What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-29 compared with 2021-03-30 · 162 added, 223 removed, 209 unchanged (65% of the section changed)

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

• Overview - The Power of Three

• Financial Highlights

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• Liquidity and Capital Resources

• Revolving Credit Facilities

• Liquidity Outlook

• Contractual Obligations and Commitments

• Off-Balance Sheet Arrangements

• Critical Accounting Policies and Estimates

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

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

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

These principles are:

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

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

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

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

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

The Power of Three

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

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

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

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

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Overview - The Power of Three

In 2021, we continued to execute against our Power of Three growth plan.

We have achieved some of our key growth goals under this plan two years ahead of schedule.

These include generating $6 billion in net revenue, doubling our men's net revenue relative to fiscal 2018, and doubling our e-commerce net revenue relative to fiscal 2018 (which we achieved in 2020).

We have seen the trends that we believe have fueled our business over the last few years continue.

These include the desire to live an active and healthy lifestyle, the desire to be part of a diverse and inclusive community, and the desire to achieve wellness, both physically and mentally.

We achieved these goals while strategically managing a number of challenges related to the COVID-19 environment, including stores closures, capacity constraints, and challenges across our supply chain including certain supplier factory closures, port slowdowns, and reduced air freight capacity.

Product Innovation

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

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

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

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

Our lens for product development and innovation continues to be what we refer to as the Science of Feel.

In 2021, we continued to bring technical innovations to our guests including expanding our Yoga offering with the launch of our Instill franchise, made from our SmoothCover fabric;

we continued to build out our high support bra offerings with the launch of the Air Support bra, our most tested bra to date, which took five years to research and develop and is made from our Ultralu fabric;

and for men we launched the versatile License to Train short, made from our High Impact Swift Pique fabric and further built out our On The Move offering with the Bowline bottom.

We are also particularly proud of our multi-year collaboration with the Canadian Olympic Committee and Paralympic Committee.

This collaboration allows us to showcase the lululemon brand and our technical expertise within apparel on the world stage;

and we believe it is a compelling platform that we can leverage to continue to grow our brand presence both inside and outside of Canada.

Omni Guest Experience

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

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

Revenue in stores decreased 34%.

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

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

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

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

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

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

We continue to see benefits from our omni business model and in 2021, net revenue in our company-operated store channel increased 70% and our e-commerce business increased 22%.

We engaged with our guests both in real life (where and when it was safe to do so) and virtually.

In our digital business, we continued to see the benefits of the investments we have made over the last several years, while we continue to invest in our websites and mobile apps as we work to elevate the guest

In 2021, we continued to make foundational investments which included expanding our accepted payment methods, improving our storytelling, making search more predictive, and making the checkout process more seamless.

When looking at MIRROR, we continue to focus on strategies and initiatives which we believe will allow us to build our community and increase guest loyalty.

These include setting up MIRROR shop-in-shops in approximately 200 stores in North America, including launching in Canada, and continuing to enhance the offering with new classes and connected accessories.

Market Expansion

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

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

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

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

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

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

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

COVID-19 Pandemic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During 2021, we opened 53 net new company-operated stores, including 31 stores in the PRC, seven stores in the rest of Asia Pacific, 10 stores in North America, and five stores in Europe.

In 2021, our net revenue in North America increased 40%.

In our international markets, we saw revenue growth of 53%, which keeps us on track with our goal to quadruple the business from 2018 levels by 2023.

COVID-19 Update

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

While most of our retail locations were open throughout 2021, certain locations were temporarily closed based on government and health authority guidance.

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

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

There has been disruption in transportation and port congestion, an increase in freight costs, and we have increased our use of air freight.

We expect this disruption and increased costs to continue throughout fiscal 2022.

Financial Highlights

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On a constant dollar basis, net revenue increased 40%.

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

• Company-operated stores net revenue increased 70% to $2.8 billion.

• Direct to consumer net revenue increased 22% to $2.8 billion, or increased 20% on a constant dollar basis.

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• Gross margin increased 170 basis points to 57.7%.

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

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

• Operating margin decreased 370 basis points to 18.6%.

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

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

• Acquisition-related expenses of $41.4 million were recognized in 2021 compared to $29.8 million in 2020.

• Income from operations increased 63% to $1.3 billion.

• Operating margin increased 270 basis points to 21.3%.

• Income tax expense increased 56% to $358.5 million.

Our effective tax rate for 2021 was 26.9% compared to 28.1% for 2020.

• Diluted earnings per share were $7.49 for 2021 compared to $4.50 in 2020.

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

This includes $40.0 million and $26.7 million of after-tax costs related to the MIRROR acquisition in 2021 and 2020, respectively, which reduced diluted earnings per share by $0.30 and $0.20 in 2021 and 2020, respectively.

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

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Net income $ 975,322 $ 588,913 15.6 % 13.4 %

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Comparison of 2021 to 2020

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

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

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

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

Net revenue increased $1.9 billion, or 42%, to $6.3 billion in 2021 from $4.4 billion in 2020.

On a constant dollar basis, assuming the average foreign currency exchange rates in 2021 remained constant with the average foreign currency exchange rates in 2020, net revenue increased $1.8 billion, or 40%.

The increase in net revenue was primarily due to increased company-operated store net revenue, which was the result of more extensive temporary store closures and COVID-19 operating restrictions that were in place during 2020.

Direct to consumer net revenue and other net revenue also increased.

Net revenue for 2021 and 2020 is summarized below.

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Company-Operated Stores.

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

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

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

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

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

The increase in net revenue from our company-operated stores segment was primarily due to most of our stores being open throughout 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020, and open with reduced operating hours and occupancy restrictions for the last two quarters of 2020 as a result of COVID-19.

During 2021, we opened 53 net new company-operated stores, including 38 stores in Asia Pacific, 10 stores in North America, and five stores in Europe.

Direct to Consumer.

Direct to consumer net revenue increased 22%, and increased 20% on a constant dollar basis.

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

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

The increase in net revenue from our direct to consumer segment was primarily the result of increased traffic and 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 2021.

The increase in net revenue from our other operations was primarily the result of net revenue from MIRROR as well as an increased number of temporary locations, including seasonal stores, that were open during 2020 compared to 2019.

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

The increase in other net revenue was primarily due to most of our outlet and pop up locations being open throughout 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020, and open with reduced operating hours and occupancy restrictions for the last two quarters of 2020 as a result of COVID-19.

The increase in net revenue from our other retail locations was partially offset by a decrease in net revenue from MIRROR.

2021 2020 Year over year change

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Gross profit $ 3,608,565 $ 2,463,991 $ 1,144,574 46.5 %

Gross margin 56.0 % 55.9 % 10 basis points

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57.7 % 56.0 % 170 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 130 basis points, driven primarily by the increase in net revenue;

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

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

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

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

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

• a decrease in costs related to our distribution centers and product departments as a percentage of net revenue of 30 basis points, driven primarily by the increase in net revenue;

• a favorable impact of foreign currency exchange rates of 30 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 global supply chain disruption, partially offset by lower markdowns.

Selling, General and Administrative Expenses

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Selling, general and administrative expenses $ 2,225,034 $ 1,609,003 $ 616,031 38.3 %

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

35.6 % 36.6 % (100) basis points

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

• an increase in costs related to our operating channels of $286.4 million, comprised of:

– an increase in employee costs of $150.8 million primarily due to an increase in salaries and wages expense and incentive compensation expenses in our company-operated store and other retail locations, primarily due to the increased number of hours worked as a result of COVID-19 impacts in 2020, and increased wage rates in 2021, as well as performance and growth in our business;

– an increase in variable costs of $78.1 million primarily due to an increase in distribution costs related to the growth in our direct to consumer net revenue, and an increase in credit card fees as a result of increased net revenue;

– an increase in brand and community costs of $37.6 million primarily due to an increase in digital marketing expenses;

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

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

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

– an increase in other costs of $19.9 million primarily due to an increase in depreciation, professional fees, and technology costs;

• an increase in head office costs of $287.7 million, comprised of:

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

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

– an increase of $163.9 million primarily due to increases in professional fees, brand and community costs, technology costs, and other head office costs;

– an increase in employee costs of $123.8 million primarily due to increased salaries and wages expense, and incentive compensation, stock-based compensation expense, and employee benefit costs;

• a decrease in government payroll subsidies of $36.5 million as no government payroll subsidies were recognized in 2021;

• an increase in net foreign exchange and derivative revaluation losses of $5.3 million.

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

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

Amortization of Intangible Assets

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Amortization of intangible assets

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

$ 8,782 $ 5,160 $ 3,622 70.2 %

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

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Acquisition-Related Expenses

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Acquisition-related expenses

$ 29,842 $ — $ 29,842 n/a

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

We also recognized transaction and integration related costs of $10.5 million for advisory and professional services, and integration costs subsequent to the acquisition.

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

We did not have acquisition-related expenses in 2019.

$ 41,394 $ 29,842 $ 11,552 38.7 %

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $38.4 million and $20.1 million in 2021 and 2020, respectively.

We also recognized transaction and integration related costs of $3.0 million and $10.5 million in 2021 and 2020, respectively.

Acquisition-related expenses in 2020 were partially offset by a $0.8 million gain that was recognized on our existing investment.

Please refer to Note 6.

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

Acquisition included in Item 8 of Part II of this report for information on the nature and recognition of acquisition-related compensation expense.

Income from Operations

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

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

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

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

Income from operations 2020 2019 2020 2019 Year over year change

2021 2020 2021 2020 Year over year change

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

Segment income from operations:

Segmented income from operations:

Company-operated stores $ 727,735 $ 212,592 25.8 % 12.8 % $ 515,143 242.3 %

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General corporate expenses 637,983 397,208 240,775 60.6

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

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

Amortization of intangible assets 8,782 5,160 3,622 70.2

Acquisition-related expenses 41,394 29,842 11,552 38.7

Income from operations $ 1,333,355 $ 819,986 $ 513,369 62.6 %

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Company-Operated Stores.

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

The decrease in gross margin was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue.

The decrease in gross profit was partially offset by a decrease in selling, general and administrative expenses, primarily due to lower people costs and lower operating costs.

People costs decreased primarily due to lower incentive compensation.

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

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

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

The increase in income from operations from company-operated stores was primarily the result of increased gross profit of $712.8 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to leverage on fixed costs.

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 the increased number of hours worked as a result of COVID-19 impacts in 2020, as well as increased wage rates in 2021, and performance and growth in our business.

Store operating costs increased, primarily due to increases in credit card fees, packaging costs and distribution costs as a result of higher net revenue, and due to government payroll subsidies during 2020 that partially offset selling, general and administrative expenses.

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 $773.7 million which was primarily due to increased net revenue and due to higher gross margin.

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

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

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

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as a result of revenue generated by MIRROR.

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

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

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $311.2 million, driven by increased net revenue, partially offset by lower gross margin.

decrease in gross margin was primarily due to increased air freight and distribution center costs relative to 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 and credit card fees as a result of higher net revenue, as well as higher digital marketing expenses, depreciation, employee costs and technology costs.

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

The increase in income from operations was primarily the result of increased gross profit of $120.6 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to higher product margin.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, driven by higher overall salaries and wages expense, incentive compensation, MIRROR marketing expenses and professional fees.

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

General Corporate Expenses.

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

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

The increase in general corporate expenses was primarily the result of increases in employee costs primarily from the growth in our business, as well as increased professional fees, brand and community costs, technology costs, and supplies.

An increase in net foreign exchange and derivative losses of $5.3 million also contributed to the increase in general corporate expense.

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

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$ 514 $ (636) $ 1,150 (180.8) %

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

The increase in other income, net was primarily due to a decrease in expenses related to our credit facilities, including for the 364-day credit facility that was in place during 2020.

This was partially offset by a decrease in interest income primarily due to lower interest rates.

We did not have any borrowings on our revolving credit facilities during 2021 or 2020.

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26.9 % 28.1 % (120) basis points

Our effective tax rate for 2020 was consistent with 2019.

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

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

The decrease in the effective tax rate was primarily due to a net increase in tax deductions related to stock-based compensation, and adjustments upon filing of certain income tax returns, partially offset by non-deductible expenses in international jurisdictions.

Certain non-deductible expenses related to the MIRROR acquisition increased the effective tax rate by 70 basis points in 2021 compared to 60 basis points in 2020.

2021 2020 Year over year change

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$ 975,322 $ 588,913 $ 386,409 65.6 %

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

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

The increase in net income in 2021 was primarily due to an increase in gross profit of $1.1 billion, an increase in other income (expense), net of $1.2 million partially offset by an increase in selling, general and administrative expenses of $616.0 million, an increase in income tax expense of $128.1 million, an increase in acquisition-related expenses of $11.6 million, and an increase in amortization of intangible assets of $3.6 million.

Comparable Store Sales and Total Comparable Sales

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

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

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

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

However, as the temporary store closures from COVID-19

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

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

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

We did not provide comparable sales metrics that included the first two quarters during 2020 or 2021.

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

Net revenue from a store is included in comparable store sales

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

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.

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

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

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

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

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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.

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Change $ 1,854,738 42 % 22 %

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

Adjustments due to foreign currency exchange rate changes (95,494) (2) (2)

Change in constant dollars $ 1,759,244 40 % 20 %

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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.

Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, investing in 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.

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

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

Risk Factors".

In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations.

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

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

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 and term deposits.

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

2021 2020 Year over year change

(In thousands)

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Financing activities (844,987) (80,788) (764,199)

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

Effect of foreign currency exchange rate changes on cash and cash equivalents (6,876) 29,996 (36,872)

Increase in cash and cash equivalents $ 109,354 $ 57,012 $ 52,342

Operating Activities

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

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

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

– $76.8 million related to other accrued liabilities, primarily due to increases in accrued duty, freight, and other operating expenses as well as an increase in the sales return allowance as a result of COVID-19 reducing in-period returns;

– $38.7 million related to inventories;

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

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

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

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

– $8.2 million related to income taxes.

• an increase of $44.2 million in adjustments to reconcile net income to net cash provided by operating activities other than changes in operating assets and liabilities, primarily related to an increase in depreciation and amortization, deferred income taxes, the settlement of derivatives not designated in a hedging relationship, and stock-based compensation.

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

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

• increased net income of $386.4 million;

• an increase in cash flows from changes in operating assets and liabilities of $176.7 million.

This increase was driven by changes in income taxes, accrued compensation, and accounts payable, partially offset by cash flows related to inventories;

• changes in adjusting items of $22.7 million primarily related to an increase in depreciation and amortization, stock-based compensation, and higher cash inflows related to derivatives not designated in a hedging relationship, partially offset by changes in deferred income taxes.

Investing Activities

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

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

This was partially offset by a decrease in capital expenditures.

The decrease in cash used in investing activities was primarily due to the acquisition of MIRROR, net of cash acquired for $452.6 million during 2020.

This was partially offset by an increase in capital expenditures.

Capital expenditures for our company-operated stores segment were $189.6 million and $134.2 million in 2021 and 2020, respectively.

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

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

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

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respectively.

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

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

The capital expenditures for our company-operated stores segment also included $47.1 million to open 56 company-operated stores and $41.0 million to open 40 company-operated stores, in 2021 and 2020 respectively.

We expect to open approximately 70 new company-operated stores in 2022.

Capital expenditures for our direct to consumer segment were $81.7 million and $37.2 million in 2021 and 2020, respectively.

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

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

The capital expenditures in 2021 were primarily related to our distribution centers as well as other technology infrastructure and system initiatives.

Capital expenditures related to corporate activities and other were $123.2 million and $57.8 million in 2021 and 2020, respectively.

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

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

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

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

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

The increase in capital expenditures for our corporate activities and other was partially due to more larger scale projects, this was partially offset by a continued shift to cloud computing in 2021.

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

Financing Activities

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

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

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

During 2021, 2.2 million shares were repurchased at a cost of $812.6 million.

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

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

We did not purchase any shares in private transactions during 2020.

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

Revolving Credit Facilities

North America 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.

Liquidity Outlook

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 expenditures out of our cash and cash equivalents and cash generated from operations.

The following table includes certain measures of our liquidity:

January 30, 2022

(In thousands)

Cash and cash equivalents $ 1,259,871

Working capital excluding cash and cash equivalents (1)

Capacity under committed revolving credit facility 396,976

(1) Working capital is calculated as current assets of $2.6 billion less current liabilities of $1.4 billion.

Capital expenditures are expected to range between $600.0 million and $625.0 million in fiscal 2022.

Our current commitments with respect to inventory purchases are included within our purchase obligations outlined below.

The timing and cost of our inventory purchases will vary depending on a variety of factors such as revenue growth, assortment and purchasing decisions, product costs including freight and duty, and the availability of production capacity and speed.

Our inventory balance as at January 30, 2022 was $966.5 million, an increase of 49% from January 31, 2021.

Increased air freight usage and cost has contributed to the increase in inventory.

On a number of units basis, our inventory increased 33% compared to January 31, 2021.

We expect that our inventory balance will continue to grow in fiscal 2022 and we expect the growth rate will exceed net revenue growth in fiscal 2022.

Our existing North America credit facility provides for $400.0 million in commitments under an unsecured five-year revolving credit facility.

The credit facility has a maturity date of December 14, 2026, subject to extension under certain circumstances.

As of January 30, 2022, aside from letters of credit of $3.0 million, we had no other borrowings outstanding under this credit facility.

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

Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) an alternate base rate, plus, an applicable margin determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax, depreciation, amortization, and rent ("EBITDAR") and ranges between 1.00%-1.50% for LIBOR loans and 0.00%-0.50% for alternate base rate loans.

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

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

We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.5:1 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).

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

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Mainland China revolving credit facility

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

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

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

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

We are required to follow certain covenants.

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

364-Day revolving credit facility

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

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

Further information regarding our credit facilities and associated covenants is outlined in Note 11.

Revolving Credit Facilities included in Item 8 of Part II of this report.

Contractual Obligations and Commitments

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The reported amounts exclude liabilities included in our consolidated balance sheets as of January 30, 2022.

One-time transition tax .

As outlined in Note 17.

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

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

One-time transition tax payable .

tax reforms enacted in December 2017 imposed a mandatory transition tax on accumulated foreign subsidiary earnings which have not previously been subject to U.S.

The one-time transition tax is payable over eight years beginning in fiscal 2018.

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

The one-time transition tax payable is net of foreign tax credits, and the table below outlines the expected payments due by fiscal year.

Deferred consideration.

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Deferred consideration 24,306 24,298 8 — — — —

Off-Balance Sheet Arrangements

As of January 30, 2022, our operating lease commitments for distribution center operating leases which have been signed, but not yet commenced, was $379.7 million, which is not reflected in the table above.

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

As of January 30, 2022, letters of credit and letters of guarantee totaling $4.4 million had been issued, including $3.0 million under our committed revolving credit facility.

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

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Critical Accounting Policies and Estimates

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generally accepted accounting principles requires management to make estimates and assumptions.

Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment.

Predicting future events is inherently an imprecise activity and, as such, requires the use of significant judgment.

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

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

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

As of January 30, 2022 the net carrying value of our inventories was $966.5 million, which included provisions for obsolete and damaged inventory of $35.7 million.

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

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Goodwill impairment assessment

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

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

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

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

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

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

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

Goodwill is tested annually for impairment on the first day of the fourth quarter, or more frequently if events or circumstances indicate it is more likely than not that an impairment may have occurred.

We have allocated $362.5 million of goodwill to the MIRROR reporting unit.

As of November 1, 2021, we performed a quantitative impairment analysis of the MIRROR reporting unit and concluded that the fair value of the MIRROR reporting unit exceeded its carrying value, and no impairment has been recognized.

We used a discounted cash flow model to estimate the fair value, supplemented by market analysis, which indicated the fair value of MIRROR was at least 18% higher than its carrying value.

The key assumptions of the fair value of the MIRROR reporting unit are the revenue growth rates, operating profit margins, and the discount rate.

Our ability to generate expected cashflows is dependent on several factors including, but not limited to, trends in the Connected Fitness industry and the desire to exercise at home, our ability to attract new subscribers to grow the community, and to maintain a loyal subscriber base.

The fair value of MIRROR is also dependent on the ability of MIRROR to leverage fixed costs and therefore achieve long term profitability.

Declining cashflow trends compared to forecast, or other internal or external indicators, could cause us to conclude that impairment indicators exist, and goodwill may be impaired.

Deferred taxes on undistributed net investment of foreign subsidiaries.

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state income taxes and foreign withholding taxes on the net investment in our subsidiaries which we have determined to be indefinitely reinvested.

This determination is based on the cash flow projections and operational and fiscal objectives of each of our foreign subsidiaries.

This determination is based on the cash flow projections and

operational and fiscal objectives of each of our foreign subsidiaries.

Such estimates are inherently imprecise since many assumptions utilized in the projections are subject to revision in the future.

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The deferred tax liability has been recorded on the basis that we would choose to make the repatriation transactions in the most tax efficient manner.

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

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

As of January 30, 2022, the paid-up-capital balance of the Canadian subsidiaries for tax purposes was $2.0 billion.

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

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

state income taxes which would

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be due upon repatriation.

Deferred income tax liabilities of $3.8 million have been recognized in relation to the portion of our net investment in our Canadian subsidiaries that is not indefinitely reinvested, representing the U.S.

state income taxes which would be due upon repatriation.

The unrecognized deferred tax liability on the indefinitely reinvested amount is approximately $3.2 million.

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

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

Absent any changes to paid-up-capital of our Canadian subsidiaries, or permanent re-investment amounts, we expect the effective tax rate to increase in fiscal 2022.

Contingencies

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

What changed 10-K

Item 7. Management’s Discussion and Analysis