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 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
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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 2020 Annual Report on Form 10-K filed with theSEC onMarch 30, 2021 . Fiscal 2021 and fiscal 2020 are referred to as "2021," and "2020," respectively. The first two quarters of 2021 and 2020 ended onAugust 1, 2021 andAugust 2, 2020 , 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 • Revolving Credit Facilities • Off-Balance Sheet Arrangements • 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://investor.lululemon.com/), the social media channels identified on our investor relations website, press releases,SEC filings, public conference calls, and webcasts. Overviewlululemon 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 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 the world by unleashing the full potential within every one of us." Our healthy lifestyle inspired athletic apparel and accessories 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 sweaty pursuits. 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. During the second quarter of 2020, we acquiredCuriouser Products Inc. , dba MIRROR. MIRROR is an 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 existinglululemon guests. 20
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COVID-19 Update COVID-19 continues to impact the global economy and cause disruption and volatility. Governments and public health officials around the world have imposed and continue to impose restrictions and recommend precautions to mitigate the spread of the virus. We believe we will continue to experience differing levels of disruption and volatility, market by market. While most of our retail locations were open throughout the first two quarters of fiscal 2021, certain locations were temporarily closed based on government and health authority guidance in those markets, including in parts ofCanada ,Asia Pacific , andEurope . We continue to operate with necessary precautionary measures in place at our retail locations and distribution centers. The pandemic has also impacted our product manufacturers and our distribution and logistics providers. We have experienced disruption in transportation and port congestion, as well as an increase in freight costs. As a result of this disruption, certain inventory receipts have been delayed, and we expect this disruption and increased costs to continue at least through to the end of 2021. Prior to the COVID-19 pandemic, guest shopping preferences were shifting towards digital platforms and we had been investing in our websites, mobile apps, and omni-channel capabilities. We believe COVID-19 further shifted guest shopping behavior and has resulted in significant increases in traffic to our websites and digital apps. This increased traffic contributed to the significant growth in our direct to consumer net revenue in 2020 and in the first quarter of 2021. While we expect our direct to consumer business to grow in 2021, we expect the year over year growth rate to moderate compared to 2020. Guest traffic at our retail locations has improved during 2021, but remains below pre-pandemic levels. Improved traffic combined with increased conversion has resulted in overall store productivity at our open stores in the second quarter of 2021 being in line with the second quarter of 2019. There remains significant uncertainty regarding the extent and duration of the impact that COVID-19 will have on our operations. Continued proliferation of the virus, resurgences, or the emergence of new variants may result in further or prolonged closures of our retail locations and distribution centers, reduce operating hours, further disrupt our supply chain, cause changes in guest behavior, and reduce discretionary spending. Such factors are beyond our control and could elicit further actions and recommendations from governments and public health authorities. Financial Highlights For the second quarter of 2021, compared to the second quarter of 2020: •Net revenue increased 61% to$1.5 billion . On a constant dollar basis, net revenue increased 56%. •Company-operated stores net revenue increased 142% to$695.1 million . •Direct to consumer net revenue increased 8% to 597.4 million, or increased 4% on a constant dollar basis. We held an online warehouse sale during the second quarter of 2020 which generated net revenue of$43.3 million . •Gross profit increased 72% to$842.7 million . •Gross margin increased 390 basis points to 58.1%. •Income from operations increased 134% to$291.0 million . •Operating margin increased 630 basis points to 20.1%. •Income tax expense increased 123% to$83.1 million . Our effective tax rate for the second quarter of 2021 was 28.5% compared to 30.0% for the second quarter of 2020. •Diluted earnings per share were$1.59 compared to$0.66 in the second quarter of 2020. This includes$7.7 million and$9.5 million of after-tax costs related to the MIRROR acquisition in the second quarter of 2021 and 2020, respectively, which reduced diluted earnings per share by$0.06 and$0.08 in the second quarter of 2021 and 2020, respectively. 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 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
2021 2020 2021 2020
(In thousands) (Percentage of net revenue)
Net revenue $ 1,450,618 $ 902,942 100.0 % 100.0 %
Cost of goods sold 607,932 413,441 41.9 45.8
Gross profit 842,686 489,501 58.1 54.2
Selling, general and administrative expenses 541,317 352,881 37.3 39.1
Amortization of intangible assets 2,195 747 0.2 0.1
Acquisition-related expenses 8,143 11,464 0.6 1.3
Income from operations 291,031 124,409 20.1 13.8
Other income (expense), net 96 (344) - -
Income before income tax expense 291,127 124,065 20.1 13.7
Income tax expense 83,053 37,264 5.7 4.1
Net income $ 208,074 $ 86,801 14.3 % 9.6 %
Net Revenue
Net revenue increased $547.7 million , or 61%, to $1.5 billion for the second
quarter of 2021 from $902.9 million for the second quarter of 2020. On a
constant dollar basis, assuming the average foreign currency exchange rates for
the second quarter of 2021 remained constant with the average foreign currency
exchange rates for the second quarter of 2020, net revenue increased $507.3
million , or 56%.
The increase in net revenue was primarily due to increased company-operated
store and other net revenue, primarily due to most of our stores being open for
the entire second quarter of 2021, while almost all were temporarily closed for
a significant portion of the second quarter of 2020 as a result of COVID-19.
Direct to consumer net revenue also increased.
Net revenue for the second quarter of 2021 and 2020 is summarized below.
Second Quarter
2021 2020 2021 2020 Year over year change
(In thousands) (Percentages) (In thousands) (Percentages)
Company-operated stores $ 695,120 $ 287,201 47.9 % 31.8 % $ 407,919 142.0 %
Direct to consumer 597,426 554,302 41.2 61.4 43,124 7.8
Other 158,072 61,439 10.9 6.8 96,633 157.3
Net revenue $ 1,450,618 $ 902,942 100.0 % 100.0 % $ 547,676 60.7 %
Company-Operated Stores. The increase in net revenue from our company-operated
stores was primarily due to most of our stores being open for the entire second
quarter of 2021, while almost all were temporarily closed for a significant
portion of the second quarter of 2020 as a result of COVID-19. We have opened 28
net new company-operated stores since the second quarter of 2020 which also
contributed to the increase in net revenue. This included 16 stores in Asia
Pacific , 10 stores in North America , and two stores in Europe .
Direct to Consumer. Direct to consumer net revenue increased 8%, and increased
4% 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.
During the second quarter of 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 second quarter of 2021.
Other channels. The increase in net revenue from our other channels was
primarily due to most of our locations being open for the entire second quarter
of 2021, while almost all were temporarily closed for a significant portion of
the second quarter of 2020 as a result of COVID-19. Net revenue from MIRROR,
which we acquired during the second quarter of 2020, also contributed to the
increase in other net revenue.
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Gross Profit
Second Quarter
2021 2020 Year over year change
(In thousands) (In thousands) (Percentage)
Gross profit $ 842,686 $ 489,501 $ 353,185 72.2 %
Gross margin 58.1 % 54.2 % 390 basis points
The increase in gross margin was primarily the result of:
•a decrease in occupancy and depreciation costs as a percentage of net revenue
of 210 basis points, driven primarily by the increase in net revenue;
•a decrease in costs related to our distribution centers and product departments
as a percentage of net revenue of 140 basis points, driven primarily by the
increase in net revenue; and
•a favorable impact of foreign currency exchange rates of 60 basis points.
The increase in gross margin was partially offset by a decrease in product
margin of 20 basis points, primarily due to higher air freight costs as a result
of COVID-19 impacts on logistics availability and costs, as well as higher
inventory provision expenses, partially offset by lower markdowns.
Selling, General and Administrative Expenses
Second Quarter
2021 2020 Year over year change
(In thousands) (In thousands) (Percentage)
Selling, general and administrative expenses
53.4 %
Selling, general and administrative expenses
as a percentage of net revenue 37.3 % 39.1 % (180) basis points
The increase in selling, general and administrative expenses was primarily due
to:
•an increase in costs related to our operating channels of $93.5 million ,
comprised of:
-an increase in employee costs of $51.0 million primarily due to an increase in
incentive compensation and salaries and wages expenses in our company-operated
stores and other retail locations, primarily from the growth in our business;
-an increase in brand and community costs of $19.9 million primarily due to an
increase in digital marketing expenses;
-an increase in variable costs of $13.6 million primarily due to an increase in
credit card fees and packaging costs as a result of increased net revenue; and
-an increase in operating costs of $9.0 million primarily due to an increase in
depreciation, occupancy, security, information technology, and repairs and
maintenance costs;
•an increase in head office costs of $71.3 million , comprised of:
-an increase in costs of $41.5 million primarily due to an increase in
professional fees, brand and community costs, information technology costs, and
depreciation; and
-an increase in employee costs of $29.8 million primarily due to an increase in
salaries and wages expense, incentive compensation, and benefits, primarily as a
result of headcount growth;
•a decrease in government payroll subsidies of $21.0 million as no government
payroll subsidies were recognized in the second quarter of 2021; and
•an increase in net foreign currency exchange and derivative revaluation losses
of $2.6 million .
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Amortization of intangible assets
Second Quarter
2021 2020 Year over year change
(In thousands) (In thousands) (Percentage)
Amortization of intangible assets $ 2,195 $ 747 $ 1,448 193.8 %
The increase in the amortization of intangible assets was the result of the
amortization of intangible assets recognized upon the acquisition of MIRROR
during the second quarter of 2020.
Acquisition-related expenses
Second Quarter
2021 2020 Year over year change
(In thousands) (In thousands) (Percentage)
Acquisition-related expenses $ 8,143 $ 11,464 $ (3,321) (29.0) %
In connection with our acquisition of MIRROR, we recognized acquisition-related
compensation expenses of $7.1 million and $5.0 million in the second quarter of
2021 and 2020, respectively. We also recognized transaction and integration
related costs of $1.0 million and $7.2 million in the second quarter of 2021 and
2020, respectively. Acquisition related expenses in the second quarter of 2020
were partially offset by a $0.8 million gain recognized on our existing
investment.
Income from Operations
On a segment basis, we determine income from operations without taking into
account our general corporate expenses. Segmented income from operations is
summarized below.
Second Quarter
2021 2020 2021 2020 Year over year change
(Percentage of net revenue of
(In thousands) respective operating segment) (In thousands) (Percentage) Segmented income (loss) from operations: Company-operated stores$ 184,996 $ (5,293) 26.6 % (1.8) %$ 190,289 n/a Direct to consumer 260,248 237,595 43.6 42.9 22,653 9.5 % Other 22,240 2,587 14.1 4.2 19,653 n/a$ 467,484 $ 234,889 $ 232,595 99.0 % General corporate expense 166,115 98,269 67,846 69.0 Amortization of intangible assets 2,195 747 1,448 n/a Acquisition-related expenses 8,143 11,464 (3,321) (29.0) Income from operations$ 291,031 $ 124,409 $ 166,622 133.9 % Operating margin 20.1 % 13.8 % 630 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$264.4 million , driven by increased net revenue and higher gross margin primarily due to most of our stores being open for the entire second quarter of 2021, while almost all were temporarily closed for a significant portion of the second quarter of 2020 as a result of COVID-19. 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 incentive compensation and higher salaries and wages expense as a result of growth in our business. Store operating costs increased primarily due to government payroll subsidies that were recognized during the second quarter of 2020. No government payroll subsidies were recognized during the second quarter of 2021. There were also increases in credit card fees, distribution and packaging costs as a result of higher net revenue. Income from operations as a percentage of company-operated stores net revenue increased due to higher gross margin and leverage on selling, general and administrative expenses. Direct to Consumer. The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of$34.5 million driven by increased net revenue. The increase in gross profit was partially 24
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offset by an increase in selling, general and administrative expenses, primarily due to higher digital marketing expenses and depreciation. Income from operations as a percentage of direct to consumer net revenue increased primarily due to higher gross margin. Other channels. The increase in income from operations from our other retail locations was primarily the result of increased gross profit of$54.4 million , primarily due to increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses driven by MIRROR digital marketing expenses, higher salaries and wages and incentive compensation, as well as increased credit card fees and distribution costs as a result of higher net revenue. Income from operations as a percentage of other net revenue increased primarily due to an increase in gross margin, partially offset by deleverage on selling, general and administrative expenses. General Corporate Expenses. The increase in general corporate expenses was primarily due to increased employee costs primarily from the growth in our business, as well as increased professional fees, information technology costs, brand and community costs, and depreciation. An increase in net foreign currency exchange and derivative revaluation losses of$2.6 million also contributed to the increase in general corporate expenses. Other Income (Expense), Net Second Quarter 2021 2020 Year over year change (In thousands) (In thousands) (Percentage) Other income (expense), net$ 96 $ (344) $ 440 (127.9) % The increase in other income, net was primarily due to an increase in interest income driven by increased cash balances. Income Tax Expense Second Quarter 2021 2020 Year over year change (In thousands) (In thousands) (Percentage) Income tax expense$ 83,053 $ 37,264 $ 45,789 122.9 % Effective tax rate 28.5 % 30.0 % (150) basis points The decrease in the effective tax rate was primarily due to a net increase in tax deductions related to stock-based compensation. Certain non-deductible expenses related to the MIRROR acquisition increased the effective tax rate by 60 basis points in the second quarter of 2021 compared to 110 basis points in the second quarter of 2020. Net Income Second Quarter 2021 2020 Year over year change (In thousands) (In thousands) (Percentage) Net income$ 208,074 $ 86,801 $ 121,273 139.7 % The increase in net income was primarily due to an increase in gross profit of$353.2 million and an increase in other income (expense), net of$0.4 million and a decrease in acquisition-related expenses of$3.3 million , partially offset by an increase in selling, general and administrative expenses of$188.4 million , an increase in income tax expense of$45.8 million , and an increase in amortization of intangible assets of$1.4 million . 25
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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
2021 2020 2021 2020
(In thousands) (Percentages)
Net revenue $ 2,677,083 $ 1,554,904 100.0 % 100.0 %
Cost of goods sold 1,134,083 731,001 42.4 47.0
Gross profit 1,543,000 823,903 57.6 53.0
Selling, general and administrative expenses 1,037,951 652,464 38.8 42.0
Amortization of intangible assets 4,390 770 0.2 -
Acquisition-related expenses 15,807 13,509 0.6 0.9
Income from operations 484,852 157,160 18.1 10.1
Other income (expense), net 323 830 - 0.1
Income before income tax expense 485,175 157,990 18.1 10.2
Income tax expense 132,145 42,557 4.9 2.7
Net income $ 353,030 $ 115,433 13.2 % 7.4 %
Net Revenue
Net revenue increased $1.1 billion , or 72%, to $2.7 billion for the first two
quarters of 2021 from $1.6 billion for the first two quarters of 2020. On a
constant dollar basis, assuming the average foreign currency exchange rates for
the first two quarters of 2021 remained constant with the average foreign
currency exchange rates for the first two quarters of 2020, net revenue
increased $1.0 billion , or 67%.
The increase in net revenue was primarily due to increased company-operated
store and other net revenue, primarily due to most of our stores being open for
the entire first two quarters of 2021, while almost all were temporarily closed
for a significant portion of the first two quarters of 2020 as a result of
COVID-19. Direct to consumer net revenue also increased, partially due to a
shift in the way guests are shopping as a result COVID-19.
Net revenue for the first two quarters of 2021 and 2020 is summarized below.
First Two Quarters
2021 2020 2021 2020 Year over year change
(In thousands) (Percentages) (In thousands) (Percentage) Company-operated stores$ 1,231,704 $ 547,171 46.0 % 35.2 %$ 684,533 125.1 % Direct to consumer 1,142,515 906,341 42.7 58.3 236,174 26.0 Other 302,864 101,392 11.3 6.5 201,472 198.7 Net revenue$ 2,677,083 $ 1,554,904 100.0 % 100.0 %$ 1,122,179 72.2 % Company-Operated Stores. The increase in net revenue from our company-operated stores was primarily due to most of our stores being open for the entire first two quarters of 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020 as a result of COVID-19. We opened 28 net new company-operated stores since the second quarter of 2020 which also contributed to the increase in net revenue. This included 16 stores inAsia Pacific , 10 stores inNorth America , and two stores inEurope . Direct to Consumer. Direct to consumer net revenue increased 26%, and increased 22% 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. During the second quarter of 2020, we held an online warehouse sale inthe United States andCanada which generated net revenue of$43.3 million . We did not hold any warehouse sales during the first two quarters of 2021. Other channels. The increase in net revenue from other channels was primarily due to most of our locations being open for the entire first two quarters of 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020 as a result of COVID-19. Net revenue from MIRROR, which we acquired during the second quarter of 2020, also contributed to the increase in other net revenue. 26
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Gross Profit
First Two Quarters
2021 2020 Year over year change
(In thousands) (In thousands) (Percentage)
Gross profit $ 1,543,000 $ 823,903 $ 719,097 87.3 %
Gross margin 57.6 % 53.0 % 460 basis points
The increase in gross margin was primarily the result of:
•a decrease in occupancy and depreciation costs as a percentage of net revenue
of 340 basis points, driven primarily by the increase in net revenue;
•a decrease in costs related to our distribution centers and product departments
as a percentage of net revenue of 120 basis points, driven primarily by the
increase in net revenue; and
•a favorable impact of foreign currency exchange rates of 60 basis points.
The increase in gross margin was partially offset by a decrease in product
margin of 60 basis points, primarily due to higher air freight costs as a result
of COVID-19 impacts on logistics availability and costs, partially offset by
lower markdowns.
Selling, General and Administrative Expenses
First Two Quarters
2021 2020 Year over year change
(In thousands) (In thousands) (Percentage)
Selling, general and administrative expenses
59.1 %
Selling, general and administrative expenses
as a percentage of net revenue 38.8 % 42.0 % (320) basis points
The increase in selling, general and administrative expenses was primarily due
to:
•an increase in costs related to our operating channels of $214.2 million ,
comprised of:
-an increase in employee costs of $89.7 million primarily due to an increase in
incentive compensation, salaries and wages expense, and benefit expenses in our
company-operated store and other retail locations, primarily from the growth in
our business;
-an increase in variable costs of $52.1 million primarily due to an increase in
distribution costs, credit card fees, and packaging expenses as a result of
increased net revenue;
-an increase in brand and community costs of $45.3 million primarily due to an
increase in digital marketing expenses; and
-an increase in other operating costs of $27.1 million primarily due to an
increase in information technology costs, depreciation, occupancy costs, and
security costs;
•an increase in head office costs of $144.3 million , comprised of:
-an increase in costs of $79.1 million primarily due to an increase in
professional fees, information technology costs, brand and community costs, and
depreciation; and
-an increase in employee costs of $65.2 million primarily due to an increase in
salaries and wages expense and employee benefit costs as a result of headcount
growth, and an increase in incentive compensation and stock-based compensation
expense.
•a decrease in government payroll subsidies of $21.1 million as no government
payroll subsidies were recognized in the first two quarters of 2021; and
•an increase in net foreign currency exchange and derivative revaluation losses
of $5.8 million .
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Amortization of intangible assets
First Two Quarters
2021 2020 Year over year change
(In thousands) (In thousands) (Percentage)
Amortization of intangible assets $ 4,390 $ 770 $ 3,620 470.1 %
The increase in the amortization of intangible assets was the result of the amortization of intangible assets recognized upon the acquisition of MIRROR during the second quarter of 2020. Acquisition-related expenses
First Two Quarters
2021 2020 Year over year change
(In thousands) (In thousands) (Percentage)
Acquisition-related expenses $ 15,807 $ 13,509 $ 2,298 17.0 %
In connection with our acquisition of MIRROR, we recognized acquisition-related
compensation expenses of $14.3 million and $5.0 million in the first two
quarters of 2021 and 2020, respectively. We also recognized transaction and
integration related costs of $1.5 million and $9.2 million in the first two
quarters of 2021 and 2020, respectively.
Income from Operations
On a segment basis, we determine income from operations without taking into
account our general corporate expenses. Segmented income from operations is
summarized below.
First Two Quarters
2021 2020 2021 2020 Year over year change
(Percentage of net revenue of
(In thousands) respective operating segment) (In thousands) (Percentage) Segmented income (loss) from operations: Company-operated stores$ 284,144 $ (35,447) 23.1 % (6.5) %$ 319,591 n/a Direct to consumer 497,181 394,542 43.5 43.5 102,639 26.0 % Other 36,746 2,318 12.1 2.3 34,428 n/a$ 818,071 $ 361,413 $ 456,658 126.4 % General corporate expense 313,022 189,974 123,048 64.8 Amortization of intangible assets 4,390 770 3,620 n/a Acquisition-related expenses 15,807 13,509 2,298 17.0 Income from operations$ 484,852 $ 157,160 $ 327,692 208.5 % Operating margin 18.1 % 10.1 % 800 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$441.9 million , driven by increased net revenue and higher gross margin primarily due to most of our stores being open for the entire first two quarters of 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020 as a result of COVID-19. 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 incentive compensation and higher salaries and wages expense as a result of the growth in our business, as well as an increase in employee benefit expense. Store operating costs increased primarily due to government payroll subsidies that were recognized during the first two quarters of 2020. No government payroll subsidies were recognized during the first two quarters of 2021. There were also increases in credit card fees, distribution and packaging costs as a result of higher net revenue. Income from operations as a percentage of company-operated stores net revenue increased, primarily due to higher gross margin and leverage on selling, general and administrative expenses. Direct to Consumer. The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of$164.1 million , driven by increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including 28
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distribution costs, packaging, and credit card fees 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 was consistent for the first two quarters of 2021, compared to the first two quarters of 2020. The increase in gross margin was offset by deleverage on selling, general and administrative expenses. Other channels. The increase in income from operations from our other retail locations was primarily the result of increased gross profit of$113.0 million , primarily due to increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, driven by MIRROR digital marketing expenses, higher salaries and wages expense and incentive compensation, as well as distribution costs and credit card fees as a result of higher net revenue. Income from operations as a percentage of other net revenue increased primarily due to leverage on selling, general and administrative expenses and in increase in gross margin. General Corporate Expense. The increase in general corporate expenses was primarily due to increased employee costs primarily from the growth in our business, as well as increased professional fees, information technology costs, brand and community costs, depreciation, and supplies costs. An increase in net foreign currency exchange and derivative revaluation losses of$5.8 million also contributed to the increase in general corporate expenses. Other Income (Expense), Net First Two Quarters 2021 2020 Year over year change (In thousands) (In thousands) (Percentage) Other income (expense), net$ 323 $ 830 $ (507) (61.1) % The decrease in other income, net was primarily due to a decrease in interest income driven by lower interest rates, partially offset by increased cash balances. Income Tax Expense First Two Quarters 2021 2020 Year over year change (In thousands) (In thousands) (Percentage) Income tax expense$ 132,145 $ 42,557 $ 89,588 210.5 % Effective tax rate 27.2 % 26.9 % 30 basis points The increase in the effective tax rate was primarily due to certain non-deductible expenses in international jurisdictions which were partially offset by a net increase in tax deductions related to stock-based compensation. Certain non-deductible expenses related to the MIRROR acquisition increased the effective tax rate by 70 basis points in the first two quarters of 2021 compared to 90 basis points in the first two quarters of 2020. Net Income First Two Quarters 2021 2020 Year over year change (In thousands) (In thousands) (Percentage) Net income$ 353,030 $ 115,433 $ 237,597 205.8 % The increase in net income was primarily due to an increase in gross profit of$719.1 million , partially offset by an increase in selling, general and administrative expenses of$385.5 million , an increase in income tax expense of$89.6 million , an increase in amortization of intangible assets of$3.6 million , an increase in acquisition-related expenses of$2.3 million , and a decrease in other income of$0.5 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 therefore believe that investors would similarly find these metrics useful in assessing the performance of our business. However, as the temporary store closures 29
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from COVID-19 during the first two quarters of 2020 resulted in a significant
number of stores being removed from our comparable store calculations, we
believe total comparable sales and comparable store sales are not currently
representative of the underlying trends of our business. We do not believe these
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. We did not provide comparable sales metrics that included
the first two quarters during 2020, and expect to do the same for 2021.
Non-GAAP Financial Measures
Constant dollar changes in net revenue 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 2021 First Two Quarters 2021
Net Revenue Direct to Consumer Net Net Revenue Direct to Consumer Net
Revenue Revenue
(In
thousands) (Percentages) (Percentages) (In thousands) (Percentages) (Percentages)
Change $ 547,676 61 % 8 % $ 1,122,179 72 % 26 %
Adjustments due to foreign
currency exchange rate
changes (40,339) (5) (4) (73,730) (5) % (4) %
Change in constant dollars $ 507,337 56 % 4 % $ 1,048,449 67 % 22 %
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 56% and 47% of our full year operating profit during the
fourth quarters of 2020 and 2019, 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 prior years.
Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash
equivalents, cash flows from operations, and capacity under our committed
revolving credit facility. Our primary cash needs are capital expenditures for
opening new stores and remodeling or relocating existing stores, investing in
information technology and making system enhancements, funding working capital
requirements, and making other strategic capital 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.
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
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
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debt or equity securities or other external financing sources to the extent we
were unable to fund such capital expenditures out of our cash and cash
equivalents and cash generated from operations.
The following table includes certain measures of our liquidity:
August 1, 2021
(In thousands)
Cash and cash equivalents $ 1,170,041
Working capital excluding cash and cash equivalents(1) 123,912
Capacity under committed revolving credit facility 397,212
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(1)Working capital is calculated as current assets of$2.3 billion less current liabilities of$1.0 billion . The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated: First Two Quarters Year over year 2021 2020 change (In thousands) Total cash provided by (used in): Operating activities$ 499,772 $ 60,062 $ 439,710 Investing activities (201,493) (545,323) 343,830 Financing activities (290,767) (82,157) (208,610)
Effect of foreign currency exchange rate changes on cash
12,012 (3,089) 15,101
Increase (decrease) in cash and cash equivalents $ 19,524 Operating Activities The increase in cash provided by operating activities was primarily as a result of: •increased net income of$237.6 million ; •an increase in cash flows from the changes in operating assets and liabilities of$115.3 million . This increase was driven by changes in accrued compensation, and prepaid expenses and other current assets; and •changes in adjusting items of$86.8 million , primarily driven by higher cash inflows related to derivatives not designated in a hedging relationship, and due to increased stock-based compensation and depreciation expense. Investing Activities The decrease in cash used in investing activities was primarily due to the MIRROR acquisition in 2020, partially offset by the settlement of net investment hedges and increased capital expenditures. The increase in capital expenditures was primarily due to increased capital expenditures for our direct to consumer segment driven by investment in our distribution centers, as well as increased corporate expenditures. This was partially offset by decreased expenditures for our company-operated stores. 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 2021 included$254.9 million to repurchase 0.8 million shares of our common stock compared to$63.7 million to repurchase 0.4 million shares for the first two quarters of 2020. 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. 31
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Revolving Credit FacilitiesNorth America revolving credit facility During 2016, we obtained a$150.0 million committed and unsecured five-year revolving credit facility with major financial institutions. OnJune 6, 2018 , we amended the credit agreement to provide for (i) an increase in the aggregate commitments under the 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, to request increases in commitments from$400.0 million to$600.0 million and (iii) an extension in the maturity of the facility fromDecember 15, 2021 toJune 6, 2023 . Borrowings under the facility may be made inU.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the lenders' approval. As ofAugust 1, 2021 , aside from letters of credit of$2.8 million , we had no other borrowings outstanding under this credit facility. Borrowings under the facility bear interest at a rate equal to, at our option, either (a) rates based on deposits on the interbank market forU.S. Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) an alternate base rate, plus, an applicable margin 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%-1.50% for LIBOR loans and 0.00%-0.50% for alternate base rate loans. Additionally, a commitment fee of between 0.10%-0.20% is payable on the average unused amounts under the revolving credit facility, and fees of 1.00%-1.50% are payable on unused letters of credit. 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 3.5:1 and to maintain the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) below 2:1. 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). As ofAugust 1, 2021 , we were in compliance with the covenants of the credit facility. MainlandChina revolving credit facility InDecember 2019 , we entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility with terms that are reviewed on an annual basis. The credit facility was increased to 230.0 million Chinese Yuan during 2020. It is comprised of a revolving loan of up to 200.0 million Chinese Yuan and a financial guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency. Loans are available for a period not to exceed 12 months, at an interest rate equal to the loan prime rate plus a spread of 0.5175%. We are required to comply with certain covenants. As ofAugust 1, 2021 , we were in compliance with the covenant and, aside from letters of credit of 1.3 million Chinese Yuan, we had no other borrowings or guarantees outstanding under this credit facility. Off-Balance Sheet Arrangements We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties. As ofAugust 1, 2021 , letters of credit and letters of guarantee totaling$3.4 million had been issued, including$2.8 million under our committed revolving credit facility. 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 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 32
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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 2020 Annual Report on Form 10-K filed with theSEC onMarch 30, 2021 . Operating Locations Our company-operated stores by country as ofAugust 1, 2021 andJanuary 31, 2021 are summarized in the table below.August 1 ,
Number of company-operated stores by country 2021 2021
United States 318 315
Canada 62 62
People's Republic of China(1) 63 55
Australia 30 31
United Kingdom 16 16
South Korea 9 7
Germany 7 7
New Zealand 7 7
Japan 6 6
Singapore 4 4
France 3 3
Malaysia 2 2
Sweden 2 2
Ireland 2 1
Netherlands 1 1
Norway 1 1
Switzerland 1 1
Total company-operated stores 534 521
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(1)Included within PRC as ofAugust 1, 2021 , were seven stores inHong Kong ,Special Administrative Region , three stores inTaiwan , and two stores inMacao ,Special Administration Region . As ofJanuary 31, 2021 , there were seven stores inHong Kong ,Special Administrative Region , two stores inTaiwan , and two stores inMacao ,Special Administration Region . Retail locations operated by third parties under license and supply arrangements are not included in the above table. As ofAugust 1, 2021 , there were eight licensed locations, including four inMexico , three in theUnited Arab Emirates , and one inQatar .
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