Lululemon 2010 Annual Report Download - page 54

Table of Contents
based largely in Canada. As of January 30, 2011, we operated 44 stores in Canada. As a result, we have been
impacted by changes in exchange rates and may be impacted materially for the foreseeable future. As we recognize
net revenue from sales in Canada in Canadian dollars, and the U.S. dollar has weakened during fiscal 2010, it has had
a positive impact on our Canadian operating results upon translation of those results into U.S. dollars for the purposes
of consolidation. However, the gain in net revenue was partially offset by higher cost of sales and higher selling,
general and administrative expenses that are generated in Canadian dollars. A 10% depreciation in the relative value
of the Canadian dollar compared to the U.S. dollar would have resulted in lost income from operations of
approximately $11.3 million in fiscal 2010 and approximately $11.2 million in fiscal 2009. 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. A portion of
our net revenue is generated in Australia. A 10% depreciation in the relative value of the Australian dollar compared
to the U.S. dollar would have resulted in lost income from operations of approximately $0.1 million in fiscal 2010.
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. 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. The revolving credit facility provides us with available borrowings in an amount
up to CDN$20.0 million. 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. As of January 30,
2011, we had no outstanding borrowings under our revolving facility. We had small outstanding balances under our
revolving facility during fiscal 2010 as we built 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 under our revolving facility, 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.
49