e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
January 30,
2011
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33608
lululemon athletica
inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-3842867
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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1818 Cornwall Avenue
Vancouver, British Columbia
(Address of principal executive offices)
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V6J 1C7
(Zip Code)
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Registrants telephone number, including area code:
(604) 732-6124
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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Nasdaq Global Select Market
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 of Section 15(d) of the
Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
rule 12b-2
of the Act).
Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant on July 30, 2010 was
approximately $1,954,124,791. Such aggregate market value was
computed by reference to the closing price of the common stock
as reported on the Nasdaq Global Select Market on July 30,
2010. For purposes of determining this amount only, the
registrant has defined affiliates as including the executive
officers and directors of the registrant on July 30, 2010.
Common Stock:
At March 14, 2011 there were 53,563,117 shares of the
registrants common stock, par value $0.01 per share,
outstanding.
Exchangeable and Special Voting Shares:
At March 14, 2011, there were outstanding
17,708,018 exchangeable shares of Lulu Canadian Holding,
Inc., a wholly-owned subsidiary of the registrant. Exchangeable
shares are exchangeable for an equal number of shares of the
registrants common stock.
In addition, at March 14, 2011, the registrant had
outstanding 17,708,018 shares of special voting stock,
through which the holders of exchangeable shares of Lulu
Canadian Holding, Inc. may exercise their voting rights with
respect to the registrant. The special voting stock and the
registrants common stock generally vote together as a
single class on all matters on which the common stock is
entitled to vote.
DOCUMENTS
INCORPORATED BY REFERENCE
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DOCUMENT
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PARTS INTO WHICH INCORPORATED
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Portions of Proxy Statement for the
2011 Annual Meeting of Stockholders
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Part III
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PART I
Special
Note Regarding Forward-Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as
amended. We use words such as anticipates,
believes, estimates, may,
intends, expects and similar expressions
to identify forward-looking statements. Discussions containing
forward-looking statements may be found in the material set
forth under Business, Managements
Discussion and Analysis of Financial Condition and Results of
Operation and in other sections of the report. All
forward-looking statements are inherently uncertain as they are
based on our expectations and assumptions concerning future
events. Any or all of our forward-looking statements in this
report may turn out to be inaccurate. We have based these
forward-looking statements largely on our current expectations
and projections about future events and financial trends that we
believe may affect our financial condition, results of
operations, business strategy and financial needs. They may be
affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties, including the risks,
uncertainties and assumptions described in the section entitled
Item 1A and elsewhere in this report. In light of these
risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this report may not occur as
contemplated, and our actual results could differ materially
from those anticipated or implied by the forward-looking
statements. All forward-looking statements in this report are
made as of the date hereof, based on information available to us
as of the date hereof, and we assume no obligation to update any
forward-looking statement.
Overview
lululemon athletica inc. is a designer and retailer of technical
athletic apparel operating primarily in North America and
Australia. Our yoga-inspired apparel is marketed under the
lululemon athletica brand name. We believe consumers associate
our brand with innovative, technical apparel products. Our
products are designed to offer performance, fit and comfort
while incorporating both function and style. Our heritage of
combining performance and style distinctly positions us to
address the needs of female athletes as well as a growing core
of consumers who desire everyday casual wear that is consistent
with their active lifestyles. We also continue to broaden our
product range to increasingly appeal to male athletes and
athletic female youth. We offer a comprehensive line of apparel
and accessories including fitness pants, shorts, tops and
jackets designed for athletic pursuits such as yoga, running and
general fitness. As of January 30, 2011, our branded
apparel was principally sold through 137 stores that are located
in Canada, the United States and Australia. We believe our
vertical retail strategy allows us to interact more directly
with, and gain feedback from, our customers while providing us
with greater control of our brand.
We have developed a distinctive community-based strategy that we
believe enhances our brand and reinforces our customer loyalty.
The key elements of our strategy are to:
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design and develop innovative athletic apparel that combines
performance with style and incorporates real-time customer
feedback;
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locate our stores in street locations, lifestyle centers and
malls that position each lululemon athletica store as an
integral part of its community;
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create an inviting and educational store environment that
encourages product trial and repeat visits; and
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market on a grassroots level in each community, including
through social media and influential fitness practitioners who
embrace and create excitement around our brand.
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We were founded in 1998 by Dennis Chip Wilson in
Vancouver, British Columbia. Noting the increasing number of
women participating in sports, and specifically yoga,
Mr. Wilson developed lululemon athletica to address a void
in the womens athletic apparel market. The founding
principles established by Mr. Wilson drive our distinctive
corporate culture with a mission of providing people with the
components to live a longer, healthier and
1
more fun life. Consistent with this mission, we promote a set of
core values in our business, which include developing the
highest quality products, operating with integrity, leading a
healthy balanced life, and training our employees in self
responsibility and goal setting. These core values attract
passionate and motivated employees who are driven to succeed and
share our vision of elevating the world from mediocrity to
greatness. We believe the energy and passion of our
employees allow us to successfully execute on our business
strategy, enhance brand loyalty and create a distinctive
connection with our customers.
We believe our culture and community-based business approach
provides us with competitive advantages that are responsible for
our strong financial performance. Our net revenue has increased
from $40.7 million in fiscal 2004 to $711.7 million in
fiscal 2010, representing a 61% compound annual growth rate. Our
net revenue increased from $452.9 million in fiscal 2009 to
$711.7 million in fiscal 2010, representing a 57% increase.
During fiscal 2010, our comparable store sales growth was 37%
and we reported income from operations of $180.4 million.
During fiscal 2009, our comparable store sales growth was 9% and
we reported income from operations of $86.5 million. In
fiscal 2010, our corporate-owned stores opened at least one year
averaged sales of approximately $1,726 per square foot, compared
to sales per square foot of approximately $1,318 for fiscal
2009. We believe this is among the best in the apparel retail
sector.
Our
Market
Our primary target customer is a sophisticated and educated
woman who understands the importance of an active, healthy
lifestyle. She is increasingly tasked with the dual
responsibilities of career and family and is constantly
challenged to balance her work, life and health. We believe she
pursues exercise to achieve physical fitness and inner peace.
As women have continued to embrace a variety of fitness and
athletic activities, including yoga, we believe other athletic
apparel companies are not effectively addressing their unique
style, fit and performance needs. We believe we have been able
to help address this void in the marketplace by incorporating
style along with comfort and functionality into our products
through our vertical retail strategy. Although we were founded
to address the unique needs of women, we are also successfully
designing products for men and athletic female youth who also
appreciate the technical rigor and premium quality of our
products. We also believe longer-term growth in athletic
participation will be reinforced as the aging Baby Boomer
generation focuses more on longevity. In addition, we believe
consumer purchase decisions are driven by both an actual need
for functional products and a desire to create a particular
lifestyle perception. As such, we believe the credibility and
authenticity of our brand expands our potential market beyond
just athletes to those who desire to lead an active, healthy,
and balanced life.
Our
Competitive Strengths
We believe the following strengths differentiate us from our
competitors and are important to our success:
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Premium Active Brand. lululemon athletica
stands for leading a healthy, balanced and fun life. We believe
customers associate the lululemon athletica brand with high
quality premium athletic apparel that incorporates technically
advanced materials, innovative functional features and style. We
believe our focus on women differentiates us and positions
lululemon athletica to address a void in the growing market for
womens athletic apparel. The premium nature of our brand
is reinforced by our vertical retail strategy and our selective
distribution through yoga studios and fitness clubs that we
believe are the most influential within the fitness communities
of their respective markets. While our brand has its roots in
yoga, our products are increasingly being designed and used for
other athletic and casual lifestyle pursuits, such as running
and general fitness. We work with local athletes and fitness
practitioners to enhance our brand awareness and broaden our
product appeal.
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Distinctive Retail Experience. We locate our
stores in street locations, lifestyle centers and malls that
position lululemon athletica stores to be an integral part of
their communities. Our retail concept is based on a
community-centric philosophy designed to offer customers an
inviting and educational experience. We believe that this
environment encourages product trial, purchases and repeat
visits. We coach our store sales associates, whom we refer to as
educators, to develop a personal connection with
each customer. Our educators receive approximately 30 hours
of in-house training within the first three months of the start
of
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their employment and are well prepared to explain the technical
and innovative design aspects of each product.
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Innovative Design Process. We offer
high-quality premium apparel that is designed for performance,
comfort, functionality and style. We attribute our ability to
develop superior products to a number of factors, including:
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our feedback-based design process through which our design and
product development team proactively and frequently seeks input
from our customers and local fitness practitioners;
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close collaboration with our third-party suppliers to formulate
innovative and technically-advanced fabrics and features for our
products; and
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although we typically bring products from design to market in
eight to 10 months, our vertical retail strategy enables us
to bring select products to market in as little as two months,
thereby allowing us to respond quickly to customer feedback,
changing market conditions and apparel trends.
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Community-Based Marketing Approach. We
differentiate lululemon athletica through an innovative,
community-based approach to building brand awareness and
customer loyalty. We use a multi-faceted grassroots marketing
strategy that includes social media, partnering with local
fitness practitioners and creating in-store community boards.
Each of our stores has a dedicated community coordinator who
organizes fitness or philanthropic events designed to heighten
the image of our brand in the community. We believe this
grassroots approach allows us to successfully increase brand
awareness and broaden our appeal while reinforcing our premium
brand image.
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Deep Rooted Culture Centered on Training and Personal
Growth. We believe our core values and
distinctive corporate culture allow us to attract passionate and
motivated employees who are driven to succeed and share our
vision. We provide our employees with a supportive,
goal-oriented environment and encourage them to reach their full
professional, health and personal potential. We offer programs
such as personal development workshops and goal coaching to
assist our employees in realizing their long-term objectives. We
believe our relationship with our employees is exceptional and a
key contributor to our success.
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Experienced Management Team with Proven Ability to
Execute. Our founder and Chief Innovation and
Branding Officer, Mr. Wilson, plays a key role in corporate
innovation strategy and in promoting our distinctive corporate
culture. Our Chief Executive Officer, Ms. Day, whose
experience includes 20 years at Starbucks Corporation, most
recently serving as President of Asia Pacific Group of Starbucks
International from 2004 to 2007, joined us in January 2008.
Ms. Day has assembled a management team with a
complementary mix of retail, design, operations, product
sourcing, marketing and information technology experience from
leading apparel and retail companies such as
Abercrombie & Fitch Co., The Gap, Inc., Nike, Inc. and
Speedo International Limited. We believe our management team is
well positioned to execute the long-term growth strategy for our
business.
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Growth
Strategy
Key elements of our growth strategy are to:
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Grow our Store Base in North America. As of
January 30, 2011, our products were sold through
122 corporate-owned stores in North America, including 44
in Canada and 78 in the United States. We expect that most of
our near-term store growth will occur in the United States. We
plan to add new stores to strengthen existing markets and
selectively enter new markets in the United States and Canada.
We opened net 12 stores in the United States and Canada in
fiscal 2010, including one franchised store that was reacquired,
and we plan to open approximately 22 to 27 additional stores in
fiscal 2011 in the United States and Canada.
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Develop our Direct to Consumer Sales
Channel. We launched our retail website in the
first quarter of fiscal 2009. The addition of
e-commerce
to our direct to consumer sales channel has already expanded our
customer base and supplemented our growing store base. We plan
to continue developing our
e-commerce
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website to further reflect the distinctive retail experience
that our customers enjoy in our stores while providing greater
shopping flexibility and to enhance our online experience.
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Increase our Brand Awareness. We will continue
to increase brand awareness and customer loyalty through our
grassroots marketing efforts, social media and planned store
expansion. We believe that increased brand awareness will result
in increased comparable store sales and store productivity over
time.
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Introduce New Product Technologies. We remain
focused on developing and offering products that incorporate
technology-enhanced fabrics and performance features that
differentiate us in the market. Collaborating with leading
fabric manufacturers, we have jointly developed and trademarked
names for innovative fabrics such as Luon and Silverescent, and
natural stretch fabrics using organic elements such as cotton
and seaweed. Among our ongoing efforts, we are developing
fabrics to provide advanced features such as UV protection and
inherent reflectivity. In addition, we will continue to develop
differentiated manufacturing techniques that provide greater
support, protection, and comfort.
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Broaden the Appeal of our Products. We will
selectively seek opportunities to expand the appeal of our brand
to improve store productivity and increase our overall
addressable market. To enhance our product appeal, we intend to:
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Expand our Product Categories. We continue to
expand our product offerings in complementary existing and new
categories such as bags, underwear and outerwear;
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Increase the Range of Athletic Activities our Products
Target. We expect customers increasingly to
purchase our products for activities such as yoga, running and
general fitness as we educate them on the versatility of our
products and expand our product categories;
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Expand Beyond North America. As of
January 30, 2011, we operated 11 corporate-owned stores and
four showrooms in Australia, and one corporate-owned showroom in
Hong Kong. We plan to open 2 additional lululemon stores in
fiscal 2011 in Australia. Over time, we intend to expand on our
own or pursue additional joint venture opportunities in other
Asian and European markets; and
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Grow our Mens Business. We believe the
premium quality and technical rigor of our products will
continue to appeal to men and that there is an opportunity to
expand our mens business as a proportion of our total
sales.
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Grow our Youth Brand. We launched our youth
focused brand, ivivva athletica, in the fourth quarter of fiscal
2009. We believe the premium quality and technical rigor of our
dance-inspired products designed for female youth serve an open
market and provide us with an opportunity to expand this line.
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Our
Stores
As of January 30, 2011, our retail footprint included 44
stores in Canada, 82 stores in the United States, four of which
are franchise stores, and 11 stores in Australia. While most of
our stores are branded lululemon athletica, two of our
corporate-owned stores are branded ivivva athletica and
specialize in dance-inspired apparel for female youth. Our
retail stores are located primarily on street locations, in
lifestyle centers and in malls.
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The following store list shows the number of branded stores
(including corporate-owned stores and franchise stores) operated
in each Canadian province, U.S. state, and internationally
as of January 30, 2011:
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Corporate-Owned
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Franchise
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Total
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Stores
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Stores
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Stores
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Canada
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Alberta
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9
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9
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British Columbia
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11
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11
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Manitoba
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1
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1
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Nova Scotia
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1
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1
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Ontario
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17
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17
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Québec
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4
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4
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Saskatchewan
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1
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1
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Total Canada
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44
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44
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United States
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Arizona
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2
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2
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California
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19
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1
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20
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Colorado
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3
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3
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Connecticut
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2
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2
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District of Columbia
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2
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2
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Florida
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4
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4
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Georgia
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1
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1
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Hawaii
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1
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1
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Illinois
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8
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8
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Maryland
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2
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2
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Massachusetts
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5
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5
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Michigan
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1
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1
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Minnesota
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2
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2
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Missouri
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1
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1
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Nevada
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1
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1
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New Jersey
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3
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3
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New York
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7
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7
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Ohio
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1
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1
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Oregon
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2
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2
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Pennsylvania
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2
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2
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Tennessee
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1
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1
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Texas
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6
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6
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Virginia
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2
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2
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Washington
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3
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3
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Total United States
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78
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4
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82
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International
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Australia
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11
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11
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Total International
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11
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11
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Overall total, as of January 30, 2011
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133
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4
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137
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Overall total, as of January 31, 2010
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110
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14
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124
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5
Store
Economics
We believe that our innovative retail concept and customer
experience contribute to the success of our stores. During
fiscal 2010 our corporate-owned stores open at least one year,
which average approximately 2,874 square feet, averaged
sales of approximately $1,726 per square foot.
Management performs an ongoing evaluation of our portfolio of
corporate-owned store locations. In fiscal 2010 we closed one
corporate-owned ivivva athletica store in British Columbia and
one corporate-owned lululemon athletica store in Australia. As
we continue our evaluation we may in future periods close
additional corporate-owned store locations.
Store
Expansion
From February 1, 2002 (when we had one store, in Vancouver)
to January 30, 2011, we opened 121 net corporate-owned
stores in North America. We opened our first corporate-owned
store in the United States in 2003. Over the next few years, our
new store growth will be primarily focused on corporate-owned
stores in the United States, an attractive market with a
population of over nine times that of Canada. We opened net 12
stores in the United States and Canada in fiscal 2010, including
one franchised store that was reacquired.
Direct
to Consumer
In fiscal 2009 we launched our
e-commerce
website which, along with phone sales, makes up our direct to
consumer channel. Direct to consumer is an increasingly
substantial part of our business, representing approximately 8%
of our net revenue in fiscal 2010, compared to 4% of our net
revenue in fiscal 2009. We believe that a direct to consumer
channel is convenient for our core customer and enhances the
image of our brand. Our direct to consumer channel makes our
product accessible in more markets than our corporate-owned
store channel alone. We use this channel to build brand
awareness, especially in new markets, including those outside of
North America.
International
Stores
Beyond North America, we intend to expand our global presence as
part of our long-term business strategy. We believe that
partnering with companies and individuals with significant
experience and proven success in the target country is to our
advantage. As of January 30, 2011, we had 11
corporate-owned stores and four showrooms in Australia and one
showroom in Hong Kong.
Wholesale
Channel
We also sell lululemon athletica products through premium yoga
studios, health clubs and fitness centers. This channel
represented 2% of our net revenue in fiscal 2010 and 2% of our
net revenue in fiscal 2009. We believe these premium wholesale
locations offer an alternative distribution channel that is
convenient for our core consumer and enhances the image of our
brand. We do not intend wholesale to be a significant
contributor to overall sales. Instead, we use the channel to
build brand awareness, especially in new markets.
Franchise
Stores
As of January 30, 2011, we had four franchise stores in the
United States. In fiscal 2010 we reacquired the franchise rights
of nine Australia locations, which we previously held an equity
interest in, and one Saskatchewan, Canada location, thereby
decreasing the net revenue earned through our franchise channel.
This channel represented 1% of our net revenue in fiscal 2010
and 3% of our net revenue in fiscal 2009. We began opening
franchise stores in select markets in 2002 to expand our store
network while limiting required capital expenditures. Opening
new franchise stores is not part of our near-term store growth
strategy. We continue to evaluate the ability to repurchase
attractive franchises, which, in some cases, we can
contractually acquire at a specified percentage of trailing
12-month
sales. Unless otherwise approved by us, our franchisees are
required to sell only our branded products, which are purchased
from us at a discount to the suggested retail price.
6
Our
Products
We offer a comprehensive line of performance apparel and
accessories for women, men and female youth. Our apparel
assortment, including items such as fitness pants, shorts, tops
and jackets, is designed for healthy lifestyle activities such
as yoga, running and general fitness. Although we benefit from
the growing number of people that participate in yoga, we
believe the percentage of our products sold for other activities
will continue to increase as we broaden our product range to
address other activities. Our fitness-related accessories
include an array of items such as bags, socks, underwear, yoga
mats, instructional yoga DVDs and water bottles.
We believe the authenticity of our products is driven by a
number of factors. These factors include our athlete-inspired
design process, our use of technical materials, our
sophisticated manufacturing methods and our innovative product
features. Our athletic apparel is designed and manufactured
using cutting-edge fabrics designed to deliver maximum function
and athletic fit. We collaborate with leading fabric suppliers
to develop advanced fabrics that we sell under our trademarks.
Our in-house design team works closely with our suppliers to
formulate fabrics that meet our performance and functional
specifications such as stretch ability, capability to wick
moisture, color fastness and durability, among others. Advanced
fabrics that we currently incorporate in our products include:
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Luon, included in more than half of our products, wicks
away moisture, moves with the body and is designed to eliminate
irritation;
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Luxtreme, our inherently wicking fabric is primarily used
in our running lines and is silky and lightweight; and
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Silverescent incorporates silver directly into the fabric
to reduce odors as a result of the antibacterial properties of
the silver in the fabric.
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Our design team continues to develop fabrics that we believe
will help advance our product line and differentiate us from the
competition.
Our products are constructed with advanced sewing techniques,
such as flat seaming, that increase comfort and functionality by
reducing skin irritation and strengthening important seams. Our
apparel products include innovative features to promote
convenience, such as pockets designed to hold credit cards,
keys, digital audio players and clips for heart rate monitors.
Our
Culture and Values
Since our inception, the Company has developed a distinctive
corporate culture with a mission to provide people with
components to live a longer, healthier and more fun life. We
promote a set of core values in our business, which include
developing the highest quality products, operating with
integrity, leading a healthy balanced life and instilling in our
employees a sense of self responsibility and personal
achievement. These core values allow us to attract passionate
and motivated employees who are driven to succeed and share our
vision of elevating the world from mediocrity to
greatness.
Community-Based
Marketing
We differentiate our business through an innovative,
community-based approach to building brand awareness and
customer loyalty. We pursue a multi-faceted strategy which
leverages our local ambassadors, social media, in-store
community boards and a variety of grassroots initiatives. Our
ambassadors, who are local fitness practitioners, share our core
values and introduce our brand to their fitness classes and
communities leading to interest in the brand, store visits and
word-of-mouth
marketing. Our in-store community boards further position our
stores as community destinations designed to educate and enrich
our customers. Each of our stores has a dedicated community
coordinator who selectively organizes events that heighten the
image of our brand in the community. Each of our community
coordinators customizes a local marketing plan to focus on the
important athletic and philanthropic activities within each
community.
7
Product
Design and Development
Our product design efforts are led by a team of designers based
in Vancouver, British Columbia partnering with international
designers. Our team is comprised of dedicated athletes and users
of our products who embody our design philosophy and dedication
to premium quality. Our design team identifies trends based on
market intelligence and research, proactively seeks the input of
our guests and our ambassadors and broadly seeks inspiration
consistent with our goals of style, function and technical
superiority. Our ambassadors have become an integral part of our
product design process as they test and evaluate our products,
providing real-time feedback on performance and functionality.
Our design team also hosts meetings each year in many of our
markets. In these meetings, local athletes, trainers, yogis and
members of the fitness industry discuss our products and provide
us with additional feedback and ideas. Members of our design
team also regularly work at our stores, which gives them the
opportunity to interact with and receive direct feedback from
guests. Our design team incorporates all of this input to adjust
fit, style, function and to detect new athletic trends and to
identify desirable fabrics.
To ensure that we continue to provide our guests with functional
fabrics, our design team works closely with our suppliers to
incorporate innovative fabrics that bring particular
specifications to our products. These specifications include
characteristics such as stretch ability, capability to wick
moisture, color fastness and durability, among others. In
addition, to ensure the quality of our fabric and its
authenticity, we test our products using a leading testing
facility, as well as actual wear tests done on any potential
fabric. We also partner with a leading independent inspection,
verification, testing and certification company, which conducts
a battery of tests before each season on our fabrics, testing
for a variety of performance characteristics including pilling,
shrinkage, abrasion resistance and colorfastness. We collaborate
with leading fabric suppliers to develop fabrics that we
ultimately trademark for brand recognition whenever possible.
We typically bring new products from design to market in
approximately eight to 10 months; however, our vertical
retail structure enables us to bring select new products to
market in as little as two months. We believe our lead times are
shorter than a typical apparel wholesaler due to our streamlined
design and development process as well as the real-time input we
receive from our consumers and ambassadors through our
corporate-owned store locations. Our process does not involve
edits by intermediaries, such as retail buyers or a sales force,
and we believe it incorporates a shorter sample process than
typical apparel wholesalers. This rapid turnaround time allows
us to respond relatively quickly to trends or changing market
conditions.
Sourcing
and Manufacturing
We do not own or operate any manufacturing facilities, nor do we
contract directly with third-party vendors for fabrics and
finished goods. The fabric used in our products is sourced by
our manufacturers from a limited number of pre-approved
suppliers. We work with a group of approximately 45
manufacturers, four of which produced approximately 65% of our
products in fiscal 2010. During fiscal 2010, no single
manufacturer produced more than 33% of our product offering.
During fiscal 2010, approximately 60% of our products were
produced in China, approximately 26% in South/South East Asia,
approximately 4% in Canada and the remainder in the United
States, Israel, Peru, Korea and Taiwan. Our North American
manufacturers provide us with the speed to market necessary to
respond quickly to changing trends and increased demand. While
we plan to support future growth through manufacturers outside
of North America, our intent is also to maintain production in
Canada and the United States whenever possible. We have
developed long-standing relationships with a number of our
vendors and take great care to ensure that they share our
commitment to quality and ethics. We do not, however, have any
long-term agreements requiring us to use any manufacturer, and
no manufacturer is required to produce our products in the
long-term. We require that all of our manufacturers adhere to a
code of conduct regarding quality of manufacturing, working
conditions and other social concerns. We currently also work
with a leading inspection and verification firm to closely
monitor each suppliers compliance with applicable law and
our workplace code of conduct.
Distribution
Facilities
We centrally distribute finished products in North America from
distribution facilities in Vancouver, British Columbia and
Sumner, Washington. We operate the distribution facilities in
Vancouver and Sumner, which are leased and are approximately
102,000 and 82,000 square feet, respectively. We believe
these modern facilities
8
enhance the efficiency of our operations. We believe our
distribution infrastructure will be sufficient to accommodate
our expected store growth and expanded product offerings over
the next several years. Merchandise is typically shipped to our
stores through third-party delivery services multiple times per
week, providing them with a steady flow of new inventory.
Competition
Competition in the athletic apparel industry is principally on
the basis of brand image and recognition as well as product
quality, innovation, style, distribution and price. We believe
that we successfully compete on the basis of our premium brand
image, our focus on women and our technical product innovation.
In addition, we believe our vertical retail distribution
strategy differentiates us from our competitors and allows us to
more effectively control our brand image.
The market for athletic apparel is highly competitive. It
includes increasing competition from established companies who
are expanding their production and marketing of performance
products, as well as from frequent new entrants to the market.
We are in direct competition with wholesalers and direct sellers
of athletic apparel, such as Nike, Inc., adidas AG, which
includes the adidas and Reebok brands, and Under Armour, Inc. We
also compete with retailers specifically focused on womens
athletic apparel including The Gap, Inc. (including the Athleta
collection), Lucy Activewear Inc., and bebe stores, inc.
(including the BEBE SPORT collection).
Our
Employees
As of January 30, 2011, we had 4,572 employees, of
which 2,321 were employed in Canada, 2,021 were employed in the
United States, and 230 were employed internationally. Of the
2,321 Canadian employees, 1,783 were employed in our
corporate-owned stores, 59 were employed in distribution, 110
were employed in design, merchandise and production, and the
remaining 369 performed selling, general and administrative and
other functions. Of the 2,021 employees in the United
States, 1,935 were employed in our corporate-owned stores and
showrooms, 44 were employed in distribution and 34 performed
selling, general and administration functions. Of the 230
international employees, 183 were employed in our international
retail locations, 13 were employed in distribution, and 24
performed design, merchandise, production, and administrative
functions. None of our employees are currently covered by a
collective bargaining agreement. We have had no labor-related
work stoppages and we believe our relations with our employees
are excellent.
Intellectual
Property
We believe we own the material trademarks used in connection
with the marketing, distribution and sale of all of our products
in Canada, the United States and in the other countries in which
our products are currently or intended to be either sold or
manufactured. Our major trademarks include lululemon
athletica & design, the logo design (WAVE design) and
lululemon as a word mark. In addition to the registrations in
Canada and the United States, lululemons design and word
mark are registered in over 66 other jurisdictions which cover
over 114 countries. We own trademark registrations for names of
several of our fabrics including Luon, Silverescent, VitaSea,
Soyla, Boolux and Luxtreme.
Securities
and Exchange Commission Filings
Our website address is www.lululemon.com. We provide free access
to various reports that we file with, or furnish to, the United
States Securities and Exchange Commission, or the SEC, through
our website, as soon as reasonably practicable after they have
been filed or furnished. These reports include, but are not
limited to, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports. Our SEC reports can also be
accessed through the SECs website at www.sec.gov. Also
available on our website are printable versions of our Code of
Business Conduct and Ethics and charters of the Audit,
Management Development and Compensation, and Nominating and
Governance Committees of our Board of Directors. Information on
our website does not constitute part of this annual report on
Form 10-K
or any other report we file or furnish with the SEC.
9
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below
together with all of the other information included or
incorporated by reference in this
Form 10-K
before making an investment decision. If any of the following
risks actually occurs, our business, financial condition or
results of operations could materially suffer. In that case, the
trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks
Related to Our Business
General
economic conditions and volatility in the worldwide economy has
adversely affected consumer spending, which has negatively
affected our results of operations and may continue to do so in
the future.
Our operations and performance depend significantly on economic
conditions, particularly those in Canada and the United States,
and their impact on levels of consumer spending. Consumer
spending on non-essential items is affected by a number of
factors, including consumer confidence in the strength of
economies, fears of recession, the tightening of credit markets,
higher levels of unemployment, higher tax rates, the cost of
consumer credit and other factors. The current volatility in the
United States economy in particular has resulted in an overall
slowing in growth in the retail sector because of decreased
consumer spending, which may remain depressed for the
foreseeable future. These unfavorable economic conditions may
continue to lead our customers to delay or reduce purchase of
our products.
In addition, we could experience reduced traffic in our stores
and limitations on the prices we can charge for our products,
which may include price discounts, either of which could reduce
our sales and profit margins. Economic factors such as those
listed above and increased transportation costs, inflation,
higher costs of labor, insurance and healthcare, and changes in
other laws and regulations may increase our cost of sales and
our operating, selling, general and administrative expenses.
These and other economic factors could have a material adverse
affect on the demand for our products and on our financial
conditions, operating results and stock price.
We
have grown rapidly in recent years and we have limited operating
experience at our current scale of operations; if we are unable
to manage our operations at our current size or to manage any
future growth effectively, our brand image and financial
performance may suffer.
We have expanded our operations rapidly since our inception in
1998 and we have limited operating experience at our current
size. We opened our first store in Canada in 1999 and our first
store in the United States in 2003. Our net revenue
increased from $40.7 million in fiscal 2004 to
$711.7 million in fiscal 2010, representing a compound
annual increase of approximately 61%. We expect our net revenue
growth rate to slow as the number of new stores that we open in
the future declines relative to our larger store base. Our
substantial growth to date has placed a significant strain on
our management systems and resources. If our operations continue
to grow, of which there can be no assurance, we will be required
to continue to expand our sales and marketing, product
development and distribution functions, to upgrade our
management information systems and other processes, and to
obtain more space for our expanding administrative support and
other headquarters personnel. Our continued growth could
increase the strain on our resources, and we could experience
serious operating difficulties, including difficulties in
hiring, training and managing an increasing number of employees,
difficulties in obtaining sufficient raw materials and
manufacturing capacity to produce our products, and delays in
production and shipments. These difficulties could result in the
erosion of our brand image and lead to a decrease in net
revenue, income from operations and the price of our common
stock.
Any
material disruption of our information systems could disrupt our
business and reduce our sales.
We are increasingly dependent on information systems to operate
our
e-commerce
website, process transactions, respond to customer inquiries,
manage inventory, purchase, sell and ship goods on a timely
basis and maintain cost-efficient operations. Throughout the
past few years, we upgraded certain of our information systems
to support recent and expected future growth. These system
upgrades improved our ability to capture, process and ship
customer orders, and transfer product between channels. We
incurred additional costs associated with these upgrades in
fiscal 2010. We believe these systems are stable upon
implementation, but there can be no assurance
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that future disruptions will not occur. We may experience
operational problems with our information systems as a result of
system failures, viruses, computer hackers or other
causes. Any material disruption or slowdown of our systems,
including a disruption or slowdown caused by our failure to
successfully upgrade our systems, could cause information,
including data related to customer orders, to be lost or delayed
which could especially if the disruption or slowdown
occurred during the holiday season result in delays
in the delivery of merchandise to our stores and customers or
lost sales, which could reduce demand for our merchandise and
cause our sales to decline. Moreover, we may not be successful
in developing or acquiring technology that is competitive and
responsive to the needs of our customers and might lack
sufficient resources to make the necessary investments in
technology to compete with our competitors. Accordingly, if
changes in technology cause our information systems to become
obsolete, or if our information systems are inadequate to handle
our growth, we could lose customers.
Our direct to consumer channel, which includes
e-commerce,
is an increasingly substantial part of our business,
representing approximately 8% of our revenues in fiscal 2010. In
addition to changing consumer preferences and buying trends
relating to
e-commerce,
we are vulnerable to certain additional risks and uncertainties
associated with
e-commerce,
including changes in required technology interfaces, website
downtime and other technical failures, security breaches, and
consumer privacy concerns. Our failure to successfully respond
to these risks and uncertainties could reduce
e-commerce
sales and damage our brands reputation.
We have taken over certain portions of our information system
needs that were previously outsourced to a third-party and
continue making upgrades to our information systems. We may take
over other outsourced portions of our information systems in the
near future. If we are unable to manage these aspects of our
information systems or the planned upgrades, our receipt and
delivery of merchandise could be disrupted, which could result
in a decline in our sales.
Problems
with our distribution system could harm our ability to meet
customer expectations, manage inventory, complete sales and
achieve objectives for operating efficiencies.
We rely on our distribution facilities in Vancouver, British
Columbia and Sumner, Washington for substantially all of our
product distribution. Our distribution facilities include
computer controlled and automated equipment, which means their
operations are complicated and may be subject to a number of
risks related to security or computer viruses, the proper
operation of software and hardware, electronic or power
interruptions or other system failures. In addition, because
substantially all of our products are distributed from two
locations, our operations could also be interrupted by labor
difficulties, or by floods, fires or other natural disasters
near our distribution centers. If we encounter problems with our
distribution system, our ability to meet customer expectations,
manage inventory, complete sales and achieve objectives for
operating efficiencies could be harmed.
We are
subject to risks associated with leasing retail space subject to
long-term non-cancelable leases and are required to make
substantial lease payments under our operating leases, and any
failure to make these lease payments when due would likely harm
our business, profitability and results of
operations.
We do not own any of our store facilities, but instead lease all
of our corporate-owned stores under operating leases. Our leases
generally have initial terms of between five and 10 years,
and generally can be extended only in five-year increments if at
all. All of our leases require a fixed annual rent, and most
require the payment of additional rent if store sales exceed a
negotiated amount. Generally, our leases are net
leases, which require us to pay all of the cost of insurance,
taxes, maintenance and utilities. We generally cannot cancel
these leases at our option. Payments under these operating
leases account for a significant portion of our cost of goods
sold. For example, as of January 30, 2011, we were a party
to operating leases associated with our corporate-owned stores
as well as other corporate facilities requiring future minimum
lease payments aggregating $176.5 million through
January 31, 2016 and approximately $72.5 million
thereafter. We expect that any new stores we open will also be
leased by us under operating leases, which will further increase
our operating lease expenses.
Our substantial operating lease obligations could have
significant negative consequences, including:
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increasing our vulnerability to general adverse economic and
industry conditions;
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limiting our ability to obtain additional financing;
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requiring a substantial portion of our available cash to pay our
rental obligations, thus reducing cash available for other
purposes;
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limiting our flexibility in planning for or reacting to changes
in our business or in the industry in which we compete; and
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placing us at a disadvantage with respect to some of our
competitors.
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We depend on cash flow from operations to pay our lease expenses
and to fulfill our other cash needs. If our business does not
generate sufficient cash flow from operating activities, and
sufficient funds are not otherwise available to us from
borrowings under our available credit facilities or from other
sources, we may not be able to service our operating lease
expenses, grow our business, respond to competitive challenges
or fund our other liquidity and capital needs, which would harm
our business.
The
cost of raw materials could increase our cost of goods sold and
cause our results of operations and financial condition to
suffer.
The fabrics used by our suppliers and manufacturers include
synthetic fabrics whose raw materials include petroleum-based
products. Our products also include natural fibers, including
cotton. Our costs for raw materials are affected by, among other
things, weather, consumer demand, speculation on the commodities
market, the relative valuations and fluctuations of the
currencies of producer versus consumer countries and other
factors that are generally unpredictable and beyond our control.
For example, during 2010, cotton prices hit their highest levels
in 140 years. Increases in the cost of cotton can result in
higher costs in the price we pay for our cotton yarn and
cotton-based textiles. We are not always successful in our
efforts to protect our business from the volatility of the
market price of cotton and other raw materials, and our business
can be adversely affected by dramatic movements in prices of raw
materials. The ultimate effect of this change on our earnings
cannot be quantified, as the effect of movements in raw
materials prices on industry selling prices are uncertain, but
any dramatic increase in these prices could have a material
adverse effect on our business, results of operations, financial
condition and cash flows.
Increasing
labor costs and other factors associated with the production of
our products in China could increase the costs to produce our
products.
During fiscal 2010, approximately 60% of our products were
produced in China. Given that the majority of our manufacturing
is conducted by third-party manufacturers located in China,
increases in the costs of labor and other costs of doing
business in China could significantly increase our costs to
produce our products and could have a negative impact on our
operations, revenues and earnings. Factors that could negatively
affect our business include a potential significant revaluation
of the Chinese Yuan, which may result in an increase in the cost
of producing products in China, labor shortage and increases in
labor costs in China, and difficulties in moving products
manufactured in China out of Asia and through the ports on the
western coast of North America, whether due to port congestion,
labor disputes, product regulations
and/or
inspections or other factors, and natural disasters or health
pandemics impacting China. Also, the imposition of trade
sanctions or other regulations against products imported by us
from, or the loss of normal trade relations status
with, China, could significantly increase our cost of products
imported into North America or Australia and harm our business.
We may
not be able to successfully open new store locations in a timely
manner, if at all, which could harm our results of
operations.
Our growth will largely depend on our ability to successfully
open and operate new stores. Our ability to successfully open
and operate new stores depends on many factors, including, among
others, our ability to:
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identify suitable store locations, the availability of which is
outside of our control;
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negotiate acceptable lease terms, including desired tenant
improvement allowances;
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hire, train and retain store personnel and field management;
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assimilate new store personnel and field management into our
corporate culture;
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source sufficient inventory levels; and
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successfully integrate new stores into our existing operations
and information technology systems.
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Successful new store openings may also be affected by our
ability to initiate our grassroots marketing efforts in advance
of opening our first store in a new market. We typically rely on
our grassroots marketing efforts to build awareness of our brand
and demand for our products. Our grassroots marketing efforts
are often lengthy and must be tailored to each new market based
on our emerging understanding of the market. Accordingly, there
can be no assurance that we will be able to successfully
implement our grassroots marketing efforts in a particular
market in a timely manner, if at all. Additionally, we may be
unsuccessful in identifying new markets where our technical
athletic apparel and other products and brand image will be
accepted or the performance of our stores will be considered
successful. Further, we will encounter pre-opening costs and we
may encounter initial losses while new stores commence
operations.
We plan to open new stores in the near future to add to our
existing store base. Of the 137 stores in operation as of
January 30, 2011, we opened 12 net new stores in North
America (including one franchise store that was reacquired) and
11 net new stores in Australia (including nine franchise
stores that were reacquired) in fiscal 2010. In fiscal 2011, we
expect to open a total of 20 to 25 additional lululemon stores
and two ivivva stores in North America, as well as three
additional lululemon stores in Australia. We estimate that we
will incur approximately $15.0 million to
$19.0 million of capital expenditures in fiscal 2011 to
open these 25 to 30 additional stores. In addition, our new
stores may not be immediately profitable and we may incur losses
until these stores become profitable. There can be no assurance
that we will open the planned number of new stores in fiscal
2011. Any failure to successfully open and operate new stores
will harm our results of operations.
If we
fail to maintain the value and reputation of our brand, our
sales are likely to decline.
Our success depends on the value and reputation of the lululemon
brand. The lululemon name is integral to our business as well as
to the implementation of our strategies for expanding our
business. Maintaining, promoting and positioning our brand will
depend largely on the success of our marketing and merchandising
efforts and our ability to provide a consistent, high quality
customer experience. We rely on social media, as one of our
marketing strategies, to have a positive impact on both our
brand value and reputation. Our brand could be adversely
affected if we fail to achieve these objectives or if our public
image or reputation were to be tarnished by negative publicity.
Any of these events could result in decreases in sales.
Our
limited operating experience and limited brand recognition in
new markets may limit our expansion strategy and cause our
business and growth to suffer.
Our future growth depends, to a considerable extent, on our
expansion efforts outside of Canada, especially in the United
States. Our current operations are based largely in Canada and
the United States. As of January 30, 2011, we had 44
corporate-owned stores in Canada, 82 corporate-owned stores in
the United States, including four franchised stores, and 11
corporate-owned stores in Australia. We have limited experience
with regulatory environments and market practices outside of
Canada and the United States, and cannot guarantee that we will
be able to penetrate or successfully operate in any market
outside of North America. As previously disclosed, we have
discontinued our operations in Japan. In connection with our
initial expansion efforts outside of North America, we have
encountered many obstacles we do not face in Canada or the
United States, including cultural and linguistic differences,
differences in regulatory environments, labor practices and
market practices, difficulties in keeping abreast of market,
business and technical developments and foreign customers
tastes and preferences.
We may also encounter difficulty expanding into new markets
because of limited brand recognition leading to delayed
acceptance of our technical athletic apparel by customers in
these new markets. In particular, we have no assurance that our
grassroots marketing efforts will prove successful outside of
the geographic regions in which they have been used in the
United States and Canada. We anticipate that as our business
expands into new markets and as the market becomes increasingly
competitive, maintaining and enhancing our brand may become
increasingly difficult and expensive. Conversely, as we
penetrate these markets and our brand becomes more widely
available, it could potentially detract from the appeal stemming
from the scarcity of our brand. Our brand may also be adversely
13
affected if our public image or reputation is tarnished by
negative publicity. Maintaining and enhancing our brand will
depend largely on our ability to be a leader in the athletic
apparel industry, to offer a unique store experience to our
customers and to continue to provide high quality products and
services, which we may not do successfully. Failure to develop
new markets outside of North America or disappointing growth
outside of North America will harm our business and results of
operations. In addition, if we are unable to maintain or enhance
our brand image our results of operations may suffer and our
business may be harmed.
Our
ability to attract customers to our stores depends heavily on
successfully locating our stores in suitable locations and any
impairment of a store location, including any decrease in
customer traffic, could cause our sales to be less than
expected.
Our approach to identifying locations for our stores typically
favors street locations, lifestyle centers and malls where we
can be a part of the community. As a result, our stores are
typically located near retailers or fitness facilities that we
believe are consistent with our customers lifestyle
choices. Sales at these stores are derived, in part, from the
volume of foot traffic in these locations. Store locations may
become unsuitable due to, and our sales volume and customer
traffic generally may be harmed by, among other things:
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economic downturns in a particular area;
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competition from nearby retailers selling athletic apparel;
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changing consumer demographics in a particular market;
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changing lifestyle choices of consumers in a particular
market; and
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the closing or decline in popularity of other businesses located
near our store.
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Changes in areas around our store locations that result in
reductions in customer foot traffic or otherwise render the
locations unsuitable could cause our sales to be less than
expected.
We
operate in a highly competitive market and the size and
resources of some of our competitors may allow them to compete
more effectively than we can, resulting in a loss of our market
share and a decrease in our net revenue and
profitability.
The market for technical athletic apparel is highly competitive.
Competition may result in pricing pressures, reduced profit
margins or lost market share or a failure to grow our market
share, any of which could substantially harm our business and
results of operations. We compete directly against wholesalers
and direct retailers of athletic apparel, including large,
diversified apparel companies with substantial market share and
established companies expanding their production and marketing
of technical athletic apparel, as well as against retailers
specifically focused on womens athletic apparel. We also
face competition from wholesalers and direct retailers of
traditional commodity athletic apparel, such as cotton T-shirts
and sweatshirts. Many of our competitors are large apparel and
sporting goods companies with strong worldwide brand
recognition, such as The Gap, Inc., which includes the Athleta
brand, Nike, Inc. and adidas AG, which includes the adidas and
Reebok brands. Because of the fragmented nature of the industry,
we also compete with other apparel sellers, including those
specializing in yoga apparel. Many of our competitors have
significant competitive advantages, including longer operating
histories, larger and broader customer bases, more established
relationships with a broader set of suppliers, greater brand
recognition and greater financial, research and development,
store development, marketing, distribution and other resources
than we do. In addition, our technical athletic apparel is sold
at a premium to traditional athletic apparel.
Our competitors may be able to achieve and maintain brand
awareness and market share more quickly and effectively than we
can. In contrast to our grassroots marketing
approach, many of our competitors promote their brands primarily
through traditional forms of advertising, such as print media
and television commercials, and through celebrity athlete
endorsements, and have substantial resources to devote to such
efforts. Our competitors may also create and maintain brand
awareness using traditional forms of advertising more quickly in
new markets than we can. Our competitors may also be able to
increase sales in their new and existing markets faster than we
do by emphasizing different distribution channels than we do,
such as catalog sales or an extensive franchise network,
14
as opposed to distribution through retail stores, wholesale or
internet, and many of our competitors have substantial resources
to devote toward increasing sales in such ways.
In addition, because we own no patents or exclusive intellectual
property rights in the technology, fabrics or processes
underlying our products, our current and future competitors are
able to manufacture and sell products with performance
characteristics, fabrication techniques and styling similar to
our products.
Our
inability to maintain recent levels of comparable store sales or
average sales per square foot could cause our stock price to
decline.
We may not be able to maintain the levels of comparable store
sales that we have experienced historically. In addition, we may
not be able to replicate outside of North America our historic
average sales per square foot. Our sales per square foot in
stores we have opened in new markets, which have primarily been
in the United States, have generally been lower than those we
have been able to achieve in Canada. As sales in new markets
grow to become a larger percentage of our overall sales, our
average sales per square foot will likely decline. The aggregate
results of operations of our stores have fluctuated in the past
and can be expected to continue to fluctuate in the future. For
example, over the past three fiscal years, our comparable store
sales have ranged from a decrease of 22% in the fourth quarter
of fiscal 2008 to an increase of 32% in the fourth quarter of
fiscal 2010. A variety of factors affect both comparable store
sales and average sales per square foot, including foreign
exchange fluctuations, fashion trends, competition, current
economic conditions, pricing, inflation, the timing of the
release of new merchandise and promotional events, changes in
our merchandise mix, the success of marketing programs and
weather conditions. These factors may cause our comparable store
sales results to be materially lower than recent periods and our
expectations, which could harm our results of operations and
result in a decline in the price of our common stock.
Our
net sales are affected by direct to consumer
sales.
We sell merchandise over the Internet through our
e-commerce
website www.lululemon.com. Our
e-commerce
operations, included in our direct to consumer channel, are
subject to numerous risks, including reliance on third party
computer hardware and software, rapid technological change,
diversion of sales from our stores, liability for online
content, violations of state or federal laws, including those
relating to online privacy, credit card fraud, risks related to
the failure of the computer systems that operate our websites
and their related support systems, including computer viruses,
telecommunications failures and electronic break-ins and similar
disruptions. There is no assurance that our
e-commerce
operations will continue to achieve sales and profitability
growth.
Failure
to comply with trade and other regulations could lead to
investigations or actions by government regulators and negative
publicity.
The labeling, distribution, importation and sale of our products
are subject to extensive regulation by various federal agencies,
including the Federal Trade Commission, or the FTC, state
attorneys general in the U.S., the Competition Bureau and Health
Canada in Canada as well as by various other federal, state,
provincial, local and international regulatory authorities in
the countries in which our products are distributed or sold. If
we fail to comply with those regulations, we could become
subject to significant penalties or claims, which could harm our
results of operations or our ability to conduct our business. In
addition, the adoption of new regulations or changes in the
interpretation of existing regulations may result in significant
compliance costs or discontinuation of product sales and could
impair the marketing of our products, resulting in significant
loss of net sales.
In addition, our failure to comply with FTC or state
regulations, or with regulations in foreign markets that cover
our product claims and advertising, including direct claims and
advertising by us, could result in enforcement actions and
imposition of penalties or otherwise harm the distribution and
sale of our products.
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Our
plans to improve and expand our product offerings may not be
successful, and implementation of these plans may divert our
operational, managerial and administrative resources, which
could harm our competitive position and reduce our net revenue
and profitability.
In addition to our store expansion strategy, we plan to grow our
business by improving and expanding our product offerings, which
includes introducing new product technologies, increasing the
range of athletic activities our products target, growing our
mens and female youth businesses and expanding our
accessories, underwear and outerwear offerings. The principal
risks to our ability to successfully carry out our plans to
improve and expand our product offering are that:
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introduction of new products may be delayed, allowing our
competitors to introduce similar products in a more timely
fashion, which could hurt our goal to be viewed as a leader in
technical athletic apparel innovation;
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if our expanded product offerings fail to maintain and enhance
our distinctive brand identity, our brand image could be
diminished and our sales may decrease;
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implementation of these plans could divert managements
attention from other aspects of our business and place a strain
on our management, operational and financial resources, as well
as our information systems; and
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incorporation of novel technologies into our products that are
not accepted by our customers or that are inferior to similar
products offered by our competitors.
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In addition, our ability to successfully carry out our plans to
improve and expand our product offerings could be affected by
economic and competitive conditions, changes in consumer
spending patterns and changes in consumer athletic preferences
and style trends. These plans could be abandoned, could cost
more than anticipated and could divert resources from other
areas of our business, any of which could impact our competitive
position and reduce our net revenue and profitability.
We
rely on third-party suppliers to provide fabrics for and to
produce our products, and we have limited control over them and
may not be able to obtain quality products on a timely basis or
in sufficient quantity.
We do not manufacture our products or the raw materials for them
and rely instead on third-party suppliers. Many of the specialty
fabrics used in our products are technically advanced textile
products developed and manufactured by third parties and may be
available, in the short-term, from only one or a very limited
number of sources. For example, Luon fabric, which is included
in many of our products, is supplied to the mills we use by a
single manufacturer in Taiwan, and the fibers used in
manufacturing Luon fabric are supplied to our Taiwanese
manufacturer by a single company. In fiscal 2010, approximately
69% of our products were produced by our top five manufacturing
suppliers.
If we experience significant increased demand, or need to
replace an existing manufacturer, there can be no assurance that
additional supplies of fabrics or raw materials or additional
manufacturing capacity will be available when required on terms
that are acceptable to us, or at all, or that any supplier or
manufacturer would allocate sufficient capacity to us in order
to meet our requirements or fill our orders in a timely manner.
Even if we are able to expand existing or find new manufacturing
or fabric sources, we may encounter delays in production and
added costs as a result of the time it takes to train our
suppliers and manufacturers in our methods, products and quality
control standards. Delays related to supplier changes could also
arise due to an increase in shipping times if new suppliers are
located farther away from our markets or from other participants
in our supply chain. Any delays, interruption or increased costs
in the supply of fabric or manufacture of our products could
have an adverse effect on our ability to meet customer demand
for our products and result in lower net revenue and income from
operations both in the short and long-term.
There can be no assurance that our suppliers and manufacturers
will continue to provide fabrics and raw materials or
manufacture products that comply with our technical
specifications and are consistent with our standards. We have
occasionally received, and may in the future continue to
receive, shipments of products that fail to comply with our
technical specifications or that fail to conform to our quality
control standards. In that event,
16
unless we are able to obtain replacement products in a timely
manner, we risk the loss of net revenue resulting from the
inability to sell those products and related increased
administrative and shipping costs.
Additionally, if defects in the manufacture of our products are
not discovered until after such products are purchased by our
customers, our customers could lose confidence in the technical
attributes of our products and our results of operations could
suffer and our business could be harmed.
We do
not have long-term contracts with our suppliers and accordingly
could face significant disruptions in supply from our current
sources.
We generally do not enter into long-term formal written
agreements with our suppliers, including those for Luon, and
typically transact business with our suppliers on an
order-by-order
basis. There can be no assurance that there will not be a
significant disruption in the supply of fabrics or raw materials
from current sources or, in the event of a disruption, that we
would be able to locate alternative suppliers of materials of
comparable quality at an acceptable price, or at all.
Identifying a suitable supplier is an involved process that
requires us to become satisfied with their quality control,
responsiveness and service, financial stability and labor and
other ethical practices. Any delays, interruption or increased
costs in the supply of fabric or manufacture of our products
arising from a lack of long-term contracts could have an adverse
effect on our ability to meet customer demand for our products
and result in lower net revenue and income from operations both
in the short and long-term. Similarly, there can no assurance
that the suppliers of our fabrics, such as Luon, will not sell
the same fabric to our competitors.
We do
not have patents or exclusive intellectual property rights in
our fabrics and manufacturing technology. If our competitors
sell similar products to ours, our net revenue and profitability
could suffer.
The intellectual property rights in the technology, fabrics and
processes used to manufacture our products are owned or
controlled by our suppliers and are generally not unique to us.
Our ability to obtain intellectual property protection for our
products is therefore limited and we currently own no patents or
exclusive intellectual property rights in the technology,
fabrics or processes underlying our products. As a result, our
current and future competitors are able to manufacture and sell
products with performance characteristics, fabrics and styling
similar to our products. Because many of our competitors, such
as The Gap, Inc., which includes the Athleta brand, Nike, Inc.
and adidas AG, which includes the adidas and Reebok brands, have
significantly greater financial, distribution, marketing and
other resources than we do, they may be able to manufacture and
sell products based on our fabrics and manufacturing technology
at lower prices than we can. If our competitors do sell similar
products to ours at lower prices, our net revenue and
profitability could suffer.
Our
future success is substantially dependent on the continued
service of our senior management.
Our future success is substantially dependent on the continued
service of our senior management. The loss of the services of
our senior management could make it more difficult to
successfully operate our business and achieve our business goals.
We also may be unable to retain existing management, technical,
sales and client support personnel that are critical to our
success, which could result in harm to our customer and employee
relationships, loss of key information, expertise or know-how
and unanticipated recruitment and training costs.
We do not maintain a key person life insurance policy on
Mr. Wilson, Ms. Day or any of the other members of our
senior management team. As a result, we would have no way to
cover the financial loss if we were to lose the services of
members of our senior management team.
Our
operating results are subject to seasonal and quarterly
variations in our net revenue and income from operations, which
could cause the price of our common stock to
decline.
We have experienced, and expect to continue to experience,
significant seasonal variations in our net revenue and income
from operations. Seasonal variations in our net revenue are
primarily related to increased sales of our products during our
fourth fiscal quarter, reflecting our historical strength in
sales during the holiday season. We generated approximately 36%,
39% and 29% of our full year gross profit during the fourth
quarters of fiscal 2010,
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fiscal 2009 and fiscal 2008, respectively. Historically,
seasonal variations in our income from operations have been
driven principally by increased net revenue in our fourth fiscal
quarter.
Our quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors,
including, among other things, the following:
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the timing of new store openings;
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net revenue and profits contributed by new stores;
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increases or decreases in comparable store sales;
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increases or decreases in our
e-commerce
sales;
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changes in our product mix; and
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the timing of new advertising and new product introductions.
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As a result of these seasonal and quarterly fluctuations, we
believe that comparisons of our operating results between
different quarters within a single fiscal year are not
necessarily meaningful and that these comparisons cannot be
relied upon as indicators of our future performance.
Any future seasonal or quarterly fluctuations in our results of
operations may not match the expectations of market analysts and
investors. Disappointing quarterly results could cause the price
of our common stock to decline. Seasonal or quarterly factors in
our business and results of operations may also make it more
difficult for market analysts and investors to assess the
longer-term profitability and strength of our business at any
particular point, which could lead to increased volatility in
our stock price. Increased volatility could cause our stock
price to suffer in comparison to less volatile investments.
If we
are unable to accurately forecast customer demand for our
products our manufacturers may not be able to deliver products
to meet our requirements, and this could result in delays in the
shipment of products to our stores and may harm our results of
operations and customer relationships.
We stock our stores based on our estimates of future demand for
particular products. If our inventory and planning team fails to
accurately forecast customer demand, we may experience excess
inventory levels or a shortage of products available for sale in
our stores. There can be no assurance that we will be able to
successfully manage our inventory at a level appropriate for
future customer demand.
Inventory levels in excess of customer demand may result in
inventory write-downs or write-offs and the sale of excess
inventory at discounted prices, which would cause our gross
margin to suffer and could impair the strength and exclusivity
of our brand. We wrote-off $1.0 million, $0.8 million
and $0.9 million of inventory in fiscal 2010, fiscal 2009
and fiscal 2008, respectively. In addition, if we underestimate
customer demand for our products, our manufacturers may not be
able to deliver products to meet our requirements, and this
could result in delays in the shipment of products to our stores
and may damage our reputation and customer relationships. There
can be no assurance that we will be able to successfully manage
our inventory at a level appropriate for future customer demand.
Our
current and future joint ventures may not be
successful.
As part of our long-term growth strategy, we plan to expand our
stores and sales of our products into new locations outside
North America. Our successful expansion and operation of new
stores outside North America may depend on our ability to find
suitable partners and to successfully implement and manage joint
venture relationships. If we are able to find a joint venture
partner in a specific geographic area, there can be no guarantee
that such a relationship will be successful. Such a relationship
often creates additional risk. For example, our partners in
joint venture relationships may have interests that differ from
ours or that conflict with ours, such as the timing of new store
openings and the pricing of our products, or our partners may
become bankrupt which may as a practical matter subject us to
such partners liabilities in connection with the joint
venture. In addition, joint ventures can magnify several other
risks for us, including the potential loss of control over our
cultural identity in the markets where we enter into joint
ventures and the possibility that our brand image could be
impaired by the actions of our
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partners. Although we generally will seek to maintain sufficient
control of any investment to permit our objectives to be
achieved, we might not be able to take action without the
approval of our partners. Reliance on joint venture
relationships and our partners exposes us to increased risk that
our joint ventures will not be successful and will result in
competitive harm to our brand image that could cause our
expansion efforts, profitability and results of operations to
suffer.
If our
independent manufacturers fail to use ethical business practices
and comply with applicable laws and regulations, our brand image
could be harmed due to negative publicity.
Our core values, which include developing the highest quality
products while operating with integrity, are an important
component of our brand image, which makes our reputation
particularly sensitive to allegations of unethical business
practices. While our internal and vendor operating guidelines
promote ethical business practices such as environmental
responsibility, fair wage practices, and compliance with child
labor laws, among others, and we, along with a third-party that
we retain for this purpose, monitor compliance with those
guidelines, we do not control our independent manufacturers or
their business practices. Accordingly, we cannot guarantee their
compliance with our guidelines. A lack of demonstrated
compliance could lead us to seek alternative suppliers, which
could increase our costs and result in delayed delivery of our
products, product shortages or other disruptions of our
operations.
Violation of labor or other laws by our independent
manufacturers or the divergence of an independent
manufacturers labor or other practices from those
generally accepted as ethical in Canada, the United States or
other markets in which we do business could also attract
negative publicity for us and our brand. This could diminish the
value of our brand image and reduce demand for our merchandise
if, as a result of such violation, we were to attract negative
publicity. Other apparel manufacturers have encountered
significant problems in this regard, and these problems have
resulted in organized boycotts of their products and significant
adverse publicity. If we, or other manufacturers in our
industry, encounter similar problems in the future, it could
harm our brand image, stock price and results of operations.
Monitoring compliance by independent manufacturers is
complicated by the fact that expectations of ethical business
practices continually evolve, may be substantially more
demanding than applicable legal requirements and are driven in
part by legal developments and by diverse groups active in
publicizing and organizing public responses to perceived ethical
shortcomings. Accordingly, we cannot predict how such
expectations might develop in the future and cannot be certain
that our guidelines would satisfy all parties who are active in
monitoring and publicizing perceived shortcomings in labor and
other business practices worldwide.
Because
a significant portion of our sales are generated in Canada,
fluctuations in foreign currency exchange rates have negatively
affected our results of operations and may continue to do so in
the future.
The reporting currency for our consolidated financial statements
is the U.S. dollar. In the future, we expect to continue to
derive a significant portion of our net revenue and incur a
significant portion of our operating costs in Canada, and
changes in exchange rates between the Canadian dollar and the
U.S. dollar may have a significant, and potentially
adverse, effect on our results of operations. A portion of our
net revenue is generated in Australia. Our primary risk of loss
regarding foreign currency exchange rate risk is caused by
fluctuations in the exchange rates between the U.S. dollar,
Canadian dollar and Australian dollar. Because we recognize net
revenue from sales in Canada in Canadian dollars, if the
Canadian dollar weakens against the U.S. dollar it would
have a negative impact on our Canadian operating results upon
translation of those results into U.S. dollars for the
purposes of consolidation. The exchange rate of the Canadian
dollar against the U.S. dollar has increased over fiscal
2010 and our results of operations have benefited from the
strength in the Canadian dollar. If the Canadian dollar were to
weaken relative to the U.S. dollar, our net revenue would
decline and our income from operations and net income could be
adversely affected. A 10% depreciation in the relative value of
the Canadian dollar compared to the U.S. dollar would have
resulted in lost income from operations of approximately
$11.3 million in fiscal 2010 and approximately
$11.2 million in fiscal 2009. A 10% depreciation in the
relative value of the Australian dollar compared to the
U.S. dollar would have resulted in lost income from
operations of approximately $0.1 million in fiscal 2010. We
have not historically engaged in hedging transactions and do not
currently contemplate engaging in hedging transactions to
mitigate foreign exchange risks. As we continue to recognize
gains and losses in foreign currency
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transactions, depending upon changes in future currency rates,
such gains or losses could have a significant, and potentially
adverse, effect on our results of operations.
The
operations of many of our suppliers are subject to additional
risks that are beyond our control and that could harm our
business, financial condition and results of
operations.
Almost all of our suppliers are located outside the United
States. During fiscal 2010, approximately 4% of our products
were produced in Canada, approximately 60% in China,
approximately 26% in South and South East Asia and the remainder
in the United States, Israel, Peru and Taiwan. As a result of
our international suppliers, we are subject to risks associated
with doing business abroad, including:
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political unrest, terrorism, labor disputes and economic
instability resulting in the disruption of trade from foreign
countries in which our products are manufactured;
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the imposition of new laws and regulations, including those
relating to labor conditions, quality and safety standards,
imports, duties, taxes and other charges on imports, as well as
trade restrictions and restrictions on currency exchange or the
transfer of funds;
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reduced protection for intellectual property rights, including
trademark protection, in some countries, particularly China;
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disruptions or delays in shipments; and
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changes in local economic conditions in countries where our
manufacturers, suppliers or customers are located.
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These and other factors beyond our control could interrupt our
suppliers production in offshore facilities, influence the
ability of our suppliers to export our products cost-effectively
or at all and inhibit our suppliers ability to procure
certain materials, any of which could harm our business,
financial condition and results of operations.
Our
ability to source our merchandise profitably or at all could be
hurt if new trade restrictions are imposed or existing trade
restrictions become more burdensome.
The United States and the countries in which our products are
produced or sold internationally have imposed and may impose
additional quotas, duties, tariffs, or other restrictions or
regulations, or may adversely adjust prevailing quota, duty or
tariff levels. For example, under the provisions of the World
Trade Organization, or the WTO, Agreement on Textiles and
Clothing, effective as of January 1, 2005, the United
States and other WTO member countries eliminated quotas on
textiles and apparel-related products from WTO member countries.
In 2005, Chinas exports into the United States surged as a
result of the eliminated quotas. In response to the perceived
disruption of the market, the United States imposed new quotas,
which remained in place through the end of 2008, on certain
categories of natural-fiber products that we import from China.
These quotas were lifted on January 1, 2009, but we have
expanded our relationships with suppliers outside of China,
which among other things has resulted in increased costs and
shipping times for some products. Countries impose, modify and
remove tariffs and other trade restrictions in response to a
diverse array of factors, including global and national economic
and political conditions, which make it impossible for us to
predict future developments regarding tariffs and other trade
restrictions. Trade restrictions, including tariffs, quotas,
embargoes, safeguards and customs restrictions, could increase
the cost or reduce the supply of products available to us or may
require us to modify our supply chain organization or other
current business practices, any of which could harm our
business, financial condition and results of operations.
We may
be subject to potential challenges relating to overtime pay and
other regulations that impact our employees, which could cause
our business, financial condition, results of operations or cash
flows to suffer.
Various labor laws, including U.S. federal, U.S. state
and Canadian provincial laws, among others, govern our
relationship with our employees and affect our operating costs.
These laws include minimum wage requirements, overtime pay,
unemployment tax rates, workers compensation rates and
citizenship requirements. These laws change frequently and may
be difficult to interpret and apply. In particular, as a
retailer, we may be subject to
20
challenges regarding the application of overtime and related pay
regulations to our employees. A determination that we do not
comply with these laws could harm our brand image, business,
financial condition and results of operation. Additional
government-imposed increases in minimum wages, overtime pay,
paid leaves of absence or mandated health benefits could also
cause our business, financial condition, results of operations
or cash flows to suffer.
Our
franchisees may take actions that could harm our business or
brand, and franchise regulations and contracts limit our ability
to terminate or replace under-performing
franchises.
As of January 30, 2011, we had four franchise stores in the
United States. Franchisees are independent business operators
and are not our employees, and we do not exercise control over
the
day-to-day
operations of their retail stores. We provide training and
support to franchisees, and set and monitor operational
standards, but the quality of franchise store operations may
decline due to diverse factors beyond our control. For example,
franchisees may not successfully operate stores in a manner
consistent with our standards and requirements, or may not hire
and train qualified employees, which could harm their sales and
as a result harm our results of operations or cause our brand
image to suffer.
Franchisees, as independent business operators, may from time to
time disagree with us and our strategies regarding the business
or our interpretation of our respective rights and obligations
under applicable franchise agreements. This may lead to disputes
with our franchisees, and we expect such disputes to occur from
time to time, such as the collection of royalty payments or
other matters related to the franchisees successful
operation of the retail store. Such disputes could divert the
attention of our management and our franchisees from our
operations, which could cause our business, financial condition,
results of operations or cash flows to suffer.
In addition, as a franchisor, we are subject to Canadian,
U.S. federal, U.S. state and international laws
regulating the offer and sale of franchises. These laws impose
registration and extensive disclosure requirements on the offer
and sale of franchises, frequently apply substantive standards
to the relationship between franchisor and franchisee and limit
the ability of a franchisor to terminate or refuse to renew a
franchise. We may therefore be required to retain an
under-performing franchise and may be unable to replace the
franchisee, which could harm our results of operations. We
cannot predict the nature and effect of any future legislation
or regulation on our franchise operations.
Our
failure or inability to protect our intellectual property rights
could diminish the value of our brand and weaken our competitive
position.
We currently rely on a combination of copyright, trademark,
trade dress and unfair competition laws, as well as
confidentiality procedures and licensing arrangements, to
establish and protect our intellectual property rights. We
cannot assure you that the steps taken by us to protect our
intellectual property rights will be adequate to prevent
infringement of such rights by others, including imitation of
our products and misappropriation of our brand. In addition,
intellectual property protection may be unavailable or limited
in some foreign countries where laws or law enforcement
practices may not protect our intellectual property rights as
fully as in the United States or Canada, and it may be more
difficult for us to successfully challenge the use of our
intellectual property rights by other parties in these
countries. If we fail to protect and maintain our intellectual
property rights, the value of our brand could be diminished and
our competitive position may suffer.
Our
trademarks and other proprietary rights could potentially
conflict with the rights of others and we may be prevented from
selling some of our products.
Our success depends in large part on our brand
image. We believe that our trademarks and other
proprietary rights have significant value and are important to
identifying and differentiating our products from those of our
competitors and creating and sustaining demand for our products.
We have obtained and applied for some United States and
foreign trademark registrations, and will continue to evaluate
the registration of additional trademarks as appropriate.
However, we cannot guarantee that any of our pending trademark
applications will be approved by the applicable governmental
authorities. Moreover, even if the applications are approved,
third parties may seek to oppose or otherwise challenge these
registrations. Additionally, we cannot assure you that obstacles
21
will not arise as we expand our product line and the geographic
scope of our sales and marketing. Third parties may assert
intellectual property claims against us, particularly as we
expand our business and the number of products we offer. Our
defense of any claim, regardless of its merit, could be
expensive and time consuming and could divert management
resources. Successful infringement claims against us could
result in significant monetary liability or prevent us from
selling some of our products. In addition, resolution of claims
may require us to redesign our products, license rights from
third parties or cease using those rights altogether. Any of
these events could harm our business and cause our results of
operations, liquidity and financial condition to suffer.
Failure
to maintain adequate financial and management processes and
controls could lead to errors in our financial reporting, which
could harm our business and cause a decline in our stock
price.
Ongoing reporting obligations as a public company and our
continued growth are likely to place a considerable strain on
our financial and management systems, processes and controls, as
well as on our personnel. In addition, as a public company we
are required to document and test our internal controls over
financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 so that our management can certify
the effectiveness of our internal controls and our independent
registered public accounting firm can render an opinion on our
internal control over financial reporting on an annual basis. As
a result, we have implemented the required financial and
managerial controls, reporting systems and procedures and we
incurred substantial expenses to test our systems and to make
additional improvements and to hire additional personnel. If our
management is unable to certify the effectiveness of our
internal controls or if our independent registered public
accounting firm cannot render an opinion on the effectiveness of
our internal control over financial reporting, or if material
weaknesses in our internal controls are identified, we could be
subject to regulatory scrutiny and a loss of public confidence,
which could harm our business and cause a decline in our stock
price. In addition, if we do not maintain adequate financial and
management personnel, processes and controls, we may not be able
to accurately report our financial performance on a timely
basis, which could cause a decline in our stock price and harm
our ability to raise capital. Failure to accurately report our
financial performance on a timely basis could also jeopardize
our continued listing on the Nasdaq Global Select Market, the
Toronto Stock Exchange or any other stock exchange on which our
common stock may be listed. Delisting of our common stock on any
exchange would reduce the liquidity of the market for our common
stock, which could reduce the price of our stock and increase
the volatility of our stock price.
Risks
Related to Our Common Stock
Our
stock price has been volatile and your investment in our common
stock could suffer a decline in value.
The market price of our common stock has been subject to
significant fluctuations and may continue to fluctuate or
decline. Since our initial public offering in July 2007 until
January 30, 2011, the closing price of our common stock has
ranged from a low of $4.49 to a high of $73.51 on the Nasdaq
Global Select Market and from a low of CDN $5.79 to a high of
CDN $74.71 on the Toronto Stock Exchange. Broad market and
industry factors may harm the price of our common stock,
regardless of our actual operating performance. Factors that
could cause fluctuation in the price of our common stock may
include, among other things:
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|
actual or anticipated fluctuations in quarterly operating
results or other operating metrics, such as comparable store
sales, that may be used by the investment community;
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|
|
changes in financial estimates by us or by any securities
analysts who might cover our stock;
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|
|
reductions in consumer spending and macroeconomic factors that
may adversely affect consumer spending;
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|
speculation about our business in the press or the investment
community;
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|
conditions or trends affecting our industry or the economy
generally, including fluctuations in foreign currency exchange
rates;
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|
stock market price and volume fluctuations of other publicly
traded companies and, in particular, those that are in the
technical athletic apparel industry;
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|
announcements by us or our competitors of new products,
significant acquisitions, strategic partnerships or divestitures;
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22
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changes in product mix between high and low margin products;
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capital commitments;
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|
our entry into new markets;
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|
timing of new store openings;
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|
percentage of sales from new stores versus established stores;
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|
additions or departures of key personnel;
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|
actual or anticipated sales of our common stock, including sales
by our directors, officers or significant stockholders;
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|
significant developments relating to our manufacturing,
distribution, joint venture or franchise relationships;
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|
customer purchases of new products from us and our competitors;
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|
investor perceptions of the apparel industry in general and our
company in particular;
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|
changes in accounting standards, policies, guidance,
interpretation or principles; and
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|
speculative trading of our common stock in the investment
community.
|
In the past, securities class action litigation has often been
instituted against companies following periods of volatility in
their stock price. This type of litigation, even if it does not
result in liability for us, could result in substantial costs to
us and divert managements attention and resources.
A
significant number of our outstanding shares are eligible for
resale and may be sold on the Nasdaq Global Select Market and
the Toronto Stock Exchange. The large number of shares eligible
for public sale could depress the market price of our common
stock.
The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the
market, and the perception that these sales could occur may also
depress the market price of our common stock. On July 31,
2008, we filed a registration statement on
Form S-3ASR
(as subsequently amended by a post-effective amendment on
Form S-3
filed on March 30, 2009) in the United States
registering the issuance of up to 20,935,041 shares of our
common stock upon the exchange of the then-outstanding
exchangeable shares of Lulu Canadian Holding, Inc. Additionally,
we filed a universal shelf registration statement on
Form S-3ASR
on July 6, 2010, registering the possible issuance
and/or
resale of shares of our common stock, preferred stock, debt
securities, warrants and units. Sales of our common stock in the
public market may make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem
appropriate. These sales also could cause our stock price to
fall and make it more difficult for you to sell shares of our
common stock.
Our
current directors and executive officers own a significant
percentage of our stock and will be able to exercise significant
influence over our affairs.
Our current directors and executive officers beneficially own
33% of our common stock. As a result, these stockholders, if
acting together, would be able to influence or control matters
requiring approval by our stockholders, including the election
of directors and the approval of mergers, acquisitions or other
extraordinary transactions. They may also have interests that
differ from yours and may vote in a way with which you disagree
and which may be adverse to your interests. This concentration
of ownership may have the effect of delaying, preventing or
deterring a change of control of our company, could deprive our
stockholders of an opportunity to receive a premium for their
common stock as part of a sale of our company and might
ultimately affect the market price of our common stock.
23
Anti-takeover
provisions of Delaware law and our certificate of incorporation
and bylaws could delay and discourage takeover attempts that
stockholders may consider to be favorable.
Certain provisions of our certificate of incorporation and
bylaws and applicable provisions of the Delaware General
Corporation Law may make it more difficult or impossible for a
third-party to acquire control of us or effect a change in our
board of directors and management. These provisions include:
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the classification of our board of directors into three classes,
with one class elected each year;
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prohibiting cumulative voting in the election of directors;
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|
the ability of our board of directors to issue preferred stock
without stockholder approval;
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|
the ability to remove a director only for cause and only with
the vote of the holders of at least
662/3%
of our voting stock;
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|
a special meeting of stockholders may only be called by our
chairman or Chief Executive Officer, or upon a resolution
adopted by an affirmative vote of a majority of the board of
directors, and not by our stockholders;
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|
prohibiting stockholder action by written consent; and
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|
our stockholders must comply with advance notice procedures in
order to nominate candidates for election to our board of
directors or to place stockholder proposals on the agenda for
consideration at any meeting of our stockholders.
|
In addition, we are governed by Section 203 of the Delaware
General Corporation Law which, subject to some specified
exceptions, prohibits business combinations between
a Delaware corporation and an interested
stockholder, which is generally defined as a stockholder
who becomes a beneficial owner of 15% or more of a Delaware
corporations voting stock, for a three-year period
following the date that the stockholder became an interested
stockholder. Section 203 could have the effect of delaying,
deferring or preventing a change in control that our
stockholders might consider to be in their best interests.
Our principal executive and administrative offices are located
at 1818 Cornwall Avenue, Vancouver, British Columbia, Canada,
V6J 1C7. We expect that our current administrative offices are
sufficient for our expansion plans for the foreseeable future.
In March 2011, we purchased the building that currently houses
our administrative offices. We currently operate two
distribution centers located in Vancouver, British Columbia and
Sumner, Washington, which together are capable of accommodating
our expansion plans through the foreseeable future.
The general location, use, approximate size and lease renewal
date of our properties, none of which we owned at
January 30, 2011, are set forth below:
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|
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|
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|
Approximate
|
|
|
Location
|
|
Use
|
|
Square Feet
|
|
Lease Renewal Date
|
|
Vancouver, BC
|
|
Executive and Administrative Offices
|
|
|
78,000
|
|
|
|
November 2015
|
|
Vancouver, BC
|
|
Former Executive and Administrative Offices
|
|
|
50,000
|
|
|
|
January 2014
|
|
Vancouver, BC
|
|
Distribution Center
|
|
|
102,000
|
|
|
|
November 2017
|
|
Sumner, WA
|
|
Distribution Center
|
|
|
82,000
|
|
|
|
April 2020
|
|
As of January 30, 2011, we leased approximately
376,000 gross square feet relating to our 133
corporate-owned stores. Our leases generally have initial terms
of between five and 10 years, and generally can be extended
only in five-year increments, if at all. All of our leases
require a fixed annual rent, and most require the payment of
additional rent if store sales exceed a negotiated amount.
Generally, our leases are net leases, which require
us to pay all of the cost of insurance, taxes, maintenance and
utilities. We generally cannot cancel these leases at our option.
24
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
On September 7, 2010, a former hourly employee filed a
class action lawsuit in the United States District Court For the
Northern District of Illinois, Eastern Division entitled Lydia
Brown v. lululemon athletica inc. The lawsuit alleges that
we require employees to work off the clock without
compensation. The plaintiff seeks on behalf of herself and other
putative class members back wages, interest, attorney fees and
costs, and equitable relief under the Fair Labor Standards Act
and the Illinois Wage Payment and Collection Act. On
February 24, 2011, the District Court granted our motion to
dismiss the plaintiffs claims in their entirety without
prejudice. The plaintiff was granted leave to file an amended
complaint on or before March 17, 2011. We continue to deny
the allegations and intend to vigorously defend the matter.
We are a party to various other legal proceedings arising in the
ordinary course of our business, but we are not currently a
party to any legal proceeding that management believes would
have a material adverse effect on our consolidated financial
position or results of operations.
25
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information and Dividends
Our common stock is quoted on the Nasdaq Global Select Market
under the symbol LULU and on the Toronto Stock
Exchange under the symbol LLL. The following table
sets forth, for the periods indicated, the high and low closing
sale prices of our common stock reported by the Nasdaq Global
Select Market for the last two fiscal years:
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Common Stock Price
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|
(Nasdaq Global Select
|
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|
Market)
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High
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|
Low
|
|
Fiscal Year Ending January 30, 2011
|
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|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
73.51
|
|
|
$
|
44.63
|
|
Third Quarter
|
|
$
|
47.48
|
|
|
$
|
31.90
|
|
Second Quarter
|
|
$
|
45.58
|
|
|
$
|
35.82
|
|
First Quarter
|
|
$
|
45.07
|
|
|
$
|
26.27
|
|
Fiscal Year Ending January 31, 2010
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
32.50
|
|
|
$
|
24.69
|
|
Third Quarter
|
|
$
|
27.90
|
|
|
$
|
18.57
|
|
Second Quarter
|
|
$
|
17.72
|
|
|
$
|
11.30
|
|
First Quarter
|
|
$
|
14.47
|
|
|
$
|
4.49
|
|
As of January 30, 2011, there were approximately 140
holders of record of our common stock.
We have never declared or paid any cash dividends on our common
stock and do not anticipate paying any cash dividends on our
common stock in the foreseeable future. We anticipate that we
will retain all of our available funds for use in the operation
and expansion of our business. Any future determination as to
the payment of cash dividends will be at the discretion of our
board of directors and will depend on our financial condition,
operating results, current and anticipated cash needs, plans for
expansion and other factors that our board of directors
considers to be relevant. In addition, financial and other
covenants in any instruments or agreements that we enter into in
the future may restrict our ability to pay cash dividends on our
common stock.
Stock
Performance Graph
The graph set forth below compares the cumulative total
stockholder return on our common stock between July 27,
2007 (the date of our initial public offering) and
January 30, 2011, with the cumulative total return of
(i) the S&P 500 Index and (ii) S&P Retail
Index, over the same period. This graph assumes the investment
of $100 on July 27, 2007 in our common stock, the S&P
500 Index and the S&P Retail Index and assumes the
reinvestment of dividends, if any. The graph assumes the initial
value of our common stock on July 27, 2007 was the closing
sale price of $28.00 per share.
26
The comparisons shown in the graph below are based on historical
data. We caution that the stock price performance showing in the
graph below is not necessarily indicative of, nor is it intended
to forecast, the potential future performance of our common
stock. Information used in the graph was obtained from the
Nasdaq Stock Market website, a source believed to be reliable,
but we are not responsible for any errors or omissions in such
information.
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27-Jul-07
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|
3-Feb-08
|
|
1-Feb-09
|
|
31-Jan-10
|
|
30-Jan-11
|
lululemon athletica inc
|
|
$
|
100.00
|
|
|
$
|
124.64
|
|
|
$
|
24.29
|
|
|
$
|
100.86
|
|
|
$
|
245.04
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
95.65
|
|
|
$
|
56.61
|
|
|
$
|
73.61
|
|
|
$
|
87.48
|
|
S&P Retail Index
|
|
$
|
100.00
|
|
|
$
|
87.67
|
|
|
$
|
53.70
|
|
|
$
|
82.13
|
|
|
$
|
103.04
|
|
Issuer
Purchase of Equity Securities
The following table provides information regarding our Employee
Share Purchase Plan (ESPP) repurchases of our common stock
during the thirteen week period ended January 30, 2011:
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
May Yet Be
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
the Plans
|
|
Period(1)
|
|
Purchased
|
|
|
per Share
|
|
|
or Programs(2)
|
|
|
or Programs(2)
|
|
|
November 1, 2010 November 28, 2010
|
|
|
2,562
|
|
|
$
|
52.69
|
|
|
|
2,562
|
|
|
|
2,841,113
|
|
November 29, 2010 January 2, 2011
|
|
|
2,264
|
|
|
|
68.80
|
|
|
|
2,264
|
|
|
|
2,838,849
|
|
January 3, 2011 January 30, 2011
|
|
|
2,424
|
|
|
|
68.19
|
|
|
|
2,424
|
|
|
|
2,836,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,250
|
|
|
|
|
|
|
|
7,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Monthly information is presented by reference to our fiscal
months during our fourth quarter of fiscal 2010. |
|
(2) |
|
Our ESPP was approved by our Board of Directors and stockholders
in September 2007. All shares purchased under the ESPP will be
purchased on the Toronto Stock Exchange or the Nasdaq Global
Select Market (or such other stock exchange as we may designate
from time to time). Unless our Board of Directors terminates the
ESPP earlier, the ESPP will continue until all shares authorized
for purchase under the ESPP have been purchased. The maximum
number of shares available for issuance under the ESPP is
3,000,000. |
27
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The selected consolidated financial data set forth below are
derived from our consolidated financial statements and should be
read in conjunction with our consolidated financial statements
and the related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this
Form 10-K.
The consolidated statement of operations data for each of the
years ended January 30, 2011, January 31, 2010,
February 1, 2009 and February 3, 2008 and the
consolidated balance sheet data as of January 30, 2011,
January 31, 2010, February 1, 2009 and
February 3, 2008 are derived from, and qualified by
reference to, our audited consolidated financial statements and
related notes appearing elsewhere in this Annual Report. The
consolidated statement of operations data for the fiscal year
ended January 31, 2007 and the consolidated balance sheet
data as of January 31, 2007 are derived from our underlying
accounting records. The consolidated statements of income for
the fiscal year ended January 31, 2007 and balance sheet
for the fiscal year ended January 31, 2007 have been
prepared on the same basis as our audited consolidated financial
statements and, in the opinion of management, contain all
adjustments necessary to fairly present the information set
forth below.
We completed a corporate reorganization on July 26, 2007.
The financial data below reflects our operations as if the
reorganization had occurred prior to the first period presented.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
711,704
|
|
|
$
|
452,898
|
|
|
$
|
353,488
|
|
|
$
|
269,942
|
|
|
$
|
147,964
|
|
Cost of goods sold
|
|
|
316,757
|
|
|
|
229,812
|
|
|
|
174,421
|
|
|
|
125,015
|
|
|
|
72,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
394,947
|
|
|
|
223,086
|
|
|
|
179,067
|
|
|
|
144,927
|
|
|
|
75,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
212,784
|
|
|
|
136,161
|
|
|
|
118,098
|
|
|
|
93,376
|
|
|
|
51,863
|
|
Provision for impairment and lease exit costs
|
|
|
1,772
|
|
|
|
379
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
180,391
|
|
|
|
86,546
|
|
|
|
56,564
|
|
|
|
51,551
|
|
|
|
16,624
|
|
Other income (expense), net
|
|
|
2,886
|
|
|
|
164
|
|
|
|
821
|
|
|
|
1,029
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
183,277
|
|
|
|
86,710
|
|
|
|
57,385
|
|
|
|
52,580
|
|
|
|
16,728
|
|
Provision for income taxes
|
|
|
61,080
|
|
|
|
28,429
|
|
|
|
16,884
|
|
|
|
20,464
|
|
|
|
8,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
122,197
|
|
|
|
58,281
|
|
|
|
40,501
|
|
|
|
32,116
|
|
|
|
7,976
|
|
Net income attributable to non-controlling interest
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
(1,273
|
)
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to lululemon athletica inc.
|
|
$
|
121,847
|
|
|
$
|
58,281
|
|
|
$
|
39,363
|
|
|
$
|
30,843
|
|
|
$
|
7,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.72
|
|
|
$
|
0.83
|
|
|
$
|
0.59
|
|
|
$
|
0.48
|
|
|
$
|
0.12
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic earnings per share
|
|
$
|
1.72
|
|
|
$
|
0.83
|
|
|
$
|
0.57
|
|
|
$
|
0.46
|
|
|
$
|
0.12
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.69
|
|
|
$
|
0.82
|
|
|
$
|
0.57
|
|
|
$
|
0.47
|
|
|
$
|
0.12
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net diluted earnings per share
|
|
$
|
1.69
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
$
|
0.45
|
|
|
$
|
0.12
|
|
Basic weighted-average number of shares outstanding
|
|
|
70,860
|
|
|
|
70,251
|
|
|
|
68,711
|
|
|
|
66,430
|
|
|
|
65,157
|
|
Diluted weighted-average number of shares outstanding
|
|
|
71,929
|
|
|
|
70,949
|
|
|
|
70,942
|
|
|
|
69,298
|
|
|
|
65,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
316,286
|
|
|
$
|
159,573
|
|
|
$
|
56,797
|
|
|
$
|
52,545
|
|
|
$
|
15,494
|
|
Total assets
|
|
|
499,302
|
|
|
|
307,258
|
|
|
|
211,636
|
|
|
|
155,092
|
|
|
|
71,325
|
|
Total stockholders equity
|
|
|
394,293
|
|
|
|
233,108
|
|
|
|
154,843
|
|
|
|
112,034
|
|
|
|
37,379
|
|
Non-controlling interest
|
|
|
3,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This discussion summarizes our consolidated operating results,
financial condition and liquidity during the three-year period
ending January 30, 2011. Our fiscal year ends on the Sunday
closest to January 31 of the following year, typically resulting
in a 52 week year, but occasionally giving rise to an
additional week, resulting in a 53 week year. Fiscal 2010,
2009 and 2008 ended on January 30, 2011, January 31,
2010 and February 1, 2009, respectively. The following
discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included
elsewhere in this Annual Report on
Form 10-K.
This discussion and analysis contains forward-looking statements
based on current expectations that involve risks, uncertainties
and assumptions, such as our plans, objectives, expectations and
intentions set forth in the Special Note Regarding
Forward-Looking Statements. Our actual results and the
timing of events may differ materially from those anticipated in
these forward looking statements as a result of various factors,
including those set forth in the Item 1A
Risk Factors section and elsewhere in this Annual Report
on
Form 10-K.
Overview
Our results for fiscal 2010 demonstrate the ongoing success of
our efforts to overcome the instability in the economy for the
last two fiscal years. In fiscal 2010, we committed to investing
in our stores and our people, making infrastructure enhancements
and funding working capital requirements, while remaining
conscious of our discretionary spending. These expenditures were
designed to position our business for long-term profitable
growth and protect our brand integrity. We continually assess
the economic environment and market conditions when making
decisions regarding timing of our investments.
These strong efforts to execute our strategic plan are reflected
in our comparable stores net revenue growth, which leveraged our
fixed operating costs and in turn led to higher income from
operations. We believe that our brand is recognized as premium
in our offerings of run and yoga assortment, as well as a leader
in technical fabrics and quality construction. This has made our
product desirable to our consumers and has driven demand.
Throughout fiscal 2010, we were able to grow our
e-commerce
website which has further increased our brand awareness and has
made our product available in new markets, including those
outside of North America. This sales channel offers product
assortment with a higher margin than our other segments. We also
increased our store base through execution of our real estate
strategy, when and where we saw opportunities for success. For
example, we opened 23 net new corporate-owned stores and
39 net new showrooms in North America and Australia since
fiscal 2009, including reacquired franchises. We believe our
strong cash flow generation, solid balance sheet and healthy
liquidity provide us with the financial flexibility to continue
executing the initiatives which we believe will be beneficial
for the Company.
In fiscal 2011, we will continue to focus on the execution of
our strategic plan. Where we have found opportunities for growth
through opening showrooms, or other community presence efforts,
we will expand our store base and therefore our business. 12 to
15 of our planned store openings in fiscal 2011 will be in
markets seeded by showrooms in fiscal 2010. Continuing increases
in traffic and conversion rates on our
e-commerce
website lead us to believe that there is potential for our
direct to consumer segment to become an increasingly substantial
part of our business and we continue to commit a portion of our
resources to further developing this channel. Further, we see
our
e-commerce
website as an opportunity to increase our brand awareness in
international markets.
Operating
Segment Overview
lululemon is a designer and retailer of technical athletic
apparel operating primarily in North America and Australia. Our
yoga-inspired apparel is primarily marketed under the lululemon
athletica and ivivva athletica brand names. We offer a
comprehensive line of apparel and accessories including fitness
pants, shorts, tops and jackets designed for athletic pursuits
such as yoga, running and general fitness, and dance-inspired
apparel for female youth. As of January 30, 2011, our
branded apparel was principally sold through 137 corporate-owned
and franchise stores that are primarily located in Canada, the
United States, and Australia and via our
e-commerce
website through our direct to consumer sales channel. We believe
our vertical retail strategy allows us to interact more directly
with and gain insights from our customers while providing us
with greater control of our brand. In fiscal
29
2010, 52% of our net revenue was derived from sales of our
products in Canada, 46% of our net revenue was derived from the
sales of our products in the United States and 2% of our net
revenue was derived from sales of our products outside of North
America. In fiscal 2009, 60% of our net revenue was derived from
sales of our products in Canada, 40% of our net revenue was
derived from the sales of our products in the United States and
an immaterial amount of our net revenue was derived from sales
of our products outside of North America. In fiscal 2008, 69% of
our net revenue was derived from sales of our products in
Canada, 31% of our net revenue was derived from the sales of our
products in the United States and an immaterial amount of our
net revenue was derived from sales of our products outside of
North America.
Our net revenue increased from $40.7 million in fiscal 2004
to $711.7 million in fiscal 2010 representing a 61%
compound annual growth rate. Our net revenue from continuing
operations also increased from $452.9 million in fiscal
2009 to $711.7 million in fiscal 2010, representing a 57%
increase. Our increase in net revenue from fiscal 2004 to fiscal
2010 resulted from the net addition of 23 retail locations in
fiscal 2010, seven retail locations and our
e-commerce
sales channel in fiscal 2009, 35 retail locations in fiscal
2008, 31 retail locations in fiscal 2007, 14 retail locations in
fiscal 2006 and 17 retail locations in fiscal 2005, including
reacquired franchises, and comparable store sales growth of 37%,
9%, 0%, 34% and 25% in fiscal 2010, fiscal 2009, fiscal 2008,
fiscal 2007 and fiscal 2006, respectively. Our ability to open
new stores and grow sales in existing stores has been driven by
increasing demand for our technical athletic apparel and a
growing recognition of the lululemon athletica brand. We believe
our superior products, strategic store locations, inviting store
environment, grassroots marketing approach and distinctive
corporate culture are responsible for our strong financial
performance.
We have three reportable segments: corporate-owned stores,
direct to consumer and other. We report our segments based on
the financial information we use in managing our businesses.
While we receive financial information for each corporate-owned
store, we have aggregated all of the corporate-owned stores into
one reportable segment due to the similarities in the economic
and other characteristics of these stores. Our direct to
consumer segment accounted for 8% of our net revenues from
continuing operations in fiscal 2010, 4% in fiscal 2009 and 1%
in fiscal 2008. Our other segment, consisting of franchise
sales, wholesale accounts, sales from company-operated
showrooms, warehouse sales and outlets, each accounted for less
than 10% of our net revenues from continuing operations in each
of fiscal 2010, fiscal 2009 and fiscal 2008. We previously
reported our franchise channel as an operating segment; however,
opening new franchise stores is not part of our near-term store
growth strategy, and as such we expect net revenue from our
franchise stores to continue to decrease, including as a
percentage of total net revenue, in future years.
As of January 30, 2011, we sold our products through 133
corporate-owned stores located in Canada, the United States and
Australia. We plan to increase our net revenue in North America
and Australia by opening additional corporate-owned stores in
new and existing markets. Corporate-owned stores accounted for
83% of total net revenue in fiscal 2010, 87% of total net
revenue in fiscal 2009 and 89% of total net revenue in fiscal
2008.
As of January 30, 2011, our direct to consumer segment
included our
e-commerce
and phone sales channels.
E-commerce
sales are taken directly from retail customers through
www.lululemon.com. Phone sales are taken directly
from retail customers through our call center. Our direct to
consumer segment is an increasingly substantial part of our
growth strategy, and we therefore expect the revenue derived
from our direct to consumer sales to comprise more than 10% of
the net revenue we report in future fiscal years.
In addition to deriving revenue from sales through our
corporate-owned stores and direct to consumer, we also derive
other net revenue, which includes wholesale customers, as well
as franchise sales, warehouse sales and sales through a number
of company-operated showrooms. Wholesale customers include
select premium yoga studios, health clubs and fitness centers.
Franchise sales include inventory sales and royalties related to
our four franchise stores located in the United States.
Warehouse sales are typically held one or more times a year to
sell slow moving inventory or inventory from prior seasons to
retail customers at discounted prices. Our showrooms are
typically small locations that we open from time to time when we
enter new markets and feature a limited selection of our product
offering during select hours. Other net revenue accounted for 9%
of total revenue in fiscal 2010, 9% of total net revenue in
fiscal 2009 and 10% of total net revenue in fiscal 2008.
We believe that our athletic apparel has and will continue to
appeal to consumers outside of North America who value its
technical attributes as well as its function and style. In 2004,
we opened our first store in Australia
30
which was operated under a franchise license. In fiscal 2008 we
made a 13% equity investment in lululemon athletica australia
Pty, our franchise operator. During fiscal 2010 we increased our
investment to 80% which has provided us control over lululemon
athletica australia Pty. In fiscal 2008, we opened a
company-operated showroom in Hong Kong.
In the past, we have entered into franchise agreements to
distribute lululemon athletica branded products to more quickly
disseminate our brand name and increase our net revenue and net
income. In exchange for the use of our brand name and the
ability to operate lululemon athletica stores in certain
regions, our franchisees generally pay us a one-time franchise
fee and ongoing royalties based on their gross revenue.
Additionally, unless otherwise approved by us, our franchisees
are required to sell only lululemon athletica branded products,
which are purchased from us at a discount to the suggested
retail price. Pursuing new franchise partnerships or opening new
franchise stores is not part of our near-term store growth
strategy. In some cases, we may exercise our contractual rights
to purchase franchises where it is attractive to us.
Basis of
Presentation
Net revenue is comprised of:
|
|
|
|
|
corporate-owned store net revenue, which includes sales to
customers through corporate-owned stores in North America and
Australia;
|
|
|
|
direct to consumer revenue, which includes sales from our
e-commerce
website and phone sales; and
|
|
|
|
other net revenue, which includes wholesale accounts, franchises
net revenue, which consists of royalties as well as sales of our
products to franchises, warehouse sales, outlets and sales from
company-operated showrooms.
|
in each case, net of an estimated allowance for sales returns
and discounts.
In addition, we separately track comparable store sales, which
reflect net revenue at corporate-owned stores that have been
open for at least 12 months. Therefore, net revenue from a
store is included in comparable store sales beginning with the
first month for which the store has a full month of comparable
prior year sales. Non-comparable store sales include sales from
new stores that have not been open or otherwise not operated by
us for 12 months or from stores which have been
significantly remodeled or relocated. Also included in
non-comparable stores sales are sales from direct to consumer
sales, wholesale, franchises, warehouse sales and showrooms, and
sales from corporate-owned stores which we have closed.
By measuring the change in
year-over-year
net revenue in stores that have been open for 12 months or
more, comparable store sales allows us to evaluate how our core
store base is performing. Various factors affect comparable
store sales, including:
|
|
|
|
|
the location of new stores relative to existing stores;
|
|
|
|
consumer preferences, buying trends and overall economic trends;
|
|
|
|
our ability to anticipate and respond effectively to customer
preferences for technical athletic apparel;
|
|
|
|
competition;
|
|
|
|
changes in our merchandise mix;
|
|
|
|
pricing;
|
|
|
|
the timing of our releases of new merchandise and promotional
events;
|
|
|
|
the effectiveness of our grassroots marketing efforts;
|
|
|
|
the level of customer service that we provide in our stores;
|
|
|
|
our ability to source and distribute products
efficiently; and
|
|
|
|
the number of stores we open, close (including for temporary
renovations) and expand in any period.
|
31
Opening new stores is an important part of our growth strategy.
Accordingly, comparable store sales has limited utility for
assessing the success of our growth strategy insofar as
comparable store sales do not reflect the performance of stores
open less than 12 months.
Cost of goods sold includes:
|
|
|
|
|
the cost of purchased merchandise, inbound freight, duty and
non-refundable taxes incurred in delivering goods to our
distribution centers;
|
|
|
|
the cost of our distribution centers (such as labor, rent and
utilities) and the depreciation and amortization related to our
distribution centers;
|
|
|
|
the cost of our production, merchandise and design departments
including salaries, stock-based compensation and benefits, and
operating expenses;
|
|
|
|
the cost of occupancy related to store operations (such as rent
and utilities) and the depreciation and amortization related to
store-level capital expenditures;
|
|
|
|
hemming; and
|
|
|
|
shrink and valuation reserves.
|
Cost of goods sold also may change as we open or close stores
because of the resulting change in related occupancy costs. The
primary drivers of the costs of individual goods are the costs
of raw materials and labor in the countries where we source our
merchandise.
Selling, general and administrative expenses consist of
all operating costs not otherwise included in cost of goods sold
and provision for impairment and lease exit costs. Our selling,
general and administrative expenses include marketing costs,
accounting costs, information technology costs, human resource
costs, professional fees, corporate facility costs, corporate
and store-level payroll and benefits expenses, stock-based
compensation and occupancy, depreciation and amortization
expense for all assets other than depreciation and amortization
expenses related to store-level capital expenditures and our
distribution centers, each of which are included in cost of
goods sold. We anticipate that our selling, general and
administrative expenses will increase in absolute dollars due to
anticipated continued growth of our corporate support staff and
store-level employees.
Provision for impairment and lease exit costs consists of
asset impairments, lease exit and other related costs associated
with the relocation of our administrative offices and the
closure of one Canadian corporate-owned store in fiscal 2010, as
well as managements evaluation of corporate-owned
locations. Also included in prior years, are one US
corporate-owned store in the first quarter of fiscal 2009 and
one US corporate-owned store in the fourth quarter of fiscal
2008 as well as an asset impairment provision based on
managements ongoing evaluation of its portfolio of
corporate-owned store locations. Long-lived assets are reviewed
at the store-level periodically for impairment or whenever
events or changes in circumstances indicate that full
recoverability of net assets through future cash flows is in
question. Factors used in the evaluation include, but are not
limited to, managements plans for future operations,
recent operating results and projected cash flows.
Stock-based compensation expense includes charges
incurred in recognition of compensation expense associated with
grants of stock options, performance stock units and restricted
stock units. We recognize stock-based compensation expense for
both awards granted by us and awards granted under a stockholder
sponsored plan. Stock-based compensation expense is measured at
the grant date, based on the fair value of the award and is
recognized as an expense over the requisite service period.
We record our stock-based compensation expense in cost of goods
sold and selling, general and administrative expenses as
stock-based awards have been made to employees whose salaries
are classified in both expense categories.
Other income (expense), net includes interest earned on
our cash balances and our advances to franchise, interest costs
associated with our credit facilities and with letters of credit
drawn under these facilities for the purchase of merchandise and
our share of the operations of our investment in lululemon
athletica australia PTY, including the remeasurement of our
investment immediately before obtaining control of the business.
We expect to
32
continue to generate interest income to the extent that our cash
generated from operations exceeds our cash used for investment.
We have maintained relatively small outstanding balances on our
credit facilities and expect to continue to do so.
Provision for income taxes depends on the statutory tax
rates in the countries where we sell our products. Historically
we have generated taxable income in Canada and we have generated
tax losses in the United States. For periods up to and including
the second quarter of fiscal 2007, we recorded a full valuation
allowance against our losses in the United States. In the third
and fourth quarters of fiscal 2007, we earned taxable income in
the United States. During the second quarter of fiscal 2008,
after considering a number of factors, including recent taxable
income, utilization of previously unrealized net operating
losses, or NOLs, our growth strategy as well as other business
and macroeconomic factors, we determined that we would more
likely than not realize the benefit of deferred tax assets
through future taxable income. We have recorded deferred tax
assets in respect of foreign tax credits and other deductible
temporary differences of $7.9 million as at
January 30, 2011.
Several factors have contributed to our effective tax rate
fluctuating in recent periods. First, in fiscal 2008 and fiscal
2007, we generated losses in the United States which we were
unable to offset against our income in Canada. Second, we
incurred stock-based compensation expense of $7.3 million,
$5.6 million and $6.5 million in fiscal 2010, fiscal
2009 and fiscal 2008, respectively, a portion of which were not
deductible for tax purposes in Canada and the United States
during these periods. Third, the Canadian corporate tax rate
decreased from 35% to 32% in fiscal 2008. Fourth, in fiscal 2008
we began to release the valuation against US loss carry
forwards. Our effective tax rate in fiscal 2010 was 33%,
compared to 33% in fiscal 2009 and 29% in fiscal 2008.
We anticipate that in the future we may start to sell our
products directly to some customers located outside of Canada,
the United States and Australia, in which case we would become
subject to taxation based on the foreign statutory rates in the
countries where these sales take place and our effective tax
rate could fluctuate accordingly.
Results
of Operations
The following tables summarize key components of our results of
operations for the periods indicated, both in dollars and as a
percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
711,704
|
|
|
$
|
452,898
|
|
|
$
|
353,488
|
|
Cost of goods sold
|
|
|
316,757
|
|
|
|
229,812
|
|
|
|
174,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
394,947
|
|
|
|
223,086
|
|
|
|
179,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
212,784
|
|
|
|
136,161
|
|
|
|
118,098
|
|
Provision for impairment and lease exit costs
|
|
|
1,772
|
|
|
|
379
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
180,391
|
|
|
|
86,546
|
|
|
|
56,564
|
|
Other income (expense), net
|
|
|
2,886
|
|
|
|
164
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
183,277
|
|
|
|
86,710
|
|
|
|
57,385
|
|
Provision for income taxes
|
|
|
61,080
|
|
|
|
28,429
|
|
|
|
16,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
122,197
|
|
|
|
58,281
|
|
|
|
40,501
|
|
Net income attributable to non-controlling interest
|
|
|
350
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to lululemon athletica inc.
|
|
$
|
121,847
|
|
|
$
|
58,281
|
|
|
$
|
39,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(% of net revenue)}
|
|
|
Net revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
44.5
|
|
|
|
50.7
|
|
|
|
49.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
55.5
|
|
|
|
49.3
|
|
|
|
50.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
29.9
|
|
|
|
30.1
|
|
|
|
33.5
|
|
Provision for impairment and lease exit costs
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
25.4
|
|
|
|
19.1
|
|
|
|
16.0
|
|
Other income (expense), net
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
25.8
|
|
|
|
19.2
|
|
|
|
16.2
|
|
Provision for income taxes
|
|
|
8.6
|
|
|
|
6.3
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
17.2
|
|
|
|
12.9
|
|
|
|
11.4
|
|
Net income attributable to non-controlling interest
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to lululemon athletica inc
|
|
|
17.1
|
|
|
|
12.9
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal 2010 to Fiscal 2009
Net
Revenue
Net revenue increased $258.8 million, or 57%, to
$711.7 million in fiscal 2010 from $452.9 million for
in fiscal 2009. Assuming the average exchange rate between the
Canadian and United States dollars in fiscal 2009 remained
constant, our net revenue would have increased
$229.6 million, or 51%, in fiscal 2010.
The net revenue increase was driven by increased sales at
locations in our comparable stores base, sales from new stores
and showrooms opened, sales from franchised stores that were
reacquired during fiscal 2010 and the growth of our
e-commerce
website sales included in our direct to consumer segment. The
constant dollar increase in comparable store sales was driven
primarily by the strength of our existing product lines, the
successful introduction of new products and increasing
recognition of the lululemon athletica brand name, especially at
our U.S. stores.
Our net revenue on a segment basis for fiscal 2010 and fiscal
2009 are expressed in dollar amounts as well as relevant
percentages, presented as a percentage of total net revenue
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 30, 2011 and
|
|
|
|
January 31, 2010
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
(Percentages)
|
|
|
Corporate-owned stores
|
|
$
|
591,031
|
|
|
$
|
393,451
|
|
|
|
83.0
|
|
|
|
86.9
|
|
Direct to consumer
|
|
|
57,348
|
|
|
|
18,257
|
|
|
|
8.1
|
|
|
|
4.0
|
|
Other
|
|
|
63,325
|
|
|
|
41,190
|
|
|
|
8.9
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
711,704
|
|
|
$
|
452,898
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $197.6 million, or
50%, to $591.0 million in fiscal 2010 from
$393.5 million in fiscal 2009. The following contributed to
the $197.6 million increase in net revenue from our
corporate-owned stores segment:
|
|
|
|
|
Comparable store sales increase of 37% in fiscal 2010 resulted
in a $136.1 million increase to net revenue, including the
effect of foreign currency fluctuations. Excluding the effect of
foreign currency fluctuations, comparable store sales increased
30%, or $112.2 million, in fiscal 2010;
|
|
|
|
Net revenue from corporate-owned stores we opened during fiscal
2010, and during fiscal 2009 prior to sales from such stores
becoming part of our comparable stores base, contributed
$42.3 million of the increase. Net new store openings in
fiscal 2010 included 12 stores in the United States and two in
Australia; and
|
34
|
|
|
|
|
The acquisition of one Canadian and nine Australian franchise
stores in fiscal 2010 contributed $20.4 million of the
increase.
|
The increase was partially offset by a decrease in net revenue
related to gift card breakage. In fiscal 2009 we recorded a
one-time credit of $1.3 million related to a change in our
estimated rate of redemption.
Direct to Consumer. Net revenue from our
direct to consumer segment increased $39.1 million, or
214%, to $57.3 million in fiscal 2010 from
$18.3 million in fiscal 2009. The increase in net revenue
from our direct to consumer segment was a result of increasing
traffic and conversion rates on our
e-commerce
website since it launched near the beginning of fiscal 2009.
Prior to the launch of our
e-commerce
website, our direct to consumer segment consisted only of phone
sales, and ultimately resulted in an increased gross profit.
Other. Net revenue from our other segment
increased $22.1 million, or 54%, to $63.3 million in
fiscal 2010 from $41.2 million in fiscal 2009. There were
increases in net revenues across most of our sales channels
included in our other segment: wholesale, showrooms, warehouse
sales and outlets. Net revenues from our franchise channel
decreased due to our reacquisition of one franchised store in
Canada and nine franchised stores in Australia. Our other
segment continues to grow year over year through new showroom
locations, new wholesale partners and net revenue growth at
existing locations attributable to a strong product offering and
brand interest. We continue to employ our other segment strategy
to increase interest in our product in markets we have not
otherwise entered with corporate-owned stores.
Gross
Profit
Gross profit increased 171.9 million, or 77%, to
394.9 million in fiscal 2010 from $223.1 million in
fiscal 2009. The increase in gross profit was driven principally
by increased net revenues as well as a strengthening Canadian
dollar relative to the U.S. dollar, which improved product
margin in all of our operating segments, and ultimately resulted
in an increased gross profit.
The increase in gross profit was partially offset by increases
in fixed costs, such as occupancy costs and depreciation, as
well as increased costs related to our design, production,
distribution and merchandising departments.
Gross profit, as a percentage of net revenue, or gross margin,
increased 620 basis points, to 55.5% in fiscal 2010 from
49.3% in fiscal 2009. The increase in gross margin resulted
primarily from:
|
|
|
|
|
a decrease in fixed costs, such as occupancy costs and
depreciation, relative to the increase in net revenue, which had
a leveraging effect on gross margin and contributed to an
increase in gross margin of 250 basis points;
|
|
|
|
an increase in product margins in corporate-owned stores, direct
to consumer and other segments, which contributed to an increase
in gross margin of 180 basis points primarily as a result
of improved product costing on our spring, summer, and fall
assortment of merchandise and a higher proportion of total sales
coming from our direct to consumer segment;
|
|
|
|
an improvement in the Canadian dollar, relative to the
U.S. dollar, decreased foreign exchange impacts on product
costs and contributed to an increase in gross margin of
140 basis points; and
|
|
|
|
a decrease in costs related to design, production, distribution
and merchandising, relative to the increase in net revenue,
which had a leveraging effect on gross margin and contributed to
an increase in gross margin of 50 basis points.
|
Our costs of goods sold in fiscal 2010 and fiscal 2009 included
$1.4 million and $0.8 million, respectively, of
stock-based compensation expense.
35
Selling,
General and Administrative Expenses
Selling, general and administrative expenses, including
provision for impairment and lease exit costs, increased
$78.0 million, or 57%, to $214.6 million in fiscal
2010 from $136.5 million in fiscal 2009. The
$78.0 million increase in selling, general and
administrative expenses was principally comprised of:
|
|
|
|
|
an increase in employee costs of $24.8 million as we
experience natural growth in labor hours associated with new
corporate-owned stores, showrooms, outlets and other, and growth
at existing locations;
|
|
|
|
an increase in variable administrative costs of
$18.4 million related to our direct to consumer segment,
primarily associated with revenue growth in our
e-commerce
website sales channel;
|
|
|
|
an increase in other costs, including occupancy costs,
depreciation, distribution and provision for impairment and
lease exist costs not included in cost of goods sold, of
$14.5 million as a result of the expansion of our business;
|
|
|
|
an increase in head office employee costs, including stock-based
compensation expense and management incentive-based
compensation, of $9.6 million incurred in order to position
us for long-term growth;
|
|
|
|
an increase in administrative costs of $6.5 million related
to our Australian business, in which we increased our investment
significantly in the second quarter of fiscal 2010, which we now
report on a consolidated basis;
|
|
|
|
an increase in marketing efforts, including initiatives
associated with the Olympic games, of $3.3 million to
increase our brand awareness in both new and existing
markets; and
|
|
|
|
an increase in professional fees of $0.9 million which
includes consulting fees for recruiting, store development and
information systems, legal fees associated with reacquisition of
franchise rights, and employment matters.
|
As a percentage of net revenue, selling, general and
administrative expenses were 30.1% in both fiscal 2010 and
fiscal 2009.
We expect selling, general and administrative expenses to
increase throughout fiscal 2011 as we add administrative and
sales personnel and increase our infrastructure to support the
growth in our store base and invest in our
e-commerce
channel.
Our selling, general and administrative expenses in fiscal 2010
and fiscal 2009 included $5.9 million and
$4.8 million, respectively, of stock-based compensation
expense.
Income
from Operations
Income from operations increased $93.8 million, or 108%, to
$180.4 million in fiscal 2010 from $86.5 million in
fiscal 2009. The increase of $93.8 million in income from
operations for fiscal 2010 was primarily due to a
$171.9 million increase in gross profit resulting from
sales growth at existing and additional corporate-owned stores
opened during fiscal 2010 and increasing traffic on our
e-commerce
website, offset by an increase of $78.0 million in selling,
general and administrative expenses including provision for
impairment and lease exit costs.
On a segment basis, we determine income from operations without
taking into account our general corporate expenses such as
corporate employee costs, travel expenses and corporate rent.
For purposes of our managements analysis of our financial
results, we have allocated some general product expenses to our
corporate-owned stores segment. For example, all expenses
related to our production, design, merchandise and distribution
departments have been allocated to this segment.
36
Income from operations (before general corporate expenses) for
fiscal 2010 and fiscal 2009 are expressed in dollar amounts as
well as percentages, presented as a percentage of net revenue of
their respective operating segments below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 30, 2011 and January 31,
2010
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
(Percentages)
|
|
|
Corporate-owned stores
|
|
$
|
215,154
|
|
|
$
|
121,614
|
|
|
|
36.4
|
|
|
|
30.9
|
|
Direct to consumer
|
|
|
16,364
|
|
|
|
6,288
|
|
|
|
28.5
|
|
|
|
34.4
|
|
Other
|
|
|
18,004
|
|
|
|
10,845
|
|
|
|
28.4
|
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before general corporate expense
|
|
$
|
249,522
|
|
|
$
|
138,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net income from our
corporate-owned stores segment increased $93.5 million, or
77%, to $215.2 million for fiscal 2010 from
$121.6 million for fiscal 2009 primarily due to an increase
of $134.0 million in gross profit, which was offset
partially by a natural increase in selling, general and
administrative expenses related to employee costs as well as
operating expenses associated with new stores and net revenue
growth at existing stores.
Direct to consumer. Net income from our direct
to consumer segment increased $10.1 million, or 160%, to
$16.4 million in fiscal 2010 from $6.3 million in
fiscal 2009. Prior to the launch of our
e-commerce
website, our direct to consumer segment consisted only of phone
sales. The addition of our
e-commerce
website near the beginning of fiscal 2009 has driven the
increase in income from operations for our direct to consumer
segment. Income from operations as a percentage of direct to
consumer revenues decreased in fiscal 2010 compared to fiscal
2009 due to the introduction of promotional shipping and
increased costs related to our digital strategy associated with
this selling channel.
Other. Net income from our other segment
increased $7.2 million, or 66%, to $18.0 million in
fiscal 2010 from $10.8 million in fiscal 2009. Gross profit
related to our other segment increased in fiscal 2010 from
fiscal 2009 primarily due to a higher proportion of full margin
sales channels in the current year, such as our showroom sales
channel, than in the prior year. There was an increase in
selling, general and administrative expenses as a result of
opening and operating an increased number of showrooms in fiscal
2010 compared to fiscal 2009, which offset a portion of the
gross profit increase.
Income from operations also includes general corporate expenses.
General corporate expenses increased $16.9 million, or 32%,
to $69.1 million in fiscal 2010 from $52.2 million in
fiscal 2009 primarily due to an increase in expenses related to
our head office growth of $13.6 million, as well as
increased depreciation and amortization expense of
$1.2 million, increased stock-based compensation expense of
$1.0 million and increased provision for impairment and
lease exist costs of $1.4 million. The increase was
partially offset by increases in realized foreign exchange gains
of $0.3 million. General corporate expenses are expected to
continue to increase in future years as we grow our overall
business and require increased efforts at our head office to
support our corporate-owned stores, franchises and other
segments.
Our $1.8 million provision for impairment and lease exit
costs was a result of managements review of our portfolio
of corporate-owned store locations and the relocation of our
administrative offices. In conjunction with our ongoing
evaluation to ensure that each of our corporate-owned stores fit
into our long-term growth strategy, we closed two of our
corporate-owned stores in the fourth quarter of fiscal 2010. We
recorded a $0.7 million provision for impairment and lease
exit costs related to the two fiscal 2010 closures, and a
$0.9 million provision for impairment and lease exit costs
related to the relocation of our administrative offices. We also
closed one of our corporate-owned stores in the first quarter of
fiscal 2009; this closure was fully accrued in fiscal 2008. The
fair market values were estimated using an expected present
value technique.
Other
Income (Expense), Net
Other income (expense), net increased $2.7 million, to
$2.9 million in fiscal 2010 from $0.2 million in
fiscal 2009. The increase was primarily a result of re-measuring
our 13 percent non-controlling equity investment in
Australia immediately prior to obtaining control of the
business, which led to a $1.8 million gain on investment.
37
Additionally, we earned more interest income in fiscal 2010
compared to fiscal 2009 on our increased cash balances.
Provision
for Income Taxes
Provision for income taxes increased $32.7 million, or
115%, to $61.1 million in fiscal 2010 from
$28.4 million in fiscal 2009. In fiscal 2010, our effective
tax rate was 33.3% compared to 32.8% in fiscal 2009. The higher
effective tax rate was due to the proportional increase of
taxable income in the United States in fiscal 2010 compared to
taxable income in Canada which is taxed at a rate lower than the
US statutory rate combined with the declining Canadian Corporate
tax rate. We expect this trend to continue as we expect to
generate a higher proportion of our future taxable income in the
United States.
We have not recorded deferred taxes on undistributed earnings
and other temporary differences of our Canadian subsidiary which
are considered to be indefinitely reinvested. If
managements intentions with respect to these undistributed
earnings and other temporary differences were to change in the
future, deferred taxes may need to be provided that could
materially impact our financial results.
Net
Income
Net income increased $63.6 million, or 109%, to
$121.8 million in fiscal 2010 from $58.3 million in
fiscal 2009. The increase in net income of $63.6 million in
fiscal 2010 was primarily due to a $171.9 million increase
in gross profit resulting from sales growth at existing and
additional corporate-owned stores opened during fiscal 2010 and
increasing traffic on our
e-commerce
website, and a $2.7 million increase in other income
(expense), net, offset by an increase of $78.0 million in
selling, general and administrative expenses including provision
for impairment and lease exist costs and an increase of
$32.7 million in provision for income taxes.
Comparison
of Fiscal 2009 to Fiscal 2008
Net
Revenue
Net revenue increased $99.4 million, or 28%, to
$452.9 million in fiscal 2009 from $353.5 million in
fiscal 2008. Assuming the average exchange rate between the
Canadian and United States dollars in fiscal 2008 remained
constant, our net revenue would have increased
$103.0 million, or 29%, in fiscal 2009.
The net revenue increase was primarily the result of increased
sales at locations in our comparable stores base as well as
sales from new stores opened. The constant dollar increase in
comparable store sales was driven primarily by the strength of
our existing product lines, successful introduction of new
products and increasing recognition of the lululemon athletica
brand name.
Our net revenue on a segment basis for fiscal 2009 and fiscal
2008 are expressed in dollar amounts as well as relevant
percentages, presented as a percentage of total net revenue
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31, 2010 and
|
|
|
|
February 1, 2009
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
(Percentages)
|
|
|
Corporate-owned stores
|
|
$
|
393,451
|
|
|
$
|
315,548
|
|
|
|
86.9
|
|
|
|
89.3
|
|
Direct to consumer
|
|
|
18,257
|
|
|
|
1,629
|
|
|
|
4.0
|
|
|
|
0.5
|
|
Other
|
|
|
41,190
|
|
|
|
36,311
|
|
|
|
9.1
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
452,898
|
|
|
$
|
353,488
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $77.9 million, or
25%, to $393.5 million in fiscal 2009 from
$315.5 million in fiscal 2008. The following contributed to
the $77.9 million increase in net revenue from our
corporate-owned stores segment:
|
|
|
|
|
Net revenue from corporate-owned stores we opened during fiscal
2009, and during fiscal 2008 prior to sales from such stores
becoming part of our comparable stores base, contributed
$46.5 million of the increase. Net new store openings in
fiscal 2009 included two stores in Canada and five stores in the
United States;
|
38
|
|
|
|
|
Comparable store sales increase of 9% in fiscal 2009 resulted in
a $26.6 million increase to net revenue, excluding the
effect of foreign currency fluctuations. Including the effect of
foreign currency fluctuations, comparable store sales increased
8%, or $24.1 million, in fiscal 2009;
|
|
|
|
Net revenue related to gift card breakage contributed
$2.2 million of the increase. Based on historical gift card
breakage, we recognize into revenue a portion of gift card sales
for which we estimate redemption is remote over the estimated
period of redemption. This includes a one-time credit of
$1.3 million recorded in the first quarter of fiscal 2009
related to a change in our estimated rate of redemption; and
|
|
|
|
The acquisition of two Victoria, British Columbia and one
Bellevue, Washington franchise stores in September 2008
contributed $5.1 million before entering the comparative
store base.
|
Direct to Consumer. Net revenue from our
direct to consumer segment increased $16.6 million, or
1,020%, to $18.3 million in fiscal 2009 from
$1.6 million in fiscal 2008. The increase in net revenue
from our direct to consumer segment was primarily due to the
launch of our
e-commerce
in fiscal 2009, which contributed $16.8 million in net
revenues. This increase was offset by decreased phonesale
revenue, which shifted to
e-commerce,
of $0.2 million.
Other. Net revenue from our other segment
increased $4.9 million, or 13%, to $41.2 million in
fiscal 2009 from $36.3 million in fiscal 2008. An increase
in outlet revenues of $5.0 million contributed to the
increase in net revenues from our other segment. This increase
in outlet revenue resulted from a $3.2 million increase in
revenue at existing outlet locations and a $1.8 million
increase in net revenue from two new outlet locations that
opened in fiscal 2009. New and existing wholesale accounts
contributed $4.4 million to the increase, and increased
showroom sales revenue contributed $1.6 million. The
increase in net revenue from our other segment was offset by
temporary store locations opened in fiscal 2008 but not fiscal
2009, which had contributed $3.2 million, and decreased
warehouse revenue due to fewer warehouse sales in fiscal 2009
compared to fiscal 2008, of $0.6 million. $2.2 million
of franchise net revenue shifted to the corporate-owned stores
segment when we acquired two franchise stores in Victoria,
British Columbia and one franchise store in Bellevue, Washington.
Gross
Profit
Gross profit increased $44.0 million, or 25%, to
$223.1 million in fiscal 2009 from $179.1 million in
fiscal 2008. The increase in gross profit was driven principally
by increased net revenues which ultimately resulted in an
increased gross profit.
The increase in gross profit was partially offset by increased
fixed costs, such as occupancy and depreciation, increased costs
related to our design, production, distribution and
merchandising departments, as well as increased discounts,
shrinkage and other as a result of increased sales volume.
Gross profit, as a percentage of net revenue, or gross margin,
decreased 140 basis points, to 49.3% in fiscal 2009 from
50.7% in fiscal 2008. The decrease in gross margin resulted from:
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unfavorable foreign exchange differences of 130 basis
points on product costs, depreciation, occupancy and production,
design, merchandising and distribution departments as a result
of the weakening Canadian dollar;
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a decrease in corporate-owned stores, franchise and other
product margins, which contributed a decrease in gross margin of
60 basis points as a result of increased direct product
costs, markdowns and discounts; and
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an increase in write-downs and other of 10 basis points.
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This was partially offset by a decrease in expenses related to
our production, design, merchandising and distribution
departments, relative to the increase in net revenue, which had
a leveraging effect on gross margin and contributed an increase
of 60 basis points.
Our costs of goods sold in fiscal 2009 and fiscal 2008 included
$0.8 million and $0.8 million, respectively, of
stock-based compensation expense.
39
Selling,
General and Administrative Expenses
Selling, general and administrative expenses, including the
provision for impairment and lease exit costs, increased
$14.0 million, or 11%, to $136.5 million in fiscal
2009 from $122.5 million in fiscal 2008. As a percentage of
net revenue, selling, general and administrative expenses
decreased 460 basis points, to 30.1%, in fiscal 2009 from
34.7% in fiscal 2008. Of the $14.0 million increase in
selling, general and administrative expenses:
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an increase in administrative costs related to our direct to
consumer segment, primarily associated with the launch in fiscal
2009 of our new
e-commerce
website, of $5.6 million;
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an increase of $3.8 million primarily associated with
employment-related legal matters, professional fees and legal
costs associated with ongoing litigation, including legal
settlement costs;
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an increase in employee compensation, including options expense,
of $2.7 million related to an increase in employee head
count in our corporate-owned store locations and store support
center, as our net revenue growth recovered in the latter half
of fiscal 2009, as well as increased store labor hours due to
opening additional corporate-owned stores, partially offset by a
one-time charge in fiscal 2008 related to the acceleration of
performance-based awards;
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an increase of $2.3 million related to higher management
incentive-based compensation;
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an increase in credit card fees of $1.9 million resulting
from increased sales volume at corporate-owned stores and the
addition of
e-commerce
sales;
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an increase in depreciation costs of $1.8 million primarily
related to IT projects placed in use as well as the retirement
of fixed assets no longer in use;
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an increase in other costs of $0.7 million as a result of
the expansion of our business;
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an increase in distribution costs of $0.5 million as a
result of increased sales volume; and
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an increase in occupancy costs of $0.4 million related to
our other segment as we opened additional outlet locations in
fiscal 2009.
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These amounts were partially offset by a decrease in the
provision for impairment and lease exit costs of
$4.0 million, and a decrease in discretionary spending of
$1.7 million related to travel, meals and entertainment and
supplies.
Our selling, general and administrative expenses in fiscal 2009
and fiscal 2008 included $4.8 million and
$5.8 million, respectively, of stock-based compensation
expense.
Income
from Operations
Income from operations increased $30.0 million, or 53%, to
$86.5 million in fiscal 2009 from $56.6 million in
fiscal 2008. The increase of $30.0 million in income from
operations for fiscal 2009 was primarily due to a
$44.0 million increase in gross profit resulting from sales
by additional corporate-owned stores opened during fiscal 2009
and fiscal 2008, offset by an increase of $14.0 million in
selling, general and administrative expenses including provision
for impairment and lease exit costs.
On a segment basis, we determine income from operations without
taking into account our general corporate expenses such as
corporate employee costs, travel expenses and corporate rent.
For purposes of our managements analysis of our financial
results, we have allocated some general product expenses to our
corporate-owned stores segment. For example, all expenses
related to our production, design, merchandise and distribution
departments have been allocated to this segment.
Income from operations (before general corporate expenses) for
fiscal 2009 and fiscal 2008 are expressed in dollar amounts as
well as percentages, presented as a percentage of net revenue of
their respective operating segments below.
40
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Fiscal Year Ended January 31, 2010 and February 1,
2009
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2009
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2008
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2009
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2008
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(In thousands)
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(Percentages)
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Corporate-owned stores
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$
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121,614
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$
|
94,867
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30.9
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30.1
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Direct to consumer
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6,288
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663
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34.4
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40.7
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Other
|
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10,845
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|
|
|
11,550
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26.3
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31.8
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Income from operations before general corporate expense
|
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$
|
138,747
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|
$
|
107,080
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Corporate-owned Stores. Net income from our
corporate-owned stores segment increased $26.7 million, or
28%, to $121.6 million for fiscal 2009 from
$94.9 million for fiscal 2008 primarily due to an increase
in corporate-owned stores product margin of $45.9 million,
which was offset by an increase of $11.6 million in
occupancy and depreciation costs, $4.5 million in store
employee expenses, $1.5 million in administrative expenses
and $1.5 million in other store expenses.
Direct to Consumer. Net income from our direct
to consumer segment increased $5.6 million, or 849%, to
$6.3 million in fiscal 2009 from $0.7 million in
fiscal 2008. This increase was primarily due to the launch of
our
e-commerce
in fiscal 2009. Our direct to consumer sales segment is an
increasingly substantial part of our business and we expect
income from operations to continue to increase in future years
as a result of this growth.
Other. Net income from our other segment
decreased $0.7 million, or 6%, to $10.8 million in
fiscal 2009 from $11.6 million in fiscal 2008. This
decrease was partially a result of franchise income from
operations of $2.2 million shifting to corporate-owned
stores income from operations when we acquired two franchise
stores in Victoria, British Columbia and one franchise store in
Bellevue, Washington. The decrease was partially offset by
increased income from operations from our wholesale channel,
showroom, outlet and remaining franchise locations. Opening new
franchise stores is not a significant part of our near-term
store growth strategy, and as such we do not expect income from
operations from our franchises to grow in future years as a
result of adding franchise locations. Increased outlet,
wholesale, and showroom income from operations contributed to
the remaining difference.
Income from operations also includes general corporate expenses.
General corporate expenses increased $1.7 million, or 3%,
to $52.2 million in fiscal 2009 from $50.5 million in
fiscal 2008 primarily due to an increase in expenses related to
our head office growth of $5.1 million and an increase in
depreciation and amortization expense of $1.8 million,
offset by a decrease in provision for impairment and lease exit
costs of $4.0 million and a decrease in other corporate
expenses of $1.2 million. General corporate expenses are
expected to continue to increase in future years as we grow our
overall business and require increased efforts at our head
office to support our corporate-owned stores, franchises and
other segments.
Our $0.4 million provision for impairment and lease exit
costs was a result of managements review of our portfolio
of corporate-owned store locations. In conjunction with our
ongoing evaluation to ensure that each of our corporate-owned
stores fit into our long-term growth strategy, we closed one of
our corporate-owned stores in the first quarter of fiscal 2009.
This closure was fully accrued in fiscal 2008. We also closed
one of our corporate-owned stores in the fourth quarter of
fiscal 2008. We recorded a $0.7 million charge related to
this closure, which included a $0.5 million asset
impairment and a $0.2 million accrual for lease exit costs.
The fair market values were estimated using an expected present
value technique.
Other
Income (Expense), Net
Other income (expense), net decreased $0.7 million, or 80%,
to $0.2 million in fiscal 2009 from $0.8 million in
fiscal 2008. Of the $0.7 million decrease in other income
(expense), net:
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$0.5 million resulted from a decrease in interest income
due to lower interest rates offered on cash balances; and
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$0.1 million resulted from an increase in interest expense.
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41
Provision
for Income Taxes
Provision for income taxes increased $11.5 million, or 68%,
to $28.4 million in fiscal 2009 from $16.9 million in
fiscal 2008. In fiscal 2009, our effective tax rate was 32.8%
compared to 29.4% in fiscal 2008. The lower effective tax rate
in fiscal 2008 was due to the release of the valuation allowance
against U.S. loss carry forwards in fiscal 2008. We
generated taxable income in the United States in fiscal 2009
which contributed to the increase in the effective tax rate.
During fiscal 2009 an adjustment was made to deferred tax assets
and additional paid-in capital in the amount of $4,963 relating
to windfall recorded in the year ended February 1, 2009 in
excess of taxes payable. We concluded that the adjustment was
not material to the financial statements.
Net
Income
Net income increased $18.9 million, or 48%, to
$58.3 million in fiscal 2009 from $39.4 million in
fiscal 2008. The increase in net income of $18.9 million in
fiscal 2009 was a result of an increase in gross profit of
$44.0 million increase in gross profit resulting from sales
by additional corporate-owned stores opened during fiscal 2009
and fiscal 2008, offset by an increase of $14.0 million in
selling, general and administrative expenses including provision
for impairment and lease exit costs, an increase of
$11.5 million in provision for income taxes and a decrease
of $0.7 million in other income (expense), net.
Seasonality
In fiscal 2010, fiscal 2009, and fiscal 2008, we recognized a
significant amount of our net revenue in the fourth quarter due
to significant increases in sales during the holiday season. We
recognized 36%, 39%, and 29% of our full year gross profit in
the fourth quarter in fiscal 2010, fiscal 2009 and fiscal 2008,
respectively. Despite the fact that we have experienced a
significant amount of our net revenue and gross profit in the
fourth quarter of our fiscal year, we believe that the true
extent of the seasonality or cyclical nature of our business may
have been overshadowed by our rapid growth to date. As our
expected growth rate slows, we believe that we will experience
fourth quarter gross profits as a percentage of full year gross
profits as high, or higher, than in the current year.
The level of our working capital reflects the seasonality of our
business. We expect inventory, accounts payable and accrued
expenses to be higher in the third and fourth quarters in
preparation for the holiday selling season. Because our products
are sold primarily through our stores, order backlog is not
material to our business.
Liquidity
and Capital Resources
Our primary sources of liquidity are our current balances of
cash and cash equivalents, cash flows from operations and
borrowings available under our revolving credit facility. Our
primary cash needs are capital expenditures for opening new
stores and remodeling existing stores, making information
technology system enhancements and funding working capital
requirements. Cash and cash equivalents in excess of our needs
are held in interest bearing accounts with financial
institutions.
As of January 30, 2011, our working capital (excluding cash
and cash equivalents) was a deficit of $12.4 million and
our cash and cash equivalents were $316.3 million.
42
The following table summarizes our net cash flows provided by
and used in operating, investing and financing activities for
the periods indicated:
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Fiscal Year Ended
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January 30,
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January 31,
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February 1,
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2011
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2010
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2009
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(In thousands)
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Total cash provided by (used in):
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Operating activities
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$
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179,995
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$
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117,960
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|
|
$
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46,438
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|
Investing activities
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|
|
(42,839
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)
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|
(16,307
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)
|
|
|
(46,795
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)
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Financing activities
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13,699
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|
|
|
(2,649
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)
|
|
|
13,460
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|
Effect of exchange rate changes
|
|
|
5,858
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|
|
|
3,772
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|
|
|
(8,851
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)
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|
|
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|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
$
|
156,713
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|
|
$
|
102,776
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|
|
$
|
4,252
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|
|
|
|
|
|
|
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|
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Operating
Activities
Operating Activities consist primarily of net income
adjusted for certain non-cash items, including depreciation and
amortization, deferred income taxes, realized gains and losses
on property and equipment, stock-based compensation expense and
the effect of the changes in non-cash working capital items,
principally accounts receivable, inventories, accounts payable
and accrued expenses.
In fiscal 2010, cash provided by operating activities increased
$62.0 million, to $180.0 million compared to cash
provided by operating activities of $118.0 million in
fiscal 2009. The $62.0 million increase was primarily a
result of increased net income as we expanded our store base, an
increase in items not affecting cash and a net decrease in the
change in other working capital balances. The net increase in
items not affecting cash was primarily due to an increase in
depreciation and amortization related to our increased store
base, a net decrease in deferred income taxes and an increase in
stock-based compensation. The net decrease in the change in
other working capital balances was primarily due to an increase
in income taxes payable and an increase in other current
liabilities resulting from a increased accrued compensation and
unredeemed gift card liabilities.
Depreciation and amortization relate almost entirely to
leasehold improvements, furniture and fixtures, computer
hardware and software, equipment and vehicles in our stores and
other corporate buildings.
Depreciation and amortization increased $3.8 million to
$24.6 million in fiscal 2010 from $20.8 million in
fiscal 2009. Depreciation for our corporate-owned store segment
was $16.3 million, $13.7 million, and
$10.6 million in fiscal 2010, fiscal 2009 and fiscal 2008,
respectively. There was no depreciation for our direct to
consumer segment in fiscal 2010, fiscal 2009, and fiscal 2008.
Depreciation related to corporate activities was
$8.3 million, $7.1 million, and $5.3 million
fiscal 2010, fiscal 2009 and fiscal 2008, respectively. We have
not allocated any depreciation to our other segment as these
amounts to date have been immaterial.
Investing
Activities
Investing Activities relate entirely to capital
expenditures, investments in and advances to franchises, and
acquisitions of franchises.
Cash used in investing activities increased $26.5 million,
to $42.8 million in fiscal 2010 from $16.3 million in
fiscal 2009. This increase in cash used in investing activities
represents an increase in the number of new stores opened in
fiscal 2010 compared to fiscal 2009, as well as our
reacquisition of franchised stores in Australia and Canada.
Capital expenditures for our corporate-owned stores segment were
$14.5 million in fiscal 2010 which included
$7.0 million to open 14 corporate-owned stores and
$10.2 million in fiscal 2009 which included
$4.8 million to open ten corporate-owned stores. The
remaining capital expenditures for our corporate-owned stores
segment in each period were for ongoing store refurbishment.
Capital expenditures for our direct to consumer segment were
$4.6 million and $nil in fiscal 2010 and fiscal 2009,
respectively. Capital expenditures related to corporate
activities and administration were $11.2 million and
$5.3 million in fiscal 2010 and fiscal 2009, respectively.
The capital expenditures in each period for corporate activities
and administration were for
43
improvements at our head office and other corporate buildings as
well as investments in information technology and business
systems.
Capital expenditures are expected to range between
$110.0 million to $115.0 million in fiscal 2011,
including approximately $15.0 million to $19.0 million
for approximately 25 to 30 new stores and the remainder
reflecting the store support center purchase, renovation capital
for existing stores, information technology enhancements and
other corporate activities.
Financing
Activities
Financing Activities consist primarily of cash received
on the exercise of stock options and excess tax benefits from
stock-based compensation. Cash provided by financing activities
increased $16.3 million, to cash provided of
$13.7 million in fiscal 2010 from cash used of
$2.6 million in fiscal 2009.
We believe that our cash from operations and borrowings
available to us under our revolving credit facility will be
adequate to meet our liquidity needs and capital expenditure
requirements for at least the next 24 months. Our cash from
operations may be negatively impacted by a decrease in demand
for our products as well as the other factors described in
Risk Factors. In addition, we may make discretionary
capital improvements with respect to our stores, distribution
facility, headquarters, or other systems, which we would expect
to fund through the issuance of debt or equity securities or
other external financing sources to the extent we were unable to
fund such capital expenditures out of our cash from operations.
Revolving
Credit Facility
In April 2007, we entered into an uncommitted senior secured
demand revolving credit facility with Royal Bank of Canada. The
revolving credit facility provides us with available borrowings
in an amount up to CDN$20.0 million. The revolving credit
facility must be repaid in full on demand and is available by
way of prime loans in Canadian currency, U.S. base rate
loans in U.S. currency, bankers acceptances, LIBOR
based loans in U.S. currency or Euro currency, letters of
credit in Canadian currency or U.S. currency and letters of
guaranty in Canadian currency or U.S. currency. The
revolving credit facility bears interest on the outstanding
balance in accordance with the following: (i) prime rate
for prime loans; (ii) U.S. base rate for
U.S. based loans; (iii) a fee of 1.125% per annum on
bankers acceptances; (iv) LIBOR plus 1.125% per annum
for LIBOR based loans; (v) a 1.125% annual fee for letters
of credit; and (vi) a 1.125% annual fee for letters of
guaranty. Both lululemon usa inc. and lululemon FC USA inc.,
Inc. provided Royal Bank of Canada with guarantees and
postponements of claims in the amounts of CDN$20.0 million
with respect to lululemon athletica canada inc.s
obligations under the revolving credit facility. The revolving
credit facility is also secured by all of our present and after
acquired personal property, including all intellectual property
and all of the outstanding shares we own in our subsidiaries. As
of January 30, 2011, aside from the letters of credit and
guarantees, we had $nil in borrowings outstanding under this
credit facility.
Contractual
Obligations and Commitments
Leases. We lease certain corporate-owned store
locations, storage spaces, building and equipment under
non-cancelable operating leases. Our leases generally have
initial terms of between five and 10 years, and generally
can be extended only in five-year increments, if at all. Our
leases expire at various dates between 2011 and 2021, excluding
extensions at our option. A substantial number of our leases for
corporate-owned store premises include renewal options and
certain of our leases include rent escalation clauses, rent
holidays and leasehold rental incentives, none of which are
reflected in the following table. Most of our leases for
corporate-owned store premises also include contingent rental
payments based on sales volume, the impact of which also are not
reflected in the following table. The following table summarizes
our contractual arrangements as of January 30, 2011, and
the timing and effect that such commitments are expected to have
on our liquidity and cash flows in future periods:
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|
|
|
|
|
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Payments Due by Fiscal Year
|
|
|
Total
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Thereafter
|
|
|
(In thousands)
|
|
Operating Leases (minimum rent)
|
|
$
|
248,999
|
|
|
$
|
36,958
|
|
|
$
|
36,329
|
|
|
$
|
35,693
|
|
|
$
|
35,277
|
|
|
$
|
32,277
|
|
|
$
|
72,465
|
|
Franchise Agreements. As of January 30,
2011, we operated four stores in the United States through
franchise agreements. Under the terms of our franchise
agreements, unless otherwise approved by us, franchisees
44
are permitted to sell only lululemon athletica products, are
required to purchase their inventory from us, which we sell at a
slight premium to our cost, and are required to pay us a royalty
based on a percentage of their gross sales. Under some of our
franchise agreements, we have the ability to repurchase
franchises at a price equal to a specified percentage of
trailing
12-month
sales.
Off-Balance
Sheet Arrangements
We enter into documentary letters of credit to facilitate the
international purchase of merchandise. We also enter into
standby letters of credit to secure certain of our obligations,
including insurance programs and duties related to import
purchases. As of January 30, 2011, letters of credit and
letters of guarantee totaling $1.5 million have been issued.
Other than these standby letters of credit, we do not have any
off-balance sheet arrangements, investments in special purpose
entities or undisclosed borrowings or debt. In addition, we have
not entered into any derivative contracts or synthetic leases.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions. Predicting future
events is inherently an imprecise activity and, as such,
requires the use of judgment. Actual results may vary from
estimates in amounts that may be material to the financial
statements. An accounting policy is deemed to be critical if it
requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate
is made, and if different estimates that reasonably could have
been used or changes in the accounting estimates that are
reasonably likely to occur periodically, could materially impact
our consolidated financial statements.
We believe that the following critical accounting policies
affect our more significant estimates and judgments used in the
preparation of our consolidated financial statements:
Revenue Recognition. Net revenue is comprised
of corporate-owned store net revenue, direct to consumer sales
through www.lululemon.com and phone sales, and other net
revenue, which includes, franchise royalties as well as sales of
products to franchisees, sales to wholesale accounts, warehouse
sales and sales from company-operated showrooms, in each case,
net of an estimated allowance for sales returns and discounts.
Sales to customers through corporate-owned stores and
company-operated showrooms are recognized at the point of sale,
net of an estimated allowance for sales returns. Direct to
consumer sales are recognized when goods are shipped and
collection is reasonably assured, net of an estimated allowance
for sales returns. Other net revenue related to franchise
royalties are recognized when earned, in accordance with the
terms of the franchise/license agreements. Royalties are based
on a percentage of the franchisees sales and recognized
when those sales occur. Other net revenue related to warehouse
sales is recognized when these sales occur. Amounts billed to
customers for shipping and handling are recognized at the time
of shipment.
Sales are reported on a net revenue basis, which is computed by
deducting from our gross sales the amount of sales taxes, actual
product returns received, discounts and an amount established
for anticipated sales returns. Our estimated allowance for sales
returns is a subjective critical estimate that has a direct
impact on reported net revenue. This allowance is calculated
based on a history of actual returns, estimated future returns
and any significant future known or anticipated events.
Consideration of these factors results in an estimated allowance
for sales returns. Our standard terms for retail sales limit
returns to approximately 14 days after the sale of the
merchandise. For our wholesale sales, we allow returns from our
wholesale customers if properly requested and approved. Employee
discounts are classified as a reduction of net revenue.
Revenues from our gift cards are recognized when tendered for
payment, or upon redemption. Outstanding customer balances are
included in Unredeemed gift card liability on the
consolidated balance sheets. There are no expiration dates on
our gift cards, and lululemon does not charge any service fees
that cause a decrement to customer balances.
While we will continue to honor all gift cards presented for
payment, management may determine the likelihood of redemption
to be remote for certain card balances due to, among other
things, long periods of inactivity. In these circumstances, to
the extent management determines there is no requirement for
remitting card
45
balances to government agencies under unclaimed property laws,
card balances may be recognized in the consolidated statements
of operations in Net revenue.
Accounts Receivable. Accounts receivable
primarily arise out of sales to wholesale accounts, sales of
products and royalties on sales owed to us by our franchises,
and landlord deferred lease inducements. The allowance for
doubtful accounts represents managements best estimate of
probable credit losses in accounts receivable. This allowance is
established based on the specific circumstances associated with
the credit risk of the receivable, the size of the accounts
receivable balance, aging of accounts receivable balances and
our collection history and other relevant information. The
allowance for doubtful accounts is reviewed on a monthly basis.
Receivables are charged to the allowance when management
believes the account will not be recovered.
Inventory. Inventory is valued at the lower of
cost and market. Cost is determined using weighted-average
costs. For finished goods, market is defined as net realizable
value, and for raw materials, market is defined as replacement
cost. Cost of inventories includes acquisition and production
costs including raw material and labor, as applicable, and all
costs incurred to deliver inventory to our distribution centers
including freight, non-refundable taxes, duty and other landing
costs.
We periodically review our inventories and make provisions as
necessary to appropriately value obsolete or damaged goods. The
amount of the provision is equal to the difference between the
book cost of the inventory and its estimated market value based
upon assumptions about future demands, selling prices and market
conditions. In addition, as part of inventory valuations, we
provide for inventory shrinkage based on historical trends from
actual physical inventories. Inventory shrinkage estimates are
made to reduce the inventory value for lost or stolen items. We
perform physical inventory counts throughout the year and adjust
the shrink provision accordingly. In fiscal 2010, we wrote-off
$1.0 million of inventory and in fiscal 2009 we wrote-off
$0.8 million of inventory.
Property and Equipment. Property and equipment
are recorded at cost less accumulated depreciation. Direct
internal and external costs related to software used for
internal purposes which are incurred during the application
development stage or for upgrades that add functionality are
capitalized. All other costs related to internal use software
are expensed as incurred. Leasehold improvements are amortized
on a straight-line basis over the lesser of the length of the
lease, without consideration of option renewal periods and the
estimated useful life of the assets, up to a maximum of five
years. All other property and equipment are amortized using the
declining balance method as follows:
|
|
|
|
|
Furniture and fixtures
|
|
|
20
|
%
|
Computer hardware and software
|
|
|
30
|
%
|
Equipment and vehicles
|
|
|
30
|
%
|
We recognize a liability for the fair value of a required asset
retirement obligation, or ARO, when such obligation is incurred.
Our AROs are primarily associated with leasehold improvements
which, at the end of a lease, we are contractually obligated to
remove in order to comply with the lease agreement. At the
inception of a lease with such conditions, we record an ARO
liability and a corresponding capital asset in an amount equal
to the estimated fair value of the obligation. The liability is
estimated based on a number of assumptions requiring
managements judgment, including store closing costs, cost
inflation rates and discount rates, and is accreted to its
projected future value over time. The capitalized asset is
depreciated using the convention for depreciation of leasehold
improvement assets. Upon satisfaction of the ARO conditions, any
difference between the recorded ARO liability and the actual
retirement costs incurred is recognized as an operating gain or
loss in the consolidated statements of operations.
We recognize a liability for a cost associated with a lease exit
activity when such obligation is incurred. A lease exit activity
is measured initially at its fair value in the period in which
the liability is incurred. We estimate fair value at the
cease-use date of its operating leases as the remaining lease
rentals, reduced by estimated sublease rentals that could be
reasonably obtained for the property, even where we does not
intend to enter into a sublease. Estimating the cost of certain
lease exit costs involves subjective assumptions, including the
time it would take to sublease the leased location and the
related potential sublease income. The estimated accruals for
these costs could be significantly affected if future experience
differs from that used in the initial estimate. Lease exit costs
are included in provision for impairment and lease exit costs.
46
Long-Lived Assets. Long-lived assets,
including intangible assets with finite useful lives, held for
use are evaluated for impairment when the occurrence of events
or changes in circumstances indicates that the carrying value of
the assets may not be recoverable as measured by comparing their
net book value to the estimated future cash flows generated by
their use and eventual disposition. Impaired assets are recorded
at fair value, determined principally by the estimated future
cash flows expected from their use and eventual disposition.
Reductions in asset values resulting from impairment valuations
are recognized in income in the period that the impairment is
determined. Long-lived assets, including intangible assets with
finite useful lives, held for sale are reported at the lower of
the carrying value of the asset and fair value less cost to
sell. Any write-downs to reflect fair value less selling cost is
recognized in income when the asset is classified as held for
sale. Gains or losses on assets held for sale and asset
dispositions are included in provision for impairment and lease
exit costs.
Income Taxes. We follow the liability method
with respect to accounting for income taxes. Deferred income tax
assets and liabilities are determined based on temporary
differences between the carrying amounts and the tax basis of
assets and liabilities. Deferred income tax assets and
liabilities are measured using enacted tax rates that are
expected to be in effect when these differences are anticipated
to reverse. Deferred income tax assets are reduced by a
valuation allowance, if based on the weight of available
positive and negative evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
The recognition of a deferred income tax asset is based upon
several assumptions and management forecasts, including current
and proposed tax legislation, current and anticipated taxable
income, utilization of previously unrealized non-operating loss
carry forwards and regulatory reviews of tax filings. Given the
judgments and estimates required and the sensitivity of the
results to the significant assumptions used, we believe the
accounting estimates used in relation to the recognition of
deferred income tax assets are subject to measurement
uncertainty and are susceptible to a material change if the
underlying assumptions change.
For financial reporting purposes, we generally provide taxes at
the rate applicable for the appropriate tax jurisdiction.
Because our present intention is to reinvest the unremitted
earnings in our foreign operations, we do not provide
U.S. income taxes on unremitted earnings of foreign
subsidiaries. Management periodically assesses the need to
utilize these unremitted earnings to finance our foreign
operations. This assessment is based on cash flow projections
that are the result of estimates of future production, fiscal
requirements by tax jurisdiction of our operations and
operational and fiscal objectives by tax jurisdiction for our
operations. Such estimates are inherently imprecise since many
assumptions utilized in the cash flow projections are subject to
revision in the future.
We file income tax returns in the United States, Canada and
various foreign and state jurisdictions. We are subject to
income tax examination by tax authorities in all jurisdictions
from our inception to date. Our policy is to recognize interest
expense and penalties related to income tax matters as tax
expense. At January 30, 2011, we do not have any
significant accruals for interest related to unrecognized tax
benefits or tax penalties. Our intercompany transfer pricing
policies will be subject to audits by various foreign tax
jurisdictions. Although we believe that our intercompany
transfer pricing policies and tax positions are reasonable, the
final determination of tax audits or potential tax disputes may
be materially different from that which is reflected in our
income tax provisions and accruals.
Goodwill and Intangible Assets. Intangible
assets are recorded at cost. Non-competition agreements are
amortized on a straight-line basis over their estimated useful
life of five years. Reacquired franchise rights are amortized on
a straight-line basis over their estimated useful lives of
10 years. Goodwill represents the excess of the purchase
price over the fair market value of identifiable net assets
acquired and is not amortized. Goodwill and intangible assets
with indefinite useful lives are tested for impairment annually
or more frequently when an event or circumstance indicates that
goodwill or indefinite useful live intangible assets might be
impaired. We use our best estimates and judgment based on
available evidence in conducting the impairment testing. When
the carrying amount exceeds the fair value, an impairment loss
is recognized in an amount equal to the excess of the carrying
value over its fair market value.
Stock-Based Compensation. We account for
stock-based compensation using the fair value method. The fair
value of awards granted is estimated at the date of grant and
recognized as employee compensation expense on a straight-line
basis over the requisite service period with the offsetting
credit to additional paid-in capital. Our calculation of
stock-based compensation requires us to make a number of complex
and subjective estimates and
47
assumptions, including future forfeitures, stock price
volatility, expected life of the options and related tax
effects. The estimation of stock awards that will ultimately
vest requires judgment, and to the extent actual results differ
from our estimates, such amounts will be recorded as a
cumulative adjustment in the period estimates are revised. We
consider several factors when estimating expected forfeitures,
such as types of awards, size of option holder group and
anticipated employee retention. Actual results may differ
substantially from these estimates. Expected volatility of the
stock is based on our review of companies we believe of similar
growth and maturity and our peer group in the industry in which
we do business because we do not have sufficient historical
volatility data for our own stock. The expected term of options
granted is derived from the output of the option valuation model
and represents the period of time that options granted are
expected to be outstanding. In the future, as we gain historical
data for volatility in our own stock and the actual term
employees hold our options, expected volatility and expected
term may change which could substantially change the grant-date
fair value of future awards of stock options and, ultimately,
the expense we record. For awards with service
and/or
performance conditions, the total amount of compensation expense
to be recognized is based on the number of awards that are
expected to vest and is adjusted to reflect those awards that do
ultimately vest. For awards with performance conditions, we
recognize the compensation expense over the requisite service
period as determined by a range of probability weighted
outcomes. For awards with market and or performance conditions,
all compensation expense is recognized if the underlying market
or performance conditions are fulfilled. Certain employees are
entitled to share-based awards from one of our principal
stockholders. These awards are accounted for as employee
compensation expense in accordance with the above noted policies.
Recent
Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (or
FASB) issued Accounting Standards Update (or ASU)
2010-06,
Fair Value Measurements and Disclosures Topic 820: Improving
Disclosures about Fair Value Measurements (or ASU
2010-06).
ASU 2010-06
requires new disclosures regarding transfers in and out of the
Level 1 and 2 and activity within Level 3 fair value
measurements and clarifies existing disclosures of inputs and
valuation techniques for Level 2 and 3 fair value
measurements. The new disclosures and clarifications of existing
disclosures are effective for interim and Annual Reporting
periods beginning after December 15, 2009, except for the
disclosure of activity within Level 3 fair value
measurements, which is effective for fiscal years beginning
after December 15, 2010, and for interim reporting periods
within those years. We adopted the new disclosures effective
January 31, 2010, except for the disclosure of activity
within Level 3 fair value measurements. The Level 3
disclosures are effective for us at the beginning of fiscal
2011. The adoption of ASU
2010-06 did
not have a material impact, and is not expected to have a
material impact, on the disclosures within our consolidated
financial statements.
In February 2010, the FASB amended Accounting Standards
Codification (or ASC) Topic 855 Subsequent Events (or
ASC 855). Under the amended guidance, SEC filers are no
longer required to disclose the date through which subsequent
events have been evaluated in originally issued and revised
financial statements. This guidance was effective immediately
and we adopted these new requirements in the first quarter of
fiscal 2010.
In April 2010, the FASB amended ASC Topic 718 Compensation
(or ASC 718) to clarify that a share-based payment
award with an exercise price denominated in the currency of a
market in which a substantial portion of the entitys
equity securities trades should not be considered to contain a
market, performance or service condition. Therefore, an entity
should not classify such an award as a liability if it otherwise
qualifies for classification in equity. This guidance is
effective for interim and annual periods beginning on or after
December 15, 2010 and is to be applied prospectively. We
have determined the adoption of the amendment will not have a
material impact on our consolidated financial statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market
prices and rates. Our market risk exposure is primarily a result
of fluctuations in interest rates and foreign currency exchange
rates. We do not hold or issue financial instruments for trading
purposes.
Foreign Currency Exchange Risk. We currently
generate a significant portion of our net revenue in Canada. The
reporting currency for our consolidated financial statements is
the U.S. dollar. Historically, our operations were
48
based largely in Canada. As of January 30, 2011, we
operated 44 stores in Canada. As a result, we have been impacted
by changes in exchange rates and may be impacted materially for
the foreseeable future. As we recognize net revenue from sales
in Canada in Canadian dollars, and the U.S. dollar has
weakened during fiscal 2010, it has had a positive impact on our
Canadian operating results upon translation of those results
into U.S. dollars for the purposes of consolidation.
However, the gain in net revenue was partially offset by higher
cost of sales and higher selling, general and administrative
expenses that are generated in Canadian dollars. A 10%
depreciation in the relative value of the Canadian dollar
compared to the U.S. dollar would have resulted in lost
income from operations of approximately $11.3 million in
fiscal 2010 and approximately $11.2 million in fiscal 2009.
To the extent the ratio between our net revenue generated in
Canadian dollars increases as compared to our expenses generated
in Canadian dollars, we expect that our results of operations
will be further impacted by changes in exchange rates. A portion
of our net revenue is generated in Australia. A 10% depreciation
in the relative value of the Australian dollar compared to the
U.S. dollar would have resulted in lost income from operations
of approximately $0.1 million in fiscal 2010. We do not
currently hedge foreign currency fluctuations. However, in the
future, in an effort to mitigate losses associated with these
risks, we may at times enter into derivative financial
instruments, although we have not historically done so. We do
not, and do not intend to, engage in the practice of trading
derivative securities for profit.
Interest Rate Risk. In April 2007, we entered
into an uncommitted senior secured demand revolving credit
facility with Royal Bank of Canada. The revolving credit
facility provides us with available borrowings in an amount up
to CDN$20.0 million. Because our revolving credit facility
bears interest at a variable rate, we will be exposed to market
risks relating to changes in interest rates, if we have a
meaningful outstanding balance. As of January 30, 2011, we
had no outstanding borrowings under our revolving facility. We
had small outstanding balances under our revolving facility
during fiscal 2010 as we built inventory and working capital for
the holiday selling season, but we do not believe we are
significantly exposed to changes in interest rate risk. We
currently do not engage in any interest rate hedging activity
and currently have no intention to do so in the foreseeable
future. However, in the future, if we have a meaningful
outstanding balance under our revolving facility, in an effort
to mitigate losses associated with these risks, we may at times
enter into derivative financial instruments, although we have
not historically done so. These may take the form of forward
sales contracts, option contracts, and interest rate swaps. We
do not, and do not intend to, engage in the practice of trading
derivative securities for profit.
Inflation
Inflationary factors such as increases in the cost of our
product and overhead costs may adversely affect our operating
results. Although we do not believe that inflation has had a
material impact on our financial position or results of
operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels
of gross margin and selling, general and administrative expenses
as a percentage of net revenue if the selling prices of our
products do not increase with these increased costs.
49
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
lululemon
athletica inc. and Subsidiaries
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of lululemon
athletica inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity and cash flows present fairly, in all
material respects, the financial position of lululemon athletica
inc. at January 30, 2011 and January 31, 2010, and the
results of its operations and its cash flows for each of the
three years in the period ended January 30, 2011 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of January 30, 2011, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Managements Report on Internal Control over Financial
Reporting under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial
statement schedule, and on the Companys internal control
over financial reporting based on our audits (which were
integrated audits for the years ended January 30, 2011 and
January 31, 2010). We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Chartered Accountants
Vancouver, BC
March 16, 2011
51
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share amounts)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
316,286
|
|
|
$
|
159,573
|
|
Accounts receivable
|
|
|
9,116
|
|
|
|
8,238
|
|
Inventories
|
|
|
57,469
|
|
|
|
44,070
|
|
Prepaid expenses and other current assets
|
|
|
6,408
|
|
|
|
4,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
389,279
|
|
|
|
216,410
|
|
Property and equipment, net
|
|
|
70,954
|
|
|
|
61,591
|
|
Goodwill and intangible assets, net
|
|
|
27,112
|
|
|
|
8,050
|
|
Deferred income taxes
|
|
|
7,894
|
|
|
|
15,102
|
|
Other non-current assets
|
|
|
4,063
|
|
|
|
6,105
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
499,302
|
|
|
$
|
307,258
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,659
|
|
|
$
|
11,028
|
|
Accrued liabilities
|
|
|
25,266
|
|
|
|
17,583
|
|
Accrued compensation and related expenses
|
|
|
16,872
|
|
|
|
10,626
|
|
Income taxes payable
|
|
|
18,399
|
|
|
|
7,742
|
|
Unredeemed gift card liability
|
|
|
18,168
|
|
|
|
11,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,364
|
|
|
|
58,678
|
|
Other non-current liabilities
|
|
|
19,645
|
|
|
|
15,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,009
|
|
|
|
74,150
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value,
5,000 shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Exchangeable stock, no par value, 30,000 shares authorized,
issued and outstanding 17,818 and 19,383
|
|
|
|
|
|
|
|
|
Special voting stock, $0.00001 par value,
30,000 shares authorized, issued and outstanding 17,818 and
19,383
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 200,000 shares
authorized, issued and outstanding 53,378 and 51,126
|
|
|
534
|
|
|
|
511
|
|
Additional paid-in capital
|
|
|
179,870
|
|
|
|
158,921
|
|
Retained earnings
|
|
|
189,656
|
|
|
|
67,809
|
|
Accumulated other comprehensive income
|
|
|
20,329
|
|
|
|
5,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390,389
|
|
|
|
233,108
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
3,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
499,302
|
|
|
$
|
307,258
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share amounts)
|
|
|
Net revenue
|
|
$
|
711,704
|
|
|
$
|
452,898
|
|
|
$
|
353,488
|
|
Cost of goods sold
|
|
|
316,757
|
|
|
|
229,812
|
|
|
|
174,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
394,947
|
|
|
|
223,086
|
|
|
|
179,067
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
212,784
|
|
|
|
136,161
|
|
|
|
118,098
|
|
Provision for impairment and lease exit costs
|
|
|
1,772
|
|
|
|
379
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
180,391
|
|
|
|
86,546
|
|
|
|
56,564
|
|
Other income (expense), net
|
|
|
2,886
|
|
|
|
164
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
183,277
|
|
|
|
86,710
|
|
|
|
57,385
|
|
Provision for income taxes
|
|
|
61,080
|
|
|
|
28,429
|
|
|
|
16,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
122,197
|
|
|
|
58,281
|
|
|
|
40,501
|
|
Net income attributable to non-controlling interest
|
|
|
350
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to lululemon athletica inc.
|
|
$
|
121,847
|
|
|
$
|
58,281
|
|
|
$
|
39,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
Continuing operations
|
|
$
|
1.72
|
|
|
$
|
0.83
|
|
|
$
|
0.59
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic earnings per share
|
|
$
|
1.72
|
|
|
$
|
0.83
|
|
|
$
|
0.57
|
|
Diluted earnings (loss) per share
Continuing operations
|
|
$
|
1.69
|
|
|
$
|
0.82
|
|
|
$
|
0.57
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net diluted earnings per share
|
|
$
|
1.69
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
Basic weighted-average number of shares outstanding
|
|
|
70,860
|
|
|
|
70,251
|
|
|
|
68,711
|
|
Diluted weighted-average number of shares outstanding
|
|
|
71,929
|
|
|
|
70,949
|
|
|
|
70,942
|
|
See accompanying notes to the consolidated financial statements
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Voting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable Stock
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
Controlling
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Interest
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2008
|
|
|
20,935
|
|
|
$
|
|
|
|
|
20,935
|
|
|
$
|
|
|
|
|
46,685
|
|
|
$
|
467
|
|
|
$
|
136,006
|
|
|
$
|
(29,835
|
)
|
|
$
|
5,397
|
|
|
$
|
112,035
|
|
|
$
|
|
|
|
$
|
112,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to lululemon athletica inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,363
|
|
|
|
|
|
|
|
39,363
|
|
|
|
|
|
|
|
39,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,548
|
)
|
|
|
(16,548
|
)
|
|
|
|
|
|
|
(16,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,815
|
|
|
|
|
|
|
|
22,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,532
|
|
|
|
|
|
|
|
|
|
|
|
6,532
|
|
|
|
|
|
|
|
6,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,024
|
|
|
|
|
|
|
|
|
|
|
|
12,024
|
|
|
|
|
|
|
|
12,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exchange of exchangeable shares
|
|
|
(1,418
|
)
|
|
|
|
|
|
|
(1,418
|
)
|
|
|
|
|
|
|
1,418
|
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,310
|
|
|
|
23
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
1,436
|
|
|
|
|
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 1, 2009
|
|
|
19,517
|
|
|
$
|
|
|
|
|
19,517
|
|
|
$
|
|
|
|
|
50,422
|
|
|
$
|
504
|
|
|
$
|
155,961
|
|
|
$
|
9,528
|
|
|
$
|
(11,151
|
)
|
|
$
|
154,842
|
|
|
$
|
|
|
|
$
|
154,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to lululemon athletica inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,281
|
|
|
|
|
|
|
|
58,281
|
|
|
|
|
|
|
|
58,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,018
|
|
|
|
17,018
|
|
|
|
|
|
|
|
17,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,299
|
|
|
|
|
|
|
|
75,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,616
|
|
|
|
|
|
|
|
|
|
|
|
5,616
|
|
|
|
|
|
|
|
5,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,858
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,858
|
)
|
|
|
|
|
|
|
(3,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exchange of exchangeable shares
|
|
|
(134
|
)
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
134
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
|
6
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
1,209
|
|
|
|
|
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2010
|
|
|
19,383
|
|
|
$
|
|
|
|
|
19,383
|
|
|
$
|
|
|
|
|
51,126
|
|
|
$
|
511
|
|
|
$
|
158,921
|
|
|
$
|
67,809
|
|
|
$
|
5,867
|
|
|
$
|
233,108
|
|
|
$
|
|
|
|
$
|
233,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to lululemon athletica inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,847
|
|
|
|
|
|
|
|
121,847
|
|
|
|
|
|
|
|
121,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,462
|
|
|
|
14,462
|
|
|
|
|
|
|
|
14,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,309
|
|
|
|
|
|
|
|
136,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,273
|
|
|
|
|
|
|
|
|
|
|
|
7,273
|
|
|
|
|
|
|
|
7,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,863
|
|
|
|
|
|
|
|
|
|
|
|
7,863
|
|
|
|
|
|
|
|
7,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exchange of exchangeable shares
|
|
|
(1,565
|
)
|
|
|
|
|
|
|
(1,565
|
)
|
|
|
|
|
|
|
1,565
|
|
|
|
16
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681
|
|
|
|
7
|
|
|
|
5,829
|
|
|
|
|
|
|
|
|
|
|
|
5,836
|
|
|
|
|
|
|
|
5,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests recognized on acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,554
|
|
|
|
3,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 30, 2011
|
|
|
17,818
|
|
|
$
|
|
|
|
|
17,818
|
|
|
$
|
|
|
|
|
53,378
|
|
|
$
|
534
|
|
|
$
|
179,870
|
|
|
$
|
189,656
|
|
|
$
|
20,329
|
|
|
$
|
390,389
|
|
|
$
|
3,904
|
|
|
$
|
394,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to lululemon athletica inc.
|
|
$
|
121,847
|
|
|
$
|
58,281
|
|
|
$
|
39,363
|
|
Net income attributable to
non-controlling
interest
|
|
|
350
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
122,197
|
|
|
|
58,281
|
|
|
|
40,501
|
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
24,614
|
|
|
|
20,832
|
|
|
|
15,823
|
|
Stock-based compensation
|
|
|
7,273
|
|
|
|
5,616
|
|
|
|
6,532
|
|
Provision for impairment and lease exit costs
|
|
|
1,772
|
|
|
|
379
|
|
|
|
4,405
|
|
Derecognition of unredeemed gift card liability
|
|
|
(1,406
|
)
|
|
|
(2,183
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
11,234
|
|
|
|
387
|
|
|
|
(6,441
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
(7,863
|
)
|
|
|
3,858
|
|
|
|
(12,024
|
)
|
Gain on investment
|
|
|
(1,792
|
)
|
|
|
|
|
|
|
|
|
Other, including net changes in other non-cash balances
|
|
|
23,966
|
|
|
|
30,790
|
|
|
|
(3,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities continuing
operations
|
|
|
179,995
|
|
|
|
117,960
|
|
|
|
45,433
|
|
Net cash provided by operating activities
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,995
|
|
|
|
117,960
|
|
|
|
46,438
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(30,357
|
)
|
|
|
(15,497
|
)
|
|
|
(40,530
|
)
|
Investment in and advances to franchise
|
|
|
|
|
|
|
(810
|
)
|
|
|
(2,863
|
)
|
Acquisition of franchises
|
|
|
(12,482
|
)
|
|
|
|
|
|
|
(3,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing
operations
|
|
|
(42,839
|
)
|
|
|
(16,307
|
)
|
|
|
(46,795
|
)
|
Net cash used in investing activities discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,839
|
)
|
|
|
(16,307
|
)
|
|
|
(46,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
5,836
|
|
|
|
1,209
|
|
|
|
1,436
|
|
Excess tax benefits from stock-based compensation
|
|
|
7,863
|
|
|
|
(3,858
|
)
|
|
|
12,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities continuing
operations
|
|
|
13,699
|
|
|
|
(2,649
|
)
|
|
|
13,460
|
|
Net cash provided by financing activities
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,699
|
|
|
|
(2,649
|
)
|
|
|
13,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
5,858
|
|
|
|
3,772
|
|
|
|
(8,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
156,713
|
|
|
|
102,776
|
|
|
|
4,252
|
|
Cash and cash equivalents from continuing operations, beginning
of year
|
|
$
|
159,573
|
|
|
$
|
56,797
|
|
|
$
|
52,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents from continuing operations, end of year
|
|
$
|
316,286
|
|
|
$
|
159,573
|
|
|
$
|
56,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
55
lululemon
athletica inc. and Subsidiaries
(Amounts
in thousands, except per share amounts and store count
information, unless otherwise indicated)
|
|
1
|
NATURE OF
OPERATIONS AND BASIS OF PRESENTATION
|
Nature
of operations
lululemon athletica inc., a Delaware corporation
(lululemon or LAI and, together with its
subsidiaries unless the context otherwise requires, the
Company) is engaged in the design, manufacture and
distribution of healthy lifestyle inspired athletic apparel,
which is sold through a chain of corporate-owned and operated
retail stores, direct to consumer through
e-commerce,
independent franchises and a network of wholesale accounts. The
Companys primary markets are Canada, the United States and
Australia, where 44, 78 and 11 corporate-owned stores,
respectively, were in operation as at January 30, 2011.
There were 133, 110, and 103 corporate-owned stores in operation
as at January 30, 2011, January 31, 2010, and
February 1, 2009, respectively.
Basis
of presentation
The accompanying consolidated financial statements include the
financial position, results of operations and cash flows of the
Company and its subsidiary companies during the three-year
period ended January 30, 2011. The consolidated financial
statements have been prepared using the U.S. dollar and are
presented in accordance with United States generally accepted
accounting principles (GAAP).
The Company has experienced, and expects to continue to
experience, significant seasonal variations in net revenue and
income from operations. Seasonal variations in revenue are
primarily related to increased sales of products during the
fourth fiscal quarter, reflecting historical strength in sales
during the holiday season. Historically, seasonal variations in
income from operations have been driven principally by increased
net revenue in the fourth fiscal quarter.
The Companys fiscal year ends on the Sunday closest to
January 31 of the following year, typically resulting in a
52 week year, but occasionally giving rise to an additional
week, resulting in a 53 week year. Fiscal 2010, 2009 and
2008 ended on January 30, 2011, January 31, 2010, and
February 1, 2009, respectively.
|
|
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of consolidation
The consolidated financial statements include the accounts of
lululemon athletica inc. and its wholly-owned subsidiaries. All
inter-company balances and transactions have been eliminated.
The results of operations of lululemon athletica australia Pty
attributable to the non-controlling interest are presented
within equity and net income, and are shown separately from the
Companys equity and net income attributable to the
Company. The results of operations of Lululemon Japan Inc. are
presented as discontinued operations following the
Companys
wind-up of
operations in Japan in fiscal 2008. In the opinion of
management, all adjustments, consisting primarily of normal
recurring accruals, considered necessary for a fair presentation
of the Companys results of operations for the periods
reported and of its financial condition as of the date of the
balance sheet have been included.
Cash
and cash equivalents
Cash and cash equivalents consist of cash on hand, bank balances
and short-term deposits with original maturities of less than
three months. The Company has not experienced any losses related
to these balances, and management believes its credit risk to be
minimal.
Accounts
receivable
Accounts receivable primarily arise out of sales to wholesale
accounts, sales of inventory to our franchisees, royalties on
sales owed to the Company by its franchisees and landlord
deferred lease inducements. The allowance for doubtful accounts
represents managements best estimate of probable credit
losses in accounts receivable and is
56
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reviewed monthly. Receivables are written off against the
allowance when management believes that the amount receivable
will not be recovered. As at January 30, 2011,
January 31, 2010 and February 1, 2009 the Company
recorded an insignificant allowance for doubtful accounts.
Inventories
Inventories, consisting of finished goods and raw materials, are
stated at the lower of cost and market value. Cost is determined
using weighted-average costs. For finished goods, market is
defined as net realizable value, and for raw materials, market
is defined as replacement cost. Cost of inventories includes
acquisition costs and all costs incurred to deliver inventory to
the Companys distribution centers including freight,
non-refundable taxes, duty and other landing costs.
The Company periodically reviews its inventories and makes
provisions as necessary to appropriately value obsolete or
damaged goods. The amount of the provision is equal to the
difference between the cost of the inventory and its estimated
net realizable value based upon assumptions about future demand,
selling prices and market conditions. In addition, as part of
inventory valuations, the Company accrues for inventory
shrinkage based on historical trends from actual physical
inventory counts. Inventory shrinkage estimates are made to
reduce the inventory value for lost or stolen items. The Company
performs physical inventory counts and cycle counts throughout
the year and adjusts the shrink reserve accordingly.
Property
and equipment
Property and equipment are recorded at cost less accumulated
depreciation. Direct internal and external costs related to
software used for internal purposes which are incurred during
the application development stage or for upgrades that add
functionality are capitalized. All other costs related to
internal use software are expensed as incurred.
Leasehold improvements are amortized on a straight-line basis
over the lesser of the length of the lease, without
consideration of option renewal periods, and the estimated
useful life of the assets, to a maximum of five years. All other
property and equipment are amortized using the declining balance
method as follows. Amortization commences when an asset is ready
for its intended use.
|
|
|
|
|
Furniture and fixtures
|
|
|
20
|
%
|
Computer hardware and software
|
|
|
30
|
%
|
Equipment and vehicles
|
|
|
30
|
%
|
Goodwill
and intangible assets
Intangible assets are recorded at cost. Non-competition
agreements are amortized on a straight-line basis over their
estimated useful life of five years. Reacquired franchise rights
are amortized on a straight-line basis over their estimated
useful lives of 10 years.
Goodwill represents the excess of the net assets acquired and
liabilities assumed over the aggregate of the consideration
transferred, the fair value of any non-controlling interest in
the acquiree and the acquisition-date fair value of the
Companys previously held equity interest. Goodwill and
intangible assets with indefinite lives are tested annually for
impairment or more frequently when an event or circumstance
indicates that goodwill or indefinite life intangible assets
might be impaired. The Companys operating segment for
goodwill is its corporate-owned stores.
Impairment
of long-lived assets
Long-lived assets, including intangible assets with finite
lives, held for use are evaluated for impairment when the
occurrence of events or a change in circumstances indicates that
the carrying value of the assets may not be
57
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recoverable as measured by comparing their carrying value to the
estimated undiscounted future cash flows generated by their use
and eventual disposition. Impaired assets are recorded at fair
value, determined principally by discounting the future cash
flows expected from their use and eventual disposition.
Reductions in asset values resulting from impairment valuations
are recognized in income in the period that the impairment is
determined. Long-lived assets, including intangible assets with
finite lives, held for sale are reported at the lower of the
carrying value of the asset and fair value less cost to sell.
Any write-downs to reflect fair value less selling cost is
recognized in income when the asset is classified as held for
sale. Gains or losses on assets held for sale and asset
dispositions are included in provision for impairment and lease
exit costs.
Leased
property and equipment
The Company leases corporate-owned stores, distribution centers
and administrative offices. Minimum rental payments, including
any fixed escalation of rental payments and rent premiums, are
amortized on a straight-line basis over the life of the lease
beginning on the possession date. Rental costs incurred during a
construction period, prior to store opening, are recognized as
rental expense. The difference between the recognized rental
expense and the total rental payments paid is reflected on the
consolidated balance sheet as a deferred lease liability or a
prepaid lease asset.
Deferred lease inducements, which include leasehold improvements
paid for by the landlord and free rent, are recorded as
liabilities on the consolidated balance sheet and recognized as
a reduction of rent expense on a straight-line basis over the
term of the lease.
Contingent rental payments based on sales volumes are recorded
in the period in which the sales occur.
The Company recognizes a liability for the fair value of a
required asset retirement obligation (ARO) when such
obligation is incurred. The Companys AROs are primarily
associated with leasehold improvements which, at the end of a
lease, the Company is contractually obligated to remove in order
to comply with the lease agreement. At the inception of a lease
with such conditions, the Company records an ARO liability and a
corresponding capital asset in an amount equal to the estimated
fair value of the obligation. The liability is estimated based
on a number of assumptions requiring managements judgment,
including store closing costs, cost inflation rates and discount
rates, and is accreted to its projected future value over time.
The capitalized asset is depreciated using the convention for
depreciation of leasehold improvement assets. Upon satisfaction
of the ARO conditions, any difference between the recorded ARO
liability and the actual retirement costs incurred is recognized
as an operating gain or loss in the consolidated statements of
earnings.
The Company recognizes a liability for a cost associated with a
lease exit or disposal activity when such obligation is
incurred. A lease exit or disposal activity is measured
initially at its fair value in the period in which the liability
is incurred. The Company estimates fair value at the cease-use
date of its operating leases as the remaining lease rentals,
reduced by estimated sublease rentals that could be reasonably
obtained for the property, even where the Company does not
intend to enter into a sublease. Estimating the cost of certain
lease exit costs involves subjective assumptions, including the
time it would take to sublease the leased location and the
related potential sublease income. The estimated accruals for
these costs could be significantly affected if future experience
differs from that used in the initial estimate. Lease exit costs
are included in provision for impairment and lease exit costs.
Deferred
revenue
Payments received from franchisees for goods not shipped as well
as receipts from the sale of gift cards are treated as deferred
revenue. Franchise inventory deposits are included in other
current liabilities and recognized as sales when the goods are
shipped. Amounts received in respect of gift cards are recorded
as unredeemed gift card liability. When gift cards are redeemed
for apparel, the Company recognizes the related revenue.
58
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
recognition
Net revenue includes sales of apparel to customers through
corporate-owned and operated retail stores, direct to consumer
through www.lululemon.com and phone sales, initial
license and franchise fees, royalties from franchisees and sales
of apparel to franchisees, sales through a network of wholesale
accounts, and sales from company-operated showrooms.
Sales to customers through corporate-owned retail stores and
phone sales are recognized at the point of sale, net of an
estimated allowance for sales returns.
Sales of apparel to customers through the Companys retail
internet site are recognized when goods are shipped, net of an
estimated allowance for sales returns.
Franchise royalties are calculated as a percentage of franchise
sales and are recognized in the month that the franchisee makes
the sale.
Sales of apparel to franchisees and wholesale accounts are
recognized when goods are shipped and collection is reasonably
assured.
All revenues are reported net of sales taxes collected for
various governmental agencies.
Revenues from the Companys gift cards are recognized when
tendered for payment, or upon redemption. Outstanding customer
balances are included in Unredeemed gift card
liability on the consolidated balance sheets. There are no
expiration dates on the Companys gift cards, and lululemon
does not charge any service fees that cause a decrement to
customer balances.
While the Company will continue to honor all gift cards
presented for payment, management may determine the likelihood
of redemption to be remote for certain card balances due to,
among other things, long periods of inactivity. In these
circumstances, to the extent management determines there is no
requirement for remitting card balances to government agencies
under unclaimed property laws, card balances may be recognized
in the consolidated statements of operations in Net
revenue. For the years ended January 30, 2011,
January 31, 2010 and February 1, 2009, net revenue
recognized on unredeemed gift card balances was $1,406, $2,183,
and $nil, respectively.
Cost
of goods sold
Cost of goods sold includes the cost of purchased merchandise,
including in-bound freight, duty and nonrefundable taxes
incurred in delivering the goods to the Companys
distribution centers. It also includes all occupancy costs such
as minimum rent, contingent rent where applicable, property
taxes, utilities and depreciation expense for the Companys
corporate-owned store locations and all costs incurred in
operating the Companys distribution centers and
production, design and merchandise departments, hemming and
shrink and valuation reserves. Production, design, merchandise
and distribution center costs include salaries and benefits as
well as operating expenses, which include occupancy costs and
depreciation expense for the Companys distribution centers.
Store
pre-opening costs
Operating costs incurred prior to the opening of new stores are
expensed as incurred.
Income
taxes
The Company follows the liability method with respect to
accounting for income taxes. Deferred income tax assets and
liabilities are determined based on temporary differences
between the carrying amounts and the tax basis of assets and
liabilities. Deferred income tax assets and liabilities are
measured using enacted tax rates that are expected to be in
effect when these differences are anticipated to reverse.
Deferred income tax assets are reduced by
59
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
a valuation allowance, if based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
The recognition of a deferred income tax asset is based
primarily on managements forecasts, including current and
proposed tax legislation, current and anticipated taxable
income, utilization of previously unrealized non-operating loss
carryforwards and regulatory reviews of tax filings. Given the
judgments and estimates required and the sensitivity of the
results to the significant assumptions used, the accounting
estimates used in relation to the recognition of deferred income
tax assets are subject to measurement uncertainty and are
susceptible to a material change if the underlying assumptions
change.
The Company generally provides for taxes at the rate applicable
for the appropriate tax jurisdiction. Because present intentions
are to reinvest the unremitted earnings into foreign operations,
the Company does not provide U.S. income taxes on
unremitted earnings of foreign subsidiaries. Management
periodically assesses the need to utilize these unremitted
earnings to finance foreign operations. This assessment is based
on cash flow projections that are the result of estimates of
future production, fiscal requirements by tax jurisdiction of
our operations and operational and fiscal objectives by tax
jurisdiction for our operations. Such estimates are inherently
imprecise since many assumptions utilized in the cash flow
projections are subject to revision in the future.
The Company files income tax returns in the United States,
Canada and various foreign and state jurisdictions. The Company
is subject to income tax examination by tax authorities in all
jurisdictions from our inception to date. Our policy is to
recognize interest expense and penalties related to income tax
matters as tax expense. At January 30, 2011, the Company
does not have any significant accruals for interest related to
unrecognized tax benefits or tax penalties. Intercompany
transfer pricing policies will be subject to audits by various
foreign tax jurisdictions. Although management believes that the
Companys intercompany transfer pricing policies and tax
positions are reasonable, the final determination of tax audits
or potential tax disputes may be materially different from that
which is reflected in the Companys income tax provisions
and accruals.
Currency
translation
The functional currency for each entity included in these
consolidated financial statements that is domiciled outside of
the United States (the foreign entities) is the applicable local
currency. Assets and liabilities of each foreign entity are
translated into U.S. dollars at the exchange rate in effect
on the balance sheet date. Revenues and expenses are translated
at the average rate in effect during the period. Unrealized
translation gains and losses are recorded as a cumulative
translation adjustment, which is included in other comprehensive
income or loss, which is a component of accumulated other
comprehensive income included in stockholders equity.
Foreign currency transactions denominated in a currency other
than an entitys functional currency are remeasured into
the functional currency with any resulting gains and losses
included in income, except for gains and losses arising on
intercompany foreign currency transactions that are of a
long-term investment nature.
Fair
value of financial instruments
The Companys financial instruments consist of cash and
cash equivalents, accounts receivable, trade accounts payable,
accrued liabilities, and other liabilities. Unless otherwise
noted, it is managements opinion that the Company is not
exposed to significant interest, currency or credit risks
arising from these financial instruments. All foreign exchange
gains or losses are recorded in the consolidated statements of
operations under selling, general and administrative expenses.
The fair value of these financial instruments approximates their
carrying value, unless otherwise noted.
Foreign
exchange risk
A significant portion of the Companys sales are
denominated in Canadian dollars. The Companys exposure to
foreign exchange risk is mainly related to fluctuations between
the Canadian dollar and the U.S. dollar. This
60
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exposure is partly mitigated by a natural hedge in that a
significant portion of the Companys operating costs are
also denominated in Canadian dollars. The Company is also
exposed to changes in interest rates. The Company does not hedge
foreign currency and interest rate exposure in a manner that
would entirely eliminate the effect of changes in foreign
currency exchange rates, or interest rates on net income and
cash flows.
The aggregate foreign exchange gains (losses) included in income
amount to $477, $174, and $(110) for the years ended
January 30, 2011, January 31, 2010, and
February 1, 2009, respectively.
Concentration
of credit risk
The Company is not exposed to significant credit risk on its
cash and cash equivalents and trade accounts receivable. Cash
and cash equivalents are held with high quality financial
institutions. Trade accounts receivable are primarily from
certain franchisees and wholesale accounts. The Company does not
require collateral to support the trade accounts receivable;
however, in certain circumstances, the Company may require
parties to provide payment for goods prior to delivery of the
goods. The accounts receivable are net of an allowance for
doubtful accounts, which is established based on
managements assessment of the credit risks of the
underlying accounts.
Stock-based
compensation
The Company accounts for stock-based compensation using the fair
value method. The fair value of awards granted is estimated at
the date of grant and recognized as employee compensation
expense on a straight-line basis over the requisite service
period with the offsetting credit to additional paid-in capital.
For awards with service
and/or
performance conditions, the total amount of compensation expense
to be recognized is based on the number of awards expected to
vest and is adjusted to reflect those awards that do ultimately
vest. For awards with performance conditions, the Company
recognizes the compensation expense if and when the Company
concludes that it is probable that the performance condition
will be achieved. The Company reassesses the probability of
achieving the performance condition at each reporting date. For
awards with market conditions, all compensation expense is
recognized irrespective of whether such conditions are met.
Certain employees are entitled to share-based awards from the
principal stockholder of the Company. These awards are accounted
for by the Company as employee compensation expense in
accordance with the above-noted policies.
Earnings
per share
Earnings per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income
available to common stockholders for the period by the diluted
weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential
dilution from common shares issuable through stock options and
performance stock units using the treasury stock method.
Use of
estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of
revenues and expenses during the reporting period.
Recently
issued accounting standards
In January 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
2010-06,
Fair Value Measurements and Disclosures Topic 820: Improving
Disclosures about Fair Value Measurements (ASU
2010-06).
ASU 2010-06
requires new disclosures regarding transfers in and out of the
61
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Level 1 and 2 and activity within Level 3 fair value
measurements and clarifies existing disclosures of inputs and
valuation techniques for Level 2 and 3 fair value
measurements. The new disclosures and clarifications of existing
disclosures are effective for interim and Annual Reporting
periods beginning after December 15, 2009, except for the
disclosure of activity within Level 3 fair value
measurements, which is effective for fiscal years beginning
after December 15, 2010, and for interim reporting periods
within those years. The company adopted the new disclosures
effective January 31, 2010, except for the disclosure of
activity within Level 3 fair value measurements. The
Level 3 disclosures are effective for the company at the
beginning of fiscal 2011. The adoption of ASU
2010-06 did
not have a material impact, and is not expected to have a
material impact, on the disclosures within the companys
consolidated financial statements.
In February 2010, the FASB amended Accounting Standards
Codification (ASC) Topic 855 Subsequent Events
(ASC 855). Under the amended guidance, SEC
filers are no longer required to disclose the date through which
subsequent events have been evaluated in originally issued and
revised financial statements. This guidance was effective
immediately and the company adopted these new requirements in
the first quarter of fiscal 2010.
In April 2010, the FASB amended ASC Topic 718 Compensation
(ASC 718) to clarify that a share-based payment
award with an exercise price denominated in the currency of a
market in which a substantial portion of the entitys
equity securities trades should not be considered to contain a
market, performance or service condition. Therefore, an entity
should not classify such an award as a liability if it otherwise
qualifies for classification in equity. This guidance is
effective for interim and annual periods beginning on or after
December 15, 2010 and is to be applied prospectively. We
have determined the adoption of the amendment will not have a
material impact on our consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to
fiscal 2010 presentation.
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Finished goods
|
|
$
|
59,138
|
|
|
$
|
45,181
|
|
Raw materials
|
|
|
1,913
|
|
|
|
1,461
|
|
Provision for obsolescence and shrink
|
|
|
(3,582
|
)
|
|
|
(2,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,469
|
|
|
$
|
44,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Leasehold improvements
|
|
$
|
84,773
|
|
|
$
|
63,999
|
|
Furniture and fixtures
|
|
|
17,940
|
|
|
|
17,776
|
|
Computers and software
|
|
|
34,581
|
|
|
|
25,194
|
|
Equipment and vehicles
|
|
|
1,038
|
|
|
|
428
|
|
Accumulated amortization
|
|
|
(67,378
|
)
|
|
|
(45,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,954
|
|
|
$
|
61,591
|
|
|
|
|
|
|
|
|
|
|
Included in the cost of property and equipment are capitalized
software costs of $17,252 and $11,823 at January 30, 2011
and January 31, 2010, respectively, associated with
internally developed software.
Depreciation expense related to property and equipment was
$23,549, $19,758 and $14,819 for the years ended
January 30, 2011, January 31, 2010, and
February 1, 2009, respectively.
62
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded impairment of $700, $112, and $2,999 for
the years ended January 30, 2011, January 31, 2010,
and February 1, 2009, respectively, in property and
equipment for stores that were relocated or closed. These assets
were previously used in the corporate-owned stores segment.
|
|
5
|
GOODWILL
AND INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Goodwill
|
|
$
|
18,437
|
|
|
$
|
738
|
|
Changes in foreign currency exchange rates
|
|
|
1,837
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,274
|
|
|
|
899
|
|
|
|
|
|
|
|
|
|
|
Intangibles Reacquired franchise rights
|
|
$
|
10,709
|
|
|
$
|
10,162
|
|
Non-competition agreements
|
|
|
694
|
|
|
|
694
|
|
Accumulated amortization
|
|
|
(6,355
|
)
|
|
|
(4,868
|
)
|
Changes in foreign currency exchange rates
|
|
|
1,790
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,838
|
|
|
|
7,151
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and intangibles
|
|
$
|
27,112
|
|
|
$
|
8,050
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was $1,065,
$1,074, and $1,004 for the years ended January 30, 2011,
January 31, 2010, and February 1, 2009, respectively.
The estimated aggregate amortization expense is as follows:
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2011
|
|
$
|
1,319
|
|
2012
|
|
|
1,319
|
|
2013
|
|
|
1,137
|
|
2014
|
|
|
1,006
|
|
2015
|
|
|
897
|
|
Thereafter
|
|
|
1,160
|
|
|
|
|
|
|
|
|
$
|
6,838
|
|
|
|
|
|
|
In May 2010, the Company increased its investment in lululemon
athletica australia Pty (lululemon australia) from
13 percent to 80 percent. The transaction provides the
Company control over lululemon australia, which became a
subsidiary of the Company on this date. lululemon australia is
engaged in the distribution of healthy lifestyle inspired
athletic apparel, which is sold through a chain of
corporate-owned retail locations and through a network of
wholesale accounts, in Australia. The Company previously
accounted for its 13 percent interest in lululemon
australia as an equity investment.
The acquired business contributed net revenues of $15,794 and
income from operations of $1,490 to the Company from the date of
acquisition to January 30, 2011. The following unaudited
pro forma summary presents consolidated information of the
Company as if the business combination had occurred on
February 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
January 30,
|
|
January 31,
|
|
February 1,
|
|
|
2011
|
|
2010
|
|
2009
|
|
Net revenue
|
|
$
|
716,328
|
|
|
$
|
463,506
|
|
|
$
|
359,992
|
|
Income from operations
|
|
$
|
180,832
|
|
|
$
|
85,854
|
|
|
$
|
54,929
|
|
63
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These amounts have been calculated after applying the
Companys accounting policies and adjusting the results of
lululemon australia to reflect the additional depreciation and
amortization that would have been charged assuming the fair
value adjustments to inventory and intangible assets had been
applied from February 1, 2010, together with the
consequential tax effects.
In fiscal 2010, the Company incurred $181 of acquisition-related
costs. These costs are included in general and administrative
expenses in the Companys consolidated statements of
operations for the year ended January 30, 2011.
The following tables summarize the consideration transferred to
acquire lululemon australia and the amounts of identified assets
acquired and liabilities assumed at the acquisition date, as
well as the fair value of the non-controlling interest in
lululemon australia at the acquisition date:
Fair value of consideration transferred:
|
|
|
|
|
Cash
|
|
$
|
5,872
|
|
Conversion of note receivable to equity
|
|
|
3,481
|
|
|
|
|
|
|
Total
|
|
|
9,353
|
|
|
|
|
|
|
Investment in lululemon australia held prior to the business
combination
|
|
|
2,345
|
|
Fair value of the non-controlling interest in lululemon australia
|
|
|
3,554
|
|
|
|
|
|
|
|
|
$
|
15,252
|
|
|
|
|
|
|
The following table summarizes the fair values of the net assets
acquired at the date of acquisition:
|
|
|
|
|
Inventory
|
|
$
|
3,053
|
|
Prepaid and other assets
|
|
|
709
|
|
Property and equipment
|
|
|
1,812
|
|
Goodwill and intangible assets
|
|
|
11,874
|
|
|
|
|
|
|
Total assets acquired
|
|
|
17,448
|
|
Current and non-current liabilities
|
|
|
2,196
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,196
|
|
|
|
|
|
|
Total identifiable net assets
|
|
$
|
15,252
|
|
|
|
|
|
|
As a result of the Company obtaining control over lululemon
australia, the Companys previously held 13 percent
interest was remeasured to fair value, resulting in a gain of
$1,792. This gain has been recognized in the line
item Other income (expense), net in the Companys
consolidated statements of operations.
The fair value of the non-controlling interest of $3,554 in
lululemon australia was estimated by applying a market approach
and an income approach. This fair value measurement is based on
significant inputs not observable in the market and thus
represents a Level 3 measurement as defined in ASC Topic
820, Fair Value Measurements and Disclosures (ASC
820). The fair value estimates use standard valuation
techniques, including discounted cash flows, comparable
transactions and internal projections, and include assumed
adjustments due to the lack of control or lack of marketability
that market participants would consider when estimating the fair
value of the non-controlling interest in lululemon australia.
In July 2010, the Company reacquired in an asset purchase
transaction a franchised store in Saskatoon, Saskatchewan for
total cash consideration of $6,610. Included in the
Companys consolidated statements of operations for the
year ended January 30, 2011 are the results of the
reacquired Saskatoon franchised store from the date of
acquisition to January 30, 2011.
64
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the fair values of the net assets
acquired at the date of acquisition:
|
|
|
|
|
Inventory
|
|
$
|
325
|
|
Prepaid and other current assets
|
|
|
9
|
|
Property and equipment
|
|
|
174
|
|
Goodwill
|
|
|
6,371
|
|
|
|
|
|
|
Total assets acquired
|
|
|
6,879
|
|
Current and non-current liabilities
|
|
|
269
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
269
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
6,610
|
|
|
|
|
|
|
On September 15, 2008, the Company reacquired in an asset
purchase transaction two franchised stores in Victoria, British
Columbia for total cash consideration of $1,181 less working
capital adjustments of $4 from a related party. The fair values
of the net assets acquired were measured as if the transaction
occurred with a arms length party. Included in the
Companys consolidated statement of operations for the year
ended February 1, 2009, are the results of the two
reacquired Victoria franchised stores from the date of
acquisition through to February 1, 2009.
The following table summarizes the fair values of the net assets
acquired as of September 15, 2008:
|
|
|
|
|
Inventory
|
|
$
|
306
|
|
Prepaid and other current assets
|
|
|
2
|
|
Property and equipment
|
|
|
261
|
|
Reacquired franchise rights
|
|
|
780
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,349
|
|
Unredeemed gift card liability
|
|
|
172
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
172
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,177
|
|
|
|
|
|
|
On September 8, 2008, the Company reacquired in an asset
purchase transaction a franchised store in Bellevue, Washington
for total cash consideration of $2,067 plus working capital
adjustments of $157. Included in the Companys consolidated
statement of operations for the year ended February 1,
2009, are the results of the reacquired Bellevue franchised
store from the date of acquisition through to February 1,
2009.
The following table summarizes the fair values of the net assets
acquired as of September 8, 2008:
|
|
|
|
|
Inventory
|
|
$
|
234
|
|
Prepaid and other current assets
|
|
|
38
|
|
Property and equipment
|
|
|
249
|
|
Reacquired franchise rights
|
|
|
1,755
|
|
|
|
|
|
|
Total assets acquired
|
|
|
2,276
|
|
Unredeemed gift card liability
|
|
|
52
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
52
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
2,224
|
|
|
|
|
|
|
The acquisition of the franchised stores is part of
managements vertical retail growth strategy. The
reacquired franchise rights are amortized on a straight-line
basis over their estimated useful lives. Goodwill is reviewed
for
65
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impairment annually, or as events occur or circumstances arise
which may reduce the fair value of goodwill below carrying
value. The weighted-average remaining useful lives of the
reacquired franchise rights was 5.24 as at January 30, 2011
and 6.28 years as at January 31, 2010.
|
|
6
|
OTHER
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Security deposits
|
|
$
|
2,762
|
|
|
$
|
945
|
|
Deferred lease cost
|
|
|
1,301
|
|
|
|
1,487
|
|
Advances to and investments in franchise
|
|
|
|
|
|
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,063
|
|
|
$
|
6,105
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2008 the Company entered into a Credit Agreement
(the Agreement) with its Australian franchise
partner, under which advances were provided by the Company to
the franchisee. The Agreement provides for a secured
non-revolving credit facility of up to AUD$3,900 and funds are
only advanced upon approval by the Company. The line of credit
was converted to equity in May 2010 as part of the
Companys consideration transferred to increase its
investment in its Australian franchise partner, as described in
Note 5. As of January 31, 2010 a total of AUD$3,255
has been drawn on the line of credit. Prior to the conversion in
2010, the loan was designated as held to maturity and beared
interest at 8% per annum which was accrued and capitalized to
the loan principal.
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Inventory purchases
|
|
$
|
11,925
|
|
|
$
|
7,664
|
|
Sales tax collected
|
|
|
4,505
|
|
|
|
2,758
|
|
Accrued rent
|
|
|
2,750
|
|
|
|
1,771
|
|
Lease exit costs
|
|
|
1,317
|
|
|
|
800
|
|
Other
|
|
|
4,769
|
|
|
|
4,590
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,266
|
|
|
$
|
17,583
|
|
|
|
|
|
|
|
|
|
|
8 OTHER
NON-CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Deferred lease liability
|
|
$
|
13,129
|
|
|
$
|
10,822
|
|
Tenant Inducements
|
|
|
6,516
|
|
|
|
4,650
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,645
|
|
|
$
|
15,472
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
LONG-TERM
DEBT AND CREDIT FACILITIES
|
In April 2007, the Company executed a new credit facility with a
lending institution that provided for a CDN$20,000 uncommitted
demand revolving credit facilities to fund the working capital
requirements of the Company. Borrowings under the uncommitted
credit facilities are made on a
when-and-as-needed
basis at the discretion of the Company.
66
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Borrowings under the credit facility can be made either as
i) Revolving Loans Revolving loan borrowings
will bear interest at a rate equal to the Banks CDN$ or
USD$ annual base rate (defined as zero% plus the lenders
annual prime rate) per annum, ii) Offshore
Loans Offshore rate loan borrowings will bear
interest at a rate equal to a base rate based upon LIBOR for the
applicable interest period, plus 1.125 percent per annum,
iii) Bankers Acceptances Bankers acceptance
borrowings will bear interest at the bankers acceptance rate
plus 1.125 percent per annum and iv) Letters of Credit
and Letters of Guarantee Borrowings drawn down under
letters of credit or guarantee issued by the banks will bear a
1.125 percent per annum fee.
At January 30, 2011, there were no borrowings outstanding
under this credit facility. As well, at January 30, 2011,
letters of credit totaling USD$nil and guarantees totaling
USD$1,466 had been issued under the facility, which reduced the
amount available by a corresponding amount.
Authorized
share capital
As part of the reorganization in connection with the
Companys 2007 initial public offering (the
reorganization), the Companys stockholders approved
an amended and restated certificate of incorporation that
provides for the issuance of up to 200,000 shares of common
stock, 5,000 shares of undesignated preferred stock and
30,000 shares of special voting stock.
The holders of the special voting stock are entitled to one vote
for each share held. The special voting shares are not entitled
to receive dividends or distributions or receive any
consideration in the event of a liquidation, dissolution or
wind-up. To
the extent that exchangeable shares as described below are
exchanged for common stock, a corresponding number of special
voting shares will be cancelled without consideration.
The holders of the exchangeable shares have dividend and
liquidation rights equivalent to those of holders of the common
shares of the Company. The exchangeable shares can be converted
on a one for one basis by the holder at any time into common
shares of the Company plus a cash payment for any accrued and
unpaid dividends. Holders of exchangeable shares are entitled to
the same or economically equivalent dividend as declared on the
common stock of the Company. The exchangeable shares are
non-voting. The Company has the right to convert the
exchangeable shares into common shares of the Company at any
time after the earlier of July 26, 2047, the date on which
less than 2,094 exchangeable shares are outstanding or in the
event of certain events such as a change in control.
|
|
11
|
STOCK-BASED
COMPENSATION
|
Share
option plans
The Companys employees participate in various stock-based
compensation plans which are either provided by a principal
stockholder of the Company or the Company.
During the year ended January 31, 2006, LIPO and LIPO USA,
entities controlled by a principal stockholder of the Company,
created a stockholder sponsored stock-based compensation plans
(LIPO Plans) for certain eligible employees of the
Company in order to provide incentive to increase stockholder
value. Under the provisions of the LIPO plans, the eligible
employees were granted options to acquire shares of LIPO and
LIPO USA, respectively. LIPO and LIPO USA held shares in LACI
and the Company, respectively. Shares of the Company that are or
will be issued to holders of the options or restricted shares
under the LIPO Plans are currently held by LIPO USA, an
affiliate of a principal stockholder. The exercise, vesting or
forfeiture of any of these awards will not have any impact on
the outstanding common shares of the Company.
In July 2007, the Companys Board of Directors adopted, and
the Companys stockholders approved the 2007 Equity
Incentive Plan (2007 Plan). The 2007 Plan provides
for the grants of stock options, stock appreciation rights,
performance stock units, restricted stock or restricted stock
units to employees (including officers and
67
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
directors who are also employees) of the Company. The majority
of stock options granted to date have a four-year vesting period
and vest at a rate of 25% per each year on the anniversary date
of the grant. Performance stock units issued under the 2007 Plan
generally vest three years from the grant date and restricted
stock issued under the 2007 Plan vest one year from the grant
date. To date, 40 shares of restricted stock have been
issued under the 2007 Plan to certain directors and consultants
of the Company.
The Companys policy is to issue shares upon the exercise
of Company options from treasury. Any shares issued to employees
related to stockholder sponsored plans are provided by the
principal stockholder and are not issued from treasury or
repurchased by the Company.
Stock-based compensation expense charged to income for the plans
was $7,273, $5,616 and $6,532 for the years ended
January 30, 2011, January 31, 2010, and
February 1, 2009, respectively.
Total unrecognized compensation cost for all stock option plans
was $15,399 as at January 30, 2011, which is expected to be
recognized over a weighted-average period of 2.7 years, and
was $13,692 as at January 31, 2010 over a weighted-average
period of 2.6 years.
Employee
stock purchase plan
The Companys Board of Directors and stockholders approved
the Companys Employee Share Purchase Plan
(ESPP) in September 2007. The ESPP allows for the
purchase of common stock of the Company by all eligible
employees at a 25% discount from fair market value subject to
certain limits as defined in the ESPP. The maximum number of
shares available under the ESPP is 3,000 shares. During the
year ended January 30, 2011, 37 shares were purchased
under the ESPP, which were funded by the Company through open
market purchases.
Stockholder
sponsored stock options
On December 1, 2005, LIPO and LIPO USA each granted 5,296
Class A options with an exercise price of CDN$0.00001 and
an expiry date of December 31, 2009 and 11,062 Class B
options with an expiry date of December 31, 2010,
respectively, prior to the reorganization. The LIPO and LIPO USA
Class B options originally had exercise prices of CDN$0.99
and $0.01, respectively. Each Class A option and each
Class B option entitled the holder to acquire one share of
common stock of LIPO and LIPO USA respectively.
While all of the Class A options of both companies vested
on December 5, 2005 and were immediately exercised, 3,549
of the common shares of LIPO and LIPO USA issued were designated
as forfeitable. These forfeitable shares were considered to be
non-vested for accounting purposes and were considered not to be
earned as of December 5, 2005. These non-vested shares
became non-forfeitable over a four-year requisite service period
to December 5, 2009. In addition, on December 5, 2005,
2,239 of the Series B options vested, with the remaining
options vesting over a five-year period ending December 5,
2010.
In connection with the reorganization of the Company,
modifications were made to the LIPO and LIPO USA plans. The
5,285 LIPO Class A awards and the 4,111 vested LIPO
Class B awards were exchanged for a total of 1,960
exchangeable shares of the Company through a series of
transactions. At the time of the reorganization, 1,418 of the
new awards were considered to be vested and the remaining 541
new awards were considered to be unvested. The unvested
exchangeable shares are held in trust by the principal
stockholder and are subject to the same vesting schedule as the
original LIPO award.
68
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the shares granted under the
stockholder sponsored plan. Amounts are presented on a post
reorganization basis.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
Exchangeable
|
|
|
LIPO USA
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Unvested balance at February 3, 2008
|
|
|
265
|
|
|
|
58
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
170
|
|
|
|
37
|
|
Cancelled
|
|
|
57
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at February 1, 2009
|
|
|
38
|
|
|
|
8
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
38
|
|
|
|
8
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at January 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at January 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to shares was
$nil at January 30, 2011.
The following table summarizes the LIPO USA options granted
under the stockholder sponsored plan. Amounts are presented on a
post reorganization basis and are shown in lululemon share
equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
LIPO USA
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Unvested balance at February 3, 2008
|
|
|
881
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
337
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
253
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 1, 2009
|
|
|
291
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
184
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 31, 2010
|
|
|
107
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
107
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 30, 2011
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to LIPO USA
options was $nil at January 30, 2011.
The Company records compensation expense for shares issued under
the stockholder sponsored awards, over the requisite service
periods.
69
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The vesting schedule of the stockholder sponsored awards in
lululemon share equivalents is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable
|
|
|
LIPO USA
|
|
|
LIPO USA
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Options
|
|
|
December 5, 2005
|
|
|
788
|
|
|
|
87
|
|
|
|
105
|
|
December 5, 2006
|
|
|
631
|
|
|
|
60
|
|
|
|
96
|
|
December 5, 2007
|
|
|
276
|
|
|
|
60
|
|
|
|
393
|
|
December 5, 2008
|
|
|
199
|
|
|
|
43
|
|
|
|
384
|
|
December 5, 2009
|
|
|
66
|
|
|
|
14
|
|
|
|
315
|
|
December 5, 2010
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,960
|
|
|
|
264
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the non-forfeitable and forfeitable shares
issued under LIPO Class A was measured at the fair value of
the underlying stock on the grant date. The fair value of the
LIPO Class B options was determined using the Black-Scholes
option pricing model with the following assumptions:
|
|
|
|
Dividend yield
|
|
|
0%
|
Expected volatility
|
|
|
45%
|
Risk-free interest rate
|
|
|
5%
|
Weighted-average expected life of option (years)
|
|
|
5.0 years
|
The expected volatility was based on available information on
volatility from a peer group of publicly traded U.S. and
Canadian retail apparel companies. The expected life of the
options was determined by reviewing data about exercise patterns
of employees in the retail industry as well as considering the
probability of a liquidity event such as the sale of the Company
or an IPO and the potential impact of such an event on the
exercise pattern. The risk-free interest rate approximates the
yield on benchmark Government of Canada bonds for terms similar
to the contract life of the options.
The total fair value of awards under the stockholder sponsored
plans that vested during the years ended January 30, 2011,
January 31, 2010 and February 1, 2009 was $261,
$464,and $1,137, respectively.
70
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company
stock options and performance stock units
A summary of the Companys stock options, performance share
units and restricted shares activity as of January 30,
2011, January 31, 2010, and February 1, 2009, and
changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Performance
|
|
|
Grant
|
|
|
Restricted
|
|
|
Grant
|
|
|
|
Options
|
|
|
Price
|
|
|
Share Units
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Balance at February 3, 2008
|
|
|
4,798
|
|
|
$
|
2.74
|
|
|
|
|
|
|
$
|
19.43
|
|
|
|
10
|
|
|
$
|
19.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
545
|
|
|
|
21.66
|
|
|
|
|
|
|
|
24.04
|
|