What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-12-10 compared with 2020-09-08 · 222 added, 210 removed, 270 unchanged (62% of the section changed)

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All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which 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, the impact of the COVID-19 pandemic on our business and results of operations, expectations related to our acquisition of MIRROR, 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," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.

In many cases, you can identify forward-looking statements by terms

such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this Form 10-Q and any documents incorporated herein by reference 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.

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MIRROR is a leading in-home fitness company with an interactive workout platform that features live and on-demand classes.

The acquisition of MIRROR will bolster our digital sweatlife offerings and bring immersive and personalized in-home sweat, and mindfulness solutions to new and existing lululemon guests.

The acquisition of MIRROR bolsters our digital sweatlife offerings and brings immersive and personalized in-home sweat and mindfulness content to new and existing lululemon guests.

COVID-19 Pandemic

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The spread of COVID-19 has caused public health officials to impose restrictions and to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers.

We have taken actions to temporarily close retail locations and to reduce operating hours, and we continue to monitor the situation and work closely with local authorities to prioritize the safety of our people and guests.

We continue to monitor the situation and work closely with local authorities to prioritize the safety of our people and guests.

In February 2020, we temporarily closed all of our retail locations in Mainland China.

In March 2020, we temporarily closed all of our 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.

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

Our 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.

As of August 2, 2020, all of our distribution centers were open.

Our retail locations and distribution centers are operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels.

Subsequent to November 1, 2020, while almost all of our retail locations have remained

open, we have experienced some temporary closures and are currently operating with tighter capacity restrictions in certain markets.

Our open retail locations and distribution centers are operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels.

This pandemic has also impacted the operations of our third party logistics providers and our manufacturing and supply partners, including through the closure or reduced capacity of facilities, and operational changes to accommodate physical distancing.

As the pandemic continues, we may face further disruptions or increased operational and logistics costs throughout our supply chain.

There is significant uncertainty regarding the extent and duration of the impact that the COVID-19 pandemic will have on our store operations, the demand for our products, and on our supply chain.

It had a material adverse impact on our results of operations for the first two quarters of fiscal 2020, and we expect it to continue to impact our results of operations, financial position, and liquidity.

There is significant uncertainty regarding the extent and duration of the impact that the COVID-19 pandemic will have on our operations, the demand for our products, and on our supply chain.

It had a material adverse impact on our results of operations for the first three quarters of fiscal 2020, and we expect it to continue to impact our results of operations and financial position.

The extent to which COVID-19 impacts our results 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.

We remain confident in the long-term growth opportunities and our Power of Three growth plan and believe that we have sufficient cash and cash equivalents, and available capacity under our revolving credit facilities, to meet our liquidity needs.

As of August 2, 2020, we had cash and cash equivalents of $523.0 million and the capacity under our committed revolving credit facilities was $697.7 million.

As of November 1, 2020, we had cash and cash equivalents of $481.6 million and the capacity under our committed revolving credit facilities was $697.3 million.

Financial Highlights

For the second quarter of fiscal 2020, compared to the second quarter of fiscal 2019:

For the third quarter of fiscal 2020, compared to the third quarter of fiscal 2019:

• Net revenue increased 22% to $1,117.4 million.

On a constant dollar basis, net revenue increased 21%.

• Company-operated stores net revenue decreased 51% to $287.2 million.

• Direct to consumer net revenue increased 155% to $554.3 million, or increased 157% on a constant dollar basis.

We held an online warehouse sale during the second quarter of fiscal 2020 which generated net revenue of $43.3 million.

• Total comparable sales, which includes comparable store sales and direct to consumer, increased 19%.

On a constant dollar basis, total comparable sales increased 18%.

– Comparable store sales decreased 17%, or decreased 18% on a constant dollar basis.

– Direct to consumer net revenue increased 94%, or increased 93% on a constant dollar basis.

• Gross profit increased 24% to $627.4 million.

• Gross margin decreased 80 basis points to 54.2%.

• Gross margin increased 100 basis points to 56.1%.

• Acquisition-related expenses of $8.5 million were recognized.

• Income from operations decreased 26% to $124.4 million.

• Income from operations increased 17% to $204.9 million.

• Operating margin decreased 90 basis points to 18.3%.

• Income tax expense decreased 17% to $37.3 million.

Our effective tax rate for the second quarter of fiscal 2020 was 30.0% compared to 26.4% for the second quarter of fiscal 2019.

• Diluted earnings per share were $0.66 compared to $0.96 in the second quarter of fiscal 2019.

This includes $9.5 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.08 for the second quarter of fiscal 2020.

As the temporary store closures from COVID-19 have resulted in a significant number of stores being removed from our comparable store base, total comparable sales and comparable store sales are not currently representative of the underlying trends of our business.

We do not believe these metrics are currently useful to investors in understanding performance, therefore we have not included these metrics in our discussion and analysis of results of operations.

• Income tax expense increased 17% to $60.7 million.

Our effective tax rate for the third quarter of fiscal 2020 was 29.7% compared to 29.1% for the third quarter of fiscal 2019.

• Diluted earnings per share were $1.10 compared to $0.96 in the third quarter of fiscal 2019.

This includes $7.6 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.06 for the third quarter of fiscal 2020.

As the temporary closures from COVID-19 resulted in a significant number of stores being removed from our comparable store base during the first two quarters of fiscal 2020, total comparable sales and comparable store sales for year-to-date periods are not currently representative of the underlying trends of our business.

We do not believe these year-to-date metrics are currently useful to investors in understanding performance, therefore we have not included these metrics in our discussion and analysis of results of operations.

As most of our stores were open during the third quarter of fiscal 2020, and our comparable store base therefore included the majority of our stores, we have included total comparable sales and comparable store sales on a quarter-to-date basis in our discussion and analysis of results of operations.

Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue and direct to consumer net revenue and the most directly comparable measures calculated in accordance with GAAP.

Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue and the most directly comparable measures calculated in accordance with GAAP.

Results of Operations

Second Quarter Results

The following table summarizes key components of our results of operations for the quarters ended August 2, 2020 and August 4, 2019.

Third Quarter Results

The following table summarizes key components of our results of operations for the quarters ended November 1, 2020 and November 3, 2019.

The percentages are presented as a percentage of net revenue.

Quarter Ended

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

November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019

(In thousands) (Percentages)

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Net income $ 143,643 $ 125,982 12.9 % 13.8 %

Net revenue increased $19.6 million, or 2%, to $902.9 million for the second quarter of fiscal 2020 from $883.4 million for the second quarter of fiscal 2019.

On a constant dollar basis, assuming the average exchange rates for the second quarter of fiscal 2020 remained constant with the average exchange rates for the second quarter of fiscal 2019, net revenue increased $26.6 million, or 3%.

The increase in net revenue was primarily due to increased direct to consumer net revenue.

This was partially offset by a decrease in company-operated store revenue, as well as a decrease in net revenue from our other channels driven by temporary retail location closures as well as reduced operating hours and limited guest occupancy levels as a result of COVID-19.

Net revenue on a segment basis for the quarters ended August 2, 2020 and August 4, 2019 is summarized below.

Net revenue increased $201.3 million, or 22%, to $1.1 billion for the third quarter of fiscal 2020 from $916.1 million for the third quarter of fiscal 2019.

On a constant dollar basis, assuming the average exchange rates for the third quarter of fiscal 2020 remained constant with the average exchange rates for the third quarter of fiscal 2019, net revenue increased $194.6 million, or 21%.

The increase in net revenue was primarily due to increased direct to consumer net revenue, partially due to a shift in the way guests are shopping due to COVID-19, as well as an increase in net revenue from our other channels.

This was partially offset by a decrease in company-operated store net revenue driven by reduced operating hours and restricted guest occupancy levels, as well as temporary closures as a result of COVID-19.

Total comparable sales, which includes comparable store sales and direct to consumer, increased 19% in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.

Total comparable sales increased 18% on a constant dollar basis.

Net revenue on a segment basis for the quarters ended November 1, 2020 and November 3, 2019 is summarized below.

The percentages are presented as a percentage of total net revenue.

Quarter Ended

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

November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019

(In thousands) (Percentages)

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Company-Operated Stores.

Net revenue from our company-operated stores segment decreased $296.6 million, or 51%, to $287.2 million in the second quarter of fiscal 2020 from $583.8 million in the second quarter of fiscal 2019.

The decrease in net revenue from our company-operated stores segment was primarily due to the impact of COVID-19, including temporary store closures, reduced operating hours, and occupancy restrictions.

Net revenue from our company-operated stores segment decreased $67.8 million, or 12%, to $511.8 million in the third quarter of fiscal 2020 from $579.5 million in the third quarter of fiscal 2019.

The decrease in net revenue from our company-operated stores segment was primarily due to the impact of COVID-19, including reduced operating hours, occupancy restrictions, and temporary closures.

Comparable store sales decreased 17%, or decreased 18% on a constant dollar basis.

The decrease was primarily a result of COVID-19 restrictions, which resulted in decreased store traffic, partially offset by an increase in conversion rates.

The decrease in net revenue from our company-operated stores segment was partially offset by an increase in net revenue from company-operated stores we opened or significantly expanded subsequent to November 3, 2019 of $18.7 million.

We opened 36 net new company-operated stores since the third quarter of fiscal 2019, including 20 stores in Asia, 11 stores in North America, and five stores in Europe.

Direct to Consumer.

Net revenue from our direct to consumer segment increased $336.7 million, or 155%, to $554.3 million in the second quarter of fiscal 2020 from $217.6 million in the second quarter of fiscal 2019.

Net revenue from our direct to consumer segment increased $231.6 million, or 94%, to $478.3 million in the third quarter of fiscal 2020 from $246.7 million in the third quarter of fiscal 2019.

Direct to consumer net revenue increased 93% on a constant dollar basis.

The increase in net revenue from our direct to consumer segment was primarily a result of increased website traffic and improved conversion rates.

This was partially offset by a decrease in dollar value per transaction.

The shift in the way guests are shopping continued in the second quarter of fiscal 2020 as a result of COVID-19, with more guests shopping online instead of in-store.

During the second quarter of fiscal 2020, we held an online warehouse sale in the United States and Canada which generated net revenue of $43.3 million.

We did not hold any warehouse sales during the second quarter of fiscal 2019.

Net revenue from our other segment decreased $20.5 million, or 25%, to $61.4 million in the second quarter of fiscal 2020 from $82.0 million in the second quarter of fiscal 2019.

This decrease was primarily the result of COVID-19, including temporary location closures, reduced operating hours, and occupancy restrictions.

Gross profit increased $3.7 million, or less than 1%, to $489.5 million for the second quarter of fiscal 2020 from $485.8 million for the second quarter of fiscal 2019.

Gross profit as a percentage of net revenue, or gross margin, decreased 80 basis points to 54.2% in the second quarter of fiscal 2020 from 55.0% in the second quarter of fiscal 2019.

The decrease in gross margin was primarily the result of:

• an increase in costs as a percentage of revenue related to our distribution centers of 130 basis points;

• an unfavorable impact of foreign exchange rates of 20 basis points.

This was partially offset by a decrease in costs related to our product departments as a percentage of revenue of 40 basis points, and a decrease in depreciation and occupancy costs as a percentage of revenue of 30 basis points.

Product margin was consistent with the second quarter of fiscal 2019 primarily due to lower product costs and product mix, offset by higher markdowns.

The increase in net revenue from our direct to consumer segment was primarily a result of increased website traffic and improved conversion rate, partially offset by a decrease in dollar value per transaction.

These changes were partially due to COVID-19, with more guests shopping online instead of in-store.

Other channels.

Net revenue from our other segment increased $37.5 million, or 42%, to $127.4 million in the third quarter of fiscal 2020 from $89.9 million in the third quarter of fiscal 2019.

This increase was primarily the result of net revenue from MIRROR as well as an increased number of temporary locations, including seasonal stores, that were open during the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.

Gross profit increased $122.3 million, or 24%, to $627.4 million for the third quarter of fiscal 2020 from $505.0 million for the third quarter of fiscal 2019.

Gross profit as a percentage of net revenue, or gross margin, increased 100 basis points to 56.1% in the third quarter of fiscal 2020 from 55.1% in the third quarter of fiscal 2019.

The increase in gross margin was primarily the result of:

• a decrease in depreciation and occupancy costs as a percentage of revenue of 170 basis points, driven primarily by the increase in net revenue;

• a favorable impact of foreign exchange rates of 10 basis points.

This was partially offset by a decrease in product margin of 80 basis points, primarily due to higher air freight costs as a result of COVID-19 capacity constraints and higher markdowns.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $35.1 million, or 11%, to $352.9 million in the second quarter of fiscal 2020 from $317.8 million in the second quarter of fiscal 2019.

Selling, general and administrative expenses increased $82.5 million, or 25%, to $411.7 million in the third quarter of fiscal 2020 from $329.2 million in the third quarter of fiscal 2019.

The increase in selling, general and administrative expenses was primarily due to:

• an increase in costs related to our operating channels of $63.4 million, comprised of:

– an increase in variable costs of $36.9 million primarily due to an increase in distribution costs as a result of increased direct to consumer net revenue;

– an increase in other costs of $19.2 million primarily due to increased digital marketing expenses;

– a decrease in employee costs of $17.4 million primarily due to lower incentive compensation expenses in our company-operated store and other channels;

– an increase in variable costs of $33.0 million primarily due to an increase in distribution costs, credit card fees and packaging costs as a result of increased direct to consumer net revenue;

– an increase in brand and community costs of $29.3 million primarily due to an increase in digital marketing expenses;

– an increase in other operating costs of $5.7 million primarily due to an increase in information technology costs and depreciation;

– a decrease in employee costs of $4.6 million primarily due to lower incentive compensation expenses in our company-operated store channel;

• an increase in head office costs of $22.3 million, comprised of:

– an increase of $15.8 million primarily due to increases in information technology costs, professional fees, and depreciation;

– a decrease in employee costs of $1.5 million primarily due to decreased travel and decreased incentive compensation expense, partially offset by increased salaries and wages expense as a result of headcount growth, and stock-based compensation expense;

• an increase in net foreign exchange and derivative revaluation losses of $3.0 million.

The increase in selling, general and administrative expenses was partially offset by $20.9 million of government payroll subsidies which were recognized during the second quarter of fiscal 2020.

As a percentage of net revenue, selling, general and administrative expenses increased 310 basis points, to 39.1% in the second quarter of fiscal 2020 from 36.0% in the second quarter of fiscal 2019.

– an increase of $22.7 million primarily due to increases in professional fees, information technology costs, donations, and depreciation;

– a decrease in employee costs of $0.4 million primarily due to decreased incentive compensation expense, and decreased travel, partially offset by increased salaries and wages expense as a result of headcount growth, and stock-based compensation expense.

The increase in selling, general and administrative expenses was partially offset by an increase in net foreign exchange and derivative revaluation gains of $3.2 million.

As a percentage of net revenue, selling, general and administrative expenses increased 90 basis points, to 36.8% in the third quarter of fiscal 2020 from 35.9% in the third quarter of fiscal 2019.

Amortization of intangible assets

Amortization of intangible assets was $0.7 million in the second quarter of fiscal 2020.

This was primarily the result of the recognition of intangible assets of $85.0 million in the second quarter of fiscal 2020 as a result of our acquisition of MIRROR.

We did not recognize an expense for the amortization of intangible assets in the second quarter of fiscal 2019.

Amortization of intangible assets increased to $2.2 million in the third quarter of fiscal 2020 from less than $0.1 million in the third quarter of fiscal 2019.

This increase was the result of amortization of intangible assets recognized upon the acquisition of MIRROR.

Acquisition-related expenses

As a result of our acquisition of MIRROR in the second quarter of fiscal 2020, we recognized acquisition-related expenses of $11.5 million in the second quarter of fiscal 2020.

This included transaction and integration related costs of $7.2 million for advisory and professional services, and integration costs subsequent to the acquisition.

This also included acquisition-related compensation of $5.0 million for the partial acceleration of vesting of certain options and deferred

consideration due to certain continuing MIRROR employees.

Acquisition-related expenses were partially offset by a $0.8 million gain recognized on our existing investment.

We did not have acquisition-related expenses in the second quarter of fiscal 2019.

We recognized acquisition-related expenses of $8.5 million in the third quarter of fiscal 2020.

This included acquisition-related compensation of $7.5 million for deferred consideration for certain continuing MIRROR employees.

This also included transaction and integration related costs of $1.0 million for advisory and professional services, and integration costs subsequent to the acquisition.

We did not have acquisition-related expenses in the third quarter of fiscal 2019.

Please refer to Note 3 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information.

Income from Operations

Income from operations decreased $43.6 million, or 26%, to $124.4 million in the second quarter of fiscal 2020 from $168.0 million in the second quarter of fiscal 2019.

Operating margin decreased 520 basis points to 13.8% compared to 19.0% in the second quarter of fiscal 2019.

Income from operations increased $29.1 million, or 17%, to $204.9 million in the third quarter of fiscal 2020 from $175.8 million in the third quarter of fiscal 2019.

Operating margin decreased 90 basis points to 18.3% compared to 19.2% in the third quarter of fiscal 2019.

On a segment basis, we determine income from operations without taking into account our general corporate expenses.

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

Segmented income (loss) from operations for the quarters ended August 2, 2020 and August 4, 2019 is summarized below.

Segmented income from operations for the quarters ended November 1, 2020 and November 3, 2019 is summarized below.

The percentages are presented as a percentage of net revenue of the respective operating segments.

Quarter Ended

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

November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019

(In thousands) (Percentage of segment revenue)

Segmented income (loss) from operations:

Segmented income from operations:

Company-operated stores $ 111,780 $ 147,720 21.8 % 25.5 %

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Company-Operated Stores .

Income from operations from our company-operated stores segment decreased $159.6 million, or 103%, to a loss of $5.3 million for the second quarter of fiscal 2020 from income of $154.3 million for the second quarter of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $209.3 million which was primarily due to lower net revenue as a result of the impact of COVID-19 restrictions, and lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue.

This was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including lower incentive compensation, credit card fees, packaging costs, and distribution costs primarily as a result of lower net revenue, and due to the recognition of government payroll subsidies and lower community costs.

Income from operations from our company-operated stores segment decreased $35.9 million, or 24%, to $111.8 million for the third quarter of fiscal 2020 from $147.7 million for the third quarter of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $50.7 million, which was primarily due to lower net revenue as a result of the impact of COVID-19 restrictions, as well as lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue.

The decrease in gross profit was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including lower incentive compensation, brand and community costs, salaries and wages, and lower credit card fees as a result of lower net revenue.

Income from operations as a percentage of company-operated stores net revenue decreased primarily due to lower gross margin and deleverage on selling, general and administrative expenses.

Direct to Consumer.

Income from operations from our direct to consumer segment increased $151.0 million, or 174%, to $237.6 million for the second quarter of fiscal 2020 from $86.6 million for the second quarter of fiscal 2019.

The increase was primarily the result of increased gross profit of $222.2 million which was primarily due to increased net revenue and higher gross margin.

This was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs, credit card fees, and packaging as a result of higher net revenue, as well as higher digital marketing expenses.

Income from operations as a percentage of direct to consumer net revenue increased 310 basis points primarily due to leverage on selling, general and administrative expenses and higher gross margin.

Income from operations from our other channels decreased $13.8 million, or 84%, to $2.6 million for the second quarter of fiscal 2020 from $16.4 million for the second quarter of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $9.2 million which was primarily due to decreased net revenue.

This was partially offset by an increase in selling, general and administrative expenses primarily due to an increase in marketing costs, partially offset by decreased operating expenses including lower incentive compensation, credit card fees, packaging costs, and distribution costs primarily as a result of lower net revenue.

Income from operations from our direct to consumer segment increased $106.0 million, or 102%, to $209.6 million for the third quarter of fiscal 2020 from $103.6 million for the third quarter of fiscal 2019.

The increase was primarily the result of increased gross profit of $156.1 million which was primarily due to increased net revenue, partially from the shift in guests shopping online instead of in-store.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, which was primarily due to higher variable costs including distribution costs, credit card fees, and packaging as a result of higher net revenue, as well as higher digital marketing expenses, employee costs and information technology expenses.

Income from operations as a percentage of direct to consumer net revenue increased 180 basis points primarily due to leverage on selling, general and administrative expenses.

Other channels.

Income from operations from our other channels decreased $15.5 million, or 92%, to $1.3 million for the third quarter of fiscal 2020 from $16.8 million for the third quarter of fiscal 2019.

The decrease was primarily the result of increased selling, general and administrative expenses which increased primarily due to MIRROR digital marketing expenses, and increased credit card fees and distribution costs as a result of higher net revenue.

The increase in selling, general and administrative expenses was partially offset by an increase in gross profit of $16.9 million, primarily due to increased net revenue.

Income from operations as a percentage of other net revenue decreased primarily due to deleverage on selling, general and administrative expenses.

General Corporate Expense.

General corporate expense increased $8.9 million, or 10%, to $98.3 million for the second quarter of fiscal 2020 from $89.4 million for the second quarter of fiscal 2019.

This increase was primarily due to increases in depreciation, information technology costs, and professional fees, and an increase in net foreign exchange and derivative revaluation losses of $3.0 million.

The increase in general corporate expense was partially offset by a decrease in incentive compensation and the recognition of government payroll subsidies.

General corporate expense increased $14.7 million, or 16%, to $107.0 million for the third quarter of fiscal 2020 from $92.3 million for the third quarter of fiscal 2019.

This increase was primarily due to increases in professional fees, information technology costs, donations, depreciation, stock based compensation expense, and salaries and wages as a result of headcount growth.

The increase in general corporate expense was partially offset by a decrease in incentive compensation and an increase in net foreign exchange and derivative revaluation gains of $3.2 million.

Other Income (Expense), Net

Other income, net decreased $2.2 million, or 119%, to an expense of $0.3 million for the second quarter of fiscal 2020 from income of $1.9 million for the second quarter of fiscal 2019.

The decrease was primarily due to a decrease in net interest income.

Other income, net decreased $2.5 million, or 130%, to an expense of $0.6 million for the third quarter of fiscal 2020 from income of $1.9 million for the third quarter of fiscal 2019.

The decrease was primarily due to a decrease in interest income as a result of lower cash balances and lower interest rates.

Income Tax Expense

Income tax expense decreased $7.6 million, or 17%, to $37.3 million for the second quarter of fiscal 2020 from $44.8 million for the second quarter of fiscal 2019.

The effective tax rate for the second quarter of fiscal 2020 was 30.0% compared to 26.4% for the second quarter of fiscal 2019.

The increase in the effective tax rate was due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 110 basis points, and due to new regulations which resulted in additional foreign tax credits being recognized in the second quarter of fiscal 2019.

Net income decreased $38.2 million, or 31%, to $86.8 million for the second quarter of fiscal 2020 from $125.0 million for the second quarter of fiscal 2019.

This was primarily due to an increase in selling, general and administrative expenses of $35.1 million, acquisition-related expenses of $11.5 million, amortization of intangible assets of $0.7 million, and a decrease in other income (expense), net of $2.2 million, partially offset by an increase in gross profit of $3.7 million, and a decrease in income tax expense of $7.6 million.

First Two Quarters Results

The following table summarizes key components of our results of operations for the first two quarters ended August 2, 2020 and August 4, 2019.

Income tax expense increased $8.9 million, or 17%, to $60.7 million for the third quarter of fiscal 2020 from $51.8 million for the third quarter of fiscal 2019.

The effective tax rate for the third quarter of fiscal 2020 was 29.7% compared to 29.1% for the third quarter of fiscal 2019.

The increase in the effective tax rate was primarily due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 80 basis points.

Net income increased $17.7 million, or 14%, to $143.6 million for the third quarter of fiscal 2020 from $126.0 million for the third quarter of fiscal 2019.

This was primarily due to an increase in gross profit of $122.3 million, partially offset by an increase in selling, general and administrative expenses of $82.5 million, an increase in income tax expense of $8.9 million, acquisition-related expenses of $8.5 million, amortization of intangible assets of $2.2 million, and a decrease in other income (expense), net of $2.5 million.

First Three Quarters Results

The following table summarizes key components of our results of operations for the first three quarters ended November 1, 2020 and November 3, 2019.

The percentages are presented as a percentage of net revenue.

Two Quarters Ended

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

Three Quarters Ended

November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019

(In thousands) (Percentages)

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Net income $ 259,076 $ 347,575 9.7 % 13.5 %

Net revenue decreased $110.8 million, or 7%, to $1.555 billion for the first two quarters of fiscal 2020 from $1.666 billion for the first two quarters of fiscal 2019.

On a constant dollar basis, assuming the average exchange rates for the first two quarters of fiscal 2020 remained constant with the average exchange rates for the first two quarters of fiscal 2019, net revenue decreased $96.1 million, or 6%.

The decrease in net revenue was primarily due to a decrease in company-operated store net revenue as well as a decrease in net revenue from our other locations driven by temporary retail location closures as well as reduced operating hours and

limited guest occupancy levels as a result of COVID-19.

This was partially offset by an increase in direct to consumer net revenue.

Net revenue on a segment basis for the first two quarters ended August 2, 2020 and August 4, 2019 is summarized below.

Net revenue increased $90.5 million, or 4%, to $2.672 billion for the first three quarters of fiscal 2020 from $2.582 billion for the first three quarters of fiscal 2019.

On a constant dollar basis, assuming the average exchange rates for the first three quarters of fiscal 2020 remained constant with the average exchange rates for the first three quarters of fiscal 2019, net revenue increased $98.5 million, or 4%.

The increase in net revenue was primarily due to an increase in direct to consumer net revenue, partially due to a shift in the way guests are shopping due to COVID-19, partially offset by a decrease in company-operated store net revenue as well as a decrease in net revenue from our other retail locations driven by temporary closures as a result of COVID-19 as well as reduced operating hours and restricted guest occupancy levels.

Net revenue on a segment basis for the first three quarters ended November 1, 2020 and November 3, 2019 is summarized below.

The percentages are presented as a percentage of total net revenue.

Two Quarters Ended

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

Three Quarters Ended

November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019

(In thousands) (Percentages)

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Company-Operated Stores .

Net revenue from our company-operated stores segment decreased $543.0 million, or 50%, to $547.2 million in the first two quarters of fiscal 2020 from $1.090 billion in the first two quarters of fiscal 2019.

Net revenue from our company-operated stores segment decreased $610.8 million, or 37%, to $1.059 billion in the first three quarters of fiscal 2020 from $1.670 billion in the first three quarters of fiscal 2019.

The decrease in net revenue from our company-operated stores segment was primarily due to the impact of COVID-19.

All of our stores in North America, Europe, and certain countries in Asia Pacific were temporarily closed for a significant portion of the first two quarters of fiscal 2020.

Since re-opening our company-operated store net revenues have been impacted by COVID-19 restrictions including reduced operating hours and occupancy limits.

COVID-19 restrictions, including reduced operating hours and occupancy limits, reduced net revenue from company-operated stores that have reopened.

Direct to Consumer.

Net revenue from our direct to consumer segment increased $478.9 million, or 112%, to $906.3 million in the first two quarters of fiscal 2020 from $427.5 million in the first two quarters of fiscal 2019.

Net revenue from our direct to consumer segment increased $710.4 million, or 105%, to $1.385 billion in the first three quarters of fiscal 2020 from $674.2 million in the first three quarters of fiscal 2019.

Direct to consumer net revenue increased 106% on a constant dollar basis.

The increase in net revenue from our direct to consumer segment was primarily a result of increased website traffic and improved conversion rates.

This was partially offset by a decrease in dollar value per transaction.

There was a shift in the way guests shopped in the first two quarters of fiscal 2020 as a result of COVID-19, with more guests shopping online instead of in-store.

During the second quarter of fiscal 2020, we held an online warehouse sale in the United States and Canada which generated net revenue of $43.3 million.

We did not hold any warehouse sales during the first two quarters of fiscal 2019.

Net revenue from our other segment decreased $46.6 million, or 31%, to $101.4 million in the first two quarters of fiscal 2020 from $148.0 million in the first two quarters of fiscal 2019.

This decrease was primarily the result of COVID-19, including temporary location closures, reduced operating hours, and occupancy restrictions.

Gross profit decreased $83.6 million, or 9%, to $823.9 million for the first two quarters of fiscal 2020 from $907.5 million for the first two quarters of fiscal 2019.

Gross profit as a percentage of net revenue, or gross margin, decreased 150 basis points, to 53.0% in the first two quarters of fiscal 2020 from 54.5% in the first two quarters of fiscal 2019.

The decrease in gross margin was primarily the result of:

• an increase in occupancy and depreciation costs as a percentage of revenue of 120 basis points;

• an increase in costs as a percentage of revenue related to our distribution centers of 110 basis points;

• an unfavorable impact of foreign exchange rates of 20 basis points.

This was partially offset by an increase in product margin of 80 basis points primarily due to lower product costs, and a favorable mix of higher margin product, partially offset by higher markdowns, and a decrease in costs related to our product departments as a percentage of revenue of 20 basis points.

The increase in net revenue from our direct to consumer segment was primarily a result of increased website traffic and improved conversion rates, partially offset by a decrease in dollar value per transaction.

These changes were partially due to COVID-19, with more guests shopping online instead of in-store.

second quarter of fiscal 2020, we held an online warehouse sale in the United States and Canada which generated net revenue of $43.3 million.

We did not hold any warehouse sales during the first three quarters of fiscal 2019.

Other channels.

Net revenue from our other segment decreased $9.1 million, or 4%, to $228.8 million in the first three quarters of fiscal 2020 from $237.9 million in the first three quarters of fiscal 2019.

This decrease was primarily the result of COVID-19, including temporary location closures, reduced operating hours, and occupancy restrictions, partially offset by net revenue from MIRROR.

Gross profit increased $38.7 million, or 3%, to $1.451 billion for the first three quarters of fiscal 2020 from $1.413 billion for the first three quarters of fiscal 2019.

Gross profit as a percentage of net revenue, or gross margin, decreased 40 basis points, to 54.3% in the first three quarters of fiscal 2020 from 54.7% in the first three quarters of fiscal 2019.

The decrease in gross margin was primarily the result of an increase in costs as a percentage of revenue related to our distribution centers of 90 basis points.

This was partially offset by a decrease in costs related to our product departments of 30 basis points, and an increase in product margin of 20 basis points.

The increase in product margin was primarily due to lower product costs and a favorable mix of higher margin product, partially offset by higher markdowns.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $41.8 million, or 7%, to $652.5 million in the first two quarters of fiscal 2020 from $610.7 million in the first two quarters of fiscal 2019.

Selling, general and administrative expenses increased $124.2 million, or 13%, to $1.064 billion in the first three quarters of fiscal 2020 from $939.9 million in the first three quarters of fiscal 2019.

The increase in selling, general and administrative expenses was primarily due to:

• an increase in costs related to our operating channels of $119.4 million, comprised of:

– an increase in variable costs of $47.3 million primarily due to an increase in distribution costs as a result of increased direct to consumer net revenue;

– an increase in other costs of $30.6 million primarily due to increased digital marketing expenses;

– an increase in variable costs of $80.3 million primarily due to an increase in distribution costs and credit card fees as a result of increased direct to consumer net revenue;

– an increase in brand and community costs of $58.4 million primarily due to an increase in digital marketing expenses;

– a decrease in employee costs of $26.6 million primarily due to lower incentive compensation expenses in our company-operated store and other channels.

This was partially offset by an increase in salaries and wages as a result of increased headcount and labor hours in our direct to consumer channel;

– an increase in other operating costs of $7.3 million primarily due to an increase in information technology costs;

• an increase in head office costs of $42.7 million, comprised of:

– an increase of $32.1 million primarily due to increases in information technology costs, depreciation, and brand and community costs;

– a decrease in employee costs of $12.1 million primarily due to decreased incentive compensation expense and decreased travel, partially offset by increased salaries and wages expense as a result of headcount growth;

• an increase in net foreign exchange and derivative revaluation losses of $1.8 million.

The increase in selling, general and administrative expenses was partially offset by $35.2 million of government payroll subsidies which were recognized during the first two quarters of fiscal 2020.

As a percentage of net revenue, selling, general and administrative expenses increased 530 basis points, to 42.0% in the first two quarters of fiscal 2020 from 36.7% in the first two quarters of fiscal 2019.

– an increase of $54.8 million primarily due to an increase in information technology costs, depreciation, and professional fees, as well as an increase in brand and community costs primarily due to donations;

– a decrease in employee costs of $12.1 million primarily due to decreased incentive compensation expense and travel expenses, partially offset by increased salaries and wages expense as a result of headcount growth, and higher stock-based compensation expense.

The increase in selling, general and administrative expenses was partially offset by $36.4 million of government payroll subsidies which were recognized during the first three quarters of fiscal 2020 and a decrease in net foreign exchange and derivative revaluation losses of $1.4 million.

As a percentage of net revenue, selling, general and administrative expenses increased 340 basis points, to 39.8% in the first three quarters of fiscal 2020 from 36.4% in the first three quarters of fiscal 2019.

Amortization of intangible assets

Amortization of intangible assets was $0.7 million in the first two quarters of fiscal 2020.

This was primarily the result of the recognition of intangible assets of $85.0 million in the second quarter of fiscal 2020 as a result of our acquisition of MIRROR.

We did not recognize an expense for the amortization intangible assets in the first two quarters of fiscal 2019.

Amortization of intangible assets increased to $3.0 million in the first three quarters of fiscal 2020 from less than $0.1 million in the first three quarters of fiscal 2019.

This increase was the result of amortization of intangible assets recognized upon the acquisition of MIRROR.

Acquisition-related expenses

As a result of our acquisition of MIRROR in the second quarter of fiscal 2020, we recognized acquisition-related expenses of $13.5 million in the first two quarters of fiscal 2020.

This included transaction and integration related costs of $9.2 million for advisory and professional services, and integration costs subsequent to the acquisition.

This also included acquisition-related compensation of $5.0 million for the partial acceleration of vesting of certain options and deferred consideration to certain continuing MIRROR employees.

As a result of our acquisition of MIRROR in the second quarter of fiscal 2020, we recognized acquisition-related expenses of $22.0 million in the first three quarters of fiscal 2020.

This included acquisition-related compensation of $12.6 million for deferred consideration for certain continuing MIRROR employees and the partial acceleration of vesting of certain options.

This also included transaction and integration related costs of $10.3 million for advisory and professional services, and integration costs subsequent to the acquisition.

Acquisition-related expenses were partially offset by a $0.8 million gain recognized on our existing investment.

We did not have acquisition-related expenses in the first two quarters of fiscal 2019.

We did not have acquisition-related expenses in the first three quarters of fiscal 2019.

Please refer to Note 3 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information.

Income from Operations

Income from operations decreased $139.6 million, or 47%, to $157.2 million in the first two quarters of fiscal 2020 from $296.8 million in the first two quarters of fiscal 2019.

Operating margin decreased 770 basis points to 10.1% compared to 17.8% in the first two quarters of fiscal 2019.

Income from operations decreased $110.5 million, or 23%, to $362.1 million in the first three quarters of fiscal 2020 from $472.6 million in the first three quarters of fiscal 2019.

Operating margin decreased 480 basis points to 13.5% compared to 18.3% in the first three quarters of fiscal 2019.

On a segment basis, we determine income from operations without taking into account our general corporate expenses.

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

Segmented income (loss) from operations for the first two quarters ended August 2, 2020 and August 4, 2019 is summarized below.

Segmented income from operations for the first three quarters ended November 1, 2020 and November 3, 2019 is summarized below.

The percentages are presented as a percentage of net revenue of the respective operating segments.

Two Quarters Ended

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

Three Quarters Ended

November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019

(In thousands) (Percentage of segment revenue)

Segmented income (loss) from operations:

Segmented income operations:

Company-operated stores $ 76,333 $ 422,948 7.2 % 25.3 %

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Company-Operated Stores.

Income from operations from our company-operated stores segment decrease $310.7 million, or 113%, to a loss of $35.4 million for the first two quarters of fiscal 2020 from income of $275.2 million for the first two quarters of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $386.8 million which was primarily due to lower net revenue as a result of the impact of COVID-19 restrictions, and lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue.

This was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including lower incentive compensation, credit card fees, packaging costs, and distribution costs primarily as a result of lower net revenue, as well as decreases in security and repairs and maintenance costs, and due to the recognition of government payroll subsidies.

Income from operations from our company-operated stores segment decreased $346.6 million, or 82%, to $76.3 million for the first three quarters of fiscal 2020 from income of $422.9 million for the first three quarters of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $437.4 million which was primarily due to lower net revenue as a result of the impact of COVID-19, as well as lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue.

This decrease in gross profit was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including lower incentive compensation, credit card fees, packaging costs, and distribution costs primarily as a result of lower net revenue, as well as decreases in security and repairs and maintenance costs, and the recognition of government payroll subsidies.

Income from operations as a percentage of company-operated stores net revenue decreased, primarily due to lower gross margin and deleverage on selling, general and administrative expenses.

Direct to Consumer.

Income from operations from our direct to consumer segment increased $228.6 million, or 138%, to $394.5 million for the first two quarters of fiscal 2020 from $166.0 million for the first two quarters of fiscal 2019.

The increase was primarily the result of increased gross profit of $325.3 million which was primarily due to increased net revenue and higher gross margin.

This was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs and credit card fees as a result of higher net revenue, as well as higher digital marketing expenses and employee costs.

Income from operations from our direct to consumer segment increased $334.6 million, or 124%, to $604.2 million for the first three quarters of fiscal 2020 from $269.6 million for the first three quarters of fiscal 2019.

The increase was primarily the result of increased gross profit of $481.4 million which was primarily due to increased net revenue, partially from the shift in guests shopping online instead of in-store.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs, credit card fees, and packaging as a result of higher net revenue, as well as higher digital marketing expenses and employee costs.

Income from operations as a percentage of direct to consumer net revenue increased 360 basis points, primarily due to leverage on selling, general and administrative expenses and higher gross margin.

Income from operations from our other channels decreased $26.7 million, or 92%, to $2.3 million for the first two quarters of fiscal 2020 from $29.0 million for the first two quarters of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $22.2 million which was primarily due to decreased net revenue, and an increase in selling, general and administrative expenses primarily due to an increase in marketing costs, partially offset by decreased operating expenses including lower incentive compensation, credit card fees, and packaging costs primarily as a result of lower net revenue.

Income from operations as a percentage of other net revenue decreased primarily due to deleverage on selling, general and administrative expenses, partially offset by an increase in gross margin.

Other channels.

Income from operations from our other channels decreased $42.2 million, or 92%, to $3.6 million for the first three quarters of fiscal 2020 from $45.9 million for the first three quarters of fiscal 2019.

This was primarily due to increased selling, general and administrative expenses, primarily due to digital marketing expenses related to MIRROR, as well as distribution costs and credit card fees as a result of revenue generated from MIRROR, and a decrease in gross profit of $5.3 million.

Income from operations as a percentage of other net revenue decreased primarily due to deleverage on selling, general and administrative expenses.

General Corporate Expense.

General corporate expense increased $16.6 million, or 10%, to $190.0 million for the first two quarters of fiscal 2020 from $173.4 million for the first two quarters of fiscal 2019.

This increase was primarily due to increases in information technology costs, depreciation, professional fees, and brand and community costs, and an increase in net foreign exchange and derivative revaluation losses of $1.8 million.

The increase in general corporate expense was partially offset by a decrease in incentive compensation and the recognition of government payroll subsidies.

General corporate expense increased $31.3 million, or 12%, to $297.0 million for the first three quarters of fiscal 2020 from $265.7 million for the first three quarters of fiscal 2019.

This increase was primarily due to increases in information technology costs, salaries and wages as a result of headcount growth, depreciation, professional fees, donations, and stock based compensation expense.

The increase in general corporate expense was partially offset by a decrease in incentive compensation, the recognition of government payroll subsidies, and a decrease in net foreign exchange and derivative revaluation losses of $1.4 million.

Other Income (Expense), Net

Other income, net decreased $3.4 million, or 80%, to $0.8 million for the first two quarters of fiscal 2020 from $4.2 million for the first two quarters of fiscal 2019.

The decrease was primarily due to a decrease in net interest income.

Other income, net decreased $5.9 million, or 96%, to $0.3 million for the first three quarters of fiscal 2020 from $6.2 million for the first three quarters of fiscal 2019.

The decrease was primarily due to a decrease in net interest income as a result of lower cash balances and lower interest rates.

Income Tax Expense

Income tax expense decreased $36.9 million, or 46%, to $42.6 million for the first two quarters of fiscal 2020 from $79.4 million for the first two quarters of fiscal 2019.

The effective tax rate for the first two quarters of fiscal 2020 was 26.9% compared to 26.4% for the first two quarters of fiscal 2019.

The increase in the effective tax rate was due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 90 basis points and due to new regulations which resulted in additional foreign tax credits being recognized in the first two quarters of fiscal 2019.

Income tax expense decreased $27.9 million, or 21%, to $103.3 million for the first three quarters of fiscal 2020 from $131.2 million for the first three quarters of fiscal 2019.

The effective tax rate for the first three quarters of fiscal 2020 was 28.5% compared to 27.4% for the first three quarters of fiscal 2019.

The increase in the effective tax rate was primarily due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 90 basis points, new regulations which resulted in additional foreign tax credits being recognized in the first three quarters of fiscal 2019, and certain non-deductible expenses in foreign jurisdictions.

This was partially offset by an increase in tax deductions related to stock-based compensation.

Net income decreased $106.2 million, or 48%, to $115.4 million for the first two quarters of fiscal 2020 from $221.6 million for the first two quarters of fiscal 2019.

This was primarily due to a decrease in gross profit of $83.6 million, an increase in selling, general and administrative expenses of $41.8 million, acquisition-related expenses of $13.5 million, amortization of intangible assets of $0.7 million, and a decrease in other income (expense), net of $3.4 million, partially offset by a decrease in income tax expense of $36.9 million.

Net income decreased $88.5 million, or 25%, to $259.1 million for the first three quarters of fiscal 2020 from $347.6 million for the first three quarters of fiscal 2019.

This was primarily due to an increase in selling, general and administrative expenses of $124.2 million, acquisition-related expenses of $22.0 million, amortization of intangible assets of $3.0 million, and a decrease in other income (expense), net of $5.9 million, partially offset by an increase in gross profit of $38.7 million, and a decrease in income tax expense of $27.9 million.

Comparable Store Sales and Total Comparable Sales

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The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.

We typically use comparable store sales to assess the performance of our existing stores as it allows us to monitor the performance of our business without the impact of recently opened or expanded stores.

We typically use total comparable sales to evaluate the performance of our business from an omni-channel perspective.

We therefore typically believe that investors would similarly find these metrics useful in assessing the performance of our business.

However, as the temporary store closures from COVID-19 have resulted in a significant number of stores being removed from our comparable store base, we believe total comparable sales and comparable store sales are not currently representative of the underlying trends of our business.

We do not believe these metrics are currently useful to investors in understanding performance, therefore we have not included these metrics in our discussion and analysis of results of operations.

We use comparable store sales to assess the performance of our existing stores as it allows us to monitor the performance of our business without the impact of recently opened or expanded stores.

We use total comparable sales to evaluate the

performance of our business from an omni-channel perspective.

We therefore believe investors would similarly find these metrics useful in assessing the performance of our business.

Non-GAAP Financial Measures

Constant dollar changes in net revenue and direct to consumer net revenue are non-GAAP financial measures.

Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue are non-GAAP financial measures.

A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign exchange rates for the same period of the prior year.

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A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.

Constant dollar changes in net revenue and direct to consumer net revenue

Constant dollar changes in net revenue

The below changes in net revenue show the change compared to the corresponding period in the prior year.

Quarter Ended

August 2, 2020

Net Revenue Direct to Consumer Net Revenue

(In thousands) (Percentages) (Percentages)

November 1, 2020 Three Quarters Ended

November 1, 2020

(In thousands) (Percentages) (In thousands) (Percentages)

Change $ 201,288 22 % $ 90,525 4 %

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Change in constant dollars $ 194,632 21 % $ 98,519 4 %

Two Quarters Ended

August 2, 2020

Net Revenue Direct to Consumer Net Revenue

(In thousands) (Percentages) (Percentages)

Constant dollar changes in total comparable sales, comparable store sales, and direct to consumer net revenue

The below changes in total comparable sales, comparable store sales, and direct to consumer net revenue show the change compared to the corresponding period in the prior year.

Quarter Ended

November 1, 2020 Three Quarters Ended November 1, 2020

Total Comparable Sales 1,2

Comparable Store Sales 2

Direct to Consumer Net Revenue Direct to Consumer Net Revenue

Change 19 % (17) % 94 % 105 %

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Change in constant dollars 18 % (18) % 93 % 106 %

(1) Total comparable sales includes comparable store sales and direct to consumer sales.

(2) Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 full fiscal months, or open for at least 12 full fiscal months after being significantly expanded.

Our business is affected by the general seasonal trends common to the retail apparel industry.

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Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions, as well as in money market funds, treasury bills, and term deposits.

As of August 2, 2020, our working capital, excluding cash and cash equivalents, was $203.4 million, our cash and cash equivalents were $523.0 million, and our capacity under our committed revolving credit facilities was $697.7 million.

As of November 1, 2020, our working capital, excluding cash and cash equivalents, was $388.4 million, our cash and cash equivalents were $481.6 million, and our capacity under our committed revolving credit facilities was $697.3 million.

On December 4, 2020, we gave notice to terminate our $300.0 million 364-day unsecured revolving credit facility, which will reduce the available capacity under our committed revolving credit facilities to $397.3 million.

The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated:

Two Quarters Ended

August 2, 2020 August 4, 2019

Three Quarters Ended

November 1, 2020 November 3, 2019

(In thousands)

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Cash flows provided by operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense, and the effect of changes in operating assets and liabilities.

Cash provided by operating activities increased $10.0 million, to $60.1 million for the first two quarters of fiscal 2020 compared to $50.0 million for the first two quarters of fiscal 2019, primarily as a result of the following:

• an increase of $110.6 million in changes in operating assets and liabilities, primarily due to the following:

– an increase of $122.8 million related to income taxes, primarily due to the deferral of Canadian income tax payments to the third quarter of fiscal 2020 as well as payments for withholding taxes on repatriated foreign earnings in the first quarter of fiscal 2019;

Cash provided by operating activities decreased $9.7 million, to $85.4 million for the first three quarters of fiscal 2020 compared to $95.1 million for the first three quarters of fiscal 2019, primarily as a result of the following:

• A decrease of $88.5 million in net income, primarily due temporary closures as well as reduced operating hours and limited guest occupancy levels as a result of COVID-19.

The decrease in net income was partially offset by the following;

• an increase of $65.5 million from changes in operating assets and liabilities, primarily due to the following:

– an increase of $63.0 million related to other accrued liabilities, primarily due to increases in accrued duty, freight, and other operating expenses as well as an increase in the sales return allowance as a result of COVID-19 reducing in-period returns;

– an increase of $52.5 million related to accounts payable;

The increase in changes in operating assets and liabilities was partially offset by the following:

– a decrease of $41.6 million related to accrued compensation related expenses;

– a decrease of $31.3 million related to prepaid expenses and other current and non-current assets, primarily due to government payroll subsidy receivables related to COVID-19;

– a decrease of $12.4 million related to inventories, primarily due to lower than expected net revenue as a result of temporary store closures and other COVID-19 restrictions.

– an increase of $17.2 million related to income taxes due to payments for withholding taxes on repatriated foreign earnings in the first quarter of fiscal 2019;

– an increase of $1.2 million related to inventories.

The increase from changes in operating assets and liabilities was partially offset by the following:

– a decrease of $40.1 million related to prepaid expenses and other current and non-current assets, including increases in cloud computing implementation costs;

– a decrease of $26.9 million related to accrued compensation.

• an increase of $13.3 million from adjustments to reconcile net income to net cash provided by operating activities other than changes in operating assets and liabilities, primarily related to an increase in depreciation and amortization, partially offset by a decrease in the settlement of derivatives not designated in a hedging relationship.

The increase in cash provided by operating activities was partially offset by a decrease of $106.2 million in net income, primarily due temporary retail location closures as well as reduced operating hours and limited guest occupancy levels as a result of COVID-19.

Investing Activities

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We also had capital expenditures related to information technology and business systems, related to corporate buildings, and for opening retail locations other than company-operated stores.

Cash used in investing activities increased $413.4 million to $545.3 million for the first two quarters of fiscal 2020 from $132.0 million for the first two quarters of fiscal 2019.

Cash used in investing activities increased $404.1 million to $616.5 million for the first three quarters of fiscal 2020 from $212.5 million for the first three quarters of fiscal 2019.

The increase was primarily the result of the acquisition of MIRROR, partially offset by a decrease in capital expenditures for our company-operated stores.

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Cash flows used in financing activities consist primarily of cash used to repurchase shares of our common stock, certain cash flows related to stock-based compensation, and other financing activities.

Cash used in financing activities decreased $88.8 million to $82.2 million for the first two quarters of fiscal 2020 compared to $171.0 million for the first two quarters of fiscal 2019.

Cash used in financing activities decreased $98.2 million to $81.4 million for the first three quarters of fiscal 2020 compared to $179.6 million for the first three quarters of fiscal 2019.

The decrease was primarily the result of a decrease in stock repurchases.

Cash used in financing activities for the first two quarters of fiscal 2020 included $63.7 million to repurchase 0.4 million shares of our common stock compared to $165.1 million to repurchase 1.0 million shares for the first two quarters of fiscal 2019.

During the first two quarters of fiscal 2019, 1.0 million shares were repurchased in a private transaction.

We did not purchase any shares in a private transaction during the first two quarters of fiscal 2020.

Cash used in financing activities for the first three quarters of fiscal 2020 included $63.7 million to repurchase 0.4 million shares of our common stock compared to $173.1 million to repurchase 1.1 million shares for the first three quarters of fiscal 2019.

During the first three quarters of fiscal 2019, 1.0 million shares were repurchased in a private transaction.

We did not purchase any shares in a private transaction during the first three quarters of fiscal 2020.

The other common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.

The share repurchase program was temporarily paused as of March 31, 2020.

We believe the cash and cash equivalent balances, cash flows from operations, and borrowings available under the revolving credit facilities are adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.

We believe the cash and cash equivalent balances, cash flows from operations, and borrowings available under the $400.0 million unsecured revolving credit facility are adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.

The cash from operations may be negatively impacted by a decrease in demand for our products, the continuing impact of COVID-19, as well as the other factors described in Item 1 of Part II of this Quarterly Report on Form 10-Q.

In addition, discretionary capital improvements may be made with respect to the stores, distribution facilities, headquarters, or systems.

Strategic investments or repurchase of shares under an approved stock repurchase program may be made, which we would expect to fund through the use of cash, 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 and cash equivalents and cash generated from operations.

Strategic investments or repurchase of shares under an approved stock repurchase program may be made, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such expenditures out of our cash and cash equivalents and cash generated from operations.

Revolving Credit Facilities

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Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) 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 1.00%-1.75% for LIBOR loans and 0.00%-0.75% for alternate base rate loans.

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 1.00%-1.75% for LIBOR loans and 0.00%-0.75% for alternate base rate loans.

Additionally, a commitment fee of between 0.125%-0.200%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the revolving credit facility.

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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, we were in compliance with the covenants of the credit facility.

As of November 1, 2020, we were in compliance with the covenants of the credit facility.

On June 6, 2018, we entered into Amendment No.

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In addition, the Amendment decreased the applicable margins for LIBOR loans from 1.00%-1.75% to 1.00%-1.50% and for alternate base rate loans from 0.00%-0.75% to 0.00%-0.50%, reduced the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduced fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%.

As of August 2, 2020, aside from letters of credit of $2.3 million, we had no other borrowings outstanding under this credit facility.

As of November 1, 2020, aside from letters of credit of $2.7 million, we had no other borrowings outstanding under this credit facility.

Mainland China revolving credit facility

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We are required to follow certain covenants.

As of August 2, 2020, we were in compliance with the covenants.

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

As of November 1, 2020, we were in compliance with the covenants.

As of November 1, 2020, there were no borrowings outstanding under this credit facility.

364-Day revolving credit facility

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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, we were in compliance with the covenants.

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

As of November 1, 2020, we were in compliance with the covenants.

As of November 1, 2020, there were no borrowings outstanding under this credit facility.

On December 4, 2020, we gave notice to terminate this 364-day unsecured revolving credit facility.

It will be terminated without penalty on December 11, 2020.

Off-Balance Sheet Arrangements

We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties.

As of August 2, 2020, letters of credit and letters of guarantee totaling $2.3 million had been issued.

As of November 1, 2020, letters of credit and letters of guarantee totaling $2.7 million had been issued.

We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

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An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements.

Our critical accounting policies and estimates are discussed in our fiscal 2019 Annual Report

on Form 10-K filed with the SEC on March 26, 2020, and in Notes 1, 2, 3, 8, and 9, included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Our critical accounting policies and estimates are discussed in our fiscal 2019 Annual Report on Form 10-K filed with the SEC on March 26, 2020, and in Notes 1, 2, 3, 8, and 9, included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Operating Locations

Our company-operated stores by country as of August 2, 2020 and February 2, 2020 are summarized in the table below.

Our company-operated stores by country as of November 1, 2020 and February 2, 2020 are summarized in the table below.

2020 February 2,

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Total company-operated stores 515 491

(1) Included within PRC as of August 2, 2020, were seven company-operated stores in the Hong Kong Special Administrative Region, two company-operated stores in the Macao Special Administration Region, and two company-operated store in Taiwan, PRC.

(1) Included within PRC as of November 1, 2020, were seven company-operated stores in the Hong Kong Special Administrative Region, two company-operated stores in the Macao Special Administration Region, and two company-operated store in Taiwan, PRC.

As of February 2, 2020, there were six company-operated stores in the Hong Kong Special Administrative Region, two company-operated stores in the Macao Special Administration Region, and one company-operated store in Taiwan, PRC.

Our retail locations have experienced temporary closures during the first two quarters of fiscal 2020 as a result of COVID-19.

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

Our retail locations have experienced temporary closures during the first three quarters of fiscal 2020 as a result of COVID-19.

Almost all locations were open during the third quarter of fiscal 2020.

Subsequent to November 1, 2020, while almost all of our retail locations have remained open, we have experienced some temporary closures and are currently operating with tighter capacity restrictions in certain markets.

Retail locations operated by third parties under license and supply arrangements are not included in the above table.

As of August 2, 2020, there were eight licensed locations, including four in Mexico, three in the United Arab Emirates, and one in Qatar.

As of November 1, 2020, there were eight licensed locations, including four in Mexico, three in the United Arab Emirates, and one in Qatar.

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 2. Management’s Discussion and Analysis