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Item 7. Management’s Discussion and Analysis

2023-03-28 compared with 2022-03-29 · 265 added, 156 removed, 215 unchanged (66% of the section changed)

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

• Overview - The Power of Three

• Financial Highlights

• Financial Highlights and Market Conditions and Trends

• Results of Operations

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

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

Overview - The Power of Three

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

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

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

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

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

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

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

In 2019 we announced our Power of Three growth plan which established our goal to double our total net revenue by 2023 and outlined our plans to double men's revenue, double digital net revenue, and to quadruple international net revenue.

We achieved our goal to double our total net revenue ahead of schedule, and in 2022 we launched our new 5-year growth plan, the Power of Three ×2.

Our Power of Three ×2 plan leverages the success of our prior growth strategy, and is comprised of three key pillars – Product Innovation, Guest Experience, and Market Expansion.

We continue to see opportunity to grow our men's, direct to consumer, and international net revenue, while continuing to grow our core businesses.

2022 was the inaugural year of our new plan and we successfully executed against our goals by delivering 30% net revenue growth.

Our strength was balanced across channel, region, and merchandise category;

and was achieved in a challenging macroeconomic backdrop with ongoing supply chain disruptions.

The underlying trends that have fueled our business continue to do so, and include a desire for guests to live an active and healthy lifestyle, the desire for apparel that offers versatility, the desire to be part of a diverse and inclusive community, and the desire to achieve wellness, both physically and mentally.

Product Innovation

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

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

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

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

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

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

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

Omni Guest Experience

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

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

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

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

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

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

We continue to solve for the unmet needs of our guest by bringing new technical innovations into our merchandise assortment.

In 2022, we expanded our core running category with the launch of Senseknit, a proprietary fabric technology offering zoned compression.

We entered new activities with our capsule collections for golf, tennis, and hiking.

And we launched footwear, enabling us to provide a head-to-toe solution to our guests.

The footwear collection currently includes three technical styles – Blissfeel, Chargefeel, and Strongfeel – all designed specifically for women.

In addition, we launched a dual gender slide for pre- and post-workouts.

Guest Experience and Membership

Our omni operating model allows us to efficiently and effectively serve our guests in the ways most convenient to them – either in store or online.

We saw strength across both channels in 2022 as net revenue in our company-operated store channel increased 29% and our direct to consumer net revenue increased 33%.

Community is at the core of our brand.

In 2022, we continued to engage with guests via in-store events, 10K runs in Atlanta and Houston, ambassador-led activations, and our Summer Sweat Games in China Mainland, among other in-person events.

In addition, we connect with our community of guests through our connected fitness content provided by lululemon Studio.

In October 2022, we launched our new two-tier membership program.

The Essential membership tier is free and provides access to select content, as well as certain benefits in-store and online.

We rebranded MIRROR to become lululemon Studio, the premium paid tier of the program which offers members a connected fitness experience via in-home hardware.

As part of our membership launch, we also enhanced the lululemon Studio offering to include access to exclusive content provided by outside studio partners, as well as a discount on lululemon product purchases.

As concerns with the COVID-19 pandemic have subsided the connected fitness industry has experienced challenging market conditions, and as a result we have seen weakening demand for our in-home fitness hardware.

Hardware unit sales did not meet our expectations during the peak holiday selling period and the reduction in customer acquisition costs was less than anticipated.

As a result, in the fourth quarter, we reviewed our strategy and we plan to evolve lululemon Studio to focus on digital app-based services.

Building on the two-tier membership program, we will be expanding the lululemon Studio premium tier by enabling guests to access digital fitness content via a new app, launching in summer 2023, for a lower monthly fee.

We believe this strategy will enable more guests to experience our digital fitness content, while also building a larger community of guests with a deeper connection to lululemon.

In 2022 we recognized post-tax charges totaling $442.7 million related to lululemon Studio, including the impairment of goodwill, intangible assets, and property and equipment, and provisions against hardware inventory.

See the section "Critical Accounting Policies and Estimates", Goodwill Impairment Assessment below and Note 8.

Impairment of Goodwill and Other Assets included in Item 8 of Part II of this report for further information.

Market Expansion

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

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

During 2022, we opened 81 net new company-operated stores, including 31 stores in the PRC, nine stores in the rest of Asia Pacific, 32 stores in North America, and nine stores in Europe, including our first locations in Spain.

In 2022, our net revenue in North America increased 29%.

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

COVID-19 Update

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

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

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

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

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

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

In our international markets, despite certain COVID-19 closures in the PRC, we saw net revenue growth of 35%.

Financial Highlights

The summary below compares 2021 to 2020:

The summary below compares 2022 to 2021 and provides both GAAP and non-GAAP financial measures.

The adjusted financial measures for 2022 exclude $442.7 million of post-tax impairment and other charges recognized in relation to our lululemon Studio business unit (formerly MIRROR) and the post-tax net gain on the sale of an administrative building of $8.5 million.

The adjusted financial measures for 2021 exclude acquisition-related expenses, and their related tax effects.

• Net revenue increased 30% to $8.1 billion.

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

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

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

• Total comparable sales increased 25%, or 28% on a constant dollar basis.

– Comparable store sales increased 16%, or 19% on a constant dollar basis.

– Direct to consumer net revenue increased 33%, or 35% on a constant dollar basis.

• Gross profit increased 24% to $4.5 billion.

• Gross margin increased 170 basis points to 57.7%.

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

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

• Operating margin increased 270 basis points to 21.3%.

Adjusted gross profit increased 26% to $4.6 billion.

• Gross margin decreased 230 basis points to 55.4%.

Adjusted gross margin decreased 150 basis points to 56.2%.

• Income from operations was consistent at $1.3 billion.

Adjusted income from operations increased 30% to $1.8 billion.

• Operating margin decreased 490 basis points to 16.4%.

Adjusted operating margin increased 10 basis points to 22.1%.

• Income tax expense increased 33% to $477.8 million.

Our effective tax rate for 2022 was 35.9% compared to 26.9% for 2021.

The adjusted effective tax rate was 28.1% and 26.2% for 2022 and 2021, respectively.

• Diluted earnings per share were $6.68 for 2022 compared to $7.49 in 2021.

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

Adjusted diluted earnings per share were $10.07 for 2022 compared to $7.79 in 2021.

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

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

Management's Discussion and Analysis of Financial Condition and Results of Operations for reconciliations between the above adjusted non-GAAP financial measures and the most directly comparable measures calculated in accordance with GAAP.

Market Conditions and Trends

Macroeconomic conditions, the recent COVID-19 pandemic, and supply chain disruption impacted our business and operating costs in 2022 and 2021.

Certain trends are expected to continue into 2023, with the impact varying by market.

Macroeconomic Conditions

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

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

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

Inflation, an anticipated economic downturn, 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 2022 and 2021, with certain locations temporarily closed due to COVID-19 resurgences, including certain closures during 2022 in the PRC.

Supply chain disruption

In 2021 and 2022 we 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 50% increase in our inventory balance as of January 29, 2023 compared to January 30, 2022.

We expect that while the growth rate in our inventories will exceed net revenue growth in the first half of 2023, the growth rate will be relatively in line with net revenue growth in the second half of 2023.

The use of air freight reduced our gross margin during the first half of 2022, however, we began seeing an improvement in the supply chain issues and experienced lower inbound freight costs in the second half of 2022, and this resulted in an overall improvement to our gross margin from air freight costs for 2022 compared to 2021.

We expect that we will similarly see improvements in our gross margin from air freight costs in the first half of 2023 compared to the prior year when there was the supply chain disruption.

Results of Operations

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Amortization of intangible assets 8,752 8,782 0.1 0.1

Impairment of goodwill and other assets 407,913 — 5.0 —

Acquisition-related expenses — 41,394 — 0.7

Gain on disposal of assets (10,180) — (0.1) —

Income from operations 1,328,408 1,333,355 16.4 21.3

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On a constant dollar basis, assuming the average foreign currency exchange rates in 2022 remained constant with the average foreign currency exchange rates in 2021, net revenue increased $2.0 billion, or 32%.

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

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

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

Other net revenue also increased.

Total comparable sales, which includes comparable store sales and direct to consumer, increased 25% in fiscal 2022 compared to fiscal 2021.

Total comparable sales increased 28% on a constant dollar basis.

Net revenue for 2022 and 2021 is summarized below.

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Company-Operated Stores.

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

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

The increase in net revenue from our company-operated stores was driven by net revenue from company-operated stores that were opened or significantly expanded since 2021 which contributed $435.9 million to the increase.

During 2022, we opened 81 net new company-operated stores, including 40 stores in Asia Pacific, 32 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 16%, 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.

Dollar value per transaction was consistent year over year.

Direct to Consumer.

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

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

During the second quarter of 2020, we held an online warehouse sale in the United States and Canada which generated net revenue of $43.3 million.

We did not hold any warehouse sales during 2021.

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

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

Direct to consumer net revenue increased 33%, or 35% on a constant dollar basis.

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 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.

2022 2021 Year over year change

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55.4 % 57.7 % (230) basis points

The increase in gross margin was primarily the result of:

• a decrease in occupancy and depreciation costs as a percentage of net revenue of 130 basis points, driven primarily by the increase in net revenue;

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

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

The increase in gross margin was partially offset by a decrease in product margin of 20 basis points, primarily due to higher air freight costs as a result of global supply chain disruption, partially offset by lower markdowns.

Our updated lululemon Studio strategy will focus on digital app based services and means we no longer expect to be able to sell all of the in-home hardware inventory above cost.

We recognized a provision of $62.9 million against hardware inventory during the fourth quarter of 2022.

This reduced 2022 gross margin by 80 basis points.

Please refer to Note 8.

Impairment of Goodwill and Other Assets included in Item 8 of Part II of this report.

The remaining 150 basis point decrease in gross margin was primarily the result of:

• a decrease in product margin of 100 basis points primarily due to higher markdowns, sales mix, and increased damages and shrink, partially offset by lower air freight costs;

• an increase in costs related to our product departments and distribution centers as a percentage of net revenue of 60 basis points;

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

The decrease in gross margin was partially offset by leverage on occupancy and depreciation costs of 50 basis points, driven primarily by the increase in net revenue.

Selling, General and Administrative Expenses

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

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

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

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

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

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

• an increase in head office costs of $283.7 million, comprised of:

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

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

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

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

– an increase in costs of $142.2 million primarily due to increased depreciation of $43.5 million and increased technology costs, including cloud computing amortization, of $35.7 million, as well as increased brand and community costs and professional fees;

– an increase in employee costs of $141.5 million primarily due to an increase in salaries and wages expense of $76.5 million and incentive compensation of $34.8 million, as well as increased stock-based compensation expense and travel costs, primarily as a result of headcount growth and increased wage rates.

• an increase in costs related to our operating channels of $249.5 million, comprised of:

– an increase in variable costs of $127.6 million primarily due to an increase in distribution costs and credit card fees, primarily as a result of increased net revenue;

– an increase in employee costs of $104.2 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 costs of $15.3 million primarily due to an increase in repairs and maintenance costs, depreciation, and technology costs, partially offset by a decrease in professional fees;

– an increase in brand and community costs of $2.4 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.

The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign exchange and derivative revaluation losses of $0.8 million.

Amortization of Intangible Assets

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$ 8,752 $ 8,782 $ (30) (0.3) %

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

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

Impairment of Goodwill and Other Assets

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Impairment of goodwill and other assets

$ 407,913 $ — $ 407,913 n/a

During the fourth quarter of 2022, we recognized an impairment of goodwill and other long-lived assets in relation to our lululemon Studio business unit (formerly MIRROR).

Please refer to the Critical Accounting Policies and Estimates section of this Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as Note 8.

Impairment of Goodwill and Other Assets included in Item 8 of Part II of this report for further information.

Acquisition-Related Expenses

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$ — $ 41,394 $ (41,394) (100.0) %

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

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

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

In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $38.4 million and transaction and integration related costs of $3.0 million in 2021.

There were no acquisition-related expenses in 2022.

Please refer to Note 9.

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

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

Gain on Disposal of Assets

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Gain on disposal of assets

$ (10,180) $ — $ (10,180) n/a

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

Income from Operations

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

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

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

Segmented income from operations is summarized below.

2022 2021 2022 2021 Year over year change

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General corporate expenses 862,867 637,983 224,884 35.2

lululemon Studio obsolescence provision 62,928 — 62,928 n/a

Amortization of intangible assets 8,752 8,782 (30) (0.3)

Impairment of goodwill and other assets 407,913 — 407,913 n/a

Acquisition-related expenses — 41,394 (41,394) (100.0)

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

Income from operations $ 1,328,408 $ 1,333,355 $ (4,947) (0.4) %

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Company-Operated Stores.

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

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

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher employee and operating costs.

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

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

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

The increase in income from operations from company-operated stores was primarily the result of increased gross profit of $413.7 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 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 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 $527.9 million, driven by increased net revenue, partially offset by lower gross margin.

decrease in gross margin was primarily due to increased air freight and distribution center costs relative to net revenue.

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

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

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

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

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

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

The decrease in gross margin was primarily due to higher markdowns, sales mix, deleverage on distribution center and product team costs, and unfavorable foreign exchange, partially offset by lower air freight costs.

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

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

The increase in income from operations was primarily the result of a reduction in lululemon Studio marketing expenses and increased operating profit from our other lululemon retail operations.

Increased net revenue from outlets, sales to wholesale accounts, license and supply arrangements, recommerce, and pop up locations resulted in increased gross profit.

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

Selling, general, and administrative expenses decreased due to lower lululemon Studio marketing costs, partially offset by higher people costs as a result of growth in our other lululemon retail locations.

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

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

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 depreciation, technology costs including cloud computing amortization, brand and community costs, and professional fees.

The increase in general corporate expenses was partially offset by a decrease in net foreign exchange and derivative losses of $0.8 million.

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

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$ 4,163 $ 514 $ 3,649 709.9 %

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

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

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

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

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35.9 % 26.9 % 900 basis points

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

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

The increase in the effective tax rate was primarily due to certain non-deductible expenses related to the impairment of goodwill and other assets recognized in relation to our lululemon Studio business unit (formerly MIRROR) partially offset by the gain on sale of an administrative building in 2022 which increased the effective tax rate by 780 basis points.

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

The increase in the effective tax rate was also due to the accrual of U.S.

state tax and Canadian withholding taxes on unremitted earnings which are not considered to be permanently reinvested, adjustments upon filing of certain income tax returns, and a decrease in deductions for stock-based compensation, partially offset by a decrease in non-deductible expenses in international jurisdictions.

Excluding the impairment of goodwill and other assets recognized in relation to our lululemon Studio business unit and the gain on sale of an administrative building in 2022, and the MIRROR acquisition-related expenses in 2021, and their tax effects, our adjusted effective tax rates were 28.1% and 26.2% for 2022 and 2021, respectively.

2022 2021 Year over year change

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$ 854,800 $ 975,322 $ (120,522) (12.4) %

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

The decrease in net income in 2022 was primarily due to an increase in selling, general and administrative expenses of $532.4 million, an impairment charge recognized in 2022 of $407.9 million, an increase in income tax expense of $119.2 million, partially offset by an increase in gross profit of $883.8 million, a decrease in acquisition-related expenses of $41.4 million, a gain on disposal of assets of $10.2 million, and an increase in other income (expense), net of $3.6 million.

Excluding the impairment of goodwill and other assets in relation to our lululemon Studio business unit (formerly MIRROR) and the gain on sale of an administrative building in 2022, and the MIRROR acquisition-related expenses in 2021, and their tax effects, adjusted net income increased $273.7 million or 27.0%.

Comparable Store Sales and Total Comparable Sales

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

However, as the temporary store closures from COVID-19

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

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

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

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

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Non-GAAP Financial Measures

Constant dollar changes in net revenue and direct to consumer net revenue are non-GAAP financial measures.

Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue are non-GAAP financial measures.

A constant dollar basis assumes the average foreign currency exchange rates for the period remained constant with the average foreign currency exchange rates for the same period of the prior year.

We provide constant dollar changes in our results to help investors understand the underlying growth rate of net revenue excluding the impact of changes in foreign currency exchange rates.

Adjusted gross profit, gross margin, income from operations, operating margin, income tax expense, effective tax rates, net income, and diluted earnings per share exclude the impairment of goodwill and other assets recognized in relation to our lululemon Studio business unit (formerly MIRROR), the gain on disposal of assets for the sale of an administrative office building, the MIRROR acquisition-related expenses, and the related income tax effects of these items.

We believe these adjusted financial measures are useful to investors as they provide supplemental information that enable evaluation of the underlying trend in our operating performance, and enable a comparison to our historical financial information.

Further, due to the finite and discrete nature of these items, we do not consider them to be normal operating expenses that are necessary to operate the business, or impairments or disposal gains that are expected to arise in the normal course of our operations.

Management uses these adjusted financial measures and constant currency metrics internally when reviewing and assessing financial performance.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP.

A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.

Constant Dollar Changes in Net Revenue

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

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Change in constant dollars $ 2,001,629 32 % 35 %

Constant Dollar Changes in Total Comparable Sales, Comparable Store Sales, and Direct to Consumer Net Revenue

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.

Total Comparable Sales 1,2

Comparable Store Sales 2

Direct to Consumer Net Revenue

Change 25 % 16 % 33 %

Adjustments due to foreign currency exchange rate changes 3 % 3 2

Change in constant dollars 28 % 19 % 35 %

(1) Total comparable sales includes comparable store sales and direct to consumer net revenue.

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

Adjusted financial measures

The following tables reconcile adjusted financial measures with the most directly comparable measures calculated in accordance with GAAP.

The 2022 adjustments relate to the impairment of goodwill and other assets in relation to our lululemon Studio business unit (formerly MIRROR) and the gain on sale of an administrative office building, and their related tax effects.

The 2021 adjustments relate to MIRROR acquisition-related expenses, and their related tax effects.

Please refer to Note 5.

Property and Equipment, Note 8.

Impairment of Goodwill and Other Assets, and Note 9.

Acquisition-Related Expenses included in Item 8 of Part II of this report for further information on the nature of these amounts.

Gross Profit Gross Margin Income from Operations Operating Margin Income Tax Expense Effective Tax Rate Net Income Diluted Earnings Per Share

(In thousands, except per share amounts)

GAAP results $ 4,492,340 55.4 % $ 1,328,408 16.4 % $ 477,771 35.9 % $ 854,800 $ 6.68

lululemon Studio charges:

Obsolescence provision 62,928 0.8 62,928 0.8 62,928 0.49

Impairment of goodwill 362,492 4.4 362,492 2.83

Impairment of intangible assets 40,585 0.5 40,585 0.32

Impairment of property and equipment 4,836 0.1 4,836 0.04

Gain on disposal of assets (10,180) (0.1) (10,180) (0.08)

Tax effect of the above 26,510 (7.8) (26,510) (0.21)

Adjusted results (non-GAAP) $ 4,555,268 56.2 % $ 1,789,069 22.1 % $ 504,281 28.1 % $ 1,288,951 $ 10.07

Fourth Quarter 2022

(In thousands)

Income from operations $ 314,426

lululemon Studio related charges:

Obsolescence provision 62,928

Impairment of goodwill 362,492

Impairment of intangible assets 40,585

Impairment of property and equipment 4,836

Adjusted income from operations (non-GAAP) $ 785,267

Income from Operations Operating Margin Income Tax Expense Effective Tax Rate Net Income Diluted Earnings Per Share

(In thousands, except per share amounts)

GAAP results $ 1,333,355 21.3 % $ 358,547 26.9 % $ 975,322 $ 7.49

Transaction and integration costs 2,989 — 2,989 0.02

Acquisition-related compensation 38,405 0.7 38,405 0.29

Tax effect of the above 1,417 (0.7) (1,417) (0.01)

Adjusted results (non-GAAP) $ 1,374,749 22.0 % $ 359,964 26.2 % $ 1,015,299 $ 7.79

Liquidity and Capital Resources

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Effect of foreign currency exchange rate changes on cash and cash equivalents (34,043) (6,876) (27,167)

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

Increase (decrease) in cash and cash equivalents $ (105,004) $ 109,354 $ (214,358)

Operating Activities

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

• increased net income of $386.4 million;

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

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

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

The decrease in cash provided by operating activities was primarily as a result of a decrease in cash flows from changes in operating assets and liabilities of $726.1 million.

This decrease was primarily driven by changes in accounts payable, inventories, and income taxes.

The decrease in cash provided by operating activities was also due to lower cash inflows related to derivatives not designated in a hedging relationship.

The decrease in cash provided by operating activities was partially offset by an increase in depreciation and stock-based compensation expense.

Investing Activities

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

This was partially offset by an increase in capital expenditures.

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 corporate expenditures and from our company-operated stores segment.

Capital expenditures for our company-operated stores segment were $303.7 million and $189.6 million in 2022 and 2021, respectively.

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

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

The capital expenditures for our company-operated stores segment also included $78.9 million to open 87 company-operated stores and $47.1 million to open 56 company-operated stores, in 2022 and 2021 respectively.

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

We expect to open 45 to 50 new company-operated stores in 2023.

Capital expenditures for our direct to consumer segment were $57.1 million and $81.7 million in 2022 and 2021, respectively.

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

Capital expenditures in 2022 were primarily related to our distribution centers as well as other technology infrastructure and system initiatives.

Capital expenditures related to corporate activities and other were $277.9 million and $123.2 million in 2022 and 2021, respectively.

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

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

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

The increase in capital expenditures in each fiscal year was primarily due to investments in technology and business systems, and for increased capital expenditures on corporate office renovations.

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

Financing Activities

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

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

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

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

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

During 2022, 1.4 million shares were repurchased at a total cost including commissions and excise taxes of $444.0 million.

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

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.

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

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

Risk Factors".

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(1) Working capital is calculated as current assets of $3.2 billion less current liabilities of $1.5 billion.

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

Capital expenditures are expected to range between $660.0 million and $680.0 million in 2023.

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

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

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

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

Our inventory balance as of January 29, 2023 was $1.4 billion, an increase of 50% from January 30, 2022.

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

On a number of units basis, our inventory increased 58% compared to January 30, 2022.

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

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

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We lease certain store and other retail locations, distribution centers, offices, and equipment under non-cancellable operating leases.

Our leases generally have initial terms of between five and 15 years, and generally can be extended in five-year increments, if at all.

Our leases generally have initial terms of between two and 15 years, and generally can be extended in increments between two and five years, if at all.

The following table details our future minimum lease payments.

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

Deferred consideration.

The amounts listed for deferred consideration in the table below represent expected future cash payments for certain continuing MIRROR employees, subject to the continued employment of those individuals up to three years from the acquisition date as outlined in Note 6.

Acquisition included in Item 8 of Part II of this report.

The following table summarizes our contractual arrangements due by fiscal year as of January 29, 2023, and the timing and effect that such commitments are expected to have on our liquidity and cash flows in future periods:

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One-time transition tax payable 38,073 9,518 12,691 15,864 — — —

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

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

As of January 29, 2023, our operating lease commitments for distribution center operating leases which have been committed to, but not yet commenced, was $632.0 million, which is not reflected in the table above.

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

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Our critical accounting policies, estimates, and judgements are as follows, and see Note 2.

Summary of Significant Account Policies included in Item 8 of Part II for additional information:

Summary of Significant Accounting Policies included in Item 8 of Part II for additional information:

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.

We acquired Curiouser Products Inc., dba "MIRROR" in 2020, subsequently re-branded "lululemon Studio," and $362.5 million of goodwill was allocated to the lululemon Studio reporting unit.

We performed a quantitative impairment analysis on October 31, 2022 for the lululemon Studio reporting unit.

The result of this annual test concluded that the fair value of the lululemon Studio reporting unit exceeded its carrying value.

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 as of October 31, 2022 were the revenue growth rates, operating profit margins, and the discount rate.

The test indicated that failure to increase the growth rate of new subscribers in the near term, or failure to reduce customer acquisition costs, or other internal or external factors could cause a material impairment of goodwill.

Sales of hardware units did not meet our fourth quarter expectations and the reduction in customer acquisition costs was less than anticipated, and therefore our short and long term forecasts for lululemon Studio were revised downwards with an adverse impact on future expected cash flows.

As a result, we reviewed our strategy and we plan to evolve lululemon Studio to focus on digital app-based services.

We determined the lower than forecasted subscriber growth, and the shift in strategy, were triggering events which indicated we should conduct an impairment test as of January 29, 2023.

We used a discounted cash flow model to estimate the fair value of the lululemon Studio reporting unit based on our updated strategic plans, supplemented by market comparable analysis.

This led to the recognition of an impairment of goodwill of $362.5 million.

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

The fair value of the lululemon Studio reporting unit is a Level 3 fair value measurement.

Finite-lived intangible asset impairment assessment

As of January 29, 2023, the performance of lululemon Studio in the fourth quarter of 2022 and our change in strategy were also triggering events which indicated we should test the related intangible assets for impairment.

The undiscounted cash flows of the asset group to which the intangible assets belong were less than their carrying value, and therefore we calculated the fair value of the asset group, which was also less than its carrying value.

This resulted in an impairment of $40.6

million, relating to the MIRROR brand, which is associated with in-home hardware and to the customer relationship intangible assets that were recognized as part of the acquisition.

The carrying value of individual long-lived assets was not reduced to lower than their fair value.

The fair values of the brand and the customer relationships were based on a relief from royalty method and a discounted cash flow model respectively, and are Level 3 fair value measurements.

The relief from royalty method is dependent on certain key estimates, including forecast hardware and hardware subscriber revenues, the royalty rate, and the discount rate.

Inventory provisions

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

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

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

If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination.

Goodwill impairment assessment

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

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

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

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

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

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

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

As of January 29, 2023 the net carrying value of our inventories was $1.4 billion, which included provisions for obsolete and damaged inventory of $123.2 million.

The provision is determined based upon assumptions about product quality, damages, future demand, selling prices, and market conditions, and includes a provision of $62.9 million against lululemon Studio hardware inventory.

Our change in strategy related to lululemon Studio means we no longer expect to be able to sell all of the hardware inventory above cost.

The net realizable value of the lululemon Studio inventory was determined based on hardware sales forecasts and assumptions regarding liquidation value.

If we do not achieve our sales forecasts, have to sell the hardware at prices lower than our forecasts, or are unable to liquidate excess inventory and the prices we anticipate, this could reduce the net realizable value of this inventory below our estimate and we would increase our provision in the period in which we made such a determination.

Deferred taxes on undistributed net investment of foreign subsidiaries.

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

This determination is based on the cash flow projections and

operational and fiscal objectives of each of our foreign subsidiaries.

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

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

For the portion of our net investment in our Canadian subsidiaries that are not indefinitely reinvested, we have recorded a deferred tax liability for the taxes which would be due upon repatriation.

For the portion of our net investment in our Canadian subsidiaries that is not indefinitely reinvested, we have recorded a deferred tax liability for the taxes which would be due upon repatriation.

For distributions made by our Canadian subsidiaries, the amount of tax payable is partially dependent on how the repatriation transactions are made.

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

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

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

The net investment in our Canadian subsidiaries was $2.5 billion, of which $1.1 billion was determined to be indefinitely reinvested.

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

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

state income taxes which would be due upon repatriation.

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

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

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

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

As of January 29, 2023, the net investment in our Canadian subsidiaries was $2.4 billion, of which $1.3 billion was determined to be indefinitely reinvested.

The paid-up-capital balance of the Canadian subsidiaries was $740.6 million.

We have recognized a deferred tax liability of $20.2 million as of January 29, 2023 which represents the Canadian withholding taxes payable on the portion of our Canadian earnings that are not indefinitely reinvested and cannot be repatriated as a return of capital, and U.S.

state income taxes payable upon repatriation of the amounts which are not indefinitely reinvested.

In future periods, if the net investment in our Canadian subsidiaries continues to grow, whether due to the accumulation of profits by these subsidiaries or due to a change in the amount that is indefinitely reinvested, we will record additional deferred tax liabilities, including both Canadian withholding taxes for the amount in excess of the paid-up capital balance and U.S.

state income taxes, and our effective tax rate will increase.

Absent any changes to the permanently reinvested amounts, or the paid-up-capital of our Canadian subsidiaries, we expect the effective tax rate to increase in 2023, where we will accrue Canadian withholding taxes and U.S.

state income taxes for profits generated in our Canadian subsidiaries.

Contingencies

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Assessing probability of loss and estimating the amount of probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts.

Should we experience adverse court judgments or should negotiated outcomes differ to our expectations with respect to such ongoing litigation it could have a material adverse effect on our results of operations, financial position, and cash flows.

experience adverse court judgments or should negotiated outcomes differ to our expectations with respect to such ongoing litigation it could have a material adverse effect on our results of operations, financial position, and cash flows.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis