Lululemon Corp., the Canada-based designer and retailer of yoga-inspired apparel, has filed a registration statement with the SEC, and a preliminary prospectus with the securities regulatory authorities in each of the provinces and territories of Canada, relating to a proposed initial public offering of approximately $200 million of its common stock. Applications will be made for quotation on the Nasdaq Global Market under the symbol “LULU” and on the Toronto Stock Exchange under the symbol “LLL.”
The proposed public offering is expected to consist of approximately $25 million in shares of common stock offered by Lululemon Corp. and the remaining shares offered by selling stockholders. The underwriters will have an option to purchase approximately $30 million of additional shares of common stock from selling stockholders.
Lululemon Corp. only expects to realize $20.3 million in net proceeds from this offering. The proceeds are expected to “fund new store openings and working capital, and for other general corporate purposes, which may include general and administrative expenses and potential acquisitions of franchises.” For fiscal 2007 and fiscal 2008, LULU has budgeted an aggregate of $28.0 million to $34.0 million for new store openings.
Lululemon Corp. holds a direct interest in Lululemon Athletica USA, a U.S. operating subsidiary, and a 48% interest in Lululemon Athletica Inc., the companys Canadian subsidiary. In December 2005, Chip Wilson, the founder and design chief of the lululemon brand, sold 48% of his interest in the company to a group of private equity investors, led by Advent International Corporation, which now owns approximately 38.1% of the companys capital stock, and Highland Capital Partners, which purchased approximately 9.6% of the capital stock. That deal also saw Bob Meers, who was formerly president of the Reebok brand in the 90s, come in as CEO of the company. Upon completion of this IPO and a reorganization of the company, Lululemon Corp. will own 100% of all operating subsidiaries.
The lululemon brand is sold primarily through 52 corporate and franchise stores that are primarily located in Canada and the United States.
“Other” income is derived from selling lululemon branded apparel on to other retailers on a wholesale basis. The companys strategy is clearly focused on the vertical owned-retail model which has been paying big dividends over the last few years.
For the full fiscal 2006 year ended January 31, 2007, the company saw 87.1% of its net revenue derived from sales of its products in Canada and 11.7% from sales in the U.S., while 1.2% of net revenue came from sales of its products in Australia and Japan.
Lululemon is boasting a compounded annual growth of 91.1% since 2004, when the company operated 20 stores, including 14 corporate-owned stores and six franchise stores in Canada, the U.S. and Australia. The majority of stores were located in Canada, with only three corporate stores in the U.S. and one franchise store in Australia. LULU added 17 retail locations in fiscal 2005 and 14 retail locations in fiscal 2006. As of April 1, 2007, LULU had 43 corporate stores located in Canada and the U.S., and two in Japan. They also had six franchise stores located in North America and one franchise store in Australia.
For fiscal 2006, corporate store net revenue accounted for 81.1% of total net revenue, while franchise net revenue comprised 14.3% of the total, and “other” net revenue accounted for 4.6% of sales.
Comp store sales results have been very strong over the three year period, jumping 18% in 2004, growing 19% in 2005, and accelerating to a strong 25% increase this past year. Currency-neutral comp store sales were up 20% in 2006 and up 12% for 2005, still strong results. The real attention getter is the sales per square foot average for the company, which was approximately $1,411 per square foot for 2006, up from $1,279/sf in 2005 and $1,328/sf in 2004.
The company said in the filing that opening new franchise stores is not a significant part of their near-term store growth strategy. The Australian franchise, which was set up in 2004, is expected to be converted to a joint venture following the IPO. The company had opened another franchise store in Japan in 2005, but LULU terminated that franchise agreement last year and entered into a joint venture agreement with Descente Ltd to operate two stores in Japan under Lululemon Japan Inc.
LULU owns 60% of LJI and maintains control over it, so the financial results of the JV are consolidated and included in the corporate-owned stores segment. The company said it intends to increase net revenue in markets outside of North America primarily by opening additional stores with joint venture partners in existing markets, as well as opening stores in new markets with new joint venture partners.
Lululemon Corp. expects to open 20 to 25 corporate stores in the U.S. and Canada in fiscal 2007, and has plans for 30 to 35 stores in North America in fiscal 2008.
LULU said in its filing that it had recently increased its focus on a mens apparel line, which represented approximately 11% of net revenue for 2006, and its accessories business, which represented approximately 9% of net revenue for fiscal 2006.
The bonuses paid to Mr. Wilson prior to December 2005 were due to his status as sole stockholder, and were in an amount equal to the companys Canadian taxable income above a “particular threshold.” A lawsuit settlement was paid to a third party Web site developer arising from the termination of a profit-sharing arrangement for Internet sales.
Fourth quarter 2006 net revenues were up 66.3% to $52.2 million from $31.4 million in the prior-year period. Gross margins increased 50 basis points to 51.4% of sales. Net income took a hit from the $7.2 million lawsuit pay-out, but still rose 29.7% to $882,000 for the quarter.
Goldman, Sachs and Merrill Lynch will act as joint bookrunners. Credit Suisse, UBS Investment Bank, William Blair & Company, CIBC World Markets, Wachovia Securities and Thomas Weisel Partners LLC will be acting as co-managers.
>>> These numbers will be tough for the market to resist and SEW suspects that this will be seen as another UA, HLYS or CROX by many. However, its noteworthy that those brands created a business where there was none. LULU will be fighting for space in a crowded U.S. market that has already seen other women-focused concepts launched in the last two years.
>>> Vertical retail is not new, but the margins will get them noticed despite slowing top-line growth
| Lululemon Corp. | |||||
| Fiscal Full Year Results | |||||
| (in US$ mm) | 2006 | 2005 | Change | 2004 | Change |
| Total Sales | $148.9 | $84.1 | 77.0% | $40.7 | 106% |
| Corp. Stores | $120.7 | $65.6 | 84.1% | $29.9 | 119% |
| Franchise | $21.4 | $14.6 | 46.8% | $7.4 | 97.7% |
| Other | $6.8 | $4.0 | 70.0% | $3.5 | 14.9% |
| GM % | 51.0% | 51.1% | -10 bps | 52.3% | -120 bps |
| SG&A % | 35.3% | 31.4% | +390 bps | 26.6% | +480 bps |
| Founder Bonus | n/a | $12.8 | n/a | $12.1 | +5.6% |
| Suit Settlement | $7.2 | n/a | n/a | ||
| Net Income | $7.7 | $1.4 | +450% | ($1.4) | vs. loss |
| Comps | |||||
