What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-12-05 compared with 2024-08-29 · 192 added, 112 removed, 357 unchanged (46% of the section changed)

14 unchanged sentences

Fiscal 2024 and fiscal 2023 are referred to as "2024," and "2023," respectively.

The first two quarters of 2024 and 2023 ended on July 28, 2024 and July 30, 2023, respectively.

The first three quarters of 2024 and 2023 ended on October 27, 2024 and October 29, 2023, respectively.

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

10 unchanged sentences

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

We provide constant dollar changes, which is a non-GAAP financial measure, as supplemental information to help investors understand the underlying growth rate of net revenue excluding the impact of changes in foreign currency exchange rates.

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 non-GAAP financial measures and the most directly comparable measures calculated in accordance with GAAP.

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:

17 unchanged sentences

Financial Highlights

The summary below compares the second quarter of 2024 to the second quarter of 2023:

The summary below compares the third quarter of 2024 to the third quarter of 2023, 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 9% to $2.4 billion.

1 unchanged sentence

• Comparable sales increased 4%, or 3% on a constant dollar basis.

– Americas comparable sales decreased 3%, or 2% on a constant dollar basis.

– Americas comparable sales decreased 2%.

– China Mainland comparable sales increased 27%, or 24% on a constant dollar basis.

1 unchanged sentence

• Gross profit increased 12% to $1.4 billion.

Adjusted gross profit increased 9%.

• Gross margin increased 150 basis points to 58.5%.

Adjusted gross margin increased 40 basis points.

• Income from operations increased 45% to $490.7 million.

Adjusted income from operations increased 12%.

• Operating margin increased 520 basis points to 20.5%.

Adjusted operating margin increased 70 basis points.

• Income tax expense increased 54% to $152.5 million.

Our effective tax rate for the second quarter of 2024 was 29.6% compared to 29.8% for the second quarter of 2023.

• Diluted earnings per share were $3.15 compared to $2.68 in the second quarter of 2023.

Our effective tax rate for the third quarter of 2024 was 30.2% compared to 28.5% for the third quarter of 2023.

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

• Diluted earnings per share were $2.87 compared to $1.96 in the third quarter of 2023.

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

Market Conditions and Trends

2 unchanged sentences

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, which has adversely impacted consumer demand for our products.

While we experienced traffic growth in the first two quarters of 2024 in all markets, we saw continued moderation in our quarterly net revenue growth in the Americas.

In the United States, net revenue declined by $2.9 million in the second quarter of 2024 compared to the second quarter of 2023.

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

We continue to monitor macroeconomic conditions and the trends in consumer demand for our products, including the economic environment in China Mainland.

We experienced revenue and traffic growth in the first three quarters of 2024 in all markets, but have experienced a reduction in our overall revenue growth in the Americas, driven by our operations in the United States.

During the first three quarters of 2024, Americas comparable sales decreased 2%, or 1% on a constant dollar basis.

Foreign currency fluctuations have adversely impacted our financial results.

Foreign currency fluctuations reduced the growth of our net revenue by $43.9 million when comparing the first two quarters of 2024 to the first two quarters of 2023, primarily due to the overall appreciation of the US dollar.

Foreign currency fluctuations reduced the growth of our net revenue by $25.7 million when comparing the first three quarters of 2024 to the first three quarters of 2023, primarily due to the overall appreciation of the US dollar.

We expect future exchange rate volatility to impact our results.

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

2024 2023 2024 2023

4 unchanged sentences

Selling, general and administrative expenses 909,827 842,795 38.0 38.2

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

Amortization of intangible assets 1,118 1,253 — 0.1

4 unchanged sentences

Net income $ 351,870 $ 248,714 14.7 % 11.3 %

Net revenue increased $161.9 million, or 7%, to $2.4 billion for the second quarter of 2024 from $2.2 billion for the second quarter of 2023.

Net revenue increased $192.4 million, or 9%, to $2.4 billion for the third quarter of 2024 from $2.2 billion for the third quarter of 2023.

On a constant dollar basis, net revenue increased 8%.

2 unchanged sentences

Americas net revenue also increased.

Net revenue for the second quarter of 2024 and 2023 is summarized below:

Second Quarter

Net revenue for the third quarter of 2024 and 2023 is summarized below:

Third Quarter

2024 2023 2024 2023 Year over year change

5 unchanged sentences

The increase in Americas net revenue was primarily due to a $71.6 million increase from new or expanded company-operated stores and our other channels.

We have opened 15 net new stores in the Americas since the second quarter of 2023.

Americas comparable sales decreased 3%, or 2% on a constant dollar basis.

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

We added 28 net new company-operated stores in the Americas since the third quarter of 2023, including 14 company-operated stores from the acquisition of the Mexico operations.

Americas comparable sales decreased 2%.

The decrease in comparable sales was primarily a result of decreased conversion rates, partially offset by a higher dollar value per transaction and an increase in e-commerce traffic.

China Mainland.

2 unchanged sentences

The increase in China Mainland net revenue was also driven by a $35.7 million increase in net revenue from new or expanded company-operated stores and our other channels.

We have opened 25 net new stores in China Mainland since the second quarter of 2023.

We have opened 24 net new company-operated stores in China Mainland since the third quarter of 2023.

Rest of World.

2 unchanged sentences

The increase in Rest of World net revenue was also driven by a $19.6 million increase in net revenue from new or expanded company-operated stores and our other channels.

We have opened nine net new stores in Rest of World since the second quarter of 2023.

Second Quarter

We have opened 11 net new company-operated stores in Rest of World since the third quarter of 2023.

Third Quarter

2024 2023 Year over year change

2 unchanged sentences

58.5 % 57.0 % 150 basis points

The increase in gross margin was primarily the result of:

• a net increase in product margin of 130 basis points, primarily due to lower product costs;

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, which reduced gross margin by 110 basis points.

Please refer to Note 4.

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

Gross margin increased 150 basis points, or increased 40 basis points on an adjusted basis.

The 40 basis point increase in adjusted gross margin was primarily the result of:

• a decrease in costs related to our product departments as a percentage of net revenue of 70 basis points;

The increase in gross margin was partially offset by an increase in occupancy and depreciation costs as a percentage of net revenue of 70 basis points, an increase in distribution center costs as a percentage of net revenue of 40 basis points, and an unfavorable impact of foreign currency exchange rates of 20 basis points.

• a net increase in product margin of 50 basis points, primarily due to lower inventory provisions, as well as lower product costs, partially offset by higher freight costs in the current year;

• a favorable impact of foreign currency exchange rates of 10 basis points.

The increase in adjusted gross margin was partially offset by an increase in occupancy and depreciation costs as a percentage of net revenue of 70 basis points, and an increase in distribution center costs as a percentage of net revenue of 20 basis points.

Selling, General and Administrative Expenses

Second Quarter

Third Quarter

2024 2023 Year over year change

5 unchanged sentences

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

• an increase in costs related to our operating channels of $37.3 million, comprised of:

– an increase in employee costs of $13.9 million primarily due to increased salaries and wages expense for retail employees primarily from the growth in our business, partially offset by decreased incentive compensation;

– an increase in brand and community costs of $12.9 million primarily due to increased digital marketing expenses;

– an increase in other operating costs of $7.5 million primarily due to increased depreciation and security costs;

– an increase in technology costs of $5.9 million.

The increase in costs related to our operating channels was partially offset by a decrease in variable costs of $2.9 million primarily due to decreased distribution cost rates, partially offset by increased credit card fees and packaging costs as a result of higher net revenue.

• an increase in head office costs of $22.7 million, comprised of:

– an increase in brand and community costs of $16.1 million primarily due to increased marketing expenses and brand campaigns;

– an increase in advisory and professional fees of $10.9 million;

3 unchanged sentences

The increase in costs related to our head office was partially offset by a net decrease in employee costs of $5.5 million primarily due to decreased incentive compensation, partially offset by increased salaries and wages expense.

• an increase in costs related to our operating channels of $22.5 million, comprised of:

– an increase in employee costs of $12.1 million primarily due to increased salaries and wages expense and benefit costs for retail employees primarily from the growth in our business, partially offset by decreased incentive compensation;

– an increase in brand and community costs of $9.1 million primarily due to increased digital marketing expenses;

– an increase in other operating costs of $7.6 million primarily due to increased technology costs, repairs and maintenance costs, and security costs.

The increase in costs related to our operating channels was partially offset by a decrease in variable costs of $6.3 million primarily due to decreased distribution cost rates, partially offset by increased credit card fees and packaging costs as a result of higher net revenue.

• a decrease in net foreign currency exchange and derivative revaluation gains of $3.2 million.

• an increase in net foreign currency exchange and derivative revaluation losses of $7.0 million.

Impairment of Assets and Restructuring Costs

Third Quarter

2024 2023 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 4.

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

Amortization of Intangible Assets

Second Quarter

Third Quarter

2024 2023 Year over year change

2 unchanged sentences

$ 1,118 $ 1,253 $ (135) (10.8) %

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.

These assets were fully impaired during the third quarter of 2023.

The amortization of intangible assets in 2024 was primarily the result of the amortization of intangible assets recognized upon the acquisition of the Mexico operations.

The amortization of intangible assets in 2023 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

3 unchanged sentences

Segmented income from operations is summarized below.

Second Quarter

Third Quarter

2024 2023 2024 2023 Year over year change

6 unchanged sentences

General corporate expense 342,522 321,480 21,042 6.5

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 1,118 1,253 (135) (10.8)

2 unchanged sentences

The increase in Americas income from operations was primarily the result of increased gross profit of $14.1 million, driven by increased net revenue, partially offset by lower gross margin.

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

The decrease in gross margin was primarily due to deleverage on occupancy costs and distribution center costs.

The increase in Americas income from operations was also driven by a decrease in selling, general and administrative expenses, primarily due to decreased distribution cost rates and lower employee costs, partially offset by increased marketing expenses.

Income from operations as a percentage of Americas net revenue was consistent with the second quarter of 2023, primarily due to leverage on selling, general and administrative expenses, offset by lower gross margin.

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

China Mainland.

The increase in China Mainland income from operations was primarily the result of increased gross profit of $61.8 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 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 increased marketing expenses and higher employee costs, as well as increased distribution costs driven by higher net revenue.

The increase in gross margin was primarily due to leverage on occupancy costs, favorable foreign currency exchange rates, as well as higher product margin.

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

1 unchanged sentence

The increase in Rest of World income from operations was primarily the result of increased gross profit of $41.4 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 distribution center costs, partially offset by unfavorable foreign currency exchange rates.

The increase in gross margin was primarily due to higher product margin and favorable foreign currency exchange rates, partially offset by deleverage on occupancy 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.

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

1 unchanged sentence

The increase in general corporate expense was primarily due to increased advisory and professional fees, technology costs and depreciation.

The increase was also due to a decrease in net foreign currency exchange and derivative revaluation gains of $3.2 million.

The increase in general corporate expense was partially offset by lower employee costs, driven by decreased incentive compensation.

The increase was also due to an increase in net foreign currency exchange and derivative revaluation losses of $7.0 million.

The increase in general corporate expense was partially offset by a net decrease in employee costs and decreased brand and community costs.

Other Income (Expense), Net

Second Quarter

Third Quarter

2024 2023 Year over year change

4 unchanged sentences

Income Tax Expense

Second Quarter

Third Quarter

2024 2023 Year over year change

4 unchanged sentences

30.2 % 28.5 % 170 basis points

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

Second Quarter

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

The increase in the effective tax rate was partially offset by an increase in tax credits, and the income tax impact of certain non-deductible impairment and other charges related to lululemon Studio.

Excluding the income tax effects of the impairment and other charges recognized in relation to lululemon Studio in 2023, our adjusted effective tax rate was 28.1% for the third quarter of 2023.

Third Quarter

2024 2023 Year over year change

1 unchanged sentence

$ 351,870 $ 248,714 $ 103,156 41.5 %

The increase in net income was primarily due to an increase in gross profit of $113.7 million and an increase in other income (expense), net of $10.6 million, partially offset by an increase in selling, general and administrative expenses of $54.6 million and an increase in income tax expense of $20.3 million.

The increase in net income was primarily due to an increase in gross profit of $144.9 million, impairment and other charges recognized in the third quarter of 2023 of $74.5 million, an increase in other income (expense), net of $3.9 million, partially offset by an increase in selling, general and administrative expenses of $67.0 million, and an increase in income tax expense of $53.3 million.

Excluding the impairment and other charges recognized in relation to lululemon Studio in 2023, and their tax effects, adjusted net income increased $31.0 million or 10%.

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

2024 2023 2024 2023

4 unchanged sentences

Selling, general and administrative expenses 2,624,212 2,407,683 37.6 37.5

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

Amortization of intangible assets 1,118 5,010 — 0.1

4 unchanged sentences

Net income $ 1,066,213 $ 880,722 15.3 % 13.7 %

Net revenue increased $370.0 million, or 9%, to $4.6 billion for the first two quarters of 2024 from $4.2 billion for the first two quarters of 2023.

On a constant dollar basis, net revenue increased 10%.

Comparable sales increased 4%, or 5% on a constant dollar basis.

Net revenue increased $562.5 million, or 9%, to $7.0 billion for the first three quarters of 2024 from $6.4 billion for the first three quarters of 2023.

Comparable sales increased 4%.

The increase in net revenue was primarily due to increased China Mainland and Rest of World net revenue.

Americas net revenue also increased.

Net revenue for the first two quarters of 2024 and 2023 is summarized below:

First Two Quarters

Net revenue for the first three quarters of 2024 and 2023 is summarized below:

First Three Quarters

2024 2023 2024 2023 Year over year change

5 unchanged sentences

The increase in Americas net revenue was primarily due to a $180.2 million increase from new or expanded company-operated stores and our other channels.

We have opened 15 net new stores in the Americas since the second quarter of 2023.

Americas comparable sales decreased 1%.

We added 28 net new company-operated stores in the Americas since the third quarter of 2023, including 14 company-operated stores from the acquisition of the Mexico operations.

Americas comparable sales decreased 2%, or 1% on a constant dollar basis.

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

3 unchanged sentences

The increase in China Mainland net revenue was also driven by a $111.6 million increase in net revenue from new or expanded company-operated stores and our other channels.

We have opened 25 net new stores in China Mainland since the second quarter of 2023.

We have opened 24 net new company-operated stores in China Mainland since the third quarter of 2023.

Rest of World.

2 unchanged sentences

The increase in Rest of World net revenue was also driven by a $63.3 million increase in net revenue from new or expanded company-operated stores and our other channels.

We have opened nine net new stores in Rest of World since the second quarter of 2023.

First Two Quarters

We have opened 11 net new company-operated stores in Rest of World since the third quarter of 2023.

First Three Quarters

2024 2023 Year over year change

2 unchanged sentences

58.6 % 57.8 % 80 basis points

The increase in gross margin was primarily the result of:

• a net increase in product margin of 120 basis points, primarily due to lower product costs, as well as lower inventory provisions in the current year, which was modestly offset by higher markdowns in the current year;

Please refer to Note 4.

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

Gross margin increased 80 basis points, or increased 50 basis points on an adjusted basis.

The 50 basis point increase in adjusted gross margin was primarily the result of:

• a net increase in product margin of 90 basis points, primarily due to lower product costs, as well as lower inventory provisions in the current year;

• a decrease in costs related to our product departments as a percentage of net revenue of 70 basis points.

The increase in gross margin was partially offset by an increase in occupancy and depreciation costs as a percentage of net revenue of 70 basis points, an increase in distribution center costs as a percentage of net revenue of 50 basis points, and an unfavorable impact of foreign currency exchange rates of 20 basis points.

The increase in adjusted gross margin was partially offset by an increase in occupancy and depreciation costs as a percentage of net revenue of 70 basis points, an increase in distribution center costs as a percentage of net revenue of 30 basis points, and an unfavorable impact of foreign currency exchange rates of 10 basis points.

Selling, General and Administrative Expenses

First Two Quarters

First Three Quarters

2024 2023 Year over year change

5 unchanged sentences

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

• an increase in costs related to our operating channels of $109.3 million, comprised of:

– an increase in employee costs of $40.1 million primarily due to increased salaries and wages expense and benefit costs for retail employees primarily from the growth in our business, partially offset by decreased incentive compensation;

– an increase in brand and community costs of $24.5 million primarily due to increased digital marketing expenses;

– an increase in other operating costs of $24.2 million primarily due to increased depreciation costs, and repairs and maintenance costs;

– an increase in technology costs of $12.2 million;

– an increase in variable costs of $8.4 million primarily due to increased credit card fees and packaging costs, primarily as a result of increased net revenue, partially offset by decreased distribution cost rates.

• an increase in head office costs of $99.0 million, comprised of:

5 unchanged sentences

The increase in costs related to our head office was partially offset by a net decrease in employee costs of $8.3 million primarily due to decreased incentive compensation, partially offset by increased salaries and wages expense.

• an increase in costs related to our operating channels of $72.0 million, comprised of:

– an increase in employee costs of $26.2 million primarily due to increased salaries and wages expense and benefit costs for retail employees primarily from the growth in our business, partially offset by decreased incentive compensation;

– an increase in other operating costs of $22.9 million primarily due to increased depreciation costs, technology costs, and repairs and maintenance costs;

– an increase in brand and community costs of $11.6 million primarily due to increased digital marketing expenses;

– an increase in variable costs of $11.3 million primarily due to increased packaging costs and credit card fees, primarily as a result of increased net revenue.

• a decrease in net foreign currency exchange and derivative revaluation gains of $1.2 million.

• an increase in net foreign currency exchange and derivative revaluation losses of $8.2 million.

Impairment of Assets and Restructuring Costs

First Three Quarters

2024 2023 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 4.

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

2024 2023 Year over year change

2 unchanged sentences

$ 1,118 $ 5,010 $ (3,892) (77.7) %

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.

These assets were fully impaired during the third quarter of 2023.

The amortization of intangible assets in 2024 was primarily the result of the amortization of intangible assets recognized upon the acquisition of the Mexico operations.

The amortization of intangible assets in 2023 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

2 unchanged sentences

Segmented income from operations is summarized below.

First Two Quarters

First Three Quarters

2024 2023 2024 2023 Year over year change

6 unchanged sentences

General corporate expense 983,465 931,296 52,169 5.6

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 1,118 5,010 (3,892) (77.7)

1 unchanged sentence

Operating margin 21.0 % 19.0 % 200 basis points

The decrease in Americas income from operations was primarily the result of increased selling, general and administrative expenses.

The increase in selling, general and administrative expenses was primarily due to increased marketing expenses, higher depreciation, and higher technology costs, partially offset by lower employee costs.

The increase in selling, general and administrative expenses was partially offset by increased gross profit of $31.1 million, driven by increased net revenue, partially offset by lower gross margin.

The increase in Americas income from operations was primarily the result of increased gross profit of $45.3 million, driven by increased net revenue, partially offset by lower gross margin.

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

Income from operations as a percentage of Americas net revenue decreased primarily due to deleverage on selling, general and administrative expenses and lower gross margin.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to increased marketing expenses and higher depreciation, partially offset by decreased distribution cost rates and lower employee costs.

Income from operations as a percentage of Americas net revenue decreased due to lower gross margin and deleverage on selling, general and administrative expenses.

China Mainland.

1 unchanged sentence

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 and increased marketing expenses, as well as increased packaging and distribution costs driven by higher net revenue.

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

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

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

Rest of World.

The increase in Rest of World income from operations was primarily the result of increased gross profit of $121.0 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 costs, partially offset by unfavorable foreign currency exchange rates.

The increase in gross margin was primarily due to higher product margin, 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 and increased marketing expenses, as well as increased distribution costs and credit card fees driven by higher net revenue.

1 unchanged sentence

General Corporate Expense.

The increase in general corporate expense was primarily due to increased advisory and professional fees, technology costs, depreciation, and employee costs.

The increase was also due to a decrease in net foreign currency exchange and derivative revaluation gains of $1.2 million.

The increase in general corporate expense was partially offset by decreased charitable donations.

The increase in general corporate expense was primarily due to increased advisory and professional fees, technology costs, and depreciation.

The increase was also due to an increase in net foreign currency exchange and derivative revaluation losses of $8.2 million.

The increase in general corporate expense was partially offset by decreased charitable donations and a net decrease in employee costs.

Other Income (Expense), Net

First Two Quarters

First Three Quarters

2024 2023 Year over year change

4 unchanged sentences

Income Tax Expense

First Two Quarters

First Three Quarters

2024 2023 Year over year change

4 unchanged sentences

29.8 % 29.2 % 60 basis points

The increase in the effective tax rate was primarily due to a decrease in tax benefits related to stock-based compensation and adjustments upon the filing of certain income tax returns, partially offset by an increase in tax credits.

First Two Quarters

Excluding the income tax effects of the impairment and other charges recognized in relation to lululemon Studio in 2023, our adjusted effective tax rate was 29.0% for the first three quarters of 2023.

First Three Quarters

2024 2023 Year over year change

1 unchanged sentence

$ 1,066,213 $ 880,722 $ 185,491 21.1 %

The increase in net income was primarily due to an increase in gross profit of $237.9 million and an increase in other income (expense), net of $25.9 million, partially offset by an increase in selling, general and administrative expenses of $149.5 million and an increase in income tax expense of $35.8 million.

The increase in net income was primarily due to an increase in gross profit of $382.9 million, impairment and other charges recognized in 2023 of $74.5 million, and an increase in other income (expense), net of $29.8 million, partially offset by an increase in selling, general and administrative expenses of $216.5 million, and an increase in income tax expense of $89.0 million.

Excluding the impairment and other charges recognized in relation to lululemon Studio in 2023, and their tax effects, adjusted net income increased $113.4 million or 12%.

Comparable Sales

5 unchanged sentences

Our back-back room capability allows our store educators to access inventory located at our other locations and have product shipped directly to a guest's address or a store.

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

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

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.

2 unchanged sentences

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

Company-operated stores acquired as a result of the acquisition of the Mexico operations will be considered comparable beginning after 12 full fiscal months of sales from the date of acquisition.

Prior to the acquisition, wholesale sales were made to a third party under a license and supply arrangement.

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

1 unchanged sentence

Non-GAAP Financial Measures

Constant dollar changes 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.

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

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, 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 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 and comparable sales show the change compared to the corresponding period in the prior year.

Second Quarter 2024 Compared to Second Quarter 2023

First Two Quarters 2024 Compared to First Two Quarters 2023

Third Quarter 2024 Compared to Third Quarter 2023

First Three Quarters 2024 Compared to First Three Quarters 2023

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

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

Adjusted Financial Measures

The following tables reconcile adjusted 2023 financial measures with the most directly comparable measures calculated in accordance with GAAP.

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

Please refer to Note 4.

Impairment of Assets and Restructuring Costs 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

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

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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

2024 2023 Year over year change

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Operating Activities

The increase in cash provided by operating activities was primarily as a result of increased net income of $82.3 million.

The increase in cash provided by operating activities was partially offset by a decrease in cash flows from the changes in operating assets and liabilities of $25.1 million, primarily driven by changes in accounts payable, accrued compensation, and other current assets, partially offset by changes in income taxes, inventories, and accrued liabilities.

The increase in cash provided by operating activities was also partially offset by changes in adjusting items of $8.7 million, primarily driven by lower cash inflows related to derivatives, partially offset by increased depreciation.

Net income increased $185.5 million.

The decrease in cash provided by operating activities was primarily a result of changes in operating assets and liabilities of $117.1 million, primarily driven by changes in inventories, accrued compensation, other assets, and accounts payable, partially offset by changes in income taxes, and accrued liabilities.

The decrease in cash

provided by operating activities was also a result of changes in impairment and other charges recognized in relation to lululemon Studio in 2023, and lower cash inflows related to derivatives, partially offset by increased depreciation.

Investing Activities

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

The modest decrease in capital expenditures was primarily due to a decrease in corporate capital expenditures, while we had similar levels of capital expenditures across distribution centers, technology infrastructure and system initiatives, and company-operated stores.

The increase in cash used in investing activities was primarily due the acquisition of the lululemon branded retail locations and operations run by a third party in Mexico, increased capital expenditures, and an increase in other investing activities, partially offset by the settlement of net investment hedges.

The modest increase in capital expenditures was primarily due to an increase in company-operated stores expenditures and system initiatives, partially offset by a decrease in corporate and digital technology infrastructure capital expenditures.

Financing Activities

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

During the first two quarters of 2024, we repurchased 2.6 million shares at a total cost including commissions and excise taxes of $888.9 million.

During the first two quarters of 2023, we repurchased 0.8 million shares at a total cost including commissions and excise taxes of $292.0 million.

During the first three quarters of 2024, we repurchased 4.2 million shares at a total cost including commissions and excise taxes of $1.3 billion.

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

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

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The following table includes certain measures of our liquidity:

July 28, 2024

October 27, 2024

(In thousands)

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

As of July 28, 2024, letters of credit and guarantee totaling $11.2 million had been issued, including $6.3 million under our committed revolving credit facility.

As of October 27, 2024, letters of credit and guarantee totaling $12.9 million had been issued, including $6.5 million under our committed revolving credit facility.

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.

As of July 28, 2024, aside from letters of credit and guarantee of $6.3 million, we had no other borrowings outstanding under this credit facility.

As of October 27, 2024, aside from letters of credit and guarantee of $6.5 million, we had no other borrowings outstanding under this credit facility.

Further information regarding our credit facilities and associated covenants is outlined in Note 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 28, 2024 was $1.4 billion, a decrease of 14% from July 30, 2023.

Our inventory balance as of October 27, 2024 was $1.8 billion, an increase of 8% from October 29, 2023.

Critical Accounting Policies and Estimates

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Operating Locations

Our company-operated stores by market as of July 28, 2024 and January 28, 2024 are summarized in the table below.

Number of company-operated stores by market July 28,

Our company-operated stores by market as of October 27, 2024 and January 28, 2024 are summarized in the table below.

Number of company-operated stores by market October 27,

2024 January 28,

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Total company-operated stores 749 711

Our retail locations operated by third parties by market as of July 28, 2024 and January 28, 2024 are summarized in the table below.

Number of retail locations operated by third parties by market July 28,

On September 10, 2024, we acquired the lululemon branded retail locations and operations run by a third party in Mexico.

We had previously granted the third party the right to operate retail locations and to sell lululemon products in Mexico.

Of the 16 retail locations acquired, 14 are company-operated stores and two are pop-up locations.

Subsequent to the acquisition, and during the third quarter of 2024, we opened one additional new company-operated store in Mexico.

Retail locations operated by third parties by market as of October 27, 2024 and January 28, 2024 are summarized in the table below.

Number of retail locations operated by third parties by market October 27,

2024 January 28,

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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