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Item 2. Management’s Discussion and Analysis

2022-06-02 compared with 2021-12-09 · 127 added, 301 removed, 189 unchanged (69% of the section changed)

4 unchanged sentences

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.

Although we believe that the expectations reflected in the forward-looking statements are

reasonable, we cannot guarantee future events, results, actions, levels of activity, performance, or achievements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance, or achievements.

Readers are cautioned not to place undue reliance on these forward-looking statements.

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Fiscal 2022 and fiscal 2021 are referred to as "2022," and "2021," respectively.

The first three quarters of 2021 and 2020 ended on October 31, 2021 and November 1, 2020, respectively.

The first quarter of 2022 and 2021 ended on May 1, 2022 and May 2, 2021, 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

2 unchanged sentences

• Liquidity and Capital Resources

• Revolving Credit Facilities

• Off-Balance Sheet Arrangements

• Critical Accounting Policies and Estimates

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

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

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

lululemon athletica inc.

is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories.

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

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

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

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

is principally a designer, distributor, and retailer of technical athletic apparel, footwear, and accessories.

We have a vision to create transformative products and experiences that build meaningful connections, unlocking greater possibility and wellbeing for all.

Since our inception, we have fostered a distinctive corporate culture;

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

These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose "to elevate human potential by helping people feel their best."

Our performance apparel and footwear are marketed under the lululemon brand.

We offer a comprehensive line of apparel and accessories.

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

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

We also offer apparel designed

for being On the Move and fitness-related accessories.

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

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

MIRROR is an in-home fitness company offering connected hardware and related software products and services, with an interactive workout platform that features live and on-demand classes.

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

We also offer in-home fitness equipment and associated content subscriptions, including live and on-demand classes, through our MIRROR brand.

COVID-19 Update

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

It has caused governments and public health officials to impose restrictions and recommend precautions to mitigate the spread of the virus.

While most of our retail locations were open throughout the first quarter of fiscal 2022 and 2021, certain locations were temporarily closed based on government and health authority guidance.

Certain stores and our third party distribution center in the People's Republic of China ("PRC") experienced temporary closures during the first quarter of 2022, and there is uncertainty regarding the ongoing impact of COVID-19 on our operations in the PRC.

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 three quarters of fiscal 2021, certain locations were temporarily closed based on government and health authority guidance.

We continue to operate with precautionary measures in place, as appropriate.

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

The pandemic has impacted our suppliers and our distribution and logistics providers, including in the PRC.

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

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.

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

Financial Highlights

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

For the first quarter of 2022, compared to the first quarter of 2021:

• Net revenue increased 32% to $1.6 billion.

On a constant dollar basis, net revenue increased 32%.

• Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 27%.

On a constant dollar basis, total comparable sales increased 26%.

– Comparable store sales increased 32% or increased 31% on a constant dollar basis.

– Direct to consumer net revenue increased 23% to 586.5 million, or increased 21% on a constant dollar basis.

• Total comparable sales increased 28%, or 29% on a constant dollar basis.

– Comparable store sales increased 24%, or 24% on a constant dollar basis.

– Direct to consumer net revenue increased 32%, or 33% on a constant dollar basis.

• Gross profit increased 24% to $870.4 million.

• Gross margin increased 110 basis points to 57.2%.

• Gross margin decreased 320 basis points to 53.9%.

• Income from operations increased 34% to $260.3 million.

• Operating margin decreased 50 basis points to 17.8%.

• Operating margin increased 30 basis points to 16.1%.

• Income tax expense increased 43% to $70.3 million.

Our effective tax rate for the third quarter of 2021 was 27.2% compared to 29.7% for the third quarter of 2020.

• Diluted earnings per share were $1.44 compared to $1.10 in the third quarter of 2020.

This includes $23.5 million and $7.6 million of after-tax costs related to the MIRROR acquisition in the third quarter of 2021 and 2020, respectively, which reduced diluted earnings per share by $0.18 and $0.06 in the third quarter of 2021 and 2020, respectively.

Our effective tax rate for the first quarter of 2022 was 27.0% compared to 25.3% for the first quarter of 2021.

• Diluted earnings per share were $1.48 compared to $1.11 in the first quarter of 2021.

The first quarter of 2021 includes $7.3 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.05.

There were no acquisition-related expenses in the first quarter of 2022.

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

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Quarter-to-Date Results of Operations:

Third Quarter Results

First Quarter Results

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

Third Quarter

First Quarter

2022 2021 2022 2021

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Net income $ 189,998 $ 144,956 11.8 % 11.8 %

Net revenue increased $333.0 million, or 30%, to $1.5 billion for the third quarter of 2021 from $1.1 billion for the third quarter of 2020.

On a constant dollar basis, assuming the average foreign currency exchange rates for the third quarter of 2021 remained constant with the average foreign currency exchange rates for the third quarter of 2020, net revenue increased $313.6 million, or 28%.

Net revenue increased $387.0 million, or 32%, to $1.6 billion for the first quarter of 2022 from $1.2 billion for the first quarter of 2021.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first quarter of 2022 remained constant with the average foreign currency exchange rates for the first quarter of 2021, net revenue increased $394.1 million, or 32%.

The increase in net revenue was primarily due to increased company-operated store net revenue, including from increased comparable store sales and new company-operated stores.

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

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 27% for the third quarter of 2021 compared to the third quarter of 2020.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 28% for the first quarter of 2022 compared to the first quarter of 2021.

Total comparable sales increased 29% on a constant dollar basis.

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

Third Quarter

Net revenue for the first quarter of 2022 and 2021 is summarized below.

First Quarter

2022 2021 2022 2021 Year over year change

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The increase in net revenue from our company-operated stores was driven by increased comparable store sales.

Comparable store sales increased 32%, or increased 31% on a constant dollar basis.

The increase in comparable store sales was primarily a result of increased store traffic, partially due to most of our stores having reduced operating hours and occupancy restrictions for the third quarter of 2020 as a result of COVID-19.

Net revenue from company-operated stores that we opened or significantly expanded since the third quarter of 2020 contributed $37.5 million to the increase in net revenue from our company-operated stores.

We opened 37 net new company-operated stores since the third quarter of 2020, including 25 stores in Asia Pacific, nine stores in North America, and three stores in Europe.

Comparable store sales increased 24%, or 24% on a constant dollar basis.

The increase in comparable store sales was primarily a result of increased store traffic, partially offset by a decrease in conversion rates and dollar value per transaction.

Net revenue from company-operated stores that we opened or significantly expanded since the first quarter of 2021 contributed $93.9 million to the increase in net revenue from our company-operated stores.

We opened 56 net new company-operated stores since the first quarter of 2021, including 38 stores in Asia Pacific, 12 stores in North America, and six stores in Europe.

Direct to Consumer.

Direct to consumer net revenue increased 23%, and increased 21% on a constant dollar basis.

Direct to consumer net revenue increased 32%, or 33% on a constant dollar basis.

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.

The increase in net revenue was primarily due to increased sales at our outlet and seasonal locations as a result of COVID-19 restrictions in place for the third quarter of 2020.

An increase in the number of temporary locations, including

seasonal and outlet stores, that were open during the third quarter of 2021 compared to the third quarter of 2020 also contributed to the increase in other net revenue.

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

Third Quarter

The increase in net revenue was primarily due to increased outlet sales, license and supply arrangement revenue, and sales to wholesale accounts.

The increase in net revenue was partially offset by a decrease in net revenue from MIRROR and our pop up locations, which had fewer locations open compared to the prior year.

First Quarter

2022 2021 Year over year change

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53.9 % 57.1 % (320) 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 60 basis points, driven primarily by the increase in net revenue;

• a favorable impact of foreign currency exchange rates of 30 basis points;

• an increase in product margin of 20 basis points, primarily due to lower markdowns, partially offset by higher air freight costs as a result of COVID impacts on supply chain.

The decrease in gross margin was primarily the result of:

• a decrease in product margin of 370 basis points, primarily due to higher air freight costs as a result of global supply chain disruption;

• an increase in costs related to our distribution centers and product departments as a percentage of net revenue of 20 basis points;

• an unfavorable impact of foreign currency exchange rates of 10 basis points.

The decrease in gross margin was partially offset by a decrease in occupancy and depreciation costs as a percentage of net revenue of 80 basis points, driven primarily by the increase in net revenue.

Selling, General and Administrative Expenses

Third Quarter

First Quarter

2022 2021 Year over year change

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• an increase in head office costs of $68.4 million, comprised of:

– an increase in costs of $55.6 million primarily due to an increase in brand and community costs, professional fees, and information technology costs;

– an increase in employee costs of $32.8 million primarily due to an increase in salaries and wages expense and incentive compensation, primarily as a result of headcount growth;

– an increase in costs of $36.4 million primarily due to an increase in brand and community costs, professional fees, technology costs, and depreciation;

– an increase in employee costs of $32.0 million primarily due to an increase in salaries and wages expense and incentive compensation, primarily as a result of headcount growth as well as increased salaries;

• an increase in costs related to our operating channels of $43.1 million, comprised of:

– an increase in employee costs of $37.8 million primarily due to an increase in salaries and wages expense and incentive compensation in our company-operated stores and other retail locations, primarily from the growth in our business;

– an increase in variable costs of $11.1 million primarily due to an increase in credit card fees, distribution costs, and packaging costs, as a result of increased net revenue;

– an increase in operating costs of $3.7 million primarily due to an increase in depreciation and professional fees;

– a decrease in brand and community costs of $9.4 million primarily due to a decrease in digital marketing expenses related to MIRROR;

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

– an increase in employee costs of $24.6 million primarily due to an increase in salaries and wages expense and incentive compensation in our company-operated stores and direct to consumer channels, primarily from the growth in our business as well as increased wage rates;

– an increase in variable costs of $17.3 million primarily due to an increase in distribution costs and credit card fees, as a result of increased net revenue;

– an increase in operating costs of $5.5 million primarily due to increased depreciation and an increase in repairs and maintenance costs in our company-operated stores.

The increase in costs related to our operating channels was partially offset by a decrease in brand and community costs of $4.3 million primarily due to a decrease in marketing expenses related to MIRROR, partially offset by an increase in digital marketing expenses related to our direct to consumer channel.

• a decrease in net foreign currency exchange and derivative revaluation losses of $0.3 million.

Amortization of intangible assets

Third Quarter

First Quarter

2022 2021 Year over year change

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Amortization of intangible assets $ 2,195 $ 2,195 $ — — %

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

The amortization of intangible assets was primarily the result of the amortization of intangible assets recognized upon the acquisition of MIRROR.

Acquisition-related expenses

Third Quarter

First Quarter

2022 2021 Year over year change

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Acquisition-related expenses $ — $ 7,664 $ (7,664) (100.0) %

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $23.8 million and $7.5 million in the third quarter of 2021 and 2020, respectively.

We also recognized transaction and integration related costs of $0.3 million and $1.0 million in the third quarter of 2021 and 2020, respectively.

Please refer to Note 3.

Acquisition included in Item 1 of Part 1 of this report for information on the nature and recognition of acquisition-related compensation expenses.

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $7.2 million and integration related costs of $0.5 million in the first quarter of 2021.

There were no acquisition-related expenses in the first quarter of 2022.

Income from Operations

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Segmented income from operations is summarized below.

Third Quarter

First Quarter

2022 2021 2022 2021 Year over year change

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Direct to consumer 285,107 236,933 39.5 43.5 48,174 20.3

Other 27,450 1,304 17.5 1.0 26,146 n/a

$ 465,200 $ 322,694 $ 142,506 44.2 %

General corporate expense 180,931 107,048 73,883 69.0

Amortization of intangible assets 2,195 2,195 — n/a

Acquisition-related expenses 24,127 8,531 15,596 182.8

Income from operations $ 257,947 $ 204,920 $ 53,027 25.9 %

Operating margin 17.8 % 18.3 % (50) 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 $110.0 million, driven by increased net revenue, as a result of increased comparable store sales, sales from new and significantly expanded stores, as well as higher gross margin.

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 salaries and wages expense and higher incentive compensation as a result of growth in our business.

Store operating costs increased primarily due to increases in packaging costs, credit card fees, and distribution costs, as a result of higher net revenue.

Income from operations as a percentage of company-operated stores net revenue increased due to increased net revenue and gross margin, as well as 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 $69.0 million, driven by increased net revenue as a result of increased traffic and a higher

dollar value per transaction.

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

Income from operations as a percentage of direct to consumer net revenue was consistent for the third quarter of 2021, compared to the third quarter of 2020.

The leverage on selling, general and administrative expenses was offset by lower gross margin.

The increase in income from operations was primarily the result of increased gross profit of $23.0 million, driven by increased net revenue and higher gross margin.

Selling, general and administrative expenses decreased, driven by decreases in digital marketing expenses and distribution costs related to MIRROR.

These decreases were partially offset by increased salaries and wages and incentive compensation related to our other retail locations.

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

General Corporate Expenses.

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

An increase in net foreign currency exchange and derivative revaluation losses of $1.8 million also contributed to the increase in general corporate expenses.

Other Income (Expense), Net

Third Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Other income (expense), net $ 15 $ (580) $ 595 (102.6) %

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.

Income Tax Expense

Third Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Income tax expense $ 70,174 $ 60,697 $ 9,477 15.6 %

Effective tax rate

27.2 % 29.7 % (250) basis points

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

Certain non-deductible expenses related to the MIRROR acquisition increased the effective tax rate by 210 basis points in the third quarter of 2021 compared to 80 basis points in the third quarter of 2020.

Third Quarter

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Net income $ 187,788 $ 143,643 $ 44,145 30.7 %

The increase in net income was primarily due to an increase in gross profit of $202.0 million and an increase in other income (expense), net of $0.6 million, partially offset by an increase in selling, general and administrative expenses of $133.4 million, an increase in income tax expense of $9.5 million, and an increase in acquisition-related expenses of $15.6 million.

Year-to-Date Results of Operations:

First Three Quarters Results

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

First Three Quarters

2021 2020 2021 2020

(In thousands) (Percentages)

Net revenue $ 4,127,504 $ 2,672,330 100.0 % 100.0 %

Cost of goods sold 1,755,111 1,221,073 42.5 45.7

Gross profit 2,372,393 1,451,257 57.5 54.3

Selling, general and administrative expenses 1,583,075 1,064,172 38.4 39.8

Amortization of intangible assets 6,585 2,965 0.2 0.1

Acquisition-related expenses 39,934 22,040 1.0 0.8

Income from operations 742,799 362,080 18.0 13.5

Other income (expense), net 338 250 — —

Income before income tax expense 743,137 362,330 18.0 13.6

Income tax expense 202,319 103,254 4.9 3.9

Net income $ 540,818 $ 259,076 13.1 % 9.7 %

Net revenue increased $1.5 billion, or 54%, to $4.1 billion for the first three quarters of 2021 from $2.7 billion for the first three quarters of 2020.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first three quarters of 2021 remained constant with the average foreign currency exchange rates for the first three quarters of 2020, net revenue increased $1.4 billion, or 51%.

The increase in net revenue was primarily due to increased company-operated store net revenue, as a result of the temporary store closures and COVID operating restrictions that were in place during the first three quarters of fiscal 2020.

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

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

First Three Quarters

2021 2020 2021 2020 Year over year change

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

Company-operated stores $ 1,938,864 $ 1,058,927 47.0 % 39.6 % $ 879,937 83.1 %

Direct to consumer 1,729,040 1,384,604 41.9 51.8 344,436 25.0

Other 19,527 14,506 12.2 10.0 5,021 34.6

Net revenue $ 4,127,504 $ 2,672,330 100.0 % 100.0 % $ 1,455,174 54.5 %

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 three quarters of 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 third quarter of 2020 as a result of COVID-19.

We opened 37 net new company-operated stores since the third quarter of 2020 which also contributed to the increase in net revenue, including 25 stores in Asia Pacific, nine stores in North America, and three stores in Europe.

Direct to Consumer.

Direct to consumer net revenue increased 25%, 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 three quarters of 2021.

The increase in other net revenue was primarily due to most of our outlet and seasonal locations being open for the entire first three quarters of 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 third quarter of 2020 as a result of COVID-19.

Net revenue from MIRROR, which we acquired during the second quarter of 2020, as well as an increase in the number of temporary locations, including seasonal and outlet stores, that were open during the third quarter of 2021 compared to the third quarter of 2020 also contributed to the increase in other net revenue.

First Three Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Gross profit $ 2,372,393 $ 1,451,257 $ 921,136 63.5 %

57.5 % 54.3 % 320 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 220 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 70 basis points, driven primarily by the increase in net revenue;

• a favorable impact of foreign currency exchange rates of 50 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 impacts on supply chain, partially offset by lower markdowns.

Selling, General and Administrative Expenses

First Three Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Selling, general and administrative expenses $ 1,583,075 $ 1,064,172 $ 518,903 48.8 %

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

38.4 % 39.8 % (140) basis points

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

• an increase in costs related to our operating channels of $242.3 million, comprised of:

– an increase in employee costs of $126.6 million primarily due to an increase in salaries and wages expense, incentive compensation, and benefit 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, as well as performance and growth in our business;

– an increase in variable costs of $63.0 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 $35.9 million primarily due to an increase in digital marketing expenses;

– an increase in other operating costs of $16.8 million primarily due to an increase in depreciation, information technology costs, and occupancy costs;

• an increase in head office costs of $232.4 million, comprised of:

– an increase in costs of $134.7 million primarily due to an increase in professional fees, brand and community costs, information technology costs, and depreciation;

– an increase in employee costs of $97.7 million primarily due to an increase in salaries and wages expense, and incentive compensation, stock-based compensation expense, and employee benefit costs, primarily as a result of headcount growth,

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

• an increase in net foreign currency exchange and derivative revaluation losses of $7.7 million.

Amortization of intangible assets

First Three Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Amortization of intangible assets $ 6,585 $ 2,965 $ 3,620 122.1 %

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 Three Quarters

2021 2020 Year over year change

(In thousands) (In thousands) (Percentage)

Acquisition-related expenses $ 39,934 $ 22,040 $ 17,894 81.2 %

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $38.1 million and $12.6 million in the first three quarters of 2021 and 2020, respectively.

We also recognized transaction and integration related costs of $1.9 million and $10.3 million in the first three quarters of 2021 and 2020, respectively.

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

Please refer to Note 3.

Acquisition included in Item 1 of Part 1 of this report for information on the nature and recognition of acquisition-related compensation expenses.

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 Three Quarters

2021 2020 2021 2020 Year over year change

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

Segmented income from operations:

Company-operated stores $ 464,844 $ 76,333 24.0 % 7.2 % $ 388,511 509 %

Direct to consumer 754,231 604,152 43.6 43.6 150,079 24.8

Other 64,196 3,622 14.0 1.6 60,574 n/a

$ 465,340 $ 350,587 $ 114,753 32.7 %

General corporate expense 202,798 146,907 55,891 38.0

Amortization of intangible assets 6,585 2,965 3,620 n/a

Amortization of intangible assets 2,195 2,195 — —

Acquisition-related expenses — 7,664 (7,664) (100.0)

2 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 $551.9 million, driven by higher gross margin and increased net revenue.

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $93.4 million, driven by increased net revenue, as a result of increased comparable store sales and sales from new and significantly expanded stores, as well as higher gross margin.

The increase in gross margin was primarily due to leverage on fixed costs, partially offset by lower product margin driven by increased air freight 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 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 performance and growth in our business, and store operating costs increased, primarily due to government payroll subsidies that were recognized during the first three quarters of 2020.

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

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

Employee costs increased primarily due to higher salaries and wages expense and higher incentive compensation as a result of the 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, as well

as increased repairs and maintenance.

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

Direct to Consumer.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $233.2 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, credit card fees, and packaging, as a result of higher net revenue, as well as higher digital marketing expenses, depreciation, employee costs, and information technology costs.

Income from operations as a percentage of direct to consumer net revenue was consistent for the first three quarters of 2021, compared to the first three quarters of 2020.

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

The increase in income from operations was primarily the result of increased gross profit of $136.1 million, driven by higher gross margin and 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 and professional fees.

Higher overall salaries and wages expense, incentive compensation, and occupancy costs, as well as higher overall credit card fees and distribution costs as a result of higher net revenue also contributed to the increase in selling, general and administrative expenses.

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 Expense.

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, brand and community costs, information technology costs, depreciation, and supplies costs.

An increase in net foreign currency exchange and derivative revaluation losses of $7.7 million also contributed to the increase in general corporate expenses.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $79.5 million, driven by increased net revenue as a result of increased traffic and a higher dollar value per transaction, partially offset by lower gross margin.

The decrease in gross margin was primarily due to lower product margin driven by 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 operating costs including distribution costs and credit card fees, as a result of higher net revenue, as well as higher digital marketing expenses, employee costs, and depreciation.

Income from operations as a percentage of direct to consumer net revenue decreased primarily due to decreased gross margin, partially offset by leverage on selling, general and administrative expenses.

The increase in other income from operations was primarily due to decreased selling, general and administrative expenses, driven by decreased MIRROR marketing expenses, and decreased people costs at our other retail locations primarily due to fewer pop up locations open compared to the prior year.

These decreases were partially offset by decreased gross profit of $2.9 million, driven by increased air freight costs.

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

General Corporate Expenses.

The increase in general corporate expense was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $0.3 million.

Other Income (Expense), Net

First Three Quarters

First Quarter

2022 2021 Year over year change

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Other income (expense), net $ (22) $ 227 $ (249) (109.7) %

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.

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

Income Tax Expense

First Three Quarters

First Quarter

2022 2021 Year over year change

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27.0 % 25.3 % 170 basis points

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 120 basis points in the first three quarters of 2021 compared to 90 basis points in the first three quarters of 2020.

First Three Quarters

The increase in the effective tax rate was primarily due to a net decrease in tax deductions related to stock-based compensation and accrued withholding taxes on unremitted foreign earnings.

First Quarter

2022 2021 Year over year change

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Net income $ 189,998 $ 144,956 $ 45,042 31.1 %

The increase in net income was primarily due to an increase in gross profit of $921.1 million, partially offset by an increase in selling, general and administrative expenses of $518.9 million, an increase in income tax expense of $99.1 million, an increase in acquisition-related expenses of $17.9 million, an increase in amortization of intangible assets of $3.6 million, and an increase in other income of $0.1 million.

The increase in net income was primarily due to an increase in gross profit of $170.1 million and a decrease in acquisition-related expenses of $7.7 million, partially offset by an increase in selling, general and administrative expenses of $111.2 million, an increase in income tax expense of $21.2 million, and a decrease in other income (expense), net of $0.2 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 year-to-date basis are not currently representative of the underlying trends of our business.

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

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

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

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.

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

Third Quarter 2021

First Three Quarters 2021

Net Revenue Net Revenue

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

First Quarter 2022

(In thousands) (Percentages)

Change $ 386,998 32 %

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

As the temporary closures from COVID-19 resulted in a significant number of stores being removed from our comparable store base during the first two quarters of 2020, total comparable sales and comparable store sales are only reported on a quarter-to-date basis.

Third Quarter 2021

First Three Quarters 2021

First Quarter 2022

Total Comparable Sales 1,2

Comparable Store Sales 2

Direct to Consumer Net Revenue Direct to Consumer Net Revenue

Direct to Consumer Net Revenue

Change 28 % 24 % 32 %

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

Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season,

while our operating expenses are more equally distributed throughout the year.

Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year.

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

For example, we generated approximately 44% and 56% of our full year operating profit during the fourth quarters of 2021 and 2020, respectively.

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

Liquidity and Capital Resources

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

The following table includes certain measures of our liquidity:

October 31, 2021

(In thousands)

Cash and cash equivalents $ 993,591

Working capital excluding cash and cash equivalents (1)

Capacity under committed revolving credit facility 396,852

(1) Working capital is calculated as current assets of $2.3 billion less current liabilities of $1.1 billion.

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:

First Three Quarters

First Quarter

2022 2021 Year over year change

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Operating Activities

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

• increased net income of $281.7 million;

• an increase in cash flows from the changes in operating assets and liabilities of $207.1 million.

This increase was driven by changes in income taxes, accrued compensation, and prepaid expenses and other assets, partially offset by changes in inventories;

• changes in adjusting items of $83.9 million, primarily driven by higher cash inflows related to derivatives not designated in a hedging relationship, as well as increased depreciation and stock-based compensation expenses.

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

• a decrease in cash flows from the changes in operating assets and liabilities of $487.9 million.

This decrease was driven by changes in inventories, income taxes, and accrued compensation;

• changes in adjusting items of $14.5 million, primarily driven by lower cash inflows related to derivatives not designated in a hedging relationship, partially offset by increased depreciation and stock-based compensation expenses.

The increase in cash used in operating activities was partially offset by increased net income of $45.0 million.

Investing Activities

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

The increase in capital expenditures was primarily due to increased corporate expenditures driven by investment in information technology and business systems.

There was also increased direct to consumer segment expenditures driven by investment in our distribution centers, as well as increased company-operated stores expenditures driven by opening new stores, remodeling or relocating certain stores, and ongoing store refurbishment.

The increase in cash used in investing activities was primarily due to increased capital expenditures, partially offset by the settlement of net investment hedges.

The increase in capital expenditures was primarily due to increased corporate expenditures driven by investment in technology and business systems and increased expenditures on corporate office renovations.

There was also increased company-operated store expenditures driven by opening new stores as well remodeling stores to support our footwear launch.

This was partially offset by decreased capital expenditures for our direct to consumer segment.

Financing Activities

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 three quarters of 2021 included $491.3 million to repurchase 1.4 million shares of our common stock compared to $63.7 million to repurchase 0.4 million shares for the first three quarters of 2020.

Cash used in financing activities for the first quarter of 2022 included $232.6 million to repurchase 0.7 million shares of our common stock compared to $83.8 million to repurchase 0.3 million shares for the first quarter of 2021.

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

Revolving Credit Facilities

North America revolving credit facility

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

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

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

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

As of October 31, 2021, aside from letters of credit of $3.1 million, we had no other borrowings outstanding under this credit facility.

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

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

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

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

We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.5:1 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 October 31, 2021, we were in compliance with the covenants of the credit facility.

Mainland China revolving credit facility

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

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

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

Loans are available for a period not to exceed 12 months, at an interest

rate equal to the loan prime rate plus a spread of 0.5175%.

We are required to comply with certain covenants.

As of October 31, 2021, we were in compliance with the covenants and, aside from letters of credit of 3.5 million Chinese Yuan, we had no other borrowings or guarantees outstanding under this credit facility.

Off-Balance Sheet Arrangements

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:

(In thousands)

Cash and cash equivalents $ 649,016

Working capital excluding cash and cash equivalents (1)

Capacity under committed revolving credit facility 396,907

(1) Working capital is calculated as current assets of $2.3 billion less current liabilities of $1.2 billion.

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

As of October 31, 2021, letters of credit and letters of guarantee totaling $4.2 million had been issued, including $3.1 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.

As of May 1, 2022, letters of credit and letters of guarantee totaling $4.3 million had been issued, including $3.1 million under our committed revolving credit facility.

Our committed 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 May 1, 2022, aside from letters of credit of $3.1 million, we had no other borrowings outstanding under this credit facility.

Further information regarding our credit facilities and associated covenants is outlined in Note 4.

Revolving Credit Facilities included in Item 1 of Part I of this report.

Critical Accounting Policies and Estimates

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

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

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

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.

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Operating Locations

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

Number of company-operated stores by country October 31,

Our company-operated stores by country as of May 1, 2022 and January 30, 2022 are summarized in the table below.

Number of company-operated stores by country May 1,

2022 January 30,

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Total company-operated stores 579 574

(1) Included within PRC as of October 31, 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.

(1) Included within PRC as of May 1, 2022, were nine stores in Hong Kong Special Administrative Region, five stores in Taiwan, and two stores in Macao Special Administration Region.

As of January 30, 2022, there were nine stores in Hong Kong Special Administrative Region, five 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 October 31, 2021, there were 14 licensed locations, including six in Mexico, six in the United Arab Emirates, one in Kuwait, and one in Qatar.

As of May 1, 2022, there were 16 licensed locations, including eight in Mexico, six in the United Arab Emirates, one in Kuwait, 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