What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-09-08 compared with 2021-06-03 · 247 added, 96 removed, 228 unchanged (60% of the section changed)

2 unchanged sentences

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.

6 unchanged sentences

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.

The first two quarters of 2021 and 2020 ended on August 1, 2021 and August 2, 2020, respectively.

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

2 unchanged sentences

• Quarter-to-Date Results of Operations

• Year-to-Date Results of Operations

• Comparable Store Sales and Total Comparable Sales

22 unchanged sentences

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.

COVID-19 continues to impact the global economy and cause disruption and volatility.

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

We believe we will continue to experience differing levels of disruption and volatility, market by market.

While most of our retail locations were open throughout the first two quarters of fiscal 2021, certain locations were temporarily closed based on government and health authority guidance in those markets, including in parts of Canada, Asia Pacific, and Europe.

We continue to operate with necessary precautionary measures in place at our retail locations and distribution centers.

The pandemic has also impacted our product manufacturers and our distribution and logistics providers.

We have experienced disruption in transportation and port congestion, as well as an increase in freight costs.

As a result of this disruption, certain inventory receipts have been delayed, and we expect this disruption and increased costs to continue at least through to the end of 2021.

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.

We believe COVID-19 further shifted guest shopping behavior and has resulted in 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.

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

Guest traffic at our retail locations has improved during 2021, but remains below pre-pandemic levels.

Improved traffic combined with increased conversion has resulted in overall store productivity at our open stores in the second quarter of 2021 being in line with the second quarter of 2019.

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.

Continued proliferation of the virus, resurgences, or the emergence of new variants may result in further or prolonged closures of our retail locations and distribution centers, reduce operating hours, further disrupt 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 first quarter of 2021, compared to the first quarter of 2020:

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

• Net revenue increased 61% to $1.5 billion.

2 unchanged sentences

• Direct to consumer net revenue increased 8% to 597.4 million, or increased 4% on a constant dollar basis.

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

• Gross profit increased 72% to $842.7 million.

3 unchanged sentences

• Income tax expense increased 123% to $83.1 million.

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.

Our effective tax rate for the second quarter of 2021 was 28.5% compared to 30.0% for the second quarter of 2020.

• Diluted earnings per share were $1.59 compared to $0.66 in the second quarter of 2020.

This includes $7.7 million and $9.5 million of after-tax costs related to the MIRROR acquisition in the second quarter of 2021 and 2020, respectively, which reduced diluted earnings per share by $0.06 and $0.08 in the second 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.

1 unchanged sentence

Quarter-to-Date Results of Operations:

First Quarter Results

Second Quarter Results

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

First Quarter

Second Quarter

2021 2020 2021 2020

11 unchanged sentences

Net income $ 208,074 $ 86,801 14.3 % 9.6 %

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

Net revenue increased $547.7 million, or 61%, to $1.5 billion for the second quarter of 2021 from $902.9 million for the second quarter of 2020.

On a constant dollar basis, assuming the average foreign currency exchange rates for the second quarter of 2021 remained constant with the average foreign currency exchange rates for the second quarter of 2020, net revenue increased $507.3 million, or 56%.

The increase in net revenue was primarily due to increased company-operated store and other net revenue, primarily due to most of our stores being open for the entire second quarter of 2021, while almost all were temporarily closed for a significant portion of the second quarter of 2020 as a result of COVID-19.

Direct to consumer net revenue also increased.

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

Second Quarter

2021 2020 2021 2020 Year over year change

5 unchanged sentences

Company-Operated Stores.

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.

The increase in net revenue from our company-operated stores was primarily due to most of our stores being open for the entire second quarter of 2021, while almost all were temporarily closed for a significant portion of the second quarter of 2020 as a result of COVID-19.

We have opened 28 net new company-operated stores since the second quarter of 2020 which also contributed to the increase in net revenue.

This included 16 stores in Asia Pacific, 10 stores in North America, and two stores in Europe.

Direct to Consumer.

Direct to consumer net revenue increased 8%, and increased 4% 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.

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

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 the second quarter of 2021.

Other channels.

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.

The increase in net revenue from our other channels was primarily due to most of our locations being open for the entire second quarter of 2021, while almost all were temporarily closed for a significant portion of the second 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

Second Quarter

2021 2020 Year over year change

3 unchanged sentences

The increase in gross margin was primarily the result of:

• 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.

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.

• a decrease in occupancy and depreciation costs as a percentage of net revenue of 210 basis points, driven primarily by the increase in net revenue;

• a decrease in costs related to our distribution centers and product departments as a percentage of net revenue of 140 basis points, driven primarily by the increase in net revenue;

• a favorable impact of foreign currency exchange rates of 60 basis points.

The increase in gross margin was partially offset by a decrease in product margin of 20 basis points, primarily due to higher air freight costs as a result of COVID-19 impacts on logistics availability and costs, as well as higher inventory provision expenses, partially offset by lower markdowns.

Selling, General and Administrative Expenses

First Quarter

Second Quarter

2021 2020 Year over year change

4 unchanged sentences

• an increase in costs related to our operating channels of $93.5 million, comprised of:

– 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 employee costs of $51.0 million primarily due to an increase in incentive compensation and salaries and wages expenses in our company-operated stores and other retail locations, primarily from the growth in our business;

– an increase in brand and community costs of $19.9 million primarily due to an increase in digital marketing expenses;

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

– an increase in variable costs of $13.6 million primarily due to an increase in credit card fees and packaging costs as a result of increased net revenue;

– an increase in operating costs of $9.0 million primarily due to an increase in depreciation, occupancy, security, information technology, and repairs and maintenance costs;

• an increase in head office costs of $71.3 million, comprised of:

– 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.

– an increase in costs of $41.5 million primarily due to an increase in professional fees, brand and community costs, information technology costs, and depreciation;

– an increase in employee costs of $29.8 million primarily due to an increase in salaries and wages expense, incentive compensation, and benefits, primarily as a result of headcount growth;

• a decrease in government payroll subsidies of $21.0 million as no government payroll subsidies were recognized in the second quarter of 2021;

• an increase in net foreign currency exchange and derivative revaluation losses of $2.6 million.

Amortization of intangible assets

First Quarter

Second Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

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

Amortization of intangible assets $ 2,195 $ 747 $ 1,448 193.8 %

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

First Quarter

Second Quarter

2021 2020 Year over year change

1 unchanged sentence

Acquisition-related expenses $ 8,143 $ 11,464 $ (3,321) (29.0) %

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.

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $7.1 million and $5.0 million in the second quarter of 2021 and 2020, respectively.

We also recognized transaction and integration related costs of $1.0 million and $7.2 million in the second quarter of 2021 and 2020, respectively.

Acquisition related expenses in the second quarter of 2020 were partially offset by a $0.8 million gain recognized on our existing investment.

Income from Operations

1 unchanged sentence

Segmented income from operations is summarized below.

First Quarter

Second 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:

Segmented income (loss) from operations:

Company-operated stores $ 184,996 $ (5,293) 26.6 % (1.8) % $ 190,289 n/a

8 unchanged sentences

Company-Operated Stores .

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.

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $264.4 million, driven by increased net revenue and higher gross margin primarily due to most of our stores being open for the entire second quarter of 2021, while almost all were temporarily closed for a significant portion of the second quarter of 2020 as a result of COVID-19.

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

Employee costs increased primarily due to higher incentive compensation and higher salaries and wages expense as a result of growth in our business.

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

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

There were also increases in credit card fees, distribution and packaging costs 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.

1 unchanged sentence

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $34.5 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.

The increase in gross profit was partially

offset by an increase in selling, general and administrative expenses, primarily due to higher digital marketing expenses and depreciation.

Income from operations as a percentage of direct to consumer net revenue increased primarily due to higher gross margin.

Other channels.

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 income from operations from our other retail locations was primarily the result of increased gross profit of $54.4 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.

1 unchanged sentence

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.

The increase in general corporate expenses was primarily due to increased employee 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 currency exchange and derivative revaluation losses of $2.6 million also contributed to the increase in general corporate expenses.

Other Income (Expense), Net

First Quarter

Second Quarter

2021 2020 Year over year change

1 unchanged sentence

Other income (expense), net $ 96 $ (344) $ 440 (127.9) %

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

The increase in other income, net was primarily due to an increase in interest income driven by increased cash balances.

Income Tax Expense

First Quarter

Second Quarter

2021 2020 Year over year change

3 unchanged sentences

28.5 % 30.0 % (150) 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

The decrease in the effective tax rate was primarily due to a net increase in tax deductions related to stock-based compensation.

Certain non-deductible expenses related to the MIRROR acquisition increased the effective tax rate by 60 basis points in the second quarter of 2021 compared to 110 basis points in the second quarter of 2020.

Second Quarter

2021 2020 Year over year change

1 unchanged sentence

Net income $ 208,074 $ 86,801 $ 121,273 139.7 %

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.

The increase in net income was primarily due to an increase in gross profit of $353.2 million and an increase in other income (expense), net of $0.4 million and a decrease in acquisition-related expenses of $3.3 million, partially offset by an increase in selling, general and administrative expenses of $188.4 million, an increase in income tax expense of $45.8 million, and an increase in amortization of intangible assets of $1.4 million.

Year-to-Date Results of Operations:

First Two Quarters Results

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

First Two Quarters

2021 2020 2021 2020

(In thousands) (Percentages)

Net revenue $ 2,677,083 $ 1,554,904 100.0 % 100.0 %

Cost of goods sold 1,134,083 731,001 42.4 47.0

Gross profit 1,543,000 823,903 57.6 53.0

Selling, general and administrative expenses 1,037,951 652,464 38.8 42.0

Amortization of intangible assets 4,390 770 0.2 —

Acquisition-related expenses 15,807 13,509 0.6 0.9

Income from operations 484,852 157,160 18.1 10.1

Other income (expense), net 323 830 — 0.1

Income before income tax expense 485,175 157,990 18.1 10.2

Income tax expense 132,145 42,557 4.9 2.7

Net income $ 353,030 $ 115,433 13.2 % 7.4 %

Net revenue increased $1.1 billion, or 72%, to $2.7 billion for the first two quarters of 2021 from $1.6 billion for the first two quarters of 2020.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first two quarters of 2021 remained constant with the average foreign currency exchange rates for the first two quarters of 2020, net revenue increased $1.0 billion, or 67%.

The increase in net revenue was primarily due to increased company-operated store and other net revenue, primarily due to most of our stores being open for the entire first two quarters of 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020 as a result of COVID-19.

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 two quarters of 2021 and 2020 is summarized below.

First Two Quarters

2021 2020 2021 2020 Year over year change

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

Company-operated stores $ 1,231,704 $ 547,171 46.0 % 35.2 % $ 684,533 125.1 %

Direct to consumer 1,142,515 906,341 42.7 58.3 236,174 26.0

Other 302,864 101,392 11.3 6.5 201,472 198.7

Net revenue $ 2,677,083 $ 1,554,904 100.0 % 100.0 % $ 1,122,179 72.2 %

Company-Operated Stores .

The increase in net revenue from our company-operated stores was primarily due to most of our stores being open for the entire first two quarters of 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020 as a result of COVID-19.

We opened 28 net new company-operated stores since the second quarter of 2020 which also contributed to the increase in net revenue.

This included 16 stores in Asia Pacific, 10 stores in North America, and two stores in Europe.

Direct to Consumer.

Direct to consumer net revenue increased 26%, and increased 22% on a constant dollar basis.

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 the first two quarters of 2021.

Other channels.

The increase in net revenue from other channels was primarily due to most of our locations being open for the entire first two quarters of 2021, while almost all were temporarily closed for a significant portion of the first two quarters 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 Two Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Gross profit $ 1,543,000 $ 823,903 $ 719,097 87.3 %

57.6 % 53.0 % 460 basis points

The increase in gross margin was primarily the result of:

• a decrease in occupancy and depreciation costs as a percentage of net revenue of 340 basis points, driven primarily by the increase in net revenue;

• a decrease in costs related to our distribution centers and product departments as a percentage of net revenue of 120 basis points, driven primarily by the increase in net revenue;

• a favorable impact of foreign currency exchange rates of 60 basis points.

The increase in gross margin was partially offset by a decrease in product margin of 60 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.

Selling, General and Administrative Expenses

First Two Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Selling, general and administrative expenses $ 1,037,951 $ 652,464 $ 385,487 59.1 %

Selling, general and administrative expenses as a percentage of net revenue

38.8 % 42.0 % (320) basis points

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

• an increase in costs related to our operating channels of $214.2 million, comprised of:

– an increase in employee costs of $89.7 million primarily due to an increase in incentive compensation, salaries and wages expense, and benefit expenses in our company-operated store and other retail locations, primarily from the growth in our business;

– an increase in variable costs of $52.1 million primarily due to an increase in distribution costs, credit card fees, and packaging expenses as a result of increased net revenue;

– an increase in brand and community costs of $45.3 million primarily due to an increase in digital marketing expenses;

– an increase in other operating costs of $27.1 million primarily due to an increase in information technology costs, depreciation, occupancy costs, and security costs;

• an increase in head office costs of $144.3 million, comprised of:

– an increase in costs of $79.1 million primarily due to an increase in professional fees, information technology costs, brand and community costs, and depreciation;

– an increase in employee costs of $65.2 million primarily due to an increase in salaries and wages expense and employee benefit costs as a result of headcount growth, and an increase in incentive compensation and stock-based compensation expense.

• a decrease in government payroll subsidies of $21.1 million as no government payroll subsidies were recognized in the first two quarters of 2021;

• an increase in net foreign currency exchange and derivative revaluation losses of $5.8 million.

Amortization of intangible assets

First Two Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Amortization of intangible assets $ 4,390 $ 770 $ 3,620 470.1 %

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

First Two Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Acquisition-related expenses $ 15,807 $ 13,509 $ 2,298 17.0 %

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $14.3 million and $5.0 million in the first two quarters of 2021 and 2020, respectively.

We also recognized transaction and integration related costs of $1.5 million and $9.2 million in the first two quarters of 2021 and 2020, respectively.

Income from Operations

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

Segmented income from operations is summarized below.

First Two Quarters

2021 2020 2021 2020 Year over year change

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

Segmented income (loss) from operations:

Company-operated stores $ 284,144 $ (35,447) 23.1 % (6.5) % $ 319,591 n/a

Direct to consumer 497,181 394,542 43.5 43.5 102,639 26.0 %

Other 36,746 2,318 12.1 2.3 34,428 n/a

$ 818,071 $ 361,413 $ 456,658 126.4 %

General corporate expense 313,022 189,974 123,048 64.8

Amortization of intangible assets 4,390 770 3,620 n/a

Acquisition-related expenses 15,807 13,509 2,298 17.0

Income from operations $ 484,852 $ 157,160 $ 327,692 208.5 %

Operating margin 18.1 % 10.1 % 800 basis points

Company-Operated Stores.

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $441.9 million, driven by increased net revenue and higher gross margin primarily due to most of our stores being open for the entire first two quarters of 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020 as a result of COVID-19.

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

Employee costs increased primarily due to higher incentive compensation and higher salaries and wages expense as a result of the growth in our business, as well as an increase in employee benefit expense.

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

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

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

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

Direct to Consumer.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $164.1 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 variable costs including

distribution costs, packaging, and credit card fees 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 was consistent for the first two quarters of 2021, compared to the first two quarters of 2020.

The increase in gross margin was offset by deleverage on selling, general and administrative expenses.

Other channels.

The increase in income from operations from our other retail locations was primarily the result of increased gross profit of $113.0 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 expense and incentive compensation, as well as distribution costs and credit card fees as a result of higher net revenue.

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

General Corporate Expense.

An increase in net foreign currency exchange and derivative revaluation losses of $5.8 million also contributed to the increase in general corporate expenses.

Other Income (Expense), Net

First Two Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Other income (expense), net $ 323 $ 830 $ (507) (61.1) %

The decrease in other income, net was primarily due to a decrease in interest income driven by lower interest rates, partially offset by increased cash balances.

Income Tax Expense

First Two Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Income tax expense $ 132,145 $ 42,557 $ 89,588 210.5 %

Effective tax rate

27.2 % 26.9 % 30 basis points

The increase in the effective tax rate was primarily due to certain non-deductible expenses in international jurisdictions which were partially offset by a net increase in tax deductions related to stock-based compensation.

Certain non-deductible expenses related to the MIRROR acquisition increased the effective tax rate by 70 basis points in the first two quarters of 2021 compared to 90 basis points in the first two quarters of 2020.

First Two Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Net income $ 353,030 $ 115,433 $ 237,597 205.8 %

The increase in net income was primarily due to an increase in gross profit of $719.1 million, partially offset by an increase in selling, general and administrative expenses of $385.5 million, an increase in income tax expense of $89.6 million, an increase in amortization of intangible assets of $3.6 million, an increase in acquisition-related expenses of $2.3 million, and a decrease in other income of $0.5 million.

Comparable Store Sales and Total Comparable Sales

2 unchanged sentences

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.

However, as the temporary store closures

from COVID-19 during the first two quarters 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.

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

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

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

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 currency 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.

2 unchanged sentences

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

First Quarter 2021

Net Revenue Direct to Consumer Net Revenue

(In thousands) (Percentages) (Percentages)

Second Quarter 2021

First Two Quarters 2021

Net Revenue Direct to Consumer Net Revenue Net Revenue Direct to Consumer Net Revenue

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

Change $ 547,676 61 % 8 % $ 1,122,179 72 % 26 %

Adjustments due to foreign exchange rate changes (33,391) (5) (5)

Adjustments due to foreign currency exchange rate changes (40,339) (5) (4) (73,730) (5) % (4) %

Change in constant dollars $ 507,337 56 % 4 % $ 1,048,449 67 % 22 %

12 unchanged sentences

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.

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:

August 1, 2021

(In thousands)

4 unchanged sentences

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

First Quarter

First Two Quarters

2021 2020 Year over year change

4 unchanged sentences

Financing activities (290,767) (82,157) (208,610)

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

Effect of foreign currency exchange rate changes on cash 12,012 (3,089) 15,101

Increase (decrease) in cash and cash equivalents $ 19,524 $ (570,507) $ 590,031

3 unchanged sentences

• an increase in cash flows from the changes in operating assets and liabilities of $115.3 million.

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

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

• changes in adjusting items of $86.8 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

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.

The decrease in cash used in investing activities was primarily due to the MIRROR acquisition in 2020, partially offset by the settlement of net investment hedges and increased 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, as well as increased corporate expenditures.

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

1 unchanged sentence

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.

Cash used in financing activities for the first two quarters of 2021 included $254.9 million to repurchase 0.8 million shares of our common stock compared to $63.7 million to repurchase 0.4 million shares for the first two quarters 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.

2 unchanged sentences

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

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.

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.

As of August 1, 2021, aside from letters of credit of $2.8 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.

4 unchanged sentences

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).

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

As of August 1, 2021, we were in compliance with the covenants of the credit facility.

Mainland China revolving credit facility

4 unchanged sentences

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.

As of August 1, 2021, we were in compliance with the covenant and, aside from letters of credit of 1.3 million Chinese Yuan, we had no other 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 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.

As of August 1, 2021, letters of credit and letters of guarantee totaling $3.4 million had been issued, including $2.8 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.

4 unchanged sentences

Actual results may vary from our estimates in amounts that may be material to the financial statements.

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.

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 within "Item 7.

1 unchanged sentence

Operating Locations

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,

Our company-operated stores by country as of August 1, 2021 and January 31, 2021 are summarized in the table below.

Number of company-operated stores by country August 1,

2021 January 31,

9 unchanged sentences

Total company-operated stores 534 521

(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.

(1) Included within PRC as of August 1, 2021, were seven stores in Hong Kong, Special Administrative Region, three stores in Taiwan, and two stores in Macao, Special Administration Region.

As of January 31, 2021, there were seven stores in Hong Kong, Special Administrative Region, two stores in Taiwan, and two stores in Macao, Special Administration Region.

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

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

As of August 1, 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