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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-33608

lululemon athletica inc.
(Exact name of registrant as specified in its charter)
Delaware20-3842867
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1818 Cornwall Avenue, Vancouver, British Columbia V6J 1C7
(Address of principal executive offices)

Registrant's telephone number, including area code:
604-732-6124
Former name, former address and former fiscal year, if changed since last report:
N/A

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.005 per shareLULUNasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (of for such shorter period that the registrant was required to submit such files).    Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated FilerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes No ☑
At May 28, 2021, there were 124,952,259 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At May 28, 2021, there were outstanding 5,203,012 exchangeable shares of Lulu Canadian Holding, Inc., a wholly-owned subsidiary of the registrant. Exchangeable shares are exchangeable for an equal number of shares of the registrant's common stock.
In addition, at May 28, 2021, the registrant had outstanding 5,203,012 shares of special voting stock, through which the holders of exchangeable shares of Lulu Canadian Holding, Inc. may exercise their voting rights with respect to the registrant. The special voting stock and the registrant's common stock generally vote together as a single class on all matters on which the common stock is entitled to vote.


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TABLE OF CONTENTS
 
  Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
May 2,
2021
January 31,
2021
ASSETS
Current assets
Cash and cash equivalents$1,179,739 $1,150,517 
Accounts receivable56,956 62,399 
Inventories732,890 647,230 
Prepaid and receivable income taxes139,123 139,126 
Prepaid expenses and other current assets144,744 125,107 
2,253,452 2,124,379 
Property and equipment, net774,685 745,687 
Right-of-use lease assets719,139 734,835 
Goodwill387,115 386,877 
Intangible assets, net77,885 80,080 
Deferred income tax assets6,773 6,731 
Other non-current assets110,782 106,626 
$4,329,831 $4,185,215 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$196,934 $172,246 
Accrued inventory liabilities9,356 14,956 
Other accrued liabilities 258,642 211,911 
Accrued compensation and related expenses154,729 130,171 
Current lease liabilities168,145 166,091 
Current income taxes payable7,997 8,357 
Unredeemed gift card liability141,149 155,848 
Other current liabilities27,862 23,598 
964,814 883,178 
Non-current lease liabilities616,917 632,590 
Non-current income taxes payable38,073 43,150 
Deferred income tax liabilities60,807 58,755 
Other non-current liabilities9,365 8,976 
1,689,976 1,626,649 
Commitments and contingencies
Stockholders' equity
Undesignated preferred stock, $0.01 par value: 5,000 shares authorized; none issued and outstanding
  
Exchangeable stock, no par value: 60,000 shares authorized; 5,203 and 5,203 issued and outstanding
  
Special voting stock, $0.000005 par value: 60,000 shares authorized; 5,203 and 5,203 issued and outstanding
  
Common stock, $0.005 par value: 400,000 shares authorized; 125,069 and 125,150 issued and outstanding
625 626 
Additional paid-in capital364,743 388,667 
Retained earnings2,408,006 2,346,428 
Accumulated other comprehensive loss(133,519)(177,155)
2,639,855 2,558,566 
$4,329,831 $4,185,215 
See accompanying notes to the unaudited interim consolidated financial statements
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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited; Amounts in thousands, except per share amounts)
Quarter Ended
May 2,
2021
May 3,
2020
Net revenue$1,226,465 $651,962 
Cost of goods sold526,151 317,560 
Gross profit700,314 334,402 
Selling, general and administrative expenses496,634 299,583 
Amortization of intangible assets2,195 23 
Acquisition-related expenses7,664 2,045 
Income from operations193,821 32,751 
Other income (expense), net227 1,174 
Income before income tax expense194,048 33,925 
Income tax expense49,092 5,293 
Net income$144,956 $28,632 
Other comprehensive income (loss):
Foreign currency translation adjustment43,636 (60,604)
Comprehensive income (loss)$188,592 $(31,972)
Basic earnings per share$1.11 $0.22 
Diluted earnings per share$1.11 $0.22 
Basic weighted-average number of shares outstanding130,358 130,251 
Diluted weighted-average number of shares outstanding130,984 130,803 
See accompanying notes to the unaudited interim consolidated financial statements
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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
Quarter Ended May 2, 2021
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance as of January 31, 20215,203 5,203 $ 125,150 $626 $388,667 $2,346,428 $(177,155)$2,558,566 
Net income144,956 144,956 
Foreign currency translation adjustment43,636 43,636 
Stock-based compensation expense14,932 14,932 
Common stock issued upon settlement of stock-based compensation324 2 4,493 4,495 
Shares withheld related to net share settlement of stock-based compensation(135)(1)(42,898)(42,899)
Repurchase of common stock(270)(2)(451)(83,378)(83,831)
Balance as of May 2, 20215,203 5,203 $ 125,069 $625 $364,743 $2,408,006 $(133,519)$2,639,855 

Quarter Ended May 3, 2020
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance as of February 2, 20206,227 6,227 $ 124,122 $621 $355,541 $1,820,637 $(224,581)$1,952,218 
Net income28,632 28,632 
Foreign currency translation adjustment(60,604)(60,604)
Common stock issued upon exchange of exchangeable shares(745)(745) 745 4 (4) 
Stock-based compensation expense6,128 6,128 
Common stock issued upon settlement of stock-based compensation371 2 3,133 3,135 
Shares withheld related to net share settlement of stock-based compensation(152)(1)(30,058)(30,059)
Repurchase of common stock(369)(2)(539)(63,122)(63,663)
Balance as of May 3, 20205,482 5,482 $ 124,717 $624 $334,201 $1,786,147 $(285,185)$1,835,787 
See accompanying notes to the unaudited interim consolidated financial statements
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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
Quarter Ended
May 2, 2021May 3, 2020
Cash flows from operating activities
Net income$144,956 $28,632 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization50,485 43,532 
Stock-based compensation expense14,932 6,128 
Settlement of derivatives not designated in a hedging relationship21,515 (5,669)
Changes in operating assets and liabilities:
Inventories(74,218)(122,810)
Prepaid and receivable income taxes767 (4,157)
Prepaid expenses and other current assets(11,104)(49,936)
Other non-current assets1,105 (3,422)
Accounts payable19,623 2,222 
Accrued inventory liabilities(6,114)4,016 
Other accrued liabilities44,295 51,034 
Accrued compensation and related expenses22,764 (60,137)
Current and non-current income taxes payable(5,433)3,711 
Unredeemed gift card liability(15,838)(13,640)
Right-of-use lease assets and current and non-current lease liabilities1,820 (16,868)
Other current and non-current liabilities4,554 16,121 
Net cash provided by (used in) operating activities214,109 (121,243)
Cash flows from investing activities
Purchase of property and equipment(64,225)(52,101)
Settlement of net investment hedges(21,239)6,475 
Net cash used in investing activities(85,464)(45,626)
Cash flows from financing activities
Proceeds from settlement of stock-based compensation4,495 3,135 
Shares withheld related to net share settlement of stock-based compensation(42,899)(30,059)
Repurchase of common stock(83,831)(63,663)
Net cash used in financing activities(122,235)(90,587)
Effect of exchange rate changes on cash and cash equivalents22,812 (13,043)
Increase (decrease) in cash and cash equivalents29,222 (270,499)
Cash and cash equivalents, beginning of period$1,150,517 $1,093,505 
Cash and cash equivalents, end of period$1,179,739 $823,006 
See accompanying notes to the unaudited interim consolidated financial statements

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lululemon athletica inc.
INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12

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lululemon athletica inc.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. Nature of Operations and Basis of Presentation
Nature of operations
lululemon athletica inc., a Delaware corporation, ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of healthy lifestyle inspired athletic apparel and accessories, which are sold through a chain of company-operated stores, direct to consumer through e-commerce, outlets, sales from temporary locations, sales to wholesale accounts, and license and supply arrangements. The Company operates stores in the United States, Canada, the People's Republic of China ("PRC"), Australia, the United Kingdom, South Korea, Germany, New Zealand, Japan, Singapore, France, Malaysia, Sweden, Ireland, the Netherlands, Norway, and Switzerland. There were 523 and 521 company-operated stores as of May 2, 2021 and January 31, 2021, respectively.
On July 7, 2020, the Company acquired Curiouser Products Inc., dba MIRROR, ("MIRROR") which has been consolidated from the date of acquisition. MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions. Please refer to Note 3. Acquisition for further information.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") has caused governments and public health officials to impose restrictions and to recommend precautions to mitigate the spread of the virus. The Company temporarily closed its retail locations for periods of time during the first two quarters of fiscal 2020. While most of the Company's retail locations remained open throughout the first quarter of fiscal 2021, certain locations were temporarily closed based on government and health authority guidance in those markets, including in parts of Europe and Canada, as well as other markets.
In accordance with relevant government and health authority guidance, the Company continues to operate its distribution centers and retail locations with restrictive and precautionary measures in place. These measures are market dependent and can include restricted occupancy levels, physical distancing, enhanced cleaning and sanitation, and reduced operating hours.
During the first quarter of fiscal 2020, the Company recognized $14.3 million of government payroll subsidies as a reduction in selling, general, and administrative expenses. These subsidies partially offset the wages paid to employees while its retail locations were temporarily closed due to COVID-19. The Company did not recognize any payroll subsidies in the first quarter of fiscal 2021.
Basis of presentation
The unaudited interim consolidated financial statements as of May 2, 2021 and for the quarters ended May 2, 2021 and May 3, 2020 are presented in U.S. dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of January 31, 2021 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 31, 2021, which are included in Item 8 in the Company's fiscal 2020 Annual Report on Form 10-K filed with the SEC on March 30, 2021. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal 2020 Annual Report on Form 10-K. Note 2. Recent Accounting Pronouncements sets out the impact of recent accounting pronouncements.
The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2021 will end on January 30, 2022 and will be a 52-week year. Fiscal 2020 was a 52-week year and ended on January 31, 2021. Fiscal 2021 and fiscal 2020 are referred to as "2021," and "2020," respectively. The first quarter of 2021 and 2020 ended on May 2, 2021 and May 3, 2020, respectively.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
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Note 2. Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In December 2019, the FASB issued guidance on ASC 740, Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application and make simplifications in other areas of this topic by clarifying and amending existing guidance. The Company adopted this update during the first quarter of 2021 and it did not have a material impact on the Company's consolidated financial statements.
Recently issued accounting pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates ("ASUs"). Recently issued ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations.
Note 3. Acquisition
On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. The results of operations, financial position, and cash flows of MIRROR have been included in the Company's consolidated financial statements since the date of acquisition. The fair value of the consideration paid, net of cash acquired, was $452.6 million. This resulted in the recognition of intangible assets of $85.0 million and goodwill of $362.5 million. The purchase price allocation was finalized as of January 31, 2021 with no measurement period adjustments.
Acquisition-related expenses
In connection with the acquisition, the Company recognized certain acquisition-related expenses which are expensed as incurred. These expenses are recognized within acquisition-related expenses in the consolidated statements of operations include the following amounts:
transaction and integration costs, including fees for advisory and professional services incurred as part of the acquisition and integration costs subsequent to the acquisition;
acquisition-related compensation, including the partial acceleration of vesting of certain stock options, and amounts due to selling shareholders that are contingent upon continuing employment; and
gain recognized on the Company's existing investment in the acquiree as of the acquisition date.
The following table summarizes the acquisition-related expenses recognized:
First Quarter
20212020
(in thousands)
Acquisition-related expenses:
Transaction and integration costs$496 $2,045 
Gain on existing investment  
Acquisition-related compensation7,168  
$7,664 $2,045 
Income tax effects of acquisition-related expenses$(372)$ 
Note 4. Revolving Credit Facilities
North America revolving credit facility
During 2016, the Company obtained a $150.0 million committed and unsecured five-year revolving credit facility with major financial institutions. During 2018, the Company amended the credit agreement to provide for:
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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 from December 15, 2021 to June 6, 2023. Borrowings under the facility may be made in U.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the lenders' approval.
As of May 2, 2021, aside from letters of credit of $2.7 million, there were no other borrowings outstanding under this facility.
Borrowings under the facility bear interest at a rate equal to, at the Company's option, either (a) rates based on deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) an alternate base rate, plus, 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 the Company's subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.
The Company is also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.5:1 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 of May 2, 2021, the Company was in compliance with the covenants of the credit facility.
Mainland China revolving credit facility
In December 2019, the Company 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%. The Company is required to follow certain covenants. As of May 2, 2021, the Company was in compliance with the covenant and there were no borrowings or guarantees outstanding under this credit facility.
Note 5. Stock-Based Compensation and Benefit Plans
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, provided directly by the Company.
Stock-based compensation expense charged to income for the plans was $16.2 million and $6.6 million for the first quarter of 2021 and 2020, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $132.6 million as of May 2, 2021, which is expected to be recognized over a weighted-average period of 2.5 years.
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A summary of the balances of the Company's stock-based compensation plans as of May 2, 2021, and changes during the first quarter then ended, is presented below:
Stock OptionsPerformance-Based Restricted Stock UnitsRestricted SharesRestricted Stock UnitsRestricted Stock Units
(Liability Accounting)
NumberWeighted-Average Exercise PriceNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Fair Value
(In thousands, except per share amounts)
Balance as of January 31, 2021804 $139.27 199 $149.2 4 $299.09 275 $166.5 15 $328.68 
Granted183 306.71 135 180.26   90 307.55   
Exercised/released40 111.23 166 100.89   117 134.79   
Forfeited/expired6 154.21  183.74   3 194.55   
Balance as of May 2, 2021941 $172.88 168 $221.93 4 $299.09 245 $233.16 15 $335.27 
Exercisable as of May 2, 2021348 $118.98 
The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of two shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the award date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved.
The grant date fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the award date. Restricted stock units that are settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement. This fair value is based on the closing price of the Company's common stock on the last business day before each period end.
The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first quarter of 2021:
First Quarter
 2021
Expected term3.75 years
Expected volatility39.32 %
Risk-free interest rate0.50 %
Dividend yield %
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the first quarter of 2021, there were 19.5 thousand shares purchased.
Defined contribution pension plans
The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches 50% to 75% of the contribution depending on the
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participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was $2.8 million and $2.3 million in the first quarter of 2021 and 2020, respectively.
Note 6. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - defined as observable inputs such as quoted prices in active markets;
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of May 2, 2021 and January 31, 2021, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
May 2, 2021Level 1Level 2Level 3Balance Sheet Classification
(In thousands)
Money market funds$652,482 $652,482 $ $ Cash and cash equivalents
Term deposits188,594  188,594  Cash and cash equivalents
Forward currency contract assets27,789  27,789  Prepaid expenses and other current assets
Forward currency contract liabilities30,858  30,858  Other current liabilities
January 31, 2021Level 1Level 2Level 3Balance Sheet Classification
(In thousands)
Money market funds$671,817 $671,817 $ $ Cash and cash equivalents
Term deposits183,015  183,015  Cash and cash equivalents
Forward currency contract assets17,364  17,364  Prepaid expenses and other current assets
Forward currency contract liabilities18,767  18,767  Other current liabilities
The Company records cash, accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds, Treasury bills, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities.
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Note 7. Derivative Financial Instruments
Foreign exchange risk
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company currently hedges against changes in the Canadian dollar and Chinese Yuan to the U.S. dollar exchange rate and changes in the Euro and Australian dollar to the Canadian dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign exchange gains and losses which arise on translation of its international subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges during the first quarter of 2021.
The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.
Derivatives not designated as hedging instruments
The Company is exposed to gains and losses arising from changes in foreign exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the first quarter of 2021, the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on specific monetary assets and liabilities denominated in currencies other than the functional currency of the entity. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses.
The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows.
Quantitative disclosures about derivative financial instruments
The Company presents its derivative assets and derivative liabilities at their gross fair values within prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of May 2, 2021, there were derivative assets of $27.8 million and derivative liabilities of $30.9 million subject to enforceable netting arrangements.
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The notional amounts and fair values of forward currency contracts were as follows:
May 2, 2021January 31, 2021
Gross NotionalAssetsLiabilitiesGross NotionalAssetsLiabilities
(In thousands)
Derivatives designated as net investment hedges:
Forward currency contracts$754,000 $ $28,846 $985,000 $ $18,099 
Derivatives not designated in a hedging relationship:
Forward currency contracts857,000 27,789 2,012 1,055,000 17,364 668 
Net derivatives recognized on consolidated balance sheets:
Forward currency contracts$27,789 $30,858 $17,364 $18,767 
The forward currency contracts designated as net investment hedges outstanding as of May 2, 2021 mature on different dates between May 2021 and October 2021.
The forward currency contracts not designated in a hedging relationship outstanding as of May 2, 2021 mature on different dates between May 2021 and October 2021.
The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows:
First Quarter
20212020
(In thousands)
Gains (losses) recognized in foreign currency translation adjustment:
Derivatives designated as net investment hedges$(31,986)$28,256 
No gains or losses have been reclassified from accumulated other comprehensive income or loss into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary.
The pre-tax net foreign exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows:
First Quarter
20212020
(In thousands)
Gains (losses) recognized in selling, general and administrative expenses:
Foreign exchange gains (losses)$(33,540)$27,742 
Derivatives not designated in a hedging relationship30,592 (27,520)
Net foreign exchange and derivative gains (losses) $(2,948)$222 
Credit risk
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance.
The Company's forward currency contracts are entered into with large, reputable financial institutions that are monitored by the Company for counterparty risk.
The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts.
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Note 8. Earnings Per Share
The details of the computation of basic and diluted earnings per share are as follows:
First Quarter
20212020
(In thousands, except per share amounts)
Net income$144,956 $28,632 
Basic weighted-average number of shares outstanding130,358 130,251 
Assumed conversion of dilutive stock options and awards626 552 
Diluted weighted-average number of shares outstanding130,984 130,803 
Basic earnings per share$1.11 $0.22 
Diluted earnings per share$1.11 $0.22 
The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have, in effect, the same rights and share equally in undistributed net income. For each of the first quarters of 2021 and 2020, 0.1 million stock options and awards were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.
On January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $500.0 million of the Company's common shares on the open market or in privately negotiated transactions. On December 1, 2020, the Company's board of directors approved an increase in the remaining authorization of the existing stock repurchase program from $263.6 million to $500.0 million. The repurchase plan has no time limit and does not require the repurchase of a minimum number of shares. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements. As of May 2, 2021, the remaining value of shares available to be repurchased under this program was $416.2 million.
During the first quarter of 2021 and 2020, 0.3 million and 0.4 million shares, respectively, were repurchased under the program at a total cost of $83.8 million and $63.7 million, respectively.
Subsequent to May 2, 2021, and up to May 28, 2021, 0.1 million shares were repurchased at a total cost of $40.4 million.
Note 9. Supplementary Financial Information
A summary of certain consolidated balance sheet accounts is as follows:
May 2,
2021
January 31,
2021
(In thousands)
Inventories:
Inventories, at cost$768,599 $678,200 
Provision to reduce inventories to net realizable value(35,709)(30,970)
$732,890 $647,230 
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May 2,
2021
January 31,
2021
(In thousands)
Prepaid expenses and other current assets:
Prepaid expenses$94,846 $82,164 
Forward currency contract assets27,789 17,364 
Other current assets22,109 25,579 
$144,744 $125,107 
Property and equipment, net:
Land$77,116 $74,261 
Buildings31,671 30,870 
Leasehold improvements613,609 583,305 
Furniture and fixtures118,911 117,334 
Computer hardware123,682 116,239 
Computer software458,430 427,313 
Equipment and vehicles18,993 17,105 
Work in progress73,118 69,847 
Property and equipment, gross1,515,530 1,436,274 
Accumulated depreciation(740,845)(690,587)
$774,685 $745,687 
Other non-current assets:
Cloud computing arrangement implementation costs$78,721 $74,631 
Security deposits23,027 23,154 
Other9,034 8,841 
$110,782 $106,626 
Other accrued liabilities
Accrued freight and other operating expenses$131,515 $97,335 
Accrued duty23,405 17,404 
Sales return allowances23,665 32,560 
Sales tax collected18,489 15,246 
Accrued capital expenditures9,003 8,653 
Forward currency contract liabilities30,858 18,766 
Accrued rent9,419 8,559 
Other12,288 13,388 
$258,642 $211,911 
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Note 10. Segmented Information
The Company's segments are based on the financial information it uses in managing its business and comprise two reportable segments: (i) company-operated stores and (ii) direct to consumer. The remainder of its operations which includes outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, and MIRROR are included within Other.
First Quarter
20212020
(In thousands)
Net revenue:
Company-operated stores$536,584 $259,970 
Direct to consumer545,089 352,039 
Other144,792 39,953 
$1,226,465 $651,962 
Segmented income from operations:
Company-operated stores$99,148 $(30,154)
Direct to consumer236,933 156,947 
Other14,506 (269)
350,587 126,524 
General corporate expense146,907 91,705 
Amortization of intangible assets2,195 23 
Acquisition-related expenses7,664 2,045 
Income from operations193,821 32,751 
Other income (expense), net227 1,174 
Income before income tax expense$194,048 $33,925 
Capital expenditures:
Company-operated stores$18,565 $33,819 
Direct to consumer26,581 2,298 
Corporate and other19,079 15,984 
$64,225 $52,101 
Depreciation and amortization:
Company-operated stores$26,800 $25,628 
Direct to consumer5,748 2,684 
Corporate and other17,937 15,220 
$50,485 $43,532 
Note 11. Net Revenue by Geography and Category
The following table disaggregates the Company's net revenue by geographic area.
First Quarter
20212020
(In thousands)
United States$849,614 $459,352 
Canada167,729 99,497 
Outside of North America209,122 93,113 
$1,226,465 $651,962 
The following table disaggregates the Company's net revenue by category. During the fourth quarter of 2020, the Company determined that a portion of certain sales returns which had been recorded within Other categories were more
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appropriately classified within Women's product and Men's product. Accordingly, comparative figures have been reclassified to conform to the presentation adopted for the current year.
First Quarter
20212020
(In thousands)
Women's product$849,645 $477,627 
Men's product274,307 128,391 
Other categories102,513 45,944 
$1,226,465 $651,962 
Note 12. Legal Proceedings and Other Contingencies
In addition to the legal proceedings described below, the Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. The Company has recognized immaterial provisions related to the expected outcome of legal proceedings.
In March 2020, a former retail employee filed a representative action in the Los Angeles Superior Court alleging violation of the Private Attorney General Act ("PAGA") based on purported California labor code violations including failure to pay wages, failure to pay overtime, failure to provide accurate itemized statements, and failure to provide meal and rest periods. The plaintiff is seeking to recover civil penalties under PAGA. The Company intends to vigorously defend this matter.
In April 2020, Aliign Activation Wear, LLC filed a lawsuit in the United States District Court for the Central District of California alleging federal trademark infringement, false designation of origin and unfair competition. The plaintiff is seeking injunctive relief, monetary damages and declaratory relief. The Company intends to vigorously defend this matter.
In April 2021, DISH Technologies L.L.C., and Sling TV L.L.C. (DISH) filed a complaint in the United States District Court for the District of Delaware and, along with DISH DBS Corporation, also with the United States International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930 against the Company and its Curiouser Products subsidiary (MIRROR), along with ICON Health & Fitness, Inc., FreeMotion Fitness, Inc., NordicTrack, Inc., and Peloton Interactive, Inc., alleging infringement of various patents related to fitness devices containing internet-streaming enabled video displays. In the ITC complaint, DISH seeks an exclusion order barring the importation of MIRROR fitness devices, streaming components and systems containing components that infringe one or more of the asserted patents as well as a cease and desist order preventing the Company from carrying out commercial activities within the United States related to those products. In the District of Delaware complaint, DISH is seeking an order permanently enjoining the Company from infringing the asserted patents, an award of damages for the infringement of the asserted patents, and an award of damages for lost sales. The Company has moved to extend the date to respond to the ITC complaint from June 7, 2021 to June 18, 2021. The Company has also moved to stay the District of Delaware litigation pending resolution of the ITC investigation. The Company intends to vigorously defend this matter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, the impact of the COVID-19 pandemic on our business and results of operations, expectations related to our acquisition of MIRROR, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.
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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 the SEC on March 30, 2021. Fiscal 2021 and fiscal 2020 are referred to as "2021," and "2020," respectively. The first quarter of 2021 and 2020 ended on May 2, 2021 and May 3, 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
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.
Overview
lululemon athletica inc. is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. We have a vision to be the experiential brand that ignites a community of people through sweat, grow, and connect, which we call "living the sweatlife." Since our inception, we have fostered a distinctive corporate culture; we promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection and 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 the lululemon 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 acquired Curiouser 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 existing lululemon guests.
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COVID-19 Update
COVID-19 continues to impact the global economy, result in disruption and volatility, and cause changes in consumer demand and behavior. While most of our retail locations remained open throughout the first quarter of fiscal 2021, certain locations were temporarily closed based on government and health authority guidance in those markets, including in parts of Europe and Canada, as well as other markets.
In accordance with relevant government and health authority guidance, we continue to operate our distribution centers and retail locations with restrictive and precautionary measures in place. These measures are market dependent and can include restricted occupancy levels, physical distancing, enhanced cleaning and sanitation, and reduced operating hours.
Governments and public health officials around the world have imposed and continue to impose restrictions and to recommend precautions to mitigate the spread of the virus. These restrictions are not coordinated among various markets and we believe we will continue to experience differing levels of disruption and volatility, market by market.
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 we have seen 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 fiscal 2021, we expect the year over year growth rate to moderate compared to 2020.
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, resurgence, or the emergence of new variants may result in further or prolonged closures of our retail locations and distribution centers, reduce operating hours, interrupt 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 first quarter of 2021, compared to the first quarter of 2020:
Net revenue increased 88% to $1.2 billion. On a constant dollar basis, net revenue increased 83%.
Company-operated stores net revenue increased 106% to $536.6 million.
Direct to consumer net revenue increased 55% to 545.1 million, or increased 50% on a constant dollar basis.
Gross profit increased 109% to $700.3 million.
Gross margin increased 580 basis points to 57.1%.
Income from operations increased 492% to $193.8 million.
Operating margin increased 1,080 basis points to 15.8%.
Income tax expense increased 827% to $49.1 million. Our effective tax rate for the first quarter of 2021 was 25.3% compared to 15.6% for the first quarter of 2020.
Diluted earnings per share were $1.11 compared to $0.22 in the first quarter of 2020. This includes $7.3 million and $2.0 million of after-tax costs related to the MIRROR acquisition in the first quarter of 2021 and 2020, respectively, which reduced diluted earnings per share by $0.05 and $0.01 in the first 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.
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Quarter-to-Date Results of Operations: First Quarter Results
The following table summarizes key components of our results of operations for the periods indicated:
 First Quarter
 2021202020212020
 (In thousands)(Percentage of net revenue)
Net revenue$1,226,465 $651,962 100.0 %100.0 %
Cost of goods sold526,151 317,560 42.9 48.7 
Gross profit700,314 334,402 57.1 51.3 
Selling, general and administrative expenses496,634 299,583 40.5 46.0 
Amortization of intangible assets2,195 23 0.2 — 
Acquisition-related expenses7,664 2,045 0.6 0.3 
Income from operations193,821 32,751 15.8 5.0 
Other income (expense), net227 1,174 — 0.2 
Income before income tax expense194,048 33,925 15.8 5.2 
Income tax expense49,092 5,293 4.0 0.8 
Net income$144,956 $28,632 11.8 %4.4 %
Net Revenue
Net revenue increased $574.5 million, or 88%, to $1.2 billion for the first quarter of 2021 from $652.0 million for the first quarter of 2020. On a constant dollar basis, assuming the average exchange rates for the first quarter of 2021 remained constant with the average exchange rates for the first quarter of 2020, net revenue increased $541.1 million, or 83%.
The increase in net revenue was primarily due to increased company-operated store and other net revenue, primarily due to retail locations that were temporarily closed during the first quarter of 2020, as a result of COVID-19, being open during the first quarter of 2021. 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 quarter of 2021 and 2020 is summarized below.
 First Quarter
 2021202020212020Year over year change
 (In thousands)(Percentages)(In thousands)(Percentages)
Company-operated stores$536,584