Lululemon Athletica Inc. — Form 10-K Summary
Reporting period: The provided filing is the Annual Report on Form 10-K for the 53-week fiscal year ended February 3, 2019, referred to as fiscal 2018. It does not correspond to fiscal 2017 Q4, although it includes unaudited fourth-quarter fiscal 2018 and fiscal 2017 information.
Business Context
Lululemon designs, distributes, and sells premium athletic apparel and accessories under the lululemon and ivivva brands through company-operated stores, e-commerce, outlets, temporary locations, wholesale accounts, showrooms, license arrangements, and warehouse sales. The Company had 440 company-operated stores in 14 countries at fiscal year-end, including 36 net new stores opened during fiscal 2018. Direct-to-consumer sales represented 26.1% of fiscal 2018 revenue.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net revenue | $3.288 billion | $2.649 billion | +24% |
| Gross profit | $1.816 billion | $1.399 billion | +30% |
| Gross margin | 55.2% | 52.8% | +240 bps |
| Income from operations | $705.8 million | $456.0 million | +55% |
| Operating margin | 21.5% | 17.2% | +430 bps |
| Net income | $483.8 million | $258.7 million | +87% |
| Diluted EPS | $3.61 | $1.90 | +90% |
| Cash flow from operations | $742.8 million | $489.3 million | +52% |
Fiscal 2018 gross margin benefited from lower product costs, favorable product mix, lower markdowns, and the absence of fiscal 2017 ivivva restructuring charges. The effective tax rate was 32.4%, compared with 43.8% in fiscal 2017; the adjusted tax rate excluding discrete items was 28.0%.
- Revenue mix: Company-operated stores generated $2.126 billion, or 64.7%, of revenue; direct-to-consumer generated $858.9 million, or 26.1%; other channels generated $303.1 million, or 9.2%.
- Comparable sales: Total comparable sales increased 18%, excluding the 53rd week; comparable store sales increased 7% and direct-to-consumer revenue increased 45%, excluding the 53rd week.
- Liquidity: Cash and cash equivalents were $881.3 million at year-end, compared with $990.5 million in the prior year. Working capital excluding cash was $47.5 million.
- Debt: The amended unsecured revolving credit facility provides commitments of $400 million, with an option to increase commitments to $600 million. There were no borrowings outstanding at year-end other than $1.5 million of letters of credit.
- Capital expenditures: Capital expenditures were $225.8 million in fiscal 2018. Management expected fiscal 2019 capital expenditures of $265 million to $275 million.
- Share repurchases: The Company repurchased 4.9 million shares for $598.3 million during fiscal 2018 and had $500.7 million remaining under its repurchase authorization at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated, supported by strong e-commerce performance, new stores, higher comparable store sales, and a 53rd fiscal week contributing $53.0 million of revenue.
- Direct-to-consumer revenue increased from $577.6 million to $858.9 million, raising its share of revenue from 21.8% to 26.1%.
- Operating profitability improved materially as fiscal 2017 included $47.2 million of pre-tax ivivva restructuring-related costs, including $8.7 million in cost of goods sold and $38.5 million in operating expenses.
- The Company completed the restructuring of ivivva initiated in fiscal 2017 and had no related restructuring charges in fiscal 2018.
- Inventory increased to $404.8 million from $329.6 million, while property and equipment increased to $567.2 million from $473.6 million, reflecting store, technology, and infrastructure investments.
- Cash declined by $109.2 million during fiscal 2018, primarily because operating cash flow and investing needs were more than offset by share repurchases and foreign-exchange effects.
- The Company repatriated $778.9 million from a Canadian subsidiary and recognized $23.7 million of related tax expense. A further $777.5 million remained indefinitely reinvested at year-end.
Outlook, Risks, and Unusual Items
Management described fiscal 2018 as particularly strong and planned to continue investing in product innovation, new stores, remodels, e-commerce, omni-channel capabilities, and supply-chain infrastructure. No specific fiscal 2019 revenue or earnings guidance is provided in the filing text. Management expected selling, general and administrative expenses and corporate expenses to increase as the business expanded.
- The business is seasonal; approximately 47% of fiscal 2018 operating profit was generated in the fourth quarter. Fiscal 2018 fourth-quarter revenue was $1.167 billion and net income was $218.5 million.
- Key risks include intense competition, changing consumer preferences, inventory forecasting and markdown risk, product quality and recalls, supplier concentration, lack of long-term supplier contracts, tariffs and trade restrictions, international expansion, foreign-exchange volatility, cybersecurity and technology disruptions, and economic weakness affecting discretionary spending.
- Approximately 79% of products were manufactured in South and Southeast Asia, and five vendors produced approximately 60% of products. No single manufacturer produced more than 21%.
- The Company had $783.9 million of minimum operating lease commitments, $387.9 million of product purchase obligations, and $46.1 million of remaining one-time transition-tax payments.
- Pending legal matters included a wage-and-hour class action and a derivative lawsuit alleging fiduciary-duty breaches relating to former executive Laurent Potdevin's departure. Management stated that routine legal matters were not expected to have a material adverse effect, but the derivative action sought unspecified damages and other remedies.
- Beginning fiscal 2019, adoption of ASC 842 was expected to recognize approximately $620 million of right-of-use assets and $650 million of lease liabilities, without a material impact on net income or cash flows.
Investor Verification Checklist
- Confirm the requested period: the supplied filing is fiscal 2018, ended February 3, 2019, rather than fiscal 2017 Q4.
- Reconcile GAAP results with adjusted results, particularly the effects of U.S. tax reform, repatriation taxes, and the prior-year ivivva restructuring.
- Assess whether the 18% comparable-sales increase and 45% direct-to-consumer growth can be sustained without the benefit of the 53rd week.
- Monitor inventory growth, markdowns, product write-offs, and supplier concentration as store and e-commerce expansion continues.
- Evaluate the effect of planned fiscal 2019 capital expenditures, lease commitments, and share repurchases on cash balances and liquidity.
- Review the potential financial and reputational effects of litigation, cybersecurity incidents, tariffs, foreign exchange, and international execution risks.