What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-06-01 compared with 2022-12-08 · 111 added, 285 removed, 218 unchanged (64% of the section changed)

2 unchanged sentences

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.

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.

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Fiscal 2023 and fiscal 2022 are referred to as "2023," and "2022," respectively.

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

The first quarter of 2023 and 2022 ended on April 30, 2023 and May 1, 2022, respectively.

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

1 unchanged sentence

• Quarter-to-Date Results of Operations

• Year-to-Date Results of Operations

• Comparable Store Sales and Total Comparable Sales

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

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

We offer a comprehensive line of apparel and accessories.

We offer a comprehensive line of performance apparel, footwear, and accessories marketed under the lululemon brand.

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

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

We also offer apparel designed for being on the move and fitness-inspired accessories.

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

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.

To help build our community of guests, and as part of our membership program, we offer in-home connected fitness and associated content subscriptions through lululemon Studio.

Financial Highlights

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

For the first quarter of 2023, compared to the first quarter of 2022:

• Net revenue increased 24% to $2.0 billion.

4 unchanged sentences

• Gross profit increased 32% to $1.2 billion.

• Gross margin decreased 130 basis points to 55.9%.

• Gross margin increased 360 basis points to 57.5%.

• Income from operations increased 54% to $401.4 million.

1 unchanged sentence

• Income tax expense increased 69% to $119.0 million.

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.

Our effective tax rate for the first quarter of 2023 was 29.1% compared to 27.0% for the first quarter of 2022.

• Diluted earnings per share were $2.28 compared to $1.48 in the first quarter of 2022.

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

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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, supply chain disruption, and the COVID-19 pandemic have impacted our business and operating costs.

Certain trends are expected to continue throughout 2023, 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").

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

Foreign currency fluctuations reduced the growth of our net revenue by $44.6 million when comparing the first quarter of 2023 to 2022 primarily due to the overall appreciation of the US dollar.

We expect that future exchange rate volatility will impact our results.

We have also experienced increased wage rates when comparing the first quarter of 2023 to 2022.

Guest traffic in our company-operated stores and online increased in the first quarter of 2023, compared to the first quarter of 2022.

Consumer purchasing behaviors may be impacted by current economic conditions including inflation, higher interest rates, and other macroeconomic factors which may have an adverse effect on our future operating margins.

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.

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 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.

We have seen an improvement in the supply chain disruption during the second half of 2022 and the first quarter of 2023, including reductions in freight costs and reductions in our levels of air freight usage.

In the first quarter of 2023 compared to the first quarter of 2022 our product margin increased by 430 basis points, primarily due to lower air freight costs from rate reductions and reduced usage.

We expect that we will see improved product margin in the first half of 2023 compared to the prior year.

COVID-19 Pandemic

Most of our retail locations were open throughout the first quarter of 2023 and 2022, with certain locations temporarily closed due to COVID-19 resurgences during the first quarter of 2022, including certain closures in the People's Republic of China ("PRC"), including the Company's third party distribution center.

Net revenue from the PRC increased 79% in the first quarter of 2023 compared to the first quarter of 2022, with improvements in COVID-19 trading conditions contributing to this increase.

Quarter-to-Date Results of Operations:

Third Quarter Results

First Quarter Results

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

Third Quarter

First Quarter

2023 2022 2023 2022

5 unchanged sentences

Amortization of intangible assets 1,878 2,195 0.1 0.1

Acquisition-related expenses — 24,127 — 1.7

Income from operations 401,414 260,347 20.1 16.1

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Net income $ 290,405 $ 189,998 14.5 % 11.8 %

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%.

Net revenue increased $387.3 million, or 24%, to $2.0 billion for the first quarter of 2023 from $1.6 billion for the first quarter of 2022.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first quarter of 2023 remained constant with the average foreign currency exchange rates for the first quarter of 2022, net revenue increased $432.0 million, or 27%.

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, which includes comparable store sales and direct to consumer net revenue, increased 14% for the first quarter of 2023 compared to the first quarter of 2022.

Total comparable sales increased 17% on a constant dollar basis.

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

Third Quarter

Net revenue for the first quarter of 2023 and 2022 is summarized below.

First Quarter

2023 2022 2023 2022 Year over year change

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Company-Operated Stores.

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 and increased dollar value per transaction, partially offset by a decrease in conversion rates.

Direct to Consumer.

Direct to consumer net revenue increased 31%, or 34% 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, 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

(In thousands) (In thousands) (Percentage)

$ 1,038,852 $ 829,393 $ 209,459 25.3 %

55.9 % 57.2 % (130) basis points

The decrease in gross margin was primarily the result of:

• 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

Third Quarter

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Selling, general and administrative expenses

$ 684,236 $ 545,124 $ 139,112 25.5 %

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

36.8 % 37.6 % (80) basis points

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

• 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 $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

Third Quarter

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Amortization of intangible assets

$ 2,189 $ 2,195 $ (6) (0.3) %

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

Acquisition-Related Expenses

Third Quarter

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Acquisition-related expenses

$ — $ 24,127 $ (24,127) (100.0) %

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

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

Segmented income from operations is summarized below.

Third Quarter

2022 2021 2022 2021 Year over year change

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

Segmented income from operations:

Company-operated stores $ 242,733 $ 180,700 26.9 % 25.6 % $ 62,033 34.3 %

Direct to consumer 321,742 257,050 41.9 43.8 64,692 25.2

Other 24,911 27,450 13.4 17.5 (2,539) (9.2)

$ 589,386 $ 465,200 $ 124,186 26.7 %

General corporate expense 234,770 180,931 53,839 29.8

Amortization of intangible assets 2,189 2,195 (6) —

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

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

Operating margin 19.0 % 17.8 % 120 basis points

Company-Operated Stores .

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

Third Quarter

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Other income (expense), net

$ 331 $ 15 $ 316 2,106.7 %

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

Income Tax Expense

Third Quarter

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Income tax expense

$ 97,288 $ 70,174 $ 27,114 38.6 %

Effective tax rate

27.6 % 27.2 % 40 basis points

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

(In thousands) (In thousands) (Percentage)

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

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 Three Quarters Results

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

First Three Quarters

2022 2021 2022 2021

(In thousands) (Percentages)

Net revenue $ 5,338,680 $ 4,127,504 100.0 % 100.0 %

Cost of goods sold 2,373,959 1,755,111 44.5 42.5

Gross profit 2,964,721 2,372,393 55.5 57.5

Selling, general and administrative expenses 1,954,340 1,583,075 36.6 38.4

Amortization of intangible assets 6,579 6,585 0.1 0.2

Acquisition-related expenses — 39,934 — 1.0

Gain on disposal of assets (10,180) — (0.2) —

Income from operations 1,013,982 742,799 19.0 18.0

Other income (expense), net 454 338 — —

Income before income tax expense 1,014,436 743,137 19.0 18.0

Income tax expense 279,447 202,319 5.2 4.9

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

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 three quarters of 2022 and 2021 is summarized below.

First Three Quarters

2022 2021 2022 2021 Year over year change

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

Company-operated stores $ 2,537,741 $ 1,938,864 47.5 % 47.0 % $ 598,877 30.9 %

Direct to consumer 2,264,029 1,729,040 42.4 41.9 534,989 31.0

Other 536,910 459,600 10.1 11.1 77,310 16.8

Net revenue $ 5,338,680 $ 4,127,504 100.0 % 100.0 % $ 1,211,176 29.3 %

Company-Operated Stores .

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 driven by net revenue from company-operated stores that we opened or significantly expanded since the first quarter of 2022 which contributed $137.9 million.

We have opened 83 net new company-operated stores since the first quarter of 2022, including 39 stores in Asia Pacific, 37 stores in North America, and seven stores in Europe.

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

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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

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 our temporary locations, which had fewer locations open compared to the prior year, and lululemon Studio.

First Quarter

2023 2022 Year over year change

2 unchanged sentences

57.5 % 53.9 % 360 basis points

The decrease in gross margin was primarily the result of:

• 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.

The decrease in gross margin was partially offset by a decrease in occupancy and depreciation costs as a percentage of net revenue of 60 basis points, driven primarily by the increase in net revenue.

The increase in gross margin was primarily the result of:

• a net increase in product margin of 430 basis points, primarily due to lower air freight costs from rate reductions and reduced usage, modestly offset by higher inventory provisions in the current year;

• a decrease in occupancy and depreciation costs as a percentage of net revenue of 10 basis points, driven primarily by the increase in net revenue.

The increase in gross margin was partially offset by an unfavorable impact of foreign currency exchange rates of 50 basis points, and an increase in costs related to our product departments and distribution centers as a percentage of net revenue of 30 basis points.

Selling, General and Administrative Expenses

First Three Quarters

First Quarter

2023 2022 Year over year change

6 unchanged sentences

• an increase in head office costs of $79.3 million, comprised of:

– 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 of $45.5 million primarily due to an increase in depreciation of $14.8 million, increased brand and community costs, including charitable donations, of $12.6 million, increased technology costs, including cloud computing amortization, of $11.0 million, as well as professional fees;

– an increase in employee costs of $33.8 million primarily due to an increase in salaries and wages of $18.9 million and increased incentive compensation and stock-based compensation of $8.1 million, primarily as a result of headcount growth and increased wage rates, as well as increased benefit costs and travel costs.

• an increase in costs related to our operating channels of $61.6 million, comprised of:

– 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 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 employee costs of $34.4 million primarily due to an increase in salaries and wages expense and incentive compensation in our company-operated stores channel, primarily from the growth in our business and increased wage rates;

– an increase in variable costs of $13.7 million primarily due to an increase in credit card fees, distribution costs, and packaging costs, primarily as a result of increased net revenue;

– an increase in other costs of $8.2 million primarily due to increased technology costs, professional fees, and repairs and maintenance costs;

– an increase in brand and community costs of $5.3 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.

The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $1.3 million.

Amortization of Intangible Assets

First Three Quarters

First Quarter

2023 2022 Year over year change

3 unchanged sentences

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

Acquisition-Related Expenses

First Three Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Acquisition-related expenses

$ — $ 39,934 $ (39,934) (100.0) %

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 Three Quarters

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Gain on disposal of assets

$ (10,180) $ — $ 10,180 n/a

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

Income from Operations

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

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.

First Three Quarters

First Quarter

2023 2022 2023 2022 Year over year change

7 unchanged sentences

Amortization of intangible assets 1,878 2,195 (317) (14)

Acquisition-related expenses — 39,934 (39,934) (100.0)

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

Income from operations $ 401,414 $ 260,347 $ 141,067 54.2 %

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 $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.

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $149.8 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to higher product margin driven by lower air freight costs and lower markdowns, partially offset by higher inventory provisions.

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

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 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.

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

Income from operations as a percentage of company-operated stores net revenue increased due to higher gross margin and 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 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.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $111.0 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to higher product margin driven by lower air freight costs, partially offset by higher inventory provisions.

The increase in gross margin was partially offset by an unfavorable impact of foreign currency exchange rates and deleverage in costs from our distribution centers and product teams.

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, packaging costs, and credit card fees, as a result of higher net revenue, as well as higher digital marketing expenses and technology costs.

Income from operations as a percentage of direct to consumer net revenue increased primarily due to higher gross margin.

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

Increased net

revenue from outlets, license and supply arrangements, sales to wholesale accounts, and recommerce resulted in increased gross profit.

This was partially offset by a decrease in net revenue from our temporary locations and lululemon Studio.

Selling, general and administrative expenses decreased primarily due to lower lululemon Studio marketing costs.

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

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.

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 depreciation, brand and community costs, technology costs, and professional fees.

The increase in general corporate expense was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $1.3 million.

Other Income (Expense), Net

First Three Quarters

First Quarter

2023 2022 Year over year change

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Other income (expense), net

$ 454 $ 338 $ 116 34.3 %

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.

$ 8,025 $ (22) $ 8,047 n/a

The increase in other income, net was primarily due to an increase in interest income as a result of higher interest rates and higher cash balances.

Income Tax Expense

First Three Quarters

First Quarter

2023 2022 Year over year change

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29.1 % 27.0 % 210 basis points

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

The effective tax rate for the first quarter of 2023 has increased compared to the first quarter of 2022 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.

First Quarter

2023 2022 Year over year change

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$ 290,405 $ 189,998 $ 100,407 52.8 %

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.

The increase in net income was primarily due to an increase in gross profit of $280.4 million and an increase in other income (expense), net of $8.0 million, partially offset by an increase in selling, general and administrative expenses of $139.7 million and an increase in income tax expense of $48.7 million.

Comparable Store Sales and Total Comparable Sales

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Net revenue from a store is included in comparable store sales beginning with the first fiscal month for which the store has a full fiscal month of sales in the prior year.

Comparable store sales exclude sales from new stores that have not been open for at least 12 full fiscal months, from stores which have not been in their significantly expanded space for at least 12 full fiscal months, and from stores which have been temporarily relocated for renovations or temporarily closed.

relocated for renovations or temporarily closed.

Comparable store sales also exclude sales from direct to consumer and our other operations, as well as sales from company-operated stores that have closed.

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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.

Our non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures reported by other companies.

Constant Dollar Changes in Net Revenue

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

Third Quarter 2022

First Three Quarters 2022

Net Revenue Net Revenue

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

First Quarter 2023

(In thousands) (Percentages)

Change $ 387,329 24 %

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

Third Quarter 2022

First Three Quarters 2022

First Quarter 2023

Total Comparable Sales (1),(2)

Comparable Store Sales (2)

Direct to Consumer Net Revenue Total Comparable Sales 1,2

Comparable Store Sales 2

Direct to Consumer Net Revenue

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

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

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

Due to a significant number of our company-operated stores being temporarily closed due to COVID-19 during the first two quarters of 2020, we earned a higher proportion of our operating profit during the last two quarters of 2020 compared to 2021.

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

For example, we generated approximately 44% of our full year operating profit during the fourth quarter of 2021.

Our operating profits in 2022 were not weighted towards our fourth quarter primarily due to the impairment of goodwill and other assets recognized in relation to our lululemon Studio business unit during that quarter.

Liquidity and Capital Resources

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

First Three Quarters

First Quarter

2023 2022 Year over year change

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Operating Activities

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

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

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.

The increase in cash used in operating activities was partially offset by increased net income of $194.2 million.

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

• an increase in cash flows from the changes in operating assets and liabilities of $156.1 million, primarily driven by changes in inventories and accounts payable, partially offset by changes in accrued liabilities;

• increased net income of $100.4 million;

• changes in adjusting items of $32.2 million, primarily driven by increased depreciation and higher cash inflows related to derivatives not designated in a hedging relationship.

Investing Activities

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

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.

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

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

The increase in capital expenditures was primarily due to 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.

There has also been an increase in direct to consumer expenditures driven by investment in our distribution centers as well as other technology infrastructure and system initiatives.

Corporate expenditures also increased driven by investment in technology and business systems and increased expenditures on corporate office renovations.

Financing Activities

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

During the first quarter of 2023, 0.3 million shares were repurchased at a total cost including commissions and excise taxes of $98.5 million.

During the first quarter of 2022, 0.7 million shares were repurchased at a total cost including commissions of $232.6

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.

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The following table includes certain measures of our liquidity:

October 30, 2022

April 30, 2023

(In thousands)

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

As of 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.

As of April 30, 2023, letters of credit and letters of guarantee totaling $10.0 million had been issued, including $6.5 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 October 30, 2022, aside from letters of credit of $5.2 million, we had no other borrowings outstanding under this credit facility.

As of April 30, 2023, aside from letters of credit of $6.5 million, we had no other borrowings outstanding under this credit facility.

Further information regarding our credit facilities and associated covenants is outlined in Note 3.

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

Revolving Credit Facilities and Supply Chain Financing Program included in Item 1 of Part I of this report.

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

Our inventory balance as of 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.

Our inventory balance as of April 30, 2023 was $1.6 billion, an increase of 24% from May 1, 2022.

Critical Accounting Policies and Estimates

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generally accepted accounting principles requires management to make estimates and assumptions.

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

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

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

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

Our critical accounting policies and estimates are discussed within "Item 7.

Our critical accounting policies, estimates, and judgements are discussed within "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2022 Annual Report on Form 10-K filed with the SEC on March 28, 2023.

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 October 30, 2022 and January 30, 2022 are summarized in the table below.

Number of company-operated stores by country October 30,

Our company-operated stores by country as of April 30, 2023 and January 29, 2023 are summarized in the table below.

Number of company-operated stores by country (market) April 30,

2023 January 29,

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Total company-operated stores 662 655

(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.

(1) PRC included 101 stores in China Mainland, nine stores in Hong Kong Special Administrative Region, seven stores in Taiwan, and two stores in Macao Special Administration Region, as of April 30, 2023.

As of January 29, 2023, there were 99 stores in China Mainland, nine stores in Hong Kong Special Administrative Region, seven stores in Taiwan, and two stores in Macao Special Administration Region.

Retail locations operated by third parties under license and supply arrangements are not included in the above table.

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

As of April 30, 2023, there were 26 licensed locations, including 12 in Mexico, seven in the United Arab Emirates, three in Qatar, three in Saudi Arabia, 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