What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-12-08 compared with 2022-09-01 · 156 added, 151 removed, 347 unchanged (47% 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.

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.

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, 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.

The forward-looking statements contained in this Form 10-Q and any documents incorporated herein by reference reflect our current views about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement.

6 unchanged sentences

Fiscal 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 first three quarters of 2022 and 2021 ended on October 30, 2022 and October 31, 2021, respectively.

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

• Overview and COVID-19 Update

• Financial Highlights

• Financial Highlights and Market Conditions and Trends

• Quarter-to-Date Results of Operations

19 unchanged sentences

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

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

COVID-19 Update

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, 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.

We also offer in-home connected fitness equipment and associated subscriptions through lululemon Studio, which evolved from our former business unit called MIRROR during the third quarter of 2022.

Financial Highlights

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

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

• Net revenue increased 28% to $1.9 billion.

8 unchanged sentences

• Income tax expense increased 39% to $97.3 million.

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.

Our effective tax rate for the third quarter of 2022 was 27.6% compared to 27.2% for the third quarter of 2021.

• Diluted earnings per share were $2.00 compared to $1.44 in the third quarter of 2021.

The third quarter of 2021 includes $23.5 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.18.

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

Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue and the most directly comparable measures calculated in accordance with GAAP.

Market Conditions and Trends

Macroeconomic conditions, COVID-19, and supply chain disruption continue to impact our business and operating costs, with the impact varying by market.

Macroeconomic Conditions

Macroeconomic conditions, including foreign currency fluctuations and inflationary pressures have impacted our financial results.

This includes higher air freight costs and increased wage rates during the first three quarters of 2022 compared to 2021.

We have not increased the retail prices on the significant proportion of our products.

Inflation and other macroeconomic factors could also impact consumer purchasing behaviors and sustained increases in costs may have an adverse effect on our operating margins.

COVID-19 Pandemic

Most of our retail locations were open throughout the first three quarters of 2022 and 2021, with certain locations temporarily closed due to COVID-19 resurgences, including certain closures during 2022 in the People's Republic of China ("PRC").

Supply chain disruption

In 2021 and 2022 we have experienced supply chain disruption, including delays in inbound delivery of our products as well as in manufacturing.

This supply chain disruption caused us to use higher cost modes of transport, including increasing our use of air freight.

The supply chain disruption we have experienced has contributed to the 85% increase in our inventory balance compared to October 31, 2021.

We expect that the growth rate in our inventory balance will moderate in the fourth quarter of 2022 as a result of higher sales made during the holiday season, but expect the growth rate in our inventories to remain higher than the growth rate in our sales.

The use of air freight reduced our gross margin during the first three quarters of 2022, however we have begun to see improvement in the supply chain disruption and lower inbound freight costs.

Quarter-to-Date Results of Operations:

Second Quarter Results

Third Quarter Results

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

Second Quarter

Third Quarter

2022 2021 2022 2021

6 unchanged sentences

Acquisition-related expenses — 24,127 — 1.7

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

Income from operations 352,427 257,947 19.0 17.8

3 unchanged sentences

Net income $ 255,470 $ 187,788 13.8 % 12.9 %

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 23% for the second quarter of 2022 compared to the second quarter of 2021.

Net revenue increased $406.5 million, or 28%, to $1.9 billion for the third quarter of 2022 from $1.5 billion for the third quarter of 2021.

On a constant dollar basis, assuming the average foreign currency exchange rates for the third quarter of 2022 remained constant with the average foreign currency exchange rates for the third quarter of 2021, net revenue increased $455.4 million, or 31%.

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

Other net revenue also increased.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 22% for the third quarter of 2022 compared to the third quarter of 2021.

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

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

Second Quarter

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

Third Quarter

2022 2021 2022 2021 Year over year change

5 unchanged sentences

Company-Operated Stores.

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

The increase in net revenue from our company-operated stores was driven by net revenue from company-operated stores that we opened or significantly expanded since the third quarter of 2021 which contributed $112.8 million to the increase.

We have opened 71 net new company-operated stores since the third quarter of 2021, including 43 stores in Asia Pacific, 19 stores in North America, and nine stores in Europe.

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

Comparable store sales increased 14%, or 17% 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.

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.

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

Direct to Consumer.

1 unchanged sentence

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

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

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

Third Quarter

2022 2021 Year over year change

3 unchanged sentences

The decrease in gross margin was primarily the result of:

• 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;

• an increase in costs related to our product departments and distribution centers as a percentage of net revenue of 70 basis points;

• an unfavorable impact of foreign currency exchange rates of 60 basis points;

• a net decrease in product margin of 40 basis points, primarily due to higher markdowns as well as higher damages, shrink and a reduction in inventory provisions in the prior year.

This was partially offset by lower air freight costs from rate reductions and reduced usage.

The decrease in gross margin was partially offset by a decrease in occupancy and depreciation costs as a percentage of net revenue of 40 basis points, driven primarily by the increase in net revenue.

Selling, General and Administrative Expenses

Second Quarter

Third Quarter

2022 2021 Year over year change

5 unchanged sentences

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 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 $72.0 million, comprised of:

– an increase in variable costs of $27.6 million primarily due to an increase in distribution costs and credit card fees, as a result of increased net revenue;

– 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.

– an increase in employee costs of $26.9 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 brand and community costs of $12.8 million primarily due to an increase in digital marketing expenses related to our direct to consumer channel, partially offset by a decrease in marketing expenses related to lululemon Studio;

– an increase in other operating costs of $4.7 million primarily due to increased repairs and maintenance costs, depreciation, and technology costs, partially offset by a decrease in professional fees.

• an increase in head office costs of $62.6 million, comprised of:

– an increase in employee costs of $33.9 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 $28.7 million primarily due to an increase in depreciation, technology costs, and professional fees, partially offset by lower charitable donations as a result of timing.

• an increase in net foreign currency exchange and derivative revaluation losses of $4.5 million.

Amortization of Intangible Assets

Second Quarter

Third Quarter

2022 2021 Year over year change

4 unchanged sentences

Acquisition-Related Expenses

Second Quarter

Third Quarter

2022 2021 Year over year change

2 unchanged sentences

$ — $ 24,127 $ (24,127) (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.

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $23.8 million and integration related costs of $0.3 million in the third quarter of 2021.

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

Income from Operations

1 unchanged sentence

Segmented income from operations is summarized below.

Second Quarter

Third Quarter

2022 2021 2022 2021 Year over year change

8 unchanged sentences

Acquisition-related expenses — 24,127 (24,127) (100.0)

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

Income from operations $ 352,427 $ 257,947 $ 94,480 36.6 %

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 $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 income from operations from our company-operated stores was primarily the result of increased gross profit of $99.7 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to leverage on occupancy and depreciation costs as a result of increased net revenue, partially offset by deleverage in costs from our distribution centers and product teams and by an unfavorable impact of foreign currency exchange rates.

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.

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.

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

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

Direct to Consumer.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $108.5 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 decrease in gross margin was primarily due to lower product margin driven by higher markdowns and an unfavorable impact of foreign currency exchange rates.

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 from the growth in our business and increased wage rates, technology costs, and depreciation.

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

The increase in 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 headcount growth and increased wage rates, as well as increased brand and community costs, technology costs, professional fees, and depreciation.

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

The decrease in income from operations from our other channels was the result of increased selling, general and administrative expenses, primarily due to higher employee costs from the growth in our business and increased wage rates, partially offset by reduced lululemon Studio marketing expenses.

The increase in selling, general and administrative expenses was partially offset by increased gross profit of $1.3 million.

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

General Corporate Expense.

The increase in general corporate expense was primarily due to increased employee costs, primarily from headcount growth and increased wage rates, as well as technology costs, and depreciation, partially offset by decreased charitable donations as a result of timing.

The increase in general corporate expense was also due to an increase in net foreign currency exchange and derivative revaluation losses of $4.5 million.

Other Income (Expense), Net

Second Quarter

Third Quarter

2022 2021 Year over year change

4 unchanged sentences

Income Tax Expense

Second Quarter

Third Quarter

2022 2021 Year over year change

4 unchanged sentences

27.6 % 27.2 % 40 basis points

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

Certain non-deductible expenses incurred in connection with the MIRROR acquisition increased the effective tax rate in the third quarter of 2021 by 210 basis points.

The effective tax rate for the third quarter of 2022 has increased compared to the third quarter of 2021 primarily due to the accrual of withholding taxes on unremitted foreign earnings and a decrease in deductions related to stock-based compensation.

This was partially offset by favorable adjustments upon the filing of certain income tax returns.

Third Quarter

2022 2021 Year over year change

1 unchanged sentence

$ 255,470 $ 187,788 $ 67,682 36.0 %

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.

The increase in net income was primarily due to an increase in gross profit of $209.5 million, and a decrease in acquisition-related expenses of $24.1 million, partially offset by an increase in selling, general and administrative expenses of $139.1 million and an increase in income tax expense of $27.1 million.

Year-to-Date Results of Operations:

First Two Quarters Results

First Three Quarters Results

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

First Two Quarters

First Three Quarters

2022 2021 2022 2021

12 unchanged sentences

Net income $ 734,989 $ 540,818 13.8 % 13.1 %

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.

Net revenue increased $1.2 billion, or 29%, to $5.3 billion for the first three quarters of 2022 from $4.1 billion for the first three quarters of 2021.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first three quarters of 2022 remained constant with the average foreign currency exchange rates for the first three quarters of 2021, net revenue increased $1.3 billion, or 32%.

Other net revenue also increased.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 24% for the first three quarters of 2022 compared to the first three quarters of 2021.

Total comparable sales increased 26% on a constant dollar basis.

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

First Two Quarters

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

First Three Quarters

2022 2021 2022 2021 Year over year change

5 unchanged sentences

Company-Operated Stores .

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

We have opened 71 net new company-operated stores since the third quarter of 2021, including 43 stores in Asia Pacific, 19 stores in North America, and nine stores in Europe.

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

Comparable store sales increased 17%, or 19% 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.

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

Dollar value per transaction was consistent year over year.

Direct to Consumer.

Direct to consumer net revenue increased 31%, or 33% on a constant dollar basis.

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

The increase in 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

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

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

First Three Quarters

2022 2021 Year over year change

3 unchanged sentences

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;

• a decrease in product margin of 180 basis points, primarily due to higher markdowns and higher air freight costs as a result of global supply chain disruption;

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

• an unfavorable impact of foreign currency exchange rates of 40 basis points.

1 unchanged sentence

Selling, General and Administrative Expenses

First Two Quarters

First Three Quarters

2022 2021 Year over year change

6 unchanged sentences

• an increase in head office costs of $199.1 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 $101.3 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 of $97.8 million primarily due to an increase in depreciation, technology costs, brand and community costs, and professional fees.

• an increase in costs related to our operating channels of $166.9 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 $73.9 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 employee costs of $73.4 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 other operating costs of $17.1 million primarily due to an increase in depreciation, repairs and maintenance costs, and technology costs, partially offset by a decrease in professional fees;

– an increase in brand and community costs of $2.6 million primarily due to an increase in digital marketing expenses related to our direct to consumer channel, partially offset by a decrease in marketing expenses related to lululemon Studio.

• an increase in net foreign currency exchange and derivative revaluation losses of $5.2 million.

Amortization of Intangible Assets

First Two Quarters

First Three Quarters

2022 2021 Year over year change

4 unchanged sentences

Acquisition-Related Expenses

First Two Quarters

First Three Quarters

2022 2021 Year over year change

2 unchanged sentences

$ — $ 39,934 $ (39,934) (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.

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $38.1 million and integration related costs of $1.9 million in the first three quarters of 2021.

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

Gain on Disposal of Assets

First Two Quarters

First Three Quarters

2022 2021 Year over year change

6 unchanged sentences

Segmented income from operations is summarized below.

First Two Quarters

First Three Quarters

2022 2021 2022 2021 Year over year change

12 unchanged sentences

Company-Operated Stores.

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $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.

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $298.1 million, driven by increased net revenue.

The increase in gross profit was

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

Store operating costs increased primarily due to increases in credit card fees 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.

Direct to Consumer.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $290.1 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.

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.

The decrease in gross margin was primarily due to lower product margin driven by higher markdowns, increased air freight costs, and an unfavorable impact of foreign currency exchange rates.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs and credit card fees as a result of higher net revenue, as well as higher digital marketing expenses, employee costs from the growth in our business and increased wage rates, depreciation and technology costs.

Income from operations as a percentage of direct to consumer net revenue decreased for the first three quarters of 2022, compared to the first three 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 primarily the result of decreased selling, general and administrative expenses driven by reduced lululemon Studio marketing expenses.

The increase in income from operations from our other channels was also due to increased gross profit of $4.2 million, driven by increased net revenue, partially offset by lower gross margin.

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

General Corporate Expense.

The increase in general corporate expense was primarily due to increased employee costs, primarily from headcount growth and increased wage rates, as well as increased technology costs, brand and community 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 $5.2 million.

Other Income (Expense), Net

First Two Quarters

First Three Quarters

2022 2021 Year over year change

2 unchanged sentences

$ 454 $ 338 $ 116 34.3 %

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.

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

Income Tax Expense

First Two Quarters

First Three Quarters

2022 2021 Year over year change

4 unchanged sentences

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

Certain non-deductible expenses incurred in connection with the MIRROR acquisition increased the effective tax rate in the first three quarters of 2021 by 120 basis points.

A lower tax rate on the capital gain on the sale of an administrative building reduced our effective tax rate in the first three quarters of 2022 by 20 basis points

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

This was partially offset by a reduction in non-deductible expenses in international jurisdictions and favorable adjustments upon the filing of certain income tax returns.

First Three Quarters

2022 2021 Year over year change

1 unchanged sentence

$ 734,989 $ 540,818 $ 194,171 35.9 %

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.

The increase in net income was primarily due to an increase in gross profit of $592.3 million, a decrease in acquisition-related expenses of $39.9 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 $371.3 million, an increase in income tax expense of $77.1 million, and an increase in other income (expense), net of $0.1 million.

Comparable Store Sales and Total Comparable Sales

20 unchanged sentences

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

Second Quarter 2022

First Two Quarters 2022

Third Quarter 2022

First Three Quarters 2022

Net Revenue Net Revenue

5 unchanged sentences

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.

Second Quarter 2022

First Two Quarters 2022

Third Quarter 2022

First Three Quarters 2022

Total Comparable Sales 1,2

19 unchanged sentences

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

First Two Quarters

First Three Quarters

2022 2021 Year over year change

9 unchanged sentences

• a decrease in cash flows from the changes in operating assets and liabilities of $929.4 million.

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;

This decrease was primarily driven by $543.2 million from inventories, as well as changes in income taxes, accrued compensation, accrued liabilities and other, and prepaid expenses and other current assets;

• changes in adjusting items of $2.7 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.

2 unchanged sentences

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 as remodeling existing stores.

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

There has also been an increase in company-operated store expenditures driven by opening new stores and remodeling existing stores as well as increased investment in our new and existing distribution facilities.

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

1 unchanged sentence

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 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 decrease in cash used in financing activities was primarily the result of a decrease in stock repurchases.

Cash used in financing activities for the first three quarters of 2022 included $375.0 million to repurchase 1.2 million shares of our common stock compared to $491.3 million to repurchase 1.4 million shares for the first three 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.

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.

2 unchanged sentences

The following table includes certain measures of our liquidity:

July 31, 2022

October 30, 2022

(In thousands)

4 unchanged sentences

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

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.

As of October 30, 2022, letters of credit and letters of guarantee totaling $6.7 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 July 31, 2022, aside from letters of credit of $5.2 million, we had no other borrowings outstanding under this credit facility.

As of October 30, 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.

1 unchanged sentence

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.

Our inventory balance as of October 30, 2022 was $1.7 billion, an increase of 85% from October 31, 2021.

On a number of units basis, our inventory increased 80% compared to October 31, 2021.

Critical Accounting Policies and Estimates

6 unchanged sentences

Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Annual Report on Form 10-K filed with the SEC on March 29, 2022.

Goodwill Impairment Assessment

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

There is $362.5 million of goodwill allocated to the MIRROR reporting unit, which was renamed the "lululemon Studio" reporting unit during the third quarter of 2022.

As of October 30, 2022, we concluded that the deterioration in macroeconomic conditions and trends in the digital fitness industry indicated a potentially adverse change in the fair value of the lululemon Studio reporting unit, and therefore we performed a quantitative impairment analysis.

The result of the analysis concluded that the fair value of the lululemon Studio reporting unit exceeded its carrying value, and no impairment has been recognized.

We used a discounted cash flow model to estimate the fair value, supplemented by market analysis, which indicated the fair value of lululemon Studio was approximately 4% higher than its carrying value.

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

Our ability to generate expected cash flows is dependent on several factors including, but not limited to, customer demand and trends in the connected fitness industry including the level of desire to exercise at home, our ability to attract new subscribers to grow the community, and our ability to maintain a loyal subscriber base.

The fair value of lululemon Studio is also dependent on the ability of lululemon Studio to achieve long term profitability.

Failure to increase the growth rate of new subscribers in the near term, or if we are unable to reduce customer acquisition costs, or other internal or external factors, could cause a material impairment of goodwill.

Operating Locations

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,

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

Number of company-operated stores by country October 30,

2022 January 30,

9 unchanged sentences

Total company-operated stores 623 574

(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.

(1) Included within PRC as of October 30, 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 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.

As of October 30, 2022, there were 22 licensed locations, including 11 in Mexico, seven in the United Arab Emirates, three 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