LULULEMON ATHLETICA INC. 
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
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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 2021 Annual Report on Form 10-K filed with theSEC onMarch 29, 2022 . Fiscal 2022 and fiscal 2021 are referred to as "2022," and "2021," respectively. The first two quarters of 2022 and 2021 ended onJuly 31, 2022 andAugust 1, 2021 , respectively. Components of management's discussion and analysis of financial condition and results of operations include: • Overview and COVID-19 Update • Financial Highlights • Quarter-to-Date Results of Operations • Year-to-Date Results of Operations • Comparable Store Sales and Total Comparable Sales • Non-GAAP Financial Measures • Seasonality • Liquidity and Capital Resources • Critical Accounting Policies and Estimates • Operating Locations We disclose material non-public information through one or more of the following channels: our investor relations website (http://corporate.lululemon.com/investors), the social media channels identified on our investor relations website, press releases,SEC filings, public conference calls, and webcasts.
Overview
lululemon athletica inc. is principally a designer, distributor, and retailer of technical athletic apparel, footwear, and accessories. We have a vision to create transformative products and experiences that build meaningful connections, unlocking greater possibility and wellbeing for all. 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, acting with courage, valuing connection and inclusion, 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 human potential by helping people feel their best." Our performance apparel and footwear are marketed under thelululemon brand. We offer a comprehensive line of apparel and accessories. 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 activities. We also offer apparel designed for being On the Move and fitness-related accessories. We expect to continue to broaden our merchandise offerings through expansion across these product areas. We also offer in-home fitness equipment and associated content subscriptions, including live and on-demand classes, through our MIRROR brand. 20
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Table of Contents COVID-19 Update While most of our retail locations were open throughout the first two quarters of fiscal 2022 and 2021, certain locations were temporarily closed based on government and health authority guidance. Certain stores and our third party distribution center inthe People's Republic of China ("PRC") experienced temporary closures during the first quarter of 2022. Almost all PRC stores reopened in the second quarter of 2022, with certain localized closures dependent on COVID-19 resurgences. We believe we will continue to experience differing levels of disruption and volatility, market by market. The pandemic has impacted our suppliers and our distribution and logistics providers, including in the PRC. There has been disruption in transportation, port congestion, and an increase in freight costs, and we have increased our use of air freight. We expect supply disruptions to continue throughout 2022 and into 2023. Financial Highlights
For the second quarter of 2022, compared to the second quarter of 2021:
•Net revenue increased 29% to
•Total comparable sales increased 23%, or 25% on a constant dollar basis.
-Comparable store sales increased 16%, or 18% on a constant dollar basis.
-Direct to consumer net revenue increased 30%, or 32% on a constant dollar basis.
•Gross profit increased 25% to
•Gross margin decreased 160 basis points to 56.5%.
•Income from operations increased 38% to
•Operating margin increased 140 basis points to 21.5%.
•Income tax expense increased 35% to$111.8 million . Our effective tax rate for the second quarter of 2022 was 27.9% compared to 28.5% for the second quarter of 2021. •Diluted earnings per share were$2.26 compared to$1.59 in the second quarter of 2021. The second quarter of 2022 includes$8.5 million of after-tax gains from the sale of an administrative office building, which increased diluted earnings per share by$0.06 . The second quarter of 2021 includes$7.7 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by$0.06 . 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. 21
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Quarter-to-Date Results of Operations: Second Quarter Results
The following table summarizes key components of our results of operations for the periods indicated:
Second Quarter
2022 2021 2022 2021
(In thousands) (Percentage of net revenue)
Net revenue $ 1,868,328 $ 1,450,618 100.0 % 100.0 %
Cost of goods sold 812,852 607,932 43.5 41.9
Gross profit 1,055,476 842,686 56.5 58.1
Selling, general and administrative expenses 662,253 541,317 35.4 37.3
Amortization of intangible assets 2,195 2,195 0.1 0.2
Acquisition-related expenses - 8,143 - 0.6
Gain on disposal of assets (10,180) - (0.5) -
Income from operations 401,208 291,031 21.5 20.1
Other income (expense), net 145 96 - -
Income before income tax expense 401,353 291,127 21.5 20.1
Income tax expense 111,832 83,053 6.0 5.7
Net income $ 289,521 $ 208,074 15.5 % 14.3 %
Net Revenue
Net revenue increased $417.7 million , or 29%, to $1.9 billion for the second
quarter of 2022 from $1.5 billion for the second quarter of 2021. On a constant
dollar basis, assuming the average foreign currency exchange rates for the
second quarter of 2022 remained constant with the average foreign currency
exchange rates for the second quarter of 2021, net revenue increased $453.0
million , or 31%.
The increase in net revenue was primarily due to increased company-operated store net revenue, including from increased comparable store sales and new company-operated stores. Direct to consumer net revenue and other net revenue also increased.
Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 23% for the second quarter of 2022 compared to the second quarter of 2021. Total comparable sales increased 25% on a constant dollar basis.
Net revenue for the second quarter of 2022 and 2021 is summarized below.
Second Quarter
2022 2021 2022 2021 Year over year change
(In thousands) (Percentages) (In thousands) (Percentages)
Company-operated stores $ 903,077 $ 695,120 48.3 % 47.9 % $ 207,957 29.9 %
Direct to consumer 775,425 597,426 41.5 41.2 177,999 29.8
Other 189,826 158,072 10.2 10.9 31,754 20.1
Net revenue $ 1,868,328 $ 1,450,618 100.0 % 100.0 % $ 417,710 28.8 %
Company-Operated Stores. The increase in net revenue from our company-operated
stores was driven by increased comparable store sales. Comparable store sales
increased 16%, or 18% on a constant dollar basis. The increase in comparable
store sales was primarily a result of increased store traffic, partially offset
by a decrease in conversion rates. Net revenue from company-operated stores that
we opened or significantly expanded since the second quarter of 2021 contributed
$116.0 million to the increase in net revenue from our company-operated stores.
We opened 66 net new company-operated stores since the second quarter of 2021,
including 43 stores in Asia Pacific , 16 stores in North America , and seven
stores in Europe .
Direct to Consumer. Direct to consumer net revenue increased 30%, or 32% on a
constant dollar basis. The increase in net revenue from our direct to consumer
segment was primarily a result of increased traffic, partially offset by a
decrease in conversion rates and a lower dollar value per transaction.
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Other. The increase in net revenue was primarily due to increased outlet sales,
license and supply arrangement revenue, sales to wholesale accounts, revenue
from our pop up locations, and recommerce revenue. The increase in net revenue
was partially offset by a decrease in net revenue from MIRROR.
Gross Profit
Second Quarter
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Gross profit $ 1,055,476 $ 842,686 $ 212,790 25.3 %
Gross margin 56.5 % 58.1 % (160) basis points
The decrease in gross margin was primarily the result of:
•a decrease in product margin of 150 basis points, primarily due to higher air freight costs as a result of global supply chain disruption and higher markdowns;
•an increase in costs related to our distribution centers and product departments as a percentage of net revenue of 40 basis points; and
•an unfavorable impact of foreign currency exchange rates of 40 basis points.
The decrease in gross margin was partially offset by a decrease in occupancy and depreciation costs as a percentage of net revenue of 70 basis points, driven primarily by the increase in net revenue.
Selling, General and Administrative Expenses
Second Quarter
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Selling, general and administrative expenses
22.3 %
Selling, general and administrative expenses
as a percentage of net revenue 35.4 % 37.3 % (190) basis points
The increase in selling, general and administrative expenses was primarily due to:
•an increase in head office costs of
-an increase in employee costs of
-an increase in other costs of$32.8 million primarily due to an increase in brand and community costs, including charitable donations, as well as increased technology costs, depreciation, and professional fees; and
•an increase in costs related to our operating channels of
-an increase in variable costs of
-an increase in employee costs of$21.8 million primarily due to an increase in salaries and wages expense in our company-operated stores and direct to consumer channels, primarily from the growth in our business as well as increased wage rates; and
-an increase in other operating costs of
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The increase in costs related to our operating channels was partially offset by
a decrease in brand and community costs of
•an increase in net foreign currency exchange and derivative revaluation losses
of
Amortization of Intangible Assets
Second Quarter
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Amortization of intangible assets $ 2,195 $ 2,195 $ - - %
The amortization of intangible assets was primarily the result of the
amortization of intangible assets recognized upon the acquisition of MIRROR.
Acquisition-Related Expenses
Second Quarter
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Acquisition-related expenses $ - $ 8,143 $ (8,143) (100.0) %
In connection with our acquisition of MIRROR, we recognized acquisition-related
compensation expenses of
Gain on Disposal of Assets
Second Quarter
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Gain on disposal of assets $ (10,180) $ - $ 10,180 n/a
During the second quarter of 2022, we completed the sale of an administrative
office building, which resulted in a pre-tax gain of
Income from Operations
On a segment basis, we determine income from operations without taking into
account our general corporate expenses. Segmented income from operations is
summarized below.
Second Quarter
2022 2021 2022 2021 Year over year change
(Percentage of net revenue of
(In thousands) respective operating segment) (In thousands) (Percentage)
Segmented income from operations: Company-operated stores$ 256,807 $ 184,996 28.4 % 26.6 %$ 71,811 38.8 % Direct to consumer 326,423 260,248 42.1 43.6 66,175 25.4 Other 29,626 22,240 15.6 14.1 7,386 33.2$ 612,856 $ 467,484 $ 145,372 31.1 % General corporate expense 219,633 166,115 53,518 32.2 Amortization of intangible assets 2,195 2,195 - - Acquisition-related expenses - 8,143 (8,143) (100.0) Gain on disposal of assets (10,180) - 10,180 n/a Income from operations$ 401,208 $ 291,031 $ 110,177 37.9 % Operating margin 21.5 % 20.1 % 140 basis points 24
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Company-Operated Stores. The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of$105.0 million , driven by increased net revenue, partially offset by lower gross margin. The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs, partially offset by leverage on occupancy and depreciation costs as a result of increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher employee and operating costs. Employee costs increased primarily due to higher salaries and wages expense and higher incentive compensation as a result of the growth in our business and increased wage rates. Store operating costs increased primarily due to increases in credit card fees, distribution costs, and packaging costs, as a result of higher net revenue, as well as increased repairs and maintenance. Income from operations as a percentage of company-operated stores net revenue increased due to leverage on selling, general and administrative expenses, partially offset by lower gross margin. Direct to Consumer. The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of$102.1 million , driven by increased net revenue, partially offset by lower gross margin. The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs and higher markdowns. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher variable operating costs including distribution costs and credit card fees, as a result of higher net revenue, as well as higher digital marketing expenses, employee costs from the growth in our business and increased wage rates, technology costs, and depreciation. Income from operations as a percentage of direct to consumer net revenue decreased primarily due to decreased gross margin, partially offset by leverage on selling, general and administrative expenses. Other. The increase in income from operations from our other channels was the result of increased gross profit of$5.7 million and decreased selling, general and administrative expenses. The increase in gross profit was driven by increased net revenue, partially offset by lower gross margin, primarily due to lower product margin driven by increased air freight costs. Selling, general and administrative expenses primarily decreased due to reduced MIRROR marketing expenses. Income from operations as a percentage of other net revenue increased primarily due to leverage on selling, general and administrative expenses, partially offset by lower gross margin. General Corporate Expenses. The increase in general corporate expenses was primarily due to increased employee costs, primarily from headcount growth and increased wage rates, as well as increased brand and community costs, technology costs, professional fees, and depreciation. The increase in general corporate expense was also due to an increase in net foreign currency exchange and derivative revaluation losses of$1.0 million .
Other Income (Expense), Net
Second Quarter
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Other income (expense), net $ 145 $ 96 $ 49 51.0 %
The increase in other income, net was primarily due to an increase in interest income from higher interest rates.
Income Tax Expense
Second Quarter
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Income tax expense $ 111,832 $ 83,053 $ 28,779 34.7 %
Effective tax rate 27.9 % 28.5 % (60) basis points
The decrease in the effective tax rate was primarily due to certain
non-deductible expenses incurred in connection with the MIRROR acquisition which
increased the effective tax rate in the second quarter of 2021 by 60 basis
points, a lower tax rate on the capital gain on the sale of an administrative
building which reduced our effective tax rate in the second quarter of
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2022 by 30 basis points, and reduced non-deductible expenses in international
jurisdictions in 2022. This was partially offset by decreased deductions related
to stock-based compensation and accrued withholding taxes on unremitted foreign
earnings.
Net Income
Second Quarter
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Net income $ 289,521 $ 208,074 $ 81,447 39.1 %
The increase in net income was primarily due to an increase in gross profit of
$212.8 million , a gain on disposal of assets of $10.2 million in the current
year, and a decrease in acquisition-related expenses of $8.1 million , partially
offset by an increase in selling, general and administrative expenses of $120.9
million and an increase in income tax expense of $28.8 million .
Year-to-Date Results of Operations: First Two Quarters Results
The following table summarizes key components of our results of operations for the periods indicated:
First Two Quarters
2022 2021 2022 2021
(In thousands) (Percentages)
Net revenue $ 3,481,791 $ 2,677,083 100.0 % 100.0 %
Cost of goods sold 1,555,922 1,134,083 44.7 42.4
Gross profit 1,925,869 1,543,000 55.3 57.6
Selling, general and administrative expenses 1,270,104 1,037,951 36.5 38.8
Amortization of intangible assets 4,390 4,390 0.1 0.2
Acquisition-related expenses - 15,807 - 0.6
Gain on disposal of assets (10,180) - (0.3) -
Income from operations 661,555 484,852 19.0 18.1
Other income (expense), net 123 323 - -
Income before income tax expense 661,678 485,175 19.0 18.1
Income tax expense 182,159 132,145 5.2 4.9
Net income $ 479,519 $ 353,030 13.8 % 13.2 %
Net Revenue
Net revenue increased $804.7 million , or 30%, to $3.5 billion for the first two
quarters of 2022 from $2.7 billion for the first two quarters of 2021. On a
constant dollar basis, assuming the average foreign currency exchange rates for
the first two quarters of 2022 remained constant with the average foreign
currency exchange rates for the first two quarters of 2021, net revenue
increased $847.1 million , or 32%.
The increase in net revenue was primarily due to increased company-operated store net revenue, including from increased comparable store sales and new company-operated stores. Direct to consumer net revenue and other net revenue also increased.
Total comparable sales, which includes comparable store sales and direct to
consumer net revenue, increased 25% for the first two quarters of 2022 compared
to the first two quarters of 2021. Total comparable sales increased 27% on a
constant dollar basis.
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Net revenue for the first two quarters of 2022 and 2021 is summarized below.
First Two Quarters
2022 2021 2022 2021 Year over year change
(In thousands) (Percentages) (In thousands) (Percentage) Company-operated stores$ 1,634,681 $ 1,231,704 46.9 % 46.0 %$ 402,977 32.7 % Direct to consumer 1,496,678 1,142,515 43.0 42.7 354,163 31.0 Other 350,432 302,864 10.1 11.3 47,568 15.7 Net revenue$ 3,481,791 $ 2,677,083 100.0 % 100.0 %$ 804,708 30.1 % Company-Operated Stores. The increase in net revenue from our company-operated stores was driven by increased comparable store sales. Comparable store sales increased 19%, or 21% on a constant dollar basis. The increase in comparable store sales was primarily a result of increased store traffic, partially offset by a decrease in conversion rates and dollar value per transaction. Net revenue from company-operated stores that we opened or significantly expanded since the second quarter of 2021 contributed$209.9 million to the increase in net revenue from our company-operated stores. We opened 66 net new company-operated stores since the second quarter of 2021, including 43 stores inAsia Pacific , 16 stores inNorth America , and seven stores inEurope . Direct to Consumer. Direct to consumer net revenue increased 31%, or 32% on a constant dollar basis. The increase in net revenue from our direct to consumer segment was primarily a result of increased traffic and a higher dollar value per transaction, partially offset by a decrease in conversion rates. Other. The increase in other net revenue was primarily due to increased outlet sales, license and supply arrangement revenue, sales to wholesale accounts, and recommerce revenue. The increase in net revenue was partially offset by a decrease in net revenue from MIRROR. Gross Profit First Two Quarters 2022 2021 Year over year change (In thousands) (In thousands) (Percentage) Gross profit$ 1,925,869 $ 1,543,000 $ 382,869 24.8 % Gross margin 55.3 % 57.6 % (230) basis points
The decrease in gross margin was primarily the result of:
•a decrease in product margin of 250 basis points, primarily due to higher air freight costs as a result of global supply chain disruption and higher markdowns;
•an increase in costs related to our distribution centers and product departments as a percentage of net revenue of 30 basis points; and
•an unfavorable impact of foreign currency exchange rates of 30 basis points.
The decrease in gross margin was partially offset by a decrease in occupancy and
depreciation costs as a percentage of net revenue of 80 basis points, driven
primarily by the increase in net revenue.
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Selling, General and Administrative Expenses
First Two Quarters
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Selling, general and administrative expenses
22.4 %
Selling, general and administrative expenses
as a percentage of net revenue 36.5 % 38.8 % (230) basis points
The increase in selling, general and administrative expenses was primarily due to:
•an increase in head office costs of
-an increase in costs of$69.1 million primarily due to an increase in brand and community costs, including charitable donations, technology costs, professional fees, and depreciation; and -an increase in employee costs of$67.5 million primarily due to an increase in salaries and wages expense, incentive compensation, and stock-based compensation expense, primarily as a result of headcount growth and increased wage rates, as well as increased travel costs;
•an increase in costs related to our operating channels of
-an increase in employee costs of$46.6 million primarily due to an increase in salaries and wages expense and incentive compensation in our company-operated store and direct to consumer channels, primarily due to growth in our business and increased wage rates; -an increase in variable costs of$46.2 million primarily due to an increase in distribution costs and credit card fees, as a result of increased net revenue; and
-an increase in other operating costs of
The increase in costs related to our operating channels was partially offset by
a decrease in brand and community costs of
•an increase in net foreign currency exchange and derivative revaluation losses
of
Amortization of Intangible Assets
First Two Quarters
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Amortization of intangible assets $ 4,390 $ 4,390 $ - - %
The amortization of intangible assets was primarily the result of the
amortization of intangible assets recognized upon the acquisition of MIRROR.
Acquisition-Related Expenses
First Two Quarters
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Acquisition-related expenses $ - $ 15,807 $ (15,807) (100.0) %
In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of$14.3 million and integration related costs of$1.5 million in the first two quarters of 2021. There were no acquisition-related expenses in the first two quarters of 2022. 28
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Gain on Disposal of Assets
First Two Quarters
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Gain on disposal of assets $ (10,180) $ - $ 10,180 n/a
During the second quarter of 2022, we completed the sale of an administrative
office building, which resulted in a pre-tax gain of
Income from Operations
On a segment basis, we determine income from operations without taking into
account our general corporate expenses. Segmented income from operations is
summarized below.
First Two Quarters
2022 2021 2022 2021 Year over year change
(Percentage of net revenue of
(In thousands) respective operating segment) (In thousands) (Percentage)
Segmented income from operations: Company-operated stores$ 417,513 $ 284,144 25.5 % 23.1 %$ 133,369 46.9 % Direct to consumer 611,530 497,181 40.9 43.5 114,349 23.0 Other 49,153 36,746 14.0 12.1 12,407 33.8$ 1,078,196 $ 818,071 $ 260,125 31.8 % General corporate expense 422,431 313,022 109,409 35.0 Amortization of intangible assets 4,390 4,390 - - Acquisition-related expenses - 15,807 (15,807) (100.0) Gain on disposal of assets (10,180) - 10,180 n/a Income from operations$ 661,555 $ 484,852 $ 176,703 36.4 % Operating margin 19.0 % 18.1 % 90 basis points Company-Operated Stores. The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of$198.4 million , driven by increased net revenue, partially offset by lower gross margin. The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs, partially offset by leverage on occupancy and depreciation costs as a result of increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher employee and operating costs. Employee costs increased primarily due to higher salaries and wages expense and higher incentive compensation as a result of the growth in our business and increased wage rates. Store operating costs increased primarily due to increases in credit card fees, distribution costs, and packaging costs, as a result of higher net revenue, as well as increased repairs and maintenance. Income from operations as a percentage of company-operated stores net revenue increased due to leverage on selling, general and administrative expenses, partially offset by lower gross margin. Direct to Consumer. The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of$181.6 million , driven by increased net revenue, partially offset by lower gross margin. The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs and higher markdowns. 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, as a result of higher net revenue, as well as higher digital marketing expenses, depreciation, employee costs from the growth in our business and increased wage rates, and technology costs. Income from operations as a percentage of direct to consumer net revenue decreased for the first two quarters of 2022, compared to the first two quarters of 2021, primarily due to decreased gross margin, partially offset by leverage on selling, general and administrative expenses. Other. The increase in income from operations from our other channels was the result of increased gross profit of$2.9 million , driven by increased net revenue, and due to decreased selling, general and administrative expenses. The decrease in selling, general and administrative expenses was driven by reduced MIRROR marketing expenses. Income from operations as a percentage of other net revenue increased primarily due to leverage on selling, general and administrative expenses, partially offset by lower gross margin. The decrease in gross margin was primarily due to lower product margin driven by increased air freight costs and higher markdowns. 29
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General Corporate Expense. The increase in general corporate expenses was primarily due to increased employee costs, primarily from headcount growth and increased wage rates, as well as increased brand and community costs, technology costs, professional fees, and depreciation. The increase in general corporate expense was also due to an increase in net foreign currency exchange and derivative revaluation losses of$0.6 million .
Other Income (Expense), Net
First Two Quarters
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Other income (expense), net $ 123 $ 323 $ (200) (61.9) %
The decrease in other income, net was primarily due to an increase in other
expenses partially offset by an increase in interest income from higher interest
rates.
Income Tax Expense
First Two Quarters
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Income tax expense $ 182,159 $ 132,145 $
50,014 37.8 %
Effective tax rate 27.5 % 27.2 % 30 basis points
The increase in the effective tax rate was primarily due to a reduction in tax
deductions related to stock-based compensation and accrued withholding taxes on
unremitted foreign earnings. This was partially offset by certain non-deductible
expenses incurred in connection with the MIRROR acquisition which increased the
effective tax rate in the first two quarters of 2021 by 70 basis points, a lower
tax rate on the capital gain on the sale of an administrative building which
reduced our effective tax rate in the first two quarters of 2022 by 20 basis
points, and reduced non-deductible expenses in international jurisdictions in
2022.
Net Income
First Two Quarters
2022 2021 Year over year change
(In thousands) (In thousands) (Percentage)
Net income $ 479,519 $ 353,030 $ 126,489 35.8 %
The increase in net income was primarily due to an increase in gross profit of
$382.9 million , a decrease in acquisition-related expenses of $15.8 million , and
a gain on disposal of assets of $10.2 million in the current year, partially
offset by an increase in selling, general and administrative expenses of $232.2
million , an increase in income tax expense of $50.0 million , and a decrease in
other income (expense), net of $0.2 million .
Comparable Store Sales and Total Comparable Sales
We use comparable store sales to assess the performance of our existing stores as it allows us to monitor the performance of our business without the impact of recently opened or expanded stores. We use total comparable sales to evaluate the performance of our business from an omni-channel perspective. We believe investors would similarly find these metrics useful in assessing the performance of our business. Comparable store sales reflect net revenue from company-operated stores that have been open, or open after being significantly expanded, for at least 12 full fiscal months. Net revenue from a store is included in comparable store sales beginning with the first fiscal month for which the store has a full fiscal month of sales in the prior year. Comparable store sales exclude sales from new stores that have not been open for at least 12 full fiscal months, from stores which have not been in their significantly expanded space for at least 12 full fiscal months, and from stores which have been temporarily relocated for renovations or temporarily closed. Comparable store sales also exclude sales from direct to consumer and our other operations, as well as sales from company-operated stores that have closed.
Total comparable sales combines comparable store sales and direct to consumer net revenue.
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.
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Opening new stores and expanding existing stores is an important part of our growth strategy. Accordingly, total comparable sales is just one way of assessing the success of our growth strategy insofar as comparable sales do not reflect the performance of stores opened, or significantly expanded, within the last 12 full fiscal months. The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.
Non-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 currency exchange rates for the period remained constant with the average foreign currency exchange rates for the same period of the prior year. We provide constant dollar changes in our results to help investors understand the underlying growth rate of net revenue excluding the impact of changes in foreign currency exchange rates. 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.
Second Quarter 2022 First Two Quarters 2022
Net Revenue Net Revenue
(In
thousands) (Percentages) (In thousands) (Percentages)
Change $ 417,710 29 % $ 804,708 30 %
Adjustments due to foreign currency exchange
rate changes 35,293 2 42,391 2 %
Change in constant dollars $ 453,003 31 % $ 847,099 32 %
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.
Second Quarter 2022 First Two Quarters 2022
Direct to Direct to
Total Comparable Comparable Store Consumer Net Total Comparable Comparable Store Consumer Net
Sales1,2 Sales2 Revenue Sales1,2 Sales2 Revenue
Change 23 % 16 % 30 % 25 % 19 % 31 %
Adjustments due to foreign
currency exchange rate
changes 2 2 2 2 2 1
Change in constant dollars 25 % 18 % 32 % 27 % 21 % 32 %
__________
(1)Total comparable sales includes comparable store sales and direct to consumer net revenue.
(2)Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 full fiscal months, or open for at least 12 full fiscal months after being significantly expanded.
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 44% and 56% of our full year operating profit during the
fourth quarters of 2021 and 2020, respectively. Due to a significant number of
our company-operated stores being temporarily closed due to COVID-19 during the
first two quarters of 2020, we earned a higher proportion of our operating
profit during the last two quarters of 2020 compared to 2021.
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Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our committed revolving credit facility, including to fund short-term working capital requirements. Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, investing in our distribution centers, investing in technology and making system enhancements, funding working capital requirements, and making other strategic capital investments both inNorth 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 and term deposits.
The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated:
First Two Quarters
Year over year
2022 2021 change
(In thousands)
Total cash provided by (used in):
Operating activities $ (145,618) $ 499,772 $ (645,390)
Investing activities (224,944) (201,493) (23,451)
Financing activities (384,576) (290,767) (93,809)Effect of foreign currency exchange rate changes on cash
(5,902) 12,012 (17,914)
Increase (decrease) in cash and cash equivalents $ (761,040) Operating Activities
The increase in cash used in operating activities was primarily as a result of:
•a decrease in cash flows from the changes in operating assets and liabilities of$745.9 million . This decrease was primarily driven by$373.2 million from inventories, as well as changes in income taxes, accrued compensation, accrued liabilities and other, and accounts payable; and •changes in adjusting items of$26.0 million , primarily driven by lower cash inflows related to derivatives not designated in a hedging relationship and the gain on disposal of assets, partially offset by increased depreciation and stock-based compensation expenses.
The increase in cash used in operating activities was partially offset by
increased net income of
Investing Activities
The increase in cash used in investing activities was primarily due to increased capital expenditures, partially offset by the settlement of net investment hedges and other investing activities. The increase in capital expenditures was primarily due to increased corporate expenditures driven by investment in technology and business systems and increased expenditures on corporate office renovations. There was also increased company-operated store expenditures driven by opening new stores as well as remodeling existing stores. This was partially offset by decreased capital expenditures for our direct to consumer segment. The proceeds of the sale of an administrative office building during the second quarter of 2022 are included in other investing activities.
Financing Activities
The increase in cash used in financing activities was primarily the result of an increase in stock repurchases. Cash used in financing activities for the first two quarters of 2022 included$358.0 million to repurchase 1.1 million shares of our common stock compared to$254.9 million to repurchase 0.8 million shares for the first two quarters of 2021. The common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.
Liquidity Outlook
We believe that our cash and cash equivalent balances, cash generated from operations, and borrowings available to us under our committed revolving credit facility will be adequate to meet our liquidity needs and capital expenditure
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requirements for at least the next 12 months. Our cash from operations may be negatively impacted by a decrease in demand for our products, as well as the other factors described in "Item 1A. Risk Factors". In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such expenditures out of our cash and cash equivalents and cash generated from operations.
The following table includes certain measures of our liquidity:
July 31, 2022
(In thousands)
Cash and cash equivalents $ 498,831
Working capital excluding cash and cash equivalents(1) 681,053
Capacity under committed revolving credit facility 394,846
__________
(1)Working capital is calculated as current assets of
We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties. As ofJuly 31, 2022 , letters of credit and letters of guarantee totaling$6.4 million had been issued, including$5.2 million under our committed revolving credit facility. Our committedNorth America credit facility provides for$400.0 million in commitments under an unsecured five-year revolving credit facility. The credit facility has a maturity date ofDecember 14, 2026 , subject to extension under certain circumstances. As ofJuly 31, 2022 , aside from letters of credit of$5.2 million , we had no other borrowings outstanding under this credit facility. Further information regarding our credit facilities and associated covenants is outlined in Note 5. Revolving Credit Facilities included in Item 1 of Part I of this report. The timing and cost of our inventory purchases will vary depending on a variety of factors such as revenue growth, assortment and purchasing decisions, product costs including freight and duty, and the availability of production capacity and speed. Our inventory balance as ofJuly 31, 2022 was$1.5 billion , an increase of 85% fromAugust 1, 2021 . Increased air freight costs have contributed to the increase in inventory. On a number of units basis, our inventory increased 64% compared toAugust 1, 2021 . We expect that our inventory balance will continue to grow in 2022 and we expect the growth rate will exceed net revenue growth in 2022.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.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 within "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our 2021 Annual Report on Form 10-K filed with the
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Our company-operated stores by country as of
July 31 ,
Number of company-operated stores by country 2022 2022
United States 331 324
People's Republic of China(1) 96 86
Canada 65 63
Australia 31 31
United Kingdom 19 17
South Korea 14 12
Germany 9 9
New Zealand 8 7
Singapore 7 6
Japan 6 6
Ireland 4 3
France 3 3
Malaysia 2 2
Sweden 2 2
Netherlands 1 1
Norway 1 1
Switzerland 1 1
Total company-operated stores 600 574
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(1)Included within PRC as of July 31, 2022 , were nine stores in Hong Kong
Special Administrative Region , six stores in Taiwan , and two stores in Macao
Special Administration Region . As of January 30, 2022 , there were nine stores in
Hong Kong Special Administrative Region , five stores in Taiwan , and two stores
in Macao Special Administration Region .
Retail locations operated by third parties under license and supply arrangements
are not included in the above table. As of July 31, 2022 , there were 18 licensed
locations, including nine in Mexico , six in the United Arab Emirates , two in
Qatar , and one in Kuwait .
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