lululemon athletica inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) lululemon athletica inc. CONSOLIDATED BALANCE SHEETS (Unaudited; Amounts in thousands, except per share amounts) October 27, 2024 January 28, 2024 ASSETS Current assets Cash and cash equivalents $ 1,188,419 $ 2,243,971 Accounts receivable, net 143,418 124,769 Inventories 1,800,893 1,323,602 Prepaid and receivable income taxes 257,388 183,733 Prepaid expenses and other current assets 215,171 184,502 3,605,289 4,060,577 Property and equipment, net 1,697,759 1,545,811 Right-of-use lease assets 1,360,589 1,265,610 Goodwill 164,462 24,083 Intangible assets, net 13,723 — Deferred income tax assets 9,253 9,176 Other non-current assets 232,594 186,684 $ 7,083,669 $ 7,091,941 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 385,960 $ 348,441 Accrued liabilities and other 561,615 348,555 Accrued compensation and related expenses 190,169 326,110 Current lease liabilities 290,368 249,270 Current income taxes payable 96,808 12,098 Unredeemed gift card liability 238,327 306,479 Other current liabilities 40,286 40,308 1,803,533 1,631,261 Non-current lease liabilities 1,223,733 1,154,012 Non-current income taxes payable — 15,864 Deferred income tax liabilities 33,231 29,522 Other non-current liabilities 37,440 29,201 3,097,937 2,859,860 Commitments and contingencies Stockholders' equity Undesignated preferred stock, $ 0.01 par value: 5,000 shares authorized; none issued and outstanding — — Exchangeable stock, no par value: 60,000 shares authorized; 5,116 and 5,116 issued and outstanding — — Special voting stock, $ 0.000005 par value: 60,000 shares authorized; 5,116 and 5,116 issued and outstanding — — Common stock, $ 0.005 par value: 400,000 shares authorized; 117,046 and 121,106 issued and outstanding 585 606 Additional paid-in capital 610,402 575,369 Retained earnings 3,694,547 3,920,362 Accumulated other comprehensive loss ( 319,802 ) ( 264,256 ) 3,985,732 4,232,081 $ 7,083,669 $ 7,091,941 See accompanying notes to the unaudited interim consolidated financial statements 3 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited; Amounts in thousands, except per share amounts) Quarter Ended Three Quarters Ended October 27, 2024 October 29, 2023 October 27, 2024 October 29, 2023 Net revenue $ 2,396,660 $ 2,204,218 $ 6,976,629 $ 6,414,175 Cost of goods sold 995,054 947,554 2,887,770 2,708,195 Gross profit 1,401,606 1,256,664 4,088,859 3,705,980 Selling, general and administrative expenses 909,827 842,795 2,624,212 2,407,683 Impairment of assets and restructuring costs — 74,501 — 74,501 Amortization of intangible assets 1,118 1,253 1,118 5,010 Income from operations 490,661 338,115 1,463,529 1,218,786 Other income (expense), net 13,743 9,842 55,020 25,229 Income before income tax expense 504,404 347,957 1,518,549 1,244,015 Income tax expense 152,534 99,243 452,336 363,293 Net income $ 351,870 $ 248,714 $ 1,066,213 $ 880,722 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment $ ( 22,277 ) $ ( 96,478 ) $ ( 92,153 ) $ ( 84,442 ) Net investment hedge gains (losses) 12,292 20,490 36,607 21,196 Other comprehensive income (loss), net of tax $ ( 9,985 ) $ ( 75,988 ) $ ( 55,546 ) $ ( 63,246 ) Comprehensive income $ 341,885 $ 172,726 $ 1,010,667 $ 817,476 Basic earnings per share $ 2.87 $ 1.97 $ 8.57 $ 6.94 Diluted earnings per share $ 2.87 $ 1.96 $ 8.55 $ 6.92 Basic weighted-average number of shares outstanding 122,697 126,460 124,471 126,892 Diluted weighted-average number of shares outstanding 122,803 126,770 124,668 127,218 See accompanying notes to the unaudited interim consolidated financial statements 4 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited; Amounts in thousands) Quarter Ended October 27, 2024 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Shares Par Value Shares Par Value Balance as of July 28, 2024 5,116 5,116 $ — 118,610 $ 593 $ 589,156 $ 3,751,713 $ ( 309,817 ) $ 4,031,645 Net income 351,870 351,870 Other comprehensive income (loss), net of tax ( 9,985 ) ( 9,985 ) Stock-based compensation expense 24,169 24,169 Common stock issued upon settlement of stock-based compensation 15 — 1,514 1,514 Shares withheld related to net share settlement of stock-based compensation ( 3 ) — ( 888 ) ( 888 ) Repurchase of common stock, including excise tax ( 1,576 ) ( 8 ) ( 3,549 ) ( 409,036 ) ( 412,593 ) Balance as of October 27, 2024 5,116 5,116 $ — 117,046 $ 585 $ 610,402 $ 3,694,547 $ ( 319,802 ) $ 3,985,732 Quarter Ended October 29, 2023 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Shares Par Value Shares Par Value Balance as of July 30, 2023 5,116 5,116 $ — 121,613 $ 608 $ 505,127 $ 3,267,589 $ ( 239,842 ) $ 3,533,482 Net income 248,714 248,714 Other comprehensive income (loss), net of tax ( 75,988 ) ( 75,988 ) Stock-based compensation expense 24,573 24,573 Common stock issued upon settlement of stock-based compensation 67 2 8,834 8,836 Shares withheld related to net share settlement of stock-based compensation ( 5 ) — ( 1,142 ) ( 1,142 ) Repurchase of common stock, including excise tax ( 553 ) ( 4 ) ( 1,002 ) ( 211,620 ) ( 212,626 ) Balance as of October 29, 2023 5,116 5,116 $ — 121,122 $ 606 $ 536,390 $ 3,304,683 $ ( 315,830 ) $ 3,525,849 5 Table of Contents Three Quarters Ended October 27, 2024 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Shares Par Value Shares Par Value Balance as of January 28, 2024 5,116 5,116 $ — 121,106 $ 606 $ 575,369 $ 3,920,362 $ ( 264,256 ) $ 4,232,081 Net income 1,066,213 1,066,213 Other comprehensive income (loss), net of tax ( 55,546 ) ( 55,546 ) Stock-based compensation expense 71,494 71,494 Common stock issued upon settlement of stock-based compensation 239 — 7,277 7,277 Shares withheld related to net share settlement of stock-based compensation ( 90 ) — ( 34,259 ) ( 34,259 ) Repurchase of common stock, including excise tax ( 4,209 ) ( 21 ) ( 9,479 ) ( 1,292,028 ) ( 1,301,528 ) Balance as of October 27, 2024 5,116 5,116 $ — 117,046 $ 585 $ 610,402 $ 3,694,547 $ ( 319,802 ) $ 3,985,732 Three Quarters Ended October 29, 2023 Exchangeable Stock Special Voting Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Shares Shares Par Value Shares Par Value Balance as of January 29, 2023 5,116 5,116 $ — 122,205 $ 611 $ 474,645 $ 2,926,127 $ ( 252,584 ) $ 3,148,799 Net income 880,722 880,722 Other comprehensive income (loss), net of tax ( 63,246 ) ( 63,246 ) Stock-based compensation expense 70,157 70,157 Common stock issued upon settlement of stock-based compensation 374 2 24,935 24,937 Shares withheld related to net share settlement of stock-based compensation ( 95 ) — ( 30,877 ) ( 30,877 ) Repurchase of common stock, including excise tax ( 1,362 ) ( 7 ) ( 2,470 ) ( 502,166 ) ( 504,643 ) Balance as of October 29, 2023 5,116 5,116 $ — 121,122 $ 606 $ 536,390 $ 3,304,683 $ ( 315,830 ) $ 3,525,849 See accompanying notes to the unaudited interim consolidated financial statements 6 Table of Contents lululemon athletica inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Amounts in thousands) Three Quarters Ended October 27, 2024 October 29, 2023 Cash flows from operating activities Net income $ 1,066,213 $ 880,722 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 312,931 276,094 lululemon Studio obsolescence provision — 23,709 Impairment of assets and restructuring costs — 74,501 Stock-based compensation expense 71,494 70,157 Settlement of derivatives not designated in a hedging relationship ( 19,645 ) 29,499 Changes in operating assets and liabilities: Inventories ( 477,682 ) ( 301,801 ) Prepaid and receivable income taxes ( 74,915 ) ( 114,616 ) Prepaid expenses and other current assets ( 50,935 ) 41,202 Other non-current assets ( 60,638 ) ( 30,513 ) Accounts payable 45,579 141,685 Accrued liabilities and other 171,566 ( 16,238 ) Accrued compensation and related expenses ( 133,630 ) ( 1,496 ) Current and non-current income taxes payable 70,615 ( 153,539 ) Unredeemed gift card liability ( 66,623 ) ( 35,927 ) Right-of-use lease assets and current and non-current lease liabilities 16,234 19,898 Other current and non-current liabilities 759 8,729 Net cash provided by operating activities 871,323 912,066 Cash flows from investing activities Purchase of property and equipment ( 454,250 ) ( 445,353 ) Settlement of net investment hedges 15,041 686 Acquisition, net of cash acquired ( 130,996 ) — Other investing activities ( 5,009 ) ( 658 ) Net cash used in investing activities ( 575,214 ) ( 445,325 ) Cash flows from financing activities Proceeds from settlement of stock-based compensation 7,277 24,937 Shares withheld related to net share settlement of stock-based compensation ( 34,259 ) ( 30,877 ) Repurchase of common stock ( 1,301,528 ) ( 504,643 ) Net cash used in financing activities ( 1,328,510 ) ( 510,583 ) Effect of foreign currency exchange rate changes on cash and cash equivalents ( 23,151 ) ( 19,887 ) Decrease in cash and cash equivalents ( 1,055,552 ) ( 63,729 ) Cash and cash equivalents, beginning of period $ 2,243,971 $ 1,154,867 Cash and cash equivalents, end of period $ 1,188,419 $ 1,091,138 See accompanying notes to the unaudited interim consolidated financial statements 7 Table of Contents lululemon athletica inc. INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Note 1 Nature of Operations and Basis of Presentation 9 Note 2 Recent Accounting Pronouncements 9 Note 3 Acquisition 10 Note 4 Impairment of Assets and Restructuring Costs 11 Note 5 Revolving Credit Facilities 12 Note 6 Supply Chain Financing Program 12 Note 7 Stock-Based Compensation and Benefit Plans 13 Note 8 Fair Value Measurement 14 Note 9 Derivative Financial Instruments 15 Note 10 Earnings Per Share 17 Note 11 Supplementary Financial Information 18 Note 12 Segmented Information 19 Note 13 Disaggregated Net Revenue 21 Note 14 Legal Proceedings and Other Contingencies 21 8 Table of Contents lululemon athletica inc. NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Operations and Basis of Presentation Nature of operations lululemon athletica inc., a Delaware corporation, ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of technical athletic apparel, footwear, and accessories. The Company organizes its operations into four regional markets: Americas, China Mainland, Asia Pacific ("APAC"), and Europe and the Middle East ("EMEA"). It conducts its business through a number of different channels in each market, including company-operated stores, e-commerce, temporary locations, wholesale, outlets, a re-commerce program, and license and supply arrangements. There were 749 and 711 company-operated stores as of October 27, 2024 and January 28, 2024, respectively. Basis of presentation The unaudited interim consolidated financial statements, including the financial position as of October 27, 2024 and the results of operations and cash flows for the periods disclosed, are presented in U.S. dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of January 28, 2024 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 28, 2024, which are included in Item 8 in the Company's fiscal 2023 Annual Report on Form 10-K filed with the SEC on March 21, 2024. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal 2023 Annual Report on Form 10-K. Note 2. Recent Accounting Pronouncements sets out the impact of recent accounting pronouncements. On September 10, 2024, the Company acquired the lululemon branded retail locations and operations run by a third party in Mexico. The Company had previously granted the third party the right to operate retail locations and to sell lululemon products in Mexico. The results of operations, financial position, and cash flows of the Mexico operations have been included in the Company's consolidated financial statements since the date of acquisition. Please refer to Note 3. Acquisition for further information. The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2024 will end on February 2, 2025 and will be a 53-week year. Fiscal 2023 was a 52-week year and ended on January 28, 2024. Fiscal 2024 and fiscal 2023 are referred to as "2024," and "2023," respectively. The first three quarters of 2024 and 2023 ended on October 27, 2024 and October 29, 2023, respectively. The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season. Use of estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of net revenue and expenses during the reporting period. Actual results could differ from those estimates. Note 2. Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standard Updates ("ASUs"). ASUs recently issued not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's consolidated financial position or results of operations. 9 Table of Contents Recently issued accounting pronouncements In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. Entities will be required to provide disclosures of significant segmented expenses and other categories used by the Chief Operating Decision Maker ("CODM") in order to enhance disclosure at the segment level. This amendment is effective for annual periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024, and is applied retrospectively for periods presented in the financial statements. The Company is currently evaluating the impact that this new guidance may have on its financial statement disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This disclosure requires expanded disclosure within the rate reconciliation as well as disaggregation of annual taxes paid. This amendment is effective for annual periods beginning after December 15, 2024, and is applied prospectively. The Company is currently evaluating the impact that this new guidance may have on its financial statement disclosures. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. Entities will be required to provide disaggregated disclosures for certain income statement expense line items. This amendment is effective for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, and shall be applied retrospectively for periods presented in the financial statements. The Company is currently evaluating the impact that this new guidance may have on its financial statement disclosures. Note 3. Acquisition On September 10, 2024, the Company acquired the lululemon branded retail locations and operations run by a third party in Mexico. The Company had previously granted the third party the right to operate retail locations and to sell lululemon products in Mexico. The following table summarizes the fair value of the consideration transferred, as well as the calculation of goodwill based on the excess of consideration over the provisional fair value of net assets acquired. September 10, 2024 (In thousands) Fair value of consideration transferred: Cash to shareholders $ 159,380 Contingent consideration 15,000 Settlement of intercompany balances 6,975 181,355 Less cash acquired ( 5,234 ) Fair value of consideration transferred, net of cash and cash equivalents acquired $ 176,121 Less fair value of net assets acquired: Assets acquired: Inventories $ 15,275 Intangible assets 15,500 Other current and non-current assets 14,013 44,788 Liabilities assumed ( 15,668 ) Net assets acquired $ 29,120 Goodwill $ 147,001 The purchase price allocation remains provisional as the Company is still obtaining all the information necessary to finalize the fair value of acquired intangibles, deferred taxes, certain contingencies, and the resulting amount of goodwill as of the date of acquisition. Goodwill relates to the assembled workforce and benefits expected as a result of the acquisition and has been allocated to the Americas segment. None of the goodwill is expected to be deductible for income tax purposes. Reacquired franchise rights were valued using the future expected cash flows of the remaining contractual franchise period until November 2026. These intangible assets have a fair value of $ 15.5 million, which is expected to be amortized until 10 Table of Contents November 2026. Contingent consideration of $ 15.0 million relates to performance related conditions from the acquisition date to December 31, 2025, and has been recognized at fair value. Of the net cash paid to shareholders, $ 131.0 million was paid during the third quarter of 2024, and $ 23.1 million was paid subsequent to October 27, 2024. The Company has not disclosed pro forma information of the combined business as the transaction is not material to net revenue or net earnings. During the first three quarters of 2024, the Company recognized $ 2.5 million in acquisition-related expenses within selling, general and administrative expenses primarily related to legal, accounting, valuation, and other professional services. Note 4. Impairment of Assets and Restructuring Costs During the third quarter of 2023, the Company decided to cease selling the lululemon Studio Mirror hardware. It also contracted with Peloton Interactive, Inc. to be the exclusive digital fitness content provider to existing lululemon Studio subscribers, and stopped producing its own digital fitness content. The Company ceased selling the lululemon Studio Mirror and new digital content subscriptions in December 2023. During the third quarter of 2023, the Company recognized certain inventory provisions, asset impairments, and restructuring costs related to lululemon Studio. The following table summarizes the amounts recognized: Third Quarter 2024 2023 (In thousands) Costs recorded in cost of goods sold: lululemon Studio obsolescence provision $ — $ 23,709 Costs recorded in operating expenses: Impairment of assets: Impairment of intangible assets $ — $ 16,951 Impairment of cloud computing arrangement implementation costs — 16,074 Impairment of property and equipment — 11,161 $ — $ 44,186 Restructuring costs — 30,315 Impairment of assets and restructuring costs $ — $ 74,501 Total pre-tax charges $ — $ 98,210 Income tax effects of charges $ — $ ( 26,085 ) Total after-tax charges $ — $ 72,125 lululemon Studio obsolescence provision As a result of the decision to cease selling the lululemon Studio Mirror, the Company recognized an inventory obsolescence provision of $ 23.7 million during the third quarter of 2023. The net realizable value of the lululemon Studio inventory was based on assumptions regarding liquidation value. Impairment of assets As a result of the Company's decision to no longer produce digital fitness content and to cease the sale of the lululemon Studio Mirror, the Company performed impairment testing for the lululemon Studio asset group as of October 29, 2023. The undiscounted cash flows of the lululemon Studio asset group were less than their carrying value, and therefore the Company calculated the fair value of the asset group, which was also less than its carrying value. As a result of the impairment test, the Company recognized asset impairments totaling $ 44.2 million during the third quarter of 2023. The fair value of long-lived 11 Table of Contents assets was based on a discounted cash flow model, and is a Level 3 non-recurring fair value measurement. The key assumptions used to estimate the fair value were subscriber churn rates and operating costs. Restructuring costs The Company recognized restructuring costs of $ 30.3 million for lululemon Studio primarily related to contract termination costs, employee severance costs, and professional fees during the third quarter of 2023. Note 5. Revolving Credit Facilities Americas revolving credit facility On December 14, 2021, the Company entered into an amended and restated credit agreement extending its existing credit facility, which provides for $ 400.0 million in commitments under an unsecured five-year revolving credit facility. The credit facility has a maturity date of December 14, 2026, subject to extension under certain circumstances. Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs). As of October 27, 2024, aside from letters of credit of $ 6.5 million, the Company had no other borrowings outstanding under this credit facility. Borrowings made under the credit facility bear interest at a rate per annum equal to, at the Company's option, either (a) a rate based on the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York ("SOFR"), or (b) an alternate base rate, plus, in each case, an applicable margin. The applicable margin is determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax, depreciation, amortization, and rent ("EBITDAR") and ranges between 1.000 %- 1.375 % for SOFR loans and 0.000 %- 0.375 % for alternate base rate or Canadian prime rate loans. Additionally, a commitment fee of between 0.100 %- 0.200 %, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility. The applicable interest rates and commitment fees are subject to adjustment based on certain sustainability key performance indicators ("KPIs"). The two KPIs are based on greenhouse gas emissions intensity reduction and gender pay equity, and the Company's performance against certain targets measured on an annual basis could result in positive or negative sustainability rate adjustments of 2.50 basis points to its drawn pricing and positive or negative sustainability fee adjustments of 0.50 basis points to its undrawn pricing. The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of the Company's subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions. The Company's financial covenants include maintaining an operating lease adjusted leverage ratio of not greater than 3.25 :1.00 and the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) of not less than 2.00 :1.00. The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control). If an event of default occurs, the credit agreement may be terminated, and the maturity of any outstanding amounts may be accelerated. As of October 27, 2024, the Company was in compliance with the covenants of the credit facility. China Mainland revolving credit facility The Company has an uncommitted and unsecured 300.0 million Chinese Yuan ($ 42.1 million) revolving credit facility with terms that are reviewed on an annual basis. It is comprised of a revolving loan of up to 200.0 million Chinese Yuan ($ 28.1 million) and a guarantee facility of up to 100.0 million Chinese Yuan ($ 14.0 million), or its equivalent in another currency. Loans are available for a period not to exceed 12 months, at an interest rate equal to the loan prime rate plus a spread of 0.5175 %. The Company is required to follow certain covenants. As of October 27, 2024, the Company was in compliance with the covenants and, aside from letters of credit of 44.1 million Chinese Yuan ($ 6.2 million), there were no other borrowings or guarantees outstanding under this credit facility. Note 6. Supply Chain Financing Program The Company facilitates a voluntary supply chain financing ("SCF") program that allows its suppliers to elect to sell the receivables owed to them by the Company to a third party financial institution. Participating suppliers negotiate arrangements 12 Table of Contents directly with the financial institution. If a supplier chooses to participate in the SCF program it may request an invoice be paid earlier than it would by the Company, and the financial institution at its sole and absolute discretion, may elect to make an early payment to the supplier at a discount. The Company’s obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted by a supplier's participation in the arrangement and the Company provides no guarantees to any third parties under the SCF program. As of October 27, 2024 and January 28, 2024, $ 49.9 million and $ 42.1 million, respectively, were outstanding under the SCF program and presented within accounts payable. Note 7. Stock-Based Compensation and Benefit Plans Stock-based compensation plans The Company's eligible employees participate in various stock-based compensation plans, provided directly by the Company. Stock-based compensation expense charged to income for the plans was $ 70.5 million and $ 69.5 million for the first three quarters of 2024 and 2023, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $ 156.8 million as of October 27, 2024, which is expected to be recognized over a weighted-average period of 2.1 years. A summary of the balances of the Company's stock-based compensation plans as of October 27, 2024, and changes during the first three quarters then ended, is presented below: Stock Options Performance-Based Restricted Stock Units Restricted Shares Restricted Stock Units Number Weighted-Average Exercise Price Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value (In thousands, except per share amounts) Balance as of January 28, 2024 783 $ 285.69 175 $ 349.84 4 $ 370.85 223 $ 359.12 Granted 230 382.84 124 354.12 5 319.19 136 373.86 Exercised/released 39 180.86 100 310.86 4 371.33 95 349.40 Forfeited/expired 64 362.78 19 374.03 — — 22 372.19 Balance as of October 27, 2024 910 $ 309.62 180 $ 371.76 5 $ 317.86 242 $ 370.02 Exercisable as of October 27, 2024 448 $ 249.06 The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of two shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the grant date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved. The grant date fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the grant date. 13 Table of Contents The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The closing price of the Company's common stock on the grant date is used in the model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future exercise behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first three quarters of 2024: First Three Quarters 2024 Expected term 3.75 years Expected volatility 37.39 % Risk-free interest rate 4.30 % Dividend yield — % Employee share purchase plan The Company has an Employee Share Purchase Plan ("ESPP"). Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the third quarter of 2024, there were 39.7 thousand shares purchased. As of October 27, 2024, 4.3 million shares remain authorized to be purchased under the ESPP. Defined contribution pension plans The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches 50 % to 75 % of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was $ 16.4 million and $ 14.6 million in the first three quarters of 2024 and 2023, respectively. Note 8. Fair Value Measurement Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value: • Level 1 - defined as observable inputs such as quoted prices in active markets; • Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and • Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. 14 Table of Contents Assets and liabilities measured at fair value on a recurring basis The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of October 27, 2024 and January 28, 2024, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis: October 27, 2024 Level 1 Level 2 Level 3 Balance Sheet Classification (In thousands) Money market funds $ 37,510 $ 37,510 $ — $ — Cash and cash equivalents Term deposits 8 — 8 — Cash and cash equivalents Forward currency contract assets 36,076 — 36,076 — Prepaid expenses and other current assets Forward currency contract liabilities 33,768 — 33,768 — Other current liabilities January 28, 2024 Level 1 Level 2 Level 3 Balance Sheet Classification (In thousands) Money market funds $ 1,102,119 $ 1,102,119 $ — $ — Cash and cash equivalents Term deposits 8 — 8 — Cash and cash equivalents Forward currency contract assets 647 — 647 — Prepaid expenses and other current assets Forward currency contract liabilities 2,872 — 2,872 — Other current liabilities The Company records cash, accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities. The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds and short-term deposits with original maturities of three months or less. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate. The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities. Note 9. Derivative Financial Instruments Foreign currency exchange risk The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes. The Company currently hedges against changes in the Canadian dollar and Chinese Yuan to the U.S. dollar exchange rate and changes in the Euro and Australian dollar to the Canadian dollar exchange rate using forward currency contracts. Net investment hedges The Company is exposed to foreign currency exchange gains and losses which arise on translation of its international subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as other comprehensive income (loss), net of tax in accumulated other comprehensive income or loss within stockholders' equity. The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The Company assesses hedge effectiveness based on 15 Table of Contents changes in forward rates. The Company recorded no ineffectiveness from net investment hedges during the first three quarters of 2024. The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows. Derivatives not designated as hedging instruments The Company is exposed to gains and losses arising from changes in foreign currency exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date foreign currency exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses. During the first three quarters of 2024, the Company entered into certain forward currency contracts designed to economically hedge the foreign currency exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on specific monetary assets and liabilities denominated in currencies other than the functional currency of the entity. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses. The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows. Quantitative disclosures about derivative financial instruments The Company presents its derivative assets and derivative liabilities at their gross fair values within prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of October 27, 2024, there were derivative assets of $ 36.1 million and derivative liabilities of $ 33.8 million subject to enforceable netting arrangements. The notional amounts and fair values of forward currency contracts were as follows: October 27, 2024 January 28, 2024 Gross Notional Assets Liabilities Gross Notional Assets Liabilities (In thousands) Derivatives designated as net investment hedges: Forward currency contracts $ 1,632,500 $ 33,952 $ — $ 1,242,000 $ — $ 258 Derivatives not designated in a hedging relationship: Forward currency contracts 1,888,854 2,124 33,768 1,543,351 647 2,614 Net derivatives recognized on consolidated balance sheets: Forward currency contracts $ 36,076 $ 33,768 $ 647 $ 2,872 The forward currency contracts designated as net investment hedges outstanding as of October 27, 2024 mature on different dates between October 2024 and May 2025. The forward currency contracts not designated in a hedging relationship outstanding as of October 27, 2024 mature on different dates between October 2024 and May 2025. 16 Table of Contents The pre-tax gains and losses on foreign currency exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows: Third Quarter First Three Quarters 2024 2023 2024 2023 (In thousands) Gains (losses) recognized in net investment hedge gains (losses): Derivatives designated as net investment hedges $ 16,538 $ 27,898 $ 49,250 $ 28,859 No gains or losses have been reclassified from accumulated other comprehensive income or loss into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary. The pre-tax net foreign currency exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows: Third Quarter First Three Quarters 2024 2023 2024 2023 (In thousands) Gains (losses) recognized in selling, general and administrative expenses: Foreign currency exchange gains (losses) $ 13,423 $ 18,154 $ 44,194 $ ( 11,944 ) Derivatives not designated in a hedging relationship ( 20,260 ) ( 17,962 ) ( 49,298 ) 15,060 Net foreign currency exchange and derivative gains (losses) $ ( 6,837 ) $ 192 $ ( 5,104 ) $ 3,116 Credit risk The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance. The Company's forward currency contracts are generally entered into with what the Company believes are investment grade credit worthy and reputable financial institutions that are monitored by the Company for counterparty risk. The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts. Note 10. Earnings Per Share The details of the computation of basic and diluted earnings per share are as follows: Third Quarter First Three Quarters 2024 2023 2024 2023 (In thousands, except per share amounts) Net income $ 351,870 $ 248,714 $ 1,066,213 $ 880,722 Basic weighted-average number of shares outstanding 122,697 126,460 124,471 126,892 Assumed conversion of dilutive stock options and awards 106 310 197 326 Diluted weighted-average number of shares outstanding 122,803 126,770 124,668 127,218 Basic earnings per share $ 2.87 $ 1.97 $ 8.57 $ 6.94 Diluted earnings per share $ 2.87 $ 1.96 $ 8.55 $ 6.92 The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the economic equivalent of common shares in all material respects. All classes of stock have, in effect, the same economic rights and share equally in undistributed net income. For the first three quarters of 2024 and 2023, 0.1 million and 0.1 million stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share. 17 Table of Contents On March 23, 2022, the Company's board of directors approved a stock repurchase program for up to $ 1.0 billion of the Company's common shares on the open market or in privately negotiated transactions. During the first quarter of 2024, the Company completed the remaining stock repurchases under this program. On November 29, 2023, the Company's board of directors approved an additional stock repurchase program for up to $ 1.0 billion of the Company's common shares on the open market or in privately negotiated transactions. On May 29, 2024, the Company's board of directors approved a $ 1.0 billion increase to the existing stock repurchase program. The repurchase plan has no time limit and does not require the repurchase of a minimum number of shares. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements. The authorized value of shares available to be repurchased under this program excludes the cost of commissions and excise taxes and as of October 27, 2024, the remaining authorized value was $ 900.1 million. During the first three quarters of 2024 and 2023, 4.2 million and 1.4 million shares, respectively, were repurchased at a total cost including commissions and excise taxes of $ 1.3 billion and $ 504.6 million, respectively. Subsequent to October 27, 2024, and up to November 29, 2024, 0.4 million shares were repurchased at a total cost including commissions and excise taxes of $ 120.6 million. Note 11. Supplementary Financial Information A summary of certain consolidated balance sheet accounts is as follows: October 27, 2024 January 28, 2024 (In thousands) Inventories: Inventories, at cost $ 1,914,758 $ 1,465,076 Inventory provisions and reserves ( 113,865 ) ( 141,474 ) $ 1,800,893 $ 1,323,602 Prepaid expenses and other current assets: Prepaid expenses $ 146,692 $ 137,203 Forward currency contract assets 36,076 647 Other current assets 32,403 46,652 $ 215,171 $ 184,502 Property and equipment, net: Land $ 77,839 $ 79,498 Buildings 28,451 29,032 Leasehold improvements 1,204,260 1,006,926 Furniture and fixtures 169,082 156,656 Computer hardware 192,608 176,597 Computer software 1,237,123 1,032,567 Equipment and vehicles 49,870 34,017 Work in progress 165,045 247,943 Property and equipment, gross 3,124,278 2,763,236 Accumulated depreciation ( 1,426,519 ) ( 1,217,425 ) $ 1,697,759 $ 1,545,811 Other non-current assets: Cloud computing arrangement implementation costs $ 155,457 $ 133,597 Security deposits 45,386 31,825 Other 31,751 21,262 $ 232,594 $ 186,684 18 Table of Contents October 27, 2024 January 28, 2024 (In thousands) Accrued liabilities and other: Accrued operating expenses $ 225,305 $ 147,215 Sales return allowances 76,365 61,634 Accrued freight 79,985 41,241 Accrued capital expenditures 31,497 31,936 Accrued duty 50,998 25,817 Accrued rent 21,039 12,522 Accrued inventory liabilities 10,093 4,783 Sales tax collected 14,928 3,088 Forward currency contract liabilities 33,768 2,872 Other 17,637 17,447 $ 561,615 $ 348,555 Note 12. Segmented Information The Company's operating segments are based on the financial information the CODM, who is the Chief Executive Officer, uses to evaluate performance and allocate resources. During the fourth quarter of 2023, the financial information the CODM regularly uses to evaluate performance and allocate resources was revised. As the Company further executed on its omni-channel retail strategy, and with the continued expansion of its international operations, the CODM has shifted resource allocation decisions to be focused by regional market, rather than by selling channel. This resulted in a change in the Company's operating segments. 19 Table of Contents Since January 28, 2024, the Company has reported three segments: Americas, China Mainland, and Rest of World, which is APAC and EMEA on a combined basis. The Company does not report capital expenditures and assets by segment as that information is not reviewed by the CODM. Previously, the Company's operating segments were comprised of company-operated stores, direct to consumer (or "e-commerce"), and other. The Company has recast the prior period information to reflect its new operating segments. Third Quarter First Three Quarters 2024 2023 2024 2023 (In thousands) Net revenue: Americas $ 1,770,382 $ 1,732,398 $ 5,134,079 $ 5,019,909 China Mainland 318,338 228,595 936,313 673,108 Rest of World 307,940 243,225 906,237 721,158 $ 2,396,660 $ 2,204,218 $ 6,976,629 $ 6,414,175 Segmented income from operations: Americas $ 654,939 $ 636,714 $ 1,889,206 $ 1,878,506 China Mainland 110,600 76,792 349,463 234,158 Rest of World 68,762 45,552 209,443 140,638 834,301 759,058 2,448,112 2,253,302 General corporate expense 342,522 321,480 983,465 931,296 lululemon Studio obsolescence provision — 23,709 — 23,709 Impairment of assets and restructuring costs — 74,501 — 74,501 Amortization of intangible assets 1,118 1,253 1,118 5,010 Income from operations 490,661 338,115 1,463,529 1,218,786 Other income (expense), net 13,743 9,842 55,020 25,229 Income before income tax expense $ 504,404 $ 347,957 $ 1,518,549 $ 1,244,015 Depreciation and amortization: Americas $ 51,726 $ 45,074 $ 143,876 $ 124,724 China Mainland 8,136 6,521 23,923 18,280 Rest of World 8,151 5,911 22,064 16,964 Corporate 45,586 40,463 123,068 116,126 $ 113,599 $ 97,969 $ 312,931 $ 276,094 20 Table of Contents Note 13. Disaggregated Net Revenue In addition to the disaggregation of net revenue by reportable segment in Note 12. Segmented Information, the following table disaggregates the Company's net revenue by geographic area. Prior to the acquisition of the Mexico operations on September 10, 2024, wholesale sales to the third party under the license and supply arrangement by lululemon athletica canada inc. were disclosed as net revenue recognized within Canada. Third Quarter First Three Quarters 2024 2023 2024 2023 (In thousands) United States $ 1,424,234 $ 1,423,574 $ 4,186,614 $ 4,162,891 Canada 335,484 308,824 936,801 857,018 Mexico 10,664 — 10,664 — Americas 1,770,382 1,732,398 5,134,079 5,019,909 China Mainland 318,338 228,595 936,313 673,108 Hong Kong SAR, Taiwan, and Macau SAR 41,050 38,296 125,349 120,968 People's Republic of China 359,388 266,891 1,061,662 794,076 Other geographic areas 266,890 204,929 780,888 600,190 $ 2,396,660 $ 2,204,218 $ 6,976,629 $ 6,414,175 The following table disaggregates the Company's net revenue by category. Other categories is primarily composed of accessories, footwear, and lululemon Studio. Third Quarter First Three Quarters 2024 2023 2024 2023 (In thousands) Women's product $ 1,555,686 $ 1,433,927 $ 4,467,048 $ 4,139,082 Men's product 551,430 504,828 1,644,653 1,473,716 Other categories 289,544 265,463 864,928 801,377 $ 2,396,660 $ 2,204,218 $ 6,976,629 $ 6,414,175 The following table disaggregates the Company's net revenue by channel. Third Quarter First Three Quarters 2024 2023 2024 2023 (In thousands) Company-operated stores $ 1,210,523 $ 1,073,973 $ 3,496,661 $ 3,128,999 E-commerce 944,777 908,127 2,761,201 2,636,742 Other channels 241,360 222,118 718,767 648,434 $ 2,396,660 $ 2,204,218 $ 6,976,629 $ 6,414,175 Note 14. Legal Proceedings and Other Contingencies In addition to the legal proceedings described below, the Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights, employment claims, product liability claims, personal injury claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. The Company has recognized immaterial provisions related to the expected outcome of legal proceedings. 21 Table of Contents On July 12, 2024, lululemon and its subsidiary, lululemon usa inc., were named as defendants in a putative consumer class action ( Gyani v. Lululemon Athletica Inc., et al., No. 1:24-cv-22651-BB) in the United States District Court for the Southern District of Florida. The complaint asserts claims under the Florida Deceptive and Unfair Trade Practices Act and for unjust enrichment based on statements by the Company relating to the sustainability and environmental impact of the Company's products and actions during the period October 28, 2020 to present. The complaint seeks monetary damages, as well as non-monetary relief such as an injunction to end the alleged unlawful practices. The Company intends to defend the action vigorously. On August 8, 2024, lululemon athletica inc. and certain officers of the Company were named as defendants in a purported securities class action ( Patel v. Lululemon Athletica Inc., et al ., No. 1:24-cv-06033) in the United States District Court for the Southern District of New York. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly false and misleading public statements and omissions by Defendants during the period December 7, 2023 to July 24, 2024 relating to lululemon's business, product offerings, and inventory allocation that Plaintiff alleges artificially inflated the Company’s stock price. The complaint currently seeks unspecified monetary damages. The Company intends to defend the action vigorously. On November 4, 2024, November 8, 2024, November 12, 2024, November 18, 2024, and November 20, 2024, stockholder derivative complaints were filed against certain of the Company's officers, and all of the Company's directors as of that date in the United States Court for the Southern District of New York: Bhavsar v. McDonald et al. , No. 1:24-cv-08405 (the " Bhavsar Action"); Muszynski v. McDonald et al. , No. 1:24-cv-08507 (the " Muszynski Action"); Holtz v. McDonald et al. , No. 1:24-cv-08572 (the " Holtz Action"); Wong v. McDonald et al. , No. 1:24-cv-08752 (the " Wong Action"); and Kanaly v. McDonald et al , No. 1:24-cv-08839 (the " Kanaly Action," and collectively with the Bhavsar Action, the Muszynski Action, the Holtz Action, and the Wong Action, the "Derivative Actions."). The Kanaly Action additionally names certain of the Company's former directors. The Derivative Actions assert claims for (a) violating Sections 10(b), 14(a) and 20(a) of the Exchange Act, (b) breach of fiduciary duties, and (c) unjust enrichment and waste of corporate assets on allegations substantially similar to the allegations in the securities action complaint. The Bhavsar Action further asserts claims for abuse of control, gross mismanagement, and contribution under Sections 10(b) and 21D of the Exchange Act. The Wong Action also asserts a claim for contribution under Sections 10(b) and 21D of the Exchange Act. The Kanaly Action also asserts claims for gross mismanagement and aiding and abetting breach of fiduciary duty. The Wong Action and the Kanaly Action further bring claims based on allegedly false and misleading public statements and omissions during the period October 28, 2020 to March 21, 2024 relating to lululemon's "Inclusion, Diversity, Equity, and Action" program. The complaints seek monetary damages, equitable relief, and attorneys' fees and costs on behalf of the company, as well as an order directing certain governance reforms.