Project #2: Lululemon 2023 10-K Analysis

Hailey Gregg & Alexandra Thieme

March 9 2024
1. Describe the format of the income statement (single-step, multi-step, hybrid) and
identify why you describe it that way.

The format of Lululemon’s income statement is multi-step. Firstly, the company lists the
calculation of gross profit at the top. There are also separate sections for operating expenses
related to the company’s primary business activities, as well as non-operating expenses (see
Reference 1). This differs from a single-step income statement, which groups revenues and
expenses together.

2. What items are included as part of the company’s other comprehensive income?
Does the company report comprehensive income as a continuation of the income statement
or as a separate statement?

Lululemon’s comprehensive income contains foreign currency translation adjustments

and net investment hedge gains. These items are reported as a continuation of the income
statement, starting right after net income. (See Reference 1).

3. Utilize the footnote addressing significant accounting policies to identify the method
used to depreciate PP&E.

Buildings are depreciated using the straight-line method over the course of their useful
life, which is 40 years. Leaseholds are also depreciated using the straight-line method over the
lesser estimate of the lease term. Other property and equipment are depreciated using the
declining balance method (see Reference 2).

4. Think about the business model utilized by your selected company (how do they sell
their products or services to customers). Utilize the footnote addressing significant
accounting policies to summarize how they recognize revenue and any specific issues
related to revenue recognition that they need to consider given their business model.
Examples could include selling on credit, receiving payments in advance, sales returns, gift
cards, collectability concerns, etc.

Revenue from in-store transactions is recorded at the time of the sale. When receiving
payments in advance, Lululemon initially records deferred revenue then recognizes revenue
when control is transferred to the buyer. In-home fitness equipment sales are recognized when
received by the buyer. Gift cards are initially deferred in the unredeemed gift card liability
account, then recorded as revenue when spent. Losses on assets from impairment valuations are
recognized in income in the period that the impairment is determined. All revenue is reported as
the net value after markdowns, returns, discounts, etc. (see Reference 3).
5. Evaluate the trend in sales/revenue over the past three years. Calculate the year
over year percentage change in revenue. Discuss what you believe is driving the change in
sales considering what you know about the company, the industry, and the overall
economic conditions.

Lululemon saw net revenue increase 29.6 % from 2021 to 2022 and 22.9% from 2022 to
2023 (see Reference 1). Management attributes this revenue growth to their “Power of Three
growth plan” which highlights the company’s goal to double net revenue from 2019 to 2023.
Specifically, Lululemon focused on increasing revenue for men, international customers, and
digitally (see Reference 4).

The company continued to improve by developing new products and becoming more innovative
in 2022. Lululemon incorporated Sensekit, a fabric offering zoned compression, into their core
running category. They also targeted new activities such as hiking, tennis, and golf. In addition,
the company launched footwear for women and slides for both genders (see Reference 4.1).

Another area Lululemon aimed to improve upon is membership experience. They did this in
person through 10k runs and other fun, engaging activities. The company also sought to keep
consumers engaged and connected to the brand through membership-tier programs (See
Reference 4.2).

Lululemon took direct initiative to expand their international customer base by opening 81 new
company stores across the globe (See Reference 4.3).

6. Evaluate the trend in net income over the past three years.
a. Calculate profit margin (net income as a percent of revenue). Perform
vertical analysis on key items (calculating each item as a percentage of
revenue) of the income statement to help identify reasons for the change in
profit margin rates between years.

Vertical Analysis

(Item as % of Revenue) Jan. 29, 2023 Jan. 30, 2022 Jan. 31, 2021

Net revenue $ 8,110,518 $ 6,256,617 $ 4,401,879

Cost of goods sold 44.61% 42.32% 44.02%

Gross Margin 53.39% 57.68% 55.98%

Selling, general, and 34.00% 35.56% 36.55%

administrative
 Impairment of goodwill 5.03% — —

Income from Operations 16.38% 21.31% 18.63%

Income before tax 16.43% 21.40% 18.61%

Income tax 5.89% 5.73% 5.23%

Net Income 10.54% 15.59% 13.38%

(see Reference 1)

Based on the metrics above, we can see that the net income over the past three years has
slightly fluctuated, by first increasing then decreasing despite a consistent increase in revenue.

b. Calculate the year over year percentage change in net income. Compare the
percentage change in revenue from question #5 to the percentage change in net income.

Horizontal Analysis

(% change YOY) 2022 to 2023 2021 to 2022

Net revenue 22.86% 29.64%

Cost of goods sold 26.81% 26.82%

Gross Margin 19.67% 31.72%

Selling, general, and 19.31% 27.69%

administrative

Income from Operations -0.37% 38.50%

Income before tax -0.10% 38.57%

Income tax 24.95% 35.73%

Net Income -14.10% 39.62%

c. Analyze and discuss your findings.

Lululemon saw a decrease in net revenue as a percentage change in net income from year
to year, which negatively impacted their gross margin. This is attributed to the increase in cost of
goods sold, as they expanded their business to produce new products, such as a footwear line. As
Lululemon branches out into new international markets, their selling, general, and administrative
expenses have continued to increase from year to year.

Even though it may appear as a noticeable decline, operating income did not fluctuate
significantly between 2022 and 2023 because it had already increased by a noticeable amount
from 2021 to 2022. Also, income taxes continue to increase from year to year, which impacts net
income and leads to a decrease in net income from 2022 to 2023.

7. Compute your company’s current ratio and debt to equity ratio for both years
presented in the balance sheet. Analyze and discuss what these ratios tell you about the
company.

Lululemon’s Ratios 2023 2022

Current ratio 2.12 1.86

Debt to Equity Ratio 0.78 0.80

The table above shows the current ratio and debt to equity ratio for Lululemon. The current ratio
of 2.12 indicates that for every dollar of current liabilities, the company has $2.12 in current
assets to pay off those current liabilities. The ratio increased from 2022 to 2023, largely
attributed to the increase in inventory and decrease in accounts payable. The debt to equity ratio
of (see Reference 5).

The debt to equity ratio of 0.78 in 2023 indicates that for every dollar of equity, the company is
leveraging it with $0.78 of debt. Typically, a lower number is favorable because it indicates a
company does not rely on debt to finance their business. The ratio decreased from 2022 to 2023
due to a noticeable increase in paid-in capital and retained earnings (see Reference 5).

8. Select a competitor and calculate current ratio and profit margin for the
competitor’s most recent year. Compare to your calculations for your company. Analyze
and discuss.
We selected Nike as a direct competitor. Below is the comparison of current ratio and profit
margin to Lululemon:

Current Ratio 2023 2022

Lululemon 2.12 1.86

Nike 2.72 2.63

Profit Margin 2023 2022 2021

Lululemon 10.54% 15.59% 13.38%

Nike 9.90% 12.94% 12.86%

Nike’s current ratio is higher than Lululemons in both 2023 and 2022. This indicates that Nike
has more assets to cover their liabilities (pay off their debts), as opposed to Lululemon. However,
the ratio of both of these companies shows good financial health and performance. The profit
margin for Lululemon is higher than Nike across all three years. This means that Lululemon
brings in more Net Income for every dollar of revenue than Nike does. Both companies have
declining profit margins, which are probably attributed to increasing costs and supply chain
issues heightened by the pandemic.
 References

Reference 1: Consolidated Statements of Operations and Comprehensive Income

Reference 2: Accounting Policies (Property, Plant, and Equipment)

Reference 3: Accounting Policies (Revenue Recognition)

Reference 4: Management’s Discussion and Analysis of Financial Condition and Results of

Operations
Reference 4.1 (Product Innovation)

Reference 4.2 (Guest Experience and Membership)

Reference 4.3 (Market Expansion)

Reference 5: Balance Sheet