Quarterly Report for the period ended May 4, 2008
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
May 4, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33608
lululemon athletica
inc.
(Exact name of registrant as
specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization)
2285 Clark Drive, Vancouver, British Columbia (Address of principal executive offices)
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20-3842867 (I.R.S. Employer Identification No.)
V5N 3G9 (Zip Code)
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Registrants telephone number, including area code:
604-732-6124
Former
name, former address and former fiscal year, if changed since
last report: N/A
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.
Yes þ
No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o
No þ
At May 29, 2008, there were 47,174,709 shares of the
registrants common stock, par value $0.01 per share,
outstanding.
Exchangeable
and Special Voting Shares:
At May 29, 2008, there were outstanding 20,935,041
exchangeable shares of Lulu Canadian Holding, Inc., a
wholly-owned subsidiary of the registrant. Exchangeable shares
are exchangeable for an equal number of shares of the
registrants common stock.
In addition, at May 29, 2008, the registrant had
outstanding 20,935,041 shares of special voting stock,
through which the holders of exchangeable shares of Lulu
Canadian Holding, Inc. may exercise their voting rights with
respect to the registrant. The special voting stock and the
registrants common stock generally vote together as a
single class on all matters on which the common stock is
entitled to vote.
TABLE OF
CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
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Item 1.
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FINANCIAL STATEMENTS:
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CONSOLIDATED BALANCE SHEETS as of May 4, 2008 and
February 3, 2008
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1
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CONSOLIDATED STATEMENTS OF OPERATIONS for the thirteen weeks
ended May 4, 2008 and the three months ended April 30,
2007
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2
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY for the
thirteen weeks ended May 4, 2008 and the three months ended
April 30, 2007
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3
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CONSOLIDATED STATEMENTS OF CASH FLOWS for the thirteen weeks
ended May 4, 2008 and the three months ended April 30,
2007
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4
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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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5
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Item 2.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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11
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Item 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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18
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Item 4.
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CONTROLS AND PROCEDURES
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19
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PART II. OTHER INFORMATION
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Item 1.
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LEGAL PROCEEDINGS
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19
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Item 1A.
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RISK FACTORS
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19
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Item 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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20
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Item 6.
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EXHIBITS
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20
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SIGNATURES
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21
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PART I
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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lululemon
athletica inc. and Subsidiaries
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May 4,
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February 3,
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2008
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2008
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(Unaudited)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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34,061,642
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$
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53,339,326
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Accounts receivable
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4,338,299
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4,431,556
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Inventories
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55,047,970
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39,092,208
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Prepaid expenses, current deferred taxes and other current assets
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3,427,277
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1,043,328
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96,875,188
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97,906,418
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Property and equipment, net
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49,062,512
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44,038,565
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Goodwill and intangible assets, net
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7,669,612
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8,124,047
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Deferred income taxes and other assets
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5,716,876
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5,023,112
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$
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159,324,188
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$
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155,092,142
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities
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Accounts payable
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$
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4,852,172
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$
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5,199,604
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Accrued liabilities
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11,609,952
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7,473,205
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Accrued compensation and related expenses
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5,670,753
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7,969,862
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Income taxes payable
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5,719,820
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Unredeemed gift card liability
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6,653,259
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8,113,972
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Other current liabilities
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1,415,130
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1,345,088
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30,201,266
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35,821,551
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Other non-current liabilities
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7,097,254
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6,721,220
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Deferred income taxes
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191,906
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196,538
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37,490,426
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42,739,309
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Non-controlling interest
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256,564
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318,824
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Stockholders equity
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Undesignated preferred stock, $0.01 par value,
5,000,000 shares authorized, none issued and outstanding
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Exchangeable stock, no par value, 30,000,000 shares
authorized, issued and outstanding 20,935,041 and
20,935,041 shares
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Special voting stock, $0.00001 par value,
30,000,000 shares authorized, issued and outstanding
20,935,041 and 20,935,041 shares
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209
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209
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Common stock, $0.01 par value, 200,000,000 shares
authorized, issued and outstanding 46,780,603 and
46,684,700 shares
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467,806
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466,847
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Additional paid-in capital
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|
138,230,688
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136,004,955
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Accumulated deficit
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(21,358,566
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)
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(29,834,956
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)
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Accumulated other comprehensive income
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4,237,061
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5,396,954
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121,577,198
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112,034,009
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$
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159,324,188
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$
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155,092,142
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See accompanying notes to the interim consolidated financial
statements
1
lululemon
athletica inc. and Subsidiaries
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Thirteen Weeks
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Three Months
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Ended May 4,
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Ended April 30,
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2008
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2007
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(Unaudited)
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Net revenue
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$
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78,167,494
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$
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44,789,456
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Cost of goods sold
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36,645,025
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22,178,568
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Gross profit
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41,522,469
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22,610,888
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Operating expenses:
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Selling, general and administrative expenses
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29,801,720
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15,762,698
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Income from operations
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11,720,749
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6,848,190
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Other expense (income), net
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(453,508
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)
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(106,936
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)
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|
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|
|
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|
Income before income taxes
|
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|
12,174,257
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|
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|
6,955,126
|
|
Provision for income tax
|
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|
3,753,231
|
|
|
|
3,448,653
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Non-controlling interest
|
|
|
(55,364
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)
|
|
|
(35,589
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)
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|
|
|
|
|
|
|
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|
Net income
|
|
$
|
8,476,390
|
|
|
$
|
3,542,062
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|
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|
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Basic earnings per share
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$
|
0.13
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|
|
$
|
0.05
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Diluted earnings per share
|
|
$
|
0.12
|
|
|
$
|
0.05
|
|
Basic weighted-average number of shares outstanding
|
|
|
67,678,349
|
|
|
|
65,225,819
|
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|
|
|
|
|
|
|
|
|
Diluted weighted-average number of shares outstanding
|
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|
71,650,999
|
|
|
|
66,060,218
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the interim consolidated financial
statements
2
lululemon
athletica inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Voting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable Stock
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
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|
Par
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
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|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
Balance at February 3, 2008
|
|
|
20,935,041
|
|
|
$
|
|
|
|
|
20,935,041
|
|
|
$
|
209
|
|
|
|
46,684,700
|
|
|
$
|
466,847
|
|
|
$
|
136,004,955
|
|
|
$
|
(29,834,956
|
)
|
|
$
|
5,396,954
|
|
|
$
|
112,034,009
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,476,390
|
|
|
|
|
|
|
|
8,476,390
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,159,893
|
)
|
|
|
(1,159,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,316,497
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,172,382
|
|
|
|
|
|
|
|
|
|
|
|
2,172,382
|
|
Stock Options Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,903
|
|
|
|
959
|
|
|
|
53,351
|
|
|
|
|
|
|
|
|
|
|
|
54,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 4, 2008
|
|
|
20,935,041
|
|
|
$
|
|
|
|
|
20,935,041
|
|
|
$
|
209
|
|
|
|
46,780,603
|
|
|
$
|
467,806
|
|
|
$
|
138,230,688
|
|
|
$
|
(21,358,566
|
)
|
|
$
|
4,237,061
|
|
|
$
|
121,577,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the interim consolidated financial
statements
3
lululemon
athletica inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks
|
|
|
Three Months
|
|
|
|
Ended May 4,
|
|
|
Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,476,390
|
|
|
$
|
3,542,062
|
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,381,060
|
|
|
|
1,503,738
|
|
Stock-based compensation
|
|
|
2,172,382
|
|
|
|
1,407,533
|
|
Deferred income taxes
|
|
|
(143,785
|
)
|
|
|
2,374,663
|
|
Non-controlling interest
|
|
|
(55,364
|
)
|
|
|
(35,589
|
)
|
Other, including net changes in other non-cash balances
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(2,415,864
|
)
|
|
|
183,114
|
|
Inventory
|
|
|
(15,955,762
|
)
|
|
|
1,629,892
|
|
Accounts payable
|
|
|
(347,432
|
)
|
|
|
(1,571,379
|
)
|
Accrued liabilities
|
|
|
1,837,638
|
|
|
|
(6,872,439
|
)
|
Other non-cash balances
|
|
|
(7,213,417
|
)
|
|
|
(7,480,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,264,154
|
)
|
|
|
(5,319,351
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(8,599,974
|
)
|
|
|
(3,325,169
|
)
|
Acquisition of franchises
|
|
|
|
|
|
|
(5,000,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,599,974
|
)
|
|
|
(8,325,991
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from credit facility
|
|
|
|
|
|
|
1,454,775
|
|
Proceeds from exercise of stock options
|
|
|
54,310
|
|
|
|
|
|
Payment of initial public offering costs
|
|
|
|
|
|
|
(452,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
54,310
|
|
|
|
1,001,838
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(467,866
|
)
|
|
|
1,007,571
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(19,277,684
|
)
|
|
|
(11,635,933
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
53,339,326
|
|
|
|
16,028,534
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
34,061,642
|
|
|
$
|
4,392,601
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the interim consolidated financial
statements
4
lululemon
athletica inc. and Subsidiaries
|
|
NOTE 1.
|
NATURE OF
OPERATIONS AND BASIS OF PRESENTATION
|
Nature
of operations
lululemon athletica inc., a Delaware corporation
(lululemon or LAI and, together with its
subsidiaries unless the context otherwise requires, the
Company) is engaged in the design, manufacture and
distribution of healthy lifestyle inspired athletic apparel,
which is sold through a chain of corporate-owned and operated
retail stores, independent franchises and a network of wholesale
accounts. The Companys primary markets are Canada, the
United States, Japan and Australia, where 38, 32, 4 and nil
corporate-owned stores were in operation as at May 4, 2008,
respectively. There were 71 and 74 corporate-owned stores in
operation as of February 3, 2008, and May 4, 2008
respectively.
Basis
of presentation
The unaudited interim consolidated financial statements as of
May 4, 2008 and for the 13-week period ended May 4,
2008 and for the three months ended April 30, 2008 are
presented using the United States dollar and have been prepared
by the Company under the rules and regulations of the Securities
and Exchange Commission (SEC). In the opinion of
management, the financial information is presented in accordance
with United States generally accepted accounting principles
(GAAP) for interim financial information and,
accordingly, do not include all of the information and footnotes
required by GAAP for complete financial statements. These
unaudited interim consolidated financial statements should be
read in conjunction with the Companys consolidated
financial statements and related notes included in the
Companys 2007 Annual Report on
Form 10-K
filed with the SEC on April 8, 2008.
The Company reorganized its corporate structure on July 26,
2007. This reorganization was accounted for as a transfer of
entities under common control, and accordingly, the financial
statements for periods prior to the reorganization have been
restated on an as if pooling basis. Prior to the
reorganization, the Company had prepared combined consolidated
financial statements combining LAI and LIPO Investments (Canada)
Inc., an entity owned by a principal stockholder of the Company.
Through fiscal 2006, the Companys fiscal year ended on
January 31st in the year following the year mentioned.
Commencing with fiscal 2007, the Companys fiscal year ends
on the first Sunday following January 30th in the year
following the year mentioned.
Our business is affected by the pattern of seasonality common to
most retail apparel businesses. The results for the periods
presented are not necessarily indicative of future financial
results.
|
|
NOTE 2.
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In March 2008, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 161, Disclosures about
Derivative Instruments and Hedging Activities
(FAS 161). FAS 161 is intended to
improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys
financial position, financial performance, and cash flows. The
provisions of FAS 161 are effective for the fiscal years
and interim periods beginning after November 15, 2008. The
Company is currently evaluating the impact of adopting
FAS 161 on its consolidated financial statement disclosures.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations (revised 2007)
(FAS 141R). FAS 141R replaces
FAS 141 and requires the acquirer of a business to
recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transaction
costs related to the business combination to be expensed as
incurred. SFAS 141R is effective for business combinations
for which the acquisition date is on or after fiscal years
beginning after December 15, 2008. The Company is currently
evaluating the impact of adopting SFAS 141R on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160
Noncontrolling Interests in Consolidated Financial
Statements (FAS 160). FAS 160 changes
the classification of noncontrolling (minority) interests on the
balance sheet and the accounting for and reporting of
transactions between the reporting entity and holders of such
5
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
noncontrolling interests. Under the new standard, noncontrolling
interests are considered equity and are to be reported as an
element of stockholders equity rather than within the
mezzanine or liability sections of the balance sheet. In
addition, the current practice of reporting minority interest
expense or benefit also will change. Under the new standard, net
income will encompass the total income before minority interest
expense. The income statement will include separate disclosure
of the attribution of income between the controlling and
noncontrolling interests. Increases and decreases in the
noncontrolling ownership interest amount are to be accounted for
as equity transactions. FAS 160 is effective for fiscal
years beginning after December 15, 2008 and earlier
application is prohibited. Upon adoption, the balance sheet and
the income statement will be recast retrospectively for the
presentation of noncontrolling interests. The other accounting
provisions of the statement are required to be adopted
prospectively. The Company is currently evaluating the impact
that adopting FAS 160 will have on its financial position
and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(FAS 159). This Statement permits entities to
choose to measure various financial assets and financial
liabilities at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. The Company adopted FAS 159 on February 4,
2008 and did not elect the fair value option for any of its
eligible financial assets or liabilities.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (FAS 157). FAS 157
defines fair value, establishes a framework for measuring fair
value in accordance with GAAP, and expands disclosures about
fair value measurements. FAS 157 applies under other
accounting pronouncements that require or permit fair value
measurements and accordingly does not require any new fair value
measurements. The provisions of FAS 157 are to be applied
prospectively as of the beginning of the fiscal year in which it
is initially applied, with any transition adjustment recognized
as a cumulative-effect adjustment to the opening balance of
retained earnings. The provisions of FAS 157 are effective
for fiscal years beginning after November 15, 2007, however
the FASB has delayed the effective date of FAS 157 to
fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The adoption of
FAS 157 for financial assets and liabilities in the first
quarter of fiscal 2008 did not have a material impact on the
Companys consolidated financial statements. The Company is
currently evaluating the impact of the adoption of FAS 157
for nonfinancial assets and nonfinancial liabilities on its
financial position and results of operations.
|
|
NOTE 3.
|
STOCK-BASED
COMPENSATION
|
Share
option plans
The Companys employees participate in various stock-based
compensation plans which are either provided by a principal
stockholder of the Company or by the Company directly.
Stock-based compensation expense charged to income for the plans
was $2,172,382 and $1,407,533 for the thirteen weeks ended
May 4, 2008 and the three months ended April 30, 2007
respectively. Total unrecognized compensation cost as at
May 4, 2008 was $12,617,507 for all stock option plans,
which is expected to be recognized over a weighted-average
period of 3.0 years.
6
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company
stock options
A summary of the Companys stock options and restricted
shares activity as of May 4, 2008 and changes during the
period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Restricted
|
|
|
Grant
|
|
|
|
Options
|
|
|
Price
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Balance at February 3, 2008
|
|
|
4,772,349
|
|
|
$
|
2.74
|
|
|
|
10,458
|
|
|
$
|
19.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
80,000
|
|
|
$
|
29.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
95,903
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
330,534
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
Balance at May 4, 2008
|
|
|
4,425,912
|
|
|
$
|
3.42
|
|
|
|
10,458
|
|
|
$
|
19.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 4, 2008
|
|
|
1,764,972
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder-
sponsored stock options
During the thirteen weeks ended May 4, 2008 there were no
grants, exercises or forfeitures related to any of the stock
options issued and outstanding under the stockholder-sponsored
awards.
Employee
stock purchase plan
The Companys Board of Directors and stockholders approved
the Companys Employee Stock Purchase Plan
(ESPP) in September 2007. The ESPP allows for the
purchase of common stock of the Company by all eligible
employees. Eligible employees may elect to have whatever portion
of his or her base salary equates, after deduction of applicable
taxes, to either 3%, 6% or 9% of his or her base salary withheld
during each payroll period for purposes of purchasing shares of
our common stock under the ESPP. Additionally, we, or the
subsidiary employing the participant, will make a cash
contribution as additional compensation to each participant
equal to one-third of the aggregate amount of that
participants contribution for that pay period, which will
be used to purchase shares of our common stock, subject to
certain limits as defined in the ESPP. The maximum number of
shares available under the ESPP is 3,000,000 shares. During
the quarter ended May 4, 2008, 9,201 shares were
purchased under the ESPP, which were funded by the Company
through open market purchases.
Options
with performance and/or market conditions
The performance options issued to an officer of the Company
became fully vested during the thirteen weeks ended May 4,
2008. The Company has recognized the remaining portion of the
fair value of the performance awards during the thirteen week
period ended May 4, 2008, and there is no further
unrecognized compensation cost related to the performance
options.
|
|
NOTE 4.
|
LEGAL
PROCEEDINGS
|
James Jones, one of our former executive officers, filed suit
against us in the Supreme Court of British Columbia, Canada. The
action, captioned James Jones v. Lululemon Athletica Inc.,
Case No. S071780, was filed on March 14, 2007 against
us. Mr. Jones claims that we terminated his employment
contract without cause and lawful compensation resulting in
breach of contract, wrongful dismissal and negligent
misrepresentation. Mr. Jones also alleges that we
misrepresented the terms of the employment contract, and seeks
damages in an unspecified amount, plus costs and interest. We
believe this claim is without merit and are vigorously defending
against it.
We are a party to various other legal proceedings arising in the
ordinary course of our business, but we are not currently a
party to any legal proceeding that management believes would
have a material adverse effect on our consolidated financial
position or results of operations.
7
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 5.
|
EARNINGS
PER SHARE
|
The details of the computation of basic and diluted earnings per
share is as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks
|
|
|
Three Months
|
|
|
|
Ended May 4,
|
|
|
Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net income
|
|
$
|
8,476,390
|
|
|
$
|
3,542,062
|
|
Basic weighted-average number of shares outstanding
|
|
|
67,678,349
|
|
|
|
65,225,819
|
|
Basic earnings per share
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
Basic weighted-average number of shares outstanding
|
|
|
67,678,349
|
|
|
|
65,225,819
|
|
Effect of stock options assumed exercised
|
|
|
3,972,650
|
|
|
|
834,399
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of shares outstanding
|
|
|
71,650,999
|
|
|
|
66,060,218
|
|
Diluted earnings per share
|
|
$
|
0.12
|
|
|
$
|
0.05
|
|
Our calculation of weighted-average shares include the common
stock of the Company as well as the exchangeable shares.
Exchangeable shares are the equivalent of common shares in all
respects. All classes of stock have in effect the same rights
and share equally in undistributed net income. For the thirteen
weeks ended May 4, 2008, 249,393 stock options were
anti-dilutive to earnings and therefore have been excluded from
the computation of diluted earnings per share.
8
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6.
|
SUPPLEMENTARY
FINANCIAL INFORMATION
|
A summary of certain balance sheet accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
May 4,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2008
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
3,206,729
|
|
|
$
|
2,623,185
|
|
Other accounts receivable
|
|
|
1,142,266
|
|
|
|
1,819,324
|
|
Allowance for doubtful accounts
|
|
|
(10,695
|
)
|
|
|
(10,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,338,299
|
|
|
$
|
4,431,556
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
55,308,981
|
|
|
$
|
39,045,937
|
|
Raw materials
|
|
|
395,079
|
|
|
|
541,651
|
|
Provision to reduce inventory to market value
|
|
|
(656,090
|
)
|
|
|
(495,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,047,970
|
|
|
$
|
39,092,208
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
37,455,553
|
|
|
$
|
33,466,659
|
|
Furniture and fixtures
|
|
|
14,801,665
|
|
|
|
13,597,290
|
|
Computer hardware and software
|
|
|
15,261,150
|
|
|
|
12,648,156
|
|
Equipment and vehicles
|
|
|
259,289
|
|
|
|
243,407
|
|
Accumulated amortization and depreciation
|
|
|
(18,715,145
|
)
|
|
|
(15,916,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,062,512
|
|
|
$
|
44,038,565
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
738,242
|
|
|
$
|
738,242
|
|
Changes in foreign currency exchange rates
|
|
|
201,688
|
|
|
|
224,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
939,930
|
|
|
|
962,618
|
|
|
|
|
|
|
|
|
|
|
Reacquired franchise rights
|
|
$
|
7,566,037
|
|
|
$
|
7,566,037
|
|
Non-competition agreements
|
|
|
694,177
|
|
|
|
694,177
|
|
Accumulated amortization
|
|
|
(2,995,291
|
)
|
|
|
(2,793,406
|
)
|
Changes in foreign currency exchange rates
|
|
|
1,464,760
|
|
|
|
1,694,621
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,729,682
|
|
|
$
|
7,161,429
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,669,612
|
|
|
$
|
8,124,047
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Inventory purchases
|
|
$
|
6,208,615
|
|
|
$
|
3,304,997
|
|
Sales tax collected
|
|
|
1,867,587
|
|
|
|
2,157,800
|
|
Accrued rent
|
|
|
1,436,629
|
|
|
|
1,291,373
|
|
Other
|
|
|
2,097,121
|
|
|
|
719,035
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,609,952
|
|
|
$
|
7,473,205
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
Deferred lease liability
|
|
$
|
3,872,618
|
|
|
$
|
3,585,699
|
|
Tenant inducements
|
|
|
3,224,636
|
|
|
|
3,135,521
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,097,254
|
|
|
$
|
6,721,220
|
|
|
|
|
|
|
|
|
|
|
9
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 7.
|
SEGMENT
REPORTING
|
The Companys reportable segments are comprised of
corporate-owned stores, franchises and other. Phone sales,
warehouse sales and showrooms sales have been combined into
Other. Information for these segments is detailed in the table
below:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks
|
|
|
Three Months
|
|
|
|
Ended May 4,
|
|
|
Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
70,578,550
|
|
|
$
|
38,007,778
|
|
Franchises
|
|
|
4,537,596
|
|
|
|
4,917,506
|
|
Other
|
|
|
3,051,348
|
|
|
|
1,864,172
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,167,494
|
|
|
$
|
44,789,456
|
|
|
|
|
|
|
|
|
|
|
Income from operations before general corporate expense:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
23,216,774
|
|
|
$
|
11,891,131
|
|
Franchises
|
|
|
2,078,608
|
|
|
|
2,339,280
|
|
Other
|
|
|
1,796,314
|
|
|
|
818,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,091,696
|
|
|
|
15,048,739
|
|
General corporate expense
|
|
|
15,370,947
|
|
|
|
8,200,549
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
11,720,749
|
|
|
|
6,848,190
|
|
Other expense (income), net
|
|
|
(453,508
|
)
|
|
|
(106,936
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
12,174,257
|
|
|
$
|
6,955,126
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
5,051,753
|
|
|
$
|
2,219,109
|
|
Corporate
|
|
|
3,548,221
|
|
|
|
1,106,060
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,599,974
|
|
|
$
|
3,325,169
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
2,137,650
|
|
|
$
|
1,221,510
|
|
Corporate
|
|
|
972,995
|
|
|
|
170,937
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,110,645
|
|
|
$
|
1,392,447
|
|
|
|
|
|
|
|
|
|
|
10
|
|
ITEM 2.
|
MANAGEMENTS
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
Managements Discussion and Analysis of Financial
Condition and Results of Operations. These factors include
without limitation:
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|
|
|
|
our ability to manage operations at our current size or manage
growth effectively;
|
|
|
|
our ability to locate suitable locations to open new stores and
to attract customers to our stores;
|
|
|
|
our ability to successfully expand in the United States and
other new markets;
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|
|
|
our ability to find suitable joint venture partners and expand
successfully outside of North America;
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|
|
|
our ability to finance our growth and maintain sufficient levels
of cash flow;
|
|
|
|
increased competition causing us to reduce the prices of our
products or to increase significantly our marketing efforts in
order to avoid losing market share;
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|
|
our ability to effectively market and maintain a positive brand
image;
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|
|
|
our ability to maintain recent levels of comparable store sales
or average sales per square foot;
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|
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our ability to continually innovate and provide our consumers
with improved products;
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|
|
the ability of our suppliers or manufacturers to produce or
deliver our products in a timely or cost-effective manner;
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|
|
our lack of long-term supplier contracts;
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|
|
our lack of patents or exclusive intellectual property rights in
our fabrics and manufacturing technology;
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|
|
our ability to attract and maintain the services of our senior
management and key employees;
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|
the availability and effective operation of management
information systems and other technology;
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|
|
changes in consumer preferences or changes in demand for
technical athletic apparel and other products;
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|
|
|
our ability to accurately forecast consumer demand for our
products;
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|
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our ability to accurately anticipate and respond to seasonal or
quarterly fluctuations in our operating results;
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our ability to maintain effective internal controls; and
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|
changes in general economic or market conditions, including as a
result of political or military unrest or terrorist attacks.
|
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
11
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.
Overview
lululemon is a designer and retailer of technical athletic
apparel. Our yoga-inspired apparel is marketed under the
lululemon athletica brand name. We offer a comprehensive line of
apparel and accessories including fitness pants, shorts, tops
and jackets designed for athletic pursuits such as yoga, dance,
running and general fitness. As of May 4, 2008, our branded
apparel was principally sold through 85 corporate-owned and
franchise stores that are primarily located in Canada and the
United States. We believe our vertical retail strategy allows us
to interact more directly with and gain insights from our
customers while providing us with greater control of our brand.
For the first quarter of fiscal 2008, 69.1% of our net revenue
was derived from sales of our products in Canada, 29.3% of our
net revenue was derived from the sales of our products in the
United States and 1.6% of our net revenue was derived from sales
of our products in Australia and Japan. After reevaluating our
operating performance in Japan and our strategic priorities, we
plan to discontinue our operations in Japan in the second
quarter of fiscal 2008. We opened our first store in Japan in
2005 and have operated in Japan through a joint venture with
Japanese apparel company, Descente, Ltd., since 2006. Japan
represented less than 1.5% of our revenues in fiscal 2007 and
required a disproportionate amount of management time and
attention during fiscal 2007. We believe that our time,
attention and capital resources are best spent focused on our
top priorities, which are growth in the United States, where we
plan to open 35 stores in fiscal 2008, and the development of an
e-commerce business.
Our net revenue has grown from $40.7 million for fiscal
2004 to $274.7 million for fiscal 2007. This represents a
compound annual growth rate of 88.9%. Our net revenue also
increased from $44.8 million for the first quarter of
fiscal 2007 to $78.2 million for the first quarter of
fiscal 2008, representing a 74.5% increase. By the end of fiscal
2004, we operated 20 stores including 14 corporate-owned stores
and six franchise stores in Canada, the United States and
Australia. The majority of our stores were located in Canada,
with only three corporate-owned stores in the United States and
one franchise store in Australia. Our increase in net revenue
from fiscal 2004 to fiscal 2007 resulted from the addition of 17
retail locations in fiscal 2005, 14 retail locations in fiscal
2006, 31 retail locations in fiscal 2007, and four retail
locations in the first quarter of fiscal 2008 and strong
comparable store sales growth of 19%, 25%, 34%, and 28% in
fiscal 2005, fiscal 2006, fiscal 2007, and the first quarter of
fiscal 2008, respectively. Our ability to open new stores and
grow sales in existing stores has been driven by increasing
demand for our technical athletic apparel and a growing
recognition of the lululemon athletica brand. We believe our
superior products, strategic store locations, inviting store
environment, grassroots marketing approach and distinctive
corporate culture are responsible for our strong financial
performance.
We have three reportable segments: corporate-owned stores,
franchises and other. We report our segments based on the
financial information we use in managing our businesses. While
we receive financial information for each corporate-owned store,
we have aggregated all of the corporate-owned stores into one
reportable segment due to the similarities in the economic and
other characteristics of these stores. Our franchises segment
accounted for 17.3% of our net revenues for fiscal 2005, 14.3%
for fiscal 2006, 6.6% for fiscal 2007 and 5.8% for the first
quarter of fiscal 2008. Opening new franchise stores is not a
significant part of our near-term store growth strategy, and we
therefore expect that the revenue derived from our franchise
stores will continue to comprise less than 10% of the net
revenue we report in future fiscal years. Our other operations
accounted for less than 10% of our revenues in each of fiscal
2005 and fiscal 2006, fiscal 2007 and the first quarter of
fiscal 2008.
For fiscal years through fiscal 2006, our fiscal year ended on
January 31st in the year following the year mentioned.
Commencing with fiscal 2007, our fiscal year ends on the first
Sunday following January 30th in the year following
the year mentioned.
12
Results
of Operations
Thirteen
weeks ended May 4, 2008 compared to three months ended
April 30, 2007
The following table summarizes key components of our results of
operations for the thirteen weeks ended May 4, 2008 and the
three months ended April 30, 2007. The operating results
are expressed in dollar amounts as well as relevant percentages,
presented as a percentage of net revenue.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended May 4, 2008 and Three
|
|
|
|
Months Ended April 30, 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(Percentages)
|
|
|
Net revenue
|
|
$
|
78,167
|
|
|
$
|
44,789
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
36,645
|
|
|
|
22,178
|
|
|
|
46.9
|
|
|
|
49.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41,522
|
|
|
|
22,611
|
|
|
|
53.1
|
|
|
|
50.5
|
|
Selling, general and administrative expenses
|
|
|
29,802
|
|
|
|
15,763
|
|
|
|
38.1
|
|
|
|
35.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,720
|
|
|
|
6,848
|
|
|
|
15.0
|
|
|
|
15.3
|
|
Other expenses (income)
|
|
|
(454
|
)
|
|
|
(107
|
)
|
|
|
(0.6
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
12,174
|
|
|
|
6,955
|
|
|
|
15.6
|
|
|
|
15.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
|
3,753
|
|
|
|
3,449
|
|
|
|
4.8
|
|
|
|
7.7
|
|
Non-controlling interest
|
|
|
(55
|
)
|
|
|
(36
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,476
|
|
|
$
|
3,542
|
|
|
|
10.8
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
Net revenue increased $33.4 million, or 74.5%, to
$78.2 million for the first quarter of fiscal 2008 from
$44.8 million for the first quarter of fiscal 2007. This
increase was the result of increased comparable store sales and
sales from new stores opened. Assuming the average exchange rate
between the Canadian and United States dollars for the first
quarter of fiscal 2007 remained constant, our net revenue would
have increased $26.2 million or 58.4% for the first quarter
of fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Three
|
|
|
|
Weeks
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
May 4,
|
|
|
April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
70,578
|
|
|
$
|
38,008
|
|
Franchises
|
|
|
4,538
|
|
|
|
4,918
|
|
Other
|
|
|
3,051
|
|
|
|
1,863
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
78,167
|
|
|
$
|
44,789
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $32.6 million, or
85.7%, to $70.6 million for the first quarter of fiscal
2008 from $38.0 million for the first quarter of fiscal
2007. The following contributed to the $32.6 million
increase in net revenue from our corporate-owned stores segment:
|
|
|
|
|
Net revenue from corporate-owned stores we opened during the
first quarter, and corporate-owed stores we opened subsequent to
April 30, 2007 and therefore not included in the comparable
store sales growth, contributed $21.8 million, or 66.9%, of
the increase. Of the increase of $21.8 million, the
acquisition of three Calgary franchise stores in April 2007
contributed $3.8 million of the total increase. New store
openings from the first quarter of fiscal 2007 included two
stores in Canada and five stores in the United States.
|
|
|
|
Comparable store sales growth of 28% in the first quarter of
fiscal 2008 contributed $10.8 million, or 33.1%, of the
increase. Assuming the average exchange rate between the
Canadian and the United States dollars for the first quarter of
fiscal 2007 remained constant our comparable store sales would
have increased 15% for
|
13
|
|
|
|
|
the first quarter of fiscal 2008 and contributed
$5.7 million, or 17.5%, of the increase. The increase in
comparable store sales was driven primarily by the strength of
our existing product lines, successful introduction of new
products and increasing recognition of the lululemon athletica
brand name.
|
Franchises. Net revenue from our franchises
segment decreased $0.4 million, or 7.7%, to
$4.5 million for the first quarter of fiscal 2008 from
$4.9 million for the first quarter of fiscal 2007. The
decrease in net revenue from our franchises segment consisted
primarily of franchises net revenue of $1.8 million that
shifted to corporate-owned stores net revenue when we acquired
three franchise stores in Calgary offset by increased franchise
revenue of $1.4 million from our remaining franchise
locations.
Other. Net revenue from our other segment
increased $1.2 million, or 63.7%, to $3.1 million for
the first quarter of fiscal 2008 from $1.9 million for the
first quarter of fiscal 2007. The $1.2 million increase was
primarily the result of increased wholesale, phone sales and
showroom sales.
Gross
Profit
Gross profit increased $18.9 million, or 83.6%, to
$41.5 million for the first quarter of fiscal 2008 from
$22.6 million for the first quarter of fiscal 2007. The
increase in gross profit was driven principally by:
|
|
|
|
|
an increase of $32.6 million in net revenue from our
corporate-owned stores segment; and
|
|
|
|
an increase of $1.2 million in net revenue from our other
segment.
|
This amount was partially offset by:
|
|
|
|
|
an increase in product costs of $8.9 million associated
with our sale of goods through corporate-owned stores,
franchises and other segments;
|
|
|
|
an increase in occupancy costs of $2.7 million related to
an increase in corporate-owned stores;
|
|
|
|
an increase in the cost of sales support departments of
$1.9 million related to additional costs for distribution,
design, and production; and
|
|
|
|
an increase in depreciation of $0.9 million primarily
related to an increase in corporate-owned stores.
|
Gross profit as a percentage of net revenue, or gross margin,
increased 2.6% in absolute terms, to 53.1% for the first quarter
of fiscal 2008 from 50.5% for the first quarter of fiscal 2007.
The increase in gross margin resulted from:
|
|
|
|
|
a reduction in product costs as a percentage of net revenue,
including a write-down of raw materials in the first quarter of
fiscal 2007, that contributed to an increase in gross margin of
3.4%.
|
This amount was partially offset by:
|
|
|
|
|
an increase in occupancy costs as a percentage of revenue
contributed to a decrease in gross margin of 0.5%; and
|
|
|
|
an increase in expenses related to our production, design,
merchandising and distribution departments (including
stock-based compensation expense) as a percentage of net revenue
from the first quarter of fiscal 2007 to the first quarter
fiscal 2008 which contributed to an increase in gross margin of
0.3%.
|
Our costs of goods sold in the first quarter of fiscal 2008 and
the first quarter of fiscal 2007 included $0.2 million and
$0.2 million, respectively, of stock-based compensation
expense.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$14.0 million, or 89.1%, to $29.8 million for the
first quarter of fiscal 2008 from $15.8 million for the
first quarter of fiscal 2007. As a percentage of net revenue,
selling, general and administrative expenses increased 2.9% in
absolute terms, to 38.1% from 35.2%. The $14.0 million
increase in selling, general and administrative expenses was
principally comprised of:
|
|
|
|
|
an increase in employee compensation of $7.9 million
related to opening additional corporate-owned stores as well as
various severance payments of $0.6 million made during the
quarter;
|
|
|
|
an increase in other store operating expenses of
$1.8 million primarily related to packaging, distribution,
marketing and supplies; and
|
14
|
|
|
|
|
an increase in other corporate expenses of $1.5 million for
costs such as: professional fees, which includes costs for
executive recruiting as well as other legal costs; stock based
compensation, which includes the one-time charge for the
accelerated vesting of performance options of $0.8 million;
amortization and depreciation costs, including amortization of
$0.4 million for capitalized inventory ERP software costs
that became available for use in the first quarter of fiscal
2008; other corporate costs such as travel expenses and
communication costs associated with corporate facilities.
|
Our selling, general and administrative expenses in the first
quarter of fiscal 2008 and the first quarter of fiscal 2007
included $2.0 million and $1.2 million, respectively,
of stock-based compensation expense.
Income
from Operations
The increase of $4.9 million in income from operations for
the first quarter of fiscal 2008 was primarily due to a
$18.9 million increase in gross profit resulting from
increased comparable store sales and additional sales from
corporate-owned stores opened, partially offset by an increase
of $14.0 million in selling, general and administrative
expenses.
On a segment basis, we determine income from operations without
taking into account our general corporate expenses such as
corporate employee costs, travel expenses and corporate rent.
For purposes of our managements analysis of our financial
results, we have allocated some general product expenses to our
corporate-owned stores segment. For example, all expenses
related to our production, design and distribution departments
have been allocated to this segment.
Income from operations (before general corporate expenses) from:
|
|
|
|
|
our corporate-owned stores segment increased $11.3 million,
or 95.2%, to $23.2 million for the first quarter of fiscal
2008 from $11.9 million for the first quarter of fiscal
2007 primarily due to an increase in corporate-owned stores
gross profit of $18.2 million, offset by an increase of
$5.0 million in store employee expenses and an increase of
$1.8 million in other store expenses;
|
|
|
|
our franchises segment decreased $0.3 million, or 11.1%, to
$2.1 million for the first quarter of fiscal 2008 from
$2.3 million for the first quarter of fiscal 2007 primarily
from franchises income from operations of $1.0 million
included in the comparative period that shifted to
corporate-owned stores income from operations when we acquired
three franchise stores in Calgary which was partially offset by
an increase of $0.7 million in franchise income from
operations from our remaining franchise locations and new
locations; and
|
|
|
|
our other segment increased $1.0 million, or 119.5%, to
$1.8 million for the first quarter of fiscal 2008 from
$0.8 million for the first quarter of fiscal 2007 primarily
due to an increase in revenue of $1.2 million and an
increase of $0.2 million in product costs.
|
Other income, net increased $0.4 million to
$0.5 million for the first quarter of fiscal 2008 from
$0.1 million for the first quarter of fiscal 2007. The
increase was primarily due to interest income earned on higher
cash balances.
Provision
for Income Taxes
Provision for income taxes increased $0.4 million, to
$3.8 million, for the first quarter of fiscal 2008 from
$3.4 million for the first quarter of fiscal 2007. Our
effective tax rate was 30.8% for the first quarter of fiscal
2008 compared to 49.6% for the first quarter of fiscal 2007. In
the first quarter of fiscal 2007 we generated losses in the
United States for which we recorded no tax benefit, whereas our
operations in the United States were profitable in the first
quarter of fiscal 2008. The income generated in the first
quarter of fiscal 2008 in the United States was fully offset by
non-operating losses generated in prior periods.
Net
Income
Net income increased $4.9 million to $8.5 million for
the first quarter of fiscal 2008 from $3.5 million for the
first quarter of fiscal 2007. The increase in net income of
$4.9 million for the first quarter of fiscal 2008 was a
result of an increase in gross profit of $18.9 million
resulting from increased comparable store sales and additional
sales from corporate-owned stores opened, offset by increases in
selling, general and administrative expenses of
$14.0 million.
15
Seasonality
Historically, we have recognized a significant portion of our
income from operations in the fourth fiscal quarter of each year
as a result of increased sales during the holiday selling
season. Despite the fact that we have experienced a significant
amount of our net revenue and gross profit in the fourth quarter
of each fiscal year, we believe that the true extent of the
seasonality or cyclical nature of our business may have been
overshadowed by our rapid growth to date.
Liquidity
and Capital Resources
Our cash requirements are principally for working capital and
capital expenditures, including the build out cost of new
stores, renovations of existing stores, and improvements to our
distribution facility and corporate infrastructure. Our need for
working capital is seasonal, with the greatest requirements from
August through the end of November each year as a result of our
inventory
build-up and
concentration of new store openings during this period for our
holiday selling season. Historically, our main sources of
liquidity have been cash flow from operating activities and
borrowings under our existing and previous revolving credit
facilities, and our initial public offering that settled on
August 2, 2007.
At May 4, 2008, our working capital (excluding cash and
cash equivalents) was $32.6 million and our cash and cash
equivalents were $34.1 million.
The following presents the major components of net cash flows
provided by and used in operating, investing and financing
activities for the periods indicated:
Operating
Activities
Operating Activities consist primarily of net income
adjusted for certain non-cash items, including depreciation and
amortization, deferred income taxes, stock-based compensation
expense and the effect of the changes in non-cash working
capital items, principally prepaid expenses, inventories,
accounts payable and accrued expenses.
For the thirteen weeks ended May 4, 2008, cash used in
operating activities increased $5.0 million to
$10.3 million compared to cash used in operating activities
of $5.3 million in the three months ended April 30,
2007. The $5.0 million increase was due to a net increase
in non-cash working capital items of $10.0 million,
partially offset by an increase in net income of
$4.9 million and a net increase in items not affecting cash
of $0.1 million. The increase in non-cash working capital
items was primarily driven by:
|
|
|
|
|
a net increase in inventory levels of $17.6 million as the
Company continued to build up fresh inventory for the Spring
selling season; and
|
|
|
|
a net increase in prepaid expenses of $2.6 million due to
higher tax installments paid in the first quarter of fiscal 2008.
|
These amounts were partially offset by:
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|
|
|
|
a net increase in accrued liabilities of $8.7 million due
to the payout of a lawsuit in the first quarter of fiscal 2007
that was accrued at the end of fiscal 2006; and
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|
|
|
a net increase in accounts payable of $1.2 million
primarily due to the payment in the first quarter of fiscal 2007
of normal operating expenses that were in accounts payable at
the end of fiscal 2006.
|
Items not affecting cash decreased in the thirteen months ended
May 4, 2008 as compared to the three months ended
April 30, 2007 as a result of higher depreciation and
amortization expense related to a higher store count and the
implementation of our inventory ERP system, and higher
stock-based compensation expense due to the one-time
acceleration of performance based options, partially offset by a
decrease in deferred income taxes.
Investing
Activities
Investing Activities relate entirely to capital
expenditures and acquisitions of franchises. Cash used in
investing activities increased $0.3 million to
$8.6 million for the thirteen weeks ended May 4, 2008
from $8.3 million for the three months ended April 30,
2007. The $0.3 million increase was a result of additional
purchases of property and equipment of $5.3 million
resulting primarily from new store openings and IT capital
expenditures including capitalized software costs, offset by a
decrease in the acquisition of franchises of $5.0 million,
as the three Calgary
16
franchises were purchased in the first quarter of fiscal 2007
while there were no franchise acquisitions in the first quarter
of fiscal 2008.
Financing
Activities
Financing Activities consist primarily of proceeds and
costs related to our initial public offering, proceeds and
repayment of long-term debt, and cash received on the exercise
of stock options. Cash used in financing activities decreased to
$0.9 million for the thirteen weeks ended May 4, 2008
from $1.0 million of cash provided by financing activities
for the three months ended April 30, 2007.
We believe that our cash from operations, proceeds from our
initial public offering and borrowings available to us under our
revolving credit facility will be adequate to meet our liquidity
needs and capital expenditure requirements for at least the next
24 months. Our cash from operations may be negatively
impacted by a decrease in demand for our products as well as the
other factors described in Risk Factors. In
addition, we may make discretionary capital improvements with
respect to our stores, distribution facility, headquarters, or
other systems, which we would expect to fund through the
issuance of debt or equity securities or other external
financing sources to the extent we were unable to fund such
capital expenditures out of our cash from operations.
Revolving
Credit Facility
In April 2007, we executed a new credit facility with the Royal
Bank of Canada that provided for a CDN$20,000,000 uncommitted
demand revolving credit facility to fund our working capital
requirements. This agreement cancels our previous CDN$8,000,000
credit facility. Borrowings under the uncommitted credit
facilities are made on a
when-and-as-needed
basis at our discretion.
Borrowings under the credit facility can be made either as
i) Revolving Loans Revolving loan
borrowings will bear interest at a rate equal to the Banks
CA$ or US$ annual base rate (defined as zero% plus the
lenders annual prime rate) per annum, ii) Offshore
Loans Offshore rate loan borrowings will bear
interest at a rate equal to a base rate based upon LIBOR for the
applicable interest period, plus 1.125 percent per annum,
iii) Bankers Acceptances Bankers
acceptance borrowings will bear interest at the bankers
acceptance rate plus 1.125 percent per annum, or
iv) Letters of Credit and Letters of
Guarantee Borrowings drawn down under letters of
credit or guarantee issued by the banks will bear a
1.125 percent per annum fee.
At May 4, 2008, there were no borrowings outstanding under
this credit facility.
Off-Balance
Sheet Arrangements
We enter into documentary letters of credit to facilitate the
international purchase of merchandise. We also enter into
standby letters of credit to secure certain of our obligations,
including insurance programs and duties related to import
purchases. As of May 4, 2008, letters of credit and letters
of guarantee totaling $1.6 million have been issued.
Other than these standby letters of credit, we do not have any
off-balance sheet arrangements, investments in special purpose
entities or undisclosed borrowings or debt. In addition, we have
not entered into any derivative contracts or synthetic leases.
Critical
Accounting Policies
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions.
Predicting future events is inherently an imprecise activity
and, as such, requires the use of judgment. Actual results may
vary from estimates in amounts that may be material to the
financial statements. An accounting policy is deemed to be
critical if it requires an accounting estimate to be made based
on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that
reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically,
could materially impact our consolidated financial statements.
Our critical accounting policies and estimates are discussed in
our recently filed Annual Report on
Form 10-K
for our 2007 fiscal year end and in Note 2 included in
Item 1 of Part I of this Quarterly Report on
Form 10-Q.
We believe that there have been no other significant changes
during the thirteen weeks ended May 4, 2008 to our critical
accounting policies.
17
Operating
Locations
Our operating locations by country, state and province as of
May 4, 2008, and the overall totals as of May 4, 2008,
are summarized in the table below.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Number of Operating
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|
|
|
|
|
|
Locations
|
|
|
|
|
Country, Province/State
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|
Corporate
|
|
|
Franchise
|
|
|
Total
|
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Alberta
|
|
|
7
|
|
|
|
|
|
|
|
7
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|
British Columbia
|
|
|
9
|
|
|
|
2
|
|
|
|
11
|
|
Manitoba
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Ontario
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Quebec
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Saskatchewan
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Canadian
|
|
|
38
|
|
|
|
3
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
12
|
|
|
|
1
|
|
|
|
13
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|
Colorado
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Florida
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Hawaii
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Illinois
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Massachusetts
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Nevada
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
New York
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Oregon
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Texas
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Virginia
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Washington
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total United States
|
|
|
32
|
|
|
|
4
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
Japan
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall total, as of May 4, 2008
|
|
|
74
|
|
|
|
11
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall total, as of February 3, 2008
|
|
|
71
|
|
|
|
10
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market
prices and rates. Our market risk exposure is primarily a result
of fluctuations in interest rates and foreign currency exchange
rates. We do not hold or issue financial instruments for trading
purposes.
Foreign Currency Exchange Risk. We currently
generate a majority of our net revenue in Canada. The reporting
currency for our consolidated financial statements is the
U.S. dollar. Historically, our operations were based
largely in Canada. As of May 4, 2008, we operated 38 stores
in Canada and four stores in Japan. As a result,
18
we have been impacted by changes in exchange rates and may be
impacted materially for the foreseeable future. For example,
because we recognize net revenue from sales in Canada in
Canadian dollars, if the U.S. dollar strengthens it would
have a negative impact on our Canadian operating results upon
translation of those results into U.S. dollars for the
purposes of consolidation. Any hypothetical loss in net revenue
could be partially or completely offset by lower cost of sales
and lower selling, general and administrative expenses that are
generated in Canadian dollars. A 10% appreciation in the
relative value of the U.S. dollar compared to the Canadian
dollar would have resulted in lost income from operations of
approximately $1.0 million for the first quarter of fiscal
2008. To the extent the ratio between our net revenue generated
in Canadian dollars increases as compared to our expenses
generated in Canadian dollars, we expect that our results of
operations will be further impacted by changes in exchange
rates. We do not currently hedge foreign currency fluctuations.
However, in the future, in an effort to mitigate losses
associated with these risks, we may at times enter into
derivative financial instruments, although we have not
historically done so. These may take the form of forward sales
contracts and option contracts. We do not, and do not intend to,
engage in the practice of trading derivative securities for
profit.
Interest Rate Risk. In April 2007, we entered
into an uncommitted senior secured demand revolving credit
facility with Royal Bank of Canada which replaced our prior
credit facility. Because our revolving credit facility bears
interest at a variable rate, we will be exposed to market risks
relating to changes in interest rates, if we have a meaningful
outstanding balance. At May 4, 2008, we had no outstanding
borrowings on our revolving facility. We do not believe we
currently are significantly exposed to changes in interest rate
risk. We currently do not engage in any interest rate hedging
activity and currently have no intention to do so in the
foreseeable future. However, in the future, if we have a
meaningful outstanding balance, in an effort to mitigate losses
associated with these risks, we may at times enter into
derivative financial instruments, although we have not
historically done so. These may take the form of forward sales
contracts, option contracts, and interest rate swaps. We do not,
and do not intend to, engage in the practice of trading
derivative securities for profit.
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of the
end of the period covered by this report, or the Evaluation
Date. Based upon the evaluation, our principal executive officer
and principal financial officer concluded that our disclosure
controls and procedures were effective as of the Evaluation
Date. Disclosure controls and procedures are controls and
procedures designed to reasonably ensure that information
required to be disclosed in our reports filed under the Exchange
Act, such as this report, is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms. Disclosure controls and procedures include
controls and procedures designed to reasonably ensure that such
information is accumulated and communicated to our management,
including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
During the 13 weeks ended May 4, 2008, the Company
implemented a new inventory subledger system. The implementation
has involved changes to processes, and accordingly, has required
changes to internal controls.
Other than the changes discussed above, there have not been any
changes in the Companys internal control over financial
reporting during the Companys most recently completed
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control
over financial reporting.
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
The Company is, from time to time, involved in routine legal
matters incidental to its business. Management believes that the
ultimate resolution of any such current proceedings will not
have a material adverse effect on the
19
Companys continued financial position, results of
operations or cash flows. Refer to Note 4 included in
Item 1 of Part 1 of this Quarterly Report on
Form 10-Q
for information regarding specific legal proceedings.
In addition to other information set forth in this report, you
should carefully consider the risk factors discussed in our
Annual Report on
Form 10-K
for our 2007 fiscal year. There have been no material changes to
the risk factors previously disclosed in our Annual Report on
Form 10-K.
|
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Our initial public offering of common stock was effected through
a Registration Statement on
Form S-1
(File
No. 333-142477),
which was declared effective by the Securities and Exchange
Commission on July 26, 2007. We sold 2,290,909 shares
of common stock in the offering and the selling stockholders
sold 18,639,091 shares of common stock in the offering,
including the over-allotment option. We did not receive any of
the proceeds from sales by the selling stockholders. We received
net proceeds of approximately $31.4 million from the
offering, and since August 2, 2007, the settlement date of
the offering, we have used all of the net proceeds for capital
expenditures, including new store openings, and inventory
purchases.
|
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|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Filed
|
|
|
|
Exhibit
|
|
|
File
|
|
Filing
|
No.
|
|
Exhibit Title
|
|
Herewith
|
|
Form
|
|
No.
|
|
|
No.
|
|
Date
|
|
|
3
|
.1
|
|
Second Amended and Restated Bylaws
|
|
|
|
8-K
|
|
|
3.1
|
|
|
001-33608
|
|
4/2/2008
|
|
10
|
.1
|
|
Letter Agreement with M. Tattersfield
|
|
|
|
8-K
|
|
|
10.1
|
|
|
001-33608
|
|
2/22/2008
|
|
31
|
.1
|
|
Certification of Chief Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer Pursuant to Exchange Act
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rule 13a-14(a)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer Pursuant to Exchange
Act
Rule 13a-14(a)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
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|
|
|
lululemon athletica inc.
|
|
|
|
Dated: May 30, 2008
|
|
By: /s/ John
E. Currie
John
E. Currie
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
21
Exhibit Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Filed
|
|
Incorporated by Reference
|
No.
|
|
|
Exhibit Title
|
|
Herewith
|
|
Form
|
|
Exhibit No.
|
|
|
File No.
|
|
Filing Date
|
|
|
3.1
|
|
|
Second Amended and Restated Bylaws
|
|
|
|
8-K
|
|
|
3.1
|
|
|
001-33608
|
|
4/2/2008
|
|
10.1
|
|
|
Letter Agreement with M. Tattersfield
|
|
|
|
8-K
|
|
|
10.1
|
|
|
001-33608
|
|
2/22/2008
|
|
31.1
|
|
|
Certification of Chief Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer Pursuant to Exchange Act
Rule 13a-14(a)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer Pursuant to Exchange
Act
Rule 13a-14(a)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
22