lululemon athletica inc. Form 10-Q Summary
Reporting period: Thirteen weeks ended May 5, 2013, compared with thirteen weeks ended April 29, 2012. The filing is for fiscal 2013 first quarter, although the request metadata identifies “2012 Q1.” Fiscal 2013 is a 52-week year ending February 2, 2014; fiscal 2012 was a 53-week year.
Business Context
Lululemon designs, manufactures and distributes athletic apparel through corporate-owned stores, e-commerce and other channels. At May 5, 2013, the company operated 218 corporate-owned stores: 141 in the United States, 51 in Canada, 24 in Australia and two in New Zealand. Revenue was generated primarily in the United States, Canada and other international markets.
Financial Performance and Position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net revenue | $345.8 million | $285.7 million | Up 21% |
| Gross profit | $170.7 million | $157.3 million | Up 9% |
| Gross margin | 49.4% | 55.0% | Down 560 basis points |
| Income from operations | $65.9 million | $73.1 million | Down 10% |
| Operating margin | 19.1% | 25.6% | Down 650 basis points |
| Net income attributable to lululemon | $47.3 million | $46.6 million | Up 1% |
| Net margin | 13.7% | 16.3% | Down 260 basis points |
| Diluted EPS | $0.32 | $0.32 | Flat |
| Cash flow from operations | $25.1 million | $16.0 million | Up $9.2 million |
| Capital expenditures | $21.0 million | $12.7 million | Up $8.3 million |
Direct-to-consumer revenue increased 40% to $54.0 million and represented 15.6% of total revenue, compared with 13.5% in the prior-year quarter. Corporate-owned store revenue increased 18% to $269.4 million, while comparable store sales increased 6%, or 7% excluding currency effects. Other revenue increased 22% to $22.5 million.
Cash and cash equivalents were $588.4 million at May 5, 2013, compared with $590.2 million at February 3, 2013. Working capital excluding cash and cash equivalents was $100.9 million. The company had no borrowings outstanding under its CDN$20 million revolving credit facility and reported $1.0 million of letters of credit and guarantees.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by new stores, higher comparable store sales, e-commerce traffic and increased brand recognition, particularly in the United States.
- Gross margin declined primarily because of a $17.5 million inventory provision related to recalled black luon pants, lower product margins and higher markdowns.
- Selling, general and administrative expenses increased 25% to $104.8 million, reflecting store expansion, higher employee costs, investments in corporate infrastructure and growth of the direct-to-consumer channel.
- Operating income declined despite higher revenue and gross profit because of the inventory charge and increased operating expenses.
- The effective tax rate decreased to 29.8% from 36.5%, primarily due to the ongoing impact of revised intercompany pricing agreements.
- Cash flow from operations improved, but higher capital expenditures and financing outflows resulted in a $1.8 million decrease in cash during the quarter.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide clear quantitative quarterly or full-year financial guidance. Management stated that cash from operations and available revolver capacity were expected to meet liquidity and capital expenditure needs for at least the next 24 months.
In March 2013, the company pulled back certain women’s black luon bottoms that did not meet specifications. The action caused lost sales, additional costs and a $17.5 million inventory provision. Management stated that the recall was intended to protect the company’s quality standards and brand reputation, but the event highlights product-quality, supplier-concentration and inventory-forecasting risks.
Management plans continued investment in information technology, new and existing stores, international expansion and e-commerce. Principal disclosed risks include consumer discretionary spending, competition, product costs and pricing, supply-chain and manufacturing concentration, raw-material availability, foreign currency movements, information-system disruptions, international expansion, seasonality and long-term retail lease obligations.
A former-employee class action lawsuit in California alleges violations of labor laws concerning meal and rest breaks, wages, overtime, seating and vacation pay. The company and plaintiffs reached a tentative settlement subject to court and final approval. Management stated that routine legal matters were not expected to materially affect financial position, results or cash flows.
Most Important Facts to Verify
- Whether the black luon product issue resulted in additional recalls, costs, customer claims or lasting effects on revenue and brand perception.
- Whether gross margin recovered after the $17.5 million inventory provision and related markdown activity.
- Comparable-store sales trends, new-store productivity and the pace and profitability of store expansion.
- Growth, conversion rates, average order value and profitability of the direct-to-consumer channel.
- Final court approval and financial terms of the California labor-law settlement.
- Cash conversion, inventory provisions and capital expenditure requirements as expansion continues.
- Foreign-exchange effects, supplier concentration and exposure to product-quality or manufacturing disruptions.