Business Context and Reporting Period
Company: Lululemon Athletica Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2007
Business Overview: Designer and retailer of technical athletic apparel, primarily yoga-inspired, sold through corporate-owned stores, franchises, and wholesale accounts. Primary markets include Canada, the United States, Japan, and Australia. As of July 31, 2007, the company operated 52 corporate-owned stores and 8 franchise stores globally.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2007 | Six Months Ended July 31, 2007 |
|---|---|---|
| Net Revenue | $58.7 million | $103.5 million |
| Gross Profit | $31.2 million | $54.1 million |
| Gross Margin | 53.2% | 52.2% |
| Income from Operations | $9.8 million | $16.6 million |
| Net Income | $5.1 million | $8.7 million |
| Diluted EPS | $0.07 | $0.12 |
| Cash and Cash Equivalents | $9.7 million (as of July 31, 2007) | N/A |
| Working Capital (excl. cash) | $3.4 million | N/A |
| Debt | $0 outstanding on revolving credit facility | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 80.5% year-over-year for the three months ended July 31, 2007, and 70.5% for the six-month period. Growth was driven by a 30.0% increase in comparable store sales and revenue from 16 new corporate-owned stores opened since the prior year.
- Profitability: Gross margin improved to 53.2% (Q2) and 52.2% (YTD) compared to 48.9% and 50.1% in the prior year periods, respectively. This was due to higher-margin corporate store sales, price increases, and fewer markdowns.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 70.0% (Q2) and 77.7% (YTD) due to store employee compensation and corporate hiring to support expansion. However, SG&A as a percentage of revenue decreased in Q2 (36.6% vs 39.0%) and increased slightly in YTD (36.2% vs 34.7%).
- Segment Shifts: Revenue from the franchise segment decreased as three Calgary franchise stores were acquired and converted to corporate-owned stores, shifting revenue to the corporate segment.
Guidance, Outlook, and Risks
- Outlook: Management expects continued revenue growth but anticipates a decline in the growth rate relative to historical periods as the revenue base expands. Future growth is expected to be concentrated in the United States.
- Capital Resources: The company completed an Initial Public Offering (IPO) on August 2, 2007, raising approximately $31.8 million in net proceeds. Management believes cash from operations, IPO proceeds, and a $20 million revolving credit facility (currently unutilized) are sufficient for the next 24 months.
- Risks: Key risks include the ability to manage rapid growth, locate suitable store sites, expand successfully in the U.S. market, and maintain brand image. The company is also exposed to foreign currency exchange risk, as a significant portion of revenue is generated in Canadian dollars while reporting in U.S. dollars.
- Legal Proceedings: A former executive officer filed a suit in March 2007 for breach of contract and wrongful dismissal; the company believes the claim is without merit.
Investor Verification Checklist
- IPO Proceeds: Verify the utilization of the $31.8 million net proceeds from the August 2007 IPO.
- Comparable Store Sales: Monitor the sustainability of the 30% comparable store sales growth rate in the U.S. market.
- Currency Exposure: Assess the impact of a strengthening U.S. dollar on Canadian operating results, given the lack of hedging strategies.
- Inventory Levels: Review inventory turnover and provisions for obsolescence, as inventory levels decreased by $2.8 million in the six-month period.
- Legal Contingencies: Track the status of the lawsuit filed by the former executive officer.