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Item 2. Management’s Discussion and Analysis

2021-06-03 compared with 2020-12-10 · 203 added, 371 removed, 121 unchanged (83% of the section changed)

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All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, the impact of the COVID-19 pandemic on our business and results of operations, expectations related to our acquisition of MIRROR, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies.

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

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

In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this Form 10-Q and any documents incorporated herein by reference reflect our current views about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement.

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This information should be read in conjunction with the unaudited interim consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our fiscal 2020 Annual Report on Form 10-K filed with the SEC on March 30, 2021.

Fiscal 2021 and fiscal 2020 are referred to as "2021," and "2020," respectively.

The first quarter of 2021 and 2020 ended on May 2, 2021 and May 3, 2020, respectively.

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

• Overview and COVID-19 Update

• Financial Highlights

• Quarter-to-Date Results of Operations

• Comparable Store Sales and Total Comparable Sales

• Non-GAAP Financial Measures

• Seasonality

• Liquidity and Capital Resources

• Revolving Credit Facilities

• Off-Balance Sheet Arrangements

• Critical Accounting Policies and Estimates

• Operating Locations

We disclose material non-public information through one or more of the following channels:

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We have a vision to be the experiential brand that ignites a community of people through sweat, grow, and connect, which we call "living the sweatlife." Since our inception, we have fostered a distinctive corporate culture;

we promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection, and choosing to have fun.

These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose "to elevate the world by unleashing the full potential within every one of us."

Our healthy lifestyle inspired athletic apparel and accessories are marketed under the lululemon brand.

We offer a comprehensive line of apparel and accessories for women and men.

We offer a comprehensive line of apparel and accessories.

Our apparel assortment includes items such as pants, shorts, tops, and jackets designed for a healthy lifestyle including athletic activities such as yoga, running, training, and most other sweaty pursuits.

We also offer fitness-related accessories.

During the second quarter of fiscal 2020, we acquired Curiouser Products Inc., dba MIRROR, for a purchase price of approximately $500.0 million, of which approximately $57.1 million is due to certain continuing employees subject to their continued employment through various vesting dates up to three years after the closing date of the transaction.

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

We also offer apparel designed for being On the Move and fitness-related accessories.

We expect to continue to broaden our merchandise offerings through expansion across these product areas.

During the second quarter of 2020, we acquired Curiouser Products Inc., dba MIRROR.

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

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

COVID-19 Pandemic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

COVID-19 Update

COVID-19 continues to impact the global economy, result in disruption and volatility, and cause changes in consumer demand and behavior.

While most of our retail locations remained open throughout the first quarter of fiscal 2021, certain locations were temporarily closed based on government and health authority guidance in those markets, including in parts of Europe and Canada, as well as other markets.

In accordance with relevant government and health authority guidance, we continue to operate our distribution centers and retail locations with restrictive and precautionary measures in place.

These measures are market dependent and can include restricted occupancy levels, physical distancing, enhanced cleaning and sanitation, and reduced operating hours.

Governments and public health officials around the world have imposed and continue to impose restrictions and to recommend precautions to mitigate the spread of the virus.

These restrictions are not coordinated among various markets and we believe we will continue to experience differing levels of disruption and volatility, market by market.

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 COVID-19 further shifted guest shopping behavior and we have seen 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 and in the first quarter of 2021.

While we expect our direct to consumer business to grow in fiscal 2021, we expect the year over year growth rate to moderate compared to 2020.

There remains significant uncertainty regarding the extent and duration of the impact that COVID-19 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.

Financial Highlights

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

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

For the first quarter of 2021, compared to the first quarter of 2020:

• Net revenue increased 88% to $1.2 billion.

On a constant dollar basis, net revenue increased 83%.

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

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

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

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

• Company-operated stores net revenue increased 106% to $536.6 million.

• Direct to consumer net revenue increased 55% to 545.1 million, or increased 50% on a constant dollar basis.

• Gross profit increased 109% to $700.3 million.

• Gross margin increased 580 basis points to 57.1%.

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

• Income from operations increased 492% to $193.8 million.

• Operating margin decreased 90 basis points to 18.3%.

• Operating margin increased 1,080 basis points to 15.8%.

• Income tax expense increased 827% to $49.1 million.

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

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

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

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

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

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

Our effective tax rate for the first quarter of 2021 was 25.3% compared to 15.6% for the first quarter of 2020.

• Diluted earnings per share were $1.11 compared to $0.22 in the first quarter of 2020.

This includes $7.3 million and $2.0 million of after-tax costs related to the MIRROR acquisition in the first quarter of 2021 and 2020, respectively, which reduced diluted earnings per share by $0.05 and $0.01 in the first quarter of 2021 and 2020, respectively.

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

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

Results of Operations

Third Quarter Results

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

The percentages are presented as a percentage of net revenue.

Quarter Ended

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

(In thousands) (Percentages)

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.

Quarter-to-Date Results of Operations:

First Quarter Results

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

First Quarter

2021 2020 2021 2020

(In thousands) (Percentage of net revenue)

Net revenue $ 1,226,465 $ 651,962 100.0 % 100.0 %

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Net income $ 144,956 $ 28,632 11.8 % 4.4 %

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

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

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

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

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

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

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

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

Quarter Ended

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

(In thousands) (Percentages)

Net revenue increased $574.5 million, or 88%, to $1.2 billion for the first quarter of 2021 from $652.0 million for the first quarter of 2020.

On a constant dollar basis, assuming the average exchange rates for the first quarter of 2021 remained constant with the average exchange rates for the first quarter of 2020, net revenue increased $541.1 million, or 83%.

The increase in net revenue was primarily due to increased company-operated store and other net revenue, primarily due to retail locations that were temporarily closed during the first quarter of 2020, as a result of COVID-19, being open during the first quarter of 2021.

Direct to consumer net revenue also increased, partially due to a shift in the way guests are shopping as a result COVID-19.

Net revenue for the first quarter of 2021 and 2020 is summarized below.

First Quarter

2021 2020 2021 2020 Year over year change

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

Company-operated stores $ 536,584 $ 259,970 43.8 % 39.9 % $ 276,614 106.4 %

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Company-Operated Stores.

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

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

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

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

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

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

The increase in net revenue from our company-operated stores was primarily due to most of our stores being open for the entire first quarter of 2021.

All of our stores in North America, Europe, and certain countries in Asia Pacific were closed for a significant portion of the first quarter of 2020 as a result of COVID-19.

We opened 34 net new company-operated stores since the first quarter of 2020 which also contributed to the increase in net revenue.

This included 16 stores in Asia Pacific, 15 stores in North America, and three stores in Europe.

Direct to Consumer.

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

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

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

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

Direct to consumer net revenue increased 55%, and increased 50% on a constant dollar basis.

The increase in net revenue from our direct to consumer segment was primarily a result of increased traffic, as well as improved conversion rates and an increase in dollar value per transaction.

The increase in traffic was partially due to a shift in the way guests are shopping as a result COVID-19.

Other channels.

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

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

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

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

The increase in net revenue from our other channels was primarily due to most of our temporary retail locations and outlets being open for the entire first quarter of 2021.

All of our retail locations in North America, Europe, and certain countries in Asia Pacific were closed for a significant portion of the first quarter of 2020, as a result of COVID-19.

Net revenue from MIRROR, which we acquired during the second quarter of 2020, also contributed to the increase in other net revenue.

First Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Gross profit $ 700,314 $ 334,402 $ 365,912 109.4 %

57.1 % 51.3 % 580 basis points

The increase in gross margin was primarily the result of:

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

• a decrease in depreciation and occupancy costs as a percentage of net revenue of 540 basis points, driven primarily by the increase in net revenue;

• a decrease in costs related to our product departments and our distribution centers as a percentage of net revenue of 100 basis points, primarily due to the increase in net revenue;

• a favorable impact of foreign exchange rates of 50 basis points.

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

The increase in gross margin was partially offset by a decrease in product margin of 110 basis points, primarily due to higher air freight costs as a result of COVID-19 impacts on logistics availability and costs, partially offset by lower markdowns and inventory provision expenses.

Selling, General and Administrative Expenses

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

First Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Selling, general and administrative expenses $ 496,634 $ 299,583 $ 197,051 65.8 %

Selling, general and administrative expenses as a percentage of net revenue 40.5 % 46.0 % (550) basis points

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

• an increase in costs related to our operating channels of $106.5 million, comprised of:

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

– an increase in employee costs of $38.7 million primarily due to higher incentive compensation expenses for our company-operated stores and other retail locations, as well as higher salaries and wages expense in our company-operated stores, other, and direct to consumer channels primarily from the growth in our business;

– an increase in variable costs of $38.2 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 brand and community costs of $25.4 million primarily due to an increase in digital marketing expenses;

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

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

– an increase in operating costs of $4.2 million primarily due to depreciation and information technology costs;

• an increase in head office costs of $73.1 million, comprised of:

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

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

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

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

– an increase in costs of $37.6 million primarily due to increased professional fees, information technology costs, brand and community costs, and depreciation;

– an increase in employee costs of $35.5 million primarily due to increased salaries and wages expense primarily as a result of headcount growth, higher incentive compensation expense, and increased stock-based compensation expense, partially offset by decreased travel expenses primarily due to restrictions related to the pandemic;

• a decrease in government payroll subsidies of $14.3 million due to no government payroll subsidies being recognized in the first quarter of 2021;

• an increase in net foreign exchange and derivative revaluation losses of $3.2 million.

Amortization of intangible assets

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

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

First Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Amortization of intangible assets $ 2,195 $ 23 $ 2,172 n/a

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

Acquisition-related expenses

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

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

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

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

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

First Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Acquisition-related expenses $ 7,664 $ 2,045 $ 5,619 274.8 %

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $7.2 million for deferred consideration for certain continuing MIRROR employees in the first quarter of 2021.

We also recognized transaction and integration related costs of $0.5 million and $2.0 million in the first quarter of 2021 and 2020, respectively.

Income from Operations

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

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

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

During the first quarter of fiscal 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 for the quarters ended November 1, 2020 and November 3, 2019 is summarized below.

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

Quarter Ended

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

(In thousands) (Percentage of segment revenue)

Segmented income from operations is summarized below.

First Quarter

2021 2020 2021 2020 Year over year change

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

Segmented income from operations:

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

Company-operated stores $ 99,148 $ (30,154) 18.5 % (11.6) % $ 129,302 n/a

Direct to consumer 236,933 156,947 43.5 44.6 79,986 51.0 %

Other 1,304 16,820 1.0 18.7

Other 14,506 (269) 10.0 (0.7) 14,775 n/a

$ 350,587 $ 126,524 $ 224,063 177.1 %

General corporate expense 146,907 91,705 55,202 60.2

Amortization of intangible assets 2,241 7

Amortization of intangible assets 2,195 23 2,172 n/a

Acquisition-related expenses 7,664 2,045 5,619 274.8

Income from operations $ 193,821 $ 32,751 $ 161,070 491.8 %

Operating margin 15.8 % 5.0 % 1,080 basis points

Company-Operated Stores .

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

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

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

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

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $177.6 million, driven by increased net revenue and higher gross margin.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher people and operating costs.

People costs increased primarily due to higher incentive compensation and higher salaries and wages expense as a result of an increased number of company-operated stores.

Store operating costs increased primarily due to government payroll subsidies that were recognized during the first quarter of 2020.

No government payroll subsidies were recognized during the first quarter of 2021.

There were also increases in distribution costs and credit card fees as a result of higher net revenue.

Income from operations as a percentage of company-operated stores net revenue increased due to higher gross margin and leverage on selling, general and administrative expenses.

Direct to Consumer.

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

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

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

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

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $129.7 million driven by increased net revenue.

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

digital marketing expenses, employee costs, and information technology expenses.

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

Other channels.

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

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

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

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

General Corporate Expense.

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

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

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

The increase in income from operations was primarily the result of increased gross profit of $58.7 million, primarily due to increased net revenue.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses driven by MIRROR digital marketing expenses, higher salaries and wages and incentive compensation, as well as increased credit card fees and distribution costs as a result of higher net revenue.

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

General Corporate Expenses.

The increase in general corporate expenses was primarily due to increased people costs primarily from the growth in our business as well as increased professional fees, information technology costs, brand and community costs, and depreciation.

An increase in net foreign exchange and derivative revaluation losses of $3.2 million also contributed to the increase in general corporate expenses.

The increase in general corporate expense was partially offset by decreased travel expenses primarily related to restrictions related to the pandemic.

Other Income (Expense), Net

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

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

Income Tax Expense

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

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

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

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

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

First Three Quarters Results

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

The percentages are presented as a percentage of net revenue.

Three Quarters Ended

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

(In thousands) (Percentages)

Net revenue $ 2,672,330 $ 2,581,805 100.0 % 100.0 %

Cost of goods sold 1,221,073 1,169,245 45.7 45.3

Gross profit 1,451,257 1,412,560 54.3 54.7

Selling, general and administrative expenses 1,064,172 939,930 39.8 36.4

Amortization of intangible assets 2,965 7 0.1 —

Acquisition-related expenses 22,040 — 0.8 —

Income from operations 362,080 472,623 13.5 18.3

First Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Other income (expense), net $ 227 $ 1,174 $ (947) (80.7) %

Income before income tax expense 362,330 478,777 13.6 18.5

The decrease in other income, net was primarily due to a decrease in interest income as a result of lower interest rates.

Income Tax Expense

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

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

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

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

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

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

Three Quarters Ended

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

(In thousands) (Percentages)

Company-operated stores $ 1,058,927 $ 1,669,699 39.6 % 64.7 %

Direct to consumer 1,384,604 674,177 51.8 26.1

Other 228,799 237,929 8.6 9.2

Net revenue $ 2,672,330 $ 2,581,805 100.0 % 100.0 %

Company-Operated Stores .

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

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

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

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

Direct to Consumer.

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

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

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

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

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

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

Other channels.

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

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

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

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

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

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

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

Selling, General and Administrative Expenses

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

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

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

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

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

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

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

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

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

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

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

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

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

Amortization of intangible assets

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

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

Acquisition-related expenses

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

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

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

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

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

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

Income from Operations

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

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

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

During the first quarter of fiscal 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 for the first three quarters ended November 1, 2020 and November 3, 2019 is summarized below.

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

Three Quarters Ended

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

(In thousands) (Percentage of segment revenue)

Segmented income operations:

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

Direct to consumer 604,152 269,553 43.6 40.0

Other 3,622 45,860 1.6 19.3

684,107 738,361

General corporate expense 297,022 265,731

Amortization of intangible assets 2,965 7

Acquisition-related expenses 22,040 —

Income from operations $ 362,080 $ 472,623

Company-Operated Stores.

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

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

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

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

Direct to Consumer.

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

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

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

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

Other channels.

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

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

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

General Corporate Expense.

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

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

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

Other Income (Expense), Net

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

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

First Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Income tax expense $ 49,092 $ 5,293 $ 43,799 827.5 %

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

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

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

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

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

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

Effective tax rate

25.3 % 15.6 % 970 basis points

The increase in the effective tax rate was primarily due to higher pre-tax income in the first quarter of 2021.

The lower level of pre-tax income in the first quarter of 2020 meant that discrete tax deductions related to stock-based compensation in that quarter represented a higher proportion of income before tax expense and so reduced the overall effective tax rate.

First Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Net income $ 144,956 $ 28,632 $ 116,324 406.3 %

The increase in net income was primarily due to an increase in gross profit of $365.9 million, partially offset by an increase in selling, general and administrative expenses of $197.1 million, an increase in income tax expense of $43.8 million, acquisition-related expenses of $7.7 million, amortization of intangible assets of $2.2 million, and a decrease in other income (expense), net of $0.9 million.

Comparable Store Sales and Total 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 at least 30 days.

Comparable store sales also exclude sales from direct to consumer and other segments, as well as sales from company-operated stores that we 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.

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

In the year following a 53 week year, the prior year period is shifted by one week to compare similar calendar weeks.

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

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

We use total comparable sales to evaluate the

performance of our business from an omni-channel perspective.

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

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 during the first quarter of 2020 resulted in a significant number of stores being removed from our comparable store calculations, we believe total comparable sales and comparable store sales are not currently representative of the underlying trends of our business.

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

Non-GAAP Financial Measures

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

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.

4 unchanged sentences

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

Quarter Ended

November 1, 2020 Three Quarters Ended

November 1, 2020

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

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

Adjustments due to foreign exchange rate changes (6,656) (1) 7,994 —

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

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

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

Quarter Ended

November 1, 2020 Three Quarters Ended November 1, 2020

Total Comparable Sales 1,2

Comparable Store Sales 2

Direct to Consumer Net Revenue Direct to Consumer Net Revenue

First Quarter 2021

Net Revenue Direct to Consumer Net Revenue

(In thousands) (Percentages) (Percentages)

Change $ 574,503 88 % 55 %

1 unchanged sentence

Change in constant dollars $ 541,112 83 % 50 %

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

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

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

1 unchanged sentence

As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year.

For example, we generated approximately 47% of our full year operating profit during each of the fourth quarters of fiscal 2019 and fiscal 2018.

For example, we generated approximately 56% and 47% of our full year operating profit during the fourth quarters of 2020 and 2019, respectively.

Due to a significant number of our company-operated stores being temporarily closed due to COVID-19 during the first two quarters of 2020, we earned a higher proportion of our operating profit during the last two quarters of 2020 compared to prior years.

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

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.

We may also use cash to repurchase shares of our common stock.

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

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

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.

The following table includes certain measures of our liquidity:

(In thousands)

Cash and cash equivalents $ 1,179,739

Working capital excluding cash and cash equivalents (1)

Capacity under committed revolving credit facility 397,271

(1) Working capital is calculated as current assets of $2.3 billion less current liabilities of $1.0 billion.

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

Three Quarters Ended

November 1, 2020 November 3, 2019

First Quarter

2021 2020 Year over year change

(In thousands)

4 unchanged sentences

Effect of exchange rate changes on cash 22,812 (13,043) 35,855

Decrease in cash and cash equivalents $ (611,924) $ (295,167)

Increase (decrease) in cash and cash equivalents $ 29,222 $ (270,499) $ 299,721

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.

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

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

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

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

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

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

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

– an increase of $1.2 million related to inventories.

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

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

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

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

The increase in cash provided by operating activities was primarily as a result of:

• increased net income of $116.3 million;

• an increase in cash flows from the changes in operating assets and liabilities of $176.1 million.

This increase was driven by changes in accrued compensation, our inventory levels, and prepaid expenses and other current assets;

• changes in adjusting items of $42.9 million, primarily driven by higher cash inflows related to derivatives not designated in a hedging relationship, and due to increased stock-based compensation and depreciation expense.

Investing Activities

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

Capital expenditures primarily relate to opening new company-operated stores, remodeling or relocating certain stores, and ongoing store refurbishment.

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

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

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

The increase in cash used in investing activities was primarily the result of the settlement of net investment hedges and an increase in capital expenditures.

The increase in capital expenditures was primarily due to increased capital expenditures for our direct to consumer segment driven by investment in our distribution centers.

This was partially offset by decreased expenditures for our company-operated stores.

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 $98.2 million to $81.4 million for the first three quarters of fiscal 2020 compared to $179.6 million for the first three quarters of fiscal 2019.

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

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

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

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

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

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

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

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

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

The increase in cash used in financing activities was primarily the result of an increase in stock repurchases.

Cash used in financing activities for the first quarter of 2021 included $83.8 million to repurchase 0.3 million shares of our common stock compared to $63.7 million to repurchase 0.4 million shares for the first quarter of 2020.

The 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.

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 May 2, 2021, aside from letters of credit of $2.7 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) rates based on 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.

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

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

1 to the credit agreement.

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

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

As of May 2, 2021, we were in compliance with the covenants of the credit facility.

Mainland China revolving credit facility

In December 2019, we 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.

dollars, the uncommitted and unsecured revolving credit facility is equivalent to $19.4 million, the revolving loan is equivalent of up to $14.9 million, and the financial bank guarantee facility is equivalent of up to $4.5 million.

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.

We are required to follow certain covenants.

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

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

364-Day revolving credit facility

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

The credit agreement matures on June 28, 2021.

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

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

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

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

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

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

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

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

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

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

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

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 is comprised 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 comply with certain covenants.

As of May 2, 2021, we were in compliance with the covenant and there were no borrowings or guarantees outstanding under this credit facility.

Off-Balance Sheet Arrangements

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

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

As of May 2, 2021, letters of credit and letters of guarantee totaling $3.2 million had been issued, including $2.7 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.

5 unchanged sentences

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

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

Our critical accounting policies and estimates are discussed within "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Annual Report on Form 10-K filed with the SEC on March 30, 2021.

Operating Locations

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

2020 February 2,

Our company-operated stores by country as of May 2, 2021 and January 31, 2021 are summarized in the table below.

Number of company-operated stores by country May 2,

2021 January 31,

United States 315 315

2 unchanged sentences

United Kingdom 16 16

New Zealand 7 7

South Korea 9 7

New Zealand 7 7

Singapore 4 4

2 unchanged sentences

Total company-operated stores 523 521

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

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

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

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

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

(1) PRC included seven stores in Hong Kong, Special Administrative Region, two stores in Macao, Special Administration Region, and two stores in Taiwan as of May 2, 2021 and January 31, 2021.

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

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

As of May 2, 2021, there were eight licensed locations, including four in Mexico, three in the United Arab Emirates, and one in Qatar.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis