Business Context and Reporting Period
Lululemon athletica inc. designs, distributes, and sells athletic apparel and accessories through company-operated stores, e-commerce, outlets, wholesale, and other channels. This Form 10-Q covers the quarter ended April 29, 2018, compared with the quarter ended April 30, 2017. The request metadata identifies “2017 Q1,” but the filing itself is for first quarter fiscal 2018. Fiscal 2018 is a 53-week year ending February 3, 2019.
The Company operated 411 company-operated stores at quarter-end, compared with 404 at January 28, 2018. During fiscal 2017, it closed 48 of 55 ivivva stores and all other ivivva temporary locations.
Financial Performance and Liquidity
| Metric | Q1 Fiscal 2018 | Q1 Fiscal 2017 | Change |
|---|---|---|---|
| Net revenue | $649.7 million | $520.3 million | Up 25% |
| Gross profit | $344.7 million | $256.9 million | Up 34% |
| Gross margin | 53.1% | 49.4% | Up 370 basis points |
| Income from operations | $104.3 million | $45.4 million | Up 130% |
| Operating margin | 16.1% | 8.7% | Up 740 basis points |
| Net income | $75.2 million | $31.2 million | Up 141% |
| Diluted EPS | $0.55 | $0.23 | Up $0.32 |
| Operating cash flow | $35.8 million | $19.4 million | Up $16.4 million |
| Capital expenditures | $34.3 million | $19.9 million | Up $14.4 million |
Revenue growth was driven by company-operated stores of $433.1 million, direct-to-consumer revenue of $157.8 million, and other revenue of $58.7 million. Direct-to-consumer revenue increased 62%, while company-operated stores increased 14%.
Total comparable sales increased 20%, or 19% on a constant-dollar basis. Comparable store sales increased 8%, or 6% on a constant-dollar basis. Direct-to-consumer revenue increased 60% on a constant-dollar basis.
Selling, general and administrative expenses increased 21% to $240.4 million, but declined to 37.0% of revenue from 38.3%. Other income, net, increased to $2.9 million, primarily due to higher interest income on cash equivalents.
Cash and cash equivalents were $966.6 million at April 29, 2018, compared with $990.5 million at January 28, 2018. Working capital excluding cash and cash equivalents was $218.9 million. The Company had $148.7 million of available capacity under its revolving credit facility and no borrowings outstanding other than $1.3 million of letters of credit.
Inventory increased to $373.4 million from $329.6 million at fiscal year-end. Total liabilities were $375.5 million, and stockholders’ equity was $1.636 billion. The Company had $199.0 million remaining under its $200 million share repurchase authorization and repurchased 100 shares during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased 25%, with particularly strong e-commerce growth and contributions from 48 net new lululemon stores opened since the prior-year quarter.
- Gross margin expanded due to favorable product mix, lower product costs and markdowns, lower inventory provisions, operating leverage, favorable foreign exchange, and the absence of prior-year ivivva restructuring charges.
- Q1 fiscal 2017 included $17.7 million of pre-tax ivivva restructuring costs, including $5.4 million in cost of goods sold and $12.3 million in operating expenses. No comparable restructuring costs were recorded in Q1 fiscal 2018.
- Excluding the prior-year restructuring charges, income from operations increased 65%, operating margin increased 400 basis points, and diluted EPS increased from adjusted EPS of $0.32 to $0.55.
- Operating cash flow improved, but increased inventory purchases consumed $50.8 million of cash during the quarter.
- Foreign currency translation reduced accumulated other comprehensive income by $43.0 million, and the Company recorded a $0.4 million net foreign exchange and derivative loss in selling, general and administrative expenses, compared with a $5.8 million gain in the prior-year quarter.
- The Company adopted ASC 606 revenue guidance on January 29, 2018. Management reported no change to the statement of operations and substantially unchanged revenue timing and amounts; balance-sheet presentation changed for sales returns.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing text provided does not include a clear numerical financial outlook or updated full-year guidance. Management stated that cash balances, operating cash flow, and available revolver capacity are expected to meet liquidity and capital expenditure needs for at least the next 12 months.
Management highlighted ongoing seasonality, with a significant portion of annual operating profit historically generated in the fourth quarter. Fiscal 2018 will include 53 weeks.
The Company is continuing to evaluate the effects of the U.S. Tax Cuts and Jobs Act, including GILTI and potential taxes related to repatriation of foreign earnings. Additional adjustments could materially affect future income tax expense and the effective tax rate.
ASC 842 lease accounting will be adopted in the first quarter of fiscal 2019 and is expected to significantly increase reported assets and liabilities through recognition of operating lease right-of-use assets and obligations.
Key risks include brand and product reputation, intense athletic-apparel competition, reliance on concentrated international suppliers and manufacturers, inventory forecasting, consumer discretionary spending, e-commerce and information-technology disruptions, cybersecurity and privacy compliance, foreign exchange, tariffs and trade restrictions, international expansion, lease commitments, raw-material and labor costs, and executive succession. The Chief Executive Officer resigned on February 2, 2018, and the Company was searching for a successor.
Pending legal matters include a New York wage-and-hour class action and a Los Angeles lawsuit alleging sexual assault, harassment, retaliation, and related claims seeking $3.0 million plus non-monetary relief. Management stated that it intends to defend these matters vigorously and does not expect current proceedings to have a material adverse effect, although outcomes remain uncertain.
Important Facts for Investors to Verify
- Confirm that the requested period is fiscal Q1 2018, ended April 29, 2018, rather than 2017 Q1.
- Assess the sustainability of 62% direct-to-consumer growth and 20% total comparable-sales growth.
- Separate the underlying operating improvement from the favorable comparison caused by the absence of $17.7 million of prior-year ivivva restructuring charges.
- Monitor inventory growth, markdowns, product margins, and working-capital conversion.
- Evaluate foreign-exchange sensitivity, including the $45.8 million quarterly increase in accumulated other comprehensive loss attributed to currency movements.
- Review the impact of U.S. tax reform, GILTI, and any subsequent changes to provisional tax accounting.
- Assess the future balance-sheet impact of adopting ASC 842 and the Company’s substantial operating lease commitments.
- Track CEO succession, senior-management turnover, pending litigation, supplier concentration, and exposure to trade restrictions.