What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-12-07 compared with 2023-08-31 · 214 added, 140 removed, 351 unchanged (50% of the section changed)

11 unchanged sentences

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 first three quarters of 2023 and 2022 ended on October 29, 2023 and October 30, 2022, respectively.

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

21 unchanged sentences

Financial Highlights

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

The summary below compares the third quarter of 2023 to the third quarter of 2022, and provides both GAAP and non-GAAP financial measures.

The adjusted financial measures for 2023 exclude $72.1 million of post-tax asset impairment and other charges recognized in relation to lululemon Studio.

• Net revenue increased 19% to $2.2 billion.

On a constant dollar basis, net revenue increased 20%.

• Total comparable sales increased 13%, or 14% on a constant dollar basis.

– Comparable store sales increased 7%, or 9% on a constant dollar basis.

– Comparable store sales increased 9%.

– Direct to consumer net revenue increased 18%, or 19% on a constant dollar basis.

• Gross profit increased 21% to $1.3 billion.

Adjusted gross profit increased 23% to $1.3 billion.

• Gross margin increased 110 basis points to 57.0%.

• Income from operations increased 19% to $479.3 million.

• Operating margin increased 20 basis points to 21.7%.

Adjusted gross margin increased 220 basis points to 58.1%.

• Income from operations decreased 4% to $338.1 million.

Adjusted income from operations increased 24% to $436.3 million.

• Operating margin decreased 370 basis points to 15.3%.

Adjusted operating margin increased 80 basis points to 19.8%.

• Income tax expense increased 2% to $99.2 million.

Our effective tax rate for the second quarter of 2023 was 29.8% compared to 27.9% for the second quarter of 2022.

• Diluted earnings per share were $2.68 compared to $2.26 in the second quarter of 2022.

The second quarter of 2022 included an after-tax gain of $8.5 million from the sale of an administrative office building, which increased diluted earnings per share by $0.06.

Our effective tax rate for the third quarter of 2023 was 28.5% compared to 27.6% for the third quarter of 2022.

The adjusted effective tax rate was 28.1% for the third quarter of 2023.

• We have contracted with Peloton Interactive, Inc.

to be the exclusive digital fitness content provider for the lululemon Studio Mirror and will no longer produce our own digital fitness content.

While we will continue to provide services and support to existing lululemon Studio subscribers, we have ceased selling the Mirror hardware.

We recognized post-tax inventory provisions, asset impairments, and restructuring costs related to lululemon Studio totaling $72.1 million during the third quarter of 2023.

• Diluted earnings per share were $1.96 compared to $2.00 in the third quarter of 2022.

Adjusted diluted earnings per share were $2.53 in the third quarter of 2023.

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

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

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

Market Conditions and Trends

3 unchanged sentences

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

Foreign currency fluctuations reduced the growth of our net revenue by $26.5 million when comparing the second quarter of 2023 to 2022 primarily due to the overall appreciation of the US dollar.

Foreign currency fluctuations reduced the growth of our net revenue by $82.2 million when comparing the first three quarters of 2023 to the first three quarters of 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 second quarter of 2023 to 2022.

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

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

Guest traffic in our company-operated stores and online increased during the first three quarters of 2023, compared to the first three quarters 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.

2 unchanged sentences

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

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

In the second quarter of 2023 compared to the second quarter of 2022 our product margin increased by 330 basis points, primarily due to lower air freight costs from rate reductions and reduced usage.

We expect that we will see higher product margin throughout 2023 compared to 2022, with the increase moderating in the second half of 2023.

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

During the first three quarters of 2023 compared to the first three quarters of 2022, our product margin increased by 320 basis points excluding the impact of the lululemon Studio inventory provision, primarily due to lower freight costs from rate reductions and reduced air freight usage.

We expect that the reduction in freight costs for the fourth quarter of 2023 will be less significant than in the first three quarters of 2023.

COVID-19 Pandemic

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

Net revenue from the PRC increased 61% in the second quarter of 2023 compared to the second quarter of 2022, with improvements in COVID-19 trading conditions contributing to this increase.

Seasonal COVID-19 resurgences could impact our operations and financial performance in our key markets.

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

Net revenue from the PRC increased 64% in the first three quarters of 2023 compared to the first three quarters of 2022, with improvements in COVID-19 trading conditions contributing to this increase.

Quarter-to-Date Results of Operations:

Second Quarter Results

Third Quarter Results

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

Second Quarter

Third Quarter

2023 2022 2023 2022

4 unchanged sentences

Selling, general and administrative expenses 842,795 684,236 38.2 36.8

Impairment of assets and restructuring costs 74,501 — 3.4 —

Amortization of intangible assets 1,253 2,189 0.1 0.1

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

Income from operations 338,115 352,427 15.3 19.0

3 unchanged sentences

Net income $ 248,714 $ 255,470 11.3 % 13.8 %

Net revenue increased $340.8 million, or 18%, to $2.2 billion for the second quarter of 2023 from $1.9 billion for the second quarter of 2022.

On a constant dollar basis, assuming the average foreign currency exchange rates for the second quarter of 2023 remained constant with the average foreign currency exchange rates for the second quarter of 2022, net revenue increased $367.3 million, or 20%.

Net revenue increased $347.3 million, or 19%, to $2.2 billion for the third quarter of 2023 from $1.9 billion for the third quarter of 2022.

On a constant dollar basis, assuming the average foreign currency exchange rates for the third quarter of 2023 remained constant with the average foreign currency exchange rates for the third quarter of 2022, net revenue increased $358.4 million, or 19%.

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 11% for the second quarter of 2023 compared to the second quarter of 2022.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 13% for the third quarter of 2023 compared to the third quarter of 2022.

Total comparable sales increased 14% on a constant dollar basis.

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

Second Quarter

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

Third Quarter

2023 2022 2023 2022 Year over year change

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

(In thousands) (Percentage of net revenue) (In thousands) (Percentage)

Company-operated stores $ 1,073,973 $ 903,060 48.7 % 48.6 % $ 170,913 18.9 %

3 unchanged sentences

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 second quarter of 2022 which contributed $141.0 million to the increase.

We have opened 72 net new company-operated stores since the second quarter of 2022, including 36 stores in Asia Pacific, 30 stores in North America, and six 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 third quarter of 2022 which contributed $108.2 million to the increase.

We have opened 63 net new company-operated stores since the third quarter of 2022, including 32 stores in Asia Pacific, 28 stores in North America, and three stores in Europe.

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

3 unchanged sentences

Direct to consumer net revenue increased 18%, or 19% 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 net revenue from our direct to consumer segment was primarily a result of increased traffic and a higher dollar value per transaction, partially offset by a decrease in conversion rates.

The increase in other net revenue was primarily due to increased outlet sales, sales to wholesale accounts, and license and supply arrangement 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 a decrease in lululemon Studio net revenue.

Second Quarter

Third Quarter

2023 2022 Year over year change

2 unchanged sentences

57.0 % 55.9 % 110 basis points

The increase in gross margin was primarily the result of:

• a net increase in product margin of 330 basis points, primarily due to lower air freight costs from rate reductions and reduced usage, modestly offset by higher damages and inventory provisions in the current year.

The increase in product margin was partially offset by:

• an increase in costs related to our product departments and distribution centers as a percentage of net revenue of 50 basis points;

• an unfavorable impact of foreign currency exchange rates of 30 basis points;

• an increase in occupancy costs as a percentage of net revenue of 20 basis points.

As a result of our decision to cease selling the lululemon Studio Mirror, we recognized an inventory obsolescence provision of $23.7 million during the third quarter of 2023.

This reduced gross margin by 110 basis points.

Please refer to Note 3.

Impairment of Assets and Restructuring Costs included in Item 1 of Part I of this report.

Gross margin increased 110 basis points, or increased 220 basis points on an adjusted basis.

The 220 basis point increase in adjusted gross margin was primarily the result of:

• a net increase in product margin of 250 basis points, primarily due to lower freight costs from rate reductions and reduced air freight usage as well as lower duty costs, modestly offset by higher inventory provisions, shrink, and damages in the current year.

The increase in adjusted gross margin was partially offset by an increase in occupancy costs as a percentage of net revenue of 20 basis points and an unfavorable impact of foreign currency exchange rates of 10 basis points.

Selling, General and Administrative Expenses

Second Quarter

Third Quarter

2023 2022 Year over year change

6 unchanged sentences

• an increase in head office costs of $89.4 million, comprised of:

– an increase in employee costs of $32.3 million primarily due to increased salaries and wages expense as well as increased incentive compensation and stock-based compensation, primarily as a result of headcount growth and increased wage rates;

– an increase in brand and community costs of $36.3 million primarily due to increased marketing expenses;

– an increase in employee costs of $26.9 million primarily due to increased salaries and wages expense as well as increased benefits costs, stock-based compensation, and incentive compensation, primarily as a result of headcount growth and increased wage rates;

– an increase in other head office costs of $11.2 million, primarily due to increased professional fees;

– an increase in technology costs, including cloud computing amortization, of $8.2 million;

– an increase in depreciation of $6.8 million.

– an increase in other head office costs of $11.0 million, including due to increased professional fees.

• an increase in costs related to our operating channels of $75.6 million, comprised of:

– an increase in employee costs of $38.2 million primarily due to increased salaries and wages expense, incentive compensation, and benefit costs in our company-operated stores channel, primarily from the growth in our business and increased wage rates;

– an increase in other operating costs of $17.8 million primarily due to increased depreciation, technology costs, and repairs and maintenance costs;

– an increase in variable costs of $10.5 million primarily due to increased credit card fees, packaging costs, and distribution costs, primarily as a result of increased net revenue;

– an increase in employee costs of $34.2 million primarily due to increased salaries and wages expense, benefit costs, and incentive compensation in our company-operated stores channel, primarily from the growth in our business and increased wage rates;

– an increase in other operating costs of $18.8 million primarily due to increased depreciation, repairs and maintenance costs, and technology costs;

– an increase in variable costs of $15.2 million primarily due to increased credit card fees, distribution costs, and packaging costs primarily as a result of increased net revenue;

– an increase in brand and community costs of $7.4 million primarily due to increased digital marketing expenses related to our direct to consumer channel.

The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $6.4 million.

Amortization of Intangible Assets

Second Quarter

Impairment of Assets and Restructuring Costs

Third Quarter

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Impairment of assets and restructuring costs $ 74,501 $ — $ 74,501 n/a

During the third quarter of 2023, we recognized certain asset impairments and restructuring costs related to lululemon Studio.

Please refer to Note 3.

Impairment of Assets and Restructuring Costs included in Item 1 of Part I of this report for further information.

Amortization of Intangible Assets

$ 1,879 $ 2,195 $ (316) (14.4) %

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

Gain on Disposal of Assets

Second Quarter

Third Quarter

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Gain on disposal of assets

Amortization of intangible assets

$ 1,253 $ 2,189 $ (936) (42.8) %

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.

The amortization of intangible assets was primarily the result of the amortization of intangible assets recognized upon the acquisition of MIRROR, which we rebranded as lululemon Studio.

Income from Operations

1 unchanged sentence

Segmented income from operations is summarized below.

Second Quarter

Third Quarter

2023 2022 2023 2022 Year over year change

6 unchanged sentences

General corporate expense 310,852 234,770 76,082 32.4

lululemon Studio obsolescence provision 23,709 — 23,709 n/a

Impairment of assets and restructuring costs 74,501 — 74,501 n/a

Amortization of intangible assets 1,253 2,189 (936) (42.8)

Gain on disposal of assets — (10,180) 10,180 (100.0)

Income from operations $ 338,115 $ 352,427 $ (14,312) (4.1) %

2 unchanged sentences

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $114.5 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 damages and 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 employee and operating costs.

Employee costs increased primarily due to higher salaries and wages expense, incentive compensation, and benefit costs 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 packaging costs, as a result of higher net revenue, as well as increased repairs and maintenance.

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

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

The increase in gross margin was partially offset by an unfavorable impact of foreign currency exchange rates, deleverage in occupancy costs, and deleverage in costs from our 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, benefit costs, and 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 packaging costs, as a result of higher net revenue, as well as increased repairs and maintenance.

Income from operations as a percentage of company-operated store net revenue increased due to higher gross margin, partially offset by deleverage 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 $105.5 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 markdowns and higher damages.

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

The increase in gross margin was primarily due to higher product margin driven by lower freight costs, partially offset by higher markdowns and 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 product teams and distribution centers.

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

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

The increase in income from operations from our other channels was primarily the result of increased gross profit of $21.6 million, driven by increased net revenue and higher gross margin.

The increase in income from operations from our other channels was also due to decreased selling, general and administrative expenses driven by reduced lululemon Studio marketing expenses, partially offset by higher salaries and wages expense.

The increase in income from operations from our other channels was partially offset by an increase in selling, general and administrative expenses primarily due to increased salaries and wages expense and increased repairs and maintenance, partially offset by reduced lululemon Studio marketing expenses.

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

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

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

The increase in general corporate expense was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $6.4 million.

Other Income (Expense), Net

Second Quarter

Third Quarter

2023 2022 Year over year change

4 unchanged sentences

Income Tax Expense

Second Quarter

Third Quarter

2023 2022 Year over year change

4 unchanged sentences

28.5 % 27.6 % 90 basis points

The increase in the effective tax rate was primarily due to the accrual of withholding taxes on unremitted foreign earnings and an increase in non-deductible expenses in international jurisdictions.

A lower tax rate on the capital gain on the sale of an administrative building reduced our effective tax rate in the second quarter of 2022 by 30 basis points.

Second Quarter

The increase in the effective tax rate was primarily due to the accrual of withholding taxes on unremitted foreign earnings and a lower tax rate on certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio which increased the effective tax rate in the third quarter of 2023 by 40 basis points.

This was partially offset by a reduction in non-deductible expenses in international jurisdictions and an increase in tax benefits related to stock-based compensation.

Excluding certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio in 2023, and their tax effects, our adjusted effective tax rate was 28.1% for the third quarter of 2023.

Third Quarter

2023 2022 Year over year change

1 unchanged sentence

$ 248,714 $ 255,470 $ (6,756) (2.6) %

The increase in net income was primarily due to an increase in gross profit of $243.0 million and an increase in other income (expense), net of $7.2 million, partially offset by an increase in selling, general and administrative expenses of $155.1 million, an increase in income tax expense of $33.2 million, and a gain on disposal of assets of $10.2 million in the prior year.

The decrease in net income was primarily due to an increase in selling, general and administrative expenses of $158.6 million, asset impairment and restructuring costs recognized in relation to lululemon Studio in the third quarter of 2023 of $74.5 million, and an increase in income tax expense of $2.0 million, partially offset by an increase in gross profit of $217.8 million and an increase in other income (expense), net of $9.5 million.

Excluding certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio in 2023, and their tax effects, adjusted net income increased $65.4 million or 26%.

Year-to-Date Results of Operations:

First Two Quarters Results

First Three Quarters Results

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

First Two Quarters

First Three Quarters

2023 2022 2023 2022

(In thousands) (Percentages)

(In thousands) (Percentage of net revenue)

Net revenue $ 6,414,175 $ 5,338,680 100.0 % 100.0 %

2 unchanged sentences

Selling, general and administrative expenses 2,407,683 1,954,340 37.5 36.6

Impairment of assets and restructuring costs 74,501 — 1.2 —

Amortization of intangible assets 5,010 6,579 0.1 0.1

5 unchanged sentences

Net income $ 880,722 $ 734,989 13.7 % 13.8 %

Net revenue increased $728.2 million, or 21%, to $4.2 billion for the first two quarters of 2023 from $3.5 billion for the first two quarters of 2022.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first two quarters of 2023 remained constant with the average foreign currency exchange rates for the first two quarters of 2022, net revenue increased $799.3 million, or 23%.

Net revenue increased $1.1 billion, or 20%, to $6.4 billion for the first three quarters of 2023 from $5.3 billion for the first three quarters of 2022.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first three quarters of 2023 remained constant with the average foreign currency exchange rates for the first three quarters of 2022, net revenue increased $1.2 billion, or 22%.

Other net revenue also increased.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 13% for the first two quarters of 2023 compared to the first two quarters of 2022.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 13% for the first three quarters of 2023 compared to the first three quarters of 2022.

Total comparable sales increased 14% on a constant dollar basis.

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

First Two Quarters

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

First Three Quarters

2023 2022 2023 2022 Year over year change

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

(In thousands) (Percentage of net revenue) (In thousands) (Percentage)

Company-operated stores $ 3,128,999 $ 2,537,741 48.8 % 47.5 % $ 591,258 23.3 %

3 unchanged sentences

Company-Operated Stores .

We have opened 72 net new company-operated stores since the second quarter of 2022, including 36 stores in Asia Pacific, 30 stores in North America, and six stores in Europe.

We have opened 63 net new company-operated stores since the third quarter of 2022, including 32 stores in Asia Pacific, 28 stores in North America, and three stores in Europe.

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

4 unchanged sentences

The increase in other net revenue was primarily due to increased outlet sales, license and supply arrangement revenue, and sales to wholesale accounts.

The increase in other net revenue was primarily due to increased outlet sales, sales to wholesale accounts, and license and supply arrangement revenue.

First Two Quarters

First Three Quarters

2023 2022 Year over year change

2 unchanged sentences

57.8 % 55.5 % 230 basis points

The increase in gross margin was primarily the result of:

• a net increase in product margin of 370 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.

The increase in product margin was partially offset by:

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

As a result of our decision to cease selling the lululemon Studio Mirror, we recognized an inventory obsolescence provision of $23.7 million during the third quarter of 2023.

This reduced gross margin by 30 basis points.

Please refer to Note 3.

Impairment of Assets and Restructuring Costs included in Item 1 of Part I of this report.

Gross margin increased 230 basis points, or increased 260 basis points on an adjusted basis.

The 260 basis point increase in adjusted gross margin was primarily the result of:

• a net increase in product margin of 320 basis points, primarily due to lower freight costs from rate reductions and reduced air freight usage as well as lower duty costs, modestly offset by higher inventory provisions and damages in the current year.

The increase in adjusted gross margin was partially offset by:

• an unfavorable impact of foreign currency exchange rates of 30 basis points;

• an increase in costs related to our distribution centers and product departments as a percentage of net revenue of 20 basis points;

• an increase in occupancy costs as a percentage of net revenue of 10 basis points.

Selling, General and Administrative Expenses

First Two Quarters

First Three Quarters

2023 2022 Year over year change

6 unchanged sentences

• an increase in head office costs of $258.0 million, comprised of:

– an increase in employee costs of $63.2 million primarily due to increased salaries and wages expense as well as increased incentive compensation and stock-based compensation, primarily as a result of headcount growth and increased wage rates;

– an increase in brand and community costs of $36.9 million primarily due to increased marketing expenses as well as increased donations;

– an increase in employee costs of $90.1 million primarily due to increased salaries and wages expense as well as increased incentive compensation, benefit costs, and stock-based compensation;

primarily as a result of headcount growth and increased wage rates;

– an increase in brand and community costs of $73.2 million primarily due to increased marketing expenses as well as increased charitable donations;

– an increase in depreciation of $34.1 million;

– an increase in technology costs, including cloud computing amortization, of $32.1 million;

– an increase in other head office costs of $17.4 million, including due to increased professional fees.

– an increase in other head office costs of $28.5 million, primarily due to increased professional fees.

• an increase in costs related to our operating channels of $213.1 million, comprised of:

1 unchanged sentence

– an increase in other operating costs of $45.3 million primarily due to increased depreciation costs, technology costs, and repairs and maintenance costs;

– an increase in variable costs of $24.4 million primarily due to increased credit card fees, packaging costs, and distribution costs, primarily as a result of increased net revenue;

– an increase in variable costs of $39.5 million primarily due to increased credit card fees, distribution costs, and packaging costs, primarily as a result of increased net revenue;

– an increase in brand and community costs of $18.6 million primarily due to increased digital marketing expenses related to our direct to consumer channel.

The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $17.8 million.

Impairment of Assets and Restructuring Costs

First Three Quarters

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Impairment of assets and restructuring costs $ 74,501 $ — $ 74,501 n/a

During the third quarter of 2023, we recognized certain asset impairments and restructuring costs related to lululemon Studio.

Please refer to Note 3.

Impairment of Assets and Restructuring Costs included in Item 1 of Part I of this report for further information.

Amortization of Intangible Assets

First Two Quarters

First Three Quarters

2023 2022 Year over year change

2 unchanged sentences

$ 5,010 $ 6,579 $ (1,569) (23.8) %

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

The amortization of intangible assets was primarily the result of the amortization of intangible assets recognized upon the acquisition of MIRROR, which we rebranded as lululemon Studio.

Gain on Disposal of Assets

First Two Quarters

First Three Quarters

2023 2022 Year over year change

6 unchanged sentences

Segmented income from operations is summarized below.

First Two Quarters

First Three Quarters

2023 2022 2023 2022 Year over year change

6 unchanged sentences

General corporate expense 872,024 657,201 214,823 32.7

lululemon Studio obsolescence provision 23,709 — 23,709 n/a

Impairment of assets and restructuring costs 74,501 — 74,501 n/a

Amortization of intangible assets 5,010 6,579 (1,569) (23.8)

4 unchanged sentences

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $396.0 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 and lower markdowns, partially offset by higher inventory provisions.

The increase in gross margin was also due to leverage on occupancy costs 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 margin was primarily due to higher product margin driven by lower freight costs and lower markdowns, partially offset by higher inventory provisions, shrink, and damages.

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

Employee costs increased primarily due to higher salaries and wages expense, incentive compensation, and benefit costs 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 packaging costs as a result of higher net revenue, as well as increased repairs and maintenance.

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

Income from operations as a percentage of company-operated store net revenue increased due to higher gross margin, partially offset by deleverage 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 $311.3 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 markdowns and 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 margin was primarily due to higher product margin driven by lower freight costs, partially offset by higher markdowns and higher inventory provisions and damages.

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

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

The increase in income from operations from our other channels was primarily the result of increased gross profit of $36.1 million, driven by increased net revenue.

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

The increase in income from operations from our other channels was primarily the result of increased gross profit of $57.7 million, driven by increased net revenue and higher gross margin.

The increase in income from operations from our other channels was partially offset by an increase in selling, general and administrative expenses driven by higher salaries and wages expense, higher repairs and maintenance, and professional fees, partially offset by reduced lululemon Studio marketing expenses.

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

General Corporate Expense.

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Other Income (Expense), Net

First Two Quarters

First Three Quarters

2023 2022 Year over year change

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Income Tax Expense

First Two Quarters

First Three Quarters

2023 2022 Year over year change

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29.2 % 27.5 % 170 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.

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

First Two Quarters

The increase in the effective tax rate was primarily due to the accrual of withholding taxes on unremitted foreign earnings, adjustments upon the filing of income tax returns, and a lower tax rate on certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio which increased the effective tax rate in the first three quarters of 2023 by 20 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 partially offset by a reduction in non-deductible expenses in international jurisdictions.

Excluding certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio in 2023, and the gain on sale of an administrative building in 2022, and their tax effects, our adjusted effective tax rates were 29.0% and 27.7% for the first three quarters of 2023 and 2022, respectively.

First Three Quarters

2023 2022 Year over year change

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$ 880,722 $ 734,989 $ 145,733 19.8 %

The increase in net income was primarily due to an increase in gross profit of $523.4 million and an increase in other income (expense), net of $15.3 million, partially offset by an increase in selling, general and administrative expenses of $294.8 million, an increase in income tax expense of $81.9 million, and a gain on disposal of assets of $10.2 million in the prior year.

The increase in net income was primarily due to an increase in gross profit of $741.3 million and an increase in other income (expense), net of $24.8 million, partially offset by an increase in selling, general and administrative expenses of $453.3 million, an increase in income tax expense of $83.8 million, asset impairment and restructuring costs recognized in relation to lululemon Studio in 2023 of $74.5 million, and a gain on disposal of assets of $10.2 million in the prior year.

Excluding certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio in 2023, and the gain on sale of an administrative building in 2022, and their tax effects, adjusted net income increased $226.4 million or 31%.

Comparable Store Sales and Total Comparable Sales

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

Adjusted gross profit, gross margin, income from operations, operating margin, income tax expense, effective tax rates, net income, and diluted earnings per share exclude certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio, the gain on disposal of assets for the sale of an administrative office building, and the related income tax effects of these items.

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

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

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

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

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

Second Quarter 2023

First Two Quarters 2023

Third Quarter 2023

First Three Quarters 2023

Net Revenue Net Revenue

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

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

Change $ 347,329 19 % $ 1,075,495 20 %

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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.

Second Quarter 2023

First Two Quarters 2023

Third Quarter 2023

First Three Quarters 2023

Total Comparable Sales (1),(2)

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

Adjusted financial measures

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

The 2023 adjustments relate to certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio and their related tax effects.

The 2022 adjustments relate to the gain on sale of an administrative office building and its related tax effects.

Please refer to Note 3.

Impairment of Assets and Restructuring Costs and Note 4.

Gain on Disposal of Assets included in Item 1 of Part I of this report for further information on the nature of these amounts.

Third Quarter 2023

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

(In thousands, except per share amounts)

GAAP results $ 1,256,664 57.0 % $ 338,115 15.3 % $ 99,243 28.5 % $ 248,714 $ 1.96

lululemon Studio charges:

lululemon Studio obsolescence provision 23,709 1.1 23,709 1.1 23,709 0.19

Impairment of assets 44,186 2.0 44,186 0.35

Restructuring costs 30,315 1.4 30,315 0.24

Tax effect of the above 26,085 (0.4) (26,085) (0.21)

23,709 1.1 98,210 4.5 26,085 (0.4) 72,125 0.57

Adjusted results (non-GAAP) $ 1,280,373 58.1 % $ 436,325 19.8 % $ 125,328 28.1 % $ 320,839 $ 2.53

First Three Quarters 2023

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

(In thousands, except per share amounts)

GAAP results $ 3,705,980 57.8 % $ 1,218,786 19.0 % $ 363,293 29.2 % $ 880,722 $ 6.92

lululemon Studio charges:

lululemon Studio obsolescence provision 23,709 0.3 23,709 0.3 23,709 0.19

Impairment of assets 44,186 0.7 44,186 0.35

Restructuring costs 30,315 0.5 30,315 0.24

Tax effect of the above 26,085 (0.2) (26,085) (0.21)

23,709 0.3 98,210 1.5 26,085 (0.2) 72,125 0.57

Adjusted results (non-GAAP) $ 3,729,689 58.1 % $ 1,316,996 20.5 % $ 389,378 29.0 % $ 952,847 $ 7.49

First Three Quarters 2022

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

(In thousands, except per share amounts)

GAAP results $ 1,013,982 19.0 % $ 279,447 27.5 % $ 734,989 $ 5.74

Gain on disposal of assets (10,180) (0.2) (10,180) (0.08)

Tax effect of the above (1,661) 0.2 1,661 0.01

Adjusted results (non-GAAP) $ 1,003,802 18.8 % $ 277,786 27.7 % $ 726,470 $ 5.67

Our business is affected by the general seasonal trends common to the retail apparel industry.

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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.

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 lululemon Studio 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 Two Quarters

First Three Quarters

2023 2022 Year over year change

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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 $426.1 million, primarily driven by changes in inventories and accounts payable, partially offset by changes in income taxes;

• an increase in cash flows from the changes in operating assets and liabilities of $613.9 million, primarily driven by changes in inventories, prepaid expenses and other current assets, and accounts payable, partially offset by changes in income taxes;

• changes in adjusting items of $232.2 million, primarily driven by certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio, as well as increased depreciation and higher cash inflows related to derivatives;

• increased net income of $145.7 million.

• changes in adjusting items of $89.2 million, primarily driven by increased depreciation and higher cash inflows related to derivatives.

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 investment in our distribution centers as well as technology infrastructure and digital investments.

Company-operated store expenditures also contributed to the increase driven by opening new stores and remodeling existing stores.

The increase in capital expenditures was primarily due to investment in our distribution centers as well as technology infrastructure and digital investments, partially offset by a slight decrease in company-operated store expenditures.

Financing Activities

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

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.

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

During the first three quarters of 2023, 1.4 million shares were repurchased at a total cost including commissions and excise taxes of $504.6 million.

During the first three quarters of 2022, 1.2 million shares were repurchased at a total cost including commissions of $375.0 million.

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

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Risk Factors".

debt or equity securities or other external financing sources to the extent we were unable to fund such expenditures out of our cash and cash equivalents and cash generated from operations.

In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such expenditures out of our cash and cash equivalents and cash generated from operations.

The following table includes certain measures of our liquidity:

July 30, 2023

October 29, 2023

(In thousands)

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(1) Working capital is calculated as current assets of $3.4 billion less current liabilities of $1.4 billion.

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

As of July 30, 2023, letters of credit and letters of guarantee totaling $10.2 million had been issued, including $6.4 million under our committed revolving credit facility.

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

As of October 29, 2023, letters of credit and guarantee totaling $10.0 million had been issued, including $6.6 million under our committed revolving credit facility.

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

The credit facility has a maturity date of December 14, 2026, subject to extension under certain circumstances.

As of July 30, 2023, aside from letters of credit of $6.4 million, we had no other borrowings outstanding under this credit facility.

As of October 29, 2023, aside from letters of credit and guarantee of $6.6 million, we had no other borrowings outstanding under this credit facility.

Further information regarding our credit facilities and associated covenants is outlined in Note 5.

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

Our inventory balance as of July 30, 2023 was $1.7 billion, an increase of 14% from July 31, 2022.

Our inventory balance as of October 29, 2023 was $1.7 billion, a decrease of 4% from October 30, 2022.

Critical Accounting Policies and Estimates

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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.

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, estimates, and judgements are discussed within "Item 7.

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Operating Locations

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

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

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

Number of company-operated stores by country (market) October 29,

2023 January 29,

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Total company-operated stores 686 655

(1) PRC included 107 stores in China Mainland, nine stores in Hong Kong Special Administrative Region, eight stores in Taiwan, and two stores in Macao Special Administration Region, as of July 30, 2023.

(1) PRC included 114 stores in China Mainland, nine stores in Hong Kong Special Administrative Region, eight stores in Taiwan, and two stores in Macao Special Administration Region, as of October 29, 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 July 30, 2023, there were 29 licensed locations, including 12 in Mexico, six in the United Arab Emirates, five in Saudi Arabia, three in Qatar, two in Kuwait, and one in Israel.

As of October 29, 2023, there were 38 licensed locations, including 18 in Mexico, six in the United Arab Emirates, six in Saudi Arabia, three in Qatar, three in Kuwait, and two in Israel.

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