Lululemon 2014 Annual Report Download - page 40

Table of Contents
ITEM 7A. 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 . The functional currency of our foreign subsidiaries is generally the applicable local currency. Our
consolidated financial statements are presented in U.S. dollars. Therefore, the net revenues, expenses, assets and liabilities of our foreign
subsidiaries are translated from their functional currencies into U.S. dollars. Fluctuations in the value of the U.S. Dollar affect the reported
amounts of net revenue, expenses, assets and liabilities. Foreign exchange differences which arise on translation of our foreign subsidiaries’
balance sheets into U.S. dollars are recorded as a cumulative translation adjustment in accumulated other comprehensive income within
stockholders' equity.
We also have exposure to changes in foreign exchange rates associated with transactions which are undertaken by our subsidiaries in
currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases denominated in
currencies other than the functional currency of the purchasing entity. As a result, we have been impacted by changes in exchange rates and may
be impacted materially for the foreseeable future. The potential impact of currency fluctuation increases as international expansion increases.
We currently generate a significant portion of our net revenue and incur a significant portion of our expenses in Canada. The reporting
currency for our consolidated financial statements is the U.S. dollar. The strengthening of the U.S. dollar against the Canadian dollar during
fiscal 2014 has resulted in:
A 10% depreciation in the relative value of the Canadian dollar against the U.S. dollar compared to the exchange rates in effect for fiscal
2014 would have resulted in lost income from operations of approximately $2.2 million in fiscal 2014 . This assumes a consistent 10%
depreciation in the Canadian dollar against the U.S. dollar throughout the fiscal year. The timing of changes in the relative value of the Canadian
dollar combined with the seasonal nature of our business, can affect the magnitude of the impact that fluctuations in foreign exchange rates have
on our income from operations.
We have not historically hedged 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. Our revolving credit facilities provide us with available borrowings in amount up to $15.0 million in the aggregate.
Because our revolving credit facilities bear 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 February 1, 2015 , aside from letters of credit and guarantees, we had no outstanding balances
under our revolving facilities. 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 contracts, option contracts, or 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.
34
• a reduction in our net revenue upon translation of the sales made by our Canadian operations into U.S. dollars for the purposes of
consolidation;
• a reduction in our selling, general and administrative expenses incurred by our Canadian operations into U.S. dollars for the purposes of
consolidation; and
•
foreign exchange gains by our Canadian subsidiaries on U.S. dollar cash and receivables denominated in U.S. dollars.