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Item 7. Management’s Discussion and Analysis

2024-03-21 compared with 2023-03-28 · 331 added, 228 removed, 252 unchanged (69% of the section changed)

3 unchanged sentences

• Financial Highlights and Market Conditions and Trends

• Results of Operations

• Results o f Operations

• Comparison of 2023 to 2022

• Comparable Store Sales and Total Comparable Sales

• Comparison of 2022 to 2021

• Comparable Sales and Sales Per Square Foot

• Non-GAAP Financial Measures

5 unchanged sentences

Fiscal 2023, 2022, and 2021 were each 52-week years.

Fiscal 2024 will be a 53-week year.

This discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions included in the "Special Note Regarding Forward-Looking Statements." Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described in the "Item 1A.

Risk Factors" section and elsewhere in this Annual Report on Form 10-K.

We use comparable sales as a metric to evaluate the performance of our business.

Refer to the Comparable Sales and Sales Per Square Foot section of this management's discussion and analysis of financial condition and results of operations for further information.

We provide constant dollar changes and adjusted financial results, which are non-GAAP financial measures, as supplemental information that enable evaluation of the underlying trend in our operating performance, and enable a comparison to our historical financial information.

Refer to the Non-GAAP Financial Measures section of this management's discussion and analysis of financial condition and results of operations for reconciliations between the adjusted non-GAAP financial measures and the most directly comparable measures calculated in accordance with GAAP.

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

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

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

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

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

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

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

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

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

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

Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

During the fourth quarter of 2023, we revised the financial information which is regularly reviewed and used by our CODM to evaluate performance and allocate resources.

Historically, our segments were based on selling channel.

As we have further executed on our omni-channel retail strategy, and with the continued expansion of our international operations, our resource allocation decisions have evolved to focus on regional markets.

We organize our operations into four regional markets:

Americas, China Mainland, APAC, and EMEA.

We report three segments, Americas, China Mainland, and Rest of World, which is comprised of the APAC and EMEA regions on a combined basis.

Our prior year segment results have been recast to reflect our new segment reporting structure.

In 2023, lululemon celebrated its 25th anniversary and delivered another strong year of financial results.

We continued to execute against our Power of Three ×2 growth plan, growing net revenue 19% and diluted earnings per share 83%, or 27% on an adjusted basis, as our teams were able to successfully navigate an uncertain macroeconomic environment.

Our growth continued across regions, merchandise categories, and channels.

We delivered strong net revenue growth across our regions including 12% in the Americas, 67% in China Mainland, and 43% in Rest of World.

Net revenue from our women's product range increased 17%, men's increased 15%, and net revenue from our other categories increased 36%.

opened 56 net new company-operated stores, contributing to a 15% increase in square footage, while total company-operated store net revenue increased 21% and e-commerce net revenue increased 17%.

We believe this broad-based growth was underpinned by our ability to bring new innovations into our product assortment, while also increasing our brand awareness and bringing new guests into our brand.

Product Innovation

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

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

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

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

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

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

Guest Experience and Membership

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

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

Community is at the core of our brand.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Market Expansion

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

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

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

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

By innovating through our Science of Feel approach, we continue to seek to solve the unmet needs of our guests.

While continuing to see strength from our key collections including Align, Scuba, Define, and Softstreme for women and our ABC collection for men, we launched new innovations as well.

For women, we launched Wundermost, our new bodywear collection, we expanded our dual gender golf and tennis assortments.

On the men’s side, we launched Steady State and Soft Jersey, to expand our lounge offering, while also enhancing our Pace Breaker short.

In accessories, we continued to see strength across our bag assortment, and in footwear we updated our Blissfeel and Chargefeel styles, and in early 2024, we launched our first footwear styles for men.

We also announced a new textile-to-textile recycling partnership with the goal of enabling circularity in our supply chain by transforming apparel waste into high quality nylon and polyester.

Brand Awareness

We believe that increasing our brand awareness and introducing new guests to the lululemon brand remains one of our largest opportunities, both in the Americas and to an even greater degree in our international markets.

In order to grow brand awareness we combine our community-based, grass roots model of guest engagement, with larger scale brand activations and global brand campaigns.

With connection points across both our physical and digital channels, we aim to bring new guests into our brand, engage with them in ways that are more than just transactional and create deeper connections.

In 2023, we executed several strategies designed to connect with guests, bring new guests into our brand, and grow awareness.

Highlights include:

hosting our Dupe Swap event in Los Angeles;

testing our first men's focused TV campaign featuring our ABC pants;

taking over the West Bund in Shanghai for one week to host wellness-centric events and experiences intended to bring awareness to World Mental Health Day;

and continuing to grow our Essentials membership program.

In addition, in September 2023 we announced our new partnership with Peloton.

Peloton is now the exclusive provider of content for our lululemon Studio members, we have become their primary apparel provider.

We plan to jointly engage our global communities through special programming, experiences, and events.

Financial Highlights

The summary below compares 2023 to 2022 and provides both GAAP and non-GAAP financial measures.

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

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

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

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

• Net revenue increased 19% to $9.6 billion.

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

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

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

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

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

– Americas comparable sales increased 8%, or 9% on a constant dollar basis.

– China Mainland comparable sales increased 39%, or 46% on a constant dollar basis.

– Rest of World comparable sales increased 32%, or 33% on a constant dollar basis.

• Gross profit increased 25% to $5.6 billion.

Adjusted gross profit increased 24% to $5.6 billion.

• Gross margin decreased 230 basis points to 55.4%.

Adjusted gross margin decreased 150 basis points to 56.2%.

• Income from operations was consistent at $1.3 billion.

• Gross margin increased 290 basis points to 58.3%.

Adjusted gross margin increased 240 basis points to 58.6%.

• Income from operations increased 61% to $2.1 billion.

Adjusted income from operations increased 25% to $2.2 billion.

• Operating margin decreased 490 basis points to 16.4%.

Adjusted operating margin increased 10 basis points to 22.1%.

• Operating margin increased 580 basis points to 22.2% from 16.4% in 2022.

Adjusted operating margin increased 110 basis points to 23.2% from 22.1% in 2022.

• Income tax expense increased 31% to $625.5 million.

3 unchanged sentences

Adjusted diluted earnings per share were $12.77 for 2023 compared to $10.07 in 2022.

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

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

Market Conditions and Trends

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

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

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

Certain trends are expected to continue throughout 2024, with the impact varying by market.

Macroeconomic Conditions

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

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

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

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

COVID-19 Pandemic

Most of our retail locations were open throughout 2022 and 2021, with certain locations temporarily closed due to COVID-19 resurgences, including certain closures during 2022 in the PRC.

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

Foreign currency fluctuations reduced the growth of our net revenue by $89.8 million when comparing 2023 to 2022, primarily due to the overall appreciation of the US dollar.

We expect future exchange rate volatility to impact our results.

We have also experienced increased wage rates which increased our employee costs when comparing 2023 to 2022.

Consumer purchasing behaviors and their propensity to spend in our sector have been impacted by uncertain economic conditions including inflation, higher interest rates, and other factors.

While we experienced traffic and net revenue growth in 2023 in all markets, over the course of 2023 we saw moderation in the year over year traffic and net revenue growth in the Americas.

We continue to monitor macroeconomic conditions and the trends in consumer demand for our products.

Supply Chain Disruption

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

The supply chain disruption we have experienced has contributed to the 50% increase in our inventory balance as of January 29, 2023 compared to January 30, 2022.

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

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

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

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

COVID-19 Pandemic

Most of our retail locations were open throughout 2023, 2022, and 2021, with certain locations temporarily closed due to COVID-19 resurgences during the first quarter of 2022 and at various times in 2021.

The effect of COVID-19, including store closures, impacted our revenue and operating margins in 2021 and the first quarter of 2022 in China Mainland.

Results of Operations

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2023 2022 2021 2023 2022 2021

(In thousands) (Percentage of revenue)

(In thousands) (Percentage of net revenue)

Net revenue $ 9,619,278 $ 8,110,518 $ 6,256,617 100.0 % 100.0 % 100.0 %

2 unchanged sentences

Selling, general and administrative expenses 3,397,218 2,757,447 2,225,034 35.3 34.0 35.6

Impairment of goodwill and other assets, restructuring costs 74,501 407,913 — 0.8 5.0 —

Amortization of intangible assets 5,010 8,752 8,782 0.1 0.1 0.1

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

Acquisition-related expenses — — 41,394 — — 0.7

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Net revenue increased $1.5 billion, or 19%, to $9.6 billion in 2023 from $8.1 billion in 2022.

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

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

Other net revenue also increased.

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

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

Net revenue for 2022 and 2021 is summarized below.

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

Comparable sales increased 13%, or 14% on a constant dollar basis.

The increase in net revenue was primarily due to increased Americas net revenue.

China Mainland and Rest of World net revenue also increased.

Net revenue for 2023 and 2022 is summarized below, and reflects our updated segments, including comparatives.

2023 2022 2023 2022 Year over year change

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

Company-operated stores $ 3,648,127 $ 2,821,497 45.0 % 45.1 % $ 826,630 29.3 %

Direct to consumer 3,699,791 2,777,944 45.6 44.4 921,847 33.2

Other 762,600 657,176 9.4 10.5 105,424 16.0

(In thousands) (Percentage of net revenue) (In thousands) (Percentage) (Constant dollar change)

Americas $ 7,631,647 $ 6,817,454 79.3 % 84.1 % $ 814,193 11.9 % 12.0 %

China Mainland 963,760 576,503 10.0 7.1 387,257 67.2 75.0

Rest of World 1,023,871 716,561 10.6 8.8 307,310 42.9 44.0

Net revenue $ 9,619,278 $ 8,110,518 100.0 % 100.0 % $ 1,508,760 18.6 % 20.0 %

Company-Operated Stores.

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

During 2022, we opened 81 net new company-operated stores, including 40 stores in Asia Pacific, 32 stores in North America, and nine stores in Europe.

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

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

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

Dollar value per transaction was consistent year over year.

Direct to Consumer.

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

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

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

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

The increase in Americas net revenue was primarily due to an increase in comparable sales, which increased 8%, or 9% on a constant dollar basis.

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

The increase in Americas net revenue was also driven by a $327.6 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2022 as well as increased outlet, wholesale, and license and supply arrangement net revenue, partially offset by fewer temporary locations and lower lululemon Studio net revenue.

China Mainland.

The increase in China Mainland net revenue was primarily due to an increase in comparable sales, which increased 39%, or 46% on a constant dollar basis.

The increase in comparable sales 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 China Mainland net revenue was also driven by a $180.6 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2022 as well as increased net revenue from outlets.

Rest of World.

The increase in Rest of World net revenue was primarily due to an increase in comparable sales, which increased 32%, or 33% on a constant dollar basis.

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

The increase in Rest of World net revenue was also driven by a $118.9 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2022 as well as increased license and supply arrangements and outlets net revenue.

2023 2022 Year over year change

2 unchanged sentences

58.3 % 55.4 % 290 basis points

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

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

During 2022, we decided to shift our lululemon Studio strategy to focus on providing digital app-based services.

While we continued to sell at-home hardware in 2023, we reached the decision to cease selling the lululemon Studio Mirror during the third quarter of 2023.

These strategy shifts resulted in the recognition of an inventory obsolescence provision of $62.9 million in 2022 and a further provision of $23.7 million in 2023.

These provisions reduced gross margin by 80 basis points and 30 basis points in 2022 and 2023 respectively.

Please refer to Note 8.

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

Gross margin increased 290 basis points, or excluding the impact of the lululemon Studio obsolescence provisions detailed above, increased 240 basis points.

This 240 basis point net increase was primarily a result of:

• a net increase in product margin of 290 basis points, primarily due to lower freight costs from rate reductions and reduced air freight, as well as lower duty costs, modestly offset by higher inventory provisions and shrink in the current year;

• an unfavorable impact of foreign currency exchange rates of 20 basis points;

• deleverage on occupancy costs of 20 basis points and an increase in costs related to our distribution centers as a percentage of net revenue of 10 basis points.

Selling, General and Administrative Expenses

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Selling, general and administrative expenses $ 3,397,218 $ 2,757,447 $ 639,771 23.2 %

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

35.3 % 34.0 % 130 basis points

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

• an increase in head office costs of $327.7 million, comprised of:

– an increase in employee costs of $108.8 million primarily due to increased salaries and wages expense as well as increased stock-based compensation and incentive compensation, primarily as a result of headcount growth and increased wage rates;

– an increase in brand and community costs of $95.4 million primarily due to increased marketing expenses;

– an increase in depreciation of $46.0 million;

– an increase in other head office costs of $40.4 million, primarily due to increased professional fees;

– an increase in technology costs, including cloud computing amortization, of $37.1 million.

• an increase in costs related to our operating channels of $319.1 million, comprised of:

– an increase in employee costs of $145.1 million primarily due to increased salaries and wages expense, incentive compensation, and benefit costs for retail employees, primarily from the growth in our business and increased wage rates;

– an increase in other operating costs of $67.7 million primarily due to increased depreciation costs, technology costs, and repairs and maintenance costs;

– an increase in variable costs of $66.8 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 $39.5 million primarily due to increased digital marketing expenses.

The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $7.0 million.

Impairment of Goodwill and Other Assets, Restructuring Costs

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Impairment of goodwill and other assets, restructuring costs $ 74,501 $ 407,913 $ (333,412) (81.7) %

During 2023, we recognized certain asset impairments and restructuring costs, and during 2022, we recognized impairment of goodwill and other assets, each in relation to lululemon Studio.

Please refer to Note 8.

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

Amortization of Intangible Assets

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Amortization of intangible assets

$ 5,010 $ 8,752 $ (3,742) (42.8) %

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

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Gain on disposal of assets

$ — $ (10,180) $ 10,180 (100.0) %

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

Income from Operations

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

Segmented income from operations is summarized below.

Our prior year segment results have been recast to reflect our new segment reporting structure.

2023 2022 2023 2022 Year over year change

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

Segmented income from operations:

Americas $ 2,937,184 $ 2,503,740 38.5 % 36.7 % $ 433,444 17.3 %

China Mainland 337,316 196,865 35.0 34.1 140,451 71.3

Rest of World 201,832 103,204 19.7 14.4 98,628 95.6

$ 3,476,332 $ 2,803,809 $ 672,523 24.0 %

General corporate expenses 1,240,436 1,005,988 234,448 23.3

lululemon Studio obsolescence provision 23,709 62,928 (39,219) (62.3)

Impairment of goodwill and other assets, restructuring costs 74,501 407,913 (333,412) (81.7)

Amortization of intangible assets 5,010 8,752 (3,742) (42.8)

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

Income from operations $ 2,132,676 $ 1,328,408 $ 804,268 60.5 %

Operating margin 22.2 % 16.4 % 580 basis points

The increase in Americas income from operations was primarily the result of increased gross profit of $691.7 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to higher product margin, partially offset by deleverage on distribution center costs.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher employee costs, increased digital marketing expenses, increased credit card fees, packaging costs, and distribution costs driven by higher net revenue, and

increased depreciation, and technology costs.

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

China Mainland.

The increase in China Mainland income from operations was primarily the result of increased gross profit of $228.1 million, driven by increased net revenue.

Gross margin was consistent year over year, primarily due to leverage on occupancy and other costs, partially offset by unfavorable foreign currency exchange rates and lower product margin.

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

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

Rest of World.

The increase in Rest of World income from operations was primarily the result of increased gross profit of $190.2 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to higher product margin as well as leverage on occupancy and other costs, partially offset by unfavorable foreign currency exchange rates.

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

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

General Corporate Expenses.

The increase in general corporate expenses was primarily due to increased employee costs, as well as increased brand and community costs, depreciation, technology costs, professional fees, and product team costs.

The increase in general corporate expenses was partially offset by a decrease in net foreign currency exchange and derivative losses of $7.0 million.

Other Income (Expense), Net

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Other income (expense), net

$ 43,059 $ 4,163 $ 38,896 934.3 %

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

Income Tax Expense

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Income tax expense $ 625,545 $ 477,771 $ 147,774 30.9 %

Effective tax rate

28.8 % 35.9 % (710) basis points

The decrease in the effective tax rate was primarily due the income tax impact of certain non-deductible impairment and other charges recognized in 2022 and 2023 related to lululemon Studio, partially offset by a lower tax rate on the gain on the sale of an administrative building in 2022.

These items increased the effective tax rate by 780 basis points and 10 basis points in 2022 and 2023, respectively.

Excluding the income tax effects of the impairment and other charges recognized in 2022 and 2023 in relation to lululemon Studio, and excluding the tax effect of the gain on the sale of the administrative building in 2022, the adjusted effective tax rate increased to 28.7% in 2023 from 28.1% in 2022.

The increase in the adjusted effective tax rate was primarily due to withholding taxes on unremitted earnings which are not considered to be permanently reinvested, partially offset by adjustments upon the filing of certain income tax returns, and a decrease in U.S.

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

$ 1,550,190 $ 854,800 $ 695,390 81.4 %

The increase in net income in 2023 was primarily due to an increase in gross profit of $1.1 billion, an increase in other income (expense), net of $38.9 million, and impairment and restructuring charges recognized in 2023 of $74.5 million compared to impairment charges of $407.9 million recognized in 2022, partially offset by an increase in selling, general and administrative expenses of $639.8 million, an increase in income tax expense of $147.8 million, and a gain on disposal of assets of $10.2 million in the prior year.

Excluding certain inventory provisions, goodwill and other asset impairments, and restructuring costs recognized in relation to lululemon Studio in 2023 and 2022 and the gain on sale of an administrative building in 2022, and their tax effects, adjusted net income increased $333.4 million or 26%.

Comparison of 2022 to 2021

Net revenue increased $1.9 billion, or 30%, to $8.1 billion in 2022 from $6.3 billion in 2021.

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

Comparable sales increased 25%, or 28% on a constant dollar basis.

The increase in net revenue was primarily due to increased Americas net revenue.

China Mainland and Rest of World net revenue also increased.

Net revenue for 2022 and 2021 is summarized below, and reflects our updated segments, including comparatives.

2022 2021 2022 2021 Year over year change

(In thousands) (Percentage of net revenue) (In thousands) (Percentage) (Constant dollar change)

Americas $ 6,817,454 $ 5,299,906 84.1 % 84.7 % $ 1,517,548 28.6 % 30.0 %

China Mainland 576,503 434,261 7.1 6.9 142,242 32.8 40.0

Rest of World 716,561 522,450 8.8 8.4 194,111 37.2 49.0

Net revenue $ 8,110,518 $ 6,256,617 100.0 % 100.0 % $ 1,853,901 29.6 % 32.0 %

The increase in Americas net revenue was primarily due to an increase in comparable sales, which increased 28%, or 29% on a constant dollar basis.

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

Americas net revenue also increased due to a $296.9 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2021 as well as increased outlet, wholesale, and re-commerce net revenue, partially offset by lower license and supply arrangement and lululemon Studio net revenue.

China Mainland.

The increase in China Mainland net revenue was primarily due to an increase in comparable sales, which increased 17%, or 23% on a constant dollar basis.

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

The increase in China Mainland net revenue was also driven by a $77.5 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2021.

Rest of World.

The increase in Rest of World net revenue was primarily due to a $151.5 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2021 as well as increased license and supply arrangements, outlets, and wholesale net revenue.

The increase in Rest of World net revenue was also driven by an increase in comparable sales, which increased 10%, or 19% on a constant dollar basis.

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

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Gross profit $ 4,492,340 $ 3,608,565 $ 883,775 24.5 %

55.4 % 57.7 % (230) basis points

During 2022, we updated our lululemon Studio strategy to focus on digital app-based services, which meant we no longer expected to be able to sell all of the in-home hardware inventory above cost.

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

This reduced 2022 gross margin by 80 basis points.

Please refer to Note 8.

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

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

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

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

– an increase in employee costs of $104.2 million primarily due to an increase in salaries and wages expense and incentive compensation in our company-operated store and direct to consumer channels, primarily due to growth in our business and increased wage rates;

– an increase in employee costs of $104.2 million primarily due to an increase in salaries and wages expense and incentive compensation in our company-operated store and e-commerce channels, primarily due to growth in our business and increased wage rates;

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

– an increase in brand and community costs of $2.4 million primarily due to an increase in digital marketing expenses related to our direct to consumer channel, partially offset by a decrease in marketing expenses related to lululemon Studio.

– an increase in brand and community costs of $2.4 million primarily due to an increase in digital marketing expenses related to our e-commerce channel, partially offset by a decrease in marketing expenses related to lululemon Studio.

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

Amortization of Intangible Assets

Impairment of Goodwill and Other Assets, Restructuring Costs

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

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

During 2022, we recognized an impairment of goodwill and other long-lived assets in relation to our lululemon Studio business unit.

Please refer to Note 8.

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

Amortization of Intangible Assets

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

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

Impairment of Goodwill and Other Assets

2022 2021 Year over year change

(In thousands) (In thousands) (Percentage)

Impairment of goodwill and other assets

$ 407,913 $ — $ 407,913 n/a

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

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

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

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

Amortization of intangible assets

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

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.

Acquisition-Related Expenses

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Segmented income from operations is summarized below.

Our prior segment results have been recast to reflect our new segment reporting structure.

2022 2021 2022 2021 Year over year change

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Segmented income from operations:

Company-operated stores $ 991,067 $ 727,735 27.2 % 25.8 % $ 263,332 36.2 %

Direct to consumer 1,562,538 1,216,496 42.2 43.8 346,042 28.4

Other 107,083 77,283 14.0 11.8 29,800 38.6

Americas $ 2,503,740 $ 1,867,016 36.7 % 35.2 % $ 636,724 34.1 %

China Mainland 196,865 167,318 34.1 38.5 29,547 17.7

Rest of World 103,204 67,674 14.4 13.0 35,530 52.5

$ 2,803,809 $ 2,102,008 $ 701,801 33.4 %

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

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

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

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

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

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Operating margin 16.4 % 21.3 % (490) basis points

Company-Operated Stores.

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

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher salaries and wages expense and higher incentive compensation as a result of the growth in our business and increased wage rates.

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

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

Direct to Consumer.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $527.9 million, driven by increased net revenue, partially offset by lower gross margin.

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

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

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

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

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

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

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

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

The increase in Americas income from operations was primarily the result of increased gross profit of $855.2 million, driven by increased net revenue, partially offset by lower gross margin.

The decrease in gross margin was primarily due to lower product margin, partially offset by leverage on occupancy and other costs.

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

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

China Mainland.

The increase in China Mainland income from operations was primarily the result of increased gross profit of $70.4 million, driven by increased net revenue, partially offset by lower gross margin.

The decrease in gross margin was primarily due to unfavorable foreign currency exchange rates as well as deleverage on distribution center and other costs.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses primarily due to higher employee costs, as well as increased digital marketing expenses, increased packaging and distribution costs driven by higher net revenue, and increased technology costs.

Income from operations as a percentage of China Mainland net revenue decreased primarily due to lower gross margin.

Rest of World.

The increase in Rest of World income from operations was primarily the result of increased gross profit of $80.9 million, driven by increased net revenue, partially offset by lower gross margin.

The decrease in gross margin was primarily due to unfavorable foreign currency exchange rates as well as lower product margin, partially offset by leverage on occupancy and other costs.

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

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

General Corporate Expenses.

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

The increase in general corporate expenses was primarily due to higher employee costs, as well as increased depreciation, brand and community costs, technology costs, professional fees, and product team costs.

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

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

Other Income (Expense), Net

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

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

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

2022 2021 Year over year change

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

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

Comparable Store Sales and Total Comparable Sales

We use comparable store sales to assess the performance of our existing stores as it allows us to monitor the performance of our business without the impact of recently opened or expanded stores.

We use total comparable sales to evaluate the performance of our business from an omni-channel perspective.

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

Comparable Sales and Sales Per Square Foot

Comparable Sales

We use comparable sales to evaluate the performance of our company-operated store and e-commerce businesses from an omni-channel perspective.

It allows us to monitor the performance of our business without the impact of recently opened or expanded stores.

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

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

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

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

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

Total comparable sales combines comparable store sales and direct to consumer net revenue.

Comparable sales includes comparable company-operated store and all e-commerce net revenue.

E-commerce net revenue includes our buy online pick-up in store, back-back room, and ship from store omni-channel retailing capabilities in addition to our websites, other region-specific websites, digital marketplaces, and mobile apps.

Comparable company-operated stores have been open, or open after being significantly expanded, for at least 12 full fiscal months.

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

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

operated stores that have closed.

Comparable sales also excludes sales from our selling channels other than company-operated stores and e-commerce.

The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.

In fiscal years with 53 weeks, the 53rd week of net revenue is excluded from the calculation of comparable sales.

In the year following a 53-week year, the prior year period is shifted by one week to compare similar calendar weeks.

Opening new stores and expanding existing stores is an important part of our growth strategy.

Accordingly, total comparable sales is just one way of assessing the success of our growth strategy insofar as comparable sales do not reflect the performance of stores opened, or significantly expanded, within the last 12 full fiscal months.

The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.

Non-comparable sales includes all net revenue other than comparable sales.

Sales Per Square Foot

We use sales per square foot to assess the performance of our company-operated stores relative to their square footage.

We believe that sales per square foot is useful in evaluating the performance of our company-operated stores.

Sales per square foot is calculated using total net revenue from all company-operated stores divided by the average ending square footage of the stores for each period during the year.

In fiscal years with 53 weeks, the 53rd week of net revenue is excluded from the calculation of sales per square foot.

The square footage of our company-operated stores includes all retail related space, including selling space as well as storage and back-office areas.

The sales per square foot metric we report may not be equivalent to similarly titled metrics reported by other companies.

Non-GAAP Financial Measures

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

Constant dollar changes and adjusted financial results are non-GAAP financial measures.

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

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

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

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, goodwill and other 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, the MIRROR acquisition-related expenses, and the related income tax effects of these items.

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

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

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.

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

Constant Dollar Changes in Net Revenue

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

Net Revenue Direct to Consumer Net Revenue

(In thousands) (Percentages) (Percentages)

Change $ 1,853,901 30 % 33 %

Adjustments due to foreign currency exchange rate changes 147,728 2 2

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

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

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

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

Constant Dollar Changes

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

2023 Compared to 2022

2022 Compared to 2021

Change Foreign exchange changes Change in constant dollars Change Foreign exchange changes Change in constant dollars

Americas 12 % — % 12 % 29 % 1 % 30 %

China Mainland 67 8 75 33 7 40

Rest of World 43 1 44 37 12 49

Total net revenue 19 % 1 % 20 % 30 % 2 % 32 %

Comparable sales (1)

Americas 8 % 1 % 9 % 28 % 1 % 29 %

China Mainland 39 7 46 17 6 23

Rest of World 32 1 33 10 9 19

Total comparable sales 13 % 1 % 14 % 25 % 3 % 28 %

Comparable Store Sales 2

Direct to Consumer Net Revenue

Change 25 % 16 % 33 %

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

Change in constant dollars 28 % 19 % 35 %

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

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

(1) Comparable sales includes comparable company-operated store and e-commerce net revenue.

Adjusted Financial Measures

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

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

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

The 2023 and 2022 adjustments relate to certain inventory provisions, goodwill and other asset impairments, and restructuring costs recognized in relation to lululemon Studio, and their related tax effects.

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

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

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Property and Equipment, Note 8.

Impairment of Goodwill and Other Assets, and Note 9.

Impairment of Goodwill and Other Assets, Restructuring Costs, and Note 9.

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

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lululemon Studio charges:

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

Impairment of goodwill 362,492 4.4 362,492 2.83

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

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

lululemon Studio obsolescence provision 23,709 0.3 23,709 0.2 23,709 0.19

Impairment of assets 44,186 0.5 44,186 0.35

Restructuring costs 30,315 0.3 30,315 0.24

Tax effect of the above 26,085 (0.1) (26,085) (0.21)

23,709 0.3 98,210 1.0 26,085 (0.1) 72,125 0.57

Adjusted results (non-GAAP) $ 5,633,114 58.6 % $ 2,230,886 23.2 % $ 651,630 28.7 % $ 1,622,315 $ 12.77

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

(In thousands, except per share amounts)

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

lululemon Studio charges:

lululemon Studio obsolescence provision 62,928 0.8 62,928 0.8 62,928 0.49

Impairment of goodwill and other assets 407,913 5.0 407,913 3.19

Tax effect of the above 28,171 (7.8) (28,171) (0.22)

62,928 0.8 470,841 5.8 28,171 (7.8) 442,670 3.46

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

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

Fourth Quarter 2022

(In thousands)

Income from operations $ 314,426

lululemon Studio related charges:

Obsolescence provision 62,928

Impairment of goodwill 362,492

Impairment of intangible assets 40,585

Impairment of property and equipment 4,836

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

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

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Liquidity and Capital Resources

Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our committed revolving credit facility.

Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, investing in technology and making system enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally.

Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our committed revolving credit facility, including to fund short-term working capital requirements.

Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, investing in our distribution centers, investing in technology and making system enhancements, funding working capital requirements, and making other strategic capital investments.

We may also use cash to repurchase shares of our common stock.

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Operating Activities

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

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

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

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

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

• an increase in cash flows from changes in operating assets and liabilities of $859.1 million, primarily driven by changes in inventories, accounts payable, and prepaid expenses and other current assets, partially offset by changes in income taxes and accrued liabilities;

• increased net income of $695.4 million.

The increase in cash provided by operating activities was partially offset by changes in adjusting items of $224.8 million, primarily driven by goodwill and other asset impairments and restructuring costs recognized in relation to lululemon Studio, as well as 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, partially offset by the settlement of net investment hedges and other investing activities.

The increase in capital expenditures was primarily due to corporate expenditures and from our company-operated stores segment.

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

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

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

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

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

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

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

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

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

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

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

Financing Activities

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

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

During 2023, 1.5 million shares were repurchased at a total cost including commissions and excise taxes of $558.7 million.

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

During 2022, 1.4 million shares were repurchased at a total cost including commissions and excise taxes of $444.0 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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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 January 29, 2023 was $1.4 billion, an increase of 50% from January 30, 2022.

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

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

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

Our inventory balance as of January 28, 2024 was $1.3 billion, a decrease of 9% from January 29, 2023.

We expect our inventories to decrease during the first half of 2024 compared to the first half of 2023, and then increase in the second half of 2024 compared to the second half of 2023.

Our existing Americas 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.

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

Goodwill impairment assessment

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

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

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

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

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

The key assumptions of the fair value of the lululemon Studio reporting unit as of October 31, 2022 were the revenue growth rates, operating profit margins, and the discount rate.

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

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

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

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

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

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

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

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

Finite-lived intangible asset impairment assessment

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

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

This resulted in an impairment of $40.6

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

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

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

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

Inventory provisions

Inventory provision

Inventory is valued at the lower of cost and net realizable value.

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As of January 28, 2024 the net carrying value of our inventories was $1.3 billion, which included provisions for obsolete and damaged inventory of $139.7 million.

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

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

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

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

provision is determined based upon assumptions about product quality, damages, future demand, selling prices, and market conditions, and includes a provision of $63.0 million against lululemon Studio Mirror inventory.

Deferred taxes on undistributed net investment of foreign subsidiaries.

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As of January 28, 2024, the net investment in our Canadian subsidiaries was $2.5 billion, of which $1.6 billion was determined to be indefinitely reinvested.

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

The paid-up-capital balance of the Canadian subsidiaries was approximately $140.0 million.

We have recognized a deferred tax liability of $41.2 million as of January 28, 2024 which represents the Canadian withholding taxes payable on the portion of our Canadian earnings that are not indefinitely reinvested and cannot be repatriated as a return of capital, and U.S.

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

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

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

state income taxes for profits generated in our Canadian subsidiaries.

state income taxes.

Contingencies

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

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis