lululemon(LULU) - 2022 Q4 - Annual Report

Revenue and Sales Performance - Net revenue increased 30% to $8.1 billion in 2022, with constant dollar growth of 32%[176] - Total comparable sales increased 25% (28% on a constant dollar basis), driven by 16% comparable store sales growth and 33% direct-to-consumer revenue growth[176] - International net revenue grew 35% in 2022, despite COVID-19 closures in China, while North America revenue increased 29%[175] - Net revenue increased by $1.9 billion (30%) to $8.1 billion in 2022 from $6.3 billion in 2021, driven by direct-to-consumer and company-operated store revenue[188] - Total comparable sales increased by 25% in fiscal 2022, with a 28% increase on a constant dollar basis[188] - Company-operated stores revenue increased by $826.6 million (29.3%) to $3.6 billion, driven by 81 new stores and a 16% increase in comparable store sales[189] - Direct-to-consumer revenue increased by $921.8 million (33%) to $3.7 billion, with a 35% increase on a constant dollar basis[189][190] Gross Profit and Operating Income - Gross profit increased 24% to $4.5 billion, with adjusted gross profit up 26% to $4.6 billion[177] - Adjusted operating income increased 30% to $1.8 billion, with adjusted operating margin improving 10 basis points to 22.1%[179] - Gross profit increased by $883.8 million (24.5%) to $4.5 billion, but gross margin decreased by 230 basis points to 55.4%[191][193] - Income from operations decreased by $4.9 million (0.4%) to $1.3 billion, with operating margin declining by 490 basis points to 16.4%[204] Store Operations and Expansion - lululemon operated 655 company-operated stores globally as of January 29, 2023, with 81 net new stores opened in 2022, including 49 outside North America[18][19] - Sales per square foot for company-operated stores increased to $1,580 in 2022, up from $1,443 in 2021[20] - Company opened 81 net new stores in 2022, including 31 in China, 32 in North America, and 9 in Europe (first stores in Spain)[175] Product and Market Focus - Women's range accounts for 65% of lululemon's 2022 net revenue, while the men's range is growing due to increased recognition of its technical quality[14] - North America represents 84% of lululemon's 2022 net revenue, with international expansion focused on China, Asia Pacific, and Europe[15] - Launched footwear collection with 3 technical styles for women and a dual-gender slide, expanding into new categories like golf, tennis, and hiking[169] Supply Chain and Manufacturing - 39% of lululemon's products were manufactured in Vietnam in 2022, with the top five vendors accounting for 56% of production[32] - 39% of products manufactured in Vietnam, 14% in Cambodia, 12% in Sri Lanka, 8% in Bangladesh, and 7% in Indonesia in 2022[81] - 43% of fabric originated from Taiwan, 19% from China Mainland, and 16% from Sri Lanka in 2022[81] - 56% of products manufactured by top five vendors, with the largest vendor producing 15% of products in 2022[84] - 56% of fabrics produced by top five fabric suppliers, with the largest supplier producing 21% of fabric in 2022[86] Sustainability and Social Impact - The company's "Like New" recommerce program supports sustainability goals by reselling gently used products[26] - The company has contributed $29.4 million to its Centre for Social Impact, with $21.2 million directly to social impact organizations[44] - The company's Vendor Code of Ethics ensures respect for human and labor rights and promotes safe and fair working conditions in the supply chain[47] - The company's Foreign Migrant Worker Standard raises standards and benefits garment workers[48] Workforce and Diversity - Approximately 55% of the company's board of directors, 65% of the senior executive leadership team, and 45% of vice presidents and above are women, while 75% of the overall workforce are women as of January 29, 2023[39] - The company has achieved full pay equity, including gender and race, in the United States[42] - The company has invested $29.4 million out of a $75.0 million goal to advance equity in well-being by 2025[43] - The company employs approximately 34,000 people globally[44] - The 2022 employee engagement survey participation rate was approximately 83%, with the engagement score exceeding the retail industry average[44] Financial Risks and Challenges - Inventory forecasting challenges could lead to excess inventory or shortages, impacting gross margins and brand reputation[67][68] - Supply chain disruptions due to geopolitical events, labor shortages, or natural disasters could impair product distribution[80][83] - Reliance on international suppliers, particularly in the Asia Pacific region, poses risks to procurement and distribution[81][83] - Increasing labor costs in South Asia and Southeast Asia could significantly raise production costs[92][94] - Cybersecurity risks could result in data breaches, litigation, and financial exposure[95][96] - Data breaches and cyber-attacks pose significant risks, with potential legal, financial, and reputational impacts, though no material impact has been observed to date[97][98] - Compliance with privacy laws such as GDPR, PIPEDA, CCPA, and PIPL increases operational complexity and costs, with potential fines and litigation risks[99] - Dependence on technology systems and third-party services for e-commerce operations creates vulnerability to disruptions, which could harm sales and reputation[100][103] - Climate change and related regulations may increase production costs, disrupt supply chains, and impact consumer demand for products[107] - ESG scrutiny from investors and stakeholders could lead to additional costs, reputational damage, and challenges in employee retention[108][109] - Economic downturns, inflation, and geopolitical uncertainties may reduce consumer discretionary spending and demand for products[113] - COVID-19 and similar health events have disrupted operations, supply chains, and consumer behavior, with potential long-term impacts[114][115][116] - Trade restrictions, tariffs, and geopolitical tensions could increase costs and disrupt supply chains, particularly with sourcing from China[118][121] - Changes in UK-EU trade relations and foreign exchange rates may impact import duties and shipping logistics[122] - Tax law changes and unanticipated liabilities, including Canadian withholding taxes, could increase the effective tax rate and reduce profitability[125] - The company is negotiating the renewal of a profit allocation arrangement between the U.S. and Canada, which could impact its effective tax rate[128] - Changes in U.S., Canadian, or international tax laws, including the Inflation Reduction Act and OECD's Pillar Two rules, may affect the company's income tax expense, profitability, and capital allocation decisions[129] - The company faces significant regulatory compliance risks across multiple jurisdictions, with potential penalties, legal fees, and revenue loss if it fails to comply with trade and other regulations[130] - Fluctuations in foreign currency exchange rates impact the company's net revenue, expenses, assets, and liabilities, with potential negative effects as international expansion increases[132][133] - The company's intellectual property is limited, with competitors potentially able to manufacture and sell similar products at lower prices, which could harm net revenue and profitability[134][135] Operational and Financial Metrics - Operating profit in Q4 2022 was 24% of the full-year total, impacted by goodwill impairment related to lululemon Studio[37] - Inventory balance increased 50% as of January 29, 2023 compared to January 30, 2022 due to supply chain disruptions[183] - Recognized $442.7 million in post-tax charges related to lululemon Studio, including impairments and inventory provisions[174] - Board approved $1.0 billion stock repurchase program in March 2022, with $743.8 million remaining as of January 29, 2023[163] - Selling, general, and administrative expenses increased by $532.4 million (23.9%) to $2.8 billion, primarily due to higher head office and operating channel costs[194][195] - Impairment of goodwill and other assets amounted to $407.9 million in 2022, primarily related to the lululemon Studio business unit[198][201] - General corporate expenses increased by $224.9 million (35.2%) to $862.9 million, driven by higher employee costs and technology expenses[204][207] - The company recognized a $62.9 million provision against hardware inventory, reducing gross margin by 80 basis points[193] Intellectual Property and Brand Value - The company holds trademark rights on many products, including the lululemon and wave design trademarks, which are considered among its most valuable assets[49] - The company faces risks related to maintaining brand value, consumer shopping preferences, product defects, and competitive pressures[52][56][58][60] Distribution and Logistics - The company has entered into new leases for distribution centers in Ontario, California (1,250,000 sq ft, expiring 2038), Ravenhall, Victoria (250,000 sq ft, expiring 2033), and Brampton, Ontario (980,000 sq ft, expiring 2039), expected to be operational in 2023 and 2024[149][150] Direct-to-Consumer and Digital Strategy - lululemon's direct-to-consumer channel enhances brand awareness and serves guests in markets without physical retail locations[23] - lululemon Studio offers in-home fitness subscriptions, contributing to the company's integrated fitness strategy[27] Product Innovation and Design - lululemon's product design team focuses on technical innovation, collaborating with suppliers to develop proprietary fabrics[31]