What changed in this filing

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Item 1. Financial Statements

2020-09-08 compared with 2020-06-11 · 305 added, 145 removed, 356 unchanged (56% of the section changed)

3 unchanged sentences

Amounts in thousands, except per share amounts)

2020 February 2,

Current assets

1 unchanged sentence

Accounts receivable 48,922 40,219

Inventories 672,773 518,513

Prepaid and receivable income taxes 125,019 85,159

Other prepaid expenses and other current assets

Prepaid expenses and other current assets 120,043 70,542

1,489,755 1,807,938

Property and equipment, net 698,514 671,693

Right-of-use lease assets 725,805 689,664

Goodwill and intangible assets, net

Goodwill 386,593 24,182

Intangible assets, net 84,471 241

Deferred income tax assets 31,591 31,435

Other non-current assets 77,298 56,201

$ 3,494,027 $ 3,281,354

LIABILITIES AND STOCKHOLDERS' EQUITY

2 unchanged sentences

Accrued inventory liabilities 31,675 6,344

Other accrued liabilities 177,436 112,641

Accrued compensation and related expenses 84,102 133,688

3 unchanged sentences

Other current liabilities 17,810 12,402

763,309 620,418

Non-current lease liabilities 632,646 611,464

2 unchanged sentences

Other non-current liabilities 6,919 5,596

1,492,925 1,329,136

Commitments and contingencies

15 unchanged sentences

Accumulated other comprehensive loss ( 230,885 ) ( 224,581 )

2,001,102 1,952,218

$ 3,494,027 $ 3,281,354

See accompanying notes to the unaudited interim consolidated financial statements

lululemon athletica inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in thousands, except per share amounts)

Quarter Ended

Quarter Ended Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

Net revenue $ 902,942 $ 883,352 $ 1,554,904 $ 1,665,667

Cost of goods sold 413,441 397,556 731,001 758,151

Gross profit 489,501 485,796 823,903 907,516

Selling, general and administrative expenses 352,904 317,814 652,510 610,722

Amortization of intangible assets 724 — 724 —

Acquisition-related expenses 11,464 — 13,509 —

Income from operations 124,409 167,982 157,160 296,794

2 unchanged sentences

Income tax expense 37,264 44,842 42,557 79,430

Other comprehensive (loss) income:

Net income $ 86,801 $ 124,990 $ 115,433 $ 221,593

Other comprehensive income:

Foreign currency translation adjustment 54,300 4,514 ( 6,304 ) ( 11,209 )

Comprehensive (loss) income

Comprehensive income $ 141,101 $ 129,504 $ 109,129 $ 210,384

Basic earnings per share $ 0.67 $ 0.96 $ 0.89 $ 1.70

6 unchanged sentences

Amounts in thousands)

Quarter Ended May 3, 2020

Exchangeable Stock

Special Voting Stock

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Loss

Quarter Ended August 2, 2020

Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total

Shares Shares Par Value Shares Par Value

Balance at May 3, 2020 5,482 5,482 $ — 124,717 $ 624 $ 334,201 $ 1,786,147 $ ( 285,185 ) $ 1,835,787

Net income 86,801 86,801

Foreign currency translation adjustment 54,300 54,300

Common stock issued upon exchange of exchangeable shares ( 89 ) ( 89 ) — 89 — — —

Stock-based compensation expense 15,784 15,784

Common stock issued upon settlement of stock-based compensation 114 — 9,328 9,328

Shares withheld related to net share settlement of stock-based compensation ( 3 ) 1 ( 899 ) ( 898 )

Balance at August 2, 2020 5,393 5,393 $ — 124,917 $ 625 $ 358,414 $ 1,872,948 $ ( 230,885 ) $ 2,001,102

Quarter Ended August 4, 2019

Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total

Shares Shares Par Value Shares Par Value

Balance at May 5, 2019 7,381 7,381 $ — 122,900 $ 615 $ 317,204 $ 1,281,432 $ ( 232,531 ) $ 1,366,720

Net income 124,990 124,990

Foreign currency translation adjustment 4,514 4,514

Stock-based compensation expense 11,848 11,848

Common stock issued upon settlement of stock-based compensation 33 1 1,336 1,337

Shares withheld related to net share settlement of stock-based compensation ( 2 ) — ( 461 ) ( 461 )

Repurchase of common stock ( 10 ) (1) ( 12 ) ( 1,556 ) ( 1,569 )

Balance at August 4, 2019 7,381 7,381 $ — 122,921 $ 615 $ 329,915 $ 1,404,866 $ ( 228,017 ) $ 1,507,379

Two Quarters Ended August 2, 2020

Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total

Shares Shares Par Value Shares Par Value

Balance at February 2, 2020 6,227 6,227 $ — 124,122 $ 621 $ 355,541 $ 1,820,637 $ ( 224,581 ) $ 1,952,218

Net income 115,433 115,433

Foreign currency translation adjustment ( 6,304 ) ( 6,304 )

4 unchanged sentences

Repurchase of common stock ( 369 ) ( 2 ) ( 539 ) ( 63,122 ) ( 63,663 )

Balance at May 3, 2020

Quarter Ended May 5, 2019

Exchangeable Stock

Special Voting Stock

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Loss

Balance at August 2, 2020 5,393 5,393 $ — 124,917 $ 625 $ 358,414 $ 1,872,948 $ ( 230,885 ) $ 2,001,102

Two Quarters Ended August 4, 2019

Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total

Shares Shares Par Value Shares Par Value

Balance at February 3, 2019 9,332 9,332 $ — 121,600 $ 608 $ 315,285 $ 1,346,890 $ ( 216,808 ) $ 1,445,975

Net income 221,593 221,593

Foreign currency translation adjustment ( 11,209 ) ( 11,209 )

4 unchanged sentences

Repurchase of common stock ( 1,010 ) ( 5 ) ( 1,477 ) ( 163,617 ) ( 165,099 )

Balance at May 5, 2019

Balance at August 4, 2019 7,381 7,381 $ — 122,921 $ 615 $ 329,915 $ 1,404,866 $ ( 228,017 ) $ 1,507,379

See accompanying notes to the unaudited interim consolidated financial statements

2 unchanged sentences

Amounts in thousands)

Quarter Ended

Two Quarters Ended

August 2, 2020 August 4, 2019

Cash flows from operating activities

Adjustments to reconcile net income to net cash used in operating activities:

Net income $ 115,433 $ 221,593

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 84,176 70,422

2 unchanged sentences

Changes in operating assets and liabilities:

Inventories ( 138,194 ) ( 93,358 )

Prepaid and receivable income taxes ( 39,860 ) ( 63,187 )

Other prepaid expenses and other current and non-current assets

Prepaid expenses and other current and non-current assets ( 76,811 ) ( 45,539 )

Accounts payable 35,967 15,791

Accrued inventory liabilities 25,322 ( 7,069 )

Other accrued liabilities 53,868 3,367

Accrued compensation and related expenses ( 49,037 ) ( 7,486 )

3 unchanged sentences

Other current and non-current liabilities 3,358 4,229

Net cash used in operating activities

Net cash provided by operating activities 60,062 50,042

Cash flows from investing activities

1 unchanged sentence

Settlement of net investment hedges 10,981 5,062

Acquisition, net of cash acquired ( 452,581 ) —

Other investing activities 1,000 ( 1,267 )

12 unchanged sentences

INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL

Nature of Operations and Basis of Presentation

Recent Accounting Pronouncements

Credit Facilities

Stock-Based Compensation and Benefit Plans

Fair Value Measurement

Derivative Financial Instruments

Earnings Per Share

Supplementary Financial Information

Segmented Information and Disaggregated Net Revenue

Legal Proceedings and Other Contingencies

Note 1 Nature of Operations and Basis of Presentation

Note 2 Recent Accounting Pronouncements

Note 3 Acquisition

Note 4 Goodwill

Note 5 Intangible Assets, Net

Note 6 Credit Facilities

Note 7 Stock-Based Compensation and Benefit Plans

Note 8 Fair Value Measurement

Note 9 Derivative Financial Instruments

Note 10 Earnings Per Share

Note 11 Supplementary Financial Information

Note 12 Segmented Information and Disaggregated Net Revenue

Note 13 Legal Proceedings and Other Contingencies

lululemon athletica inc.

4 unchanged sentences

The Company primarily conducts its business through company-operated stores and direct to consumer through e-commerce.

It also generates net revenue from outlets, sales from temporary locations, sales to wholesale accounts, license and supply arrangements, and warehouse sales.

The Company operates stores in the United States, Canada, the People's Republic of China ("PRC"), Australia, the United Kingdom, Japan, New Zealand, Germany, South Korea, Singapore, France, Malaysia, Sweden, Ireland, the Netherlands, Norway, and Switzerland.

There were 489 and 491 company-operated stores in operation as of May 3, 2020 and February 2, 2020 , respectively.

It also generates net revenue from outlets, sales from temporary locations, sales to wholesale accounts, and license and supply arrangements.

The Company operates stores in the United States, Canada, the People's Republic of China ("PRC"), Australia, the United Kingdom, Japan, Germany, New Zealand, South Korea, Singapore, France, Malaysia, Sweden, Ireland, the Netherlands, Norway, and Switzerland.

There were 506 and 491 company-operated stores in operation as of August 2, 2020 and February 2, 2020, respectively.

On July 7, 2020, the Company acquired Curiouser Products Inc., dba MIRROR, ("MIRROR") which has been consolidated from the date of acquisition.

MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions.

Please refer to Note 3 for further information.

COVID-19 Pandemic

The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020.

In line with recommendations by public health officials and in accordance with governmental authority orders, the Company took actions to close the majority of its retail locations and to reduce operating hours.

In February 2020, the Company temporarily closed all of its retail locations in Mainland China.

All of these locations have since reopened.

In March 2020, the Company temporarily closed all of its retail locations in North America, Europe, and certain countries in Asia Pacific.

Its distribution centers in Columbus, Ohio and Sumner, Washington were temporarily closed for one and two weeks, respectively, during the first quarter of fiscal 2020 due to COVID-19.

Subsequent to May 3, 2020 , the Company began reopening stores in certain markets in accordance with local government and public health authority guidelines.

These stores are operating with precautionary measures in place such as reduced operating hours and maximum occupancy levels.

As of June 10, 2020 , 295 of its company-operated stores were open.

As of June 10, 2020 , all of its distribution centers were open.

In line with recommendations by public health officials and in accordance with governmental authority orders, the Company took actions to temporarily close the majority of its retail locations and to reduce operating hours.

In February 2020, the Company temporarily closed all of its retail locations in Mainland China, and in March 2020, the Company temporarily closed all of its retail locations in North America, Europe, and certain countries in Asia Pacific.

The stores in Mainland China reopened during the first quarter of fiscal 2020, and stores in other markets began reopening in accordance with local government and public health authority guidelines during the second quarter of fiscal 2020.

The Company's stores are operating with restrictive measures in place such as reduced operating hours and limited occupancy levels.

As of August 2, 2020, 492 of its company-operated stores were open.

The Company's distribution centers in Columbus, Ohio and Sumner, Washington were temporarily closed for one and two weeks, respectively, during the first quarter of fiscal 2020 due to COVID-19.

In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses.

The most significant relief measures which the Company qualifies for are the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in the United States, and the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada.

During the first quarter of fiscal 2020 , the Company recognized payroll subsidies totaling $ 14.3 million under these wage subsidy programs and similar plans in other jurisdictions.

During the first two quarters of fiscal 2020, the Company recognized payroll subsidies totaling $ 35.5 million under these wage subsidy programs and similar plans in other jurisdictions.

These subsidies were recorded as a reduction in the associated wage costs which the Company incurred, and were recognized in selling, general and administrative expenses.

The Company also qualifies for and has deferred certain corporate income tax payments and employer payroll tax payments.

The most significant is the deferral of $ 56.8 million of Canadian corporate income tax payments which would otherwise have been paid during the first quarter of fiscal 2020 to the third quarter of fiscal 2020.

The most significant is the deferral of $ 127.5 million of Canadian corporate income tax payments which would otherwise have been paid during the first and second quarters of fiscal 2020 to the third quarter of fiscal 2020.

The Financial Accounting Standards Board ("FASB") staff issued guidance in April 2020 in relation to accounting for lease concessions made in connection with the effects of COVID-19.

1 unchanged sentence

The Company is actively negotiating commercially reasonable lease concessions.

No significant lease concessions have yet been confirmed.

The temporary store closures as a result of COVID-19 and associated reduction in operating income during the first quarter of fiscal 2020 are considered to be an indicator of impairment and the Company performed an assessment of recoverability for the long-lived assets and right-of-use assets associated with its closed retail locations.

The Company recognized an insignificant impairment charge as a result of this analysis.

Inventory is valued at the lower of cost and net realizable value.

The Company periodically reviews its inventories and makes provisions as necessary to appropriately value goods that are obsolete, have quality issues, or are damaged.

The amount of the provision is equal to the difference between the cost of the inventory and its net realizable value based upon assumptions about product quality, damages, future demand, selling prices, and market conditions.

The Company did not recognize any significant additional inventory provisions in the first quarter of fiscal 2020 as a result of this analysis.

Revenue is presented net of an allowance for expected returns, which is estimated based on historic return rates, trends, and future expectations.

In light of the store closures, the Company has extended its return policy and the increase in the sales return allowances reflects an anticipated delay in returns as a result of retail location closures.

The COVID-19 pandemic has materially impacted the Company's statement of operations.

The extent to which COVID-19 continues to impacts the Company's results and financial position will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.

No significant lease concessions were recognized in the first two quarters of fiscal 2020.

Temporary store closures as a result of COVID-19 and associated reduction in operating income during the first two quarters of fiscal 2020 are considered to be an indicator of impairment and the Company performed an assessment of recoverability for the long-lived assets and right-of-use assets associated with closed retail locations.

In the first quarter of fiscal 2020, the Company recognized an insignificant impairment charge as a result of this analysis.

Revenue is presented net of an allowance for expected returns, which is estimated based on historic return rates, trends, considering shifts towards increased online shopping by guests, and future expectations.

In light of the store closures, the

Company has extended its return policy.

The increase in the sales return allowance reflects the higher proportion of direct to consumer net revenue and anticipated delays in returns as a result of reduced capacity at retail location and closures.

The COVID-19 pandemic has materially impacted the Company's operations.

The extent to which COVID-19 continues to impact the Company's operations, and in turn, its operating results and financial position will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.

Continued proliferation of the virus, or resurgence, may result in further or prolonged closures of its retail locations and distribution centers, reduce operating hours, interrupt the Company's supply chain, cause changes in guest behavior, and reduce discretionary spending.

1 unchanged sentence

Basis of presentation

The unaudited interim consolidated financial statements as of May 3, 2020 and for the quarters ended May 3, 2020 and May 5, 2019 are presented in United States dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC").

The unaudited interim consolidated financial statements as of August 2, 2020 and for the quarters and two quarters ended August 2, 2020 and August 4, 2019 are presented in United States dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC").

The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements.

2 unchanged sentences

These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal 2019 Annual Report on Form 10-K.

Except as disclosed in Note 2 pertaining to the adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's fiscal 2019 Annual Report on Form 10-K.

Changes in the significant accounting policies of the Company compared to those described in the Company's fiscal 2019 Annual Report on Form 10-K as a result of the acquisition of MIRROR are described below, and Note 2 sets out the impact of recent accounting pronouncements.

The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year.

4 unchanged sentences

Certain comparative figures have been reclassified to conform to the financial presentation adopted for the current year.

Accounting policies related to the acquisition of MIRROR

Business combinations

The purchase price of an acquisition is measured as the aggregate of the fair value of the consideration transferred including the acquisition-date fair value of the Company's previously held equity interests.

The purchase price is allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess recorded as goodwill.

These fair value determinations require judgment and may involve the use of significant estimates and assumptions.

The purchase price allocation may be provisional during a measurement period of up to one year to provide reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed.

Any such measurement period adjustments are recognized in the period in which the adjustment amount is determined.

Transaction costs associated with the acquisition are expensed as incurred.

Goodwill and intangible assets

Acquired finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, and are reviewed for impairment when events or circumstances indicate that the asset group to which the intangible assets belong might be impaired.

The Company revises the estimated remaining useful life of these assets when events or changes in circumstances warrant a revision.

If the Company revises the useful life, the unamortized balance is amortized over the remaining useful life on a prospective basis.

Goodwill represents the excess of the aggregate of the consideration transferred over the net assets acquired and liabilities assumed and is tested annually for impairment, or more frequently if there are indicators of impairment.

Revenue recognition and cost of goods sold

MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions.

Certain in-home fitness contracts contain multiple performance obligations, including hardware and a subscription service commitment.

For customer contracts that contain multiple performance obligations the Company accounts for individual performance obligations if they are distinct.

The transaction price is allocated to each performance obligation based on its standalone selling price.

The cost of digital content subscription services, including the costs of content creation, studio overhead, and related production departments is recorded in costs of goods sold.

RECENT ACCOUNTING PRONOUNCEMENTS

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Facilitation of the Effects of Reference Rate Reform on Financial Reporting" .

This update provides optional expedients and exceptions to the current

guidance on contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

This update provides optional expedients and exceptions to the current guidance on contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments in this update apply only to contracts and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform.

1 unchanged sentence

The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements but does not believe it will have a material impact.

On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes.

The results of operations, financial position, and cash flows of MIRROR have been included in the Company's consolidated financial statements since the date of acquisition.

The following table summarizes the fair value of the consideration transferred at the date of acquisition, as well as the calculation of goodwill based on the excess of consideration over the provisional fair value of net assets acquired.

As part of the transaction, the Company assumed $ 30.1 million of MIRROR's outstanding debt.

This included $ 15.1 million of external debt that was settled as part of the transaction and $ 15.0 million of debt previously owed by MIRROR to the Company, which

represents the effective settlement of a preexisting relationship.

The debt was determined to be at market terms and was recognized as a component of the consideration transferred, and no gain or loss was recorded on settlement.

(in thousands)

Fair value of consideration transferred:

Cash paid to shareholders $ 428,261

Employee options attributed to pre-combination vesting 4,569

Acquired debt settled on acquisition 30,122

Fair value of existing lululemon investment 1,782

Less cash and cash equivalents acquired ( 12,153 )

Fair value of consideration transferred, net of cash and cash equivalents acquired $ 452,581

Less net assets acquired:

Assets acquired:

Inventories $ 16,734

Prepaid expenses and other current assets 3,492

Intangible assets 85,000

Other non-current assets 5,648

Liabilities assumed:

Current liabilities $ ( 13,465 )

Current and non-current lease liabilities ( 3,246 )

Net deferred income tax liability ( 4,074 )

Net assets acquired $ 90,089

Goodwill $ 362,492

The purchase price allocation remains provisional as the Company is still obtaining all information necessary to finalize the fair value of acquired intangibles, deferred taxes, certain contingencies, and resulting amount of goodwill as of the date of acquisition.

Goodwill relates to benefits expected as a result of the acquisition to MIRROR's business and has been allocated to the MIRROR reporting unit within the Company's other channels.

None of the goodwill is expected to be deductible for income tax purposes.

The Company assigned a fair value to and estimated useful lives for the intangible assets acquired as part of the MIRROR business combination.

The fair value of the separately identifiable intangible assets, and their estimated useful lives as of the acquisition date were as follows:

Estimated Fair Value Estimated Useful Life

(In thousands)

Intangible assets:

Brand $ 26,500 20.0 years

Customer relationships 28,000 10.0 years

Technology 25,500 7.5 years

Content 5,000 5.0 years

Accounting for business combinations requires significant estimates and assumptions to derive the fair value of acquired assets and liabilities, and in the case of MIRROR, this is with specific reference to acquired intangible assets.

The fair value of intangible assets was based upon widely-accepted valuation techniques, including discounted cash flows and relief from royalty and replacement cost methods, depending on the nature of the assets acquired or liabilities assumed.

Inherent in each valuation technique are critical assumptions, including future revenue growth rates, gross margin, royalty rates, discount rates, and terminal value assumptions.

The recognition of deferred tax assets in relation to the historic net operating losses of MIRROR relied on assumptions and estimates of the future profitability of the Company's US operations.

The Company has not disclosed pro forma information of the combined business as the transaction is not material to revenue or net earnings.

Acquisition-related expenses

In connection with the acquisition, the Company recognized certain acquisition-related expenses which are expensed as incurred.

These expenses are recognized within acquisition-related expenses in the consolidated statements of operations include the following amounts:

• transaction and integration costs, including fees for advisory and professional services incurred as part of the acquisition and integration costs subsequent to the acquisition;

• acquisition-related compensation, including the partial acceleration of vesting of certain stock options, and amounts due to selling shareholders that are contingent upon continuing employment;

• gain recognized on the Company's existing investment in the acquiree as of the acquisition date.

The following table summarizes the acquisition-related expenses recognized during fiscal 2020:

Quarter Ended

August 2, 2020 Two Quarters Ended

August 2, 2020

(in thousands)

Acquisition-related expenses:

Transaction and integration costs $ 7,201 $ 9,246

Gain on existing investment ( 782 ) ( 782 )

Acquisition-related compensation 5,045 5,045

$ 11,464 $ 13,509

Income tax effects of acquisition-related expenses $ ( 1,967 ) $ ( 1,967 )

In the first two quarters of fiscal 2020, the Company recognized an expense of $ 2.9 million for the partial acceleration of vesting of certain stock options held by MIRROR employees, and recognized $ 2.1 million related to deferred consideration.

The Company will recognize a total expense of $ 57.1 million for deferred consideration which is due to certain continuing MIRROR employees, subject to the continued employment of those individuals through various vesting dates up to three years from the acquisition date.

This acquisition-related compensation is expensed over the vesting periods as service is provided, and consists of cash payments, which are included within accrued compensation and related expenses until payments are made, and stock-based compensation awards that have been granted under the Company's 2014 Equity Incentive Plan to replace certain unvested options as of the acquisition date.

The Company's goodwill is assigned to its company-operated stores and other segments.

The changes in the carrying amounts of goodwill were as follows:

(In thousands)

Balance as of February 2, 2020 $ 24,182

MIRROR acquisition 362,492

Effect of foreign currency translation ( 81 )

Balance as of August 2, 2020 $ 386,593

INTANGIBLE ASSETS, NET

The carrying value of intangible assets, and their estimated remaining useful lives as of August 2, 2020 were as follows:

2020 February 2,

2020 Remaining Useful Life

(In thousands)

Intangible assets, net:

Brand $ 26,390 $ — 19.9 years

Customer relationships 27,758 — 9.9 years

Technology 25,211 — 7.4 years

Content 4,917 — 4.9 years

Other 195 241 2.2 years

$ 84,471 $ 241

CREDIT FACILITIES

5 unchanged sentences

The Company is required to follow certain covenants.

As of May 3, 2020 , the Company was in compliance with these covenants.

The Company had no borrowings outstanding under this credit facility as of May 3, 2020 and February 2, 2020 .

As of May 3, 2020 , the Company had letters of credit of $ 1.8 million outstanding.

As of August 2, 2020, the Company was in compliance with these covenants.

The Company had no borrowings outstanding under this credit facility as of August 2, 2020 and February 2, 2020.

As of August 2, 2020, the Company had letters of credit of $ 2.3 million outstanding.

Mainland China revolving credit facility

6 unchanged sentences

The Company is required to follow certain covenants.

As of May 3, 2020 , the Company was in compliance with these covenants.

As of May 3, 2020 , there were immaterial borrowings outstanding under this credit facility.

As of August 2, 2020, the Company was in compliance with these covenants.

As of August 2, 2020, there were no borrowings outstanding under this credit facility.

364-Day revolving credit facility

On June 29, 2020, the Company entered into a 364 -day credit agreement providing for a $ 300.0 million committed and unsecured revolving credit facility.

The credit agreement matures on June 28, 2021.

Bank of America, N.A., is administrative agent and swing line lender.

Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs).

Borrowings made under the credit facility bear interest at a rate per annum equal to, at the Company's option, either (1) a rate based on the rates applicable for deposits on the interbank market for U.S.

Dollars or the applicable currency in which the borrowings are made (“LIBOR”) or (2) an alternate base rate, plus, in each case, an applicable margin.

The applicable margin is determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax depreciation, amortization, and rent (“EBITDAR”) and ranges between 1.50 %- 2.25 % for LIBOR loans and 0.50 %- 1.25 % for alternate base rate or Canadian prime rate loans.

Additionally, a commitment fee of between 0.25 %- 0.55 %, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility.

The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of the Company's subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.

The Company is also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50 :1.00 and the Company is not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be less than 2.00 :1.00.

The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control).

If an event of default occurs, the credit agreement may be terminated, and the maturity of any outstanding amounts may be accelerated.

As of August 2, 2020, the Company was in compliance with the covenants.

As of August 2, 2020, there were no borrowings outstanding under this credit facility.

STOCK-BASED COMPENSATION AND BENEFIT PLANS

1 unchanged sentence

The Company's eligible employees participate in various stock-based compensation plans, which are provided by the Company directly.

Stock-based compensation expense charged to income for the plans was $ 6.6 million and $ 11.0 million for the quarters ended May 3, 2020 and May 5, 2019 , respectively.

Total unrecognized compensation cost for all stock-based compensation plans was $ 89.9 million at May 3, 2020 , which is expected to be recognized over a weighted-average period of 2.4 years .

A summary of the balances of the Company's stock-based compensation plans as of May 3, 2020 , and changes during the first quarter then ended, is presented below:

Stock Options

Performance-Based Restricted Stock Units

Restricted Shares

Restricted Stock Units

Stock-based compensation expense charged to income for the plans was $ 24.9 million and $ 23.5 million for the two quarters ended August 2, 2020 and August 4, 2019, respectively.

Total unrecognized compensation cost for all stock-based compensation plans was $ 95.5 million at August 2, 2020, which is expected to be recognized over a weighted-average period of 2.2 years.

A summary of the balances of the Company's stock-based compensation plans as of August 2, 2020, and changes during the first two quarters then ended, is presented below:

Stock Options Performance-Based Restricted Stock Units Restricted Shares Restricted Stock Units Restricted Stock Units

(Liability Accounting)

Weighted-Average Exercise Price

Weighted-Average Grant Date Fair Value

Weighted-Average Fair Value

Number Weighted-Average Exercise Price Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value Number Weighted-Average Fair Value

(In thousands, except per share amounts)

Balance at February 2, 2020 776 $ 113.41 238 $ 103.52 7 $ 175.82 333 $ 108.44 29 $ 239.39

Granted 233 177.71 136 115.73 4 296.36 119 197.45 — —

Exercised/released 145 85.80 171 63.03 7 175.82 165 86.93 — —

Forfeited/expired 26 158.45 7 158.76 — — 9 156.80 — —

Balance at May 3, 2020

Exercisable at May 3, 2020

Balance at August 2, 2020 838 $ 134.68 196 $ 145.13 4 $ 296.36 278 $ 157.64 29 $ 325.59

Exercisable at August 2, 2020 175 $ 100.92

The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model.

4 unchanged sentences

Treasury yield curve for the period corresponding with the expected term of the options.

The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first quarter of fiscal 2020 :

Quarter Ended

Expected term

The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first two quarters of fiscal 2020:

Two Quarters Ended

August 2, 2020

Expected term 3.61 years

Expected volatility 40.03 %

12 unchanged sentences

All shares purchased under the ESPP are purchased in the open market.

During the quarter ended May 3, 2020 , there were 22.1 thousand shares purchased.

During the quarter ended August 2, 2020, there were 14.9 thousand shares purchased.

Defined contribution pension plans

3 unchanged sentences

The Company matches 50 % to 75 % of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period.

The Company's net expense for the defined contribution plans was $ 2.3 million and $ 2.3 million in the first quarter of fiscal 2020 and fiscal 2019 , respectively.

The Company's net expense for the defined contribution plans was $ 4.5 million and $ 4.3 million in the first two quarters of fiscal 2020 and fiscal 2019, respectively.

FAIR VALUE MEASUREMENT

6 unchanged sentences

The fair value measurement is categorized in its entirety by reference to its lowest level of significant input.

As of May 3, 2020 and February 2, 2020 , the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:

Balance Sheet Classification

As of August 2, 2020 and February 2, 2020, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:

August 2, 2020 Level 1 Level 2 Level 3 Balance Sheet Classification

(In thousands)

Money market funds

Cash and cash equivalents

Term deposits

Cash and cash equivalents

Forward currency contract assets

Other prepaid expenses and other current assets

Forward currency contract liabilities

Other current liabilities

February 2, 2020

Balance Sheet Classification

Money market funds $ 179,151 $ 179,151 $ — $ — Cash and cash equivalents

Term deposits 70,136 — 70,136 — Cash and cash equivalents

Forward currency contract assets 6,513 — 6,513 — Prepaid expenses and other current assets

Forward currency contract liabilities 6,559 — 6,559 — Other current liabilities

February 2, 2020 Level 1 Level 2 Level 3 Balance Sheet Classification

(In thousands)

Money market funds

Cash and cash equivalents

Term deposits

Cash and cash equivalents

Forward currency contract assets

Other prepaid expenses and other current assets

Forward currency contract liabilities

Other current liabilities

Money market funds $ 610,800 $ 610,800 $ — $ — Cash and cash equivalents

Term deposits 203,360 — 203,360 — Cash and cash equivalents

Forward currency contract assets 1,735 — 1,735 — Prepaid expenses and other current assets

Forward currency contract liabilities 1,920 — 1,920 — Other current liabilities

The Company records accounts receivable, accounts payable, and accrued liabilities at cost.

20 unchanged sentences

Hedge effectiveness is measured using a method based on changes in forward exchange rates.

The Company recorded no ineffectiveness from net investment hedges during the first quarter of fiscal 2020 .

The Company recorded no ineffectiveness from net investment hedges during the first two quarters of fiscal 2020.

The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.

4 unchanged sentences

The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.

During the first quarter of fiscal 2020 , the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on U.S.

During the first two quarters of fiscal 2020, the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on U.S.

dollar denominated monetary assets and liabilities.

2 unchanged sentences

Quantitative disclosures about derivative financial instruments

The Company presents its derivative assets and derivative liabilities at their gross fair values within other prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets.

The Company presents its derivative assets and derivative liabilities at their gross fair values within prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets.

However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions.

As of May 3, 2020 , there were derivative assets of $ 23.5 million and derivative liabilities of $ 23.8 million subject to enforceable netting arrangements.

As of August 2, 2020, there were derivative assets of $ 6.5 million and derivative liabilities of $ 6.6 million subject to enforceable netting arrangements.

The notional amounts and fair values of forward currency contracts were as follows:

February 2, 2020

Gross Notional

August 2, 2020 February 2, 2020

Gross Notional Assets Liabilities Gross Notional Assets Liabilities

(In thousands)

5 unchanged sentences

Forward currency contracts $ 6,513 $ 6,559 $ 1,735 $ 1,920

The forward currency contracts designated as net investment hedges outstanding as of May 3, 2020 mature on different dates between May 2020 and October 2020.

The forward currency contracts not designated in a hedging relationship outstanding as of May 3, 2020 mature on different dates between May 2020 and October 2020.

The forward currency contracts designated as net investment hedges outstanding as of August 2, 2020 mature on different dates between August 2020 and February 2021.

The forward currency contracts not designated in a hedging relationship outstanding as of August 2, 2020 mature on different dates between August 2020 and January 2021.

The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows:

Quarter Ended

Quarter Ended Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands)

3 unchanged sentences

The pre-tax net foreign exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows:

Quarter Ended

Quarter Ended Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands)

Gains (losses) recognized in selling, general and administrative expenses:

Foreign exchange gains

Foreign exchange gains (losses) $ ( 23,867 ) $ ( 4,452 ) $ 3,874 $ 1,245

Derivatives not designated in a hedging relationship 21,574 5,121 ( 5,946 ) ( 1,510 )

7 unchanged sentences

The details of the computation of basic and diluted earnings per share are as follows:

Quarter Ended

Quarter Ended Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands, except per share amounts)

Net income $ 86,801 $ 124,990 $ 115,433 $ 221,593

Basic weighted-average number of shares outstanding 130,245 130,285 130,248 130,489

6 unchanged sentences

All classes of stock have, in effect, the same rights and share equally in undistributed net income.

For the quarters ended May 3, 2020 and May 5, 2019 , 97.5 thousand and 75.7 thousand stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.

For the two quarters ended August 2, 2020 and August 4, 2019, 58.2 thousand and 75.1 thousand stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.

On January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $ 500.0 million of the Company's common shares on the open market or in privately negotiated transactions.

2 unchanged sentences

As of March 31, 2020, the Company temporarily paused its share repurchase program.

As of May 3, 2020 , the remaining aggregate value of shares available to be repurchased under this program was $ 263.6 million .

During the quarters ended May 3, 2020 and May 5, 2019 , 0.4 million and 1.0 million shares, respectively, were repurchased under the program at a total cost of $ 63.7 million and $ 163.5 million , respectively.

Subsequent to May 3, 2020 , and up to June 5, 2020 , no shares were repurchased.

As of August 2, 2020, the remaining aggregate value of shares available to be repurchased under this program was $ 263.6 million.

During the two quarters ended August 2, 2020 and August 4, 2019, 0.4 million and 1.0 million shares, respectively, were repurchased under the program at a total cost of $ 63.7 million and $ 165.1 million, respectively.

Subsequent to August 2, 2020, and up to September 1, 2020, no shares were repurchased.

SUPPLEMENTARY FINANCIAL INFORMATION

A summary of certain consolidated balance sheet accounts is as follows:

2020 February 2,

(In thousands)

1 unchanged sentence

Provision to reduce inventories to net realizable value ( 27,261 ) ( 22,067 )

$ 672,773 $ 518,513

2020 February 2,

(In thousands)

Other prepaid expenses and other current assets:

Other prepaid expenses

Prepaid expenses and other current assets:

Prepaid expenses $ 70,753 $ 64,568

Forward currency contract assets 6,513 1,735

1 unchanged sentence

Other current assets 10,077 4,239

$ 120,043 $ 70,542

Property and equipment, net:

Land $ 70,843 $ 71,829

Buildings 29,910 30,187

Leasehold improvements 535,033 489,202

6 unchanged sentences

Accumulated depreciation ( 592,861 ) ( 521,676 )

$ 698,514 $ 671,693

Other non-current assets:

1 unchanged sentence

Security deposits 21,858 19,901

Other current liabilities:

Other 9,441 11,652

$ 77,298 $ 56,201

Other accrued liabilities

Accrued duty, freight, and other operating expenses $ 93,658 $ 59,403

Sales return allowances 30,093 12,897

Deferred revenue

Forward currency contract liabilities

Accrued capital expenditures

Sales tax collected 19,301 17,370

Accrued capital expenditures 13,624 5,457

Forward currency contract liabilities 6,559 1,920

Accrued rent 6,117 8,356

Other 8,084 7,238

$ 177,436 $ 112,641

SEGMENTED INFORMATION AND DISAGGREGATED NET REVENUE

3 unchanged sentences

Direct to consumer represents sales from the Company's e-commerce websites and mobile apps.

Outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, and warehouse sale net revenue have been combined into other.

Other net revenue includes revenue from outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, and the sale of in-home fitness equipment and associated content subscriptions.

During the first quarter of fiscal 2020, the Company reviewed its segment and general corporate expenses and determined certain costs that are more appropriately classified in different categories.

Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.

Quarter Ended

Quarter Ended Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands)

1 unchanged sentence

Direct to consumer 554,302 217,636 906,341 427,480

Other 61,439 81,960 101,392 148,009

$ 902,942 $ 883,352 $ 1,554,904 $ 1,665,667

Segmented income (loss) from operations:

1 unchanged sentence

Direct to consumer 237,595 86,618 394,542 165,955

Other 2,587 16,418 2,318 29,041

234,889 257,352 361,413 470,223

General corporate expense 98,292 89,370 190,020 173,429

Amortization of intangible assets 724 — 724 —

Acquisition-related expenses 11,464 — 13,509 —

Income from operations 124,409 167,982 157,160 296,794

5 unchanged sentences

Corporate and other 15,525 17,720 31,509 41,218

$ 52,622 $ 67,330 $ 104,723 $ 135,764

Depreciation and amortization:

2 unchanged sentences

Corporate and other 15,753 10,917 30,973 20,218

$ 40,644 $ 37,599 $ 84,176 $ 70,422

The following table disaggregates the Company's net revenue by geographic area.

Quarter Ended

Quarter Ended Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands)

United States $ 595,918 $ 621,843 $ 1,055,270 $ 1,175,490

Canada 147,658 145,605 247,155 269,250

Outside of North America 159,366 115,904 252,479 220,927

$ 902,942 $ 883,352 $ 1,554,904 $ 1,665,667

The following table disaggregates the Company's net revenue by category.

Quarter Ended

Quarter Ended Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands)

2 unchanged sentences

Other categories 62,613 54,428 105,133 103,541

$ 902,942 $ 883,352 $ 1,554,904 $ 1,665,667

LEGAL PROCEEDINGS AND OTHER CONTINGENCIES

8 unchanged sentences

The Company intends to vigorously defend this matter.

On November 21, 2018, plaintiff David Shabbouei filed in the Delaware Court of Chancery a derivative lawsuit on behalf of the Company against certain of the Company's current and former directors and officers, captioned David Shabbouei v.

Laurent Potdevin, et al., 2018-0847-JRS.

Plaintiff claims that the defendants breached their fiduciary duties to the Company by allegedly failing to address alleged sexual harassment, gender discrimination, and related conduct at the Company.

Plaintiff also claims that the defendants breached their fiduciary duties to the Company and wasted corporate assets with respect to the separation agreement entered into by the Company and Laurent Potdevin in connection with his departure from the Company in February 2018.

Plaintiff also further brings an unjust enrichment claim against Mr.

Potdevin with respect to the separation agreement.

Plaintiff seeks unspecified money damages for the Company for the defendants' alleged breaches of fiduciary duty, waste and unjust enrichment, disgorgement of all profits, benefits and other compensation Mr.

Potdevin received as a result of defendants' alleged conduct for the Company, an order directing the Company to implement corporate governance and internal procedures, and an award of plaintiff's attorneys' fees, costs and expenses.

On April 2, 2020, the Court granted the motion of the defendants and the Company to dismiss the lawsuit with prejudice.

On March 23, 2020, a former retail employee filed a representative action in the Los Angeles Superior Court alleging violation of the Private Attorney General Act ("PAGA") based on purported California labor code violations including failure to pay wages, failure to pay overtime, failure to provide accurate itemized statements, and failure to provide meal and rest periods.

1 unchanged sentence

The Company intends to vigorously defend this matter.

On April 9, 2020, Aliign Activation Wear, LLC filed a lawsuit in the United States District Court for the Central District of California alleging federal trademark infringement, false designation of original and unfair competition.

The plaintiff is seeking injunctive relief, monetary damages and declaratory relief.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements