Business Context and Reporting Period
Lululemon designs, distributes, and sells premium athletic apparel, accessories, and in-home fitness products through company-operated stores, direct-to-consumer digital channels, outlets, temporary locations, wholesale accounts, licensing arrangements, and MIRROR. The provided filing is a Form 10-K for the 52-week fiscal year ended January 31, 2021, referred to as fiscal 2020, compared with the 52-week fiscal year ended February 2, 2020. It does not correspond to “2019 Q4” as specified in the request.
The company operated 521 stores at January 31, 2021, compared with 491 a year earlier. North America generated 86% of fiscal 2020 revenue, and women’s products generated 69%.
Key Financial Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net revenue | $4.402 billion | $3.979 billion | 10.6% increase |
| Gross profit | $2.464 billion | $2.223 billion | 10.8% increase |
| Gross margin | 56.0% | 55.9% | 10 basis points |
| Income from operations | $820.0 million | $889.1 million | 7.8% decrease |
| Operating margin | 18.6% | 22.3% | 370 basis points decrease |
| Net income | $588.9 million | $645.6 million | 8.8% decrease |
| Diluted earnings per share | $4.50 | $4.93 | Decrease |
| Cash flow from operations | $803.3 million | $669.3 million | 20.0% increase |
Company-operated store revenue declined 33.7% to $1.659 billion, while direct-to-consumer revenue increased 100.7% to $2.284 billion. Other revenue increased 34.8% to $459.0 million, partly reflecting MIRROR revenue and temporary locations.
At January 31, 2021, cash and cash equivalents were $1.151 billion, working capital excluding cash was $90.7 million, and inventory was $647.2 million, including a $31.0 million provision for obsolete, damaged, or otherwise impaired inventory. The company had no borrowings outstanding under its $400 million North American revolving facility, aside from $2.4 million of letters of credit; available capacity was approximately $397.6 million. Total lease liabilities were $798.7 million.
Material Changes Versus the Prior Comparable Period
- COVID-19 temporarily closed most stores during the first two quarters and caused later closures, reduced hours, occupancy limits, and lower store traffic.
- Digital demand accelerated substantially: e-commerce revenue increased 101%, offsetting the 34% decline in store revenue.
- Gross margin was broadly stable, but operating margin fell because selling, general and administrative expenses increased 20.6% to $1.609 billion, including higher digital marketing, technology, fulfillment, and distribution costs.
- The company acquired MIRROR on July 7, 2020. The transaction used $452.6 million of cash net of cash acquired, added $362.5 million of goodwill and $85.0 million of acquired intangible assets, and generated $29.8 million of acquisition-related expenses.
- Operating cash flow increased despite lower net income, aided by working-capital changes, including higher accounts payable and accrued liabilities.
- Investing cash outflows increased to $695.5 million, primarily due to the MIRROR acquisition. Capital expenditures declined to $229.2 million from $283.0 million.
- Share repurchases declined to $63.7 million for 0.4 million shares, from $173.4 million for 1.1 million shares in fiscal 2019. The remaining repurchase authorization was $500 million at year-end.
Guidance, Outlook, Risks, and Unusual Items
Management maintained its “Power of Three” targets through 2023, including doubling the men’s business, doubling e-commerce, and quadrupling international business from 2018 levels. The e-commerce target was exceeded in fiscal 2020, although management expected the rate of digital growth to moderate in fiscal 2021.
Fiscal 2021 capital expenditures were expected to range from $335 million to $345 million, with approximately 40 to 50 new company-operated stores planned. Management stated that cash, operating cash flow, and available revolving capacity were expected to meet liquidity needs for at least the next 12 months.
Key risks include further COVID-19 resurgences, store or distribution-center closures, supply-chain disruption, changes in consumer shopping behavior, inventory markdowns, dependence on concentrated overseas suppliers, foreign-exchange volatility, cybersecurity and privacy exposure, intense competition, international expansion risk, lease obligations, and the integration and profitability of MIRROR.
Other notable items include $37.1 million of government payroll subsidies, $9.1 million of COVID-related lease concessions, $49.5 million of contingent deferred consideration payable to continuing MIRROR employees, and $48.2 million of remaining U.S. transition-tax payments. The company disclosed routine legal matters and two specified proceedings: a California employment-related representative action and a trademark-infringement lawsuit; management stated that it intends to defend both matters vigorously.
PricewaterhouseCoopers LLP issued an unqualified audit opinion on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of January 31, 2021.
Important Facts for Investors to Verify
- Confirm the requested period: the supplied filing covers fiscal 2020 ended January 31, 2021, not 2019 Q4.
- Assess whether the exceptional shift from stores to e-commerce is sustainable and how digital growth affects fulfillment costs and margins.
- Review MIRROR’s revenue, operating losses or profitability, subscriber trends, goodwill, intangible-asset valuations, and potential impairment exposure.
- Monitor inventory growth and the adequacy of the $31.0 million inventory provision amid changing demand and markdown risk.
- Evaluate store reopening trends, comparable-sales disclosures, international expansion, and the planned fiscal 2021 capital spending.
- Review lease commitments of $874.5 million, purchase obligations of $567.9 million, and deferred MIRROR consideration of $49.5 million.
- Track COVID-19 developments, supply-chain concentration, foreign-exchange exposure, tariffs, cybersecurity matters, and the disclosed legal proceedings.