Item 1. Business
ITEM 1. BUSINESS
General
lululemon athletica inc. is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. We have a vision to be the experiential brand that ignites a community of people through sweat, grow, and connect, which we call "living the sweatlife." Since our inception, we have fostered a distinctive corporate culture; we promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection and inclusion, and choosing to have fun. These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose "to elevate the world by realizing the full potential within every one of us."
In this Annual Report on Form 10-K for the fiscal year ended January 30, 2022, lululemon athletica inc. (together with its subsidiaries) is referred to as "lululemon," "the Company," "we," "us," or "our." We refer to the fiscal year ended January 30, 2022 as "2021" and the fiscal year ended January 31, 2021 as "2020."
Components of this discussion of our business include:
• Our Products
• Our Market
• Our Segments
• Community-Based Marketing
• Product Design and Development
• Sourcing and Manufacturing
• Distribution Facilities
• Competition
• Seasonality
• Human Capital
• Intellectual Property
• Securities and Exchange Commission Filings
Our Products
Our healthy lifestyle inspired athletic apparel and accessories are marketed under the lululemon brand. We offer a comprehensive line of apparel and accessories. Our apparel assortment includes items such as pants, shorts, tops, and jackets
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designed for a healthy lifestyle including athletic activities such as yoga, running, training, and most other sweaty pursuits. We also offer a range of products designed for being On the Move, fitness-related accessories, and footwear. We expect to continue to broaden our merchandise offerings through expansion across these product areas.
Our design and development team continues to source technically advanced fabrics, with new feel and fit, and craft innovative functional features for our products. Through our vertical retail strategy and direct connection with our customers, whom we refer to as guests, we are able to collect feedback and incorporate unique performance and fashion needs into our design process. In this way, we believe we are better positioned to address the needs of our guests, helping us advance our product lines and differentiate us from the competition.
During the second quarter of 2020, we acquired Curiouser Products Inc., dba MIRROR. MIRROR is an in-home fitness company with an interactive workout platform that features live and on-demand classes. The acquisition of MIRROR bolsters our digital sweatlife offerings and brings immersive and personalized in-home sweat and mindfulness content to new and existing lululemon guests.
Our Market
Our guests seek a combination of performance, style, and sensation in their athletic apparel, choosing products that allow them to feel great however they exercise. Since consumer purchase decisions are driven by both an actual need for functional products and a desire to live a particular lifestyle, we believe the credibility of our brand and the authentic community experiences we offer expand our potential market beyond just athletes to those who pursue an active, mindful, and balanced life.
Although our largest customer group is made up of guests who shop our women's range, representing 67% of our 2021 net revenue, we also design a comprehensive men's line and have a targeted strategy in place. Revenue from men's range is growing as more guests discover the technical rigor and premium quality of our men's products, and are attracted by our distinctive brand.
North America is our largest market by geographical split, representing 85% of our 2021 net revenue. We are expanding internationally across the People's Republic of China ("PRC"), the rest of Asia Pacific, and Europe. We are expanding in these regions via a decentralized model, allowing for local community insight and consumer preference to inform our strategic expansion.
Our Segments
We primarily conduct our business through two channels: company-operated stores and direct to consumer.
We also operate outlets and temporary locations, conduct business through MIRROR, serve certain wholesale accounts, have license and supply arrangements, and hold warehouse sales from time to time. The financial results of these operations are disclosed in Other.
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Company-Operated Stores
At the end of 2021, we operated 574 stores in 17 countries across the globe. In addition to being a venue to sell our products, our stores give us a direct connection to our guest, which we view as a valuable tool in helping us build our brand and product line. Our retail stores are located primarily on street locations, in lifestyle centers, and in malls.
Number of company-operated stores by country January 30, 2022 January 31, 2021
United States 324 315
People's Republic of China (1)
86 55
Canada 63 62
Australia 31 31
United Kingdom 17 16
South Korea 12 7
Germany 9 7
New Zealand 7 7
Japan 6 6
Singapore 6 4
France 3 3
Ireland 3 1
Malaysia 2 2
Sweden 2 2
Netherlands 1 1
Norway 1 1
Switzerland 1 1
Total company-operated stores 574 521
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(1) PRC included nine stores in Hong Kong Special Administrative Region, five stores in Taiwan, and two stores in Macao Special Administration Region, as of January 30, 2022. As of January 31, 2021, there were seven stores in Hong Kong Special Administrative Region, two stores in Macao Special Administration Region, and two stores in Taiwan.
We opened 53 net new company-operated stores in 2021, including 43 net new stores outside of North America.
We perform ongoing evaluations of our portfolio of company-operated store locations. During 2021, we closed three of our lululemon branded company-operated stores. As we continue our evaluations we may, in the future, close or relocate additional company-operated stores.
In fiscal 2022, our new store growth will come primarily from company-operated store openings in Asia and in the United States. Our real estate strategy over the next several years will not only consist of opening new company-operated stores, but also in overall square footage growth through store expansions and relocations.
We believe that our innovative retail concept and guest experience contribute to the success of our stores. We use sales per square foot to assess the performance of our company-operated stores relative to their square footage. We believe that sales per square foot is useful in evaluating the performance of our company-operated stores. Our sales per square foot for 2021 was $1,443. As a significant number of our stores were temporarily closed due to COVID-19 during the first two quarters of 2020, we do not believe sales per square foot for 2020 is useful to investors in understanding performance, therefore we have not included this metric.
Sales per square foot is calculated using total net revenue from all company-operated stores divided by the average square footage of the stores during the year. In fiscal years with 53 weeks, the 53rd week of net revenue is excluded from the calculation of sales per square foot. The square footage of our company-operated stores includes all retail related space, storage areas, and administrative space used by the store employees. It excludes any space used for non-retail related activities. The sales per square foot metric we report may not be equivalent to similarly titled metrics reported by other companies.
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Direct to Consumer
We believe that e-commerce is convenient for our core guest and enhances the image of our brand. Our direct to consumer channel also allows us to reach and serve guests in markets beyond where our physical retail locations are based. We believe this channel is effective in building brand awareness, especially in new markets.
We serve our guests via our e-commerce website www.lululemon.com, other country and region-specific websites, and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers or other retail locations.
We continue to evolve and integrate our digital and physical channels in order to enrich our interactions with our guests, and to provide an enhanced omni-channel experience.
Other
Our other operations primarily include:
• Outlets and warehouse sales - We utilize outlets as well as physical warehouse sales, which are held from time to time, to sell slow moving inventory and inventory from prior seasons at discounted prices. As of January 30, 2022, we operated 37 outlets, with the majority in North America.
• Temporary locations - Our temporary locations, including pop ups, are typically opened for a short period of time. We believe these retail locations enable us to serve guests during peak shopping periods in markets where we do not ordinarily have a physical location, or enable us to better serve our guest in markets where we see high demand at our existing locations.
• MIRROR - We offer in-home fitness through an interactive workout platform that allows our guests to subscribe for live and on-demand classes.
• Wholesale - Our wholesale accounts include premium yoga studios, health clubs, and fitness centers. We believe these premium wholesale locations offer an alternative distribution channel that is convenient for our core guest 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, including outside of North America.
• License and supply arrangements - We enter into license and supply arrangements from time to time when we believe that it will be to our advantage to partner with companies and individuals with significant experience and proven success in certain target markets.
We have license and supply arrangements with partners in the Middle East and Mexico which grant them the right to operate lululemon branded retail locations in the United Arab Emirates, Kuwait, Qatar, Oman, Bahrain, and Mexico. We retain the rights to sell lululemon products through our e-commerce websites in these countries. Under these arrangements we supply the partners with lululemon products, training and other support. An extension to the initial term of the agreement for the Middle East was signed in 2020 and it extends the arrangement to December 2024. The initial term of the agreement for Mexico expires in November 2026. As of January 30, 2022, there were 14 licensed locations, including six in Mexico, six in the United Arab Emirates, one in Kuwait, and one in Qatar, which are not included in the above company-operated stores table.
Community-Based Marketing
We utilize a community-based approach to build brand awareness and guest loyalty. We pursue a multi-faceted strategy which leverages our local teams and ambassadors, digital marketing and social media, in-store community boards, and a variety of grassroots initiatives. We complement and amplify our community-based initiatives with global brand-building activity.
Product Design and Development
Our product design and development efforts are led by a team of researchers, scientists, engineers, and designers. Our team is comprised of athletes and users of our products who embody our design philosophy and dedication to premium quality. Our design and development 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 function, style, and technical superiority.
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As we strive to continue to provide our guests with technically advanced fabrics, our team works closely with our suppliers to incorporate the latest in technical innovation, bringing particular specifications to our products. We partner with independent inspection, verification, and testing companies, who conduct a variety of tests on our fabrics, testing performance characteristics including pilling, shrinkage, abrasion resistance, and colorfastness. We develop proprietary fabrics and collaborate with leading fabric and trims suppliers to manufacture fabrics and trims that we ultimately protect through agreements, trademarks, and trade-secrets.
Sourcing and Manufacturing
We do not own or operate any manufacturing facilities. We rely on a limited number of suppliers to provide fabrics for, and to produce, our products. The following statistics are based on cost.
We work with a group of approximately 41 vendors that manufacture our products, five of which produced 57% of our products in 2021, with the largest manufacturer producing 15%. During 2021, 40% of our products were manufactured in Vietnam, 17% in Cambodia, 11% in Sri Lanka, 7% in the PRC, including 2% in Taiwan, and the remainder in other regions.
We work with a group of approximately 65 suppliers to provide the fabrics for our products. In 2021, 56% of our fabrics were produced by our top five fabric suppliers, with the largest manufacturer producing 27%. During 2021, 48% of our fabrics originated from Taiwan, 19% from Mainland China, 11% from Sri Lanka, and the remainder from other regions.
We also source other raw materials which are used in our products, including items such as content labels, elastics, buttons, clasps, and drawcords from suppliers located predominantly in the Asia Pacific region.
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 term contracts with the majority of our suppliers or manufacturing sources for the production and supply of our fabrics and garments, and we compete with other companies for fabrics, raw materials, and production. We require that all of our manufacturers adhere to our vendor code of ethics regarding social and environmental sustainability practices. Our product quality and sustainability teams partner with leading inspection and verification firms to closely monitor each supplier's compliance with applicable laws and our vendor code of ethics.
Distribution Facilities
We operate and distribute finished products from our distribution facilities in the United States, Canada, and Australia. We own our distribution center in Columbus, Ohio, and lease our other distribution facilities. We also utilize third-party logistics providers to warehouse and distribute finished products from their warehouse locations in the United Sates, the PRC, and the Netherlands. We regularly evaluate our distribution infrastructure and consolidate or expand our distribution capacity as we believe appropriate for our operations and to meet anticipated needs.
Competition
Competition in the athletic apparel industry is based principally on 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 and our technical product innovation. We also believe our ability to introduce new product innovations, combine function and fashion, and connect through in-store, online, and community experiences sets us apart from our competition. In addition, we believe our vertical retail distribution strategy and community-based marketing differentiates us further, allowing us to more effectively control our brand image and connect with our guest.
The market for athletic apparel is highly competitive. It includes increasing competition from established companies that 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, Under Armour, Inc, and Columbia Sportswear Company. We also compete with retailers who have expanded to include women's athletic apparel including The Gap, Inc. (including the Athleta brand), Victoria's Secret with its sport and lounge offering, and Urban Outfitters, Inc.
Seasonality
Our business is affected by the general seasonal trends common to the retail apparel industry. Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year. As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year. For example, we generated approximately 44% and
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56% of our full year operating profit during the fourth quarters of 2021 and 2020, respectively. Due to a significant number of our company-operated stores being temporarily closed due to COVID-19 during the first two quarters of 2020, we earned a higher proportion of our operating profit during the last two quarters of 2020 compared to 2021.
Human Capital
Our Impact Agenda sets out our social and environmental goals, commitments, and strategy across three pillars - Be Well, Be Planet, and Be Human. Details of our Impact Agenda and corresponding Impact Report can be found on our website (https://corporate.lululemon.com/our-impact).
The Be Human pillar of our Impact Agenda sets out our focus areas with respect to our human capital, including our employees and broader community:
• advancing a culture of Inclusion, Diversity, Equity, and Action (“IDEA”);
• empowering our employees through whole-person opportunities; and
• supporting the well-being of the people who make our products in our supply chain.
Advancing a culture of Inclusion, Diversity, Equity and Action
We continually endeavor to create an environment that is equitable, inclusive, and fosters personal growth.
Diversity and inclusion are key components of our culture and are fundamental to achieving our strategic priorities and future vision. The diversity of our teams and working in an inclusive culture enables increased employee engagement, better decision making, greater adaptability, creativity, and a deeper understanding of the communities we serve. We are proud that as of January 30, 2022, approximately 55% of our board of directors, 65% of our senior executive leadership team, and 50% of our vice presidents and above are women, while approximately 75% of our overall workforce are women. (1)
We maintain 100% gender pay equity within our entire global employee population, meaning equal pay for equal work across genders. We have achieved pay equity across all areas of diversity in the United States and are seeking, to the extent permitted under local law and regulation, to collect the data necessary to confirm complete pay equity globally.
We expect to invest at least $5 million annually to fund our global IDEA activities. These funds can further support the career progress of our diverse talent and increase access to internal opportunities and professional development. We offer all employees IDEA education, training, and guided conversations on a variety of topics, including anti-racism, anti-discrimination, and inclusive leadership behaviors. We aim to foster a culture of inclusion by making IDEA part of our everyday conversation, and frequently review our policies, programs, and practices to identify ways to be more inclusive and equitable.
Inclusive in our Impact Agenda is a goal to invest a total of $75.0 million to advance equity in well-being by 2025.
(1) While we track male and female genders, we acknowledge this is not fully encompassing of all gender identities.
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Empowering our employees through whole-person opportunities
We believe that each of our approximately 29,000 people are key to the success of our business. We strive to foster a distinctive culture rooted in our core values that attracts and retains passionate and motivated employees who are driven to achieve personal and professional goals. We believe our people succeed because we create an environment that fosters growth and is diverse and equitable.
We assess our performance and identify opportunities for improvement through an annual employee engagement survey. In 2021, the participation rate was approximately 85% and our employee engagement score exceeded the retail industry average. (2) Our engagement score suggests our people are proud to work for lululemon, they are motivated to contribute to work that aligns with their purpose, and they recommend lululemon as a great place to work.
We understand that health and wealth programs need to offer choice at all stages of life. Our current offerings support our goal of becoming the number one place where people come to develop and grow as inclusive leaders. These offerings include, among other things:
• Competitive compensation which rewards exceptional performance;
• A parenthood program which is a gender-neutral benefit that provides all eligible employees up to six months of paid leave;
• An employee assistance program which provides free, confidential, support to all our employees and their families in a variety of areas from mental well-being to financial services to advice for new parents;
• Personal resilience tools to employees, ambassadors, and suppliers;
• Reimbursement programs which reward physical activity; and
• A Fund your Future program for eligible employees which offers partial contribution matches to a pension plan and employee share purchase plan.
As part of the competitive compensation we offer, we raised the minimum base pay for the majority of our store and Guest Education Center employees in North America during 2021.
Supporting the well-being of the people who make our products in our supply chain
We work with suppliers who share our values and collaborate as partners to uphold robust standards, address systemic challenges, and improve the well-being of people who make our products.
Our Vendor Code of Ethics outlines our commitment to respect human and labor rights, and to promote safe and fair working conditions for people in our supply chain. The code is based on international standards for workers' rights with regard to their employment, wages and working hours, occupational health and safety, access to confidential grievance mechanisms without retaliation, and environmental protection. Our finished goods and mill suppliers are assessed against the Vendor Code of Ethics prior to forming a business relationship, and regularly thereafter; we work with factories that can uphold our strict requirements.
(2) Based on an industry benchmark provided by the third party that administers this survey to our employees.
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We have developed and implemented our Foreign Migrant Worker Standard, which outlines our expectations with respect to foreign migrant workers. This program was successfully executed in Taiwan in 2020 and based on lessons learned from this program, we are now expanding beyond Taiwan so that we can further support foreign migrant workers globally.
Our COVID-19 response
We closely monitor the changing landscape of COVID-19 so that we can make appropriate decisions to support and keep our people safe. Over the last two years, we have responded to the pandemic with a variety of measures from temporarily closing our stores to committing to pay protection for employees during the COVID-19 related closures. During 2020 we launched a hardship fund for employees, the We Stand Together Fund, and launched an Ambassador Relief Fund, and these continued in 2021.
We created a wide range of resiliency and connection sessions and tools to support our people during the pandemic and we made these resources available to our guests and the broader community.
As we continue to navigate the COVID-19 pandemic, we continue to prioritize the safety of our people and our guests. We are closely monitoring the situation in the markets and communities that we serve. We will temporarily close stores and restrict operations as necessary, based upon information from government and health officials.
Intellectual Property
We have trademark rights on many of our products and believe having distinctive marks that are readily identifiable is an important factor in building our brand image and in distinguishing our products from the products of others. We consider our lululemon and wave design trademarks to be among our most valuable assets. In addition, we own many other trademarks for names of several of our brands, slogans, fabrics and products. We own registered and pending U.S. and foreign utility and design patents, industrial designs in Canada, and registered community designs in Europe that protect our product innovations, distinctive apparel, and accessory designs.
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 the standing 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.