filings.toolsItem 1. BUSINESS
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Item 1. BUSINESS
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Overview
lululemon athletica inc. is a designer and retailer of technical athletic apparel operating primarily in North America and Australia. Our yoga-inspired apparel is marketed under the lululemon athletica and ivivva athletica brand names. 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, general fitness and dance-inspired apparel for female youth. As of February 3, 2013, our branded apparel was principally sold through 211 stores that are located in Canada, the United States, Australia and New Zealand. We believe our vertical retail strategy allows us to interact more directly with, and gain feedback from, our customers, whom we call guests, 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 guest loyalty. The key elements of our strategy are to:
| • | design and develop innovative athletic apparel that combines performance with style and incorporates real-time guest 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
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address a void in the women’s athletic apparel market. The founding principles established by Mr. Wilson drive our distinctive corporate culture with a mission of providing people with the components to live a longer, healthier and more fun life. Consistent with this mission, we promote a set of core values in our business, which include developing the highest quality products, operating with integrity, leading a healthy balanced life, and training our employees in self responsibility and goal setting. These core values attract passionate and motivated employees who are driven to succeed and share our vision of “elevating the world from mediocrity to greatness.” We believe the energy and passion of our employees allow us to successfully execute on our business strategy, enhance brand loyalty and create a distinctive connection with our guests.
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 $1,370.4 million in fiscal 2012, representing a 55% compound annual growth rate. Our net revenue increased from $1,000.8 million in fiscal 2011 to $1,370.4 million in fiscal 2012, representing a 37% increase, including the impact of the 53rd week of sales. During fiscal 2012, our comparable store sales growth was 16%, excluding the impact of the 53rd week of sales, and we reported income from operations of $376.4 million. During fiscal 2011, our comparable store sales growth was 22% and we reported income from operations of $287.0 million. In fiscal 2012, our corporate-owned stores opened at least one year, averaged sales of $2,058 per square foot, excluding the impact of the 53rd week of sales, compared to sales per square foot of $2,004 for fiscal 2011. We believe this is among the best in the apparel retail sector.
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 2012, which ends on February 3, 2013, is a 53 week year.
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 through our vertical retail strategy. 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 the following strengths differentiate us from our competitors and are important to our success:
| • | 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 women’s athletic apparel. While our brand has its roots in yoga, our products are |
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| increasingly being designed and used for other athletic and casual lifestyle pursuits, such as running and general fitness. 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. We coach our store sales associates, whom 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 guests 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 two months, 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, local ambassadors, hosting community events and creating in-store community boards. 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 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. Ms. Day has assembled a management team with a complementary mix of retail, design, operations, product sourcing, marketing and information technology experience from leading apparel and retail companies such as Abercrombie & Fitch Co., The Gap, Inc., 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:
| • | Grow our Store Base in North America. As of February 3, 2013, our products were sold through 186 corporate-owned stores in North America, including 135 in the United States and 51 in Canada. We expect that most of our near-term store growth will occur in the United States. We plan to add new |
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| stores to strengthen existing markets and selectively enter new markets in the United States and Canada. We opened 27 stores in the United States and four stores in Canada in fiscal 2012, including three ivivva branded stores, and we plan to open up to 38 stores, including three ivivva athletica branded stores in North America in fiscal 2013. |
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| • | Expand Beyond North America. As of February 3, 2013, we operated 23 corporate-owned stores and one showroom in Australia, two corporate-owned stores and one showroom in New Zealand, two showrooms in Hong Kong, and one showroom in the United Kingdom. We plan to open approximately five lululemon stores in fiscal 2013 in Australia and New Zealand. Over the next two years we intend to open additional showrooms as pre-seeding activities in the Asian and European markets. |
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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 expanded our customer base and supplemented our growing store base over the past four years. During fiscal 2012 we added new country and region specific websites in Australia, Europe and Asia, and new brand specific websites in North America. We plan to continue developing our e-commerce website to provide a distinctive online shopping experience and extend our reach. |
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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 activities and planned store expansion. We believe that increased brand awareness will result in increased comparable store sales and store 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 expand our 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, underwear and outerwear; |
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| • | Increase the Range of Athletic Activities our Products Target. Our guests purchase our products mainly for activities such as yoga, running and general fitness. We will continue to expand our product categories and educate our guests on the versatility of our products; |
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| • | Grow our Men’s 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 men’s business as a proportion of our total sales; and |
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| • | Develop our Youth Brand. We launched our youth focused brand, ivivva athletica, in 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 for future growth. |
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Our Stores
As of February 3, 2013, our retail footprint included 135 stores in the United States, 51 stores in Canada, 23 stores in Australia and two in New Zealand. While most of our corporate-owned stores are branded lululemon athletica, eight of our corporate-owned stores are branded ivivva athletica and specialize in dance-inspired apparel for female youth. We no longer operate any franchised stores as we reacquired our four remaining franchise stores during fiscal 2011. 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 corporate-owned stores operated in each U.S. state, Canadian province, Australian state and in New Zealand, and the overall totals:
| February 3, 2013 | January 29, 2012 | |||||||
| United States | ||||||||
| Alabama | 1 | 1 | ||||||
| Arizona | 3 | 3 | ||||||
| California | 24 | 23 | ||||||
| Colorado | 3 | 3 | ||||||
| Connecticut | 3 | 3 | ||||||
| District of Columbia | 2 | 2 | ||||||
| Florida | 8 | 7 | ||||||
| Georgia | 3 | 1 | ||||||
| Hawaii | 1 | 1 | ||||||
| Illinois | 9 | 8 | ||||||
| Indiana | 1 | 1 | ||||||
| Kansas | 1 | 1 | ||||||
| Louisiana | 1 | — | ||||||
| Maryland | 3 | 2 | ||||||
| Massachusetts | 6 | 5 | ||||||
| Michigan | 2 | 1 | ||||||
| Minnesota | 3 | 3 | ||||||
| Missouri | 2 | 1 | ||||||
| Nebraska | 1 | — | ||||||
| Nevada | 1 | 1 | ||||||
| New Jersey | 6 | 5 | ||||||
| New Mexico | 1 | — | ||||||
| New York | 9 | 8 | ||||||
| North Carolina | 4 | 2 | ||||||
| Ohio | 5 | 3 | ||||||
| Oregon | 2 | 2 | ||||||
| Pennsylvania | 6 | 4 | ||||||
| South Carolina | 1 | — | ||||||
| Tennessee | 3 | 1 | ||||||
| Texas | 10 | 10 | ||||||
| Utah | 1 | — | ||||||
| Vermont | 1 | — | ||||||
| Virginia | 3 | 3 | ||||||
| Washington | 3 | 3 | ||||||
| Wisconsin | 2 | — | ||||||
| Total United States | 135 | 108 | ||||||
| Canada | ||||||||
| Alberta | 12 | 11 | ||||||
| British Columbia | 12 | 12 | ||||||
| Manitoba | 2 | 1 | ||||||
| Nova Scotia | 1 | 1 | ||||||
| Ontario | 18 | 17 | ||||||
| Québec | 4 | 4 | ||||||
| Saskatchewan | 2 | 1 | ||||||
| Total Canada | 51 | 47 | ||||||
| Australia | ||||||||
| Australian Capital Territory | 1 | — | ||||||
| New South Wales | 7 | 6 | ||||||
| Queensland | 3 | 2 | ||||||
| South Australia | 1 | 1 | ||||||
| Tasmania | 1 | — | ||||||
| Victoria | 7 | 6 | ||||||
| Western Australia | 3 | 3 | ||||||
| Total Australia | 23 | 18 | ||||||
| New Zealand | 2 | 1 | ||||||
| Total | 211 | 174 | ||||||
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Store Economics
We believe that our innovative retail concept and guest experience contribute to the success of our stores. During fiscal 2012 our corporate-owned stores open at least one year, which average approximately 2,834 square feet, averaged sales of $2,058 per square foot, excluding the 53rd week of sales.
Management performs an ongoing evaluation of our portfolio of corporate-owned store locations. In fiscal 2012 we did not close any of our corporate-owned stores. As we continue our evaluation we may in future periods close corporate-owned store locations.
Store Expansion
From February 1, 2002 (when we had one store, in Vancouver) to February 3, 2013, we opened or acquired 210 net corporate-owned stores in North America and Australia. We opened our first corporate-owned store in the United States in 2003 and in Australia in 2010. We opened 37 corporate-owned stores in North America and Australia in fiscal 2012. 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. Beyond North America, we intend to expand our global presence as part of our long-term business strategy. We believe that partnering with companies and individuals with significant experience and proven success in the target country is to our advantage.
Direct to Consumer
In fiscal 2009 we launched our e-commerce website which makes up our direct to consumer channel. Direct to consumer is an increasingly substantial part of our business, representing approximately 14% of our net revenue in fiscal 2012, compared to 11% of our net revenue in fiscal 2011. We believe that a direct to consumer channel is convenient for our core customer and enhances the image of our brand. Our direct to consumer channel makes our product accessible to more markets than our corporate-owned store channel alone. We use this channel to build brand awareness, especially in new markets.
Wholesale Channel
We also sell lululemon athletica products through premium yoga studios, health clubs and fitness centers. This channel represented 2% of our net revenue in both fiscal 2012 and fiscal 2011. We believe 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 significant contributor to overall sales. Instead, we use the channel to build brand awareness, especially in new markets, including those outside of North America.
Our Products
We offer a comprehensive line of performance apparel and accessories for 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.
Our design team continues to develop fabrics that we believe will help advance our product line and differentiate us from the competition.
Our Culture and Values
Since our inception, we have 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
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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 and a variety of grassroots initiatives.
Product Design and Development
Our product design efforts are led by a team of designers based in Vancouver, British Columbia partnering with international designers. Our team is comprised of dedicated athletes and users of our products who embody our design philosophy and dedication to premium quality. Our design team identifies trends based on market intelligence and research, proactively seeks the input of our guests and our ambassadors and broadly seeks inspiration consistent with our goals of style, function and technical superiority.
As we strive to continue to provide our guests with functional fabrics, our design team works closely with our suppliers to incorporate innovative fabrics that bring particular specifications to our products. We 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.
Sourcing and Manufacturing
We do not own or operate any manufacturing facilities. 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 50 manufacturers, five of which produced approximately 60% of our products in fiscal 2012. During fiscal 2012, no single manufacturer produced more than 26% of our product offering. During fiscal 2012, approximately 54% of our products were produced in South/South East Asia, approximately 34% in China, approximately 3% in North America and the remainder in the Peru, Israel, Egypt and other countries. 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 whenever practicable. 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 supplier’s compliance with applicable law and our workplace code of conduct. We believe that the services of additional, or other, producers of our fabrics could be obtained with little or no additional expense to us and/or delay in the timeliness of our production process.
Distribution Facilities
We centrally distribute finished products from distribution facilities in Vancouver, British Columbia, Sumner, Washington, and Melbourne, Victoria. We operate the distribution facilities in Vancouver, Sumner and Melbourne which are leased and are approximately 120,000, 167,000 and 54,000 square feet, respectively. We believe these modern facilities enhance the efficiency of our operations. We believe our distribution
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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 women’s athletic apparel including The Gap, Inc. (including the Athleta brand), Lucy Activewear Inc., and bebe stores, inc. (including the BEBE SPORT collection).
Our Employees
As of February 3, 2013, we had 6,383 employees, of which 3,387 were employed in the United States, 2,545 were employed in Canada, and 451 were employed outside of North America. Of the 3,387 employees in the United States, 3,196 were employed in our retail locations, 114 were employed in distribution and the remaining 77 performed selling, general and administrative and other functions. Of the 2,545 Canadian employees, 1,574 were employed in our retail locations, 75 were employed in distribution, 162 were employed in design, merchandise and production, and the remaining 734 performed selling, general and administration functions. Of the 451 international employees, 347 were employed in our international retail locations, 27 were employed in distribution, and 77 performed merchandise, production, and administrative functions. None of our employees is 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, the United States, and Australia, lululemon’s design and word mark are registered in over 68 other jurisdictions which cover over 112 countries. We own trademark registrations for names of several of our fabrics and products including Luon, Silverescent, VitaSea, Boolux, Luxtreme, Groove Pant, Light as Air, and Power Y. In addition to trademarks, we own 22 industrial design registrations in Canada that protect our distinctive apparel and accessory designs, as well as a number of corresponding design patents in the United States and registered community designs in Europe.
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 SEC’s website at www.sec.gov. Also available on our website are printable versions of our Code of Business Conduct and Ethics and charters of
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the Audit, Compensation, and Nominating and Governance Committees of our Board of Directors. Information on our website does not constitute part of this annual report on Form 10-K or any other report we file or furnish with the SEC.
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