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Item 7. Management’s Discussion and Analysis

2021-03-30 compared with 2020-03-26 · 315 added, 336 removed, 117 unchanged (85% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

Components of management's discussion and analysis of financial condition and results of operations include:

• Financial Highlights

• Results of Operations

• Comparison of 2020 to 2019

• Comparable Store Sales and Total Comparable Sales

• Non-GAAP Financial Measures

• Liquidity and Capital Resources

• Revolving Credit Facilities

• Contractual Obligations and Commitments

• Off-Balance Sheet Arrangements

• Critical Accounting Policies and Estimates

Our 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.

Fiscal 2019 was a 52 week year and fiscal 2018 was a 53 week year.

Net revenue includes results from the 53rd week, however, comparable sales are calculated on a one week shifted basis such that the 52 week s ended February 2, 2020 are compared to the 52 week s ended February 3, 2019 rather than January 27, 2019 .

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

We have omitted the results of operations and cash flows for fiscal 2017 , and the comparison of fiscal 2018 to fiscal 2017 .

For the omitted results and comparisons please refer to "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" of our fiscal 2018 Annual Report on Form 10-K filed with the SEC on March 27, 2019.

Fiscal 2020 and 2019 were each 52-week years.

This discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions included in the "Special Note Regarding Forward-Looking Statements." Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described in the "Item 1A.

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our investor relations website (http://investor.lululemon.com/), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls, and webcasts.

Our business momentum continued in fiscal 2019.

Net revenue grew 21% and total comparable sales increased 17% .

In addition, we expanded our operating margin 80 basis points to 22.3% and grew earnings per share 37% , or 28% excluding certain discrete tax items which were recognized in fiscal 2018.

Fueling our performance this year was strength across our product assortment, 18% square footage growth driven by new stores and our remodel program, and a robust e-commerce business.

In addition, our local community events and educators continued to connect us with our guests in a truly unique manner.

Fiscal 2020 was a year in which we had to adapt our priorities, and evolve our strategies, to navigate the challenges of the COVID-19 pandemic and begin to more impactfully address systemic inequities in our society.

We put three foundational principles in place to help guide us through the pandemic.

These principles are:

1) protect our people to ensure their health, safety, and well-being, 2) make balanced decisions including investing in our digital and omni capabilities while tightly managing discretionary expenses, and 3) continue to invest in our future.

We completed our first acquisition in 2020, with our purchase of MIRROR.

MIRROR bolsters our digital sweatlife offerings and brings immersive and personalized at-home sweat and mindfulness solutions to new and existing lululemon guests.

In addition, we established IDEA – our commitment to Inclusion, Diversity, Equity, and Action – to help drive lasting change both within our company and the communities in which we operate.

In October 2020, we released our Impact Agenda detailing our strategies to become a more sustainable and equitable business, to minimize our environmental impact, and to accelerate positive change both internally and externally.

The Power of Three

We believe the first year of our Power of Three growth plan proved to be particularly successful.

The strategic pillars of this plan are product innovation, omni-guest experience, and market expansion.

Despite the global pandemic, we remain committed to our Power of Three growth plan and the targets contemplated by this plan which include a doubling of our men's business, a doubling of our e-commerce business, and a quadrupling of our international business by 2023 from levels realized in 2018.

Due to a shift towards online shopping as a result of COVID-19, we exceeded our e-commerce goal this year.

In addition to the growth targets, the three strategic pillars of the plan also remain unchanged and include:

product innovation, omni-guest experience, and market expansion.

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Product Innovation

Throughout fiscal 2019, response to our product offerings was strong as we continued to grow our core product categories, expand our merchandise range, and deliver new innovation through our Science of Feel development platform.

Momentum continued in both our men's and women's pant category, and we continued to expand the important categories of bras and outerwear.

In men's, one of our key growth areas, revenue increased 34% in 2019.

We also moved beyond test phase with our new assortment of selfcare personal-care products.

We rolled out our initial assortment to 50 stores and online.

We continued to leverage our Science of Feel development platform and brought innovations to our guests including a relaunch of our Everlux fabric and an expansion of our Align franchise into tops.

We also brought newness into our bra offering and expanded our On the Move assortment.

We introduced more inclusive sizing into our core women's styles in 2020 with additional styles to be added in 2021.

In men's, our guests responded well to shorts, sweats, hoodies, and joggers as they adapted their wardrobes to working and sweating from home.

Omni-Guest Experience

Performance was strong across both our company-operated store and direct to consumer channels in fiscal 2019, with comparable store sales increasing 9% and direct to consumer net revenue growing 35% , each based on a shifted calendar.

In fiscal 2019 we began to engage with our guests in new ways.

We began testing a new membership program, with four markets tested in fiscal 2019.

We also opened and began testing our first two fully experiential stores in 2019, one in the Lincoln Park neighborhood of Chicago and the second at the Mall of America near Minneapolis.

These stores were designed to offer dedicated studio space for sweat classes and meditation, locker rooms, healthy foods, and an elevated shopping experience.

In fiscal 2019 we continued to host unique events in North America and in our international markets.

In addition to our SeaWheeze half marathon and festival in Vancouver, we hosted 10K races in Toronto, Edmonton, and San Diego, our first in the United States.

In Europe, we held Sweatlife festivals in London, Paris, and Berlin, and in Mainland China, we hosted our 4th annual Unroll China event.

These festivals and events brought together guests, educators, ambassadors, and other members of the local community to engage in sweat classes, yoga, personal development, and meditation.

The COVID-19 pandemic impacted the way guests interacted with our brand in 2020.

Temporary store closures, social distancing requirements, and other actions taken within our stores to keep our guests and employees safe, contributed to a decline in store traffic relative to 2019.

Revenue in stores decreased 34%.

However, this was offset by significant strength in our e-commerce business.

We invested in IT infrastructure, fulfillment capacity, and increased the number of educators assisting guests in our Guest Education Center, including an online digital educator experience to provide a more personalized shopping experience.

In addition, we used our social channels to engage with our guests by offering ambassador-led digital sweat sessions, meditation classes, and other recovery and well-being tools.

Revenue in our e-commerce channel increased 101% in 2020.

In 2020, as it was safe to welcome guests back into our stores, we launched several initiatives to enhance the in-store experience.

We adapted our Buy Online Pick-up In-store capability to allow guests to pick-up their purchases at the door of the store or at curbside, we implemented virtual waitlist capabilities so that guests did not have to physically wait in line to enter stores operating under strict capacity constraints, and we offered appointment shopping in-store.

Market Expansion

In fiscal 2019, we continued to expand our presence both in North America and in our international markets.

During the year, we opened 51 net new company-operated stores, including 19 in North America, 24 in Asia Pacific, and eight in Europe.

We expanded into two new markets in Europe during the year, the Netherlands and Norway.

We also launched local market e-commerce sites in Germany and France.

In Asia, we opened our first stores in Malaysia and launched a local e-commerce site in Japan.

We also expanded our seasonal store strategy in fiscal 2019 with approximately 80 seasonal stores in operation for some period of time during the year.

These stores allowed us to better cater to our guests in select markets, particularly during the holidays, while also helping introduce new guests to our brand.

For fiscal 2019, our business in North America grew 20% , while total growth in our international markets was 32% .

Coronavirus (COVID-19)

The outbreak of the COVID-19 coronavirus has been declared a pandemic by the World Health Organization and continues to spread in the United States, Canada, and in many other countries globally.

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

Government authorities in certain markets in which we operate have also issued orders that require the closure of non-essential businesses and people to remain at home.

We have taken actions to close certain 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.

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

All but one of these locations have since reopened.

In March 2020, we temporarily closed all of our retail locations in North America, Europe, Malaysia, New Zealand, and we temporarily closed our distribution center in Sumner, WA.

These locations currently remain closed.

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

We expect our sales growth trends to experience a meaningful deterioration from those achieved in fiscal 2019 and to experience a material adverse impact on our fiscal 2020 results.

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 February 2, 2020 , we had cash and cash equivalents of $1.1 billion and the capacity under our committed revolving credit facility was $398.2 million .

We continued to expand our presence both in North America and in our international markets.

During the year, we opened 30 net new company-operated stores, including 18 stores in Asia Pacific, nine stores in North America, and three stores in Europe.

We also expanded our seasonal store strategy in 2020 with over 100 seasonal stores in operation for some period of time during the year.

These stores allowed us to better cater to our guests in select markets, while also helping introduce new guests to our brand.

In addition, in the fourth quarter, we opened 11 of these stores in close proximity to permanent lululemon stores.

Having two stores in select locations, where locally mandated capacity constraints were contributing to long wait times, allowed guests quicker and easier access to our in-store shopping experience.

For 2020, our business in North America increased 8%, while total growth in our international markets was 31%.

COVID-19 Pandemic

The outbreak of the COVID-19 coronavirus was declared a pandemic by the World Health Organization in March 2020 and it has caused governments and public health officials to impose restrictions and to recommend precautions to mitigate the spread of the virus.

Throughout the pandemic we have prioritized the safety of our employees and guests.

In February and March, we temporarily closed all of our retail locations in Mainland China, North America, Europe, and certain countries in Asia Pacific.

Our retail locations in Mainland China reopened during the first quarter of 2020, and our retail locations in other markets began reopening during the second quarter of 2020.

Almost all locations were open during the third quarter of 2020, and while most of our retail locations have remained open since then, certain locations have temporarily closed based on government and health authority guidance in those markets.

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

Prior to the COVID-19 pandemic, guest shopping preferences were shifting towards digital platforms and we had been investing in our websites, mobile apps, and omni-channel capabilities.

We believe that the COVID-19 pandemic further shifted guest shopping behaviour and we saw significant increases in traffic to our websites and digital apps.

This increased traffic contributed to the significant growth in our direct to consumer net revenue in 2020.

While we expect our direct to consumer business to grow, we expect the year over year growth rate in direct to consumer net revenue to moderate in 2021.

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The COVID-19 pandemic had a material adverse impact on our results of operations for 2020 and there remains significant uncertainty regarding the extent and duration of the impact that the COVID-19 pandemic will have on our operations.

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

Such factors are beyond our control and could elicit further actions and recommendations from governments and public health authorities.

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 committed revolving credit facility, to meet our liquidity needs.

As of January 31, 2021, we had cash and cash equivalents of $1.2 billion and the capacity under our committed revolving credit facility was $397.6 million.

Financial Highlights

The summary below provides both GAAP and non-GAAP financial measures.

The adjusted financial measures for fiscal 2018 exclude the amounts recognized in connection with U.S.

tax reform and taxes on the repatriation of foreign earnings.

For the fiscal year ended February 2, 2020 , compared to the fiscal year ended February 3, 2019 :

The summary below compares 2020 to 2019:

• Net revenue increased 11% to $4.4 billion.

On a constant dollar basis, net revenue increased 10%.

Total comparable sales, which includes comparable store sales and direct to consumer, increased 17% .

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

Comparable store sales increase d 9% , or increased 10% on a constant dollar basis.

Direct to consumer net revenue increased 35% , or increased 35% on a constant dollar basis.

• Company-operated stores net revenue decreased 34% to $1.7 billion.

• Direct to consumer net revenue increased 101% to $2.3 billion, or increased 101% on a constant dollar basis.

• Gross profit increased 11% to $2.5 billion.

• Gross margin increased 10 basis points to 56.0%.

Income from operations increased 26% to $889.1 million .

Operating margin increased 80 basis points to 22.3% .

Income tax expense increased 9% to $251.8 million .

Our effective tax rate for fiscal 2019 was 28.1% compared to 32.4% for fiscal 2018 .

The adjusted effective tax rate was 28.0% for fiscal 2018 .

Diluted earnings per share were $4.93 for fiscal 2019 compared to $3.61 in fiscal 2018 .

Adjusted diluted earnings per share were $3.84 for fiscal 2018 .

Due to the 53rd week in fiscal 2018 , comparable sales are calculated on a one week shifted basis such that the 52 week s ended February 2, 2020 are compared to the 52 week s ended February 3, 2019 rather than January 27, 2019 .

• Acquisition-related expenses of $29.8 million were recognized.

• Income from operations decreased 8% to $820.0 million.

• Operating margin decreased 370 basis points to 18.6%.

• Income tax expense decreased 8% to $230.4 million.

Our effective tax rate was 28.1% for each of 2020 and 2019.

• Diluted earnings per share were $4.50 for 2020 compared to $4.93 in 2019.

This includes $26.7 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.20 in 2020.

Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this "Item 7.

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 adjusted income tax expense, effective tax rates, and diluted earnings per share, and the most directly comparable measures calculated in accordance with GAAP.

Net revenue is comprised of company-operated store sales, direct to consumer sales through www.lululemon.com, other country and region specific websites, and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, and other net revenue, which includes outlet sales, sales from temporary locations, sales to wholesale accounts, license and supply arrangement net revenue which consists of royalties as well as sales of our products to licensees, and warehouse sales.

Cost of goods sold includes the cost of purchased merchandise, including freight, duty, and nonrefundable taxes incurred in delivering the goods to our distribution centers.

It also includes occupancy costs and depreciation expense for our company-operated store locations, all costs incurred in operating our distribution centers and production, design, distribution, and merchandise departments, hemming, shrink, and inventory provision expense.

The primary drivers of the costs of individual products are the costs of raw materials and labor in the countries where we source our merchandise.

Selling, general and administrative expenses consist of all operating costs not otherwise included in cost of goods sold.

Income tax expense depends on the statutory tax rates in the countries where we sell our products and the proportion of taxable income earned in those jurisdictions.

To the extent the relative proportion of taxable income in the jurisdictions fluctuates, or the tax legislation in the respective jurisdictions changes, so will our effective tax rate.

We also anticipate that, in the future, we may start to sell our products through retail locations in countries in which we have not yet operated, in which case, we would become subject to taxation based on the foreign statutory rates in the countries where these sales take place and our effective tax rate could fluctuate accordingly.

In addition, increases in our Canadian net assets may result in an increase to our effective tax rate due to Canadian withholding taxes that could be payable on future repatriations from our Canadian subsidiaries to the extent that they are not able to be made as a return of capital.

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.

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenue:

Fiscal Year Ended

February 2, 2020

February 3, 2019

February 2, 2020

February 3, 2019

(In thousands)

(Percentages)

The following table summarizes key components of our results of operations for the periods indicated:

2020 2019 2020 2019

(In thousands) (Percentage of revenue)

Net revenue $ 4,401,879 $ 3,979,296 100.0 % 100.0 %

Cost of goods sold 1,937,888 1,755,910 44.0 44.1

Gross profit 2,463,991 2,223,386 56.0 55.9

Selling, general and administrative expenses 1,609,003 1,334,247 36.6 33.5

Amortization of intangible assets 5,160 29 0.1 —

Acquisition-related expenses 29,842 — 0.7 —

Income from operations 819,986 889,110 18.6 22.3

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Income tax expense 230,437 251,797 5.2 6.3

Comparison of Fiscal 2019 to Fiscal 2018

Net revenue increase d $691.0 million , or 21% , to $4.0 billion in fiscal 2019 from $3.3 billion in fiscal 2018 .

On a constant dollar basis, assuming the average exchange rates in fiscal 2019 remained constant with the average exchange rates in fiscal 2018 , net revenue increased $718.5 million , or 22% .

The increase in net revenue was primarily due to increased direct to consumer net revenue, net revenue generated by new company-operated stores, and an increase in comparable store sales.

Based on a shifted calendar, total comparable sales, which includes comparable store sales and direct to consumer, increased 17% in fiscal 2019 compared to fiscal 2018 .

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

Net revenue on a segment basis for fiscal 2019 and fiscal 2018 is summarized below.

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

Fiscal Years Ended February 2, 2020 and February 3, 2019

(In thousands)

(Percentages)

Net income $ 588,913 $ 645,596 13.4 % 16.2 %

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Comparison of 2020 to 2019

Net revenue increased $422.6 million, or 11%, to $4.4 billion in 2020 from $4.0 billion in 2019.

On a constant dollar basis, assuming the average exchange rates in 2020 remained constant with the average exchange rates in 2019, net revenue increased $412.7 million, or 10%.

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, as well as net revenue from MIRROR.

This was 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 for 2020 and 2019 is summarized below.

2020 2019 2020 2019 Year over year change

(In thousands) (Percentage of revenue) (In thousands) (Percentage)

Company-operated stores $ 1,658,807 $ 2,501,067 37.7 % 62.9 % $ (842,260) (33.7) %

Direct to consumer 2,284,068 1,137,822 51.9 28.6 1,146,246 100.7

Other 459,004 340,407 10.4 8.6 118,597 34.8

Net revenue $ 4,401,879 $ 3,979,296 100.0 % 100.0 % $ 422,583 10.6 %

Company-Operated Stores.

Net revenue from our company-operated stores segment increase d $374.7 million , or 18% , to $2.5 billion in fiscal 2019 from $2.1 billion in fiscal 2018 .

The following contributed to the increase in net revenue from our company-operated stores segment:

Net revenue from company-operated stores we opened or significantly expanded subsequent to February 3, 2019 , and are therefore not included in comparable store sales, increased net revenue by $238.5 million .

During fiscal 2019 we opened 51 net new company-operated stores, including 24 stores in Asia Pacific, 19 stores in North America, and eight stores in Europe.

Based on a shifted calendar, a comparable store sales increase of 9% in fiscal 2019 compared to fiscal 2018 .

Comparable store sales increased 10% on a constant dollar basis.

The increase in comparable store sales was primarily a result of increased store traffic and improved conversion rates.

We generated net revenue of $32.7 million in the 53rd week of fiscal 2018 from our company-operated stores segment.

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 2020.

Certain stores experienced temporary re-closures during the last two quarters of 2020.

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

During 2020, we opened 30 net new company-operated stores, including 18 stores in Asia Pacific, nine stores in North America, and three stores in Europe.

Direct to Consumer.

Net revenue from our direct to consumer segment increased $279.0 million to $1.1 billion in fiscal 2019 from $858.9 million in fiscal 2018 .

We generated net revenue of $20.3 million in the 53rd week of fiscal 2018 from our direct to consumer segment.

Based on a shifted calendar, direct to consumer net revenue increased 35% , or increased 35% on a constant dollar basis.

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

Net revenue from our other segment increased $37.3 million , or 12% , to $340.4 million in fiscal 2019 from $303.1 million in fiscal 2018 .

This increase was primarily the result of an increase in net revenue from sales to wholesale accounts, and an increased number of temporary locations, including seasonal stores, open during fiscal 2019 compared to fiscal 2018 .

Gross profit increased $407.1 million , or 22% , to $2.2 billion in fiscal 2019 from $1.8 billion in fiscal 2018 .

Gross profit as a percentage of net revenue, or gross margin, increased 70 basis points, to 55.9% in fiscal 2019 from 55.2% in fiscal 2018 .

The increase in gross margin was primarily the result of an increase in product margin of 110 basis points, which was primarily due to lower product costs, a favorable mix of higher margin product, and lower markdowns.

This was partially offset by an increase in costs as a percentage of revenue related to our distribution centers and our product departments of 30 basis points, an increase in occupancy and depreciation costs as a percentage of revenue of 10 basis points, and an unfavorable impact of foreign exchange rates of 10 basis points.

Direct to consumer net revenue increased 101%, and increased 101% on a constant dollar basis.

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

The increase in traffic was partially due to COVID-19, with more guests shopping online instead of in-stores.

During the second quarter of 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 2019.

The increase in net revenue from our other operations 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 2020 compared to 2019.

The increase was partially offset by a decrease in outlet sales primarily due to the impact of COVID-19.

2020 2019 Year over year change

(In thousands) (In thousands) (Percentage)

Gross profit $ 2,463,991 $ 2,223,386 $ 240,605 10.8 %

Gross margin 56.0 % 55.9 % 10 basis points

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The increase in gross margin was primarily the result of:

• a decrease in occupancy and depreciation costs as a percentage of net revenue of 60 basis points, driven primarily by the increase in net revenue;

• a decrease in costs related to our product departments as a percentage of revenue of 50 basis points, driven by lower incentive compensation and travel costs, as well as the increase in net revenue;

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

The increase in gross margin was partially offset by an increase in costs as a percentage of net revenue related to our distribution centers of 80 basis points.

This was primarily due to an increase in costs related to COVID-19 safety precautions, higher people costs related to the growth in our direct to consumer business, and increased usage of third-party warehouse and logistics providers.

There was also a decrease in product margin of 30 basis points, which was primarily due to higher markdowns and air freight costs, partially offset by a favorable mix of higher margin product.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $223.8 million , or 20% , to $1.3 billion in fiscal 2019 from $1.1 billion in fiscal 2018 .

2020 2019 Year over year change

(In thousands) (In thousands) (Percentage)

Selling, general and administrative expenses $ 1,609,003 $ 1,334,247 $ 274,756 20.6 %

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

• an increase in costs related to our operating channels of $253.2 million, comprised of:

an increase in employee costs of $64.7 million primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher incentive compensation expenses;

an increase in variable costs of $49.2 million primarily due to an increase in distribution costs, credit card fees, and packaging costs as a result of increased net revenue;

an increase in other costs of $22.8 million primarily due to increases in digital marketing expenses, information technology costs, security, and other costs associated with our operating locations;

– an increase in variable costs of $144.1 million primarily due to an increase in distribution costs related to the growth in our direct to consumer net revenue, and an increase in credit card fees as a result of increased net revenue;

– an increase in brand and community costs of $116.4 million primarily due to an increase in digital marketing expenses;

– an increase in other costs of $14.2 million primarily due to increases in information technology costs;

– a decrease in employee costs of $21.5 million primarily due to lower incentive compensation expenses in our company-operated stores 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 and other operations;

• an increase in head office costs of $56.5 million, comprised of:

an increase in employee costs of $43.0 million primarily due to increased incentive and stock-based compensation expense and due to increased wages, primarily from additional employees to support the growth in our business;

an increase in other costs of $41.3 million primarily due to increases in depreciation, information technology costs, professional fees, brand and community costs, and other head office costs;

– an increase of $63.0 million primarily due to increases in information technology costs, professional fees, depreciation, community giving, and other head office costs;

– a decrease in employee costs of $6.5 million primarily due to lower incentive compensation and travel expenses, partially offset by increased salaries and wages expense as a result of headcount growth, and higher stock-based compensation expense;

• an increase in net foreign exchange and derivative revaluation losses of $1.6 million.

There were net foreign exchange and derivative revaluation losses of $1.5 million in fiscal 2019 compared to net foreign exchange revaluation gains of $1.4 million in fiscal 2018 .

As a percentage of net revenue, selling, general and administrative expenses decreased 30 basis points, to 33.5% in fiscal 2019 from 33.8% in fiscal 2018 .

The increase in selling, general and administrative expenses was partially offset by $36.5 million of government payroll subsidies.

These payroll subsidies partially offset the wages paid to employees while our retail locations were temporarily closed due to the COVID-19 pandemic.

Amortization of Intangible Assets

2020 2019 Year over year change

(In thousands) (In thousands) (Percentage)

Amortization of intangible assets

$ 5,160 $ 29 $ 5,131 n/a

The increase in the amortization of intangible assets was the result of the intangible assets recognized upon the acquisition of MIRROR during the second quarter of 2020.

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Acquisition-Related Expenses

2020 2019 Year over year change

(In thousands) (In thousands) (Percentage)

Acquisition-related expenses

$ 29,842 $ — $ 29,842 n/a

As a result of our acquisition of MIRROR in the second quarter of 2020, we recognized acquisition-related compensation of $20.1 million for deferred consideration for certain continuing MIRROR employees.

We also recognized transaction and integration related costs of $10.5 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 2019.

Please refer to Note 6.

Acquisition included in Item 8 of Part II of this report for further information.

Income from Operations

Income from operations increased $183.3 million , or 26% , to $889.1 million in fiscal 2019 from $705.8 million in fiscal 2018 .

Operating margin increased 80 basis points to 22.3% compared to 21.5% in fiscal 2018 .

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

Segmented income from operations before general corporate expenses for fiscal 2019 and fiscal 2018 is summarized below and is expressed in dollar amounts.

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

Fiscal Years Ended February 2, 2020 and February 3, 2019

(In thousands)

(Percentages)

Segmented income from operations:

During the first quarter of 2020, we reviewed our 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.

Segmented income from operations before general corporate expenses is summarized below.

Income from operations 2020 2019 2020 2019 Year over year change

(In thousands) (Percentage of net revenue of respective operating segment) (In thousands) (Percentage)

Segment income from operations:

Company-operated stores $ 212,592 $ 689,339 12.8 % 27.6 % $ (476,747) (69.2) %

Direct to consumer 1,029,102 484,146 45.1 42.6 544,956 112.6 %

Other 10,502 72,013 2.3 21.2 (61,511) (85.4) %

$ 1,252,196 $ 1,245,498 $ 6,698 0.5 %

General corporate expenses 397,208 356,359 40,849 11.5 %

Amortization of intangibles 5,160 29 5,131 n/a

Acquisition-related expenses 29,842 — 29,842 n/a

Income from operations $ 819,986 $ 889,110 $ (69,124) (7.8) %

Operating margin 18.6 % 22.3 % (370) basis points

Company-Operated Stores.

Income from operations from our company-operated stores segment increase d $113.8 million , or 20% , to $689.3 million for fiscal 2019 from $575.5 million for fiscal 2018 .

The increase was primarily the result of increased gross profit of $199.5 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 increased employee costs, increased store operating expenses including higher credit card fees, distribution costs, and packaging costs as a result of higher net revenue, and due to increased security, repairs and maintenance costs, and information technology costs.

Income from operations as a percentage of company-operated stores net revenue increased by 50 basis points, primarily due to leverage on selling, general and administrative expenses and an increase in gross margin.

The decrease in income from operations from company-operated stores was primarily the result of decreased gross profit of $591.8 million which was primarily due to lower net revenue as well as lower gross margin.

The decrease in gross margin 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 lower people costs and lower operating costs.

People costs decreased primarily due to lower incentive compensation.

Store operating costs decreased primarily due to lower credit card fees, packaging and supplies, and distribution costs as a result of lower net revenue, as well as lower community, security, and repairs and maintenance costs.

The recognition of certain government payroll subsidies also reduced selling, general, and administrative expenses.

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 increase d $128.3 million , or 36% , to $482.4 million in fiscal 2019 from $354.1 million in fiscal 2018 .

The increase was primarily the result of increased gross profit of $194.0 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 costs as a result of higher net revenue, as well as higher digital marketing expenses, information technology costs, and employee costs.

Income from operations as a percentage of direct to consumer net revenue has increased by 120 basis points, primarily due to an increase in gross margin, partially offset by deleverage on selling, general and administrative expenses.

Other income from operations increase d $10.0 million , or 16% , to $72.6 million in fiscal 2019 from $62.6 million in fiscal 2018 .

The increase was primarily the result of increased gross profit of $ 13.6 million which was primarily due to increased net revenue.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased employee costs, increased operating expenses including higher credit card fees and higher distribution costs as a result of higher net revenue, and due to higher repairs and maintenance costs and information technology costs.

Income from operations as a percentage of other net revenue increased 70 basis points, primarily due to leverage on selling, general and administrative expenses, partially offset by a decrease in gross margin.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $773.7 million which was primarily due to increased net revenue and due to higher gross margin.

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 and supplies costs as a result of higher net revenue, as well as higher digital marketing expenses, employee costs and information technology costs.

Income from operations as a percentage of direct to consumer net revenue has increased primarily due to leverage on selling, general and administrative expenses and an increase in gross margin.

The decrease in income from operations was primarily the result of increased selling, general and administrative expenses, driven primarily by MIRROR digital marketing expenses, as well as increased distribution costs and credit card fees

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as a result of revenue generated by MIRROR.

The increase in selling, general and administrative expenses was partially offset by an increase in gross profit related to MIRROR, driven by 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 Expenses.

General corporate expenses increased $68.8 million , or 24% , to $355.2 million in fiscal 2019 from $286.4 million in fiscal 2018 .

This increase was primarily due to increases in head office employee costs, depreciation, brand and community costs, information technology costs, professional fees, and an increase in net foreign exchange and derivative losses of $2.9 million .

We expect general corporate expenses to continue to increase in future years as we grow our overall business and require increased efforts at our head office to support our company-operated stores, direct to consumer and other segments.

The increase in general corporate expenses was primarily the result of increases in information technology costs, salaries and wages as a result of headcount growth, professional fees, depreciation, community giving, and an increase in net foreign exchange and derivative losses of $1.6 million.

The increase in general corporate expense was partially offset by a decrease in travel and incentive compensation costs, as well as the recognition of certain government payroll subsidies.

We expect general corporate expenses to continue to increase in future years as we grow our overall business and require increased efforts at our head office to support our operations.

Other Income (Expense), Net

There was net other income of $8.3 million in fiscal 2019 compared to $9.4 million in fiscal 2018 .

The decrease was primarily due to a decrease in net interest income, primarily from lower cash balances during the majority of fiscal 2019 compared to fiscal 2018 .

The decrease in net other income was partially offset by a decrease in interest expense, primarily the result of borrowings on our North American revolving credit facility during fiscal 2018.

We did not have any borrowings on our revolving credit facilities during fiscal 2019.

2020 2019 Year over year change

(In thousands) (In thousands) (Percentage)

Other income (expense), net

$ (636) $ 8,283 $ (8,919) (107.7) %

The decrease in other income, net was primarily due to a decrease in net interest income as a result of lower cash balances and lower interest rates during the majority of 2020 compared to 2019.

We did not have any borrowings on our revolving credit facilities during 2020 or 2019.

Income Tax Expense

Income tax expense increased $20.3 million , or 9% , to $251.8 million in fiscal 2019 from $231.4 million in fiscal 2018 .

tax reform was enacted on December 22, 2017 and introduced significant changes to U.S.

income tax law.

We completed the accounting for the income tax effects of U.S.

tax reform during fiscal 2018.

This resulted in the recognition of an additional tax expense of $7.5 million related to the mandatory one-time transition tax on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries.

In fiscal 2018, we also completed our assessment of the impact that U.S.

tax reform has upon repatriation taxes, our reinvestment plans, and the most efficient means of deploying our capital resources globally.

We concluded that the net investment in a Canadian subsidiary in excess of the amounts necessary to sustain our business operations would no longer be indefinitely reinvested and $778.9 million was repatriated from that subsidiary.

This resulted in the recognition of a tax expense of $23.7 million in fiscal 2018.

Further information on the adjustments recognized in fiscal 2018 is outlined in Note 15 to the audited consolidated financial statements included in Item 8 of Part II of this report.

Our effective tax rate for fiscal 2019 was 28.1% compared to 32.4% for fiscal 2018 .

The effective tax rate excluding the above tax adjustments related to U.S.

tax reform was 28.0% for fiscal 2018 .

The increase in the effective tax rate compared to our adjusted effective tax rate in the prior year was primarily due to accruals for repatriation taxes on unremitted earnings and true-ups upon filing of tax returns.

This was partially offset by a reduction in non-deductible stock-based compensation expense.

Net income increased $161.8 million , or 33% , to $645.6 million in fiscal 2019 from $483.8 million in fiscal 2018 .

The increase in net income in fiscal 2019 was primarily due to an increase in gross profit of $407.1 million , partially offset by an increase in selling, general and administrative expenses of $223.8 million , an increase in income tax expense of $20.3 million , and a decrease in other income (expense), net of $1.1 million .

Comparable Sales

We separately track comparable store sales, which reflect net revenue from company-operated stores that have been open, or open after being significantly expanded, for at least 12 full fiscal months.

Net revenue from a store is included in comparable store sales beginning with the first fiscal month for which the store has a full fiscal month of sales in the prior year.

Comparable store sales exclude sales from new stores that have not been open for at least 12 full fiscal months, from stores which have not been in their significantly expanded space for at least 12 full fiscal months, and from stores which have been temporarily relocated for renovations or temporarily closed for over 30 days.

Comparable store sales also exclude sales from direct to consumer, outlets, temporary locations, wholesale accounts, through license and supply arrangements, warehouse sales, and sales from company-operated stores that we have closed.

We use comparable store sales to assess the performance of our existing stores.

It allows us to monitor the performance of our business without the impact of recently opened or expanded stores.

We believe that investors would similarly find this metric useful in assessing the performance of our business.

2020 2019 Year over year change

(In thousands) (In thousands) (Percentage)

Income tax expense $ 230,437 $ 251,797 $ (21,360) (8.4) %

Effective tax rate

28.1 % 28.1 % — basis points

Our effective tax rate for 2020 was consistent with 2019.

This included an increase in the effective tax rate due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 60 basis points.

This was offset by adjustments upon filing of certain income tax returns and an increase in tax deductions related to stock-based compensation.

2020 2019 Year over year change

(In thousands) (In thousands) (Percentage)

$ 588,913 $ 645,596 $ (56,683) (8.8) %

The decrease in net income in 2020 was primarily due to an increase in selling, general and administrative expenses of $274.8 million, the recognition of acquisition-related expenses of $29.8 million, an increase in amortization of intangible assets of $5.1 million, and a decrease in other income (expense), net of $8.9 million.

This was partially offset by an increase in gross profit of $240.6 million, and a decrease in income tax expense of $21.4 million.

Comparable Store Sales and Total Comparable Sales

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

However, as the temporary store closures from COVID-19 resulted in a significant number of stores being removed from our comparable store calculations during the first two quarters of 2020, we believe total comparable sales and comparable store sales on a full year basis are not currently representative of the underlying trends of our business.

We do not believe these full year 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 did not provide comparable sales metrics that included the first two quarters during 2020, and expect to do the same for 2021.

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

Net revenue from a store is included in comparable store sales

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beginning with the first fiscal month for which the store has a full fiscal month of sales in the prior year.

Comparable store sales also exclude sales from direct to consumer and our other operations, as well as sales from company-operated stores that have closed.

Total comparable sales combines comparable store sales and direct to consumer sales.

We are evolving towards an omni-channel approach to support the shopping behavior of our guests.

This involves country and region specific websites, mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, social media, product notification emails, and online order fulfillment through stores.

Total comparable sales is an increasingly important metric to us as it allows us to evaluate the performance of our business from an omni-channel perspective.

We therefore believe that reporting total comparable sales with comparable store sales and direct to consumer sales combined provides a relevant performance metric to investors.

Various factors affect comparable sales, including:

the location of new stores relative to existing stores;

consumer preferences, buying trends, foot traffic in the malls in which our stores are located, and overall economic trends;

our ability to anticipate and respond effectively to customer preferences for technical athletic apparel;

changes in our merchandise mix;

the timing of our releases of new merchandise and promotional events;

the effectiveness of our marketing efforts;

the design and ease of use of our websites and mobile apps;

the level of customer service that we provide in our stores and on our websites and mobile apps;

our ability to source and distribute products efficiently;

the number of stores we open, close (including for temporary renovations), and expand in any period.

In fiscal years with 53 weeks, the 53rd week of net revenue is excluded from the calculation of comparable sales.

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Non-GAAP Financial Measures

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

Constant dollar changes in net revenue 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.

We provide constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue because we use these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates.

We believe that disclosing

these measures on a constant dollar basis is useful to investors because it enables them to understand the level of growth of our business.

Adjusted income tax expense, effective tax rates, and diluted earnings per share exclude the amounts recognized in connection with U.S.

tax reform and taxes on repatriation of foreign earnings.

We believe these adjusted financial measures are useful to investors in evaluating the trend in our operating performance as the adjustments do not directly relate to our ongoing business operations.

Furthermore, we do not believe the adjustments are reflective of our expectations of our future operating performance and believe these non-GAAP measures are useful to investors because of their comparability to our historical information.

We provide constant dollar changes in our results to help investors understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP.

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

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

Fiscal Year Ended

February 2, 2020

(In thousands)

(Percentages)

Adjustments due to foreign exchange rate changes

Change in constant dollars

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

Due to the 53rd week in fiscal 2018 , the below changes in total comparable sales, comparable store sales, and direct to consumer net revenue are calculated on a one week shifted basis such that the 52 week s ended February 2, 2020 are compared to the 52 week s ended February 3, 2019 rather than January 27, 2019 .

Fiscal Year Ended

February 2, 2020

Total Comparable Sales 1,2

Comparable Store Sales 2

Direct to Consumer Net Revenue

Net Revenue Direct to Consumer Net Revenue

(In thousands) (Percentages) (Percentages)

Change $ 422,583 11 % 101 %

Adjustments due to foreign exchange rate changes (9,898) (1) —

Change in constant dollars $ 412,685 10 % 101 %

Total comparable sales includes comparable store sales and direct to consumer sales.

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.

Adjusted financial measures

The following tables reconcile adjusted financial measures with the most directly comparable measures calculated in accordance with GAAP.

The adjustments relate to the amounts recognized in connection with U.S.

tax reform and taxes on repatriation of foreign earnings.

Please refer to Note 15 to the audited consolidated financial statements included in Item 8 of Part II of this report for further information on these adjustments.

Fiscal Year Ended February 3, 2019

Adjusted Amounts

Tax on Repatriation of Foreign Earnings

(In thousands, except per share amounts)

Income tax expense

Effective tax rate

Diluted earnings per share

Liquidity and Capital Resources

Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our revolving credit facilities.

Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our committed revolving credit facility.

Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, investing in information technology and making system enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally.

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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 February 2, 2020 , our working capital (excluding cash and cash equivalents) was $94.0 million , our cash and cash equivalents were $1.1 billion and our capacity under our committed revolving credit facility was $398.2 million .

We believe that our cash and cash equivalent balances, cash generated from operations, and borrowings available to us under our committed revolving credit facility will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.

Our cash from operations may be negatively impacted by a decrease in demand for our products as well as the other factors described in "Item 1A.

Risk Factors".

In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, 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.

Capital expenditures are expected to range between $335.0 million and $345.0 million in fiscal 2021.

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As of January 31, 2021, our working capital (excluding cash and cash equivalents) was $90.7 million, our cash and cash equivalents were $1.2 billion and our capacity under our committed revolving credit facility was $397.6 million.

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

Fiscal Year Ended

February 2, 2020

February 3, 2019

(In thousands)

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Effect of exchange rate changes on cash 29,996 (1,550)

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents $ 57,012 $ 212,185

Operating Activities

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.

Net cash provided by operating activities decreased $73.5 million in fiscal 2019 compared to fiscal 2018 , primarily as a result of the following:

an increase in cash used in operating activities of $306.9 million as a result of changes in operating assets and liabilities, primarily due to the following:

$115.9 million related to income taxes, primarily due to payments for withholding taxes on repatriated foreign earnings, as well as timing of tax installments;

$86.8 million related to accounts payable, primarily due to a change in our payment terms in the prior fiscal year;

$51.0 million related to other prepaid expenses and other current and non-current assets;

$45.6 million related to inventory, primarily due to an increase in inventory purchases to support our growth.

This was partially offset by an increase of $161.8 million in net income, and an increase of $71.7 million in non-cash expenses primarily related to an increase in depreciation, stock-based compensation, the settlement of derivatives not designated in a hedging relationship, and deferred income taxes.

Net cash provided by operating activities increased $134.0 million to $803.3 million in 2020 from $669.3 million in 2019, primarily as a result of the following:

• an increase from changes in operating assets and liabilities of $146.5 million, primarily due to the following:

– $97.5 million related to accounts payable, partially due to a change in payment terms with our non-product vendors;

– $76.8 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;

– $38.7 million related to inventories;

– $12.1 million related to other current and non-current liabilities.

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

– $38.4 million related to prepaid expenses and other current and non-current assets, including increases in cloud computing implementation costs;

– $32.0 million related to accrued compensation and related expenses due to lower accrued incentive compensation, partially offset by acquisition-related compensation accruals;

– $8.2 million related to income taxes.

• an increase of $44.2 million in 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, deferred income taxes, the settlement of derivatives not designated in a hedging relationship, and stock-based compensation.

The increase in cash provided by operating activities was partially offset by a decrease of $56.7 million in net income.

Investing Activities

Cash flows used in investing activities relate to capital expenditures, the settlement of net investment hedges, and other investing activities.

Cash used in investing activities increased $35.6 million , to $278.4 million in fiscal 2019 from $242.8 million in fiscal 2018 .

Capital expenditures for our company-operated stores segment were $171.5 million and $129.2 million in fiscal 2019 and fiscal 2018 , respectively.

Cash used in investing activities increased $417.1 million, to $695.5 million in 2020 from $278.4 million in 2019.

The increase was primarily due to the acquisition of MIRROR, net of cash acquired for $452.6 million during 2020.

This was partially offset by a decrease in capital expenditures.

Capital expenditures for our company-operated stores segment were $134.2 million and $171.5 million in 2020 and 2019, respectively.

The capital expenditures for our company-operated stores segment in each period were primarily for the remodeling or relocation of certain stores, for opening new company-operated stores, and ongoing store refurbishment.

The increase in capital expenditures for our company-operated stores segment was primarily due to an increased amount spent on store remodels and relocations, including our experiential stores.

The capital expenditures for our company-operated stores segment also included $44.3 million to open 57 company-operated stores and $27.1 million to open 39 company-operated stores, in fiscal 2019 and fiscal 2018 respectively.

Capital expenditures for our direct to consumer segment were $15.8 million and $6.4 million in fiscal 2019 and fiscal 2018 , respectively.

The capital expenditures for our direct to consumer segment in fiscal 2019 were primarily related to our new distribution center in Toronto, Canada as well as other information technology infrastructure and system initiatives, and in fiscal 2018 were primarily related to our global and region specific websites as well as mobile apps.

Capital expenditures related to corporate activities and other were $95.7 million and $90.2 million in fiscal 2019 and fiscal 2018 , respectively.

The capital expenditures in each fiscal year were primarily related to investments in information technology and business systems, improvements at our head office and other corporate buildings, and for capital expenditures related to opening retail locations other than company-operated stores.

The decrease in capital expenditures for our company-operated stores segment was primarily due to fewer store renovations during 2020 in comparison with 2019.

The capital expenditures for our company-operated stores segment also included $41.0 million to open 40 company-operated stores and $44.3 million to open 57 company-operated stores, in 2020 and 2019

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respectively.

As a result of the COVID-19 pandemic we delayed certain store renovations and new store openings.

We expect to open between 40 and 50 company-operated stores in 2021.

Capital expenditures for our direct to consumer segment were $37.2 million and $15.8 million in 2020 and 2019, respectively.

We accelerated our investments in our e-commerce websites and mobile apps during 2020 in response to the COVID-19 pandemic and the impact it had on guest shopping behavior.

The capital expenditures in 2020 were primarily related to enhancing the functionality and capacity of our websites, and in 2019 were primarily related to our then new distribution center in Toronto, Canada as well as other information technology infrastructure and system initiatives.

Capital expenditures related to corporate activities and other were $57.8 million and $95.7 million in 2020 and 2019, respectively.

The capital expenditures in each fiscal year were primarily related to investments in information technology and business systems, and for capital expenditures related to opening retail locations other than company-operated stores.

The decrease in capital expenditures for our corporate activities and other was partially due to more larger scale projects in the prior year in comparison to the current year as well as a shift to cloud computing.

Implementation costs related to cloud service arrangements are capitalized within other non-current assets in the consolidated balance sheets and the associated cash flows are included in operating activities.

We anticipate that we will continue to shift towards more cloud-based technology services in the future.

Financing Activities

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 $413.0 million , to $177.2 million in fiscal 2019 from $590.2 million in fiscal 2018 .

Cash used in financing activities decreased $96.4 million, to $80.8 million in 2020 from $177.2 million in 2019.

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

During the fiscal years ended February 2, 2020 and February 3, 2019 , 1.1 million and 4.9 million , respectively, were repurchased under the programs at a total cost of $173.4 million and $598.3 million , respectively.

During the first quarter of fiscal 2019, we repurchased 1.0 million shares in a private transaction, and during the second quarter of fiscal 2018, we repurchased 3.3 million shares in a private transaction.

During 2020, 0.4 million shares were repurchased at a cost of $63.7 million.

During 2019, 1.1 million shares, were repurchased at a cost of $173.4 million.

In the first quarter of 2019, we repurchased 1.0 million shares in a private transaction.

We did not purchase any shares in private transactions during 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.

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

Our cash from operations may be negatively impacted by a decrease in demand for our products as well as the other factors described in "Item 1A.

Risk Factors".

Revolving Credit Facilities

North America revolving credit facility

On December 15, 2016, we entered into a credit agreement for $150.0 million under a committed and unsecured five-year revolving credit facility.

Bank of America, N.A., is administrative agent and HSBC Bank Canada is the syndication agent and letter of credit issuer, and the lenders party thereto.

Borrowings under the revolving credit facility may be made, in U.S.

Dollars, Euros, Canadian Dollars, and in other currencies, subject to the approval of the administrative agent and the lenders.

Up to $35.0 million of the revolving credit facility is available for the issuance of letters of credit and up to $25.0 million is

available for the issuance of swing line loans.

Commitments under the revolving credit facility may be increased by up to $200.0 million, subject to certain conditions, including the approval of the lenders.

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

The principal amount outstanding under the credit agreement, if any, will be due and payable in full on December 15, 2021, subject to provisions that permit us to request a limited number of one year extensions annually.

Borrowings made under the revolving credit facility bear interest at a rate per annum equal to, at our option, either (a) 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 (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.

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.

During 2016, we obtained a $150.0 million committed and unsecured five-year revolving credit facility with major financial institutions.

On June 6, 2018, we amended the credit agreement to provide for (i) an increase in the aggregate commitments under the revolving credit facility to $400.0 million, with an increase of the sub-limits for the issuance of letters of credit and extensions of swing line loans to $50.0 million for each, (ii) an increase in the option, subject to certain conditions, to request increases in commitments from $400.0 million to $600.0 million and (iii) an extension in the maturity of the facility from December 15, 2021 to June 6, 2023.

Borrowings under the facility may be made in U.S.

Dollars, Euros, Canadian Dollars, and in other currencies, subject to the lenders' approval.

As of January 31, 2021, aside from letters of credit of $2.4 million, we had no other borrowings outstanding under this credit facility.

Borrowings under the facility bear interest at a rate equal to, at our option, either (a) 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 (b) an alternate base rate, plus, an applicable margin 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%-1.50% for LIBOR loans and 0.00%-0.50% for alternate base rate loans.

Additionally, a commitment fee of between 0.10%-0.20% is payable on the average unused amounts under the revolving credit facility, and fees of 1.00%-1.50% are payable on unused letters of credit.

The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of our 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.

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

We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.5:1 and to maintain the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) below 2:1.

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.

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

1 to the credit agreement.

The Amendment amends the credit agreement to provide for (i) an increase in the aggregate commitments under the unsecured five-year revolving credit facility to $400.0 million, with an increase of the sub-limits for the issuance of letters of credit and extensions of swing line loans to $50.0 million for each, (ii) an increase in the option, subject to certain conditions as set forth in the credit agreement, to request increases in commitments under the revolving facility from $400.0 million to $600.0 million and (iii) an extension in the maturity of the revolving facility from December 15, 2021 to June 6, 2023.

In addition, the Amendment decreases 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%, reduces the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduces fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%.

As of February 2, 2020 , aside from letters of credit of $1.8 million , we had no other borrowings outstanding under this credit facility.

As of January 31, 2021, we were in compliance with the covenants of the credit facility.

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Mainland China revolving credit facility

In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility.

The terms are reviewed on an annual basis.

The facility includes a revolving loan of up to 100.0 million Chinese Yuan as well as a financial bank guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency.

Loans are available in Chinese Yuan for a period not to exceed 12 months, and interest accrues on them at a rate equal to 105% of the applicable PBOC Benchmark Lending Rate.

Guarantees have a commission equal to 1% per annum of the outstanding amount.

The Company is required to follow certain covenants.

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

In December 2019, we entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility with terms that are reviewed on an annual basis.

The credit facility was increased to 230.0 million Chinese Yuan during 2020.

It comprises of a revolving loan of up to 200.0 million Chinese Yuan and a financial guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency.

Loans are available for a period not to exceed 12 months, at an interest rate equal to the loan prime rate plus a spread of 0.5175%.

We are required to follow certain covenants.

As of January 31, 2021, we were in compliance with the covenant and there were no borrowings or guarantees outstanding under this credit facility.

364-Day revolving credit facility

In June 2020, we obtained a 364-day $300.0 million committed and unsecured revolving credit facility.

In December 2020, we elected to terminate this credit facility.

Contractual Obligations and Commitments

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Our leases generally have initial terms of between five and 15 years, and generally can be extended in five-year increments, if at all.

The following table details the Company's future minimum lease payments.

The following table details our future minimum lease payments.

Minimum lease commitments exclude variable lease expenses including contingent rent payments, common area maintenance, property taxes, and landlord's insurance.

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In some cases, values are subject to change, such as for product purchases throughout the production process.

The reported amounts exclude liabilities included in our consolidated balance sheets as of February 2, 2020 .

The reported amounts exclude liabilities included in our consolidated balance sheets as of January 31, 2021.

One-time transition tax .

As outlined in Note 15 to our audited consolidated financial statements included in Item 8 of Part II of this report, U.S.

As outlined in Note 17.

Income Taxes included in Item 8 of Part II of this report, U.S.

tax reform imposed a mandatory transition tax on accumulated foreign subsidiary earnings which have not previously been subject to U.S.

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The table below outlines the expected payments due by fiscal year.

The following table summarizes our contractual arrangements as of February 2, 2020 , and the timing and effect that such commitments are expected to have on our liquidity and cash flows in future periods:

Payments Due by Fiscal Year

Deferred consideration.

The amounts listed for deferred consideration in the table below represent expected future cash payments for certain continuing MIRROR employees, subject to the continued employment of those individuals up to three years from the acquisition date as outlined in Note 6.

Acquisition included in Item 8 of Part II of this report.

The following table summarizes our contractual arrangements due by fiscal year as of January 31, 2021, and the timing and effect that such commitments are expected to have on our liquidity and cash flows in future periods:

Total 2021 2022 2023 2024 2025 Thereafter

(In thousands)

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One-time transition tax payable 48,226 5,076 5,076 9,518 12,691 15,865 —

Deferred consideration 49,544 25,194 24,341 9 — — —

Off-Balance Sheet Arrangements

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

As of February 2, 2020 , letters of credit totaling $1.8 million had been issued.

As of January 31, 2021, letters of credit and letters of guarantee totaling $2.8 million had been issued, including $2.4 million under our committed revolving credit facility.

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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Critical Accounting Policies and Estimates

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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.

We believe that the following critical accounting policies affect our more significant estimates and judgments used in the preparation of our consolidated financial statements:

Revenue Recognition.

Net revenue is comprised of company-operated store net revenue, direct to consumer net revenue through websites and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, and other net revenue, which includes revenue from outlets, temporary locations, sales to wholesale accounts, warehouse sales, and license and supply arrangement net revenue, which consists of royalties as well as sales of our products to licensees.

All net revenue is reported net of sales taxes collected from customers on behalf of taxing authorities.

We record an estimated allowance for sales returns.

This allowance is calculated based on a history of actual returns, estimated future returns, and any significant future known, or anticipated, events.

Consideration of these factors results in an estimated allowance for sales returns and an asset for estimated returned inventory.

Our standard terms for retail sales limit returns to approximately 30 days after sale;

however, we accept returns after 30 days where the product fails to meet our guests' quality expectations.

Proceeds from the sale of gift cards are initially deferred and recognized within "Unredeemed gift card liability" on the consolidated balance sheets, and are recognized as revenue when tendered for payment.

To the extent there is no requirement to remit unclaimed card balances to government agencies, an estimate of the gift card balances that will never be redeemed is recognized as revenue in proportion to gift cards which have been redeemed.

The estimate of gift cards that will never be redeemed is based on the historic trend of unredeemed cards.

Our critical accounting policies, estimates, and judgements are as follows, and see Note 2.

Summary of Significant Account Policies included in Item 8 of Part II for additional information:

Inventory provisions

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

We periodically review our inventories and make a provision 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.

We periodically review our inventories and make a provision for obsolescence and goods that have quality issues or that are damaged.

We record a provision at an amount that is equal to the difference between the inventory cost and its net realizable value.

As at January 31, 2021 the net carrying value of our inventories was $647.2 million, which included provisions for obsolete and damaged inventory of $30.0 million.

The provision is determined based upon assumptions about product quality, damages, future demand, selling prices, and market conditions.

If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination.

Property and Equipment.

Property and equipment are recorded at cost less accumulated depreciation.

Buildings are depreciated on a straight-line basis over the expected useful life of the asset, which is individually assessed, and estimated to be up to 20 years.

Leasehold improvements are depreciated on a straight-line basis over the lesser of the length of the lease and the estimated useful life of the assets, up to a maximum of five years.

All other property and equipment is depreciated using the declining balance method as follows:

Furniture and fixtures

Computer hardware and software

Equipment and vehicles

Changes in circumstances, such as technological advances, can result in differences between the actual and estimated useful lives.

In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset's net book value to its estimated salvage value.

Long-lived assets, including intangible assets with finite useful lives are evaluated for impairment when the occurrence of events or changes in circumstances indicates that the carrying value of the assets may not be recoverable as measured by comparing their net book value to the undiscounted estimated future cash flows generated by their use and eventual disposition.

Impaired assets are recorded at fair value, determined principally by the present value of the estimated future cash flows expected from their use and eventual disposition.

Deferred taxes on undistributed net investment of foreign subsidiarie s.

Goodwill impairment assessment

Goodwill is tested annually for impairment on the first day of the fourth quarter each fiscal year, or more frequently if there are indicators of impairment.

Goodwill is allocated to the reporting unit which is expected to receive the benefit from the synergies of the combination.

The Company has allocated $362.5 million of goodwill to the MIRROR reporting unit.

As at November 2, 2020, we performed a qualitative assessment and concluded that it was more likely than not that the fair value of the MIRROR reporting unit exceeded its carrying value, and therefore, no further impairment testing was required.

In concluding that it was more likely than not that the fair value of the MIRROR reporting unit exceeded its fair value we considered if there had been any negative changes to the key valuation inputs;

including future revenue growth rates, future gross and operating margin, discount rates, and terminal value assumptions since the date of acquisition.

In future periods a full impairment test may be required depending on changes to market conditions, performance of the MIRROR reporting unit, or changes in the Company's strategy.

Deferred taxes on undistributed net investment of foreign subsidiaries.

We have not recognized U.S.

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Specifically, to the extent that the Canadian subsidiaries have sufficient paid-up-capital, any such distributions would be characterized for Canadian tax purposes as a return of capital, rather than as a dividend, and would not be subject to Canadian withholding tax.

As of February 2, 2020 , the paid-up-capital balance of the Canadian subsidiaries for tax purposes was $1.5 billion .

As of January 31, 2021, the paid-up-capital balance of the Canadian subsidiaries for tax purposes was $2.0 billion.

The net investment in our Canadian subsidiaries was $1.8 billion, of which $0.8 billion was determined to be indefinitely reinvested.

The Canadian subsidiaries have sufficient paid-up-capital such that we could choose to repatriate the portion of our net investment that is not indefinitely reinvested without paying Canadian withholding tax.

Deferred tax liabilities of $1.5 million have been recognized in relation to the portion of our net investment in our Canadian subsidiaries that is not indefinitely reinvested, principally representing the U.S.

state income taxes which would be due upon repatriation.

Deferred income tax liabilities of $3.0 million have been recognized in relation to the portion of our net investment in our Canadian subsidiaries that is not indefinitely reinvested, principally representing the U.S.

state income taxes which would

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be due upon repatriation.

The unrecognized deferred tax liability on the indefinitely reinvested amount is approximately $2.4 million.

Stock-Based Compensation.

We account for stock-based compensation using the fair value method.

The fair value of awards granted is estimated at the date of grant.

Awards settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement.

The employee compensation expense is recognized on a straight-line basis over the requisite service period.

For awards with service and/or performance conditions, the amount of compensation expense recognized is based on the number of awards that are expected to vest.

The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.

We consider several factors when estimating the number of awards which are expected to vest, including, future profit forecasts, types of awards, size of option holder group, and anticipated employee retention and estimated expected forfeitures.

Actual results may differ substantially from these estimates.

The calculation of the grant-date fair value of stock options requires us to make certain estimates and assumptions, including, stock price volatility, and the expected life of the options.

We evaluate and revise these estimates and assumptions as necessary, to reflect market conditions and our historical experience.

The expected term of the options is based upon historical experience of similar awards, giving consideration to expectations of future employee behavior.

Expected volatility is based upon the historical volatility of our common stock for the period corresponding with the expected term of the options.

In the future, the expected volatility and expected term may change which could substantially change the grant-date fair value of future awards of stock options and, ultimately, the expense we record.

In future periods, if the net investment in our Canadian subsidiaries exceeds their paid-up-capital balance, whether due to a change in the amount that is indefinitely reinvested or as a result of accumulation of profits by these subsidiaries, we will record additional deferred tax liabilities for Canadian withholding taxes and our effective tax rate will increase.

Contingencies

In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships and a variety of other matters.

We record contingent liabilities resulting from claims against us, when a loss is assessed to be probable and the amount of the loss is reasonably estimable.

Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts.

We are involved in legal proceedings regarding contractual and employment relationships and a variety of other matters.

We record contingent liabilities, when a loss is assessed to be probable and its amount is reasonably estimable.

If it is reasonably possible that a material loss could occur through ongoing litigation, we provide disclosure in the footnotes to our financial statements.

Assessing probability of loss and estimating the amount of probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts.

Should we experience adverse court judgments or should negotiated outcomes differ to our expectations with respect to such ongoing litigation it could have a material adverse effect on our results of operations, financial position, and cash flows.

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-K

Item 7. Management’s Discussion and Analysis