driven by store labor, head-office staffing, professional fees, technology, marketing, and other operating costs.
- General corporate expense increased 25% in Q2 and 39% for the first half, reflecting additional personnel, professional fees, strategic initiatives, and foreign-exchange effects.
- First-half net foreign-exchange results shifted from a $1.2 million gain in the prior-year period to an $8.5 million loss in fiscal 2016.
- Share repurchases declined substantially from $82.0 million in the first half of fiscal 2015 to $28.6 million in fiscal 2016 because the repurchase program was completed.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide a clear numerical revenue, earnings, or margin guidance range.
- Retail seasonality is significant: management expects a disproportionate share of annual revenue and operating profit in the fourth fiscal quarter, particularly during the holiday season.
- The second-quarter effective tax rate was 28.1%, including a $1.9 million net tax recovery related to transfer-pricing arrangements and planned repatriation of $156.0 million of foreign earnings. Excluding related tax and interest adjustments, the rate was 30.5% and adjusted diluted EPS was $0.38.
- For the first half, the tax recovery was $7.6 million, with $1.5 million of related net interest expense. Management expected the bilateral Advance Pricing Arrangement with the IRS and Canada Revenue Agency to be finalized within six months.
- Foreign-exchange exposure remains material. A 10% appreciation of the U.S. dollar against the Canadian dollar would have increased first-half operating income by approximately $5.4 million, based on the filing’s sensitivity analysis.
- Principal risks include brand and product quality, intense competition, supply-chain and supplier concentration, raw-material costs, inventory forecasting, economic conditions, cybersecurity and information systems, international expansion, foreign exchange, tariffs and trade restrictions, leases, litigation, tax changes, and management retention.
- A Delaware derivative action was dismissed, but plaintiffs appealed. A separate New York wage-and-hour class action seeks unspecified damages; the company intends to defend it.
- The company adopted certain accounting amendments prospectively without material impact. It is evaluating the future effects of revenue recognition, inventory, leases, and stock-compensation standards.
Most Important Facts to Verify
- Confirm the intended period: the supplied document is fiscal Q2 2016, not fiscal Q2 2015.
- Assess whether elevated SG&A growth and higher corporate costs continue to pressure operating margins despite gross-margin improvement.
- Monitor comparable-store and direct-to-consumer growth separately from growth attributable to new stores.
- Verify the timing and final financial impact of the IRS/CRA Advance Pricing Arrangement and related repatriation plan.
- Evaluate foreign-exchange sensitivity, particularly exposure to the Canadian dollar and the effect on reported revenue, expenses, equity, and operating income.
- Track capital expenditures, store expansion, inventory valuation, and cash generation relative to seasonal fourth-quarter dependence.
- Review developments in the wage-and-hour litigation and the appeal of the dismissed derivative action.