ITEM 1.
FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
January 29,
2017
|
ASSETS
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
650,054
|
|
|
$
|
734,846
|
|
Accounts receivable
|
|
21,281
|
|
|
9,200
|
|
Inventories
|
|
396,892
|
|
|
298,432
|
|
Prepaid and receivable income taxes
|
|
77,625
|
|
|
81,190
|
|
Other prepaid expenses and other current assets
|
|
42,496
|
|
|
39,069
|
|
|
|
1,188,348
|
|
|
1,162,737
|
|
Property and equipment, net
|
|
440,403
|
|
|
423,499
|
|
Goodwill and intangible assets, net
|
|
24,476
|
|
|
24,557
|
|
Deferred income tax assets
|
|
37,583
|
|
|
26,256
|
|
Other non-current assets
|
|
29,639
|
|
|
20,492
|
|
|
|
$
|
1,720,449
|
|
|
$
|
1,657,541
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
14,113
|
|
|
$
|
24,846
|
|
Accrued inventory liabilities
|
|
23,420
|
|
|
8,601
|
|
Accrued compensation and related expenses
|
|
62,387
|
|
|
55,238
|
|
Income taxes payable
|
|
4,403
|
|
|
30,290
|
|
Unredeemed gift card liability
|
|
52,500
|
|
|
70,454
|
|
Lease termination liabilities
|
|
12,164
|
|
|
—
|
|
Other current liabilities
|
|
71,590
|
|
|
52,561
|
|
|
|
240,577
|
|
|
241,990
|
|
Deferred income tax liabilities
|
|
—
|
|
|
7,262
|
|
Other non-current liabilities
|
|
58,596
|
|
|
48,316
|
|
|
|
299,173
|
|
|
297,568
|
|
Stockholders' equity
|
|
|
|
|
Undesignated preferred stock, $0.01 par value: 5,000 shares authorized; none issued and outstanding
|
|
—
|
|
|
—
|
|
Exchangeable stock, no par value: 60,000 shares authorized; 9,781 and 9,781 issued and outstanding
|
|
—
|
|
|
—
|
|
Special voting stock, $0.000005 par value: 60,000 shares authorized; 9,781 and 9,781 issued and outstanding
|
|
—
|
|
|
—
|
|
Common stock, $0.005 par value: 400,000 shares authorized; 125,592 and 127,304 issued and outstanding
|
|
628
|
|
|
637
|
|
Additional paid-in capital
|
|
275,871
|
|
|
266,622
|
|
Retained earnings
|
|
1,336,216
|
|
|
1,294,214
|
|
Accumulated other comprehensive loss
|
|
(191,439
|
)
|
|
(201,500
|
)
|
|
|
1,421,276
|
|
|
1,359,973
|
|
|
|
$
|
1,720,449
|
|
|
$
|
1,657,541
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
Net revenue
|
|
$
|
619,018
|
|
|
$
|
544,416
|
|
|
$
|
1,720,379
|
|
|
$
|
1,554,452
|
|
Cost of goods sold
|
|
297,056
|
|
|
265,990
|
|
|
844,100
|
|
|
782,734
|
|
Gross profit
|
|
321,962
|
|
|
278,426
|
|
|
876,279
|
|
|
771,718
|
|
Selling, general and administrative expenses
|
|
215,367
|
|
|
185,451
|
|
|
640,032
|
|
|
547,195
|
|
Asset impairment and restructuring costs
|
|
21,007
|
|
|
—
|
|
|
36,524
|
|
|
—
|
|
Income from operations
|
|
85,588
|
|
|
92,975
|
|
|
199,723
|
|
|
224,523
|
|
Other income (expense), net
|
|
1,052
|
|
|
628
|
|
|
2,771
|
|
|
720
|
|
Income before income tax expense
|
|
86,640
|
|
|
93,603
|
|
|
202,494
|
|
|
225,243
|
|
Income tax expense
|
|
27,696
|
|
|
25,318
|
|
|
63,593
|
|
|
57,997
|
|
Net income
|
|
$
|
58,944
|
|
|
$
|
68,285
|
|
|
$
|
138,901
|
|
|
$
|
167,246
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
(31,018
|
)
|
|
(24,748
|
)
|
|
10,061
|
|
|
20,762
|
|
Comprehensive income
|
|
$
|
27,926
|
|
|
$
|
43,537
|
|
|
$
|
148,962
|
|
|
$
|
188,008
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.50
|
|
|
$
|
1.02
|
|
|
$
|
1.22
|
|
Diluted earnings per share
|
|
$
|
0.43
|
|
|
$
|
0.50
|
|
|
$
|
1.02
|
|
|
$
|
1.22
|
|
Basic weighted-average number of shares outstanding
|
|
135,364
|
|
|
137,033
|
|
|
136,191
|
|
|
137,095
|
|
Diluted weighted-average number of shares outstanding
|
|
135,578
|
|
|
137,237
|
|
|
136,357
|
|
|
137,321
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable Stock
|
|
Special Voting Stock
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
|
|
Shares
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
|
|
|
Balance at January 29, 2017
|
|
9,781
|
|
|
9,781
|
|
|
$
|
—
|
|
|
127,304
|
|
|
$
|
637
|
|
|
$
|
266,622
|
|
|
$
|
1,294,214
|
|
|
$
|
(201,500
|
)
|
|
$
|
1,359,973
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,901
|
|
|
|
|
138,901
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,061
|
|
|
10,061
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
13,048
|
|
|
|
|
|
|
13,048
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
194
|
|
|
1
|
|
|
1,647
|
|
|
|
|
|
|
1,648
|
|
Shares withheld related to net share settlement of stock-based compensation
|
|
|
|
|
|
|
|
(58
|
)
|
|
—
|
|
|
(3,086
|
)
|
|
|
|
|
|
(3,086
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
(1,848
|
)
|
|
(10
|
)
|
|
(2,360
|
)
|
|
(96,899
|
)
|
|
|
|
(99,269
|
)
|
Balance at October 29, 2017
|
|
9,781
|
|
|
9,781
|
|
|
$
|
—
|
|
|
125,592
|
|
|
$
|
628
|
|
|
$
|
275,871
|
|
|
$
|
1,336,216
|
|
|
$
|
(191,439
|
)
|
|
$
|
1,421,276
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
Cash flows from operating activities
|
|
|
|
|
Net income
|
|
$
|
138,901
|
|
|
$
|
167,246
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
80,129
|
|
|
63,641
|
|
Deferred income taxes
|
|
(18,385
|
)
|
|
—
|
|
Stock-based compensation expense
|
|
13,048
|
|
|
12,939
|
|
Asset impairment for ivivva restructuring
|
|
11,593
|
|
|
—
|
|
Settlement of derivatives not designated in a hedging relationship
|
|
4,178
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Inventories
|
|
(95,475
|
)
|
|
(73,660
|
)
|
Prepaid and receivable income taxes
|
|
3,565
|
|
|
(30,580
|
)
|
Other prepaid expenses and other current assets
|
|
(14,885
|
)
|
|
(13,471
|
)
|
Other non-current assets
|
|
8,126
|
|
|
(8,804
|
)
|
Accounts payable
|
|
(11,141
|
)
|
|
(1,558
|
)
|
Accrued inventory liabilities
|
|
14,602
|
|
|
5,270
|
|
Accrued compensation and related expenses
|
|
6,579
|
|
|
8,835
|
|
Income taxes payable
|
|
(26,420
|
)
|
|
(17,563
|
)
|
Unredeemed gift card liability
|
|
(18,272
|
)
|
|
(14,123
|
)
|
Lease termination liabilities
|
|
12,164
|
|
|
—
|
|
Other accrued and non-current liabilities
|
|
23,002
|
|
|
487
|
|
Net cash provided by operating activities
|
|
131,309
|
|
|
98,659
|
|
Cash flows from investing activities
|
|
|
|
|
Purchase of property and equipment
|
|
(107,128
|
)
|
|
(106,168
|
)
|
Settlement of net investment hedges
|
|
(4,599
|
)
|
|
—
|
|
Other investing activities
|
|
(8,324
|
)
|
|
—
|
|
Net cash used in investing activities
|
|
(120,051
|
)
|
|
(106,168
|
)
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from settlement of stock-based compensation
|
|
1,648
|
|
|
5,959
|
|
Taxes paid related to net share settlement of stock-based compensation
|
|
(3,086
|
)
|
|
(2,691
|
)
|
Repurchase of common stock
|
|
(99,269
|
)
|
|
(28,556
|
)
|
Net cash used in financing activities
|
|
(100,707
|
)
|
|
(25,288
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
4,657
|
|
|
11,701
|
|
(Decrease) increase in cash and cash equivalents
|
|
(84,792
|
)
|
|
(21,096
|
)
|
Cash and cash equivalents, beginning of period
|
|
$
|
734,846
|
|
|
$
|
501,482
|
|
Cash and cash equivalents, end of period
|
|
$
|
650,054
|
|
|
$
|
480,386
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
Note 1
|
|
|
Note 2
|
|
|
Note 3
|
|
|
Note 4
|
|
|
Note 5
|
|
|
Note 6
|
|
|
Note 7
|
|
|
Note 8
|
|
|
Note 9
|
|
|
Note 10
|
|
|
Note 11
|
|
|
Note 12
|
|
|
lululemon athletica inc.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of operations
lululemon athletica inc., a Delaware corporation ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of healthy lifestyle inspired athletic apparel, which is sold through a chain of company-operated stores, direct to consumer through e-commerce, outlets, showrooms, temporary locations, sales to wholesale accounts, license and supply arrangements, and through warehouse sales. Its apparel is marketed under the lululemon and ivivva brand names. The Company operates stores in the United States, Canada, Australia, the United Kingdom, China, New Zealand, Hong Kong, Singapore, South Korea, Germany, Ireland, Japan, Puerto Rico, Switzerland, and Taiwan. There were a total of
388
and
406
company-operated stores in operation as of
October 29, 2017
and
January 29, 2017
, respectively.
On June 1, 2017, the Company announced a plan to restructure its ivivva operations. On
August 20, 2017
, as part of this plan, the Company closed
48
of its
55
ivivva branded company-operated stores. The
seven
remaining ivivva branded stores remain in operation and are not expected to close. All of the Company's ivivva branded showrooms and other temporary locations have been closed. The Company continues to offer ivivva branded products on its e-commerce websites. Please refer to Note 6 of these unaudited interim consolidated financial statements for further details regarding the ivivva restructuring.
Basis of presentation
The unaudited interim consolidated financial statements as of
October 29, 2017
and for the
quarters and three quarters ended
October 29, 2017
and
October 30, 2016
are presented in United States dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of
January 29, 2017
is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended
January 29, 2017
, which are included in Item 8 in the Company's fiscal
2016
Annual Report on Form 10-K filed with the SEC on
March 29, 2017
. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal
2016
Annual Report on Form 10-K.
The Company's 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
2017
will end on
January 28, 2018
and will be a 52-week year.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
Certain comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers
("ASC 606"). This ASU supersedes the revenue recognition requirements in ASC Topic 605
Revenue Recognition
, including most industry-specific revenue recognition guidance. ASU 2014-09 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and expands the related disclosure requirements. In 2015, the FASB deferred the effective date for this guidance, and in 2016, the FASB issued several updates that clarify the guidance in this topic. ASC 606 may be adopted either on a full retrospective basis or using a modified retrospective method with a cumulative adjustment to equity. This guidance will be adopted by the Company beginning in its first quarter of fiscal 2018. The Company continues to evaluate the impact that this new guidance may have on its consolidated financial statements, and the method of retrospective adoption that it will elect, but does not expect ASC 606 to materially
impact the amount, or timing, of its revenue recognition. Under the new requirements, the Company expects to recognize its provision for sales returns on a gross basis, rather than a net basis on the consolidated balance sheets.
In July 2015, the FASB amended ASC Topic 330,
Inventory
to simplify the measurement of inventory. The amendments require that an entity measure inventory at the lower of cost and net realizable value instead of the lower of cost and market. This guidance became effective for the Company the first quarter of fiscal 2017 and the adoption did not impact its consolidated financial statements.
In February 2016, the FASB issued ASC Topic 842,
Leases
("ASC 842") to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. This guidance will be effective for the Company beginning in its first quarter of fiscal 2019, with early application permitted. The Company will adopt ASC 842 in its first quarter of fiscal 2019. While the Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements, it is expected that the primary impact upon adoption will be the recognition, on a discounted basis, of the Company's minimum commitments under noncancelable operating leases as right of use assets and obligations on the consolidated balance sheets. It is expected that this will result in a significant increase in assets and liabilities on the consolidated balance sheets.
In March 2016, the FASB amended ASC Topic 718,
Stock Compensation
simplifying the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance also allows an entity to account for forfeitures when they occur. The Company adopted this amendment in the first quarter of fiscal 2017 and elected to continue to estimate expected forfeitures. The Company is now required to include excess tax benefits and deficiencies as a component of income tax expense, rather than a component of stockholders' equity. Additionally, the Company retrospectively adjusted its consolidated statement of cash flows for the
three quarters ended
October 30, 2016
to reclassify excess tax benefits of
$1.3 million
from financing activities to operating activities.
In August 2017, the FASB amended ASC 815,
Derivatives and Hedging
to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. It will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This guidance will be effective for the Company beginning in its first quarter of fiscal 2019, with early application permitted. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements.
NOTE 3. STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, which are provided by the Company directly.
Stock-based compensation expense charged to income for the plans was
$13.0 million
and
$12.9 million
for the
three quarters ended
October 29, 2017
and
October 30, 2016
, respectively. Total unrecognized compensation cost for all stock-based compensation plans was
$40.2 million
at
October 29, 2017
, which is expected to be recognized over a weighted-average period of
2.3
years.
Company stock options, performance-based restricted stock units, restricted shares, and restricted stock units
A summary of the Company's stock option, performance-based restricted stock unit, restricted share, and restricted stock unit activity as of
October 29, 2017
, and changes during the first
three quarters
then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Performance-Based Restricted Stock Units
|
|
Restricted Shares
|
|
Restricted Stock Units
|
|
|
Number
|
|
Weighted-Average Exercise Price
|
|
Number
|
|
Weighted-Average Grant Date Fair Value
|
|
Number
|
|
Weighted-Average Grant Date Fair Value
|
|
Number
|
|
Weighted-Average Grant Date Fair Value
|
|
|
(In thousands, except per share amounts)
|
Balance at January 29, 2017
|
|
918
|
|
|
$
|
59.20
|
|
|
390
|
|
|
$
|
61.05
|
|
|
14
|
|
|
$
|
70.54
|
|
|
360
|
|
|
$
|
62.99
|
|
Granted
|
|
614
|
|
|
52.16
|
|
|
191
|
|
|
52.21
|
|
|
24
|
|
|
52.38
|
|
|
332
|
|
|
52.65
|
|
Exercised/released
|
|
40
|
|
|
40.70
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
70.29
|
|
|
131
|
|
|
60.74
|
|
Forfeited
|
|
247
|
|
|
58.18
|
|
|
224
|
|
|
54.72
|
|
|
3
|
|
|
51.72
|
|
|
111
|
|
|
57.18
|
|
Balance at October 29, 2017
|
|
1,245
|
|
|
$
|
56.53
|
|
|
357
|
|
|
$
|
60.30
|
|
|
21
|
|
|
$
|
52.45
|
|
|
450
|
|
|
$
|
57.46
|
|
Exercisable at October 29, 2017
|
|
350
|
|
|
$
|
56.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following assumptions were used in calculating the fair value of stock options granted in the first
three quarters
of fiscal
2017
:
|
|
|
|
|
|
|
Three Quarters Ended
October 29, 2017
|
Expected term
|
|
4.00 years
|
|
Expected volatility
|
|
38.28
|
%
|
Risk-free interest rate
|
|
1.72
|
%
|
Dividend yield
|
|
—
|
%
|
The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of
two
shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the award date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved.
The fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the award date.
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007.
Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution.
The maximum number of shares authorized to be purchased under the ESPP is
6.0 million
shares. All shares purchased under the ESPP are purchased in the open market. During the quarter ended
October 29, 2017
, there were
34.2 thousand
shares purchased.
Defined contribution pension plans
During the second quarter of fiscal 2016, the Company began offering defined contribution pension plans to its eligible employees in Canada and the United States. Participating employees may elect to defer and contribute a portion of their eligible
compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches
50%
to
75%
of the contribution depending on the participant's length of service, and the contribution is subject to a
two
year vesting period. The Company's net expense for the defined contribution plans was
$3.9 million
and
$1.6 million
in the first
three quarters
of fiscal
2017
and fiscal
2016
, respectively.
NOTE 4. FAIR VALUE MEASUREMENT
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
|
|
•
|
Level 1 - defined as observable inputs such as quoted prices in active markets;
|
|
|
•
|
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
|
|
|
•
|
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of
October 29, 2017
, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In thousands)
|
Net forward currency contract (liabilities) assets
|
|
$
|
(583
|
)
|
|
$
|
—
|
|
|
$
|
(583
|
)
|
|
$
|
—
|
|
The Company records cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company has impaired certain long-lived assets and recorded them at their estimated fair value on a non-recurring basis. The fair value of these long-lived assets was determined using Level 3 inputs, principally the present value of the estimated future cash flows expected from their use and eventual disposition.
As a result of the ivivva restructuring, the Company recorded lease termination liabilities of
$12.2 million
, determined using Level 3 inputs based on remaining lease rentals and reduced by estimated sublease income.
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS
Foreign exchange risk
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company currently hedges against changes in the Canadian dollar to U.S. dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign exchange gains and losses which arise on translation of its foreign subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
The Company holds a significant portion of its assets in Canada and during the
three quarters ended
October 29, 2017
, it entered into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The effective portions of the hedges are reported in accumulated other comprehensive income or loss and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges for the
three quarters ended
October 29, 2017
.
The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.
Derivatives not designated as hedging instruments
The Company is exposed to gains and losses arising from changes in foreign exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the
three quarters ended
October 29, 2017
the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian subsidiaries on U.S. dollar denominated monetary assets and liabilities. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses.
The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows.
Outstanding notional amounts
The Company had foreign exchange forward contracts outstanding with the following notional amounts:
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
Derivatives designated as net investment hedges
|
|
$
|
50,000
|
|
|
$
|
—
|
|
Derivatives not designated in a hedging relationship
|
|
40,000
|
|
|
—
|
|
The forward currency contracts designated as net investment hedges mature in January 2018.
The forward currency contracts not designated in a hedging relationship mature on different dates between November 2017 and December 2017.
Quantitative disclosures about derivative financial instruments
The Company presents its derivative assets and derivative liabilities at their gross fair values within other prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of
October 29, 2017
, there were derivative assets of
$1.2 million
and derivative liabilities of
$1.5 million
subject to enforceable netting arrangements.
The fair values of forward currency contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
Derivatives designated as net investment hedges, recognized within:
|
|
|
|
|
Other current liabilities
|
|
$
|
2,902
|
|
|
$
|
—
|
|
Derivatives not designated in a hedging relationship, recognized within:
|
|
|
|
|
Other prepaid expenses and other current assets
|
|
2,319
|
|
|
—
|
|
The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income and in the consolidated statement of operations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
Derivatives designated as net investment hedges:
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
1,424
|
|
|
$
|
—
|
|
|
$
|
(7,501
|
)
|
|
$
|
—
|
|
Derivatives not designated in a hedging relationship:
|
|
|
|
|
|
|
|
|
(Loss) gain recognized in selling, general and administrative expenses
|
|
(1,137
|
)
|
|
—
|
|
|
6,497
|
|
|
—
|
|
No gains or losses have been reclassified from accumulated other comprehensive income into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary.
Credit risk
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance.
The Company's forward currency contracts are entered into with large, reputable financial institutions that are monitored by the Company for counterparty risk.
The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts.
NOTE 6. ASSET IMPAIRMENT AND RESTRUCTURING
On June 1, 2017, the Company announced a plan to restructure its ivivva operations. On
August 20, 2017
, as part of this plan, the Company closed
48
of its
55
ivivva branded company-operated stores. The
seven
remaining ivivva branded stores remain in operation and are not expected to close. All of the Company's ivivva branded showrooms and other temporary locations have been closed. The Company continues to offer ivivva branded products on its e-commerce websites.
As a result of the closures, the Company recognized aggregate pre-tax charges of
$45.4 million
during the
three quarters ended
October 29, 2017
. The restructuring was substantially completed during the third quarter of fiscal 2017.
A summary of the pre-tax charges recognized during the
third
quarter and the first
three quarters
of fiscal
2017
in connection with the Company's restructuring of its ivivva operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 29, 2017
|
|
Three Quarters Ended
October 29, 2017
|
|
|
(In thousands)
|
Costs recorded in cost of goods sold:
|
|
|
|
|
Provision to reduce inventories to net realizable value
|
|
$
|
1,934
|
|
|
$
|
4,838
|
|
Loss (reversal of loss) on committed inventory purchases
|
|
(2,286
|
)
|
|
250
|
|
Accelerated depreciation
|
|
1,530
|
|
|
3,753
|
|
|
|
1,178
|
|
|
8,841
|
|
Costs recorded in operating expenses:
|
|
|
|
|
Lease termination costs
|
|
19,441
|
|
|
19,884
|
|
Impairment of property and equipment
|
|
—
|
|
|
11,593
|
|
Employee related costs
|
|
804
|
|
|
4,000
|
|
Other restructuring costs
|
|
762
|
|
|
1,047
|
|
Asset impairment and restructuring costs
|
|
21,007
|
|
|
36,524
|
|
Restructuring and related costs
|
|
$
|
22,185
|
|
|
$
|
45,365
|
|
Income tax recoveries of
$5.8 million
and
$11.9 million
were recorded on the above items in the
third
quarter and the first
three quarters
of fiscal
2017
, respectively. These income tax recoveries are based on the expected annual tax rate of the applicable tax jurisdictions.
Costs recorded in cost of goods sold
During the first
three quarters
of fiscal
2017
, the Company recognized expenses of
$8.8 million
in cost of goods sold as a result of the restructuring of its ivivva operations. This included
$4.8 million
to reduce inventories to their estimated net realizable value, and
$0.3 million
for the losses the Company expects to incur on certain firm inventory and fabric purchase commitments. The liability for the expected losses is included within accrued inventory liabilities on the consolidated balance sheets.
During the second and third quarters of fiscal 2017, the Company took delivery of inventory that it had previously committed to purchase. As a result, there was a reduction in the Company's liability for expected losses on committed inventory purchases and a corresponding increase in its provision to reduce inventories to net realizable value.
The Company also recorded accelerated depreciation charges of
$3.8 million
during the first
three quarters
of fiscal
2017
, primarily related to leasehold improvements and furniture and fixtures for stores that closed during the third quarter of fiscal 2017.
Costs recorded in operating expenses
The Company recognized asset impairment and restructuring costs of
$36.5 million
during the first
three quarters
of fiscal
2017
as a result of the restructuring of its ivivva operations.
As a result of the plan to close the majority of the ivivva branded locations, the long-lived assets of each ivivva branded location were tested for impairment as of April 30, 2017. For impaired locations, a loss was recognized representing the difference between the net book value of the long-lived assets and their estimated fair value. Impairment losses totaling
$11.6 million
were recognized during the first quarter of fiscal
2017
. These losses primarily relate to leasehold improvements and furniture and fixtures of the company-operated stores segment. These assets were retired during the third quarter of fiscal 2017 in conjunction with the closures of the company-operated stores.
The fair value of the long-lived assets for each store was determined using Level 3 inputs, principally the present value of the estimated future cash flows expected from their use and eventual disposition.
During the first
three quarters
of fiscal
2017
, the Company recognized employee related expenses as a result of the restructuring of
$4.0 million
.
The Company recognized lease termination costs of
$19.9 million
during the first
three quarters
of fiscal
2017
. As of
October 29, 2017
, the Company had lease termination liabilities of
$12.2 million
. During the first
three quarters
of fiscal
2017
, the Company also recognized other restructuring costs of
$1.0 million
.
NOTE 7. INCOME TAXES
As disclosed in Note 15 to the audited consolidated financial statements included in Item 8 of the Company's fiscal
2016
Annual Report on Form 10-K filed with the SEC on
March 29, 2017
, the Company finalized a bilateral Advance Pricing Arrangement ("APA") with the Internal Revenue Service ("IRS") and the Canada Revenue Agency ("CRA") during fiscal 2016.
The results for the
quarter and three quarters ended
October 29, 2017
did not include any discrete items or adjustments related to the APA.
The results for the
quarter and three quarters ended
October 30, 2016
included net interest expenses of
$0.2 million
and
$1.7 million
, respectively, that were recorded in other income (expense), net, and net income tax recoveries of
$4.0 million
and
$11.6 million
, respectively, related to the expected outcome of the APA and taxes associated with the anticipated repatriation of foreign earnings.
NOTE 8. EARNINGS PER SHARE
The details of the computation of basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands, except per share amounts)
|
Net income
|
|
$
|
58,944
|
|
|
$
|
68,285
|
|
|
$
|
138,901
|
|
|
$
|
167,246
|
|
Basic weighted-average number of shares outstanding
|
|
135,364
|
|
|
137,033
|
|
|
136,191
|
|
|
137,095
|
|
Assumed conversion of dilutive stock options and awards
|
|
214
|
|
|
204
|
|
|
166
|
|
|
226
|
|
Diluted weighted-average number of shares outstanding
|
|
135,578
|
|
|
137,237
|
|
|
136,357
|
|
|
137,321
|
|
Basic earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.50
|
|
|
$
|
1.02
|
|
|
$
|
1.22
|
|
Diluted earnings per share
|
|
$
|
0.43
|
|
|
$
|
0.50
|
|
|
$
|
1.02
|
|
|
$
|
1.22
|
|
The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have, in effect, the same rights and share equally in undistributed net income. For the
three quarters ended
October 29, 2017
and
October 30, 2016
,
0.2 million
and
0.1 million
stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.
On June 11, 2014, the Company's board of directors approved a program to repurchase shares of the Company's common stock up to an aggregate value of
$450.0 million
. This stock repurchase program was completed during the second quarter of fiscal 2016.
On December 1, 2016, the Company's board of directors approved a program to repurchase shares of the Company's common stock up to an aggregate value of
$100.0 million
. The common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors. This stock repurchase program was completed during the third quarter of fiscal 2017.
During the
three quarters ended
October 29, 2017
and
October 30, 2016
,
1.8 million
and
0.4 million
shares, respectively, were repurchased under the program at a total cost of
$99.3 million
and
$28.6 million
, respectively.
NOTE 9. SUPPLEMENTARY FINANCIAL INFORMATION
For the quarters ended
October 29, 2017
and
October 30, 2016
, there were net foreign exchange and derivative revaluation gains of
$2.7 million
and
$4.3 million
, respectively, included within selling, general and administrative expenses.
For the
three quarters ended
October 29, 2017
and
October 30, 2016
, there were net foreign exchange and derivative revaluation gains of
$6.9 million
and losses of
$4.1 million
, respectively, included within selling, general and administrative expenses.
A summary of certain consolidated balance sheet accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
January 29,
2017
|
|
|
(In thousands)
|
Inventories:
|
|
|
|
|
Finished goods
|
|
$
|
412,648
|
|
|
$
|
306,087
|
|
Provision to reduce inventories to net realizable value
|
|
(15,756
|
)
|
|
(7,655
|
)
|
|
|
$
|
396,892
|
|
|
$
|
298,432
|
|
Property and equipment, net:
|
|
|
|
|
Land
|
|
$
|
79,852
|
|
|
$
|
78,561
|
|
Buildings
|
|
38,144
|
|
|
32,174
|
|
Leasehold improvements
|
|
289,775
|
|
|
273,801
|
|
Furniture and fixtures
|
|
88,545
|
|
|
84,479
|
|
Computer hardware
|
|
63,882
|
|
|
58,270
|
|
Computer software
|
|
199,601
|
|
|
160,835
|
|
Equipment and vehicles
|
|
14,858
|
|
|
13,704
|
|
Accumulated depreciation and impairment
|
|
(334,254
|
)
|
|
(278,325
|
)
|
|
|
$
|
440,403
|
|
|
$
|
423,499
|
|
Goodwill and intangible assets, net:
|
|
|
|
|
Goodwill
|
|
$
|
25,496
|
|
|
$
|
25,496
|
|
Changes in foreign currency exchange rates
|
|
(1,156
|
)
|
|
(1,263
|
)
|
|
|
24,340
|
|
|
24,233
|
|
Intangibles - reacquired franchise rights
|
|
10,150
|
|
|
10,150
|
|
Accumulated amortization
|
|
(10,009
|
)
|
|
(9,807
|
)
|
Changes in foreign currency exchange rates
|
|
(5
|
)
|
|
(19
|
)
|
|
|
136
|
|
|
324
|
|
|
|
$
|
24,476
|
|
|
$
|
24,557
|
|
Other non-current assets:
|
|
|
|
|
Security deposits
|
|
$
|
10,484
|
|
|
$
|
9,009
|
|
Deferred lease assets
|
|
10,099
|
|
|
10,560
|
|
Other
|
|
9,056
|
|
|
923
|
|
|
|
$
|
29,639
|
|
|
$
|
20,492
|
|
Other current liabilities:
|
|
|
|
|
Accrued duty, freight, and other operating expenses
|
|
$
|
42,923
|
|
|
$
|
27,477
|
|
Sales tax collected
|
|
11,686
|
|
|
10,182
|
|
Accrued rent
|
|
5,620
|
|
|
5,562
|
|
Other
|
|
11,361
|
|
|
9,340
|
|
|
|
$
|
71,590
|
|
|
$
|
52,561
|
|
Other non-current liabilities:
|
|
|
|
|
Deferred lease liabilities
|
|
$
|
26,763
|
|
|
$
|
26,648
|
|
Tenant inducements
|
|
26,199
|
|
|
21,668
|
|
Other
|
|
5,634
|
|
|
—
|
|
|
|
$
|
58,596
|
|
|
$
|
48,316
|
|
As of
October 29, 2017
, as a result of the restructuring of its ivivva operations, the Company had a provision of
$4.8 million
to reduce the carrying value of certain ivivva branded finished goods inventories to their estimated net realizable value. In addition, the Company had a liability for the losses it expects to incur on certain firm inventory and fabric purchase commitments of
$0.3 million
. This liability is included within accrued inventory liabilities on the consolidated balance sheets.
Please refer to Note 6 of these unaudited interim consolidated financial statements for further details regarding the ivivva restructuring plans, including impairment of property and equipment, net which was recorded during the first quarter of fiscal
2017
.
NOTE 10. SEGMENT REPORTING
The Company applies ASC Topic 280,
Segment Reporting
("ASC 280"), in determining reportable segments for its financial statement disclosure. The Company reports segments based on the financial information it uses in managing its business. The Company's reportable segments are comprised of company-operated stores and direct to consumer. Direct to consumer represents sales from the Company's e-commerce websites. Outlets, showrooms, temporary locations, sales to wholesale accounts, license and supply arrangements, and warehouse sale net revenue have been combined into other. Information for these segments is detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
Net revenue:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
425,084
|
|
|
$
|
393,506
|
|
|
$
|
1,218,127
|
|
|
$
|
1,133,599
|
|
Direct to consumer
|
|
131,181
|
|
|
104,013
|
|
|
341,453
|
|
|
288,978
|
|
Other
|
|
62,753
|
|
|
46,897
|
|
|
160,799
|
|
|
131,875
|
|
|
|
$
|
619,018
|
|
|
$
|
544,416
|
|
|
$
|
1,720,379
|
|
|
$
|
1,554,452
|
|
Income from operations before general corporate expense:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
97,015
|
|
|
$
|
91,497
|
|
|
$
|
267,178
|
|
|
$
|
245,056
|
|
Direct to consumer
|
|
52,201
|
|
|
43,588
|
|
|
127,746
|
|
|
114,744
|
|
Other
|
|
9,319
|
|
|
5,709
|
|
|
19,076
|
|
|
12,430
|
|
|
|
158,535
|
|
|
140,794
|
|
|
414,000
|
|
|
372,230
|
|
General corporate expense
|
|
50,762
|
|
|
47,819
|
|
|
168,912
|
|
|
147,707
|
|
Restructuring and related costs
|
|
22,185
|
|
|
—
|
|
|
45,365
|
|
|
—
|
|
Income from operations
|
|
85,588
|
|
|
92,975
|
|
|
199,723
|
|
|
224,523
|
|
Other income (expense), net
|
|
1,052
|
|
|
628
|
|
|
2,771
|
|
|
720
|
|
Income before income tax expense
|
|
$
|
86,640
|
|
|
$
|
93,603
|
|
|
$
|
202,494
|
|
|
$
|
225,243
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
29,747
|
|
|
$
|
18,932
|
|
|
$
|
53,549
|
|
|
$
|
47,197
|
|
Direct to consumer
|
|
7,582
|
|
|
3,711
|
|
|
16,423
|
|
|
9,425
|
|
Corporate and other
|
|
19,910
|
|
|
12,263
|
|
|
37,156
|
|
|
49,546
|
|
|
|
$
|
57,239
|
|
|
$
|
34,906
|
|
|
$
|
107,128
|
|
|
$
|
106,168
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
16,549
|
|
|
$
|
15,735
|
|
|
$
|
47,630
|
|
|
$
|
44,030
|
|
Direct to consumer
|
|
3,740
|
|
|
1,854
|
|
|
10,087
|
|
|
4,908
|
|
Corporate and other
|
|
8,271
|
|
|
6,370
|
|
|
22,412
|
|
|
14,703
|
|
|
|
$
|
28,560
|
|
|
$
|
23,959
|
|
|
$
|
80,129
|
|
|
$
|
63,641
|
|
The accelerated depreciation related to the restructuring of the ivivva operations is included in corporate and other in the above breakdown of depreciation and amortization.
NOTE 11. LEGAL PROCEEDINGS
In addition to the legal matter described below, the Company is, from time to time, involved in routine legal matters incidental to the conduct of its business, including legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such current proceeding will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows.
On October 9, 2015, certain current and former hourly employees of the Company filed a class action lawsuit in the Supreme Court of New York entitled
Rebecca Gathmann-Landini et al v. lululemon USA inc.
On December 2, 2015, the case was moved to the United States District Court for the Eastern District of New York. The lawsuit alleges that the Company violated various New York labor codes by failing to pay all earned wages, including overtime compensation. The plaintiffs are seeking an unspecified amount of damages. The Company intends to vigorously defend this matter.
NOTE 12. SUBSEQUENT EVENT
The Company evaluates events or transactions that occur after the balance sheet date through to the date which the financial statements are issued, for potential recognition or disclosure in its unaudited interim consolidated financial statements in accordance with ASC Topic 855,
Subsequent Events
("ASC 855").
On November 29, 2017, the Company's board of directors approved a stock repurchase program for up to
$200 million
of its common shares in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements, and the repurchase program is expected to be completed in
two
years. Shares may be repurchased from time to time on the open market, through block trades or otherwise. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q and any documents incorporated herein by reference reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in "Risk Factors" and elsewhere in this report.
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q. Except as required by applicable securities law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
This information should be read in conjunction with the unaudited interim consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our fiscal
2016
Annual Report on Form 10-K filed with the SEC on
March 29, 2017
.
We disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.lululemon.com/), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls, and webcasts.
Overview
lululemon is a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel. Since our inception, we have developed a distinctive corporate culture, and we have a mission to produce products which create transformational experiences for people to live happy, healthy, fun lives. We promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection, and choosing to have fun. These core values attract passionate and motivated employees who are driven to succeed and share our purpose of "elevating the world from mediocrity to greatness."
We offer a comprehensive line of apparel and accessories for women and men. We also offer activewear for girls under our ivivva brand name. Our apparel assortment includes items such as pants, shorts, tops, and jackets designed for healthy lifestyle and athletic activities such as yoga, running, training, and most other sweaty pursuits. We also offer fitness-related accessories, including an array of items such as bags, socks, underwear, yoga mats, and water bottles.
On June 1, 2017, we announced a plan to restructure our ivivva operations to a primarily e-commerce focused business, with a select number of stores remaining in key communities across North America. The restructuring was substantially completed during the third quarter of fiscal 2017. On
August 20, 2017
, as a part of the restructuring plan, we closed
48
of our
55
ivivva branded company-operated stores. The
seven
remaining ivivva branded stores remain in operation and are not expected to close. All of our ivivva branded showrooms and other temporary locations have been closed. We continue to offer ivivva branded products on our e-commerce websites.
Financial Highlights
The summary below provides both GAAP and adjusted non-GAAP financial measures. In connection with the restructuring of our ivivva operations, we recognized pre-tax costs totaling
$22.2 million
in the
third
quarter of fiscal
2017
. The adjusted financial measures exclude these charges and their related tax effects, and also exclude certain discrete items related to our transfer pricing arrangements and taxes on repatriation of foreign earnings which were recognized during the
third
quarter of fiscal
2016
.
For the
third
quarter of fiscal
2017
, compared to the
third
quarter of fiscal
2016
:
|
|
•
|
Net revenue
increase
d
14%
to
$619.0 million
. On a constant dollar basis, net revenue
increased
12%
.
|
|
|
•
|
Total comparable sales, which includes comparable store sales and direct to consumer,
increased
8%
. On a constant dollar basis, total comparable sales
increased
7%
.
|
|
|
–
|
Comparable store sales
increased
2%
, or
increased
1%
on a constant dollar basis.
|
|
|
–
|
Direct to consumer net revenue
increased
26%
, or
increased
25%
on a constant dollar basis.
|
|
|
•
|
Gross profit
increase
d
16%
to
$322.0 million
. Adjusted gross profit increased
16%
to
$323.1 million
.
|
|
|
•
|
Gross margin
increase
d
90
basis points to
52.0%
. Adjusted gross margin
increase
d
110
basis points to
52.2%
.
|
|
|
•
|
Income from operations
decrease
d
8%
to
$85.6 million
. Adjusted income from operations
increase
d
16%
to
$107.8 million
.
|
|
|
•
|
Operating margin
decrease
d
330
basis points to
13.8%
. Adjusted operating margin
increased
30
basis points to
17.4%
.
|
|
|
•
|
Income tax expense
increase
d
9%
to
$27.7 million
. Our effective tax rate for the
third
quarter of fiscal
2017
was
32.0%
compared to
27.0%
for the
third
quarter of fiscal
2016
. The adjusted effective tax rate was
30.8%
in the
third
quarter of fiscal
2017
compared to
31.3%
in the
third
quarter of fiscal
2016
.
|
|
|
•
|
Diluted earnings per share were
$0.43
compared to
$0.50
in the
third
quarter of fiscal
2016
. Adjusted diluted earnings per share were
$0.56
for the
third
quarter of fiscal
2017
compared to
$0.47
for the
third
quarter of fiscal
2016
.
|
Refer to the non-GAAP reconciliation tables contained in the "Results of Operations" section of this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and adjusted
gross profit, gross margin, income from operations, operating margin, effective tax rates, and diluted earnings per share, and the most directly comparable measures calculated in accordance with GAAP.
Results of Operations
Third
Quarter Results
The following table summarizes key components of our results of operations for the quarters ended
October 29, 2017
and
October 30, 2016
. The percentages are presented as a percentage of net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
|
(Percentages)
|
Net revenue
|
|
$
|
619,018
|
|
|
$
|
544,416
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
297,056
|
|
|
265,990
|
|
|
48.0
|
|
|
48.9
|
|
Gross profit
|
|
321,962
|
|
|
278,426
|
|
|
52.0
|
|
|
51.1
|
|
Selling, general and administrative expenses
|
|
215,367
|
|
|
185,451
|
|
|
34.8
|
|
|
34.1
|
|
Asset impairment and restructuring costs
|
|
21,007
|
|
|
—
|
|
|
3.4
|
|
|
—
|
|
Income from operations
|
|
85,588
|
|
|
92,975
|
|
|
13.8
|
|
|
17.1
|
|
Other income (expense), net
|
|
1,052
|
|
|
628
|
|
|
0.2
|
|
|
0.1
|
|
Income before income tax expense
|
|
86,640
|
|
|
93,603
|
|
|
14.0
|
|
|
17.2
|
|
Income tax expense
|
|
27,696
|
|
|
25,318
|
|
|
4.5
|
|
|
4.7
|
|
Net income
|
|
$
|
58,944
|
|
|
$
|
68,285
|
|
|
9.5
|
%
|
|
12.5
|
%
|
Net Revenue
Net revenue
increase
d
$74.6
million, or
14%
, to
$619.0
million for the
third
quarter of fiscal
2017
from
$544.4
million for the
third
quarter of fiscal
2016
. On a constant dollar basis, assuming the average exchange rates for the
third
quarter of fiscal
2017
remained constant with the average exchange rates for the
third
quarter of fiscal
2016
, net revenue
increased
$67.8 million
, or
12%
.
The
increase
in net revenue was primarily due to net revenue generated by new company-operated stores as well as increased direct to consumer net revenue. Total comparable sales, which includes comparable store sales and direct to consumer,
increased
8%
in the
third
quarter of fiscal
2017
compared to the
third
quarter of fiscal
2016
. Total comparable sales
increased
7%
on a constant dollar basis.
Net revenue on a segment basis for the quarters ended
October 29, 2017
and
October 30, 2016
is summarized below. The percentages are presented as a percentage of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
425,084
|
|
|
$
|
393,506
|
|
|
68.7
|
%
|
|
72.3
|
%
|
Direct to consumer
|
|
131,181
|
|
|
104,013
|
|
|
21.2
|
|
|
19.1
|
|
Other
|
|
62,753
|
|
|
46,897
|
|
|
10.1
|
|
|
8.6
|
|
Net revenue
|
|
$
|
619,018
|
|
|
$
|
544,416
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Company-Operated Stores.
Net revenue from our company-operated stores segment
increase
d
$31.6 million
, or
8%
, to
$425.1 million
in the
third
quarter of fiscal
2017
from
$393.5 million
in the
third
quarter of fiscal
2016
. The following contributed to the increase in net revenue from our company-operated stores segment:
|
|
•
|
Net revenue from company-operated stores we opened or significantly expanded subsequent to
October 30, 2016
, and therefore not included in comparable store sales, contributed
$33.7 million
to the
increase
. We opened
46
net new lululemon branded company-operated stores since the
third
quarter of fiscal
2016
, including
30
stores in North America,
13
stores in Asia Pacific, and
three
stores in Europe.
|
|
|
•
|
A comparable store sales
increase
of
2%
in the
third
quarter of fiscal
2017
compared to the
third
quarter of fiscal
2016
resulted in a
$6.6 million
increase
to net revenue. Comparable store sales
increased
1%
, or
$3.0 million
on a constant dollar basis. The
increase
in comparable store sales was primarily a result of improved conversion rates and increased dollar value per transaction. This was partially offset by a decrease in store traffic, due in part to shifting retail traffic trends from in-store to online.
|
The closure of
48
of our ivivva branded company-operated stores as part of the restructuring of our ivivva operations in the
third
quarter of fiscal
2017
reduced our net revenue from company-operated stores by
$8.8 million
compared to the
third
quarter of fiscal
2016
.
Direct to Consumer.
Net revenue from our direct to consumer segment
increased
$27.2 million
, or
26%
, to
$131.2 million
in the
third
quarter of fiscal
2017
from
$104.0 million
in the
third
quarter of fiscal
2016
. Direct to consumer net revenue
increased
25%
on a constant dollar basis. This was primarily a result of increased website traffic, increased dollar value per transaction, and improved conversion rates.
Other.
Net revenue from our other segment
increase
d
$15.9 million
, or
34%
, to
$62.7 million
in the
third
quarter of fiscal
2017
from
$46.9 million
in the
third
quarter of fiscal
2016
. This
increase
was primarily the result of an increased number of outlets and increased net revenue at existing outlets during the
third
quarter of fiscal
2017
compared to the
third
quarter of fiscal
2016
. There was also an increase in net revenue from warehouse sales and temporary locations. The increase in net revenue from our other segment was partially offset by lower net revenue from showrooms, primarily due to a decreased number of showrooms open during the
third
quarter of fiscal
2017
compared to the
third
quarter of fiscal
2016
.
Gross Profit
Gross profit
increase
d
$43.5 million
, or
16%
, to
$322.0 million
for the
third
quarter of fiscal
2017
from
$278.4 million
for the
third
quarter of fiscal
2016
.
Gross profit as a percentage of net revenue, or gross margin,
increase
d
90
basis points to
52.0%
in the
third
quarter of fiscal
2017
from
51.1%
in the
third
quarter of fiscal
2016
. The
increase
in gross margin was primarily the result of:
|
|
•
|
an increase in product margin of 70 basis points which was primarily due to a favorable mix of higher margin product and lower product costs, partially offset by higher markdowns;
|
|
|
•
|
a decrease in fixed costs, including occupancy and depreciation costs and costs related to our product and supply chain departments, of 20 basis points; and
|
|
|
•
|
a favorable impact of foreign exchange rates of 20 basis points.
|
This was partially offset by accelerated depreciation charges related to the restructuring of our ivivva operations of 20 basis points.
During the
third
quarter of fiscal
2017
, as a result of the restructuring of our ivivva operations, we recognized costs totaling
$1.2 million
within costs of goods sold, as outlined in Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report. These costs primarily related to accelerated depreciation on leasehold improvements and furniture and fittings for stores which were closed during the third quarter of fiscal 2017. Excluding these charges, adjusted gross profit increased
16%
to
$323.1 million
, and adjusted gross margin
increase
d
110
basis points to
52.2%
compared to the
third
quarter of fiscal
2016
.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increase
d
$29.9 million
, or
16%
, to
$215.4 million
in the
third
quarter of fiscal
2017
from
$185.5 million
in the
third
quarter of fiscal
2016
. The
increase
in selling, general and administrative expenses was primarily due to:
|
|
•
|
an increase
in costs related to our operating channels of
$25.3 million
, comprised of:
|
|
|
–
|
an increase
in employee costs of
$7.7 million
primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations;
|
|
|
–
|
an increase
in variable costs of
$3.7 million
primarily due to an increase in credit card fees and packaging costs as a result of increased net revenue; and
|
|
|
–
|
an increase
in other costs of
$13.9 million
primarily due to an increase in digital marketing expenses, website related costs including photography costs, brand and community costs, and other costs associated with our operating locations;
|
|
|
•
|
an increase
in head office costs of
$3.1 million
, comprised of:
|
|
|
–
|
an increase
in employee costs of
$2.1 million
primarily due to additional employees to support the growth in our business; and
|
|
|
–
|
an increase
in other costs of
$1.0 million
primarily due to increases in information technology related costs, an increase in brand and community costs, partially offset by a decrease in professional fees; and
|
|
|
•
|
a decrease
in net foreign exchange and derivative revaluation gains of
$1.6 million
. There were net foreign exchange and derivative revaluation gains of
$2.7 million
in the
third
quarter of fiscal
2017
compared to net foreign exchange revaluation gains of
$4.3 million
in the
third
quarter of fiscal
2016
. The net foreign exchange gains and losses primarily relate to the revaluation of U.S. dollar denominated monetary assets and liabilities held by Canadian subsidiaries, and the derivatives are designed to economically hedge these gains and losses.
|
As a percentage of net revenue, selling, general and administrative expenses
increased
70
basis points, to
34.8%
in the
third
quarter of fiscal
2017
from
34.1%
in the
third
quarter of fiscal
2016
.
Asset Impairment and Restructuring Costs
As a result of the restructuring of our ivivva operations, we recognized restructuring costs of
$21.0 million
in the
third
quarter of fiscal
2017
. This included lease termination costs of
$19.4 million
, employee related costs of
$0.8 million
, and other restructuring costs of
$0.8 million
. We did not have any asset impairment and restructuring costs in the
third
quarter of fiscal
2016
. Please refer to Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
Income from Operations
Income from operations
decrease
d
$7.4 million
, or
8%
, to
$85.6 million
in the
third
quarter of fiscal
2017
from
$93.0 million
in the
third
quarter of fiscal
2016
. Operating margin
decrease
d
330
basis points to
13.8%
compared to
17.1%
in the
third
quarter of fiscal
2016
.
In connection with the restructuring of our ivivva operations, we recognized pre-tax costs totaling
$22.2 million
in the
third
quarter of fiscal
2017
. This includes restructuring costs of
$21.0 million
and costs recognized in cost of goods sold totaling
$1.2 million
. Excluding these charges, adjusted income from operations
increase
d
16%
to
$107.8 million
and adjusted operating margin
increased
30
basis points to
17.4%
.
On a segment basis, we determine income from operations without taking into account our general corporate expenses and the costs we incur in connection with the restructuring of our ivivva operations.
Segmented income from operations for the quarters ended
October 29, 2017
and
October 30, 2016
is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
97,015
|
|
|
$
|
91,497
|
|
|
22.8
|
%
|
|
23.3
|
%
|
Direct to consumer
|
|
52,201
|
|
|
43,588
|
|
|
39.8
|
|
|
41.9
|
|
Other
|
|
9,319
|
|
|
5,709
|
|
|
14.9
|
|
|
12.2
|
|
Segmented income from operations
|
|
158,535
|
|
|
140,794
|
|
|
|
|
|
General corporate expense
|
|
50,762
|
|
|
47,819
|
|
|
|
|
|
Restructuring and related costs
|
|
22,185
|
|
|
—
|
|
|
|
|
|
Income from operations
|
|
$
|
85,588
|
|
|
$
|
92,975
|
|
|
|
|
|
Company-Operated Stores
. Income from operations from our company-operated stores segment
increase
d
$5.5 million
, or
6%
, to
$97.0 million
for the
third
quarter of fiscal
2017
from
$91.5 million
for the
third
quarter of fiscal
2016
. The increase was primarily the result of
increase
d gross profit of
$14.5 million
which was primarily due to increased net revenue. This was partially offset by an increase in selling, general and administrative expenses, including increased store employee costs, increased brand and community costs, and increased store operating expenses. Income from operations as a percentage of company-operated stores net revenue
decreased
50
basis points primarily due to deleverage of selling, general and administrative expenses.
Direct to Consumer.
Income from operations from our direct to consumer segment
increase
d
$8.6 million
, or
20%
, to
$52.2 million
for the
third
quarter of fiscal
2017
from
$43.6 million
for the
third
quarter of fiscal
2016
. The
increase
was primarily the result of
increase
d gross profit of
$21.3 million
which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses including higher digital marketing expenses and website related costs, and higher variable costs such as packaging, distribution and credit card fees as a result of higher net revenue. Income from operations as a percentage of direct to consumer net revenue
decreased
210
basis points primarily due to deleverage of selling, general and administrative expenses, partially offset by increased gross margin.
Other.
Other income from operations
increase
d
$3.6 million
, or
63%
, to
$9.3 million
for the
third
quarter of fiscal
2017
from
$5.7 million
for the
third
quarter of fiscal
2016
. The increase was primarily the result of
increase
d gross profit of
$8.8 million
which was primarily due to increased net revenue and higher gross margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased employee costs, increased brand and community costs, and increased other operating costs. Income from operations as a percentage of other net revenue
increased
270
basis points primarily due to an increase in gross margin.
General Corporate Expense.
General corporate expense
increase
d
$2.9 million
, or
6%
, to
$50.8 million
for the
third
quarter of fiscal
2017
from
$47.8 million
for the
third
quarter of fiscal
2016
. This increase was primarily due to increases in information technology costs, head office employee costs, and other brand and community costs, partially offset by decreased professional fees. There was also
a decrease
in net foreign exchange and derivative revaluation gains of
$1.6 million
. There were net foreign exchange and derivative revaluation gains of
$2.7 million
in the
third
quarter of fiscal
2017
compared to net foreign exchange revaluation gains of
$4.3 million
in the
third
quarter of fiscal
2016
. The net foreign exchange gains and losses primarily relate to the revaluation of U.S. dollar denominated monetary assets and liabilities held by Canadian subsidiaries, and the derivatives are designed to economically hedge these gains and losses.
Other Income (Expense), Net
Other income, net
increase
d
$0.4 million
, or
68%
, to
$1.1 million
for the
third
quarter of fiscal
2017
from income of
$0.6 million
for the
third
quarter of fiscal
2016
. The
third
quarter of fiscal
2016
included a net interest expense of
$0.2 million
in relation to certain tax adjustments that are outlined in Note 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
Income Tax Expense
Income tax expense
increase
d
$2.4 million
, or
9%
, to
$27.7 million
for the
third
quarter of fiscal
2017
from
$25.3 million
for the
third
quarter of fiscal
2016
.
The
third
quarters of fiscal
2017
and fiscal
2016
included certain adjustments which resulted in net income tax recoveries of
$5.8 million
and
$4.0 million
, respectively. As outlined in Notes 6 and 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report, the tax recovery recognized in the
third
quarter of fiscal
2017
relates to the tax effect of the costs recognized in connection with the ivivva restructuring, and the tax recovery recognized in the
third
quarter of fiscal
2016
relates to our transfer pricing arrangements and taxes on repatriation of foreign earnings.
The effective tax rate for the
third
quarter of fiscal
2017
was
32.0%
compared to
27.0%
for the
third
quarter of fiscal
2016
. The adjusted effective tax rate was
30.8%
for the
third
quarter of fiscal
2017
compared to
31.3%
for the
third
quarter of fiscal
2016
. The decrease in the adjusted effective tax rate compared to the
third
quarter of fiscal
2016
is primarily due to certain adjustments which were recorded during the third quarter of fiscal 2017 following the finalization of our U.S. tax return.
Net Income
Net income
decrease
d
$9.3 million
, or
14%
, to
$58.9 million
for the
third
quarter of fiscal
2017
from
$68.3 million
for the
third
quarter of fiscal
2016
. This was primarily due to
an increase
in selling, general and administrative expenses of
$29.9 million
, asset impairment and restructuring costs of
$21.0 million
,
an increase
in income tax expense of
$2.4 million
, partially offset by
an increase
in gross profit of
$43.5 million
and
an increase
in other income (expense), net of
$0.4 million
.
First
Three Quarters
Results
The following table summarizes key components of our results of operations for the first
three quarters
ended
October 29, 2017
and
October 30, 2016
. The percentages are presented as a percentage of net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
|
(Percentages)
|
Net revenue
|
|
$
|
1,720,379
|
|
|
$
|
1,554,452
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
844,100
|
|
|
782,734
|
|
|
49.1
|
|
|
50.4
|
|
Gross profit
|
|
876,279
|
|
|
771,718
|
|
|
50.9
|
|
|
49.6
|
|
Selling, general and administrative expenses
|
|
640,032
|
|
|
547,195
|
|
|
37.2
|
|
|
35.2
|
|
Asset impairment and restructuring costs
|
|
36,524
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
Income from operations
|
|
199,723
|
|
|
224,523
|
|
|
11.6
|
|
|
14.4
|
|
Other income (expense), net
|
|
2,771
|
|
|
720
|
|
|
0.2
|
|
|
0.1
|
|
Income before income tax expense
|
|
202,494
|
|
|
225,243
|
|
|
11.8
|
|
|
14.5
|
|
Income tax expense
|
|
63,593
|
|
|
57,997
|
|
|
3.7
|
|
|
3.7
|
|
Net income
|
|
$
|
138,901
|
|
|
$
|
167,246
|
|
|
8.1
|
%
|
|
10.8
|
%
|
Net Revenue
Net revenue
increase
d
$165.9 million
, or
11%
, to
$1.720 billion
for the first
three quarters
of fiscal
2017
from
$1.554 billion
for the first
three quarters
of fiscal
2016
. On a constant dollar basis, assuming the average exchange rates for the first
three quarters
of fiscal
2017
remained constant with the average exchange rates for the first
three quarters
of fiscal
2016
, net revenue
increased
$162.9 million
, or
10%
.
The
increase
in net revenue was primarily due to net revenue generated by new company-operated stores as well as increased direct to consumer net revenue. Total comparable sales, which includes comparable store sales and direct to consumer,
increased
5%
in the first
three quarters
of fiscal
2017
compared to the first
three quarters
of fiscal
2016
. Total comparable sales
increased
4%
on a constant dollar basis.
Net revenue on a segment basis for the first
three quarters
ended
October 29, 2017
and
October 30, 2016
is summarized below. The percentages are presented as a percentage of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
1,218,127
|
|
|
$
|
1,133,599
|
|
|
70.8
|
%
|
|
72.9
|
%
|
Direct to consumer
|
|
341,453
|
|
|
288,978
|
|
|
19.8
|
|
|
18.6
|
|
Other
|
|
160,799
|
|
|
131,875
|
|
|
9.4
|
|
|
8.5
|
|
Net revenue
|
|
$
|
1,720,379
|
|
|
$
|
1,554,452
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Company-Operated Stores
. Net revenue from our company-operated stores segment
increase
d
$84.5 million
, or
7%
, to
$1.218 billion
in the first
three quarters
of fiscal
2017
from
$1.134 billion
in the first
three quarters
of fiscal
2016
. The following contributed to the increase in net revenue from our company-operated stores segment:
|
|
•
|
Net revenue from company-operated stores we opened or significantly expanded subsequent to
October 30, 2016
, and therefore not included in comparable store sales, contributed
$89.0 million
to the increase. We opened
46
net new lululemon branded company-operated stores since the
third
quarter of fiscal
2016
, including
30
stores in North America,
13
stores in Asia Pacific, and
three
stores in Europe.
|
|
|
•
|
A comparable store sales
increase
of
1%
in the first
three quarters
of fiscal
2017
compared to the first
three quarters
of fiscal
2016
which resulted in a
$4.3 million
increase
to net revenue. Comparable store sales
increased
1%
, or
$2.3 million
on a constant dollar basis. The
increase
in comparable store sales was primarily a result of increased dollar value per transaction and improved conversion rates. This was partially offset by a decrease in store traffic, due in part to shifting retail traffic trends from in-store to online.
|
The closure of
48
of our ivivva branded company-operated stores as part of the restructuring of our ivivva operations in the
third
quarter of fiscal
2017
reduced our net revenue from company-operated stores by
$8.8 million
compared to the first
three quarters
of fiscal
2016
.
Direct to Consumer.
Net revenue from our direct to consumer segment
increased
$52.5 million
, or
18%
, to
$341.5 million
in the first
three quarters
of fiscal
2017
from
$289.0 million
in the first
three quarters
of fiscal
2016
. Direct to consumer net revenue
increased
18%
on a constant dollar basis. This was primarily a result of increased website traffic and increased dollar value per transaction, partially offset by lower conversion rates. During the second quarter of fiscal 2017, we held online warehouse sales in the United States and Canada which generated net revenue of
$12.3 million
. We did not hold any online warehouse sales during the first
three quarters
of fiscal
2016
. Excluding the impact of the online warehouse sales, direct to consumer net revenue
increased
14%
.
Other.
Net revenue from our other segment
increase
d
$28.9 million
, or
22%
, to
$160.8 million
in the first
three quarters
of fiscal
2017
from
$131.9 million
in the first
three quarters
of fiscal
2016
. This
increase
was primarily the result of increased net revenue at existing outlets, and an increased number of outlets and temporary locations open during the first
three quarters
of fiscal
2017
compared to the first
three quarters
of fiscal
2016
. The
increase
in net revenue from our other segment was partially offset by lower net revenue from showrooms, primarily due a decreased number of showrooms open during the first
three quarters
of fiscal
2017
compared to the first
three quarters
of fiscal
2016
.
Gross Profit
Gross profit
increased
$104.6 million
, or
14%
, to
$876.3 million
for the first
three quarters
of fiscal
2017
from
$771.7 million
for the first
three quarters
of fiscal
2016
.
Gross profit as a percentage of net revenue, or gross margin,
increase
d
130
basis points, to
50.9%
in the first
three quarters
of fiscal
2017
from
49.6%
in the first
three quarters
of fiscal
2016
. The
increase
in gross margin was primarily the result of:
|
|
•
|
an increase in product margin of 230 basis points which was primarily due to a favorable mix of higher margin product and lower product costs, partially offset by higher markdowns; and
|
|
|
•
|
a favorable impact of foreign exchange rates of 10 basis points.
|
This was partially offset by an increase in fixed costs, including occupancy and depreciation costs, and costs related to our product and supply chain departments, of 60 basis points and costs incurred in connection with the restructuring of our ivivva operations of 50 basis points.
During the first
three quarters
of fiscal
2017
, as a result of the restructuring of our ivivva operations, we recognized costs totaling
$8.8 million
within costs of goods sold, as outlined in Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report. Excluding these charges, adjusted gross profit increased
15%
to
$885.1 million
and adjusted gross margin
increase
d
180
basis points to
51.4%
compared to the first
three quarters
of fiscal
2016
.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increase
d
$92.8 million
, or
17%
, to
$640.0 million
in the first
three quarters
of fiscal
2017
from
$547.2 million
in the first
three quarters
of fiscal
2016
. The
increase
in selling, general and administrative expenses was primarily due to:
|
|
•
|
an increase
in costs related to our operating channels of
$63.3 million
, comprised of:
|
|
|
–
|
an increase
in employee costs of
$26.8 million
, primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations;
|
|
|
–
|
an increase
in variable costs of
$6.8 million
, primarily due to an increase in credit card fees and distribution costs as a result of increased net revenue; and
|
|
|
–
|
an increase
in other costs of
$29.7 million
, primarily due to an increase in digital marketing expenses, website related costs, brand and community costs, and other costs associated with our operating locations; and
|
|
|
•
|
an increase
in head office costs of
$40.6 million
, comprised of:
|
|
|
–
|
an increase
in employee costs of
$13.4 million
primarily due to additional employees to support the growth in our business; and
|
|
|
–
|
an increase
in other costs of
$27.2 million
primarily due to a global brand campaign, increases in other brand and community costs, professional fees, depreciation, and information technology related costs.
|
The
increase
in selling, general and administrative expenses was partially offset by an increase in net foreign exchange and derivative revaluation gains of
$11.0 million
. There were net foreign exchange and derivative revaluation gains of
$6.9 million
in the first
three quarters
of fiscal
2017
compared to net foreign exchange revaluation losses of
$4.1 million
in the first
three quarters
of fiscal
2016
. The net foreign exchange gains and losses primarily relate to the revaluation of U.S. dollar denominated monetary assets and liabilities held by Canadian subsidiaries, and the derivatives are designed to economically hedge these gains and losses.
As a percentage of net revenue, selling, general and administrative expenses
increase
d
200
basis points, to
37.2%
in the first
three quarters
of fiscal
2017
from
35.2%
in the first
three quarters
of fiscal
2016
.
Asset Impairment and Restructuring Costs
As a result of the restructuring of our ivivva operations, we recognized asset impairment and restructuring costs of
$36.5 million
in the first
three quarters
of fiscal
2017
. This includes lease termination costs of
$19.9 million
, long-lived asset impairment charges of
$11.6 million
, employee related costs of
$4.0 million
, and other restructuring costs of
$1.0 million
. We did not have any asset impairment and restructuring costs in the first
three quarters
of fiscal
2016
. Please refer to Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
Income from Operations
Income from operations
decrease
d
$24.8 million
, or
11%
, to
$199.7 million
in the first
three quarters
of fiscal
2017
from
$224.5 million
in the first
three quarters
of fiscal
2016
. Operating margin
decrease
d
280
basis points to
11.6%
compared to
14.4%
in the first
three quarters
of fiscal
2016
.
In connection with the restructuring of our ivivva operations, we recognized pre-tax costs totaling
$45.4 million
in the first
three quarters
of fiscal
2017
. This includes asset impairment and restructuring costs of
$36.5 million
and costs recognized in cost of goods sold totaling
$8.8 million
. Excluding these charges, adjusted income from operations
increase
d
9%
to
$245.1 million
and adjusted operating margin
decreased
20
basis points to
14.2%
.
On a segment basis, we determine income from operations without taking into account our general corporate expenses and the costs we incur in connection with the restructuring of our ivivva operations.
Segmented income from operations for the first
three quarters
ended
October 29, 2017
and
October 30, 2016
is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
267,178
|
|
|
$
|
245,056
|
|
|
21.9
|
%
|
|
21.6
|
%
|
Direct to consumer
|
|
127,746
|
|
|
114,744
|
|
|
37.4
|
|
|
39.7
|
|
Other
|
|
19,076
|
|
|
12,430
|
|
|
11.9
|
|
|
9.4
|
|
Segmented income from operations
|
|
414,000
|
|
|
372,230
|
|
|
|
|
|
|
|
General corporate expense
|
|
168,912
|
|
|
147,707
|
|
|
|
|
|
|
|
Restructuring and related costs
|
|
45,365
|
|
|
—
|
|
|
|
|
|
Income from operations
|
|
$
|
199,723
|
|
|
$
|
224,523
|
|
|
|
|
|
|
|
Company-Operated Stores.
Income from operations from our company-operated stores segment
increased
$22.1 million
, or
9%
, to
$267.2 million
for the first
three quarters
of fiscal
2017
from
$245.1 million
for the first
three quarters
of fiscal
2016
. The increase was primarily the result of
increase
d gross profit of
$55.4 million
which was primarily due to increased net revenue and higher gross margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased store employee costs, increased brand and community costs, and increased operating expenses associated with higher net revenues and new stores. Income from operations as a percentage of company-operated stores net revenue
increased
by
30
basis points, primarily due to an increase in gross margin, partially offset by deleverage of selling, general and administrative expenses.
Direct to Consumer.
Income from operations from our direct to consumer segment
increase
d
$13.0 million
, or
11%
, to
$127.7 million
for the first
three quarters
of fiscal
2017
from
$114.7 million
for the first
three quarters
of fiscal
2016
. The
increase
was primarily the result of
increase
d gross profit of
$40.6 million
which was primarily due to increased net revenue and higher gross margin. The
increase
in gross profit was partially offset by an increase in selling, general and administrative expenses including higher digital marketing expenses, website related costs, and higher variable costs such as packaging and distribution and credit card fees as a result of higher net revenue. Income from operations as a percentage of direct to consumer net revenue
decreased
230
basis points primarily due to deleverage of selling, general and administrative expenses, partially offset by increased gross margin.
Other.
Other income from operations
increase
d
$6.6 million
, or
53%
, to
$19.1 million
for the first
three quarters
of fiscal
2017
from
$12.4 million
for the first
three quarters
of fiscal
2016
. The
increase
was primarily the result of
increase
d gross profit of
$17.4 million
which was primarily due to increased net revenue and higher gross margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased employee costs, increased brand and community costs, and increased operating expenses associated with new locations and higher net revenues. Income from operations as a percentage of other net revenue
increased
250
basis points primarily due to an increase in gross margin partially offset by deleverage of selling, general and administrative expenses as a percentage of other net revenue.
General Corporate Expense.
General corporate expense
increase
d
$21.2 million
, or
14%
, to
$168.9 million
for the first
three quarters
of fiscal
2017
from
$147.7 million
for the first
three quarters
of fiscal
2016
. This increase was primarily due to increased head office employee costs, a global brand campaign, increases in other brand and community costs, professional fees, depreciation, and information technology related costs. These increases were partially offset by an
increase
in net foreign exchange and derivative revaluation gains of
$11.0 million
. There were net foreign exchange and derivative revaluation gains of
$6.9 million
in the first
three quarters
of fiscal
2017
compared to net foreign exchange losses of
$4.1 million
in the first
three quarters
of fiscal
2016
. The net foreign exchange gains and losses primarily relate to the revaluation of U.S. dollar denominated monetary assets and liabilities held by Canadian subsidiaries, and the derivatives are designed to economically hedge these gains and losses.
Other Income (Expense), Net
Other income, net
increase
d
$2.1 million
, or
285%
, to
$2.8 million
for the first
three quarters
of fiscal
2017
from income of
$0.7 million
for the first
three quarters
of fiscal
2016
. The
increase
was primarily due to net interest expense of
$1.7 million
which was recorded in the first
three quarters
of fiscal
2016
in relation to certain tax adjustments that are outlined in Note 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
Income Tax Expense
Income tax expense
increased
$5.6 million
, or
10%
, to
$63.6 million
for the first
three quarters
of fiscal
2017
from
$58.0 million
for the first
three quarters
of fiscal
2016
.
The first
three quarters
of fiscal
2017
and fiscal
2016
included certain tax adjustments which resulted in net income tax recoveries of
$11.9 million
and
$11.6 million
, respectively. As outlined in Notes 6 and 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report, the tax recovery recognized in the first
three quarters
of fiscal
2017
relates to the tax effect of the costs recognized in connection with the ivivva restructuring, and the tax recovery recognized in the first
three quarters
of fiscal
2016
relates to our transfer pricing arrangements and taxes on repatriation of foreign earnings.
The effective tax rate for the first
three quarters
of fiscal
2017
was
31.4%
compared to
25.7%
for the first
three quarters
of fiscal
2016
. The adjusted effective tax rate was
30.5%
for the first
three quarters
of fiscal
2017
compared to
30.7%
for the first
three quarters
of fiscal
2016
. The decrease in the adjusted effective tax rate compared to first
three quarters
of fiscal
2016
is primarily due to certain adjustments which were recorded during the first
three quarters
of fiscal
2017
following the finalization of our U.S. and Canadian tax returns.
Net Income
Net income
decreased
$28.3 million
, or
17%
, to
$138.9 million
for the first
three quarters
of fiscal
2017
from
$167.2 million
for the first
three quarters
of fiscal
2016
. This was primarily due to an
increase
in selling, general and administrative expenses of
$92.8 million
, long-lived asset impairment and restructuring costs of
$36.5 million
, and
an increase
in income tax expense of
$5.6 million
, partially offset by
an increase
in gross profit of
$104.6 million
, and an
increase
in other income (expense), net of
$2.1 million
.
Comparable Store Sales and Total Comparable Sales
We separately track comparable store sales, which reflect net revenue from company-operated stores that have been open for at least 12 months, or open for at least 12 months after being significantly expanded. 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 sales in the prior year. Comparable store sales exclude sales from new stores that have not been open for at least 12 months, from stores which have not been in their significantly expanded space for at least 12 months, and from stores which have been temporarily relocated for renovations. Comparable store sales also exclude sales from direct to consumer, outlets, showrooms, temporary locations, wholesale accounts, license and supply arrangements, warehouse sales, and sales from company-operated stores that we have closed.
Total comparable sales combines comparable store sales and direct to consumer sales.
The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.
Non-GAAP Financial Measures
Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and the adjusted financial results are non-GAAP financial measures.
A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign exchange rates for the same period of the prior year. We provide constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue because we use these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates. We believe that disclosing these measures on a constant dollar basis is useful to investors because it enables them to better understand the level of growth of our business.
Adjusted gross profit, gross margin, income from operations, operating margin, effective tax rates, and diluted earnings per share exclude the costs recognized in connection with the restructuring of our ivivva operations, its related tax effects, and certain discrete items related to our transfer pricing arrangements and taxes on repatriation of foreign earnings. We believe these adjusted financial measures are useful to investors as the adjustments do not directly relate to our ongoing business operations and therefore do not contribute to a meaningful evaluation of the trend in our operating performance. Furthermore, we do not believe the adjustments are reflective of our expectations of our future operating performance and believe these non-GAAP measures are useful to investors because of their comparability to our historical information.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP. A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.
The below changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue show the change compared to the corresponding period in the prior year.
Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 29, 2017
|
|
Three Quarters Ended
October 29, 2017
|
|
|
(In thousands)
|
|
(Percentages)
|
|
(In thousands)
|
|
(Percentages)
|
Change in net revenue
|
|
$
|
74,602
|
|
|
14
|
%
|
|
$
|
165,927
|
|
|
11
|
%
|
Adjustments due to foreign exchange rate changes
|
|
(6,842
|
)
|
|
(2
|
)
|
|
(3,011
|
)
|
|
(1
|
)
|
Change in net revenue in constant dollars
|
|
$
|
67,760
|
|
|
12
|
%
|
|
$
|
162,916
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 29, 2017
|
|
Three Quarters Ended
October 29, 2017
|
Change in total comparable sales
1,2
|
|
8
|
%
|
|
5
|
%
|
Adjustments due to foreign exchange rate changes
|
|
(1
|
)
|
|
(1
|
)
|
Change in total comparable sales in constant dollars
1,2
|
|
7
|
%
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 29, 2017
|
|
Three Quarters Ended
October 29, 2017
|
|
|
(In thousands)
|
|
(Percentages)
|
|
(In thousands)
|
|
(Percentages)
|
Change in comparable store sales
2
|
|
$
|
6,611
|
|
|
2
|
%
|
|
$
|
4,255
|
|
|
1
|
%
|
Adjustments due to foreign exchange rate changes
|
|
(3,631
|
)
|
|
(1
|
)
|
|
(1,931
|
)
|
|
—
|
|
Change in comparable store sales in constant dollars
2
|
|
$
|
2,980
|
|
|
1
|
%
|
|
$
|
2,324
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 29, 2017
|
|
Three Quarters Ended
October 29, 2017
|
|
|
(Percentages)
|
Change in direct to consumer net revenue
|
|
26
|
%
|
|
18
|
%
|
Adjustments due to foreign exchange rate changes
|
|
(1
|
)
|
|
—
|
|
Change in direct to consumer net revenue in constant dollars
|
|
25
|
%
|
|
18
|
%
|
__________
1
Total comparable sales includes comparable store sales and direct to consumer sales.
2
Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 months, or open for at least 12 months after being significantly expanded.
Adjusted financial measures
The following tables reconcile adjusted financial measures with the most directly comparable measures calculated in accordance with GAAP. The amounts are in thousands, except for the per share amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 29, 2017
|
|
Quarter Ended
October 30, 2016
|
|
|
GAAP Results
|
|
Adjustments
|
|
Adjusted Results
(Non-GAAP)
|
|
GAAP Results
|
|
Adjustments
|
|
Adjusted Results
(Non-GAAP)
|
Gross profit
1
|
|
$
|
321,962
|
|
|
$
|
1,178
|
|
|
$
|
323,140
|
|
|
$
|
278,426
|
|
|
$
|
—
|
|
|
$
|
278,426
|
|
Gross margin
1
|
|
52.0
|
%
|
|
0.2
|
%
|
|
52.2
|
%
|
|
51.1
|
%
|
|
—
|
%
|
|
51.1
|
%
|
Income from operations
1,2
|
|
85,588
|
|
|
22,186
|
|
|
107,774
|
|
|
92,975
|
|
|
—
|
|
|
92,975
|
|
Operating margin
1,2
|
|
13.8
|
%
|
|
3.6
|
%
|
|
17.4
|
%
|
|
17.1
|
%
|
|
—
|
%
|
|
17.1
|
%
|
Income before income tax expense
1,2,3
|
|
86,640
|
|
|
22,185
|
|
|
108,825
|
|
|
93,603
|
|
|
186
|
|
|
93,789
|
|
Income tax expense
3,4
|
|
27,696
|
|
|
5,813
|
|
|
33,509
|
|
|
25,318
|
|
|
4,005
|
|
|
29,323
|
|
Effective tax rate
3,4
|
|
32.0
|
%
|
|
(1.2
|
)%
|
|
30.8
|
%
|
|
27.0
|
%
|
|
4.3
|
%
|
|
31.3
|
%
|
Diluted earnings per share
1,2,3,4
|
|
$
|
0.43
|
|
|
$
|
0.13
|
|
|
$
|
0.56
|
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
October 29, 2017
|
|
Three Quarters Ended
October 30, 2016
|
|
|
GAAP Results
|
|
Adjustments
|
|
Adjusted Results
(Non-GAAP)
|
|
GAAP Results
|
|
Adjustments
|
|
Adjusted Results
(Non-GAAP)
|
Gross profit
1
|
|
$
|
876,279
|
|
|
$
|
8,841
|
|
|
$
|
885,120
|
|
|
$
|
771,718
|
|
|
$
|
—
|
|
|
$
|
771,718
|
|
Gross margin
1
|
|
50.9
|
%
|
|
0.5
|
%
|
|
51.4
|
%
|
|
49.6
|
%
|
|
—
|
%
|
|
49.6
|
%
|
Income from operations
1,2
|
|
199,723
|
|
|
45,365
|
|
|
245,088
|
|
|
224,523
|
|
|
—
|
|
|
224,523
|
|
Operating margin
1,2
|
|
11.6
|
%
|
|
2.6
|
%
|
|
14.2
|
%
|
|
14.4
|
%
|
|
—
|
%
|
|
14.4
|
%
|
Income before income tax expense
1,2,3
|
|
202,494
|
|
|
45,365
|
|
|
247,859
|
|
|
225,243
|
|
|
1,696
|
|
|
226,939
|
|
Income tax expense
3,4
|
|
63,593
|
|
|
11,886
|
|
|
75,479
|
|
|
57,997
|
|
|
11,576
|
|
|
69,573
|
|
Effective tax rate
3,4
|
|
31.4
|
%
|
|
(0.9
|
)%
|
|
30.5
|
%
|
|
25.7
|
%
|
|
5.0
|
%
|
|
30.7
|
%
|
Diluted earnings per share
1,2,3,4
|
|
$
|
1.02
|
|
|
$
|
0.24
|
|
|
$
|
1.26
|
|
|
$
|
1.22
|
|
|
$
|
(0.07
|
)
|
|
$
|
1.15
|
|
__________
1
During the
quarter and three quarters ended
October 29, 2017
, we recognized costs totaling
$1.2 million
and
$8.8 million
, respectively, within cost of goods sold related to the restructuring of our ivivva operations.
2
During the
quarter and three quarters ended
October 29, 2017
, we recognized asset impairment and restructuring costs related to the restructuring of our ivivva operations totaling
$21.0 million
and
$36.5 million
, respectively.
3
The adjustments in the
quarter and three quarters ended
October 30, 2016
relate to our transfer pricing arrangements and the associated repatriation of foreign earnings and were recorded in other income (expense), net and income tax expense.
4
The adjustment to income tax expense for the
quarter and three quarters ended
October 29, 2017
represents the tax effect of the ivivva related restructuring adjustments, calculated based on the expected annual tax rate of the applicable tax jurisdictions.
Please refer to Notes 6 and 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information on these adjustments.
Seasonality
Our business is affected by the general seasonal trends common to the retail apparel industry. Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year. As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year. For example, we generated approximately 47%, 45%, and 42% of our full year operating profit during the fourth quarters of fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our revolving credit facility. Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, making information technology system enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally. We may also use cash to repurchase shares of our common stock. Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions.
As of
October 29, 2017
, our working capital (excluding cash and cash equivalents) was
$297.7 million
, our cash and cash equivalents were
$650.1
million and our capacity under our revolving facility was
$148.9 million
.
The following table summarizes our net cash flows provided by and used in operating, investing and financing activities for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(In thousands)
|
Total cash provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
131,309
|
|
|
$
|
98,659
|
|
Investing activities
|
|
(120,051
|
)
|
|
(106,168
|
)
|
Financing activities
|
|
(100,707
|
)
|
|
(25,288
|
)
|
Effect of exchange rate changes on cash
|
|
4,657
|
|
|
11,701
|
|
(Decrease) increase in cash and cash equivalents
|
|
$
|
(84,792
|
)
|
|
$
|
(21,096
|
)
|
Operating Activities
Cash flows provided by operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense, and the effect of changes in operating assets and liabilities.
Cash provided by operating activities
increased
$32.7 million
, to
$131.3 million
for the first
three quarters
of fiscal
2017
compared to
$98.7 million
for the first
three quarters
of fiscal
2016
. This increase was primarily the result of a
decrease
in net cash outflows from changes in operating assets and liabilities of
$47.0 million
, an
increase
in depreciation and amortization of
$16.5 million
, and asset impairment related to our ivivva restructuring of
$11.6 million
. This was partially offset by a
decrease
in net income of
$28.3 million
and a change in deferred income taxes of
$18.4 million
.
Investing Activities
Cash flows used in investing activities relate to capital expenditures, the settlement of net investment hedges, and other investing activities. The capital expenditures were primarily for opening new company-operated stores, remodeling or relocating certain stores, and ongoing store refurbishment. We also had capital expenditures related to information technology and business systems, related to corporate buildings, and for opening retail locations other than company-operated stores.
Cash used in investing activities
increased
$13.9 million
to
$120.1 million
for the first
three quarters
of fiscal
2017
from
$106.2 million
for the first
three quarters
of fiscal
2016
. This increase was primarily the result of an increase in capital expenditures for our direct to consumer and company-operated stores segments, primarily related to our new website and an increased number of stores opened during the first
three quarters
of fiscal 2017 compared to the first
three quarters
of fiscal 2016. The increase in cash used in investing activities was partially offset by a decrease in capital expenditures at our corporate level. In the second quarter of fiscal
2016
, we purchased a land parcel in Vancouver, BC for $19.7 million for general corporate purposes.
Financing Activities
Cash flows used in or provided by financing activities consist primarily of cash used to repurchase shares of our common stock and certain cash flows related to stock-based compensation.
Cash used in financing activities
increased
$75.4 million
, to
$100.7 million
for the first
three quarters
of fiscal
2017
compared to
$25.3 million
for the first
three quarters
of fiscal
2016
.
On June 11, 2014, our board of directors approved a program to repurchase shares of our common stock up to an aggregate value of
$450.0 million
. This stock repurchase program was completed during the second quarter of fiscal 2016. On December 1, 2016, our board of directors approved a program to repurchase shares of our common stock up to an aggregate value of
$100.0 million
. This stock repurchase program was completed during the third quarter of fiscal 2017.
Our cash used in financing activities for the first
three quarters
of fiscal
2017
included
$99.3 million
to repurchase
1.8 million
shares of our common stock compared to
$28.6 million
to repurchase
0.4 million
shares for the first
three quarters
of fiscal
2016
. The common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.
We believe that our cash and cash equivalent balances, cash generated 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 12 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 Item 1 of Part II of this Quarterly Report on Form 10-Q. In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, 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 and cash equivalents and cash generated from operations.
Revolving Credit Facility
On December 15, 2016, we entered into a credit agreement for $150.0 million under an unsecured five-year revolving credit facility. Bank of America, N.A., is administrative agent and HSBC Bank Canada is the syndication agent and letter of credit issuer, and the lenders party thereto. Borrowings under the revolving credit facility may be made, in U.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the approval of the administrative agent and the lenders. Up to $35.0 million of the revolving credit facility is available for the issuance of letters of credit and up to $25.0 million is available for the issuance of swing line loans. Commitments under the revolving credit facility may be increased by up to $200.0 million, subject to certain conditions, including the approval of the lenders. Borrowings under the agreement may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs). The principal amount outstanding under the credit agreement will be due and payable in full on December 15, 2021, subject to provisions that permit us to request a limited number of one year extensions annually.
Borrowings made under the revolving credit facility bear interest at a rate per annum equal to, at our option, either (a) a rate based on the rates applicable for deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) an alternate base rate, plus, in each case, an applicable margin. The applicable margin is determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax depreciation, amortization and rent ("EBITDAR") and ranges between 1.00%-1.75% for LIBOR loans and 0.00%-0.75% for alternate base rate loans. Additionally, a commitment fee of between 0.125%-0.200%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the revolving credit facility.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of our subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.
We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and we are not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be less than 2.00:1.00. The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control). If an event of default occurs, the credit agreement may be terminated and the maturity of any outstanding amounts may be accelerated.
As of
October 29, 2017
, aside from letters of credit of
$1.1 million
, we had no other borrowings outstanding under this credit facility.
Off-Balance Sheet Arrangements
We enter into standby letters of credit to secure certain of our obligations, including leases, taxes and duties. As of
October 29, 2017
, letters of credit and letters of guarantee totaling
$1.1 million
had been issued.
We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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 our 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. Our critical accounting policies and estimates are discussed in our fiscal
2016
Annual Report on Form 10-K filed with the SEC on
March 29, 2017
, and in Notes 2, 4, and 5 included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Operating Locations
Our company-operated stores by brand and by country as of
October 29, 2017
and
January 29, 2017
, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
January 29,
2017
|
lululemon
|
|
|
|
|
United States
|
|
263
|
|
|
245
|
|
Canada
|
|
54
|
|
|
51
|
|
Australia
|
|
27
|
|
|
27
|
|
United Kingdom
|
|
9
|
|
|
9
|
|
China
|
|
6
|
|
|
3
|
|
New Zealand
|
|
6
|
|
|
5
|
|
Hong Kong
|
|
3
|
|
|
3
|
|
Singapore
|
|
3
|
|
|
3
|
|
South Korea
|
|
3
|
|
|
2
|
|
Germany
|
|
2
|
|
|
1
|
|
Ireland
|
|
1
|
|
|
—
|
|
Japan
|
|
1
|
|
|
—
|
|
Puerto Rico
|
|
1
|
|
|
1
|
|
Switzerland
|
|
1
|
|
|
1
|
|
Taiwan
|
|
1
|
|
|
—
|
|
|
|
381
|
|
|
351
|
|
ivivva
|
|
|
|
|
United States
|
|
4
|
|
|
42
|
|
Canada
|
|
3
|
|
|
13
|
|
|
|
7
|
|
|
55
|
|
Total
|
|
388
|
|
|
406
|
|
Retail locations operated by third parties under license and supply arrangements are not included in the above table. As of
October 29, 2017
, there were
five
licensed stores, including
three
in the United Arab Emirates,
one
in Mexico, and
one
in Qatar.
On
August 20, 2017
, as part of the restructuring of our ivivva operations, we closed
48
of our
55
ivivva branded company-operated stores. The
seven
remaining ivivva branded stores remain in operation and are not expected to close.