PART I
Special Note Regarding Forward-Looking Statements
This report and some documents incorporated herein by reference include estimates, projections, statements relating to our business plans, objectives, and expected operating results that are "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. We use words such as "anticipates," "believes," "estimates," "may," "intends," "expects," and similar expressions to identify forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under "Business", "Management's Discussion and Analysis of Financial Condition and Results of Operations", and in other sections of the report. All forward-looking statements are inherently uncertain as they are based on our expectations and assumptions concerning future events. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including the risks, uncertainties and assumptions described in the section entitled "Item 1A. Risk Factors" and elsewhere in this report. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur as contemplated, and our actual results could differ materially from those anticipated or implied by the forward-looking statements. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
This annual report includes website addresses and references to additional materials found on those websites. These websites and materials are not incorporated by reference herein. ITEM 1. BUSINESS
General
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 unleashingrealizing the full potential within every one of us."
In this Annual Report on Form 10-K ("10-K" or "Report") for the fiscal year ended February 2, 2020 ("fiscal 2019"),January 30, 2022, lululemon athletica inc. (together with its subsidiaries) is referred to as "lululemon," "the Company," "we," "us""us," or "our." We refer to the fiscal year ended January 30, 2022 as "2021" and the fiscal year ended January 31, 2021 as "2020."
Components of this discussion of our business include:
Our Products
Our healthy lifestyle inspired athletic apparel and accessories are marketed under the lululemon brand. We offer a comprehensive line of apparel and accessories for women and men.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 a range of products designed for being On the Move, fitness-related accessories.accessories, and footwear. We expect to continue to broaden our merchandise offerings through expansion across these product areas.
Our design and development team continues to source technically advanced fabrics, with new feel and fit, and craft innovative functional features for our products. Through our vertical retail strategy and direct connection with our customers, whom we refer to as guests, we are able to collect feedback and incorporate unique performance and fashion needs into our design process. In this way, we believe we solve problems forare better positioned to address the needs of our guests, helping us advance our product lines and differentiate us from the competition.
AlthoughDuring the second quarter of 2020, we benefit from the growing numberacquired 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 people that participate in yoga, we believe the percentage ofMIRROR bolsters our products sold for other activities will continuedigital sweatlife offerings and brings immersive and personalized in-home sweat and mindfulness content to increase as we broaden our product range.new and existing lululemon guests.
Our Market
Our guests seek a combination of performance, style, and sensation in their athletic apparel, choosing products that allow them to feel great however they exercise. Since consumer purchase decisions are driven by both an actual need for functional products and a desire to live a particular lifestyle, we believe the credibility of our brand and the authentic community experiences we offer expand our potential market beyond just athletes to those who pursue an active, mindful, and balanced life.
Although our primary and largest customer group is made up of women,guests who shop our women's range, representing 67% of our 2021 net revenue, we also design a comprehensive men's line and have a targeted strategy in place to serve our male guests. Our businessplace. Revenue from men's range is growing as more menguests discover the technical rigor and premium quality of our men's products, and are attracted by our distinctive brand.
North America is our largest market by geographical split, offering a mature health and wellness industry and sophisticated consumer. Additionally, werepresenting 85% of our 2021 net revenue. We are expanding internationally across Europe, the People's Republic of China ("PRC"), and the rest of Asia Pacific.Pacific, and Europe. We are expanding in these regions via a decentralized model, allowing for local community insight and consumer preference to inform our strategic expansion.
Our Segments
We primarily conduct our business through two channels: company-operated stores and direct to consumer.
We also generate net revenue fromoperate outlets sales fromand temporary locations, sales toconduct business through MIRROR, serve certain wholesale accounts, throughhave license and supply arrangements, and hold warehouse sales.sales from time to time. The net revenue we generate fromfinancial results of these sources is combinedoperations are disclosed in our other segment.Other.
We operate in both the physical and digital space to better cater to the shopping desires
Company-Operated Stores
At the end of fiscal 2019,2021, we had 491operated 574 stores in 17 countries across the globe. In addition to being a venue to sell product,our products, our stores give us a direct connection to our guest, which we view as a valuable tool in helping us build our brand and product line.
Our direct to consumer segment includes the net revenue which we generate from our e-commerce website www.lululemon.com, other country and region specific websites, and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers or other retail locations.
Company-Operated Stores
As of February 2, 2020, our retail footprint included 491 company-operated stores. While most of our company-operated stores are branded lululemon, five of our company-operated stores are branded ivivva and specialize in athletic wear for female youth. Our retail stores are located primarily on street locations, in lifestyle centers, and in malls.
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Number of company-operated stores by country | | January 30, 2022 | | January 31, 2021 |
United States | | 324 | | | 315 | |
People's Republic of China(1) | | 86 | | | 55 | |
Canada | | 63 | | | 62 | |
Australia | | 31 | | | 31 | |
United Kingdom | | 17 | | | 16 | |
South Korea | | 12 | | | 7 | |
Germany | | 9 | | | 7 | |
New Zealand | | 7 | | | 7 | |
Japan | | 6 | | | 6 | |
Singapore | | 6 | | | 4 | |
France | | 3 | | | 3 | |
Ireland | | 3 | | | 1 | |
Malaysia | | 2 | | | 2 | |
Sweden | | 2 | | | 2 | |
Netherlands | | 1 | | | 1 | |
Norway | | 1 | | | 1 | |
Switzerland | | 1 | | | 1 | |
Total company-operated stores | | 574 | | | 521 | |
__________
Our company-operatedPRC included nine stores by countryin Hong Kong Special Administrative Region, five stores in Taiwan, and two stores in Macao Special Administration Region, as of February 2, 2020January 30, 2022. As of January 31, 2021, there were seven stores in Hong Kong Special Administrative Region, two stores in Macao Special Administration Region, and February 3, 2019 are summarizedtwo stores in the table below:
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| | | | | | |
| | February 2, 2020 | | February 3, 2019 |
United States | | 305 |
| | 285 |
|
Canada | | 63 |
| | 64 |
|
People's Republic of China(1) | | 38 |
| | 22 |
|
Australia | | 31 |
| | 29 |
|
United Kingdom | | 14 |
| | 12 |
|
Japan | | 7 |
| | 5 |
|
New Zealand | | 7 |
| | 7 |
|
Germany | | 6 |
| | 5 |
|
South Korea | | 5 |
| | 4 |
|
Singapore | | 4 |
| | 3 |
|
France | | 3 |
| | 1 |
|
Malaysia | | 2 |
| | — |
|
Sweden | | 2 |
| | 1 |
|
Ireland | | 1 |
| | 1 |
|
Netherlands | | 1 |
| | — |
|
Norway | | 1 |
| | — |
|
Switzerland | | 1 |
| | 1 |
|
Total company-operated stores | | 491 |
| | 440 |
|
__________
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(1)Taiwan.
| PRC included six company-operated stores in Hong Kong, Special Administrative Region, two company-operated stores in Macao, Special Administration Region, and one company-operated store in Taiwan, PRC as of February 2, 2020. As of February 3, 2019, there were five company-operated stores in Hong Kong, Special Administrative Region, one company-operated store in Macao, Special Administration Region, and one company-operated store in Taiwan, PRC. |
We opened 5153 net new company-operated stores in fiscal 2019,2021, including 3243 net new stores outside of North America.
We perform ongoing evaluations of our portfolio of company-operated store locations. During fiscal 2019,2021, we closed fourthree of our lululemon branded company-operated stores and two of our ivivva branded company-operated stores. As we continue our evaluations we may, in the future, periods, close or relocate additional company-operated stores.
In fiscal 2020,2022, our new store growth will come primarily from company-operated store openings in Asia and in the United States. Our real estate strategy over the next several years will not only consist of opening new company-operated stores, but also in overall square footage growth through store expansions and relocations.
We believe that our innovative retail concept and guest experience contribute to the success of our stores. We use sales per square foot to assess the performance of our company-operated stores relative to their square footage. We believe that sales per square foot is useful in evaluating the performance of our company-operated stores. During fiscal 2019, ourOur sales per square foot for 2021 was $1,657.$1,443. As a significant number of our stores were temporarily closed due to COVID-19 during the first two quarters of 2020, we do not believe sales per square foot for 2020 is useful to investors in understanding performance, therefore we have not included this metric.
Sales per square foot is calculated using total net revenue from all company-operated stores that opened, or opened in their significantly expanded space, prior to the current fiscal year. The total net revenue of these stores for the fiscal year is divided by the total square footage of these stores at the end of the year. The fiscal 2019 sales per square foot metric is based on an average square footage of 3,127 per store as of February 2, 2020.the stores during the year. In fiscal years with 53 weeks, the 53rd week of net revenue is excluded from the calculation of sales per square foot. The square footage of our company-operated stores includes all retail related space, storage areas, and administrative space used by the store employees. It excludes any space used for non-retail related activities. The sales per square foot metric we report may not be equivalent to similarly titled metrics reported by other companies.
Direct to Consumer
Direct to consumer is a substantial part of our business, representing 28.6% of our net revenue in fiscal 2019. We believe that e-commerce is convenient for our core customerguest and enhances the image of our brand. Our direct to consumer channel
makes also allows us to reach and serve guests in markets beyond where our product accessible to more markets than our company-operated store channel alone.physical retail locations are based. We believe this channel is effective in building brand awareness, especially in new markets.
We serve our guests via our e-commerce website www.lululemon.com, other country and region-specific websites, and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers or other retail locations.
We continue to evolve and integrate our digital and physical channels in order to enrich our interactions with our guests, and to provide an enhanced omni-channel experience.
Other Channels
Other net revenue accountedOur other operations primarily include:
•Outlets and warehouse sales - We utilize outlets as well as physical warehouse sales, which are held from time to time, to sell slow moving inventory and inventory from prior seasons at discounted prices. As of January 30, 2022, we operated 37 outlets, with the majority in North America.
•Temporary locations - Our temporary locations, including pop ups, are typically opened for 8.6%a short period of total net revenuetime. We believe these retail locations enable us to serve guests during peak shopping periods in fiscal 2019, comparedmarkets where we do not ordinarily have a physical location, or enable us to 9.2%better serve our guest in fiscal 2018,markets where we see high demand at our existing locations.
•MIRROR - We offer in-home fitness through an interactive workout platform that allows our guests to subscribe for live and 8.9%on-demand classes.
•Wholesale - Our wholesale accounts include premium yoga studios, health clubs, and fitness centers. We believe these premium wholesale locations offer an alternative distribution channel that is convenient for our core guest and enhances the image of total net revenue in fiscal 2017. Other net revenue includes sales made throughour brand. We do not intend wholesale to be a significant contributor to overall sales. Instead, we use the following channels:channel to build brand awareness, including outside of North America.
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• | Outlets and warehouse sales - We utilize outlets as well as physical warehouse sales, which are held from time to time, to sell slow moving inventory and inventory from prior seasons to retail customers at discounted prices.
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• | Temporary locations - Our temporary locations, including seasonal stores, are typically opened for a short period of time in markets in which we may not already have a presence.
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• | Wholesale - Our wholesale accounts include premium yoga studios, health clubs, and fitness centers. We believe these premium wholesale locations offer an alternative distribution channel that is convenient for our core consumer and enhances the image of our brand. We do not intend wholesale to be a significant contributor to overall sales. Instead, we use the channel to build brand awareness, including outside of North America.
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• | License and supply arrangements - We enter into license and supply arrangements from time to time when we believe that it will be to our advantage to partner with companies and individuals with significant experience and proven success in certain target markets. |
We have entered into license and supply arrangements with partners in the Middle East and Mexico which grant them the right to operate lululemon branded retail locations in the United Arab Emirates, Kuwait, Qatar, Oman, Bahrain, and Mexico. We retain the rights to sell lululemon products through our e-commerce websites in these countries. Under these arrangements we supply the partners with lululemon products, training and other support. TheAn extension to the initial term of the agreement for the Middle East expiredwas signed in January 2020 and we currently intendit extends the arrangement to stay in the market.December 2024. The initial term of the agreement for Mexico expires in November 2026. As of February 2, 2020,January 30, 2022, there were four14 licensed retail locations, including six in Mexico, threesix in the United Arab Emirates, one in Kuwait, and one in Qatar, which are not included in the above company-operated stores table.
Community-Based Marketing
We utilize a community-based approach to build brand awareness and customerguest loyalty. We pursue a multi-faceted strategy which leverages our local teams and ambassadors, digital marketing and social media, in-store community boards, and a variety of grassroots initiatives. We also plan to continue to explore how we can complement and amplify our community-based initiatives with global brand-building activity.
Product Design and Development
Our product design and development efforts are led by a team of researchers, scientists, engineers, and designers. Our team is comprised of athletes and users of our products who embody our design philosophy and dedication to premium quality. Our design and development team identifies trends based on market intelligence and research, proactively seeks the input of our guests and our ambassadors, and broadly seeks inspiration consistent with our goals of function, style, and technical superiority.
As we strive to continue to provide our guests with technically advanced fabrics, our team works closely with our suppliers to incorporate the latest in technical innovation, bringing particular specifications to our products. We partner with independent inspection, verification, and testing companies, who conduct a variety of tests on our fabrics, testing performance characteristics including pilling, shrinkage, abrasion resistance, and colorfastness. We develop proprietary fabrics and collaborate with leading fabric and trims suppliers to manufacture fabrics and trims that we ultimately protect through agreements, trademarks, and trade-secrets.
Sourcing and Manufacturing
We do not own or operate any manufacturing facilities. We rely on a limited number of suppliers to provide fabrics for, and to produce, our products. The following statistics are based on cost.
We work with a group of approximately 3941 vendors that manufacture our products, five of which produced approximately 56%57% of our products in fiscal 2019. During fiscal 2019,2021, with the largest single manufacturer produced approximately 17% of our
products.producing 15%. During fiscal 2019, approximately 33%2021, 40% of our products were manufactured in Vietnam, 16%17% in Cambodia, 15%11% in Sri Lanka, and 11%7% in the PRC, including 2% in Taiwan, PRC.and the remainder in other regions.
We work with a group of approximately 7665 suppliers to provide the fabrics for our products. In fiscal 2019, approximately 59%2021, 56% of our fabrics were produced by our top five fabric suppliers, andwith the largest single manufacturer produced approximately 32% of fabric used.producing 27%. During fiscal 2019, approximately 46%2021, 48% of our fabrics originated from Taiwan, PRC, 14%19% from the rest of the PRC, 19%Mainland China, 11% from Sri Lanka, and the remainder from other regions.
We also source other raw materials which are used in our products, including items such as content labels, elastics, buttons, clasps, and drawcords from suppliers located predominantly in the Asia Pacific region.
We have developed long-standing relationships with a number of our vendors and take great care to ensure that they share our commitment to quality and ethics. We do not, however, have any long-term term contracts with the majority of our suppliers or manufacturing sources for the production and supply of our fabrics and garments, and we compete with other companies for fabrics, raw materials, and production. We require that all of our manufacturers adhere to our vendor code of ethics regarding social and environmental sustainability practices. Our product quality and sustainability teams partner with leading inspection and verification firms to closely monitor each supplier's compliance with applicable laws and our vendor code of ethics.
Distribution Facilities
We operate and distribute finished products from our distribution facilities in the United States, Canada, and Australia. We own our distribution center in Columbus, Ohio, and lease our other distribution facilities. We also utilize third-party logistics providers to warehouse and distribute finished products from their warehouse locations in the United Sates, the PRC, and the Netherlands. We regularly evaluate our distribution infrastructure and consolidate or expand our distribution capacity as we believe appropriate for our operations and to meet anticipated needs.
Competition
Competition in the athletic apparel industry is based principally on brand image and recognition as well as product quality, innovation, style, distribution, and price. We believe that we successfully compete on the basis of our premium brand image and our technical product innovation. We also believe our ability to introduce new product innovations, combine function and fashion, and connect through in-store, online, and community experiences sets us apart from our competition. In addition, we believe our vertical retail distribution strategy and community-based marketing differentiates us further, allowing us to more effectively control our brand image and connect with our guest.
The market for athletic apparel is highly competitive. It includes increasing competition from established companies that are expanding their production and marketing of performance products, as well as from frequent new entrants to the market. We are in direct competition with wholesalers and direct sellers of athletic apparel, such as Nike, Inc., adidas AG, and Under Armour, Inc.Inc, and Columbia Sportswear Company. We also compete with retailers who have expanded to include women's athletic apparel including The Gap, Inc. (including the Athleta brand) and, Victoria's Secret with its Sport collection.sport and lounge offering, and Urban Outfitters, Inc.
Seasonality
Our business is affected by the general seasonal trends common to the retail apparel industry. Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year. As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year. For example, we generated approximately 47%44% and
56% of our full year operating profit during each of the fourth quarters of fiscal 20192021 and fiscal 2018.2020, respectively. Due to a significant number of our company-operated stores being temporarily closed due to COVID-19 during the first two quarters of 2020, we earned a higher proportion of our operating profit during the last two quarters of 2020 compared to 2021.
Human Capital
Our EmployeesImpact Agenda sets out our social and environmental goals, commitments, and strategy across three pillars - Be Well, Be Planet, and Be Human. Details of our Impact Agenda and corresponding Impact Report can be found on our website (https://corporate.lululemon.com/our-impact).
The Be Human pillar of our Impact Agenda sets out our focus areas with respect to our human capital, including our employees and broader community:
•advancing a culture of Inclusion, Diversity, Equity, and Action (“IDEA”);
•empowering our employees through whole-person opportunities; and
•supporting the well-being of the people who make our products in our supply chain.
Advancing a culture of Inclusion, Diversity, Equity and Action
We continually endeavor to create an environment that is equitable, inclusive, and fosters personal growth.
Diversity and inclusion are key components of our culture and are fundamental to achieving our strategic priorities and future vision. The diversity of our teams and working in an inclusive culture enables increased employee engagement, better decision making, greater adaptability, creativity, and a deeper understanding of the communities we serve. We are proud that as of January 30, 2022, approximately 55% of our board of directors, 65% of our senior executive leadership team, and 50% of our vice presidents and above are women, while approximately 75% of our overall workforce are women.(1)
We maintain 100% gender pay equity within our entire global employee population, meaning equal pay for equal work across genders. We have achieved pay equity across all areas of diversity in the United States and are seeking, to the extent permitted under local law and regulation, to collect the data necessary to confirm complete pay equity globally.
We expect to invest at least $5 million annually to fund our global IDEA activities. These funds can further support the career progress of our diverse talent and increase access to internal opportunities and professional development. We offer all employees IDEA education, training, and guided conversations on a variety of topics, including anti-racism, anti-discrimination, and inclusive leadership behaviors. We aim to foster a culture of inclusion by making IDEA part of our everyday conversation, and frequently review our policies, programs, and practices to identify ways to be more inclusive and equitable.
Inclusive in our Impact Agenda is a goal to invest a total of $75.0 million to advance equity in well-being by 2025.
(1) While we track male and female genders, we acknowledge this is not fully encompassing of all gender identities.
Empowering our employees through whole-person opportunities
We believe that each of our approximately 29,000 people are key to the success of our business, and webusiness. We strive to foster a distinctive corporate culture rooted in our core business values which attractthat attracts and retains passionate and motivated employees who are driven to achieve personal and professional goals. We believe our people succeed because we create an environment that fosters growth and is diverse and equitable.
AsWe assess our performance and identify opportunities for improvement through an annual employee engagement survey. In 2021, the participation rate was approximately 85% and our employee engagement score exceeded the retail industry average.(2) Our engagement score suggests our people are proud to work for lululemon, they are motivated to contribute to work that aligns with their purpose, and they recommend lululemon as a great place to work.
We understand that health and wealth programs need to offer choice at all stages of February 2, 2020, we had approximately 19,000life. Our current offerings support our goal of becoming the number one place where people come to develop and grow as inclusive leaders. These offerings include, among other things:
•Competitive compensation which rewards exceptional performance;
•A parenthood program which is a gender-neutral benefit that provides all eligible employees up to six months of paid leave;
•An employee assistance program which approximately 11,000 were employed in the United States, approximately 5,200 were employed in Canada, and approximately 2,800 were employed outside of North America. None of our employees are currently covered by a collective bargaining agreement. We have had no labor-related work stoppages byprovides free, confidential, support to all our employees and their families in a variety of areas from mental well-being to financial services to advice for new parents;
•Personal resilience tools to employees, ambassadors, and suppliers;
•Reimbursement programs which reward physical activity; and
•A Fund your Future program for eligible employees which offers partial contribution matches to a pension plan and employee share purchase plan.
As part of the competitive compensation we believeoffer, we raised the minimum base pay for the majority of our relationsstore and Guest Education Center employees in North America during 2021.
Supporting the well-being of the people who make our products in our supply chain
We work with suppliers who share our employeesvalues and collaborate as partners to uphold robust standards, address systemic challenges, and improve the well-being of people who make our products.
Our Vendor Code of Ethics outlines our commitment to respect human and labor rights, and to promote safe and fair working conditions for people in our supply chain. The code is based on international standards for workers' rights with regard to their employment, wages and working hours, occupational health and safety, access to confidential grievance mechanisms without retaliation, and environmental protection. Our finished goods and mill suppliers are excellent.assessed against the Vendor Code of Ethics prior to forming a business relationship, and regularly thereafter; we work with factories that can uphold our strict requirements.
(2) Based on an industry benchmark provided by the third party that administers this survey to our employees.
We have developed and implemented our Foreign Migrant Worker Standard, which outlines our expectations with respect to foreign migrant workers. This program was successfully executed in Taiwan in 2020 and based on lessons learned from this program, we are now expanding beyond Taiwan so that we can further support foreign migrant workers globally.
Our COVID-19 response
We closely monitor the changing landscape of COVID-19 so that we can make appropriate decisions to support and keep our people safe. Over the last two years, we have responded to the pandemic with a variety of measures from temporarily closing our stores to committing to pay protection for employees during the COVID-19 related closures. During 2020 we launched a hardship fund for employees, the We Stand Together Fund, and launched an Ambassador Relief Fund, and these continued in 2021.
We created a wide range of resiliency and connection sessions and tools to support our people during the pandemic and we made these resources available to our guests and the broader community.
As we continue to navigate the COVID-19 pandemic, we continue to prioritize the safety of our people and our guests. We are closely monitoring the situation in the markets and communities that we serve. We will temporarily close stores and restrict operations as necessary, based upon information from government and health officials.
Intellectual Property
We have trademark rights on mostmany of our products and believe having distinctive marks that are readily identifiable is an important factor in building our brand image and in distinguishing our products from the products of others. We consider our lululemon and wave design trademarks to be among our most valuable assets. In addition, we own many other trademarks for names of several of our brands, slogans, fabrics and products. We own registered and pending U.S. and foreign utility and design patents, industrial designs in Canada, and registered community designs in Europe that protect our product innovations, distinctive apparel, and accessory designs.
Securities and Exchange Commission Filings
Our website address is www.lululemon.com. We provide free access to various reports that we file with, or furnish to, the United States Securities and Exchange Commission, or the SEC, through our website, as soon as reasonably practicable after they have been filed or furnished. These reports include, but are not limited to, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports. Our SEC reports can also be accessed through the SEC's website at www.sec.gov. Also available on our website are printable versions of our Code of Business Conduct and Ethics and charters of the Audit, Compensation, and Nominating and Governance Committeesstanding committees of our board of directors. Information on our website does not constitute part of this annual report on Form 10-K or any other report we file or furnish with the SEC.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected byas a result of any of these risks. Please note that additional risks not presently known
Risks related to us or that we currently deem immaterial could also impair our business and operations.industry
Our success depends on our ability to maintain the value and reputation of our brand.
Our success depends on the value and reputation of the lululemon brand. The lululemon name is integral to our business as well as to the implementation of our strategies for expanding our business.expansion strategies. Maintaining, promoting, and positioning our brand will depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality product, and guest experience. We rely on social media, as one of our marketing strategies, to have a positive impact on both our brand value and reputation. Our brand and reputation could be adversely affected if we fail to achieve these objectives, if our public image was to be tarnished by negative publicity, which could be amplified by social media, if we fail to deliver innovative and high quality products acceptable to our guests, or if we face or mishandle a product recall. Our reputation could also be impacted by adverse publicity, whether or not valid, regarding allegations that we, or persons associated with us or formerly associated with us, have violated applicable laws or regulations, including but not limited to those related to safety, employment, discrimination, harassment, whistle-blowing, privacy, corporate citizenship, improper business practices, or cybersecurity. Certain activities on the part of stakeholders, including nongovernmental organizations and governmental institutions, could cause reputational damage, distract senior management, and disrupt our business. Additionally, while we devote considerable effortseffort and resources to protecting our
intellectual property, if these efforts are not successful the value of our brand may be harmed. Any harm to our brand and reputation could have a material adverse effect on our financial condition.
The current COVID-19 coronavirus pandemic and related government, private sector, and individual consumer responsive actions have and could continue to affect our business operations, store traffic, employee availability, supply chain, financial condition, liquidity, and cash flow.
The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. COVID-19 negatively impacted our business and operations in 2020. While conditions improved in 2021, the extent and duration of ongoing impacts remain uncertain.
The spread of COVID-19 has caused health officials to impose restrictions and recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers. Our stores have experienced temporary closures, and we have implemented precautionary measures in line with guidance from local authorities in the stores that are open. These measures include restrictions such as limitations on the number of guests allowed in our stores at any single time, minimum physical distancing requirements, and limited operating hours. We do not know how the measures recommended by local authorities or implemented by us may change over time or what the duration of these restrictions will be.
Further resurgences in COVID-19 cases, including from variants, could cause additional restrictions, including temporarily closing all or some of our stores again. An outbreak at one of our locations, even if we follow appropriate precautionary measures, could negatively impact our employees, guests, and brand. There is uncertainty over the impact of COVID-19 on the U.S., Canadian, and global economies, consumer willingness to visit stores, malls, and lifestyle centers, and employee willingness to staff our stores as the pandemic continues and if there are future resurgences. There is also uncertainty regarding potential long-term changes to consumer shopping behavior and preferences and whether consumer demand will recover when restrictions are lifted.
The COVID-19 pandemic also has the potential to significantly impact our supply chain if the factories that manufacture our products, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers are disrupted, temporarily closed, or experience worker shortages. In particular, we have seen disruptions and delays in shipments, and we may see negative impacts to pricing of certain components of our products as a result of the COVID-19 pandemic.
The COVID-19 situation is changing rapidly and the extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and its variants and the actions taken to contain it or treat its impact, including vaccinations.
Changes in consumer shopping preferences, and shifts in distribution channels could materially impact our results of operations.
We sell our products through a variety of channels, with a significant portion through traditional brick-and-mortar retail channels. The COVID-19 pandemic has shifted guest shopping preferences away from brick-and-mortar and towards digital platforms. As strong e-commerce channels emerge and develop, we are evolving towards an omni-channel approach to support the shopping behavior of our guests. This involves country and region-specific websites, social media, product notification emails, mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, and online order fulfillment through stores. The diversion of sales from our company-operated stores could adversely impact our return on investment and could lead to impairment charges and store closures, including lease exit costs. We could have difficulty in recreating the in-store experience through direct channels. Our failure to successfully integrate our digital and physical channels and respond to these risks might adversely impact our business and results of operations, as well as damage our reputation and brands.
If any of our products have manufacturing or design defects or are otherwise unacceptable to us or our guests, our business could be harmed.
We have occasionally received, and may in the future receive, shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards. We have also received, and may in the future receive, products that are otherwise unacceptable to us or our guests. Under these circumstances, unless we are able to obtain replacement products in a timely manner, we risk the loss of net revenue resulting from the inability to sell those products and related increased administrative and shipping costs. Additionally, if the unacceptability of our products is not discovered until after such products are purchased by our guests,sold, our guests could lose confidence in our products or we could face a product recall and our results of operations could suffer and our business, reputation, and brand could be harmed.
The recent COVID-19 coronavirus outbreak
Our MIRROR subsidiary offers complex hardware and software products and services that can be affected by design and manufacturing defects. Sophisticated operating system software and applications, such as those offered by MIRROR, often have issues that can unexpectedly interfere with the intended operation of hardware or software products. Defects may also exist in components and products that we source from third parties. Any defects could make our products and services unsafe and create a risk of environmental or property damage or personal injury and we may become subject to the hazards and uncertainties of product liability claims and related government, private sector, and individual consumer responsive actions may adversely affectlitigation. The occurrence of real or perceived defects in any of our business operations, store traffic, employee availability, financial condition, liquidity, and cash flow.
The outbreak of the COVID-19 coronavirus disease has been declared a pandemic by the World Health Organization continues to spreadproducts, now or in the United States, Canada,future, could result in additional negative publicity, regulatory investigations, or lawsuits filed against us, particularly if guests or others who use or purchase our MIRROR products are injured. Even if injuries are not the result of any defects, if they are perceived to be, we may incur expenses to defend or settle any claims and in many other countries globally. Related governmentour brand and private sector responsive actionsreputation may adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.
The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers. In February 2020, we temporarily
closed all of our retail locations in Mainland China. All but one of these locations have since reopened. In March 2020, we temporarily closed all of our retail locations in North America, Europe, Malaysia, New Zealand, and we temporarily closed our distribution center in Sumner, WA. These locations currently remain closed. There is significant uncertainty around the breadth and duration of our store closures and other business disruptions related to COVID-19, as well as its impact on the U.S., Canadian, and global economies, consumer willingness to visit stores, malls, and lifestyle centers, and employee willingness to staff our stores once they re-open. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.harmed.
We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of our market share and a decrease in our net revenue and profitability.
The market for technical athletic apparel is highly competitive. Competition may result in pricing pressures, reduced profit margins or lost market share, or a failure to grow or maintain our market share, any of which could substantially harm our business and results of operations. We compete directly against wholesalers and direct retailers of athletic apparel, including large, diversified apparel companies with substantial market share, and established companies expanding their production and marketing of technical athletic apparel, as well as against retailers specifically focused on women's athletic apparel. We also face competition from wholesalers and direct retailers of traditional commodity athletic apparel, such as cotton T-shirts and sweatshirts. Many of our competitors are large apparel and sporting goods companies with strong worldwide brand recognition. Because of the fragmented nature of the industry, we also compete with other apparel sellers, including those specializing in yoga apparel and other activewear. Many of our competitors have significant competitive advantages, including longer operating histories, larger and broader customer bases, more established relationships with a broader set of suppliers, greater brand recognition and greater financial, research and development, store development, marketing, distribution, and other resources than we do.
Our competitors may be able to achieve and maintain brand awareness and market share more quickly and effectively than we can. In contrast to our grassroots community-based marketing approach, many of our competitors promote their brands through traditional forms of advertising, such as print media and television commercials, and through celebrity endorsements, and have substantial resources to devote to such efforts. Our competitors may also create and maintain brand awareness using traditional forms of advertising more quickly than we can. Our competitors may also be able to increase sales in their new and existing markets faster than we do by emphasizing different distribution channels than we do, such as catalog sales or an extensive franchise network.
In addition, because we hold limited patents and exclusive intellectual property rights in the technology, fabrics or processes underlying our products, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrication techniques, and styling similar to our products.
Our reliance on suppliers to provide fabrics for and to produce our products could cause problems in our supply chain.
We do not manufacture our products or the raw materials for them and rely instead on suppliers. Many of the specialty fabrics used in our products are technically advanced textile products developed and manufactured by third parties and may be available, in the short-term, from only one or a very limited number of sources. We have no long-term contracts with any of our suppliers or manufacturers for the production and supply of our raw materials and products, and we compete with other companies for fabrics, other raw materials, and production. The following statistics are based on cost.
We work with a group of approximately 39 vendors that manufacture our products, five of which produced approximately 56% of our products in fiscal 2019. During fiscal 2019, the largest single manufacturer produced approximately 17% of our products. During fiscal 2019, approximately 33% of our products were manufactured in Vietnam, 16% in Cambodia, 15% in Sri Lanka, and 11% in the PRC, including 2% in Taiwan, PRC.
We work with a group of approximately 76 suppliers to provide the fabrics for our products. In fiscal 2019, approximately 59% of our fabrics were produced by our top five fabric suppliers, and the largest single manufacturer produced approximately 32% of fabric used. During fiscal 2019, approximately 46% of our fabrics originated from Taiwan, PRC, 14% from the rest of the PRC, 19% from Sri Lanka, and the remainder from other regions.
We also source other raw materials which are used in our products, including items such as content labels, elastics, buttons, clasps, and drawcords from suppliers located predominantly in the Asia Pacific region.
We have experienced, and may in the future experience, a significant disruption in the supply of fabrics or raw materials from current sources and we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significant increased demand, or if we need to replace an existing supplier or
manufacturer, we may be unable to locate additional supplies of fabrics or raw materials or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier or manufacturer with sufficient capacity to meet our requirements or to fill our orders in a timely manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with its quality control, responsiveness and service, financial stability, and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing or fabric sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products, and quality control standards. Our supply of fabric or manufacture of our products could be disrupted or delayed by the impact of global health pandemics, including the current COVID-19 coronavirus pandemic, and the related government and private sector responsive actions such as border closures, restrictions on product shipments, and travel restrictions. Delays related to supplier changes could also arise due to an increase in shipping times if new suppliers are located farther away from our markets or from other participants in our supply chain. Any delays, interruption, or increased costs in the supply of fabric or manufacture of our products could have an adverse effect on our ability to meet guest demand for our products and result in lower net revenue and income from operations both in the short and long term.
The operations of many of our suppliers are subject to additional risks that are beyond our control and that could harm our business, financial condition, and results of operations.
Almost all of our suppliers are located outside of North America, and as a result, we are subject to risks associated with doing business abroad, including:
the impact of health conditions, including the current COVID-19 coronavirus pandemic, and related government and private sector responsive actions, and other changes in local economic conditions in countries where our manufacturers, suppliers, or guests are located;
political unrest, terrorism, labor disputes, and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;
the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, duties, taxes and other charges on imports, as well as trade restrictions and restrictions on currency exchange or the transfer of funds;
reduced protection for intellectual property rights, including trademark protection, in some countries, particularly in the PRC; and
disruptions or delays in shipments whether due to port congestion, labor disputes, product regulations and/or inspections or other factors, natural disasters or health pandemics, or other transportation disruptions.
These and other factors beyond our control could interrupt our suppliers' production in offshore facilities, influence the ability of our suppliers to export our products cost-effectively or at all and inhibit our suppliers' ability to procure certain materials, any of which could harm our business, financial condition, and results of operations.
Our business could be harmed if our suppliers and manufacturers do not comply with our Vendor Code of Ethics or applicable laws.
While we require our suppliers and manufacturers to comply with our Vendor Code of Ethics, which includes labor, health and safety, and environment standards, we do not control their practices. If suppliers or contractors do not comply with these standards or applicable laws or there is negative publicity regarding the production methods of any of our suppliers or manufacturers, even if unfounded or not material to our supply chain, our reputation and sales could be adversely affected, we could be subject to legal liability, or we could be forced to locate alternative suppliers or manufacturing sources.
An economic downturn or economic uncertainty in our key markets may adversely affect consumer discretionary spending and demand for our products.
Many of our products may be considered discretionary items for consumers. Some of the factors that may influence consumer spending on discretionary items include general economic conditions (particularly those in North America), high levels of unemployment, health pandemics (such as the impact of the current COVID-19 coronavirus pandemic, including reduced store traffic and widespread temporary store closures), higher consumer debt levels, reductions in net worth based on market declines and uncertainty, home foreclosures and reductions in home values, fluctuating interest and foreign currency rates and credit availability, government austerity measures, fluctuating fuel and other energy costs, fluctuating commodity prices, tax rates and general uncertainty regarding the overall future economic environment. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the future. Unfavorable economic conditions may
lead consumers to delay or reduce purchases of our products. Consumer demand for our products may not reach our targets, or may decline, when there is an economic downturn or economic uncertainty in our key markets, particularly in North America. Our sensitivity to economic cycles and any related fluctuation in consumer demand may have a material adverse effect on our financial condition.
Our sales and profitability may decline as a result of increasing product costs and decreasing selling prices.
Our business is subject to significant pressure on costs and pricing caused by many factors, including intense competition, constrained sourcing capacity and related inflationary pressure, the availability of qualified labor and wage inflation, pressure from consumers to reduce the prices we charge for our products, and changes in consumer demand. These factors may cause us to experience increased costs, reduce our prices to consumers or experience reduced sales in response to increased prices, any of which could cause our operating margin to decline if we are unable to offset these factors with reductions in operating costs and could have a material adverse effect on our financial condition, operating results, and cash flows.
If we are unable to anticipate consumer preferences and successfully develop and introduce new, innovative, and updateddifferentiated products, we may not be able to maintain or increase our sales and profitability.
Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. If we are unable to introduce new products or novel technologies in a timely manner or our new products or technologies are not accepted by our guests, our competitors may introduce similar products in a more timely fashion, which could hurt our goal to be viewed as a leader in technical athletic apparel innovation. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of athletic apparel or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. Our failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels. Even if we are successful in anticipating consumer preferences,
our ability to adequately react to and address those preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality products. Our failure to effectively introduce new products that are accepted by consumers could result in a decrease in net revenue and excess inventory levels, which could have a material adverse effect on our financial condition.
Our results of operations could be materially harmed if we are unable to accurately forecast guest demand for our products.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with our manufacturers based on our estimates of future demand for particular products. Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decrease in guest demand for our products or for products of our competitors, our failure to accurately forecast guest acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions (for example, because of unexpected effects on inventory supply and consumer demand caused by the current COVID-19 coronavirus pandemic), and weakening of economic conditions or consumer confidence in future economic conditions.conditions (for example, because of inflationary pressures, or because of sanctions, restrictions, and other responses related to geopolitical events). If we fail to accurately forecast guest demand, we may experience excess inventory levels or a shortage of products available for sale in our stores or for delivery to guests.
Inventory levels in excess of guest demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margin to suffer and could impair the strength and exclusivity of our brand. Conversely, if we underestimate guest demand for our products, our manufacturers may not be able to deliver products to meet our requirements, and this could result in damage to our reputation and guest relationships.
Our inability to safeguard against security breaches or our failure to comply with data privacy laws could damage our customer relationships and result in significant legal and financial exposure.
As part of our normal operations, we receive confidential, proprietary, and personally identifiable information, including credit card information, and information about our customers, our employees, job applicants, and other third parties. Our business employs systems and websites that allow for the storage and transmission of this information. However, despite our safeguards and security processes and protections, security breaches could expose us to a risk of theft or misuse of this information, and could result in litigation and potential liability. The retail industry, in particular, has been the target of many recent cyber-attacks. We may not have the resources or technical sophistication to be able to anticipate or prevent rapidly evolving types of cyber-attacks. Attacks may be targeted at us, our vendors or customers, or others who have entrusted us with information. In addition, despite taking measures to safeguard our information security and privacy environment from security breaches, our customers and our business could still be exposed to risk. Actual or anticipated attacks may cause us to incur increasing costs including costs to deploy additional personnel and protection technologies, train employees and engage third party experts and consultants. Advances in computer capabilities, new technological discoveries or other developments may
result in the technology used by us to protect transaction or other data being breached or compromised. Measures we implement to protect against cyber-attacks may also have the potential to impact our customers' shopping experience or decrease activity on our websites by making them more difficult to use. Data and security breaches can also occur as a result of non-technical issues including intentional or inadvertent breach by employees or persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and damage to our brand and reputation or other harm to our business.
Additionally, we are subject to laws and regulations such as the European Union's General Data Privacy Regulation ("GDPR") and the California Consumer Privacy Act ("CCPA"). These regulations require companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection, and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to comply with GDPR requirements could result in penalties of up to four percent of worldwide revenue. The GDPR, CCPA, and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines, negative publicity, or demands or orders that we modify or cease existing business practices.
Any material disruption of our information technology systems or unexpected network interruption could disrupt our business and reduce our sales.
We are increasingly dependent on information technology systems and third-parties to operate our e-commerce websites, process transactions, respond to guest inquiries, manage inventory, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. The failure of our information technology systems to operate properly or effectively, problems with transitioning to upgraded or replacement systems, or difficulty in integrating new systems, could adversely affect our business. In addition, we have e-commerce websites in the United States, Canada, and internationally. Our information technology systems, websites, and operations of third parties on whom we rely, may encounter damage or disruption or slowdown caused by a failure to successfully upgrade systems, system failures, viruses, computer "hackers", natural disasters, or other causes. These could cause information, including data related to guest orders, to be lost or delayed which could, especially if the disruption or slowdown occurred during the holiday season, result in delays in the delivery of products to our stores and guests or lost sales, which could reduce demand for our products and cause our sales to decline. The concentration of our primary offices, two of our distribution centers, and a number of our stores along the west coast of North America could amplify the impact of a natural disaster occurring in that area to our business, including to our information technology systems. In addition, if changes in technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth, we could lose guests. We have limited back-up systems and redundancies, and our information technology systems and websites have experienced system failures and electrical outages in the past which have disrupted our operations. Any significant disruption in our information technology systems or websites could harm our reputation and credibility, and could have a material adverse effect on our business, financial condition, and results of operations.
If the technology-based systems that give our customers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our e-commerce business globally, could be materially adversely affected.
Many of our customers shop with us through our e-commerce websites and mobile apps. Increasingly, customers are using tablets and smart phones to shop online with us and with our competitors and to do comparison shopping. We are increasingly using social media and proprietary mobile apps to interact with our customers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly e-commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with customers, have a material adverse impact on the growth of our e-commerce business globally and could have a material adverse impact on our business and results of operations.
Changes in consumer shopping preferences and shifts in distribution channels could materially impact our results of operations.
We sell our products through a variety of trade channels, with a significant portion through traditional brick-and-mortar retail channels. As strong e-commerce channels emerge and develop, we are evolving towards an omni-channel approach to support the shopping behavior of our guests. This involves country and region specific websites, social media, product notification emails, mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, and online order fulfillment through stores. The diversion of sales from our company-operated stores could adversely impact our return on investment and could lead to store closures and impairment charges. We could have difficulty in
recreating the in-store experience through direct channels. We could also be exposed to liability for online content. Our failure to successfully integrate our digital and physical channels and respond to these risks might adversely impact our business and results of operations, as well as damage our reputation and brands.
The fluctuating cost of raw materials could increase our cost of goods sold and cause our results of operations and financial condition to suffer.
The fabrics used by our suppliers and manufacturers include synthetic fabrics whose raw materials include petroleum-based products. Our products also include silver and natural fibers, including cotton. Our costs for raw materials are affected by, among other things, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries, and other factors that are generally unpredictable and beyond our control. Increases in the cost of raw materials, including petroleum or the prices we pay for silver and our cotton yarn and cotton-based textiles, could have a material adverse effect on our cost of goods sold, results of operations, financial condition, and cash flows.
Our limited operating experience and limited brand recognition in new international markets and new product categories may limit our expansion and cause our business and growth to suffer.
Our future growth depends in part on our expansion efforts outside of North America. We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in any new market. In connection with our expansion efforts we may encounter obstacles we did not face in North America, including cultural and linguistic differences, differences in regulatory environments, labor practices and market practices, difficulties in keeping abreast of market, business and technical developments, and foreigninternational guests' tastes and preferences. We may also encounter difficulty expanding into new international markets because of limited brand recognition leading to delayed acceptance of our technical athletic apparel by guests in these new international markets. Our failure to develop our business in new international markets or disappointing growth outside of existing markets could harm our business and results of operations.
Global economicIn addition, our continued growth depends in part on our ability to expand our product categories and political conditionsintroduce new product lines. We may not be able to successfully manage integration of new product categories or the new product lines with our existing products. Selling new product categories and global eventslines will require our management to learn different strategies in order to be successful. We may be unsuccessful in entering new product categories and developing or launching new product lines, which requires management of new suppliers, potential new customers, and new business models. Our management may not have the experience of selling in these new product categories and we may not be able to grow our business as planned. For example, in July 2020, we acquired MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. If we are unable to effectively and successfully further develop these and future new product categories and lines, we may not be able to increase or maintain our sales and our operating margins may be adversely affected.
We may not realize the potential benefits and synergies sought with the acquisition of MIRROR.
During 2020, we acquired MIRROR as part of our growth plan, which includes driving business through omni-guest experiences. The potential benefits of enhancing our digital and interactive capabilities and deepening our roots in the sweatlife might not be realized fully, if at all, or take longer than anticipated to achieve. Further, the expected synergies between lululemon and MIRROR, such as health pandemics couldthose related to our connections with our guests and communities as well as our store and direct to consumer infrastructure, may not materialize. A significant portion of the purchase price was allocated to goodwill and if our acquisition does not yield expected returns, we may be required to record impairment charges, which would adversely impactaffect our results of operations.
UncertainOur management team has limited experience in addressing the challenges of integrating management teams, strategies, cultures, and organizations of two companies. This integration may divert the attention of management and cause additional expenses. Management also has limited experience outside of the retail industry, including with the specialized hardware and software sold and licensed by MIRROR. If MIRROR has inadequate or challenging global economicineffective controls and political conditionsprocedures, our
internal control over financial reporting could impactbe adversely impacted. The acquisition may not be well received by the customers or employees of either company, and this could hurt our performance, including our abilitybrand and result in the loss of key employees. If we are unable to successfully expand internationally. Global economic conditions could impact levels of consumer spending in the markets in whichintegrate MIRROR, including its people and technologies, or if integration takes longer than planned, we operate,may not be able to manage operations efficiently, which could impactadversely affect our sales and profitability. Political unrest could negatively impact our guests and employees, reduce consumer spending, and adversely impact our business and results of operations. Health pandemics, such as the current COVID-19 coronavirus pandemic, and the related governmental, private sector and individual consumer responsive actions could reduce store traffic and consumer spending, result in temporary or permanent closuresThe acquisition of stores, offices, and factories, and could negatively impact the flow of goods.
If we encounter problems with our distribution system, our ability to deliver our products to the market and to meet guest expectations could be harmed.
We rely on our distribution facilities for substantially all of our product distribution. Our distribution facilities include computer controlled and automated equipment, which means their operationsMIRROR may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, electronic or power interruptions, or other system failures. In addition, our operations could also be interrupted by labor difficulties, extreme or severe weather conditions or by floods, fires, or other natural disasters near our distribution centers. If we encounter problems with our distribution system, our ability to meet guest expectations, manage inventory, complete sales, and achieve objectives for operating efficiencies could be harmed.
Our fabrics and manufacturing technology generally are not patented and can be imitated by our competitors.
The intellectual property rights in the technology, fabrics, and processes used to manufacture our products generally are owned or controlled by our suppliers and are generally not unique to us. Our ability to obtain intellectual property protection for our products is therefore limited and we do not generally own patents or hold exclusive intellectual property rights in the technology, fabrics or processes underlying our products. As a result, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrics and styling similar to our products. Because many of our competitors have significantly greater financial, distribution, marketing,divert management time and other resources thanaway from our existing business.
In addition, we do, they may, from time to time, evaluate and pursue other strategic investments or acquisitions. These involve various inherent risks and the benefits sought may not be able to manufacturerealized. The acquisition of MIRROR or other strategic investments or acquisitions may not create value and sell products based on our fabrics and manufacturing technology at lower prices than we can. If our competitors do sell similar products to ours at lower prices, our net revenue and profitability could suffer.
Our failure or inability to protect our intellectual property rights could diminish the value ofmay harm our brand and weaken our competitive position.
We currently rely on a combination of copyright, trademark, trade dress, and unfair competition laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our intellectual property rights. The steps we take to protect our intellectual property rights may not be adequate to prevent infringement of these rights by others, including imitation of our products and misappropriation of our brand. In addition, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States or Canada, and it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our intellectual property rights, the value of our brand could be diminished, and our competitive position may suffer.
Our ability to source and sell our merchandise profitably or at all could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.
The United States and the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty, or tariff levels. The results of any audits or related disputes regarding these restrictions or regulations could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. Countries impose, modify, and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards, and customs restrictions, could increase the cost or reduce the supply of products available to us, could increase shipping times, or may require us to modify our supply chain organization or other current business practices, any of which could harmaffect our business, financial condition, and results of operations.
We may not be able to grow the MIRROR business and have it achieve profitability.
We may be unable to attract and retain subscribers to MIRROR. If we do not provide the delivery and installation service that our guests expect, offer engaging and innovative classes, and support and continue to improve the technology used, we may not be able to maintain and grow the number of subscribers. This could adversely impact our results of operations.
We are dependent on international trade agreementstechnology systems to provide live and regulations. The countriesrecorded classes to our customers with MIRROR subscriptions, to maintain its software, and to manage subscriptions. If we experience issues such as cybersecurity threats or actions, or interruptions or delays in which we produceour technology systems, the data privacy and selloverall experience of subscribers could be negatively impacted and could therefore damage our products could impose or increase tariffs, duties, or other similar charges that could negativelybrand and adversely affect our results of operations, financial position, or cash flows.operations.
Adverse changes in, or withdrawalCompetition, including from trade agreements or political relationships betweenother in-home fitness providers as well as in-person fitness studios, and trends of consumer preferences, could also impact the United Stateslevel of subscriptions and the PRC, Canada, or other countries where we sell or source our products, could negatively impacttherefore our results of operations or cash flows. The current political administrations in the United States and the PRC have proposed tariffs which increase the costs of our products. It is possible that further tariffs may be introduced, or increased. Such changes could adversely impact our business and could increase the costs of sourcing our products from the PRC, or could require us to source our products from other countries.
On January 31, 2020, the United Kingdom ("UK") withdrew from the European Union ("EU"), commonly referred to as "Brexit". There is significant uncertainty related to how the UK's trade, duties, and customs arrangements with the EU will be impacted by Brexit after the transition period, as well as the impact on the movement of goods, people, and capital between the UK and the EU. There could be changes in economic conditions in the UK or EU, including foreign exchange rates and consumer markets. Our business could be adversely affected by these changes, including by additional duties on the importation of our products into the UK from the EU and as a result of shipping delays or congestion.
Changes in tax laws or unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to the income tax laws of the United States, Canada, and several other foreign jurisdictions. Our effective income tax rates could be unfavorably impacted by a number of factors, including changes in the mix of earnings amongst countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, new tax interpretations and guidance, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of unremitted earnings for which we have not previously accrued applicable U.S. income taxes and foreign withholding taxes.
Repatriations from our Canadian subsidiaries are not subject to Canadian withholding taxes if such distributions are made as a return of capital. We have not accrued for any Canadian withholding taxes that could be payable on future repatriations from our Canadian subsidiaries because we believe the current net investment in our Canadian subsidiaries can either be repatriated free of withholding tax or is expected to be indefinitely reinvested. The extent to which future increases in the net assets of our Canadian subsidiaries can be repatriated free of withholding tax is dependent on, among other things, the amount of paid-up-capital in our Canadian subsidiaries and transactions undertaken by our exchangeable shareholders. We are unable to determine the timing and extent to which such transactions may occur. Accordingly, increases in our Canadian net assets may result in an increase to our effective tax rate.
We and our subsidiaries engage in a number of intercompany transactions across multiple tax jurisdictions. Although we believe that these transactions reflect the accurate economic allocation of profit and that proper transfer pricing documentation is in place, the profit allocation and transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates.
Current economic and political conditions make tax rules in any jurisdiction, including the United States and Canada, subject to significant change. Changes in applicable U.S., Canadian, or other foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect our income tax expense and profitability, as they did in fiscal 2017 and fiscal 2018 upon passage of the U.S. Tax Cuts and Jobs Act.operations.
If we continue to grow at a rapid pace, we may not be able to effectively manage our growth and the increased complexity of our business and as a result our brand image and financial performance may suffer.
We have expanded our operations rapidly since our inception in 1998 and our net revenue has increased from $40.7 million in fiscal 2004 to $4.0$6.3 billion in fiscal 2019.2021. If our operations continue to grow at a rapid pace, we may experience difficulties in obtaining sufficient raw materials and manufacturing capacity to produce our products, as well as delays in production and shipments, as our products are subject to risks associated with overseas sourcing and manufacturing. We could be required to continue to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes and technology, and to obtain more space for our expanding workforce. This expansion could increase the strain on our resources, and we could experience operating difficulties, including difficulties in hiring, training, and managing an increasing number of employees. These difficulties could result in the erosion of our brand image which could have a material adverse effect on our financial condition.
We are subject to risks associated with leasing retail and distribution space subject to long-term and non-cancelable leases.
We lease the majority of our stores under operating leases and our inability to secure appropriate real estate or lease terms could impact our ability to grow. Our leases generally have initial terms of between five and 15 years, and generally can be extended in five-year increments if at all. We generally cannot cancel these leases at our option. If an existing or new store is not profitable, and we decide to close it, as we have done in the past and may do in the future, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Similarly, we may be committed to perform our obligations under the applicable leases even if current locations of our stores become unattractive as demographic patterns change. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could require us to close stores in desirable locations.
We also lease the majority of our distribution centers and our inability to secure appropriate real estate or lease terms could impact our ability to deliver our products to the market.
We may not be able to successfully open new store locations in a timely manner, if at all, which could harm our results of operations.
Our growth will largely depend on our ability to successfully open and operate new stores. We may be unsuccessful in identifying new locations and markets where our technical athletic apparel and other products and brand image will be accepted. In addition, we may not be able to open or profitably operate new stores in existing, adjacent, or new markets due to the impact of COVID-19, political instability, inflationary pressures, or other economic conditions, which could have a material adverse effect on us.
Our future success is substantially dependent on the service of our senior management and other key employees.
In the last few years, we have had changes to our senior management team including new hires, departures, and role and responsibility changes. The performance of our senior management team and other key employees may not meet our needs and expectations. Also, the loss of services of any of these key employees, or any negative public perception with respect to these individuals, may be disruptive to, or cause uncertainty in, our business and could have a negative impact on our ability to manage and grow our business effectively. Such disruption could have a material adverse impact on our financial performance, financial condition, and the market price of our stock.
Our business is affected by seasonality, which could result in fluctuations in our operating results.
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. This seasonality, along with other factors that are beyond our control, including weather conditions and the effects of climate change, could adversely affect our business and cause our results of operations to fluctuate.
Risks related to our supply chain
Disruptions of our supply chain could have a material adverse effect on our operating and financial results.
Disruption of our supply chain capabilities due to trade restrictions, political instability, severe weather, natural disasters, public health crises such as the ongoing COVID-19 pandemic, war, terrorism, product recalls, labor supply or stoppages, the financial or operational instability of key suppliers and carriers, changes in diplomatic or trade relationships (including any sanctions, restrictions, and other responses such as those related to current geopolitical events), or other reasons could impair our ability to distribute our products. To the extent we are unable to mitigate the likelihood or potential impact of such events, there could be a material adverse effect on our operating and financial results.
Our reliance on suppliers to provide fabrics for and to produce our products could cause problems if we experience a supply chain disruption and we are unable to secure additional suppliers of fabrics or other raw materials, or manufacturers of our end products.
The entire apparel industry, including our company, continues to face supply chain challenges as a result of economic uncertainty due to the impacts of COVID-19, political instability, inflationary pressures, and other factors, including reduced freight availability and increased costs, port disruption, manufacturing facility closures, and related labor shortages and other supply chain disruptions. We do not manufacture our products or the raw materials for them and rely instead on suppliers. Many of the specialty fabrics used in our products are technically advanced textile products developed and manufactured by third parties and may be available, in the short-term, from only one or a limited number of sources. We have no long-term contracts with any of our suppliers or manufacturers for the production and supply of our raw materials and products, and we compete with other companies for fabrics, other raw materials, and production. The following statistics are based on cost.
We work with a group of approximately 41 vendors that manufacture our products, five of which produced 57% of our products in 2021. During 2021, the largest single manufacturer produced approximately 15% of our products. During 2021, approximately 40% of our products were manufactured in Vietnam, 17% in Cambodia, 11% in Sri Lanka, 7% in the PRC, including 2% in Taiwan, and the remainder in other regions.
We work with a group of approximately 65 suppliers to provide the fabrics for our products. In 2021, 56% of our fabrics were produced by our top five fabric suppliers, and the largest single manufacturer produced approximately 27% of fabric used. During 2021, approximately 48% of our fabrics originated from Taiwan, 19% from Mainland China, 11% from Sri Lanka, and the remainder from other regions.
We also source other raw materials which are used in our products, including items such as content labels, elastics, buttons, clasps, and drawcords from suppliers located predominantly in the Asia Pacific region.
We have experienced, and may in the future experience, a significant disruption in the supply of fabrics or raw materials and may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significant increased demand, or if we need to replace an existing supplier or manufacturer, we may be unable to locate additional supplies of fabrics or raw materials or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier or manufacturer with sufficient capacity to meet our requirements or fill our orders in a timely manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with its quality control, responsiveness and service, financial stability, and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing or fabric sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products, and quality control standards.
Our supply of fabric or manufacture of our products could be disrupted or delayed by the impact of health pandemics, including the current COVID-19 pandemic, and the related government and private sector responsive actions such as border closures, restrictions on product shipments, and travel restrictions, as well as other economic or political conditions. Delays related to supplier changes could also arise due to an increase in shipping times if new suppliers are located farther away from our markets or from other participants in our supply chain. The receipt of inventory sourced from areas impacted by COVID-19 has been slowed or disrupted and our manufacturers may also face similar challenges in receiving fabric and fulfilling our orders. In addition, ocean freight capacity issues continue to persist worldwide as there is much greater demand for shipping and reduced capacity and equipment. Any delays, interruption, or increased costs in the supply of fabric or manufacture of our products could have an adverse effect on our ability to meet guest demand for our products and result in lower net revenue and income from operations both in the short and long term.
Our business could be harmed if our suppliers and manufacturers do not comply with our Vendor Code of Ethics or applicable laws.
While we require our suppliers and manufacturers to comply with our Vendor Code of Ethics, which includes labor, health and safety, and environment standards, we do not control their operations. If suppliers or contractors do not comply with these standards or applicable laws or there is negative publicity regarding the production methods of any of our suppliers or manufacturers, even if unfounded or not specific to our supply chain, our reputation and sales could be adversely affected, we could be subject to legal liability, or could cause us to contract with alternative suppliers or manufacturing sources.
The fluctuating cost of raw materials could increase our cost of goods sold.
The fabrics used to make our products include synthetic fabrics whose raw materials include petroleum-based products. Our products also include silver and natural fibers, including cotton. Our costs for raw materials are affected by, among other things, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries, and other factors that are generally unpredictable and beyond our control. Any and all of these factors may be exacerbated by global climate change. In addition, ongoing impacts of the pandemic, political instability, trade relations, sanctions, price inflationary pressure, or other geopolitical or economic conditions could cause raw material costs to increase and have an adverse effect on our future margins. Increases in the cost of raw materials, including petroleum or the prices we pay for silver and our cotton yarn and cotton-based textiles, could have a material adverse effect on our cost of goods sold, results of operations, financial condition, and cash flows.
If we encounter problems with our distribution system, our ability to deliver our products to the market and to meet guest expectations could be harmed.
We rely on our distribution facilities for substantially all of our product distribution. Our distribution facilities include computer controlled and automated equipment, which means their operations may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, electronic or power interruptions, or other system failures. In addition, our operations could also be interrupted by labor difficulties, pandemics (such as the COVID-19 pandemic), the impacts of climate change, extreme or severe weather conditions or by floods, fires, or other natural disasters near our distribution centers. If we encounter problems with our distribution system, our ability to meet guest expectations, manage inventory, complete sales, and achieve objectives for operating efficiencies could be harmed.
Increasing labor costs and other factors associated with the production of our products in South Asia and South East Asia could increase the costs to produce our products.
A significant portion of our products are produced in South Asia and South East Asia and increases in the costs of labor and other costs of doing business in the countries in this area could significantly increase our costs to produce our products and could have a negative impact on our operations and earnings. Factors that could negatively affect our business include a potentiallabor shortages and increases in labor costs, labor disputes, pandemics, the impacts of climate change, difficulties and
additional costs in transporting products manufactured from these countries to our distribution centers and significant revaluation of the currencies used in these countries, which may result in an increase in the cost of producing products, labor shortage and increases in labor costs, and difficulties and additional costs in transporting products manufactured from these countries to our distribution centers.products. Also, the imposition of trade sanctions or other regulations against products imported by us from, or the loss of "normal trade relations" status with any country in which our products are manufactured, could significantly increase our cost of products and harm our business.
Risks related to information security and technology
We may be unable to safeguard against security breaches which could damage our customer relationships and result in significant legal and financial exposure.
As part of our normal operations, we receive confidential, proprietary, and personally identifiable information, including credit card information, and information about our customers, our employees, job applicants, and other third parties. Our business employs systems and websites that allow for the storage and transmission of this information. However, despite our safeguards and security processes and protections, security breaches could expose us to a risk of theft or misuse of this information, and could result in litigation and potential liability.
The retail industry, in particular, has been the target of many recent cyber-attacks. We may not have the resources or technical sophistication to be able to successfully openanticipate or prevent rapidly evolving types of cyber-attacks. Attacks may be targeted at us, our vendors or customers, or others who have entrusted us with information. In addition, despite taking measures to safeguard our information security and privacy environment from security breaches, our customers and our business could still be exposed to risk. Actual or anticipated attacks may cause us to incur increasing costs including costs to deploy additional personnel and protection technologies, train employees and engage third party experts and consultants. Advances in computer capabilities, new store locationstechnological discoveries or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. Measures we implement to protect against cyber-attacks may also have the potential to impact our customers' shopping experience or decrease activity on our websites by making them more difficult to use.
Data and security breaches can also occur as a result of non-technical issues including intentional or inadvertent breach by employees or persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and damage to our brand and reputation or other harm to our business.
In addition, the increased use of employee-owned devices for communications as well as work-from-home arrangements, such as those implemented in response to the COVID-19 pandemic, present additional operational risks to our technology systems, including increased risks of cyber-attacks. Further, like other companies in the retail industry, we have in the past experienced, and we expect to continue to experience, cyber-attacks, including phishing, and other attempts to breach, or gain unauthorized access to, our systems. To date, these attacks have not had a material impact on our operations, but they may have an impact in the future.
Privacy and data protection laws increase our compliance burden.
We are subject to a variety of privacy and data protection laws and regulations that change frequently and have requirements that vary from jurisdiction to jurisdiction. For example, we are subject to significant compliance obligations under privacy laws such as the General Data Privacy Regulation ("GDPR") in the European Union, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) in Canada, the California Consumer Privacy Act ("CCPA") modified by the California Privacy Rights Act (“CPRA”), and the Personal Information Protection Law (“PIPL”) in the PRC. Some privacy laws prohibit the transfer of personal information to certain other jurisdictions. We are subject to privacy and data protection audits or investigations by various government agencies. Our failure to comply with these laws subjects us to potential regulatory enforcement activity, fines, private litigation including class actions, and other costs. Our efforts to comply with privacy laws may complicate our operations and add to our compliance costs. A significant privacy breach or failure or perceived failure by us or our third-party service providers to comply with privacy or data protection laws, regulations, policies or regulatory guidance might have a materially adverse impact on our reputation, business operations and our financial condition or results of operations.
Disruption of our technology systems or unexpected network interruption could disrupt our business.
We are increasingly dependent on technology systems and third-parties to operate our e-commerce websites, process transactions, respond to guest inquiries, manage inventory, purchase, sell and ship goods on a timely manner,basis, and maintain cost-efficient operations. The failure of our technology systems to operate properly or effectively, problems with transitioning to upgraded or replacement systems, or difficulty in integrating new systems, could adversely affect our business. In addition, we have e-commerce websites in the United States, Canada, and internationally. Our technology systems, websites, and
operations of third parties on whom we rely, may encounter damage or disruption or slowdown caused by a failure to successfully upgrade systems, system failures, viruses, computer "hackers", natural disasters, or other causes. These could cause information, including data related to guest orders, to be lost or delayed which could, especially if the disruption or slowdown occurred during the holiday season, result in delays in the delivery of products to our stores and guests or lost sales, which could reduce demand for our products and cause our sales to decline. The concentration of our primary offices, two of our distribution centers, and a number of our stores along the west coast of North America could amplify the impact of a natural disaster occurring in that area to our business, including to our technology systems. In addition, if changes in technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth, we could lose guests. We have limited back-up systems and redundancies, and our technology systems and websites have experienced system failures and electrical outages in the past which have disrupted our operations. Any significant disruption in our technology systems or websites could harm our reputation and credibility, and could have a material adverse effect on our business, financial condition, and results of operations.
Our technology-based systems that give our customers the ability to shop with us online may not function effectively.
Many of our customers shop with us through our e-commerce websites and mobile apps. Increasingly, customers are using tablets and smart phones to shop online with us and with our competitors and to do comparison shopping. We are increasingly using social media and proprietary mobile apps to interact with our customers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly e-commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with customers, have a material adverse impact on the growth of our e-commerce business globally and could have a material adverse impact on our business and results of operations.
Risks related to environmental, social, and governance issues
Climate change, and related legislative and regulatory responses to climate change, may adversely impact our business.
There is increasing concern that a gradual rise in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe, an increase in the frequency, severity, and duration of extreme weather conditions and natural disasters, and water scarcity and poor water quality. These events could adversely impact the cultivation of cotton, which is a key resource in the production of our products, disrupt the operation of our supply chain and the productivity of our contract manufacturers, increase our production costs, impose capacity restraints and impact the types of apparel products that consumers purchase. These events could also compound adverse economic conditions and impact consumer confidence and discretionary spending. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations. In many countries, governmental bodies are enacting new or additional legislation and regulations to reduce or mitigate the potential impacts of climate change. If we, our suppliers, or our contract manufacturers are required to comply with these laws and regulations, or if we choose to take voluntary steps to reduce or mitigate our impact on climate change, we may experience increased costs for energy, production, transportation, and raw materials, increased capital expenditures, or increased insurance premiums and deductibles, which could adversely impact our operations. Inconsistency of legislation and regulations among jurisdictions may also affect the costs of compliance with such laws and regulations. Any assessment of the potential impact of future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change in the countries in which we operate.
Increased scrutiny from investors and others regarding our environmental, social, governance, or sustainability, responsibilities could result in additional costs or risks and adversely impact our reputation, employee retention, and willingness of customers and suppliers to do business with us.
Investor advocacy groups, certain institutional investors, investment funds, other market participants, stockholders, and customers have focused increasingly on the environmental, social and governance ("ESG") or “sustainability” practices of companies, including those associated with climate change. These parties have placed increased importance on the implications of the social cost of their investments. If our ESG practices do not meet investor or other industry stakeholder expectations and standards, which continue to evolve, our brand, reputation and employee retention may be negatively impacted based on an assessment of our ESG practices. Any sustainability report that we publish or other sustainability disclosures we make may include our policies and practices on a variety of social and ethical matters, including corporate governance, environmental compliance, employee health and safety practices, human capital management, product quality, supply chain management, and workforce inclusion and diversity. It is possible that stakeholders may not be satisfied with our ESG practices or the speed of their adoption. We could also incur additional costs and require additional resources to monitor, report, and comply with various ESG practices. Also, our failure, or perceived failure, to meet the standards included in any
sustainability disclosure could negatively impact our reputation, employee retention, and the willingness of our customers and suppliers to do business with us.
Risks related to global economic, political, and regulatory conditions
An economic recession, depression, downturn, periods of inflation, or economic uncertainty in our key markets may adversely affect consumer discretionary spending and demand for our products.
Many of our products may be considered discretionary items for consumers. Some of the factors that may influence consumer spending on discretionary items include general economic conditions, high levels of unemployment, health pandemics (such as the impact of the current COVID-19 coronavirus pandemic, including reduced store traffic and widespread temporary closures of retail locations), higher consumer debt levels, reductions in net worth based on market declines and uncertainty, home foreclosures and reductions in home values, fluctuating interest and foreign currency exchange rates and credit availability, government austerity measures, fluctuating fuel and other energy costs, fluctuating commodity prices, inflationary pressure, tax rates and general uncertainty regarding the overall future economic environment. Global economic conditions are uncertain and volatile, due in part to the impacts of COVID-19 and related restrictions and mitigation measures, the potential impacts of increasing inflation in the United States (our largest market), the potential impacts of geopolitical uncertainties, and any potential sanctions, restrictions or responses to those conditions. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the future. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products. Consumer demand for our products may not reach our targets, or may decline, when there is an economic downturn or economic uncertainty in our key markets. Our sensitivity to economic cycles and any related fluctuation in consumer demand may have a material adverse effect on our financial condition.
Global economic and political conditions and global events such as health pandemics could adversely impact our results of operations.
Uncertain or challenging global economic and political conditions could impact our performance, including our ability to successfully expand internationally. Global economic conditions could impact levels of consumer spending in the markets in which we operate, which could impact our sales and profitability. Political unrest, such as the turmoil related to current geopolitical events and the related sanctions, restrictions, or other responses, could negatively impact our guests and employees, reduce consumer spending, and adversely impact our business and results of operations. Health pandemics, such as the current COVID-19 coronavirus pandemic, and the related governmental, private sector and individual consumer responses could contribute to a recession, depression, or global economic downturn, reduce store traffic and consumer spending, result in temporary or permanent closures of retail locations, offices, and factories, and could negatively impact the flow of goods.
We may be unable to source and sell our merchandise profitably or at all if new trade restrictions are imposed or existing restrictions become more burdensome.
The United States and the countries in which our products are produced or sold have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty, or tariff levels. The results of any audits or related disputes regarding these restrictions or regulations could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. Countries impose, modify, and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards, and customs restrictions, could increase the cost or reduce the supply of products available to us, could increase shipping times, or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition, and results of operations.
We are dependent on international trade agreements and regulations. The countries in which we produce and sell our products could impose or increase tariffs, duties, or other similar charges that could negatively affect our results of operations, financial position, or cash flows.
Adverse changes in, or withdrawal from, trade agreements or political relationships between the United States and the PRC, Canada, or other countries where we sell or source our products, could negatively impact our results of operations or cash flows. Any tariffs imposed between the United States and the PRC could increase the costs of our products. General geopolitical instability and the responses to it, such as the possibility of sanctions, trade restrictions, and changes in tariffs, including recent sanctions against the PRC, tariffs imposed by the United States and the PRC, and the possibility of additional
tariffs or other trade restrictions between the United States and Mexico, could adversely impact our business. It is possible that further tariffs may be introduced, or increased. Such changes could adversely impact our business and could increase the costs of sourcing our products from the PRC, or could require us to source more of our products from other countries.
There could be changes in economic conditions in the United Kingdom ("UK") or European Union ("EU"), including due to the UK's withdrawal from the EU, foreign currency exchange rates, and consumer markets. Our growth will largely dependbusiness could be adversely affected by these changes, including by additional duties on the importation of our abilityproducts into the UK from the EU and as a result of shipping delays or congestion.
Changes in tax laws or unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to successfully openthe income tax laws of the United States, Canada, and operate new stores, which depends on manyseveral other international jurisdictions. Our effective income tax rates could be unfavorably impacted by a number of factors, including among others,changes in the mix of earnings amongst countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, new tax interpretations and guidance, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of unremitted earnings for which we have not previously accrued applicable U.S. income taxes and international withholding taxes.
Repatriations from our ability to:
identify suitable store locations,Canadian subsidiaries are not subject to Canadian withholding taxes if such distributions are made as a return of capital. We have not accrued for any Canadian withholding taxes that could be payable on future repatriations from our Canadian subsidiaries because we believe the availabilitycurrent net investment in our Canadian subsidiaries is expected to be indefinitely reinvested, or can be repatriated free of withholding tax. The extent to which is outsidefuture increases in the net assets of our control;Canadian subsidiaries can be repatriated free of withholding tax is dependent on, among other things, the amount of paid-up-capital in our Canadian subsidiaries and transactions undertaken by our exchangeable shareholders. As of January 30, 2022, we had 5.2 million exchangeable shares outstanding. If there are insufficient transactions by our exchangeable shareholders between now and the end of fiscal 2022, and our Canadian subsidiary continues to generate profits at historic rates, then it is likely that we will be unable to repatriate all of our fiscal 2022 Canadian earnings free of withholding tax. We would therefore accrue for Canadian withholding taxes, and our effective tax rate would increase as a result.
gain brand recognitionWe and acceptance, particularlyour subsidiaries engage in marketsa number of intercompany transactions across multiple tax jurisdictions. Although we believe that these transactions reflect the accurate economic allocation of profit and that proper transfer pricing documentation is in place, the profit allocation and transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates. At the end of 2020, our Advance Pricing Arrangement ("APA") with the Internal Revenue Service and the Canada Revenue Agency expired. This APA stipulated the allocation of certain profits between the U.S. and Canada. We are newcurrently in the process of negotiating the renewal of this arrangement and the final agreed upon terms and conditions thereof could impact our effective tax rate.
Current economic and political conditions make tax rules in any jurisdiction, including the United States and Canada, subject to us;
negotiate acceptable lease terms,significant change. Changes in applicable U.S., Canadian, or other international tax laws and regulations, or their interpretation and application, including desired tenant improvement allowances;
hire, trainretroactive effect, could affect our income tax expense and retain store personnelprofitability, as they did in fiscal 2017 and field management;
immerse new store personnelfiscal 2018 upon passage of the U.S. Tax Cuts and field management into our corporate culture;
source sufficient inventory levels;Jobs Act and
successfully integrate new stores into our existing operations in 2020 with the passage of the Coronavirus Aid, Relief, and information technology systems.Economic Security Act.
Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators and negative publicity.
The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the United States, the Competition Bureau and Health Canada in Canada, the State Administration for Market Regulation of the PRC, General Administration of Customs of the PRC, as well as by various other federal, state, provincial, local, and international regulatory authorities in the countries in which our products are distributed or sold. If we fail to comply with any of these regulations, we could become subject to enforcement actions or the imposition of significant penalties or claims, which could harm our results of operations or our ability to conduct our business. In addition, any audits and inspections by governmental agencies related to these matters could result in significant settlement amounts, damages, fines, or other penalties, divert financial and management resources, and result in significant legal fees. An unfavorable outcome of any particular proceeding could have an adverse impact on our business, financial condition, and results of operations. In addition, the adoption of new regulations or changes in the interpretation of existing regulations may result in significant compliance costs or discontinuation of product sales and could impair the marketing of our products, resulting in significant loss of net revenue.
Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery laws applicable to our operations. In many foreign countries, particularly in those with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other U.S. and foreigninternational laws and regulations applicable to us. Although we have implemented procedures designed to ensure compliance with the FCPA and similar laws, some of our employees, agents, or other channel partners, as well as those companies to which we outsource certain of our business operations, could take actions in violation of our policies. Any such violation could have a material and adverse effect on our business.
Our future success is substantially dependent on the service of our senior management and other key employees.
In the last few years, we have had changes to our senior management team including new hires, departures, and role and responsibility changes. The performance of our senior management team and other key employees may not meet our needs and expectations. Also, the loss of services of any of these key employees, or any negative public perception with respect to these individuals, may be disruptive to, or cause uncertainty in, our business and could have a negative impact on our ability to manage and grow our business effectively. Such disruption could have a material adverse impact on our financial performance, financial condition, and the market price of our stock.
We do not maintain a key person life insurance policy on any of the members of our senior management team. As a result, we would have no way to cover the financial loss if we were to lose the services of members of our senior management team.
Our business is affected by seasonality.
Our business is affected by the general seasonal trends common to the retail apparel industry. This seasonality may adversely affect our business and cause our results of operations to fluctuate, and, as a result, we believe that comparisons of our operating results between different quarters within a single fiscal year are not necessarily meaningful and that results of operations in any period should not be considered indicative of the results to be expected for any future period.
Because a significant portion of our net revenue and expenses are generated in countries other than the United States, fluctuations in foreign currency exchange rates have affected our results of operations and may continue to do so in the future.
The functional currency of our foreigninternational subsidiaries is generally the applicable local currency. Our consolidated financial statements are presented in U.S. dollars. Therefore, the net revenue, expenses, assets, and liabilities of our foreigninternational subsidiaries are translated from their functional currencies into U.S. dollars. Fluctuations in the value of the U.S. dollar affect the reported amounts of net revenue, expenses, assets, and liabilities. Foreign currency exchange differences which arise on translation of our foreigninternational subsidiaries' balance sheets into U.S. dollars are recorded as a foreign currency translation adjustmentother comprehensive income (loss), net of tax in accumulated other comprehensive income or loss within stockholders' equity.
We also have exposure to changes in foreign currency exchange rates associated with transactions which are undertaken by our subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases denominated in currencies other than the functional currency of the purchasing entity. As a result, we have been impacted by changes in foreign currency exchange rates and may be impacted for the foreseeable future. The potential impact of currency fluctuation increases as our international expansion increases.
We have, and may continue to, enter into forward currency contracts, or other derivative instruments, in an effort to mitigate the foreign exchange risks which we are exposed to. This may include entering into forward currency contracts to hedge against the foreign exchange gains and losses which arise on translation of our foreign subsidiaries' balance sheets into U.S. dollars, or entering into forward currency contracts in an effort to reduce our exposure to foreign exchange revaluation gains and losses that arise on monetary assets and liabilities held by our subsidiaries in a currency other than their functional currency.
Although we use financial instruments to hedge certain foreign currency risks, these measures may not succeed in fully offsetting the negative impact of foreign currency rate movements.
We are exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts.contracts used in our hedging strategies.
Risks related to intellectual property
Our fabrics and manufacturing technology generally are not patented and can be imitated by our competitors. If our competitors sell products similar to ours at lower prices, our net revenue and profitability could suffer.
The intellectual property rights in the technology, fabrics, and processes used to manufacture our products generally are owned or controlled by our suppliers and are generally not unique to us. Our ability to obtain intellectual property protection for our products is therefore limited. We hold limited patents and exclusive intellectual property rights in the technology, fabrics or processes underlying our products. As a result, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrics and styling similar to our products. Because many of our competitors have significantly greater financial, distribution, marketing, and other resources than we do, they may be able to manufacture and sell products based on our fabrics and manufacturing technology at lower prices than we can. If our competitors sell products similar to ours at lower prices, our net revenue and profitability could suffer.
Our failure or inability to protect our intellectual property rights could diminish the value of our brand and weaken our competitive position.
We currently rely on a combination of patent, copyright, trademark, trade dress, trade secret, and unfair competition laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our intellectual property rights. The steps we take to protect our intellectual property rights may not be adequate to prevent infringement of these rights by others, including imitation of our products and misappropriation of our brand. In addition, any of our intellectual property rights may be challenged, which could result in them being narrowed in scope or declared invalid or unenforceable, or our intellectual property protection may be unavailable or limited in some international countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States or Canada, and it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our intellectual property rights, the value of our brand could be diminished, and our competitive position may suffer.
Our trademarks, patents, and other proprietary rights could potentially conflict with the rights of others and we may be prevented from selling some of our products.
Our success depends in large part on our brand image. We believe that our trademarks, patents, and other proprietary rights have significant value and are important to identifying and differentiating our products from those of our competitors and creating and sustaining demand for our products. We have applied for and obtained some United States, Canada, and foreigninternational trademark registrations and patents, and will continue to evaluate the registration of additional trademarks and patents as appropriate. However, some or all of these pending trademark or patent applications may not be approved by the applicable governmental authorities. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge these applications or registrations. Additionally, we may face obstacles as we expand our product line and the geographic scope of our sales and marketing. Third parties may assert intellectual property claims against us, particularly as we expand our business and the number of products we offer. Our defense of any claim, regardless of its merit, could be expensive and time consuming and could divert management resources. Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products. In addition, resolution of claims may require us to redesign our products, license rights from third parties, or cease using those rights altogether. Any of these events could harm our business and cause our results of operations, liquidity, and financial condition to suffer.
We have been, and in the future may be, sued by third parties for alleged infringement of their proprietary rights.
There is considerable patent and other intellectual property development activity in our market, and litigation, based on allegations of infringement or other violations of intellectual property, is frequent in the fitness and technology industries. Furthermore, it is common for individuals and groups to purchase patents and other intellectual property assets for the purpose of making claims of infringement to extract settlements from companies like ours. Our use of third-party content, including music content, software, and other intellectual property rights may be subject to claims of infringement or misappropriation. We cannot guarantee that our internally developed or acquired technologies and content do not or will not infringe the intellectual property rights of others. From time to time, our competitors or other third parties may claim that we are infringing upon or misappropriating their intellectual property rights, and we may be found to be infringing upon such rights. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our platform or services or using certain technologies, force us to implement expensive work-arounds, or impose other unfavorable terms. We expect that the occurrence of infringement claims is likely to grow as the market for fitness products and services grows and as we introduce new and updated products and offerings. Accordingly, our exposure to damages resulting from infringement claims could increase and this could further exhaust our financial and management resources. Any of the foregoing could prevent us from competing effectively and could have an adverse effect on our business, financial condition, and operating results.
Risks related to legal and governance matters
We are subject to periodic claims and litigation that could result in unexpected expenses and could ultimately be resolved against us.
From time to time, we are involved in litigation and other proceedings, including matters related to product liability claims, stockholder class action and derivative claims, commercial disputes and intellectual property, as well as trade, regulatory, employment, and other claims related to our business. Any of these proceedings could result in significant settlement amounts, damages, fines, or other penalties, divert financial and management resources, and result in significant legal fees. An unfavorable outcome of any particular proceeding could exceed the limits of our insurance policies or the carriers may decline to fund such final settlements and/or judgments and could have an adverse impact on our business, financial condition, and results of operations. In addition, any proceeding could negatively impact our reputation among our guests and our brand image.
Our business could be negatively affected as a result of actions of activist stockholders or others.
We may be subject to actions or proposals from stockholders or others that may not align with our business strategies or the interests of our other stockholders. Responding to such actions can be costly and time-consuming, disrupt our business and operations, and divert the attention of our board of directors, management, and employees from the pursuit of our business strategies. Such activities could interfere with our ability to execute our strategic plan. Activist stockholders or others may create perceived uncertainties as to the future direction of our business or strategy which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel and potential guests, and may affect our relationships with current guests, vendors, investors, and other third parties. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our board of directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.
Anti-takeover provisions of Delaware law and our certificate of incorporation and bylaws could delay and discourage takeover attempts that stockholders may consider to be favorable.
Certain provisions of our certificate of incorporation and bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult or impossible for a third-party to acquire control of us or effect a change in our board of directors and management. These provisions include:
In addition, we are governed by Section 203 of the Delaware General Corporation Law which, subject to some specified exceptions, prohibits "business combinations" between a Delaware corporation and an "interested stockholder," which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation's voting stock, for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring, or preventing a change in control that our stockholders might consider to be in their best interests.
Our principal executive and administrative offices are located at 1818 Cornwall Avenue, Vancouver, British Columbia, Canada, V6J 1C7.
The general location, use and approximate size of our principal owned properties as of February 2, 2020,January 30, 2022, are set forth below:
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Dividends
Our common stock is quoted on the Nasdaq Global Select Market under the symbol "LULU."
As of March 20, 2020,23, 2022, there were approximately 9001,000 holders of record of our common stock. This does not include persons whose stock is in nominee or "street name" accounts through brokers.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination as to the payment of cash dividends will be at the discretion of our board of directors and will depend on our financial condition, operating results, current and anticipated cash needs, plans for expansion, and other factors that our board of directors considers to be relevant. In addition, financial and other covenants in any instruments or agreements that we enter into in the future may restrict our ability to pay cash dividends on our common stock.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock between February 1, 2015January 29, 2017 (the date of our fiscal year end five years ago) and February 2, 2020,January 30, 2022, with the cumulative total return of (i) the S&P 500 Index and (ii) S&P 500 Apparel, Accessories & Luxury Goods Index, over the same period. This graph assumes the investment of $100 on February 1, 2015January 29, 2017 at the closing sale price our common stock, the S&P 500 Index and the S&P Apparel, Accessories & Luxury Goods Index and assumes the reinvestment of dividends, if any.
The comparisons shown in the graph below are based on historical data. We caution that the stock price performance showingshown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from Bloomberg, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 29-Jan-17 | | 28-Jan-18 | | 03-Feb-19 | | 02-Feb-20 | | 31-Jan-21 | | 30-Jan-22 |
lululemon athletica inc. | | $ | 100.00 | | | $ | 118.35 | | | $ | 218.68 | | | $ | 358.26 | | | $ | 491.89 | | | $ | 472.78 | |
S&P 500 Index | | $ | 100.00 | | | $ | 125.20 | | | $ | 117.95 | | | $ | 140.56 | | | $ | 161.86 | | | $ | 193.14 | |
S&P 500 Apparel, Accessories & Luxury Goods Index | | $ | 100.00 | | | $ | 130.17 | | | $ | 114.68 | | | $ | 103.56 | | | $ | 99.21 | | | $ | 96.09 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 01-Feb-15 | | 31-Jan-16 | | 29-Jan-17 | | 28-Jan-18 | | 03-Feb-19 | | 02-Feb-20 |
lululemon athletica inc. | | $ | 100.00 |
| | $ | 93.70 |
| | $ | 100.88 |
| | $ | 119.38 |
| | $ | 220.59 |
| | $ | 361.40 |
|
S&P 500 Index | | $ | 100.00 |
| | $ | 97.26 |
| | $ | 115.02 |
| | $ | 144.00 |
| | $ | 135.67 |
| | $ | 161.68 |
|
S&P 500 Apparel, Accessories & Luxury Goods Index | | $ | 100.00 |
| | $ | 82.75 |
| | $ | 69.42 |
| | $ | 90.37 |
| | $ | 79.62 |
| | $ | 71.89 |
|
Issuer Purchase of Equity Securities
The following table provides information regarding our purchases of shares of our common stock during the thirteen weeks ended February 2, 2020fourth quarter of 2021 related to our stock repurchase program:
|
| | | | | | | | | | | | | | |
Period(1) | | Total Number of Shares Purchased(2) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
November 4, 2019 - December 1, 2019 | | 1,584 |
| | $ | 194.10 |
| | 1,584 |
| | $ | 327,302,004 |
|
December 2, 2019 - January 5, 2020 | | — |
| | — |
| | — |
| | 327,302,004 |
|
January 6, 2020 - February 2, 2020 | | — |
| | — |
| | — |
| | 327,302,004 |
|
Total | | 1,584 |
| | | | 1,584 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period(1) | | Total Number of Shares Purchased(2) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
November 1, 2021 - November 28, 2021 | | 38,385 | | | $ | 463.93 | | | 38,385 | | | $ | 490,880,706 | |
November 29, 2021 - January 2, 2022 | | 477,777 | | | 399.62 | | | 477,777 | | | 299,952,853 | |
January 3, 2022 - January 30, 2022 | | 327,428 | | | 343.62 | | | 327,428 | | | 187,441,452 | |
Total | | 843,590 | | | | | 843,590 | | | |
__________
| |
(1)(1)Monthly information is presented by reference to our fiscal periods during our fourth quarter of 2021. (2)On January 31, 2019, our board of directors approved a stock repurchase program of up to $500.0 million of our common shares on the open market or in privately negotiated transactions. On December 1, 2020, our board of directors approved an increase in the remaining authorization of our existing stock repurchase program from $263.6 million to $500.0 million, and on October 1, 2021, it approved an increase in the remaining authorization from $141.2 million to $641.2 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.
| Monthly information is presented by reference to our fiscal periods during our fourth quarter of fiscal 2019. |
| |
(2)
| On January 31, 2019, our board of directors approved a stock repurchase program of up to $500 million of our common shares on the open market or in privately negotiated transactions. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors. The repurchases are expected to be completed by January 2021. |
The following table provides information regarding oursummarizes purchases of shares of our common stock during the thirteen weeks ended February 2, 2020fourth quarter of 2021 related to our Employee Share Purchase Plan:Plan (ESPP):
|
| | | | | | | | | | | | | |
Period(1) | | Total Number of Shares Purchased(2) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
November 4, 2019 - December 1, 2019 | | 5,644 |
| | $ | 221.41 |
| | 5,644 |
| | 4,737,749 |
|
December 2, 2019 - January 5, 2020 | | 5,629 |
| | 227.93 |
| | 5,629 |
| | 4,732,120 |
|
January 6, 2020 - February 2, 2020 | | 5,474 |
| | 238.34 |
| | 5,474 |
| | 4,726,646 |
|
Total | | 16,747 |
| | | | 16,747 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period(1) | | Total Number of Shares Purchased(2) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
November 1, 2021 - November 28, 2021 | | 4,176 | | | $ | 459.22 | | | 4,176 | | | 4,603,434 | |
November 29, 2021 - January 2, 2022 | | 5,579 | | | 402.14 | | | 5,579 | | | 4,597,855 | |
January 3, 2022 - January 30, 2022 | | 6,203 | | | 335.68 | | | 6,203 | | | 4,591,652 | |
Total | | 15,958 | | | | | 15,958 | | | |
___________
| |
(1)(1)Monthly information is presented by reference to our fiscal periods during our fourth quarter of 2021. (2)The ESPP was approved by our board of directors and stockholders in September 2007. All shares purchased under the ESPP are purchased on the Nasdaq Global Select Market (or such other stock exchange as we may designate). Unless our board terminates the ESPP earlier, it will continue until all shares authorized for purchase have been purchased. The maximum number of shares authorized to be purchased under the ESPP was 6,000,000. | Monthly information is presented by reference to our fiscal periods during our fourth quarter of fiscal 2019. |
| |
(2)
| Our Employee Share Purchase Plan (ESPP) was approved by our board of directors and stockholders in September 2007. All shares purchased under the ESPP are purchased on the Nasdaq Global Select Market (or such other stock exchange as we may designate from time to time). Unless our board of directors terminates the ESPP earlier, the ESPP will continue until all shares authorized for purchase under the ESPP have been purchased. The maximum number of shares authorized to be purchased under the ESPP is 6,000,000. |
Excluded from this disclosure are shares repurchased to settle statutory employee tax withholding related to the vesting of stock-based compensation awards.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below is derived from our consolidated financial statements and should be read in conjunction with our audited consolidated financial statements and notes included in Item 8 of Part II of this report as well as "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".Not applicable.
|
| | | | | | | | | | | | | | | | | | | | |
|
| Fiscal Year Ended |
|
| February 2, 2020 | | February 3, 2019 | | January 28, 2018 | | January 29, 2017 | | January 31, 2016 |
|
| (In thousands, except per share data) |
Consolidated statement of operations and comprehensive income data: |
|
|
|
|
|
|
|
|
|
|
Net revenue |
| $ | 3,979,296 |
|
| $ | 3,288,319 |
| | $ | 2,649,181 |
| | $ | 2,344,392 |
| | $ | 2,060,523 |
|
Cost of goods sold |
| 1,755,910 |
|
| 1,472,032 |
| | 1,250,391 |
| | 1,144,775 |
| | 1,063,357 |
|
Gross profit |
| 2,223,386 |
|
| 1,816,287 |
| | 1,398,790 |
| | 1,199,617 |
| | 997,166 |
|
Selling, general and administrative expenses |
| 1,334,276 |
|
| 1,110,451 |
| | 904,264 |
| | 778,465 |
| | 628,090 |
|
Asset impairment and restructuring costs | | — |
| | — |
| | 38,525 |
| | — |
| | — |
|
Income from operations |
| 889,110 |
|
| 705,836 |
| | 456,001 |
| | 421,152 |
| | 369,076 |
|
Other income (expense), net |
| 8,283 |
|
| 9,414 |
| | 3,997 |
| | 1,577 |
| | (581 | ) |
Income before income tax expense |
| 897,393 |
|
| 715,250 |
| | 459,998 |
| | 422,729 |
| | 368,495 |
|
Income tax expense |
| 251,797 |
|
| 231,449 |
| | 201,336 |
| | 119,348 |
| | 102,448 |
|
Net income |
| $ | 645,596 |
|
| $ | 483,801 |
| | $ | 258,662 |
| | $ | 303,381 |
| | $ | 266,047 |
|
| | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustment | | (7,773 | ) |
| (73,885 | ) | | 58,577 |
| | 36,703 |
| | (64,796 | ) |
Comprehensive income | | $ | 637,823 |
|
| $ | 409,916 |
| | $ | 317,239 |
| | $ | 340,084 |
| | $ | 201,251 |
|
| | | | | | | | | | |
Basic earnings per share |
| $ | 4.95 |
| | $ | 3.63 |
| | $ | 1.90 |
| | $ | 2.21 |
| | $ | 1.90 |
|
Diluted earnings per share |
| $ | 4.93 |
| | $ | 3.61 |
| | $ | 1.90 |
| | $ | 2.21 |
| | $ | 1.89 |
|
Basic weighted-average number of shares outstanding |
| 130,393 |
|
| 133,413 |
| | 135,988 |
| | 137,086 |
| | 140,365 |
|
Diluted weighted-average number of shares outstanding |
| 130,955 |
|
| 133,971 |
| | 136,198 |
| | 137,302 |
| | 140,610 |
|
|
| | | | | | | | | | | | | | | | | | | | |
|
| As of |
|
| February 2, 2020 | | February 3, 2019 | | January 28, 2018 | | January 29, 2017 | | January 31, 2016 |
|
| (In thousands) |
Consolidated balance sheet data1: |
|
|
Cash and cash equivalents |
| $ | 1,093,505 |
|
| $ | 881,320 |
| | $ | 990,501 |
| | $ | 734,846 |
| | $ | 501,482 |
|
Inventories | | 518,513 |
| | 404,842 |
| | 329,562 |
| | 298,432 |
| | 284,009 |
|
Total assets |
| 3,281,354 |
|
| 2,084,711 |
| | 1,998,483 |
| | 1,657,541 |
| | 1,314,077 |
|
Total liabilities | | 1,329,136 |
| | 638,736 |
| | 401,523 |
| | 297,568 |
| | 286,595 |
|
Total stockholders' equity |
| 1,952,218 |
|
| 1,445,975 |
| | 1,596,960 |
| | 1,359,973 |
| | 1,027,482 |
|
__________
| |
(1)
| We adopted ASC 842 on February 4, 2019 using the modified retrospective approach with no restatement of comparative periods. See Note 2 to the audited consolidated financial statements included in Item 8 of Part II of this report for additional information. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our 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 2019 was a 52 week year and fiscal 2018 was a 53 week year. Net revenue includes results from the 53rd week, however, comparable sales are calculated on a one week shifted basis such that the 52 weeks ended February 2, 2020 are compared to the 52 weeks ended February 3, 2019 rather than January 27, 2019. The followingManagement's discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
We have omitted the Components of management's discussion and analysis of financial condition and results of operations and cash flows for fiscal 2017, and the comparisoninclude:
Our fiscal 2018 Annual Reportyear ends on Form 10-K filed with the SEC on March 27, 2019.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 and 2020 were each 52-week years.
This discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions included in the "Special Note Regarding Forward-Looking Statements." Our actual results and the timing of events may differ materially from those anticipated in these forward lookingforward-looking statements as a result of various factors, including those described in the "Item 1A. Risk Factors" section and elsewhere in this Annual Report on Form 10-K.
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
Our business momentum continued in fiscal 2019. Net revenue grew 21% and total comparable sales increased 17%. In addition, we expanded our operating margin 80 basis points to 22.3% and grew earnings per share 37%, or 28% excluding certain discrete tax items which were recognized in fiscal 2018.
Fueling our performance this year was strength across our product assortment, 18% square footage growth driven by new stores and our remodel program, and a robust e-commerce business. In addition, our local community events and educators continued to connect us with our guests in a truly unique manner.
- The Power of Three
We believe the first year ofIn 2021, we continued to execute against our Power of Three growth plan proved to be particularly successful. The strategic pillars of this plan are product innovation, omni-guest experience, and market expansion.
Product Innovation
Throughout fiscal 2019, response to our product offerings was strong as we continued to grow our core product categories, expand our merchandise range, and deliver new innovation through our Science of Feel development platform. Momentum continued in both our men's and women's pant category, and we continued to expand the important categories of bras and outerwear. In men's, oneplan. We have achieved some of our key growth areas,goals under this plan two years ahead of schedule. These include generating $6 billion in net revenue, increased 34%doubling our men's net revenue relative to fiscal 2018, and doubling our e-commerce net revenue relative to fiscal 2018 (which we achieved in 2019.2020). We also moved beyond test phasehave seen the trends that we believe have fueled our business over the last few years continue. These include the desire to live an active and healthy lifestyle, the desire to be part of a diverse and inclusive community, and the desire to achieve wellness, both physically and mentally.
We achieved these goals while strategically managing a number of challenges related to the COVID-19 environment, including stores closures, capacity constraints, and challenges across our supply chain including certain supplier factory closures, port slowdowns, and reduced air freight capacity.
Product Innovation
Our lens for product development and innovation continues to be what we refer to as the Science of Feel. In 2021, we continued to bring technical innovations to our guests including expanding our Yoga offering with the launch of our new assortment of selfcare personal-care products. We rolledInstill franchise, made from our SmoothCover fabric; we continued to build out our initial assortmenthigh support bra offerings with the launch of the Air Support bra, our most tested bra to 50 storesdate, which took five years to research and online.develop and is made from our Ultralu fabric; and for men we launched the versatile License to Train short, made from our High Impact Swift Pique fabric and further built out our On The Move offering with the Bowline bottom. We are also particularly proud of our multi-year collaboration with the Canadian Olympic Committee and Paralympic Committee. This collaboration allows us to showcase the lululemon brand and our technical expertise within apparel on the world stage; and we believe it is a compelling platform that we can leverage to continue to grow our brand presence both inside and outside of Canada.
Omni-GuestOmni Guest Experience
Performance was strong across bothWe continue to see benefits from our omni business model and in 2021, net revenue in our company-operated store channel increased 70% and direct to consumer channels in fiscal 2019, with comparable store sales increasing 9% and direct to consumer net revenue growing 35%, each based on a shifted calendar. In fiscal 2019 we began to engageour e-commerce business increased 22%. We engaged with our guests both in new ways. We began testing a new membership program, with four markets tested in fiscal 2019. We also openedreal life (where and began testingwhen it was safe to do so) and virtually. In our first two fully experiential stores in 2019, one in the Lincoln Park neighborhood of Chicago and the second at the Mall of America near Minneapolis. These stores were designed to offer dedicated studio space for sweat classes and meditation, locker rooms, healthy foods, and an elevated shopping experience.
In fiscal 2019digital business, we continued to host unique eventssee the benefits of the investments we have made over the last several years, while we continue to invest in our websites and mobile apps as we work to elevate the guest
experience. In 2021, we continued to make foundational investments which included expanding our accepted payment methods, improving our storytelling, making search more predictive, and making the checkout process more seamless. When looking at MIRROR, we continue to focus on strategies and initiatives which we believe will allow us to build our community and increase guest loyalty. These include setting up MIRROR shop-in-shops in approximately 200 stores in North America, including launching in Canada, and in our international markets. In additioncontinuing to our SeaWheeze half marathonenhance the offering with new classes and festival in Vancouver, we hosted 10K races in Toronto, Edmonton, and San Diego, our first in the United States. In Europe, we held Sweatlife festivals in London, Paris, and Berlin, and in Mainland China, we hosted our 4th annual Unroll China event. These festivals and events brought together guests, educators, ambassadors, and other members of the local community to engage in sweat classes, yoga, personal development, and meditation.
connected accessories.
Market Expansion
In fiscal 2019, weWe continued to expand our presence both in North America and in our international markets. During the year,2021, we opened 5153 net new company-operated stores, including 1931 stores in the PRC, seven stores in the rest of Asia Pacific, 10 stores in North America, 24 in Asia Pacific, and eight in Europe. We expanded into two new markets in Europe during the year, the Netherlands and Norway. We also launched local market e-commerce sites in Germany and France. In Asia, we opened our firstfive stores in Malaysia and launched a local e-commerce site in Japan.Europe.
We also expandedIn 2021, our seasonal store strategy in fiscal 2019 with approximately 80 seasonal stores in operation for some period of time during the year. These stores allowed us to better cater to our guests in select markets, particularly during the holidays, while also helping introduce new guests to our brand.
For fiscal 2019, our businessnet revenue in North America grew 20%, while total growth inincreased 40%. In our international markets, was 32%.we saw revenue growth of 53%, which keeps us on track with our goal to quadruple the business from 2018 levels by 2023.
Coronavirus (COVID-19)COVID-19 Update
The outbreak of the COVID-19 coronavirus has been declared a pandemic by the World Health Organization and continues to spread inimpact the United States, Canada,global economy and in many other countries globally. The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as mallscause disruption and lifestyle centers. Government authorities in certain markets in which we operate have also issued orders that require the closure of non-essential businesses and people to remain at home.
We have taken actions to close certain retail locations and to reduce operating hours, and we continue to monitor the situation and work closely with local authorities to prioritize the safety of our people and guests. In February 2020, we temporarily closed allvolatility. While most of our retail locations in Mainland China. All but one of thesewere open throughout 2021, certain locations have since reopened. In March 2020, wewere temporarily closed allbased on government and health authority guidance. We believe we will continue to experience differing levels of disruption and volatility, market by market. The pandemic has also impacted our retail locationsproduct manufacturers and our distribution and logistics providers. There has been disruption in North America, Europe, Malaysia, New Zealand,transportation and port congestion, an increase in freight costs, and we temporarily closedhave increased our distribution center in Sumner, WA. These locations currently remain closed.
There is significant uncertainty regarding the extent and durationuse of the impact that the COVID-19 coronavirus pandemic will have on the demand for our products and our supply chain.air freight. We expect our sales growth trendsthis disruption and increased costs to experience a meaningful deterioration from those achieved incontinue throughout fiscal 2019 and to experience a material adverse impact on our fiscal 2020 results. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.2022.
We remain confident in the long-term growth opportunities and our Power of Three growth plan and believe that we have sufficient cash and cash equivalents, and available capacity under our revolving credit facilities, to meet our liquidity needs. As of February 2, 2020, we had cash and cash equivalents of $1.1 billion and the capacity under our committed revolving credit facility was $398.2 million.
Financial Highlights
The summary below provides both GAAP and non-GAAP financial measures. The adjusted financial measures for fiscal 2018 exclude the amounts recognized in connection with U.S. tax reform and taxes on the repatriation of foreign earnings.compares 2021 to 2020:
For the fiscal year ended February 2, 2020, compared to the fiscal year ended February 3, 2019:
•Net revenue increased 21%42% to $4.0$6.3 billion. On a constant dollar basis, net revenue increased 22%40%.
Total comparable sales, which includes comparable store sales and direct•Company-operated stores net revenue increased 70% to $2.8 billion.
•Direct to consumer net revenue increased 17%. On22% to $2.8 billion, or increased 20% on a constant dollar basis, total comparable sales increased 18%.basis.
| |
– | Comparable store sales increased 9%, or increased 10% on a constant dollar basis. |
| |
– | Direct to consumer net revenue increased 35%, or increased 35% on a constant dollar basis. |
•Gross profit increased 22%46% to $2.2$3.6 billion.
•Gross margin increased 70170 basis points to 55.9%57.7%.
•Acquisition-related expenses of$41.4 million were recognized in 2021 compared to $29.8 million in 2020.
•Income from operations increased 26%63% to $889.1 million.$1.3 billion.
•Operating margin increased 80270 basis points to 22.3%21.3%.
•Income tax expense increased 9%56% to $251.8$358.5 million. Our effective tax rate for fiscal 20192021 was 28.1%26.9% compared to 32.4%28.1% for fiscal 2018. The adjusted effective tax rate was 28.0% for fiscal 2018.2020.
Diluted earnings per share were $4.93$7.49 for fiscal 20192021 compared to $3.61$4.50 in fiscal 2018. Adjusted2020. This includes $40.0 million and $26.7 million of after-tax costs related to the MIRROR acquisition in 2021 and 2020, respectively, which reduced diluted earnings per share were $3.84 for fiscal 2018.
Due to the 53rd weekby $0.30 and $0.20 in fiscal 2018, comparable sales are calculated on a one week shifted basis such that the 52 weeks ended February 2,2021 and 2020, are compared to the 52 weeks ended February 3, 2019 rather than January 27, 2019.respectively.
Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue total comparable sales, comparable store sales, and direct to consumer net revenue, and adjusted income tax expense, effective tax rates, and diluted earnings per share, and the most directly comparable measures calculated in accordance with GAAP.
General
Net revenue is comprisedTable of company-operated store sales, direct to consumer sales through www.lululemon.com, other country and region specific websites, and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, and other net revenue, which includes outlet sales, sales from temporary locations, sales to wholesale accounts, license and supply arrangement net revenue which consists of royalties as well as sales of our products to licensees, and warehouse sales.ContentsCost of goods sold includes the cost of purchased merchandise, including freight, duty, and nonrefundable taxes incurred in delivering the goods to our distribution centers. It also includes occupancy costs and depreciation expense for our company-operated store locations, all costs incurred in operating our distribution centers and production, design, distribution, and merchandise departments, hemming, shrink, and inventory provision expense. The primary drivers of the costs of individual products are the costs of raw materials and labor in the countries where we source our merchandise.
Selling, general and administrative expenses consist of all operating costs not otherwise included in cost of goods sold.
Income tax expense depends on the statutory tax rates in the countries where we sell our products and the proportion of taxable income earned in those jurisdictions. To the extent the relative proportion of taxable income in the jurisdictions fluctuates, or the tax legislation in the respective jurisdictions changes, so will our effective tax rate. We also anticipate that, in the future, we may start to sell our products through retail locations in countries in which we have not yet operated, in which case, we would become subject to taxation based on the foreign statutory rates in the countries where these sales take place and our effective tax rate could fluctuate accordingly. In addition, increases in our Canadian net assets may result in an increase to our effective tax rate due to Canadian withholding taxes that could be payable on future repatriations from our Canadian subsidiaries to the extent that they are not able to be made as a return of capital.
Results of Operations
The following tables summarizetable summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenue:indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (In thousands) | | (Percentage of revenue) |
Net revenue | | $ | 6,256,617 | | | $ | 4,401,879 | | | 100.0 | % | | 100.0 | % |
Cost of goods sold | | 2,648,052 | | | 1,937,888 | | | 42.3 | | | 44.0 | |
Gross profit | | 3,608,565 | | | 2,463,991 | | | 57.7 | | | 56.0 | |
Selling, general and administrative expenses | | 2,225,034 | | | 1,609,003 | | | 35.6 | | | 36.6 | |
Amortization of intangible assets | | 8,782 | | | 5,160 | | | 0.1 | | | 0.1 | |
Acquisition-related expenses | | 41,394 | | | 29,842 | | | 0.7 | | | 0.7 | |
Income from operations | | 1,333,355 | | | 819,986 | | | 21.3 | | | 18.6 | |
Other income (expense), net | | 514 | | | (636) | | | — | | | — | |
Income before income tax expense | | 1,333,869 | | | 819,350 | | | 21.3 | | | 18.6 | |
Income tax expense | | 358,547 | | | 230,437 | | | 5.7 | | | 5.2 | |
Net income | | $ | 975,322 | | | $ | 588,913 | | | 15.6 | % | | 13.4 | % |
|
| | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | February 2, 2020 | | February 3, 2019 | | February 2, 2020 | | February 3, 2019 |
| | (In thousands) | | (Percentages) |
Net revenue | | $ | 3,979,296 |
| | $ | 3,288,319 |
| | 100.0 | % | | 100.0 | % |
Cost of goods sold | | 1,755,910 |
| | 1,472,032 |
| | 44.1 |
| | 44.8 |
|
Gross profit | | 2,223,386 |
| | 1,816,287 |
| | 55.9 |
| | 55.2 |
|
Selling, general and administrative expenses | | 1,334,276 |
| | 1,110,451 |
| | 33.5 |
| | 33.8 |
|
Income from operations | | 889,110 |
| | 705,836 |
| | 22.3 |
| | 21.5 |
|
Other income (expense), net | | 8,283 |
| | 9,414 |
| | 0.2 |
| | 0.3 |
|
Income before income tax expense | | 897,393 |
| | 715,250 |
| | 22.6 |
| | 21.8 |
|
Income tax expense | | 251,797 |
| | 231,449 |
| | 6.3 |
| | 7.0 |
|
Net income | | $ | 645,596 |
| | $ | 483,801 |
| | 16.2 | % | | 14.7 | % |
Comparison of Fiscal 20192021 to Fiscal 20182020
Net Revenue
Net revenue increased $691.0 million,$1.9 billion, or 21%42%, to $4.0$6.3 billion in fiscal 20192021 from $3.3$4.4 billion in fiscal 2018.2020. On a constant dollar basis, assuming the average foreign currency exchange rates in fiscal 20192021 remained constant with the average foreign currency exchange rates in fiscal 2018,2020, net revenue increased $718.5 million,$1.8 billion, or 22%40%.
The increase in net revenue was primarily due to increased directcompany-operated store net revenue, which was the result of more extensive temporary store closures and COVID-19 operating restrictions that were in place during 2020. Direct to consumer net revenue and other net revenue generated by new company-operated stores, and an increase in comparable store sales.
Based on a shifted calendar, total comparable sales, which includes comparable store sales and direct to consumer, increased 17% in fiscal 2019 compared to fiscal 2018. Total comparable sales increased 18% on a constant dollar basis.also increased.
Net revenue on a segment basis for fiscal 20192021 and fiscal 20182020 is summarized below. The percentages are presented as a percentage of total net revenue.
| | | | Fiscal Years Ended February 2, 2020 and February 3, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2019 | | 2018 | | | 2021 | | 2020 | | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (Percentages) | | | (In thousands) | | (Percentage of revenue) | | (In thousands) | | (Percentage) |
Company-operated stores | | $ | 2,501,067 |
| | $ | 2,126,363 |
| | 62.9 | % | | 64.7 | % | Company-operated stores | | $ | 2,821,497 | | | $ | 1,658,807 | | | 45.1 | % | | 37.7 | % | | $ | 1,162,690 | | | 70.1 | % |
Direct to consumer | | 1,137,822 |
| | 858,856 |
| | 28.6 |
| | 26.1 |
| Direct to consumer | | 2,777,944 | | | 2,284,068 | | | 44.4 | | | 51.9 | | | 493,876 | | | 21.6 | |
Other | | 340,407 |
| | 303,100 |
| | 8.6 |
| | 9.2 |
| Other | | 657,176 | | | 459,004 | | | 10.5 | | | 10.4 | | | 198,172 | | | 43.2 | |
Net revenue | | $ | 3,979,296 |
| | $ | 3,288,319 |
| | 100.0 | % | | 100.0 | % | Net revenue | | $ | 6,256,617 | | | $ | 4,401,879 | | | 100.0 | % | | 100.0 | % | | $ | 1,854,738 | | | 42.1 | % |
Company-Operated Stores. Net revenue from our company-operated stores segment increased $374.7 million, or 18%, to $2.5 billion in fiscal 2019 from $2.1 billion in fiscal 2018. The following contributed to the increase in net revenue from our company-operated stores segment:segment was primarily due to most of our stores being open throughout 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020, and open with reduced operating hours and occupancy restrictions for the last two quarters of 2020 as a result of COVID-19.
Net revenue from company-operated storesDuring 2021, we opened or significantly expanded subsequent to February 3, 2019, and are therefore not included in comparable store sales, increased net revenue by $238.5 million. During fiscal 2019 we opened 5153 net new company-operated stores, including 2438 stores in Asia Pacific, 1910 stores in North America, and eightfive stores in Europe.
Based on a shifted calendar, a comparable store sales increase of 9% in fiscal 2019 compared to fiscal 2018. Comparable store sales increased 10% on a constant dollar basis. The increase in comparable store sales was primarily a result of increased store traffic and improved conversion rates.
We generated net revenue of $32.7 million in the 53rd week of fiscal 2018 from our company-operated stores segment.
Direct to Consumer. Net revenue from our direct to consumer segment increased $279.0 million to $1.1 billion in fiscal 2019 from $858.9 million in fiscal 2018. We generated net revenue of $20.3 million in the 53rd week of fiscal 2018 from our direct to consumer segment. Based on a shifted calendar, directDirect to consumer net revenue increased 35%22%, orand increased 35%20% on a constant dollar basis. The increase in net revenue from our direct to consumer segment was primarily the result of increased traffic on our e-commerce websites and improved conversion rates,higher dollar value per transaction, partially offset by a decrease in dollar value per transaction.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 2021.
Other. NetThe increase in other net revenue from our other segment increased $37.3 million, or 12%, to $340.4 million in fiscal 2019 from $303.1 million in fiscal 2018. This increase was primarily due to most of our outlet and pop up locations being open throughout 2021, while almost all were temporarily closed for a significant portion of the first two quarters of 2020, and open with reduced operating hours and occupancy restrictions for the last two quarters of 2020 as a result of anCOVID-19. The increase in net revenue from sales to wholesale accounts, and an increased numberour other retail locations was partially offset by a decrease in net revenue from MIRROR.
Gross Profit
Gross profit increased $407.1 million, or 22%, to $2.2 billion in fiscal 2019 from $1.8 billion in fiscal 2018. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (In thousands) | | (Percentage) |
Gross profit | | $ | 3,608,565 | | | $ | 2,463,991 | | | $ | 1,144,574 | | | 46.5 | % |
| | | | | | | | |
Gross margin | | 57.7 | % | | 56.0 | % | | 170 basis points |
Gross profit as a percentage of net revenue, or gross margin, increased 70 basis points, to 55.9% in fiscal 2019 from 55.2% in fiscal 2018. The increase in gross margin was primarily the result of an increase in product margin of 110 basis points, which was primarily due to lower product costs, of:
•a favorable mix of higher margin product, and lower markdowns.
This was partially offset by an increase in costs as a percentage of revenue related to our distribution centers and our product departments of 30 basis points, an increasedecrease in occupancy and depreciation costs as a percentage of net revenue of 10130 basis points, driven primarily by the increase in net revenue;
•a decrease in costs related to our distribution centers and an unfavorableproduct departments as a percentage of net revenue of 30 basis points, driven primarily by the increase in net revenue; and
•a favorable impact of foreign currency exchange rates of 1030 basis points.
20 basis points, primarily due to higher air freight costs as a result of global supply chain disruption, partially offset by lower markdowns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $223.8 million, or 20%, to $1.3 billion in fiscal 2019 from $1.1 billion in fiscal 2018. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (In thousands) | | (Percentage) |
Selling, general and administrative expenses | | $ | 2,225,034 | | | $ | 1,609,003 | | | $ | 616,031 | | | 38.3 | % |
| | | | | | | | |
Selling, general and administrative expenses as a percentage of net revenue | | 35.6 | % | | 36.6 | % | | (100) basis points |
The increase in selling, general and administrative expenses was primarily due to:
•an increase in costs related to our operating channels of $136.6$286.4 million, comprised of:
| |
– | an increase in employee costs of $64.7 million primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher incentive compensation expenses; |
| |
– | an increase in variable costs of $49.2 million primarily due to an increase in distribution costs, credit card fees, and packaging costs as a result of increased net revenue; and |
| |
– | an increase in other costs of $22.8 million primarily due to increases in digital marketing expenses, information technology costs, security, and other costs associated with our operating locations; |
–an increase in employee costs of $150.8 million primarily due to an increase in salaries and wages expense and incentive compensation expenses in our company-operated store and other retail locations, primarily due to the increased number of hours worked as a result of COVID-19 impacts in 2020, and increased wage rates in 2021, as well as performance and growth in our business;
–an increase in variable costs of $78.1 million primarily due to an increase in distribution costs related to the growth in our direct to consumer net revenue, and an increase in credit card fees as a result of increased net revenue;
–an increase in brand and community costs of $37.6 million primarily due to an increase in digital marketing expenses; and
–an increase in other costs of $19.9 million primarily due to an increase in depreciation, professional fees, and technology costs;
•an increase in head office costs of $84.3$287.7 million, comprised of:
| |
– | an increase in employee costs of $43.0 million primarily due to increased incentive and stock-based compensation expense and due to increased wages, primarily from additional employees to support the growth in our business; and |
| |
– | an increase in other costs of $41.3 million primarily due to increases in depreciation, information technology costs, professional fees, brand and community costs, and other head office costs; and |
–an increase of $163.9 million primarily due to increases in professional fees, brand and community costs, technology costs, and other head office costs; and
–an increase in employee costs of $123.8 million primarily due to increased salaries and wages expense, and incentive compensation, stock-based compensation expense, and employee benefit costs;
•a decrease in government payroll subsidies of $36.5 million as no government payroll subsidies were recognized in 2021; and
•an increase in net foreign exchange and derivative revaluation losses of $2.9$5.3 million. There were net foreign exchange
Amortization of Intangible Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (In thousands) | | (Percentage) |
Amortization of intangible assets | | $ | 8,782 | | | $ | 5,160 | | | $ | 3,622 | | | 70.2 | % |
The increase in the amortization of intangible assets was the result of the intangible assets recognized upon the acquisition of MIRROR during the second quarter of 2020.
Acquisition-Related Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (In thousands) | | (Percentage) |
Acquisition-related expenses | | $ | 41,394 | | | $ | 29,842 | | | $ | 11,552 | | | 38.7 | % |
In connection with our acquisition of MIRROR, we recognized acquisition-related compensation expenses of $38.4 million and derivative revaluation losses of $1.5$20.1 million in fiscal 2019 compared to net foreign exchange revaluation gains2021 and 2020, respectively. We also recognized transaction and integration related costs of $1.4$3.0 million and $10.5 million in fiscal 2018.2021 and 2020, respectively. Acquisition-related expenses in 2020 were partially offset by a $0.8 million gain that was recognized on our existing investment.
As a percentagePlease refer to Note 6. Acquisition included in Item 8 of net revenue, selling, generalPart II of this report for information on the nature and administrative expenses decreased 30 basis points, to 33.5% in fiscal 2019 from 33.8% in fiscal 2018.recognition of acquisition-related compensation expense.
Income from Operations
Income from operations increased $183.3 million, or 26%, to $889.1 million in fiscal 2019 from $705.8 million in fiscal 2018. Operating margin increased 80 basis points to 22.3% compared to 21.5% in fiscal 2018.
On a segment basis, we determine income from operations without taking into account our general corporate expenses.
Segmented income from operations before general corporate expenses for fiscal 2019 and fiscal 2018 is summarized below and is expressed in dollar amounts. The percentages are presented as a percentage of net revenue of the respective operating segments.below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (Percentage of net revenue of respective operating segment) | | (In thousands) | | (Percentage) |
Segmented income from operations: |
Company-operated stores | | $ | 727,735 | | | $ | 212,592 | | | 25.8 | % | | 12.8 | % | | $ | 515,143 | | | 242.3 | % |
Direct to consumer | | 1,216,496 | | | 1,029,102 | | | 43.8 | | | 45.1 | | | 187,394 | | | 18.2 | |
Other | | 77,283 | | | 10,502 | | | 11.8 | | | 2.3 | | | 66,781 | | | 635.9 | |
| | $ | 2,021,514 | | | $ | 1,252,196 | | | | | | | $ | 769,318 | | | 61.4 | % |
General corporate expenses | | 637,983 | | | 397,208 | | | | | | | 240,775 | | | 60.6 | |
Amortization of intangible assets | | 8,782 | | | 5,160 | | | | | | | 3,622 | | | 70.2 | |
Acquisition-related expenses | | 41,394 | | | 29,842 | | | | | | | 11,552 | | | 38.7 | |
Income from operations | | $ | 1,333,355 | | | $ | 819,986 | | | | | | | $ | 513,369 | | | 62.6 | % |
Operating margin | | 21.3 | % | | 18.6 | % | | | | | | 270 basis points |
|
| | | | | | | | | | | | | | |
| | Fiscal Years Ended February 2, 2020 and February 3, 2019 |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) | | (Percentages) |
Segmented income from operations: | | | | | | | | |
Company-operated stores | | $ | 689,339 |
| | $ | 575,536 |
| | 27.6 | % | | 27.1 | % |
Direct to consumer | | 482,368 |
| | 354,107 |
| | 42.4 |
| | 41.2 |
|
Other | | 72,559 |
| | 62,558 |
| | 21.3 |
| | 20.6 |
|
| | 1,244,266 |
| | 992,201 |
| | | | |
General corporate expenses | | 355,156 |
| | 286,365 |
| | | | |
Income from operations | | $ | 889,110 |
| | $ | 705,836 |
| | | | |
Company-Operated Stores. IncomeThe increase in income from operations from our company-operated stores segment increased $113.8 million, or 20%, to $689.3 million for fiscal 2019 from $575.5 million for fiscal 2018. The increase was primarily the result of increased gross profit of $199.5$712.8 million, which was primarily due todriven by increased net revenue and higher gross margin. ThisThe increase in gross margin was primarily due to leverage on fixed costs. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to increasedhigher employee and operating costs. Employee costs increased storeprimarily due to the increased number of hours worked as a result of COVID-19 impacts in 2020, as well as increased wage rates in 2021, and performance and growth in our business. Store operating expenses including highercosts increased, primarily due to increases in credit card fees, distributionpackaging costs and packagingdistribution costs as a result of higher net revenue, and due to increased security, repairsgovernment payroll subsidies during 2020 that partially offset selling, general and maintenance costs, and information technology costs.administrative expenses. Income from operations as a percentage of company-operated stores net revenue increased, by 50 basis points, primarily due to higher gross margin and leverage on selling, general and administrative expenses and an increase in gross margin.expenses.
Direct to Consumer. IncomeThe increase in income from operations from our direct to consumer segment increased $128.3 million, or 36%, to $482.4 million in fiscal 2019 from $354.1 million in fiscal 2018. The increase was primarily the result of increased gross profit of $194.0$311.2 million, whichdriven by increased net revenue, partially offset by lower gross margin. The
decrease in gross margin was primarily due to increased air freight and distribution center costs relative to net revenue and higherrevenue. The increase in gross margin. Thisprofit was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs and credit card fees and packaging costs as a result of higher net revenue, as well as higher digital marketing expenses, information technologydepreciation, employee costs and employeetechnology costs. Income from operations as a percentage of direct to consumer net revenue has increased by 120 basis points,decreased primarily due to an increasea decrease in gross margin partially offset byand deleverage on selling, general and administrative expenses.
Other. OtherThe increase in income from operations increased $10.0 million, or 16%, to $72.6 million in fiscal 2019 from $62.6 million in fiscal 2018. The increase was primarily the result of increased gross profit of $13.6$120.6 million, whichdriven by increased net revenue and higher gross margin. The increase in gross margin was primarily due to increased net revenue.higher product margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased employee costs, increased operatingdriven by higher overall salaries and wages expense, incentive compensation, MIRROR marketing expenses including higher credit card fees and higher distribution costs as a result of higher net revenue, and due to higher repairs and maintenance costs and information technology costs.professional fees. Income from operations as a percentage of other net revenue increased 70 basis points, primarily due to leverage on selling, general and administrative expenses partially offset byand a decrease inhigher gross margin.
General Corporate Expenses. GeneralThe increase in general corporate expenses increased $68.8 million, or 24%, to $355.2 million in fiscal 2019 from $286.4 million in fiscal 2018. This increase was primarily due tothe result of increases in head office employee costs depreciation,primarily from the growth in our business, as well as increased professional fees, brand and community costs, information technology costs, professional fees, and ansupplies. An increase in net foreign exchange and derivative losses of $2.9 million.$5.3 million also contributed to the increase in general corporate expense. We expect general corporate expenses to continue to increase in future years as we grow our overall business and require increased efforts at our head office to support our company-operated stores, direct to consumer and other segments.operations.
Other Income (Expense), Net
There was net | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (In thousands) | | (Percentage) |
Other income (expense), net | | $ | 514 | | | $ | (636) | | | $ | 1,150 | | | (180.8) | % |
The increase in other income, of $8.3 million in fiscal 2019 compared to $9.4 million in fiscal 2018. The decreasenet was primarily due to a decrease in net interest income, primarily from lower cash balancesexpenses related to our credit facilities, including for the 364-day credit facility that was in place during the majority of fiscal 2019 compared to fiscal 2018. The decrease in net other income2020. This was partially offset by a decrease in interest expense,income primarily the result of borrowings on our North American revolving credit facility during fiscal 2018.due to lower interest rates. We did not have any borrowings on our revolving credit facilities during fiscal 2019.2021 or 2020.
Income Tax Expense
Income tax expense increased $20.3 million, or 9%, to $251.8 million in fiscal 2019 from $231.4 million in fiscal 2018. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (In thousands) | | (Percentage) |
Income tax expense | | $ | 358,547 | | | $ | 230,437 | | | $ | 128,110 | | | 55.6 | % |
| | | | | | | | |
Effective tax rate | | 26.9 | % | | 28.1 | % | | (120) basis points |
U.S. tax reform was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. We completed the accounting for the income tax effects of U.S. tax reform during fiscal 2018. This resulted in the recognition of an additional tax expense of $7.5 million related to the mandatory one-time transition tax on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries.
In fiscal 2018, we also completed our assessment of the impact that U.S. tax reform has upon repatriation taxes, our reinvestment plans, and the most efficient means of deploying our capital resources globally. We concluded that the net investment in a Canadian subsidiary in excess of the amounts necessary to sustain our business operations would no longer be indefinitely reinvested and $778.9 million was repatriated from that subsidiary. This resulted in the recognition of a tax expense of $23.7 million in fiscal 2018.
Further information on the adjustments recognized in fiscal 2018 is outlined in Note 15 to the audited consolidated financial statements included in Item 8 of Part II of this report.
Our effective tax rate for fiscal 2019 was 28.1% compared to 32.4% for fiscal 2018. The effective tax rate excluding the above tax adjustments related to U.S. tax reform was 28.0% for fiscal 2018. The increasedecrease in the effective tax rate compared to our adjusted effective tax rate in the prior year was primarily due to accruals for repatriation taxes on unremitted earningsa net increase in tax deductions related to stock-based compensation, and true-upsadjustments upon filing of certain income tax returns. This wasreturns, partially offset by a reductionnon-deductible expenses in international jurisdictions. Certain non-deductible stock-based compensation expense.expenses related to the MIRROR acquisition increased the effective tax rate by 70 basis points in 2021 compared to 60 basis points in 2020.
Net Income
Net income increased $161.8 million, or 33%, to $645.6 million in fiscal 2019 from $483.8 million in fiscal 2018. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | (In thousands) | | (Percentage) |
Net income | | $ | 975,322 | | | $ | 588,913 | | | $ | 386,409 | | | 65.6 | % |
The increase in net income in fiscal 20192021 was primarily due to an increase in gross profit of $407.1$1.1 billion, an increase in other income (expense), net of $1.2 million partially offset by an increase in selling, general and administrative expenses of $223.8$616.0 million, an increase in income tax expense of $20.3$128.1 million, an increase in acquisition-related expenses of $11.6 million, and a decreasean increase in other income (expense), netamortization of $1.1intangible assets of $3.6 million.
Comparable Store Sales and Total Comparable Sales
We separately trackuse comparable store sales whichto assess the performance of our existing stores as it allows us to monitor the performance of our business without the impact of recently opened or expanded stores. We use total comparable sales to evaluate the performance of our business from an omni-channel perspective. We believe investors would similarly find these metrics useful in assessing the performance of our business. However, as the temporary store closures from COVID-19
resulted in a significant number of stores being removed from our comparable store calculations during the first two quarters of 2020, we believe total comparable sales and comparable store sales on a full year basis are not currently representative of the underlying trends of our business. We do not believe these full year 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 or 2021.
Comparable store sales reflect net revenue from company-operated stores that have been open, or open after being significantly expanded, for at least 12 full fiscal months. Net revenue from a store is included in comparable store sales beginning with the first fiscal month for which the store has a full fiscal month of sales in the prior year. Comparable store sales exclude sales from new stores that have not been open for at least 12 full fiscal months, from stores which have not been in their significantly expanded space for at least 12 full fiscal months, and from stores which have been temporarily relocated for renovations or temporarily closed for over 30 days.closed. Comparable store sales also exclude sales from direct to consumer outlets, temporary locations, wholesale accounts, through license and supply arrangements, warehouse sales, andour other operations, as well as sales from company-operated stores that we have closed.
We use comparable store sales to assess the performance of our existing stores. It allows us to monitor the performance of our business without the impact of recently opened or expanded stores. We believe that investors would similarly find this metric useful in assessing the performance of our business.
Total comparable sales combines comparable store sales and direct to consumer sales. We are evolving towards an omni-channel approach to support the shopping behavior of our guests. This involves country and region specific websites, mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, social media, product notification emails, and online order fulfillment through stores. Total comparable sales is an increasingly important metric to us as it allows us to evaluate the performance of our business from an omni-channel perspective. We therefore believe that reporting total comparable sales with comparable store sales and direct to consumer sales combined provides a relevant performance metric to investors.
Various factors affect comparable sales, including:
the location of new stores relative to existing stores;
consumer preferences, buying trends, foot traffic in the malls in which our stores are located, and overall economic trends;
our ability to anticipate and respond effectively to customer preferences for technical athletic apparel;
competition;
changes in our merchandise mix;
pricing;
the timing of our releases of new merchandise and promotional events;
the effectiveness of our marketing efforts;
the design and ease of use of our websites and mobile apps;
the level of customer service that we provide in our stores and on our websites and mobile apps;
our ability to source and distribute products efficiently; and
the number of stores we open, close (including for temporary renovations), and expand in any period.net revenue.
In fiscal years with 53 weeks, the 53rd week of net revenue is excluded from the calculation of comparable sales. In the year following a 53 week year, the prior year period is shifted by one week to compare similar calendar weeks.
Opening new stores and expanding existing stores is an important part of our growth strategy. Accordingly, total comparable sales is just one way of assessing the success of our growth strategy insofar as comparable sales do not reflect the performance of stores opened, or significantly expanded, within the last 12 full fiscal months. The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.
Non-GAAP Financial Measures
Constant dollar changes in net revenue total comparable sales, comparable store sales, and direct to consumer net revenue and the adjusted financial results 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 net revenue, total comparable sales, comparable store sales, and directour results to consumer net revenue because we use these measures tohelp investors understand the underlying growth rate of net revenue excluding the impact of changes in foreign currency exchange rates. We believe that disclosing
these measures on a constant dollar basis is useful to investors because it enables them to understand the level of growth of our business.
Adjusted income tax expense, effective tax rates, and diluted earnings per share exclude the amounts recognized in connection with U.S. tax reform and taxes on repatriation of foreign earnings. We believe these adjusted financial measures are useful to investors in evaluating the trend in our operating performance as the adjustments do not directly relate to our ongoing business operations. Furthermore, we do not believe the adjustments are reflective of our expectations of our future operating performance and believe these non-GAAP measures are useful to investors because of their comparability to our historical information.
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.
| | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | Net Revenue | | Direct to Consumer Net Revenue |
| | (In thousands) | | (Percentages) | | (Percentages) |
Change | | $ | 1,854,738 | | | 42 | % | | 22 | % |
Adjustments due to foreign currency exchange rate changes | | (95,494) | | | (2) | | | (2) | |
Change in constant dollars | | $ | 1,759,244 | | | 40 | % | | 20 | % |
|
| | | | | | | |
| | Fiscal Year Ended February 2, 2020 |
| | (In thousands) | | (Percentages) |
Change | | $ | 690,977 |
| | 21 | % |
Adjustments due to foreign exchange rate changes | | 27,487 |
| | 1 |
|
Change in constant dollars | | $ | 718,464 |
| | 22 | % |
Constant dollar changes in total comparable sales, comparable store sales, and direct to consumer net revenue
Due to the 53rd week in fiscal 2018, the below changes in total comparable sales, comparable store sales, and direct to consumer net revenue are calculated on a one week shifted basis such that the 52 weeks ended February 2, 2020 are compared to the 52 weeks ended February 3, 2019 rather than January 27, 2019.
|
| | | | | | | | | |
| | Fiscal Year Ended February 2, 2020 |
| | Total Comparable Sales1,2 | | Comparable Store Sales2 | | Direct to Consumer Net Revenue |
Change | | 17 | % | | 9 | % | | 35 | % |
Adjustments due to foreign exchange rate changes | | 1 |
| | 1 |
| | — |
|
Change in constant dollars | | 18 | % | | 10 | % | | 35 | % |
__________
| |
(1)
| Total comparable sales includes comparable store sales and direct to consumer sales. |
| |
(2)
| Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 full fiscal months, or open for at least 12 full fiscal months after being significantly expanded. |
Adjusted financial measures
The following tables reconcile adjusted financial measures with the most directly comparable measures calculated in accordance with GAAP. The adjustments relate to the amounts recognized in connection with U.S. tax reform and taxes on repatriation of foreign earnings. Please refer to Note 15 to the audited consolidated financial statements included in Item 8 of Part II of this report for further information on these adjustments.
|
| | | | | | | | | | | | | | | | |
| | Fiscal Year Ended February 3, 2019 |
| | GAAP Amounts |
| Adjustments |
| Adjusted Amounts (Non-GAAP) |
| |
| Tax on Repatriation of Foreign Earnings |
| U.S. Tax Reform |
|
| | (In thousands, except per share amounts) |
Income tax expense | | $ | 231,449 |
|
| $ | (23,714 | ) |
| $ | (7,464 | ) |
| $ | 200,271 |
|
Effective tax rate | | 32.4 | % |
| (3.3 | )% |
| (1.1 | )% |
| 28.0 | % |
Diluted earnings per share | | $ | 3.61 |
|
| $ | 0.18 |
|
| $ | 0.05 |
|
| $ | 3.84 |
|
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 facilities.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.
The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated:
| | | | Fiscal Year Ended | | | | | | | | | | | | | | | | | |
| | February 2, 2020 | | February 3, 2019 | | | 2021 | | 2020 | | Year over year change |
| | (In thousands) | | | (In thousands) |
Total cash provided by (used in): | | | | | Total cash provided by (used in): | | |
Operating activities | | $ | 669,316 |
| | $ | 742,779 |
| Operating activities | | $ | 1,389,108 | | | $ | 803,336 | | | $ | 585,772 | |
Investing activities | | (278,408 | ) | | (242,794 | ) | Investing activities | | (427,891) | | | (695,532) | | | 267,641 | |
Financing activities | | (177,173 | ) | | (590,214 | ) | Financing activities | | (844,987) | | | (80,788) | | | (764,199) | |
Effect of exchange rate changes on cash | | (1,550 | ) | | (18,952 | ) | |
Increase (decrease) in cash and cash equivalents | | $ | 212,185 |
| | $ | (109,181 | ) | |
Effect of foreign currency exchange rate changes on cash and cash equivalents | | Effect of foreign currency exchange rate changes on cash and cash equivalents | | (6,876) | | | 29,996 | | | (36,872) | |
Increase in cash and cash equivalents | | Increase in cash and cash equivalents | | $ | 109,354 | | | $ | 57,012 | | | $ | 52,342 | |
We believe that our cash and cash equivalent balances, cash generated from operations, and borrowings available to us under our committed revolving credit facilitiesfacility 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 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.
We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties. As of February 2, 2020,January 30, 2022, letters of credit and letters of guarantee totaling $1.8$4.4 million had been issued.issued, including $3.0 million under our committed revolving credit facility.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of significant judgment. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements.
We have not recognized U.S. state income taxes and foreign withholding taxes on the net investment in our subsidiaries which we have determined to be indefinitely reinvested. This determination is based on the cash flow projections and
operational and fiscal objectives of each of our foreign subsidiaries. Such estimates are inherently imprecise since many assumptions utilized in the projections are subject to revision in the future.
For the portion of our net investment in our Canadian subsidiaries that are not indefinitely reinvested, we have recorded a deferred tax liability for the taxes which would be due upon repatriation. For distributions made by our Canadian subsidiaries, the amount of tax payable is partially dependent on how the repatriation transactions are made. The deferred tax liability has been recorded on the basis that we would choose to make the repatriation transactions in the most tax efficient manner. Specifically, to the extent that the Canadian subsidiaries have sufficient paid-up-capital, any such distributions would be characterized for Canadian tax purposesstructured as a return of capital, rather than as a dividend, and would not be subject to Canadian withholding tax.
We currently generate a significant portion of our net revenue and incur a significant portion of our expenses in Canada. We also hold a significant portion of our net assets in Canada. The reporting currency for our consolidated financial statements is the U.S. dollar. A strengtheningweakening of the U.S. dollar against the Canadian dollar results in:
A 10% appreciation in the relative value of the U.S. dollar against the Canadian dollar compared to the foreign currency exchange rates in effect for fiscal 20192021 would have resulted in lower income from operations of approximately $4.6$16.2 million in fiscal 2019.2021. This assumes a consistent 10% appreciation in the U.S. dollar against the Canadian dollar throughoutover the fiscal year. The timing of changes in the relative value of the U.S. dollar combined with the seasonal nature of our business, can affect the magnitude of the impact that fluctuations in foreign currency exchange rates have on our income from operations.
Our cash and cash equivalent balances are held in the form of cash on hand, bank balances, and short-term deposits and treasury bills with original maturities of three months or less, and in money market funds. We do not believe these balances are subject to material interest rate risk.
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has hadDuring 2021 our product margin was impacted by higher air freight costs compared to 2020 as a material impact on our financial positionresult of global supply chain disruption. Sustained air freight cost increases or results of operations to date, a high rate of inflationother inflationary pressures in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenue if the selling prices of our products do not increase with these increased costs.
The U.S. tax reformreforms enacted onin December 22, 2017 introduced significant changes to the U.S. income tax laws, including reduction in the U.S. federal income tax rate from 35% to 21%, a shift to a territorial tax system which changed how foreign earnings are subject to U.S. tax, and the imposition of a mandatory one-time transition tax on the accumulated undistributed earnings of foreign subsidiaries.
No deferred income tax liabilities have been recognized on any of the undistributed earnings of the Company's other foreign subsidiaries as these earnings are permanently reinvested outside of the United States. Excluding its Canadian subsidiaries, cumulative undistributed earnings of the Company's foreign subsidiaries as of February 2, 2020January 30, 2022 were $52.1$168.8 million.