lululemon(LULU) - 2023 Q4 - Annual Report

Part I - Business and Risk Factors Business Overview lululemon designs and retails athletic apparel and accessories via stores and e-commerce, focusing on product innovation, guest experience, and global expansion Products and Market - The company offers a comprehensive line of performance apparel (pants, shorts, tops, jackets), footwear, and accessories under the lululemon brand, designed for activities like yoga, running, and training[10][12] - lululemon Studio offers in-home connected fitness and content subscriptions to build its guest community[13] - The company is strategically focused on growing its men's product line and expanding internationally in the PRC, Asia Pacific, and Europe using a decentralized model[14][15] Operating Segments Net Revenue by Segment (Fiscal 2022) | Segment | Percentage of Net Revenue | | :--- | :--- | | Company-Operated Stores | 45.0% | | Direct to Consumer | 45.6% | | Other | 9.4% | - The company operated 655 stores globally at the end of fiscal 2022, an increase of 81 net new stores from 574 in 2021, with 49 new international stores outside North America[17][18][19] - Sales per square foot for company-operated stores increased to $1,580 in 2022 from $1,443 in 2021, indicating improved store performance[20] - The 'Other' segment includes outlets, wholesale, license and supply arrangements (26 licensed locations as of Jan 2023), the 'Like New' recommerce program, and lululemon Studio[24][25][26] Sourcing and Manufacturing - The company does not own any manufacturing facilities and relies on a limited number of third-party suppliers[32] Manufacturing and Sourcing Concentration (Fiscal 2022) | Category | Top 5 Concentration | Key Geographic Regions | | :--- | :--- | :--- | | Product Manufacturing | 56% (by 5 vendors) | Vietnam (39%), Cambodia (14%), Sri Lanka (12%) | | Fabric Sourcing | 56% (by 5 suppliers) | Taiwan (43%), China Mainland (19%), Sri Lanka (16%) | Human Capital - The company's human capital strategy is guided by its 'Be Human' pillar, focusing on Inclusion, Diversity, Equity, and Action (IDEA), employee empowerment, and supply chain well-being[38] - As of January 29, 2023, women represented approximately 55% of the board of directors, 65% of the senior executive leadership team, and 75% of the overall workforce[39] - The company employed approximately 34,000 people as of fiscal year-end 2022, with an annual engagement survey showing an 83% participation rate and a score exceeding the retail industry average[44] - The company's vision is to create transformative products and experiences that build meaningful connections, unlocking greater possibility and wellbeing for all[9] - Women's apparel is the largest product category, accounting for 65% of net revenue in 2022, while North America is the largest geographical market, representing 84% of 2022 net revenue[14][15] Risk Factors The company faces significant risks including brand reputation damage, intense competition, supply chain vulnerabilities, cybersecurity threats, economic downturns, and evolving international trade and tax policies Business and Industry Risks - Success is highly dependent on maintaining the value and reputation of the lululemon brand, which could be harmed by negative publicity, product quality issues, or failure to protect intellectual property[52][55] - The lululemon Studio hardware and software products introduce risks of design/manufacturing defects, which could lead to safety issues, product liability claims, and reputational damage[59] - The market is highly competitive, with pressure from established players like Nike and adidas, as well as new entrants, and competitors could imitate products as the company holds limited patents on fabrics and technology[60][61][63] - Failure to anticipate consumer preferences and introduce innovative products could lead to lower sales and excess inventory[65][66] Supply Chain Risks - The company relies on a concentrated number of suppliers in the Asia Pacific region, with 56% of products made by the top five vendors and 56% of fabrics from the top five suppliers in 2022[84][86] - Disruptions from political instability, public health crises, trade restrictions, or supplier instability could impair the ability to procure and distribute products[80][81][83] - Fluctuating costs of raw materials, such as petroleum-based synthetics and cotton, could increase cost of goods sold and negatively impact margins[90] Technology and Security Risks - The company is a target for cyber-attacks and security breaches, which could expose confidential customer and employee data, leading to litigation, financial liability, and brand damage[95][96][97] - Compliance with evolving data privacy laws like GDPR (EU), CCPA (California), and PIPL (PRC) increases the compliance burden and risk of regulatory action[99] Economic and Regulatory Risks - Economic downturns, inflation, or uncertainty may adversely affect consumer discretionary spending on the company's products[112][113] - Changes in international trade policies, such as new tariffs or quotas, could increase costs, reduce supply, and harm the business[117][120][121] - Changes in tax laws or adverse outcomes of tax audits could negatively impact the effective tax rate, with an expected increase in 2023 due to Canadian withholding taxes on unremitted earnings[122][125] Properties The company manages principal offices and distribution centers globally, with significant expansion of leased distribution capacity planned for 2023-2024 Principal Owned and Leased Properties (as of Jan 29, 2023) | Location | Use | Approx. Sq. Feet | Ownership | | :--- | :--- | :--- | :--- | | Groveport, OH, USA | Distribution Center | 310,000 | Owned | | Vancouver, BC, Canada | Executive/Admin Offices | 140,000 | Owned | | Delta, BC, Canada | Distribution Center | 375,000 | Leased | | Milton, ON, Canada | Distribution Center | 255,000 | Leased | | Mississauga, ON, Canada | Distribution Center | 250,000 | Leased | - Significant new distribution centers are being added: a 1,250,000 sq. ft. facility in Ontario, CA (operational early fiscal 2024), a 250,000 sq. ft. facility in Ravenhall, VIC, Australia (operational in 2023), and a 980,000 sq. ft. facility in Brampton, ON, Canada (operational in fiscal 2024)[149][150] Part II - Financial Information Stockholder Matters and Equity Purchases LULU common stock trades on Nasdaq, with the company not anticipating dividends but actively repurchasing shares under a $1.0 billion program - The company's stock (LULU) has significantly outperformed both the S&P 500 Index and the S&P 500 Apparel, Accessories & Luxury Goods Index over the five-year period ending January 29, 2023[153][156] - A stock repurchase program of up to $1.0 billion was approved in March 2022, with 212,531 shares repurchased during Q4 2022 under this program[163] - The company does not anticipate paying any cash dividends in the foreseeable future[155] Management's Discussion and Analysis (MD&A) Fiscal 2022 saw 30% net revenue growth to $8.1 billion, but profitability was impacted by a $442.7 million lululemon Studio impairment, leading to a strategic shift and gross margin decline Overview and Strategy - The company launched its new 5-year growth plan, "Power of Three ×2," focusing on Product Innovation, Guest Experience, and Market Expansion[167] - Product innovation in 2022 included the launch of Senseknit fabric, new capsule collections for golf, tennis, and hiking, and the introduction of a women's footwear line[169] - The company faced weakening demand for its lululemon Studio (formerly MIRROR) in-home fitness hardware, leading to a strategic pivot towards a digital app-based service model[173] - Market expansion continued with 81 net new stores in 2022, including 31 in the PRC and the first locations in Spain, resulting in North American revenue growth of 29% and international revenue growth of 35%[175] Financial Highlights (Fiscal 2022 vs. 2021) Key Financial Metrics (Fiscal 2022 vs. 2021) | Metric | 2022 (GAAP) | 2021 (GAAP) | Change | 2022 (Adjusted) | 2021 (Adjusted) | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $8.1B | $6.3B | +30% | $8.1B | $6.3B | +30% | | Gross Margin | 55.4% | 57.7% | -230 bps | 56.2% | 57.7% | -150 bps | | Operating Margin | 16.4% | 21.3% | -490 bps | 22.1% | 22.0% | +10 bps | | Diluted EPS | $6.68 | $7.49 | -10.8% | $10.07 | $7.79 | +29.3% | - Adjustments for 2022 exclude a $442.7 million post-tax impairment charge for lululemon Studio and a gain on an asset sale, while 2021 adjustments exclude acquisition-related expenses[176] Results of Operations Net Revenue by Channel (Fiscal 2022 vs. 2021) | Channel | 2022 Revenue (in thousands) | 2021 Revenue (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Company-Operated Stores | $3,648,127 | $2,821,497 | +29.3% | | Direct to Consumer | $3,699,791 | $2,777,944 | +33.2% | | Other | $762,600 | $657,176 | +16.0% | | Total Net Revenue | $8,110,518 | $6,256,617 | +29.6% | - Gross margin decreased by 230 basis points, primarily driven by a $62.9 million (80 bps) inventory provision for lululemon Studio hardware and a 150 bps decrease from factors like higher markdowns and unfavorable FX rates[191][193] - A pre-tax impairment charge of $407.9 million was recognized in Q4 2022 related to goodwill and other long-lived assets of the lululemon Studio business unit[198][201] - The effective tax rate increased to 35.9% in 2022 from 26.9% in 2021, primarily due to non-deductible expenses related to the lululemon Studio impairment[210][212] Liquidity and Capital Resources Cash Flow Summary (Fiscal 2022 vs. 2021) | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash from Operating Activities | $966,463 | $1,389,108 | | Net cash used in Investing Activities | ($569,937) | ($427,891) | | Net cash used in Financing Activities | ($467,487) | ($844,987) | - Cash from operating activities decreased primarily due to changes in working capital, including a significant increase in inventory[230] - The company ended fiscal 2022 with $1.2 billion in cash and cash equivalents and $393.5 million available under its revolving credit facility[234] - Capital expenditures are projected to be between $660.0 million and $680.0 million in fiscal 2023[235] - Inventory balance increased 50% to $1.4 billion at year-end, driven by supply chain disruptions and strategic purchasing, with the growth rate expected to align with revenue growth in the second half of 2023[183][235] Critical Accounting Policies and Estimates - Goodwill Impairment: A full impairment of goodwill of $362.5 million was recognized for the lululemon Studio reporting unit as of January 29, 2023, triggered by lower-than-expected hardware sales, revised forecasts, and a strategic shift to digital app-based services[242] - Intangible Asset Impairment: An impairment of $40.6 million was recognized for lululemon Studio's brand and customer relationship intangible assets[243] - Inventory Provisions: A provision of $62.9 million was recorded against lululemon Studio hardware inventory, as the company no longer expects to sell all units above cost[246] - Deferred Taxes: The company has determined that $1.3 billion of its $2.4 billion net investment in Canadian subsidiaries is indefinitely reinvested, with a deferred tax liability of $20.2 million recognized for the portion not indefinitely reinvested[248][249] Market Risk Disclosures The company faces market risks from foreign currency fluctuations, particularly USD/CAD, and inflationary pressures, while interest rate risk remains minimal - The company has significant exposure to foreign currency fluctuations, particularly between the U.S. and Canadian dollars, where a 10% appreciation in the USD against the CAD would have reduced 2022 income from operations by an estimated $30.9 million[257] - The company uses forward currency contracts to hedge a portion of its net investment in its Canadian subsidiary and to manage revaluation risk on certain monetary assets and liabilities[256][404] - Interest rate risk is currently low as the company had no borrowings outstanding under its $400.0 million variable-rate revolving credit facility as of January 29, 2023[260] - Inflationary factors, such as higher air freight costs in the first half of 2022 and increased wage rates, adversely affected operating results[263] Consolidated Financial Statements This section presents the audited consolidated financial statements and PricewaterhouseCoopers LLP's unqualified opinion, highlighting critical audit matters related to inventory and goodwill impairment Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP issued an unqualified opinion, stating the consolidated financial statements are presented fairly and the company maintained effective internal control over financial reporting as of January 29, 2023[269][270] - The audit identified two Critical Audit Matters (CAMs): the Inventory Provision and the Goodwill Impairment Assessment for the lululemon Studio reporting unit, both of which involved significant management judgment[276][278][281] Financial Statements Highlights Consolidated Balance Sheet Highlights (as of Jan 29, 2023 vs Jan 30, 2022) | Account | Jan 29, 2023 (in thousands) | Jan 30, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $1,154,867 | $1,259,871 | | Inventories | $1,447,367 | $966,481 | | Goodwill | $24,144 | $386,880 | | Total Assets | $5,607,038 | $4,942,478 | | Total Liabilities | $2,458,239 | $2,202,432 | | Total Stockholders' Equity | $3,148,799 | $2,740,046 | Consolidated Statement of Operations Highlights (Fiscal Year Ended) | Account | Jan 29, 2023 (in thousands) | Jan 30, 2022 (in thousands) | | :--- | :--- | :--- | | Net Revenue | $8,110,518 | $6,256,617 | | Gross Profit | $4,492,340 | $3,608,565 | | Impairment of goodwill and other assets | $407,913 | $0 | | Income from Operations | $1,328,408 | $1,333,355 | | Net Income | $854,800 | $975,322 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of January 29, 2023, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[434] - Based on an evaluation against the COSO framework, management concluded that the company maintained effective internal control over financial reporting as of January 29, 2023[438] Part III - Corporate Governance and Executive Compensation This section incorporates information from the 2023 Proxy Statement, covering corporate governance, executive compensation, and equity compensation plan details Equity Compensation Plan Information As of January 29, 2023, the company had securities available for issuance under stockholder-approved equity compensation plans, including options, RSUs, and future issuances Equity Compensation Plan Information (as of January 29, 2023) | Plan Category | Securities to be Issued Upon Exercise (A) | Weighted-Average Exercise Price (B) | Securities Remaining for Future Issuance (C) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 1,253,404 | $230.78 | 16,784,492 |