Annual Report 02/03/2008
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
February 3, 2008
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OR
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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)
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20-3842867
(I.R.S. Employer
Identification Number)
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2285 Clark Drive
Vancouver, British Columbia
(Address of principal executive offices)
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V5N 3G9
(Zip Code)
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Registrants telephone number, including area code:
(604) 732-6124
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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Nasdaq Global Select Market
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o
No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 of Section 15(d) of the
Act.
Yes o
No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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
(Do not check if a smaller reporting company)
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Smaller reporting
Company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
rule 12b-2
of the Act).
Yes o
No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant on July 31, 2007 was
approximately $834,916,914. Such aggregate market value was
computed by reference to the closing price of the common stock
as reported on the Nasdaq Global Select Market on July 31,
2007. For purposes of determining this amount only, the
registrant has defined affiliates as including the executive
officers and directors of the registrant on July 31, 2007.
Common
Stock:
At March 31, 2008 there were 46,734,405 shares of the
registrants common stock, par value $0.01 per share,
outstanding.
Exchangeable
and Special Voting Shares:
At March 31, 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 March 31, 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.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT
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FORM 10-K REFERENCE
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Portions of Proxy Statement for the
2008 Annual Meeting of Stockholders
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Part III
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PART I
Overview
lululemon is a rapidly growing designer and retailer of
technical athletic apparel primarily in North America. Our
yoga-inspired apparel is marketed under the lululemon athletica
brand name. We believe consumers associate our brand with
innovative, technical apparel products. Our products are
designed to offer performance, fit and comfort while
incorporating both function and style. Our heritage of combining
performance and style distinctly positions us to address the
needs of female athletes as well as a growing core of consumers
who desire everyday casual wear that is consistent with their
active lifestyles. We also continue to broaden our product range
to increasingly appeal to male athletes. 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
February 3, 2008, our branded apparel was principally sold
through our 81 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.
We have developed a distinctive community-based strategy that we
believe enhances our brand and reinforces our customer loyalty.
The key elements of our strategy are to:
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design and develop innovative athletic apparel that combines
performance with style and incorporates real-time customer
feedback;
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locate our stores in street locations, lifestyle centers and
malls that position each lululemon athletica store as an
integral part of its community;
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create an inviting and educational store environment that
encourages product trial and repeat visits; and
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market on a grassroots level in each community, including
through influential fitness practitioners who embrace and create
excitement around our brand.
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We were founded in 1998 by Dennis Chip Wilson in
Vancouver, Canada. Noting the increasing number of women
participating in sports, and specifically yoga, Mr. Wilson
developed lululemon athletica to address a void in the
womens athletic apparel market. The founding principles
established by Mr. Wilson drive our distinctive corporate
culture with a mission of providing people with the components
to live a longer, healthier and more fun life. Consistent with
this mission, we promote a set of core values in our business,
which include developing the highest quality products, operating
with integrity, leading a healthy balanced life, and training
our employees in self responsibility and goal setting. These
core values attract passionate and motivated employees who are
driven to succeed and share our vision of elevating the
world from mediocrity to greatness. We believe the energy
and passion of our employees allow us to successfully execute on
our business strategy, enhance brand loyalty and create a
distinctive connection with our customers.
We believe our culture and community-based business approach
provide us with competitive advantages that are responsible for
our strong financial performance. Our net revenue has increased
from $40.7 million in fiscal 2004 to $274.7 million in
fiscal 2007, representing an 88.9% compound annual growth rate.
Our net revenue also increased from $148.9 million in
fiscal 2006 to $274.7 million in fiscal 2007, representing
an 84.5% increase. During fiscal 2006 our comparable store sales
increased 25% and we reported income from operations of
$16.2 million, which includes a one-time $7.2 million
litigation settlement charge. During fiscal 2007, our comparable
store sales increased 34% as compared to the same period during
the prior year and we reported income from operations of
$50.1 million. In the fiscal year ended February 3,
2008, our corporate-owned stores opened for at least one year
averaged sales of approximately $1,700 per square foot, compared
to sales per square foot of approximately $1,400 for the four
quarters ended January 31, 2007, which we believe is among
the best in the apparel retail sector.
1
Our
Market
Our primary target customer is a sophisticated and educated
woman who understands the importance of an active, healthy
lifestyle. She is increasingly tasked with the dual
responsibilities of career and family and is constantly
challenged to balance her work, life and health. We believe she
pursues exercise to achieve physical fitness and inner peace.
As women have continued to embrace a variety of fitness and
athletic activities, including yoga, we believe other athletic
apparel companies are not effectively addressing their unique
style, fit and performance needs. We believe we have been able
to help address this void in the marketplace by incorporating
style along with comfort and functionality into our products.
Although we were founded to address the unique needs of women,
we are also successfully designing products for men who also
appreciate the technical rigor and premium quality of our
products. We also believe longer-term growth in athletic
participation will be reinforced as the aging Baby Boomer
generation focuses more on longevity. In addition, we believe
consumer purchase decisions are driven by both an actual need
for functional products and a desire to create a particular
lifestyle perception. As such, we believe the credibility and
authenticity of our brand expands our potential market beyond
just athletes to those who desire to lead an active, healthy,
and balanced life.
Our
Competitive Strengths
We believe that the following strengths differentiate us from
our competitors and are important to our success:
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Premium Active Brand. lululemon athletica
stands for leading a healthy, balanced and fun life. We believe
customers associate the lululemon athletica brand with high
quality premium athletic apparel that incorporates technically
advanced materials, innovative functional features and style. We
believe our focus on women differentiates us and positions
lululemon athletica to address a void in the growing market for
womens athletic apparel. The premium nature of our brand
is reinforced by our vertical retail strategy and our selective
distribution through yoga studios and fitness clubs that we
believe are the most influential within the fitness communities
of their respective markets. While our brand has its roots in
yoga, our products are increasingly being designed and used for
other athletic and casual lifestyle pursuits. We work with local
athletes and fitness practitioners to enhance our brand
awareness and broaden our product appeal.
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Distinctive Retail Experience. We locate our
stores in street locations, lifestyle centers and malls that
position lululemon athletica stores to be an integral part of
their communities. Our retail concept is based on a
community-centric philosophy designed to offer customers an
inviting and educational experience. We believe that this
environment encourages product trial, purchases and repeat
visits. We coach our store sales associates, who we refer to as
educators, to develop a personal connection with
each guest. They receive approximately 30 hours of in-house
training within the first three months of the start of their
employment and are well prepared to explain the technical and
innovative design aspects of each product.
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Innovative Design Process. We offer
high-quality premium apparel that is designed for performance,
comfort, functionality and style. We attribute our ability to
develop superior products to a number of factors, including:
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our feedback-based design process through which our design and
product development team proactively and frequently seeks input
from our customers and local fitness practitioners;
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close collaboration with our third-party suppliers to formulate
innovative and technically-advanced fabrics and features for our
products; and
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although we typically bring products from design to market in
eight to 10 months, our vertical retail strategy enables us
to bring select products to market in as little as one month,
thereby allowing us to respond quickly to customer feedback,
changing market conditions and apparel trends.
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Community-Based Marketing Approach. We
differentiate lululemon athletica through an innovative,
community-based approach to building brand awareness and
customer loyalty. We use a multi-faceted grassroots marketing
strategy that includes partnering with local fitness
practitioners and retail educators and creating in-store
community boards. Each of our stores has a dedicated community
coordinator who
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organizes fitness or philanthropic events that heighten the
image of our brand in the community. We believe this grassroots
approach allows us to successfully increase brand awareness and
broaden our appeal while reinforcing our premium brand image.
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Deep Rooted Culture Centered on Training and Personal
Growth. We believe our core values and
distinctive corporate culture allow us to attract passionate and
motivated employees who are driven to succeed and share our
vision. We provide our employees with a supportive,
goal-oriented environment and encourage them to reach their full
professional, health and personal potential. We offer programs
such as personal development workshops and goal coaching to
assist our employees in realizing their long-term objectives. We
believe our relationship with our employees is exceptional and a
key contributor to our success.
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Experienced Management Team with Proven Ability to
Execute. Our founder, Mr. Wilson, leads our
design team and plays a central role in corporate strategy and
in promoting our distinctive corporate culture. Our Chief
Executive Officer, Robert Meers, whose experience includes
15 years at Reebok International Ltd., most recently
serving as the Chief Executive Officer of the Reebok brand from
1996 to 1999, joined us in December 2005. Our President, Chief
Operating Officer, and CEO designate, Christine Day, whose
experience includes 20 years at Starbucks Corporation, most
recently serving as President of Asia Pacific Group of Starbucks
International from 2004 to 2007, joined us in January 2008.
Messrs. Wilson and Meers and Ms. Day have assembled a
management team with a complementary mix of retail, design,
operations, product sourcing and marketing experience from
leading apparel and retail companies such as
Abercrombie & Fitch Co., Nike, Inc., and Reebok
International Ltd. We believe our management team is well
positioned to execute the long-term growth strategy for our
business.
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Growth
Strategy
Key elements of our growth strategy are to:
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Grow our Store Base in North America. As of
February 3, 2008, our products were sold through 74 stores
in North America, including 40 in Canada and 34 in the United
States. We expect that most of our near-term store growth will
occur in the United States. We plan to add new stores to
strengthen existing markets and selectively enter new markets in
the United States and Canada. We opened 27 stores in the United
States and Canada in fiscal 2007, and we plan to open
approximately 35 additional stores in fiscal 2008 in the United
States and Canada.
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Increase our Brand Awareness. We will continue
to increase brand awareness and customer loyalty through our
grassroots marketing efforts and planned store expansion. We
believe that increased brand awareness will result in increased
comparable store sales and sales productivity over time.
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Introduce New Product Technologies. We remain
focused on developing and offering products that incorporate
technology-enhanced fabrics and performance features that
differentiate us in the market. Collaborating with leading
fabric manufacturers, we have jointly developed and trademarked
names for innovative fabrics such as Luon and Silverescent, and
natural stretch fabrics using organic elements such as bamboo,
soy, and seaweed. Among our ongoing efforts, we are jointly
developing encapsulation-enhanced fabrics to provide advanced
features such as UV protection and temperature control. In
addition, we will continue to develop differentiated
manufacturing techniques that provide greater support,
protection, and comfort.
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Broaden the Appeal of our Products. We will
selectively seek opportunities to expand the appeal of our brand
to improve store productivity and increase our overall
addressable market. To enhance our product appeal, we intend to:
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Grow our Mens Business. We believe the
premium quality and technical rigor of our products will
continue to appeal to men and that there is an opportunity to
expand our mens business as a proportion of our total
sales.
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Expand our Product Categories. We plan to
expand our product offerings in complementary existing and new
categories such as bags, undergarments, outerwear and sandals.
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Increase the Range of Athletic Activities our Products
Target. We expect customers to increasingly
purchase our products for activities such as running, dance and
general fitness as we educate them on the versatility of our
products and expand our product categories.
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Expand Beyond North America. As of
February 3, 2008, we operated four stores in Japan through
a joint venture and three franchise stores in Australia, which
we intend to transition to a joint venture. Over time, we intend
to pursue additional joint venture opportunities in other Asian
and European markets.
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Develop a Retail Website. We expect to launch
a retail website in late 2008 or early 2009. The addition of an
ecommerce sales channel will expand our customer base and
supplement our growing store base. This site will be designed to
reflect the distinctive retail experience that our customers
enjoy in our stores while providing greater shopping flexibility.
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Our
Stores
As of February 3, 2008, our retail footprint included 40
stores in Canada, 34 stores in the United States, three stores
in Australia, and four joint venture-controlled stores in Japan.
We recently announced our intention to discontinue our
operations in Japan. The 74 stores in Canada and the United
States include three franchise stores in Canada and four in the
United States. While the significant majority of our stores are
branded lululemon athletica, one of our corporate-owned stores
and one franchise store in Canada are branded oqoqo and
specialize in apparel made with sustainable organic or recycled
fabrics. Our retail stores are located primarily on street
locations, in lifestyle centers and in malls.
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The following store list shows the number of branded stores
(including corporate-owned stores, franchise stores, and stores
operated through our joint venture relationships) operated in
each Canadian province, U.S. state, and internationally as
of February 3, 2008.
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Corporate-Owned
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Franchise
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Total
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Stores
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Stores
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Stores
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Canada
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Alberta
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7
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7
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British Columbia
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9
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2
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11
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Manitoba
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1
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1
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Ontario
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16
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16
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Québec
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4
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4
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Saskatchewan
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1
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1
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Total Canada
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37
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3
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40
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United States
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California
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11
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1
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12
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Colorado
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2
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2
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Florida
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2
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2
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Illinois
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4
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4
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Massachusetts
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4
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4
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New York
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1
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1
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Oregon
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1
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1
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Texas
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4
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4
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Virginia
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2
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2
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Washington
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1
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1
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2
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Total United States
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30
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4
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34
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International
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Australia
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3
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3
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Japan
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4
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4
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Total International
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4
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3
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7
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Overall total, as of January 31, 2007
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41
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10
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51
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Overall total, as of February 3, 2008
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71
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10
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81
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Store
Economics
We believe that our innovative retail concept and customer
experience contribute to the success of our stores most of which
generate strong productivity and returns. During fiscal 2007 our
corporate-owned stores open at least one year, which average
approximately 2,900 square feet, averaged sales of
approximately $1,700 per square foot.
Store
Expansion
From February 1, 2002 (when we had one store, in Vancouver)
to February 3, 2008, we opened 70 corporate-owned stores in
North America. We opened our first corporate-owned store in the
United States in 2003. Over the next few years, our new store
growth will be primarily focused on corporate-owned stores in
the United States, an attractive market with a population of
over nine times the size of Canada. We opened 27 stores in
the United States and Canada in fiscal 2007. We expect to open
approximately 35 additional stores in fiscal 2008 in the United
States and Canada.
Franchise
Stores in North America
As of February 3, 2008 we had three franchise stores in
Canada and four franchise stores in the United States. We began
opening franchise stores in select markets in 2002 to expand our
store network while limiting required capital expenditures. We
have committed to open one additional franchise store in the
United States with one of our
5
existing franchisees. Pursuing new franchise partnerships or
opening new franchise stores is not a significant part of our
near-term store growth strategy. We continue to evaluate the
ability to repurchase attractive franchises, which, in some
cases, we can contractually acquire at a specified percentage of
trailing
12-month
sales. Unless otherwise approved by us, our franchisees are
required to sell only our branded products, which are purchased
from us at a discount to the suggested retail price.
International
Stores
Beyond North America, we intend to pursue a joint venture model
to expand our global presence. We believe that partnering with
companies and individuals with significant experience and proven
success in the target country is to our advantage. In 2006, we
established a joint venture in Japan with Descente Ltd., a
global leader in fabric technology, called Lululemon Japan
Inc. We own 60% of the joint venture, which currently
operates four stores. Japan represents less than 1.5% of our
fiscal 2007 revenues and has been taking a disproportionate
amount of managements time and attention over the past
year. After reevaluating our operating performance in Japan and
our strategic priorities, we plan to discontinue our operations
in Japan.
As of February 3, 2008, we operated one store in Melbourne,
Australia and two stores in Sydney, Australia, through a
franchise arrangement. We expect to transition these franchises
to a joint venture arrangement in which we are the majority
owner.
Wholesale
Channel
We also sell lululemon athletica products through premium yoga
studios, health clubs and fitness centers. This channel
represented only 2.2% of our net revenue in fiscal 2006 and 1.8%
of our net revenue in fiscal 2007. We believe that these premium
wholesale locations offer an alternative distribution channel
that is convenient for our core consumer and enhances the image
of our brand. We do not intend wholesale to be a meaningful
contributor to overall sales. Instead we use the channel to
build brand awareness, especially in new markets.
Our
Products
We offer a comprehensive line of performance apparel and
accessories for both women and men. Our apparel assortment,
including items such as fitness pants, shorts, tops and jackets,
is designed for healthy lifestyle activities such as yoga,
dance, running and general fitness. According to a third-party
survey commissioned by one of our investors in 2005,
approximately 25% of our products were purchased specifically
for yoga. The balance of purchases were for a range of athletic
and casual pursuits. Although we benefit from the growing number
of people that participate in yoga, we believe the percentage of
our products sold for other activities will continue to increase
as we broaden our product range to address other activities. Our
fitness-related accessories include an array of items such as
bags, socks, underwear, yoga mats, instructional yoga DVDs,
water bottles and headbands.
We believe the authenticity of our products is driven by a
number of factors. These factors include our athlete-inspired
design process, our use of technical materials, our
sophisticated manufacturing methods and our innovative product
features. Our athletic apparel is designed and manufactured
using cutting-edge fabrics that deliver maximum function and
athletic fit. We collaborate with leading fabric suppliers to
develop advanced fabrics that we sell under our trademarks. Our
in-house design team works closely with our suppliers to
formulate fabrics that meet our performance and functional
specifications such as stretch ability, capability to wick
moisture and durability. We currently incorporate the following
advanced fabrics in our products:
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Luon, included in more than half of our products, wicks
away moisture, moves with the body and is designed to eliminate
irritation;
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Silverescent incorporates silver directly into the fabric
to reduce odors as a result of the antibacterial properties of
the silver in the fabric; and
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VitaSea, derived from a seaweed compound.
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Our design team continues to develop fabrics that we believe
will help advance our product line and differentiate us from the
competition.
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Our products are constructed with advanced sewing techniques
such as flat seaming, and care and content labels which increase
comfort and functionality by reducing skin irritation and
strengthening important seams. Our apparel products include
innovative features to promote convenience, such as pockets
designed to hold credit cards, keys, digital audio players, and
heart rate monitors, or clips for heart rate transmitters.
Our
Culture and Values
Since our inception, Mr. Wilson has developed a distinctive
corporate culture with a mission to provide people with
components to live a longer, healthier and more fun life. We
promote a set of core values in our business, which include
developing the highest quality products, operating with
integrity, leading a healthy balanced life and instilling in our
employees a sense of self responsibility and personal
achievement. These core values allow us to attract passionate
and motivated employees who are driven to succeed and share our
vision of elevating the world from mediocrity to
greatness.
Community-Based
Marketing
We differentiate our business through an innovative,
community-based approach to building brand awareness and
customer loyalty. We pursue a multi-faceted strategy which
leverages our local ambassadors, in-store community boards,
retail educators and a variety of grassroots initiatives. Our
ambassadors, who are local fitness practitioners, share our core
values and introduce our brand to their fitness classes and
communities leading to interest in the brand, store visits and
word-of-mouth
marketing. Our in-store community boards, coupled with our
educators knowledge, further position our stores as
community destinations designed to educate and enrich our
customers. Each of our stores has a dedicated community
coordinator who selectively organizes events that heighten the
image of our brand in the community. Each of our community
coordinators customizes a local marketing plan to focus on the
important athletic and philanthropic activities within each
community.
Product
Design and Development
Our product design efforts are led by Mr. Wilson and a team
of 13 designers based in Vancouver, Canada. Our team is
comprised of dedicated athletes and users of our products who
embody our design philosophy and dedication to premium quality.
While our design team identifies trends based on market
research, we primarily use an innovative feedback-based design
process through which we proactively seek the input of customers
and our ambassadors. Our ambassadors have become an integral
part of our product design process as they test and evaluate our
products, providing real-time feedback on performance and
functionality. Our design team also hosts meetings each year in
many of our markets. In these meetings, local athletes,
trainers, yogis and members of the fitness industry discuss our
products and provide us with additional feedback and ideas.
Members of our design team also regularly work at our stores,
which gives them the opportunity to interact with and receive
direct feedback from customers. Our design team incorporates all
of this input to adjust fit and style, to detect new athletic
trends and to identify desirable fabrics.
To ensure that we continue to provide our customers with
advanced fabrics, our design team works closely with our
suppliers to incorporate innovative fabrics that meet particular
specifications into our products. These specifications include
characteristics such as stretch ability, capability to wick
moisture and durability. In addition, to ensure the product
quality of our fabric and its authenticity, we test our products
using a leading testing facility. We also partner with a leading
independent inspection, verification, testing and certification
company, which conducts a battery of tests before each season on
all of our fabrics across all product lines, testing for a
variety of attributes including content, pilling, shrinkage, and
colorfastness. We collaborate with leading fabric suppliers to
develop fabrics that we ultimately trademark for brand
recognition whenever possible.
We typically bring new products from design to market in
approximately eight to 10 months, however, our vertical
retail structure enables us to bring select new products to
market in as little as one month. We believe our lead times are
shorter than a typical apparel wholesaler due to our streamlined
design and development process as well as the real-time input we
receive from our consumers and ambassadors through our retail
locations. Our process does not involve edits by intermediaries,
such as retail buyers or a sales force, and we believe it
incorporates
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a shorter sample process than typical apparel wholesalers. This
rapid turnaround time allows us to respond relatively quickly to
trends or changing market conditions.
Sourcing
and Manufacturing
We do not own or operate any manufacturing facilities, and
contract directly with third-party vendors for fabrics and
finished goods. The fabric used in our products is sourced by
our manufacturers from a limited number of pre-approved
suppliers. We work with a group of approximately 30
manufacturers, 10 of which produced approximately 80% of our
products in fiscal 2007. During fiscal 2007, no single
manufacturer produced more than 25% of our product offering.
During fiscal 2007, approximately 60% of our products were
produced in China, approximately 18% in Canada, approximately
14% in South East Asia and the remainder in the United States,
Israel, Peru, Korea, and Taiwan. Our North American
manufacturers typically produce more core products and provide
us with the speed to market necessary to respond quickly to
changing trends and increased demand. While we plan to support
future growth through manufacturers outside of North America,
our intent is to also maintain production in Canada and the
United States. We have developed long-standing relationships
with a number of our vendors and take great care to ensure that
they share our commitment to quality and ethics. We do not,
however, have any long-term agreements requiring us to use any
manufacturer, and no manufacturer is required to produce our
products in the long-term. We require that all of our
manufacturers adhere to a code of conduct regarding quality of
manufacturing, working conditions and other social concerns. We
currently also work with a leading inspection and verification
firm to closely monitor each suppliers compliance to
applicable law and our workplace code of conduct.
Distribution
Facilities
We centrally distribute finished products in North America from
distribution facilities in Vancouver, Canada and Renton,
Washington. The facility in Washington is operated by a
third-party. Our contract for the Renton, Washington
distribution facility expires in April 2010. We operate the
distribution facility in Vancouver, which is leased and is
approximately 51,000 square feet. We believe that this
modern facility enhances the efficiency of our operations. We
believe our distribution infrastructure will be sufficient to
accommodate our expected store growth and expanded product
offerings over the next several years. Merchandise is typically
shipped to our stores via third-party delivery services multiple
times per week, providing them with a steady flow of new
inventory.
Competition
Competition in the athletic apparel industry is principally on
the basis of brand image and recognition as well as product
quality, innovation, style, distribution and price. We believe
that we successfully compete on the basis of our premium brand
image, our focus on women and our technical product innovation.
In addition, we believe our vertical retail distribution
strategy differentiates us from our competitors and allows us to
more effectively control our brand image.
The market for athletic apparel is highly competitive. It
includes increasing competition from established companies who
are expanding their production and marketing of performance
products, as well as from frequent new entrants to the market.
We are in direct competition with wholesalers and direct sellers
of athletic apparel, such as Nike, Inc., adidas AG, which
includes the adidas and Reebok brands, and Under Armour, Inc. We
also compete with retailers specifically focused on womens
athletic apparel including Lucy Activewear Inc., The Finish Line
Inc. (including Finish Line and Paiva collection), and bebe
stores, inc. (BEBE SPORT collection).
Our
Employees
As of February 3, 2008, we had 2,683 employees, of
which 1,860 were employed in Canada and 823 were employed in the
United States. Of the 1,860 Canadian employees, 1,280 were
employed in our corporate-owned stores, 74 were employed in
distribution, 47 were employed in supply chain and production,
and the remaining 459 performed selling, general and
administrative and other functions. Of the 823 employees
employed in the United States, 795 were employed in our
corporate-owned stores and showrooms and 28 performed selling,
general
8
and administration functions. None of our employees is currently
covered by a collective bargaining agreement. We have had no
labor-related work stoppages.
Intellectual
Property
We believe we own the material trademarks used in connection
with the marketing, distribution and sale of all of our
products, in Canada, the United States and in the other
countries in which our products are currently or intended to be
either sold or manufactured. Our major trademarks include
lululemon athletica & design, the logo design (WAVE
design) and lululemon as a word mark. In addition to the
registrations in Canada and the United States,
lululemons design and word mark are registered in over 66
other jurisdictions which cover over 114 countries. We own
trademark registrations or have made trademark applications for
names of several of our fabrics including Luon, Silverescent,
VitaSea, Soyla, Boolux and LULLURE.
Securities
and Exchange Commission Filings
Our website address is www.lululemon.com We provide free access
to various reports that we file with, or furnish to, the United
States Securities and Exchange Commission, or SEC, through our
website, as soon as reasonably practicable after they have been
filed or furnished. These reports include, but are not limited
to, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports. Our SEC reports can also be
accessed through the SECs website at www.sec.gov. Also
available on our website are printable versions of our Code of
Business Conduct and Ethics and charters of the Audit,
Compensation, and Nominating and Governance Committees of our
Board of Directors. Information on our website does not
constitute part of this annual report on
Form 10-K
or any other report we file or furnish with the SEC.
9
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below
together with all of the other information included or
incorporated by reference in this
Form 10-K
before making an investment decision. If any of the following
risks actually occurs, our business, financial condition or
results of operations could materially suffer. In that case, the
trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks
Related to Our Business
We
have grown rapidly in recent years and we have limited operating
experience at our current scale of operations; if we are unable
to manage our operations at our current size or to manage any
future growth effectively, our brand image and financial
performance may suffer.
We have expanded our operations rapidly since our inception in
1998 and we have limited operating experience at our current
size. We opened our first store in Canada in 1999 and our first
store in the United States in 2003. Our net revenue
increased from $40.7 million in fiscal 2004 to
$274.7 million in fiscal 2007, representing a compound
annual increase of approximately 88.9%. We expect our net
revenue growth rate to slow as the number of new stores that we
open in the future declines relative to our larger store base.
Our substantial growth to date has placed a significant strain
on our management systems and resources. If our operations
continue to grow, of which there can be no assurance, we will be
required to continue to expand our sales and marketing, product
development and distribution functions, to upgrade our
management information systems and other processes, and to
obtain more space for our expanding administrative support and
other headquarters personnel. Our continued growth could
increase the strain on our resources, and we could experience
serious operating difficulties, including difficulties in
hiring, training and managing an increasing number of employees,
difficulties in obtaining sufficient raw materials and
manufacturing capacity to produce our products, and delays in
production and shipments. These difficulties would likely result
in the erosion of our brand image and lead to a decrease in net
revenue, income from operations and the price of our common
stock.
We may
not be able to successfully open new store locations in a timely
manner, if at all, which could harm our results of
operations.
Our growth will largely depend on our ability to successfully
open and operate new stores. Our ability to successfully open
and operate new stores depends on many factors, including, among
others, our ability to:
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identify suitable store locations, the availability of which is
outside of our control;
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negotiate acceptable lease terms, including desired tenant
improvement allowances;
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hire, train and retain store personnel and field management;
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assimilate new store personnel and field management into our
corporate culture;
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source sufficient inventory levels; and
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successfully integrate new stores into our existing operations
and information technology systems.
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Successful new store openings may also be affected by our
ability to initiate our grassroots marketing efforts in advance
of opening our first store in a new market. We typically rely on
our grassroots marketing efforts to build awareness of our brand
and demand for our products. Our grassroots marketing efforts
are often lengthy and must be tailored to each new market based
on our emerging understanding of the market. Accordingly, there
can be no assurance that we will be able to successfully
implement our grassroots marketing efforts in a particular
market in a timely manner, if at all. Additionally, we may be
unsuccessful in identifying new markets where our technical
athletic apparel and other products and brand image will be
accepted or the performance of our stores will be considered
successful. Further, we will encounter pre-operating costs and
we may encounter initial losses while new stores commence
operations.
We plan to open a large number of stores in the near future in
comparison to our existing store base and our historical rate of
store launches. Of the 81 stores in operation as of
February 3, 2008, we opened five new stores in
10
Canada, 22 new stores in the United States and four new stores
outside of North America in fiscal 2007. In May 2007, we closed
one corporate-owned oqoqo store. During fiscal 2006, we
opened seven new stores in Canada, six new stores in the United
States and one new store outside of North America. During fiscal
2005, we opened 13 new stores in Canada, three new stores in the
United States and one new store outside of North America. We
expect to open a total of 35 additional stores in fiscal 2008 in
the United States and Canada. We estimate that we will incur
approximately $18 million to $21 million of capital
expenditures in fiscal 2008 to open these 35 additional stores.
In addition, our new stores will not be immediately profitable
and we will incur losses until these stores become profitable.
There can be no assurance that we will open the planned number
of new stores in fiscal 2008. Any failure to successfully open
and operate new stores will harm our results of operations.
Our
limited operating experience and limited brand recognition in
new markets may limit our expansion strategy and cause our
business and growth to suffer.
Our future growth depends, to a considerable extent, on our
expansion efforts outside of Canada, especially in the United
States. Our current operations are based largely in Canada. As
of February 3, 2008, we had 40 stores in Canada, 34 stores
in the United States, three stores in Australia and four stores
in Japan. Therefore we have a limited number of customers and
limited experience in operating outside of Canada. We also have
limited experience with regulatory environments and market
practices outside of Canada, and cannot guarantee that we will
be able to penetrate or successfully operate in any market
outside of Canada. As previously disclosed, we plan to
discontinue our operations in Japan. In connection with our
initial expansion efforts, especially in the United States, we
have encountered increased costs of operations resulting from
higher payroll expenses and increased rent expense. In
connection with our initial expansion efforts outside of North
America, we have encountered many obstacles we do not face in
Canada or the United States, including cultural and linguistic
differences, differences in regulatory environments and market
practices, difficulties in keeping abreast of market, business
and technical developments and foreign customers tastes
and preferences.
We may also encounter difficulty expanding into new markets
because of limited brand recognition leading to delayed
acceptance of our technical athletic apparel by customers in
these new markets. In particular, we have no assurance that our
grassroots marketing efforts will prove successful outside of
the narrow geographic regions in which they have been used in
the United States and Canada. We anticipate that as our business
expands into new markets and as the market becomes increasingly
competitive, maintaining and enhancing our brand may become
increasingly difficult and expensive. Conversely, as we
penetrate these markets and our brand becomes more widely
available, it could potentially detract from the appeal stemming
from the scarcity of our brand. Our brand may also be adversely
affected if our public image or reputation is tarnished by
negative publicity. For example, we have recently been subject
to stories in several publications questioning the seaweed
content and product claims for our VitaSea products. While we
have conducted independent testing which has confirmed the
seaweed content of our products and have modified our product
claims, such publicity on this or our other products may harm
our business. Maintaining and enhancing our brand will depend
largely on our ability to be a leader in the athletic apparel
industry, to offer a unique store experience to our customers
and to continue to provide high quality products and services,
which we may not do successfully. Failure to develop new markets
outside of Canada or disappointing growth outside of Canada will
harm our business and results of operations. In addition, if we
are unable to maintain or enhance our brand image our results of
operations may suffer and our business may be harmed.
We
plan to primarily use cash from operations to finance our growth
strategy, and if we are unable to maintain sufficient levels of
cash flow we may not meet our growth expectations.
We intend to finance our growth through the cash flows generated
by our existing stores, borrowings under our available credit
facilities and the net proceeds from our initial public
offering. However, if our stores are not profitable or if our
store profits decline, we may not have the cash flow necessary
in order to pursue or maintain our growth strategy. We may also
be unable to obtain any necessary financing on commercially
reasonable terms to pursue or maintain our growth strategy. If
we are unable to pursue or maintain our growth strategy, the
market price of our common stock could decline and our results
of operations and profitability could suffer.
11
A
downturn in the economy may affect consumer purchases of
discretionary items, which could materially harm our sales,
profitability and financial condition.
Many factors affect the level of consumer spending for
discretionary items such as our technical athletic apparel and
related products. These factors include general business
conditions, interest and tax rates, the availability of consumer
credit and consumer confidence in future economic conditions.
Consumer purchases of discretionary items, such as our technical
athletic apparel, tend to decline during recessionary periods
when disposable income is lower. Due to our limited operating
history, we have not experienced a recessionary period and can
therefore not predict the effect on our sales and profitability
of a downturn in the economy. However, a downturn in the economy
in markets in which we sell our products may materially harm our
sales, profitability and financial condition.
Our
ability to attract customers to our stores depends heavily on
successfully locating our stores in suitable locations and any
impairment of a store location, including any decrease in
customer traffic, could cause our sales to be less than
expected.
Our approach to identifying locations for our stores typically
favors street locations and lifestyle centers where we can be a
part of the community. As a result, our stores are typically
located near retailers or fitness facilities that we believe are
consistent with our customers lifestyle choices. Sales at
these stores are derived, in part, from the volume of foot
traffic in these locations. Store locations may become
unsuitable due to, and our sales volume and customer traffic
generally may be harmed by, among other things:
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economic downturns in a particular area;
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competition from nearby retailers selling athletic apparel;
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changing consumer demographics in a particular market;
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changing lifestyle choices of consumers in a particular
market; and
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the closing or decline in popularity of other businesses located
near our store.
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Changes in areas around our store locations that result in
reductions in customer foot traffic or otherwise render the
locations unsuitable could cause our sales to be less than
expected.
We
operate in a highly competitive market and the size and
resources of some of our competitors may allow them to compete
more effectively than we can, resulting in a loss of our market
share and a decrease in our net revenue and
profitability.
The market for technical athletic apparel is highly competitive.
Competition may result in pricing pressures, reduced profit
margins or lost market share or a failure to grow our market
share, any of which could substantially harm our business and
results of operations. We compete directly against wholesalers
and direct retailers of athletic apparel, including large,
diversified apparel companies with substantial market share and
established companies expanding their production and marketing
of technical athletic apparel, as well as against retailers
specifically focused on womens athletic apparel. We also
face competition from wholesalers and direct retailers of
traditional commodity athletic apparel, such as cotton T-shirts
and sweat shirts. Many of our competitors are large apparel and
sporting goods companies with strong worldwide brand
recognition, such as Nike, Inc. and adidas AG, which includes
the adidas and Reebok brands. Because of the fragmented nature
of the industry, we also compete with other apparel sellers,
including those specializing in yoga apparel. Many of our
competitors have significant competitive advantages, including
longer operating histories, larger and broader customer bases,
more established relationships with a broader set of suppliers,
greater brand recognition and greater financial, research and
development, marketing, distribution and other resources than we
do. In addition, our technical athletic apparel is sold at a
premium to traditional athletic apparel.
Our competitors may be able to achieve and maintain brand
awareness and market share more quickly and effectively than we
can. In contrast to our grassroots marketing
approach, many of our competitors promote their brands primarily
through traditional forms of advertising, such as print media
and television commercials, and through celebrity athlete
endorsements, and have substantial resources to devote to such
efforts. Our competitors
12
may also create and maintain brand awareness using traditional
forms of advertising more quickly in new markets than we can.
Our competitors may also be able to increase sales in their new
and existing markets faster than we do by emphasizing different
distribution channels than we do, such as wholesale, internet or
catalog sales or an extensive franchise network, as opposed to
distribution through retail stores, and many of our competitors
have substantial resources to devote toward increasing sales in
such ways.
In addition, because we own no patents or exclusive intellectual
property rights in the technology, fabrics or processes
underlying our products, our current and future competitors are
able to manufacture and sell products with performance
characteristics, fabrication techniques and styling similar to
our products.
Our
inability to maintain recent levels of comparable store sales or
average sales per square foot could cause our stock price to
decline.
We may not be able to maintain the levels of comparable store
sales that we have experienced historically. In addition, we may
not be able to replicate in the United States and outside of
North America our historic average sales per square foot. Our
sales per square foot in stores we have opened in the United
States have generally been lower than those we have been able to
achieve in Canada. As sales in the United States grow to become
a larger percentage of our overall sales, our average sales per
square foot will likely decline. If our future comparable store
sales or average sales per square foot decline or fail to meet
market expectations, the price of our common stock could
decline. In addition, the aggregate results of operations of our
stores have fluctuated in the past and can be expected to
continue to fluctuate in the future. For example, over the past
16 fiscal quarters, our quarterly comparable store sales have
ranged from a decrease of 1% in the second quarter of fiscal
2004 to an increase of 41% in the fourth quarter of fiscal 2007.
A variety of factors affect both comparable store sales and
average sales per square foot, including fashion trends,
competition, current economic conditions, pricing, inflation,
the timing of the release of new merchandise and promotional
events, changes in our merchandise mix, the success of marketing
programs and weather conditions. These factors may cause our
comparable store sales results to be materially lower than
recent periods and our expectations, which could harm our
results of operations and result in a decline in the price of
our common stock.
Failure
to comply with trade and other regulations could lead to
investigations or actions by government regulators and negative
publicity.
The labeling, distribution, importation and sale of our products
are subject to extensive regulation by various federal agencies,
including the Federal Trade Commission, or FTC, state attorneys
general in the U.S., the Competition Bureau and Health Canada in
Canada as well as by various other federal, state, provincial,
local and international regulatory authorities in the countries
in which our products are distributed or sold. If we fail to
comply with those regulations, we could become subject to
significant penalties or claims, which could harm our results of
operations or our ability to conduct our business. In addition,
the adoption of new regulations or changes in the interpretation
of existing regulations may result in significant compliance
costs or discontinuation of product sales and may impair the
marketing of our products, resulting in significant loss of net
sales.
In addition, our failure to comply with FTC or state
regulations, or with regulations in foreign markets that cover
our product claims and advertising, including direct claims and
advertising by us, may result in enforcement actions and
imposition of penalties or otherwise harm the distribution and
sale of our products.
Our
plans to improve and expand our product offerings may not be
successful, and implementation of these plans may divert our
operational, managerial and administrative resources, which
could harm our competitive position and reduce our net revenue
and profitability.
In addition to our store expansion strategy, we plan to grow our
business by improving and expanding our product offerings, which
includes introducing new product technologies, increasing the
range of athletic activities our products target, growing our
mens business and expanding our accessories, undergarments
and outerwear
13
offerings. The principal risks to our ability to successfully
carry out our plans to improve and expand our product offering
are that:
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introduction of new products may be delayed, which may allow our
competitors to introduce similar products in a more timely
fashion, which could hurt our goal to be viewed as a leader in
technical athletic apparel innovation;
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if our expanded product offerings fail to maintain and enhance
our distinctive brand identity, our brand image may be
diminished and our sales may decrease;
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implementation of these plans may divert managements
attention from other aspects of our business and place a strain
on our management, operational and financial resources, as well
as our information systems; and
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incorporation of novel technologies into our products that are
not accepted by our customers or that are inferior to similar
products offered by our competitors.
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In addition, our ability to successfully carry out our plans to
improve and expand our product offerings may be affected by
economic and competitive conditions, changes in consumer
spending patterns and changes in consumer athletic preferences
and style trends. These plans could be abandoned, could cost
more than anticipated and could divert resources from other
areas of our business, any of which could impact our competitive
position and reduce our net revenue and profitability.
We
rely on third-party suppliers to provide fabrics for and to
produce our products, and we have limited control over them and
may not be able to obtain quality products on a timely basis or
in sufficient quantity.
We do not manufacture our products or the raw materials for them
and rely instead on third-party suppliers. Many of the specialty
fabrics used in our products are technically advanced textile
products developed and manufactured by third parties and may be
available, in the short-term, from only one or a very limited
number of sources. For example, our Luon fabric, which is
included in many of our products, is supplied to the mills we
use by a single manufacturer in Taiwan, and the fibers used in
manufacturing our Luon fabric are supplied to our Taiwanese
manufacturer by a single company. In fiscal 2007, approximately
80% of our products were produced by our top 10 manufacturing
suppliers.
If we experience significant increased demand, or need to
replace an existing manufacturer, there can be no assurance that
additional supplies of fabrics or raw materials or additional
manufacturing capacity will be available when required on terms
that are acceptable to us, or at all, or that any supplier or
manufacturer would allocate sufficient capacity to us in order
to meet our requirements or fill our orders in a timely manner.
Even if we are able to expand existing or find new manufacturing
or fabric sources, we may encounter delays in production and
added costs as a result of the time it takes to train our
suppliers and manufacturers in our methods, products and quality
control standards. Delays related to supplier changes could also
arise due to an increase in shipping times if new suppliers are
located farther away from our markets or from other participants
in our supply chain. Any delays, interruption or increased costs
in the supply of fabric or manufacture of our products could
have an adverse effect on our ability to meet customer demand
for our products and result in lower net revenue and income from
operations both in the short and long term.
In addition, there can be no assurance that our suppliers and
manufacturers will continue to provide fabrics and raw materials
or manufacture products that comply with our technical
specifications and are consistent with our standards. We have
occasionally received, and may in the future continue to
receive, shipments of products that fail to comply with our
technical specifications or that fail to conform to our quality
control standards. In that event, unless we are able to obtain
replacement products in a timely manner, we risk the loss of net
revenue resulting from the inability to sell those products and
related increased administrative and shipping costs.
Additionally, if defects in the manufacture of our products are
not discovered until after such products are purchased by our
customers, our customers could lose confidence in the technical
attributes of our products and our results of operations could
suffer and our business may be harmed.
14
We do
not have long-term contracts with our suppliers and accordingly
could face significant disruptions in supply from our current
sources.
We generally do not enter into long-term formal written
agreements with our suppliers, including those for Luon, and
typically transact business with our suppliers on an
order-by-order
basis. There can be no assurance that there will not be a
significant disruption in the supply of fabrics or raw materials
from current sources or, in the event of a disruption, that we
would be able to locate alternative suppliers of materials of
comparable quality at an acceptable price, or at all.
Identifying a suitable supplier is an involved process that
requires us to become satisfied with their quality control,
responsiveness and service, financial stability and labor and
other ethical practices. Any delays, interruption or increased
costs in the supply of fabric or manufacture of our products
arising from a lack of long-term contracts could have an adverse
effect on our ability to meet customer demand for our products
and result in lower net revenue and income from operations both
in the short and long term.
We do
not have patents or exclusive intellectual property rights in
our fabrics and manufacturing technology. If our competitors
sell similar products to ours, our net revenue and profitability
could suffer.
The intellectual property rights in the technology, fabrics and
processes used to manufacture our products are owned or
controlled by our suppliers and are generally not unique to us.
Our ability to obtain intellectual property protection for our
products is therefore limited and we currently own no patents or
exclusive intellectual property rights in the technology,
fabrics or processes underlying our products. As a result, our
current and future competitors are able to manufacture and sell
products with performance characteristics, fabrications and
styling similar to our products. Because many of our
competitors, such as Nike, Inc. and adidas AG, which includes
the adidas and Reebok brands, have significantly greater
financial, distribution, marketing and other resources than we
do, they may be able to manufacture and sell products based on
our fabrics and manufacturing technology at lower prices than we
can. If our competitors do sell similar products to ours at
lower prices, our net revenue and profitability could suffer.
Our
future success is substantially dependent on the continued
service of our senior management.
Our future success is substantially dependent on the continued
service of our senior management, particularly Dennis Wilson,
our founder and Chairman and Chief Product Designer, Robert
Meers, our Chief Executive Officer, and Christine Day, our
President, Chief Operating Officer and CEO designate. The loss
of the services of our senior management could make it more
difficult to successfully operate our business and achieve our
business goals.
We also may be unable to retain existing management, technical,
sales and client support personnel that are critical to our
success, which could result in harm to our customer and employee
relationships, loss of key information, expertise or know-how
and unanticipated recruitment and training costs.
In addition, while we maintain a key person insurance policy for
Mr. Wilson, we have not obtained key person life insurance
policies on Mr. Meers, Ms. Day or any of our other
members of our senior management team. As a result, we would
have no way to cover the financial loss if we were to lose the
services of members of our senior management team.
We are
planning a replacement of our core systems that might disrupt
our supply chain operations.
We are in the process of substantially modifying our information
technology systems supporting our financial management and
reporting, inventory and purchasing management, order
management, warehouse management and forecasting. Modifications
will involve replacing legacy systems with successor systems
during the course of fiscal 2008. There are inherent risks
associated with replacing our core systems, including supply
chain disruptions that may affect our ability to deliver
products to our stores and customers. We believe that other
companies have experienced significant delays and cost overruns
in implementing similar systems changes, and we may encounter
similar problems. We may not be able to successfully implement
these new systems or implement them without supply chain
disruptions in the future. Any resulting supply chain
disruptions could harm our business, prospects, financial
condition and results of operations. Although our existing
systems may be satisfactory in the short-term, we do not believe
these systems are adequate to support our long-term growth.
Thus, if we are not able to implement these new systems
successfully, our business, prospects, financial condition and
results of operations may suffer.
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Problems
with our distribution system could harm our ability to meet
customer expectations, manage inventory, complete sales and
achieve objectives for operating efficiencies.
We rely on our distribution facility in Vancouver, British
Columbia and a distribution center located in Renton, Washington
operated by a third-party vendor for substantially all of our
product distribution. In addition, in October 2007, we relocated
our Vancouver distribution facility to a new, larger
distribution facility. Our contract for the Renton, Washington
distribution facility expires in April 2010 and there can be no
assurance that we will be able to enter into another contract
for a distribution center on acceptable terms. Such an event
could disrupt our operations. Our distribution facilities
include computer controlled and automated equipment, which means
their operations are complicated and may be subject to a number
of risks related to security or computer viruses, the proper
operation of software and hardware, electronic or power
interruptions or other system failures. In addition, because
substantially all of our products are distributed from two
locations, our operations could also be interrupted by labor
difficulties, or by floods, fires or other natural disasters
near our distribution centers. If we encounter problems with our
distribution system, our ability to meet customer expectations,
manage inventory, complete sales and achieve objectives for
operating efficiencies could be harmed.
Our
operating results are subject to seasonal and quarterly
variations in our net revenue and income from operations, which
could cause the price of our common stock to
decline.
We have experienced, and expect to continue to experience,
significant seasonal variations in our net revenue and income
from operations. Seasonal variations in our net revenue are
primarily related to increased sales of our products during our
fiscal fourth quarter, reflecting our historical strength in
sales during the holiday season. We generated approximately 37%,
35% and 39% of our full year gross profit during the fourth
quarters of fiscal 2005, fiscal 2006 and fiscal 2007
respectively. Historically, seasonal variations in our income
from operations have been driven principally by increased net
revenue in our fiscal fourth quarter.
Our quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors,
including, among other things, the following:
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the timing of new store openings;
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net revenue and profits contributed by new stores;
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increases or decreases in comparable store sales;
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changes in our product mix; and
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the timing of new advertising and new product introductions.
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As a result of these seasonal and quarterly fluctuations, we
believe that comparisons of our operating results between
different quarters within a single fiscal year are not
necessarily meaningful and that these comparisons cannot be
relied upon as indicators of our future performance.
Any future seasonal or quarterly fluctuations in our results of
operations may not match the expectations of market analysts and
investors. Disappointing quarterly results could cause the price
of our common stock to decline. Seasonal or quarterly factors in
our business and results of operations may also make it more
difficult for market analysts and investors to assess the
longer-term profitability and strength of our business at any
particular point, which could lead to increased volatility in
our stock price. Increased volatility could cause our stock
price to suffer in comparison to less volatile investments.
If we
are unable to accurately forecast customer demand for our
products our manufacturers may not be able to deliver products
to meet our requirements, and this could result in delays in the
shipment of products to our stores and may harm our results
of operations and customer relationships.
We stock our stores based on our estimates of future demand for
particular products. If our inventory and planning team fails to
accurately forecast customer demand, we may experience excess
inventory levels or a shortage of products available for sale in
our stores. There can be no assurance that we will be able to
successfully manage our inventory at a level appropriate for
future customer demand.
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Inventory levels in excess of customer demand may result in
inventory write-downs or write-offs and the sale of excess
inventory at discounted prices, which would cause our gross
margin to suffer and could impair the strength and exclusivity
of our brand. In fiscal 2006, we wrote-off $1.0 million of
inventory and in fiscal 2007, we wrote off $0.8 million of
inventory. In addition, if we underestimate customer demand for
our products, our manufacturers may not be able to deliver
products to meet our requirements, and this could result in
delays in the shipment of products to our stores and may damage
our reputation and customer relationships. There can be no
assurance that we will be able to successfully manage our
inventory at a level appropriate for future customer demand.
Our
current and future joint ventures may not be
successful.
As part of our growth strategy, we plan to expand our stores and
sales of our products into new locations outside North America,
particularly in the Asia-Pacific region. Our successful
expansion and operation of new stores outside North America will
depend on our ability to find suitable partners and to
successfully implement and manage joint venture relationships.
If we are able to find a joint venture partner in a specific
geographic area, there can be no guarantee that such a
relationship will be successful. Such a relationship often
creates additional risk. For example, our partners in joint
venture relationships may have interests that differ from ours
or that conflict with ours, such as the timing of new store
openings and the pricing of our products, or our partners may
become bankrupt which may as a practical matter subject us to
such partners liabilities in connection with the joint
venture. In addition, joint ventures can magnify several other
risks for us, including the potential loss of control over our
cultural identity in the markets where we enter into joint
ventures and the possibility that our brand image could be
impaired by the actions of our partners. Although we generally
will seek to maintain sufficient control of any joint venture to
permit our objectives to be achieved, we might not be able to
take action without the approval of our partners. Reliance on
joint venture relationships and our partners exposes us to
increased risk that our joint ventures will not be successful
and will result in competitive harm to our brand image that
could cause our expansion efforts, profitability and results of
operations to suffer.
We may
need to raise additional capital that may be required to grow
our business, and we may not be able to raise capital on terms
acceptable to us or at all.
Operating our business and maintaining our growth efforts will
require significant cash outlays and advance capital
expenditures and commitments. If cash on hand and cash generated
from operations and from our initial public offering are not
sufficient to meet our cash requirements, we will need to seek
additional capital, potentially through debt or equity
financings, to fund our growth. We cannot assure you that we
will be able to raise needed cash on terms acceptable to us or
at all. Financings may be on terms that are dilutive or
potentially dilutive to our stockholders, and the prices at
which new investors would be willing to purchase our securities
may be lower than the current price per share of our common
stock. The holders of new securities may also have rights,
preferences or privileges which are senior to those of existing
holders of common stock. If new sources of financing are
required, but are insufficient or unavailable, we will be
required to modify our growth and operating plans based on
available funding, if any, which would harm our ability to grow
our business.
We are
subject to risks associated with leasing retail space subject to
long-term non-cancelable leases and are required to make
substantial lease payments under our operating leases, and any
failure to make these lease payments when due would likely harm
our business, profitability and results of
operations.
We do not own any of our stores, but instead lease all of our
corporate-owned stores under operating leases. Our leases
generally have initial terms of between five and 10 years,
and generally can be extended only in five-year increments (at
increased rates) if at all. All of our leases require a fixed
annual rent, and most require the payment of additional rent if
store sales exceed a negotiated amount. Generally, our leases
are net leases, which require us to pay all of the
cost of insurance, taxes, maintenance and utilities. We
generally cannot cancel these leases at our option. Payments
under these operating leases account for a significant portion
of our cost of goods sold. For example, as of February 3,
2008, we were a party to operating leases associated with our
corporate-owned stores as well as other corporate facilities
requiring future minimum lease payments aggregating
$35.1 million through January 31, 2011 and
approximately $34.7 million thereafter. We expect that any
new stores we open will also be leased by us under operating
leases, which will further increase our operating lease expenses.
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Our substantial operating lease obligations could have
significant negative consequences, including:
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increasing our vulnerability to general adverse economic and
industry conditions;
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limiting our ability to obtain additional financing;
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requiring a substantial portion of our available cash to pay our
rental obligations, thus reducing cash available for other
purposes;
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limiting our flexibility in planning for or reacting to changes
in our business or in the industry in which we compete; and
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placing us at a disadvantage with respect to some of our
competitors.
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We depend on cash flow from operations to pay our lease expenses
and to fulfill our other cash needs. If our business does not
generate sufficient cash flow from operating activities, and
sufficient funds are not otherwise available to us from
borrowings under our available credit facilities or from other
sources, we may not be able to service our operating lease
expenses, grow our business, respond to competitive challenges
or to fund our other liquidity and capital needs, which would
harm our business.
If our
independent manufacturers fail to use ethical business practices
and comply with applicable laws and regulations, our brand image
could be harmed due to negative publicity.
Our core values, which include developing the highest quality
products while operating with integrity, are an important
component of our brand image, which makes our reputation
particularly sensitive to allegations of unethical business
practices. While our internal and vendor operating guidelines
promote ethical business practices such as environmental
responsibility, fair wage practices, and compliance with child
labor laws, among others, and we, along with a third party that
we retain for this purpose, monitor compliance with those
guidelines, we do not control our independent manufacturers or
their business practices. Accordingly, we cannot guarantee their
compliance with our guidelines. A lack of demonstrated
compliance could lead us to seek alternative suppliers, which
could increase our costs and result in delayed delivery of our
products, product shortages or other disruptions of our
operations.
Violation of labor or other laws by our independent
manufacturers or the divergence of an independent
manufacturers labor or other practices from those
generally accepted as ethical in Canada, the United States or
other markets in which we do business could also attract
negative publicity for us and our brand. This could diminish the
value of our brand image and reduce demand for our merchandise
if, as a result of such violation, we were to attract negative
publicity. Other apparel manufacturers have encountered
significant problems in this regard, and these problems have
resulted in organized boycotts of their products and significant
adverse publicity. If we, or other manufacturers in our
industry, encounter similar problems in the future, it could
harm our brand image, stock price and results of operations.
Monitoring compliance by independent manufacturers is
complicated by the fact that expectations of ethical business
practices continually evolve, may be substantially more
demanding than applicable legal requirements and are driven in
part by legal developments and by diverse groups active in
publicizing and organizing public responses to perceived ethical
shortcomings. Accordingly, we cannot predict how such
expectations might develop in the future and cannot be certain
that our guidelines would satisfy all parties who are active in
monitoring and publicizing perceived shortcomings in labor and
other business practices worldwide.
The
cost of raw materials could increase our cost of goods sold and
cause our results of operations and financial condition to
suffer.
The fabrics used by our suppliers and manufacturers include
synthetic fabrics whose raw materials include petroleum-based
products. Our products also include natural fibers, including
cotton. Significant price fluctuations or shortages in petroleum
or other raw materials may increase our cost of goods sold and
cause our results of operations and financial condition to
suffer.
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Because
a significant portion of our sales are generated in Canada,
fluctuations in foreign currency exchange rates could harm our
results of operations.
The reporting currency for our consolidated financial statements
is the U.S. dollar. In the future, we expect to continue to
derive a significant portion of our sales and incur a
significant portion of our operating costs in Canada, and
changes in exchange rates between the Canadian dollar and the
U.S. dollar may have a significant, and potentially
adverse, effect on our results of operations. Our primary risk
of loss regarding foreign currency exchange rate risk is caused
by fluctuations in the exchange rates between the
U.S. dollar and Canadian dollar, Australian dollar and
Japanese yen. Because we recognize net revenue from sales in
Canada in Canadian dollars, if the Canadian dollar weakens
against the U.S. dollar 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. The
exchange rate of the Canadian dollar against the
U.S. dollar is currently near a multi-year high and our
results of operations have benefited from the strength in the
Canadian dollar. If the Canadian dollar were to weaken relative
to the U.S. dollar, our net revenue would decline and our
income from operations and net income could be adversely
affected. A 10% depreciation in the relative value of the
Canadian dollar compared to the U.S. dollar would have
resulted in lost income from operations of approximately
$4.0 million in fiscal 2006 and approximately
$5.4 million in fiscal 2007. We have not historically
engaged in hedging transactions and do not currently contemplate
engaging in hedging transactions to mitigate foreign exchange
risks. As we continue to recognize gains and losses in foreign
currency transactions, depending upon changes in future currency
rates, such gains or losses could have a significant, and
potentially adverse, effect on our results of operations.
The
operations of many of our suppliers are subject to additional
risks that are beyond our control and that could harm our
business, financial condition and results of
operations.
Almost all of our suppliers are located outside the United
States. During fiscal 2007, approximately 18% of our products
were produced in Canada, approximately 60% in China,
approximately 14% in South East Asia and the remainder in USA,
Israel, Peru, Korea and Taiwan. As a result of our international
suppliers, we are subject to risks associated with doing
business abroad, including:
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political unrest, terrorism, labor disputes and economic
instability resulting in the disruption of trade from foreign
countries in which our products are manufactured;
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the imposition of new laws and regulations, including those
relating to labor conditions, quality and safety standards,
imports, duties, taxes and other charges on imports, as well as
trade restrictions and restrictions on currency exchange or the
transfer of funds;
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reduced protection for intellectual property rights, including
trademark protection, in some countries, particularly China;
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disruptions or delays in shipments; and
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changes in local economic conditions in countries where our
manufacturers, suppliers or customers are located.
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These and other factors beyond our control could interrupt our
suppliers production in offshore facilities, influence the
ability of our suppliers to export our products cost-effectively
or at all and inhibit our suppliers ability to procure
certain materials, any of which could harm our business,
financial condition and results of operations.
Our
ability to source our merchandise profitably or at all could be
hurt if new trade restrictions are imposed or existing trade
restrictions become more burdensome.
The United States and the countries in which our products are
produced or sold internationally have imposed and may impose
additional quotas, duties, tariffs, or other restrictions or
regulations, or may adversely adjust prevailing quota, duty or
tariff levels. For example, under the provisions of the World
Trade Organization, or WTO, Agreement on Textiles and Clothing,
effective as of January 1, 2005, the United States and
other WTO member countries eliminated quotas on textiles and
apparel related products from WTO member countries. In 2005,
Chinas exports into the United States surged as a result
of the eliminated quotas. In response to the perceived
disruption of
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the market, the United States imposed new quotas, which are
permitted to remain in place through the end of 2008, on certain
categories of natural-fiber products that we import from China.
As a result, we have expanded our relationships with suppliers
outside of China, which among other things has resulted in
increased costs and shipping times for some products. Countries
impose, modify and remove tariffs and other trade restrictions
in response to a diverse array of factors, including global and
national economic and political conditions, which make it
impossible for us to predict future developments regarding
tariffs and other trade restrictions. Trade restrictions,
including tariffs, quotas, embargoes, safeguards and customs
restrictions, could increase the cost or reduce the supply of
products available to us or may require us to modify our supply
chain organization or other current business practices, any of
which could harm our business, financial condition and results
of operations.
We may
be subject to potential challenges relating to overtime pay and
other regulations that impact our employees, which could cause
our business, financial condition, results of operations or cash
flows to suffer.
Various labor laws, including U.S. federal, U.S. state
and Canadian provincial laws, among others, govern our
relationship with our employees and affect our operating costs.
These laws include minimum wage requirements, overtime pay,
unemployment tax rates, workers compensation rates and
citizenship requirements. These laws change frequently and may
be difficult to interpret and apply. In particular, as a
retailer, we may be subject to challenges regarding the
application of overtime and related pay regulations to our
employees. A determination that we do not comply with these laws
could harm our brand image, business, financial condition and
results of operation. Additional government-imposed increases in
minimum wages, overtime pay, paid leaves of absence or mandated
health benefits could also cause our business, financial
condition, results of operations or cash flows to suffer.
Our
franchisees may take actions that could harm our business or
brand, and franchise regulations and contracts limit our ability
to terminate or replace under-performing
franchises.
As of February 3, 2008, we had three franchise stores in
Canada, four franchise stores in the United States and three
franchise stores in Australia, which we expect to restructure
into a joint venture relationship. Additionally, we have
committed to open one additional franchise store in the United
States pursuant to an understanding with one of our existing
franchisees. Franchisees are independent business operators and
are not our employees, and we do not exercise control over the
day-to-day
operations of their retail stores. We provide training and
support to franchisees, and set and monitor operational
standards, but the quality of franchise store operations may
decline due to diverse factors beyond our control. For example,
franchisees may not successfully operate stores in a manner
consistent with our standards and requirements, or may not hire
and train qualified employees, which could harm their sales and
as a result harm our results of operations or cause our brand
image to suffer.
Franchisees, as independent business operators, may from time to
time disagree with us and our strategies regarding the business
or our interpretation of our respective rights and obligations
under applicable franchise agreements. This may lead to disputes
with our franchisees, and we expect such disputes to occur from
time to time, such as the collection of royalty payments or
other matters related to the franchisees successful
operation of the retail store. Such disputes could divert the
attention of our management and our franchisees from our
operations, which could cause our business, financial condition,
results of operations or cash flows to suffer.
In addition, as a franchisor, we are subject to Canadian,
U.S. federal, U.S. state and international laws
regulating the offer and sale of franchises. These laws impose
registration and extensive disclosure requirements on the offer
and sale of franchises, frequently apply substantive standards
to the relationship between franchisor and franchisee and limit
the ability of a franchisor to terminate or refuse to renew a
franchise. We may therefore be required to retain an
under-performing franchise and may be unable to replace the
franchisee, which could harm our results of operations. We
cannot predict the nature and effect of any future legislation
or regulation on our franchise operations.
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Our
failure or inability to protect our intellectual property rights
could diminish the value of our brand and weaken our competitive
position.
We currently rely on a combination of copyright, trademark,
trade dress and unfair competition laws, as well as
confidentiality procedures and licensing arrangements, to
establish and protect our intellectual property rights. We
cannot assure you that the steps taken by us to protect our
intellectual property rights will be adequate to prevent
infringement of such rights by others, including imitation of
our products and misappropriation of our brand. In addition,
intellectual property protection may be unavailable or limited
in some foreign countries where laws or law enforcement
practices may not protect our intellectual property rights as
fully as in the United States or Canada, and it may be more
difficult for us to successfully challenge the use of our
intellectual property rights by other parties in these
countries. If we fail to protect and maintain our intellectual
property rights, the value of our brand could be diminished and
our competitive position may suffer.
Our
trademarks and other proprietary rights could potentially
conflict with the rights of others and we may be prevented from
selling some of our products.
Our success depends in large part on our brand image. We believe
that our trademarks and other proprietary rights have
significant value and are important to identifying and
differentiating our products from those of our competitors and
creating and sustaining demand for our products. We have
obtained and applied for some U.S. and foreign trademark
registrations, and will continue to evaluate the registration of
additional trademarks as appropriate. However, we cannot
guarantee that any of our pending trademark applications will be
approved by the applicable governmental authorities. Moreover,
even if the applications are approved, third parties may seek to
oppose or otherwise challenge these registrations. Additionally,
we cannot assure you that obstacles will not arise as we expand
our product line and the geographic scope of our sales and
marketing. Third parties may assert intellectual property claims
against us, particularly as we expand our business and the
number of products we offer. Our defense of any claim,
regardless of its merit, could be expensive and time consuming
and could divert management resources. Successful infringement
claims against us could result in significant monetary liability
or prevent us from selling some of our products. In addition,
resolution of claims may require us to redesign our products,
license rights from third parties or cease using those rights
altogether. Any of these events could harm our business and
cause our results of operations, liquidity and financial
condition to suffer.
We
will continue to incur significant expenses as a result of being
a public company, which will negatively impact our financial
performance and could cause our results of operations and
financial condition to suffer.
We will continue to incur significant legal, accounting,
insurance and other expenses as a result of being a public
company. We expect that compliance with the Sarbanes-Oxley Act
of 2002, as well as related rules implemented by the SEC and the
securities regulators in each of the provinces and territories
of Canada and by The Nasdaq Stock Market LLC, will continue to
increase our expenses, including our legal and accounting costs,
and make some activities more time consuming and costly. We also
expect these laws, rules and regulations to make it more
expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced policy
limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified persons to
serve on our board of directors or as officers. As a result of
the foregoing, we have experienced a substantial increase in
legal, accounting, insurance and certain other expenses and we
expect we will incur substantially higher expenses in the
future, which will negatively impact our financial performance
and could cause our results of operations and financial
condition to suffer.
Failure
to maintain adequate financial and management processes and
controls could lead to errors in our financial reporting, which
could harm our business and cause a decline in our stock
price.
Ongoing reporting obligations as a public company and our
anticipated growth are likely to place a considerable strain on
our financial and management systems, processes and controls, as
well as on our personnel. In addition, as a public company we
are required to document and test our internal controls over
financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 so that our management can certify
the effectiveness of our internal controls and our independent
registered public accounting firm can render an opinion on our
internal control over financial reporting by the time our fiscal
2008 annual report is due and thereafter. As a result, we are
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implementing the required financial and managerial controls,
reporting systems and procedures and we are incurring
substantial expenses to test our systems and to make additional
improvements and to hire additional personnel. If our management
is unable to certify the effectiveness of our internal controls
or if our independent registered public accounting firm cannot
render an opinion on the effectiveness of our internal control
over financial reporting, or if material weaknesses in our
internal controls are identified, we could be subject to
regulatory scrutiny and a loss of public confidence, which could
harm our business and cause a decline in our stock price. In
addition, if we do not maintain adequate financial and
management personnel, processes and controls, we may not be able
to accurately report our financial performance on a timely
basis, which could cause a decline in our stock price and harm
our ability to raise capital. Failure to accurately report our
financial performance on a timely basis could also jeopardize
our continued listing on the Nasdaq Global Select Market, the
Toronto Stock Exchange or any other stock exchange on which our
common stock may be listed. Delisting of our common stock on any
exchange would reduce the liquidity of the market for our common
stock, which would reduce the price of our stock and increase
the volatility of our stock price.
Risks
Related to Our Common Stock
Our
stock price has been volatile and your investment in our common
stock could suffer a decline in value.
The market price of our common stock has been subject to
significant fluctuations and may continue to fluctuate or
decline. Since our initial public offering in July 2007, the
price of our common stock has ranged from a low of $21.72 to a
high of $60.70 on the Nasdaq Global Select Market and from a low
of CDN $21.20 to a high of CDN $58.77 on the Toronto
Stock Exchange. Broad market and industry factors may harm the
price of our common stock, regardless of our actual operating
performance. Factors that could cause fluctuation in the price
of our common stock may include, among other things:
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actual or anticipated fluctuations in quarterly operating
results or other operating metrics, such as comparable store
sales, that may be used by the investment community;
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changes in financial estimates by us or by any securities
analysts who might cover our stock;
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speculation about our business in the press or the investment
community;
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conditions or trends affecting our industry or the economy
generally, including fluctuations in foreign currency exchange
rates;
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stock market price and volume fluctuations of other publicly
traded companies and, in particular, those that are in the
technical athletic apparel industry;
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announcements by us or our competitors of new products,
significant acquisitions, strategic partnerships or divestitures;
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changes in product mix between high and low margin products;
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capital commitments;
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our entry into new markets;
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timing of new store openings;
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percentage of sales from new stores versus established stores;
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additions or departures of key personnel;
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actual or anticipated sales of our common stock, including sales
by our directors, officers or significant stockholders;
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significant developments relating to our manufacturing,
distribution, joint venture or franchise relationships;
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customer purchases of new products from us and our competitors;
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investor perceptions of the apparel industry in general and our
company in particular;
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changes in accounting standards, policies, guidance,
interpretation or principles; and
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speculative trading of our common stock in the investment
community.
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In the past, securities class action litigation has often been
instituted against companies following periods of volatility in
their stock price. This type of litigation, even if it does not
result in liability for us, could result in substantial costs to
us and divert managements attention and resources.
A
significant number of our outstanding shares are restricted from
immediate resale, but may be sold on the Nasdaq Global Select
Market and the Toronto Stock Exchange in the near future. The
large number of shares eligible for public sale or subject to
rights requiring us to register them for public sale could
depress the market price of our common stock.
The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the
market, and the perception that these sales could occur may also
depress the market price of our common stock. After
July 26, 2008, we plan to file a registration statement in
the United States to register either the issuance of up to
20,935,041 shares of our common stock upon the exchange of
the then-outstanding exchangeable shares of Lulu Canadian
Holding, Inc. or the resale of up to 20,935,041 shares of
our common stock. Sales of our common stock as restrictions end
or pursuant to registration rights may make it more difficult
for us to sell equity securities in the future at a time and at
a price that we deem appropriate. These sales also could cause
our stock price to fall and make it more difficult for you to
sell shares of our common stock.
Our
principal stockholders and management own a significant
percentage of our stock and will be able to exercise significant
influence over our affairs.
Our current directors and executive officers beneficially own
61% of our common stock. As a result, these stockholders, if
acting together, would be able to influence or control matters
requiring approval by our stockholders, including the election
of directors and the approval of mergers, acquisitions or other
extraordinary transactions. They may also have interests that
differ from yours and may vote in a way with which you disagree
and which may be adverse to your interests. This concentration
of ownership may have the effect of delaying, preventing or
deterring a change of control of our company, could deprive our
stockholders of an opportunity to receive a premium for their
common stock as part of a sale of our company and might
ultimately affect the market price of our common stock.
Anti-takeover
provisions of Delaware law and our certificate of incorporation
and bylaws could delay and discourage takeover attempts that
stockholders may consider to be favorable.
Certain provisions of our certificate of incorporation and
bylaws and applicable provisions of the Delaware General
Corporation Law may make it more difficult or impossible for a
third party to acquire control of us or effect a change in our
board of directors and management. These provisions include:
|
|
|
|
|
the classification of our board of directors into three classes,
with one class elected each year;
|
|
|
|
prohibiting cumulative voting in the election of directors;
|
|
|
|
the ability of our board of directors to issue preferred stock
without stockholder approval;
|
|
|
|
the ability to remove a director only for cause and only with
the vote of the holders of at least
662/3%
of our voting stock;
|
|
|
|
a special meeting of stockholders may only be called by our
chairman or Chief Executive Officer, or upon a resolution
adopted by an affirmative vote of a majority of the board of
directors, and not by our stockholders;
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|
|
prohibiting stockholder action by written consent; and
|
|
|
|
our stockholders must comply with advance notice procedures in
order to nominate candidates for election to our board of
directors or to place stockholder proposals on the agenda for
consideration at any meeting of our stockholders.
|
23
In addition, we are governed by Section 203 of the Delaware
General Corporation Law which, subject to some specified
exceptions, prohibits business combinations between
a Delaware corporation and an interested
stockholder, which is generally defined as a stockholder
who becomes a beneficial owner of 15% or more of a Delaware
corporations voting stock, for a three-year period
following the date that the stockholder became an interested
stockholder. Section 203 could have the effect of delaying,
deferring or preventing a change in control that our
stockholders might consider to be in their best interests.
Our principal executive and administrative offices are located
at 2285 Clark Drive, Vancouver, British Columbia, Canada, V5N
3G9. We expect that our current administrative offices are
sufficient for our expansion plans through 2008, and we have
secured new executive and administrative office space that we
plan to move into in January 2009. We currently operate one
distribution center located in Vancouver, BC, capable of
accommodating our expansion plans through the foreseeable future.
The general location, use, approximate size and lease renewal
date of our properties, none of which is owned by us, are set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
Location
|
|
Use
|
|
Square Feet
|
|
|
Lease Renewal Date
|
|
|
Vancouver, BC
|
|
Executive and Administrative Offices
|
|
|
30,000
|
|
|
|
January 2009
|
|
Vancouver, BC
|
|
Executive and Administrative Offices
|
|
|
85,000
|
|
|
|
December 31, 2019
|
|
Vancouver, BC
|
|
Distribution Center
|
|
|
51,000
|
|
|
|
November 2017
|
|
As of February 3, 2008, we leased approximately
196,000 gross square feet relating to our 71
corporate-owned stores. Our leases generally have initial terms
of between five and 10 years, and generally can be extended
only in five-year increments (at increased rates) if at all. All
of our leases require a fixed annual rent, and most require the
payment of additional rent if store sales exceed a negotiated
amount. Generally, our leases are net leases, which
require us to pay all of the cost of insurance, taxes,
maintenance and utilities. We generally cannot cancel these
leases at our option.
|
|
ITEM 3.
|
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.
24
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information and Dividends
Our common stock is quoted on the Nasdaq Global Select Market
under the symbol LULU and on the Toronto Stock
Exchange under the symbol LLL. Prior to
July 27, 2007, there was no public market for our common
stock. The following tables sets forth, for the periods
indicated, the high and low sales prices of our common stock
reported by the Nasdaq Global Select Market.
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|
|
|
|
|
|
Common Stock Price
|
|
|
|
(Nasdaq Global Select Market)
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ending February 3, 2008
|
|
|
|
|
|
|
|
|
Second Quarter (from July 27, 2007)
|
|
$
|
34.17
|
|
|
$
|
24.92
|
|
Third Quarter
|
|
$
|
60.70
|
|
|
$
|
28.70
|
|
Fourth Quarter
|
|
$
|
51.94
|
|
|
$
|
25.00
|
|
As of February 3, 2008, there were approximately 60 holders
of record of our common stock.
We have never declared or paid any cash dividends on our common
stock and do not anticipate paying any cash dividends on our
common stock in the foreseeable future. We anticipate that we
will retain all of our available funds for use in the operation
and expansion of our business. Any future determination as to
the payment of cash dividends will be at the discretion of our
board of directors and will depend on our financial condition,
operating results, current and anticipated cash needs, plans for
expansion and other factors that our board of directors
considers to be relevant. In addition, financial and other
covenants in any instruments or agreements that we enter into in
the future may restrict our ability to pay cash dividends on our
common stock.
Stock
Performance Graph
The graph set forth below compares the cumulative total
stockholder return on our common stock between July 27,
2007 (the date of our initial public offering) and
February 3, 2008, with the cumulative total return of
(i) the S&P 500 Index and (ii) S&P Apparel
Retail Index, over the same period. This graph assumes the
investment of $100 on July 27, 2007 in our common stock,
the S&P 500 Index and the S&P 500 Apparel Retail Index
and assumes the reinvestment of dividends, if any. The graph
assumes the initial value of our common stock on July 27,
2007 was the closing sales price of $28.00 per share.
The comparisons shown in the graph below are based on historical
data. We caution that the stock price performance showing in the
graph below is not necessarily indicative of, nor is it intended
to forecast, the potential
25
future performance of our common stock. Information used in the
graph was obtained from the Nasdaq website, a source believed to
be reliable, but we are not responsible for any errors or
omissions in such information.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27-Jul-07
|
|
|
31-Jul-07
|
|
|
31-Oct-07
|
|
|
3-Feb-08
|
|
|
lululemon athletica inc.
|
|
$
|
100.00
|
|
|
$
|
114.79
|
|
|
$
|
190.07
|
|
|
$
|
124.64
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
101.03
|
|
|
$
|
100.03
|
|
|
$
|
95.65
|
|
S&P Apparel Retail Index
|
|
$
|
100.00
|
|
|
$
|
99.26
|
|
|
$
|
95.20
|
|
|
$
|
87.67
|
|
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 approximately $26.9 million of
the net proceeds for capital expenditures, including new store
openings, and inventory purchases. The remainder of the net
proceeds have been utilized as temporary investments in cash and
cash equivalents.
The following table provides information regarding our
repurchases of our common stock during our fourth fiscal quarter
ended February 3, 2008:
Issuer
Purchase of Equity Securities
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
May Yet Be
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
the Plans
|
|
Period(1)
|
|
Purchased
|
|
|
per Share
|
|
|
or Programs(2)
|
|
|
or Programs(2)
|
|
|
November 1, 2007 November 30, 2007
|
|
|
1,131
|
|
|
$
|
56.60
|
|
|
|
1,131
|
|
|
|
2,998,869
|
|
December 1, 2007 December 31, 2007
|
|
|
1,335
|
|
|
|
46.33
|
|
|
|
1,335
|
|
|
|
2,997,534
|
|
January 1, 2008 February 3, 2008
|
|
|
3,101
|
|
|
|
32.17
|
|
|
|
3,101
|
|
|
|
2,994,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,567
|
|
|
|
|
|
|
|
5,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Monthly information is presented by reference to our fiscal
months during our fourth quarter of fiscal 2007. |
26
|
|
|
(2) |
|
Our Employee Share Purchase Plan (ESPP) was approved by our
Board of Directors and stockholders in September 2007. All
shares purchased under the ESPP will be purchased on the Toronto
Stock Exchange or the Nasdaq Global Select Market (or such other
stock exchange as we may designate from time to time). Unless
our Board of Directors terminates the ESPP earlier, the ESPP
will continue until all shares authorized for purchase under the
ESPP have been purchased. The maximum number of shares available
for issuance under the ESPP is 3,000,000. |
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The selected consolidated financial data set forth below are
derived from our consolidated financial statements and should be
read in conjunction with our consolidated financial statements
and the related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this
Form 10-K.
The consolidated statement of income data for each of the years
ended January 31, 2006, January 31, 2007, and
February 3, 2008 and the consolidated balance sheet data as
of January 31, 2007, and February 3, 2008 are derived
from, and qualified by reference to, our audited consolidated
financial statements and related notes appearing elsewhere in
this annual report. The consolidated statement of income data
for the years ended January 31, 2004 and January 31,
2005 and the consolidated balance sheet data as of
January 31, 2004, January 31, 2005 and
January 31, 2006 are derived from our underlying accounting
records. The consolidated statements of income for the years
ended January 31, 2004 and January 31, 2005 and
balance sheets for the years ended January 31, 2004,
January 31, 2005 and January 31, 2006 have been
prepared on the same basis as our audited consolidated financial
statements and, in the opinion of management, contain all
adjustments necessary to fairly present the information set
forth below.
We completed a corporate reorganization on July 26, 2007.
The financial data below reflects our operations as if the
reorganization had occurred prior to the first period presented.
Refer to note 10 of the financial statements appearing
elsewhere in this
Form 10-K
for further details related to the reorganization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
18,188
|
|
|
$
|
40,748
|
|
|
$
|
84,129
|
|
|
$
|
148,885
|
|
|
$
|
274,713
|
|
Cost of goods sold(1)
|
|
|
8,748
|
|
|
|
19,448
|
|
|
|
41,177
|
|
|
|
72,903
|
|
|
|
128,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,439
|
|
|
|
21,300
|
|
|
|
42,952
|
|
|
|
75,982
|
|
|
|
146,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses(1)
|
|
|
4,896
|
|
|
|
10,840
|
|
|
|
26,416
|
|
|
|
52,540
|
|
|
|
96,177
|
|
Principal stockholder bonus
|
|
|
3,782
|
|
|
|
12,134
|
|
|
|
12,809
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
761
|
|
|
|
(1,674
|
)
|
|
|
3,727
|
|
|
|
16,213
|
|
|
|
50,125
|
|
Interest expense (income), net
|
|
|
4
|
|
|
|
35
|
|
|
|
(4
|
)
|
|
|
(94
|
)
|
|
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
|
757
|
|
|
|
(1,709
|
)
|
|
|
3,730
|
|
|
|
16,307
|
|
|
|
50,979
|
|
Provision for (recovery of) income tax
|
|
|
437
|
|
|
|
(298
|
)
|
|
|
2,336
|
|
|
|
8,753
|
|
|
|
20,471
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112
|
)
|
|
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
319
|
|
|
$
|
(1,411
|
)
|
|
$
|
1,394
|
|
|
$
|
7,666
|
|
|
$
|
30,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.46
|
|
Diluted income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.45
|
|
Basic weighted-average number of shares outstanding
|
|
|
33,845,394
|
|
|
|
33,845,394
|
|
|
|
38,724,287
|
|
|
|
65,156,625
|
|
|
|
66,430,022
|
|
Diluted weighted-average number of shares outstanding
|
|
|
33,845,394
|
|
|
|
33,845,394
|
|
|
|
38,724,287
|
|
|
|
65,303,839
|
|
|
|
69,297,878
|
|
27
|
|
|
(1) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
January 31,
|
|
January 31,
|
|
January 31,
|
|
January 31,
|
|
February 3,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
(In thousands)
|
|
Cost of goods sold
|
|
$
|
|
|
|
$
|
|
|
|
$
|
755
|
|
|
$
|
360
|
|
|
$
|
743
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
1,945
|
|
|
|
2,282
|
|
|
|
5,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,700
|
|
|
$
|
2,642
|
|
|
$
|
5,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
January 31,
|
|
January 31,
|
|
January 31,
|
|
January 31,
|
|
February 3,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
(In thousands)
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
433
|
|
|
$
|
7
|
|
|
$
|
3,877
|
|
|
$
|
16,029
|
|
|
$
|
53,339
|
|
Total assets
|
|
|
2,323
|
|
|
|
11,448
|
|
|
|
41,914
|
|
|
|
72,293
|
|
|
|
155,092
|
|
Long term debt
|
|
|
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
419
|
|
|
|
810
|
|
|
|
28,052
|
|
|
|
37,379
|
|
|
|
112,034
|
|
28
|
|
ITEM 7.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with the Selected Consolidated Financial Data
section and our consolidated financial statements and related
notes appearing elsewhere in this Annual Report on
Form 10-K.
In addition, this discussion and analysis contains
forward-looking statements based on current expectations that
involve risks, uncertainties and assumptions, such as our plans,
objectives, expectations and intentions set forth in the
Special Note Regarding Forward-Looking Statements.
Our actual results and the timing of events may differ
materially from those anticipated in these forward looking
statements as a result of various factors, including those set
forth in the Item 1A Risk Factors
section and elsewhere in this Annual Report on
Form 10-K.
Certain tables may not sum due to rounding.
Overview
We believe lululemon is one of the fastest growing designers and
retailers of technical athletic apparel in North America.
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 February 3, 2008, our
branded apparel was principally sold through 81 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. In fiscal 2006, 87.1% of our net revenue was derived from
sales of our products in Canada, 11.7% of our net revenue was
derived from the sales of our products in the United States and
1.2% of our net revenue was derived from sales of our products
in Australia and Japan. In fiscal 2007, 79.5% of our net revenue
was derived from sales of our products in Canada, 19.4% of our
net revenue was derived from the sales of our products in the
United States and 1.1% of our net revenue was derived from sales
of our products in Australia and Japan.
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 will end on the
first Sunday following January 30th in the year
following the year mentioned.
Our net revenue has grown from $40.7 million in fiscal 2004
to $274.7 million in fiscal 2007. This represents a
compound annual growth rate of 88.9%. Our net revenue also
increased from $148.9 million in fiscal 2006 to
$274.7 million in fiscal 2007, representing an 84.5%
increase. 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 and 31 retail locations
in fiscal 2007, and strong comparable store sales growth of 19%,
25% and 34% in fiscal 2005, fiscal 2006 and fiscal 2007,
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
recently increased our focus on our mens apparel line,
which increased 69% in fiscal 2007 compared to fiscal 2006 and
represented approximately 11% of net revenue in fiscal 2006 and
10% of net revenue in fiscal 2007, and our accessories business,
which represented approximately 9% and 10% of net revenue for
each of fiscal 2006 and fiscal 2007, respectively.
The two most important drivers of our future net revenue,
earnings and cash flow growth are the successful expansion of
our corporate-owned store base and increases in comparable store
sales. Though we expect continued growth in net revenues, we
expect our growth rate to decline in the future relative to the
rate of growth we have experienced in historical periods as
incremental revenue is measured against a larger revenue base.
Moreover, we expect a significant portion of our new store
growth to be concentrated in the United States. Future
comparable store sales growth will depend on our ability to
continue to attract and retain motivated corporate- and
store-level employees that are passionate about the lululemon
athletica vision. Other external factors that could affect our
net revenue, earnings and cash flows include fluctuations in
currency exchange rates and general economic conditions in our
target markets.
29
lululemon was founded in 1998 by Dennis Chip Wilson
in Vancouver, Canada. We initially conducted our operations
through our Canadian operating company, lululemon athletica
canada inc. In 2002, in connection with our expansion into the
United States, we formed a sibling operating company to conduct
our U.S. operations, lululemon usa inc. Both operating
companies were wholly-owned by affiliates of Mr. Wilson. In
December 2005, Mr. Wilson sold 48% of his interest in
lululemon to a group of private equity investors led by Advent
International Corporation and Highland Capital Partners. Prior
to this time, Mr. Wilson was our sole stockholder. Pursuant
to the terms of the December 2005 transaction, we formed
lululemon athletica inc. (formerly known as Lululemon Corp. and
before that as Lulu Holding, Inc.) to serve as a holding company
for all of our related entities, including our two primary
operating companies lululemon usa inc. and lululemon athletica
canada inc. We completed the initial public offering of our
common stock on July 26, 2007.
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 in fiscal 2005, 14.3% in
fiscal 2006 and 6.6% in fiscal 2007. Opening new franchise
stores is not a significant part of our near-term growth
strategy, and we therefore expect that if the revenue derived
from our franchise stores continues to comprise less than 10% of
the net revenue we report in future fiscal years, we will
re-evaluate our segment reporting disclosures. Our other
operations accounted for less than 10% of our revenues in each
of fiscal 2005, fiscal 2006 and fiscal 2007.
As of February 3, 2008, we sold our products through 71
corporate-owned stores located in Canada, the United States and
Japan. Most of our corporate-owned stores are located in North
America, with only four corporate-owned stores located in Japan.
As previously disclosed, we plan to discontinue our operations
in Japan. We plan to increase our net revenue in North America
by opening additional corporate-owned stores in new and existing
markets. Corporate-owned stores net revenue accounted for 81.1%
of total net revenue in fiscal 2006 and 88.7% of total net
revenue in fiscal 2007.
As of February 3, 2008, we also had seven franchise stores
located in North America and three franchise stores located in
Australia. In the past, we have entered into franchise
agreements to distribute lululemon athletica branded products to
more quickly disseminate our brand name and increase our net
revenue and net income. In exchange for the use of our brand
name and the ability to operate lululemon athletica stores in
certain regions, our franchisees generally pay us a one-time
franchise fee and ongoing royalties based on their gross
revenue. Additionally, unless otherwise approved by us, our
franchisees are required to sell only lululemon athletica
branded products, which are purchased from us at a discount to
the suggested retail price. Pursuing new franchise partnerships
or opening new franchise stores is not a significant part of our
near-term store growth strategy. In some cases, we may exercise
our contractual rights to purchase franchises where it is
attractive to us. Franchises net revenue accounted for 14.3% of
total net revenue in fiscal 2006 and 6.6% of total net revenue
in fiscal 2007.
We believe that our athletic apparel has and will continue to
appeal to consumers outside of North America who value its
technical attributes as well as its function and style. In 2004,
we opened our first franchise store in Australia. In the third
quarter of fiscal 2007, we opened our second franchise store in
Australia, and in the fourth quarter of fiscal 2007 we opened
our third franchise store in Australia. We intend to convert the
Australian franchise operations into a joint venture
partnership. In 2005, we opened a franchise store in Japan. In
2006, we terminated our franchise arrangement and entered into a
joint venture agreement with Descente Ltd, or Descente, a global
leader in fabric technology, to operate our stores in Japan.
This joint venture company is named Lululemon Japan Inc. As of
February 3, 2008, we operated four stores through Lululemon
Japan Inc. that we plan to close.
In addition to deriving revenue from sales through our
corporate-owned stores and our franchises, we also derive other
net revenue, which includes the sale of our products directly to
wholesale customers, telephone sales to retail customers,
including related shipping and handling charges, warehouse sales
and sales through a limited number of company-operated
showrooms. Wholesale customers include select premium yoga
studios, health clubs and fitness centers. Telephone sales are
taken directly from retail customers through our call center.
Warehouse sales are typically held one or more times a year to
sell slow moving inventory or inventory from prior seasons to
retail customers at discounted prices. Our showrooms are
typically small locations that we open from time to time
30
when we enter new markets and feature a limited selection of our
product offering during select hours. Other net revenue
accounted for 4.6% of total net revenue in fiscal 2006 and 4.7%
of total net revenue in fiscal 2007.
We believe that a number of trends relevant to our industry have
affected our results and may continue to do so. Specifically, we
believe that there is an increasing appreciation for the health
benefits of yoga and related fitness activities in our markets
and that women, our primary customers, are increasingly
embracing an active healthy lifestyle. As such, we believe that
participation in yoga and related fitness activities will
continue to grow. There is also an increasing demand for
technical athletic apparel relative to traditional athletic
apparel, and we believe that more people are wearing technical
apparel in casual environments to create a healthy lifestyle
perception. The duration and extent of these trends, however, is
unknown, and adverse changes in these trends may negatively
impact our net revenue, earnings or cash flows.
Basis of
Presentation
Net revenue is comprised of:
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corporate-owned store net revenue, which includes sales to
customers through corporate-owned stores (including stores
operated by our majority-owned joint venture);
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franchises net revenue, which consists of licensing fees and
royalties as well as sales of our products to
franchises; and
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other net revenue, which includes sales to wholesale accounts,
telephone sales, including related shipping and handling
charges, warehouse sales and sales from company-operated
showrooms;
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in each case, less returns and discounts.
Comparable store sales reflects net revenue at
corporate-owned stores that have been open for at least
12 months. Therefore, net revenue from a store is included
in comparable store sales beginning with the first month for
which the store has a full month of comparable prior year sales.
Comparable store sales includes stores that have been remodeled
or relocated and stores operated by our majority-owned joint
venture. Non-comparable store sales include sales from new
stores that have not been open for 12 months, sales from
showrooms, and sales from stores that were closed within the
past 12 months.
By measuring the change in year-over-year net revenue in stores
that have been open for 12 months or more, comparable store
sales allows us to evaluate how our core store base is
performing. Various factors affect comparable store sales,
including:
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the location of new stores relative to existing stores;
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consumer preferences, buying trends and overall economic trends;
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our ability to anticipate and respond effectively to customer
preferences for technical athletic apparel;
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competition;
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changes in our merchandise mix;
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pricing;
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the timing of our releases of new merchandise and promotional
events;
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the effectiveness of our grassroots marketing efforts;
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the level of customer service that we provide in our stores;
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our ability to source and distribute products
efficiently; and
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the number of stores we open, close (including for temporary
renovations) and expand in any period.
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As we continue our store expansion program, we expect that a
greater percentage of our net revenue will come from
non-comparable store sales. Opening new stores is an important
part of our growth strategy. Accordingly,
31
comparable store sales has limited utility for assessing the
success of our growth strategy insofar as comparable store sales
do not reflect the performance of stores open less than
12 months.
Cost of goods sold includes:
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the cost of purchased merchandise, inbound freight, duty and
non-refundable taxes incurred in delivering goods to our
distribution centers;
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the cost of our production, merchandise and design departments
including salaries, stock-based compensation and benefits, and
operating expenses;
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the cost of occupancy related to store operations (such as rent
and utilities) and the depreciation and amortization related to
store-level capital expenditures;
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the cost of our distribution centers (such as rent and
utilities) as well as other fees we pay to third parties to
operate our distribution centers and the depreciation and
amortization related to our distribution centers;
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the cost of outbound freight and handling costs incurred upon
shipment of merchandise; and
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shrink and valuation reserves.
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Cost of goods sold also may change as we open or close stores
because of the resulting change in related occupancy costs. The
primary drivers of the costs of individual goods are the costs
of raw materials and labor in the countries where we source our
merchandise. In fiscal 2006 and fiscal 2007, cost of goods sold
included $0.4 million and $0.7 million, respectively,
of charges related to stock-based compensation. We anticipate
that our cost of goods sold will increase in absolute dollars
but will remain relatively stable as a percentage of net revenue.
Our selling, general and administrative expenses consist
of all operating costs not otherwise included in cost of goods
sold, principal stockholder bonus or settlement of lawsuit. Our
selling, general and administrative expenses include marketing
costs, accounting costs, information technology costs,
professional fees, corporate facility costs, corporate and
store-level payroll and benefits expenses including stock-based
compensation (other than the salaries and benefits and
stock-based compensation for our production, merchandise and
design departments included in cost of goods sold and other
corporate costs). In fiscal 2006 and fiscal 2007, selling,
general and administrative expenses included $2.6 million
and $5.2 million, respectively, of charges related to
stock-based compensation. Our selling, general and
administrative expenses also include depreciation and
amortization expense for all assets other than depreciation and
amortization expenses related to store-level capital
expenditures and our distribution centers, each of which are
included in cost of goods sold. We anticipate that our selling,
general and administrative expenses for will increase in
absolute dollars due to anticipated continued growth of our
corporate support staff and store-level employees.
Principal stockholder bonus consists of annual bonus
payments paid to Mr. Wilson prior to December 2005. These
bonuses were paid to Mr. Wilson as our sole stockholder and
were in an amount equal to our Canadian taxable income for the
year above a particular threshold. For Canadian income tax
purposes, these payments were fully taxable to Mr. Wilson
as ordinary income and fully deductible by us as a compensation
expense. Following his sale of 48% of his interest in lululemon
to a group of private equity investors in December 2005, these
payments to Mr. Wilson were discontinued.
Settlement of lawsuit consists of a payment we made in
February 2007 in the amount of $7.2 million to a third
party website developer arising from the termination of a profit
sharing arrangement associated with our retail website for our
products. We accrued for the entire settlement amount in fiscal
2006.
Stock-based compensation expense includes charges
incurred in recognition of compensation expense associated with
grants of stock options, grants of restricted stock units, and
stock purchases. In December 2005, we adopted the fair
value recognition and measurement provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)). SFAS 123(R) is applicable to
stock-based awards exchanged for employee services and in
certain circumstances for non-employee directors. We recognize
stock-based compensation expense for both awards granted by us
and awards granted under a stockholder sponsored plan. Pursuant
to SFAS 123(R), stock-based compensation expense is
measured at the grant date, based on the fair value of the award
and is recognized as an expense over the requisite service
period.
32
Prior to our initial public offering in July 2007, the fair
value of the shares of common stock that underlie the stock
options we granted was determined by our board of directors. Our
board of directors determined a valuation of lululemon as of
April 30, 2006. The valuation was calculated based upon the
equity value implied by the December 2005 transaction in
which Mr. Wilson sold 48% of his interest in lululemon to a
group of private equity investors for approximately
$193.3 million. At the time, our board of directors
believed the December 2005 transaction was a valid indication of
fair value because the terms of the December 2005 transaction
were the result of arms-length negotiations among independent
parties. Because there had been no public market for our common
stock, our board used this valuation to determine the fair value
of our common stock at the time of grant of the options.
In connection with the preparation of the financial statements
necessary for our initial public offering and based in part on
discussions with prospective underwriters for the planned
offering, in March 2007 we reassessed the estimated accounting
fair value as of January 2007 of common stock in light of the
potential completion of the initial public offering. After
reviewing its valuation, our board of directors determined that
the valuation would not be appropriate for valuing the options
as the valuation did not fully consider requirements under
SFAS 123(R) and other relevant regulatory guidelines,
specifically:
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the valuation did not coincide with the option grant
dates; and
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the valuation incorrectly included a minority interest discount.
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As a result, management determined that it would be necessary to
retrospectively calculate a new valuation for the July 2006
option grants. For determining the value of the July 2006 option
grants, our board of directors prepared a valuation based upon
our sales and earnings multiples implied by the December 2005
transaction. In determining the reassessed fair value of the
common stock, we determined it appropriate to consider
operational achievements in executing against the operating plan
and market trends. Because of the impact the achievement of
unique milestones had on the valuation during the various points
in time before the reassessment, certain additional adjustments
for factors unique to us were considered in the reassessed
values determined for the July 2006 option grants, which
impacted valuations throughout these periods. These included the
following:
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in July 2006, management and our board of directors did not
believe an initial public offering was possible in the near
future because the board of directors was still in the process
of augmenting the management team and enhancing infrastructure
related to expanding our operations into the United States;
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in July 2006, we had only seven stores in the United States,
four of which were located in California, and, because of our
limited experience outside of Canada, there was still
uncertainty that our stores would be successful in the United
States and that management would be able to identify suitable
markets and retail sites; and
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throughout 2006, we were in the process of identifying suitable
off-shore manufacturers with the necessary quality standards and
capacity to satisfy our current and future manufacturing needs;
this process involved meaningful risk requiring significant
management focus and attention as well as additional management
resources.
|
During this process, management also determined that it would be
necessary to retrospectively calculate a new valuation for the
December 2006 and January 2007 option grants. Due to the
proximity of the December 2006 and January 2007 option grants to
a potential initial public offering, our board of directors
determined that it was necessary to use a different valuation
methodology for these grants. Our board of directors believed
then that an initial public offering could be completed as soon
as April 30, 2007 and that a forward-looking valuation
based on our projected sales and earnings potential was
appropriate. The decision to apply forward-looking valuation
metrics was based in part on discussions with potential
underwriters, and our board of directors understanding
that the public markets generally use a forward-looking
valuation.
From the date of the January 2007 stock option grants to the
date of our initial public offering in July 2007, we continued
to experience increased growth and improved performance. Our
board of directors believed that the
33
valuation implied by our then-estimated initial public offering
share price was greater than the December 2006 and January 2007
grants as a result of these and the factors set forth below.
Such factors included:
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in the third and fourth quarter of 2006, we appointed both a
Chief Financial Officer and a Chief Operating Officer with past
public company roles in similar capacities;
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net revenue growth in fiscal 2006 was 77%, to
$148.9 million, compared to net revenue in fiscal 2005 of
$84.1 million;
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net revenue, income from operations and net income for the first
quarter of fiscal 2007 increased 58.9%, 12.0%, and 11.3%,
respectively, from the first quarter of fiscal 2006,
outperforming managements internal estimates;
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favorable exchange rate movement between the U.S. dollar
and the Canadian dollar in the first
five-and-a-half
months of fiscal 2007, which was anticipated to have a positive
impact on income from operations in fiscal 2007;
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the positive performance of the U.S. equity markets and
continued strong equity valuations for high growth companies
during such portion of fiscal 2007; and
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from February 1, 2007 to the date of our initial public
offering, we opened 11 new stores.
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Based upon the reassessment, we determined that the accounting
fair value of the options granted to employees from
February 1, 2006 to January 31, 2007 was greater than
the exercise price for certain of those options. The comparison
of the originally determined fair value and reassessed fair
value is as follows for all dates on which an option was
granted, assuming that our corporate reorganization had occurred
and using the initial public offering price of $18.00 per share:
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Initial
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Original
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Number of
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Public
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Fair Value
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Reassessed
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Options
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Exercise
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Offering
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Assessment
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Fair Value
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Grant Date
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Granted
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Price
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Price
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of Options
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of Options
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July 3, 2006
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2,899,186
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$
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0.58
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$
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18.00
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$
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0.33
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|
$
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0.91
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|
December 6, 2006
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5,955
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$
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0.58
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$
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18.00
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$
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0.33
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$
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8.09
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|
December 27, 2006
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1,309,008
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$
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0.58
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$
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18.00
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|
$
|
0.33
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|
|
$
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8.09
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|
January 3, 2007
|
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357,335
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|
$
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0.58
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$
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18.00
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$
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0.33
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|
$
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8.09
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Based upon the reassessment discussed above, we determined the
reassessed accounting fair value of the options to purchase
4,571,484 shares of common stock granted to employees
during the period from February 1, 2006 to January 31,
2007 ranged from $0.91 to $8.09 per share. As a result of the
reassessed fair value of our grants of stock options, the
aggregate fair value of our stock options increased by
$14.6 million.
Stock-based compensation expense for the year ended
January 31, 2007 includes the difference between the
reassessed accounting fair value per share of the common stock
on the date of grant and the exercise price per share and is
amortized over the vesting period of the underlying options
using the straight-line method. There are significant judgments
and estimates inherent in the determination of the reassessed
accounting fair values. For this and other reasons, the
reassessed accounting fair value used to compute the stock-based
compensation expense may not be reflective of the fair market
value that would result from the application of other valuation
methods, including accepted valuation methods for tax purposes.
We record our stock-based compensation expense in cost of goods
sold and selling, general and administrative expenses as
stock-based awards have been made to employees whose salaries
are classified in both expense categories. As of
February 3, 2008, we had options to purchase
4,772,349 shares of our common stock outstanding with a
weighted-average exercise price of $2.74 per share, 745,985 of
which were exercisable as of February 3, 2008. As of
February 3, 2008, we had 10,458 shares or restricted
stock outstanding, none of which had vested as of
February 3, 2008. Additionally, prior to our initial public
offering, each of LIPO Investments (USA) Inc., or LIPO USA,
and LIPO Investments (Canada) Inc., or LIPO Canada, had granted
to some of our employees restricted stock of those entities and
options to purchase shares of stock in those entities. LIPO USA
and LIPO Canada, the sole assets of which were, at the time of
our initial public offering, a 52% interest in lululemon, were
entities controlled by Mr. Wilson. As part of our corporate
reorganization, LIPO Canada became a wholly-owned subsidiary
34
of Lulu Canadian Holding, Inc. and subsequently amalgamated
(i.e., merged) with Lulu Canadian Holding, Inc. to become one
entity. LIPO USA continues to be controlled by Mr. Wilson.
Accordingly, we recognize a stock-based compensation expense for
the restricted stock and options granted by those entities. As
of February 3, 2008, pursuant to SFAS 123(R), there
was $18.4 million of total unrecognized stock-based
compensation expense, of which we expect to amortize
$7.3 million in fiscal 2008 and the remainder thereafter.
Interest income includes interest earned on our cash
balances. We expect to continue to generate interest income to
the extent that our cash generated from operations exceeds our
cash used for investment.
Interest expense includes interest costs associated with
our credit facilities and with letters of credit drawn under
these facilities for the purchase of merchandise. We have
maintained relatively small outstanding balances on our credit
facilities and expect to continue to do so.
Provision for income tax depends on the statutory tax
rates in the countries where we sell our products. Historically
we have generated taxable income in Canada and we have generated
tax losses in the United States. As of February 3, 2008, we
had $2.8 million of federal net operating loss
carryforwards available to reduce future taxable income in the
United States. These tax operating loss carryforwards begin to
expire in 2023. These annual limitations may result in the
expiration of net operating loss carryforwards before they may
be used. For the period up to and including the second quarter
of fiscal 2007, we recorded a full valuation allowance against
our losses in the United States. In the third and fourth
quarters of fiscal 2007, we earned taxable income in the United
States. However, we continue to record a full valuation
allowance against our losses and other tax assets in the
United States due to uncertainties surrounding our ability
to generate future taxable income to realize these assets.
Several factors have contributed to our effective tax rate in
recent periods being significantly higher than our anticipated
long-term effective tax rate. First, in fiscal 2005, fiscal 2006
and fiscal 2007, we generated losses in the United States which
we were unable to offset against our income in Canada for tax
purposes. Second, in fiscal 2005, fiscal 2006 and fiscal 2007 we
incurred stock-based compensation expense of $2.7 million,
$2.8 million and $5.9 million, respectively, a potion
of which were not deductible for tax purposes in Canada and the
United States during these periods. The impact of these losses
and non-deductible expenses on our effective tax rate was
exacerbated in fiscal 2005 by the payment of a bonus to our
principal stockholder in that period. Prior to
December 2005 our sole stockholder, Mr. Wilson,
received a bonus payout each year representing a substantial
percentage of our earnings before income taxes. Following
Mr. Wilsons sale of 48% of his interest in lululemon
to a group of private equity investors in December 2005 we
discontinued this practice. Payments of these bonuses therefore
were eliminated in fiscal 2006 from $12.8 million in fiscal
2005. This payment in fiscal 2005 significantly decreased our
income before income taxes in this period and accordingly
resulted in us realizing a higher effective tax rate in this
period as we gave effect to the non-deductible nature of the
losses and the stock-based compensation expenses. Our effective
tax rate in fiscal 2007 was 40.2%, compared to 53.7% in fiscal
2006 and 62.6% in fiscal 2005.
In addition, we anticipate that in the future we may start to
sell our products directly to some customers located outside of
Canada, the United States and Japan, in which case we would
become subject to taxation based on the foreign statutory rates
in the countries where these sales take place and our effective
tax rate could fluctuate accordingly.
Internal
Controls
The process of improving our internal controls has required and
will continue to require us to expend significant resources to
design, implement and maintain a system of internal controls
that is adequate to satisfy our reporting obligations as a
public company. There can be no assurance that any actions we
take will be completely successful. We will continue to evaluate
the effectiveness of our disclosure controls and procedures and
internal control over financial reporting on an on-going basis.
We have begun to document our internal control procedures in
order to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. Section 404 requires annual
management assessments of the effectiveness of our internal
control over financial reporting and a report by our independent
auditors relating to our internal control over financial
reporting. We must comply with Section 404 no later than
the time we file our annual
35
report for fiscal 2008 with the SEC. As part of this process,
we may identify specific internal controls as being deficient.
We anticipate retaining additional personnel to assist us in
complying with our Section 404 obligations.
Results
of Operations
The following tables summarize key components of our results of
operations for the periods indicated, both in dollars and as a
percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
84,129
|
|
|
$
|
148,885
|
|
|
$
|
274,713
|
|
Cost of goods sold
|
|
|
41,177
|
|
|
|
72,903
|
|
|
|
128,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,952
|
|
|
|
75,982
|
|
|
|
146,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
26,416
|
|
|
|
52,541
|
|
|
|
96,177
|
|
Principal stockholder bonus
|
|
|
12,809
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,727
|
|
|
|
16,213
|
|
|
|
50,125
|
|
Interest expense (income), net
|
|
|
(3
|
)
|
|
|
(94
|
)
|
|
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
3,730
|
|
|
|
16,307
|
|
|
|
50,979
|
|
Provision for income tax
|
|
|
2,336
|
|
|
|
8,753
|
|
|
|
20,471
|
|
Non-controlling interest
|
|
|
|
|
|
|
(112
|
)
|
|
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,394
|
|
|
$
|
7,666
|
|
|
$
|
30,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(% of net revenue)
|
|
|
Net revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
48.9
|
|
|
|
49.0
|
|
|
|
46.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
51.1
|
|
|
|
51.0
|
|
|
|
53.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
31.4
|
|
|
|
35.3
|
|
|
|
35.0
|
|
Principal stockholder bonus
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4.4
|
|
|
|
10.9
|
|
|
|
18.3
|
|
Interest expense (income), net
|
|
|
(0.0
|
)
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
4.4
|
|
|
|
11.0
|
|
|
|
18.6
|
|
Provision for income tax
|
|
|
2.8
|
|
|
|
5.9
|
|
|
|
7.5
|
|
Non-controlling interest
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.7
|
|
|
|
5.1
|
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Comparison
of Fiscal 2007 to Fiscal 2006
Net
Revenue
Net revenue increased $125.8 million, or 84.5%, to
$274.7 million in fiscal 2007 from $148.9 million in
fiscal 2006. This increase was primarily the result of increased
comparable store sales, sales from new stores opened, and the
strengthening of the average exchange rate for the Canadian
dollar against the U.S. dollar during the period. Assuming
the average exchange rate between the Canadian and United States
dollars in fiscal 2006 remained constant, our net revenue would
have increased $108.2 million, or 72.7%, in fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
120,733
|
|
|
$
|
243,560
|
|
Franchises
|
|
|
21,360
|
|
|
|
18,141
|
|
Other
|
|
|
6,792
|
|
|
|
13,012
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
148,885
|
|
|
$
|
274,713
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $122.8 million, or
101.7%, to $243.6 million in fiscal 2007 from
$120.7 million in fiscal 2006. The following contributed to
the $122.8 million increase in net revenue from our
corporate-owned stores segment:
|
|
|
|
|
Comparable store sales growth of 34% in fiscal 2007 contributed
$39.6 million, or 32.2%, of the increase. Assuming the
average exchange rate between the Canadian and U.S. dollar
in fiscal 2006 remained constant, our comparable store sales
would have increased 24% in fiscal 2007 and contributed
$28.6 million, or 23.3%, 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.
|
|
|
|
New stores opened during fiscal 2007 contributed
$29.8 million, or 24.3%, of the increase. During fiscal
2007, we opened 28 corporate-owned stores, consisting of five in
Canada, 21 in the United States, and two in Japan.
|
|
|
|
New stores opened during fiscal 2006 prior to sales from such
stores becoming part of our comparable store sales base
contributed $28.1 million, or 22.9%, of the increase. This
consisted of seven stores in Canada, five stores in the United
States and two stores in Japan.
|
|
|
|
The acquisition of three Calgary franchise stores in April 2007
contributed $22.8 million, or 18.6%, of the increase.
|
|
|
|
The inclusion of three additional days in our fiscal year in
order to align our year-end to a 52/53 week fiscal year
contributed an additional $2.5 million.
|
Franchises. Net revenue from our franchises
segment decreased $3.3 million, or 15.1%, to
$18.1 million in fiscal 2007 from $21.4 million in
fiscal 2006. The decrease in net revenue from our franchises
segment consisted primarily of franchises net revenue of
$9.7 million that shifted to corporate-owned stores net
revenue when we acquired three franchise stores in Calgary. This
was partially offset by increased franchise revenue of
$6.5 million from our remaining franchise locations and one
new franchise location in the United States and one new location
in Australia.
Other. Net revenue from our other segment
increased $6.2 million, or 91.6%, to $13.0 million in
fiscal 2007 from $6.8 million in fiscal 2006. The following
contributed to the $6.2 million increase in net revenue
from our other segment:
|
|
|
|
|
warehouse sales revenue increased $2.2 million;
|
|
|
|
|
|
new and existing wholesale accounts contributed
$1.7 million of the increase;
|
37
|
|
|
|
|
showroom sales revenue increased $1.7 million; and
|
|
|
|
phone sale revenue accounted for $0.6 million of the
increase.
|
Gross
Profit
Gross profit increased $70.3 million, or 92.5%, to
$146.3 million in fiscal 2007 from $76.0 million in
fiscal 2006. The increase in gross profit was driven principally
by:
|
|
|
|
|
an increase of $122.8 million in net revenue from our
corporate-owned stores segment; and
|
|
|
|
an increase of $6.2 million in net revenue from our other
segment.
|
This amount was partially offset by:
|
|
|
|
|
an increase in product costs of $38.9 million associated
with our sale of goods through corporate-owned stores,
franchises and other segments;
|
|
|
|
an increase in occupancy costs of $8.0 million related to
an increase in corporate-owned stores;
|
|
|
|
an increase of $3.4 million in expenses related to our
production, design and merchandising departments;
|
|
|
|
an increase in depreciation of $3.2 million primarily
related to an increase in the number of corporate-owned stores;
|
|
|
|
a decrease in franchise revenue of $3.2 million related to
our acquisition of three franchise locations in Calgary;
|
|
|
|
a net decrease in the raw materials provision of
$0.7 million and an increase of $0.2 million in
finished goods provision recorded in current period from the
comparative period; and
|
|
|
|
an increase of $2.2 million in expenses related to
distribution costs as a result of increased production to
support our growth.
|
Gross profit as a percentage of net revenue, or gross margin,
increased 2.3%, to 53.3% in fiscal 2007 from 51.0% in fiscal
2006. The increase in gross margin resulted from:
|
|
|
|
|
a reduction in product costs as a percentage of net revenue that
contributed to an increase in gross margin of 1.9%, primarily
related to our acquisition of three franchise stores in Calgary;
|
|
|
|
a decrease in expenses related to our production, design and
distribution departments (including stock-based compensation
expense) as a percentage of net revenue in fiscal 2007 compared
to fiscal 2006, which contributed to an increase in gross margin
of 0.4%; and
|
|
|
|
a decrease in occupancy costs as a percentage of net revenue
that contributed to an increase in gross margin of 0.1%.
|
This amount was partially offset by an increase in store
depreciation expense as a percentage of net revenue in fiscal
2007 compared to fiscal 2006 as a result of new store openings
in new markets, which contributed to a decrease in gross margin
of 0.2%.
Our costs of goods sold in fiscal 2007 and fiscal 2006 included
$0.7 million and $0.4 million, respectively, of
stock-based compensation expense.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$43.6 million, or 83.1%, to $96.2 million in fiscal
2007 from $52.5 million in fiscal 2006. As a percentage of
net revenue, selling, general and administrative expenses
decreased 0.3%, to 35.0%, in 2007 from 35.3% in 2006. Of the
$43.6 million increase in selling, general and
administrative expenses:
|
|
|
|
|
$17.1 million resulted from an increase in store employee
compensation related to opening additional corporate-owned
stores;
|
38
|
|
|
|
|
$8.1 million resulted from an increase in corporate
compensation principally due to hiring of additional employees
to support our growth;
|
|
|
|
$10.5 million resulted from an increase in other store
operating expenses primarily related to an increase of
$4.0 million in distribution costs, $1.6 million in
credit card fees, $1.3 million in supplies,
$1.2 million in packaging costs, $0.9 million in
marketing costs, $0.6 million in repairs and maintenance,
$0.3 million in communications costs, $0.2 million in
meals and entertainment, $0.1 million in insurance costs,
and $0.1 million in professional fees;
|
|
|
|
$5.5 million resulted from an increase in other corporate
expenses such as travel expenses and rent associated with
corporate facilities;
|
|
|
|
$2.9 million resulted from an increase in stock-based
compensation expense; and
|
|
|
|
a foreign exchange loss of $0.7 million.
|
This amount was partially offset by a decrease in professional
fees of $1.1 million.
Our selling, general and administrative expenses in fiscal 2007
and fiscal 2006 included $5.2 million and
$2.5 million, respectively, of stock-based compensation
expense.
Income
from Operations
Income from operations increased $33.9 million, or 209.2%,
to $50.1 million in 2007 from $16.2 million in 2006.
The increase of $33.9 million in income from operations for
fiscal 2007 was primarily due to a $70.3 million increase
in gross profit resulting from increased comparable store sales
and additional sales from corporate-owned stores opened during
fiscal 2006 and fiscal 2007, partially offset by an increase of
$43.6 million in selling, general and administrative
expenses and the settlement of a lawsuit in fiscal 2006 of
$7.2 million.
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, merchandise and distribution
departments have been allocated to this segment.
Income from operations (before general corporate expenses) from:
|
|
|
|
|
our corporate-owned stores segment increased $41.3 million,
or 109.3%, to $79.1 million for fiscal 2007 from
$37.8 million for fiscal 2006 primarily due to an increase
in corporate-owned stores gross profit of $69.0 million,
offset by an increase of $17.1 million in store employee
expenses and an increase of $10.6 million in other store
expenses;
|
|
|
|
our franchises segment decreased $1.9 million, or 17.8%, to
$8.8 million in fiscal 2007 from $10.7 million in
fiscal 2006 primarily as a result of franchises income from
operations of $4.5 million included in the comparative
period shifting to corporate-owned stores income from operations
when we acquired three franchise stores in Calgary, partially
offset by increased franchise income from operations of
$2.6 million from our remaining franchise
locations; and
|
|
|
|
our other segment increased $3.3 million, or 118.1%, to
$6.0 million in fiscal 2007 from $2.7 million in
fiscal 2006 primarily due to an increase in revenue of
$6.2 million, offset by an increase of $3.0 million in
product costs.
|
Income from operations also includes general corporate expenses.
General corporate expenses increased $13.0 million, or
52.3%, to $37.9 million in fiscal 2007 from
$24.9 million in fiscal 2006 primarily due to an increase
in corporate employee costs of $8.1 million, an increase in
depreciation and amortization expense of $0.6 million, and
an increase in other corporate expenses of $5.5 million,
partially offset by a $1.1 million decrease in professional
fees.
39
Interest
Income
Interest income increased $0.9 million, to
$1.0 million in fiscal 2007 from $0.1 million in
fiscal 2006 due to higher average cash balances.
Interest
Expense
Interest expense increased $0.2 million, to
$0.2 million in fiscal 2007 from nil in fiscal 2006 due to
higher average borrowings on our line of credit.
Provision
for Income Taxes
Provision for income taxes increased $11.7 million, to
$20.5 million in fiscal 2007 from $8.8 million in
fiscal 2006. In fiscal 2007, our effective tax rate was 40.2%
compared to 53.7% in fiscal 2006. In both fiscal 2006 and fiscal
2007, we generated losses in the United States which we were
unable to offset against our income in Canada for tax purposes.
In fiscal 2006 and fiscal 2007, we also incurred stock-based
compensation expenses of $2.6 million and
$5.9 million, respectively, a portion of which were not
deductible for tax purposes during these periods.
Net
Income
Net income increased $23.2 million, to $30.8 million
in fiscal 2007 from $7.7 million in fiscal 2006. The
increase in net income of $23.2 million in fiscal 2007 was
a result of an increase in gross profit of $70.3 million
resulting from increased comparable store sales, additional
sales from corporate-owned stores opened and the strengthening
of the average rate for the Canadian dollar against the
U.S. dollar during the period, offset by increases in
selling, general and administrative expenses of
$43.6 million and an increase of $11.7 million in
provision for income taxes.
Comparison
of Fiscal 2006 to Fiscal 2005
Net
Revenue
Net revenue increased $64.8 million, or 77.0%, to
$148.9 million in fiscal 2006 from $84.1 million in
fiscal 2005. This increase was the result of increased
comparable store sales, sales from new stores opened in fiscal
2005 and fiscal 2006, higher franchises net revenues and the
strengthening of the average exchange rate for the Canadian
dollar against the U.S. dollar during the year. Assuming
the average exchange rate between the Canadian and
U.S. dollar in fiscal 2005 remained constant, our net
revenue would have increased $58.1 million, or 69.0%, in
fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
65,577
|
|
|
$
|
120,733
|
|
Franchises
|
|
|
14,555
|
|
|
|
21,360
|
|
Other
|
|
|
3,997
|
|
|
|
6,792
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
84,129
|
|
|
$
|
148,885
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $55.2 million, or
84.1%, to $120.7 million in fiscal 2006 from
$65.6 million in fiscal 2005. The following contributed to
the $55.2 million increase in net revenue from our
corporate-owned stores segment:
|
|
|
|
|
New stores opened during fiscal 2005 prior to sales from such
stores becoming part of our comparable store sales base
contributed $22.2 million, or 40.3%, of the increase.
During fiscal 2005, we opened 13 corporate-owned stores,
consisting of 12 in Canada and one in the United States.
|
40
|
|
|
|
|
New stores opened during fiscal 2006 contributed
$16.7 million, or 30.3%, of the increase. During fiscal
2006, we opened 13 corporate-owned stores, consisting of seven
in Canada, five in the United States and one in Japan.
|
|
|
|
Comparable store sales in fiscal 2006 contributed
$16.2 million, or 29.4%, of the increase. Assuming the
average exchange rate between the Canadian and the
U.S. dollar in fiscal 2005 remained constant, our
comparable store sales would have increased $12.8 million
or 20% in fiscal 2006. The increase in comparable store sales on
a constant currency basis 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 increased $6.8 million, or 46.8%, to
$21.4 million in fiscal 2006 from $14.6 million in
fiscal 2005. Of the $6.8 million increase in net revenue
from our franchises segment, $4.4 million, or 64.1%, of the
increase resulted from sales of goods to franchise stores and
$2.4 million, or 35.9%, of the increase resulted from an
increase in royalty revenue. During fiscal 2006, two franchise
stores were opened and two franchise stores were converted to
corporate-owned stores.
Other. Net revenue from our other segment
increased $2.8 million, or 69.9%, to $6.8 million in
fiscal 2006 from $4.0 million in fiscal 2005. The following
contributed to the $2.8 million increase in net revenue
from our other segment:
|
|
|
|
|
warehouse and showroom sales accounted for $2.1 million, or
73.7%, of the increase due to four warehouse sales in fiscal
2006 compared to one new warehouse sale in fiscal 2005 and three
showrooms open at the end of fiscal 2006 compared to one
showroom open at the end of fiscal 2005;
|
|
|
|
phone sale revenue accounted for $0.5 million, or 17.9%, of
the increase; and
|
|
|
|
new wholesale accounts at fitness clubs and yoga studios in the
United States accounted for $0.2 million, or 8.4%, of the
increase.
|
Gross
Profit
Gross profit increased $33.0 million, or 76.9%, to
$76.0 million in fiscal 2006 from $43.0 million in
fiscal 2005. The increase in gross profit was driven principally
by:
|
|
|
|
|
an increase of $55.2 million in net revenue from our
corporate-owned stores segment;
|
|
|
|
an increase of $6.8 million in net revenue from our
franchises segment; and
|
|
|
|
an increase of $2.8 million net revenue from in our other
segment.
|
This amount was partially offset by:
|
|
|
|
|
an increase in product costs of $22.2 million associated
with our sale of goods through corporate-owned stores,
franchises and other segments;
|
|
|
|
an increase in occupancy costs of $6.1 million due to
higher occupancy costs in new markets;
|
|
|
|
an increase of $1.9 million in expenses related to our
production, design and distribution departments (including
stock-based compensation expense) principally due to the hiring
of additional employees to support our growth, partially offset
by the absence in fiscal 2006 of the cash bonus paid to
employees in fiscal 2005 in conjunction with our
recapitalization; and
|
|
|
|
an increase in depreciation of $1.6 million related to
opening new corporate-owned stores.
|
Gross profit as a percentage of net revenue, or gross margin,
decreased 0.1%, to 51.0%, in fiscal 2006 from 51.1% in fiscal
2005. The decrease in gross margin resulted from:
|
|
|
|
|
higher occupancy costs in new markets that contributed to a
decrease in gross margin of 2.1%; and
|
|
|
|
an increase in depreciation that contributed to a decrease in
gross margin of 0.3% related to opening new corporate-owned
stores.
|
41
The factors that led to a decrease in gross margin were offset
by:
|
|
|
|
|
a decrease in product costs as a percentage of net revenue that
contributed to an increase in gross margin of 0.7% due to an
increase in pricing to our franchises and wholesale customers,
partially offset by an increased percentage of our net revenue
being derived from our oqoqo and factory outlet stores,
which generate lower gross margins than our other
corporate-owned stores, and a short-term increase in expenses
during our transition to the use of more off-shore
manufacturers; and
|
|
|
|
a decrease in expenses related to our production, design and
distribution departments (including stock-based compensation
expense) as a percentage of net revenue from fiscal 2005 to
fiscal 2006 which contributed to an increase in gross margin of
1.6%.
|
Our costs of goods sold in fiscal 2006 and fiscal 2005 included
$0.4 million and $0.8 million, respectively, of
stock-based compensation expense.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$26.1 million, or 98.9%, to $52.5 million in fiscal
2006 from $26.4 million in fiscal 2005. As a percentage of
net revenue, selling, general and administrative expenses
increased 3.9%, to 35.3% in 2006 from 31.4% in 2005. Of the
$26.1 million increase in selling, general and
administrative expenses:
|
|
|
|
|
$7.8 million, or 29.9%, resulted from an increase in store
employee compensation related to opening additional
corporate-owned stores;
|
|
|
|
$5.1 million, or 19.4%, resulted from an increase in
consulting fees paid to third parties to analyze and implement
new accounting and logistics processes and from an increase in
fees associated with retaining professional search firms in
connection with identifying qualified senior management
candidates;
|
|
|
|
$4.6 million, or 17.7%, resulted from an increase in
corporate compensation principally due to hiring of additional
employees to support our growth, partially offset by the absence
in fiscal 2006 of the cash bonus paid to employees in fiscal
2005 in conjunction with our recapitalization;
|
|
|
|
$3.9 million, or 15.1%, resulted from an increase in other
corporate expenses such as travel expenses and rent associated
with corporate facilities;
|
|
|
|
$3.6 million, or 13.7%, resulted from an increase in other
store operating expenses such as supplies, packaging, and credit
card fees; and
|
|
|
|
$0.6 million, or 2.1%, resulted from an increase in
depreciation resulting from our move into a new corporate
headquarters at the beginning of fiscal 2006.
|
Our selling, general and administrative expenses in fiscal 2006
and fiscal 2005 included $2.5 million and
$1.9 million, respectively, of stock-based compensation
expense.
Principal
Stockholder Bonus
There was no principal stockholder bonus in fiscal 2006 due to
the termination of the payment of a principal stockholder bonus
at the end of fiscal 2005 as part of the stockholders sale
of 48% of his interest in us to a group of private equity
investors. Principal stockholder bonus was $12.8 million in
fiscal 2005.
Settlement
of Lawsuit
In February 2007, we settled a lawsuit with a third-party
website developer arising from the termination of a profit
sharing arrangement associated with our retail website for our
products. In connection with the settlement, we paid
$7.2 million in fiscal 2007, all of which was accrued in
fiscal 2006. We did not incur any similar material liabilities
during fiscal 2005.
42
Income
from Operations
The increase of $12.5 million in income from operations in
fiscal 2006 was primarily due to a $33.0 million increase
in gross profit resulting from increased comparable store sales
and additional sales from corporate-owned stores opened during
fiscal 2005 and fiscal 2006, and a $12.8 million decline in
our principal stockholder bonus, partially offset by an increase
of $26.1 million in selling, general and administrative
expenses and the payment of $7.2 million in connection with
a lawsuit settlement in fiscal 2006.
On a segment basis, we determine income from operations without
taking into account the payment of our principal stockholder
bonus fiscal 2005, the settlement of a lawsuit in fiscal 2006
and 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 $17.0 million,
or 82.2%, to $37.8 million in fiscal 2006 from
$20.7 million in fiscal 2005 primarily due to an increase
in corporate-owned stores gross profit of $28.4 million,
offset by an increase of $7.8 million in store employee
expenses and an increase of $3.6 million in other store
expenses;
|
|
|
|
our franchises segment increased $3.4 million to
$10.7 million in fiscal 2006 from $7.3 million in
fiscal 2005 primarily due to an increase of $2.4 million in
royalty revenue and an increase of $0.9 million in gross
profit associated with our sale of our products to
franchises; and
|
|
|
|
our other segment increased $1.3 million to
$2.7 million in fiscal 2006 from $1.5 million in
fiscal 2005 primarily due to an increase in revenue of
$2.8 million, offset by an increase of $1.5 million in
product costs.
|
Total income from operations also includes general corporate
expenses. General corporate expenses increased
$9.2 million, or 35.5%, to $35.0 million in fiscal
2006 from $25.8 million in fiscal 2005 primarily due to a
lawsuit settlement of $7.2 million in fiscal 2006, an
increase of $5.1 million in consulting and recruiting fees,
an increase of $4.6 million in corporate employee costs, an
increase of $3.9 million in other corporate expenses and an
increase of $0.6 million in depreciation and amortization
expense, partially offset by a $12.8 million decrease in
our principal stockholder bonus.
Interest
Income
Interest income increased to $141,736 in fiscal 2006 from
$54,562 in fiscal 2005 due to higher average cash balances.
Interest
Expense
Interest expense remained relatively constant at $47,348 in
fiscal 2006 from $51,020 in fiscal 2005.
Provision
for Income Taxes
Provision for income taxes increased $6.5 million, to
$8.8 million in fiscal 2006 from $2.3 million in
fiscal 2005. In fiscal 2006, our effective tax rate was 53.7%
compared to 62.6% in fiscal 2005. In both fiscal 2005 and fiscal
2006, we generated losses in the United States which we were
unable to offset against our income in Canada for tax purposes.
In fiscal 2005 and fiscal 2006, we also incurred stock-based
compensation expenses of $2.7 million and
$2.8 million, respectively, which were not deductible for
tax purposes during these periods. The impact of these losses
and non-deductible expenses on our effective tax rate was
exacerbated in fiscal 2005 by the payment of a bonus to our
principal stockholder in that period. Prior to December 2005 our
sole stockholder, Mr. Wilson, received a bonus payout each
year representing a substantial percentage of our earnings
before income taxes. We discontinued this practice following
Mr. Wilsons sale of 48% of his interest in lululemon
to a group of private equity investors in December 2005.
Payments of these bonuses therefore decreased to nil in fiscal
2006 from $12.8 million in fiscal 2005. This payment in
fiscal 2005 dramatically decreased our income before income
taxes in
43
this period and accordingly resulted in us realizing a higher
effective tax rate in this period as we gave effect to the
non-deductible nature of the losses and the stock-based
compensation expenses.
Net
Income
Net income increased $6.3 million, to $7.7 million in
fiscal 2006 from $1.4 million in fiscal 2005. The increase
in net income of $6.3 million in fiscal 2006 was a result
of an increase in gross profit of $33.0 million resulting
from increased comparable store sales and additional sales from
corporate-owned stores opened during fiscal 2005 and fiscal 2006
and the elimination of our principal stockholder bonus in fiscal
2006, which accounted for an expense of $12.8 million in
fiscal 2005, offset by increases in selling, general and
administrative expenses of $26.1 million, the payment of
$7.2 million in connection with a lawsuit settlement in
fiscal 2006, and an increase of $6.5 million in provision
for income taxes. Our cost of goods sold and selling, general
and administrative expenses in fiscal 2006 and fiscal 2005
included $2.8 million and $2.7 million of stock-based
compensation expense, respectively.
Seasonality
In fiscal 2005, fiscal 2006 and fiscal 2007, we recognized over
35% of our net revenue in the fourth quarter due to significant
increases in sales during the holiday season. We recognized 37%,
35% and 39% of our full year gross profit in the fourth quarter
in fiscal 2005, fiscal 2006 and fiscal 2007, respectively.
Despite the fact that we have experienced a significant amount
of our net revenue and gross profit in the fourth quarter of our
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.
The level of our working capital reflects the seasonality of our
business. We expect inventory, accounts payable and accrued
expenses to be higher in the third and fourth quarters in
preparation for the holiday selling season. Because our products
are sold primarily through our stores, order backlog is not
material to our business.
Liquidity
and Capital Resources
Our cash requirements are principally for working capital and
capital expenditures, principally 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
during this period for our holiday selling season. Historically,
our main sources of liquidity have been cash flow from operating
activities, borrowings under our existing and previous revolving
credit facilities, and proceeds from equity offerings, including
our initial public offering.
As of February 3, 2008, our working capital (excluding cash
and cash equivalents) was $8.7 million and our cash and
cash equivalents was $53.3 million.
44
The following table presents the major components of net cash
flows provided by and used in operating, investing and financing
activities for the periods indicated.
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net income for the period
|
|
$
|
1,394
|
|
|
$
|
7,666
|
|
|
$
|
30,842
|
|
Items not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,466
|
|
|
|
4,619
|
|
|
|
8,341
|
|
Deferred income taxes
|
|
|
(175
|
)
|
|
|
(3,077
|
)
|
|
|
1,799
|
|
Stock-based compensation expense
|
|
|
2,700
|
|
|
|
2,830
|
|
|
|
5,947
|
|
Non-controlling interest
|
|
|
10
|
|
|
|
563
|
|
|
|
(334
|
)
|
Loss on property and equipment
|
|
|
|
|
|
|
230
|
|
|
|
|
|
Changes in non-cash working capital items
|
|
|
(17,379
|
)
|
|
|
13,293
|
|
|
|
(8,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used by) operating activities
|
|
$
|
(10,984
|
)
|
|
$
|
26,124
|
|
|
$
|
38,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities consist primarily of net income
adjusted for certain non-cash items, including depreciation and
amortization, deferred income taxes, realized gains and losses
on property and equipment, stock-based compensation expense and
the effect of the changes in non-cash working capital items,
principally accounts receivable, inventories, accounts payable
and accrued expenses.
In fiscal 2007, cash provided by operating activities increased
$12.6 million, to $38.1 million compared to cash
provided by operating activities of $25.4 million in fiscal
2006. The $12.6 million increase was primarily a result of:
|
|
|
|
|
an increase in net income of $23.2 million to
$30.8 million in fiscal 2007 compared to $7.7 million
in fiscal 2006; and
|
|
|
|
an increase in items not affecting cash of $11.3 million
consisting of an increase of $4.9 million in deferred
income taxes, an increase of $3.1 million in stock-based
compensation expense, and an increase of $3.7 million in
depreciation and amortization, offset by a decrease in
non-controlling interest related to our joint venture in Japan
of $0.2 million.
|
This amount was partially offset by a net decrease in the change
in other working capital balances of $21.8 million
primarily due to:
|
|
|
|
|
a net decrease in the change in income taxes payable of
$12.1 million;
|
|
|
|
a net decrease in accrued liabilities of $10.6 million;
|
|
|
|
a net increase in the change in inventories of $6.6 million;
|
|
|
|
a net increase in the change in tenant inducement receivable of
$2.4 million; and
|
|
|
|
a net increase in prepaid expenses of $2.2 million.
|
These amounts were offset by:
|
|
|
|
|
a net increase in the change in other current liabilities of
$5.5 million;
|
|
|
|
a net decrease in tenant inducements received of
$2.3 million;
|
|
|
|
a net decrease in the change in accounts receivable of
$1.3 million;
|
|
|
|
a net decrease in related party receivables of
$1.2 million;
|
|
|
|
a net increase in the change in trade accounts payable of
$1.2 million; and
|
|
|
|
a net decrease in other current assets of $0.5 million.
|
45
Depreciation and amortization relate almost entirely to
leasehold improvements, furniture and fixtures, computer
hardware and software, equipment and vehicles in our stores and
other corporate buildings.
Depreciation and amortization increased $3.7 million to
$8.3 million in fiscal 2007 from $4.6 million in
fiscal 2006. Depreciation for our corporate-owned store segment
was $6.2 million, $3.1 million and $1.5 million
in fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
Depreciation related to corporate activities was
$2.1 million, $1.1 million and $0.5 million in
fiscal 2007, fiscal 2006 and fiscal 2005, respectively. We have
not allocated any depreciation to our franchises or other
segments as these amounts to date have been immaterial.
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Purchase of property and equipment
|
|
$
|
(7,144
|
)
|
|
$
|
(12,838
|
)
|
|
$
|
(29,676
|
)
|
Acquisition of franchises
|
|
|
(461
|
)
|
|
|
(512
|
)
|
|
|
(5,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
$
|
(7,605
|
)
|
|
$
|
(13,350
|
)
|
|
$
|
(35,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities relate entirely to capital
expenditures and acquisitions of franchises.
Cash used in investing activities increased $21.9 million,
to $35.2 million in fiscal 2007 from $13.3 million in
fiscal 2006. This increase in cash used in investing activities
represents an increase in the number of new stores as well as
store improvements on a larger store base. Capital expenditures
for our corporate-owned stores segment were $20.7 million
in fiscal 2007 which included $17.0 million to open 28
stores (not including one acquired franchise store),
$11.3 million in fiscal 2006, which included
$7.5 million to open 13 stores (not including one acquired
franchise store), $6.1 million in fiscal 2005, which
included $5.3 million to open 13 stores, and
$2.8 million in fiscal 2004, which included
$2.3 million to open seven stores. The remaining capital
expenditures for our corporate-owned stores segment in each
period were for ongoing store refurbishment. Capital
expenditures related to corporate activities and administration
were $9.0 million, $2.0 million, $2.3 million and
$1.0 million in fiscal 2007, fiscal 2006, fiscal 2005 and
fiscal 2004, respectively. The capital expenditures in each
period for corporate activities and administration were for
improvements at our head office and other corporate buildings as
well as investments in information technology. There were no
capital expenditures associated with our franchises and other
segments. In fiscal 2005, fiscal 2006 and fiscal 2007, we
purchased our franchises in Whistler, British Columbia for
$0.5 million, Portland, Oregon for $0.5 million, and
Calgary, Alberta for $5.6 million, respectively.
Capital expenditures are expected to aggregate approximately
$36 million in fiscal 2008, including approximately
$18 million to $21 million for approximately 35 new
stores, approximately $8 million for information technology
enhancements, approximately $7 million for the build-out of
our new corporate headquarters, and the remainder for ongoing
store maintenance and for corporate activities. This does not
include capital expenditures for our internet retail website
which we expect to launch in late 2008 or early 2009.
46
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Capital stock issued for cash
|
|
$
|
93,037
|
|
|
$
|
446
|
|
|
$
|
38,350
|
|
Payment of initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
(6,992
|
)
|
Distribution to principal stockholder
|
|
|
(69,005
|
)
|
|
|
|
|
|
|
|
|
Proceeds from credit facility
|
|
|
|
|
|
|
|
|
|
|
1,455
|
|
Repayment of credit facility
|
|
|
|
|
|
|
|
|
|
|
(1,455
|
)
|
Repayment of long-term debt
|
|
|
(634
|
)
|
|
|
|
|
|
|
|
|
Amounts received from related party
|
|
|
|
|
|
|
|
|
|
|
564
|
|
Cash received on exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Funds received from principal stockholder loan
|
|
|
7,832
|
|
|
|
222
|
|
|
|
|
|
Funds repaid on principal stockholder loan
|
|
|
(11,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
$
|
20,087
|
|
|
$
|
668
|
|
|
$
|
31,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities consist primarily of capital stock
issued for cash and the related issuance costs, distributions to
principal stockholder, repayment of long-term debt, funds
received from and repaid on stockholder loan and changes in bank
indebtedness. Cash provided by financing activities increased
$31.3 million, to $32.0 million in fiscal 2007 from
$0.7 million in fiscal 2006. The increase in cash provided
by financing activities was primarily due to a
$38.4 million issuance of capital stock as part of our
initial public offering, offset by offering costs of
$7.0 million, in fiscal 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 entered into an uncommitted senior secured
demand revolving credit facility with Royal Bank of Canada. The
revolving credit facility provides us with available borrowings
in an amount up to CDN$20.0 million. The revolving credit
facility must be repaid in full on demand and is available by
way of prime loans in Canadian currency, U.S. base rate
loans in U.S. currency, bankers acceptances, LIBOR
based loans in U.S. currency or Euro currency, letters of
credit in Canadian currency or U.S. currency and letters of
guaranty in Canadian currency or U.S. currency. The
revolving credit facility bears interest on the outstanding
balance in accordance with the following: (i) prime rate
for prime loans; (ii) U.S. base rate for
U.S. based loans; (iii) a fee of 1.125% per annum on
bankers acceptances; (iv) LIBOR plus 1.125% per annum
for LIBOR based loans; (v) a 1.125% annual fee for letters
of credit; and (vi) a 1.125% annual fee for letters of
guaranty. Both lululemon usa inc. and lululemon FC USA inc.,
Inc. provided Royal Bank of Canada with guarantees and
postponements of claims in the amounts of CDN$20.0 million
with respect to lululemon athletica canada inc.s
obligations under the revolving credit facility. The revolving
credit facility is also secured by all of our present and after
acquired personal property, including all intellectual property
and all of the outstanding shares we own in our subsidiaries. As
of February 3, 2008, aside from the letters of credit and
guarantees, we had no borrowings outstanding under this credit
facility.
Contractual
Obligations and Commitments
Leases. We lease certain retail locations,
storage spaces, building and equipment under non-cancelable
operating leases. Our leases generally have initial terms of
between five and 10 years, and generally can be extended
47
only in five-year increments (at increased rates) if at all. Our
leases expire at various dates between 2008 and 2019, excluding
extensions at our option. A substantial number of our leases for
retail premises include renewal options and certain of our
leases include rent escalation clauses, rent holidays and
leasehold rental incentives, none of which are reflected in the
following table. Most of our leases for retail premises also
include contingent rental payments based on sales volume, the
impact of which also are not reflected in the following table.
The following table summarizes our contractual arrangements as
of February 3, 2008, and the timing and effect that such
commitments are expected to have on our liquidity and cash flows
in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year Ending
|
|
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Operating Leases (minimum
rent)*
|
|
$
|
175,105
|
|
|
$
|
17,114
|
|
|
$
|
20,539
|
|
|
$
|
19,707
|
|
|
$
|
18,037
|
|
|
$
|
17,952
|
|
|
$
|
81,756
|
|
|
|
|
* |
|
Includes $250, $250, $250 and $270 for each of the years ended
January 31, 2009, 2010, 2011 and thereafter for one store
lease which was terminated on May 15, 2007. |
Franchise Agreements. As of February 3,
2008, we operated seven stores in North America and three stores
in Australia through franchise agreements. Under the terms of
our franchise agreements, unless otherwise approved by us,
franchisees are permitted to sell only lululemon athletica
products, are required to purchase their inventory from us,
which we sell at a slight premium to our cost, and are required
to pay us a royalty based on a percentage of their gross sales.
Additionally, under some of our franchise agreements, we have
the ability to repurchase franchises at a price equal to a
specified percentage of trailing
12-month
sales. Pursuant to one of our franchise agreements, the
franchisee has the right to sell his interest in the franchise
back to us by June 2008. As of February 3, 2008, if the
franchisee elected to sell his interest in the franchise to us,
our repurchase costs for this franchise would have been
approximately $0.6 million.
During the year ended January 31, 2007, we and a franchisee
mutually terminated our franchise agreement. The franchisee had
commenced operations during the prior year. We paid the
franchisee a negotiated amount of $527,590 that was recognized
as a loss on the termination of the agreement and charged to
selling, general and administrative expenses. The amount
represented compensation for working capital that we abandoned
and the return of the initial franchise fee of $10,000.
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 February 3, 2008, letters of credit and
letters of guaranty totaling $2.4 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.
Commencing July 7, 2003, our principal stockholder,
Mr. Wilson, held an interest in a company that manufactured
finished goods exclusively for us. Mr. Wilson sold his
interest in this manufacturing company in December 2006. As a
result of the relationships between us, Mr. Wilson and the
manufacturing company, we had a variable interest in the
manufacturing company. We have concluded that we were not the
primary beneficiary of this variable interest entity, and we
have not consolidated the entity. The assets, liabilities,
results of operations and cash flows of the manufacturing
company have not been included in our consolidated financial
statements. We were not exposed directly or indirectly to any
losses of the manufacturing company. Following
Mr. Wilsons sale of his interests in the
manufacturing company in December 2006, we no longer have a
variable interest in the manufacturing company.
48
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions. Predicting future
events is inherently an imprecise activity and, as such,
requires the use of judgment. Actual results may vary from
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.
We believe that the following critical accounting policies
affect our more significant estimates and judgments used in the
preparation of our consolidated financial statements:
Revenue Recognition. Net revenue is comprised
of corporate-owned store net revenue, which includes sales to
customers through corporate-owned stores (including stores
operated by our majority-owned joint venture), franchise
licensing fees and royalties as well as sales of products to
franchisees, and other net revenue, which includes sales to
wholesale accounts, telephone sales, including related shipping
and handling charges, warehouse sales and sales from
company-operated showrooms, in each case, less returns and
discounts. Sales to customers through corporate-owned stores are
recognized at the point of sale, net of an estimated allowance
for sales returns. Franchise licensing fees and royalties are
recognized when earned, in accordance with the terms of the
franchise/license agreements. Royalties are based on a
percentage of the franchisees sales and recognized when
those sales occur. Franchise fee net revenue arising from the
sale of a franchise is recognized when the agreement has been
signed and all of our substantial obligations have been
completed. Other net revenue, generated by sales to wholesale
accounts, telephone sales, including related shipping and
handling charges, and showroom sales are recognized when those
sales occur, net of an estimated allowance for sales returns.
Other net revenue related to warehouse sales are recognized when
these sales occur. Amounts billed to customers for shipping and
handling are recognized at the time of shipment.
Sales are reported on a net revenue basis, which is computed by
deducting from our gross sales the amount of sales taxes, actual
product returns received, discounts and an amount established
for anticipated sales returns. Our estimated allowance for sales
returns is a subjective critical estimate that has a direct
impact on reported net revenue. This allowance is calculated
based on a history of actual returns, estimated future returns
and any significant future known or anticipated events.
Consideration of these factors results in an estimated allowance
for sales returns. Our standard terms for retail sales limit
returns to approximately 14 days after the sale of the
merchandise. For our wholesale sales, we allow returns from our
wholesale customers if properly requested and approved. Employee
discounts are classified as a reduction of net revenue. We
account for gift cards by recognizing a liability at the time a
gift card is sold, and recognizing net revenue at the time the
gift card is redeemed for merchandise. We review our gift card
liability on an ongoing basis and recognize our estimate of the
unredeemed gift card liability on a ratable basis over the
estimated period of redemption.
Accounts Receivable. Accounts receivable
primarily arise out of sales to wholesale accounts, sales of
products and royalties on sales owed to us by our franchises.
The allowance for doubtful accounts represents managements
best estimate of probable credit losses in accounts receivable.
This allowance is established based on the specific
circumstances associated with the credit risk of the receivable,
the size of the accounts receivable balance, aging of accounts
receivable balances and our collection history and other
relevant information. The allowance for doubtful accounts is
reviewed on a monthly basis. Receivables are charged to the
allowance when management believes the account will not be
recovered.
Inventory. Inventory is valued at the lower of
cost and market. Cost is determined using standard costs, which
approximate the average costs. For finished goods and
work-in-process,
market is defined as net realizable value, and for raw
materials, market is defined as replacement cost. Cost of
inventories includes all costs incurred to deliver inventory to
our distribution centers including freight, duty and other
landing costs. During fiscal 2006, we initiated a new purchasing
strategy that requires our manufacturers to acquire the raw
materials used in the manufacturing of our apparel products.
Because we will no longer be required to acquire these raw
materials, we expect raw materials and work in process
inventories to decline.
49
We periodically review our inventories and make provisions as
necessary to appropriately value obsolete or damaged goods. The
amount of the markdown is equal to the difference between the
book cost of the inventory and its estimated market value based
upon assumptions about future demands, selling prices and market
conditions. In fiscal 2006, we wrote-off $1.0 million of
inventory, and in fiscal 2007 we wrote-off $0.4 million of
inventory.
Property and Equipment. Property and equipment
are recorded at cost less accumulated depreciation. Costs
related to software used for internal purposes are capitalized
in accordance with the provisions of the Statement of Position
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use whereby direct internal and
external costs incurred during the application development stage
or for upgrades that add functionality are capitalized. All
other costs related to internal use software are expensed as
incurred. Leasehold improvements are amortized on a
straight-line basis over the lesser of the length of the lease,
without consideration of option renewal periods and the
estimated useful life of the assets, up to a maximum of five
years. All other property and equipment are amortized using the
declining balance method as follows:
|
|
|
|
|
Furniture and fixtures
|
|
|
20
|
%
|
Computer hardware and software
|
|
|
30
|
%
|
Equipment and vehicles
|
|
|
30
|
%
|
Long-Lived Assets. Long-lived assets held for
use are evaluated for impairment when the occurrence of events
or changes in circumstances indicates that the carrying value of
the assets may not be recoverable as measured by comparing their
net book value to the estimated future cash flows generated by
their use and eventual disposition. Impaired assets are recorded
at fair value, determined principally by discounting the future
cash flows expected from their use and eventual disposition.
Reductions in asset values resulting from impairment valuations
are recognized in earnings in the period that the impairment is
determined. Long-lived assets held for sale are reported at the
lower of the carrying value of the asset and fair value less
cost to sell. Any write-downs to reflect fair value less selling
cost is recognized in income when the asset is classified as
held for sale. Gains or losses on assets held for sale and asset
dispositions are included in selling, general and administrative
expenses.
Income Taxes. We follow the liability method
with respect to accounting for income taxes. Deferred tax assets
and liabilities are determined based on temporary differences
between the carrying amounts and the tax basis of assets and
liabilities. Deferred income tax assets and liabilities are
measured using enacted tax rates that will be in effect when
these differences are expected to reverse. Deferred income tax
assets are reduced by a valuation allowance, if based on the
weight of available positive and negative evidence, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized.
Goodwill and Intangible Assets. Intangible
assets are recorded at cost. Non-competition agreements are
amortized on a straight-line basis over their estimated useful
life of five years. Reacquired franchise rights are amortized on
a straight-line basis over their estimated useful lives of
10 years. Goodwill represents the excess of the purchase
price over the fair market value of identifiable net assets
acquired and is not amortized. Goodwill is tested for impairment
annually or more frequently when an event or circumstance
indicates that goodwill might be impaired. We use our best
estimates and judgment based on available evidence in conducting
the impairment testing. When the carrying amount exceeds the
fair value, an impairment loss is recognized in an amount equal
to the excess of the carrying value over its fair market value.
Stock-Based Compensation. We account for
stock-based compensation using the fair value method as required
by Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share Based
Payments (SFAS 123(R)). The fair value of awards
granted is estimated at the date of grant and recognized as
employee compensation expense on a straight-line basis over the
requisite service period with the offsetting credit to
additional paid-in capital. Our calculation of stock-based
compensation requires us to make a number of complex and
subjective estimates and assumptions, including future
forfeitures, stock price volatility, expected life of the
options and related tax effects. Prior to our initial public
offering, our board of directors determined the estimated fair
value of our common stock on the date of grant based on a number
of factors, most significantly our implied enterprise value
based upon the purchase price of our securities sold in December
2005 pursuant to an arms-length private placement to a group of
private equity investors. The estimation of stock awards that
will ultimately vest requires judgment, and to the extent actual
results differ from our estimates, such amounts will be recorded
as a cumulative adjustment in the period estimates are revised.
We consider several factors when estimating expected
50
forfeitures, such as types of awards, size of option holder
group and anticipated employee retention. Actual results may
differ substantially from these estimates. Expected volatility
of the stock is based on our review of companies we believe of
similar growth and maturity and our peer group in the industry
in which we do business because we do not have sufficient
historical volatility data for our own stock. The expected term
of options granted is derived from the output of the option
valuation model and represents the period of time that options
granted are expected to be outstanding. In the future, as we
gain historical data for volatility in our own stock and the
actual term employees hold our options, expected volatility and
expected term may change which could substantially change the
grant-date fair value of future awards of stock options and,
ultimately, the expense we record. For awards with service
and/or
performance conditions, the total amount of compensation expense
to be recognized is based on the number of awards that are
expected to vest and is adjusted to reflect those awards that do
ultimately vest. For awards with performance conditions, we
recognize the compensation expense over the requisite service
period as determined by a range of probability weighted
outcomes. For awards with market and or performance conditions,
all compensation expense is recognized if the underlying market
or performance conditions are fulfilled. Certain employees are
entitled to share-based awards from one of our stockholders.
These awards are accounted for as employee compensation expense
in accordance with the above noted policies. We commenced
applying SFAS 123(R) when we introduced share based awards
for our employees in the year ended January 31, 2006.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB), issued Statement of Financial Accounting Standards
No. 160 (FAS 160), Noncontrolling Interests in
Consolidated Financial Statements. 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
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 Statement of Financial
Accounting Standard 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.
FAS 159 is effective for the Company beginning
January 1, 2008. The Company is currently evaluating the
impact, if any, that adopting FAS 159 will have on its
consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157, Fair Value
Measurements (FAS 157), which defines fair value,
establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands
disclosures about fair value measurements. FAS 157 is
effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact, if any,
that adopting FAS 157 will have on its consolidated
financial statements.
In June 2006, the FASB issued Financial Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109 (FIN 48), which provides additional guidance
and clarifies the accounting for uncertainty in income tax
positions. FIN 48 defines the threshold for recognizing a
tax return position in the financial statements as more
likely than not that the position is sustainable, based on
its technical merits. FIN 48 also provides guidance on the
measurement, classification and disclosure of tax return
positions in the financial statements. FIN 48 is effective
for the first reporting period beginning after December 15,
2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to the beginning balance of
51
retained earnings in the period of adoption. The adoption of
FIN 48 did not have any effect on the Companys
financial position or results of operation.
|
|
ITEM 7A.
|
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. However, since fiscal 2003, we have opened 25
stores in the United States, three stores in Australia and four
stores in Japan. As a result, 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 revenue upon translation of those results into
U.S. dollars for the purposes of consolidation. The
exchange rate of the Canadian dollar against the
U.S. dollar is currently near a multi-year high. If the
Canadian dollar were to weaken relative to the U.S. dollar,
our net revenue would decline and our income from operations and
net income could be adversely affected. 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 $4.0 million in fiscal 2006 and
approximately $5.4 million in fiscal 2007. 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. The revolving credit
facility provides us with available borrowings in an amount up
to CDN$20.0 million. 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. As of February 3, 2008, we
had no outstanding borrowings under our revolving facility. We
have maintained small outstanding balances during the third and
fourth quarters as we build inventory and working capital for
the holiday selling season, but we do not believe we 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.
Inflation
Inflationary factors such as increases in the cost of our
product and overhead costs may adversely affect our operating
results. Although we do not believe that inflation has had a
material impact on our financial position or results of
operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels
of gross margin and selling, general and administrative expenses
as a percentage of net revenue if the selling prices of our
products do not increase with these increased costs.
52
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
lululemon
athletica inc. and Subsidiaries
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
53
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the board of directors and stockholders of lululemon
athletica inc.
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of lululemon athletica inc. and its
subsidiaries at February 3, 2008 and January 31, 2007
and the results of their operations their cash flows for each of
the three years in the period ended February 3, 2008 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
item 15 (a) (1) present fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our
audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Vancouver, British Columbia
April 4, 2008
54
lululemon
athletica inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,028,534
|
|
|
$
|
53,339,326
|
|
Accounts receivable
|
|
|
2,290,665
|
|
|
|
4,431,556
|
|
Inventories
|
|
|
26,628,113
|
|
|
|
39,092,208
|
|
Prepaid expenses and other current assets
|
|
|
1,022,533
|
|
|
|
1,043,328
|
|
Current deferred taxes
|
|
|
2,522,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,492,743
|
|
|
|
97,906,418
|
|
Property and equipment, net
|
|
|
18,175,944
|
|
|
|
44,038,565
|
|
Goodwill and intangible assets, net
|
|
|
2,951,689
|
|
|
|
8,124,047
|
|
Deferred income taxes
|
|
|
588,397
|
|
|
|
1,124,597
|
|
Other non-current assets
|
|
|
2,084,336
|
|
|
|
3,898,515
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,293,109
|
|
|
$
|
155,092,142
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,935,037
|
|
|
$
|
5,199,604
|
|
Accrued liabilities
|
|
|
11,701,805
|
|
|
|
7,473,205
|
|
Accrued compensation and related expenses
|
|
|
2,816,751
|
|
|
|
7,969,862
|
|
Income taxes payable
|
|
|
9,177,953
|
|
|
|
5,719,820
|
|
Unredeemed gift card liability
|
|
|
3,272,766
|
|
|
|
8,113,972
|
|
Other current liabilities
|
|
|
34,278
|
|
|
|
1,345,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,938,590
|
|
|
|
35,821,551
|
|
Other non-current liabilities
|
|
|
2,023,668
|
|
|
|
6,721,220
|
|
Deferred income taxes
|
|
|
384,354
|
|
|
|
196,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,346,612
|
|
|
|
42,739,309
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
567,699
|
|
|
|
318,824
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value,
5,000,000 shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Exchangeable stock, no par value, 30,000,000 shares
authorized, issued and outstanding 20,935,041 and 20,935,041
|
|
|
|
|
|
|
|
|
Special voting stock, $0.00001 par value,
30,000,000 shares authorized, issued and outstanding
20,935,041 and 20,935,041
|
|
|
209
|
|
|
|
209
|
|
Common stock, $0.01 par value, 200,000,000 shares
authorized, issued and outstanding 44,290,778 and 46,684,700
|
|
|
442,908
|
|
|
|
466,847
|
|
Additional paid-in capital
|
|
|
98,669,641
|
|
|
|
136,004,955
|
|
Accumulated deficit
|
|
|
(60,677,395
|
)
|
|
|
(29,834,956
|
)
|
Accumulated other comprehensive income
|
|
|
(1,056,565
|
)
|
|
|
5,396,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,378,798
|
|
|
|
112,034,009
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,293,109
|
|
|
$
|
155,092,142
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
55
lululemon
athletica inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
84,129,093
|
|
|
$
|
148,884,834
|
|
|
$
|
274,713,328
|
|
Cost of goods sold
|
|
|
41,176,981
|
|
|
|
72,903,112
|
|
|
|
128,411,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,952,112
|
|
|
|
75,981,722
|
|
|
|
146,302,153
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
26,416,262
|
|
|
|
52,539,998
|
|
|
|
96,177,348
|
|
Principal stockholder bonus
|
|
|
12,809,142
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
7,228,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,726,708
|
|
|
|
16,213,414
|
|
|
|
50,124,805
|
|
Interest expense (income), net
|
|
|
(3,542
|
)
|
|
|
(94,388
|
)
|
|
|
(854,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
3,730,250
|
|
|
|
16,307,802
|
|
|
|
50,978,893
|
|
Provision for income tax
|
|
|
2,336,146
|
|
|
|
8,753,336
|
|
|
|
20,470,674
|
|
Non-controlling interest
|
|
|
|
|
|
|
(111,865
|
)
|
|
|
(334,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,394,104
|
|
|
$
|
7,666,331
|
|
|
$
|
30,842,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.46
|
|
Diluted earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.45
|
|
Basic weighted-average number of shares outstanding
|
|
|
38,724,287
|
|
|
|
65,156,625
|
|
|
|
66,430,022
|
|
Diluted weighted-average number of shares outstanding
|
|
|
38,724,287
|
|
|
|
65,303,839
|
|
|
|
69,297,878
|
|
See accompanying notes to the consolidated financial statements
56
lululemon
athletica inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Voting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Exchangeable Stock
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at January 31, 2005*
|
|
|
20,935,041
|
|
|
$
|
|
|
|
|
20,935,041
|
|
|
$
|
209
|
|
|
|
12,910,353
|
|
|
$
|
129,104
|
|
|
$
|
(29,311
|
)
|
|
$
|
(732,703
|
)
|
|
$
|
28,516
|
|
|
$
|
(604,185
|
)
|
Distribution to principal stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,005,127
|
)
|
|
|
|
|
|
|
(69,005,127
|
)
|
December 2005 stock issued for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,242,037
|
|
|
|
312,420
|
|
|
|
92,724,429
|
|
|
|
|
|
|
|
|
|
|
|
93,036,849
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,394,104
|
|
|
|
|
|
|
|
1,394,104
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530,227
|
|
|
|
530,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,924,331
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,699,916
|
|
|
|
|
|
|
|
|
|
|
|
2,699,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2006
|
|
|
20,935,041
|
|
|
|
|
|
|
|
20,935,041
|
|
|
|
209
|
|
|
|
44,152,390
|
|
|
|
441,524
|
|
|
|
95,395,034
|
|
|
|
(68,343,726
|
)
|
|
|
558,743
|
|
|
|
28,051,784
|
|
Stock issued for cash and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,388
|
|
|
|
1,384
|
|
|
|
633,043
|
|
|
|
|
|
|
|
|
|
|
|
634,427
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,666,331
|
|
|
|
|
|
|
|
7,666,331
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,615,308
|
)
|
|
|
(1,615,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,051,023
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,641,564
|
|
|
|
|
|
|
|
|
|
|
|
2,641,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2007
|
|
|
20,935,041
|
|
|
|
|
|
|
|
20,935,041
|
|
|
|
209
|
|
|
|
44,290,778
|
|
|
|
442,908
|
|
|
|
98,669,641
|
|
|
|
(60,677,395
|
)
|
|
|
(1,056,565
|
)
|
|
|
37,378,798
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,842,439
|
|
|
|
|
|
|
|
30,842,439
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,453,519
|
|
|
|
6,453,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,295,958
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,947,097
|
|
|
|
|
|
|
|
|
|
|
|
5,947,097
|
|
Common stock issued for cash net of transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,290,909
|
|
|
|
22,909
|
|
|
|
31,334,598
|
|
|
|
|
|
|
|
|
|
|
|
31,357,507
|
|
Restricted Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,458
|
|
|
|
105
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,555
|
|
|
|
925
|
|
|
|
53,724
|
|
|
|
|
|
|
|
|
|
|
|
54,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
As a result of the reorganization
on July 26, 2007 the par value of the outstanding shares
exceeded the amount of capital stock by $129,104. The excess of
$29,311 has been deducted from the opening balance of Additional
Paid-In Capital.
|
See accompanying notes to the consolidated financial statements
57
lululemon
athletica inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,394,104
|
|
|
$
|
7,666,331
|
|
|
$
|
30,842,439
|
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,466,298
|
|
|
|
4,618,512
|
|
|
|
8,340,732
|
|
Stock-based compensation
|
|
|
2,699,916
|
|
|
|
2,829,572
|
|
|
|
5,947,097
|
|
Deferred income taxes
|
|
|
(174,901
|
)
|
|
|
(3,076,876
|
)
|
|
|
1,798,882
|
|
Loss on property and equipment
|
|
|
|
|
|
|
229,950
|
|
|
|
|
|
Non-controlling interest
|
|
|
10,000
|
|
|
|
(111,865
|
)
|
|
|
(334,220
|
)
|
Other, including net changes in other non-cash balances
|
|
|
(17,379,431
|
)
|
|
|
13,293,190
|
|
|
|
(8,504,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,984,014
|
)
|
|
|
25,448,814
|
|
|
|
38,090,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(7,144,319
|
)
|
|
|
(12,837,820
|
)
|
|
|
(29,675,940
|
)
|
Acquisition of franchises
|
|
|
(460,567
|
)
|
|
|
(511,850
|
)
|
|
|
(5,559,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,604,886
|
)
|
|
|
(13,349,670
|
)
|
|
|
(35,235,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds received from principal stockholder loan
|
|
|
7,831,694
|
|
|
|
222,440
|
|
|
|
|
|
Distribution to principal stockholder
|
|
|
(69,005,127
|
)
|
|
|
|
|
|
|
|
|
Funds repaid on principal stockholder loan
|
|
|
(11,143,141
|
)
|
|
|
|
|
|
|
|
|
Amounts received from joint venture partner
|
|
|
|
|
|
|
|
|
|
|
564,397
|
|
Proceeds from credit facility
|
|
|
|
|
|
|
|
|
|
|
1,454,775
|
|
Repayment of credit facility
|
|
|
|
|
|
|
|
|
|
|
(1,454,775
|
)
|
Repayment of long-term debt
|
|
|
(634,467
|
)
|
|
|
|
|
|
|
|
|
Cash received on exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
54,649
|
|
Capital stock issued for cash
|
|
|
93,036,851
|
|
|
|
446,419
|
|
|
|
38,349,817
|
|
Payment of initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
(6,992,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,085,810
|
|
|
|
668,859
|
|
|
|
31,976,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(271,667
|
)
|
|
|
(616,486
|
)
|
|
|
2,478,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
1,225,243
|
|
|
|
12,151,517
|
|
|
|
37,310,792
|
|
Cash and cash equivalents, beginning of year
|
|
|
2,651,774
|
|
|
|
3,877,017
|
|
|
|
16,028,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
3,877,017
|
|
|
$
|
16,028,534
|
|
|
$
|
53,339,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
58
lululemon
athletica inc. and Subsidiaries
|
|
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 37, 30, four and nil
corporate-owned stores were in operation as at February 3,
2008, respectively. There were 27, 41, and 71 corporate-owned
stores in operation as at January 31, 2006,
January 31, 2007 and February 3, 2008 respectively.
Basis
of presentation
The accompanying consolidated financial statements include the
financial position, results of operations and cash flows of the
Company and its subsidiary companies during the three-year
period ended February 3, 2008. The consolidated financial
statements have been prepared using the U.S. dollar and are
presented in accordance with United States generally accepted
accounting principles (GAAP).
The Company reorganized its corporate structure on July 26,
2007 (note 10). 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. (LIPO).
The Company has experienced, and expects to continue to
experience, significant seasonal variations in net revenue and
income from operations. Seasonal variations in revenue are
primarily related to increased sales of products during the
fiscal fourth quarter, reflecting historical strength in sales
during the holiday season. Historically, seasonal variations in
income from operations have been driven principally by increased
net revenue in the fiscal fourth quarter.
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.
|
|
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of consolidation
The consolidated financial statements include the accounts of
lululemon athletica inc., its wholly-owned subsidiaries and
Lululemon Japan Inc., a 60% controlled joint venture entity. All
inter-company balances and transactions have been eliminated. In
the opinion of management, all adjustments, consisting primarily
of normal recurring accruals, considered necessary for a fair
presentation of the Companys results of operations for the
periods reported and of its financial condition as of the date
of the balance sheet have been included.
Cash
and cash equivalents
Cash and cash equivalents consist of cash on hand, bank balances
and short-term deposits with original maturities of less than
three months. The Company has not experienced any losses related
to these balances, and management believes its credit risk to be
minimal.
59
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts
receivable
Accounts receivable primarily arise out of sales to wholesale
accounts, sales of material, royalties on sales owed to the
Company by its franchisees and landlord tenant inducements. The
allowance for doubtful accounts represents managements
best estimate of probable credit losses in accounts receivable
and is reviewed monthly. Receivables are written off against the
allowance when management believes that the amount receivable
will not be recovered. As at January 31, 2006,
January 31, 2007 and February 3, 2008 the Company
recorded no allowance for doubtful accounts.
Inventories
Inventories, consisting of finished goods, raw materials and
work in process, are stated at the lower of cost and market
value. Cost is determined using standard costs, which
approximate average actual costs. For finished goods and work in
process, market is defined as net realizable value, and for raw
materials, market is defined as replacement cost. Cost of
inventories includes acquisition and production costs including
raw material, labor and an allocation of overhead, as
applicable, and all costs incurred to deliver inventory to the
Companys distribution centers including freight,
non-refundable taxes, duty and other landing costs.
The Company periodically reviews its inventories and makes
provisions as necessary to appropriately value obsolete or
damaged goods. The amount of the provision is equal to the
difference between the cost of the inventory and its estimated
net realizable value based upon assumptions about future demand,
selling prices and market conditions. In addition, as part of
inventory valuations, the Company reviews for inventory
shrinkage based on historical trends from actual physical
inventories. Inventory shrinkage estimates are made to reduce
the inventory value for lost or stolen items. The Company
performs physical inventory counts throughout the year and
adjusts the shrink reserve accordingly.
Property
and equipment
Property and equipment are recorded at cost less accumulated
depreciation. Costs related to software used for internal
purposes are capitalized in accordance with the provisions of
the Statement of Position
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use, whereby direct internal and
external costs incurred during the application development stage
or for upgrades that add functionality are capitalized. All
other costs related to internal use software are expensed as
incurred.
Leasehold improvements are amortized on a straight-line basis
over the lesser of the length of the lease, without
consideration of option renewal periods, and the estimated
useful life of the assets, to a maximum of five years. All other
property and equipment are amortized using the declining balance
method as follows. Amortization commences when an asset is ready
for its intended use.
|
|
|
|
|
Furniture and fixtures
|
|
|
20
|
%
|
Computer hardware and software
|
|
|
30
|
%
|
Equipment and vehicles
|
|
|
30
|
%
|
Goodwill
and intangible assets
Intangible assets are recorded at cost. Non-competition
agreements are amortized on a straight-line basis over their
estimated useful life of five years. Reacquired franchise rights
are amortized on a straight-line basis over their estimated
useful lives of 10 years.
Goodwill represents the excess of the purchase price over the
fair market value of identifiable net assets acquired and is not
amortized, but tested annually for impairment or more frequently
when an event or circumstance indicates that goodwill might be
impaired. The Companys operating segment for goodwill is
its US and Canadian stores.
60
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
of long-lived assets
Long-lived assets held for use are evaluated for impairment when
the occurrence of events or a change in circumstances indicates
that the carrying value of the assets may not be recoverable as
measured by comparing their carrying value to the estimated
future cash flows generated by their use and eventual
disposition. Impaired assets are recorded at fair value,
determined principally by discounting the future cash flows
expected from their use and eventual disposition. Reductions in
asset values resulting from impairment valuations are recognized
in earnings in the period that the impairment is determined.
Long-lived assets held for sale are reported at the lower of the
carrying value of the asset and fair value less cost to sell.
Any write-downs to reflect fair value less selling cost is
recognized in income when the asset is classified as held for
sale. Gains or losses on assets held for sale and asset
dispositions are included in selling, general and administrative
expenses.
Leased
property and equipment
The Company leases retail stores, distribution centers and
administrative offices. Minimum rental payments, including any
fixed escalation of rental payments and rent premiums, are
amortized on a straight-line basis over the life of the lease
beginning on the possession date. Rental costs incurred during a
construction period, prior to store opening, are recognized as
rental expense. The difference between the recognized rental
expense and the total rental payments paid is reflected on the
consolidated balance sheet as a deferred lease liability or a
prepaid lease asset.
Deferred lease inducements, which include leasehold improvements
paid for by the landlord and free rent, are recorded as
liabilities on the consolidated balance sheet and recognized as
a reduction of rent expense on a straight-line basis over the
term of the lease.
Contingent rental payments based on sales volumes are recorded
in the period in which the sales occur.
The Company may be obligated to remove long-lived assets from
leased property. The Company recognizes at fair value a
liability and an asset retirement cost for asset retirement
obligations in the period the obligation is incurred. The asset
retirement cost is included in the cost of the related asset. As
at January 31, 2006, January 31, 2007 and
February 3, 2008 these obligations were not material.
Deferred
revenue
Payments received from franchisees for goods not shipped as well
as receipts from the sale of gift cards are treated as deferred
revenue. Franchise inventory deposits are included in other
current liabilities and recognized as sales when the goods are
shipped. Amounts received in respect of gift cards are recorded
as deferred revenue. When gift cards are redeemed for apparel,
the Company recognizes the related revenue.
Based on historical experience, the Company estimates the value
of gift cards not expected to be redeemed and, to the extent
allowed by local laws, amortizes these amounts into income.
Revenue
recognition
Sales revenue includes sales of apparel to customers through
corporate-owned and operated retail stores, phone sales, sales
through a network of wholesale accounts, initial license and
franchise fees, royalties from franchisees and sales of apparel
to franchisees.
Sales to customers through corporate-owned retail stores and
phone sales are recognized at the point of sale, net of an
estimated allowance for sales returns.
Initial license and franchise fees are recognized when all
material services or conditions relating to the sale of a
franchise right have been substantially performed or satisfied
by the Company, provided collection is reasonably assured.
Substantial performance is considered to occur when the
franchisee commences operations. Franchise
61
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
royalties are calculated as a percentage of franchise sales and
are recognized in the month that the franchisee makes the sale.
Sales of apparel to franchisees and wholesale accounts are
recognized when goods are shipped and collection is reasonably
assured.
All revenues are reported net of sales taxes collected for
various governmental agencies.
Cost
of goods sold
Cost of goods sold includes the cost of merchandise, including
in-bound freight, duty and nonrefundable taxes incurred in
delivering the goods to the Companys distribution centers.
It also includes all occupancy costs such as minimum rent,
contingent rent where applicable, property taxes, utilities and
depreciation expense for the Companys retail locations and
all costs incurred in operating the Companys distribution
centers and production and design departments. Production,
design and distribution center costs include salaries and
benefits as well as operating expenses, which include occupancy
costs and depreciation expense for the Companys
distribution centers.
Store
pre-opening costs
Operating costs incurred prior to the opening of new stores are
expensed as incurred.
Income
taxes
The Company follows the liability method with respect to
accounting for income taxes. Deferred tax assets and liabilities
are determined based on temporary differences between the
carrying amounts and the tax basis of assets and liabilities.
Deferred income tax assets and liabilities are measured using
enacted tax rates that will be in effect when these differences
are expected to reverse. Deferred income tax assets are reduced
by a valuation allowance, if based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
In July 2006, the Financial Accounting Standards Board issued
Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), which
clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. Additionally,
FIN 48 provides guidance on the de-recognition,
classification, interest and penalties, accounting in interim
periods, and disclosure requirements for uncertain tax
positions. The Company adopted the provisions of FIN 48
beginning February 1, 2007.
We file income tax returns in the U.S., Canada and various
foreign and state jurisdictions. We are subject to income tax
examination by tax authorities in all jurisdictions from our
inception to date. Our policy is to recognize interest expense
and penalties related to income tax matters as tax expense. At
February 3, 2008, we do not have any significant accruals
for interest related to unrecognized tax benefits or tax
penalties. Our intercompany transfer pricing policies will be
subject to audits by various foreign tax jurisdictions. Although
we believe that our intercompany transfer pricing policies and
tax positions are reasonable, the final determination of tax
audits or potential tax disputes may be materially different
from that which is reflected in our income tax provisions
and accruals.
With regard to our U.S. operations, we had deferred tax
assets of approximately $4.8 million as of February 3,
2008, which have been fully offset by a valuation allowance due
to uncertainties surrounding our ability to generate future
taxable income to realize these assets. The deferred tax assets
are primarily composed of U.S. federal and state tax net
operating loss (NOL) carryforwards.
62
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Currency
translation
The functional currency for each entity included in these
consolidated financial statements that is domiciled outside of
the United States (the foreign entities) is the applicable local
currency. Assets and liabilities of each foreign entity are
translated into U.S. dollars at the exchange rate in effect
on the balance sheet date. Revenues and expenses are translated
at the average rate in effect during the period. Unrealized
translation gains and losses are recorded as a cumulative
translation adjustment, which is included in other comprehensive
income or loss, which is a component of accumulated other
comprehensive income included in stockholders equity.
Foreign currency transactions denominated in a currency other
than an entitys functional currency are translated into
the functional currency with any resulting gains and losses
included in income, except for gains and losses arising on
intercompany foreign currency transactions that are of a
long-term investment nature.
Fair
value of financial instruments
The Companys financial instruments consist of cash and
cash equivalents, accounts receivable, due from related parties,
trade accounts payable, accrued liabilities, other liabilities,
and due to related parties. Unless otherwise noted, it is
managements opinion that the Company is not exposed to
significant interest, currency or credit risks arising from
these financial instruments. All foreign exchange gains or
losses were recorded in the income statement under selling,
general and administrative expenses. The fair value of these
financial instruments approximates their carrying value, unless
otherwise noted.
Foreign
exchange risk
A significant portion of the Companys sales are
denominated in Canadian dollars. The Companys exposure to
foreign exchange risk is mainly related to fluctuations between
the Canadian dollar and the U.S. dollar. This exposure is
partly mitigated by a natural hedge in that a significant
portion of the Companys operating costs are also
denominated in Canadian dollars. The Company is also exposed to
changes in interest rates. The Company does not hedge foreign
currency and interest rate exposure in a manner that would
entirely eliminate the effect of changes in foreign currency
exchange rates, or interest rates on net income and cash flows.
The aggregate foreign exchange gains (losses) included in income
amount to $211,970, $183,471, and $(543,351) for the years ended
January 31, 2006, January 31, 2007 and
February 3, 2008, respectively.
Concentration
of credit risk
The Company is not exposed to significant credit risk on its
cash and cash equivalents and trade accounts receivable. Cash
and cash equivalents are held with high quality financial
institutions. Trade accounts receivable are primarily from
certain franchisees and wholesale accounts. The Company does not
require collateral to support the trade accounts receivable;
however, in certain circumstances, the Company may require
parties to provide payment for goods prior to delivery of the
goods. The accounts receivable are net of an allowance for
doubtful accounts, which is established based on
managements assessment of the credit risks of the
underlying accounts.
Stock-based
compensation
The Company accounts for stock-based compensation using the fair
value method as required by Statement of Financial Accounting
Standards No. 123 (Revised 2004),
Share Based Payments
(FAS 123R). The fair value of awards
granted is estimated at the date of grant and recognized as
employee compensation expense on a straight-line basis over the
requisite service period with the offsetting credit to
additional paid-in capital. For awards with service
and/or
performance conditions, the total amount of compensation expense
to be recognized is based on the number of awards expected to
vest and is adjusted to reflect those awards that do ultimately
vest. For awards with performance conditions, the Company
recognizes the compensation expense if and when the Company
concludes that it is probable that the performance condition
will be achieved. The Company reassesses the
63
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
probability of achieving the performance condition at each
reporting date. For awards with market conditions, all
compensation expense is recognized irrespective of whether such
conditions are met.
Certain employees are entitled to share-based awards from the
principal stockholder of the Company. These awards are accounted
for by the Company as employee compensation expense in
accordance with the above-noted policies.
Earnings
per share
Earnings per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income
available to common stockholders for the period by the diluted
weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential
dilution from common shares issuable through stock options using
the treasury stock method.
Use of
estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of
revenues and expenses during the reporting period.
Recently
issued accounting standards
(a) In December 2007, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards 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
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.
(b) In February 2007, the FASB issued Statement of
Financial Accounting Standard 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. FAS 159 is effective for the Company beginning
January 1, 2008. The Company is currently evaluating the
impact, if any, that adopting FAS 159 will have on its
consolidated financial statements.
(c) In September 2006, the FASB issued Statement of
Financial Accounting Standard No. 157, Fair Value
Measurements (FAS 157), which defines
fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. FAS 157
is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact, if any,
that adopting FAS 157 will have on its consolidated
financial statements.
64
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(d) In June 2006, the FASB issued Financial Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109 (FIN 48), which provides additional guidance
and clarifies the accounting for uncertainty in income tax
positions. FIN 48 defines the threshold for recognizing a
tax return position in the financial statements as more
likely than not that the position is sustainable, based on
its technical merits. FIN 48 also provides guidance on the
measurement, classification and disclosure of tax return
positions in the financial statements. FIN 48 is effective
for the first reporting period beginning after December 15,
2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to the beginning balance of
retained earnings in the period of adoption. The adoption of
FIN 48 did not have any effect on the Companys
financial position or results of operation.
Comparability
Certain comparative amounts have been reclassified to conform to
the presentation adopted in the current period.
3 INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
Finished goods
|
|
$
|
21,470,361
|
|
|
$
|
39,045,937
|
|
Work in process
|
|
|
1,634,196
|
|
|
|
|
|
Raw materials
|
|
|
4,644,620
|
|
|
|
541,651
|
|
Provision to reduce inventory to market value
|
|
|
(1,121,064
|
)
|
|
|
(495,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,628,113
|
|
|
$
|
39,092,208
|
|
|
|
|
|
|
|
|
|
|
4 PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
Leasehold improvements
|
|
$
|
16,393,457
|
|
|
$
|
33,466,659
|
|
Furniture and fixtures
|
|
|
5,287,109
|
|
|
|
13,597,290
|
|
Computers and software
|
|
|
3,532,824
|
|
|
|
12,648,156
|
|
Equipment and vehicles
|
|
|
174,206
|
|
|
|
243,407
|
|
Accumulated amortization
|
|
|
(7,211,652
|
)
|
|
|
(15,916,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,175,944
|
|
|
$
|
44,038,565
|
|
|
|
|
|
|
|
|
|
|
Included in the cost of property and equipment are costs of
$390,247 in fiscal 2007 and $6,052,786 in fiscal 2007
capitalized in connection with internally developed software as
part of the Companys ERP implementation. These costs will
be amortized when the computer hardware and software are ready
for their intended use in fiscal 2008.
Depreciation expense related to property and equipment was
$2,069,948 in fiscal 2005, $4,183,289 in fiscal 2006, and
$7,321,583 in fiscal 2007.
The Company recorded a loss of nil in fiscal 2005, $229,950 in
fiscal 2006, and nil in fiscal 2007 in leasehold improvements
for stores that were relocated or closed. These assets were
previously used in the corporate-owned stores segment.
65
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
5 GOODWILL
AND INTANGIBLE ASSETS NET
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
Goodwill
|
|
$
|
840,325
|
|
|
$
|
811,678
|
|
Changes in foreign currency exchange rates
|
|
|
(28,647
|
)
|
|
|
150,940
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
811,678
|
|
|
$
|
962,618
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
|
|
Reacquired franchise rights
|
|
$
|
2,928,312
|
|
|
$
|
7,637,384
|
|
Non-competition agreements
|
|
|
790,167
|
|
|
|
763,229
|
|
Accumulated amortization
|
|
|
(1,464,682
|
)
|
|
|
(1,948,590
|
)
|
Changes in foreign currency exchange rates
|
|
|
(113,786
|
)
|
|
|
709,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,140,011
|
|
|
|
7,161,429
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and intangibles
|
|
$
|
2,951,689
|
|
|
$
|
8,124,047
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was $396,350,
$435,223 and $1,019,150 for the years ended January 31,
2006, January 31, 2007 and February 3, 2008,
respectively. The estimated aggregate amortization expense is as
follows:
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2008
|
|
$
|
993,888
|
|
2009
|
|
|
853,135
|
|
2010
|
|
|
853,135
|
|
2011
|
|
|
853,135
|
|
2012
|
|
|
853,135
|
|
2013 and beyond
|
|
|
2,755,001
|
|
|
|
|
|
|
|
|
$
|
7,161,429
|
|
|
|
|
|
|
On April 1, 2007, the Company reacquired in an asset
purchase deal three franchised stores in Calgary for $5,562,821.
The acquisition of the franchise stores is part of
managements vertical retail growth strategy. Included in
the Companys consolidated statement of income for the year
ended February 3, 2008 are the results of the three
reacquired Calgary franchise stores from the date of acquisition
through February 3, 2008. Management has concluded that
this is an immaterial business combination.
The following table summarizes the fair values of the assets
acquired on April 1, 2007:
|
|
|
|
|
Inventory
|
|
$
|
407,355
|
|
Prepaid and other current assets
|
|
|
52,492
|
|
Property and equipment
|
|
|
500,274
|
|
Reacquired franchise rights
|
|
|
5,006,059
|
|
|
|
|
|
|
Total assets acquired
|
|
|
5,966,180
|
|
Deferred revenue
|
|
|
403,359
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
403,359
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
5,562,821
|
|
|
|
|
|
|
66
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reacquired franchise rights are amortized on a straight-line
basis over their estimated useful lives. The weighted-average
remaining useful lives of the reacquired franchise rights is
9.33 years as at February 3, 2008.
6 OTHER
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
Prepaid rent and security deposits
|
|
$
|
1,433,510
|
|
|
$
|
2,884,768
|
|
Deferred lease cost
|
|
|
650,826
|
|
|
|
1,013,747
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,084,336
|
|
|
$
|
3,898,515
|
|
|
|
|
|
|
|
|
|
|
7 ACCRUED
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
Inventory purchases
|
|
$
|
1,877,065
|
|
|
$
|
3,304,997
|
|
Settlement of lawsuit (note 14)
|
|
|
7,228,310
|
|
|
|
|
|
Sales tax collected
|
|
|
927,555
|
|
|
|
2,157,800
|
|
Accrued rent
|
|
|
459,249
|
|
|
|
1,291,373
|
|
Other
|
|
|
1,209,626
|
|
|
|
719,035
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,701,805
|
|
|
$
|
7,473,205
|
|
|
|
|
|
|
|
|
|
|
8 OTHER
NON-CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
Deferred lease liability
|
|
$
|
1,585,097
|
|
|
$
|
3,585,699
|
|
Tenant Inducements
|
|
|
438,571
|
|
|
|
3,135,521
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,023,668
|
|
|
$
|
6,721,220
|
|
|
|
|
|
|
|
|
|
|
9 LONG-TERM
DEBT AND CREDIT FACILITIES
On November 29, 2005 the Company renegotiated its credit
facility with a lending institution. This revolving demand
facility provided up to CDN$8,000,000, bearing interest at prime
plus 0.50% for general operating requirements. This facility was
available by way of letters of credit or guarantees.
In April, 2007, the Company executed a new credit facility with
a lending institution that provided for a CDN$20,000,000
uncommitted demand revolving credit facilities to fund the
working capital requirements of the Company. This agreement
cancels the previous CDN$8,000,000 credit facility. Borrowings
under the uncommitted credit facilities are made on a
when-and-as-needed
basis at the discretion of the Company.
Borrowings under the credit facility can be made either as
i) Revolving Loans Revolving loan borrowings
will bear interest at a rate equal to the Banks CDN$ or
USD$ 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 and 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.
67
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At February 3, 2008, there were no borrowings outstanding
under this credit facility. As well, at February 3, 2008,
letters of credit totaling USD$439,000 and guarantees totaling
USD$1,916,000 had been issued under the facility, which reduced
the amount available by a corresponding amount.
10 STOCKHOLDERS
EQUITY
Reorganization
in connection with initial public offering
On July 26, 2007, the Company completed an initial public
offering (IPO). In connection with the IPO, the
Company entered into an Agreement and Plan of Reorganization
dated April 26, 2007 (Reorganization
Agreement), with all of its stockholders, lululemon usa
inc. (Lulu US), lululemon athletica canada inc.
(Lulu Canada), Lulu Canadian Holding, Inc.
(LCHI), LIPO Investments (Canada) Inc.
(LIPO), LIPO Investments (USA), Inc. (LIPO
USA) and Slinky Financial ULC, an entity owned by a
principal stockholder of the Company, pursuant to which the
parties executed a corporate reorganization of the Company on
July 26, 2007, immediately following the execution of the
underwriting agreement entered into in connection with the IPO.
Prior to the reorganization, the interests in the Canadian,
U.S., and Japanese operating companies were held by third party
investors (48% subsequent to December 5, 2005) and by LIPO and
its affiliates (52% subsequent to December 5, 2005 and 100%
prior to December 5, 2005). In the reorganization, all
outstanding shares of the Company, which consisted of
Series A preferred shares (Series A
shares) and Series TS preferred shares
(Series TS Shares), and all outstanding shares
of LIPO, which was combined with the Company prior to the
reorganization, were exchanged for common shares of the Company
or exchangeable shares issued by LCHI, a wholly-owned subsidiary
of the Company. Upon completion of the reorganization, Lulu USA
and LCHI became direct or indirect wholly-owned subsidiaries of
the Company. Refer to Pre reorganization share capital section
below for additional details.
On the reorganization the holders of 107,995 Series A
shares and 116,994 Series TS shares were exchanged for
common shares of the Company, and the holders of the 117,000,361
LIPO shares exchanged those for common shares of the Company and
exchangeable shares of LCHI plus special voting stock of the
Company, in exchange for their LIPO shares. The exchangeable
shares of LCHI and the special voting shares of the Company,
when taken together, are the economic equivalent of the
corresponding common shares of the Company and entitle the
holder to one vote on the same basis and in the same
circumstances as one corresponding share of the common shares of
the Company. The exchangeable shares are exchangeable at any
time, at the option of the holder, on a one-for-one basis with
the corresponding common shares of the Company.
In connection with the reorganization, Lulu US, a wholly-owned
subsidiary of the Company, repurchased all outstanding shares of
its non-participating preferred stock for a purchase price of
$1.00 per share, resulting in an aggregate purchase price of
$10,000.
Prior to the reorganization, LIPO and LIPO USA had created
stock-based compensation plans (the predecessor plans) for
eligible employees of Lulu Canada and Lulu US. The eligible
employees were granted options to acquire shares of LIPO and
LIPO USA. The outstanding unvested stock options of LIPO were
exchanged for options of LIPO USA which allow the holders to
acquire shares of LIPO USA. Vested LIPO options are immediately
exercised for shares in LIPO and then exchanged for a fraction
of an exchangeable share or common share in the Company. The
exercise price and the number of common shares of the Company
subject to the new Company stock options were also modified.
Refer to note 11 for additional information regarding
stock-based compensation.
For accounting purposes, the corporate reorganization has been
reflected as if the companies had been combined for
all periods.
Authorized
share capital
As part of the reorganization in connection with the IPO, the
Companys stockholders approved an amended and restated
certificate of incorporation that provides for the issuance of
up to 200,000,000 shares of common stock,
5,000,000 shares of undesignated preferred stock and
30,000,000 shares of special voting stock. Upon completion
68
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the reorganization there were 44,290,778 shares of
common stock, 20,935,041 shares of exchangeable stock and
20,935,041 shares of special voting stock outstanding.
Additionally, 10,000,000 shares of common stock are
reserved for issuance under the Companys 2007 Equity
Incentive Plan. The Companys stock options outstanding
after completion of the reorganization were 4,479,176. The
outstanding stock options issued to purchase shares of Lulu
Canada and Lulu US prior to the reorganization were exchanged
for options to acquire common shares of the Company at an
adjusted exercise price. The exchange did not result in an
incremental charge as the relevant terms and conditions were set
to preserve the original fair value of the awards. Refer to
note 11 for additional details on stock options.
As part of the reorganization in connection with the IPO, on
July 26, 2007, a 2.38267841 for one stock split was
effected for all authorized, issued, and outstanding shares of
common stock of the Company. The common stock presented in the
consolidated financial statements and the notes to the
consolidated financial statements have been restated to properly
reflect this stock split.
The holders of the special voting stock are entitled to one vote
for each share held. The special voting shares are not entitled
to receive dividends or distributions or receive any
consideration in the event of a liquidation, dissolution or
wind-up. To
the extent that exchangeable shares as described below are
exchanged for common stock, a corresponding number of special
voting shares will be cancelled without consideration.
The exchangeable shares have been issued by LCHI and included in
these consolidated financial statements as equity. The holders
of the exchangeable shares have dividend and liquidation rights
equivalent to those of holders of the common shares of the
Company. The exchangeable shares can be converted on a one for
one basis by the holder at any time into common shares of the
Company plus a cash payment for any accrued and unpaid
dividends. Holders of exchangeable shares are entitled to the
same or economically equivalent dividend as declared on the
common stock of the Company. The exchangeable shares are
non-voting. The Company has the right to convert the
exchangeable shares into common shares of the Company at any
time after the earlier of July 26, 2047, the date on which
less than 2,093,504 exchangeable shares are outstanding or in
the event of certain events such as a change in control.
Pre
reorganization share capital
The authorized capital as at January 31, 2006 and
January 31, 2007 of the two pre reorganization companies
combined was as follows:
LIPO
Unlimited number of common shares, voting, without par value.
Prior to December 5, 2005, the pre reorganization combined
financial statements represented the combination of Lulu Canada
and Lulu US. The authorized share capital of Lulu Canada and
Lulu US for the period from February 1, 2004 to
December 5, 2005 was as follows:
Lulu
Canada
Unlimited number of Class A voting shares, Class B
shares, Class D shares and preferred shares, each without
par value.
Lulu
US
10,000,000 common shares with a par value of $0.001 per
share and 232,296 preferred shares issuable in series with a par
value of $0.0001 per share.
69
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
LAI
35,000,000 common shares, voting, with a par value of $0.01
per share and 5,750,000 preferred shares issuable in series with
a par value of $0.01 per share.
LAI had designated three series of preferred shares as follows:
a) Series A preferred stock
250,000 shares with a par value of $0.01 per share and a
stated value of $859.11 per share;
b) Series B preferred stock (Series B
shares) 250,000 shares with a par value
of $0.01 per share and a stated value of $859.11 per share;
c) Series TS preferred tracking stock
250,000 shares with a par value of $0.01 per share and a
stated value of $10.28 per share.
Each Series A share, Series B share and Series TS
share was entitled to 100 votes on all matters to be voted on by
the LAI stockholders with the caveat that the Series TS
shares shall not be entitled to vote on any matter relating to
LCHI or its subsidiaries.
In the event of a liquidation, dissolution or winding up of the
business and prior to the payment of any amount in respect of
any other class of shares, the holders of each Series A
share, Series B share and Series TS share were
entitled to receive in respect of each share, the Series A
liquidation preference, the Series B liquidation preference
and the Series TS liquidation preference, respectively,
where the liquidation preference for each share is the
unreturned original cost of that share plus the accrued and
unpaid dividends outstanding at the date of the liquidation
event. If, upon a liquidation event, the net assets available
for distribution to the stockholders are insufficient to fully
pay the Series A liquidation preference, the Series B
liquidation preference and the Series TS liquidation
preference then the available assets shall be distributed,
first, in respect of each Series A share pro-rata up to the
amount of the unreturned original cost of each Series A
share; second, in respect of each Series B share pro-rata
up to the amount of the unreturned original cost of each
Series B share; third, in respect of each Series TS
share pro-rata up to the amount of the unreturned original cost
of each Series TS share; fourth, in respect of each
Series TS share any accrued and unpaid dividends pro-rata
up to the total accrued and unpaid dividends outstanding at the
liquidation date; and fifth in respect of each Series A and
Series B share any accrued and unpaid dividends pro-rata up
to the total accrued and unpaid dividends outstanding at the
liquidation date. In any event, distributions made on
liquidation in respect of the Series TS shares shall not
exceed the net assets of Lulu US and its subsidiaries
attributable to the Series TS shares.
Each Series A share, Series B share and Series TS
share shall accrue preferred cumulative dividends at the rate of
8% of the stated value of the underlying share per annum,
compounded quarterly, adjusted for any stock dividends, splits,
combinations or other similar changes. Accrued dividends are
payable at the discretion of the board of directors and any
dividends paid to the Series A shares, the Series B
shares or the Series TS shares must be paid
contemporaneously to the other two classes of shares. Any
accrued and unpaid dividends owing to holders of Series A,
Series B or Series TS shares must be paid out prior to
any dividends being paid on the common shares. In addition, each
Series A, Series B and Series TS share is
entitled to receive dividends equal to 100 times the amount of
any dividend paid in respect of each common share. At
January 31, 2006, January 31, 2007, and
February 3, 2008 the amount of cumulative dividends was
$1,271,720, $9,907,054, and nil, respectively. On July 26,
2007, in connection with the reorganization of the Company, the
cumulative dividends of $26,957,834 were settled for newly
created shares of LAI which resulted in 1,471,180 shares of the
Company being issued. The statement of stockholders equity
and earnings per share was retroactively adjusted to reflect
this stock dividend.
LAIs certificate of incorporation provided that in the
event of an IPO of LAI in which the gross cash proceeds to LAI
in the offering is at least $75 million, each then
outstanding Series A share, Series B share and
Series TS share shall be converted into 100 common shares
of LAI plus the number of then outstanding shares determined by
dividing the unreturned original cost and the accrued and unpaid
dividends attributable to each share by the public
70
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
offering price. Since the IPO of LAI did not result in LAI
receiving at least $75 million in gross proceeds, the
foregoing conversion provision in LAIs certificate of
incorporation did not apply to the IPO of LAI.
In connection with the IPO of LAI, the stockholders of LAI
agreed to exchange their Series A shares and Series TS
shares for common shares of LAI. These shares were effectively
cancelled upon completion of the IPO.
LIPO
Investments (Canada), Inc.
LIPO had designated one class of common share without par value.
Under corporate charters and agreements as in effect on
December 5, 2005, upon an IPO of LAI in which the gross
proceeds to LAI in the offering is at least $75 million,
all of the outstanding shares of LIPO would be exchanged for
Series B shares of LAI, followed by the conversion of each
Series B share into 100 common shares of LAI plus the
number of common shares of LAI resulting from dividing the
liquidation value of Lulu Canada Class B Shares held by
LIPO calculated as the stated value $859.11 and accrued dividend
thereon at 8%, by the initial public offering price. Since the
IPO of LAI did not result in LAI receiving at least
$75 million in gross proceeds, the foregoing exchange and
conversion provisions did not apply to the IPO of LAI.
In connection with the IPO of LAI, the stockholders of LIPO
agreed to exchange their shares for common shares of LAI.
lululemon
athletica canada inc.
Prior to December 5, 2005, Lulu Canada had 100 Class A
voting common shares outstanding and issued. These shares were
effectively cancelled on December 5, 2005 upon completion
of the transactions described under Summary of Share
Capital Transactions December 2005 below.
lululemon
usa inc.
Prior to December 5, 2005, Lulu US had 100 common shares
outstanding and issued. These shares were effectively cancelled
on December 5, 2005 upon completion of the transactions
described under Summary of Pre reorganization of Share
Capital Transactions December 2005 below.
Summary
of Pre reorganization Share Capital Transactions
December
2005
On December 5, 2005, the principal stockholder of the
company directly or indirectly held all of the issued and
outstanding interests in Lulu Canada and Lulu US. On
December 5, 2005, the principal stockholder agreed to sell
a 48% interest in these operating companies to third party
investors. In conjunction with this sale, three holding
companies (LIPO, LAI and LCHI) were created to hold the
interests in the operating companies (Lulu Canada and Lulu US).
On December 5, 2005, through a series of transactions, Lulu
Canada became a subsidiary of LIPO, and LCHI, which is wholly
owned by LAI, acquired a 48% interest in Lulu Canada; Lulu US
became a subsidiary of LAI; and Lulu FC became a subsidiary of
Lulu US. The foregoing transactions resulted in the issuance by
Lulu Canada of 106,702 Class A shares to LCHI and 115,594
Class B shares to LIPO. The Lulu Canada Class A and B
shares have no par value. Each Class A and Class B
share has a stated value of $859.11 per share or an aggregate
stated value of $190,976,717. The third party investors acquired
75% of their interests from the principal stockholder for cash
consideration. The remaining 25% of their interests was acquired
through an issuance of preferred shares in LAI for cash
consideration of $23 million.
As a result of this series of transactions, the principal
stockholder effectively retained a 52% interest in the Company
and the third party investors acquired a 48% interest in the
Company. The principal stockholders interest is
subordinate to the stock issued to the third party investors.
71
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This series of transactions resulting in the operating companies
becoming subsidiaries of the respective holding companies have
been accounted for as transactions between entities under common
control with of the interests reflected at the carrying amounts
as held by the principal stockholder. The acquisition of the 36%
interest from the principal stockholder has been accounted for
as an acquisition of shares by the Company with proceeds in
excess of the carrying value of $69,005,127 being reflected as a
distribution to the principal stockholder. The acquisition of
the remaining 12% interest acquired by the third party investors
has been accounted for as a purchase of shares from treasury of
LAI.
On December 5, 2005 Lulu US authorized and issued 10,000
non-participating preferred shares with a par value of $0.001
per share to LIPO USA and third party investors and 222,296
participating preferred shares with a par value per share of
$0.001 to the Company. The non-participating preferred shares
have an aggregate stated value of $10,000 and the participating
preferred shares have an aggregate stated value of $2,312,990.
As part of the reorganization in connection with the IPO, Lulu
US repurchased all outstanding shares of its non-participating
preferred stock for a purchase price of $1.00 per share.
December
2006
During 2006, LAI issued 500 Series A preferred shares to
two directors for cash consideration of $446,419. As these
shares were issued at a price below market value, a charge of
$188,008 was recorded as non-cash compensation expense in the
combined consolidated statement of income. These shares were
unrestricted at the date of issuance and the fair value was
determined by the Company based on an analysis of EBITDA and
revenue multiples.
11 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 the Company.
During the year ended January 31, 2006, LIPO and LIPO USA,
entities controlled by a principal stockholder of the Company,
created a stockholder sponsored stock-based compensation plans
(LIPO Plans) for certain eligible employees of the
Company in order to provide incentive to increase stockholder
value. Under the provisions of the LIPO plans, the eligible
employees were granted options to acquire shares of LIPO and
LIPO USA, respectively. LIPO and LIPO USA held shares in
LACI and the Company, respectively. These plans provide that the
board of directors of LIPO and LIPO USA were able to exchange
the LIPO and LIPO USA shares held in trust for an equivalent
number of shares of the Company to be held by LIPO and LIPO USA,
respectively, on the exchange date. If an employee ceases
employment, the LIPO Plans provided that LIPO and LIPO USA would
repurchase the shares issued pursuant to the Series A
options at the fair market value of the shares. Shares issued
pursuant to the Series B options would be repurchased at
the exercise price paid. Subsequent to the reorganization
described in note 10, LIPO options and shares were
exchanged for options and common share equivalents of the
Company. Shares of the Company that are or will be issued to
holders of the options or restricted shares under the LIPO Plans
are currently held by LIPO USA, an affiliate of a principal
stockholder. The exercise, vesting or forfeiture of any of these
awards will not have any impact on the outstanding common shares
of the Company.
On July 3, 2006, the board of directors approved the
Lululemon Athletica Inc. Equity Incentive Compensation Plan and
the Lululemon Athletica USA Inc. 2005 Equity Incentive
Compensation Plan (Plans), which provide for the
grant of stock awards to employees, directors, consultants and
other individuals providing services to the Company. Lulu Canada
and Lulu US have each reserved 2,500,000 shares of common
stock for issuance under the Plans. The exercise price and
vesting conditions are determined by the board of directors for
each grant. The contractual life of the options is 10 years.
In July 2007, the Companys Board of Directors adopted, and
the Companys stockholders approved, in conjunction with
the reorganization of the Company, the 2007 Equity Incentive
Plan (note 10). Upon completion of the reorganization of
the Company, outstanding awards under the Companys
predecessor plan were exchanged for
72
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards under the 2007 Plan in such a way that no incremental
stock-based compensation expense resulted from the exchange. The
2007 Plan provides for the grants of stock options, stock
appreciation rights, restricted stock or restricted stock units
to employees (including officers and directors who are also
employees) of the Company. Stock options granted to date have a
four-year vesting period and vest at a rate of 25% per each year
on the anniversary date of the grant. Restricted stock issued
under the 2007 Plan vest one year from the grant date. To date,
10,458 shares of restricted stock have been issued under
the 2007 Plan to certain directors of the Company.
The Companys policy is to issue shares upon the exercise
of Company options from treasury. Any shares issued to employees
related to stockholder sponsored plans are provided by the
principal stockholder and are not issued from treasury or
repurchased by the Company.
As described in note 10, a reorganization and stock split
resulted in changes to the capital structure of the Company.
Information in this note has been presented to reflect the
combination of the stockholder sponsored plans. The number of
options and exercise prices for options issued under the
predecessor plans prior to the corporate reorganization have
been presented to reflect the replacement options of the Company
that have been issued as if the replacement options had always
been issued.
Stock-based compensation expense charged to income for the plans
was $2,699,916, $2,829,572 and $5,947,097 for the years ended
January 31, 2006, January 31, 2007 and
February 3, 2008, respectively. The Company has not
recognized any income tax benefits related to these plans.
Total unrecognized compensation cost as at February 3, 2008
was $18.4 million for all stock option plans, which is
expected to be recognized over a weighted-average period of
3.0 years.
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 at a 25% discount from fair market value 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 year ended February 3, 2008, 5,546 shares were
purchased under the ESPP, which were funded by the Company
through open market purchases.
Stockholder
sponsored stock options
On December 1, 2005, LIPO and LIPO USA each granted
5,295,952 Class A options with an exercise price of
CDN$0.00001 and an expiry date of December 31, 2009 and
11,062,179 Class B options with an expiry date of
December 31, 2010, respectively, prior to the
reorganization (note 10). The LIPO and LIPO USA
Class B options originally had exercise prices of CDN$0.99
and $0.01, respectively. Each Class A option and each
Class B option entitled the holder to acquire one share of
common stock of LIPO and LIPO USA respectively.
While all of the Class A options of both companies vested
on December 5, 2005 and were immediately exercised,
3,549,444 of the common shares of LIPO and LIPO USA issued were
designated as forfeitable. These forfeitable shares were
considered to be non-vested for accounting purposes and were
considered not to be earned as of December 5, 2005. These
non-vested shares become non-forfeitable over a four-year
requisite service period to December 5, 2009. In addition,
on December 5, 2005, 2,239,395 of the Series B options
vested, with the remaining options vesting over a five-year
period ending December 5, 2010.
In connection with the reorganization of the Company
(note 10) modifications were made to the LIPO and LIPO USA
plans. The 5,285,154 LIPO Class A awards and the 4,110,511
vested LIPO Class B awards were exchanged for a total of
1,959,819 exchangeable shares of the Company through a series of
transactions. At the time of the reorganization, 1,418,426 of
the new awards were considered to be vested and the remaining
541,393 new awards were considered to be unvested. The unvested
exchangeable shares are held in trust by the principal
stockholder and are subject to the same vesting schedule as the
original LIPO award.
73
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the exchangeable shares granted
under the stockholder sponsored plan. Amounts are presented on a
post reorganization basis.
|
|
|
|
|
|
|
Number of
|
|
|
|
Exchangeable
|
|
|
|
Shares
|
|
|
Balance at January 31, 2005
|
|
|
|
|
Granted
|
|
|
1,959,819
|
|
Vested
|
|
|
787,992
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at January 31, 2006
|
|
|
1,171,827
|
|
Granted
|
|
|
|
|
Vested
|
|
|
630,434
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at January 31, 2007
|
|
|
541,393
|
|
Granted
|
|
|
|
|
Vested
|
|
|
276,091
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at February 3, 2008
|
|
|
265,302
|
|
|
|
|
|
|
The total unrecognized compensation cost related to exchangeable
shares was $896,122 at February 3, 2008.
In connection with the reorganization of the Company
(note 10), the 5,285,154 LIPO USA Class A awards were
exchanged for LIPO USA shares through a series of transactions,
resulting in 264,439 awards outstanding in lululemon share
equivalents. At the time of the reorganization, 146,342 of the
new awards were considered to be vested and the remaining
118,097 awards were considered to be unvested and are subject to
the same vesting schedule as the original LIPO awards.
The following table summarizes the LIPO USA shares granted under
the stockholder sponsored plan. Amounts are presented on a post
reorganization basis and are shown in lululemon share
equivalents.
|
|
|
|
|
|
|
Number of
|
|
|
|
LIPO USA
|
|
|
|
Shares
|
|
|
Balance at January 31, 2005
|
|
|
|
|
Granted
|
|
|
264,439
|
|
Vested
|
|
|
86,823
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 31, 2006
|
|
|
177,616
|
|
Granted
|
|
|
|
|
Vested
|
|
|
59,519
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 31, 2007
|
|
|
118,097
|
|
Granted
|
|
|
|
|
Vested
|
|
|
60,229
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 3, 2008
|
|
|
57,868
|
|
|
|
|
|
|
74
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total unrecognized compensation cost related to LIPO USA
shares was $11,466 as at February 3, 2008.
In connection with the reorganization of the Company
(note 10), the 16,841,989 LIPO Class B unvested awards
and LIPO USA Class B awards were exchanged for LIPO USA
options using a conversion factor set out in the reorganization
agreement and resulting in the issuance of new awards which were
equivalent to 1,474,821 lululemon shares. At the time of the
reorganization, 200,879 of the awards were considered to be
vested and the remaining 1,273,942 awards were considered to be
unvested. The vesting terms of these LIPO USA options were not
changed.
The cancellation of the LIPO Class B unvested options and
the issuance of the new LIPO USA options occurred with the
relative fair value and other terms and conditions being
preserved through the number and terms of new options being
granted resulting in no incremental compensation cost to the
Company.
The following table summarizes the LIPO USA options granted
under the stockholder sponsored plan. Amounts are presented on a
post reorganization basis and are shown in lululemon share
equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
LIPO USA
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Balance at January 31, 2005
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,474,821
|
|
|
$
|
0.01
|
|
Vested
|
|
|
104,635
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 31, 2006
|
|
|
1,370,186
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
96,244
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 31, 2007
|
|
|
1,273,942
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
393,095
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 3, 2008
|
|
|
880,847
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to LIPO USA
options was $1,406,567 at February 3, 2008.
The Company records compensation expense for shares issued under
the stockholder sponsored awards, over the requisite service
periods.
The vesting schedule of the stockholder sponsored awards in
lululemon share equivalents is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable
|
|
|
LIPO USA
|
|
|
LIPO USA
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Options
|
|
|
December 5, 2005
|
|
|
787,992
|
|
|
|
86,823
|
|
|
|
104,635
|
|
December 5, 2006
|
|
|
630,434
|
|
|
|
59,519
|
|
|
|
96,244
|
|
December 5, 2007
|
|
|
276,091
|
|
|
|
60,229
|
|
|
|
393,095
|
|
December 5, 2008
|
|
|
198,877
|
|
|
|
43,384
|
|
|
|
383,922
|
|
December 5, 2009
|
|
|
66,425
|
|
|
|
14,490
|
|
|
|
315,055
|
|
December 5, 2010
|
|
|
|
|
|
|
|
|
|
|
181,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,959,819
|
|
|
|
264,445
|
|
|
|
1,474,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average remaining contractual term for the options
outstanding and exercisable at February 3, 2008 is
3.2 years.
The fair value of the non-forfeitable and forfeitable shares
issued under LIPO Class A was measured at the fair value of
the underlying stock on the grant date. The fair value of the
LIPO Class B options was determined using the Black-Scholes
option pricing model with the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
45
|
%
|
Risk-free interest rate
|
|
|
5
|
%
|
Weighted-average expected life of option (years)
|
|
|
5.0 years
|
|
The expected volatility was based on available information on
volatility from a peer group of publicly traded U.S. and
Canadian retail apparel companies. The expected life of the
options was determined by reviewing data about exercise patterns
of employees in the retail industry as well as considering the
probability of a liquidity event such as the sale of the Company
or an IPO and the potential impact of such an event on the
exercise pattern. The risk-free interest rate approximates the
yield on benchmark Government of Canada bonds for terms similar
to the contract life of the options.
The weighted-average estimated fair value at the date of grant
for the non-forfeitable shares and options granted by LIPO and
LIPO US was CDN$0.67 and CDN$0.0067, respectively, for the year
ended January 31, 2006.
The total fair value of awards under the stockholder sponsored
plans that vested during the years ended January 31, 2006,
January 1, 2007 and February 3, 2008 was
$2.9 million, $1.8 million and $1.3 million,
respectively.
Company
stock options
Prior to the reorganization described in note 10, the
Company had an option plan and LACI had an option plan.
Employees received the same number of options in each company.
In conjunction with the reorganization, the Company modified the
previous companies sponsored stock options. On the date of the
reorganization 1,879,891 options of LACI with a
weighted-average exercise price of $1.38 were exchanged for
4,479,176 options of the Company with a weighted-average
exercise price of $0.58. The vesting terms and the term of the
options were not modified. On the date of the reorganization,
the Company compared the fair value of the modified Company
option to the fair value of the Company and LACI options
immediately before the modification and determined there was no
incremental compensation cost as a result of this modification.
The information presented below reflects the impact of these
modifications and the stock split described in note 10 as
if the reorganization had occurred when the plans were
introduced.
76
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys stock options and restricted
shares activity as of January 31, 2007 and February 3,
2008 and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Restricted
|
|
|
Grant
|
|
|
|
Options
|
|
|
Price
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Granted
|
|
|
4,543,492
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
47,644
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2007
|
|
|
4,495,848
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
416,219
|
|
|
$
|
25.49
|
|
|
|
10,458
|
|
|
$
|
19.43
|
|
Exercised
|
|
|
92,555
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
47,163
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2008
|
|
|
4,772,349
|
|
|
$
|
2.74
|
|
|
|
10,458
|
|
|
$
|
19.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 3, 2008
|
|
|
745,985
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable at February 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Range of
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
Exercise Prices
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
$0.49 - $0.60
|
|
|
4,358,630
|
|
|
$
|
0.58
|
|
|
|
8.6
|
|
|
|
745,985
|
|
|
$
|
0.58
|
|
|
|
8.6
|
|
$18.00
|
|
|
244,326
|
|
|
|
18.00
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$33.56 - $34.53
|
|
|
127,250
|
|
|
|
33.68
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$44.32 - $50.46
|
|
|
42,143
|
|
|
|
44.36
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,772,349
|
|
|
$
|
2.74
|
|
|
|
8.7
|
|
|
|
745,985
|
|
|
$
|
0.58
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic Value
|
|
$
|
153,462,680
|
|
|
|
|
|
|
|
|
|
|
$
|
25,602,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 3, 2008, the unrecognized compensation cost
related to these options was $16.1 million, which is
expected to be recognized over a weighted-average period of
3.1 years; and the total aggregate intrinsic value for
stock options outstanding and exercisable was
$25.6 million. The intrinsic value of stock options
exercised during the years ended January 31, 2006,
January 31, 2007 and February 3, 2008 was nil, nil and
$2.6 million. The weighted-average grant date fair value of
options granted during the years ended January 31, 2006,
January 31, 2007 and February 3, 2008 was nil, $3.53
and $13.28, respectively.
The fair value of options with service conditions was determined
at the date of grant using the Black-Scholes model. Expected
volatilities are based on a review of a peer group of publicly
traded apparel retailers. The expected term of options with
service conditions is the simple average of the term and the
requisite service period as stated in the respective option
contracts. The risk-free interest rate for Lulu Canada is the
Bank of Canada bank rate and for Lulu US is the Federal Reserve
federal funds rate.
77
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
lululemon
|
|
|
|
athletica inc.
|
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
50
|
%
|
Risk-free interest rate
|
|
|
5
|
%
|
Weighted-average life
|
|
|
7.0 years
|
|
Options
with performance and/or market conditions
Certain options granted under the Plans have a potential to vest
based on the return multiple achieved in connection with the
sale by certain of the Companys stockholders of 80% of
their holding of the Companys capital stock through one or
a series of transactions. The percentage of options under grant
that vest increases in defined increments as the return multiple
increases. A minimum return multiple of two is required for any
of the options to vest and all options vest if a return multiple
of five is achieved. These options have a contractual life of
10 years. During the year ended January 31, 2007, the
Company granted 1,114,892 options with these terms with a
weighted-average exercise price of $0.58. Of these options, all
remain outstanding and none were exercisable at February 3,
2008. These options had a weighted-average contractual term of
10 years and an aggregate fair value of $1,051,516 at the
grant date. Expense of $433,583, and $618,468 was recognized
during the year ended January 31, 2007 and February 3,
2008 and the remaining compensation expense is expected to be
recognized over a weighted-average term of 0.5 years from
February 3, 2008. The aggregate intrinsic value of the
outstanding options as at January 31, 2007 and
February 3, 2008 were nil and $38,263,025, respectively.
The fair value of these options was determined by first
considering a range of potential outcomes with regard to the
timing of the sale transaction. Probabilities were ascribed to
different terms based on knowledge of the investors
strategy for the fund, general market conditions at the time of
the grant, volatility assumptions and other relevant
information. The weighted-average of these probabilities was
used as the requisite service period.
The valuation also considered the probability of the
stockholders achieving the threshold multiples stipulated in the
option agreement was developed. Probabilities were assigned
based on the Companys growth plans, the option holders and
managements expectations at the time of the grant, the
anticipated time of the sale transaction as noted above and
other relevant information. The weighted-average of the assigned
probabilities was used as the most likely multiple to be
achieved.
The weighted-average probabilities developed above were used as
input for a valuation simulation to establish the option values.
Other terms used in the probabilities based valuation simulation
were consistent with those used for the time-vested options
noted above except for the term that was shortened to four years
consistent with the employment contract of the option holder.
In November 2007, in recognition of the fact that the original
option agreements were prepared at the time the Company was not
a publicly traded company and contained provisions more suitable
for a private company than a public company, the Company agreed
with an officer of the Company to modify the replacement
options. The options were amended to delete
drag-along provisions benefiting our institutional
investors, requiring the officer to participate in and otherwise
support change of control transactions favored by our
institutional investors. The options were amended to vest
pursuant to certain return multiples received in connection with
a sale of substantially all of our assets or the sale by certain
of our stockholders of at least 80% of their capital stock (or
realize a return equal to five times their original investment,
regardless of percentage of shares sold) in one transaction or a
series of transactions, including our initial public offering.
The remaining terms of those options are unchanged. The
incremental compensation cost resulting from the modification of
these awards will be amortized over the remaining expected term
consistent with the initial valuation amount.
78
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The modification analysis was performed using Monte Carlo
simulations and resulted in the following amendments:
|
|
|
|
|
|
|
|
|
|
|
Original Award
|
|
|
Modified Award
|
|
|
Options Outstanding
|
|
|
1,114,890
|
|
|
|
1,114,890
|
|
Intrinsic Value
|
|
$
|
39.92
|
|
|
$
|
39.92
|
|
Weighted-average expected options to vest
|
|
|
96.5
|
%
|
|
|
98.4
|
%
|
Weighted-average fair value of options
|
|
$
|
27.65
|
|
|
$
|
29.09
|
|
Weighted-average total value
|
|
$
|
30,823,763
|
|
|
$
|
32,305,411
|
|
Total fair value to the Company
|
|
$
|
983,664
|
|
|
$
|
1,883,664
|
|
The weighted-average valuation difference between the original
award and the modified award is approximately $900,000. This
incremental cost will be amortized over the remaining originally
estimated service period. The weighted-average exercise price
and term of the options did not change as a result of the
modification and remain at $0.58 and 10 years, respectively.
12 EARNINGS
PER SHARE
In conjunction with the IPO, the Companys capital
structure was reorganized such that LIPO became an indirect,
wholly-owned subsidiary of the Company, and the holders of
preferred shares of the Company acquired common shares of the
Company in exchange for their preferred shares, while the
holders of LIPO shares acquired either common shares of the
Company or a combination of exchangeable shares of LCHI plus
shares of special voting stock of the Company, in exchange for
their LIPO shares. In connection with the reorganization, each
outstanding share of the Companys common stock was split
into 2.38267841 shares of common stock, with a
corresponding effect on outstanding options and exercise prices.
The common stock and options outstanding as of the completion of
the reorganization and stock split was 65,225,819 shares
and 4,479,176 options, respectively. The potential exercise of
options or vesting of forfeitable shares under the LIPO plans
have been excluded as the exercise of such option will result in
exchangeable shares currently outstanding and held by a
principal stockholder being transferred to the option holder.
Accordingly, these LIPO options and forfeitable shares are not
dilutive to the Company.
Earnings per share have been computed based on the post
reorganization and post share split capital structure as if the
common shares had been outstanding for all periods presented or
since the respective share transactions occurred. For diluted
earnings per share, the equivalent potential common stock issued
on a post reorganization and post split basis has been used. The
details of the computation of basic and diluted earnings per
share is as follows:
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|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Net income
|
|
$
|
1,394,104
|
|
|
$
|
7,666,331
|
|
|
$
|
30,842,439
|
|
Basic weighted-average number of shares outstanding
|
|
|
38,724,287
|
|
|
|
65,156,625
|
|
|
|
66,430,022
|
|
Basic earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.46
|
|
Basic weighted-average number of shares outstanding
|
|
|
38,724,287
|
|
|
|
65,156,625
|
|
|
|
66,430,022
|
|
Effect of stock options assumed exercised
|
|
|
|
|
|
|
147,214
|
|
|
|
2,867,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of shares outstanding
|
|
|
38,724,287
|
|
|
|
65,303,839
|
|
|
|
69,297,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.45
|
|
79
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
13 COMMON
CONTROL TRANSACTION
Prior to December 5, 2005, Lulu US and lululemon FC USA,
Inc. (Lulu FC) were affiliates under common
ownership and control. On December 5, 2005, all of the
issued and outstanding shares of Lulu FC were transferred to
Lulu US for cash consideration of $260,000. This transfer was
accounted for in a manner similar to a pooling of interests
whereby the assets, liabilities, results of operations and cash
flows have been included as if Lulu FC had been consolidated by
Lulu US for all periods presented prior to December 5,
2005. The net assets of Lulu FC of $99,450 as at
December 5, 2005 consisted of cash of $105,300, other
assets of $173,997 and liabilities of $179,847. The difference
between the cash consideration paid to the principal stockholder
and the net assets acquired in the amount of $138,294 has been
reflected as a reduction of retained earnings in the combined
consolidated statement of stockholders equity under the
caption Distribution to principal stockholder on
December 5, 2005 and as a financing activity in the
combined consolidated statement of cash flows for the year ended
January 31, 2006.
14 COMMITMENTS
AND CONTINGENCIES
The Company has obligations under operating leases for its
office, warehouse and retail premises in Canada and the United
States. As of February 3, 2008, the lease terms of various
leases are from three to 10 years. A substantial number of
the Companys leases for retail premises include renewal
options and certain of the Companys leases include rent
escalation clauses, rent holidays and leasehold rental
incentives. Certain of the Companys leases for retail
premises also include contingent rental payments based on sales
volume. The Company is required to make deposits for rental
payments pursuant to certain lease agreements, which have been
included in other non-current assets. Minimum annual basic rent
payments excluding other executory operating costs, pursuant to
lease agreements are approximately as laid out in the table
below. These amounts include commitment in respect of
administrative offices and for stores that have not yet opened
but for which lease agreements have been executed.
|
|
|
|
|
Fiscal Year Ending
|
|
|
|
|
2009
|
|
$
|
17,113,758
|
|
2010
|
|
|
20,539,171
|
|
2011
|
|
|
19,706,901
|
|
2012
|
|
|
18,037,184
|
|
2013
|
|
|
17,952,115
|
|
Thereafter
|
|
|
81,756,185
|
|
Rent expense for the years ended January 31, 2006,
January 31, 2007, and February 3, 2008 was $3,415,045,
$9,299,076, and $19,006,214, respectively, under operating lease
agreements, consisting of minimum rental expense of $3,035,413,
$8,144,993, and $10,495,369, respectively, and contingent rental
amounts of $379,632, $1,154,083, and $8,510,845, respectively.
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 Companys continued
financial position, results of operations or cash flows except
as follows:
On March 5, 2003, the Company was named in a lawsuit filed
in the Supreme Court of British Columbia by a firm that had
provided services to the Company alleging that the Company had
breached the terms of its contract with the complainant. The
Company negotiated a full settlement of the suit in January 2007
for $7.2 million. The total amount was paid in February
2007 and the amount is fully recognized in these consolidated
financial statements.
On March 14, 2007, a former executive officer filed suit
against the Company for breach of contract, wrongful dismissal
and negligent misrepresentation seeking damages in an
unspecified amount plus costs and intent. The Company believes
the claim is without merit and is vigorously defending
against it.
80
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
15 RELATED
PARTY TRANSACTIONS AND BALANCES
Amounts outstanding with related parties at January 31,
2006, January 31, 2007 and February 3, 2008 are as
follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
February 3,
|
|
&nb |