lululemon athletica inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS lululemon athletica inc. CONSOLIDATED BALANCE SHEETS (Unaudited; Amounts in thousands, except per share amounts) July 31, 2022 January 30, 2022 ASSETS Current assets Cash and cash equivalents $ 498,831 $ 1,259,871 Accounts receivable 81,784 77,001 Inventories 1,462,076 966,481 Prepaid and receivable income taxes 166,438 118,928 Prepaid expenses and other current assets 177,965 192,572 2,387,094 2,614,853 Property and equipment, net 1,059,859 927,710 Right-of-use lease assets 867,901 803,543 Goodwill 386,868 386,880 Intangible assets, net 66,908 71,299 Deferred income tax assets 6,025 6,091 Other non-current assets 146,056 132,102 $ 4,920,711 $ 4,942,478 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 259,927 $ 289,728 Accrued liabilities and other 345,105 330,800 Accrued compensation and related expenses 153,381 204,921 Current lease liabilities 196,259 188,996 Current income taxes payable 50,815 133,852 Unredeemed gift card liability 172,666 208,195 Other current liabilities 29,057 48,842 1,207,210 1,405,334 Non-current lease liabilities 757,865 692,056 Non-current income taxes payable 28,555 38,074 Deferred income tax liabilities 53,271 53,352 Other non-current liabilities 16,012 13,616 2,062,913 2,202,432 Commitments and contingencies Stockholders' equity Undesignated preferred stock, $ 0.01 par value: 5,000 shares authorized; none issued and outstanding — — Exchangeable stock, no par value: 60,000 shares authorized; 5,203 and 5,203 issued and outstanding — — Special voting stock, $ 0.000005 par value: 60,000 shares authorized; 5,203 and 5,203 issued and outstanding — — Common stock, $ 0.005 par value: 400,000 shares authorized; 122,334 and 123,297 issued and outstanding 612 616 Additional paid-in capital 433,092 422,507 Retained earnings 2,636,377 2,512,840 Accumulated other comprehensive loss ( 212,283 ) ( 195,917 ) 2,857,798 2,740,046 $ 4,920,711 $ 4,942,478 See accompanying notes to the unaudited interim consolidated financial statements 3 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited; Amounts in thousands, except per share amounts) Quarter Ended Two Quarters Ended July 31, 2022 August 1, 2021 July 31, 2022 August 1, 2021 Net revenue $ 1,868,328 $ 1,450,618 $ 3,481,791 $ 2,677,083 Cost of goods sold 812,852 607,932 1,555,922 1,134,083 Gross profit 1,055,476 842,686 1,925,869 1,543,000 Selling, general and administrative expenses 662,253 541,317 1,270,104 1,037,951 Amortization of intangible assets 2,195 2,195 4,390 4,390 Acquisition-related expenses — 8,143 — 15,807 Gain on disposal of assets ( 10,180 ) — ( 10,180 ) — Income from operations 401,208 291,031 661,555 484,852 Other income (expense), net 145 96 123 323 Income before income tax expense 401,353 291,127 661,678 485,175 Income tax expense 111,832 83,053 182,159 132,145 Net income $ 289,521 $ 208,074 $ 479,519 $ 353,030 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment $ 8,715 $ ( 36,014 ) ( 17,133 ) 31,227 Net investment hedge gains (losses) ( 4,289 ) 12,494 767 ( 11,111 ) Other comprehensive income (loss), net of tax $ 4,426 $ ( 23,520 ) $ ( 16,366 ) $ 20,116 Comprehensive income $ 293,947 $ 184,554 $ 463,153 $ 373,146 Basic earnings per share $ 2.27 $ 1.60 $ 3.75 $ 2.71 Diluted earnings per share $ 2.26 $ 1.59 $ 3.74 $ 2.70 Basic weighted-average number of shares outstanding 127,619 130,007 127,848 130,187 Diluted weighted-average number of shares outstanding 127,906 130,490 128,224 130,742 See accompanying notes to the unaudited interim consolidated financial statements 4 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited; Amounts in thousands) Quarter Ended July 31, 2022 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shares Shares Par Value Shares Par Value Balance as of May 1, 2022 5,203 5,203 $ — 122,732 $ 614 $ 412,713 $ 2,471,432 $ ( 216,709 ) $ 2,668,050 Net income 289,521 289,521 Other comprehensive income (loss), net of tax 4,426 4,426 Stock-based compensation expense 20,817 20,817 Common stock issued upon settlement of stock-based compensation 24 — 1,043 1,043 Shares withheld related to net share settlement of stock-based compensation ( 2 ) — ( 719 ) ( 719 ) Repurchase of common stock ( 420 ) ( 2 ) ( 762 ) ( 124,576 ) ( 125,340 ) Balance as of July 31, 2022 5,203 5,203 $ — 122,334 $ 612 $ 433,092 $ 2,636,377 $ ( 212,283 ) $ 2,857,798 Quarter Ended August 1, 2021 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shares Shares Par Value Shares Par Value Balance as of May 2, 2021 5,203 5,203 $ — 125,069 $ 625 $ 364,743 $ 2,408,006 $ ( 133,519 ) $ 2,639,855 Net income 208,074 208,074 Other comprehensive income (loss), net of tax ( 23,520 ) ( 23,520 ) Stock-based compensation expense 15,289 15,289 Common stock issued upon settlement of stock-based compensation 88 — 5,218 5,218 Shares withheld related to net share settlement of stock-based compensation ( 8 ) — ( 2,668 ) ( 2,668 ) Repurchase of common stock ( 505 ) ( 2 ) ( 845 ) ( 170,235 ) ( 171,082 ) Balance as of August 1, 2021 5,203 5,203 $ — 124,644 $ 623 $ 381,737 $ 2,445,845 $ ( 157,039 ) $ 2,671,166 5 Table of Contents Two Quarters Ended July 31, 2022 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shares Shares Par Value Shares Par Value Balance as of January 30, 2022 5,203 5,203 $ — 123,297 $ 616 $ 422,507 $ 2,512,840 $ ( 195,917 ) $ 2,740,046 Net income 479,519 479,519 Other comprehensive income (loss), net of tax ( 16,366 ) ( 16,366 ) Stock-based compensation expense 39,175 39,175 Common stock issued upon settlement of stock-based compensation 263 2 6,184 6,186 Shares withheld related to net share settlement of stock-based compensation ( 98 ) — ( 32,778 ) ( 32,778 ) Repurchase of common stock ( 1,128 ) ( 6 ) ( 1,996 ) ( 355,982 ) ( 357,984 ) Balance as of July 31, 2022 5,203 5,203 $ — 122,334 $ 612 $ 433,092 $ 2,636,377 $ ( 212,283 ) $ 2,857,798 Two Quarters Ended August 1, 2021 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shares Shares Par Value Shares Par Value Balance as of January 31, 2021 5,203 5,203 $ — 125,150 $ 626 $ 388,667 $ 2,346,428 $ ( 177,155 ) $ 2,558,566 Net income 353,030 353,030 Other comprehensive income (loss), net of tax 20,116 20,116 Stock-based compensation expense 30,221 30,221 Common stock issued upon settlement of stock-based compensation 412 2 9,711 9,713 Shares withheld related to net share settlement of stock-based compensation ( 143 ) ( 1 ) ( 45,566 ) ( 45,567 ) Repurchase of common stock ( 775 ) ( 4 ) ( 1,296 ) ( 253,613 ) ( 254,913 ) Balance as of August 1, 2021 5,203 5,203 $ — 124,644 $ 623 $ 381,737 $ 2,445,845 $ ( 157,039 ) $ 2,671,166 See accompanying notes to the unaudited interim consolidated financial statements 6 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Amounts in thousands) Two Quarters Ended July 31, 2022 August 1, 2021 Cash flows from operating activities Net income $ 479,519 $ 353,030 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 132,441 104,123 Gain on disposal of assets ( 10,180 ) — Stock-based compensation expense 39,175 30,221 Settlement of derivatives not designated in a hedging relationship ( 8,055 ) 45,010 Changes in operating assets and liabilities: Inventories ( 510,567 ) ( 137,364 ) Prepaid and receivable income taxes ( 47,510 ) 21,763 Prepaid expenses and other current assets 1,618 ( 8,337 ) Other non-current assets ( 15,046 ) ( 5,487 ) Accounts payable ( 28,249 ) 28,232 Accrued liabilities and other 6,082 65,494 Accrued compensation and related expenses ( 50,187 ) 19,260 Current and non-current income taxes payable ( 91,874 ) 456 Unredeemed gift card liability ( 35,099 ) ( 19,377 ) Right-of-use lease assets and current and non-current lease liabilities 8,775 1,265 Other current and non-current liabilities ( 16,461 ) 1,483 Net cash provided by (used in) operating activities ( 145,618 ) 499,772 Cash flows from investing activities Purchase of property and equipment ( 256,070 ) ( 144,494 ) Settlement of net investment hedges 15,469 ( 46,999 ) Other investing activities 15,657 ( 10,000 ) Net cash used in investing activities ( 224,944 ) ( 201,493 ) Cash flows from financing activities Proceeds from settlement of stock-based compensation 6,186 9,713 Shares withheld related to net share settlement of stock-based compensation ( 32,778 ) ( 45,567 ) Repurchase of common stock ( 357,984 ) ( 254,913 ) Net cash used in financing activities ( 384,576 ) ( 290,767 ) Effect of foreign currency exchange rate changes on cash and cash equivalents ( 5,902 ) 12,012 Increase (decrease) in cash and cash equivalents ( 761,040 ) 19,524 Cash and cash equivalents, beginning of period $ 1,259,871 $ 1,150,517 Cash and cash equivalents, end of period $ 498,831 $ 1,170,041 See accompanying notes to the unaudited interim consolidated financial statements 7 Table of Contents lululemon athletica inc. INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Note 1 Nature of Operations and Basis of Presentation 9 Note 2 Recent Accounting Pronouncements 9 Note 3 Acquisition-Related Expenses 10 Note 4 Gain on Disposal of Assets 10 Note 5 Revolving Credit Facilities 10 Note 6 Stock-Based Compensation and Benefit Plans 11 Note 7 Fair Value Measurement 12 Note 8 Derivative Financial Instruments 13 Note 9 Earnings Per Share 15 Note 10 Supplementary Financial Information 16 Note 11 Segmented Information 18 Note 12 Net Revenue by Geography and Category 19 Note 13 Legal Proceedings and Other Contingencies 19 8 Table of Contents lululemon athletica inc. NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Operations and Basis of Presentation Nature of operations lululemon athletica inc., a Delaware corporation, ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of technical athletic apparel, footwear, and accessories, which are sold through a chain of company-operated stores, direct to consumer through e-commerce, outlets, sales from temporary locations, sales to wholesale accounts, license and supply arrangements, and recommerce. Recommerce is the sale of repurchased product via the Company's "Like New" program. The Company operates stores in the United States, the People's Republic of China ("PRC"), Canada, Australia, the United Kingdom, South Korea, Germany, New Zealand, Singapore, Japan, Ireland, France, Malaysia, Sweden, the Netherlands, Norway, and Switzerland. There were 600 and 574 company-operated stores as of July 31, 2022 and January 30, 2022, respectively. The Company also engages in the design and retail of in-home fitness equipment and associated content subscriptions through its MIRROR brand. COVID-19 pandemic The outbreak of a novel strain of coronavirus ("COVID-19") caused governments and public health officials to impose restrictions and recommend precautions to mitigate the spread of the virus. While most of the Company's 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 the Company's third party distribution center in the 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. The pandemic has impacted the Company's suppliers and its distribution and logistics providers, including in the PRC. There has been disruption in transportation, port congestion, and an increase in freight costs, and the Company has increased its use of air freight. Basis of presentation The unaudited interim consolidated financial statements as of July 31, 2022 and for the quarters and two quarters ended July 31, 2022 and August 1, 2021 are presented in U.S. dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of January 30, 2022 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 30, 2022, which are included in Item 8 in the Company's fiscal 2021 Annual Report on Form 10-K filed with the SEC on March 29, 2022. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal 2021 Annual Report on Form 10-K. Note 2. Recent Accounting Pronouncements sets out the impact of recent accounting pronouncements. The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2022 will end on January 29, 2023 and will be a 52-week year. Fiscal 2021 was a 52-week year and ended on January 30, 2022. Fiscal 2022 and fiscal 2021 are referred to as "2022," and "2021," respectively. The first two quarters of 2022 and 2021 ended on July 31, 2022 and August 1, 2021, respectively. The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season. Note 2. Recent Accounting Pronouncements Recently adopted accounting pronouncements The Company considers the applicability and impact of all Accounting Standard Updates ("ASUs"). ASUs adopted by the Company during the first two quarters of 2022 not listed below were assessed, and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations. 9 Table of Contents In November 2021, the FASB issued ASC 832, Government Assistance to require annual disclosures about the nature of certain government assistance received, the accounting policy used to account for the transactions, the location in the financial statements where such transactions were recorded and significant terms and conditions associated with such transactions. The Company adopted this update prospectively during the first quarter of 2022 and it did not have a material impact on the Company's consolidated financial statements. Recently issued accounting pronouncements ASUs recently issued were assessed and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations. Note 3. Acquisition-Related Expenses On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. In connection with the acquisition, the Company recognized certain acquisition-related expenses which were expensed within acquisition-related expenses in the consolidated statements of operations. The following table summarizes the acquisition-related expenses recognized: Second Quarter First Two Quarters 2022 2021 2022 2021 (in thousands) Acquisition-related expenses: Transaction and integration costs $ — $ 1,035 $ — $ 1,531 Acquisition-related compensation — 7,108 — 14,276 $ — $ 8,143 $ — $ 15,807 Income tax effects of acquisition-related expenses $ — $ ( 434 ) $ — $ ( 806 ) Note 4. Gain on Disposal of Assets During the second quarter of 2022, the Company completed the sale of an administrative office building, which resulted in a pre-tax gain of $ 10.2 million. The income tax effect of the gain on disposal of assets was an expense of $ 1.7 million. The building's carrying value of $ 5.4 million was first classified as held for sale and recognized within other current assets as of May 1, 2022 . Note 5. Revolving Credit Facilities North America revolving credit facility On December 14, 2021, the Company entered into an amended and restated credit agreement extending its existing credit facility, which 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. Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs). As of July 31, 2022, aside from letters of credit of $ 5.2 million, the Company had no other borrowings outstanding under this credit facility. Borrowings made under the credit facility bear interest at a rate per annum equal to, at the Company's option, either (a) a rate based on the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York ("SOFR"), or (b) an alternate base rate, plus, in each case, an applicable margin. The applicable margin is determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax, depreciation, amortization, and rent ("EBITDAR") and ranges between 1.000 %- 1.375 % for SOFR loans and 0.000 %- 0.375 % for alternate base rate or Canadian prime rate loans. Additionally, a commitment fee of between 0.100 %- 0.200 %, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility. The applicable interest rates and commitment fees are subject to adjustment based on certain sustainability key performance indicators ("KPIs"). The two KPIs are based on greenhouse gas emissions intensity reduction and gender pay equity, and the Company's performance against certain targets measured on an annual basis could result in positive or 10 Table of Contents negative sustainability rate adjustments of 2.50 basis points to its drawn pricing and positive or negative sustainability fee adjustments of 0.50 basis points to its undrawn pricing. The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of the Company's 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. The Company's financial covenants include maintaining an operating lease adjusted leverage ratio of not greater than 3.25 :1.00 and the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) of not less than 2.00 :1.00. The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control). If an event of default occurs, the credit agreement may be terminated, and the maturity of any outstanding amounts may be accelerated. As of July 31, 2022, the Company was in compliance with the covenants of the credit facility. China Mainland revolving credit facility In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan ($ 19.3 million) revolving credit facility with terms that are reviewed on an annual basis. The credit facility was increased to 230.0 million Chinese Yuan ($ 34.1 million) during 2020. It is comprised of a revolving loan of up to 200.0 million Chinese Yuan ($ 29.7 million) and a financial guarantee facility of up to 30.0 million Chinese Yuan ($ 4.4 million), 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 %. The Company is required to follow certain covenants. As of July 31, 2022, the Company was in compliance with the covenants and, aside from letters of credit of 8.9 million Chinese Yuan ($ 1.3 million), there were no other borrowings or guarantees outstanding under this credit facility. Note 6. Stock-Based Compensation and Benefit Plans Stock-based compensation plans The Company's eligible employees participate in various stock-based compensation plans, provided directly by the Company. Stock-based compensation expense charged to income for the plans was $ 38.8 million and $ 33.6 million for the first two quarters of 2022 and 2021, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $ 154.4 million as of July 31, 2022, which is expected to be recognized over a weighted-average period of 2.3 years. A summary of the balances of the Company's stock-based compensation plans as of July 31, 2022, and changes during the first two quarters then ended, is presented below: Stock Options Performance-Based Restricted Stock Units Restricted Shares Restricted Stock Units Number Weighted-Average Exercise Price Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value (In thousands, except per share amounts) Balance as of January 30, 2022 789 $ 186.10 167 $ 225.27 4 $ 326.70 238 $ 265.90 Granted 184 372.45 116 274.15 4 307.77 102 370.72 Exercised/released 50 122.91 114 170.04 4 326.70 95 217.92 Forfeited/expired 14 268.26 3 302.77 — — 9 310.80 Balance as of July 31, 2022 909 $ 226.19 166 $ 295.76 4 $ 307.77 236 $ 328.60 Exercisable as of July 31, 2022 415 $ 153.80 The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of two shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the grant date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved. The grant date fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the grant date. 11 Table of Contents The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The closing price of the Company's common stock on the grant date is used in the model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee exercise behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first two quarters of 2022: First Two Quarters 2022 Expected term 3.75 years Expected volatility 40.00 % Risk-free interest rate 2.51 % Dividend yield — % Employee share purchase plan The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the second quarter of 2022, there were 23.1 thousand shares purchased. Defined contribution pension plans The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches 50 % to 75 % of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was $ 6.7 million and $ 5.8 million in the first two quarters of 2022 and 2021, respectively. Note 7. Fair Value Measurement Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value: • Level 1 - defined as observable inputs such as quoted prices in active markets; • Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and • Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. 12 Table of Contents Assets and liabilities measured at fair value on a recurring basis The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of July 31, 2022 and January 30, 2022, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis: July 31, 2022 Level 1 Level 2 Level 3 Balance Sheet Classification (In thousands) Money market funds $ 40,357 $ 40,357 $ — $ — Cash and cash equivalents Term deposits 34,894 — 34,894 — Cash and cash equivalents Forward currency contract assets 6,397 — 6,397 — Prepaid expenses and other current assets Forward currency contract liabilities 5,015 — 5,015 — Other current liabilities January 30, 2022 Level 1 Level 2 Level 3 Balance Sheet Classification (In thousands) Money market funds $ 38,475 $ 38,475 $ — $ — Cash and cash equivalents Term deposits 318,698 — 318,698 — Cash and cash equivalents Forward currency contract assets 19,077 — 19,077 — Prepaid expenses and other current assets Forward currency contract liabilities 18,985 — 18,985 — Other current liabilities The Company records cash, accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities. The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate. The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities. Note 8. Derivative Financial Instruments Foreign currency exchange risk The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes. The Company currently hedges against changes in the Canadian dollar and Chinese Yuan to the U.S. dollar exchange rate and changes in the Euro and Australian dollar to the Canadian dollar exchange rate using forward currency contracts. Net investment hedges The Company is exposed to foreign currency exchange gains and losses which arise on translation of its international subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as other comprehensive income (loss), net of tax in accumulated other comprehensive income or loss within stockholders' equity. The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges during the first two quarters of 2022. 13 Table of Contents The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows. Derivatives not designated as hedging instruments The Company is exposed to gains and losses arising from changes in foreign currency exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date foreign currency exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses. During the first two quarters of 2022, the Company entered into certain forward currency contracts designed to economically hedge the foreign currency exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on specific monetary assets and liabilities denominated in currencies other than the functional currency of the entity. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses. The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows. Quantitative disclosures about derivative financial instruments The Company presents its derivative assets and derivative liabilities at their gross fair values within prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of July 31, 2022, there were derivative assets of $ 6.4 million and derivative liabilities of $ 5.0 million subject to enforceable netting arrangements. The notional amounts and fair values of forward currency contracts were as follows: July 31, 2022 January 30, 2022 Gross Notional Assets Liabilities Gross Notional Assets Liabilities (In thousands) Derivatives designated as net investment hedges: Forward currency contracts $ 1,190,500 $ 4,039 $ — $ 1,502,000 $ 18,468 $ — Derivatives not designated in a hedging relationship: Forward currency contracts 1,470,750 2,358 5,015 1,597,878 609 18,985 Net derivatives recognized on consolidated balance sheets: Forward currency contracts $ 6,397 $ 5,015 $ 19,077 $ 18,985 The forward currency contracts designated as net investment hedges outstanding as of July 31, 2022 mature on different dates between August 2022 and June 2023. The forward currency contracts not designated in a hedging relationship outstanding as of July 31, 2022 mature on different dates between August 2022 and February 2023. The pre-tax gains and losses on foreign currency exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows: Second Quarter First Two Quarters 2022 2021 2022 2021 (In thousands) Gains (losses) recognized in net investment hedge gains (losses): Derivatives designated as net investment hedges $ ( 5,807 ) $ 16,930 $ 1,039 $ ( 15,056 ) 14 Table of Contents No gains or losses have been reclassified from accumulated other comprehensive income or loss into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary. The pre-tax net foreign currency exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows: Second Quarter First Two Quarters 2022 2021 2022 2021 (In thousands) Gains (losses) recognized in selling, general and administrative expenses: Foreign currency exchange gains (losses) $ ( 14,497 ) $ 13,404 $ ( 16,240 ) $ ( 20,135 ) Derivatives not designated in a hedging relationship 8,600 ( 18,344 ) 7,708 12,247 Net foreign currency exchange and derivative gains (losses) $ ( 5,897 ) $ ( 4,940 ) $ ( 8,532 ) $ ( 7,888 ) Credit risk The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance. The Company's forward currency contracts are entered into with large, reputable financial institutions that are monitored by the Company for counterparty risk. The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts. Note 9. Earnings Per Share The details of the computation of basic and diluted earnings per share are as follows: Second Quarter First Two Quarters 2022 2021 2022 2021 (In thousands, except per share amounts) Net income $ 289,521 $ 208,074 $ 479,519 $ 353,030 Basic weighted-average number of shares outstanding 127,619 130,007 127,848 130,187 Assumed conversion of dilutive stock options and awards 287 483 376 555 Diluted weighted-average number of shares outstanding 127,906 130,490 128,224 130,742 Basic earnings per share $ 2.27 $ 1.60 $ 3.75 $ 2.71 Diluted earnings per share $ 2.26 $ 1.59 $ 3.74 $ 2.70 The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have, in effect, the same rights and share equally in undistributed net income. For the first two quarters of 2022 and 2021, 0.1 million and 0.1 million stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share. On January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $ 500.0 million of the Company's common shares. On December 1, 2020, it approved an increase in the remaining authorization from $ 263.6 million to $ 500.0 million, and on October 1, 2021, it approved an increase in the remaining authorization from $ 141.2 million to $ 641.2 million. During the first quarter of 2022, the Company completed the remaining stock repurchases under this program. On March 23, 2022, the Company's board of directors approved a stock repurchase program for up to $ 1.0 billion of the Company's common shares on the open market or in privately negotiated transactions. The repurchase plan has no time limit and does not require the repurchase of a minimum number of shares. Common shares repurchased on the open market are 15 Table of Contents 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. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements. As of July 31, 2022, the remaining authorized value of shares available to be repurchased under this program was $ 829.5 million. During the first two quarters of 2022 and 2021, 1.1 million and 0.8 million shares, respectively, were repurchased under the program at a total cost of $ 358.0 million and $ 254.9 million, respectively. Subsequent to July 31, 2022, and up to August 26, 2022, 31.5 thousand shares were repurchased at a total cost of $ 10.0 million. Note 10. Supplementary Financial Information A summary of certain consolidated balance sheet accounts is as follows: July 31, 2022 January 30, 2022 (In thousands) Inventories: Inventories, at cost $ 1,524,026 $ 1,004,526 Provision to reduce inventories to net realizable value ( 61,950 ) ( 38,045 ) $ 1,462,076 $ 966,481 Prepaid expenses and other current assets: Prepaid inventories $ 126 $ 42,691 Other prepaid expenses 121,388 98,254 Forward currency contract assets 6,397 19,077 Other current assets 50,054 32,550 $ 177,965 $ 192,572 Property and equipment, net: Land $ 73,444 $ 74,297 Buildings 27,849 30,880 Leasehold improvements 731,521 676,762 Furniture and fixtures 133,183 125,213 Computer hardware 143,115 130,393 Computer software 664,310 532,819 Equipment and vehicles 27,972 23,060 Work in progress 182,107 163,420 Property and equipment, gross 1,983,501 1,756,844 Accumulated depreciation ( 923,642 ) ( 829,134 ) $ 1,059,859 $ 927,710 Other non-current assets: Cloud computing arrangement implementation costs $ 101,341 $ 89,334 Security deposits 26,317 24,083 Other 18,398 18,685 $ 146,056 $ 132,102 16 Table of Contents July 31, 2022 January 30, 2022 (In thousands) Accrued liabilities and other: Accrued operating expenses $ 128,755 $ 116,822 Accrued freight 53,901 71,390 Sales return allowances 41,934 41,690 Accrued duty 26,580 27,182 Forward currency contract liabilities 5,015 18,985 Sales tax collected 13,726 13,540 Accrued rent 12,669 11,254 Accrued capital expenditures 20,733 9,616 Accrued inventory liabilities 25,309 4,005 Other 16,483 16,316 $ 345,105 $ 330,800 17 Table of Contents Note 11. Segmented Information The Company's segments are based on the financial information it uses in managing its business and comprise two reportable segments: (i) company-operated stores and (ii) direct to consumer. The remainder of its operations which includes outlets, temporary locations, MIRROR, sales to wholesale accounts, license and supply arrangements, and recommerce are included within Other. Second Quarter First Two Quarters 2022 2021 2022 2021 (In thousands) Net revenue: Company-operated stores $ 903,077 $ 695,120 $ 1,634,681 $ 1,231,704 Direct to consumer 775,425 597,426 1,496,678 1,142,515 Other 189,826 158,072 350,432 302,864 $ 1,868,328 $ 1,450,618 $ 3,481,791 $ 2,677,083 Segmented income from operations: Company-operated stores $ 256,807 $ 184,996 $ 417,513 $ 284,144 Direct to consumer 326,423 260,248 611,530 497,181 Other 29,626 22,240 49,153 36,746 612,856 467,484 1,078,196 818,071 General corporate expense 219,633 166,115 422,431 313,022 Amortization of intangible assets 2,195 2,195 4,390 4,390 Acquisition-related expenses — 8,143 — 15,807 Gain on disposal of assets ( 10,180 ) — ( 10,180 ) — Income from operations 401,208 291,031 661,555 484,852 Other income (expense), net 145 96 123 323 Income before income tax expense $ 401,353 $ 291,127 $ 661,678 $ 485,175 Capital expenditures: Company-operated stores $ 60,905 $ 28,656 $ 85,851 $ 47,221 Direct to consumer 7,003 16,902 27,342 43,483 Corporate and other 76,810 34,711 142,877 53,790 $ 144,718 $ 80,269 $ 256,070 $ 144,494 Depreciation and amortization: Company-operated stores $ 32,015 $ 28,304 $ 63,325 $ 55,104 Direct to consumer 8,807 6,836 17,476 12,584 Corporate and other 27,149 18,498 51,640 36,435 $ 67,971 $ 53,638 $ 132,441 $ 104,123 18 Table of Contents Note 12. Net Revenue by Geography and Category The following table disaggregates the Company's net revenue by geographic area. Second Quarter First Two Quarters 2022 2021 2022 2021 (In thousands) United States $ 1,278,361 $ 996,292 $ 2,376,690 $ 1,845,906 Canada 268,622 216,502 513,566 384,231 Outside of North America 321,345 237,824 591,535 446,946 $ 1,868,328 $ 1,450,618 $ 3,481,791 $ 2,677,083 In addition to the disaggregation of net revenue by reportable segment, the following table disaggregates the Company's net revenue by category. Other categories is primarily composed of accessories, MIRROR, and footwear. Second Quarter First Two Quarters 2022 2021 2022 2021 (In thousands) Women's product $ 1,205,636 $ 968,951 $ 2,279,560 $ 1,818,596 Men's product 461,310 363,063 836,308 637,370 Other categories 201,382 118,604 365,923 221,117 $ 1,868,328 $ 1,450,618 $ 3,481,791 $ 2,677,083 Note 13. Legal Proceedings and Other Contingencies In addition to the legal proceedings described below, the Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. The Company has recognized immaterial provisions related to the expected outcome of legal proceedings. In April 2020, Aliign Activation Wear, LLC filed a lawsuit in the United States District Court for the Central District of California alleging federal trademark infringement, false designation of origin and unfair competition. The plaintiff is seeking injunctive relief, monetary damages and declaratory relief. The Company obtained summary judgment that the Company did not infringe upon any of the plaintiff's rights and the district court entered judgment in the Company's favor on all claims. The plaintiff filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit. The Ninth Circuit affirmed the district court's decision on all grounds and entered judgment in favor of the Company in August 2022. In April 2021, DISH Technologies L.L.C., and Sling TV L.L.C. (DISH) filed a complaint in the United States District Court for the District of Delaware and, along with DISH DBS Corporation, also with the United States International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930 against the Company and its Curiouser Products subsidiary (MIRROR), along with ICON Health & Fitness, Inc., FreeMotion Fitness, Inc., NordicTrack, Inc., and Peloton Interactive, Inc., alleging infringement of various patents related to fitness devices containing internet-streaming enabled video displays. In the ITC complaint, DISH seeks an exclusion order barring the importation of MIRROR fitness devices, streaming components and systems containing components that infringe one or more of the asserted patents as well as a cease and desist order preventing the Company from carrying out commercial activities within the United States related to those products. In the District of Delaware complaint, DISH is seeking an order permanently enjoining the Company from infringing the asserted patents, an award of damages for the infringement of the asserted patents, and an award of damages for lost sales. The ITC investigation is ongoing and the Delaware litigation remains stayed pending resolution to the ITC investigation. The Company intends to vigorously defend this matter.