lululemon(LULU) - 2024 Q3 - Quarterly Report

Revenue Growth - Net revenue increased 19% to $2.2 billion in Q3 2023 compared to Q3 2022[87] - Net revenue from China increased 64% in the first three quarters of 2023 compared to the same period in 2022[95] - Net revenue increased by 20.1% to$ 6.41 billion for the first three quarters of 2023, with company-operated stores contributing $591.3 million (23.3% increase)[120] - Company-operated stores contributed$ 108.2 million to net revenue growth, with 63 net new stores opened since Q3 2022[99] - Company-operated stores opened 63 net new locations since Q3 2022, contributing $387.1 million to net revenue growth[121] - The company-operated stores increased to 686 as of October 29, 2023, up from 655 in January 2023[171] Comparable Sales and Direct-to-Consumer Performance - Total comparable sales increased 13%, with comparable store sales up 9% and direct to consumer net revenue up 18%[87] - Comparable sales increased by 13% (14% on a constant dollar basis) for the first three quarters of 2023, driven by increased store traffic and direct-to-consumer revenue[118] - Direct-to-consumer net revenue increased by 16% (18% on a constant dollar basis) for the first three quarters of 2023, primarily due to increased traffic[122] - Total comparable sales increased by 14% in constant dollars, with direct to consumer net revenue up 18% and comparable store sales up 11%[153] Gross Profit and Margin - Gross profit increased 21% to$ 1.3 billion, with gross margin rising 110 basis points to 57.0%[87] - Gross profit increased by 25% to $3.71 billion for the first three quarters of 2023, with gross margin expanding by 230 basis points to 57.8%[120][123] - Adjusted gross margin increased by 260 basis points, primarily due to lower freight costs and reduced air freight usage[123] - Gross profit for Q3 2023 was$ 1,256.7 million with a gross margin of 57.0%[156] - Product margin increased by 320 basis points excluding the impact of lululemon Studio inventory provision, primarily due to lower freight costs[94] Operating Income and Expenses - Adjusted income from operations increased 24% to $436.3 million, with adjusted operating margin up 80 basis points to 19.8%[89] - Selling, general and administrative expenses increased 23.2% to$ 842.8 million, driven by higher head office costs and marketing expenses[103] - Operating costs increased by $75.6 million, including$ 34.2 million in employee costs, $18.8 million in other operating costs,$ 15.2 million in variable costs, and $7.4 million in brand and community costs[104] - Selling, general and administrative expenses increased by$ 453.3 million (23.2%) year-over-year, driven by higher head office costs ( $258.0 million) and operating channel costs ($ 213.1 million)[125][126] - General corporate expenses increased by $214.8 million (32.7%) due to higher employee costs, brand and community costs, and technology expenses[131][137] - Company-operated stores income from operations increased by$ 249.8 million (37.8%) due to higher gross profit ( $396.0 million) and improved gross margin[131] - Direct to consumer income from operations increased by$ 204.4 million (21.9%) driven by higher gross profit ( $311.3 million) and improved gross margin[131][135] - Other channels income from operations increased by$ 72.2 million (97.5%) due to higher gross profit ( $57.7 million) and improved gross margin[136] Net Income and Earnings Per Share - Diluted earnings per share were$ 1.96, while adjusted diluted earnings per share were $2.53[90] - Net income decreased by 2.6% to$ 248.7 million in Q3 2023, driven by higher SG&A expenses and asset impairment costs[116] - Net income increased by $145.7 million (19.8%) primarily due to higher gross profit ($ 741.3 million) and other income ( $24.8 million)[141] - Adjusted net income for Q3 2023 was$ 320.8 million, with diluted earnings per share of $2.53[156] Asset Impairment and Restructuring Costs - Impairment of assets and restructuring costs for lululemon Studio amounted to$ 74.5 million in Q3 2023[106][107] - Asset impairment and restructuring costs related to lululemon Studio totaled $74.5 million in 2023[127][131] Amortization and Intangible Assets - Amortization of intangible assets decreased by 42.8% to$ 1.25 million in Q3 2023, primarily due to the acquisition of MIRROR[106][108] - Amortization of intangible assets decreased by $1.6 million (23.8%) primarily due to the rebranding of MIRROR as lululemon Studio[128][130] Foreign Currency Impact - Foreign currency fluctuations reduced net revenue growth by$ 82.2 million in the first three quarters of 2023 compared to the same period in 2022[93] - A 10% appreciation in the U.S. dollar against the Canadian dollar would result in a $46.0 million decrease in income from operations[179] - The change in the U.S. dollar against the Canadian dollar resulted in a$ 54.5 million increase in accumulated other comprehensive loss in 2023[178] - The change in the U.S. dollar against the Canadian dollar resulted in an $83.0 million increase in accumulated other comprehensive loss in 2022[178] - Foreign currency exchange risk is managed through forward currency contracts, particularly for Canadian and Chinese subsidiaries[176] Cash Flow and Financial Position - Total cash provided by operating activities increased by$ 991.9 million year-over-year to $912.1 million[158] - Inventory balance as of October 29, 2023, decreased by 4% to$ 1.7 billion compared to the previous year[167] - The company repurchased 1.4 million shares in the first three quarters of 2023 at a total cost of $504.6 million[164] - Cash and cash equivalents as of October 29, 2023, stood at$ 1,091.1 million[166] - The company's committed revolving credit facility has a capacity of $400.0 million, with$ 393.4 million available as of October 29, 2023[166] - The company has a committed revolving credit facility of up to $400.0 million, with no borrowings outstanding as of October 29, 2023[180] - The company holds cash and cash equivalents exceeding government-insured limits with certain financial institutions[182] Inflationary and Cost Pressures - Inflationary pressures, including increased wage rates and air freight costs, impacted operating and gross margins in 2022 and 2023[183] - Sustained increases in transportation costs, wages, and raw material costs may adversely affect operating margins if selling prices do not increase accordingly[183] Tax and Other Financial Metrics - Income tax expense increased by$ 83.8 million (30.0%) with an effective tax rate of 29.2%, up 170 basis points[135][138] - The company's operating profits are historically weighted towards the fourth quarter, with 44% of full-year operating profit generated in Q4 2021[159] Credit and Risk Management - The company does not engage in interest rate hedging activities and has no current intention to do so[180] - Credit risk exposure includes unrealized gains on derivative instruments based on foreign currency rates at the time of nonperformance[182] - The company seeks to minimize credit risk by transacting with investment-grade financial institutions and monitoring their credit standing[182]