lululemon athletica inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) lululemon athletica inc. CONSOLIDATED BALANCE SHEETS (Unaudited; Amounts in thousands, except per share amounts) July 30, 2023 January 29, 2023 ASSETS Current assets Cash and cash equivalents $ 1,107,530 $ 1,154,867 Accounts receivable, net 106,221 132,906 Inventories 1,660,753 1,447,367 Prepaid and receivable income taxes 224,916 185,641 Prepaid expenses and other current assets 224,513 238,672 3,323,933 3,159,453 Property and equipment, net 1,367,172 1,269,614 Right-of-use lease assets 1,079,198 969,419 Goodwill 24,176 24,144 Intangible assets, net 18,204 21,961 Deferred income tax assets 6,188 6,402 Other non-current assets 173,587 156,045 $ 5,992,458 $ 5,607,038 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 298,914 $ 172,732 Accrued liabilities and other 399,178 399,223 Accrued compensation and related expenses 192,289 248,167 Current lease liabilities 216,837 207,972 Current income taxes payable 20,576 174,221 Unredeemed gift card liability 216,116 251,478 Other current liabilities 42,460 38,405 1,386,370 1,492,198 Non-current lease liabilities 976,736 862,362 Non-current income taxes payable 15,864 28,555 Deferred income tax liabilities 55,258 55,084 Other non-current liabilities 24,748 20,040 2,458,976 2,458,239 Commitments and contingencies Stockholders' equity Undesignated preferred stock, $ 0.01 par value: 5,000 shares authorized; none issued and outstanding — — Exchangeable stock, no par value: 60,000 shares authorized; 5,116 and 5,116 issued and outstanding — — Special voting stock, $ 0.000005 par value: 60,000 shares authorized; 5,116 and 5,116 issued and outstanding — — Common stock, $ 0.005 par value: 400,000 shares authorized; 121,613 and 122,205 issued and outstanding 608 611 Additional paid-in capital 505,127 474,645 Retained earnings 3,267,589 2,926,127 Accumulated other comprehensive loss ( 239,842 ) ( 252,584 ) 3,533,482 3,148,799 $ 5,992,458 $ 5,607,038 See accompanying notes to the unaudited interim consolidated financial statements 3 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited; Amounts in thousands, except per share amounts) Quarter Ended Two Quarters Ended July 30, 2023 July 31, 2022 July 30, 2023 July 31, 2022 Net revenue $ 2,209,165 $ 1,868,328 $ 4,209,957 $ 3,481,791 Cost of goods sold 910,654 812,852 1,760,641 1,555,922 Gross profit 1,298,511 1,055,476 2,449,316 1,925,869 Selling, general and administrative expenses 817,375 662,253 1,564,888 1,270,104 Amortization of intangible assets 1,879 2,195 3,757 4,390 Gain on disposal of assets — ( 10,180 ) — ( 10,180 ) Income from operations 479,257 401,208 880,671 661,555 Other income (expense), net 7,362 145 15,387 123 Income before income tax expense 486,619 401,353 896,058 661,678 Income tax expense 145,016 111,832 264,050 182,159 Net income $ 341,603 $ 289,521 $ 632,008 $ 479,519 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment $ 54,786 $ 8,715 $ 12,036 $ ( 17,133 ) Net investment hedge gains (losses) ( 17,014 ) ( 4,289 ) 706 767 Other comprehensive income (loss), net of tax $ 37,772 $ 4,426 $ 12,742 $ ( 16,366 ) Comprehensive income $ 379,375 $ 293,947 $ 644,750 $ 463,153 Basic earnings per share $ 2.69 $ 2.27 $ 4.97 $ 3.75 Diluted earnings per share $ 2.68 $ 2.26 $ 4.96 $ 3.74 Basic weighted-average number of shares outstanding 126,969 127,619 127,108 127,848 Diluted weighted-average number of shares outstanding 127,263 127,906 127,442 128,224 See accompanying notes to the unaudited interim consolidated financial statements 4 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited; Amounts in thousands) Quarter Ended July 30, 2023 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Shares Par Value Shares Par Value Balance as of April 30, 2023 5,116 5,116 $ — 122,099 $ 610 $ 478,496 $ 3,118,584 $ ( 277,614 ) $ 3,320,076 Net income 341,603 341,603 Other comprehensive income (loss), net of tax 37,772 37,772 Stock-based compensation expense 24,283 24,283 Common stock issued upon settlement of stock-based compensation 33 — 4,228 4,228 Shares withheld related to net share settlement of stock-based compensation ( 2 ) — ( 942 ) ( 942 ) Repurchase of common stock, including excise tax ( 517 ) ( 2 ) ( 938 ) ( 192,598 ) ( 193,538 ) Balance as of July 30, 2023 5,116 5,116 $ — 121,613 $ 608 $ 505,127 $ 3,267,589 $ ( 239,842 ) $ 3,533,482 Quarter Ended July 31, 2022 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Shares Par Value Shares Par Value Balance as of May 1, 2022 5,203 5,203 $ — 122,732 $ 614 $ 412,713 $ 2,471,432 $ ( 216,709 ) $ 2,668,050 Net income 289,521 289,521 Other comprehensive income (loss), net of tax 4,426 4,426 Stock-based compensation expense 20,817 20,817 Common stock issued upon settlement of stock-based compensation 24 — 1,043 1,043 Shares withheld related to net share settlement of stock-based compensation ( 2 ) — ( 719 ) ( 719 ) Repurchase of common stock ( 420 ) ( 2 ) ( 762 ) ( 124,576 ) ( 125,340 ) Balance as of July 31, 2022 5,203 5,203 $ — 122,334 $ 612 $ 433,092 $ 2,636,377 $ ( 212,283 ) $ 2,857,798 5 Table of Contents Two Quarters Ended July 30, 2023 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Shares Par Value Shares Par Value Balance as of January 29, 2023 5,116 5,116 $ — 122,205 $ 611 $ 474,645 $ 2,926,127 $ ( 252,584 ) $ 3,148,799 Net income 632,008 632,008 Other comprehensive income (loss), net of tax 12,742 12,742 Stock-based compensation expense 45,584 45,584 Common stock issued upon settlement of stock-based compensation 307 — 16,101 16,101 Shares withheld related to net share settlement of stock-based compensation ( 90 ) — ( 29,735 ) ( 29,735 ) Repurchase of common stock, including excise tax ( 809 ) ( 3 ) ( 1,468 ) ( 290,546 ) ( 292,017 ) Balance as of July 30, 2023 5,116 5,116 $ — 121,613 $ 608 $ 505,127 $ 3,267,589 $ ( 239,842 ) $ 3,533,482 Two Quarters Ended July 31, 2022 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Shares Par Value Shares Par Value Balance as of January 30, 2022 5,203 5,203 $ — 123,297 $ 616 $ 422,507 $ 2,512,840 $ ( 195,917 ) $ 2,740,046 Net income 479,519 479,519 Other comprehensive income (loss), net of tax ( 16,366 ) ( 16,366 ) Stock-based compensation expense 39,175 39,175 Common stock issued upon settlement of stock-based compensation 263 2 6,184 6,186 Shares withheld related to net share settlement of stock-based compensation ( 98 ) — ( 32,778 ) ( 32,778 ) Repurchase of common stock ( 1,128 ) ( 6 ) ( 1,996 ) ( 355,982 ) ( 357,984 ) Balance as of July 31, 2022 5,203 5,203 $ — 122,334 $ 612 $ 433,092 $ 2,636,377 $ ( 212,283 ) $ 2,857,798 See accompanying notes to the unaudited interim consolidated financial statements 6 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Amounts in thousands) Two Quarters Ended July 30, 2023 July 31, 2022 Cash flows from operating activities Net income $ 632,008 $ 479,519 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 178,125 132,441 Gain on disposal of assets — ( 10,180 ) Stock-based compensation expense 45,584 39,175 Settlement of derivatives not designated in a hedging relationship 18,870 ( 8,055 ) Changes in operating assets and liabilities: Inventories ( 234,050 ) ( 510,567 ) Prepaid and receivable income taxes ( 39,275 ) ( 47,510 ) Prepaid expenses and other current assets 37,595 1,618 Other non-current assets ( 16,554 ) ( 15,046 ) Accounts payable 126,007 ( 28,249 ) Accrued liabilities and other 8,538 6,082 Accrued compensation and related expenses ( 55,716 ) ( 50,187 ) Current and non-current income taxes payable ( 167,216 ) ( 91,874 ) Unredeemed gift card liability ( 35,377 ) ( 35,099 ) Right-of-use lease assets and current and non-current lease liabilities 14,049 8,775 Other current and non-current liabilities 9,625 ( 16,461 ) Net cash provided by (used in) operating activities 522,213 ( 145,618 ) Cash flows from investing activities Purchase of property and equipment ( 282,453 ) ( 256,070 ) Settlement of net investment hedges ( 549 ) 15,469 Other investing activities ( 658 ) 15,657 Net cash used in investing activities ( 283,660 ) ( 224,944 ) Cash flows from financing activities Proceeds from settlement of stock-based compensation 16,101 6,186 Shares withheld related to net share settlement of stock-based compensation ( 29,735 ) ( 32,778 ) Repurchase of common stock ( 292,017 ) ( 357,984 ) Net cash used in financing activities ( 305,651 ) ( 384,576 ) Effect of foreign currency exchange rate changes on cash and cash equivalents 19,761 ( 5,902 ) Increase (decrease) in cash and cash equivalents ( 47,337 ) ( 761,040 ) Cash and cash equivalents, beginning of period $ 1,154,867 $ 1,259,871 Cash and cash equivalents, end of period $ 1,107,530 $ 498,831 See accompanying notes to the unaudited interim consolidated financial statements 7 Table of Contents lululemon athletica inc. INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Note 1 Nature of Operations and Basis of Presentation 9 Note 2 Recent Accounting Pronouncements 9 Note 3 Gain on Disposal of Assets 10 Note 4 Revolving Credit Facilities and Supply Chain Financing Program 10 Note 5 Stock-Based Compensation and Benefit Plans 11 Note 6 Fair Value Measurement 12 Note 7 Derivative Financial Instruments 13 Note 8 Earnings Per Share 15 Note 9 Supplementary Financial Information 16 Note 10 Segmented Information 18 Note 11 Net Revenue by Geography and Category 19 Note 12 Legal Proceedings and Other Contingencies 19 8 Table of Contents lululemon athletica inc. NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Operations and Basis of Presentation Nature of operations lululemon athletica inc., a Delaware corporation, ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of technical athletic apparel, footwear, and accessories, which are sold through company-operated stores, direct to consumer through e-commerce, outlets, sales to wholesale accounts, license and supply arrangements, recommerce, and sales from temporary locations. The Company operates stores in the United States, the People's Republic of China ("PRC"), Canada, Australia, the United Kingdom, South Korea, Germany, New Zealand, Singapore, Japan, France, Ireland, Spain, Malaysia, Sweden, the Netherlands, Norway, Switzerland, and Thailand. There were 672 and 655 company-operated stores as of July 30, 2023 and January 29, 2023. Basis of presentation The unaudited interim consolidated financial statements as of July 30, 2023 and for the quarters and two quarters ended July 30, 2023 and July 31, 2022 are presented in U.S. dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of January 29, 2023 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 29, 2023, which are included in Item 8 in the Company's fiscal 2022 Annual Report on Form 10-K filed with the SEC on March 28, 2023. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal 2022 Annual Report on Form 10-K. Note 2. Recent Accounting Pronouncements sets out the impact of recent accounting pronouncements. The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2023 will end on January 28, 2024 and will be a 52-week year. Fiscal 2022 was a 52-week year and ended on January 29, 2023. Fiscal 2023 and fiscal 2022 are referred to as "2023," and "2022," respectively. The first two quarters of 2023 and 2022 ended on July 30, 2023 and July 31, 2022, respectively. The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season. Certain comparative figures have been reclassified to conform to the financial presentation adopted for the current year. Use of estimates The preparation of financial statements in conformity with GAAP in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of net revenue and expenses during the reporting period. Actual results could differ from those estimates. Note 2. Recent Accounting Pronouncements Recently adopted accounting pronouncements The Company considers the applicability and impact of all Accounting Standard Updates ("ASUs"). ASUs adopted by the Company during the first two quarters of 2023 not listed below were assessed, and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations. In September 2022, the FASB issued ASC 405-50, Liabilities - Supplier Finance Programs, to require annual and interim disclosures about the key terms of supplier finance programs used in connection with the purchase of goods and services 9 Table of Contents along with information about the obligations under these programs, including the amount outstanding at the end of each reporting period and a rollforward of those obligations. The Company adopted this update during the first quarter of 2023 and the related disclosures are included in Note 4. Revolving Credit Facilities and Supply Chain Financing Program. Recently issued accounting pronouncements ASUs recently issued were assessed and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations. Note 3. Gain on Disposal of Assets During the second quarter of 2022, the Company completed the sale of an administrative office building, which resulted in a pre-tax gain of $ 10.2 million. The income tax effect of the gain on disposal of assets was an expense of $ 1.7 million. Note 4. Revolving Credit Facilities and Supply Chain Financing Program North America revolving credit facility On December 14, 2021, the Company entered into an amended and restated credit agreement extending its existing credit facility, which provides for $ 400.0 million in commitments under an unsecured five-year revolving credit facility. The credit facility has a maturity date of December 14, 2026, subject to extension under certain circumstances. Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs). As of July 30, 2023, aside from letters of credit of $ 6.4 million, the Company had no other borrowings outstanding under this credit facility. Borrowings made under the credit facility bear interest at a rate per annum equal to, at the Company's option, either (a) a rate based on the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York ("SOFR"), or (b) an alternate base rate, plus, in each case, an applicable margin. The applicable margin is determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax, depreciation, amortization, and rent ("EBITDAR") and ranges between 1.000 %- 1.375 % for SOFR loans and 0.000 %- 0.375 % for alternate base rate or Canadian prime rate loans. Additionally, a commitment fee of between 0.100 %- 0.200 %, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility. The applicable interest rates and commitment fees are subject to adjustment based on certain sustainability key performance indicators ("KPIs"). The two KPIs are based on greenhouse gas emissions intensity reduction and gender pay equity, and the Company's performance against certain targets measured on an annual basis could result in positive or negative sustainability rate adjustments of 2.50 basis points to its drawn pricing and positive or negative sustainability fee adjustments of 0.50 basis points to its undrawn pricing. The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of the Company's subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions. The Company's financial covenants include maintaining an operating lease adjusted leverage ratio of not greater than 3.25 :1.00 and the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) of not less than 2.00 :1.00. The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control). If an event of default occurs, the credit agreement may be terminated, and the maturity of any outstanding amounts may be accelerated. As of July 30, 2023, the Company was in compliance with the covenants of the credit facility. China Mainland revolving credit facility In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan ($ 18.2 million) revolving credit facility with terms that are reviewed on an annual basis. The credit facility was increased to 230.0 million Chinese Yuan ($ 32.2 million) during 2020. It is comprised of a revolving loan of up to 200.0 million Chinese Yuan ($ 28.0 million) and a financial guarantee facility of up to 30.0 million Chinese Yuan ($ 4.2 million), or its equivalent in another currency. Loans are available for a period not to exceed 12 months, at an interest rate equal to the loan prime rate plus a spread of 0.5175 %. The Company is required to follow certain covenants. As of July 30, 2023, the Company was in compliance 10 Table of Contents with the covenants and, aside from letters of credit of 28.1 million Chinese Yuan ($ 3.9 million), there were no other borrowings or guarantees outstanding under this credit facility. Supply Chain Financing Program The Company facilitates a voluntary supply chain financing ("SCF") program that allows its suppliers to elect to sell the receivables owed to them by the Company to a third party financial institution. Participating suppliers negotiate arrangements directly with the financial institution. If a supplier chooses to participate in the SCF program it may request an invoice be paid earlier than it would by the Company, and the financial institution at its sole and absolute discretion, may elect to make an early payment to the supplier at a discount. The Company’s obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted by a supplier's participation in the arrangement and the Company provides no guarantees to any third parties under the SCF program. As of July 30, 2023 and January 29, 2023, $ 38.6 million and $ 17.6 million, respectively, was outstanding under the SCF program and presented within accounts payable . Note 5. Stock-Based Compensation and Benefit Plans Stock-based compensation plans The Company's eligible employees participate in various stock-based compensation plans, provided directly by the Company. Stock-based compensation expense charged to income for the plans was $ 45.2 million and $ 38.8 million for the first two quarters of 2023 and 2022, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $ 184.3 million as of July 30, 2023, which is expected to be recognized over a weighted-average period of 2.4 years. A summary of the balances of the Company's stock-based compensation plans as of July 30, 2023, and changes during the first two quarters then ended, is presented below: Stock Options Performance-Based Restricted Stock Units Restricted Shares Restricted Stock Units Number Weighted-Average Exercise Price Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value (In thousands, except per share amounts) Balance as of January 29, 2023 866 $ 230.78 166 $ 295.93 5 $ 308.66 221 $ 323.89 Granted 209 358.48 121 295.69 4 368.36 124 358.75 Exercised/released 106 151.58 104 201.56 5 308.66 92 283.84 Forfeited/expired 15 319.78 5 343.83 — — 9 347.97 Balance as of July 30, 2023 954 $ 266.24 178 $ 349.85 4 $ 368.36 244 $ 355.81 Exercisable as of July 30, 2023 481 $ 195.84 The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of two shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the grant date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved. The grant date fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the grant date. 11 Table of Contents The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The closing price of the Company's common stock on the grant date is used in the model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee exercise behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first two quarters of 2023: First Two Quarters 2023 Expected term 3.75 years Expected volatility 42.35 % Risk-free interest rate 3.49 % Dividend yield — % Employee share purchase plan The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the second quarter of 2023, there were 23.1 thousand shares purchased. Defined contribution pension plans The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches 50 % to 75 % of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was $ 9.6 million and $ 6.7 million in the first two quarters of 2023 and 2022, respectively. Note 6. Fair Value Measurement Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value: • Level 1 - defined as observable inputs such as quoted prices in active markets; • Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and • Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. 12 Table of Contents Assets and liabilities measured at fair value on a recurring basis The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of July 30, 2023 and January 29, 2023, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis: July 30, 2023 Level 1 Level 2 Level 3 Balance Sheet Classification (In thousands) Money market funds $ 379,300 $ 379,300 $ — $ — Cash and cash equivalents Term deposits 8 — 8 — Cash and cash equivalents Forward currency contract assets 22,262 — 22,262 — Prepaid expenses and other current assets Forward currency contract liabilities 15,854 — 15,854 — Other current liabilities January 29, 2023 Level 1 Level 2 Level 3 Balance Sheet Classification (In thousands) Money market funds $ 568,000 $ 568,000 $ — $ — Cash and cash equivalents Term deposits 8 — 8 — Cash and cash equivalents Forward currency contract assets 16,707 — 16,707 — Prepaid expenses and other current assets Forward currency contract liabilities 25,625 — 25,625 — Other current liabilities The Company records cash, accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities. The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in AAA-rated money market funds, which include investments in government bonds, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate. The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities. Note 7. Derivative Financial Instruments Foreign currency exchange risk The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes. The Company currently hedges against changes in the Canadian dollar and Chinese Yuan to the U.S. dollar exchange rate and changes in the Euro and Australian dollar to the Canadian dollar exchange rate using forward currency contracts. Net investment hedges The Company is exposed to foreign currency exchange gains and losses which arise on translation of its international subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as other comprehensive income (loss), net of tax in accumulated other comprehensive income or loss within stockholders' equity. The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The Company assesses hedge effectiveness based on 13 Table of Contents changes in forward rates. The Company recorded no ineffectiveness from net investment hedges during the first two quarters of 2023. The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows. Derivatives not designated as hedging instruments The Company is exposed to gains and losses arising from changes in foreign currency exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date foreign currency exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses. During the first two quarters of 2023, the Company entered into certain forward currency contracts designed to economically hedge the foreign currency exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on specific monetary assets and liabilities denominated in currencies other than the functional currency of the entity. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses. The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows. Quantitative disclosures about derivative financial instruments The Company presents its derivative assets and derivative liabilities at their gross fair values within prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of July 30, 2023, there were derivative assets of $ 22.3 million and derivative liabilities of $ 15.9 million subject to enforceable netting arrangements. The notional amounts and fair values of forward currency contracts were as follows: July 30, 2023 January 29, 2023 Gross Notional Assets Liabilities Gross Notional Assets Liabilities (In thousands) Derivatives designated as net investment hedges: Forward currency contracts $ 776,500 $ — $ 15,701 $ 1,070,000 $ — $ 17,211 Derivatives not designated in a hedging relationship: Forward currency contracts 1,259,605 22,262 153 1,605,284 16,707 8,414 Net derivatives recognized on consolidated balance sheets: Forward currency contracts $ 22,262 $ 15,854 $ 16,707 $ 25,625 The forward currency contracts designated as net investment hedges outstanding as of July 30, 2023 mature on different dates between August 2023 and December 2023. The forward currency contracts not designated in a hedging relationship outstanding as of July 30, 2023 mature on different dates between August 2023 and November 2023. 14 Table of Contents The pre-tax gains and losses on foreign currency exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows: Second Quarter First Two Quarters 2023 2022 2023 2022 (In thousands) Gains (losses) recognized in net investment hedge gains (losses): Derivatives designated as net investment hedges $ ( 23,166 ) $ ( 5,807 ) $ 961 $ 1,039 No gains or losses have been reclassified from accumulated other comprehensive income or loss into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary. The pre-tax net foreign currency exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows: Second Quarter First Two Quarters 2023 2022 2023 2022 (In thousands) Gains (losses) recognized in selling, general and administrative expenses: Foreign currency exchange gains (losses) $ ( 38,426 ) $ ( 14,497 ) $ ( 30,099 ) $ ( 16,240 ) Derivatives not designated in a hedging relationship 42,729 8,600 33,023 7,708 Net foreign currency exchange and derivative gains (losses) $ 4,303 $ ( 5,897 ) $ 2,924 $ ( 8,532 ) Credit risk The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance. The Company's forward currency contracts are generally entered into with what the Company believes are investment grade credit worthy and reputable financial institutions that are monitored by the Company for counterparty risk. The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts. Note 8. Earnings Per Share The details of the computation of basic and diluted earnings per share are as follows: Second Quarter First Two Quarters 2023 2022 2023 2022 (In thousands, except per share amounts) Net income $ 341,603 $ 289,521 $ 632,008 $ 479,519 Basic weighted-average number of shares outstanding 126,969 127,619 127,108 127,848 Assumed conversion of dilutive stock options and awards 294 287 334 376 Diluted weighted-average number of shares outstanding 127,263 127,906 127,442 128,224 Basic earnings per share $ 2.69 $ 2.27 $ 4.97 $ 3.75 Diluted earnings per share $ 2.68 $ 2.26 $ 4.96 $ 3.74 The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have, in effect, the same rights and share equally in undistributed net income. For the first two quarters of 2023 and 2022, 0.1 million and 0.1 million stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share. 15 Table of Contents On January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $ 500.0 million of the Company's common shares. On December 1, 2020, it approved an increase in the remaining authorization from $ 263.6 million to $ 500.0 million, and on October 1, 2021, it approved an increase in the remaining authorization from $ 141.2 million to $ 641.2 million. During the first quarter of 2022, the Company completed the remaining stock repurchases under this program. On March 23, 2022, the Company's board of directors approved a stock repurchase program for up to $ 1.0 billion of the Company's common shares on the open market or in privately negotiated transactions. The repurchase plan has no time limit and does not require the repurchase of a minimum number of shares. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements. The authorized value of shares available to be repurchased under this program excludes the cost of commissions and excise taxes and as of July 30, 2023, the remaining authorized value was $ 454.0 million. During the first two quarters of 2023, 0.8 million shares were repurchased at a total cost including commissions and excise taxes of $ 292.0 million. During the first two quarters of 2022, 1.1 million shares were repurchased at a total cost including commissions of $ 358.0 million. Subsequent to July 30, 2023, and up to August 25, 2023, 0.2 million shares were repurchased at a total cost including commissions and excise taxes of $ 72.1 million. Note 9. Supplementary Financial Information A summary of certain consolidated balance sheet accounts is as follows: July 30, 2023 January 29, 2023 (In thousands) Inventories: Inventories, at cost $ 1,816,671 $ 1,571,981 Provision to reduce inventories to net realizable value ( 155,918 ) ( 124,614 ) $ 1,660,753 $ 1,447,367 Prepaid expenses and other current assets: Prepaid expenses $ 142,816 $ 142,003 Forward currency contract assets 22,262 16,707 Other current assets 59,435 79,962 $ 224,513 $ 238,672 Property and equipment, net: Land $ 80,760 $ 80,692 Buildings 29,333 28,850 Leasehold improvements 879,240 818,071 Furniture and fixtures 149,657 144,572 Computer hardware 164,902 166,768 Computer software 900,434 742,295 Equipment and vehicles 38,691 30,766 Work in progress 216,407 244,898 Property and equipment, gross 2,459,424 2,256,912 Accumulated depreciation ( 1,092,252 ) ( 987,298 ) $ 1,367,172 $ 1,269,614 Other non-current assets: Cloud computing arrangement implementation costs $ 129,603 $ 114,700 Security deposits 30,018 28,447 Other 13,966 12,898 $ 173,587 $ 156,045 16 Table of Contents July 30, 2023 January 29, 2023 (In thousands) Accrued liabilities and other: Accrued operating expenses $ 153,302 $ 169,429 Accrued freight 40,908 57,692 Sales return allowances 48,151 55,528 Forward currency contract liabilities 15,854 25,625 Accrued duty 29,000 21,046 Sales tax collected 14,175 20,183 Accrued capital expenditures 11,492 19,365 Accrued rent 12,222 12,223 Accrued inventory liabilities 59,334 4,345 Other 14,740 13,787 $ 399,178 $ 399,223 17 Table of Contents Note 10. Segmented Information The Company's segments are based on the financial information it uses in managing its business and comprise two reportable segments: (i) company-operated stores and (ii) direct to consumer. The remainder of its operations, which includes outlets, sales to wholesale accounts, license and supply arrangements, recommerce, temporary locations, and lululemon Studio, are included within Other. Second Quarter First Two Quarters 2023 2022 2023 2022 (In thousands) Net revenue: Company-operated stores $ 1,096,939 $ 903,077 $ 2,055,026 $ 1,634,681 Direct to consumer 893,673 775,425 1,728,615 1,496,678 Other 218,553 189,826 426,316 350,432 $ 2,209,165 $ 1,868,328 $ 4,209,957 $ 3,481,791 Segmented income from operations: Company-operated stores $ 339,692 $ 256,807 $ 599,511 $ 417,513 Direct to consumer 383,870 326,423 753,323 611,530 Other 48,683 29,626 92,766 49,153 772,245 612,856 1,445,600 1,078,196 General corporate expense 291,109 219,633 561,172 422,431 Amortization of intangible assets 1,879 2,195 3,757 4,390 Gain on disposal of assets — ( 10,180 ) — ( 10,180 ) Income from operations 479,257 401,208 880,671 661,555 Other income (expense), net 7,362 145 15,387 123 Income before income tax expense $ 486,619 $ 401,353 $ 896,058 $ 661,678 Capital expenditures: Company-operated stores $ 53,471 $ 60,905 $ 95,182 $ 85,851 Direct to consumer 27,489 21,752 54,379 42,091 Corporate and other 64,551 62,061 132,892 128,128 $ 145,511 $ 144,718 $ 282,453 $ 256,070 Depreciation and amortization: Company-operated stores $ 37,951 $ 32,015 $ 74,700 $ 63,325 Direct to consumer 16,895 8,807 25,561 17,476 Corporate and other 39,163 27,149 77,864 51,640 $ 94,009 $ 67,971 $ 178,125 $ 132,441 18 Table of Contents Note 11. Net Revenue by Geography and Category In addition to the disaggregation of net revenue by reportable segment in Note 10. Segmented Information, the following table disaggregates the Company's net revenue by geographic area. Second Quarter First Two Quarters 2023 2022 2023 2022 (In thousands) United States $ 1,424,926 $ 1,278,361 $ 2,739,317 $ 2,376,690 Canada 294,847 268,622 548,194 513,566 People's Republic of China 277,500 172,020 527,185 311,447 Rest of world 211,892 149,325 395,261 280,088 $ 2,209,165 $ 1,868,328 $ 4,209,957 $ 3,481,791 The following table disaggregates the Company's net revenue by category. Other categories is primarily composed of accessories, lululemon Studio, and footwear. Second Quarter First Two Quarters 2023 2022 2023 2022 (In thousands) Women's product $ 1,396,327 $ 1,205,636 $ 2,705,155 $ 2,279,560 Men's product 530,723 461,310 968,888 836,308 Other categories 282,115 201,382 535,914 365,923 $ 2,209,165 $ 1,868,328 $ 4,209,957 $ 3,481,791 Note 12. Legal Proceedings and Other Contingencies The Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. The Company has recognized immaterial provisions related to the expected outcome of legal proceedings.