What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-09-01 compared with 2022-06-02 · 263 added, 81 removed, 235 unchanged (59% of the section changed)

1 unchanged sentence

Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

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

All statements, other than statements of

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

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

7 unchanged sentences

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

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

The first two quarters of 2022 and 2021 ended on July 31, 2022 and August 1, 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

15 unchanged sentences

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 activities.

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.

1 unchanged sentence

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 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.

While most of our retail locations were open throughout the first two quarters 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.

Almost all PRC stores reopened in the second quarter of 2022, with certain localized closures dependent on COVID-19 resurgences.

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

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.

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

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

We expect supply disruptions to continue throughout 2022 and into 2023.

Financial Highlights

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

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

• Net revenue increased 29% to $1.9 billion.

3 unchanged sentences

– Direct to consumer net revenue increased 30%, or 32% on a constant dollar basis.

• Gross profit increased 24% to $870.4 million.

• Gross profit increased 25% to $1.1 billion.

• Gross margin decreased 160 basis points to 56.5%.

2 unchanged sentences

• Income tax expense increased 35% to $111.8 million.

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.

Our effective tax rate for the second quarter of 2022 was 27.9% compared to 28.5% for the second quarter of 2021.

• Diluted earnings per share were $2.26 compared to $1.59 in the second quarter of 2021.

The second quarter of 2022 includes $8.5 million of after-tax gains from the sale of an administrative office building, which increased diluted earnings per share by $0.06.

The second quarter of 2021 includes $7.7 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.06.

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

1 unchanged sentence

Quarter-to-Date Results of Operations:

First Quarter Results

Second Quarter Results

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

First Quarter

Second Quarter

2022 2021 2022 2021

6 unchanged sentences

Acquisition-related expenses — 8,143 — 0.6

Gain on disposal of assets (10,180) — (0.5) —

Income from operations 401,208 291,031 21.5 20.1

3 unchanged sentences

Net income $ 289,521 $ 208,074 15.5 % 14.3 %

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%.

Net revenue increased $417.7 million, or 29%, to $1.9 billion for the second quarter of 2022 from $1.5 billion for the second quarter of 2021.

On a constant dollar basis, assuming the average foreign currency exchange rates for the second quarter of 2022 remained constant with the average foreign currency exchange rates for the second quarter of 2021, net revenue increased $453.0 million, or 31%.

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 28% for the first quarter of 2022 compared to the first quarter of 2021.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 23% for the second quarter of 2022 compared to the second quarter of 2021.

Total comparable sales increased 25% on a constant dollar basis.

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

First Quarter

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

Second Quarter

2022 2021 2022 2021 Year over year change

7 unchanged sentences

Comparable store sales increased 16%, or 18% 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.

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

Net revenue from company-operated stores that we opened or significantly expanded since the second quarter of 2021 contributed $116.0 million to the increase in net revenue from our company-operated stores.

We opened 66 net new company-operated stores since the second quarter of 2021, including 43 stores in Asia Pacific, 16 stores in North America, and seven stores in Europe.

Direct to Consumer.

Direct to consumer net revenue increased 30%, or 32% 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 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

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

The increase in net revenue was primarily due to increased outlet sales, license and supply arrangement revenue, sales to wholesale accounts, revenue from our pop up locations, and recommerce revenue.

The increase in net revenue was partially offset by a decrease in net revenue from MIRROR.

Second Quarter

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Gross profit $ 870,393 $ 700,314 $ 170,079 24.3 %

$ 1,055,476 $ 842,686 $ 212,790 25.3 %

56.5 % 58.1 % (160) basis points

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;

• a decrease in product margin of 150 basis points, primarily due to higher air freight costs as a result of global supply chain disruption and higher markdowns;

• an increase in costs related to our distribution centers and product departments as a percentage of net revenue of 40 basis points;

2 unchanged sentences

Selling, General and Administrative Expenses

First Quarter

Second Quarter

2022 2021 Year over year change

1 unchanged sentence

Selling, general and administrative expenses

Selling, general and administrative expenses as a percentage of net revenue 37.7 % 40.5 % (280) basis points

$ 662,253 $ 541,317 $ 120,936 22.3 %

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

35.4 % 37.3 % (190) basis points

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

• an increase in head office costs of $68.2 million, comprised of:

– 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 employee costs of $35.4 million primarily due to an increase in salaries and wages and incentive compensation, primarily as a result of headcount growth and increased wage rates, and due to increased travel costs;

– an increase in other costs of $32.8 million primarily due to an increase in brand and community costs, including charitable donations, as well as increased technology costs, depreciation, and professional fees;

• an increase in costs related to our operating channels of $51.8 million, comprised of:

– 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 $29.0 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.

– an increase in employee costs of $21.8 million primarily due to an increase in salaries and wages expense 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 other operating costs of $6.8 million primarily due to increased depreciation and an increase in technology costs in our direct to consumer channel.

The increase in costs related to our operating channels was partially offset by a decrease in brand and community costs of $5.8 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.

• an increase in net foreign currency exchange and derivative revaluation losses of $1.0 million.

Amortization of Intangible Assets

First Quarter

Second Quarter

2022 2021 Year over year change

1 unchanged sentence

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.

Acquisition-Related Expenses

First Quarter

Second Quarter

2022 2021 Year over year change

1 unchanged sentence

Acquisition-related 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.

$ — $ 8,143 $ (8,143) (100.0) %

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $7.1 million and integration related costs of $1.0 million in the second quarter of 2021.

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

Gain on Disposal of Assets

Second Quarter

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Gain on disposal of assets

$ (10,180) $ — $ 10,180 n/a

During the second quarter of 2022, we completed the sale of an administrative office building, which resulted in a pre-tax gain of $10.2 million.

Income from Operations

1 unchanged sentence

Segmented income from operations is summarized below.

First Quarter

Second Quarter

2022 2021 2022 2021 Year over year change

8 unchanged sentences

Acquisition-related expenses — 8,143 (8,143) (100.0)

Gain on disposal of assets (10,180) — 10,180 n/a

Income from operations $ 401,208 $ 291,031 $ 110,177 37.9 %

1 unchanged sentence

Company-Operated Stores .

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 income from operations from our company-operated stores was primarily the result of increased gross profit of $105.0 million, driven by increased net revenue, partially offset by lower gross margin.

The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs, partially offset by leverage on occupancy and depreciation costs as a result of increased 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 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.

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

Store operating costs increased primarily due to increases in credit card fees, distribution costs, and packaging 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, partially offset by lower 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 $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.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $102.1 million, driven by increased net revenue, partially offset by lower gross margin.

The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs and higher markdowns.

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.

The increase in income from operations from our other channels was the result of increased gross profit of $5.7 million and decreased selling, general and administrative expenses.

The increase in gross profit was driven by increased net revenue, partially offset by lower gross margin, primarily due to lower product margin driven by increased air freight costs.

Selling, general and administrative expenses primarily decreased due to reduced MIRROR marketing expenses.

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 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, technology costs, and depreciation.

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.

The increase in general corporate expenses was primarily due to increased employee costs, primarily from headcount growth and increased wage rates, as well as increased brand and community costs, technology costs, professional fees, and depreciation.

The increase in general corporate expense was also due to an increase in net foreign currency exchange and derivative revaluation losses of $1.0 million.

Other Income (Expense), Net

First Quarter

Second Quarter

2022 2021 Year over year change

1 unchanged sentence

Other income (expense), net

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

$ 145 $ 96 $ 49 51.0 %

The increase in other income, net was primarily due to an increase in interest income from higher interest rates.

Income Tax Expense

First Quarter

Second Quarter

2022 2021 Year over year change

1 unchanged sentence

Income tax expense

$ 111,832 $ 83,053 $ 28,779 34.7 %

Effective tax rate

27.9 % 28.5 % (60) basis points

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

The decrease in the effective tax rate was primarily due to certain non-deductible expenses incurred in connection with the MIRROR acquisition which increased the effective tax rate in the second quarter of 2021 by 60 basis points, a lower tax rate on the capital gain on the sale of an administrative building which reduced our effective tax rate in the second quarter of

2022 by 30 basis points, and reduced non-deductible expenses in international jurisdictions in 2022.

This was partially offset by decreased deductions related to stock-based compensation and accrued withholding taxes on unremitted foreign earnings.

Second Quarter

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

$ 289,521 $ 208,074 $ 81,447 39.1 %

The increase in net income was primarily due to an increase in gross profit of $212.8 million, a gain on disposal of assets of $10.2 million in the current year, and a decrease in acquisition-related expenses of $8.1 million, partially offset by an increase in selling, general and administrative expenses of $120.9 million and an increase in income tax expense of $28.8 million.

Year-to-Date Results of Operations:

First Two Quarters Results

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

First Two Quarters

2022 2021 2022 2021

(In thousands) (Percentages)

Net revenue $ 3,481,791 $ 2,677,083 100.0 % 100.0 %

Cost of goods sold 1,555,922 1,134,083 44.7 42.4

Gross profit 1,925,869 1,543,000 55.3 57.6

Selling, general and administrative expenses 1,270,104 1,037,951 36.5 38.8

Amortization of intangible assets 4,390 4,390 0.1 0.2

Acquisition-related expenses — 15,807 — 0.6

Gain on disposal of assets (10,180) — (0.3) —

Income from operations 661,555 484,852 19.0 18.1

Other income (expense), net 123 323 — —

Income before income tax expense 661,678 485,175 19.0 18.1

Income tax expense 182,159 132,145 5.2 4.9

Net income $ 479,519 $ 353,030 13.8 % 13.2 %

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.

Net revenue increased $804.7 million, or 30%, to $3.5 billion for the first two quarters of 2022 from $2.7 billion for the first two quarters of 2021.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first two quarters of 2022 remained constant with the average foreign currency exchange rates for the first two quarters of 2021, net revenue increased $847.1 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 25% for the first two quarters of 2022 compared to the first two quarters of 2021.

Total comparable sales increased 27% on a constant dollar basis.

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

First Two Quarters

2022 2021 2022 2021 Year over year change

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

Company-operated stores $ 1,634,681 $ 1,231,704 46.9 % 46.0 % $ 402,977 32.7 %

Direct to consumer 1,496,678 1,142,515 43.0 42.7 354,163 31.0

Other 350,432 302,864 10.1 11.3 47,568 15.7

Net revenue $ 3,481,791 $ 2,677,083 100.0 % 100.0 % $ 804,708 30.1 %

Company-Operated Stores .

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

Comparable store sales increased 19%, or 21% 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 second quarter of 2021 contributed $209.9 million to the increase in net revenue from our company-operated stores.

We opened 66 net new company-operated stores since the second quarter of 2021, including 43 stores in Asia Pacific, 16 stores in North America, and seven stores in Europe.

Direct to Consumer.

Direct to consumer net revenue increased 31%, or 32% on a constant dollar basis.

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

The increase in net revenue was partially offset by a decrease in net revenue from MIRROR.

First Two Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

$ 1,925,869 $ 1,543,000 $ 382,869 24.8 %

55.3 % 57.6 % (230) basis points

The decrease in gross margin was primarily the result of:

• a decrease in product margin of 250 basis points, primarily due to higher air freight costs as a result of global supply chain disruption and higher markdowns;

• an increase in costs related to our distribution centers and product departments as a percentage of net revenue of 30 basis points;

• an unfavorable impact of foreign currency exchange rates of 30 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

First Two Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Selling, general and administrative expenses

$ 1,270,104 $ 1,037,951 $ 232,153 22.4 %

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

36.5 % 38.8 % (230) basis points

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

• an increase in head office costs of $136.6 million, comprised of:

– an increase in costs of $69.1 million primarily due to an increase in brand and community costs, including charitable donations, technology costs, professional fees, and depreciation;

– an increase in employee costs of $67.5 million primarily due to an increase in salaries and wages expense, incentive compensation, and stock-based compensation expense, primarily as a result of headcount growth and increased wage rates, as well as increased travel costs;

• an increase in costs related to our operating channels of $94.9 million, comprised of:

– an increase in employee costs of $46.6 million primarily due to an increase in salaries and wages expense and incentive compensation in our company-operated store and direct to consumer channels, primarily due to growth in our business and increased wage rates;

– an increase in variable costs of $46.2 million primarily due to an increase in distribution costs and credit card fees, as a result of increased net revenue;

– an increase in other operating costs of $12.3 million primarily due to an increase in depreciation, repairs and maintenance costs, and technology costs.

The increase in costs related to our operating channels was partially offset by a decrease in brand and community costs of $10.2 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.

• an increase in net foreign currency exchange and derivative revaluation losses of $0.6 million.

Amortization of Intangible Assets

First Two Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Amortization of intangible assets

$ 4,390 $ 4,390 $ — — %

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

Acquisition-Related Expenses

First Two Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Acquisition-related expenses

$ — $ 15,807 $ (15,807) (100.0) %

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $14.3 million and integration related costs of $1.5 million in the first two quarters of 2021.

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

Gain on Disposal of Assets

First Two Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Gain on disposal of assets

$ (10,180) $ — $ 10,180 n/a

During the second quarter of 2022, we completed the sale of an administrative office building, which resulted in a pre-tax gain of $10.2 million.

Income from Operations

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

Segmented income from operations is summarized below.

First Two Quarters

2022 2021 2022 2021 Year over year change

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

Segmented income from operations:

Company-operated stores $ 417,513 $ 284,144 25.5 % 23.1 % $ 133,369 46.9 %

Direct to consumer 611,530 497,181 40.9 43.5 114,349 23.0

Other 49,153 36,746 14.0 12.1 12,407 33.8

$ 1,078,196 $ 818,071 $ 260,125 31.8 %

General corporate expense 422,431 313,022 109,409 35.0

Amortization of intangible assets 4,390 4,390 — —

Acquisition-related expenses — 15,807 (15,807) (100.0)

Gain on disposal of assets (10,180) — 10,180 n/a

Income from operations $ 661,555 $ 484,852 $ 176,703 36.4 %

Operating margin 19.0 % 18.1 % 90 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 $198.4 million, driven by increased net revenue, partially offset by lower 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 the growth in our business and increased wage rates.

Income from operations as a percentage of company-operated stores net revenue increased due to leverage on selling, general and administrative expenses, partially offset by lower 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 $181.6 million, driven by increased net revenue, partially offset by lower gross margin.

The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs and higher markdowns.

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, as a result of higher net revenue, as well as higher digital marketing expenses, depreciation, employee costs from the growth in our business and increased wage rates, and technology costs.

Income from operations as a percentage of direct to consumer net revenue decreased for the first two quarters of 2022, compared to the first two quarters of 2021, primarily due to decreased gross margin, partially offset by leverage on selling, general and administrative expenses.

The increase in income from operations from our other channels was the result of increased gross profit of $2.9 million, driven by increased net revenue, and due to decreased selling, general and administrative expenses.

The decrease in selling, general and administrative expenses was driven by reduced MIRROR marketing expenses.

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.

The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs and higher markdowns.

General Corporate Expense.

The increase in general corporate expense was also due to an increase in net foreign currency exchange and derivative revaluation losses of $0.6 million.

Other Income (Expense), Net

First Two Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Other income (expense), net

$ 123 $ 323 $ (200) (61.9) %

The decrease in other income, net was primarily due to an increase in other expenses partially offset by an increase in interest income from higher interest rates.

Income Tax Expense

First Two Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Income tax expense

$ 182,159 $ 132,145 $ 50,014 37.8 %

Effective tax rate

27.5 % 27.2 % 30 basis points

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

This was partially offset by certain non-deductible expenses incurred in connection with the MIRROR acquisition which increased the effective tax rate in the first two quarters of 2021 by 70 basis points, a lower tax rate on the capital gain on the sale of an administrative building which reduced our effective tax rate in the first two quarters of 2022 by 20 basis points, and reduced non-deductible expenses in international jurisdictions in 2022.

First Two Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

$ 479,519 $ 353,030 $ 126,489 35.8 %

The increase in net income was primarily due to an increase in gross profit of $382.9 million, a decrease in acquisition-related expenses of $15.8 million, and a gain on disposal of assets of $10.2 million in the current year, partially offset by an increase in selling, general and administrative expenses of $232.2 million, an increase in income tax expense of $50.0 million, and a decrease in other income (expense), net of $0.2 million.

Comparable Store Sales and Total Comparable Sales

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

First Quarter 2022

(In thousands) (Percentages)

Second Quarter 2022

First Two Quarters 2022

Net Revenue Net Revenue

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

Change $ 417,710 29 % $ 804,708 30 %

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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.

First Quarter 2022

Second Quarter 2022

First Two Quarters 2022

Total Comparable Sales 1,2

Comparable Store Sales 2

Direct to Consumer Net Revenue Total Comparable Sales 1,2

Comparable Store Sales 2

Direct to Consumer Net Revenue

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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 technology and making system enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally.

Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our committed revolving credit facility, including to fund short-term working capital requirements.

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

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

First Quarter

First Two Quarters

2022 2021 Year over year change

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• a decrease in cash flows from the changes in operating assets and liabilities of $745.9 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.

This decrease was primarily driven by $373.2 million from inventories, as well as changes in income taxes, accrued compensation, accrued liabilities and other, and accounts payable;

• changes in adjusting items of $26.0 million, primarily driven by lower cash inflows related to derivatives not designated in a hedging relationship and the gain on disposal of assets, 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 $126.5 million.

Investing Activities

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

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.

There was also increased company-operated store expenditures driven by opening new stores as well as remodeling existing stores.

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

The proceeds of the sale of an administrative office building during the second quarter of 2022 are included in other investing activities.

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 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.

Cash used in financing activities for the first two quarters of 2022 included $358.0 million to repurchase 1.1 million shares of our common stock compared to $254.9 million to repurchase 0.8 million shares for the first two quarters 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.

Liquidity Outlook

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.

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.

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The following table includes certain measures of our liquidity:

July 31, 2022

(In thousands)

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

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.

As of July 31, 2022, letters of credit and letters of guarantee totaling $6.4 million had been issued, including $5.2 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.

As of July 31, 2022, aside from letters of credit of $5.2 million, we had no other borrowings outstanding under this credit facility.

Further information regarding our credit facilities and associated covenants is outlined in Note 5.

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

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 of July 31, 2022 was $1.5 billion, an increase of 85% from August 1, 2021.

Increased air freight costs have contributed to the increase in inventory.

On a number of units basis, our inventory increased 64% compared to August 1, 2021.

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

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

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

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

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Operating Locations

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,

Our company-operated stores by country as of July 31, 2022 and January 30, 2022 are summarized in the table below.

Number of company-operated stores by country July 31,

2022 January 30,

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Total company-operated stores 600 574

(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.

(1) Included within PRC as of July 31, 2022, were nine stores in Hong Kong Special Administrative Region, six 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 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.

As of July 31, 2022, there were 18 licensed locations, including nine in Mexico, six in the United Arab Emirates, two in Qatar, and one in Kuwait.

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