S-1 1 o35800sv1.htm FORM S-1 Form S-1
 

As filed with the Securities and Exchange Commission on April 30, 2007
Registration No. 333-       
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 
 
 
 
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
Lululemon Corp.
(Exact name of registrant as specified in its charter)
 
         
Delaware   5600   20-3842867
(State or other jurisdiction of
incorporation or organization)
  (Primary standard industrial
classification code number)
  (I.R.S. employer
identification number)
 
 
 
 
2285 Clark Drive
Vancouver, British Columbia
Canada, V5N 3G9
(604) 732-6124
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
 
 
 
Lululemon Corp.
c/o PHS Corporate Services, Inc.
1313 North Market Street, Suite 5100
Wilmington, DE 19801
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
 
 
 
Copies to:
     
Barry M. Abelson
John P. Duke
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103-2799
(215) 981-4000
  Kevin P. Kennedy
Simpson Thacher & Bartlett LLP
2550 Hanover Street
Palo Alto, CA 94034
(650) 251-5000
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o            
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o            
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o            
 
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  o
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
                     
Title of Securities
    Proposed Maximum
    Amount of
To be Registered     Aggregate Offering Price(1)     Registration Fee
Common Stock, par value $0.01 per share     $ 230,000,000.00       $ 7,061.00  
                     
 
(1) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. The proposed maximum offering price includes amounts attributable to shares that may be purchased by the underwriters to cover the underwriters’ option to purchase additional shares of our common stock from the selling stockholders at the initial public offering price less the underwriters’ discount.
 
 
 
 
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
 


 

 
EXPLANATORY NOTE
 
This registration statement contains two forms of prospectus: one to be used in connection with the offerings of the securities described herein in the United States (the U.S. Prospectus), and one to be used in connection with the offering of such securities in Canada (the Canadian Prospectus). The U.S. Prospectus and the Canadian Prospectus are identical except for the cover page, the table of contents, page 142, page 143 and the back page, and except that the Canadian Prospectus includes a “Certificate of Lululemon,” a “Certificate of the Canadian Underwriters” and “Auditors’ Consent.” The form of the U.S. Prospectus is included herein and is followed by the alternate pages to be used in the Canadian Prospectus. Each of the alternate pages for the Canadian Prospectus included herein is labeled “Alternate Page for Canadian Prospectus.”


 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
 
Subject to Completion, Dated April 30, 2007
 
           Shares
 
(LOGO)
 
Lululemon Corp.
 
Common Stock
 
 
 
 
This is an initial public offering of shares of our common stock.
 
We are offering           of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional           shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.
 
Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $      and $       . Application will be made for quotation on the Nasdaq Global Market under the symbol “LULU” and on the Toronto Stock Exchange under the symbol “LLL.”
 
See “Risk Factors” on page 9 to read about factors you should consider before buying shares of our common stock.
 
 
 
 
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 
 
                 
    Per Share     Total  
 
Initial public offering price
  $                $             
Underwriting discount
  $       $    
Proceeds, before expenses, to us
  $       $    
Proceeds, before expenses, to the selling stockholders
  $       $  
 
To the extent that the underwriters sell more than           shares of common stock, the underwriters have the option to purchase up to an additional           shares from the selling stockholders at the initial public offering price less the underwriting discount.
 
 
 
 
The underwriters expect to deliver the shares against payment in New York, New York on          , 2007.
 
 
Goldman, Sachs & Co. Merrill Lynch & Co.
 
 
 
 
Credit Suisse UBS Investment Bank
 
William Blair & Company  
    CIBC World Markets  
      Wachovia Securities  
  Thomas Weisel Partners LLC
 
 
 
Prospectus dated          , 2007


 

 
[ALTERNATE PAGE FOR CANADIAN PROSPECTUS]
 
A copy of this preliminary prospectus has been filed with the securities regulatory authorities in each of the provinces and territories of Canada but has not yet become final for the purpose of the sale of securities. Information contained in this preliminary prospectus may not be complete and may have to be amended. The securities may not be sold until a receipt for the prospectus is obtained from the securities regulatory authorities.
 
This prospectus has been filed under procedures in each of the provinces and territories of Canada that permit certain information about these securities to be determined after the prospectus has become final and that permit the omission of that information from this prospectus. The procedures require the delivery to purchasers of a supplemented PREP prospectus containing the omitted information within a specified period of time after agreeing to purchase any of the securities. All disclosure contained in a supplemented PREP prospectus that is not contained in this prospectus will be incorporated by reference into this prospectus as of the date of the supplemented PREP prospectus.
 
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. The Company has filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission, under the United States Securities Act of 1933, as amended, with respect to these securities.
 
Initial Public Offering and Secondary Offering April 30, 2007
PRELIMINARY BASE PREP PROSPECTUS
 
Lululemon Corp.
 
(LOGO)
U.S. $
SHARES OF COMMON STOCK
 
This prospectus qualifies the distribution of shares of common stock of Lululemon Corp. Of the           shares of common stock being offered,           shares are being offered by us and           shares are being offered by certain of our stockholders (the “Selling Stockholders”).
We are offering our common stock for sale concurrently in Canada under the terms of this prospectus and in the United States under the terms of a registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission. Our common stock is being offered in Canada by Goldman Sachs Canada Inc., Merrill Lynch Canada Inc., Credit Suisse Securities (Canada) Inc., UBS Securities Canada Inc. and CIBC World Markets Inc. (the “Canadian Underwriters”) and in the United States by Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, UBS Securities LLC, William Blair & Company, L.L.C., CIBC World Markets Corp., Wachovia Capital Markets, LLC and Thomas Weisel Partners LLC (together with the Canadian Underwriters, the “Underwriters”).
 
Price: U.S.$      per Share of Common Stock
 
                                 
          Underwriters’
          Net Proceeds to the
 
    Price to the
    Discounts and
    Net Proceeds to
    Selling
 
   
Public(1)
   
Commissions
   
Lululemon(2)
   
Stockholders(3)
 
 
Per share(4)
  U.S.$       U.S.$       U.S.$       U.S.$    
Total offering(5)
  U.S.$       U.S.$       U.S.$       U.S.$  
 
(1) The offering price for shares of our common stock has been determined by negotiation between us, the Selling Stockholders and the Underwriters.
(2) Before deducting expenses of this offering, which are estimated to be approximately U.S.$         , which will be paid by us out of our general corporate funds.
(3) The Selling Stockholders will pay the Underwriters’ discounts and commissions in respect of the shares of common stock sold by the Selling Stockholders.
(4) Assumes an initial public offering price of $      per share (the midpoint of the price range of $           to $          ).
(5) The Selling Stockholders have granted an option, exercisable in whole or in part for a period of 30 days from the closing of this offering, to purchase up to          additional shares of common stock on the terms as set forth above. If this option is exercised in full, the total Price to the Public, Underwriters’ Discounts and Commissions and Net Proceeds to the Selling Stockholders will be U.S.$     , U.S.$     and U.S.$     , respectively. This prospectus qualifies the distribution of the option and the distribution of the additional shares of common stock sold upon the exercise of the option. See “Underwriting.”
An investment in our common stock is subject to certain risk factors that prospective investors should carefully consider. It is important for prospective purchasers of our common stock to consider the particular risk factors that may affect the athletic apparel industry. See “Risk Factors” for a more complete assessment of those risks.
There is currently no market through which our common stock may be sold, and purchasers may not be able to resell common stock purchased under this prospectus. We will apply to list our common stock on the Toronto Stock Exchange under the symbol “LLL.” Listing will be subject to fulfilling all the listing requirements of the Toronto Stock Exchange. We will also apply to have our common stock approved for quotation on the Nasdaq Global Market under the symbol “LULU.”
The Canadian Underwriters, as principals, conditionally offer our common stock in Canada, subject to prior sale, if, as and when issued, sold and delivered by us and sold by the Selling Stockholders to, and accepted by, the Canadian Underwriters in accordance with the conditions contained in the underwriting agreement referred to under “Underwriting”, and subject to the approval of certain legal matters for us by McCarthy Tétrault LLP as to matters of Canadian law and Pepper Hamilton LLP as to matters of U.S. law and for the Underwriters by Osler, Hoskin & Harcourt LLP as to matters of Canadian law and Simpson Thacher & Bartlett LLP as to matters of U.S. law. In connection with this offering, the Underwriters may sell more shares of our common stock than they are required to purchase in this offering or effect transactions that stabilize or maintain the market price of our common stock at levels other than those which might otherwise prevail on the open market. See “Underwriting.”
Subscriptions for our common stock will be received subject to rejection or allotment in whole or in part and the right is reserved to close the subscription books at any time without notice. A book entry only certificate representing our common stock will be issued in registered form to Depository Trust Company or its nominee (“DTC”) and will be deposited with DTC on the date of the closing of this offering. The closing of the offering is expected to occur on or about          , 2007 or such later date as we and the Underwriters may agree, but in any event not later than          , 2007. A purchaser of our common stock in Canada will receive only a customer confirmation from a registered dealer that is a participant in CDS Clearing and Depository Services Inc. from or through which our common stock is purchased.
We and certain of the Selling Stockholders are incorporated under the laws of a foreign jurisdiction or reside outside of Canada. It may not be possible for investors to collect from us or the Selling Stockholders judgments obtained in courts in Canada predicated on the civil liability provisions of securities legislation.


 

(PHOTO)
Creativity is maximized when you’re            living in the moment.

 


 

(PHOTO)

 


 

(PHOTO)
lululemon athletica creates components for people to
LIVE LONGER, HEALTHIER AND MORE FUN LIVES.

 


 

TABLE OF CONTENTS
 
         
   
Page
 
  1
  9
  29
  31
  31
  32
  39
  41
  43
  45
  71
  83
  90
  109
  114
  118
  126
  129
  133
  136
  141
  141
  141
  F-1
 
 
Exchange Rate Information
 
We publish our combined consolidated financial statements in U.S. dollars. All references in this prospectus to “dollars”, “$” or “US$” are to U.S. dollars and all references to “CDN$” are to Canadian dollars, unless otherwise noted. The following table presents, in U.S. dollars, the exchange rates for the Canadian dollar, determined based on the inverse of the noon buying rate in New York City for cable transfers in U.S. dollars as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”) for the periods indicated.
 
                                         
Fiscal Year Ended January 31,
 
2003
   
2004
   
2005
   
2006
   
2007
 
 
High
  $ 0.662     $ 0.788     $ 0.849     $ 0.874     $ 0.910  
Low
  $ 0.621     $ 0.653     $ 0.716     $ 0.787     $ 0.846  
End of Period
  $ 0.654     $ 0.754     $ 0.807     $ 0.874     $ 0.848  
Average
  $ 0.639     $ 0.729     $ 0.776     $ 0.834     $ 0.882  
 
The average exchange rate is calculated using the average of the exchange rates on the last business day of each month during the applicable fiscal year. On April 25, 2007, the noon buying rate was CDN$1.00 = $0.897.


 

[ALTERNATE PAGE FOR CANADIAN PROSPECTUS]
 
TABLE OF CONTENTS
         
   
Page
 
  1
  9
  29
  31
  31
  32
  39
  41
  43
  45
  71
  83
  90
  109
  114
  118
  126
  129
  133
  136
  141
  141
  141
Intercorporate Relationships
  142
Material Contracts
  142
Notice to Investors
  142
Eligibility for Investment
  143
Purchasers’ Statutory Rights
  143
Auditors’ Consent
  144
  F-1
Certificate of Lululemon
  C-1
Certificate of the Canadian Underwriters
  C-2
 
 
Exchange Rate Information
 
We publish our combined consolidated financial statements in U.S. dollars. All references in this prospectus to “dollars”, “$” or “US$” are to U.S. dollars and all references to “CDN$” are to Canadian dollars, unless otherwise noted. The following table presents, in U.S. dollars, the exchange rates for the Canadian dollar, determined based on the inverse of the noon buying rate in New York City for cable transfers in U.S. dollars as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”) for the periods indicated.
 
                                         
Fiscal Year Ended January 31,
 
2003
   
2004
   
2005
   
2006
   
2007
 
 
High
  $ 0.662     $ 0.788     $ 0.849     $ 0.874     $ 0.910  
Low
  $ 0.621     $ 0.653     $ 0.716     $ 0.787     $ 0.846  
End of Period
  $ 0.654     $ 0.754     $ 0.807     $ 0.874     $ 0.848  
Average
  $ 0.639     $ 0.729     $ 0.776     $ 0.834     $ 0.882  
 
The average exchange rate is calculated using the average of the exchange rates on the last business day of each month during the applicable fiscal year. On April 25, 2007, the noon buying rate was CDN$1.00 = $0.897.


 

In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved. These securities have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense.
 
 
We have filed with the U.S. Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under Securities Act of 1933, as amended, or the Securities Act, with respect to the common stock offered by this prospectus. This prospectus, filed as part of the registration statement, does not contain all the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. With respect to statements in this prospectus about the contents of any contract, agreement or other document, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, and each such statement is qualified in all respects by reference to the document to which it refers.
 
A copy of the registration statement and the exhibits that were filed with the registration statement may be inspected without charge at the public reference facilities maintained by the SEC in Room 1590, 100 F Street, N.E., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the SEC upon payment of the prescribed fee. Information on the operation of the public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov.
 


 

 
PROSPECTUS SUMMARY
 
This summary highlights some of the information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed in the “Risk Factors” section of this prospectus and our consolidated financial statements and the related notes appearing at the end of this prospectus.
 
Our fiscal year ends on January 31. All references in this prospectus to our fiscal years refer to the fiscal year ended on January 31 in the year following the year mentioned. For example, our “fiscal 2006” ended on January 31, 2007.
 
Our Company
 
lululemon is one of the fastest growing designers and retailers of technical athletic apparel in North America. Our yoga-inspired apparel is marketed under the lululemon athletica brand name. We believe consumers associate our brand with highly innovative, technically advanced premium apparel products. Our products are designed to offer superior 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. We offer a comprehensive line of apparel and accessories including fitness pants, shorts, tops and jackets designed for athletic pursuits such as yoga, dance, running and general fitness. As of April 1, 2007, our branded apparel was principally sold through our 52 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 insights 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:
 
  •  design and develop innovative athletic apparel that combines performance with style and incorporates real-time customer feedback;
 
  •  locate our stores in street locations, lifestyle centers and malls that position each lululemon athletica store as an integral part of its community;
 
  •  create an inviting and educational store environment that encourages product trial and repeat visits; and
 
  •  market on a grassroots level in each community, including through influential fitness practitioners who embrace and create excitement around our brand.
 
We were founded in 1998 by Dennis “Chip” Wilson in Vancouver, Canada. Noting the increasing number of women participating in sports, and specifically yoga, Mr. Wilson developed lululemon athletica to address a void in the women’s athletic apparel market. The founding principles established by Mr. Wilson drive our distinctive corporate culture and promote a set of core values that attracts passionate and motivated employees. We believe the passion and dedication 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 provide 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 $148.9 million in fiscal 2006, representing a 91.1% compound annual growth rate. During fiscal 2006, our comparable store sales increased 25% and we reported income from operations of $16.2 million, which included a one-time $7.2 million litigation settlement charge. Over that same period, our stores opened at least one year averaged sales of approximately $1,400 per square foot, which we believe is among the best in the apparel retail sector.


1


 

 
Our Competitive Strengths
 
We believe that 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. The premium nature of our brand is reinforced by our vertical retail strategy and our selective distribution through leading yoga studios and fitness clubs. We believe this approach allows us to further control our brand image and merchandising.
 
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 distinctive retail concept is based on a community-centric philosophy designed to offer customers an inviting and educational experience. To enhance our store’s appeal as a community hub, we train our sales associates to be knowledgeable about the technical design aspects of our products and to remain current regarding local fitness classes, instructors and athletic activities. We believe that our engaging store environment differentiates us from other specialty retailers and encourages product trial, purchases and repeat visits.
 
Innovative Design Process.  We attribute our ability to develop superior products to a number of factors, including: our customer-driven design process; our collaborative relationships with third-party suppliers and local fitness practitioners to develop technically advanced and functional products; and our vertical retail strategy that allows us to integrate customer feedback into our products.
 
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 partnering with local fitness practitioners, creating in-store community boards, and facilitating fitness activities in our communities. To create excitement and establish a premium image for our brand, we often initiate our grassroots marketing efforts in advance of opening our first store in a new market.
 
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 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 believe our strong relationship with our employees is a key contributor to our success.
 
Experienced Management Team.  Our founder, Mr. Wilson, leads our design team and plays a central role in corporate strategy and in promoting our distinctive corporate culture. Our Chief Executive Officer, Robert Meers, whose experience includes 15 years at Reebok International Ltd., most recently serving as the chief executive officer of the Reebok brand from 1996 to 1999, joined us in December 2005. Messrs. Wilson and Meers 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., Limited Brands, Inc., Nike, Inc. and Reebok. We believe our management team is well positioned to execute the long-term growth strategy for our business.


2


 

Growth Strategy
 
Key elements of our growth strategy are to:
 
Grow our Store Base in North America.  We believe that there is a significant opportunity for us to expand our store base in North America, primarily in the United States. We plan to add new stores to strengthen existing markets while selectively entering new markets in the United States and Canada. We believe that our strong sales in the United States to date demonstrate the portability of our brand and retail concept. We expect to open 20 to 25 stores in fiscal 2007 and 30 to 35 additional stores in fiscal 2008 in the United States and Canada.
 
Increase our Brand Awareness.  We will continue to increase brand awareness and customer loyalty through our grassroots marketing efforts and planned store expansion. Our grassroots marketing programs are designed to reinforce the premium image of our brand and our connection with the community. These efforts, which we often initiate before we open a store in a new market, include organizing events and partnering with local fitness practitioners. We believe our grassroots marketing efforts enhance our profile in the community and create excitement for lululemon athletica.
 
Introduce New Product Technologies.  We will continue to focus on developing and offering products that incorporate technology-enhanced fabrics and performance features that differentiate us in the market and broaden our customer base. We believe that incorporating new technologies, providing advanced features and using differentiated manufacturing techniques will reinforce the authenticity and appeal of our products and drive sales growth.
 
Broaden the Appeal of our Products.  We will selectively seek opportunities to expand the appeal of lululemon athletica to improve store productivity and increase our overall addressable market. This includes our current plans to: grow our men’s business as a proportion of our total sales; expand our product offerings in categories such as bags, undergarments, outerwear and sandals; and increase the range of the athletic activities our products target.
 
Expand Beyond North America.  We plan to open additional stores in Japan and Australia through our existing and planned joint venture relationships. Over time, we intend to pursue additional joint venture opportunities in other Asian and European markets that we believe offer similar, attractive demographics. We believe our joint venture model allows us to leverage our partners’ knowledge of local markets to reduce risks and improve our probability of success in these markets.
 
Company Information
 
We commenced operations in Canada in fiscal 1998 as a retailer of technical athletic apparel. We initially conducted our operations through our Canadian operating company, Lululemon Athletica Inc. In 2002, in connection with our expansion into the United States, we formed a sibling operating company to conduct our U.S. operations, Lululemon Athletica USA Inc. Both operating companies were wholly-owned by affiliates of Mr. Wilson.
 
In December 2005, Mr. Wilson sold 48% of his interest in our capital stock to a group of private equity investors led by Advent International Corporation, which purchased approximately 38.1% of our capital stock, and Highland Capital Partners, which purchased approximately 9.6% of our capital stock. In connection with this transaction, we formed Lululemon Corp. (formerly known as Lulu Holding, Inc.) to serve as a holding company for all of our related entities, including our two primary operating subsidiaries, Lululemon Athletica Inc. and Lululemon Athletica USA Inc.
 
We are a Delaware corporation. Our principal executive offices are located at 2285 Clark Drive, Vancouver, British Columbia, Canada, V5N 3G9. Our telephone number is (604) 732-6124. The address of our website is www.lululemon.com (which is not intended to be an active hyperlink in this prospectus). The information contained on or connected to our website is not part of this prospectus.


3


 

 
Unless otherwise specifically stated herein, in this prospectus, the terms “lululemon”, “our Company” and “we”, “us” or “our” refer to Lululemon Corp. and its direct and indirect subsidiaries.
 
This prospectus contains references to a number of trademarks which are our registered trademarks or trademarks for which we have pending applications or common law rights. These include lululemon’s original trademarks, Lululemon Athletica & design mark, the logo design (WAVE design) mark, lululemon as a word mark, and lululemon’s more recent brand, oqoqo®. In addition to the registrations in Canada and the United States, lululemon’s design and word mark are registered in over 50 other jurisdictions which cover over 90 countries. We own trademark registrations or have made trademark applications for the names of several of our fabrics, including Luon®, Silverescent®, Vitaseatm, Soyla®, Booluxtm and WET.DRY.WARM. Other trademarks, service marks or trade names referred to in this prospectus are the property of their respective owners.


4


 

THE OFFERING
 
Common stock offered by us            shares
 
Common stock offered by the selling stockholders            shares
 
Common stock outstanding after this offering            shares
 
The number of shares of our common stock outstanding after this offering is based on the assumptions outlined in the bullets below. As described below, the number of shares outstanding after this offering depends in part on the initial public offering price and the effective date of our corporate reorganization.
 
Use of proceeds We expect to receive net proceeds from this offering of approximately $20.3 million, based upon an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares in this offering by the selling stockholders, including upon the sale of shares if the underwriters exercise their option to purchase additional shares from the selling stockholders in this offering.
 
We intend to use the net proceeds of this offering, together with cash flow from operations, 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, we have budgeted an aggregate of $28.0 million to $34.0 million for new store openings, although the actual amounts that we spend on such items may vary. See “Use of Proceeds.”
 
Risk factors See “Risk Factors” on page 9 and the other information in this prospectus for a discussion of the factors you should consider before you decide to invest in our common stock.
 
Directed share program The underwriters have reserved for sale, at the initial public offering price, up to      shares of our common stock being offered for sale to our business associates, employees, friends and family members of our employees. The number of shares available for sale to the general public in this offering will be reduced to the extent these persons purchased reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares.
 
Proposed Nasdaq Global Market symbol LULU
 
Proposed Toronto Stock Exchange symbol LLL


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Unless otherwise indicated, information in this prospectus:
 
  •  assumes an initial public offering price of $      per share (the midpoint of the price range set forth on the front cover of this prospectus);
 
  •  reflects the consummation of our corporate reorganization on an assumed date of          , 2007, and (assuming an initial public offering price of $      per share) the issuance of           shares of our common stock and the issuance by Lulu Canadian Holding, Inc., our wholly owned subsidiary, of           exchangeable shares in connection therewith, as described in “Pre-Offering Transactions” included elsewhere in this prospectus;
 
  •  assumes the issuance of           shares of our common stock issuable upon the exchange of all of the exchangeable shares of Lulu Canadian Holding, Inc. to be outstanding as a result of our corporate reorganization;
 
  •  assumes the underwriters’ option to purchase additional shares in this offering has not been exercised;
 
  •  excludes 1,885,250 shares of our common stock issuable upon exercise of options outstanding as of the date of this prospectus under our 2007 Equity Incentive Plan at a weighted average exercise price of $1.39; and
 
  •  excludes           shares of our common stock reserved for future issuance under our 2007 Equity Incentive Plan.
 
In addition, unless we specifically state otherwise, all dollar amounts listed in this prospectus are in U.S. dollars.
 
The number of shares of our common stock to be issued in connection with our corporate reorganization and upon exchange of the exchangeable shares of Lulu Canadian Holding, Inc. depends in part on the initial offering price and the date of our corporate reorganization. This is because, as further described in “Pre-Offering Transactions,” various securities will be exchanged in our corporate reorganization based in part on the ratio of the value of accrued but unpaid dividends (which, where applicable, accrue on a daily basis until the consummation of our corporate reorganization) to our initial public offering price. Accordingly:
 
  •  A $1.00 increase in the assumed initial public offering price of $      per share would decrease the number of shares of common stock outstanding after this offering by approximately           shares, assuming that our corporate reorganization occurs on          , 2007;
 
  •  A $1.00 decrease in the assumed initial public offering price of $      per share would increase the number of shares of common stock outstanding after this offering by approximately           shares, assuming that our corporate reorganization occurs on          , 2007; and
 
  •  If our corporate reorganization occurred five days later or earlier than the assumed date of          , 2007, the common stock outstanding after this offering would increase or decrease, respectively, by approximately           shares, assuming an initial public offering price of $      per share.
 
We expect our corporate reorganization to occur immediately following the execution of an underwriting agreement with the underwriters relating to the shares of common stock being offered by this prospectus.


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SUMMARY COMBINED CONSOLIDATED FINANCIAL INFORMATION
 
The following table summarizes our combined consolidated financial and other data for the periods indicated. The statement of income data for each of the three fiscal years ended January 31, 2005, 2006 and 2007 have been derived from our audited combined consolidated financial statements. You should read this information in conjunction with our combined consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of results for any future period.
 
                         
    For the Fiscal Year Ended January 31,  
   
2005
   
2006
   
2007
 
    (In thousands, except share data)  
Combined consolidated statements of income:
                       
Net revenue
  $ 40,748     $ 84,129     $ 148,885  
Cost of goods sold(1)
    19,448       41,177       72,903  
                         
Gross profit
    21,300       42,952       75,982  
                         
Operating expenses:
                       
Selling, general and administrative expenses(1)
    10,840       26,416       52,540  
Principal stockholder bonus
    12,134       12,809        
Settlement of lawsuit
                7,228  
                         
Income (loss) from operations
    (1,674 )     3,727       16,213  
                         
Other expenses (income)
                       
Interest income
    (11 )     (55 )     (142 )
Interest expense
    46       51       47  
                         
Income (loss) before income taxes
    (1,709 )     3,730       16,308  
Provision for (recovery of) income taxes
    (298 )     2,336       8,753  
Non-controlling interest
                (112 )
                         
Net income (loss)
  $ (1,411 )   $ 1,394     $ 7,666  
                         
Pro forma weighted average number of shares outstanding(2):
                       
For pro forma basic earnings per share
                       
Series A preferred stock
                       
Common stock equivalents
                       
Pro forma diluted earnings per share
                       
                         
Pro forma Series A preferred basic earnings per share(2)
                       
Pro forma common stock equivalents basic earnings per share(2)
                       
Pro forma diluted earnings per share(2)
                       
                         
Selected store data:
                       
Number of corporate-owned stores open at end of period
    14       27       41  
Corporate-owned stores sales per gross square foot
  $ 1,328     $ 1,279     $ 1,411  
Comparable store sales change
    18 %     19 %     25 %
 
(1) Includes stock-based compensation as follows:
                         
    For the Fiscal Year Ended January 31,  
   
2005
   
2006
   
2007
 
    (In thousands)  
 
Cost of goods sold
  $     —     $ 755     $ 360  
Selling, general and administrative expenses
          1,945       2,470  
                         
Total
  $     $ 2,700     $ 2,830  
                         


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(2) We have not computed basic and diluted earnings per share as the combined consolidated results reflect the results of two separate companies (Lululemon Corp. and LIPO Investments (Canada) Inc.), each with its own distinct and separate capital structure. As a result of our corporate reorganization, various securities (including Series A preferred stock issued by Lululemon Corp. and common stock equivalents issued by LIPO Investments (Canada) Inc.) will be exchanged for shares of our common stock based in part on the quotient of the value of accrued but unpaid dividends (which, where applicable, accrue on a daily basis until the consummation of our corporate reorganization) to our initial public offering price. We have accordingly presented pro forma earnings per share for the fiscal year ended January 31, 2007 giving effect to our corporate reorganization as if it had been consummated on the first day of that period. In addition, the outstanding stock options of the two companies will be converted into options to purchase shares of our common stock. See “Pre-Offering Transactions” and Note 11 to our combined consolidated financial statements appearing elsewhere in this prospectus.
 
The following table represents a summary of our combined consolidated balance sheet data as of January 31, 2007:
 
  •  on an actual basis, derived from our audited combined consolidated balance sheet as of January 31, 2007;
 
  •  on a “pro forma” basis, giving effect to:
 
  •  the consummation of our corporate reorganization on an assumed date of          , 2007, and (assuming an initial public offering price of $      per share) the issuance of           shares of our common stock;
 
  •  the issuance by Lulu Canadian Holding, Inc., our wholly owned subsidiary, of           exchangeable shares in connection therewith, as described in “Pre-Offering Transactions” included elsewhere in this prospectus, and the issuance of           shares of our common stock upon the exchange of the Lulu Canadian Holding exchangeable shares; and
 
  •  on a “pro forma as adjusted” basis, further reflecting the sale by us of           shares of our common stock in this offering (assuming an initial public offering price of $      per share, and after deducting estimated offering expenses and underwriting discounts and commissions payable by us).
 
                         
    As of January 31, 2007  
                Pro Forma
 
   
Actual
   
Pro Forma
   
as Adjusted
 
    (In thousands)  
 
Combined consolidated balance sheet data:
                       
Cash and cash equivalents
  $ 16,029     $ 16,029     $ 36,279  
Working capital (excluding cash and cash equivalents)
    1,180       1,180       1,180  
Property and equipment, net
    18,822       18,822       18,822  
Total assets
    71,855       71,855       92,105  
Long term debt
                 
Total stockholders’ equity
    37,379                  


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RISK FACTORS
 
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 in this prospectus 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
 
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 January 1999 and our first store in the United States in 2003. Our net revenue increased from $40.7 million for fiscal 2004 to $148.9 million for fiscal 2006, a compound annual increase of approximately 91.1%. Our substantial growth to date has placed a significant strain on our management systems and resources. If our operations continue to grow, 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.
 
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:
 
  •  identify suitable store locations, the availability of which is outside of our control;
 
  •  negotiate acceptable lease terms, including desired tenant improvement allowances;
 
  •  hire, train and retain store personnel and field management;
 
  •  assimilate new store personnel and field management into our corporate culture;
 
  •  source sufficient inventory levels; and
 
  •  successfully integrate new stores into our existing operations and information technology systems.
 
Successful new store openings may also be affected by our ability to initiate our grassroots marketing efforts in advance of opening our first store. 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,


9


 

we will encounter pre-operating costs and we may encounter initial losses while new stores commence operations.
 
We plan to open a large number of stores in the near future in comparison to our existing store base and our historical rate of store launches. Of the 52 stores in operation as of April 1, 2007, 7 new stores were opened in Canada, 6 new stores were opened in the United States and 1 new store was opened outside of North America during fiscal 2006. During fiscal 2005, 13 new stores were opened in Canada, 3 new stores were opened in the United States and 1 new store was opened outside of North America. We expect to open 20 to 25 stores in fiscal 2007 and 30 to 35 additional stores in fiscal 2008 in the United States and Canada. We estimate that we will incur approximately $28.0 million to $34.0 million of capital expenditures to open these additional stores by the end of fiscal 2008. In addition, our new stores will not be immediately profitable and we will incur losses until these stores become profitable. There can be no assurance that we will open the planned number of new stores in fiscal 2007 or thereafter. Any failure to successfully open and operate new stores would harm our results of operations.
 
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. As of April 1, 2007, we had only 12 stores in the United States, 1 store in Australia and 2 stores in Japan. Therefore we have a limited number of customers and limited experience in operating outside of Canada. We also have limited experience with regulatory environments and market practices outside of Canada, and cannot guarantee that we will be able to penetrate or successfully operate in any market outside of Canada. In connection with our initial expansion efforts, especially in the United States, we have encountered increased costs of operations resulting from higher payroll expenses and increased rent expense. 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 and difficulties in keeping abreast of market, business and technical developments. 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. The expansion into new markets may also present competitive, merchandising, forecasting and distribution challenges that are different from or more severe than those we currently face. Failure to develop new markets outside of Canada or disappointing growth outside of Canada may harm our business and results of operations.
 
We plan to primarily use cash from operations to finance our growth strategy, and if we are unable to maintain sufficient levels of cash flow we may not meet our growth expectations.
 
We intend to finance our growth through the cash flows generated by our existing stores, borrowings under our available credit facilities and the net proceeds from this offering. However, if our stores are not profitable or if our store profits decline, we may not have the cash flow necessary in order to pursue or maintain our growth strategy. We may also be unable to obtain any necessary financing on commercially reasonable terms to pursue or maintain our growth strategy. If we are unable to pursue or maintain our growth strategy, the market price of our common stock could decline and our results of operations and profitability could suffer.


10


 

 
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:
 
  •  economic downturns in a particular area;
 
  •  competition from nearby retailers selling athletic apparel;
 
  •  changing consumer demographics in a particular market;
 
  •  changing lifestyle choices of consumers in a particular market; and
 
  •  the closing or decline in popularity of other businesses located near our store.
 
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 women’s athletic apparel. We also face competition from wholesalers and direct retailers of traditional commodity athletic apparel, such as cotton T-shirts and sweat shirts. 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.
 
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 wholesale, internet or catalog sales or an extensive franchise network, as opposed to distribution through retail stores, 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.


11


 

 
Our business depends on a strong brand, and if we are not able to maintain and enhance our brand we may be unable to sell our products, which would harm our business and cause the results of our operations to suffer.
 
We believe that the brand image we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing the lululemon athletica brand is critical to maintaining and expanding our customer base. Maintaining and enhancing our brand may require us to make substantial investments in areas such as research and development, store operations, community relations and employee training, and these investments may not be successful. As of April 1, 2007, our brand is sold in only 13 cities in Canada, 9 cities in the United States and 1 metropolitan area in each of Japan and Australia. A primary component of our strategy involves expanding into other geographic markets, particularly within the United States. As we expand into new geographic markets, consumers in these markets may not accept our brand image and may not be willing to pay a premium to purchase our technical athletic apparel as compared to traditional athletic apparel. 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 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. If we are unable to maintain or enhance our brand image our results of operations may suffer and our business may be harmed.
 
If our grassroots marketing efforts are not successful our business, results of operations and financial condition could be harmed.
 
We rely principally on grassroots marketing efforts to advertise our brand. These efforts include working with local athletes and fitness professionals chosen by us, who we refer to as ambassadors, who assist us by introducing our brand and culture to the communities around our stores. Our grassroots marketing efforts must be tailored to each particular market, which may require substantial ongoing attention and resources. For instance, we must successfully identify and retain suitable ambassadors in each of our new and existing markets. Our future growth and profitability and the success of our new stores will depend in part upon the effectiveness and efficiency of these grassroots marketing efforts.
 
Because we do not rely on traditional advertising channels, such as print or television advertisements, if our grassroots marketing efforts are not successful, there may be no immediately available alternative marketing channel for us to build awareness of our products in a manner that we think will be successful. This may impair our ability to successfully integrate new stores into the surrounding communities, to expand into new markets at all or to maintain the strength or distinctiveness of our brand in our existing markets. In addition, if our grassroots marketing efforts are unsuccessful and we are required to use traditional advertising channels in our overall marketing strategy, then we will incur additional expense associated with the transition to and operation of a traditional advertising channel. Failure to successfully market our products and brand in new and existing markets could harm our business, results of operations and financial condition.
 
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 in the United States and outside of North America our historic average sales per square foot. Our sales per square foot in stores we have opened in the United States have generally been lower than those we have been able to achieve in Canada. As sales in the United States grow to become a larger percentage of our overall sales, our average sales per square foot will likely decline. If our future comparable store sales or average sales per square foot


12


 

decline or fail to meet market expectations, the price of our common stock could decline. In addition, 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 twelve fiscal quarters, our quarterly comparable store sales have ranged from a decrease of 1% in the second quarter of fiscal 2004 to an increase of 32% in the second quarter of fiscal 2006. A variety of factors affect both comparable store sales and average sales per square foot, including 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.
 
If we fail to continue to innovate and provide consumers with design features that meet their expectations, we may not be able to generate sufficient consumer interest in our technical athletic apparel to remain competitive.
 
We must continue to invest in research and development in connection with the innovation and design of our products in order to attract and retain consumers. If we are unable to anticipate consumer preferences or industry changes, or if we are unable to modify our products on a timely basis, we may lose customers or become subject to greater pricing pressures. Our operating results would also suffer if our innovations do not respond to the needs of our customers, are not appropriately timed with market opportunities or are not effectively brought to market. Any failure on our part to innovate and design new products or modify existing products will hurt our brand image and could result in a decrease in our net revenue and an increase in our inventory levels. In addition, we may not be able to generate sufficient consumer interest in our technical athletic apparel to remain competitive. Any of these factors could harm our business or stock price.
 
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 our products target, growing our men’s business 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:
 
  •  introduction of new products may be delayed, which may allow 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;
 
  •  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;
 
  •  implementation of these plans may divert management’s 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
 
  •  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.
 
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


13


 

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. We do not have long-term contracts with our suppliers, 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 by third parties and may be available, in the short-term, from only one or a very limited number of sources. For example, our 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 our Luon fabric are supplied to our Taiwanese manufacturer by a single company. In fiscal 2006, approximately 85% of our products were produced by our top ten manufacturing suppliers.
 
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. In addition, we cannot be certain that our manufacturers will be able to fill our orders in a timely manner. 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. 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 are consistent with our standards. We have occasionally received, and may in the future continue to receive, shipments of products 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.
 
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, fabrications 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


14


 

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, particularly Dennis Wilson, our founder and Chairman and Chief Product Designer, as well as Robert Meers, our Chief Executive Officer. 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.
 
In addition, while we maintain a key man insurance policy for Mr. Wilson, we have not obtained key man life insurance policies on Mr. Meers or any of our 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 senior management team has limited experience working together as a group, and may not be able to manage our business effectively.
 
Most of the members of our senior management team, including our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer have been hired since December 2005. As a result, our senior management team has limited experience working together as a group. This lack of shared experience could harm our senior management team’s ability to quickly and efficiently respond to problems and effectively manage our business. If our management team is not able to work together as a group, our results of operations may suffer and our business may be harmed.
 
If we are unable to attract, assimilate and retain new team members, including store and regional managers, we may not be able to grow or successfully operate our business.
 
Our success has largely been the result of significant contributions by our employees, including members of our current senior management and product design teams. However, to be successful in continuing to grow our business, we will need to continue to attract, assimilate, retain and motivate highly talented employees with a range of skills and experience, especially at the store and regional management levels. Competition for employees in our industry is intense and we have from time to time experienced difficulty in attracting the personnel necessary to support the growth of our business, and we may experience similar difficulties in the future. These problems could be exacerbated as we embark on our strategy of opening a significant number of new stores in the United States and elsewhere over the next few years. If we are unable to attract, assimilate and retain additional employees with the necessary skills, we may not be able to grow or successfully operate our business.
 
Sales of technical athletic apparel may not continue to increase, and this could impair our ability to grow our business and achieve the level of sales necessary to support new stores.
 
We believe that continued increases in sales of technical athletic apparel will largely depend on customers continuing to demand technically advanced apparel designed for specific athletic pursuits. If the number of customers demanding technical athletic apparel does not continue to increase, if the trend towards wearing technical athletic apparel when engaged in athletic pursuits or as casual wear subsides, if the style of our technical athletic apparel falls out of fashion with customers, or if customers engaging in athletic pursuits are not convinced that our technical athletic apparel is a better choice than traditional alternatives, then we may not achieve the level of sales necessary to support new stores and our ability to grow our business will be severely impaired.


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We are planning a replacement of our core systems that might disrupt our supply chain operations.
 
We are in the process of substantially modifying our information technology systems supporting our financial management and reporting, inventory and purchasing management, order management, warehouse management and forecasting. Modifications will involve replacing legacy systems with successor systems during the course of fiscal 2007 and fiscal 2008. There are inherent risks associated with replacing our core systems, including supply chain disruptions that may affect our ability to deliver products to our stores and customers. We believe that other companies have experienced significant delays and cost overruns in implementing similar systems changes, and we may encounter similar problems. We may not be able to successfully implement these new systems or implement them without supply chain disruptions in the future. Any resulting supply chain disruptions could harm our business, prospects, financial condition and results of operations. Although our existing systems may be satisfactory in the short term, we do not believe these systems are adequate to support our long-term growth. Thus, if we are not able to implement these new systems successfully, our business, prospects, financial condition and results of operations may suffer.
 
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. Our contract for the Renton, Washington distribution facility expired in February 2007 and there can be no assurance that we will be able to enter into another contract for a distribution center on acceptable terms. Currently, our operations at this facility are on a month-to-month basis and, as a result, we may lose our ability to use this facility with limited notice. Such an event could disrupt our operations. In addition, in August 2007, we are scheduled to relocate our Vancouver distribution facility to a new, larger distribution facility. 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. We maintain business interruption insurance, but it may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system, such as the long-term loss of customers or an erosion of our brand image. In addition, our distribution capacity is dependent on the timely performance of services by third parties, including the shipping of our products to and from our Renton, Washington distribution facility. 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.
 
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 fiscal fourth quarter, reflecting our historical strength in sales during the holiday season. We generated approximately 37% and 35% of our full year gross profit during the fourth quarters of fiscal 2005 and fiscal 2006, respectively. Historically, seasonal variations in our income from operations have been driven principally by increased net revenue in our fiscal fourth 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:
 
  •  the timing of new store openings;
 
  •  net revenue and profits contributed by new stores;


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  •  increases or decreases in comparable store sales;
 
  •  changes in our product mix; and
 
  •  the timing of new advertising and new product introductions.
 
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.
 
We began selling our products in Canada in January 1999 and in the United States in 2003. Our limited operating history makes it difficult to assess the exact impact of seasonal factors on our business or whether or not our business is susceptible to cyclical fluctuations in the economy in the markets in which we operate. In addition, our rapid growth may have overshadowed whatever seasonal or cyclical factors might have influenced our business to date. Seasonal or cyclical variations in our business may become more pronounced over time and may harm our results of operations in the future.
 
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. Our inventory management and planning team determines the number of pieces of each product that we will order from our manufacturers based upon past sales of similar products, feedback from our focus groups, sales trend information and anticipated retail price. However, 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.
 
Factors that could affect our inventory and planning team’s ability to accurately forecast customer demand for our products include:
 
  •  a substantial increase or decrease in consumer demand for our products or for products of our competitors;
 
  •  our failure to accurately forecast customer acceptance for our new products;
 
  •  new product introductions or pricing strategies by competitors;
 
  •  more limited historical store sales information for our newer markets;
 
  •  weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products; and
 
  •  acts or threats of war or terrorism which could adversely affect consumer confidence and spending or interrupt production and distribution of our products and our raw materials.
 
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. In fiscal 2006, we wrote-off $1.0 million of inventory. We are a relatively young company and may experience significant write-offs in the future.


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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.
 
A downturn in the economy may affect consumer purchases of discretionary items, which could materially harm our sales, profitability and financial condition.
 
Many factors affect the level of consumer spending for discretionary items such as our technical athletic apparel and related products. These factors include general business conditions, interest and tax rates, the availability of consumer credit and consumer confidence in future economic conditions. Consumer purchases of discretionary items, such as our technical athletic apparel, tend to decline during recessionary periods when disposable income is lower. Due to our limited operating history, we have not experienced a recessionary period and can therefore not predict the effect on our sales and profitability of a downturn in the economy. However, a downturn in the economy in markets in which we sell our products may materially harm our sales, profitability and financial condition.
 
We may fail to find suitable joint venture partners to expand outside North America and this may cause our growth strategy to suffer and may harm our revenue and results of operations.
 
As part of our growth strategy, we plan to expand our stores and sales of our products into new locations outside North America, particularly in the Asia-Pacific region. 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. We have a joint venture with Descente Ltd. in Japan. In addition, we expect to convert our franchise in Australia into a joint venture. Failure to find sufficient or capable partners in a particular geographic region may delay the rollout of our products in that area. If we are unable to find suitable partners through joint venture relationships, our growth strategy will suffer and our revenue and results of operations could be harmed.
 
Even 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 joint venture 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.
 
We may need to raise additional capital that may be required to grow our business, and we may not be able to raise capital on terms acceptable to us or at all.
 
Operating our business and maintaining our growth efforts will require significant cash outlays and advance capital expenditures and commitments. If cash on hand and cash generated from operations and from this offering are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our growth. We cannot assure you that we will be able to raise needed cash on terms acceptable to us or at all. Financings may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the price per share of our common stock in this offering. The holders of new securities may also have rights, preferences or privileges which are senior to


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those of existing holders of common stock. If new sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating plans based on available funding, if any, which would harm our ability to grow our business.
 
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 stores, but instead lease all of our corporate-owned stores under operating leases. Our leases generally have initial terms of between five and ten years, and generally can be extended only in five-year increments (at increased rates) 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, 2007, 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 $35.1 million through fiscal 2011 and approximately $34.7 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:
 
  •  increasing our vulnerability to general adverse economic and industry conditions;
 
  •  limiting our ability to obtain additional financing;
 
  •  requiring a substantial portion of our available cash to pay our rental obligations, thus reducing cash available for other purposes;
 
  •  limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and
 
  •  placing us at a disadvantage with respect to some of our competitors.
 
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 to fund our other liquidity and capital needs, which would harm our business.
 
In addition, additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. Of our 51 stores as of January 31, 2007, no leases expire in fiscal 2007 and three leases expire in fiscal 2008. If we are unable to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close, our business, profitability and results of operations may be harmed.
 
If we are unable to adequately demonstrate that our independent manufacturers 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


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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 manufacturer’s 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.
 
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.
 
Parties active in promoting ethical business practices, in addition to evaluating the substance of companies’ practices, also often scrutinize companies’ transparency as to such practices and the policies and procedures they use to ensure compliance by their suppliers and other business partners. Prior to this offering, we have been a private company, and so do not have extensive experience in assembling and disclosing information on such matters as required for public companies or as may be expected by such parties. Moreover, we do not expect as a general matter to publicly disclose information that we deem competitively sensitive, except as required by law. If we do not meet the transparency standards expected by parties active in promoting ethical business practices, we may attract negative publicity, regardless of whether the actual labor and other business practices adhered to by us and our independent manufacturers satisfy substantive expectations of ethical business practices. Such negative publicity could harm our brand image and results of operations and result in a decline in the price of our common stock.
 
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.
 
Because a significant portion of our sales are generated in Canada, fluctuations in foreign currency exchange rates could harm our results of operations.
 
Net revenue in Canada accounted for 91.5% and 87.1% of our total net revenue for fiscal 2005 and fiscal 2006, respectively. In addition to our new stores in the United States, we anticipate opening additional stores outside of North America in Japan and Australia and potentially in other countries with new joint venture partners. The reporting currency for our combined consolidated financial statements is


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the U.S. dollar. The local currency of each country is the functional currency for each of our stores operating in that country. 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 and the currencies of our foreign stores 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 U.S. dollar and Canadian dollars, Australian dollars and Japanese yen. Due to the large percentage of our operations conducted outside the United States, strengthening or weakening of the U.S. dollar relative to one or more of the foregoing currencies could have an adverse impact on future results of operations. 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.
 
Our international operations and 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.
 
We plan to expand our business into international markets and almost all of our suppliers are located outside the United States. Manufacturers in Canada, the People’s Republic of China and Taiwan produced approximately 94% of our apparel for fiscal 2006. The remaining 6% of our apparel was produced in Australia, Italy and the United States for fiscal 2006. Beginning in fiscal 2007, we expect to purchase products from manufacturers in Indonesia, Israel, Peru and Vietnam. As a result of our international operations and our international suppliers, we are subject to risks associated with doing business abroad, including:
 
  •  political unrest, terrorism, labor disputes and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;
 
  •  currency exchange fluctuations;
 
  •  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;
 
  •  reduced protection for intellectual property rights, including trademark protection, in some countries, particularly the People’s Republic of China;
 
  •  understanding foreign consumer tastes and preferences that may differ from those in the United States or Canada;
 
  •  complying with foreign laws and regulations that differ from country to country;
 
  •  disruptions or delays in shipments; and
 
  •  changes in local economic conditions in countries where our manufacturers, suppliers or customers are located.
 
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, inhibit our and our suppliers’ ability to procure certain materials and influence our ability to sell our products in international markets, 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.
 
All of our apparel products are currently manufactured for us outside of the United States. 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 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 the beginning of 2005, China’s 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 are permitted to remain in place through the end of 2008, on certain categories of natural-fiber products that we import from China. As a result, 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 are 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 April 1, 2007, we had three franchise stores in Canada, three franchise stores in the United States and one franchise store in Australia, which we expect to restructure into a joint venture relationship. Additionally, we may open one additional franchise store in the United States pursuant to an understanding with one of our existing franchisees. 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 franchisee’s successful operation of the retail store. Such disputes could divert the attention of our


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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 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 U.S. 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 currently own the exclusive right to use various domain names containing or relating to our brand. We may be unable to prevent third parties from acquiring and using domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. Failure to protect our domain names could adversely affect our brand, and make it more difficult for users to find our website.
 
We will 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 incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Sarbanes-Oxley Act of 2002, as well as related rules implemented by the SEC and


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the securities regulators in each of the provinces and territories of Canada and by The Nasdaq Stock Market LLC, have required changes in corporate governance practices of public companies. We expect that compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act as discussed in the following risk factor, will substantially increase 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 expect a substantial increase in legal, accounting, insurance and certain other expenses in the future, which will negatively impact our financial performance and could cause our results of operations and financial condition to suffer.
 
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.
 
Reporting obligations as a public company and our anticipated 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 will be 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 management’s assessment and on the effectiveness of our internal control over financial reporting by the time our fiscal 2008 annual report is due and thereafter. As a result, we will be required to improve our financial and managerial controls, reporting systems and procedures, to incur substantial expenses to test our systems and to make such 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 management’s assessment and 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 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 this Offering and Our Common Stock
 
We cannot assure you that a market will develop for our common stock or what the price of our common stock will be.
 
Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price for our common stock will be determined through our negotiations with the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business. It is possible that, in future quarters, our operating results may be below the expectations of securities analysts and investors. As a result of these and other factors, the price of our common stock may decline, possibly materially.


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Our stock price may be volatile and your investment in our common stock could suffer a decline in value.
 
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:
 
  •  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;
 
  •  changes in financial estimates by us or by any securities analysts who might cover our stock;
 
  •  speculation about our business in the press or the investment community;
 
  •  conditions or trends affecting our industry or the economy generally;
 
  •  stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the technical athletic apparel industry;
 
  •  announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
 
  •  changes in product mix between high and low margin products;
 
  •  capital commitments;
 
  •  our entry into new markets;
 
  •  timing of new store openings;
 
  •  percentage of sales from new stores versus established stores;
 
  •  additions or departures of key personnel;
 
  •  actual or anticipated sales of our common stock, including sales by our directors, officers or significant stockholders;
 
  •  significant developments relating to our manufacturing, distribution, joint venture or franchise relationships;
 
  •  customer purchases of new products from us and our competitors;
 
  •  investor perceptions of the apparel industry in general and our company in particular;
 
  •  major catastrophic events;
 
  •  volatility in our stock price, which may lead to higher stock-based compensation expense under applicable accounting standards; and
 
  •  changes in accounting standards, policies, guidance, interpretation or principles.
 
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 management’s attention and resources.
 
A total of          , or  %, of our total outstanding shares after the offering are restricted from immediate resale, but may be sold on the Nasdaq Global Market and the Toronto Stock Exchange in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them 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 after this offering, and the perception that these sales could occur may also depress the market price of our common stock. Based on shares outstanding as of          , 2007, we will have           shares of common stock outstanding after this offering. Of these


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shares, the common stock sold in this offering will be freely tradable in the United States, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933, and freely tradeable in Canada, except for any shares held by a control person for the purposes of Canadian securities laws. The holders of           shares of outstanding common stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock during the 180-day period beginning on the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. This 180-day restricted period may be extended under the circumstances described in the “Underwriting” section of this prospectus. After the expiration of the 180-day restricted period, including any extension, these shares may be sold in the public market in the United States or Canada, subject to prior registration in the United States or qualification by prospectus in Canada, if required, or reliance upon an exemption from U.S. registration or Canadian prospectus requirements, including, in the case of shares held by affiliates or control persons, compliance with the volume restrictions of Rule 144 in the United States and compliance with the control block notice of sale requirements in Canada, respectively.
 
     
Number of shares and
   
% of total outstanding
 
Date Available for Sale into Public Markets
 
          , or    %
  Immediately after this offering.
          , or    %
  180 days after the date of this prospectus due to contractual obligations and lock-up agreements between the holders of these shares and the underwriters. However, the underwriters can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time, provided their respective one-year holding periods under Rule 144 have expired.
          , or    %
  From time to time after the date 180 days after the date of this prospectus upon expiration of their respective one-year holding periods in the U.S. or in Canada.
 
As of          , 2007, stockholders owning an aggregate of           shares are entitled, under contracts providing for registration rights, to require us to register shares of our common stock owned by them for public sale in the United States. In addition, we intend to file a registration statement to register the approximately           shares reserved for future issuance under our equity compensation plans. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and, in certain cases, lock-up agreements with the representatives of the underwriters referred to above, the shares of common stock issued upon exercise of outstanding options will be available for immediate resale in the United States in the open market.
 
After the first anniversary of the date of this prospectus, we will file a registration statement in the United States to register either the issuance of up to           shares of our common stock upon the exchange of the then outstanding exchangeable shares of Lulu Canadian Holding, Inc. or the resale of up to           shares of our common stock. In the case of a registration of shares of our common stock issuable upon the exchange of exchangeable shares, the registered shares will be freely tradeable, subject to the restrictions applicable to affiliates or control persons described above. In the case of a resale registration, although the registered shares will be freely tradeable under applicable securities laws, the holders of the registered shares or the exchangeable shares exchangeable for such registered shares will be required to agree in writing to limit the volume of public sales of the registered shares to the number of shares which such holders would have been permitted to sell under Rule 144 if the shares were “control securities” under Rule 144.
 
Sales of our common stock as restrictions end or pursuant to registration rights 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.


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If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.
 
If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $      per share, because the price that you pay will be substantially greater than the net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon the exercise of options to purchase common stock under our equity incentive plans.
 
We do not intend to pay dividends for the foreseeable future.
 
We have never declared or paid any dividends on our common stock. We intend to retain all of our earnings for the foreseeable future to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. Our board of directors retains the discretion to change this policy.
 
Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.
 
Mr. Wilson, our founder and Chairman and Chief Product Designer, will control approximately  % of the voting power of our outstanding stock after this offering or  % if the underwriters exercise in full their option to purchase additional shares in this offering. Additionally, after this offering, funds controlled by Advent International will control an aggregate of    % of the voting power of our outstanding stock after this offering or    % if the underwriters exercise in full their option to purchase additional shares in this offering. 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.
 
We will have broad discretion over the use of proceeds from this offering.
 
We will have broad discretion over the use of the net proceeds to us from this offering, and you will be relying on the judgment of our board of directors and management regarding the application of these proceeds. Although we expect to use the net proceeds from this offering for new store openings, working capital and other general corporate purposes, which may include general and administrative expenses, we have not allocated these net proceeds for specific purposes. It is possible that a substantial portion of the net proceeds will be invested in a way that does not yield a favorable, or any, return for us.
 
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 that will be in effect upon completion of this offering 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:
 
  •  the classification of our board of directors into three classes, with one class elected each year;
 
  •  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;
 
  •  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;
 
  •  prohibiting stockholder action by written consent; and
 
  •  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.
 
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 corporation’s 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.
 
These and other provisions of the Delaware General Corporation Law and our articles of incorporation and bylaws could delay, defer or prevent us from experiencing a change of control or changes in our board of directors and management and may adversely affect our stockholders’ voting and other rights. Any delay or prevention of a change of control transaction or changes in our board of directors and management could deter potential acquirors or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares of our common stock.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Some of the statements contained in this prospectus constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or the negative of these terms or other comparable terminology.
 
The forward-looking statements contained in this prospectus reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors include without limitation:
 
  •  our ability to manage operations at our current size or manage growth effectively;
 
  •  our ability to locate suitable locations to open new stores and to attract customers to our stores;
 
  •  our ability to successfully expand in the United States and other new markets;
 
  •  our ability to finance our growth and maintain sufficient levels of cash flow;
 
  •  increased competition causing us to reduce the prices of our products or to increase significantly our marketing efforts in order to avoid losing market share;
 
  •  our ability to effectively market and maintain a positive brand image;
 
  •  our ability to maintain levels of comparable store sales or average sales per square foot;
 
  •  our ability to continually innovate and provide our consumers with improved products;
 
  •  the ability of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;
 
  •  our ability to attract and maintain the services of our senior management and key employees;
 
  •  the availability and effective operation of management information systems and other technology;
 
  •  changes in consumer preferences or changes in demand for technical athletic apparel and other products;
 
  •  our ability to accurately forecast consumer demand for our products;
 
  •  our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
 
  •  our ability to find suitable joint venture partners to further our expansion outside North America;
 
  •  our ability to maintain effective internal controls; and
 
  •  changes in general economic or market conditions, including as a result of political or military unrest or terrorist attacks.


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Although we believe that the assumptions inherent in the forward-looking statements contained in this prospectus are reasonable, undue reliance should not be placed on these statements, which only apply as of the date hereof. In addition to the assumptions specifically identified herein, assumptions have been made regarding, among other things:
 
  •  the continued and growing demand for our products;
 
  •  the impact of competition;
 
  •  the ability to obtain and maintain existing financing on acceptable terms; and
 
  •  currency exchange and interest rates.
 
The forward-looking statements contained in this prospectus reflect our views and assumptions only as of the date of this prospectus. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from the sale of the shares of our common stock in this offering of approximately $20.3 million, assuming an initial public offering price of $      per share, which is the mid-point of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, respectively, the net proceeds to us from this offering by approximately $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares being sold by the selling stockholders, including any shares sold by the selling stockholders in connection with the underwriters’ exercise of their option to purchase additional shares, although we will pay the expenses (other than underwriting discounts and commissions) associated with the sale of those shares.
 
We intend to use the net proceeds from this offering, together with cash flow from operations, 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, we have budgeted an aggregate of $28.0 million to $34.0 million for new store openings although the actual amounts that we spend on such items may vary. As a result, we will retain broad discretion over the use of the net proceeds from this offering. Pending the uses described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. We cannot predict whether the proceeds invested will yield a favorable return for us.
 
DIVIDEND POLICY
 
We have never declared or paid any cash dividends on our capital 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.


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PRE-OFFERING TRANSACTIONS
 
Prior to the private equity investment in our capital stock in December 2005 by a group of private equity investors, all of our equity owners were subject to Canadian taxation. With the intention of allowing our Canadian equity owners, including Mr. Wilson, to defer tax in Canada following that investment transaction, we established the corporate structure described below. Upon completion of the private equity investment, Mr. Wilson, along with entities he controls, effectively beneficially owned 52% of the equity of lululemon, while Advent International Corporation, Brooke Private Equity Advisors and Highland Capital Partners together effectively beneficially owned a total of approximately 48% of the equity of lululemon, before giving effect to employee stock options.
 
Prior to our corporate reorganization, our equity owners held their ownership interests at various different corporations in our structure incorporated in the U.S. or Canada, including directly in our operating subsidiaries. Following our corporate reorganization, we will in effect own 100% of our operating subsidiaries, and all of our equity owners will own all of their equity interests only in our capital stock or shares exchangeable for our capital stock. With the intention of allowing our Canadian equity owners, including Mr. Wilson, to continue to defer tax in Canada following our corporate reorganization with respect to such equity owners’ continuing equity ownership, in our corporate reorganization we will issue to our Canadian shareholders shares in one of our Canadian subsidiaries which are exchangeable for our common stock, together with special voting shares in Lululemon Corp. These exchangeable shares and special voting shares are intended to be the economic and voting equivalent of shares of our common stock.
 
The following information describes in more detail our capital structure immediately before and immediately after our corporate reorganization. The diagrams included in this section are simplified illustrations that summarize our capital structure and are intended only as a supplement to, and not a substitute for, the following information regarding our corporate reorganization.
 
Pre-Reorganization Capitalization
 
As of April 26, 2007, Lululemon Corp. had the following shares of capital stock outstanding:
 
  •  108,495 shares of series A preferred stock; and
 
  •  116,994 shares of series TS preferred stock.
 
There were no shares of common stock outstanding and there were no outstanding options or warrants to purchase shares of our capital stock. Additionally, we were authorized to issue shares of series B preferred stock, although none were outstanding.
 
Holders of our series A preferred stock are entitled to receive dividends in an amount equal to 8% per annum of the stated value per share of series A preferred stock, compounded quarterly. Holders of our series TS preferred stock are entitled to receive dividends in an amount equal to 8% per annum of the stated value per share of series TS preferred stock, compounded quarterly. As of April 26, 2007, the stated value per share of our series A and series TS preferred stock was $859.11 per share and $10.281 per share, respectively. On April 26, 2007, the aggregate accrued dividend for our then outstanding shares of series A and series TS preferred stock was approximately $12.2 million and $0.2 million, respectively.
 
Our series TS preferred stock is a tracking stock which entitles the holder only to the economic rights associated with the equity of our U.S. subsidiary, Lululemon Athletica USA Inc., or Lulu USA. As a result, the dividend that was payable on our series TS preferred stock was limited to an amount equal to the value of our assets attributable to Lulu USA. Since the accrued aggregate dividend on our series TS preferred stock was less than the value of our assets attributable to Lulu USA, the full amount of the accrued aggregate dividend on our series TS preferred stock was payable, but only to the extent that our board of directors declares a dividend on our series TS preferred stock.


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Pre-Reorganization Structure
 
Set forth below is a diagram that graphically illustrates, in simplified form, our corporate structure prior to our corporate reorganization.
 
(ORGANIZATIONAL CHART)
 
(1) Dennis Wilson is the controlling stockholder of LIPO Investments (USA) and LIPO Investments (Canada). He holds common shares in these companies in his individual capacity and in his capacity as trustee under a trust arrangement established for the benefit of the other stockholders of these companies, all of whom are Lululemon employees.
 
Our U.S. operations are conducted through Lulu USA, a company in which we hold a direct interest. Our Canadian operations are conducted through Lululemon Athletica Inc., or LAI, a company in which we hold an indirect 48% interest through our wholly-owned subsidiary, Lulu Canadian Holding, Inc., or Lulu Canadian Holding.
 
Lulu USA had two classes of capital stock outstanding, participating preferred stock and non-participating preferred stock. We owned all of the issued and outstanding shares of the participating preferred stock which entitled us to a majority of the voting and economic rights associated with Lulu USA. All of the shares of non-participating preferred stock of Lulu USA were held by substantially all of our stockholders, including LIPO Investments (USA) Inc., or LIPO USA, an entity controlled by Mr. Wilson. In addition, as of April 6, 2007, there were outstanding vested and unvested options to purchase 1,885,250 shares of Lulu USA common stock held by employees of Lulu USA and LAI.
 
LAI also had two classes of capital stock outstanding, class A shares and class B shares. Lulu Canadian Holding owned all of the issued and outstanding class A shares of LAI which entitles Lulu Canadian Holding to 48% of the voting and economic interests associated with LAI. All of the issued and outstanding class B shares of LAI were held by an entity controlled by Mr. Wilson, LIPO Investments (Canada) Inc., or LIPO Canada, which entitles LIPO Canada to 52% of the voting and economic interests associated with LAI. In addition, as of April 6, 2007, there were outstanding vested and


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unvested options outstanding to purchase 1,885,250 LAI class C shares held by employees of Lulu USA and LAI.
 
Our stockholders agreement, which terminates upon completion of this offering, provided that upon a decision by our stockholders to proceed with an initial underwritten public offering, including this offering, each of our stockholders was required to support a reorganization of our capital stock and the capital stock of our subsidiaries so that Lulu USA and LAI will in effect become our direct (or indirect) wholly-owned subsidiaries. We refer to these transactions as our corporate reorganization. Upon completion of our corporate reorganization, with the exception of exchangeable shares that will be issued by Lulu Canadian Holding and which are described in greater detail below, all equity and voting interests in lululemon will be held through Lululemon Corp., the issuer of the shares offered in this prospectus.
 
Agreement and Plan of Reorganization
 
In order to carry out our corporate reorganization, we have entered into a reorganization agreement with all of our stockholders, Lulu USA, LAI, Lulu Canadian Holding, LIPO Canada, LIPO USA, Mr. Wilson, in his individual capacity and in his capacity as trustee pursuant to a trust arrangement established for the benefit of the minority stockholders and option holders of LIPO Canada and LIPO USA, and Slinky Financial ULC, or Slinky, an entity owned by Mr. Wilson which owns shares of LIPO Canada. Our corporate reorganization will be completed immediately following the execution and delivery of an underwriting agreement to be entered into with the underwriters named in this prospectus relating to the shares of common stock being offered hereby. We refer to the date on which our corporate reorganization is completed as the reorganization date. In furtherance of our corporate reorganization, prior to the time the SEC declares a registration statement relating to this offering effective, we will file an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware and Lulu Canadian Holding will file a notice of alteration of its articles of incorporation with the Province of British Columbia Registrar of Companies.
 
Securities to be Issued in Our Corporate Reorganization.  Upon completion of our corporate reorganization, we will issue shares of our common stock to our existing stockholders, to holders of shares of non-participating preferred stock of Lulu USA and to Slinky. The shares of our common stock being issued to Slinky are being offered pursuant to this prospectus. In connection with our corporate reorganization, each outstanding share of our common stock will be split into           shares of our common stock. In addition, Lulu Canadian Holding will issue a newly created class of shares, or exchangeable shares, to certain holders of LIPO Canada common shares. Holders of these exchangeable shares will be entitled, at any time, to exchange their exchangeable shares for an equal number of shares of our common stock (subject to anti-dilution provisions attaching to such shares).
 
In connection with our corporate reorganization, we will issue shares of a newly formed special class of voting stock, which we call the special voting shares, to holders of exchangeable shares. The total number of special voting shares that we will issue will be equal to the number of exchangeable shares that are issued. Holders of special voting shares and holders of shares of our common stock will vote together as a single class on all matters, except to the extent voting as a separate class is required by applicable law or our certificate of incorporation. For additional information on our special voting shares and the exchangeable shares, see “Description of Capital Stock — Special Voting Stock” and Description of Capital Stock — Exchangeable Shares of Lulu Canadian Holding and Related Agreements.”
 
The exchangeable shares are intended to be a means for LIPO Canada stockholders who are resident in Canada, including Mr. Wilson, to defer tax in Canada. The exchangeable shares, together with the special voting shares, are intended to be the economic and voting equivalent of shares of our common stock.
 
In connection with the reorganization, we established a direct wholly-owned subsidiary, Lululemon Callco ULC, or Callco. Callco will be a party to the exchangeable share support agreement


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described under “Description of Capital Stock — Exchangeable Shares of Lulu Canadian Holding and Related Agreements.” Callco will have the right, but not the obligation, to purchase any exchangeable shares tendered to Lulu Canadian Holding in exchange for shares of our common stock or to purchase all outstanding exchangeable shares if Lulu Canadian Holding elects to redeem these shares, which it is only entitled to do in certain limited circumstances. In each case, the purchase price payable by Callco would be paid through the delivery of one share of our common stock for each exchangeable share being purchased by Callco, plus the payment of any accrued and unpaid dividends on such exchangeable share at the time of purchase. Since Callco is our wholly-owned subsidiary, any exchangeable shares that Callco acquires will be indirectly owned by us. Pursuant to the terms of the exchangeable share support agreement, we have agreed to take any actions necessary for Callco to satisfy its obligations if it elects to exercise its right to acquire the exchangeable shares, including, without limitation, the issuance of shares of our common stock to holders of exchangeable shares.
 
Rights Attaching to Exchangeable Shares.  As described above, holders of exchangeable shares will be entitled, at any time, to exchange their exchangeable shares for an equal number of shares of our common stock. However, shares of our common stock issuable upon an exchange of exchangeable shares will not be delivered other than pursuant to an effective registration statement filed with the SEC, which we will not file prior to the first anniversary of the closing of this offering, or pursuant to an exemption from registration under U.S. and Canadian securities laws. The exchangeable shares will be accompanied by, and may not be traded separately from, shares of our special voting stock. The holders of exchangeable shares will not be entitled to vote on resolutions of shareholders of Lulu Canadian Holding except in certain limited circumstances as prescribed by law.
 
Corporate Reorganization.  The following discussion of shares issued in connection with our corporate reorganization assumes a reorganization date of          , 2007 and assumes an initial public offering price of $      per share (the mid-point of the range set forth on the cover of this prospectus). The actual number of shares issued in connection with our corporate reorganization will depend upon the actual reorganization date due to the accrual of dividends on shares of preferred stock, and the initial public offering price.
 
Series A Preferred Stock.  Each holder of our series A preferred stock will be entitled to receive:
 
  •  its pro rata portion of 22,229,600 shares of our common stock (which we refer to as the common share amount); and
 
  •  with respect to each share of our series A preferred stock held by such stockholder, the number of shares of our common stock that is equal to (x) $           (representing the stated value of each such share plus accrued and unpaid dividends through the assumed reorganization date, assuming that such share of series A preferred stock was issued on December 5, 2005), divided by (y) the initial public offering price per share of our common stock.
 
Assuming an initial public offering price of $      per share (the mid-point of the range set forth on the cover of this prospectus), we expect to issue an aggregate of           shares of our common stock to our existing holders of series A preferred stock upon completion of this offering.
 
Lulu USA Non-Participating Preferred Stock.  Lulu USA will repurchase all shares of non-participating preferred stock of Lulu USA which are outstanding as of the reorganization date for a purchase price of $1.00 per share in cash, or US$10,000 in the aggregate.
 
LIPO USA and LIPO Canada.  LIPO USA and LIPO Canada, or the LIPO Entities, are the holding companies formed by Mr. Wilson to hold his interests in lululemon. Substantially all of the assets of LIPO USA are composed of shares of our series TS preferred stock and Lulu USA non-participating preferred stock and substantially all of the assets of LIPO Canada are composed of LAI class B shares. In our corporate reorganization, we and Lulu Canadian Holding will issue a combination of shares of our common stock and exchangeable shares of Lulu Canadian Holding, respectively, in exchange for the


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securities of our company held by LIPO USA and in exchange for the securities of LIPO Canada that are held by the shareholders of LIPO Canada in the following amounts (the LIPO Share Amount):
 
  •  the LIPO Entities’ pro rata portion of the common share amount; and
 
  •  the number of shares of our common stock that is equal to (x) $      (representing the stated value of our series TS preferred stock and LAI class B shares held by the LIPO Entities, plus accrued and unpaid dividends through the assumed reorganization date) divided by (y) the initial public offering price per share of our common stock.
 
Assuming an initial public offering price of $      per share (the mid-point of the range set forth on the cover of this prospectus), we expect to issue an aggregate of           shares of our common stock with respect to the LIPO Entities’ interest in the company and LAI.
 
LIPO USA, on the one hand, and the shareholders of LIPO Canada, on the other hand, are entitled to their respective pro rata shares of the LIPO Share Amount. The portion of the LIPO Share Amount issuable to LIPO USA will be issued in the form of our common stock. The portion of the LIPO Share Amount issuable to the LIPO Canada shareholders will be issued in the form of shares of our common stock or exchangeable shares.
 
As part of our corporate reorganization, Slinky will transfer its LIPO Canada common shares to us in exchange for shares of our common stock, which Slinky will sell in this offering. Mr. Wilson and the remainder of the LIPO Canada shareholders will transfer the balance of the issued and outstanding common shares of LIPO Canada to Lulu Canadian Holding in exchange for exchangeable shares of Lulu Canadian Holding. The holders of the exchangeable shares other than Mr. Wilson are employees of lululemon. A portion of the exchangeable shares to be issued to these employees will be held by them outright, while the balance will be held in trust for them by Mr. Wilson pursuant to an incentive arrangement under which shares will vest, and will thereupon be released from the trust, ratably over time, as long as the employee remains employed by lululemon as of each vesting date. To the extent that shares do not vest, they will be forfeited and revert to the ownership of Mr. Wilson.
 
In connection with our corporate reorganization, we will issue to each holder of exchangeable shares a number of special voting shares that is equal to the number of exchangeable shares that is held by such holder.
 
LIPO Canada Stock Options.  As part of our corporate reorganization, each vested option to purchase LIPO Canada common shares will be exercised for LIPO Canada common shares, which will be transferred to Lulu Canadian Holding, as discussed above. Each unvested option to purchase LIPO Canada common shares will be exchanged for options to purchase LIPO USA common stock.
 
Lulu USA and LAI Stock Options.  In addition, each option to purchase shares of Lulu USA common stock or LAI class C shares will be exchanged for options to purchase shares of our common stock at an adjusted exercise price. Upon completion of this option adjustment, we will have outstanding options to purchase 1,885,250 shares of our common stock at a weighted average per share exercise price of $1.39.
 
After all of the foregoing share issuances and option adjustments have occurred, LIPO Canada will become a wholly owned subsidiary of Lulu Canadian Holding. At such time, Lulu Canadian Holding and LIPO Canada will be amalgamated (i.e., merged) and become one entity.
 
Upon completion of our corporate reorganization and the amalgamation of Lulu Canadian Holding and LIPO Canada, Lulu USA and LAI in effect will be our direct or indirect wholly-owned subsidiaries.
 
Post-reorganization Capitalization
 
Immediately after our corporate reorganization, we will have outstanding:
 
  •             shares of our common stock assuming an initial public offering price of $      per share and a reorganization date of          , 2007;


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  •             shares of our special voting stock; and
 
  •  options to purchase 1,885,250 shares of our common stock at a weighted average exercise price of $1.39 per share.
 
We will have no shares of series A preferred stock, series B preferred stock or series TS preferred stock outstanding. In addition, no person other than us or our subsidiaries will have a direct voting or economic interest in Lulu USA or LAI since each of these companies will in effect be our direct or indirect wholly-owned subsidiaries.
 
Immediately after our corporate reorganization, Lulu Canadian Holding will have           exchangeable shares outstanding, each exchangeable for one share of our common stock, and the former stockholders of LIPO Canada, through their ownership of exchangeable shares, will be the only group of persons who will have an interest in one of our subsidiaries.
 
Post-reorganization Structure
 
Set forth below is a diagram that graphically illustrates, in simplified form, our corporate structure immediately following completion of our corporate reorganization.
 
(POST-ORGANIZATIONAL CHART)


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Termination of Stockholders Agreement
 
The reorganization agreement provides that our stockholders agreement will terminate upon the completion of this offering.
 
Hold-back Provisions
 
The reorganization agreement includes “hold-back” provisions that prohibit dispositions of shares of our common stock for a 180-day period following an underwritten public offering of our common stock, including this offering. Specifically, our stockholders who are party to the reorganization agreement have agreed not to offer, sell, assign, transfer, pledge or contract to sell or otherwise dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for shares of our common stock, including the exchangeable shares of Lulu Canadian Holding, in connection with an underwritten public offering of our common stock.
 
Registration Rights
 
Pursuant to the reorganization agreement, we have granted to Advent International GPE V Limited Partnership, Advent International GPE V-A Limited Partnership, Advent International GPE V-B Limited Partnership, Advent International GPE V-G Limited Partnership, Advent International GPE V-I Limited Partnership, Advent Partners III Limited Partnership, Advent Partners GPE V Limited Partnership, Advent Partners GPE V-A Limited Partnership, Advent Partners GPE V-B Limited Partnership, Brooke Private Equity Advisors Fund I-A, Limited Partnership, Brooke Private Equity Advisors Fund I (D), Limited Partnership, Highland Capital Partners VI Limited Partnership, Highland Capital Partners VI-B Limited Partnership, Highland Entrepreneurs’ Fund VI Limited Partnership and Slinky Financial ULC, the right to include certain of their shares in this offering. These holders may request that we include up to an aggregate of           of the shares of our common stock that they receive in our corporate reorganization in this offering. This number may be decreased prior to the effectiveness of the registration statement to which this offering relates upon the request of Goldman Sachs & Co., the lead co-managing underwriter in this offering. We are obligated to pay all expenses in connection with such registration (other than underwriting commissions or discounts).
 
In addition, the reorganization agreement provides for the amendment and restatement of a registration rights agreement providing for certain registration rights after the closing of this offering. See “Description of Capital Stock — Registration Rights” for a description of these rights.


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CAPITALIZATION
 
The following table describes our capitalization and cash and cash equivalents as of January 31, 2007. Our capitalization and cash and cash equivalents are presented:
 
  •  on an actual basis, derived from our audited combined consolidated balance sheet as of January 31, 2007;
 
  •  on a “pro forma” basis, giving effect to:
 
  •  the consummation of our corporate reorganization on an assumed date of          , 2007, and (assuming an initial public offering price of $      per share) the issuance of           shares of our common stock;
 
  •  the issuance by Lulu Canadian Holding, Inc., our wholly owned subsidiary, of           shares of its exchangeable common stock in connection therewith, as described in “Pre-Offering Transactions” included elsewhere in this prospectus, and the issuance of           shares of our common stock upon the exchange of the Lulu Canadian Holding exchangeable shares; and
 
  •  on a “pro forma as adjusted” basis, further reflecting the sale by us of           shares of our common stock in this offering (assuming an initial public offering price of $      per share, and after deducting estimated offering expenses and underwriting discounts and commissions payable by us).
 
The number of shares of our common stock to be issued in connection with our corporate reorganization and upon exchange of the exchangeable common stock of Lulu Canadian Holding depends in part on the initial offering price and the date of our corporate reorganization. This is because, as further described in “Pre-Offering Transactions,” various securities will be exchanged in our corporate reorganization based in part on the ratio of the value of accrued but unpaid dividends (which, where applicable, accrue on a daily basis until the consummation of our corporate reorganization) to our initial public offering price. Accordingly:
 
  •  A $1.00 increase in the assumed initial public offering price of $      per share would decrease the number of shares of common stock outstanding after this offering by approximately           shares, assuming that our corporate reorganization occurs on          , 2007;
 
  •  A $1.00 decrease in the assumed initial public offering price of $      per share would increase the number of shares of common stock outstanding after this offering by approximately           shares, assuming that our corporate reorganization occurs on          , 2007; and
 
  •  If our corporate reorganization occurred five days later or earlier than the assumed date of          , 2007, the common stock outstanding after this offering would increase or decrease, respectively, by approximately           shares, assuming an initial public offering price of $      per share.
 
We expect our corporate reorganization to occur immediately following the execution of an underwriting agreement with the underwriters relating to the shares of common stock being offered by this prospectus.


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You should read the information below in conjunction with our combined consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
                         
    January 31, 2007  
                Pro Forma
 
   
Actual(1)
   
Pro Forma
   
as Adjusted(2)
 
    (In thousands)  
          (Unaudited)     (Unaudited)  
 
Cash and cash equivalents
  $ 16,029     $ 16,029     $ 36,279  
                         
Long-term debt
                 
Non-controlling interest
    568       558       558  
Stockholders’ equity:
                       
Participating preferred stock, $0.01 par value: 5,570,000 authorized, 225,489 issued and outstanding, actual;          authorized, none issued and outstanding, pro forma and pro forma as adjusted
                       
Undesignated preferred stock, $0.01 par value: no shares authorized, actual; 5,000,000 shares authorized, none issued and outstanding, pro forma and pro forma as adjusted
                       
Common stock, no par value, actual; $0.01 par value, pro forma and pro forma as adjusted: unlimited shares authorized, 117,000,361 issued and outstanding, actual;          authorized,          issued and outstanding, pro forma;          authorized,          issued and outstanding, pro forma as adjusted
                       
Special voting stock, no par value: none authorized, issued and outstanding, actual;          authorized,          issued and outstanding, pro forma and pro forma as adjusted
                       
Additional paid-in capital
    99,111                  
Accumulated deficit
    (60,677 )                
Accumulated other comprehensive income (loss)
    (1,057 )                
                         
Total stockholders’ equity
    37,379                  
Total capitalization
  $ 37,947     $       $  
                         
 
(1) Stockholders’ equity and components thereof consist of capital of two related companies, Lululemon Corp. and LIPO Investments (Canada), Inc.
 
(2) A $1.00 increase or decrease in the assumed public offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus, would increase or decrease, respectively, each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
The number of pro forma as adjusted shares of common stock shown as issued and outstanding excludes:
 
  •  1,899,000 shares of our common stock issuable upon exercise of options outstanding as of January 31, 2007 at a weighted average exercise price of $1.39 per share; and
 
  •             shares of our common stock reserved for future issuance under our 2007 Equity Incentive Plan.
 


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DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.
 
Our pro forma net tangible book value as of January 31, 2007 was approximately $      million, or approximately $      per share. Pro forma net tangible book value per share is determined by dividing the amount of our tangible net worth, or total tangible assets less total liabilities, as of January 31, 2007 by the pro forma number of shares of our common stock outstanding after giving effect to our corporate reorganization as described in “Pre-Offering Transactions” included elsewhere in this prospectus, and assuming the exchange, for shares of our common stock, of all the exchangeable shares of Lulu Canadian Holding, Inc. to be issued in connection with our corporate reorganization. The number of shares of our common stock and the number of exchangeable shares of Lulu Canadian Holding, Inc. to be issued in connection with our corporate reorganization depends in part on the initial offering price and the date of our corporate reorganization. See “Capitalization” for a discussion of how changes in the initial public offering price or the date of our corporate reorganization may affect the number of shares to be issued in connection with our corporate reorganization.
 
Dilution to new investors represents the difference between the amount per share paid by investors in this offering and the net tangible book value per share of our common stock immediately after the completion of this offering. After giving effect to our sale of the shares offered hereby on an assumed date of          , 2007 and at an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the estimated net proceeds therefrom, our pro forma net tangible book value as of January 31, 2007 would have been $      million, or $      per share. This represents an immediate increase in pro forma net tangible book value of $      per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $      per share to new investors. The following table illustrates this per share dilution:
 
                 
Assumed initial public offering price per share
          $        
                 
Pro forma net tangible book value per share as of January 31, 2007
  $                
Increase per share attributable to new investors
               
                 
Pro forma net tangible book value per share after this offering
               
                 
Dilution per share to new investors
          $    
                 
 
A $1.00 increase (decrease) in the assumed public offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus, would increase (decrease) our pro forma net tangible book value after this offering by $     , our pro forma net tangible book value per share after this offering by $      per share, and the dilution in pro forma net tangible book value to new investors in this offering by $      per share (assuming the number of shares set forth on the cover of this preliminary prospectus remains the same).
 
The following table sets forth, on a pro forma basis as of January 31, 2007, after giving effect to our reorganization as described in “Pre-Offering Transactions” included elsewhere in this prospectus, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors who purchase shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions

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and estimated offering expenses payable by us, assuming an initial public offering price of $      per share:
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
   
Number
   
Percent
   
Amount
   
Percent
   
Per Share
 
 
Existing stockholders
                     %   $               %   $             
New investors
                                       
                                         
Total
            100.0 %             100.0 %        
                                         
 
A $1.00 increase (decrease) in the assumed public offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus, would increase (decrease) total consideration paid by new investors by $     , and increase (decrease) the percent of total consideration paid by all new investors by  % (assuming the number of shares set forth on the cover of this preliminary prospectus remains the same).
 
If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own  %, and new investors would own    %, of the total number of shares of common stock outstanding after this offering.
 
The foregoing tables and calculations assume no exercise of any options outstanding as of January 31, 2007. Specifically, these tables and calculations exclude 1,899,000 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $1.39 per share. If all of these options were exercised, then:
 
  •  pro forma net tangible book value per share would increase from $      to $     , resulting in a decrease in dilution to new investors of $      per share;
 
  •  our existing stockholders, including the holders of these options, would own  %, and our new investors would own  %, of the total number of shares of our common stock outstanding upon the completion of this offering; and
 
  •  our existing stockholders, including the holders of these options, would have paid  % of total consideration, at an average price per share of $     , and our new investors would have paid  % of total consideration.


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SELECTED COMBINED CONSOLIDATED FINANCIAL DATA
 
The selected combined consolidated financial data set forth below are derived from our combined consolidated financial statements and should be read in conjunction with our combined consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The combined consolidated statement of operations data for each of the fiscal years ended January 31, 2005, 2006 and 2007 and the combined consolidated balance sheet data as of January 31, 2006 and 2007 are derived from, and qualified by reference to, our audited combined consolidated financial statements and related notes appearing elsewhere in this prospectus. The combined consolidated statement of operations data for each of the fiscal years ended January 31, 2003 and 2004, and the combined consolidated balance sheet data as of January 31, 2003, 2004 and 2005 are derived from our unaudited combined consolidated statements of income and balance sheets. The unaudited combined consolidated statements of income and balance sheets have been prepared on the same basis as our audited combined consolidated financial statements and, in the opinion of management, contain all adjustments necessary to fairly present the information set forth below.
 
                                         
    For the Fiscal Year Ended January 31,  
   
2003
   
2004
   
2005
   
2006
   
2007
 
    (In thousands, except share data)  
    (Unaudited)     (Unaudited)                    
 
Combined consolidated statement of income data:
                                       
Net revenue
  $  5,903     $ 18,188     $ 40,748     $ 84,129     $ 148,885  
Cost of goods sold(1)
    3,079       8,748       19,448       41,177       72,903  
                                         
Gross profit
    2,823       9,439       21,300       42,952       75,982  
                                         
Operating expenses:
                                       
Selling, general and administrative expenses(1)
    1,173       4,896       10,840       26,416       52,540  
Principal stockholder bonus
    1,314       3,782       12,134       12,809        
Settlement of lawsuit
                            7,228  
                                         
Income (loss) from operations
    336       761       (1,674 )     3,727       16,213  
Other expenses (income)
                                       
Interest income
                (11 )     (55 )     (142 )
Interest expense
          4       46       51       47  
                                         
Income (loss) before income taxes
    336       757       (1,709 )     3,730       16,308  
Provision for (recovery of) income taxes
    41       437       (298 )     2,336       8,753  
Non-controlling interest
                            (112 )
                                         
Net income (loss)
  $ 295     $ 319     $ (1,411 )   $ 1,394     $ 7,666  
                                         
Pro forma weighted average number of shares outstanding(2):
                                       
For pro forma basic earnings per share
                                       
Series A preferred stock
                                       
Common stock equivalents
                                       
Pro forma diluted earnings per share
                                       
                                         
Pro forma Series A preferred basic earnings per share(2)
                                       
Pro forma common stock equivalents basic earnings per share(2)
                                       
Pro forma diluted earnings per share(2)
                                       


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(1) Includes stock-based compensation as follows:
                         
    For the Fiscal Year Ended
 
    January 31,  
   
2005
   
2006
   
2007
 
    (In thousands)  
 
Cost of goods sold
  $     —     $ 755     $ 360  
Selling, general and administrative expenses
          1,945       2,470  
                         
Total
  $     $ 2,700     $ 2,830  
                         
 
(2) We have not computed basic and diluted earnings per share as the combined consolidated results reflect the results of two separate companies (Lululemon Corp. and LIPO Investments (Canada) Inc.), each with its own distinct and separate capital structures. As a result of our corporate reorganization, various securities (including Series A preferred stock issued by Lululemon Corp. and common stock equivalents issued by LIPO Investments (Canada) Inc.) will be exchanged for shares of our common stock based in part on the quotient of the value of accrued but unpaid dividends (which, where applicable, accrue on a daily basis until the consummation of our corporate reorganization) to our initial public offering price. We have accordingly presented pro forma earnings per share for the year ended January 31, 2007 giving effect to our corporate reorganization as if it had been consummated on the first day of that period. In addition, the outstanding stock options of the two companies will be converted into options to purchase shares of our common stock. See “Pre-Offering Transactions” and Note 11 to our combined consolidated financial statements appearing elsewhere in this prospectus.
 
                                         
    As of January 31,  
   
2003
   
2004
   
2005
   
2006
   
2007
 
    (In thousands)  
    (unaudited)     (unaudited)     (unaudited)              
 
Combined consolidated balance sheet data:
                                       
Cash and cash equivalents
  $ 433     $ 7     $ 2,652     $ 3,877     $ 16,029  
Total assets
    2,323       11,448       21,148       41,914       71,855  
Long term debt
          594       272              
Total stockholders’ equity
    419       894       (604 )     28,052       37,379  


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the “Selected Combined Consolidated Financial Data” section of this prospectus and our combined consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, 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 “Risk Factors‘ section and elsewhere in this prospectus. Certain tables may not sum due to rounding.
 
Overview
 
lululemon is one of the fastest growing designers and retailers of technical athletic apparel in North America. Our yoga-inspired apparel is 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, dance, running and general fitness. As of April 1, 2007, our branded apparel was principally sold through 52 corporate and franchise 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 insights from our customers while providing us with greater control of our brand. For fiscal 2006, 87.1% of our net revenue was derived from sales of our products in Canada, 11.7% of our net revenue was derived from the sales of our products in the United States and 1.2% of our net revenue was derived from sales of our products in Australia and Japan.
 
Our net revenue has grown from $40.7 million for fiscal 2004 to $148.9 million for fiscal 2006. This represents a compound annual growth rate of 91.1%. By the end of fiscal 2004, we operated 20 stores including 14 corporate-owned stores and 6 franchise stores in Canada, the United States and Australia. The majority of our stores were located in Canada, with only three corporate-owned stores in the United States and one franchise store in Australia. Our increase in net revenue from fiscal 2004 to fiscal 2006 resulted from the addition of 17 retail locations in fiscal 2005 and 14 retail locations in fiscal 2006 and strong comparable store sales growth of 19% and 25% in fiscal 2005 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 men’s apparel line, which represented approximately 11% of net revenue for fiscal 2006 and our accessories business, which represented approximately 9% of net revenue for fiscal 2006. The continued growth of our business and any future increase in our net revenue, earnings or cash flows are dependent on the successful expansion of our corporate-owned store base and on us continuing to develop innovative technical athletic apparel that our consumers demand.
 
lululemon was founded in 1998 by Dennis “Chip” Wilson in Vancouver, Canada. We initially conducted our operations through our Canadian operating company, Lululemon Athletica Inc. In 2002, in connection with our expansion into the United States, we formed a sibling operating company to conduct our U.S. operations, Lululemon Athletica USA Inc. Both operating companies were wholly-owned by affiliates of Mr. Wilson. In December 2005, Mr. Wilson sold 48% of his interest in lululemon to a group of private equity investors led by Advent International Corporation and Highland Capital Partners. Prior to this time, Mr. Wilson was our sole stockholder. Pursuant to the terms of the December 2005 transaction, we formed Lululemon Corp. (formerly known as Lulu Holding, Inc.), the issuer of the shares offered by this prospectus, to serve as a holding company for all of our related entities, including our two primary operating subsidiaries.


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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 more than 10% of our net revenues for each of fiscal 2005 and fiscal 2006. Opening new franchise stores is not a significant part of our near-term store growth strategy, and we therefore expect that revenue derived from our franchise stores will eventually comprise less than 10% of the net revenue we report in future fiscal years, at which time we will reevaluate our segment reporting disclosures. Our other operations accounted for less than 10% of our revenues in each of fiscal 2005 and fiscal 2006.
 
As of April 1, 2007, we sold our products through 45 corporate-owned stores located in Canada, the United States and Japan. Most of our corporate-owned stores are located in North America, with only two corporate-owned stores located in Japan. We plan to increase our net revenue in North America by opening additional corporate-owned stores in new and existing markets. For fiscal 2006, corporate-owned stores net revenue accounted for 81.1% of total net revenue.
 
As of April 1, 2007, we also had six franchise stores located in North America and one franchise store 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. For fiscal 2006, franchises net revenue accounted for 14.3% of total net revenue.
 
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 a franchise store in Australia, our first store outside of North America. We intend to convert this Australian franchise into a joint venture partnership. In 2005, we opened a franchise store in Japan. In 2006, we terminated our franchise arrangement and entered into a joint venture agreement with Descente Ltd, or Descente, a global leader in fabric technology, to operate our stores in Japan. This joint venture company is named Lululemon Japan Inc. As of April 1, 2007, we operated two stores through Lululemon Japan Inc. Because we own 60% of the joint venture and maintain control over it, the financial results of Lululemon Japan Inc. are consolidated and included in our corporate-owned stores segment. We plan 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.
 
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 directly to wholesale customers, telephone sales to retail customers, including related shipping and handling charges, warehouse sales and sales through a limited number of company operated showrooms. Wholesale customers include select premium yoga studios, health clubs and fitness centers. Telephone sales are taken directly from retail customers through our call center. Warehouse sales are typically held a few 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. For fiscal 2006, other net revenue accounted for 4.6% of total net revenue.
 
We believe that a number of trends relevant to our industry have affected our results and may continue to do so. Specifically, we believe that there is an increasing appreciation for the health benefits


46


 

of yoga and related fitness activities in our markets and that women, our primary customers, are increasingly embracing an active healthy lifestyle. As such, we believe that participation in yoga and related fitness activities will continue to grow. There is also an increasing demand for technical athletic apparel relative to traditional athletic apparel, and we believe that more people are wearing technical apparel in casual environments to create a healthy lifestyle perception.
 
Basis of Presentation
 
Net revenue is comprised of:
 
  •  corporate-owned store net revenue, which includes sales to customers through corporate-owned stores (including stores operated by our majority owned joint venture);
 
  •  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 sales to wholesale accounts, telephone sales, including related shipping and handling charges, warehouse sales and sales from company operated showrooms;
 
in each case, less returns and discounts.
 
Comparable store sales reflects net revenue at corporate-owned stores, that have been open for at least twelve 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. Comparable store sales includes stores that have been remodeled or relocated and stores operated by our majority owned joint venture, although as of January 31, 2007, the joint venture stores had not had a full month of comparable prior year sales. Non-comparable store sales include sales from new stores that have not been open for twelve months, sales from showrooms, and sales from stores that were closed within the past twelve months.
 
By measuring the change in year-over-year net revenue in stores that have been open for twelve 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.
 
As we continue our store expansion program, we expect that a greater percentage of our net revenue will come from non-comparable store sales. Opening new stores is an important part of our growth strategy. Accordingly, comparable store sales has limited utility for assessing the success of our


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growth strategy insofar as comparable store sales do not reflect the performance of stores open less than twelve months.
 
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 production 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;
 
  •  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 outbound freight and handling costs incurred upon shipment of merchandise; and
 
  •  shrink and valuation reserves.
 
Our cost of goods sold is substantially higher in the holiday season because cost of goods sold generally increases as net revenue increases. 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. For fiscal 2006, cost of goods sold included $0.4 million of compensation charges related to stock-based compensation. We anticipate that our cost of goods sold will increase in absolute dollars compared to fiscal 2006, but will remain relatively stable as a percentage of net revenue.
 
Our selling, general and administrative expenses consist of all operating costs not otherwise included in cost of goods sold, principal stockholder bonus or settlement of lawsuit. 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 including stock-based compensation, (other than the salaries and benefits and stock-based compensation for our production and design departments included in cost of goods sold and other corporate costs). For fiscal 2006, selling, general and administrative expenses included $2.5 million of charges related to stock-based compensation. Our selling, general and administrative expenses also include 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 for fiscal 2007 will increase in absolute dollars compared to fiscal 2006, due to the full year of compensation expense related to personnel hired at the end of fiscal 2006, as well as the anticipated continued growth of our corporate support staff and store-level employees. We believe that we have now assembled a management team that should allow us to grow our business for the foreseeable future. Accordingly, we expect our selling, general and administrative expenses as a percentage of our net revenue to decline as we achieve higher revenues.
 
Principal stockholder bonus consists of annual bonus payments paid to Mr. Wilson prior to December 2005. These bonuses were paid to Mr. Wilson as our sole stockholder and were in an amount equal to our Canadian taxable income for the year above a particular threshold. For Canadian income tax purposes, these payments were fully taxable to Mr. Wilson as ordinary income and fully deductible by us as a compensation expense. Following his sale of 48% of his interest in lululemon to a group of private equity investors in December 2005, these payments to Mr. Wilson were discontinued.
 
Settlement of lawsuit consists of a payment we made in February 2007 in the amount of $7.2 million to a third party web site developer arising from the termination of a profit sharing


48


 

arrangement associated with our retail web site for our products. We accrued for the entire settlement amount in fiscal 2006.
 
Stock-based compensation includes charges incurred in recognition of compensation expense associated with grants of stock options and stock purchases. In December 2005, we adopted the fair value recognition and measurement provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)). SFAS 123(R) is applicable to stock-based awards exchanged for employee services and in certain circumstances for non-employee directors. Pursuant to SFAS 123(R), stock-based compensation cost 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. We record our stock-based compensation 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. As of January 31, 2007, we had options to purchase 1,899,000 shares of our common stock outstanding with a weighted average exercise price of $1.39 per share, 187,250 of which were exercisable at January 31, 2007. Additionally, as of January 31, 2007, each of LIPO Investments (USA) Inc., or LIPO USA, and LIPO Investments (Canada) Inc., or LIPO Canada, had granted to some of our employees restricted stock of those entities and options to purchase shares of stock in those entities. LIPO USA and LIPO Canada, the sole assets of which are a 52% interest in lululemon, are entities controlled by Mr. Wilson. Accordingly, we recognize a stock-based compensation expense for the restricted stock and options granted by those entities. As of January 31, 2007, pursuant to SFAS 123(R), there was $18.3 million of total unrecognized stock-based compensation expense, of which we expect to amortize $5.3 million in fiscal 2007, $5.1 million in fiscal 2008 and the remainder thereafter.
 
Interest income includes interest earned on our cash balances. We expect to continue to generate interest income to the extent that our cash generated from operations exceeds our cash used for investment.
 
Interest expense includes interest costs associated with our credit facilities and with letters of credit drawn under these facilities for the purchase of merchandise. 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. As of January 31, 2007, we had $5.0 million of federal net operating loss carry-forwards available to reduce future taxable income in the United States. These tax operating loss carry-forwards begin to expire in 2023. The consummation of the corporate reorganization transactions contemplated by this prospectus combined with this offering could result in an annual limitation on the amount of tax operating loss carry-forwards that we can use in future years to offset future taxable income in the United States. These annual limitations may result in the expiration of net operating loss carry-forwards before they may be used. We currently record a full valuation allowance against our losses in the United States.
 
Several factors have contributed to our effective tax rate in recent periods being significantly higher than our anticipated long-term effective tax rate. First, in both fiscal 2005 and fiscal 2006, we generated losses in the United States which we were unable to offset against our income in Canada for tax purposes. Second, in fiscal 2005 and fiscal 2006 we incurred stock-based compensation expenses of $2.7 million and $2.8 million, respectively, which were not deductible for tax purposes in Canada and the United States during these periods. The impact of these losses and non-deductible expenses on our effective tax rate was exacerbated in fiscal 2005 by the payment of a bonus to our principal stockholder in that period. Prior to December 2005 our sole stockholder, Mr. Wilson, received a bonus payout each year representing a substantial percentage of our earnings before income taxes. Following Mr. Wilson’s sale of 48% of his interest in lululemon to a group of private equity investors in December 2005 we discontinued this practice. Payments of these bonuses therefore decreased to $0 in fiscal 2006 from $12.8 million in fiscal 2005. This payment in fiscal 2005 significantly decreased our income before income taxes in this period and accordingly resulted in us realizing a higher effective tax rate in this


49


 

period as we gave effect to the non-deductible nature of the losses and the stock-based compensation expenses. Our effective tax rate in fiscal 2006 was 53.7%, compared to 62.6% in fiscal 2005.
 
As we begin to generate taxable income in the United States and Japan, we expect our effective tax rate to decline. We expect that our long term effective tax rate will be between approximately 35% and 40%. In addition, 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 Japan, 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.
 
Internal Controls
 
The process of improving our internal controls has required and will continue to require us to expend significant resources to design, implement and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. There can be no assurance that any actions we take will be completely successful. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an on-going basis.
 
We have not begun testing or documenting our internal control procedures in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing these assessments. We must comply with Section 404 no later than the time we file our annual report for fiscal 2008 with the SEC. As part of this process, we may identify specific internal controls as being deficient. We anticipate retaining additional personnel to assist us in complying with our Section 404 obligations. We are currently evaluating whether such personnel will be retained as consultants or as our employees.
 
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,
 
   
2005
   
2006
   
2007
 
    (In thousands)  
 
Combined consolidated statements of income:
                       
Net revenue
  $ 40,748     $ 84,129     $ 148,885  
Cost of goods sold (including stock-based compensation expense of $nil, $755 and $359)
    19,448       41,177       72,903  
                         
Gross profit
    21,300       42,952       75,982  
                         
Operating expenses:
                       
Selling, general and administrative expenses (including stock-based compensation expense of $nil, $1,945 and $2,470)
    10,840       26,416       52,540  
Principal stockholder bonus
    12,134       12,809        
Settlement of lawsuit
                7,228  
Income (loss) from operations
    (1,674 )     3,727       16,213  
                         
Other expenses (income)
                       
Interest income
    (11 )     (55 )     (142 )
Interest expense
    46       51       47  
                         
Income (loss) before income taxes
    (1,709 )     3,730       16,308  
Provision for (recovery of) income taxes
    (298 )     2,336       8,753  
                         
Non-controlling interest
                (112 )
                         
Net income (loss)
  $ (1,411 )   $ 1,394     $ 7,666  
                         


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Fiscal Year Ended January 31,
 
   
2005
   
2006
   
2007
 
    (% of net revenue)  
 
Net revenue
    100.0       100.0       100.0  
Cost of goods sold (including stock-based compensation expense of 0%, 0.9% and 0.2%)
    47.7       48.9       49.0  
Gross profit
    52.3       51.1       51.0  
Operating expenses:
                       
Selling, general and administrative expenses (including stock-based compensation expense of 0%, 2.3% and 1.7%)
    26.6       31.4       35.3  
Principal stockholder bonus
    29.8       15.2        
Settlement of lawsuit
                4.9  
Income (loss) from operations
    (4.1 )     4.4       10.9  
Other expenses (income)
                       
Interest income
    (0.0 )     (0.1 )     (0.1 )
Interest expense
    0.1       (0.1 )     0.0  
Income (loss) before income taxes
    (4.2 )     4.4       11.0  
Provision for (recovery of) income taxes
    (0.7 )     2.8       5.9  
Non-controlling interest
                (0.0 )
Net income (loss)
    (3.5 )     1.7       5.1  
 
Comparison of Fiscal 2005 and Fiscal 2006
 
Net Revenue
 
Net revenue increased $64.8 million, or 77.0%, to $148.9 million for fiscal 2006 from $84.1 million for fiscal 2005. This increase was the result of increased comparable store sales, sales from new stores opened in fiscal 2005 and fiscal 2006, higher franchises net revenues and the strengthening of the average exchange rate for the Canadian dollar against the United States dollar during the year. Assuming the average exchange rate between Canadian and United States dollars for fiscal 2005 remained constant, our net revenue would have increased $58.1 million or 69.0% for fiscal 2006.
 
                 
   
Fiscal Year Ended January 31,
 
   
2006
   
2007
 
    (In thousands)  
 
Net revenue by segment:
               
Corporate-owned stores
  $ 65,578     $ 120,733  
Franchises
    14,555       21,360  
Other
    3,997       6,792  
                 
Net revenue
  $ 84,129     $ 148,885  
 
Corporate-Owned Stores.  Net revenue from our corporate-owned stores segment increased $55.2 million, or 84.1%, to $120.7 million for fiscal 2006 from $65.6 million for fiscal 2005. The following contributed to the $55.2 million increase in net revenue from our corporate-owned stores segment.
 
  •  New stores opened during fiscal 2005 prior to sales from such stores becoming part of our comparable store sales base contributed $22.2 million or 40.3% of the increase. During fiscal 2005, we opened 13 corporate-owned stores, consisting of 12 in Canada and 1 in the United States.


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  •  New stores opened during fiscal 2006 contributed $16.7 million or 30.3% of the increase. During fiscal 2006, we opened 13 corporate-owned stores, consisting of 7 in Canada, 5 in the United States and 1 in Japan.
 
  •  Comparable store sales in fiscal 2006 contributed $16.2 million or 29.4% of the increase. Assuming the average exchange rate between the Canadian and the United States dollars for fiscal 2005 remained constant, our comparable store sales would have increased $12.8 million or 20% for fiscal 2006. The increase in comparable store sales on a constant currency basis 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.
 
Franchises.  Net revenue from our franchises segment increased $6.8 million, or 46.8%, to $21.4 million for fiscal 2006 from $14.6 million for fiscal 2005. Of the $6.8 million increase in net revenue from our franchises segment, $4.4 million or 64.1% of the increase resulted from sales of goods to franchise stores and $2.4 million or 35.9% of the increase resulted from an increase in royalty revenue. During fiscal 2006, two franchise stores were opened and two franchise stores were converted to corporate-owned stores.
 
Other.  Net revenue from our other segment increased $2.8 million, or 69.9%, to $6.8 million for fiscal 2006 from $4.0 million for fiscal 2005. The following contributed to the $2.8 million increase in net revenue from our other segment.
 
  •  Warehouse and showroom sales accounted for $2.1 million or 73.7% of the increase due to four warehouse sales in fiscal 2006 compared to one new warehouse sale in fiscal 2005 and three new showrooms opened in the United States during fiscal 2006 compared to one new showroom opened at the end of fiscal 2005.
 
  •  Phone sales revenue accounted for $0.5 million or 17.9% of the increase.
 
  •  New wholesale accounts at fitness clubs and yoga studios in the United States accounted for $0.2 million or 8.4% of the increase.
 
Gross Profit
 
Gross profit increased $33.0 million, or 76.9%, to $76.0 million for fiscal 2006 from $43.0 million for fiscal 2005. The increase in gross profit was driven principally by:
 
  •  an increase of $55.2 million in our corporate-owned stores segment;
 
  •  an increase of $6.8 million in our franchises segment; and
 
  •  an increase of $2.8 million in our other segment.
 
This amount was partially offset by:
 
  •  an increase in product costs of $22.2 million associated with our sale of goods through corporate-owned stores, franchises and other segments;
 
  •  an increase in occupancy costs of $6.1 million due to higher occupancy costs in new markets;
 
  •  an increase of $1.9 million in expenses related to our production, design and distribution departments (including stock-based compensation expense) principally due to the hiring of additional employees to support our growth, partially offset by the absence in fiscal 2006 of the cash bonus paid to employees in fiscal 2005 in conjunction with our recapitalization; and
 
  •  an increase in depreciation of $1.6 million related to opening new corporate-owned stores.


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Gross profit as a percentage of net revenue, or gross margin, decreased 0.1% to 51.0% for fiscal 2006 from 51.1% for fiscal 2005. The decrease in gross margin resulted from:
 
  •  higher occupancy costs in new markets that contributed to a decrease in gross margin of 2.1%; and
 
  •  an increase in depreciation that contributed to a decrease in gross margin of 0.3% related to opening new corporate-owned stores.
 
The factors that led to a decrease in gross margin were offset by:
 
  •  a decrease in product costs as a percentage of net revenue that contributed to an increase in gross margin of 0.7% due to an increase in pricing to our franchises and wholesale customers, partially offset by an increased percentage of our net revenue being derived from our oqoqo and factory outlet stores, which generate lower gross margins than our other corporate-owned stores, and a short-term increase in expenses during our transition to the use of more off-shore manufacturers; and
 
  •  a decrease in expenses related to our production, design and distribution departments (including stock-based compensation expense) as a percentage of net revenue from fiscal 2005 to fiscal 2006 which contributed to an increase in gross margin of 1.6%.
 
Our costs of goods sold in fiscal 2006 and fiscal 2005 included $0.4 million and $0.8 million, respectively, of stock-based compensation expense.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased $26.1 million, or 98.9%, to $52.5 million for fiscal 2006 from $26.4 million for fiscal 2005. As a percentage of net revenue, selling, general and administrative expenses increased 3.9% to 35.3% from 31.4%. Of the $26.1 million increase in selling, general and administrative expenses:
 
  •  $7.8 million or 29.9% resulted from an increase in store employee compensation related to opening additional corporate-owned stores;
 
  •  $5.1 million or 19.4% resulted from an increase in consulting fees paid to third parties to analyze and implement new accounting and logistics processes and from an increase in fees associated with retaining professional search firms in connection with identifying qualified senior management candidates;
 
  •  $4.6 million or 17.7% resulted from an increase in corporate compensation principally due to hiring of additional employees to support our growth, partially offset by the absence in fiscal 2006 of the cash bonus paid to employees in fiscal 2005 in conjunction with our recapitalization;
 
  •  $3.9 million or 15.1% resulted from an increase in other corporate expenses such as travel expenses and rent associated with corporate facilities;
 
  •  $3.6 million or 13.7% resulted from an increase in other store operating expenses such as supplies, packaging, and credit card fees; and
 
  •  $0.6 million or 2.1% resulted from an increase in depreciation resulting from our move into a new corporate headquarters at the beginning of fiscal 2006.
 
Our selling, general and administrative expenses in fiscal 2006 and fiscal 2005 included $2.5 million and $1.9 million, respectively, of stock-based compensation expense.


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Principal Stockholder Bonus
 
There was no principal stockholder bonus for fiscal 2006 due to the termination of the payment of a principal stockholder bonus at the end of fiscal 2005 as part of the stockholder’s sale of 48% of his interest in us to a group of private equity investors. Principal stockholder bonus was $12.8 million for fiscal 2005.
 
Settlement of Lawsuit
 
In February 2007, we settled a lawsuit with a third-party web site developer arising from the termination of a profit sharing arrangement associated with our retail web site for our products. In connection with the settlement, we paid $7.2 million in fiscal 2007, all of which was accrued in fiscal 2006. We did not incur any similar material liabilities during fiscal 2005.
 
Income from Operations
 
The increase of $12.5 million in income from operations for fiscal 2006 was primarily due to a $33.0 million increase in gross profit resulting from increased comparable store sales and additional sales from corporate-owned stores opened during fiscal 2005 and fiscal 2006, and a $12.8 million decline in our principal stockholder bonus, partially offset by an increase of $26.1 million in selling, general and administrative expenses and the payment of $7.2 million in connection with a lawsuit settlement in fiscal 2006.
 
On a segment basis, we determine income from operations without taking into account the payment of our principal stockholder bonus in fiscal 2004 and fiscal 2005, the settlement of a lawsuit in fiscal 2006 and our general corporate expenses such as employee costs, travel expenses and corporate rent. For purposes of our management’s 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 and distribution departments have been allocated to this segment.
 
Income from operations (before general corporate expenses) from:
 
  •  our corporate-owned stores segment increased $17.0 million, or 82.2%, to $37.8 million for fiscal 2006 from $20.7 million for fiscal 2005 primarily due to an increase in corporate-owned stores gross profit of $28.4 million, offset by an increase of $7.8 million in store employee expenses and an increase of $3.6 million in other store expenses;
 
  •  our franchises segment increased $3.4 million to $10.7 million for fiscal 2006 from $7.3 million for fiscal 2005 primarily due to an increase of $2.4 million in royalty revenue and an increase of $0.9 million in gross profit associated with our sale of our products to franchises; and
 
  •  our other segment increased $1.3 million to $2.7 million for fiscal 2006 from $1.5 million for fiscal 2005 primarily due to an increase in revenue of $2.8 million, offset by an increase of $1.5 million in product costs.
 
Total income from operations also includes general corporate expenses. General corporate expenses increased $9.2 million, or 35.5%, to $35.0 million for fiscal 2006 from $25.8 million in fiscal 2005 primarily due to a lawsuit settlement of $7.2 million in fiscal 2006, an increase of $5.1 million in consulting and recruiting fees, an increase of $4.6 million in corporate employee costs, an increase of $3.9 million in other corporate expenses and an increase of $0.6 million in depreciation, partially offset by a $12.8 million decrease in our principal stockholder bonus.
 
Interest Income
 
Interest income remained relatively constant at $141,736 for fiscal 2006 from $54,562 for fiscal 2005.


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Interest Expense
 
Interest expense remained relatively constant at $47,348 for fiscal 2006 from $51,020 for fiscal 2005.
 
Provision for Income Taxes
 
Provision for income taxes increased $6.5 million to $8.8 million for fiscal 2006 from $2.3 million for fiscal 2005. For fiscal 2006, our effective tax rate was 53.7% compared to 62.6% for fiscal 2005. In both fiscal 2005 and fiscal 2006, we generated losses in the United States which we were unable to offset against our income in Canada for tax purposes. In fiscal 2005 and fiscal 2006, we also incurred stock-based compensation expenses of $2.7 million and $2.8 million, respectively, which were not deductible for tax purposes during these periods. The impact of these losses and non-deductible expenses on our effective tax rate was exacerbated in fiscal 2005 by the payment of a bonus to our principal stockholder in that period. Prior to December 2005 our sole stockholder, Mr. Wilson, received a bonus payout each year representing a substantial percentage of our earnings before income taxes. We discontinued this practice following Mr. Wilson’s sale of 48% of his interest in lululemon to a group of private equity investors in December 2005. Payments of these bonuses therefore decreased to $0 in fiscal 2006 from $12.8 million in fiscal 2005. This payment in fiscal 2005 dramatically decreased our income before income taxes in this period and accordingly resulted in us realizing a higher effective tax rate in this period as we gave effect to the non-deductible nature of the losses and the stock-based compensation expenses.
 
Net Income
 
Net income increased $6.3 million to $7.7 million for fiscal 2006 from $1.4 million for fiscal 2005. The increase in net income of $6.3 million for fiscal 2006 is a result of an increase in gross profit of $33.0 million resulting from increased comparable store sales and additional sales from corporate-owned stores opened during fiscal 2005 and fiscal 2006 and the elimination of our principal stockholder bonus in fiscal 2006, which accounted for an expense of $12.8 million in fiscal 2005, offset by increases in selling, general and administrative expenses of $26.1 million, the payment of $7.2 million in connection with a lawsuit settlement in fiscal 2006, and an increase of $6.5 million in provision for income taxes. Our cost of goods sold and selling, general and administrative expenses in fiscal 2006 and fiscal 2005 included $2.8 million and $2.7 million of stock-based compensation expense respectively.
 
Comparison of Fiscal 2004 and Fiscal 2005
 
Net Revenue
 
Net revenue increased $43.4 million, or 106.5%, to $84.1 million for fiscal 2005 from $40.7 million for fiscal 2004. This increase was the result of increased comparable store sales, sales from new stores opened in fiscal 2004 prior to such stores being included in comparable store sales, sales from new stores in fiscal 2004 and fiscal 2005, and the strengthening of the average exchange rate for the Canadian dollar against the United States dollar during the year. Assuming the average exchange rate between Canadian and United States dollars for fiscal 2004 remained constant, our net revenue would have increased $38.4 million or 94.2% for fiscal 2005.
 


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Fiscal Year Ended January 31,
 
   
2005
   
2006
 
    (In thousands)  
 
Net revenue by segment:
               
Corporate-owned stores
  $ 29,906     $ 65,578  
Franchises
    7,363       14,555  
Other
    3,480       3,997  
                 
Net revenue
  $ 40,748     $ 84,129  
 
Corporate-Owned Stores.  Net revenue from our corporate-owned stores segment increased $35.7 million, or 119.3%, to $65.6 million for fiscal 2005 from $29.9 million for fiscal 2004. The following contributed to the $35.7 million increase in net revenue from our corporate-owned stores segment.
 
  •  New stores opened during fiscal 2004 prior to sales from such stores becoming part of our comparable store sales base contributed $11.0 million or 30.7% of the increase. During fiscal 2004, we opened seven corporate-owned stores, consisting of five in Canada and two in the United States.
 
  •  New stores opened during fiscal 2005 contributed $19.6 million or 54.9% of the increase. During fiscal 2005, we opened 13 corporate-owned stores, consisting of 12 in Canada and 1 in the United States.
 
  •  Comparable store sales in fiscal 2005 contributed $5.1 million or 14.4% of the increase. Assuming the average exchange rate between the Canadian and the United States dollars for fiscal 2004 remained constant, our comparable store sales would have increased $3.1 million or 12% for fiscal 2005. The increase in comparable store sales on a constant currency basis was driven primarily by the strength of our existing product lines, successful introduction of new products and increasing recognition for the lululemon athletica brand name.
 
Franchises.  Net revenue from our franchises segment increased $7.2 million, or 97.7%, to $14.6 million for fiscal 2005 from $7.4 million for fiscal 2004. Of the $7.2 million increase in net revenue from our franchises segment, approximately $4.9 million or 68.3% of the increase resulted from an increase in royalty revenue and $2.3 million or 31.7% of the increase resulted from sales of goods to franchise stores. During fiscal 2005, five franchise stores were opened and one franchise store was purchased and converted to a corporate-owned store.
 
Other.  Net revenue from our other segment increased $0.5 million, or 14.9%, to $4.0 million for fiscal 2005 from $3.5 million for fiscal 2004. The following contributed to the $0.5 million increase in net revenue for our other segment.
 
  •  An increase of $0.4 million from warehouse and showroom revenue due to increased sales at our one warehouse sale in fiscal 2005 compared to our one warehouse sale in fiscal 2004 and the addition of one showroom in fiscal 2005 where none existed in fiscal 2004.
 
  •  An increase of $0.3 million in wholesale revenue.
 
The increase in other net revenue was partially offset by a decline of $0.1 million in phone sales revenue. In fiscal 2004, we had limited revenue from our retail website that was included in phone sales revenue. We ceased operating this website in fiscal 2005.

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Gross Profit
 
Gross profit increased $21.7 million, or 101.7%, to $43.0 million for fiscal 2005 from $21.3 million for fiscal 2004. The increase in gross profit was driven principally by:
 
  •  an increase of $35.7 million in our corporate-owned stores segment;
 
  •  an increase of $7.2 million in our franchises segment; and
 
  •  an increase of $0.5 million in our other segment.
 
This amount was partially offset by:
 
  •  an increase in product costs of $14.5 million associated with our sale of goods through corporate-owned stores, franchises and other segments;
 
  •  an increase in occupancy costs of $2.1 million due to higher occupancy costs in new markets;
 
  •  an increase of $4.0 million in expenses related to our production, design and distribution departments due to an increase in compensation from an employee stock compensation program introduced in December 2005 and a cash bonus paid to employees of these departments in conjunction with our recapitalization in December 2005; and
 
  •  an increase in depreciation of $1.1 million related to opening new corporate-owned stores.
 
Gross profit as a percentage of net revenue, or gross margin, decreased 1.2% to 51.1% for fiscal 2005 from 52.3% for fiscal 2004. The decrease in gross margin resulted from:
 
  •  an increase in expenses related to our production, design and distribution departments that contributed to a decrease in gross margin of 2.6%;
 
  •  an increase in occupancy costs that contributed to a decrease in gross margin of 0.4%; and
 
  •  an increase in depreciation that contributed to a decrease in gross margin of 0.7%.
 
The factors that led to a decrease in gross margin were offset by higher product pricing to our franchisees and wholesale customers. The higher pricing contributed to an increase in gross margin of 2.5%, offset by lower gross margin on select new products during fiscal 2005.
 
Our gross profit in fiscal 2005 and 2004 included $0.8 million and $0, respectively, of stock-based compensation expense.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased $15.6 million, or 143.7%, to $26.4 million for fiscal 2005 from $10.8 million for fiscal 2004. As a percentage of net revenue, selling, general and administrative expenses increased 4.8% to 31.4% from 26.6%. The $15.6 million increase in selling, general and administrative expenses resulted from:
 
  •  an increase of $6.7 million or 42.8% in corporate employee costs due to hiring additional employees, an increase in stock-based compensation from stock grants made under an employee stock compensation program introduced in December 2005 and a cash bonus paid to corporate employees in conjunction with our recapitalization in December 2005;
 
  •  an increase of $5.5 million or 35.6% in store employee compensation related to opening additional corporate-owned stores;
 
  •  an increase of $1.8 million or 11.7% in other corporate expenses such as travel expenses and rent associated with corporate facilities;
 
  •  an increase of $1.3 million or 8.3% in other store operating expenses such as supplies, packaging, and credit card fees;


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  •  an increase of $0.4 million or 2.5% in professional fees; and
 
  •  an increase of $0.3 million or 1.6% in depreciation.
 
The factors that led to an increase in selling, general and administrative expenses were partially offset by a $0.3 million decrease in foreign exchange gain.
 
Our selling, general and administrative expense in fiscal 2005 and fiscal 2004 included $1.9 million and $0, respectively, of stock-based compensation expense related to grants under our employee stock option plan.
 
Principal Stockholder Bonus
 
Principal stockholder bonus increased $0.7 million to $12.8 million for fiscal 2005 from $12.1 million for fiscal 2004. These bonuses were paid to Mr. Wilson as our sole stockholder and were in an amount equal to our Canadian taxable income for the year above a particular threshold. Though our Canadian taxable income before the principal stockholder bonus was significantly greater in fiscal 2005 than fiscal 2004, our principal stockholder bonus increased but did not increase at the same rate as Canadian taxable income before the principal stockholder bonus because the principal stockholder bonus was not paid for all of fiscal 2005. Following his sale of 48% of his interest in lululemon to a group of private equity investors in December 2005, these payments to our principal stockholder were discontinued.
 
Income (Loss) from Operations
 
Income from operations increased $5.4 million to income of $3.7 million for fiscal 2005 from a loss of $1.7 million for fiscal 2004. The increase of $5.4 million in income from operations for fiscal 2005 was primarily due to a significant increase in gross profit of $21.7 million resulting from increased comparable store sales and additional sales from corporate-owned stores opened during fiscal 2005 and fiscal 2006, partially offset by an increase in selling, general and administrative expenses of $15.6 million and an increase of $0.7 million in principal stockholder bonus.
 
On a segment basis, we determine income from operations without taking into account the payment of our principal stockholder bonus in fiscal 2004 and fiscal 2005 and our general corporate expenses such as employee costs, travel expenses and corporate rent. For purposes of our management’s 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 and distribution departments have been allocated to this segment.
 
Income from operations (before general corporate expenses) from:
 
  •  our corporate-owned stores segment increased $10.9 million, or 111.8%, to $20.7 million for fiscal 2005 from $9.8 million for fiscal 2004 primarily due to an increase in corporate-owned stores gross profit of $17.8 million, partially offset by an increase of $5.5 million in store employee expenses and an increase of $1.3 million in other store expenses;
 
  •  our franchises segment increased $4.2 million to $7.3 million for fiscal 2005 from $3.1 million for fiscal 2004 primarily due to an increase of $2.3 million in royalty revenue and an increase of $1.9 million in gross profit associated with our sale of our products to franchises; and
 
  •  our other segment decreased $0.3 million to $1.5 million for fiscal 2005 from $1.8 million for fiscal 2004 primarily due to our decision to cease operation of our retail website and a decline in the profitability of our one warehouse sale in fiscal 2005 as compared to fiscal 2004, notwithstanding the increase in net revenue from the sale in fiscal 2005.
 
Total income from operations also includes general corporate expenses. General corporate expenses increased $9.4 million to $25.8 million for fiscal 2005 from $16.4 million in fiscal 2004 primarily due to an increase of $6.7 million in corporate employee costs, an increase of $1.8 million in


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other corporate expenses, an increase of $0.7 million in principal stockholder bonus, an increase of $0.4 million in professional fees and an increase of $0.3 million in depreciation, partially offset by a $0.3 million decrease in foreign exchange gain.
 
Interest Income
 
Interest income remained relatively constant at $54,562 for fiscal 2005 from $10,686 for fiscal 2004.
 
Interest Expense
 
Interest expense remained relatively constant at $51,020 for fiscal 2005 from $45,549 for fiscal 2004.
 
Provision for (Recovery of) Income Taxes
 
Provision for income taxes increased $2.6 million to $2.3 million for fiscal 2005 from a recovery of $0.3 million in fiscal 2004. For fiscal 2005, our effective tax rate was 62.6% compared to 17.4% for fiscal 2004. This increase in the effective tax rate and the increase of $2.6 million in our provision for income taxes was a result of:
 
  •  greater losses in the United States in fiscal 2005 which we are unable to offset against our income in Canada for tax purposes; and
 
  •  an increase in stock-based compensation expenses from $0 in fiscal 2004 to $2.7 million in fiscal 2005, which were not deductible for tax purposes during these periods.
 
Net Income (Loss)
 
Net income increased $2.8 million to net income of $1.4 million for fiscal 2005 from a net loss of $1.4 million for fiscal 2004. The increase in net income of $2.8 million was primarily due to a significant increase in gross profit of $21.7 million resulting from increased comparable store sales and sales from new corporate-owned stores opened during the period, offset by an increase in selling, general and administrative expenses of $15.6 million, an increase in the provision for income taxes of $2.6 million, and an increase in principal stockholder bonus of $0.7 million. Our cost of goods sold and selling, general and administrative expenses in fiscal 2005 and fiscal 2004 included $2.7 million and $0, respectively, of stock-based compensation expense.
 
Unaudited Quarterly Statements of Operations
 
The following tables present our unaudited quarterly results of operations for each of the eight fiscal quarters in the period ended January 31, 2007 and our unaudited quarterly results of operations expressed as a percentage of the annual amount for the same periods. You should read the following tables in conjunction with our audited combined consolidated financial statements and related notes appearing at the end of this prospectus. We have prepared the unaudited information on a basis consistent with our audited combined consolidated financial statements and have included all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary to fairly present our operating results for the quarters presented. Our historical unaudited quarterly results of operations are not necessarily indicative of results for any future quarter or for a full year.
 


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    Fiscal 2005     Fiscal 2006  
    First
    Second
    Third
    Fourth
    First
    Second
    Third
    Fourth
 
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
 
    (In thousands)
 
    (unaudited)  
Combined consolidated statements of income:                                                                
Net revenue
  $ 15,630     $ 17,126     $ 19,984     $ 31,390     $ 28,184     $ 32,517     $ 35,968     $ 52,216  
Cost of goods sold
    8,207       7,940       9,613       15,416       13,664       16,614       17,227       25,397  
                                                                 
Gross profit
    7,423       9,186       10,371       15,973       14,519       15,903       18,740       26,819  
                                                                 
Operating expenses:
                                                               
Selling, general and administrative expenses
    3,574       4,473       5,338       13,032       8,406       12,667       14,046       17,421  
Principal stockholder bonus
    3,667       4,634       4,508                                
Settlement of lawsuit
                                              7,228  
                                                                 
Income (loss) from operations
    182       79       525       2,941       6,113       3,236       4,694       2,170  
                                                                 
Other expenses (income) Interest income
    (16 )     (27 )     (6 )     (6 )     (26 )     (34 )     (52 )     (30 )
Interest expense
    10       8       15       19       3       12       8       23  
                                                                 
Income (loss) before income taxes
    188       98       516       2,929       6,136       3,258       4,738       2,176  
                                                                 
Provision for (recovery of) income taxes
    (31 )     (41 )     160       2,249       2,955       1,318       3,132       1,348  
                                                                 
Non-controlling interest
                                        (58 )     (54 )
                                                                 
Net income (loss)
  $ 219     $ 139     $ 356     $ 680     $ 3,181     $ 1,940     $ 1,664     $ 882  
                                                                 
Selected store data:
                                                               
Number of stores open at end of period
    24       26       30       37       40       42       46       51  
 
                                                                 
    Fiscal 2005     Fiscal 2006  
    First
    Second
    Third
    Fourth
    First
    Second
    Third
    Fourth
 
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
 
    (% of net revenue)  
 
Net revenue
    100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0  
Cost of goods sold
    52.5       46.4       48.1       49.1       48.5       51.1       47.9       48.6  
Gross profit
    47.5       53.6       51.9       50.9       51.5       48.9       52.1       51.4  
Operating expenses:
                                                               
Selling, general and administrative expenses
    22.9       26.1       26.7       41.5       29.8       39.0       39.1       33.4  
Principal stockholder bonus
    23.5       27.1       22.6                                
Settlement of lawsuit
                                              13.8  
Income (loss) from operations
    1.2       0.5       2.6       9.4       21.7       10.0       13.1       4.2  
Other expenses (income)
                                                               
Interest income
    (0.1 )     (0.2 )     (0.0 )     (0.0 )     (0.1 )     (0.1 )     (0.1 )     (0.1 )
Interest expense
    0.1       0.0       0.1       0.1       0.0       0.0       0.0       0.0  
Income (loss) before income taxes
    1.2       0.6       2.6       9.3       21.8       10.0       13.2       4.2  
Provision for (recovery of) income taxes
    (0.2 )     (0.2 )     0.8       7.2       10.5       4.1       8.7       2.6  
Non-controlling interest
                                        (0.2 )     (0.1 )
Net income (loss)
    1.4       0.8       1.8       2.2       11.3       6.0       4.6       1.7  

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Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that comparisons of our quarterly results of operations should not be relied upon as an indication of our future performance. The items discussed below highlight unusual events and circumstances that make comparability between quarters difficult.
 
Cost of Goods Sold.  We experience seasonal fluctuations in our cost of goods sold as a result of the increased sales during the holiday period. In addition, we have experienced quarterly fluctuations due to warehouse sales, where we sell our products at reduced gross margins, and write downs of inventory. For example, a warehouse sale caused our cost of goods sold as a percentage of net revenue to decrease from 52.5% to 46.4% in the second quarter of fiscal 2005. Another example is a write down of obsolete raw material inventory that caused our cost of goods sold as a percentage of net revenue to increase from 49.8% to 52.2% in the second quarter of fiscal 2006.
 
Selling, General and Administrative Expenses.  The quarterly fluctuations in our selling, general and administrative expenses are primarily due to an increase in stock-based compensation expenses from grants made under our employee stock compensation plan, a cash bonus paid to employees in conjunction with our recapitalization in December 2005, various consulting projects, and fees associated with the hiring of senior executives. For example, compensation expenses from grants made under our employee stock compensation plan and a cash bonus paid to employees in conjunction with our recapitalization in December 2005 caused our selling, general and administrative expenses as a percentage of net revenue to increase from 26.7% to 41.5% in the fourth quarter of fiscal 2005. Additionally, our selling, general and administrative expenses increased from 29.8% to 39.0% in the second quarter of fiscal 2006 and remained at that level for the third quarter of fiscal 2006 as a result of increased expenses from consulting projects that began in the second quarter.
 
Principal Stockholder Bonus.  Prior to December 2005, we paid an annual bonus to Mr. Wilson, our sole stockholder, in an amount equal to our Canadian taxable income for the year above a particular threshold. For quarterly reporting purposes, the bonus amounts were allocated based on taxable income for the respective quarters. As the principal stockholder bonus was discontinued during the fourth quarter of fiscal 2005, there was no bonus amount allocated to that quarter or in any subsequent quarter.
 
Provision for (Recovery of) Income Taxes.  Provision for (recovery of) income taxes has fluctuated during the last eight quarters due to fluctuations in taxable income, discontinuing the tax deductible principal stockholder bonus, and the treatment of stock-based compensation. For example, provision for income taxes as a percentage of net revenue increased to 7.2% from 0.8% in the fourth quarter of fiscal 2005 due to our discontinuation of the principal stockholder bonus.
 
  Seasonality
 
In fiscal 2005 and fiscal 2006, we recognized over 35% of our net revenue in the fourth quarter due to significant increases in sales during the holiday season. We recognized 48.8% and 11.5% of our net income in the fourth quarter in fiscal 2005 and fiscal 2006, respectively. The amount of net income attributable to the fourth quarter in fiscal 2006 was substantially impacted by a lawsuit expense of $7.2 million that was accrued for in the fourth quarter of fiscal 2006. Despite the fact that we have experienced a significant amount of our net revenue and net income 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.
 
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 cash requirements are principally for working capital and capital expenditures, principally the build out cost of new stores, renovations of existing stores, and improvements to our distribution facility


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and corporate infrastructure. Our need for working capital is seasonal, with the greatest requirements from August through the end of November each year as a result of our inventory build-up during this period for our holiday selling season. Historically, our main sources of liquidity have been cash flow from operating activities and borrowings under our existing and previous revolving credit facilities.
 
At January 31, 2007, our working capital (excluding cash and cash equivalents) was $1.2 million and our cash and cash equivalents were $16.0 million.
 
The following table presents the major components of net cash flows provided by and used in operating, investing and financing activities for the periods indicated.
 
Operating Activities
 
                         
   
For the Fiscal Year Ended January 31,
 
   
2005
   
2006
   
2007
 
    (In thousands)  
 
(Loss) net income for the year
  $ (1,411 )   $ 1,394     $ 7,666  
Items not affecting cash:
                       
Depreciation and amortization
    1,123       2,466       4,619  
Deferred income taxes
    (107 )     (175 )     (3,077 )
Loss on property and equipment
                230  
Non-cash compensation
          2,700       2,830  
Non-controlling interest
          10       563  
Changes in non-cash working capital items
    5,737       (16,677 )     12,869  
                         
Cash flows (used by) operating activities
  $ 5,342     $ (10,282 )   $ 25,699  
 
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.
 
For fiscal 2006, cash provided by operating activities increased $36.0 million to $25.7 million compared to cash used in operating activities of $10.3 million for fiscal 2005. The increase was due to an increase of $29.5 million due to changes in working capital, excluding cash, an increase in net income of $6.3 million and an increase in depreciation and amortization of $2.1 million, offset by the negative impact of an increase in deferred income taxes of $2.9 million. Inventories increased $10.7 million and $5.4 million in fiscal 2005 and fiscal 2006, respectively. The significant build-up of inventory in fiscal 2005 was in anticipation of increased sales associated with new store openings in fiscal 2005 and fiscal 2006. The termination of our principal stockholder bonus at the end of fiscal 2005 resulted in a decrease in accrued liabilities of $11.5 million in fiscal 2006 from an increase of $11.1 million in fiscal 2005. Income taxes payable increased $8.7 million and $0.1 million in fiscal 2005 and fiscal 2006, respectively.
 
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 $2.1 million to $4.6 million for fiscal 2006 from $2.5 million for fiscal 2005. Depreciation for our corporate-owned store segment was $3.1 million, $1.5 million and $0.4 million in fiscal 2006, fiscal 2005 and fiscal 2004, respectively. Depreciation related to corporate activities was $1.1 million, $0.5 million and $0.3 million in fiscal 2006, fiscal 2005 and fiscal 2004, respectively. We have not allocated any depreciation to our franchises or other segments as these amounts to date have been immaterial.
 
Net cash provided by operating activities was $5.3 million for fiscal 2004.


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Investing Activities
 
                         
    For the Fiscal Year Ended
 
    January 31,  
   
2005
   
2006
   
2007
 
    (In thousands)  
 
Purchase of property and equipment
  $ (3,806 )   $ (7,846 )   $ (12,414 )
Acquisition of franchises
          (461 )     (512 )
                         
Cash flows from investing activities
  $ (3,806 )   $ (8,307 )   $ (12,926 )
 
Investing Activities relate entirely to capital expenditures and acquisitions of franchises. Cash used in investing activities increased $4.6 million to $12.9 million for fiscal 2006 from $8.3 million for fiscal 2005. This increase in cash used in investing activities represents an increase in the number of new stores as well as maintenance and repair expenditures on a larger store base. Capital expenditures for our corporate-owned stores segment were $11.3 million in fiscal 2006 which included $7.5 million to open 13 stores (not including one acquired franchise store), $6.1 million in fiscal 2005 which included $5.3 million to open 13 stores and $2.8 million in fiscal 2004 which included $2.3 million to open 7 stores. The remaining capital expenditures for our corporate-owned stores segment in each period were for ongoing store maintenance. Capital expenditures related to corporate activities and administration were $2.0 million, $2.3 million and $1.0 million in fiscal 2006, fiscal 2005 and fiscal 2004, 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. In fiscal 2005 and fiscal 2006, we purchased our franchises in Whistler, British Columbia for $0.5 million and Portland, Oregon for $0.5 million, respectively.
 
Capital expenditures are expected to aggregate approximately $44.0 million to $50.0 million in fiscal 2007 and fiscal 2008, including approximately $28.0 million to $34.0 million for 50 to 60 new stores, approximately $5.0 million for information technology enhancements, approximately $6.0 million for the build-out of our new corporate headquarters, and the remainder for ongoing store maintenance and for corporate activities.
 
Financing Activities
 
                         
    For the Fiscal Year Ended
 
    January 31,  
   
2005
   
2006
   
2007
 
    (In thousands)  
 
Capital stock issued for cash — net of issuance costs
  $     $ 93,037     $ 446  
Distribution to principal stockholder
          (69,005 )      
Repayment of long-term debt
    (300 )     634        
Funds received from principal stockholder loan
    4,325       7,832       222  
Funds repaid on principal stockholder loan
    (2,527 )     (11,143 )      
Change in bank indebtedness
    (65 )            
                         
Cash flows from financing activities
  $ 1,433     $ 20,086     $ 669  
 
Financing Activities consist primarily of capital stock issued for cash, distributions to principal stockholder, repayment of long-term debt, funds received from and repaid on stockholder loan and changes in bank indebtedness. Cash provided by financing activities decreased $19.4 million to $0.7 million for fiscal 2006 from $20.1 million for fiscal 2005. The decrease in cash provided by financing activities was primarily due to a $93.1 million issuance of capital stock in fiscal 2005, offset by a purchase of shares from a stockholder of $69.0 million in fiscal 2005. In fiscal 2004, financing activities provided $1.4 million in cash primarily from funds received from principal stockholder loan of $4.3 million, offset by $2.5 million from funds repaid on principal stockholder loan.


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We believe that our cash from operations, proceeds from our initial public offering 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 which replaces our existing credit facility. 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, US base rate loans in US currency, bankers’ acceptances, LIBOR based loans in US currency or Euro currency, letters of credit in Canadian currency or US currency and letters of guarantee in Canadian currency or US currency. The revolving credit facility bears interest on the outstanding balance in accordance with the following: (i) prime rate for prime loans; (ii) US base rate for US 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 guarantee. Both Lulu USA and Lululemon FC USA, Inc. provided Royal Bank of Canada with guarantees and postponements of claims in the amounts of CDN$20.0 million with respect to LAI’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.
 
Our prior credit facility included a revolving term loan facility of up to CDN$2.1 million, bearing interest at prime plus 0.50%, for general operating requirements. We also had a revolving demand facility of up to CDN$6.0 million available by way of letters of credit or guarantees for the payment of suppliers and we also had a revolving demand facility for the security of a lease for retail premises that was cancelled in November 2005. The term loans and demand facilities were secured by a general security agreement provided by us. On January 31, 2006, a guarantee and postponement of claim in an amount totaling CDN$4.5 million was provided by our majority stockholder.
 
Contractual Obligations and Commitments
 
Leases.  We lease certain retail locations, storage spaces, building and equipment under non-cancelable operating leases. Our leases generally have initial terms of between five and ten years, and generally can be extended only in five-year increments (at increased rates) if at all. Our leases expire at various dates between 2008 and 2019, excluding extensions at our option. A substantial number of our leases for retail 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 retail premises also include contingent rental payments based on sales volume, the impact of which also are not reflected in the following table. The following table summarizes our contractual arrangements at January 31, 2007, and the timing and effect that such commitments are expected to have on our liquidity and cash flows in future periods:
 
                                         
    Payments due by Period
       
   
(Year Ended January 31,)
       
   
(In thousands)
 
Contractual Obligations
 
2008
   
2009
   
2010
   
2011
   
Thereafter
 
 
Operating Leases (minimum rent)*
  $ 8,797     $ 9,823     $ 9,056     $ 7,384     $ 34,675  
 
* Includes $250, $250, $250, $250 and $270 for fiscal 2007, fiscal 2008, fiscal 2009, fiscal 2010 and thereafter for one store lease which has been terminated on May 15, 2007.
 


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Franchise Agreements.  As of April 1, 2007, we operated six stores in North America and one store 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. Additionally, 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. Pursuant to one of our franchise agreements, the franchisee has the right to sell his interest in the franchise back to us by June 2008. As of March 1, 2007, if the franchisee elected to sell his interest in the franchise to us, our repurchase costs for this franchise would have been approximately $0.5 million.
 
On April 1, 2007, we acquired three franchise stores in Calgary, Alberta for a purchase price of $5.4 million, subject to final working capital adjustments.
 
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, 2007, letters of credit and guarantees totaling $0.4 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.
 
Commencing July 7, 2003, our principal stockholder, Mr. Wilson, held an interest in a company that manufactured finished goods exclusively for us. Mr. Wilson sold his interest in this manufacturing company in December 2006. As a result of the relationships between us, Mr. Wilson and the manufacturing company, we had a variable interest in the manufacturing company. We have concluded that we were not the primary beneficiary of this variable interest entity, and we have not consolidated the entity. The assets, liabilities, results of operations and cash flows of the manufacturing company have not been included in our combined consolidated financial statements. We were not exposed directly or indirectly to any losses of the manufacturing company. Following Mr. Wilson’s sale of his interests in the manufacturing company in December 2006, we no longer have a variable interest in the manufacturing company.
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and consolidated results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to uncollectible accounts receivable and accrued expenses. We base these estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates.


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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 which includes sales to customers through corporate-owned stores (including stores operated by our majority owned joint venture), franchise licensing fees and royalties as well as sales of products to franchises, and other net revenue, which includes sales to wholesale accounts, telephone sales, including related shipping and handling charges, warehouse sales and sales from company operated showrooms, in each case, less 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, generated by sales to wholesale accounts, telephone sales, including related shipping and handling charges, and showroom sales are recognized when those sales occur, net of an estimated allowance for sales returns. Other net revenue related to warehouse sales are 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. We account for gift cards by recognizing a liability at the time a gift card is sold, and recognizing net revenue at the time the gift card is redeemed for merchandise. We review our gift card liability on an ongoing basis and recognize our estimate of the unredeemed gift card liability on a ratable basis over the estimated period of redemption.
 
Accounts Receivable.  Accounts receivable primarily arise out of royalties on sales owed us by our franchises. The allowance for doubtful accounts represents management’s best estimate of probable credit losses in accounts receivable. This allowance is established based on the specific circumstances associated with the credit risk of a franchise, the size of the accounts receivable balance, aging of accounts receivable balances and our collection history with the franchisee 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 the average cost method. For finished goods and work-in-process, market is defined as net realizable value; for raw materials, market is defined as replacement cost. Cost of inventories includes all costs incurred to deliver inventory to our distribution centers including freight, duty and other landing costs. During fiscal 2006, we initiated a new purchasing strategy that requires our manufacturers to acquire the raw materials used in the manufacturing of our apparel products. Because we will no longer be required to acquire these raw materials, we expect raw materials and work in process inventories to decline.
 
We periodically review our inventories and make provisions as necessary to appropriately value obsolete or damaged goods. The amount of the markdown 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 fiscal 2006, we wrote-off $1.0 million of inventory.
 
Property and Equipment.  Property and equipment are recorded at cost less accumulated depreciation. Costs related to software used for internal purposes are capitalized in accordance with the provisions of the Statement of Position 98-1,Accounting for Costs of Computer Software Developed or


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Obtained for Internal Use” whereby direct internal and external costs 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
    30 %
Vehicles
    30 %
 
Long-Lived Assets.  Long-lived assets 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 earnings in the period that the impairment is determined. Long-lived assets 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 selling, general and administrative expenses.
 
Income Taxes.  We follow the liability method with respect to accounting for income taxes. Deferred 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 will be in effect when these differences are expected 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.
 
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 ten years. Goodwill represents the excess of the purchase price over the fair market value of identifiable net assets acquired and is not amortized. Goodwill is tested for impairment annually or more frequently when an event or circumstance indicates that goodwill might be impaired. We use our best estimates and judgment based on available evidence in conducting the impairment testing. When the carrying 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 as required by Statement of Financial Accounting Standards No. 123 — (Revised 2004) “Share Based Payments” (FAS 123R). 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 the fair value of our common stock, 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.


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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 cost 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 cost over the requisite service period as determined by a range of probability weighted outcomes. For awards with market and or performance conditions, all compensation cost is recognized if the underlying market or performance conditions are fulfilled. Certain employees are entitled to share based awards from a stockholder of the Company. These awards are accounted for as employee compensation expense in accordance with the above noted policies. We commenced applying FAS 123R when we introduced share based awards for our employees in the year ended January 31, 2006.
 
Recent Accounting Pronouncements
 
In September 2006, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires financial statement errors to be quantified using both balance sheet and income statement approaches and an evaluation on whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006. SAB 108 did not have any impact on these combined consolidated financial statements.
 
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements”, (FAS 157) which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that adopting SFAS 157 will have on its combined consolidated financial statements.
 
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” — an interpretation of FASB Statement No. 109 (FIN 48), which provides additional guidance and clarifies the accounting for uncertainty in income tax positions. FIN 48 defines the threshold for recognizing a tax return position in the financial statements as “more likely than not” that the position is sustainable, based on its technical merits. FIN 48 also provides guidance on the measurement, classification and disclosure of tax return positions in the financial statements. FIN 48 is effective for the first reporting period beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to the beginning balance of retained earnings in the period of adoption. The Company has determined that the adoption of FIN 48 will not have a material impact on its combined consolidated financial statements.
 
In June 2006, the FASB ratified the consensus reached in EITF 06-03, “How Sales Tax Collected from Customers and Remitted to Government Authorities Should be Presented in the Income Statement” (gross versus net presentation). The EITF reached a consensus that the presentation of taxes on either a gross or net basis is an accounting policy decision that requires disclosure. EITF 06-03, is effective for


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the first interim or annual reporting period beginning after December 15, 2006. The adoption of EITF 06-03 did not have any effect on the company’s financial position or results of operations.
 
In October 2005, the FASB issued Staff Position No. (FSP) SFAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (FSP SFAS 13-1). FSP SFAS 13-1 concludes that there is no distinction between the right to use a leased asset during and after the construction period; therefore rental costs incurred during the construction period should be recognized as rental expense and deducted from income from continuing operations. FSP SFAS 13-1 is effective for the first reporting period beginning after December 15, 2005. The company has applied the guidance under SFAS 13-1 for all periods presented.
 
In June 2005, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (EITF 05-6). EITF 05-6 addresses the amortization period for leasehold improvements in operating leases that are either (a) placed in a service significantly after and not contemplated at or near the beginning of the initial lease term or (b) acquired in a business combination. Leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. Leasehold improvements acquired in a business combination should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date of acquisition. EITF 05-6 has been applied for all periods presented.
 
In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154, Accounting Changes and Error Corrections, (FAS 154) which replaced APB Opinion No. 20, Accounting Changes, and FAS No. 3, Reporting Accounting Changes in Interim Financial Statements. FAS 154 applies to all voluntary changes in accounting principle and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of FAS 154 in 2007 had no effect on the Company’s consolidated financial statements.
 
In December 2004, the FASB issued Statement of Financial Accounting Standard 123R, Share Based Payment (FAS 123R), which revised Statement of Financial Accounting Standard 123, Accounting for Stock-based compensation and supersedes APB 25, Accounting for Stock Issued to Employees. FAS 123R requires all stock-based compensation to be recognized as an expense in the financial statements and that such costs be measured according to the fair value of the award. FAS 123R became effective for the Company on January 1, 2006 but has been applied for all periods presented. In March 2005, SEC Staff Accounting Bulletin no. 107 was issued to provide guidance from SEC staff on the implementation of FAS 123R as this statements relates to the valuation of the share-based payment arrangements for public companies. The Company has applied FAS 123R to all share based awards since the inception of its plans during fiscal 2005.
 
In November 2004, FASB issues FAS No. 151, Inventory Costs (“FAS 151”) which is an amendment of Accounting Research Bulletin No. 43, Inventory Pricing. FAS 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expenses, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to costs of conversation be based on the normal capacity of the production facilities. FAS 151 was effective for fiscal years beginning after June 15, 2005. SFAS 151 has been applied for all periods presented in these combined consolidated financial statements with no effect.


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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 a majority of our net revenue in Canada. The reporting currency for our consolidated financial statements is U.S. dollars. Historically, our operations were based largely in Canada. However, since fiscal 2003, we have opened 11 stores in the United States, one store in Australia and two stores in Japan. As a result, we have been impacted by changes in exchange rates and may be impacted materially for the foreseeable future. For example, because we recognize sales in Canada in Canadian dollars, as the U.S. dollar strengthens it would have a negative impact on our Canadian operating results upon translation of those results into U.S. Dollars upon consolidation. Any hypothetical loss in net revenue could be partially or completely offset by lower cost of sales and lower selling, general and administrative expenses that are generated in Canadian dollars. A 10% appreciation in the relative value of the U.S. dollar compared to the Canadian dollar would have resulted in lost income from operations for fiscal 2006 of approximately $4.0 million. 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 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. These may take the form of forward sales contracts and option contracts. 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 which replaces our existing credit facility. 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. At January 31, 2007, we had no outstanding borrowings on our then existing revolving facility and our term facility, other than letters of credit drawn under these facilities for the purchase of merchandise. We have maintained small outstanding balances during the third and fourth quarters as we build 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, 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.


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BUSINESS
 
Overview
 
lululemon is one of the fastest growing designers and retailers of technical athletic apparel in North America. Our yoga-inspired apparel is marketed under the lululemon athletica brand name. We believe consumers associate our brand with highly innovative, technically advanced premium apparel products. Our products are designed to offer superior 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. We offer a comprehensive line of apparel and accessories including fitness pants, shorts, tops and jackets designed for athletic pursuits such as yoga, dance, running and general fitness. As of April 1, 2007, our branded apparel was principally sold through our 52 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 insights 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:
 
  •  design and develop innovative athletic apparel that combines performance with style and incorporates real-time customer feedback;
 
  •  locate our stores in street locations, lifestyle centers and malls that position each lululemon athletica store as an integral part of its community;
 
  •  create an inviting and educational store environment that encourages product trial and repeat visits; and
 
  •  market on a grassroots level in each community, including through influential fitness practitioners who embrace and create excitement around our brand.
 
We were founded in 1998 by Dennis “Chip” Wilson in Vancouver, Canada, an important center for active and outdoor culture. Noting the increasing number of women participating in sports, and specifically yoga, Mr. Wilson developed lululemon athletica to 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 customers.
 
We believe our culture and community-based business approach provide 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 $148.9 million in fiscal 2006, representing a 91.1% compound annual growth rate. During fiscal 2006 our comparable store sales increased 25% and we reported income from operations of $16.2 million, which includes a one-time $7.2 million litigation settlement charge. Over that same period, our stores open at least one year averaged sales of approximately $1,400 per square foot, which we believe is 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


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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 who also appreciate the technical rigor and premium quality of our products.
 
We believe that we are one of the leaders in the yoga apparel market and are well positioned in the broader sports apparel market. According to the 2004 Yoga in America Study, as published by the Yoga Journal on December 8, 2004, the yoga apparel market was estimated to be approximately $500 million in 2004, part of the larger market for yoga products and services estimated at approximately $2.95 billion. The yoga apparel market has been, and continues to be, supported by a growing number of participants in yoga and related activities. In 2006, SGMA International, a global business trade association for the sports products industry, estimated that participation in yoga and related activities grew approximately 18% from 2004 to 2005. In addition to this growth in the yoga apparel market, the broader sports apparel market grew 8.3% in 2006 to over $47 billion as estimated by The NPD Group Consumer Tracking Service. We believe that both yoga and broader fitness-related participation will continue to grow as a result of a sustained shift toward health and well-being on the part of women and men. 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:
 
  •  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. 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. We believe this approach allows us to further control our brand image and merchandising. 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.
 
  •  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 embody our core values and are typically experienced fitness practitioners. They 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. Each of our stores features


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  a community board with local information regarding yoga, fitness and other activities. Our educators also serve as knowledgeable references for information on fitness classes, instructors and events in the local community. We believe that these characteristics contribute to the productivity of our stores which exhibit strong operating metrics, including sales per square foot and average payback period on new store investments.
 
  •  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:
 
  •  Our feedback-based design process through which our design and product development team proactively and frequently seek input from our customers and local fitness practitioners;
 
  •  Close collaboration with our third-party suppliers to formulate innovative and technically advanced fabrics and features for our products; and
 
  •  Although we typically bring products from design to market in 8 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.
 
  •  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 partnering with local fitness practitioners and retail educators and creating in-store community boards. To create excitement and reinforce the premium image for our brand, we often initiate our grassroots marketing efforts in advance of opening our first store. 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.
 
  •  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. The passion and dedication of our employees allows us to execute on our business strategy which promotes repeat visits and strengthens our brand loyalty.
 
  •  Experienced Management Team with Proven Ability to Execute. Our founder, Mr. Wilson, leads our design team and plays a central role in corporate strategy and in promoting our distinctive corporate culture. Our Chief Executive Officer, Robert Meers, whose experience includes 15 years at Reebok International Ltd., most recently serving as the chief executive officer of the Reebok brand from 1996 to 1999, joined us in December 2005. Messrs. Wilson and Meers 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., Limited Brands, Inc., Nike, Inc. and Reebok. 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 April 1, 2007, our products were sold through 52 stores, including 37 in Canada and 12 in the United States. We expect that most of our near-term store growth will occur in the United States. We have demonstrated strong sales to date in the United States, supporting the portability of our brand and retail concept. We plan to add new stores to strengthen existing markets and selectively enter new markets in the United States and Canada. We anticipate opening between 20 and 25 stores in fiscal 2007 and between 30 and 35 additional stores in fiscal 2008 in the United States and Canada.
 
  •  Increase our Brand Awareness.  We will continue to increase brand awareness and customer loyalty through our grassroots marketing efforts and planned store expansion. In existing markets, our community coordinators organize frequent events and generate excitement around our brand to enhance our profile in the local community. We also seek to cluster our new stores within a given area when appropriate to leverage our community marketing efforts. Our ability to initiate our grassroots marketing efforts in advance of selected store openings allows us to actively develop brand awareness in new markets. We believe that increased brand awareness will result in increased comparable-store sales and sales productivity over time.
 
  •  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 bamboo, soy, and seaweed. Among our ongoing efforts, we are jointly developing encapsulation enhanced fabrics to provide advanced features such as UV protection and temperature control. In addition, we will continue to develop differentiated manufacturing techniques that provide greater support, protection, and comfort. We believe that incorporating new technologies into our products will reinforce the authenticity and appeal of our products and encourage brand loyalty.
 
  •  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:
 
  •  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.
 
  •  Expand our Product Categories.  We plan to expand our product offerings in complementary existing and new categories such as bags, undergarments, outerwear and sandals.
 
  •  Increase the Range of Athletic Activities our Products Target.  We expect customers to increasingly purchase our products for activities such as running, dance and general fitness as we educate them on the versatility of our products and expand our offering.
 
  •  Expand Beyond North America.  As of April 1, 2007, we operated two stores in Japan through a joint venture and one franchise store in Australia, which we intend to transition to a joint venture. Given the attractive demographics of and our early success in both markets, we plan to open additional stores in Japan and Australia with our joint venture partners. Over time, we intend to pursue additional joint venture opportunities in other Asian and European markets. We believe partnering in these regions reduces our risk and improves the probability of success in these markets, as we are able to leverage our partners’ local market knowledge and existing infrastructure.


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Our Stores
 
As of April 1, 2007, our retail footprint included 37 stores in Canada, 12 stores in the United States, 1 store in Australia, and 2 joint-venture controlled stores in Japan. The 49 stores in Canada and the United States include 3 franchise stores in Canada and 3 in the United States. While the significant majority of our stores are branded lululemon athletica, two of our corporate-owned stores and one franchise store in Canada are branded oqoqo and specialize in apparel made with sustainable organic or recycled fabrics. Our retail stores are located primarily on street locations, in lifestyle centers and in malls. Each store exterior is unique and prominently displays the lululemon athletica or oqoqo logo. Store windows are creatively designed by the store’s management team to reflect the unique features of the surrounding community.
 
The following store list shows the number of branded stores (including corporate-owned stores, franchise stores, and stores operated through our joint venture relationships) operated in each Canadian province, U.S. state, and internationally as of April 1, 2007.
 
                 
    Corporate-Owned
    Franchise
 
Canada
 
Stores
   
Stores
 
 
British Columbia
      10 *         2  
Ontario
    13        
Alberta
    7        
Quebec
    3        
Manitoba
    1        
Saskatchewan
          1  
                 
Total Canada
    34       3  
                 
                 
United States
               
California
    5       1  
Colorado
          1  
Illinois
    1        
Massachusetts
    1        
New York
    1        
Oregon
    1        
Washington
          1  
                 
Total United States
    9       3  
                 
                 
International
               
Japan
    2        
Australia
          1  
                 
Total International
     2        1  
                 
 
* Includes one oqoqo store which will close on May 15, 2007.
 
Distinctive Store Experience
 
We are committed to providing our customers with an inviting and educational store environment. Our store sales associates, who we refer to as educators, are coached to personally engage and connect with each guest. Our educators, who embody our core values and are often experienced fitness practitioners, receive approximately 30 hours of in-house training within the first three months of the start of their employment. They are therefore well prepared to explain the technical features of all of our products. We believe this environment encourages product trial, purchases and repeat visits.
 
We position our stores as community hubs designed to educate and enrich our customers. Each of our stores posts a community board featuring local yoga studios, athletic events and other information.


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Our educators also serve as knowledgeable references for guests seeking information on fitness classes, instructors and events in the community. Our stores display pictures of local fitness practitioners wearing our apparel while engaged in athletic activity at area landmarks. In order to make our customers feel welcome and provide a personalized experience, we refer to them on a first name basis in the changing area, allow them to use our restrooms, and provide everyone fresh filtered water.
 
Store Economics
 
We believe that our innovative retail concept and customer experience contribute to the success of our stores most of which generate strong productivity and returns. During fiscal 2006 our corporate-owned stores open at least one year, which average approximately 2,900 square feet, produced annual average sales per square foot of approximately $1,400. Generally, we have found that as each location becomes more integrated into its community and brand awareness grows, our store productivity tends to improve as measured by comparable store sales.
 
Store Expansion and Site Selection
 
From February 1, 2002 to April 1, 2007, we opened 42 corporate-owned stores in North America. We opened our first corporate-owned store in the United States in 2003 and as of April 1, 2007, there were 12 stores in the United States, including 3 franchise stores. 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 the size of Canada. We intend to open between 20 and 25 stores in fiscal 2007, and between 30 and 35 new stores in fiscal 2008 in the United States and Canada.
 
In new markets, our new store operating model assumes a target store size of 2,500 square feet that achieved sales per square foot of $750 in the first year of operation. Our new store operating model also assumes an average new store investment of approximately $825,000, which consists of approximately $500,000 of build-out costs, exclusive of landlord contributions, approximately $175,000 of pre-opening costs and approximately $150,000 of initial inventory. We target an average payback period of 18 months on our initial investment.
 
                                 
                      Total
 
                      Corporate-Owned
 
   
Corporate-Owned Stores Opened or Repurchased From Franchisees
    Stores at
 
Fiscal Year
 
Canada
   
U.S.
   
International
   
End of Period
 
 
Prior to 2002
    1                   1  
2002
    1                   2  
2003
    4       1             7  
2004
    5       2             14  
2005
    12       1             27  
2006
    7       5       2       41  
2007 YTD
    4                   45  
                                 
Total Stores as of April 1, 2007
      34 *         9           2         45  
                                 
 
* Includes one oqoqo store which will close on May 15, 2007.
 
We believe our innovative approach to entering new markets should allow us to successfully open stores in diverse areas. This often includes initiating our grassroots marketing efforts in advance of opening our first store in a new market to create excitement and reinforce the premium image of our brand.
 
We have adopted a strategic approach to selecting store locations. We generally look for areas that offer the right mix of high foot traffic and consistency with our brand position and community marketing efforts. We have a flexible approach to designing and locating our stores and strive to open stores that reflect the distinctive characteristics of each community that we enter. This approach typically favors


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street locations and lifestyle centers where we are an integral part of the community rather than mall-based locations favored by many traditional retailers. Nevertheless, we recognize that there are some markets where the mall serves as a hub for the community, and as such, we do not constrain ourselves to a formulaic approach to site selection. Our stores are typically located near retailers and fitness facilities that we believe are complementary to the lifestyle choices of our customers. Also, in an effort to leverage our ongoing community based marketing efforts and distribution infrastructure, we seek to ‘cluster’ our new stores within a given area when appropriate. We believe that this approach allows us to maximize our return on investment in each market while selecting store locations that serve their targeted communities.
 
Franchise Stores in North America
 
As of April 1, 2007 we had three franchise stores in Canada and three franchise stores in the United States. We began opening franchise stores in select markets in 2002 to expand our store network while limiting required capital expenditures. We have committed to open one additional franchise store in the United States with one of our existing franchisees. Pursuing new franchise partnerships or 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 to pursue a joint venture model to expand our global presence. We believe that partnering with companies and individuals that have significant experience and proven success in the target country is to our advantage. This model allows us to leverage our partners’ knowledge of local markets to reduce risks and improve our probability of success. In 2006, we established a joint venture in Japan with Descente Ltd, a global leader in fabric technology, called “Lululemon Japan Inc.” We own 60% of the joint venture, which currently operates two stores. Through the joint venture, we take advantage of Descente Ltd.’s experience and resources in Japan including real estate, point-of-sale systems, experienced local management and distribution operations. In return, we contribute marketing support, operational support services, training, and brand management.
 
As of April 1, 2007, we operated one store in Melbourne, Australia, through a franchise arrangement. We expect to transition this franchise to a joint venture arrangement. We intend to structure the joint venture such that that we are the majority owner.
 
In addition to these efforts, we plan to selectively create new joint venture relationships across Europe and Asia. We currently have not made arrangements or plans to enter these markets and do not intend to in the immediate term.
 
oqoqo
 
As of April 1, 2007, we operated three oqoqo branded stores in Canada, including one franchise oqoqo store. These stores focus on apparel products that integrate sustainable organic materials such as soy and bamboo. Products sold at these stores are labeled with the oqoqo trademark. Selected oqoqo products are also sold through our lululemon athletica branded stores. We plan to continue to develop and sell products that integrate sustainable organic materials. On May 15, 2007, we will close one corporate-owned oqoqo store, and we do not intend to open any additional oqoqo stores over the next few years.
 
Wholesale Channel
 
We also sell lululemon athletica products through premium yoga studios, health clubs and fitness centers. In fiscal 2006, this channel represented only 2.2% of our net revenue. We believe that these


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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.
 
Our Products
 
Our yoga-inspired apparel is marketed under the lululemon athletica brand name. We believe consumers associate our brand with highly innovative, technically advanced premium apparel products. We offer premium apparel that is optimized for performance, comfort, functionality and style. By combining performance enhancing technology with style, our brand not only has strong athletic appeal, but also attracts a growing core of consumers that desire casual wear suited to their active lifestyles. We believe that our superior quality and technically advanced products allow us to maintain premium price points and encourage repeat purchases among our customers. We believe that while we are one of the few global brands primarily designed for and catering to women, the technology, performance and functionality of our products resonate with male athletes. Therefore, we believe there is an opportunity to grow our men’s business as a percentage of our total net revenue. In fiscal 2006, sales of products designed for men represented approximately 11% of our net revenue.
 
We offer a comprehensive line of performance apparel and accessories for both women and men. Our apparel assortment, including items such as fitness pants, shorts, tops and jackets, is designed for healthy lifestyle activities such as yoga, dance, running and general fitness. According to a third-party survey commissioned by one of our investors in 2005, approximately 25% of our products were purchased specifically for yoga. The balance of purchases were for a range of athletic and casual pursuits. 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, water bottles and headbands.
 
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 and development team works closely with our suppliers to formulate fabrics that meet our performance and functional specifications such as stretch ability, capability to wick moisture and durability. We currently incorporate the following advanced fabrics in our products:
 
  •  Luon, included in more than half of our products, wicks away moisture, moves with the body and is designed to eliminate irritation;
 
  •  Silverescent incorporates silver directly into the fabric to reduce odors as a result of the antibacterial properties of the silver in the fabric; and
 
  •  Vitasea, derived from a seaweed compound, releases amino acids, minerals and vitamins directly into the skin.
 
In addition to these fabrics, we have filed trademark applications for the names Boolux and WET.DRY.WARM and obtained a trademark registration for the name Soyla for present and future use. Our design and development team continues to develop fabrics that we believe will help advance our product line and differentiate us from the competition.
 
We also offer a line of casual, organic products made from sustainable recyclable materials such as soy, bamboo and vitasea. These products are typically sold under the oqoqo brand name and feature stylish casual designs sold through lululemon athletica and oqoqo stores.


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Our products are constructed with advanced sewing techniques such as flat seaming, and ’rip-out’ 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 heart rate monitors, or clips for heart rate transmitters.
 
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.”
 
For many team members, their job is an extension of their personal philosophy and lifestyle. We provide our employees with a supportive and goal-oriented environment and encourage them to reach their full professional, health and personal potential. We believe at least three quarters of our staff have written professional, health and personal goals and we offer programs such as personal development workshops and goal coaching to assist them in realizing their objectives. All employees have access to an updated library of business, leadership and personal development books.
 
We believe our relationship with our employees, at all levels within our organization, is exceptional and a key contributor to our success. We believe the knowledge and passion of our employees allows us to execute our community-based strategy and strengthens our brand loyalty. We believe motivated and educated employees lead to satisfied customers who, in turn, lead to increased revenues and profitability.
 
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, 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.
 
We often initiate our grassroots marketing efforts in advance of opening our first store in a new market. We believe building brand awareness in new markets prior to opening a new store will continue to contribute to our ability to successfully open stores in diverse markets.
 
We believe our community-based marketing strategy allows us to successfully increase brand awareness and broaden our appeal while reinforcing our product superiority and functionality.
 
Product Design and Development
 
Our product design efforts are led by Mr. Wilson and a team of ten designers based in Vancouver, Canada. 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 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


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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.
 
We typically bring new products from design to market in approximately 8 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 retail 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. We instead choose to contract with third-party vendors for fabrics and finished goods. To ensure that we continue to provide our customers with advanced fabrics, our design and development team works closely with our suppliers to incorporate innovative fabrics that meet particular specifications into our products. These specifications include characteristics such as stretch ability, capability to wick moisture and durability. We collaborate with leading fabric suppliers to develop fabrics that we ultimately trademark for brand recognition whenever possible. To enhance our efficiency and profitability, we recently discontinued the practice of purchasing fabrics directly from suppliers and now buy finished products from third-party manufacturers. The fabric used in our products is sourced by our manufacturers from a limited number of pre-approved suppliers.
 
All of our products are manufactured by third-parties. We work with a group of approximately 30 manufacturers, ten of which produce approximately 85% of our products. During fiscal 2006, no single manufacturer produced more than 30% of our product offering. During fiscal 2006, approximately 36% of our products at cost were produced in Canada, approximately 36% in China, approximately 22% in Taiwan and the remainder in Australia, Italy and the United States. Beginning in fiscal 2007, we expect to purchase products from manufacturers in Indonesia, Israel, Peru and Vietnam. Our Canadian manufacturers typically produce more fashion-oriented products and provide us with the speed to market necessary to respond quickly to changing trends. While we plan to support future growth through manufacturers outside of Canada, our intent is to also maintain production from Canadian manufacturers. 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 to applicable law. In managing our sourcing relationships, we currently work with a leading sourcing consultant and have taken steps to bring all of our sourcing operations in-house by the end of 2008. In fiscal 2006, we hired a Director of Global Production with significant experience with third party manufacturers in Asia to lead our in-house sourcing operations.
 
Distribution Facilities
 
We centrally distribute finished products in North America from distribution facilities in Vancouver, Canada and Renton, Washington. The facility in Washington is operated by a third party. Our contract for the Renton, Washington distribution facility expired in February 2007, and our operations at the facility are on a month-to-month basis. We are currently evaluating proposals from third party operators of distribution facilities, including our current operator. We operate the distribution facility in Vancouver,


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which is leased and is approximately 50,000 square feet in size with 18 foot ceilings. In August 2007, we are scheduled to relocate to a larger distribution facility in Vancouver, which is approximately 50,000 square feet in size with 28 foot ceilings. We believe that this more modern facility will enhance the efficiency of our operations. We believe that once we have relocated, 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, via third-party delivery services, multiple times per week, providing them with a steady flow of new inventory.
 
Management Information Systems
 
We use our information systems to manage our retail and corporate operations. These management information systems provide business process support and intelligence across merchandising, retail point of sale and inventory management, and finance and accounting systems.
 
We believe that our existing systems infrastructure is sufficient to support our operations over the next couple of years. To support our growth beyond fiscal 2008, we embarked on a comprehensive strategy to replace our legacy information systems infrastructure. Our new systems will include core functions such as purchasing, merchandising, finance and accounting, inventory and order management, and warehousing and distribution. Our systems upgrade will provide us with a number of benefits, including enhanced customer service, improved operational efficiency and increased management reporting and control. Moreover, the new system will provide us with the ability to monitor store level sales, transaction and inventory information on a daily basis.
 
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. We are also differentiated by our commitment to community-based grassroots marketing which allows us to increase brand awareness and strengthen customer loyalty.
 
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 Lucy Activewear Inc., The Finish Line Inc. (including Finish Line and Paiva collection), and bebe stores, inc. (BEBE SPORT collection).
 
Our Employees
 
As of April 1, 2007, we had 1,673 employees, of which 1,403 were employed in Canada and 270 were employed in the United States. Of the 1,403 Canadian employees, 1,116 were employed in our corporate-owned stores, 68 were employed in distribution, 43 were employed in sourcing and production, and the remaining 152 performed selling, general and administrative and other functions. Of the 270 employees employed in the United States, 252 were employed in our corporate-owned stores and 18 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


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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, lululemon’s design and word mark are registered in over 50 other jurisdictions which cover over 90 countries. We own trademark registrations for names of several of our fabrics including Luon, Silverescent, Vitasea, Soyla, Boolux and WET.DRY.WARM. In addition, we own trademark registration for oqoqo in Canada and the United States.
 
We intend to continue to strategically register both domestically and internationally trademarks we use today and those we develop in the future. We also own domain names for our primary trademarks and own unregistered copyright rights in our design marks as well as in our website.
 
Properties
 
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 through 2008, and we have secured appropriate office space beyond 2008. We currently operate one distribution center located in Vancouver, BC, which we opened in 2005. We have secured a new distribution center, which will open in fiscal 2007, capable of accommodating our expansion plans through the foreseeable future. See “Distribution Facilities” elsewhere in this prospectus for further information.
 
The general location, use, approximate size and lease renewal date of our properties, none of which is owned by us, are set forth below:
 
                     
        Approximate
    Lease
 
Location
 
Use
 
Square Feet
   
Renewal Date
 
 
Vancouver, BC
  Executive and Administrative Offices     30,000       January 2009  
Vancouver, BC
  Distribution Center     50,000       January 2008  
 
As of January 31, 2007, we leased approximately 122,181 gross square feet relating to 41 corporate-owned stores. Our leases generally have initial terms of between five and ten years, and generally can be extended only in five-year increments (at increased rates) 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.
 
Legal Proceedings
 
James Jones, one of our former executive officers, filed suit against us in the Supreme Court of British Columbia, Canada. The action, captioned James Jones v. Lululemon Athletica Inc., Case No. S071780, was filed on March 14, 2007 against us. The complaint charges breach of contract, wrongful dismissal and negligent misrepresentation, and the plaintiff seeks damages in an unspecified amount, plus costs and interest. We believe this claim is without merit and are vigorously defending against it.
 
We are subject to various legal proceedings and claims, including the James Jones matter described above, which arise in the ordinary course of our business. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition, cash flows or results of operations.


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MANAGEMENT
 
Directors and Executive Officers
 
The following table sets forth information concerning our executive officers and directors as of April 1, 2007:
 
             
Name and
       
Municipality of Residence
 
Age
 
Position
 
Dennis J. Wilson
Vancouver, British Columbia
  51   Chairman of the Board of Directors and Chief Product Designer
Steven J. Collins
Boston, Massachusetts
  38   Director
RoAnn Costin
Boston, Massachusetts
  54   Director
R. Brad Martin
Memphis, Tennessee
  55   Director
Robert Meers
Pasadena, California
  63   Director and Chief Executive Officer
David M. Mussafer
Boston, Massachusetts
  43   Director
Rhoda M. Pitcher
Clyde Hill, Washington
  52   Director
Thomas G. Stemberg
Chestnut Hill, Massachusetts
  58   Director
John E. Currie
North Vancouver, British Columbia
  51   Chief Financial Officer
Mike J. Tattersfield
Columbus, Ohio
  41   Chief Operating Officer
 
Non-Executive Directors
 
Steven J. Collins has been a member of our board of directors since 2005. Mr. Collins is currently a Partner of Advent International Corporation, one of our principal stockholders. Mr. Collins joined Advent International Corporation in 1995 and has been a principal of that firm since 2000. Mr. Collins is a member of the board of directors of Kirkland’s, Inc., a specialty retailer of home décor. Mr. Collins received a B.S. from the Wharton School of the University of Pennsylvania and an M.B.A. from the Harvard Business School.
 
RoAnn Costin has been a member of our board of directors since March 2007. Ms. Costin has served as the President of Wilderness Point, a financial investment firm, since 2005. From 1992 until 2005, Ms. Costin served as the President of Reservoir Capital Management, Inc., an investment advisory firm. Ms. Costin received a B.A. in Government from Harvard University and an M.B.A. from the Stanford University Graduate School of Business.
 
R. Brad Martin has been a member of our board of directors since March 2007. Mr. Martin served as the Chief Executive Officer of Saks Incorporated, a retail department store company, from 1989 until January 2006. Mr. Martin is a member of the board of directors of Saks Incorporated, First Horizon National Corporation, a banking corporation, and Harrah’s Entertainment, Inc. and Gaylord Entertainment Company, each a hospitality and entertainment company. Mr. Martin received a B.S. in political science from the University of Memphis and an M.B.A. from Vanderbilt University.
 
David M. Mussafer has been a member of our board of directors since 2005. Mr. Mussafer is currently a Managing Director of Advent International Corporation, one of our principal stockholders, and is responsible for Advent International Corporation’s North American private equity operations.


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Mr. Mussafer joined Advent International Corporation in 1990 and has been a principal of the firm since 1993 and is a member of Advent’s executive committee and board of directors. Mr. Mussafer is a member of the board of directors of Kirkland’s, Inc., a specialty retailer of home décor and Shoes for Crews Inc, a designer and marketer of footwear. Mr. Mussafer received a B.S.M. from Tulane University and an M.B.A. from the Wharton School of the University of Pennsylvania.
 
Rhoda M. Pitcher has been a member of our board of directors since 2005. For the past ten years she has served as the founder and Chief Executive Officer of Rhoda M. Pitcher Inc., a provider of management consulting services. Ms. Pitcher received a Masters of Human Resource Development from University Associates.
 
Thomas G. Stemberg has been a member of our board of directors since 2005. Since March 2007, he has been the managing general partner of Highland Consumer Partners, a venture capital firm. From February 2005 until March 2007, Mr. Stemberg was a venture partner with Highland Capital Partners. Mr. Stemberg co-founded Staples, Inc., an office supplies retailer, serving as its Chairman from 1988 to 2005, and as its Chief Executive Officer from 1986 until 2002. Mr. Stemberg serves on the board of directors of CarMax, Inc., a retailer of used cars, The Nasdaq Stock Market, Inc., a national securities exchange and PETsMART, Inc., a retailer of pet supplies and products. Mr. Stemberg received an A.B. in Physical Science from Harvard University and an M.B.A. from the Harvard Business School.
 
Executive Officers Who Also Serve as Directors
 
Dennis J. Wilson founded our company in 1998 and has served as the Chairman of our board of directors since 1998 and currently also serves as our Chief Product Designer. Prior to serving as our Chairman and Chief Product Designer, Mr. Wilson served as our Chief Executive Officer from 1998 until 2005. In 1980, Mr. Wilson founded Westbeach Snowboard Ltd., a surf, skate and snowboard vertical retailer, and served as its Chief Executive Officer from 1980 until 1995 and as its Head of Design and Production from 1995 until 1997. Mr. Wilson received a B.A. in Economics from the University of Calgary.
 
Robert Meers has served as a member of our board of directors and as our Chief Executive Officer since 2005. Prior to joining us, Mr. Meers served since 2002 as the President and Chief Executive Officer of Syratech Corporation, a designer, manufacturer, importer and distributor of a variety of tabletop and home decoration products. In February 2005, Syratech Corporation filed a voluntary petition for protection pursuant to Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Massachusetts. From 1999 until 2002 Mr. Meers served as Chairman of BBM Holding, Inc., a specialty retailer and an importer/exporter in the food industry. Mr. Meers served as President and Chief Executive Officer of the Reebok brand from 1996 until 1999, having joined the company in 1984. Mr. Meers graduated from the University of Massachusetts at Amherst’s School of Hotel, Restaurant, and Travel Administration.
 
Executive Officers Who Do Not Serve as Directors
 
John E. Currie has served as our Chief Financial Officer since January 2007. Prior to joining us, Mr. Currie worked for Intrawest Corporation, a provider of destination resorts and leisure travel, from 1989 to 2006, including as Chief Financial Officer from 2004 to 2006 and Senior Vice President, Financing & Taxation from 1997 to 2004. Prior to joining Intrawest he held senior financial positions within the BCE Group, a telecommunications service provider, and was a specialist in international taxation with a major accounting firm. Mr. Currie is a member of the board of directors of Hathor Exploration Limited, a resource exploration company. Mr. Currie, a chartered accountant, received a Bachelor of Commerce degree from the University of British Columbia.
 
Mike J. Tattersfield joined us in November 2006 and serves as our Chief Operating Officer. From 2005 until joining us, Mr. Tattersfield served as the Vice President and Head of Store Operations for Limited Brands, an international apparel company. From 1992 until 2005, Mr. Tattersfield held various roles at Yum Restaurants International (former division of Pepsico). His roles increased in scope and level


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of responsibility from Mexico Director of Operations from 1992 until 1997, to Mexico Chief Financial Officer and Director of Development from 1997 until 1998, to Chief Executive Officer and Managing Director of Puerto Rico/USVI and Venezuela from 1998 until 2003, to lastly President of A&W Restaurants worldwide from 2003 until 2005. Mr. Tattersfield is a member of the board of directors of Peter Piper Pizza, a restaurant chain. Mr. Tattersfield received a B.S. in Accounting from Indiana University and an M.B.A. from the Harvard Business School.
 
Board Composition
 
We currently have eight directors, seven of whom were elected as a director under the board of director composition provisions of a stockholders agreement, which will terminate upon the closing of this offering, and there will be no further contractual obligations regarding the election of our directors. Under our existing stockholders agreement, shares of our capital stock held by affiliates of Advent International Corporation have the right to nominate three individuals for membership on our board of directors. Messrs. Mussafer, Collins and Meers are the current designees of affiliates of Advent International Corporation. In addition, affiliates of Mr. Wilson also have the right to nominate three individuals for membership on our board of directors. Ms. Pitcher, Mr. Martin and Mr. Wilson are the current designees of Mr. Wilson’s affiliated entities. Finally, affiliates of Highland Capital Partners that hold shares of our capital stock have the right to nominate one individual for membership on our board of directors. Mr. Stemberg is the current designee of the entities affiliated with Highland Capital Partners. See “Certain Relationships and Related Party Transactions — Stockholders Agreement.” Our stockholders agreement will terminate upon the completion of this offering, including those provisions of the stockholders agreement set forth above. See “Pre-Offering Transactions — Termination of Stockholders Agreement.”
 
Following the offering, our board of directors will be divided into three classes of directors as follows:
 
  •  the Class I directors will be Ms. Costin and Mr. Martin, whose terms will expire at the annual meeting of stockholders to be held in 2008;
 
  •  the Class II directors will be Ms. Pitcher, Mr. Collins and Mr. Meers, whose terms will expire at the annual meeting of stockholders to be held in 2009; and
 
  •  the Class III directors will be Messrs. Mussafer, Stemberg and Wilson, whose terms will expire at the annual meeting of stockholders to be held in 2010.
 
A classified board of directors may have the effect of deterring or delaying any attempt by any person or group to obtain control of us by a proxy contest since such third party would be required to have its nominees elected at two separate annual meetings of our board of directors in order to elect a majority of the members of our board of directors. See “Risk Factors — 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.”
 
Our board of directors will observe all applicable criteria for independence established by The Nasdaq Stock Market LLC and other governing laws and applicable regulations. No director will be deemed to be independent unless our board of directors determines that the director has no relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that Ms. Costin and Messrs. Collins, Martin, Mussafer and Stemberg are independent for purposes of the listing standards of The Nasdaq Stock Market LLC and pursuant to other governing laws and applicable regulations.
 
Board Committees
 
Our board of directors maintains the following three standing committees: Audit Committee; Compensation Committee and Nominating Committee.


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Audit Committee
 
Our Audit Committee oversees our corporate accounting and financial reporting process. The responsibilities of our Audit Committee, which are set forth in a written charter adopted by our board of directors and reviewed and reassessed annually by the Audit Committee, include:
 
  •  review and assess the adequacy of the Audit Committee and its charter at least annually;
 
  •  evaluate, determine the selection of, and if necessary, the replacement/rotation of, our independent public accountants;
 
  •  review our audited financial statements;
 
  •  review whether interim accounting policies and significant events or changes in accounting estimates were considered by our independent public accountants to have affected the quality of our financial reporting;
 
  •  review our financial reports and other information submitted to any governmental body or the public;
 
  •  review with management and our independent public accountants their judgments about the quality of disclosures in our financial statements;
 
  •  obtain from our independent public accountants their recommendation regarding our internal controls and review management’s report on its assessment of the design and effectiveness of our internal controls;
 
  •  review our major financial risk exposures;
 
  •  pre-approve all audit and permitted non-audit services and related fees;
 
  •  establish, review and update periodically our code of business conduct and ethics;
 
  •  establish and review policies for approving related party transactions between us and our directors, officers or employees;
 
  •  adopt procedures for receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters; and
 
  •  adopt regular and separate systems of reporting to our Audit Committee by management and our internal auditors regarding controls and operations of our business units.
 
Our Audit Committee is composed of Mr. Collins (Chair), Ms. Costin and Mr. Martin. Our board of directors has determined that Mr. Collins qualifies as an “audit committee financial expert” as that term is defined in Item 407(d) of Regulation S-K of the Securities Exchange Commission.
 
Ms. Costin and Mr. Martin have been determined to be independent by our board of directors. Mr. Collins, a principal of one of our affiliates, has been determined by our board of directors to not be independent pursuant to Rule 10A-3 under the Securities Exchange Act of 1934 and the applicable rules of The Nasdaq Stock Market LLC. Although our Audit Committee includes only two instead of at least three independent directors as required by The Nasdaq Stock Market LLC, a company listing in connection with its initial public offering is permitted to phase in its compliance with the independent committee requirements under the rules of The Nasdaq Stock Market LLC. Under those rules, our Audit Committee may continue with its current composition, with a majority of the members of Audit Committee meeting applicable independence requirements, until our first anniversary of initial Nasdaq listing. After the first anniversary of our initial listing on Nasdaq, all of our Audit Committee members must meet applicable independence requirements.


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Compensation Committee
 
Our Compensation Committee administers the compensation program for our named executive officers. Our Compensation Committee reviews and either approves, on behalf of the board of directors, or recommends to the board of directors for approval, (i) annual salaries, bonuses, and other compensation for our executive officers, and (ii) individual equity awards for our employees and executive officers. Our Compensation Committee also oversees our compensation policies and practices. Our Compensation Committee may from time to time establish a subcommittee to perform any action required to be performed by a committee of “non-employee directors” pursuant to Rule 16b-3 under the Securities Exchange Act of 1934 and “outside directors” pursuant to Rule 162(m) under the Internal Revenue Code.
 
Our Compensation Committee also performs the following functions related to executive compensation:
 
  •  Evaluates the performance of our executive officers in light of the goals and objectives of our compensation programs;
 
  •  Annually evaluates each of our executive officers’ performance;
 
  •  Reviews and approves our compensation programs;
 
  •  Reviews and recommends new executive compensation programs;
 
  •  Annually reviews the operation and efficacy of our executive compensation programs;
 
  •  Periodically reviews that executive compensation programs comport with the compensation committee’s stated compensation philosophy;
 
  •  Establishes and periodically reviews policies in the area of management perquisites;
 
  •  Reviews and recommends to the board of directors the terms of any employment agreements entered into with executive officers;
 
  •  Reviews and recommends to the board of directors the appropriate structure and amount of compensation for our directors;
 
  •  Reviews and approves material changes in our employee benefit plans;
 
  •  Establishes and periodically reviews policies for the administration of our equity compensation plans; and
 
  •  Reviews the adequacy of the Compensation Committee and its charter and recommends any proposed changes to the board of directors not less than annually.
 
In deciding upon the appropriate level of compensation for our executive officers, the Compensation Committee regularly reviews our compensation programs relative to our strategic objectives and emerging market practice and other changing business and market conditions. In addition, the Compensation Committee also takes into consideration the recommendations of our Chief Executive Officer concerning compensation actions for our other executive officers.
 
Our Compensation Committee also administers the issuance of stock options and other awards under our 2007 Equity Incentive Plan. The Compensation Committee is currently composed of Mr. Collins, Mr. Mussafer (Chair) and Mr. Stemberg, each of whom has been determined to be independent by our board of directors.
 
Nominating Committee
 
The responsibilities of our Nominating Committee include the selection of potential candidates for our board of directors. Our Nominating Committee also makes recommendations to our board of directors concerning the membership of the other board committees. Our Nominating Committee also is


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responsible for developing policies and procedures with regard to consideration of any director candidates recommended by our stockholders. Our Nominating Committee is composed of Mr. Mussafer and Mr. Stemberg (Chair).
 
Compensation Committee Interlocks and Insider Participation
 
The current members of our Compensation Committee are Messrs. Collins, Mussafer (Chair) and Stemberg. None of these individuals was at any time during fiscal 2007 an officer or employee of ours. In addition, none of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive offices serving as a member of our board of directors or Compensation Committee.
 
Director Compensation
 
The following table sets forth the amount of compensation we paid to each of our directors for fiscal 2006. The dollar amounts shown were converted to U.S. dollars from Canadian dollars using the average of the exchange rates on the last business day of each month during fiscal 2006. Applying this formula to fiscal 2006, CDN$1.00 was equal to US$0.882.
 
                                                         
                           
 
       
                            Change in
             
                            Pension Value
             
    Fees Earned
                Non-Equity
    and Nonqualified
             
    or Paid in
    Stock
    Option
    Incentive Plan
    Deferred
    All Other
       
    Cash
    Awards
    Awards
    Compensation
    Compensation
    Compensation
    Total
 
Name
 
($)
   
($)
   
($)
   
($)
   
Earnings
   
($)
   
($)
 
 
Susanne Conrad(1)
    23,318             12,690 (2)                 94,004 (3)     130,012  
Rhoda Pitcher
    23,318             12,690 (4)                 225,566 (5)     261,574  
 
(1) Ms. Conrad served as a director of ours from December 2005 until March 2007. Mr. Wilson, our Chairman and Chief Product Designer, is Ms. Conrad’s brother-in-law.
 
(2) As of January 31, 2007, Ms. Conrad had outstanding options to purchase 23,500 shares of our common stock. In connection with her resignation from our board of directors, our board of directors immediately accelerated 11,750 of her options to purchase shares of our common stock and extended the exercise period of these options until December 31, 2007.
 
(3) Represents a stock-based compensation expense recognized by us in the amount of $94,004 in connection with the sale by us to Ms. Conrad of 250 shares of series A preferred stock.
 
(4) As of January 31, 2007, Ms. Pitcher had outstanding options to purchase 23,500 shares of our common stock.
 
(5) All other compensation for Ms. Pitcher consists of the following: (a) fees and expenses paid to Ms. Pitcher for human resources consulting services provided to us in the amount of $131,562 and (b) a stock-based compensation expense recognized by us in the amount of $94,004 in connection with the sale by us to Ms. Pitcher of 250 shares of series A preferred stock.
 
Other than compensation paid to Ms. Conrad and Ms. Pitcher, we did not pay any of our other directors for service on our board of directors.
 
We intend to provide compensation to our non-employee directors for their services following the completion of the offering pursuant to the following policy:
 
  •  Each director will be paid an annual cash retainer (pro rated for partial-year service) of $30,000.
 
  •  The audit committee chair will be paid an additional $15,000 annual retainer, and the chair of the compensation committee will be paid an annual retainer of $10,000.
 
  •  In addition, each director will be paid meeting fees of (1) $1,000 per regular or special meeting for in-person attendance, (2) $500 per committee meeting, and (3) $500 per regular or special board meeting for telephone participation.


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  •  Directors will be reimbursed for reasonable expenses incurred in connection with attending meetings of the board of directors or its committees.
 
  •  Equity compensation will consist of (1) an annual grant of restricted stock awards under our 2007 Equity Incentive Plan having a fair market value at the time of grant equal to $30,000, subject to one year vesting and (2) an annual option grant under our 2007 Equity Incentive Plan having a fair market value at the time of grant equal to $80,000 subject to four year vesting at 25% per year on each anniversary of the grant date. Other than the first equity grant under the policy, such annual grants will be made at the conclusion of each annual meeting of stockholders if the director is then a member of our board of directors. Stock option grants will have a 10-year term and an exercise price equal to the fair market value on the date of grant. The first equity grants under the policy will be made on the date of this prospectus with an exercise price equal to the initial public offering price.


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