e10vk
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
January 31,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33608
lululemon athletica
inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-3842867
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(State or other jurisdiction of
incorporation or organization)
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(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 whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o 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 þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
rule 12b-2
of the Act).
Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant on August 2, 2009 was
approximately $807,343,082 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 August 2,
2009. For purposes of determining this amount only, the
registrant has defined affiliates as including the executive
officers and directors of the registrant on August 2, 2009.
Common Stock:
At March 23, 2010 there were 51,140,069 shares of the
registrants common stock, par value $0.01 per share,
outstanding.
Exchangeable and Special Voting Shares:
At March 23, 2010, there were outstanding
19,371,328 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 23, 2010, the registrant had
outstanding 19,371,328 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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PARTS INTO WHICH INCORPORATED
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Portions of Proxy Statement for the
2010 Annual Meeting of Stockholders
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Part III
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TABLE OF
CONTENTS
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Page
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1
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BUSINESS
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1
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RISK FACTORS
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10
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PROPERTIES
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24
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LEGAL PROCEEDINGS
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24
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PART II
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25
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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25
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SELECTED CONSOLIDATED FINANCIAL DATA
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27
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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28
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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48
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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50
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CONTROLS AND PROCEDURES
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85
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PART III
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86
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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86
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EXECUTIVE COMPENSATION
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86
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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86
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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86
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PRINCIPAL ACCOUNTING FEES AND SERVICES
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87
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PART IV
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87
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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87
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EX-10.22 |
EX-10.23 |
EX-10.24 |
EX-10.25 |
Exhibit 23.1 |
Exhibit 31.1 |
Exhibit 31.2 |
Exhibit 32.1 |
PART I
Special
Note Regarding Forward-Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as
amended. We use words such as anticipates,
believes, estimates, may,
intends, expects and similar expressions
to identify forward-looking statements. Discussions containing
forward-looking statements may be found in the material set
forth under Business, Managements
Discussion and Analysis of Financial Condition and Results of
Operation and in other sections of the report. All
forward-looking statements are inherently uncertain as they are
based on our expectations and assumptions concerning future
events. Any or all of our forward-looking statements in this
report may turn out to be inaccurate. We have based these
forward-looking statements largely on our current expectations
and projections about future events and financial trends that we
believe may affect our financial condition, results of
operations, business strategy and financial needs. They may be
affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties, including the risks,
uncertainties and assumptions described in the section entitled
Item 1A and elsewhere in this report. In light of these
risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this report may not occur as
contemplated, and our actual results could differ materially
from those anticipated or implied by the forward-looking
statements. All forward-looking statements in this report are
made as of the date hereof, based on information available to us
as of the date hereof, and we assume no obligation to update any
forward-looking statement.
Overview
lululemon athletica inc. is a designer and retailer of technical
athletic apparel operating 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 and athletic female
youth. We offer a comprehensive line of apparel and accessories
including fitness pants, shorts, tops and jackets designed for
athletic pursuits such as yoga, running and general fitness. As
of January 31, 2010, our branded apparel was principally
sold through 124 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 feedback
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 social media and 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, British Columbia. 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
1
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
provides 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 $452.9 million in
fiscal 2009, representing a 61.9% compound annual growth rate.
Our net revenue increased from $353.5 million in fiscal
2008 to $452.9 million in fiscal 2009, representing a 28.1%
increase. During fiscal 2009, our comparable store sales growth
was 9% and we reported income from operations of
$86.5 million. During fiscal 2008, our comparable store
sales growth was 0% and we reported income from operations of
$56.6 million. In fiscal 2009, our corporate-owned stores
opened at least one year averaged sales of approximately $1,318
per square foot, compared to sales per square foot of
approximately $1,450 for fiscal 2008. We believe this is still
among the best in the apparel retail sector.
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 and athletic
female youth 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. Our educators 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 social media, partnering with local
fitness practitioners and retail educators and creating in-store
community boards. Each of our stores has a dedicated community
coordinator who 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 and Chief Innovation and
Branding Officer, Mr. Wilson, plays a central role in
corporate strategy and in promoting our distinctive corporate
culture. Our Chief Executive Officer, Ms. 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.
Mr. Wilson 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 Speedo International Limited. 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
January 31, 2010, our products were sold through 115 stores
in North America, including 45 in Canada and 70 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 net seven stores in the
United States and Canada in fiscal 2009, and we plan to
open approximately 12 to 15 additional stores in
fiscal 2010 in the United States and Canada.
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Develop our Direct to Consumer Sales
Channel. We launched our retail website in the
first quarter of fiscal 2009. The addition of
e-commerce
to our direct to consumer sales channel has already expanded our
customer base and supplemented our growing store base. We plan
to continue developing our retail website to further reflect the
distinctive retail experience that our customers enjoy in our
stores while providing greater shopping flexibility.
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Increase our Brand Awareness. We will continue
to increase brand awareness and customer loyalty through our
grassroots marketing efforts, social media 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 cotton
and seaweed. Among our ongoing efforts, we are developing
fabrics to provide advanced features such as UV protection and
inherent reflectivity. 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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Expand our Product Categories. We continue to
expand our product offerings in complementary existing and new
categories such as bags, undergarments and outerwear;
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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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Increase the Range of Athletic Activities our Products
Target. We expect customers to increasingly
purchase our products for activities such as yoga, running and
general fitness as we educate them on the versatility of our
products and expand our product categories; and
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Expand Beyond North America. As of
January 31, 2010, we operated nine franchise stores in
Australia and one showroom in Hong Kong which is
corporate-owned. Over time, we intend to expand on our own or
pursue additional joint venture opportunities in other Asian and
European markets.
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Grow our Youth Brand. We launched our youth
focused brand, ivivva athletica, in the fourth quarter of fiscal
2009. We believe the premium quality and technical rigor of our
dance-inspired products designed for female youth serve an open
market and provide us with an opportunity to expand this line.
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Our
Stores
As of January 31, 2010, our retail footprint included 45
stores in Canada, 70 stores in the United States and nine
franchise stores in Australia. We discontinued our operations in
Japan in fiscal 2008. The 115 stores in Canada and the United
States include one franchise store in Canada and four in the
United States. While most of our stores are branded lululemon
athletica, three of our corporate-owned stores are branded
ivivva athletica and specialize in dance-inspired apparel for
female youth. 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 and franchise stores) operated
in each Canadian province, U.S. state, and internationally
as of January 31, 2010:
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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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9
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9
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British Columbia
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12
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12
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Manitoba
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1
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1
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Nova Scotia
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1
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1
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Ontario
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17
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17
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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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44
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1
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45
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United States
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Arizona
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1
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1
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California
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19
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1
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20
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Colorado
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3
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3
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Connecticut
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2
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2
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District of Columbia
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2
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2
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Florida
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3
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3
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Hawaii
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1
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1
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Illinois
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7
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7
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Maryland
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2
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2
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Massachusetts
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5
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5
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Michigan
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1
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1
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Nevada
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1
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1
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New Jersey
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2
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2
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New York
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7
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7
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Oregon
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1
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1
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Pennsylvania
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1
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1
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Texas
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6
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6
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Virginia
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2
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2
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Washington
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3
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3
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Total United States
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66
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4
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|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall total, as of January 31, 2010
|
|
|
110
|
|
|
|
14
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall total, as of February 1, 2009
|
|
|
103
|
|
|
|
10
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
Economics
We believe that our innovative retail concept and customer
experience contribute to the success of our stores. During
fiscal 2009 our corporate-owned stores open at least one year,
which average approximately 2,856 square feet, averaged
sales of approximately $1,318 per square foot.
5
Management performs an ongoing evaluation of our portfolio of
corporate-owned store locations. In response to the continuing
volatile worldwide operating environment, our management team
has taken a series of actions designed to reduce ongoing
operating costs and improve operating efficiencies through
reductions in employee headcount, the disposal of property and
equipment, and considering possible store closures. In fiscal
2009 we closed one corporate-owned store in California. As we
continue our evaluation we may in future periods close
additional corporate-owned store locations.
Store
Expansion
From February 1, 2002 (when we had one store, in Vancouver)
to January 31, 2010, we opened 109 net 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 that of Canada. We opened net
seven stores in the United States and Canada in fiscal 2009.
Franchise
Stores in North America
As of January 31, 2010, we had one franchise store in
Canada and four franchise stores in the United States. In fiscal
2008 we reacquired the franchise rights of two Victoria, British
Columbia and one Bellevue, Washington locations thereby
decreasing the net revenue earned through our franchise channel.
This channel represented 3.2% of our net revenue in fiscal 2009
and 4.6% of our net revenue in fiscal 2008. We began opening
franchise stores in select markets in 2002 to expand our store
network while limiting required capital expenditures. 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, as part of our long-term
business strategy, 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. As of January 31, 2010, we had four franchise
stores in Melbourne, Australia, three franchise stores in
Sydney, Australia, one franchise store in Brisbane, Australia,
one franchise store in Perth, Australia and one corporate-owned
showroom in Hong Kong. In fiscal 2008, we reevaluated our
operating performance in Japan and our strategic priorities and
discontinued our operations in Japan.
Direct
to Consumer
In fiscal 2009 we launched our
e-commerce
website which, along with phone sales, makes up our direct to
consumer channel and is included in our other segment. This
channel is an increasingly substantial part of our business,
representing approximately 4.0% of our revenues in fiscal 2009,
compared to 0.5% of our revenues in fiscal 2008. We believe that
a direct to consumer channel is convenient for our core consumer
and enhances the image of our brand. Our direct to consumer
channel makes our product accessible in more markets than from
our corporate-owned store and franchise channels alone. We use
the channel to build brand awareness, especially in new markets
including those outside of North America.
Wholesale
Channel
We also sell lululemon athletica products through premium yoga
studios, health clubs and fitness centers. This channel
represented 2.3% of our net revenue in fiscal 2009 and 1.7% of
our net revenue in fiscal 2008. 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.
6
Our
Products
We offer a comprehensive line of performance apparel and
accessories for both women, men and female youth. Our apparel
assortment, including items such as fitness pants, shorts, tops
and jackets, is designed for healthy lifestyle activities such
as yoga, running and general fitness. 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 and water bottles.
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, color fastness and durability, among others. 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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Luxtreme, our inherently wicking fabric is primarily used
in our running lines and is silky and lightweight; and
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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.
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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.
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
clips for heart rate monitors.
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, social media, 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.
7
Product
Design and Development
Our product design efforts are led by a team of 14 designers
based in Vancouver, British Columbia. 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
persons we refer to as 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 bring
particular specifications to our products. These specifications
include characteristics such as stretch ability, capability to
wick moisture, color fastness and durability, among others. In
addition, to ensure the quality of our fabric and its
authenticity, we test our products using a leading testing
facility, as well as actual wear tests done on any potential
fabric. We also partner with a leading independent inspection,
verification, testing and certification company, which conducts
a battery of tests before each season on our fabrics, testing
for a variety of performance characteristics including pilling,
shrinkage, abrasion resistance 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
corporate-owned store locations. Our process does not involve
edits by intermediaries, such as retail buyers or a sales force,
and we believe it incorporates 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, nor do we
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 35
manufacturers, 10 of which produced approximately 85% of our
products in fiscal 2009. During fiscal 2009, no single
manufacturer produced more than 25% of our product offering.
During fiscal 2009, approximately 75% of our products were
produced in China, approximately 8% in South East Asia,
approximately 5% in Canada and the remainder in the United
States, Israel, Peru and Taiwan. Our North American
manufacturers 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 also to 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 with applicable law and our workplace code of conduct.
Distribution
Facilities
We centrally distribute finished products in North America from
distribution facilities in Vancouver, British Columbia and
Renton, Washington. We operate the distribution facility in
Vancouver, which is leased and is approximately
102,000 square feet. The facility in Renton, Washington is
operated by a third-party. Our contract for
8
the Renton, Washington distribution facility expires in April
2010 and will not be extended. We also entered into a lease and
plan to operate a distribution facility beginning in the second
quarter of fiscal 2010 in Sumner, Washington which is
approximately 82,000 square feet. We believe that these
modern facilities enhance 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 through 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 Gap, Inc.
(including the Athleta collection), and bebe stores, inc.
(including the BEBE SPORT collection).
Our
Employees
As of January 31, 2010, we had 3,219 employees, of
which 1,844 were employed in Canada and 1,375 were employed in
the United States. Of the 1,844 Canadian employees, 1,451 were
employed in our corporate-owned stores, 66 were employed in
distribution, 101 were employed in design, merchandise and
production, and the remaining 226 performed selling, general and
administrative and other functions. Of the 1,375 employees
in the United States, 1,350 were employed in our corporate-owned
stores and showrooms and 25 performed selling, general and
administration functions. None of our employees are currently
covered by a collective bargaining agreement. We have had no
labor-related work stoppages and we believe our relations with
our employees are excellent.
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 the 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,
Management Development and 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
General
economic conditions and volatility in the worldwide economy has
adversely affected consumer spending, which has negatively
affected our results of operations and may continue to do so in
the future.
Our operations and performance depend significantly on economic
conditions, particularly those in Canada and the United States,
and their impact on levels of consumer spending. Consumer
spending on non-essential items is affected by a number of
factors, including consumer confidence in the strength of
economies, fears of recession, the tightening of credit markets,
higher levels of unemployment, higher tax rates, the cost of
consumer credit and other factors. The current volatility in the
United States economy in particular has resulted in an overall
slowing in growth in the retail sector because of decreased
consumer spending, which may remain depressed for the
foreseeable future. These unfavorable economic conditions may
continue to lead our customers to delay or reduce purchase of
our products.
In addition, we could experience reduced traffic in our stores
and limitations on the prices we can charge for our products,
which may include price discounts, either of which could reduce
our sales and profit margins. Economic factors such as those
listed above and increased transportation costs, inflation,
higher costs of labor, insurance and healthcare, and changes in
other laws and regulations may increase our cost of sales and
our operating, selling, general and administrative expenses.
These and other economic factors could have a material adverse
affect on the demand for our products and on our financial
conditions, operating results and stock price.
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
$452.9 million in fiscal 2009, representing a compound
annual increase of approximately 61.9%. 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.
Any
material disruption of our information systems could disrupt our
business and reduce our sales.
We are increasingly dependent on information systems to operate
our website, process transactions, respond to customer
inquiries, manage inventory, purchase, sell and ship goods on a
timely basis and maintain cost-efficient operations. Throughout
fiscal 2009 and fiscal 2008, we upgraded certain of our
information systems to support recent and expected future
growth. These system upgrades improved our ability to capture,
process and ship customer orders, and transfer product between
channels. We incurred additional costs associated with these
upgrades in fiscal 2009 and fiscal 2008. We believe these
systems are stable upon implementation, but there can be no
assurance that future
10
disruptions will not occur. We may experience operational
problems with our information systems as a result of system
failures, viruses, computer hackers or other causes.
Any material disruption or slowdown of our systems, including a
disruption or slowdown caused by our failure to successfully
upgrade our systems, could cause information, including data
related to customer orders, to be lost or delayed which
could especially if the disruption or slowdown
occurred during the holiday season result in delays
in the delivery of merchandise to our stores and customers or
lost sales, which could reduce demand for our merchandise and
cause our sales to decline. Moreover, we may not be successful
in developing or acquiring technology that is competitive and
responsive to the needs of our customers and might lack
sufficient resources to make the necessary investments in
technology to compete with our competitors. Accordingly, if
changes in technology cause our information systems to become
obsolete, or if our information systems are inadequate to handle
our growth, we could lose customers.
Our direct to consumer channel, which includes
e-commerce,
is an increasingly substantial part of our business,
representing approximately 4.0% of our revenues in fiscal 2009.
In addition to changing consumer preferences and buying trends
relating to
e-commerce,
we are vulnerable to certain additional risks and uncertainties
associated with
e-commerce,
including changes in required technology interfaces, website
downtime and other technical failures, security breaches, and
consumer privacy concerns. Our failure to successfully respond
to these risks and uncertainties could reduce
e-commerce
sales and damage our brands reputation.
We have taken over certain portions of our information systems
needs that were previously outsourced to a third-party and are
making upgrades to our information systems. We may take over
other outsourced portions of our information systems in the near
future. If we are unable to manage these aspects of our
information systems or the planned upgrades, our receipt and
delivery of merchandise could be disrupted, which could result
in a decline in our sales.
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 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 will not be extended. We have
entered into a lease and plan to operate a distribution facility
in Sumner, Washington beginning in the second quarter of fiscal
2010. 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.
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.
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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11
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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 new stores in the near future to add to our
existing store base. Of the 124 stores in operation as of
January 31, 2010, we opened two net new stores in Canada,
five net new stores in the United States and four new franchise
stores outside of North America in fiscal 2009. We expect to
open a total of 12 to 15 additional stores in fiscal 2010 in the
United States and Canada. We estimate that we will incur
approximately $7.0 million to $8.5 million of capital
expenditures in fiscal 2010 to open these 12 to 15 additional
stores. In addition, our new stores may not be immediately
profitable and we may incur losses until these stores become
profitable. There can be no assurance that we will open the
planned number of new stores in fiscal 2010. Any failure to
successfully open and operate new stores will harm our results
of operations.
If we
fail to maintain the value and reputation of our brand, our
sales are likely to decline.
Our success depends on the value and reputation of the lululemon
brand. The lululemon name is integral to our business as well as
to the implementation of our strategies for expanding our
business. Maintaining, promoting and positioning our brand will
depend largely on the success of our marketing and merchandising
efforts and our ability to provide a consistent, high quality
customer experience. We rely on social media, as one of our
marketing strategies, to have a positive impact on both our
brand value and reputation. Our brand could be adversely
affected if we fail to achieve these objectives or if our public
image or reputation were to be tarnished by negative publicity.
Any of these events could result in decreases in sales.
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 and
the United States. As of January 31, 2010, we had 44
corporate-owned stores in Canada, 66 corporate-owned stores in
the United States, five franchise stores in North America and
nine franchise stores in Australia. We have limited experience
with regulatory environments and market practices outside of
Canada and the United States, and cannot guarantee that we will
be able to penetrate or successfully operate in any market
outside of North America. As previously disclosed, we have
discontinued our operations in Japan. 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
12
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. 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 North America or disappointing growth
outside of North America 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.
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 sweatshirts. 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 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 catalog sales or an extensive franchise network,
13
as opposed to distribution through retail stores, wholesale or
internet, 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 outside of North America our historic
average sales per square foot. Our sales per square foot in
stores we have opened in new markets, which have primarily been
in the United States, have generally been lower than those we
have been able to achieve in Canada. As sales in new markets
grow to become a larger percentage of our overall sales, our
average sales per square foot will likely decline. 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 three fiscal years, our comparable store
sales have ranged from a decrease of 22% in the fourth quarter
of fiscal 2008 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 foreign
exchange fluctuations, 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.
Our
net sales are affected by direct to consumer
sales.
We sell merchandise over the Internet through our website. Our
e-commerce
operations, included in our direct to consumer channel, are
subject to numerous risks, including reliance on third party
computer hardware/software, rapid technological change,
diversion of sales from our stores, liability for online
content, violations of state or federal laws, including those
relating to online privacy, credit card fraud, risks related to
the failure of the computer systems that operate our websites
and their related support systems, including computer viruses,
telecommunications failures and electronic break-ins and similar
disruptions. There is no assurance that our
e-commerce
operations will continue to achieve sales and profitability
growth.
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 the 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
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our products target, growing our mens and female youth
businesses and expanding our accessories, undergarments and
outerwear 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, allowing 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, 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 Luon fabric are supplied to our Taiwanese
manufacturer by a single company. In fiscal 2009, approximately
85% 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.
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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. Similarly, there can no assurance
that the suppliers of our fabrics, such as Luon, will not sell
the same fabric to our competitors.
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, fabrics 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. 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.
We do not maintain a key person life insurance policy on
Mr. Wilson, Ms. Day or any of the 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.
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
fourth fiscal quarter, reflecting our historical strength in
sales during the holiday season. We generated approximately 39%,
29% and 39% of our full year gross profit during the fourth
quarters of fiscal 2009, fiscal 2008 and fiscal 2007,
respectively. Historically, seasonal variations in our income
from operations have been driven principally by increased net
revenue in our fourth fiscal 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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increases or decreases in our
e-commerce
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.
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. We wrote-off $0.8 million, $0.9 million
and $0.8 million of inventory in fiscal 2009, fiscal 2008
and fiscal 2007, respectively. 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 long-term growth strategy, we plan to expand our
stores and sales of our products into new locations outside
North America. 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 investment 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.
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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 store facilities or real estate, 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 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 January 31,
2010, 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
$144.4 million through January 31, 2015 and
approximately $63.1 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.
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 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.
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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.
Because
a significant portion of our sales are generated in Canada,
fluctuations in foreign currency exchange rates have negatively
affected our results of operations and may continue to do so in
the future.
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, Canadian dollar and Australian dollar. 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 has increased over fiscal 2009 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 $11.2 million in
fiscal 2009 and approximately $11.1 million in fiscal 2008.
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 2009, approximately 5% of our products
were produced in Canada, approximately 75% in China,
approximately 8% in Southeast Asia and the remainder in the
United States, Israel, Peru 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.
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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 the 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 the market, the United States imposed new quotas,
which remained in place through the end of 2008, on certain
categories of natural-fiber products that we import from China.
These quotas were lifted on January 1, 2009, but 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 January 31, 2010, we had one franchise store in
Canada, four franchise stores in the United States and nine
franchise stores in Australia. 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
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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.
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 United States 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
impact 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 may incur higher expenses in the future, which will
negatively impact our financial performance and could cause our
results of operations and financial condition to suffer.
21
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
continued 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 on an annual basis. As
a result, we have implemented the required financial and
managerial controls, reporting systems and procedures and we
incurred 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 until
January 31, 2010, the price of our common stock has ranged
from a low of $4.33 to a high of $60.70 on the Nasdaq Global
Select Market and from a low of CDN $5.60 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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reductions in consumer spending and macroeconomic factors that
may adversely affect consumer spending;
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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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22
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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 eligible for
resale and may be sold on the Nasdaq Global Select Market and
the Toronto Stock Exchange. The large number of shares eligible
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. On July 31,
2008, we filed a registration statement on
Form S-3ASR
(as subsequently amended by a post-effective amendment on
Form S-3
filed on March 30, 2009) in the United States
registering 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. Sales of our
common stock in the public market 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
35% 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:
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the classification of our board of directors into three classes,
with one class elected each year;
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prohibiting cumulative voting in the election of directors;
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the ability of our board of directors to issue preferred stock
without stockholder approval;
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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;
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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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23
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prohibiting stockholder action by written consent; and
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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.
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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 for the foreseeable future.
We currently operate one distribution center located in
Vancouver, British Columbia, and will begin operating a
distribution center located in Sumner, Washington, during the
first quarter of fiscal 2010, which together are 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:
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Approximate
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Location
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Use
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Square Feet
|
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Lease Renewal Date
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Vancouver, BC
|
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Executive and Administrative Offices
|
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30,000
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January 2012
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Vancouver, BC
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Distribution Center
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102,000
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|
November 2017
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Sumner, WA
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Distribution Center
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82,000
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April 2020
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As of January 31, 2010, we leased approximately
314,000 gross square feet relating to our 110
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, 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.
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ITEM 3.
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LEGAL
PROCEEDINGS
|
On April 2, 2009, three former hourly Company employees
filed a class action lawsuit in San Diego Superior Court,
California, entitled Mia Stephens et al v. lululemon
athletica inc. The lawsuit alleges that we violated various
California Labor Code sections by requiring employees to wear
lululemon clothing during working hours without reimbursing such
employees for the cost of the clothing and by paying certain
bonus payments to our employees in the form of lululemon gift
cards redeemable only for lululemon merchandise. The complaint
also alleges that we owe waiting time penalties as the result of
failing to pay employees all wages due at the time of
termination. We and the plaintiffs have agreed to the general
terms of a settlement which has not yet been finalized and which
must be submitted to the court for preliminary and final
approval.
On March 26, 2009, a former hourly Company employee filed a
class action lawsuit in Orange County Superior Court,
California, entitled Brett Kohlenberg et al v.
lululemon athletica inc. The lawsuit alleges that we violated
various California Labor Code sections by failing to pay our
employees for certain rest and meal breaks and off the
clock work, and for penalties related to waiting times and
failure to provide itemized wage statements. We and the
plaintiffs have agreed to the general terms of a settlement
which has not yet been finalized and which must be submitted to
the court for preliminary and final approval.
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
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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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. The following table
sets forth, for the periods indicated, the high and low closing
sale prices of our common stock reported by the Nasdaq Global
Select Market for the last two fiscal years:
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Common Stock Price
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(Nasdaq Global Select
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Market)
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High
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Low
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Fiscal Year Ending January 31, 2010
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Fourth Quarter
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$
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32.50
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$
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24.69
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Third Quarter
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$
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27.90
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$
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18.57
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Second Quarter
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$
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17.72
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$
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11.30
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First Quarter
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$
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14.47
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$
|
4.49
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Fiscal Year Ending February 1, 2009
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Fourth Quarter
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$
|
12.34
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|
$
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6.22
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Third Quarter
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$
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24.85
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$
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10.12
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Second Quarter
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$
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36.63
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|
$
|
22.02
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First Quarter
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$
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35.31
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$
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21.72
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As of January 31, 2010, there were approximately 120
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
January 31, 2010, 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 sale price of $28.00 per share.
The comparisons shown in the graph below are based on historical
data. We caution that the stock price performance showing in the
graph below is not necessarily indicative of, nor is it intended
to forecast, the potential future performance of our common
stock. Information used in the graph was obtained from the
Nasdaq Stock
25
Market website, a source believed to be reliable, but we are not
responsible for any errors or omissions in such information.
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27-Jul-07
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3-Feb-08
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1-Feb-09
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31-Jan-10
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lululemon athletica inc
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$
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100.00
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$
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124.64
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$
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24.29
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$
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100.86
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S&P 500 Index
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$
|
100.00
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$
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95.65
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$
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56.61
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$
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73.61
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S&P Retail Index
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$
|
100.00
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$
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87.67
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$
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53.70
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$
|
82.13
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Issuer
Purchase of Equity Securities
The following table provides information regarding our
repurchases of our common stock during the thirteen week period
ended January 31, 2010:
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Maximum Number
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Total Number of
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of Shares that
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Shares Purchased
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May Yet Be
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Total Number
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Average
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as Part of Publicly
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Purchased Under
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of Shares
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Price Paid
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Announced Plans
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the Plans
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Period(1)
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Purchased
|
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per Share
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|
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or Programs(2)
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|
or Programs(2)
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|
|
January 4, 2010 January 31, 2010
|
|
|
3,170
|
|
|
$
|
31.05
|
|
|
|
3,170
|
|
|
|
2,879,903
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|
November 30, 2009 January 3, 2010
|
|
|
3,146
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|
|
|
30.33
|
|
|
|
3,146
|
|
|
|
2,876,757
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|
November 2 November 29, 2009
|
|
|
3,264
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|
|
|
27.57
|
|
|
|
3,264
|
|
|
|
2,873,493
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,580
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|
|
|
|
|
|
|
9,580
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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(1) |
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Monthly information is presented by reference to our fiscal
months during our fourth quarter of fiscal 2009. |
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(2) |
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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. |
26
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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 operations data for each of the
years ended January 31, 2010, February 1, 2009, and
February 3, 2008 and the consolidated balance sheet data as
of January 31, 2010 and February 1, 2009 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 operations
data for the fiscal years ended January 31, 2007 and
January 31, 2006 and the consolidated balance sheet data as
of February 3, 2008, January 31, 2007 and
January 31, 2006 are derived from our underlying accounting
records. The consolidated statements of income for the years
ended January 31, 2007 and January 31, 2006 and
balance sheets for the fiscal years ended February 3, 2008,
January 31, 2007 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.
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|
|
|
|
|
|
|
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|
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Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
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Consolidated statement of operations data:
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|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
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Net revenue
|
|
$
|
452,898
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|
|
$
|
353,488
|
|
|
$
|
269,942
|
|
|
$
|
147,964
|
|
|
$
|
84,129
|
|
Cost of goods sold
|
|
|
229,812
|
|
|
|
174,421
|
|
|
|
125,015
|
|
|
|
72,249
|
|
|
|
41,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
223,086
|
|
|
|
179,067
|
|
|
|
144,927
|
|
|
|
75,715
|
|
|
|
42,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
136,161
|
|
|
|
118,098
|
|
|
|
93,376
|
|
|
|
51,863
|
|
|
|
26,416
|
|
Provision for impairment and lease exit costs
|
|
|
379
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,228
|
|
|
|
|
|
Principal stockholder bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
86,546
|
|
|
|
56,564
|
|
|
|
51,551
|
|
|
|
16,624
|
|
|
|
3,727
|
|
Other income (expense), net
|
|
|
164
|
|
|
|
821
|
|
|
|
1,029
|
|
|
|
104
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
86,710
|
|
|
|
57,386
|
|
|
|
52,580
|
|
|
|
16,728
|
|
|
|
3,730
|
|
Provision for income taxes
|
|
|
28,429
|
|
|
|
16,884
|
|
|
|
20,464
|
|
|
|
8,752
|
|
|
|
2,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
58,281
|
|
|
|
40,502
|
|
|
|
32,116
|
|
|
|
7,976
|
|
|
|
1,394
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
(1,273
|
)
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
58,281
|
|
|
$
|
39,363
|
|
|
$
|
30,843
|
|
|
$
|
7,666
|
|
|
$
|
1,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.83
|
|
|
$
|
0.59
|
|
|
$
|
0.48
|
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic earnings per share
|
|
$
|
0.83
|
|
|
$
|
0.57
|
|
|
$
|
0.46
|
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.82
|
|
|
$
|
0.57
|
|
|
$
|
0.46
|
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
$
|
0.45
|
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
Basic weighted-average number of shares outstanding
|
|
|
70,251
|
|
|
|
68,711
|
|
|
|
66,430
|
|
|
|
65,157
|
|
|
|
38,724
|
|
Diluted weighted-average number of shares outstanding
|
|
|
70,949
|
|
|
|
70,942
|
|
|
|
69,298
|
|
|
|
65,304
|
|
|
|
38,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
159,573
|
|
|
$
|
56,797
|
|
|
$
|
52,545
|
|
|
$
|
15,494
|
|
|
$
|
3,877
|
|
Total assets
|
|
|
307,258
|
|
|
|
211,636
|
|
|
|
155,092
|
|
|
|
71,325
|
|
|
|
41,914
|
|
Total stockholders equity
|
|
|
233,108
|
|
|
|
154,843
|
|
|
|
112,034
|
|
|
|
37,379
|
|
|
|
28,052
|
|
27
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This discussion summarizes our consolidated operating results,
financial condition and liquidity during the three-year period
ending January 31, 2010. Our fiscal year ends on the Sunday
closest to January 31 of the following year, typically resulting
in a 52 week year, but occasionally giving rise to an
additional week, resulting in a 53 week year. Fiscal 2009,
2008 and 2007 ended on January 31, 2010, February 1,
2009 and February 3, 2008, respectively. The following
discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included
elsewhere in this annual report on
Form 10-K.
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.
Overview
The world economy and capital markets are continuing to
experience the effects of unprecedented volatility. During
fiscal 2008, there was a considerable slow down as problems in
global financial markets became more widespread and consumers
cut back on retail spending amid fears of a global recession.
Our sales growth slowed in the latter part of fiscal 2008,
driven in part by this reduced spending. This challenging
economic climate and the continued weakness of the Canadian
dollar continued to negatively affect our financial results
during the beginning of fiscal 2009. Recently, the global
economy has shown some signs of improvement, as reflected in our
current quarter net revenue growth, and the Canadian dollar has
strengthened relative to the United States dollar. This growth
however, does not match the rapid growth we realized in prior
years. Management recognizes the difficult economic situation
that many of our consumers are still facing and does not expect
our rate of growth to change significantly in the next fiscal
year.
In response to the changes in the world economy and the impact
on our operating results, we have taken several steps to address
the deterioration in the retail environment and to address our
support structure. These steps, which we discussed in our annual
report on
Form 10-K
for fiscal 2008 filed with the SEC on March 27, 2009,
included the development and implementation of several important
initiatives as part of our strategy designed to increase
customer traffic in our corporate-owned store locations, reduce
infrastructure expenses and improve our operating results.
We continue to realize the positive effects of our cost
reductions and efficiency initiatives, and expect that such
initiatives, combined with modest net revenue growth, will
continue to impact our financial results during fiscal 2010.
These targeted cost reductions and associated efficiency efforts
were designed to structure our business for long-term profitable
growth and to protect our brand integrity. We believe our
continued strong cash flow generation, solid balance sheet and
healthy liquidity provide us with the financial flexibility to
continue executing the initiatives we implemented at the end of
fiscal 2008, as well as make investments at strategic times
going forward which will benefit our company.
Operating
Segment Overview
lululemon is a designer and retailer of technical athletic
apparel operating primarily in North America. Our yoga-inspired
apparel is primarily 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, running and general
fitness. As of January 31, 2010, our branded apparel was
principally sold through 124 corporate-owned and franchise
stores that are primarily located in Canada and the United
States and via our retail website through our direct to
consumers sales channel. 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 2009, 59.9% of our net revenue was derived from
sales of our products in Canada, 40.0% of our net revenue was
derived from the sales of our products in the United States and
an immaterial amount of our net revenue was derived from sales
of our products outside of North America. In fiscal 2008, 68.9%
of our net revenue was derived
28
from sales of our products in Canada, 31.1% of our net revenue
was derived from the sales of our products in the United States
and an immaterial amount of our net revenue was derived from
sales of our products outside of North America. In fiscal
2007, 80.3% of our net revenue was derived from sales of our
products in Canada, 19.7% of our net revenue was derived from
the sales of our products in the United States and an immaterial
amount of our net revenue was derived from sales of our products
outside of North America.
Our net revenue has grown from $40.7 million in fiscal 2004
to $452.9 million in fiscal 2009. This represents a
compound net annual growth rate of 61.9%. Our net revenue from
continuing operations also increased from $353.5 million in
fiscal 2008 to $452.9 million in fiscal 2009, representing
a 28.1% increase. Our increase in net revenue from fiscal 2004
to fiscal 2009 resulted from the net addition of seven retail
locations and our
e-commerce
sales channel in fiscal 2009, 35 retail locations in fiscal
2008, 31 retail locations in fiscal 2007, 14 retail locations in
fiscal 2006 and 17 retail locations in fiscal 2005, and
comparable store sales growth of 9%, 0%, 34% and 25% in fiscal
2009, fiscal 2008, fiscal 2007 and fiscal 2006, 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, net revenue from which
increased 30% in fiscal 2009 compared to fiscal 2008 and
represented approximately 12.1% of net revenue in fiscal 2009
versus 11.5% of net revenue in fiscal 2008, and our accessories
line, which also increased in proportion to net revenue in
fiscal 2009 as compared to fiscal 2008.
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 3.2% of our net revenues from continuing
operations in fiscal 2009, 4.6% in fiscal 2008 and 6.7% 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. Our other operations, consisting of direct to
consumer sales, wholesale accounts, warehouse sales and sales
from company-operated showrooms, accounted for less than 10% of
our net revenues from continuing operations in each of fiscal
2009, fiscal 2008 and fiscal 2007. We will re-evaluate our
segment reporting disclosures in fiscal 2010.
As of January 31, 2010, we sold our products through 110
corporate-owned stores located in Canada and the United States.
As previously disclosed, we discontinued 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 86.9%
of total net revenue in fiscal 2009 and 89.3% of total net
revenue in fiscal 2008.
As of January 31, 2010, we also had five franchise stores
located in North America and nine 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.
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. During fiscal
2008 we invested in NEW HARBOUR YOGA PTY LTD. (formerly known as
lululemon athletica (australia) pty ltd.) which operates nine
franchise stores. In 2005, we opened a franchise store in Japan.
In 2006, we terminated our franchise arrangement and entered
into a joint venture agreement with Japanese apparel
29
company Descente Ltd, or Descente, a global leader in fabric
technology, to operate our stores in Japan, which were
discontinued in fiscal 2008.
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 direct to
consumers through our
e-commerce
and phone sales channels, as well as wholesale customers,
including related shipping and handling charges, warehouse sales
and sales through a number of company-operated showrooms.
E-commerce
sales are taken directly from retail customers through
www.lululemon.com. Wholesale customers include select
premium yoga studios, health clubs and fitness centers. Phone
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
when we enter new markets and feature a limited selection of our
product offering during select hours. Other net revenue
accounted for 9.9% of total net revenue in fiscal 2009 and 6.1%
of total net revenue in fiscal 2008.
Basis of
Presentation
Net revenue is comprised of:
|
|
|
|
|
corporate-owned store net revenue, which includes sales to
customers through corporate-owned stores;
|
|
|
|
franchises net revenue, which consists of licensing fees and
royalties as well as sales of our products to
franchises; and
|
|
|
|
other net revenue, which includes direct to consumer sales,
wholesale accounts, warehouse sales and sales from
company-operated showrooms.
|
in each case, net of an estimated allowance for sales returns
and discounts.
In addition, we separately track comparable store sales, which
reflect 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. Non-comparable store sales include sales from
new stores that have not been open for 12 months, sales
from franchises, direct to consumer sales, wholesale and
showrooms, and sales from corporate-owned stores which we have
closed.
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:
|
|
|
|
|
the location of new stores relative to existing stores;
|
|
|
|
consumer preferences, buying trends and overall economic trends;
|
|
|
|
our ability to anticipate and respond effectively to customer
preferences for technical athletic apparel;
|
|
|
|
competition;
|
|
|
|
changes in our merchandise mix;
|
|
|
|
pricing;
|
|
|
|
the timing of our releases of new merchandise and promotional
events;
|
|
|
|
the effectiveness of our grassroots marketing efforts;
|
|
|
|
the level of customer service that we provide in our stores;
|
|
|
|
our ability to source and distribute products
efficiently; and
|
|
|
|
the number of stores we open, close (including for temporary
renovations) and expand in any period.
|
Opening new stores is an important part of our growth strategy.
Accordingly, 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.
30
Cost of goods sold includes:
|
|
|
|
|
the cost of purchased merchandise, inbound freight, duty and
non-refundable taxes incurred in delivering goods to our
distribution centers;
|
|
|
|
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;
|
|
|
|
the cost of our production, merchandise and design departments
including salaries, stock-based compensation and benefits, and
operating expenses;
|
|
|
|
the cost of occupancy related to store operations (such as rent
and utilities) and the depreciation and amortization related to
store-level capital expenditures;
|
|
|
|
hemming; and
|
|
|
|
shrink and valuation reserves.
|
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.
Selling, general and administrative expenses consist of
all operating costs not otherwise included in cost of goods sold
and provision for impairment and lease exit costs. 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, and 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 will increase in absolute dollars due to
anticipated continued growth of our corporate support staff and
store-level employees.
Provision for impairment and lease exit costs consists of
asset impairments, lease exit and other related costs associated
with the closure of one US corporate-owned store in the first
quarter of fiscal 2009 and one US corporate-owned store in the
fourth quarter of fiscal 2008 as well as an asset impairment
provision based on managements ongoing evaluation of its
portfolio of corporate-owned store locations. Long-lived assets
are reviewed at the store-level periodically for impairment or
whenever events or changes in circumstances indicate that full
recoverability of net assets through future cash flows is in
question. Factors used in the evaluation include, but are not
limited to, managements plans for future operations,
recent operating results and projected cash flows.
Stock-based compensation expense includes charges
incurred in recognition of compensation expense associated with
grants of stock options and grants of restricted stock units. We
recognize stock-based compensation expense for both awards
granted by us and awards granted under a stockholder sponsored
plan. 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.
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 FASB
ASC Topic
31
718 Compensation Stock Compensation
(which codified former Statement of Financial Accounting
Standards No. 123(R) Share-Based Payments) and
other relevant regulatory guidelines, specifically:
|
|
|
|
|
the valuation did not coincide with the option grant
dates; and
|
|
|
|
the valuation incorrectly included a minority interest discount.
|
As a result, management determined that it would be necessary to
retrospectively calculate a new valuation for the July 2006
option grants. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Weghted-
|
|
Initial
|
|
Original
|
|
Average
|
|
|
Number of
|
|
Average
|
|
Public
|
|
Fair Value
|
|
Reassessed
|
|
|
Options
|
|
Exercise
|
|
Offering
|
|
Assessment
|
|
Fair Value
|
Grant Date
|
|
Granted
|
|
Price
|
|
Price
|
|
of Options
|
|
of Options
|
|
July 3, 2006
|
|
|
2,899,186
|
|
|
$
|
0.58
|
|
|
$
|
18.00
|
|
|
$
|
0.33
|
|
|
$
|
0.91
|
|
December 6, 2006
|
|
|
5,955
|
|
|
$
|
0.58
|
|
|
$
|
18.00
|
|
|
$
|
0.33
|
|
|
$
|
8.09
|
|
December 27, 2006
|
|
|
1,309,008
|
|
|
$
|
0.58
|
|
|
$
|
18.00
|
|
|
$
|
0.33
|
|
|
$
|
8.09
|
|
January 3, 2007
|
|
|
357,335
|
|
|
$
|
0.58
|
|
|
$
|
18.00
|
|
|
$
|
0.33
|
|
|
$
|
8.09
|
|
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 a weighted-average price of $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.
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.
Other income (expense), net includes interest earned on
our cash balances and our advances to franchise, interest costs
associated with our credit facilities and with letters of credit
drawn under these facilities for the purchase of merchandise and
our share of the operations of our investment in NEW HARBOUR
YOGA PTY LTD. (the Australian franchise operator). We expect to
continue to generate interest income to the extent that our cash
generated from operations exceeds our cash used for investment.
We have maintained relatively small outstanding balances on our
credit facilities and expect to continue to do so.
Provision for income taxes 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. For periods 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. During the second quarter of fiscal
2008, after considering a number of factors, including recent
taxable income, utilization of previously unrealized net
operating losses, or NOLs, our growth strategy as well as other
business and macroeconomic factors, we determined that we would
more likely than not realize the benefit of deferred tax assets
through future taxable income. We have recorded deferred tax
assets in respect of foreign tax credits and other deductible
temporary differences of $15.1 million as at
January 31, 2010.
Several factors have contributed to our effective tax rate
fluctuating in recent periods. First, in fiscal 2008 and fiscal
2007, we generated losses in the United States which we were
unable to offset against our income in Canada.
32
Second, we incurred stock-based compensation expense of
$5.6 million, $6.5 million and $5.9 million in
fiscal 2009, fiscal 2008 and fiscal 2007, respectively, a
portion of which were not deductible for tax purposes in Canada
and the United States during these periods. Third, the Canadian
corporate tax rate decrease in fiscal 2008 from 35% to 32%.
Fourth, in fiscal 2008 we began to release the valuation against
US loss carry forwards. Our effective tax rate in fiscal 2009
was 32.8%, compared to 29.4% in fiscal 2008, and 38.9% in fiscal
2007.
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 Australia, 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.
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,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
452,898
|
|
|
$
|
353,488
|
|
|
$
|
269,942
|
|
Cost of goods sold
|
|
|
229,812
|
|
|
|
174,421
|
|
|
|
125,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
223,086
|
|
|
|
179,067
|
|
|
|
144,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
136,161
|
|
|
|
118,098
|
|
|
|
93,376
|
|
Provision for impairment and lease exit costs
|
|
|
379
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
86,546
|
|
|
|
56,564
|
|
|
|
51,551
|
|
Other income (expense), net
|
|
|
164
|
|
|
|
821
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
86,710
|
|
|
|
57,385
|
|
|
|
52,580
|
|
Provision for income taxes
|
|
|
28,429
|
|
|
|
16,884
|
|
|
|
20,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
58,281
|
|
|
|
40,501
|
|
|
|
32,116
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
(1,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
58,281
|
|
|
$
|
39,363
|
|
|
$
|
30,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(% of net revenue)
|
|
|
Net revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
50.7
|
|
|
|
49.3
|
|
|
|
46.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49.3
|
|
|
|
50.7
|
|
|
|
53.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
30.1
|
|
|
|
33.4
|
|
|
|
34.6
|
|
Provision for impairment and lease exit costs
|
|
|
0.1
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19.1
|
|
|
|
16.0
|
|
|
|
19.1
|
|
Other income (expense), net
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
19.2
|
|
|
|
16.2
|
|
|
|
19.5
|
|
Provision for income taxes
|
|
|
6.3
|
|
|
|
4.8
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
12.9
|
|
|
|
11.5
|
|
|
|
11.9
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12.9
|
|
|
|
11.1
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Comparison
of Fiscal 2009 to Fiscal 2008
Net
Revenue
Net revenue increased $99.4 million, or 28%, to
$452.9 million in fiscal 2009 from $353.5 million in
fiscal 2008. This increase was primarily the result of increased
sales at locations in our comparable stores base as well as
sales from new stores opened. Assuming the average exchange rate
between the Canadian and United States dollars in fiscal 2008
remained constant, our net revenue would have increased
$103.0 million, or 29%, in fiscal 2009. The constant dollar
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.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
393,451
|
|
|
$
|
315,548
|
|
Franchises
|
|
|
14,554
|
|
|
|
16,198
|
|
Other
|
|
|
44,893
|
|
|
|
21,742
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
452,898
|
|
|
$
|
353,488
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $77.9 million, or
25%, to $393.5 million in fiscal 2009 from
$315.5 million in fiscal 2008. The following contributed to
the $77.9 million increase in net revenue from our
corporate-owned stores segment:
|
|
|
|
|
Net revenue from corporate-owned stores we opened during fiscal
2009, and during fiscal 2008 prior to sales from such stores
becoming part of our comparable stores base, contributed
$46.5 million of the increase. Net new store openings in
fiscal 2009 included two stores in Canada and five stores in the
United States;
|
|
|
|
Comparable store sales increase of 9% in fiscal 2009 resulted in
a $26.6 million increase to net revenue, excluding the
effect of foreign currency fluctuations. Including the effect of
foreign currency fluctuations, comparable store sales increased
8%, or $24.1 million, in fiscal 2009;
|
|
|
|
Net revenue related to gift card breakage contributed
$2.2 million of the increase. Based on historical gift card
breakage, we recognize into revenue a portion of gift card sales
for which we estimate redemption is remote over the estimated
period of redemption. This includes a one-time credit of
$1.3 million recorded in the first quarter of fiscal 2009
related to a change in our estimated rate of redemption; and
|
|
|
|
The acquisition of two Victoria, British Columbia and one
Bellevue, Washington franchise stores in September 2008
contributed $5.1 million before entering the comparative
store base.
|
Franchises. Net revenue from our franchises
segment decreased $1.6 million, or 10%, to
$14.6 million in fiscal 2009 from $16.2 million in
fiscal 2008. The decrease in net revenue from our franchises
segment consisted primarily of franchises net revenue of
$2.2 million that shifted to corporate-owned stores net
revenue when we acquired two franchise stores in Victoria,
British Columbia and one franchise store in Bellevue,
Washington. This was partially offset by increased franchise
revenue of $0.6 million from our one remaining Canadian
franchise location and four franchise locations in the United
States. Opening new franchise stores is not a significant part
of our near-term store growth strategy, and as such we expect
net revenue from our franchises segment to continue to decrease
in future years.
Other. Net revenue from our other segment
increased $23.2 million, or 106%, to $44.9 million in
fiscal 2009 from $21.7 million in fiscal 2008. The
following contributed to the $23.2 million increase in net
revenue from our other segment:
|
|
|
|
|
an increase in sales from the launch of our
e-commerce,
which is included in our direct to consumer channel, in fiscal
2009 which contributed $16.8 million in net revenues;
|
|
|
|
an increase in outlet revenues of $5.0 million due to
existing outlet locations increase of $3.2 million and two
new outlet locations opened in fiscal 2009 which contributed
sales revenue of $1.8 million;
|
34
|
|
|
|
|
new and existing wholesale accounts contributed
$4.4 million of the increase; and
|
|
|
|
showroom sales revenue increased $1.6 million.
|
The increase in net revenue from our other segment was offset by:
|
|
|
|
|
temporary store locations opened in fiscal 2008, which
contributed $3.2 million, were not opened in fiscal 2009;
|
|
|
|
decreased warehouse revenue, due to fewer warehouse sales in
fiscal 2009 compared to fiscal 2008, of
$0.6 million; and
|
|
|
|
decreased phonesale revenue, which shifted to
e-commerce,
of $0.2 million.
|
Gross
Profit
Gross profit increased $44.0 million, or 25%, to
$223.1 million in fiscal 2009 from $179.1 million in
fiscal 2008. The increase in gross profit was driven principally
by:
|
|
|
|
|
an increase of $77.3 million in net revenue from our
corporate-owned stores segment; and
|
|
|
|
an increase of $23.2 million in net revenue from our other
segment.
|
This amount was partially offset by:
|
|
|
|
|
an increase in product costs of $39.5 million associated
with our sale of goods through corporate-owned stores,
franchises and other segments;
|
|
|
|
an increase in occupancy costs of $8.5 million related to
an increase in corporate-owned stores;
|
|
|
|
an increase in depreciation of $3.2 million primarily
related to an increase in corporate-owned stores;
|
|
|
|
an increase of $1.8 million in expenses related to our
production, design and merchandising departments;
|
|
|
|
an increase of $1.7 million in discounts, shrinkage and
other as a result of increased sales volume; and
|
|
|
|
a decrease of $1.6 million in net revenue from our
franchise segment.
|
Gross profit, as a percentage of net revenue, or gross margin,
decreased 1.4%, to 49.3% in fiscal 2009 from 50.7% in fiscal
2008. The decrease in gross margin resulted from:
|
|
|
|
|
unfavorable foreign exchange differences of 1.3% on product
costs, depreciation, occupancy and production, design,
merchandising and distribution departments as a result of the
strengthening Canadian dollar;
|
|
|
|
a decrease in corporate-owned stores, franchise and other
product margins, which contributed a decrease in gross margin of
0.6% as a result of increased direct product costs, markdowns
and discounts; and
|
|
|
|
an increase in reduced write-downs and other of 0.1%.
|
This was partially offset by a decrease in expenses related to
our production, design, merchandising and distribution
departments, relative to the increase in net revenue, which had
a leveraging effect on gross margin and contributed an increase
of 0.6%.
Our costs of goods sold in fiscal 2009 and fiscal 2008 included
$0.8 million and $0.8 million, respectively, of
stock-based compensation expense.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$18.0 million, or 15%, to $136.2 million in fiscal
2009 from $118.1 million in fiscal 2008. As a percentage of
net revenue, selling, general and administrative expenses
35
decreased 3.3%, to 30.1%, in fiscal 2009 from 33.4% in fiscal
2008. Of the $18.0 million increase in selling, general and
administrative expenses:
|
|
|
|
|
an increase in administrative costs related to our direct to
consumer segment, primarily associated with the launch in fiscal
2009 of our new
e-commerce
website, of $5.6 million;
|
|
|
|
an increase of $3.8 million primarily associated with
employment-related legal matters, professional fees and legal
costs associated with ongoing litigation, including legal
settlement costs;
|
|
|
|
an increase in employee compensation, including options expense,
of $2.7 million related to an increase in employee head
count in our corporate-owned store locations and store support
center, as our net revenue growth recovered in the latter half
of fiscal 2009, as well as increased store labor hours due to
opening additional corporate-owned stores, partially offset by a
one-time charge in fiscal 2008 related to the acceleration of
performance-based awards;
|
|
|
|
an increase of $2.3 million related to higher management
incentive-based
compensation;
|
|
|
|
an increase in credit card fees of $1.9 million resulting
from increased sales volume at corporate-owned stores and the
addition of
e-commerce
sales;
|
|
|
|
an increase in depreciation costs of $1.8 million primarily
related to IT projects placed in use as well as the retirement
of fixed assets no longer in use;
|
|
|
|
an increase in other costs of $0.7 million as a result of
the expansion of our business;
|
|
|
|
an increase in distribution costs of $0.5 million as a
result of increased sales volume; and
|
|
|
|
an increase in occupancy costs of $0.4 million related to
our other segment as we opened additional outlet locations in
fiscal 2009.
|
These amounts were partially offset by a decrease in
discretionary spending of $1.7 million related to travel,
meals and entertainment and supplies.
We expect selling, general and administrative expenses to
increase throughout fiscal 2010 as we add administrative and
sales personnel and increase our infrastructure to support the
growth in our store base and our
e-commerce
channel.
Our selling, general and administrative expenses in fiscal 2009
and fiscal 2008 included $4.8 million and
$5.8 million, respectively, of stock-based compensation
expense.
Income
from Operations
Income from operations increased $30.0 million, or 53%, to
$86.5 million in fiscal 2009 from $56.6 million in
fiscal 2008. The increase of $30.0 million in income from
operations for fiscal 2009 was primarily due to a
$44.0 million increase in gross profit resulting from sales
by additional corporate-owned stores opened during fiscal 2009
and fiscal 2008 and a decrease of $4.0 million in provision
for impairment and lease exit costs, offset by an increase of
$18.0 million in selling, general and administrative
expenses.
On a segment basis, we determine income from operations without
taking into account our general corporate expenses such as
corporate employee costs, travel expenses and corporate rent.
For purposes of our managements analysis of our financial
results, we have allocated some general product expenses to our
corporate-owned stores segment. For example, all expenses
related to our production, design, merchandise and distribution
departments have been allocated to this segment.
Income from operations (before general corporate expenses) from:
|
|
|
|
|
our corporate-owned stores segment increased $26.7 million,
or 28%, to $121.6 million for fiscal 2009 from
$94.9 million for fiscal 2008 primarily due to an increase
in corporate-owned stores product margin of $45.9 million,
offset by an increase of $11.6 million in occupancy and
depreciation costs, $4.5 million in store employee
expenses, $1.5 million in administrative expenses and
$1.5 million in other store expenses;
|
36
|
|
|
|
|
our franchises segment decreased $2.1 million, or 27%, to
$5.5 million in fiscal 2009 from $7.5 million in
fiscal 2008, primarily as a result of franchise income from
operations of $2.2 million included in the comparative
period shifting to corporate-owned stores income from operations
when we acquired two franchise stores in Victoria, British
Columbia and one franchise store in Bellevue, Washington,
partially offset by increased franchise income from operations
of $0.6 million from our remaining franchise locations.
Opening new franchise stores is not a significant part of our
near-term store growth strategy, and as such we do not expect
income from operations from our franchises segment to grow in
future years as a result of adding franchise locations; and
|
|
|
|
|
|
our other segment increased $7.6 million, or 161%, to
$12.4 million in fiscal 2009 from $4.7 million in
fiscal 2008 primarily due to an increase in revenue of
$23.2 million, offset by an increase of $9.5 million
in product costs and an increase of $6.1 million in other
administrative expenses. Our direct to consumer sales channel,
which is included in our other segment, is an increasingly
substantial part of our business and we expect income from
operations to continue to increase in future years as a result
of this growth.
|
Income from operations also includes general corporate expenses.
General corporate expenses increased $2.3 million, or 5%,
to $52.9 million in fiscal 2009 from $50.6 million in
fiscal 2008 primarily due to an increase in expenses related to
our production, design, merchandising and distribution
departments of $5.7 million and an increase in depreciation
and amortization expense of $1.8 million, offset by a
decrease in provision for impairment and lease exit costs of
$4.0 million and a decrease in other corporate expenses of
$1.2 million. General corporate expenses are expected to
continue to increase in future years as we grow our overall
business and require increased efforts at our head office to
support our corporate-owned stores, franchises and other
segments.
Our $0.4 million provision for impairment and lease exit
costs was a result of managements review of our portfolio
of corporate-owned store locations. In conjunction with our
ongoing evaluation to ensure that each of our corporate-owned
stores fit into our long-term growth strategy, we closed one of
our corporate-owned stores in the first quarter of fiscal 2009.
This closure was fully accrued in fiscal 2008. We also closed
one of our corporate-owned stores in the fourth quarter of
fiscal 2008. We recorded a $0.7 million charge related to
this closure, which included a $0.5 million asset
impairment and a $0.2 million accrual for lease exit costs.
The fair market values were estimated using an expected present
value technique.
Other
Income (Expense), Net
Other income (expense), net decreased $0.7 million, or 87%,
to $0.2 million in fiscal 2009 from $0.8 million in
fiscal 2008. Of the $0.7 million decrease in other income
(expense), net:
|
|
|
|
|
$0.5 million resulted from a decrease in interest income
due to lower interest rates offered on cash balances; and
|
|
|
|
|
|
$0.1 million resulted from an increase in interest expense.
|
Provision
for Income Taxes
Provision for income taxes increased $11.5 million, or 68%,
to $28.4 million in fiscal 2009 from $16.9 million in
fiscal 2008. In fiscal 2009, our effective tax rate was 32.8%
compared to 29.4% in fiscal 2008. The lower effective tax rate
in fiscal 2008 was due to the release of the valuation allowance
against U.S. loss carry forwards in fiscal 2008. We
generated taxable income in the United States in fiscal 2009
which contributed to the increase in the effective tax rate.
During fiscal 2009 an adjustment was made to deferred tax assets
and additional paid-in capital in the amount of $4,963 relating
to windfall recorded in the year ended February 1, 2009 in
excess of taxes payable. The Company has concluded that the
adjustment was not material to the financial statements.
Net
Income
Net income increased $18.9 million, or 48%, to
$58.3 million in fiscal 2009 from $39.4 million in
fiscal 2008. The increase in net income of $18.9 million in
fiscal 2009 was a result of an increase in gross profit of
$44.0 million increase in gross profit resulting from sales
by additional corporate-owned stores opened during fiscal 2009
and fiscal 2008 and a decrease of $4.0 million in provision
for impairment and lease exit costs, offset by an increase of
$18.0 million in selling, general and administrative
expenses, an increase of $11.5 million in provision for
income taxes and a decrease of $0.7 million in other income
(expense), net.
37
Comparison
of Fiscal 2008 to Fiscal 2007
Net
Revenue
Net revenue increased $83.5 million, or 31%, to
$353.5 million in fiscal 2008 from $269.9 million in
fiscal 2007. This increase was primarily the result of sales
from new stores opened. Assuming the average exchange rate
between the Canadian and United States dollars in fiscal 2007
remained constant, our net revenue would have increased
$92.6 million, or 34%, in fiscal 2008. The constant dollar
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.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
315,548
|
|
|
$
|
240,441
|
|
Franchises
|
|
|
16,198
|
|
|
|
18,141
|
|
Other
|
|
|
21,742
|
|
|
|
11,360
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
353,488
|
|
|
$
|
269,942
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $75.1 million, or
31%, to $315.5 million in fiscal 2008 from
$240.4 million in fiscal 2007. The following contributed to
the $75.1 million increase in net revenue from our
corporate-owned stores segment:
|
|
|
|
|
New stores opened during fiscal 2008 contributed
$37.3 million, or 16%, of the increase. During fiscal 2008,
we opened 34 corporate-owned stores, consisting of three in
Canada and 31 in the United States;
|
|
|
|
New stores opened during fiscal 2007 prior to sales from such
stores becoming part of our comparable store sales base
contributed $34.3 million, or 14%, of the increase. This
consisted of five stores in Canada and 21 stores in the United
States; and
|
|
|
|
The acquisition of two Victoria, British Columbia and one
Bellevue, Washington franchise stores in September 2008
contributed $3.7 million, or 2%, of the increase.
|
The increase was partially offset by comparable store sales
decline in fiscal 2008, resulting in a $0.2 million
decrease to net revenue. Assuming the average exchange rate
between the Canadian and U.S. dollar in fiscal 2007
remained constant, our comparable store sales would have
increased 3% in fiscal 2008 and contributed $7.5 million,
or 3%, of the increase.
Franchises. Net revenue from our franchises
segment decreased $1.9 million, or 11%, to
$16.2 million in fiscal 2008 from $18.1 million in
fiscal 2007. The decrease in net revenue from our franchises
segment consisted primarily of franchises net revenue of
$2.7 million that shifted to corporate-owned stores net
revenue when we acquired two franchise stores in Victoria,
British Columbia and one franchise store in Bellevue,
Washington. This was partially offset by increased franchise
revenue of $0.8 million from our one remaining Canadian
franchise location and four franchise locations in the United
States.
Other. Net revenue from our other segment
increased $10.4 million, or 91%, to $21.7 million in
fiscal 2008 from $11.4 million in fiscal 2007. The
following contributed to the $10.4 million increase in net
revenue from our other segment:
|
|
|
|
|
temporary store locations opened in fiscal 2008 contributed
sales revenue of $3.2 million;
|
|
|
|
an additional warehouse sale in fiscal 2008 contributed
increased sales revenue of $2.8 million;
|
|
|
|
two new outlet locations opened in fiscal 2008 contributed sales
revenue of $2.0 million;
|
|
|
|
new and existing wholesale accounts contributed
$1.2 million of the increase;
|
|
|
|
showroom sales revenue increased $0.9 million; and
|
|
|
|
phonesale revenue accounted for $0.4 million of the
increase.
|
38
Gross
Profit
Gross profit increased $34.1 million, or 24%, to
$179.1 million in fiscal 2008 from $144.9 million in
fiscal 2007. The increase in gross profit was driven principally
by:
|
|
|
|
|
an increase of $75.1 million in net revenue from our
corporate-owned stores segment; and
|
|
|
|
an increase of $10.4 million in net revenue from our other
segment.
|
This amount was partially offset by:
|
|
|
|
|
an increase in product costs of $28.8 million associated
with our sale of goods through corporate-owned stores,
franchises and other segments;
|
|
|
|
an increase in occupancy costs of $12.8 million related to
an increase in corporate-owned stores;
|
|
|
|
an increase in depreciation of $4.4 million primarily
related to an increase in corporate-owned stores;
|
|
|
|
an increase of $2.1 million in expenses related to our
production, design and merchandising departments;
|
|
|
|
a decrease of $1.9 million in net revenue from our
franchise segment; and
|
|
|
|
an increase of $1.4 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,
decreased 3.0%, to 50.7% in fiscal 2008 from 53.7% in fiscal
2007. The decrease in gross margin resulted from:
|
|
|
|
|
an increase in occupancy costs as a percentage of net revenue
that contributed to a decrease in gross margin of 2.0% as a
result of decreased sales per store and a resulting deleverage
on fixed occupancy costs;
|
|
|
|
an increase in store depreciation expense as a percentage of net
revenue in fiscal 2008 compared to fiscal 2007 as a result of
new store openings in new markets, which contributed to a
decrease in gross margin of 0.7%;
|
|
|
|
an increase in product costs as a percentage of net revenue that
contributed to a decrease in gross margin of 0.3%, primarily due
to an increase in corporate-owned store product costs and
increased mark-downs in consideration of the current economic
climate; and
|
|
|
|
an increase in expenses related to our production, design and
merchandising departments as a percentage of net revenue in
fiscal 2008 compared to fiscal 2007, which contributed to a
decrease in gross margin of 0.1%.
|
Our costs of goods sold in fiscal 2008 and fiscal 2007 included
$0.8 million and $0.7 million, respectively, of
stock-based compensation expense.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$24.7 million, or 26%, to $118.1 million in fiscal
2008 from $93.4 million in fiscal 2007. As a percentage of
net revenue, selling, general and administrative expenses
decreased 1.2%, to 33.4%, in fiscal 2008 from 34.6% in fiscal
2007. Of the $24.7 million increase in selling, general and
administrative expenses:
|
|
|
|
|
$8.7 million resulted from an increase in store employee
compensation related to opening additional corporate-owned
stores;
|
|
|
|
$7.0 million resulted from an increase in other store
operating expenses primarily related to an increase of
$2.6 million in employee costs such as commissions,
bonuses, benefits and other employee costs, $1.6 million in
credit card fees, $1.0 million in communications, phone and
fax expense, $0.8 million in occupancy cost,
$0.6 million in repairs and maintenance expense, and
$0.3 million in travel expense;
|
|
|
|
$4.9 million resulted from an increase in corporate
compensation principally due to hiring of additional employees
to support our growth;
|
39
|
|
|
|
|
$3.2 million resulted from an increase in depreciation
related to property and equipment at the store support centre,
including depreciation of our recently implemented software
systems;
|
|
|
|
$2.3 million resulted from an increase in professional fees
as a result of increased regulatory requirements associated with
being a public company such as advisory fees for internal
control compliance and legal fees; and
|
|
|
|
$0.6 million resulted from an increase in stock-based
compensation expense.
|
This amount was partially offset by a decrease in distribution
costs of $1.6 million and a decrease in foreign exchange
losses of $0.4 million.
Our selling, general and administrative expenses in fiscal 2008
and fiscal 2007 included $5.8 million and
$5.2 million, respectively, of stock-based compensation
expense.
Income
from Operations
Income from operations increased $5.0 million, or 10%, to
$56.6 million in fiscal 2008 from $51.6 million in
fiscal 2007. The increase of $5.0 million in income from
operations for fiscal 2008 was primarily due to a
$34.1 million increase in gross profit resulting from sales
from additional corporate-owned stores opened during fiscal 2008
and fiscal 2007, offset by an increase of $24.7 million in
selling, general and administrative expenses and a
$4.4 million provision for impairment and lease exit costs.
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 $15.0 million,
or 19%, to $94.9 million for fiscal 2008 from
$79.8 million for fiscal 2007 primarily due to an increase
in corporate-owned stores gross profit of $32.9 million,
offset by an increase of $12.8 million in store employee
expenses, $3.4 million in administrative expenses, and an
increase of $1.2 million in other store expenses;
|
|
|
|
our franchises segment decreased $1.2 million, or 14%, to
$7.5 million in fiscal 2008 from $8.8 million in
fiscal 2007 primarily as a result of franchise income from
operations of $1.8 million included in the comparative
period shifting to corporate-owned stores income from operations
when we acquired two franchise stores in Victoria, British
Columbia and one franchise store in Bellevue, Washington,
partially offset by increased franchise income from operations
of $0.6 million from our remaining franchise
locations; and
|
|
|
|
our other segment decreased $0.9 million, or 16%, to
$4.7 million in fiscal 2008 from $5.6 million in
fiscal 2007 primarily due to an increase of $11.3 million
in product costs, offset by an increase in revenue of
$10.4 million.
|
Income from operations also includes general corporate expenses.
General corporate expenses increased $7.9 million, or 19%,
to $50.6 million in fiscal 2008 from $42.7 million in
fiscal 2007 primarily due to an increase in corporate employee
costs of $4.8 million, a provision for impairment and lease
exit costs of $4.4 million and an increase in depreciation
and amortization expense of $3.2 million, offset by a
decrease in other corporate expenses of $4.5 million.
Our $4.4 million provision for impairment and lease exit
costs was a result of managements review of our portfolio
of corporate-owned store locations. In conjunction with our
ongoing evaluation to ensure that each of our corporate-owned
stores fit into our long-term growth strategy we closed one of
our corporate-owned stores in the fourth quarter of fiscal 2008.
We recorded a $0.7 million charge related to this closure,
which included a $0.5 million asset impairment and a
$0.2 million accrual for lease exit costs. The fair market
values were estimated using an expected present value technique.
We identified four other corporate-owned store locations
40
where the carrying amount of the assets exceeded
managements estimate of the fair value of the location.
Asset impairment of $2.5 million was recorded as at
February 1, 2009 related to these locations. Further, we
accrued $1.2 million for lease exit costs related to
certain locations which management has identified as
underperforming corporate-owned stores.
Other
Income (Expense), Net
Other income (expense), net decreased $0.2 million, or 20%,
to $0.8 million in fiscal 2008 from $1.0 million in
fiscal 2007. Of the $0.2 million decrease in other income
(expense), net:
|
|
|
|
|
$0.2 million resulted from a decrease in interest
income; and
|
|
|
|
$0.1 million resulted from an increase in equity loss
associated with our investment in Australia.
|
This amount was partially offset by a $0.1 million decrease
in interest expense.
Provision
for Income Taxes
Provision for income taxes decreased $3.6 million, or 17%,
to $16.9 million in fiscal 2008 from $20.5 million in
fiscal 2007. In fiscal 2008, our effective tax rate was 29.4%
compared to 38.9% in fiscal 2007. The reduction in the effective
tax rate in fiscal 2008 resulted from the decrease in the
Canadian corporate tax rate from 35% to 32% as well as the
release of the valuation against U.S. loss carryforwards.
Net
Income
Net income increased $8.5 million, or 28%, to
$39.4 million in fiscal 2008 from $30.8 million in
fiscal 2007. The increase in net income of $8.5 million in
fiscal 2008 was a result of an increase in gross profit of
$34.1 million resulting from sales from additional
corporate-owned stores opened and an increase of
$3.5 million in provision for income taxes, offset by
increases in selling, general and administrative expenses of
$24.7 million and a $4.4 million provision for
impairment and lease exit costs.
Seasonality
In fiscal 2009, fiscal 2008 and fiscal 2007, we recognized a
significant amount of our net revenue in the fourth quarter due
to significant increases in sales during the holiday season. We
recognized 39%, 29% and 39% of our full year gross profit in the
fourth quarter in fiscal 2009, fiscal 2008 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. As our
expected growth rate slows, we believe that we will experience
fourth quarter gross profits as a percentage of full year gross
profits as high, or higher, than in the current year.
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 primary sources of liquidity are our current balances of
cash and cash equivalents, cash flows from operations and
borrowings available under our revolving credit facility. Our
primary cash needs are capital expenditures for opening new
stores and remodeling existing stores, making information
technology system enhancements and funding working capital
requirements. Cash and cash equivalents in excess of our needs
are held in interest bearing accounts with financial
institutions.
As of January 31, 2010, our working capital deficit
(excluding cash and cash equivalents) was $1.8 million and
our cash and cash equivalents were $159.6 million.
41
The following table summarizes our net cash flows provided by
and used in operating, investing and financing activities for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
117,960
|
|
|
$
|
46,438
|
|
|
$
|
36,481
|
|
Investing activities
|
|
|
(16,307
|
)
|
|
|
(46,795
|
)
|
|
|
(35,235
|
)
|
Financing activities
|
|
|
(2,649
|
)
|
|
|
13,460
|
|
|
|
31,412
|
|
Effect of exchange rate changes
|
|
|
3,772
|
|
|
|
(8,851
|
)
|
|
|
4,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
$
|
102,776
|
|
|
$
|
4,252
|
|
|
$
|
37,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
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 2009, cash provided by operating activities increased
$71.5 million, to $118.0 million compared to cash
provided by operating activities of $46.4 million in fiscal
2008. The $71.5 million increase was primarily a result of
increased net income as we expanded our store base and a net
decrease in the change in other working capital balances,
partially offset by a decrease in items not affecting cash. The
net decrease in the change in other working capital balances was
primarily due to an increase in accrued liabilities resulting
from a provision for impairment and lease exit costs and was
partially offset by an increase in the change in inventories as
we build up spring and summer inventories for a larger store
base. The decrease in items not affecting cash was primarily due
to decreases in excess tax benefits from stock-based
compensation and deferred income taxes, and was partially offset
by an increase in depreciation and amortization related to our
increased store base.
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 $5.0 million to
$20.8 million in fiscal 2009 from $15.8 million in
fiscal 2008. Depreciation for our corporate-owned store segment
was $13.7 million, $10.6 million and $6.1 million
in fiscal 2009, fiscal 2008 and fiscal 2007, respectively.
Depreciation related to corporate activities was
$7.1 million, $5.3 million and $2.1 million in
fiscal 2009, fiscal 2008 and fiscal 2007, respectively. We have
not allocated any depreciation to our franchises or other
segments as these amounts to date have been immaterial.
Investing
Activities
Investing Activities relate entirely to capital
expenditures, investments in and advances to franchises, and
acquisitions of franchises.
Cash used in investing activities decreased $30.5 million,
to $16.3 million in fiscal 2009 from $46.8 million in
fiscal 2008. This decrease in cash used in investing activities
represents a decrease in the number of new stores opened in
fiscal 2009 compared to fiscal 2008, offset by store
improvements on a larger store base. Capital expenditures for
our corporate-owned stores segment were $10.2 million in
fiscal 2009 which included $4.8 million to open ten
corporate-owned stores and $30.1 million in fiscal 2008,
which included $27.0 million to open 34 corporate-owned
stores (not including three acquired franchise 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 $5.3 million and $10.9 million in
fiscal 2009 and fiscal 2008, 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. Investment in and advances to
franchises
42
are to NEW HARBOUR YOGA PTY LTD. In fiscal 2008 and fiscal 2007,
we purchased our franchises in Victoria, British Columbia and
Bellevue, Washington for $3.4 million and Calgary, Alberta
for $5.6 million, respectively.
Capital expenditures are expected to range between
$27 million to $30 million in fiscal 2010, including
approximately $7.0 million to $8.5 million for
approximately 12 to 15 new stores and the remainder reflecting
renovation capital for existing stores, information technology
enhancements and other corporate activities.
Financing
Activities
Financing Activities consist primarily of cash received
on the exercise of stock options and excess tax benefits from
stock based compensation. Cash provided by financing activities
decreased $16.1 million, to cash used of $2.6 million
in fiscal 2009 from cash provided of $13.5 million in
fiscal 2008.
We believe that our cash from operations 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 January 31, 2010, aside from the letters of credit and
guarantees, we had $nil in borrowings outstanding under this
credit facility.
Contractual
Obligations and Commitments
Leases. We lease certain corporate-owned store
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 only in five-year increments, if at all. Our
leases expire at various dates between 2010 and 2020, excluding
extensions at our option. A substantial number of our leases for
corporate-owned store 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
corporate-owned store premises also include contingent rental
payments based on sales volume, the impact of which also are not
reflected in the following table. During the third quarter of
fiscal 2008 we were released from our contractual obligation
related to the new head office location in Vancouver, British
Columbia. The following table summarizes our contractual
arrangements as of January 31, 2010, and the timing and
effect that such commitments are expected to have on our
liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
|
Total
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Thereafter
|
|
|
(In thousands)
|
|
Operating Leases (minimum rent)*
|
|
$
|
207,477
|
|
|
$
|
29,551
|
|
|
$
|
29,220
|
|
|
$
|
29,209
|
|
|
$
|
28,726
|
|
|
$
|
27,710
|
|
|
$
|
63,061
|
|
|
|
|
* |
|
Includes $250 and $270 for each of the years ending in 2011 and
thereafter for one store lease which was terminated on
May 15, 2007. |
43
Franchise Agreements. As of January 31,
2010, we operated five stores in North America and nine 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.
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.
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 January 31, 2010, letters of credit and
letters of guarantee totaling $2.6 million have been issued.
Other than these standby letters of credit, we do not have any
off-balance sheet arrangements, investments in special purpose
entities or undisclosed borrowings or debt. In addition, we have
not entered into any derivative contracts or synthetic leases.
Critical
Accounting Policies 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, franchise licensing fees
and royalties as well as sales of products to franchisees, and
other net revenue, which includes direct to consumer sales
through www.lululemon.com, sales to wholesale accounts,
phone sales, warehouse sales and sales from company-operated
showrooms, in each case, net of an estimated allowance for sales
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 is recognized when goods
are shipped and collection is reasonably assured, net of an
estimated allowance for sales returns. Other net revenue related
to warehouse sales is 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.
Revenues from the Companys gift cards are recognized when
tendered for payment, or upon redemption. Outstanding customer
balances are included in Unredeemed gift card
liability on the consolidated balance sheets.
44
There are no expiration dates on the Companys gift cards,
and lululemon does not charge any service fees that cause a
decrement to customer balances.
While the Company will continue to honor all gift cards
presented for payment, management may determine the likelihood
of redemption to be remote for certain card balances due to,
among other things, long periods of inactivity. In these
circumstances, to the extent management determines there is no
requirement for remitting card balances to government agencies
under unclaimed property laws, card balances may be recognized
in the consolidated statements of operations in Net
revenue.
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 weighted-average
costs. For finished goods, 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 and labor, as applicable, and all
costs incurred to deliver inventory to our distribution centers
including freight, non-refundable taxes, duty and other landing
costs.
We periodically review our inventories and make provisions as
necessary to appropriately value obsolete or damaged goods. The
amount of the provision 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 addition, as part of inventory valuations, we
review 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. We
perform physical inventory counts throughout the year and adjust
the shrink reserve accordingly. In fiscal 2009, we wrote-off
$0.8 million of inventory and in fiscal 2008 we wrote-off
$0.9 million of inventory.
Property and Equipment. Property and equipment
are recorded at cost less accumulated depreciation. Direct
internal and external costs related to software used for
internal purposes which are 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
|
%
|
We recognize a liability for the fair value of a required asset
retirement obligation, or ARO, when such obligation is incurred.
Our AROs are primarily associated with leasehold improvements
which, at the end of a lease, we are contractually obligated to
remove in order to comply with the lease agreement. At the
inception of a lease with such conditions, we record an ARO
liability and a corresponding capital asset in an amount equal
to the estimated fair value of the obligation. The liability is
estimated based on a number of assumptions requiring
managements judgment, including store closing costs, cost
inflation rates and discount rates, and is accreted to its
projected future value over time. The capitalized asset is
depreciated using the convention for depreciation of leasehold
improvement assets. Upon satisfaction of the ARO conditions, any
difference between the recorded ARO liability and the actual
retirement costs incurred is recognized as an operating gain or
loss in the consolidated statements of operations. Prior to
fiscal 2008 these obligations were not material.
We recognize a liability for a cost associated with an exit or
disposal activity when such obligation is incurred. An exit or
disposal activity is measured initially at its fair value in the
period in which the liability is incurred. We estimate fair
value at the cease-use date of its operating leases as the
remaining lease rentals, reduced by estimated
45
sublease rentals that could be reasonably obtained for the
property, even where we does not intend to enter into a
sublease. Estimating the cost of certain lease exit costs
involves subjective assumptions, including the time it would
take to sublease the leased location and the related potential
sublease income. The estimated accruals for these costs could be
significantly affected if future experience differs from that
used in the initial estimate. Lease exit costs are included in
provision for impairment and lease exit costs.
Long-Lived Assets. Long-lived assets,
including intangible assets with finite useful lives, 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 income in the period that the impairment is
determined. Long-lived assets, including intangible assets with
finite useful lives, 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 provision for impairment and lease
exit costs.
Income Taxes. We follow the liability method
with respect to accounting for income taxes. Deferred income 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 are
expected to be in effect when these differences are anticipated
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.
The recognition of a deferred income tax asset is based upon
several assumptions and management forecasts, including current
and proposed tax legislation, current and anticipated taxable
income, utilization of previously unrealized non-operating loss
carry forwards and regulatory reviews of tax filings. Given the
judgments and estimates required and the sensitivity of the
results to the significant assumptions used, we believe the
accounting estimates used in relation to the recognition of
deferred income tax assets are subject to measurement
uncertainty and are susceptible to a material change if the
underlying assumptions change.
For financial reporting purposes, we generally provide taxes at
the rate applicable for the appropriate tax jurisdiction.
Because our present intention is to reinvest the unremitted
earnings in our foreign operations, we do not provide
U.S. income taxes on unremitted earnings of foreign
subsidiaries. Management periodically assesses the need to
utilize these unremitted earnings to finance our foreign
operations. This assessment is based on cash flow projections
that are the result of estimates of future production, fiscal
requirements by tax jurisdiction of our operations and
operational and fiscal objectives by tax jurisdiction for our
operations. Such estimates are inherently imprecise since many
assumptions utilized in the cash flow projections are subject to
revision in the future.
We file income tax returns in the United States, 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 January 31, 2010, 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.
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 and intangible assets
with indefinite useful lives are tested for impairment annually
or more frequently when an event or circumstance indicates that
goodwill or indefinite useful live intangible assets might be
impaired. We use our best estimates and judgment based on
available evidence in conducting the impairment testing. When
the carrying
46
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. 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
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 the principal stockholders
of the Company. These awards are accounted for as employee
compensation expense in accordance with the above noted
policies. We commenced applying this guidance when we introduced
share-based awards for our employees in the year ended
January 31, 2006.
Recent
Accounting Pronouncements
On July 1, 2009, the Accounting Standards Codification, or
ASC, became the Financial Accounting Standards Boards, or
FASB, officially recognized source of authoritative GAAP,
superseding existing FASB, the American Institute of Certified
Accountants, the Emerging Issues Task Force and related
literature. Rules and interpretive releases of the SEC under the
authority of federal securities law are also sources of
authoritative GAAP for SEC registrants. All other accounting
literature is considered non-authoritative. The switch to the
ASC affects the way companies refer to GAAP in financial
statements and accounting policies. Citing particular content in
the ASC involves specifying the unique numeric path to the
content through the Topic, Section and Paragraph structure. This
standard was effective prospectively for reporting periods ended
after September 15, 2009 and, accordingly, we adopted it
during the third quarter of fiscal 2009. The adoption of this
standard did not have an effect on our consolidated financial
position, results of operations or cash flows. As a result of
adopting this standard, our references to GAAP standards have
been changed to refer to topics, subtopics, sections or
subsections of the ASC, as appropriate.
In June 2009, the FASB amended ASC Topic 810,
Consolidation, which requires a qualitative approach to
identifying a controlling financial interest in a variable
interest entity, or VIE, and requires ongoing assessment of
whether an entity is a VIE and whether an interest in a VIE
makes the holder a primary beneficiary of the VIE. The amendment
will be effective for us at the beginning of fiscal 2010. We are
currently evaluating the impact that adoption may have on its
consolidated financial statements.
In May 2009, the FASB issued ASC Topic 855, Subsequent
Events, or ASC 855. ASC 855 establishes general standards of
accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. In particular, ASC 855 sets forth
the period after the balance sheet
47
date during which management of a reporting entity should
evaluate events or transactions that may occur for potential
recognition or disclosure in the consolidated financial
statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its consolidated financial statements, and the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
Subsequent events were evaluated through March 24, 2010
which is the date the financial statements were issued. We have
determined that the standard did not have any impact on our
consolidated financial statements.
In April 2008, the FASB amended ASC Topic 350, Intangibles
and Other, or ASC 350. This new accounting standard,
currently contained in ASC
350-30-35,
specifically amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The objective
of this amendment is to improve the consistency between the
useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset.
This new standard is effective for fiscal years beginning after
December 15, 2008. The effective date, as well as the
adoption date for us, was February 2, 2009. Although ASC
350 may impact our reporting in future financial periods,
we have determined that the standard did not have any impact on
our historical consolidated financial statements at the time of
adoption.
In February 2008, the FASB partially delayed the effective date
of ASC Topic 820, Fair Value Measurements and
Disclosures, or ASC 820, for one year for non-financial
assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis. The
effective date, as well as the adoption date for us, was
February 2, 2009. We have determined that the provisions of
the topic which were delayed did not have any impact on our
consolidated financial statements.
In December 2007, the FASB revised the accounting standards for
business combinations. This new standard (currently contained in
ASC Topic 805, Business Combinations, or ASC 805), among
other things, generally requires that an acquirer recognize the
assets acquired and liabilities assumed at their full fair
values on the acquisition date. This practice replaces the
practice, under predecessor accounting standards, of allocating
the cost of an acquisition to the individual assets acquired and
liabilities assumed based on their relative estimated fair
values. This new standard further requires that
acquisition-related costs be recognized separately from the
related acquisition. In April 2009, the FASB issued ASC
805-20,
Business Combinations Identifiable Assets and
Liabilities and Any Non-controlling Interest, which further
amends and clarifies ASC 805 and applies to assets acquired and
liabilities assumed that arise from contingencies in a business
combination. This new standard and the amendment must be applied
prospectively to business combinations consummated on or after
the first annual reporting period beginning on or after
December 15, 2008. The effective date, as well as the
adoption date for us, was February 2, 2009. Although ASC
805 may impact our reporting in future financial periods,
we have determined that the standard did not have any impact on
our historical consolidated financial statements at the time of
adoption.
|
|
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 the majority of our net revenue in Canada. The
reporting currency for our consolidated financial statements is
the U.S. dollar. Historically, our operations were based
largely in Canada. As of January 31, 2010, we operated 44
stores in Canada. As a result, we have been impacted by changes
in exchange rates and may be impacted materially for the
foreseeable future. As we recognize net revenue from sales in
Canada in Canadian dollars, and the U.S. dollar has
weakened during fiscal 2009, it has had a positive impact on our
Canadian operating results upon translation of those results
into U.S. dollars for the purposes of consolidation.
However, the gain in net revenue was partially offset by higher
cost of sales and higher selling, general and administrative
expenses that are generated in Canadian dollars. 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 $11.2 million in
fiscal 2009 and approximately $11.1 million in fiscal 2008.
To the extent the ratio between our net revenue generated in
Canadian dollars increases as compared to our expenses generated
in Canadian dollars, we expect that our results of operations
will be further impacted by changes in exchange rates. We
48
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. 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 January 31, 2010, we
had no outstanding borrowings under our revolving facility. We
had small outstanding balances under our revolving facility
during fiscal 2009 as we built 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 under our revolving facility, 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.
49
|
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
lululemon
athletica inc. and Subsidiaries
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of lululemon
athletica inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity and cash flows present fairly, in all
material respects, the financial position of lululemon athletica
inc. at January 31, 2010 and February 1, 2009, and the
results of its operations and its cash flows for each of the
three years in the period ended January 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of January 31, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Managements Report on Internal Control over Financial
Reporting under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial
statement schedule, and on the Companys internal control
over financial reporting based on our audits (which were
integrated audits for the years ended January 31, 2010 and
February 1, 2009). We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Chartered Accountants
Vancouver, BC
March 24, 2010
51
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share amounts)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
159,573
|
|
|
$
|
56,797
|
|
Accounts receivable
|
|
|
8,238
|
|
|
|
4,029
|
|
Inventories
|
|
|
44,070
|
|
|
|
52,051
|
|
Prepaid expenses and other current assets
|
|
|
4,529
|
|
|
|
4,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,410
|
|
|
|
116,988
|
|
Property and equipment, net
|
|
|
61,591
|
|
|
|
61,662
|
|
Goodwill and intangible assets, net
|
|
|
8,050
|
|
|
|
8,160
|
|
Deferred income taxes
|
|
|
15,102
|
|
|
|
19,373
|
|
Other non-current assets
|
|
|
6,105
|
|
|
|
5,453
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
307,258
|
|
|
$
|
211,636
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,028
|
|
|
$
|
5,269
|
|
Accrued liabilities
|
|
|
17,207
|
|
|
|
22,103
|
|
Accrued compensation and related expenses
|
|
|
10,626
|
|
|
|
5,862
|
|
Income taxes payable
|
|
|
7,742
|
|
|
|
2,133
|
|
Unredeemed gift card liability
|
|
|
11,699
|
|
|
|
9,278
|
|
Other current liabilities
|
|
|
376
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,678
|
|
|
|
45,335
|
|
Other non-current liabilities
|
|
|
15,472
|
|
|
|
11,301
|
|
Deferred income taxes
|
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,150
|
|
|
|
56,794
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value,
5,000 shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Exchangeable stock, no par value, 30,000 shares authorized,
issued and outstanding 19,383 and 19,517
|
|
|
|
|
|
|
|
|
Special voting stock, $0.00001 par value,
30,000 shares authorized, issued and outstanding 19,383 and
19,517
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 200,000 shares
authorized, issued and outstanding 51,126 and 50,422
|
|
|
511
|
|
|
|
504
|
|
Additional paid-in capital
|
|
|
158,921
|
|
|
|
155,961
|
|
Retained earnings
|
|
|
67,809
|
|
|
|
9,528
|
|
Accumulated other comprehensive income (loss)
|
|
|
5,867
|
|
|
|
(11,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
233,108
|
|
|
|
154,842
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
307,258
|
|
|
$
|
211,636
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share amounts)
|
|
|
Net revenue
|
|
$
|
452,898
|
|
|
$
|
353,488
|
|
|
$
|
269,942
|
|
Cost of goods sold
|
|
|
229,812
|
|
|
|
174,421
|
|
|
|
125,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
223,086
|
|
|
|
179,067
|
|
|
|
144,927
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
136,161
|
|
|
|
118,098
|
|
|
|
93,376
|
|
Provision for impairment and lease exit costs
|
|
|
379
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
86,546
|
|
|
|
56,564
|
|
|
|
51,551
|
|
Other income (expense), net
|
|
|
164
|
|
|
|
821
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
86,710
|
|
|
|
57,385
|
|
|
|
52,580
|
|
Provision for income taxes
|
|
|
28,429
|
|
|
|
16,884
|
|
|
|
20,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
58,281
|
|
|
|
40,501
|
|
|
|
32,116
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
(1,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
58,281
|
|
|
$
|
39,363
|
|
|
$
|
30,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
Continuing operations
|
|
$
|
0.83
|
|
|
$
|
0.59
|
|
|
$
|
0.48
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic earnings per share
|
|
$
|
0.83
|
|
|
$
|
0.57
|
|
|
$
|
0.46
|
|
Diluted earnings (loss) per share
Continuing operations
|
|
$
|
0.82
|
|
|
$
|
0.57
|
|
|
$
|
0.47
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net diluted earnings per share
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
$
|
0.45
|
|
Basic weighted-average number of shares outstanding
|
|
|
70,251
|
|
|
|
68,711
|
|
|
|
66,430
|
|
Diluted weighted-average number of shares outstanding
|
|
|
70,949
|
|
|
|
70,942
|
|
|
|
69,298
|
|
See accompanying notes to the consolidated financial statements
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Voting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Exchangeable Stock
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
Balance at January 31, 2007
|
|
|
20,935
|
|
|
$
|
|
|
|
|
20,935
|
|
|
$
|
|
|
|
|
44,291
|
|
|
$
|
443
|
|
|
$
|
98,670
|
|
|
$
|
(60,677
|
)
|
|
$
|
(1,057
|
)
|
|
$
|
37,379
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,842
|
|
|
|
|
|
|
|
30,842
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,454
|
|
|
|
6,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,296
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,947
|
|
|
|
|
|
|
|
|
|
|
|
5,947
|
|
Common stock issued for cash net of transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,291
|
|
|
|
23
|
|
|
|
31,335
|
|
|
|
|
|
|
|
|
|
|
|
31,358
|
|
Restricted stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
1
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2008
|
|
|
20,935
|
|
|
$
|
|
|
|
|
20,935
|
|
|
$
|
|
|
|
|
46,685
|
|
|
$
|
467
|
|
|
$
|
136,006
|
|
|
$
|
(29,835
|
)
|
|
$
|
5,397
|
|
|
$
|
112,035
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,363
|
|
|
|
|
|
|
|
39,363
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,548
|
)
|
|
|
(16,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,815
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,532
|
|
|
|
|
|
|
|
|
|
|
|
6,532
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,024
|
|
|
|
|
|
|
|
|
|
|
|
12,024
|
|
Common stock issued upon exchange of exchangeable shares
|
|
|
(1,418
|
)
|
|
|
|
|
|
|
(1,418
|
)
|
|
|
|
|
|
|
1,418
|
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,310
|
|
|
|
23
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 1, 2009
|
|
|
19,517
|
|
|
$
|
|
|
|
|
19,517
|
|
|
$
|
|
|
|
|
50,422
|
|
|
$
|
504
|
|
|
$
|
155,961
|
|
|
$
|
9,528
|
|
|
$
|
(11,151
|
)
|
|
$
|
154,842
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,281
|
|
|
|
|
|
|
|
58,281
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,018
|
|
|
|
17,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,299
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,616
|
|
|
|
|
|
|
|
|
|
|
|
5,616
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,858
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,858
|
)
|
Common stock issued upon exchange of exchangeable shares
|
|
|
(134
|
)
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
134
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
|
6
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2010
|
|
|
19,383
|
|
|
$
|
|
|
|
|
19,383
|
|
|
$
|
|
|
|
|
51,126
|
|
|
$
|
511
|
|
|
$
|
158,921
|
|
|
$
|
67,809
|
|
|
$
|
5,867
|
|
|
$
|
233,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
58,281
|
|
|
$
|
39,363
|
|
|
$
|
30,842
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
1,138
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
58,281
|
|
|
|
40,501
|
|
|
|
32,116
|
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,832
|
|
|
|
15,823
|
|
|
|
8,291
|
|
Stock-based compensation
|
|
|
5,616
|
|
|
|
6,532
|
|
|
|
5,947
|
|
Provision for impairment and lease exit costs
|
|
|
379
|
|
|
|
4,405
|
|
|
|
|
|
Derecognition of unredeemed gift card liability
|
|
|
(2,183
|
)
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
387
|
|
|
|
(6,441
|
)
|
|
|
1,799
|
|
Excess tax benefits from stock-based compensation
|
|
|
3,858
|
|
|
|
(12,024
|
)
|
|
|
|
|
Other, including net changes in other non-cash balances
|
|
|
30,790
|
|
|
|
(3,363
|
)
|
|
|
(9,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities continuing
operations
|
|
|
117,960
|
|
|
|
45,433
|
|
|
|
39,119
|
|
Net cash provided by (used in) operating activities
discontinued operations
|
|
|
|
|
|
|
1,005
|
|
|
|
(2,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,960
|
|
|
|
46,438
|
|
|
|
36,481
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(15,497
|
)
|
|
|
(40,530
|
)
|
|
|
(29,126
|
)
|
Investment in and advances to franchises
|
|
|
(810
|
)
|
|
|
(2,863
|
)
|
|
|
|
|
Acquisition of franchises
|
|
|
|
|
|
|
(3,402
|
)
|
|
|
(5,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing
operations
|
|
|
(16,307
|
)
|
|
|
(46,795
|
)
|
|
|
(34,685
|
)
|
Net cash used in investing activities discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,307
|
)
|
|
|
(46,795
|
)
|
|
|
(35,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,209
|
|
|
|
1,436
|
|
|
|
55
|
|
Excess tax benefits from stock-based compensation
|
|
|
(3,858
|
)
|
|
|
12,024
|
|
|
|
|
|
Payment of initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
(6,992
|
)
|
Capital stock issued for cash
|
|
|
|
|
|
|
|
|
|
|
38,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
continuing operations
|
|
|
(2,649
|
)
|
|
|
13,460
|
|
|
|
31,412
|
|
Net cash provided by financing activities
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,649
|
)
|
|
|
13,460
|
|
|
|
31,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
3,772
|
|
|
|
(8,851
|
)
|
|
|
4,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
102,776
|
|
|
|
4,252
|
|
|
|
37,051
|
|
Cash and cash equivalents from continuing operations, beginning
of year
|
|
$
|
56,797
|
|
|
$
|
52,545
|
|
|
$
|
15,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents from continuing operations, end of year
|
|
$
|
159,573
|
|
|
$
|
56,797
|
|
|
$
|
52,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
55
lululemon
athletica inc. and Subsidiaries
(Amounts
in thousands, except per share amounts and store count
information, unless otherwise indicated)
|
|
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, direct to consumer through
e-commerce,
independent franchises and a network of wholesale accounts. The
Companys primary markets are Canada, the United States and
Australia, where 44, 66 and nil corporate-owned stores were in
operation as at January 31, 2010, respectively. There were
110, 103 and 71 corporate-owned stores in operation as at
January 31, 2010, February 1, 2009 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 January 31, 2010. 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 in conjunction with its initial public offering. 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
fourth fiscal 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 fourth fiscal quarter.
The Companys fiscal year ends on the Sunday closest to
January 31 of the following year, typically resulting in a
52 week year, but occasionally giving rise to an additional
week, resulting in a 53 week year. Fiscal 2009, 2008 and
2007 ended on January 31, 2010, February 1, 2009 and
February 3, 2008, respectively.
|
|
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of consolidation
The consolidated financial statements include the accounts of
lululemon athletica inc. and its wholly-owned subsidiaries. The
results of operations of Lululemon Japan Inc. are presented as
discontinued operations following the Companys
wind-up of
operations in Japan in fiscal 2008. 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.
56
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 inventory to our franchisees, royalties on
sales owed to the Company by its franchisees and landlord
deferred lease 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, 2010, February 1, 2009
and February 3, 2008 the Company recorded an insignificant
allowance for doubtful accounts.
Inventories
Inventories, consisting of finished goods and raw materials, are
stated at the lower of cost and market value. Cost is determined
using weighted-average costs. For finished goods, 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 and
labor, 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 and cycle counts throughout
the year and adjusts the shrink reserve accordingly.
Property
and equipment
Property and equipment are recorded at cost less accumulated
depreciation. Direct internal and external costs related to
software used for internal purposes which are 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. Goodwill and intangible assets with indefinite lives
are tested annually for impairment or more frequently when an
event or circumstance indicates that goodwill of indefinite life
intangible assets might be impaired. The Companys
operating segment for goodwill is its corporate-owned stores.
57
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
of long-lived assets
Long-lived assets, including intangible assets with finite
lives, 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 income in the period that the impairment is determined.
Long-lived assets, including intangible assets with finite
lives, 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 provision for impairment and lease
exit costs.
Leased
property and equipment
The Company leases corporate-owned 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 recognizes a liability for the fair value of a
required asset retirement obligation (ARO) when such
obligation is incurred. The Companys AROs are primarily
associated with leasehold improvements which, at the end of a
lease, the Company is contractually obligated to remove in order
to comply with the lease agreement. At the inception of a lease
with such conditions, the Company records an ARO liability and a
corresponding capital asset in an amount equal to the estimated
fair value of the obligation. The liability is estimated based
on a number of assumptions requiring managements judgment,
including store closing costs, cost inflation rates and discount
rates, and is accreted to its projected future value over time.
The capitalized asset is depreciated using the convention for
depreciation of leasehold improvement assets. Upon satisfaction
of the ARO conditions, any difference between the recorded ARO
liability and the actual retirement costs incurred is recognized
as an operating gain or loss in the consolidated statements of
earnings. Prior to fiscal 2008 these obligations were not
material.
The Company recognizes a liability for a cost associated with an
exit or disposal activity when such obligation is incurred. An
exit or disposal activity is measured initially at its fair
value in the period in which the liability is incurred. The
Company estimates fair value at the cease-use date of its
operating leases as the remaining lease rentals, reduced by
estimated sublease rentals that could be reasonably obtained for
the property, even where the Company does not intend to enter
into a sublease. Estimating the cost of certain lease exit costs
involves subjective assumptions, including the time it would
take to sublease the leased location and the related potential
sublease income. The estimated accruals for these costs could be
significantly affected if future experience differs from that
used in the initial estimate. Lease exit costs are included in
provision for impairment and lease exit costs.
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
58
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sales when the goods are shipped. Amounts received in respect of
gift cards are recorded as unredeemed gift card liability. When
gift cards are redeemed for apparel, the Company recognizes the
related revenue.
Revenue
recognition
Net revenue includes sales of apparel to customers through
corporate-owned and operated retail stores, initial license and
franchise fees, royalties from franchisees and sales of apparel
to franchisees, direct to consumer through
www.lululemon.com and phone sales, sales through a
network of wholesale accounts, and sales from company-operated
showrooms.
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 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.
Sales of apparel to customers through the Companys retail
internet site are recognized when goods are shipped, net of an
estimated allowance for sales returns.
All revenues are reported net of sales taxes collected for
various governmental agencies.
Revenues from the Companys gift cards are recognized when
tendered for payment, or upon redemption. Outstanding customer
balances are included in Unredeemed gift card
liability on the consolidated balance sheets. There are no
expiration dates on the Companys gift cards, and lululemon
does not charge any service fees that cause a decrement to
customer balances.
While the Company will continue to honor all gift cards
presented for payment, management may determine the likelihood
of redemption to be remote for certain card balances due to,
among other things, long periods of inactivity. In these
circumstances, to the extent management determines there is no
requirement for remitting card balances to government agencies
under unclaimed property laws, card balances may be recognized
in the consolidated statements of operations in Net
revenue. For the year ended January 31, 2010, net
revenue recognized on unredeemed gift card balances was $2,183.
There was no net revenue recognized on unredeemed gift card
balances during the year ended February 1, 2009.
Cost
of goods sold
Cost of goods sold includes the cost of purchased 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
corporate-owned store locations and all costs incurred in
operating the Companys distribution centers and
production, design and merchandise departments, hemming and
shrink and valuation reserves. Production, design, merchandise
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.
59
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
taxes
The Company follows the liability method with respect to
accounting for income taxes. Deferred income 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 are expected to be in
effect when these differences are anticipated 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.
The recognition of a deferred income tax asset is based
primarily on managements forecasts, including current and
proposed tax legislation, current and anticipated taxable
income, utilization of previously unrealized non-operating loss
carryforwards and regulatory reviews of tax filings. Given the
judgments and estimates required and the sensitivity of the
results to the significant assumptions used, the accounting
estimates used in relation to the recognition of deferred income
tax assets are subject to measurement uncertainty and are
susceptible to a material change if the underlying assumptions
change.
The Company generally provides for taxes at the rate applicable
for the appropriate tax jurisdiction. Because present intentions
are to reinvest the unremitted earnings into foreign operations,
the Company does not provide U.S. income taxes on
unremitted earnings of foreign subsidiaries. Management
periodically assesses the need to utilize these unremitted
earnings to finance foreign operations. This assessment is based
on cash flow projections that are the result of estimates of
future production, fiscal requirements by tax jurisdiction of
our operations and operational and fiscal objectives by tax
jurisdiction for our operations. Such estimates are inherently
imprecise since many assumptions utilized in the cash flow
projections are subject to revision in the future.
The Company files income tax returns in the United States,
Canada and various foreign and state jurisdictions. The Company
is 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 January 31, 2010, the Company
does not have any significant accruals for interest related to
unrecognized tax benefits or tax penalties. Intercompany
transfer pricing policies will be subject to audits by various
foreign tax jurisdictions. Although management believes that the
Companys 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 the Companys income tax provisions
and accruals.
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 remeasured 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,
advances to and investments in franchises, 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 are recorded
in the consolidated statements of operations under selling,
general and
60
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $174, $(110) and $(543) for the years ended
January 31, 2010, February 1, 2009 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. 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 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
61
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
On July 1, 2009, the Accounting Standards Codification
(ASC) became the Financial Accounting Standards
Boards (FASB) officially recognized source of
authoritative GAAP, superseding existing FASB, the American
Institute of Certified Accountants, the Emerging Issues Task
Force and related literature. Rules and interpretive releases of
the SEC under the authority of federal securities law are also
sources of authoritative GAAP for SEC registrants. All other
accounting literature is considered non-authoritative. The
switch to the ASC affects the way companies refer to GAAP in
financial statements and accounting policies. Citing particular
content in the ASC involves specifying the unique numeric path
to the content through the Topic, Section and Paragraph
structure. This standard was effective prospectively for
reporting periods ended after September 15, 2009 and,
accordingly, the Company adopted it during the third quarter of
fiscal 2009. The adoption of this standard did not have an
effect on the Companys consolidated financial position,
results of operations or cash flows. As a result of adopting
this standard, the Companys references to GAAP standards
have been changed to refer to topics, subtopics, sections or
subsections of the ASC, as appropriate.
In June 2009, the FASB amended ASC Topic 810 Consolidation
(ASC 810), which requires a qualitative approach
to identifying a controlling financial interest in a variable
interest entity (VIE), and requires ongoing
assessment of whether an entity is a VIE and whether an interest
in a VIE makes the holder a primary beneficiary of the VIE. The
amendment will be effective for the Company at the beginning of
fiscal 2010. The Company is currently evaluating the impact that
adoption may have on its consolidated financial statements.
In May 2009, the FASB issued ASC Topic 855 Subsequent Events
(ASC 855). ASC 855 establishes general standards
of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. In particular, ASC 855 sets forth
the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the
consolidated financial statements, the circumstances under which
an entity should recognize events or transactions occurring
after the balance sheet date in its consolidated financial
statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. Subsequent events were evaluated through March 24,
2010 which is the date the financial statements were issued. The
Company has determined that the standard did not have any impact
on its consolidated financial statements.
In April 2008, the FASB amended ASC Topic 350, Intangibles
and Other (ASC 350). This new accounting
standard, currently contained in ASC
350-30-35,
specifically amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The objective
of this amendment is to improve the consistency between the
useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset.
This new standard is effective for fiscal years beginning after
December 15, 2008. The effective date, as well as the
adoption date for the Company, was February 2, 2009.
Although ASC 350 may impact the Companys reporting in
future financial periods, the Company has determined that the
standard did not have any impact on its historical consolidated
financial statements at the time of adoption.
In February 2008, the FASB partially delayed the effective date
of ASC Topic 820, Fair Value Measurements and Disclosures
(ASC 820), for one year for non-financial assets
and liabilities that are recognized or disclosed at fair value
in the financial statements on a non-recurring basis. The
effective date, as well as the adoption date for the Company,
was February 2, 2009. The Company has determined that the
provisions of the topic which were delayed did not have any
impact on its consolidated financial statements.
62
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2007, the FASB revised the accounting standards for
business combinations. This new standard (currently contained in
ASC Topic 805, Business Combinations (ASC
805)), among other things, generally requires that an
acquirer recognize the assets acquired and liabilities assumed
at their full fair values on the acquisition date.
This practice replaces the practice, under predecessor
accounting standards, of allocating the cost of an acquisition
to the individual assets acquired and liabilities assumed based
on their relative estimated fair values. This new standard
further requires that acquisition-related costs be recognized
separately from the related acquisition. In April 2009, the FASB
issued ASC
805-20,
Business Combinations Identifiable Assets and
Liabilities and Any Non-controlling Interest, which further
amends and clarifies ASC 805 and applies to assets acquired and
liabilities assumed that arise from contingencies in a business
combination. This new standard and the amendment must be applied
prospectively to business combinations consummated on or after
the first annual reporting period beginning on or after
December 15, 2008. The effective date, as well as the
adoption date for the Company, was February 2, 2009.
Although ASC 805 may impact the Companys reporting in
future financial periods, the Company has determined that the
standard did not have any impact on its historical consolidated
financial statements at the time of adoption.
Reclassifications
Certain prior year amounts have been reclassified to conform to
fiscal 2009 presentation.
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2010
|
|
|
2009
|
|
|
Finished goods
|
|
$
|
45,181
|
|
|
$
|
52,828
|
|
Raw materials
|
|
|
1,461
|
|
|
|
558
|
|
Provision to reduce inventory to market value
|
|
|
(2,572
|
)
|
|
|
(1,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,070
|
|
|
$
|
52,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2010
|
|
|
2009
|
|
|
Leasehold improvements
|
|
$
|
63,999
|
|
|
$
|
52,101
|
|
Furniture and fixtures
|
|
|
17,776
|
|
|
|
16,581
|
|
Computers and software
|
|
|
25,194
|
|
|
|
19,411
|
|
Equipment and vehicles
|
|
|
428
|
|
|
|
279
|
|
Accumulated amortization
|
|
|
(45,806
|
)
|
|
|
(26,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,591
|
|
|
$
|
61,662
|
|
|
|
|
|
|
|
|
|
|
Included in the cost of property and equipment are costs of
$11,823 and $11,213 at January 31, 2010 and
February 1, 2009, respectively, capitalized in connection
with internally developed software as part of the Companys
ERP implementation.
Depreciation expense related to property and equipment was
$19,758, $14,819 and $7,322 for the years ended January 31,
2010, February 1, 2009 and February 3, 2008,
respectively.
The Company recorded a loss of $112, $2,999 and $nil for the
years ended January 31, 2010, February 1, 2009 and
February 3, 2008, respectively, in property and equipment
for stores that were relocated or closed. These assets were
previously used in the corporate-owned stores segment.
63
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5
|
GOODWILL
AND INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2010
|
|
|
2009
|
|
|
Goodwill
|
|
$
|
738
|
|
|
$
|
738
|
|
Changes in foreign currency exchange rates
|
|
|
161
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
899
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
Intangibles Reacquired franchise rights
|
|
$
|
10,162
|
|
|
$
|
10,162
|
|
Non-competition agreements
|
|
|
694
|
|
|
|
694
|
|
Accumulated amortization
|
|
|
(4,868
|
)
|
|
|
(3,162
|
)
|
Changes in foreign currency exchange rates
|
|
|
1,163
|
|
|
|
(308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
7,151
|
|
|
|
7,386
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and intangibles
|
|
$
|
8,050
|
|
|
$
|
8,160
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was $1,074,
$1,004 and $1,019 for the years ended January 31, 2010,
February 1, 2009 and February 3, 2008, respectively.
The estimated aggregate amortization expense is as follows:
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2010
|
|
$
|
1,122
|
|
2011
|
|
|
1,122
|
|
2012
|
|
|
1,122
|
|
2013
|
|
|
951
|
|
2014
|
|
|
865
|
|
Thereafter
|
|
|
1,969
|
|
|
|
|
|
|
|
|
$
|
7,151
|
|
|
|
|
|
|
On September 15, 2008, the Company reacquired in an asset
purchase transaction two franchised stores in Victoria, British
Columbia for total cash consideration of $1,181 less working
capital adjustments of $4 from a related party. The fair values
of the net assets acquired were measured as if the transaction
occurred with a arms length party. Included in the
Companys consolidated statement of operations for the year
ended February 1, 2009, are the results of the two
reacquired Victoria franchised stores from the date of
acquisition through to February 1, 2009.
The following table summarizes the fair values of the net assets
acquired as of September 15, 2008:
|
|
|
|
|
Inventory
|
|
$
|
306
|
|
Prepaid and other current assets
|
|
|
2
|
|
Property and equipment
|
|
|
261
|
|
Reacquired franchise rights
|
|
|
780
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,349
|
|
Unredeemed gift card liability
|
|
|
172
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
172
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,177
|
|
|
|
|
|
|
64
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On September 8, 2008, the Company reacquired in an asset
purchase transaction a franchised store in Bellevue, Washington
for total cash consideration of $2,067 plus working capital
adjustments of $157. Included in the Companys consolidated
statement of operations for the year ended February 1,
2009, are the results of the reacquired Bellevue franchised
store from the date of acquisition through to February 1,
2009.
The following table summarizes the fair values of the net assets
acquired as of September 8, 2008:
|
|
|
|
|
Inventory
|
|
$
|
234
|
|
Prepaid and other current assets
|
|
|
38
|
|
Property and equipment
|
|
|
249
|
|
Reacquired franchise rights
|
|
|
1,755
|
|
|
|
|
|
|
Total assets acquired
|
|
|
2,276
|
|
Unredeemed gift card liability
|
|
|
52
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
52
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
2,224
|
|
|
|
|
|
|
On April 1, 2007, the Company reacquired in an asset
purchase transaction three franchised stores in Calgary, Alberta
for $5,563. Included in the Companys consolidated
statement of operations for the year ended February 3, 2008
are the results of the three reacquired Calgary franchised
stores from the date of acquisition through February 3,
2008.
The following table summarizes the fair values of the assets
acquired on April 1, 2007:
|
|
|
|
|
Inventory
|
|
$
|
407
|
|
Prepaid and other current assets
|
|
|
53
|
|
Property and equipment
|
|
|
500
|
|
Reacquired franchise rights
|
|
|
5,006
|
|
|
|
|
|
|
Total assets acquired
|
|
|
5,966
|
|
Unredeemed gift card liability
|
|
|
403
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
403
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
5,563
|
|
|
|
|
|
|
The acquisition of the franchised stores is part of
managements vertical retail growth strategy. 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 was
6.28 years as at January 31, 2010 and 7.46 at
February 1, 2009.
|
|
6
|
OTHER
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2010
|
|
|
2009
|
|
|
Prepaid rent and security deposits
|
|
$
|
945
|
|
|
$
|
872
|
|
Deferred lease cost
|
|
|
1,487
|
|
|
|
1,718
|
|
Advances to and investments in franchise
|
|
|
3,673
|
|
|
|
2,863
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,105
|
|
|
$
|
5,453
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2008 the Company entered into a Credit Agreement
(the Agreement) with its Australian franchise
partner, under which advances were provided by the Company to
the franchisee. The Agreement provides
65
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for a secured non-revolving credit facility of up to AUD$3,900
and funds are only advanced upon approval by the Company. As of
January 31, 2010 a total of AUD$3,255 has been drawn on the
line of credit.
The loan is designated as held to maturity and bears interest at
8% per annum which will accrue and capitalize to the loan
principal.
At the Companys option, the loan is convertible into
equity of the franchise three years after the effective date of
the Agreement. If the Company does not elect to convert the loan
at that time, the outstanding balance and interest is due and
payable within six months.
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2010
|
|
|
2009
|
|
|
Inventory purchases
|
|
$
|
7,664
|
|
|
$
|
15,772
|
|
Sales tax collected
|
|
|
2,758
|
|
|
|
1,681
|
|
Accrued rent
|
|
|
1,771
|
|
|
|
1,147
|
|
Lease exit costs
|
|
|
800
|
|
|
|
1,189
|
|
Other
|
|
|
4,214
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,207
|
|
|
$
|
22,103
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
OTHER
NON-CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred lease liability
|
|
$
|
10,822
|
|
|
$
|
7,326
|
|
Tenant Inducements
|
|
|
4,650
|
|
|
|
3,975
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,472
|
|
|
$
|
11,301
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
LONG-TERM
DEBT AND CREDIT FACILITIES
|
In April, 2007, the Company executed a new credit facility with
a lending institution that provided for a CDN$20,000 uncommitted
demand revolving credit facilities to fund the working capital
requirements of the Company. This agreement cancels the previous
CDN$8,000 credit facility. Borrowings under the uncommitted
credit facilities are made on a
when-and-as-needed
basis at the discretion of the Company.
Borrowings under the credit facility can be made either as
i) Revolving Loans Revolving loan borrowings
will bear interest at a rate equal to the Banks CDN$ 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.
At January 31, 2010, there were no borrowings outstanding
under this credit facility. As well, at January 31, 2010,
letters of credit totaling USD$1,185 and guarantees totaling
USD$1,462 had been issued under the facility, which reduced the
amount available by a corresponding amount.
66
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 108 Series A shares
and 117 Series TS shares were exchanged for common shares
of the Company, and the holders of the 117,000 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.
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 shares of common stock, 5,000 shares of
undesignated preferred stock and 30,000 shares of special
voting stock. Upon completion of the reorganization there were
44,291 shares of common stock, 20,935 shares of
exchangeable stock and 20,935 shares of special voting
stock outstanding. Additionally, 10,000 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.
The outstanding stock options issued to purchase shares of Lulu
Canada and Lulu US
67
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2,094 exchangeable shares are outstanding or in the
event of certain events such as a change in control.
|
|
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.
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 (2007 Plan). Upon completion of the
reorganization of the Company, outstanding awards under the
Companys predecessor plan were exchanged for 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. The majority of stock options granted to date have a
four-year vesting period and vest
68
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 35 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 principal 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 $5,616, $6,532 and $5,947 for the years ended
January 31, 2010, February 1, 2009 and
February 3, 2008, respectively.
Total unrecognized compensation cost for all stock option plans
was $13,692 as at January 31, 2010, which is expected to be
recognized over a weighted-average period of 2.6 years, and
was $11,943 as at February 1, 2009 over a weighted-average
period of 2.7 years.
Employee
stock purchase plan
The Companys Board of Directors and stockholders approved
the Companys Employee Share 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 shares. During the
year ended January 31, 2010, 10 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 5,296
Class A options with an exercise price of CDN$0.00001 and
an expiry date of December 31, 2009 and 11,062 Class B
options with an expiry date of December 31, 2010,
respectively, prior to the reorganization. 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
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
became non-forfeitable over a four-year requisite service period
to December 5, 2009. In addition, on December 5, 2005,
2,239 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
modifications were made to the LIPO and LIPO USA plans. The
5,285 LIPO Class A awards and the 4,111 vested LIPO
Class B awards were exchanged for a total of 1,960
exchangeable shares of the Company through a series of
transactions. At the time of the reorganization, 1,418 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.
69
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
|
|
|
Non-forfeitable balance at January 31, 2007
|
|
|
541
|
|
Granted
|
|
|
|
|
Vested
|
|
|
276
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at February 3, 2008
|
|
|
265
|
|
Granted
|
|
|
|
|
Vested
|
|
|
170
|
|
Cancelled
|
|
|
57
|
|
|
|
|
|
|
Non-forfeitable balance at February 1, 2009
|
|
|
38
|
|
Granted
|
|
|
|
|
Vested
|
|
|
38
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at January 31, 2010
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to exchangeable
shares was $nil at January 31, 2010.
In connection with the reorganization of the Company, the 5,285
LIPO USA Class A awards were exchanged for LIPO USA shares
through a series of transactions, resulting in 264 awards
outstanding in lululemon share equivalents. At the time of the
reorganization, 146 of the new awards were considered to be
vested and the remaining 118 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
|
|
|
Unvested balance at January 31, 2007
|
|
|
118
|
|
Granted
|
|
|
|
|
Vested
|
|
|
60
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 3, 2007
|
|
|
58
|
|
Granted
|
|
|
|
|
Vested
|
|
|
37
|
|
Cancelled
|
|
|
13
|
|
|
|
|
|
|
Unvested balance at February 1, 2009
|
|
|
8
|
|
Granted
|
|
|
|
|
Vested
|
|
|
8
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at January 31, 2010
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to LIPO USA
shares was $nil as at January 31, 2010.
70
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the reorganization of the Company, the 16,842
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 1,475
lululemon shares. At the time of the reorganization, 201 of the
awards were considered to be vested and the remaining 1,274
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
|
|
|
Unvested balance at January 31, 2007
|
|
|
1,274
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
393
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 3, 2008
|
|
|
881
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
337
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
253
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 1, 2009
|
|
|
291
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
184
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 31, 2010
|
|
|
107
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to LIPO USA
options was $185 at January 31, 2010.
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
|
|
|
788
|
|
|
|
87
|
|
|
|
105
|
|
December 5, 2006
|
|
|
631
|
|
|
|
60
|
|
|
|
96
|
|
December 5, 2007
|
|
|
276
|
|
|
|
60
|
|
|
|
393
|
|
December 5, 2008
|
|
|
199
|
|
|
|
43
|
|
|
|
384
|
|
December 5, 2009
|
|
|
66
|
|
|
|
14
|
|
|
|
315
|
|
December 5, 2010
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,960
|
|
|
|
264
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual term for the options
outstanding and exercisable at January 31, 2010 is
0.8 years.
71
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2010,
February 1, 2009 and February 3, 2008 was $464, $1,137
and $1,253, 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 1,880 options of LACI with a weighted-average
exercise price of $1.38 were exchanged for 4,479 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.
72
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, 2010, February 1,
2009 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
|
|
|
Balance at January 31, 2007
|
|
|
4,522
|
|
|
$
|
0.58
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
416
|
|
|
|
25.49
|
|
|
|
10
|
|
|
|
19.43
|
|
Exercised
|
|
|
93
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
47
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2008
|
|
|
4,798
|
|
|
$
|
2.74
|
|
|
|
10
|
|
|
$
|
19.43
|
|
Granted
|
|
|
545
|
|
|
|
21.66
|
|
|
|
9
|
|
|
|
24.04
|
|
Exercised
|
|
|
2,310
|
|
|
|
0.62
|
|
|
|
10
|
|
|
|
19.43
|
|
Forfeited
|
|
|
1,128
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 1, 2009
|
|
|
1,905
|
|
|
$
|
10.83
|
|
|
|
9
|
|
|
$
|
24.04
|
|
Granted
|
|
|
959
|
|
|
|
14.81
|
|
|
|
15
|
|
|
|
13.83
|
|
Exercised
|
|
|
557
|
|
|
|
2.23
|
|
|
|
9
|
|
|
|
24.04
|
|
Forfeited
|
|
|
113
|
|
|
|
23.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2010
|
|
|
2,194
|
|
|
$
|
14.08
|
|
|
|
15
|
|
|
$
|
13.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable at January 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
530
|
|
|
$
|
0.58
|
|
|
|
6.9
|
|
|
|
286
|
|
|
$
|
0.58
|
|
|
|
6.9
|
|
$6.98 - 18.30
|
|
|
856
|
|
|
|
11.18
|
|
|
|
6.8
|
|
|
|
87
|
|
|
|
15.84
|
|
|
|
4.3
|
|
$18.91 - $29.20
|
|
|
637
|
|
|
|
23.99
|
|
|
|
7.7
|
|
|
|
98
|
|
|
|
24.17
|
|
|
|
8.5
|
|
$32.31 - $50.46
|
|
|
171
|
|
|
|
33.55
|
|
|
|
7.7
|
|
|
|
65
|
|
|
|
33.96
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,194
|
|
|
$
|
14.08
|
|
|
|
7.2
|
|
|
|
536
|
|
|
$
|
11.40
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic Value
|
|
$
|
31,653
|
|
|
|
|
|
|
|
|
|
|
$
|
8,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2010, the unrecognized compensation cost
related to these options was $13,507, which is expected to be
recognized over a weighted-average period of 2.6 years; and
the total aggregate intrinsic value for stock options
outstanding and exercisable was $8,998. The intrinsic value of
stock options exercised during the years ended January 31,
2010, February 1, 2009 and February 3, 2008 was
$8,093, $50,053 and $2,686. The weighted-average grant date fair
value of options granted during the years ended January 31,
2010, February 1, 2009 and February 3, 2008 was $8.07,
$10.20 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
73
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Lulu US is the Federal Reserve federal funds rate. The following
assumptions were used in calculating the fair value of stock
options issued in fiscal 2009:
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|
|
|
|
|
|
lululemon
|
|
|
|
athletica inc.
|
|
|
Dividend yield
|
|
|
0%
|
|
Expected volatility
|
|
|
70.1%
|
|
Risk-free interest rate
|
|
|
1.71%
|
|
Weighted-average life
|
|
|
4.21 years
|
|
Options
with performance and/or market conditions
Certain options under the Plans were granted with 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 increased in defined increments as the return multiple
increases. A minimum return multiple of two was required for any
of the options to vest and all options vest if a return multiple
of five is achieved. These options had a contractual life of
10 years. During the year ended January 31, 2007, the
Company granted 1,115 options with these terms with a
weighted-average exercise price of $0.58. Of these options, all
were vested and exercised as at February 1, 2009.
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.
74
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
|
|
|
1,115
|
|
|
|
1,115
|
|
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
|
|
$
|
30,824
|
|
|
$
|
32,305
|
|
Total fair value to the Company
|
|
$
|
984
|
|
|
$
|
1,884
|
|
The weighted-average valuation difference between the original
award and the modified award was approximately $900. This
incremental cost was amortized over the remaining originally
estimated service period and has been fully recognized as at
February 1, 2009. 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.
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 65,226 shares and
4,479 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
75
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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: