ITEM 1. FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
2020
|
|
February 2,
2020
|
ASSETS
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
481,581
|
|
|
$
|
1,093,505
|
|
Accounts receivable
|
|
59,772
|
|
|
40,219
|
|
Inventories
|
|
770,990
|
|
|
518,513
|
|
Prepaid and receivable income taxes
|
|
168,272
|
|
|
85,159
|
|
Prepaid expenses and other current assets
|
|
120,198
|
|
|
70,542
|
|
|
|
1,600,813
|
|
|
1,807,938
|
|
Property and equipment, net
|
|
719,880
|
|
|
671,693
|
|
Right-of-use lease assets
|
|
714,086
|
|
|
689,664
|
|
Goodwill
|
|
386,632
|
|
|
24,182
|
|
Intangible assets, net
|
|
82,276
|
|
|
241
|
|
Deferred income tax assets
|
|
31,562
|
|
|
31,435
|
|
Other non-current assets
|
|
92,671
|
|
|
56,201
|
|
|
|
$
|
3,627,920
|
|
|
$
|
3,281,354
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
160,779
|
|
|
$
|
79,997
|
|
Accrued inventory liabilities
|
|
10,654
|
|
|
6,344
|
|
Other accrued liabilities
|
|
190,366
|
|
|
112,641
|
|
Accrued compensation and related expenses
|
|
96,527
|
|
|
133,688
|
|
Current lease liabilities
|
|
138,082
|
|
|
128,497
|
|
Current income taxes payable
|
|
5,818
|
|
|
26,436
|
|
Unredeemed gift card liability
|
|
104,760
|
|
|
120,413
|
|
Other current liabilities
|
|
23,892
|
|
|
12,402
|
|
|
|
730,878
|
|
|
620,418
|
|
Non-current lease liabilities
|
|
635,386
|
|
|
611,464
|
|
Non-current income taxes payable
|
|
43,150
|
|
|
48,226
|
|
Deferred income tax liabilities
|
|
47,199
|
|
|
43,432
|
|
Other non-current liabilities
|
|
8,354
|
|
|
5,596
|
|
|
|
1,464,967
|
|
|
1,329,136
|
|
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; 5,216 and 6,227 issued and outstanding
|
|
—
|
|
|
—
|
|
Special voting stock, $0.000005 par value: 60,000 shares authorized; 5,216 and 6,227 issued and outstanding
|
|
—
|
|
|
—
|
|
Common stock, $0.005 par value: 400,000 shares authorized; 125,121 and 124,122 issued and outstanding
|
|
626
|
|
|
621
|
|
Additional paid-in capital
|
|
374,352
|
|
|
355,541
|
|
Retained earnings
|
|
2,016,591
|
|
|
1,820,637
|
|
Accumulated other comprehensive loss
|
|
(228,616)
|
|
|
(224,581)
|
|
|
|
2,162,953
|
|
|
1,952,218
|
|
|
|
$
|
3,627,920
|
|
|
$
|
3,281,354
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
Net revenue
|
|
$
|
1,117,426
|
|
|
$
|
916,138
|
|
|
$
|
2,672,330
|
|
|
$
|
2,581,805
|
|
Cost of goods sold
|
|
490,072
|
|
|
411,094
|
|
|
1,221,073
|
|
|
1,169,245
|
|
Gross profit
|
|
627,354
|
|
|
505,044
|
|
|
1,451,257
|
|
|
1,412,560
|
|
Selling, general and administrative expenses
|
|
411,662
|
|
|
329,208
|
|
|
1,064,172
|
|
|
939,930
|
|
Amortization of intangible assets
|
|
2,241
|
|
|
7
|
|
|
2,965
|
|
|
7
|
|
Acquisition-related expenses
|
|
8,531
|
|
|
—
|
|
|
22,040
|
|
|
—
|
|
Income from operations
|
|
204,920
|
|
|
175,829
|
|
|
362,080
|
|
|
472,623
|
|
Other income (expense), net
|
|
(580)
|
|
|
1,925
|
|
|
250
|
|
|
6,154
|
|
Income before income tax expense
|
|
204,340
|
|
|
177,754
|
|
|
362,330
|
|
|
478,777
|
|
Income tax expense
|
|
60,697
|
|
|
51,772
|
|
|
103,254
|
|
|
131,202
|
|
Net income
|
|
$
|
143,643
|
|
|
$
|
125,982
|
|
|
$
|
259,076
|
|
|
$
|
347,575
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
2,269
|
|
|
9,880
|
|
|
(4,035)
|
|
|
(1,329)
|
|
Comprehensive income
|
|
$
|
145,912
|
|
|
$
|
135,862
|
|
|
$
|
255,041
|
|
|
$
|
346,246
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.10
|
|
|
$
|
0.97
|
|
|
$
|
1.99
|
|
|
$
|
2.67
|
|
Diluted earnings per share
|
|
$
|
1.10
|
|
|
$
|
0.96
|
|
|
$
|
1.98
|
|
|
$
|
2.65
|
|
Basic weighted-average number of shares outstanding
|
|
130,318
|
|
|
130,282
|
|
|
130,271
|
|
|
130,420
|
|
Diluted weighted-average number of shares outstanding
|
|
130,924
|
|
|
130,805
|
|
|
130,842
|
|
|
130,975
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended November 1, 2020
|
|
|
Exchangeable Stock
|
|
Special Voting Stock
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
|
|
Shares
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
|
|
|
Balance at August 2, 2020
|
|
5,393
|
|
|
5,393
|
|
|
$
|
—
|
|
|
124,917
|
|
|
$
|
625
|
|
|
$
|
358,414
|
|
|
$
|
1,872,948
|
|
|
$
|
(230,885)
|
|
|
$
|
2,001,102
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,643
|
|
|
|
|
143,643
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,269
|
|
|
2,269
|
|
Common stock issued upon exchange of exchangeable shares
|
|
(177)
|
|
|
(177)
|
|
|
—
|
|
|
177
|
|
|
1
|
|
|
(1)
|
|
|
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
15,186
|
|
|
|
|
|
|
15,186
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
30
|
|
|
1
|
|
|
1,678
|
|
|
|
|
|
|
1,679
|
|
Shares withheld related to net share settlement of stock-based compensation
|
|
|
|
|
|
|
|
(3)
|
|
|
(1)
|
|
|
(925)
|
|
|
|
|
|
|
(926)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 1, 2020
|
|
5,216
|
|
|
5,216
|
|
|
$
|
—
|
|
|
125,121
|
|
|
$
|
626
|
|
|
$
|
374,352
|
|
|
$
|
2,016,591
|
|
|
$
|
(228,616)
|
|
|
$
|
2,162,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended November 3, 2019
|
|
|
Exchangeable Stock
|
|
Special Voting Stock
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
|
|
Shares
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
|
|
|
Balance at August 4, 2019
|
|
7,381
|
|
|
7,381
|
|
|
$
|
—
|
|
|
122,921
|
|
|
$
|
615
|
|
|
$
|
329,915
|
|
|
$
|
1,404,866
|
|
|
$
|
(228,017)
|
|
|
$
|
1,507,379
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,982
|
|
|
|
|
125,982
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,880
|
|
|
9,880
|
|
Common stock issued upon exchange of exchangeable shares
|
|
(421)
|
|
|
(421)
|
|
|
—
|
|
|
421
|
|
|
2
|
|
|
(2)
|
|
|
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
14,065
|
|
|
|
|
|
|
14,065
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
50
|
|
|
—
|
|
|
1,516
|
|
|
|
|
|
|
1,516
|
|
Shares withheld related to net share settlement of stock-based compensation
|
|
|
|
|
|
|
|
(12)
|
|
|
—
|
|
|
(2,093)
|
|
|
|
|
|
|
(2,093)
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
(44)
|
|
|
—
|
|
|
(66)
|
|
|
(7,927)
|
|
|
|
|
(7,993)
|
|
Balance at November 3, 2019
|
|
6,960
|
|
|
6,960
|
|
|
$
|
—
|
|
|
123,336
|
|
|
$
|
617
|
|
|
$
|
343,335
|
|
|
$
|
1,522,921
|
|
|
$
|
(218,137)
|
|
|
$
|
1,648,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended November 1, 2020
|
|
|
Exchangeable Stock
|
|
Special Voting Stock
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
|
|
Shares
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
|
|
|
Balance at February 2, 2020
|
|
6,227
|
|
|
6,227
|
|
|
$
|
—
|
|
|
124,122
|
|
|
$
|
621
|
|
|
$
|
355,541
|
|
|
$
|
1,820,637
|
|
|
$
|
(224,581)
|
|
|
$
|
1,952,218
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,076
|
|
|
|
|
259,076
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,035)
|
|
|
(4,035)
|
|
Common stock issued upon exchange of exchangeable shares
|
|
(1,011)
|
|
|
(1,011)
|
|
|
—
|
|
|
1,011
|
|
|
5
|
|
|
(5)
|
|
|
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
37,098
|
|
|
|
|
|
|
37,098
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
515
|
|
|
3
|
|
|
14,139
|
|
|
|
|
|
|
14,142
|
|
Shares withheld related to net share settlement of stock-based compensation
|
|
|
|
|
|
|
|
(158)
|
|
|
(1)
|
|
|
(31,882)
|
|
|
|
|
|
|
(31,883)
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
(369)
|
|
|
(2)
|
|
|
(539)
|
|
|
(63,122)
|
|
|
|
|
(63,663)
|
|
Balance at November 1, 2020
|
|
5,216
|
|
|
5,216
|
|
|
$
|
—
|
|
|
125,121
|
|
|
$
|
626
|
|
|
$
|
374,352
|
|
|
$
|
2,016,591
|
|
|
$
|
(228,616)
|
|
|
$
|
2,162,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended November 3, 2019
|
|
|
Exchangeable Stock
|
|
Special Voting Stock
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
|
|
Shares
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
|
|
|
Balance at February 3, 2019
|
|
9,332
|
|
|
9,332
|
|
|
$
|
—
|
|
|
121,600
|
|
|
$
|
608
|
|
|
$
|
315,285
|
|
|
$
|
1,346,890
|
|
|
$
|
(216,808)
|
|
|
$
|
1,445,975
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,575
|
|
|
|
|
347,575
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,329)
|
|
|
(1,329)
|
|
Common stock issued upon exchange of exchangeable shares
|
|
(2,372)
|
|
|
(2,372)
|
|
|
—
|
|
|
2,372
|
|
|
12
|
|
|
(12)
|
|
|
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
36,070
|
|
|
|
|
|
|
36,070
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
547
|
|
|
3
|
|
|
15,027
|
|
|
|
|
|
|
15,030
|
|
Shares withheld related to net share settlement of stock-based compensation
|
|
|
|
|
|
|
|
(129)
|
|
|
(1)
|
|
|
(21,492)
|
|
|
|
|
|
|
(21,493)
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
(1,054)
|
|
|
(5)
|
|
|
(1,543)
|
|
|
(171,544)
|
|
|
|
|
(173,092)
|
|
Balance at November 3, 2019
|
|
6,960
|
|
|
6,960
|
|
|
$
|
—
|
|
|
123,336
|
|
|
$
|
617
|
|
|
$
|
343,335
|
|
|
$
|
1,522,921
|
|
|
$
|
(218,137)
|
|
|
$
|
1,648,736
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
Cash flows from operating activities
|
|
|
|
|
Net income
|
|
$
|
259,076
|
|
|
$
|
347,575
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
133,209
|
|
|
114,444
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
37,098
|
|
|
36,070
|
|
Settlement of derivatives not designated in a hedging relationship
|
|
(9,841)
|
|
|
(3,375)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Inventories
|
|
(234,154)
|
|
|
(225,124)
|
|
Prepaid and receivable income taxes
|
|
(83,113)
|
|
|
(77,330)
|
|
Prepaid expenses and other current assets
|
|
(66,778)
|
|
|
(47,660)
|
|
Other non-current assets
|
|
(36,419)
|
|
|
(15,447)
|
|
Accounts payable
|
|
73,596
|
|
|
21,085
|
|
Accrued inventory liabilities
|
|
4,240
|
|
|
(5,940)
|
|
Other accrued liabilities
|
|
69,496
|
|
|
6,486
|
|
Accrued compensation and related expenses
|
|
(37,077)
|
|
|
(10,223)
|
|
Current and non-current income taxes payable
|
|
(25,611)
|
|
|
(48,573)
|
|
Unredeemed gift card liability
|
|
(15,624)
|
|
|
(24,183)
|
|
|
|
|
|
|
Right-of-use lease assets and current and non-current lease liabilities
|
|
6,577
|
|
|
9,794
|
|
Other current and non-current liabilities
|
|
10,729
|
|
|
17,507
|
|
Net cash provided by operating activities
|
|
85,404
|
|
|
95,106
|
|
Cash flows from investing activities
|
|
|
|
|
Purchase of property and equipment
|
|
(170,830)
|
|
|
(214,217)
|
|
Settlement of net investment hedges
|
|
5,867
|
|
|
3,378
|
|
Acquisition, net of cash acquired
|
|
(452,581)
|
|
|
—
|
|
Other investing activities
|
|
1,000
|
|
|
(1,636)
|
|
Net cash used in investing activities
|
|
(616,544)
|
|
|
(212,475)
|
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from settlement of stock-based compensation
|
|
14,142
|
|
|
15,030
|
|
Taxes paid related to net share settlement of stock-based compensation
|
|
(31,883)
|
|
|
(21,493)
|
|
Repurchase of common stock
|
|
(63,663)
|
|
|
(173,092)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(81,404)
|
|
|
(179,555)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
620
|
|
|
1,757
|
|
Decrease in cash and cash equivalents
|
|
(611,924)
|
|
|
(295,167)
|
|
Cash and cash equivalents, beginning of period
|
|
$
|
1,093,505
|
|
|
$
|
881,320
|
|
Cash and cash equivalents, end of period
|
|
$
|
481,581
|
|
|
$
|
586,153
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
Note 1
|
|
|
Note 2
|
|
|
Note 3
|
|
|
Note 4
|
|
|
Note 5
|
|
|
Note 6
|
|
|
Note 7
|
|
|
Note 8
|
|
|
Note 9
|
|
|
Note 10
|
|
|
Note 11
|
|
|
Note 12
|
|
|
Note 13
|
|
|
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 healthy lifestyle inspired athletic apparel and accessories. The Company primarily conducts its business through company-operated stores and direct to consumer through e-commerce. It also generates net revenue from outlets, sales from temporary locations, sales to wholesale accounts, and license and supply arrangements. The Company operates stores in the United States, Canada, the People's Republic of China ("PRC"), Australia, the United Kingdom, Japan, Germany, New Zealand, South Korea, Singapore, France, Malaysia, Sweden, Ireland, the Netherlands, Norway, and Switzerland. The Company had 515 and 491 company-operated stores as of November 1, 2020 and February 2, 2020, respectively.
On July 7, 2020, the Company acquired Curiouser Products Inc., dba MIRROR, ("MIRROR") which has been consolidated from the date of acquisition. MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions. Please refer to Note 3 for further information.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020.
In line with recommendations by public health officials and in accordance with governmental authority orders, the Company took actions to temporarily close the majority of its retail locations and to reduce operating hours. In February 2020, the Company temporarily closed all of its retail locations in Mainland China, and in March 2020, the Company temporarily closed all of its retail locations in North America, Europe, and certain countries in Asia Pacific. The stores in Mainland China reopened during the first quarter of fiscal 2020, and stores in other markets began reopening in accordance with local government and public health authority guidelines during the second quarter of fiscal 2020. Almost all of the Company's stores were open during the third quarter of fiscal 2020. The Company's stores are operating with restrictive measures in place such as reduced operating hours and limited occupancy levels. The Company's distribution centers in Columbus, Ohio and Sumner, Washington were temporarily closed for one and two weeks, respectively, during the first quarter of fiscal 2020 due to COVID-19. Subsequent to November 1, 2020, while almost all of the Company's retail locations have remained open, it has experienced some temporary closures and is currently operating with tighter capacity restrictions in certain markets.
In response to the COVID-19 pandemic, various government programs have been announced which provide financial relief for affected businesses. The most significant relief measures which the Company qualifies for are the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in the United States, and the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. During the third quarter of fiscal 2020 and the first three quarters of fiscal 2020, the Company recognized payroll subsidies totaling $1.4 million and $37.0 million, respectively, under these wage subsidy programs and similar plans in other jurisdictions. These subsidies were recorded as a reduction in the associated wage costs which the Company incurred, and were recognized in selling, general and administrative expenses.
The Company also deferred certain corporate income tax payments and employer payroll tax payments. The most significant was the deferral of $127.5 million of Canadian corporate income tax payments from the first and second quarters of fiscal 2020 to the third quarter of fiscal 2020. The Canadian corporate income payments during the third quarter of fiscal 2020 removed the balance previously included within income taxes payable on the consolidated balance sheets and resulted in a balance being recognized within prepaid and receivable income taxes on the consolidated balance sheets.
The Financial Accounting Standards Board ("FASB") issued guidance in April 2020 in relation to accounting for lease concessions made in connection with the effects of COVID-19. In accordance with this guidance, the Company has elected to treat COVID-19-related lease concessions as variable lease payments. The Company is actively negotiating commercially reasonable lease concessions. Lease concessions of $2.4 million and $5.5 million were recognized during the third quarter of fiscal 2020 and the first three quarters of fiscal 2020, respectively.
Temporary closures as a result of COVID-19 and associated reduction in operating income during the first two quarters of fiscal 2020 were considered to be an indicator of impairment and the Company performed an assessment of recoverability
for the long-lived assets and right-of-use assets associated with closed retail locations. In the first quarter of fiscal 2020, the Company recognized an insignificant impairment charge as a result of this analysis.
Revenue is presented net of an allowance for expected returns, which is estimated based on historic return rates, trends, considering shifts towards increased online shopping by guests, and future expectations. The increase in the sales return allowance reflects the higher proportion of direct to consumer net revenue and anticipated delays in returns as a result of reduced capacity at retail locations.
The COVID-19 pandemic has materially impacted the Company's operations. The extent to which COVID-19 continues to impact the Company's operations, and in turn, its operating results and financial position will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. Continued proliferation of the virus, or resurgence, may result in further or prolonged closures of the Company's retail locations and distribution centers, reduce operating hours, interrupt the Company's supply chain, cause changes in guest behavior, and reduce discretionary spending. Such factors could result in the impairment of long-lived assets and right-of-use assets and the need for an increased provision against the carrying value of the Company's inventories.
Basis of presentation
The unaudited interim consolidated financial statements as of November 1, 2020 and for the quarters and three quarters ended November 1, 2020 and November 3, 2019 are presented in United States 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 February 2, 2020 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended February 2, 2020, which are included in Item 8 in the Company's fiscal 2019 Annual Report on Form 10-K filed with the SEC on March 26, 2020. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal 2019 Annual Report on Form 10-K. Changes in the significant accounting policies of the Company compared to those described in the Company's fiscal 2019 Annual Report on Form 10-K adopted as a result of the acquisition of MIRROR are described below, and Note 2 sets out the impact of recent accounting pronouncements.
The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2020 will end on January 31, 2021 and will be a 52-week year. Fiscal 2019 was a 52-week year.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
Certain comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
Accounting policies related to the acquisition of MIRROR
Business combinations
The purchase price of an acquisition is measured as the aggregate of the fair value of the consideration transferred including the acquisition-date fair value of the Company's previously held equity interests. The purchase price is allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess recorded as goodwill. These fair value determinations require judgment and may involve the use of significant estimates and assumptions. The purchase price allocation may be provisional during a measurement period of up to one year to provide reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. Any such measurement period adjustments are recognized in the period in which the adjustment amount is determined. Transaction costs associated with the acquisition are expensed as incurred.
Goodwill and intangible assets
Acquired finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, and are reviewed for impairment when events or circumstances indicate that the asset group to which the intangible assets belong might
be impaired. The Company revises the estimated remaining useful life of these assets when events or changes in circumstances warrant a revision. If the Company revises the useful life, the unamortized balance is amortized over the remaining useful life on a prospective basis.
Goodwill represents the excess of the aggregate of the consideration transferred over the net assets acquired and liabilities assumed and is tested annually for impairment, or more frequently if there are indicators of impairment.
Revenue recognition and cost of goods sold
MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions. Certain in-home fitness contracts contain multiple performance obligations, including hardware and a subscription service commitment. For customer contracts that contain multiple performance obligations the Company accounts for individual performance obligations if they are distinct. The transaction price is allocated to each performance obligation based on its standalone selling price.
The cost of digital content subscription services, including the costs of content creation, studio overhead, and related production departments is recorded in costs of goods sold.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements
In June 2016, the FASB issued guidance on ASC 326 "Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments". This guidance changes the impairment model for most financial assets and requires the use of a forward-looking expected loss model rather than incurred losses for instruments measured at amortized cost. Under this model, entities are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The Company adopted this update during the first quarter of fiscal 2020 and it did not have a material impact on the Company's consolidated financial statements.
Recently issued accounting pronouncements
In December 2019, the FASB issued guidance on ASC 740, "Income Taxes". The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application and simplify GAAP for other areas of this topic by clarifying and amending existing guidance. This guidance is effective for the Company beginning in its first quarter of fiscal 2021 and early adoption is permitted. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements but does not believe it will have a material impact.
In March 2020, the FASB released guidance on ASC 848, "Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting". This update provides optional expedients and exceptions to the current guidance on contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements but does not believe it will have a material impact.
NOTE 3. ACQUISITION
On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. The results of operations, financial position, and cash flows of MIRROR have been included in the Company's consolidated financial statements since the date of acquisition.
The following table summarizes the fair value of the consideration transferred at the date of acquisition, as well as the calculation of goodwill based on the excess of consideration over the provisional fair value of net assets acquired. As part of the transaction, the Company assumed $30.1 million of MIRROR's outstanding debt. This included $15.1 million of external debt that was settled as part of the transaction and $15.0 million of debt previously owed by MIRROR to the Company, which
represents the effective settlement of a preexisting relationship. The debt was determined to be at market terms and was recognized as a component of the consideration transferred, and no gain or loss was recorded on settlement.
|
|
|
|
|
|
|
|
|
|
|
July 7, 2020
|
|
|
(in thousands)
|
Fair value of consideration transferred:
|
|
|
Cash paid to shareholders
|
|
$
|
428,261
|
|
Employee options attributed to pre-combination vesting
|
|
4,569
|
|
Acquired debt settled on acquisition
|
|
30,122
|
|
Fair value of existing lululemon investment
|
|
1,782
|
|
|
|
464,734
|
|
Less cash and cash equivalents acquired
|
|
(12,153)
|
|
Fair value of consideration transferred, net of cash and cash equivalents acquired
|
|
$
|
452,581
|
|
Less net assets acquired:
|
|
|
Assets acquired:
|
|
|
Inventories
|
|
$
|
16,734
|
|
Prepaid expenses and other current assets
|
|
3,492
|
|
Intangible assets
|
|
85,000
|
|
Other non-current assets
|
|
5,648
|
|
|
|
$
|
110,874
|
|
Liabilities assumed:
|
|
|
Current liabilities
|
|
$
|
(13,465)
|
|
Current and non-current lease liabilities
|
|
(3,246)
|
|
Net deferred income tax liability
|
|
(4,074)
|
|
|
|
$
|
(20,785)
|
|
Net assets acquired
|
|
$
|
90,089
|
|
Goodwill
|
|
$
|
362,492
|
|
The purchase price allocation remains provisional as the Company is still obtaining all information necessary to finalize the fair value of acquired intangibles, deferred taxes, certain contingencies, and resulting amount of goodwill as of the date of acquisition.
Goodwill relates to benefits expected as a result of the acquisition to MIRROR's business and has been allocated to the MIRROR reporting unit within the Company's other channels. None of the goodwill is expected to be deductible for income tax purposes.
The Company assigned a fair value to and estimated useful lives for the intangible assets acquired as part of the MIRROR business combination. The fair value of the separately identifiable intangible assets, and their estimated useful lives as of the acquisition date were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Estimated Useful Life
|
|
|
(In thousands)
|
|
|
Intangible assets:
|
|
|
|
|
Brand
|
|
$
|
26,500
|
|
|
20.0 years
|
Customer relationships
|
|
28,000
|
|
|
10.0 years
|
Technology
|
|
25,500
|
|
|
7.5 years
|
Content
|
|
5,000
|
|
|
5.0 years
|
|
|
$
|
85,000
|
|
|
|
Accounting for business combinations requires significant estimates and assumptions to derive the fair value of acquired assets and liabilities, and in the case of MIRROR, this is with specific reference to acquired intangible assets. The fair value of intangible assets was based upon widely-accepted valuation techniques, including discounted cash flows and relief from royalty and replacement cost methods, depending on the nature of the assets acquired or liabilities assumed. Inherent in each valuation technique are critical assumptions, including future revenue growth rates, gross margin, royalty rates, discount rates, and terminal value assumptions. The recognition of deferred tax assets in relation to the historic net operating losses of MIRROR relied on assumptions and estimates of the future profitability of the Company's US operations.
The Company has not disclosed pro forma information of the combined business as the transaction is not material to revenue or net earnings.
Acquisition-related expenses
In connection with the acquisition, the Company recognized certain acquisition-related expenses which are expensed as incurred. These expenses are recognized within acquisition-related expenses in the consolidated statements of operations include the following amounts:
•transaction and integration costs, including fees for advisory and professional services incurred as part of the acquisition and integration costs subsequent to the acquisition;
•acquisition-related compensation, including the partial acceleration of vesting of certain stock options, and amounts due to selling shareholders that are contingent upon continuing employment; and
•gain recognized on the Company's existing investment in the acquiree as of the acquisition date.
The following table summarizes the acquisition-related expenses recognized during fiscal 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
November 1, 2020
|
|
Three Quarters Ended
November 1, 2020
|
|
|
(in thousands)
|
Acquisition-related expenses:
|
|
|
|
|
Transaction and integration costs
|
|
$
|
1,017
|
|
|
$
|
10,263
|
|
Gain on existing investment
|
|
—
|
|
|
(782)
|
|
Acquisition-related compensation
|
|
7,514
|
|
|
12,559
|
|
|
|
$
|
8,531
|
|
|
$
|
22,040
|
|
|
|
|
|
|
Income tax effects of acquisition-related expenses
|
|
$
|
(896)
|
|
|
$
|
(2,862)
|
|
In the first three quarters of fiscal 2020, the Company recognized $9.7 million related to deferred consideration, and recognized an expense of $2.9 million for the partial acceleration of vesting of certain stock options held by MIRROR employees.
The Company will recognize a total expense of $57.1 million for deferred consideration which is due to certain continuing MIRROR employees, subject to the continued employment of those individuals through various vesting dates up to three years from the acquisition date. This acquisition-related compensation is expensed over the vesting periods as service is provided, and consists of cash payments, which are included within accrued compensation and related expenses until payments are made, and stock-based compensation awards that have been granted under the Company's 2014 Equity Incentive Plan to replace certain unvested options as of the acquisition date.
NOTE 4. GOODWILL
The Company's goodwill is assigned to its company-operated stores and other segments. The changes in the carrying amounts of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(In thousands)
|
Balance as of February 2, 2020
|
|
$
|
24,182
|
|
MIRROR acquisition
|
|
362,492
|
|
Effect of foreign currency translation
|
|
(42)
|
|
Balance as of November 1, 2020
|
|
$
|
386,632
|
|
NOTE 5. INTANGIBLE ASSETS, NET
The carrying value of intangible assets, and their estimated remaining useful lives as of November 1, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
2020
|
|
February 2,
2020
|
|
Remaining Useful Life
|
|
|
(In thousands)
|
|
|
Intangible assets, net:
|
|
|
|
|
|
|
Brand
|
|
$
|
26,058
|
|
|
$
|
—
|
|
|
19.7 years
|
Customer relationships
|
|
27,033
|
|
|
—
|
|
|
9.7 years
|
Technology
|
|
24,344
|
|
|
—
|
|
|
7.2 years
|
Content
|
|
4,667
|
|
|
—
|
|
|
4.7 years
|
Other
|
|
174
|
|
|
241
|
|
|
1.9 years
|
|
|
$
|
82,276
|
|
|
$
|
241
|
|
|
|
NOTE 6. CREDIT FACILITIES
North America revolving credit facility
On June 6, 2018, the Company entered into Amendment No. 1 to its credit agreement. This amended the credit agreement to provide for (i) an increase in the aggregate commitments under the unsecured five-year revolving credit facility to $400.0 million, with an increase of the sub-limits for the issuance of letters of credit and extensions of swing line loans to $50.0 million for each, (ii) an increase in the option, subject to certain conditions as set forth in the credit agreement, to request increases in commitments under the revolving facility from $400.0 million to $600.0 million, and (iii) an extension in the maturity of the revolving facility from December 15, 2021 to June 6, 2023.
In addition, this amendment decreased the applicable margins for LIBOR loans from 1.00%-1.75% to 1.00%-1.50% and for alternate base rate loans from 0.00%-0.75% to 0.00%-0.50%, reduced the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduced fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%.
The Company is required to follow certain covenants. As of November 1, 2020, the Company was in compliance with these covenants.
The Company had no borrowings outstanding under this credit facility as of November 1, 2020 and February 2, 2020. As of November 1, 2020, the Company had letters of credit of $2.7 million outstanding.
Mainland China revolving credit facility
In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility. The terms are reviewed on an annual basis. The facility includes a revolving loan of up to 100.0 million Chinese Yuan as well as a financial bank guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency. In U.S. dollars, the uncommitted and unsecured revolving credit facility is equivalent to $19.4 million, the revolving loan is equivalent of up to $14.9 million, and the financial bank guarantee facility is equivalent of up to $4.5 million. Loans are available in Chinese Yuan for a period not to exceed 12 months, and interest accrues on them at a rate equal to 105% of the applicable PBOC Benchmark Lending Rate. Guarantees have a commission equal to 1% per annum of the outstanding amount.
The Company is required to follow certain covenants. As of November 1, 2020, the Company was in compliance with these covenants. As of November 1, 2020, there were no borrowings outstanding under this credit facility.
364-Day revolving credit facility
On June 29, 2020, the Company entered into a 364-day credit agreement providing for a $300.0 million committed and unsecured revolving credit facility. The credit agreement matures on June 28, 2021. Bank of America, N.A., is administrative agent and swing line lender. Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs).
Borrowings made under the credit facility bear interest at a rate per annum equal to, at the Company's option, either (1) a rate based on the rates applicable for deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made (“LIBOR”) or (2) 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 1.50%-2.25% for LIBOR loans and 0.50%-1.25% for alternate base rate or Canadian prime rate loans. Additionally, a commitment fee of between 0.25%-0.55%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility.
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 is also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and the Company is not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be 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 November 1, 2020, the Company was in compliance with the covenants. As of November 1, 2020, there were no borrowings outstanding under this credit facility. On December 4, 2020, the Company gave notice to terminate this 364-day unsecured revolving credit facility. It will be terminated without penalty on December 11, 2020.
NOTE 7. STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, which are provided by the Company directly.
Stock-based compensation expense charged to income for the plans was $41.9 million and $35.7 million for the three quarters ended November 1, 2020 and November 3, 2019, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $86.1 million at November 1, 2020, 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 November 1, 2020, and changes during the first three quarters then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Performance-Based Restricted Stock Units
|
|
Restricted Shares
|
|
Restricted Stock Units
|
|
Restricted Stock Units
(Liability Accounting)
|
|
|
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
|
|
Number
|
|
Weighted-Average Fair Value
|
|
|
(In thousands, except per share amounts)
|
Balance at February 2, 2020
|
|
776
|
|
|
$
|
113.41
|
|
|
238
|
|
|
$
|
103.52
|
|
|
7
|
|
|
$
|
175.82
|
|
|
333
|
|
|
$
|
108.44
|
|
|
29
|
|
|
$
|
239.39
|
|
Granted
|
|
238
|
|
|
180.83
|
|
|
138
|
|
|
117.60
|
|
|
4
|
|
|
296.36
|
|
|
127
|
|
|
205.76
|
|
|
—
|
|
|
—
|
|
Exercised/released
|
|
168
|
|
|
84.42
|
|
|
171
|
|
|
63.03
|
|
|
7
|
|
|
175.82
|
|
|
172
|
|
|
87.00
|
|
|
14
|
|
|
366.42
|
|
Forfeited/expired
|
|
26
|
|
|
157.71
|
|
|
7
|
|
|
158.76
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
163.30
|
|
|
—
|
|
|
—
|
|
Balance at November 1, 2020
|
|
820
|
|
|
$
|
137.49
|
|
|
198
|
|
|
$
|
146.25
|
|
|
4
|
|
|
$
|
296.36
|
|
|
278
|
|
|
$
|
164.21
|
|
|
15
|
|
|
$
|
319.29
|
|
Exercisable at November 1, 2020
|
|
176
|
|
|
$
|
107.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee 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 fiscal 2020:
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
November 1, 2020
|
Expected term
|
|
3.61 years
|
Expected volatility
|
|
40.02
|
%
|
Risk-free interest rate
|
|
0.32
|
%
|
Dividend yield
|
|
—
|
%
|
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 award 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 award date. Restricted stock units that are settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement. This fair value is based on the closing price of the Company's common stock on the last business day before each period end.
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the quarter ended November 1, 2020, there were 16.0 thousand shares purchased.
Defined contribution pension plans
The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches 50% to 75% of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was $6.7 million and $6.4 million in the first three quarters of fiscal 2020 and fiscal 2019, 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.
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 November 1, 2020 and February 2, 2020, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
30,528
|
|
|
$
|
30,528
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Term deposits
|
|
76,428
|
|
|
—
|
|
|
76,428
|
|
|
—
|
|
|
Cash and cash equivalents
|
Forward currency contract assets
|
|
7,491
|
|
|
—
|
|
|
7,491
|
|
|
—
|
|
|
Prepaid expenses and other current assets
|
Forward currency contract liabilities
|
|
9,688
|
|
|
—
|
|
|
9,688
|
|
|
—
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
610,800
|
|
|
$
|
610,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Term deposits
|
|
203,360
|
|
|
—
|
|
|
203,360
|
|
|
—
|
|
|
Cash and cash equivalents
|
Forward currency contract assets
|
|
1,735
|
|
|
—
|
|
|
1,735
|
|
|
—
|
|
|
Prepaid expenses and other current assets
|
Forward currency contract liabilities
|
|
1,920
|
|
|
—
|
|
|
1,920
|
|
|
—
|
|
|
Other current liabilities
|
The Company records 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, Treasury bills, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities.
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS
Foreign 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 to U.S. dollar exchange rate and changes in the Chinese Yuan to U.S. dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign exchange gains and losses which arise on translation of its foreign subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as a foreign currency translation adjustment 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 effective portions of the hedges are reported in accumulated other comprehensive income or loss and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated. Hedge effectiveness is measured using a method based on changes in forward exchange rates. The Company recorded no ineffectiveness from net investment hedges during the first three quarters of fiscal 2020.
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 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 exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the first three quarters of fiscal 2020, the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on U.S. dollar denominated monetary assets and liabilities. 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 November 1, 2020, there were derivative assets of $7.5 million and derivative liabilities of $9.7 million subject to enforceable netting arrangements.
The notional amounts and fair values of forward currency contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2020
|
|
February 2, 2020
|
|
|
Gross Notional
|
|
Assets
|
|
Liabilities
|
|
Gross Notional
|
|
Assets
|
|
Liabilities
|
|
|
(In thousands)
|
Derivatives designated as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
693,000
|
|
|
$
|
—
|
|
|
$
|
8,147
|
|
|
$
|
417,000
|
|
|
$
|
1,583
|
|
|
$
|
—
|
|
Derivatives not designated in a hedging relationship:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
744,000
|
|
|
7,491
|
|
|
1,541
|
|
|
460,000
|
|
|
152
|
|
|
1,920
|
|
Net derivatives recognized on consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
|
|
$
|
7,491
|
|
|
$
|
9,688
|
|
|
|
|
$
|
1,735
|
|
|
$
|
1,920
|
|
The forward currency contracts designated as net investment hedges outstanding as of November 1, 2020 mature on different dates between November 2020 and April 2021.
The forward currency contracts not designated in a hedging relationship outstanding as of November 1, 2020 mature on different dates between November 2020 and April 2021.
The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
Gains (losses) recognized in foreign currency translation adjustment:
|
|
|
|
|
|
|
|
|
Derivatives designated as net investment hedges
|
|
$
|
(7,391)
|
|
|
$
|
(839)
|
|
|
$
|
(3,863)
|
|
|
$
|
1,103
|
|
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 exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
Gains (losses) recognized in selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
Foreign exchange gains (losses)
|
|
$
|
(3,627)
|
|
|
$
|
(2,945)
|
|
|
$
|
247
|
|
|
$
|
(1,700)
|
|
Derivatives not designated in a hedging relationship
|
|
3,823
|
|
|
(94)
|
|
|
(2,123)
|
|
|
(1,603)
|
|
Net foreign exchange and derivative gains (losses)
|
|
$
|
195
|
|
|
$
|
(3,039)
|
|
|
$
|
(1,876)
|
|
|
$
|
(3,303)
|
|
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 entered into with large, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands, except per share amounts)
|
Net income
|
|
$
|
143,643
|
|
|
$
|
125,982
|
|
|
$
|
259,076
|
|
|
$
|
347,575
|
|
Basic weighted-average number of shares outstanding
|
|
130,318
|
|
|
130,282
|
|
|
130,271
|
|
|
130,420
|
|
Assumed conversion of dilutive stock options and awards
|
|
606
|
|
|
523
|
|
|
571
|
|
|
555
|
|
Diluted weighted-average number of shares outstanding
|
|
130,924
|
|
|
130,805
|
|
|
130,842
|
|
|
130,975
|
|
Basic earnings per share
|
|
$
|
1.10
|
|
|
$
|
0.97
|
|
|
$
|
1.99
|
|
|
$
|
2.67
|
|
Diluted earnings per share
|
|
$
|
1.10
|
|
|
$
|
0.96
|
|
|
$
|
1.98
|
|
|
$
|
2.65
|
|
The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have, in effect, the same rights and share equally in undistributed net income. For the three quarters ended November 1, 2020 and November 3, 2019, 40.2 thousand and 63.0 thousand 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.
On January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $500.0 million of the Company's common shares on the open market or in privately negotiated transactions. 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. As of March 31, 2020, the Company temporarily paused its share repurchase program, which has restarted again as of September 22, 2020. As of November 1, 2020, the remaining aggregate value of shares available to be repurchased under this program was $263.6 million.
During the three quarters ended November 1, 2020 and November 3, 2019, 0.4 million and 1.1 million shares, respectively, were repurchased under the program at a total cost of $63.7 million and $173.1 million, respectively.
Subsequent to November 1, 2020, and up to December 4, 2020, no shares were repurchased. On December 1, 2020, the Company's board of directors approved an increase in the remaining authorization of its existing stock repurchase program from $263.6 million to $500.0 million. The repurchase plan has no time limit and does not require the repurchase of any minimum number of shares.
NOTE 11. SUPPLEMENTARY FINANCIAL INFORMATION
A summary of certain consolidated balance sheet accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
2020
|
|
February 2,
2020
|
|
|
(In thousands)
|
Inventories:
|
|
|
|
|
Inventories, at cost
|
|
$
|
804,541
|
|
|
$
|
540,580
|
|
Provision to reduce inventories to net realizable value
|
|
(33,551)
|
|
|
(22,067)
|
|
|
|
$
|
770,990
|
|
|
$
|
518,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
2020
|
|
February 2,
2020
|
|
|
(In thousands)
|
Prepaid expenses and other current assets:
|
|
|
|
|
Prepaid expenses
|
|
$
|
91,097
|
|
|
$
|
64,568
|
|
Forward currency contract assets
|
|
7,491
|
|
|
1,735
|
|
Government payroll subsidy receivables
|
|
13,309
|
|
|
—
|
|
Other current assets
|
|
8,301
|
|
|
4,239
|
|
|
|
$
|
120,198
|
|
|
$
|
70,542
|
|
Property and equipment, net:
|
|
|
|
|
Land
|
|
$
|
71,322
|
|
|
$
|
71,829
|
|
Buildings
|
|
30,045
|
|
|
30,187
|
|
Leasehold improvements
|
|
555,337
|
|
|
489,202
|
|
Furniture and fixtures
|
|
113,294
|
|
|
109,533
|
|
Computer hardware
|
|
108,384
|
|
|
95,399
|
|
Computer software
|
|
394,614
|
|
|
336,768
|
|
Equipment and vehicles
|
|
15,511
|
|
|
19,521
|
|
Work in progress
|
|
66,350
|
|
|
40,930
|
|
Property and equipment, gross
|
|
1,354,857
|
|
|
1,193,369
|
|
Accumulated depreciation
|
|
(634,977)
|
|
|
(521,676)
|
|
|
|
$
|
719,880
|
|
|
$
|
671,693
|
|
Other non-current assets:
|
|
|
|
|
Cloud computing arrangement implementation costs
|
|
$
|
60,740
|
|
|
$
|
24,648
|
|
Security deposits
|
|
22,879
|
|
|
19,901
|
|
Other
|
|
9,052
|
|
|
11,652
|
|
|
|
$
|
92,671
|
|
|
$
|
56,201
|
|
Other accrued liabilities
|
|
|
|
|
Accrued freight and other operating expenses
|
|
$
|
94,716
|
|
|
$
|
43,225
|
|
Accrued duty
|
|
19,641
|
|
|
16,178
|
|
Sales return allowances
|
|
23,923
|
|
|
12,897
|
|
Sales tax collected
|
|
16,173
|
|
|
17,370
|
|
Accrued capital expenditures
|
|
10,685
|
|
|
5,457
|
|
Forward currency contract liabilities
|
|
9,688
|
|
|
1,920
|
|
Accrued rent
|
|
6,449
|
|
|
8,356
|
|
Other
|
|
9,091
|
|
|
7,238
|
|
|
|
$
|
190,366
|
|
|
$
|
112,641
|
|
NOTE 12. SEGMENTED INFORMATION AND DISAGGREGATED NET REVENUE
The Company applies ASC Topic 280, Segment Reporting ("ASC 280"), in determining reportable segments for its financial statement disclosure. The Company reports segments based on the financial information it uses in managing its business. The Company's reportable segments are comprised of company-operated stores and direct to consumer. Direct to consumer represents sales from the Company's e-commerce websites and mobile apps. Other net revenue includes revenue from outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, and the sale of in-home fitness equipment and associated content subscriptions. During the first quarter of fiscal 2020, the Company reviewed its segment and general corporate expenses and determined certain costs that are more appropriately classified in different categories. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
Net revenue:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
511,756
|
|
|
$
|
579,521
|
|
|
$
|
1,058,927
|
|
|
$
|
1,669,699
|
|
Direct to consumer
|
|
478,263
|
|
|
246,697
|
|
|
1,384,604
|
|
|
674,177
|
|
Other
|
|
127,407
|
|
|
89,920
|
|
|
228,799
|
|
|
237,929
|
|
|
|
$
|
1,117,426
|
|
|
$
|
916,138
|
|
|
$
|
2,672,330
|
|
|
$
|
2,581,805
|
|
Segmented income from operations:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
111,780
|
|
|
$
|
147,720
|
|
|
$
|
76,333
|
|
|
$
|
422,948
|
|
Direct to consumer
|
|
209,610
|
|
|
103,599
|
|
|
604,152
|
|
|
269,553
|
|
Other
|
|
1,304
|
|
|
16,820
|
|
|
3,622
|
|
|
45,860
|
|
|
|
322,694
|
|
|
268,139
|
|
|
684,107
|
|
|
738,361
|
|
General corporate expense
|
|
107,002
|
|
|
92,303
|
|
|
297,022
|
|
|
265,731
|
|
Amortization of intangible assets
|
|
2,241
|
|
|
7
|
|
|
2,965
|
|
|
7
|
|
Acquisition-related expenses
|
|
8,531
|
|
|
—
|
|
|
22,040
|
|
|
—
|
|
Income from operations
|
|
204,920
|
|
|
175,829
|
|
|
362,080
|
|
|
472,623
|
|
Other income (expense), net
|
|
(580)
|
|
|
1,925
|
|
|
250
|
|
|
6,154
|
|
Income before income tax expense
|
|
$
|
204,340
|
|
|
$
|
177,754
|
|
|
$
|
362,330
|
|
|
$
|
478,777
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
37,946
|
|
|
$
|
47,939
|
|
|
$
|
99,081
|
|
|
$
|
128,675
|
|
Direct to consumer
|
|
13,671
|
|
|
1,165
|
|
|
25,750
|
|
|
14,975
|
|
Corporate and other
|
|
14,490
|
|
|
29,349
|
|
|
45,999
|
|
|
70,567
|
|
|
|
$
|
66,107
|
|
|
$
|
78,453
|
|
|
$
|
170,830
|
|
|
$
|
214,217
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
26,334
|
|
|
$
|
26,434
|
|
|
$
|
73,925
|
|
|
$
|
71,206
|
|
Direct to consumer
|
|
4,103
|
|
|
3,498
|
|
|
9,715
|
|
|
8,930
|
|
Corporate and other
|
|
18,596
|
|
|
14,090
|
|
|
49,569
|
|
|
34,308
|
|
|
|
$
|
49,033
|
|
|
$
|
44,022
|
|
|
$
|
133,209
|
|
|
$
|
114,444
|
|
The following table disaggregates the Company's net revenue by geographic area.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
United States
|
|
$
|
775,576
|
|
|
$
|
645,600
|
|
|
$
|
1,830,845
|
|
|
$
|
1,821,090
|
|
Canada
|
|
181,376
|
|
|
159,552
|
|
|
428,531
|
|
|
428,802
|
|
Outside of North America
|
|
160,474
|
|
|
110,986
|
|
|
412,954
|
|
|
331,913
|
|
|
|
$
|
1,117,426
|
|
|
$
|
916,138
|
|
|
$
|
2,672,330
|
|
|
$
|
2,581,805
|
|
The following table disaggregates the Company's net revenue by category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
Women's product
|
|
$
|
791,946
|
|
|
$
|
650,269
|
|
|
$
|
1,921,569
|
|
|
$
|
1,829,452
|
|
Men's product
|
|
239,496
|
|
|
209,371
|
|
|
559,644
|
|
|
592,329
|
|
Other categories
|
|
85,984
|
|
|
56,498
|
|
|
191,117
|
|
|
160,024
|
|
|
|
$
|
1,117,426
|
|
|
$
|
916,138
|
|
|
$
|
2,672,330
|
|
|
$
|
2,581,805
|
|
NOTE 13. 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, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows.
On October 9, 2015, certain current and former hourly employees of the Company filed a class action lawsuit in the Supreme Court of New York entitled Rebecca Gathmann-Landini et al v. lululemon USA inc. On December 2, 2015, the case was moved to the United States District Court for the Eastern District of New York. The lawsuit alleges that the Company violated various New York labor codes by failing to pay all earned wages, including overtime compensation. This matter was settled on September 30, 2020 for an immaterial amount.
On March 23, 2020, a former retail employee filed a representative action in the Los Angeles Superior Court alleging violation of the Private Attorney General Act ("PAGA") based on purported California labor code violations including failure to pay wages, failure to pay overtime, failure to provide accurate itemized statements, and failure to provide meal and rest periods. The plaintiff is seeking to recover civil penalties under PAGA. The Company intends to vigorously defend this matter.
On April 9, 2020, Aliign Activation Wear, LLC filed a lawsuit in the United States District Court for the Central District of California alleging federal trademark infringement, false designation of origin and unfair competition. The plaintiff is seeking injunctive relief, monetary damages and declaratory relief. The Company intends to vigorously defend this matter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, the impact of the COVID-19 pandemic on our business and results of operations, expectations related to our acquisition of MIRROR, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms
such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q and any documents incorporated herein by reference reflect our current views about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in "Risk Factors" and elsewhere in this report.
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q. Except as required by applicable securities law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
This information should be read in conjunction with the unaudited interim consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our fiscal 2019 Annual Report on Form 10-K filed with the SEC on March 26, 2020.
We disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.lululemon.com/), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls, and webcasts.
Overview
lululemon athletica inc. is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. We have a vision to be the experiential brand that ignites a community of people through sweat, grow, and connect, which we call "living the sweatlife." Since our inception, we have fostered a distinctive corporate culture; we promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection, and choosing to have fun. These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose "to elevate the world by unleashing the full potential within every one of us."
Our healthy lifestyle inspired athletic apparel and accessories are marketed under the lululemon brand. We offer a comprehensive line of apparel and accessories for women and men. Our apparel assortment includes items such as pants, shorts, tops, and jackets designed for a healthy lifestyle including athletic activities such as yoga, running, training, and most other sweaty pursuits. We also offer fitness-related accessories.
During the second quarter of fiscal 2020, we acquired Curiouser Products Inc., dba MIRROR, for a purchase price of approximately $500.0 million, of which approximately $57.1 million is due to certain continuing employees subject to their continued employment through various vesting dates up to three years after the closing date of the transaction. MIRROR is a leading in-home fitness company with an interactive workout platform that features live and on-demand classes. The acquisition of MIRROR bolsters our digital sweatlife offerings and brings immersive and personalized in-home sweat and mindfulness content to new and existing lululemon guests.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020. The spread of COVID-19 has caused public health officials to impose restrictions and to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers.
We continue to monitor the situation and work closely with local authorities to prioritize the safety of our people and guests. In February 2020, we temporarily closed all of our retail locations in Mainland China. In March 2020, we temporarily closed all of our retail locations in North America, Europe, and certain countries in Asia Pacific. The stores in Mainland China reopened during the first quarter of fiscal 2020, and stores in other markets began reopening in accordance with local government and public health authority guidelines during the second quarter of fiscal 2020 and almost all locations were open during the third quarter of fiscal 2020. Subsequent to November 1, 2020, while almost all of our retail locations have remained
open, we have experienced some temporary closures and are currently operating with tighter capacity restrictions in certain markets.
Our open retail locations and distribution centers are operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels. This pandemic has also impacted the operations of our third party logistics providers and our manufacturing and supply partners, including through the closure or reduced capacity of facilities, and operational changes to accommodate physical distancing. As the pandemic continues, we may face further disruptions or increased operational and logistics costs throughout our supply chain.
There is significant uncertainty regarding the extent and duration of the impact that the COVID-19 pandemic will have on our operations, the demand for our products, and on our supply chain. It had a material adverse impact on our results of operations for the first three quarters of fiscal 2020, and we expect it to continue to impact our results of operations and financial position. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.
We remain confident in the long-term growth opportunities and our Power of Three growth plan and believe that we have sufficient cash and cash equivalents, and available capacity under our revolving credit facilities, to meet our liquidity needs. As of November 1, 2020, we had cash and cash equivalents of $481.6 million and the capacity under our committed revolving credit facilities was $697.3 million.
Financial Highlights
For the third quarter of fiscal 2020, compared to the third quarter of fiscal 2019:
•Net revenue increased 22% to $1,117.4 million. On a constant dollar basis, net revenue increased 21%.
•Total comparable sales, which includes comparable store sales and direct to consumer, increased 19%. On a constant dollar basis, total comparable sales increased 18%.
–Comparable store sales decreased 17%, or decreased 18% on a constant dollar basis.
–Direct to consumer net revenue increased 94%, or increased 93% on a constant dollar basis.
•Gross profit increased 24% to $627.4 million.
•Gross margin increased 100 basis points to 56.1%.
•Acquisition-related expenses of $8.5 million were recognized.
•Income from operations increased 17% to $204.9 million.
•Operating margin decreased 90 basis points to 18.3%.
•Income tax expense increased 17% to $60.7 million. Our effective tax rate for the third quarter of fiscal 2020 was 29.7% compared to 29.1% for the third quarter of fiscal 2019.
•Diluted earnings per share were $1.10 compared to $0.96 in the third quarter of fiscal 2019. This includes $7.6 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.06 for the third quarter of fiscal 2020.
As the temporary closures from COVID-19 resulted in a significant number of stores being removed from our comparable store base during the first two quarters of fiscal 2020, total comparable sales and comparable store sales for year-to-date periods are not currently representative of the underlying trends of our business. We do not believe these year-to-date metrics are currently useful to investors in understanding performance, therefore we have not included these metrics in our discussion and analysis of results of operations. As most of our stores were open during the third quarter of fiscal 2020, and our comparable store base therefore included the majority of our stores, we have included total comparable sales and comparable store sales on a quarter-to-date basis in our discussion and analysis of results of operations.
Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue and the most directly comparable measures calculated in accordance with GAAP.
Results of Operations
Third Quarter Results
The following table summarizes key components of our results of operations for the quarters ended November 1, 2020 and November 3, 2019. The percentages are presented as a percentage of net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
|
(Percentages)
|
Net revenue
|
|
$
|
1,117,426
|
|
|
$
|
916,138
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
490,072
|
|
|
411,094
|
|
|
43.9
|
|
|
44.9
|
|
Gross profit
|
|
627,354
|
|
|
505,044
|
|
|
56.1
|
|
|
55.1
|
|
Selling, general and administrative expenses
|
|
411,662
|
|
|
329,208
|
|
|
36.8
|
|
|
35.9
|
|
Amortization of intangible assets
|
|
2,241
|
|
|
7
|
|
|
0.2
|
|
|
—
|
|
Acquisition-related expenses
|
|
8,531
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
Income from operations
|
|
204,920
|
|
|
175,829
|
|
|
18.3
|
|
|
19.2
|
|
Other income (expense), net
|
|
(580)
|
|
|
1,925
|
|
|
(0.1)
|
|
|
0.2
|
|
Income before income tax expense
|
|
204,340
|
|
|
177,754
|
|
|
18.3
|
|
|
19.4
|
|
Income tax expense
|
|
60,697
|
|
|
51,772
|
|
|
5.4
|
|
|
5.7
|
|
Net income
|
|
$
|
143,643
|
|
|
$
|
125,982
|
|
|
12.9
|
%
|
|
13.8
|
%
|
Net Revenue
Net revenue increased $201.3 million, or 22%, to $1.1 billion for the third quarter of fiscal 2020 from $916.1 million for the third quarter of fiscal 2019. On a constant dollar basis, assuming the average exchange rates for the third quarter of fiscal 2020 remained constant with the average exchange rates for the third quarter of fiscal 2019, net revenue increased $194.6 million, or 21%.
The increase in net revenue was primarily due to increased direct to consumer net revenue, partially due to a shift in the way guests are shopping due to COVID-19, as well as an increase in net revenue from our other channels. This was partially offset by a decrease in company-operated store net revenue driven by reduced operating hours and restricted guest occupancy levels, as well as temporary closures as a result of COVID-19.
Total comparable sales, which includes comparable store sales and direct to consumer, increased 19% in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. Total comparable sales increased 18% on a constant dollar basis.
Net revenue on a segment basis for the quarters ended November 1, 2020 and November 3, 2019 is summarized below. The percentages are presented as a percentage of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
511,756
|
|
|
$
|
579,521
|
|
|
45.8
|
%
|
|
63.3
|
%
|
Direct to consumer
|
|
478,263
|
|
|
246,697
|
|
|
42.8
|
|
|
26.9
|
|
Other
|
|
127,407
|
|
|
89,920
|
|
|
11.4
|
|
|
9.8
|
|
Net revenue
|
|
$
|
1,117,426
|
|
|
$
|
916,138
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Company-Operated Stores. Net revenue from our company-operated stores segment decreased $67.8 million, or 12%, to $511.8 million in the third quarter of fiscal 2020 from $579.5 million in the third quarter of fiscal 2019. The decrease in net revenue from our company-operated stores segment was primarily due to the impact of COVID-19, including reduced operating hours, occupancy restrictions, and temporary closures. Comparable store sales decreased 17%, or decreased 18% on a constant dollar basis. The decrease was primarily a result of COVID-19 restrictions, which resulted in decreased store traffic, partially offset by an increase in conversion rates.
The decrease in net revenue from our company-operated stores segment was partially offset by an increase in net revenue from company-operated stores we opened or significantly expanded subsequent to November 3, 2019 of $18.7 million. We opened 36 net new company-operated stores since the third quarter of fiscal 2019, including 20 stores in Asia, 11 stores in North America, and five stores in Europe.
Direct to Consumer. Net revenue from our direct to consumer segment increased $231.6 million, or 94%, to $478.3 million in the third quarter of fiscal 2020 from $246.7 million in the third quarter of fiscal 2019. Direct to consumer net revenue increased 93% on a constant dollar basis. The increase in net revenue from our direct to consumer segment was primarily a result of increased website traffic and improved conversion rate, partially offset by a decrease in dollar value per transaction. These changes were partially due to COVID-19, with more guests shopping online instead of in-store.
Other channels. Net revenue from our other segment increased $37.5 million, or 42%, to $127.4 million in the third quarter of fiscal 2020 from $89.9 million in the third quarter of fiscal 2019. This increase was primarily the result of net revenue from MIRROR as well as an increased number of temporary locations, including seasonal stores, that were open during the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.
Gross Profit
Gross profit increased $122.3 million, or 24%, to $627.4 million for the third quarter of fiscal 2020 from $505.0 million for the third quarter of fiscal 2019.
Gross profit as a percentage of net revenue, or gross margin, increased 100 basis points to 56.1% in the third quarter of fiscal 2020 from 55.1% in the third quarter of fiscal 2019. The increase in gross margin was primarily the result of:
•a decrease in depreciation and occupancy costs as a percentage of revenue of 170 basis points, driven primarily by the increase in net revenue; and
•a favorable impact of foreign exchange rates of 10 basis points.
This was partially offset by a decrease in product margin of 80 basis points, primarily due to higher air freight costs as a result of COVID-19 capacity constraints and higher markdowns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $82.5 million, or 25%, to $411.7 million in the third quarter of fiscal 2020 from $329.2 million in the third quarter of fiscal 2019. The increase in selling, general and administrative expenses was primarily due to:
•an increase in costs related to our operating channels of $63.4 million, comprised of:
–an increase in variable costs of $33.0 million primarily due to an increase in distribution costs, credit card fees and packaging costs as a result of increased direct to consumer net revenue; and
–an increase in brand and community costs of $29.3 million primarily due to an increase in digital marketing expenses; and
–an increase in other operating costs of $5.7 million primarily due to an increase in information technology costs and depreciation; and
–a decrease in employee costs of $4.6 million primarily due to lower incentive compensation expenses in our company-operated store channel; and
•an increase in head office costs of $22.3 million, comprised of:
–an increase of $22.7 million primarily due to increases in professional fees, information technology costs, donations, and depreciation; and
–a decrease in employee costs of $0.4 million primarily due to decreased incentive compensation expense, and decreased travel, partially offset by increased salaries and wages expense as a result of headcount growth, and stock-based compensation expense.
The increase in selling, general and administrative expenses was partially offset by an increase in net foreign exchange and derivative revaluation gains of $3.2 million.
As a percentage of net revenue, selling, general and administrative expenses increased 90 basis points, to 36.8% in the third quarter of fiscal 2020 from 35.9% in the third quarter of fiscal 2019.
Amortization of intangible assets
Amortization of intangible assets increased to $2.2 million in the third quarter of fiscal 2020 from less than $0.1 million in the third quarter of fiscal 2019. This increase was the result of amortization of intangible assets recognized upon the acquisition of MIRROR.
Acquisition-related expenses
We recognized acquisition-related expenses of $8.5 million in the third quarter of fiscal 2020. This included acquisition-related compensation of $7.5 million for deferred consideration for certain continuing MIRROR employees. This also included transaction and integration related costs of $1.0 million for advisory and professional services, and integration costs subsequent to the acquisition. We did not have acquisition-related expenses in the third quarter of fiscal 2019. Please refer to Note 3 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information.
Income from Operations
Income from operations increased $29.1 million, or 17%, to $204.9 million in the third quarter of fiscal 2020 from $175.8 million in the third quarter of fiscal 2019. Operating margin decreased 90 basis points to 18.3% compared to 19.2% in the third quarter of fiscal 2019.
On a segment basis, we determine income from operations without taking into account our general corporate expenses. During the first quarter of fiscal 2020, we reviewed our segment and general corporate expenses and determined certain costs that are more appropriately classified in different categories. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
Segmented income from operations for the quarters ended November 1, 2020 and November 3, 2019 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
|
(Percentage of segment revenue)
|
Segmented income from operations:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
111,780
|
|
|
$
|
147,720
|
|
|
21.8
|
%
|
|
25.5
|
%
|
Direct to consumer
|
|
209,610
|
|
|
103,599
|
|
|
43.8
|
|
|
42.0
|
|
Other
|
|
1,304
|
|
|
16,820
|
|
|
1.0
|
|
|
18.7
|
|
|
|
322,694
|
|
|
268,139
|
|
|
|
|
|
General corporate expense
|
|
107,002
|
|
|
92,303
|
|
|
|
|
|
Amortization of intangible assets
|
|
2,241
|
|
|
7
|
|
|
|
|
|
Acquisition-related expenses
|
|
8,531
|
|
|
—
|
|
|
|
|
|
Income from operations
|
|
$
|
204,920
|
|
|
$
|
175,829
|
|
|
|
|
|
Company-Operated Stores. Income from operations from our company-operated stores segment decreased $35.9 million, or 24%, to $111.8 million for the third quarter of fiscal 2020 from $147.7 million for the third quarter of fiscal 2019. The decrease was primarily the result of decreased gross profit of $50.7 million, which was primarily due to lower net revenue as a result of the impact of COVID-19 restrictions, as well as lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue. The decrease in gross profit was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including lower incentive compensation, brand and community costs, salaries and wages, and lower credit card fees as a result of lower net revenue.
Income from operations as a percentage of company-operated stores net revenue decreased primarily due to lower gross margin and deleverage on selling, general and administrative expenses.
Direct to Consumer. Income from operations from our direct to consumer segment increased $106.0 million, or 102%, to $209.6 million for the third quarter of fiscal 2020 from $103.6 million for the third quarter of fiscal 2019. The increase was primarily the result of increased gross profit of $156.1 million which was primarily due to increased net revenue, partially from the shift in guests shopping online instead of in-store. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, which was primarily due to higher variable costs including distribution costs, credit card fees, and packaging as a result of higher net revenue, as well as higher digital marketing expenses, employee costs and information technology expenses. Income from operations as a percentage of direct to consumer net revenue increased 180 basis points primarily due to leverage on selling, general and administrative expenses.
Other channels. Income from operations from our other channels decreased $15.5 million, or 92%, to $1.3 million for the third quarter of fiscal 2020 from $16.8 million for the third quarter of fiscal 2019. The decrease was primarily the result of increased selling, general and administrative expenses which increased primarily due to MIRROR digital marketing expenses, and increased credit card fees and distribution costs as a result of higher net revenue. The increase in selling, general and administrative expenses was partially offset by an increase in gross profit of $16.9 million, primarily due to increased net revenue. Income from operations as a percentage of other net revenue decreased primarily due to deleverage on selling, general and administrative expenses.
General Corporate Expense. General corporate expense increased $14.7 million, or 16%, to $107.0 million for the third quarter of fiscal 2020 from $92.3 million for the third quarter of fiscal 2019. This increase was primarily due to increases in professional fees, information technology costs, donations, depreciation, stock based compensation expense, and salaries and wages as a result of headcount growth. The increase in general corporate expense was partially offset by a decrease in incentive compensation and an increase in net foreign exchange and derivative revaluation gains of $3.2 million.
Other Income (Expense), Net
Other income, net decreased $2.5 million, or 130%, to an expense of $0.6 million for the third quarter of fiscal 2020 from income of $1.9 million for the third quarter of fiscal 2019. The decrease was primarily due to a decrease in interest income as a result of lower cash balances and lower interest rates.
Income Tax Expense
Income tax expense increased $8.9 million, or 17%, to $60.7 million for the third quarter of fiscal 2020 from $51.8 million for the third quarter of fiscal 2019. The effective tax rate for the third quarter of fiscal 2020 was 29.7% compared to 29.1% for the third quarter of fiscal 2019.
The increase in the effective tax rate was primarily due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 80 basis points.
Net Income
Net income increased $17.7 million, or 14%, to $143.6 million for the third quarter of fiscal 2020 from $126.0 million for the third quarter of fiscal 2019. This was primarily due to an increase in gross profit of $122.3 million, partially offset by an increase in selling, general and administrative expenses of $82.5 million, an increase in income tax expense of $8.9 million, acquisition-related expenses of $8.5 million, amortization of intangible assets of $2.2 million, and a decrease in other income (expense), net of $2.5 million.
First Three Quarters Results
The following table summarizes key components of our results of operations for the first three quarters ended November 1, 2020 and November 3, 2019. The percentages are presented as a percentage of net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
|
(Percentages)
|
Net revenue
|
|
$
|
2,672,330
|
|
|
$
|
2,581,805
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
1,221,073
|
|
|
1,169,245
|
|
|
45.7
|
|
|
45.3
|
|
Gross profit
|
|
1,451,257
|
|
|
1,412,560
|
|
|
54.3
|
|
|
54.7
|
|
Selling, general and administrative expenses
|
|
1,064,172
|
|
|
939,930
|
|
|
39.8
|
|
|
36.4
|
|
Amortization of intangible assets
|
|
2,965
|
|
|
7
|
|
|
0.1
|
|
|
—
|
|
Acquisition-related expenses
|
|
22,040
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
Income from operations
|
|
362,080
|
|
|
472,623
|
|
|
13.5
|
|
|
18.3
|
|
Other income (expense), net
|
|
250
|
|
|
6,154
|
|
|
—
|
|
|
0.2
|
|
Income before income tax expense
|
|
362,330
|
|
|
478,777
|
|
|
13.6
|
|
|
18.5
|
|
Income tax expense
|
|
103,254
|
|
|
131,202
|
|
|
3.9
|
|
|
5.1
|
|
Net income
|
|
$
|
259,076
|
|
|
$
|
347,575
|
|
|
9.7
|
%
|
|
13.5
|
%
|
Net Revenue
Net revenue increased $90.5 million, or 4%, to $2.672 billion for the first three quarters of fiscal 2020 from $2.582 billion for the first three quarters of fiscal 2019. On a constant dollar basis, assuming the average exchange rates for the first three quarters of fiscal 2020 remained constant with the average exchange rates for the first three quarters of fiscal 2019, net revenue increased $98.5 million, or 4%.
The increase in net revenue was primarily due to an increase in direct to consumer net revenue, partially due to a shift in the way guests are shopping due to COVID-19, partially offset by a decrease in company-operated store net revenue as well as a decrease in net revenue from our other retail locations driven by temporary closures as a result of COVID-19 as well as reduced operating hours and restricted guest occupancy levels.
Net revenue on a segment basis for the first three quarters ended November 1, 2020 and November 3, 2019 is summarized below. The percentages are presented as a percentage of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
1,058,927
|
|
|
$
|
1,669,699
|
|
|
39.6
|
%
|
|
64.7
|
%
|
Direct to consumer
|
|
1,384,604
|
|
|
674,177
|
|
|
51.8
|
|
|
26.1
|
|
Other
|
|
228,799
|
|
|
237,929
|
|
|
8.6
|
|
|
9.2
|
|
Net revenue
|
|
$
|
2,672,330
|
|
|
$
|
2,581,805
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Company-Operated Stores. Net revenue from our company-operated stores segment decreased $610.8 million, or 37%, to $1.059 billion in the first three quarters of fiscal 2020 from $1.670 billion in the first three quarters of fiscal 2019. The decrease in net revenue from our company-operated stores segment was primarily due to the impact of COVID-19. All of our stores in North America, Europe, and certain countries in Asia Pacific were temporarily closed for a significant portion of the first two quarters of fiscal 2020. COVID-19 restrictions, including reduced operating hours and occupancy limits, reduced net revenue from company-operated stores that have reopened.
Direct to Consumer. Net revenue from our direct to consumer segment increased $710.4 million, or 105%, to $1.385 billion in the first three quarters of fiscal 2020 from $674.2 million in the first three quarters of fiscal 2019. Direct to consumer net revenue increased 106% on a constant dollar basis. The increase in net revenue from our direct to consumer segment was primarily a result of increased website traffic and improved conversion rates, partially offset by a decrease in dollar value per transaction. These changes were partially due to COVID-19, with more guests shopping online instead of in-store. During the
second quarter of fiscal 2020, we held an online warehouse sale in the United States and Canada which generated net revenue of $43.3 million. We did not hold any warehouse sales during the first three quarters of fiscal 2019.
Other channels. Net revenue from our other segment decreased $9.1 million, or 4%, to $228.8 million in the first three quarters of fiscal 2020 from $237.9 million in the first three quarters of fiscal 2019. This decrease was primarily the result of COVID-19, including temporary location closures, reduced operating hours, and occupancy restrictions, partially offset by net revenue from MIRROR.
Gross Profit
Gross profit increased $38.7 million, or 3%, to $1.451 billion for the first three quarters of fiscal 2020 from $1.413 billion for the first three quarters of fiscal 2019.
Gross profit as a percentage of net revenue, or gross margin, decreased 40 basis points, to 54.3% in the first three quarters of fiscal 2020 from 54.7% in the first three quarters of fiscal 2019. The decrease in gross margin was primarily the result of an increase in costs as a percentage of revenue related to our distribution centers of 90 basis points. This was partially offset by a decrease in costs related to our product departments of 30 basis points, and an increase in product margin of 20 basis points. The increase in product margin was primarily due to lower product costs and a favorable mix of higher margin product, partially offset by higher markdowns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $124.2 million, or 13%, to $1.064 billion in the first three quarters of fiscal 2020 from $939.9 million in the first three quarters of fiscal 2019. The increase in selling, general and administrative expenses was primarily due to:
•an increase in costs related to our operating channels of $119.4 million, comprised of:
–an increase in variable costs of $80.3 million primarily due to an increase in distribution costs and credit card fees as a result of increased direct to consumer net revenue; and
–an increase in brand and community costs of $58.4 million primarily due to an increase in digital marketing expenses; and
–a decrease in employee costs of $26.6 million primarily due to lower incentive compensation expenses in our company-operated store and other channels. This was partially offset by an increase in salaries and wages as a result of increased headcount and labor hours in our direct to consumer channel; and
–an increase in other operating costs of $7.3 million primarily due to an increase in information technology costs; and
•an increase in head office costs of $42.7 million, comprised of:
–an increase of $54.8 million primarily due to an increase in information technology costs, depreciation, and professional fees, as well as an increase in brand and community costs primarily due to donations; and
–a decrease in employee costs of $12.1 million primarily due to decreased incentive compensation expense and travel expenses, partially offset by increased salaries and wages expense as a result of headcount growth, and higher stock-based compensation expense.
The increase in selling, general and administrative expenses was partially offset by $36.4 million of government payroll subsidies which were recognized during the first three quarters of fiscal 2020 and a decrease in net foreign exchange and derivative revaluation losses of $1.4 million.
As a percentage of net revenue, selling, general and administrative expenses increased 340 basis points, to 39.8% in the first three quarters of fiscal 2020 from 36.4% in the first three quarters of fiscal 2019.
Amortization of intangible assets
Amortization of intangible assets increased to $3.0 million in the first three quarters of fiscal 2020 from less than $0.1 million in the first three quarters of fiscal 2019. This increase was the result of amortization of intangible assets recognized upon the acquisition of MIRROR.
Acquisition-related expenses
As a result of our acquisition of MIRROR in the second quarter of fiscal 2020, we recognized acquisition-related expenses of $22.0 million in the first three quarters of fiscal 2020. This included acquisition-related compensation of $12.6 million for deferred consideration for certain continuing MIRROR employees and the partial acceleration of vesting of certain options. This also included transaction and integration related costs of $10.3 million for advisory and professional services, and integration costs subsequent to the acquisition. Acquisition-related expenses were partially offset by a $0.8 million gain recognized on our existing investment. We did not have acquisition-related expenses in the first three quarters of fiscal 2019. Please refer to Note 3 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information.
Income from Operations
Income from operations decreased $110.5 million, or 23%, to $362.1 million in the first three quarters of fiscal 2020 from $472.6 million in the first three quarters of fiscal 2019. Operating margin decreased 480 basis points to 13.5% compared to 18.3% in the first three quarters of fiscal 2019.
On a segment basis, we determine income from operations without taking into account our general corporate expenses. During the first quarter of fiscal 2020, we reviewed our segment and general corporate expenses and determined certain costs that are more appropriately classified in different categories. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
Segmented income from operations for the first three quarters ended November 1, 2020 and November 3, 2019 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
|
(Percentage of segment revenue)
|
Segmented income operations:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
76,333
|
|
|
$
|
422,948
|
|
|
7.2
|
%
|
|
25.3
|
%
|
Direct to consumer
|
|
604,152
|
|
|
269,553
|
|
|
43.6
|
|
|
40.0
|
|
Other
|
|
3,622
|
|
|
45,860
|
|
|
1.6
|
|
|
19.3
|
|
|
|
684,107
|
|
|
738,361
|
|
|
|
|
|
General corporate expense
|
|
297,022
|
|
|
265,731
|
|
|
|
|
|
Amortization of intangible assets
|
|
2,965
|
|
|
7
|
|
|
|
|
|
Acquisition-related expenses
|
|
22,040
|
|
|
—
|
|
|
|
|
|
Income from operations
|
|
$
|
362,080
|
|
|
$
|
472,623
|
|
|
|
|
|
Company-Operated Stores. Income from operations from our company-operated stores segment decreased $346.6 million, or 82%, to $76.3 million for the first three quarters of fiscal 2020 from income of $422.9 million for the first three quarters of fiscal 2019. The decrease was primarily the result of decreased gross profit of $437.4 million which was primarily due to lower net revenue as a result of the impact of COVID-19, as well as lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue. This decrease in gross profit was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including lower incentive compensation, credit card fees, packaging costs, and distribution costs primarily as a result of lower net revenue, as well as decreases in security and repairs and maintenance costs, and the recognition of government payroll subsidies. Income from operations as a percentage of company-operated stores net revenue decreased, primarily due to lower gross margin and deleverage on selling, general and administrative expenses.
Direct to Consumer. Income from operations from our direct to consumer segment increased $334.6 million, or 124%, to $604.2 million for the first three quarters of fiscal 2020 from $269.6 million for the first three quarters of fiscal 2019. The increase was primarily the result of increased gross profit of $481.4 million which was primarily due to increased net revenue, partially from the shift in guests shopping online instead of in-store. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs, credit card fees, and packaging as a result of higher net revenue, as well as higher digital marketing expenses and employee costs. Income from operations as a percentage of direct to consumer net revenue increased 360 basis points, primarily due to leverage on selling, general and administrative expenses and higher gross margin.
Other channels. Income from operations from our other channels decreased $42.2 million, or 92%, to $3.6 million for the first three quarters of fiscal 2020 from $45.9 million for the first three quarters of fiscal 2019. This was primarily due to increased selling, general and administrative expenses, primarily due to digital marketing expenses related to MIRROR, as well as distribution costs and credit card fees as a result of revenue generated from MIRROR, and a decrease in gross profit of $5.3 million. Income from operations as a percentage of other net revenue decreased primarily due to deleverage on selling, general and administrative expenses.
General Corporate Expense. General corporate expense increased $31.3 million, or 12%, to $297.0 million for the first three quarters of fiscal 2020 from $265.7 million for the first three quarters of fiscal 2019. This increase was primarily due to increases in information technology costs, salaries and wages as a result of headcount growth, depreciation, professional fees, donations, and stock based compensation expense. The increase in general corporate expense was partially offset by a decrease in incentive compensation, the recognition of government payroll subsidies, and a decrease in net foreign exchange and derivative revaluation losses of $1.4 million.
Other Income (Expense), Net
Other income, net decreased $5.9 million, or 96%, to $0.3 million for the first three quarters of fiscal 2020 from $6.2 million for the first three quarters of fiscal 2019. The decrease was primarily due to a decrease in net interest income as a result of lower cash balances and lower interest rates.
Income Tax Expense
Income tax expense decreased $27.9 million, or 21%, to $103.3 million for the first three quarters of fiscal 2020 from $131.2 million for the first three quarters of fiscal 2019. The effective tax rate for the first three quarters of fiscal 2020 was 28.5% compared to 27.4% for the first three quarters of fiscal 2019.
The increase in the effective tax rate was primarily due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 90 basis points, new regulations which resulted in additional foreign tax credits being recognized in the first three quarters of fiscal 2019, and certain non-deductible expenses in foreign jurisdictions. This was partially offset by an increase in tax deductions related to stock-based compensation.
Net Income
Net income decreased $88.5 million, or 25%, to $259.1 million for the first three quarters of fiscal 2020 from $347.6 million for the first three quarters of fiscal 2019. This was primarily due to an increase in selling, general and administrative expenses of $124.2 million, acquisition-related expenses of $22.0 million, amortization of intangible assets of $3.0 million, and a decrease in other income (expense), net of $5.9 million, partially offset by an increase in gross profit of $38.7 million, and a decrease in income tax expense of $27.9 million.
Comparable Store Sales and Total Comparable Sales
We separately track comparable store sales, which reflect net revenue from company-operated stores that have been open, or open after being significantly expanded, for at least 12 full fiscal months. Net revenue from a store is included in comparable store sales beginning with the first fiscal month for which the store has a full fiscal month of sales in the prior year. Comparable store sales exclude sales from new stores that have not been open for at least 12 full fiscal months, from stores which have not been in their significantly expanded space for at least 12 full fiscal months, and from stores which have been temporarily relocated for renovations or temporarily closed for at least 30 days. Comparable store sales also exclude sales from direct to consumer and other segments, as well as sales from company-operated stores that we have closed.
Total comparable sales combines comparable store sales and direct to consumer sales. We are evolving towards an omni-channel approach to support the shopping behavior of our guests. This involves country and region specific websites, mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, social media, product notification emails, and online order fulfillment through stores.
In fiscal years with 53 weeks, the 53rd week of net revenue is excluded from the calculation of comparable sales. In the year following a 53 week year, the prior year period is shifted by one week to compare similar calendar weeks.
The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.
We use comparable store sales to assess the performance of our existing stores as it allows us to monitor the performance of our business without the impact of recently opened or expanded stores. We use total comparable sales to evaluate the
performance of our business from an omni-channel perspective. We therefore believe investors would similarly find these metrics useful in assessing the performance of our business.
As the temporary closures from COVID-19 resulted in a significant number of stores being removed from our comparable store base during the first two quarters of fiscal 2020, total comparable sales and comparable store sales for year-to-date periods are not currently representative of the underlying trends of our business. We do not believe these year-to-date metrics are currently useful to investors in understanding performance, therefore we have not included these metrics in our discussion and analysis of results of operations. As most of our stores were open during the third quarter of fiscal 2020, and our comparable store base therefore included the majority of our stores, we have included total comparable sales and comparable store sales on a quarter-to-date basis in our discussion and analysis of results of operations.
Non-GAAP Financial Measures
Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue are non-GAAP financial measures.
A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign 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 exchange rates.
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. A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.
Constant dollar changes in net revenue
The below changes in net revenue show the change compared to the corresponding period in the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
November 1, 2020
|
|
Three Quarters Ended
November 1, 2020
|
|
|
(In thousands)
|
|
(Percentages)
|
|
(In thousands)
|
|
(Percentages)
|
Change
|
|
$
|
201,288
|
|
|
22
|
%
|
|
$
|
90,525
|
|
|
4
|
%
|
Adjustments due to foreign exchange rate changes
|
|
(6,656)
|
|
|
(1)
|
|
|
7,994
|
|
|
—
|
|
Change in constant dollars
|
|
$
|
194,632
|
|
|
21
|
%
|
|
$
|
98,519
|
|
|
4
|
%
|
Constant dollar changes in total comparable sales, comparable store sales, and direct to consumer net revenue
The below changes in total comparable sales, comparable store sales, and direct to consumer net revenue show the change compared to the corresponding period in the prior year. As the temporary closures from COVID-19 resulted in a significant number of stores being removed from our comparable store base during the first two quarters of fiscal 2020, total comparable sales and comparable store sales are only reported on a quarter-to-date basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
November 1, 2020
|
|
Three Quarters Ended November 1, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Total Comparable Sales1,2
|
|
Comparable Store Sales2
|
|
Direct to Consumer Net Revenue
|
|
Direct to Consumer Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
19
|
%
|
|
(17)
|
%
|
|
94
|
%
|
|
105
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments due to foreign exchange rate changes
|
|
(1)
|
|
|
(1)
|
|
|
(1)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in constant dollars
|
|
18
|
%
|
|
(18)
|
%
|
|
93
|
%
|
|
106
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
__________
(1)Total comparable sales includes comparable store sales and direct to consumer sales.
(2)Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 full fiscal months, or open for at least 12 full fiscal months after being significantly expanded.
Seasonality
Our business is affected by the general seasonal trends common to the retail apparel industry. Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year. As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year. For example, we generated approximately 47% of our full year operating profit during each of the fourth quarters of fiscal 2019 and fiscal 2018.
Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our revolving credit facilities. Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, making information technology system investments and enhancements, funding working capital requirements, and making other strategic investments both in North America and internationally. We may also use cash to repurchase shares of our common stock. Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions, as well as in money market funds, treasury bills, and term deposits.
As of November 1, 2020, our working capital, excluding cash and cash equivalents, was $388.4 million, our cash and cash equivalents were $481.6 million, and our capacity under our committed revolving credit facilities was $697.3 million. On December 4, 2020, we gave notice to terminate our $300.0 million 364-day unsecured revolving credit facility, which will reduce the available capacity under our committed revolving credit facilities to $397.3 million.
The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
November 1, 2020
|
|
November 3, 2019
|
|
|
(In thousands)
|
Total cash provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
85,404
|
|
|
$
|
95,106
|
|
Investing activities
|
|
(616,544)
|
|
|
(212,475)
|
|
Financing activities
|
|
(81,404)
|
|
|
(179,555)
|
|
Effect of exchange rate changes on cash
|
|
620
|
|
|
1,757
|
|
Decrease in cash and cash equivalents
|
|
$
|
(611,924)
|
|
|
$
|
(295,167)
|
|
Operating Activities
Cash flows provided by operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense, and the effect of changes in operating assets and liabilities.
Cash provided by operating activities decreased $9.7 million, to $85.4 million for the first three quarters of fiscal 2020 compared to $95.1 million for the first three quarters of fiscal 2019, primarily as a result of the following:
•A decrease of $88.5 million in net income, primarily due temporary closures as well as reduced operating hours and limited guest occupancy levels as a result of COVID-19.
The decrease in net income was partially offset by the following;
•an increase of $65.5 million from changes in operating assets and liabilities, primarily due to the following:
–an increase of $63.0 million related to other accrued liabilities, primarily due to increases in accrued duty, freight, and other operating expenses as well as an increase in the sales return allowance as a result of COVID-19 reducing in-period returns;
–an increase of $52.5 million related to accounts payable;
–an increase of $17.2 million related to income taxes due to payments for withholding taxes on repatriated foreign earnings in the first quarter of fiscal 2019; and
–an increase of $1.2 million related to inventories.
The increase from changes in operating assets and liabilities was partially offset by the following:
–a decrease of $40.1 million related to prepaid expenses and other current and non-current assets, including increases in cloud computing implementation costs; and
–a decrease of $26.9 million related to accrued compensation.
•an increase of $13.3 million from adjustments to reconcile net income to net cash provided by operating activities other than changes in operating assets and liabilities, primarily related to an increase in depreciation and amortization, partially offset by a decrease in the settlement of derivatives not designated in a hedging relationship.
Investing Activities
Cash flows used in investing activities relate to the acquisition of MIRROR, capital expenditures, the settlement of net investment hedges, and other investing activities. Capital expenditures primarily relate to opening new company-operated stores, remodeling or relocating certain stores, and ongoing store refurbishment. We also had capital expenditures related to information technology and business systems, related to corporate buildings, and for opening retail locations other than company-operated stores.
Cash used in investing activities increased $404.1 million to $616.5 million for the first three quarters of fiscal 2020 from $212.5 million for the first three quarters of fiscal 2019. The increase was primarily the result of the acquisition of MIRROR, partially offset by a decrease in capital expenditures for our company-operated stores.
Financing Activities
Cash flows used in financing activities consist primarily of cash used to repurchase shares of our common stock, certain cash flows related to stock-based compensation, and other financing activities.
Cash used in financing activities decreased $98.2 million to $81.4 million for the first three quarters of fiscal 2020 compared to $179.6 million for the first three quarters of fiscal 2019. The decrease was primarily the result of a decrease in stock repurchases.
Cash used in financing activities for the first three quarters of fiscal 2020 included $63.7 million to repurchase 0.4 million shares of our common stock compared to $173.1 million to repurchase 1.1 million shares for the first three quarters of fiscal 2019. During the first three quarters of fiscal 2019, 1.0 million shares were repurchased in a private transaction. We did not purchase any shares in a private transaction during the first three quarters of fiscal 2020. The other common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.
We believe the cash and cash equivalent balances, cash flows from operations, and borrowings available under the $400.0 million unsecured revolving credit facility are adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. The cash from operations may be negatively impacted by a decrease in demand for our products, the continuing impact of COVID-19, as well as the other factors described in Item 1 of Part II of this Quarterly Report on Form 10-Q. In addition, discretionary capital improvements may be made with respect to the stores, distribution facilities, headquarters, or systems. Strategic investments or repurchase of shares under an approved stock repurchase program may be made, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such expenditures out of our cash and cash equivalents and cash generated from operations.
Revolving Credit Facilities
North America revolving credit facility
On December 15, 2016, we entered into a credit agreement for $150.0 million under a committed and unsecured five-year revolving credit facility. Bank of America, N.A., is administrative agent and HSBC Bank Canada is the syndication agent and letter of credit issuer, and the lenders party thereto. Borrowings under the revolving credit facility may be made, in U.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the approval of the administrative agent and the lenders. Up to $35.0 million of the revolving credit facility is available for the issuance of letters of credit and up to $25.0 million is available for the issuance of swing line loans. Commitments under the revolving credit facility may be increased by up to $200.0 million, subject to certain conditions, including the approval of the lenders. Borrowings under the agreement may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs). The principal amount outstanding under the credit agreement, if any, will be due and payable in full on December 15, 2021, subject to provisions that permit us to request a limited number of one year extensions annually.
Borrowings made under the revolving credit facility bear interest at a rate per annum equal to, at our option, either (a) a rate based on the rates applicable for deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made ("LIBOR") 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 1.00%-1.75% for LIBOR loans and 0.00%-0.75% for alternate base rate loans. Additionally, a commitment fee of between 0.125%-0.200%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the revolving credit facility.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of our 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.
We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and we are not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be 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 November 1, 2020, we were in compliance with the covenants of the credit facility.
On June 6, 2018, we entered into Amendment No. 1 to the credit agreement. The Amendment amended the credit agreement to provide for (i) an increase in the aggregate commitments under the unsecured five-year revolving credit facility to $400.0 million, with an increase of the sub-limits for the issuance of letters of credit and extensions of swing line loans to $50.0 million for each, (ii) an increase in the option, subject to certain conditions as set forth in the credit agreement, to request increases in commitments under the revolving facility from $400.0 million to $600.0 million and (iii) an extension in the maturity of the revolving facility from December 15, 2021 to June 6, 2023.
In addition, the Amendment decreased the applicable margins for LIBOR loans from 1.00%-1.75% to 1.00%-1.50% and for alternate base rate loans from 0.00%-0.75% to 0.00%-0.50%, reduced the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduced fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%.
As of November 1, 2020, aside from letters of credit of $2.7 million, we had no other borrowings outstanding under this credit facility.
Mainland China revolving credit facility
In December 2019, we entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility. The terms are reviewed on an annual basis. The facility includes a revolving loan of up to 100.0 million Chinese Yuan as well as a financial bank guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency. In U.S. dollars, the uncommitted and unsecured revolving credit facility is equivalent to $19.4 million, the revolving loan is equivalent of up to $14.9 million, and the financial bank guarantee facility is equivalent of up to $4.5 million. Loans are available in Chinese Yuan for a period not to exceed 12 months, and interest accrues on them at a rate equal to 105% of the applicable PBOC Benchmark Lending Rate. Guarantees have a commission equal to 1% per annum of the outstanding amount. We are required to follow certain covenants. As of November 1, 2020, we were in compliance with the covenants. As of November 1, 2020, there were no borrowings outstanding under this credit facility.
364-Day revolving credit facility
On June 29, 2020, we entered into a 364-day credit agreement providing for a $300.0 million committed and unsecured revolving credit facility. The credit agreement matures on June 28, 2021. Bank of America, N.A., is administrative agent and swing line lender. Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs).
Borrowings made under the credit facility bear interest at a rate per annum equal to, at our option, either (1) a rate based on the rates applicable for deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made (“LIBOR”) or (2) 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 1.50%-2.25% for LIBOR loans and 0.50%-1.25% for alternate base rate or Canadian prime rate loans. Additionally, a commitment fee of between 0.25%-0.55%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of our 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.
We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and we are not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be 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 November 1, 2020, we were in compliance with the covenants. As of November 1, 2020, there were no borrowings outstanding under this credit facility.
On December 4, 2020, we gave notice to terminate this 364-day unsecured revolving credit facility. It will be terminated without penalty on December 11, 2020.
Off-Balance Sheet Arrangements
We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties. As of November 1, 2020, letters of credit and letters of guarantee totaling $2.7 million had been issued.
We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in our fiscal 2019 Annual Report on Form 10-K filed with the SEC on March 26, 2020, and in Notes 1, 2, 3, 8, and 9, included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Operating Locations
Our company-operated stores by country as of November 1, 2020 and February 2, 2020 are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
2020
|
|
February 2,
2020
|
United States
|
|
314
|
|
|
305
|
|
Canada
|
|
61
|
|
|
63
|
|
People's Republic of China(1)
|
|
50
|
|
|
38
|
|
Australia
|
|
31
|
|
|
31
|
|
United Kingdom
|
|
16
|
|
|
14
|
|
Japan
|
|
7
|
|
|
7
|
|
Germany
|
|
7
|
|
|
6
|
|
New Zealand
|
|
7
|
|
|
7
|
|
South Korea
|
|
7
|
|
|
5
|
|
Singapore
|
|
4
|
|
|
4
|
|
France
|
|
3
|
|
|
3
|
|
Malaysia
|
|
2
|
|
|
2
|
|
Sweden
|
|
2
|
|
|
2
|
|
Ireland
|
|
1
|
|
|
1
|
|
Netherlands
|
|
1
|
|
|
1
|
|
Norway
|
|
1
|
|
|
1
|
|
Switzerland
|
|
1
|
|
|
1
|
|
Total company-operated stores
|
|
515
|
|
|
491
|
|
__________
(1)Included within PRC as of November 1, 2020, were seven company-operated stores in the Hong Kong Special Administrative Region, two company-operated stores in the Macao Special Administration Region, and two company-operated store in Taiwan, PRC. As of February 2, 2020, there were six company-operated stores in the Hong Kong Special Administrative Region, two company-operated stores in the Macao Special Administration Region, and one company-operated store in Taiwan, PRC.
Our retail locations have experienced temporary closures during the first three quarters of fiscal 2020 as a result of COVID-19. Almost all locations were open during the third quarter of fiscal 2020. Subsequent to November 1, 2020, while almost all of our retail locations have remained open, we have experienced some temporary closures and are currently operating with tighter capacity restrictions in certain markets.
Retail locations operated by third parties under license and supply arrangements are not included in the above table. As of November 1, 2020, there were eight licensed locations, including four in Mexico, three in the United Arab Emirates, and one in Qatar.