NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of operations
lululemon athletica inc., a Delaware corporation, ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of healthy lifestyle inspired athletic apparel and accessories, which are sold through a chain of company-operated stores, direct to consumer through e-commerce, outlets, sales from temporary locations, sales to wholesale accounts, license and supply arrangements, and warehouse sales. The Company operates stores in the United States, Canada, the People's Republic of China ("PRC"), Australia, the United Kingdom, Germany, New Zealand, South Korea, Japan, Singapore, France, Malaysia, Sweden, Ireland, the Netherlands, Norway, and Switzerland. There were 521, 491, and 440 company-operated stores in operation as of January 31, 2021, February 2, 2020, and February 3, 2019, respectively.
On July 7, 2020, the Company acquired Curiouser Products Inc., dba MIRROR, ("MIRROR") which has been consolidated from the date of acquisition. MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions. Please refer to Note 6. Acquisition for further information.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020 and it has caused governments and public health officials to impose restrictions and to recommend precautions to mitigate the spread of the virus.
In February 2020, the Company temporarily closed all of its retail locations in Mainland China, and in March 2020, the Company temporarily closed all of its retail locations in North America, Europe, and certain countries in Asia Pacific. The stores in Mainland China reopened during the first quarter of fiscal 2020, and stores in other markets began reopening in accordance with local government and public health authority guidelines during the second quarter of fiscal 2020. Almost all of the Company's retail locations were open during the third quarter of fiscal 2020, and while most retail locations have remained open, certain locations have temporarily closed based on government and health authority guidance in those markets.
The Company's distribution centers and most of its open retail locations are operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels.
In response to the COVID-19 pandemic, various government programs have been announced which provide financial relief for affected businesses. The most significant relief measures which the Company qualified for are the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in the United States, and the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. During fiscal 2020 the Company recognized payroll subsidies totaling $37.1 million under these wage subsidy programs and similar plans in other jurisdictions. These subsidies were recorded as a reduction in the associated wage costs which the Company incurred, and were recognized in selling, general and administrative expenses.
The Financial Accounting Standards Board ("FASB") issued guidance in April 2020 in relation to accounting for lease concessions made in connection with the effects of COVID-19. In accordance with this guidance, the Company has elected to treat COVID-19-related lease concessions as variable lease payments. The Company is actively negotiating commercially reasonable lease concessions. Lease concessions of $9.1 million were recognized during fiscal 2020.
Temporary closures as a result of COVID-19 and associated reduction in operating income during the first two quarters of fiscal 2020 were considered to be an indicator of impairment and the Company performed an assessment of recoverability for the long-lived assets and right-of-use assets associated with closed retail locations. In the first quarter of fiscal 2020, the Company recognized an insignificant impairment charge as a result of this analysis.
Revenue is presented net of an allowance for expected returns. The increase in the sales return allowance reflects the higher proportion of direct to consumer net revenue, and the longer period of time taken for returns to be made as a result of restricted capacity at retail locations.
The COVID-19 pandemic has materially impacted the Company's operations. The extent to which COVID-19 continues to impact the Company's operations, and in turn, its operating results and financial position will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. Continued proliferation of the virus, or resurgence, may result in further or prolonged closures of the Company's retail locations and distribution centers, reduce operating hours, interrupt the Company's supply chain, cause changes in guest behavior, and reduce discretionary spending. Such factors could result in the impairment of long-lived assets and right-of-use assets and the need for an increased provision against the carrying value of the Company's inventories.
Basis of presentation
The consolidated financial statements have been presented in U.S. dollars and are prepared in accordance with United States generally accepted accounting principles ("GAAP").
The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2020 and fiscal 2019 were each 52-week years. Fiscal 2018 was a 53-week year. Fiscal 2020, 2019, and 2018 ended on January 31, 2021, February 2, 2020, and February 3, 2019, respectively, and are referred to as "2020," "2019," and "2018," respectively.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of lululemon athletica inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, bank balances, and short-term deposits with original maturities of three months or less. The Company has not experienced any losses related to these balances, and management believes the Company's credit risk to be minimal.
Accounts receivable
Accounts receivable primarily arise out of duty receivables, sales to wholesale accounts, and license and supply arrangements. The allowance for doubtful accounts represents management's best estimate of probable credit losses in accounts receivable. Receivables are written off against the allowance when management believes that the amount receivable will not be recovered. As of January 31, 2021, February 2, 2020, and February 3, 2019, the Company recorded an insignificant allowance for doubtful accounts.
Inventories
Inventories, consisting of finished goods, inventories in transit, and raw materials, are stated at the lower of cost and net realizable value. Cost is determined using weighted-average costs, and includes all costs incurred to deliver inventory to the Company's distribution centers including freight, non-refundable taxes, duty, and other landing costs.
The Company periodically reviews its inventories and makes a provision as necessary to appropriately value goods that are obsolete, have quality issues, or are damaged. The amount of the provision is equal to the difference between the cost of the inventory and its net realizable value based upon assumptions about product quality, damages, future demand, selling prices, and market conditions. If changes in market conditions result in reductions in the estimated net realizable value of its inventory below its previous estimate, the Company would increase its reserve in the period in which it made such a determination.
In addition, the Company provides for inventory shrinkage based on historical trends from actual physical inventory counts. Inventory shrinkage estimates are made to reduce the inventory value for lost or stolen items. The Company performs physical inventory counts and cycle counts throughout the year and adjusts the shrink reserve accordingly.
Business combinations
The purchase price of an acquisition is measured as the aggregate of the fair value of the consideration transferred including the acquisition-date fair value of the Company's previously held equity interests. The purchase price is allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess recorded as goodwill. These fair value determinations require judgment and may involve the use of significant estimates and assumptions. The purchase price allocation may be provisional during a measurement period of up to one year to provide reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. Any such measurement period adjustments are recognized in the period in which the adjustment amount is determined. Transaction costs associated with the acquisition are expensed as incurred.
Goodwill
Goodwill represents the excess of the aggregate of the consideration transferred, the fair value of any non-controlling interest in the acquiree, and the acquisition-date fair value of the Company's previously held equity interest over the net assets acquired and liabilities assumed. Goodwill is allocated to the reporting unit which is expected to receive the benefit from the synergies of the combination.
Goodwill is tested annually for impairment or more frequently when an event or circumstance indicates that goodwill might be impaired. Generally, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If factors indicate that this is the case, the Company then estimates the fair value of the related reporting unit. If the fair value is less than the carrying value, the goodwill of the reporting unit is determined to be impaired and the Company will record an impairment equal to the excess of the carrying value over its fair value.
Intangible assets
Acquired finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, and are reviewed for impairment when events or circumstances indicate that the asset group to which the intangible assets belong might be impaired. The Company revises the estimated remaining useful life of these assets when events or changes in circumstances warrant a revision. If the Company revises the useful life, the unamortized balance is amortized over the remaining useful life on a prospective basis.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation. Direct internal and external costs related to software used for internal purposes which are incurred during the application development stage or for upgrades that add functionality are capitalized. All other costs related to internal use software are expensed as incurred.
Depreciation commences when an asset is ready for its intended use. Buildings are depreciated on a straight-line basis over the expected useful life of the asset, which is individually assessed, and estimated to be up to 20 years. Leasehold improvements are depreciated on a straight-line basis over the lesser of the length of the lease and the estimated useful life of the improvement, to a maximum of 10 years for stores and 15 years for corporate offices and distribution centers. All other property and equipment are depreciated using the declining balance method as follows:
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|
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|
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Furniture and fixtures
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20%
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Computer hardware and software
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20% - 50%
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Equipment and vehicles
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30%
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Cloud Computing Arrangements
Costs incurred to implement cloud computing service arrangements are initially deferred, and recognized as other non-current assets. Implementation costs are subsequently amortized over the expected term of the related cloud service. The carrying value of cloud computing implementation costs are tested for impairment when an event or circumstance indicates that the asset might be impaired. Changes in cloud computing arrangement implementation costs are classified within operating activities in the consolidated statements of cash flows.
Impairment of long-lived assets
Long-lived assets, including intangible assets with finite lives, held for use are evaluated for impairment when the occurrence of events or a change in circumstances indicates that the carrying value of the assets may not be recoverable as measured by comparing their carrying value to the estimated undiscounted future cash flows generated by their use and eventual disposition. Impaired assets are recorded at fair value, determined principally by discounting the future cash flows expected from their use and eventual disposition. Reductions in asset values resulting from impairment valuations are recognized in income in the period that the impairment is determined.
Leased property and equipment
At lease commencement, which is generally when the Company takes possession of the asset, the Company records a lease liability and corresponding right-of-use asset. Lease liabilities represent the present value of minimum lease payments over the expected lease term, which includes options to extend or terminate the lease when it is reasonably certain those options will be exercised. The present value of the lease liability is determined using the Company's incremental collateralized borrowing rate at the lease commencement.
Minimum lease payments include base rent, fixed escalation of rental payments, and rental payments that are adjusted periodically depending on a rate or index. In determining minimum lease payments, the Company does not separate non-lease components for real estate leases. Non-lease components are generally services that the lessor performs for the Company associated with the leased asset, such as common area maintenance.
Right-of-use assets represent the right to control the use of the leased asset during the lease and are initially recognized in an amount equal to the lease liability. In addition, prepaid rent, initial direct costs, and adjustments for lease incentives are components of the right-of-use asset. Over the lease term the lease expense is amortized on a straight-line basis beginning on the lease commencement date. Right-of-use assets are assessed for impairment as part of the impairment of long-lived assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
Variable lease payments, including contingent rental payments based on sales volume, are recognized when the achievement of the specific target is probable. A right-of-use asset and lease liability are not recognized for leases with an initial term of 12 months or less, and the lease expense is recognized on a straight-line basis over the lease term.
The Company recognizes a liability for the fair value of asset retirement obligations ("AROs") when such obligations are incurred. The Company's AROs are primarily associated with leasehold improvements which, at the end of a lease, the Company is contractually obligated to remove in order to comply with the lease agreement. At the inception of a lease with such conditions, the Company records an ARO liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. The liability is estimated based on a number of assumptions requiring management's judgment, including store closing costs, cost inflation rates and discount rates, and is accreted to its projected future value over time. The capitalized asset is depreciated using the convention for depreciation of leasehold improvement assets. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement costs incurred is recognized as an operating gain or loss in the consolidated statements of operations.
The Company recognizes a liability for a cost associated with a lease exit or disposal activity when such obligation is incurred. A lease exit or disposal liability is measured initially at its fair value in the period in which the liability is incurred. The Company estimates fair value at the cease-use date of its operating leases as the remaining lease rentals, reduced by estimated sublease rentals that could be reasonably obtained for the property, even where the Company does not intend to enter into a sublease. Estimating the cost of certain lease exit costs involves subjective assumptions, including the time it would take to sublease the leased location and the related potential sublease income. The estimated accruals for these costs could be significantly affected if future experience differs from the assumptions used in the initial estimate.
Revenue recognition
Net revenue is comprised of company-operated store net revenue, direct to consumer net revenue through websites and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via the Company's distribution centers, and other net revenue, which includes revenue from MIRROR, outlets, temporary locations, sales to wholesale accounts, warehouse sales, and license and supply arrangement net revenue, which consists of royalties as well as sales of the Company's products to licensees. All revenue is reported net of markdowns, discounts, sales taxes collected from customers on behalf of taxing authorities, and returns.
MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions. Certain in-home fitness contracts contain multiple performance obligations, including hardware and a subscription service commitment. For customer contracts that contain multiple performance obligations the Company accounts for individual performance obligations if they are distinct. The transaction price, net of discounts, is allocated to each performance obligation based on its standalone selling price.
Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the Company's customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the product. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Revenue from company-operated stores and other retail locations is recognized at the point of sale. Direct to consumer revenue, sales to wholesale accounts and in-home fitness hardware sales are recognized
upon receipt by the customer. In certain arrangements the Company receives payment before the customer receives the promised good. These payments are initially recorded as deferred revenue, and recognized as revenue in the period when control is transferred to the customer.
Revenue is presented net of an allowance for estimated returns. The Company's liability for sales return refunds is recognized within other current liabilities, and an asset for the value of inventory which is expected to be returned is recognized within other prepaid expenses and other current assets on the consolidated balance sheets.
Shipping fees billed to customers are recorded as revenue, and shipping costs are recognized within selling, general and administrative expenses in the same period the related revenue is recognized.
Proceeds from the sale of gift cards are initially deferred and recognized within unredeemed gift card liability on the consolidated balance sheets, and are recognized as revenue when tendered for payment. While the Company will continue to honor all gift cards presented for payment, to the extent management determines there is no requirement to remit unused card balances to government agencies under unclaimed property laws, the portion of card balances not expected to be redeemed are recognized in net revenue in proportion to the gift cards which have been redeemed, under the redemption recognition method. For 2020, 2019, and 2018, net revenue recognized on unredeemed gift card balances was $13.7 million, $11.9 million, and $6.9 million, respectively.
Cost of goods sold
Cost of goods sold includes:
•the cost of purchased merchandise, which includes acquisition and production costs including raw material and labor, as applicable;
•the cost incurred to deliver inventory to the Company's distribution centers including freight, non-refundable taxes, duty, and other landing costs;
•the cost of the Company's distribution centers, such as labor, rent, utilities, and depreciation;
•the cost of the Company's production, design, research and development, distribution, and merchandising departments including salaries, stock-based compensation and benefits, and other expenses;
•occupancy costs such as minimum rent, contingent rent where applicable, property taxes, utilities, and depreciation expense for the Company's company-operated store locations;
•hemming costs;
•shrink and inventory provision expense; and
•the cost of digital content subscription services, including the costs of content creation, studio overhead, and related production departments.
Selling, general and administrative expenses
Selling, general and administrative expenses consist of all operating costs not otherwise included in cost of goods sold, intangible asset amortization, or acquisition-related expenses. The Company's selling, general and administrative expenses include the costs of corporate and retail employee wages and benefits, costs to transport the Company's products from the distribution facilities to the Company's retail locations and e-commerce guests, professional fees, marketing, information technology, human resources, accounting, legal, corporate facility and occupancy costs, and depreciation and amortization expense other than in cost of goods sold.
For 2020, 2019, and 2018, the Company incurred costs to transport its products from its distribution facilities to its retail locations and e-commerce guests of $232.4 million, $106.7 million, and $79.5 million, respectively.
Store pre-opening costs
Operating costs incurred prior to the opening of new stores are expensed as incurred as selling, general and administrative expenses.
Income taxes
The Company follows the liability method with respect to accounting for income taxes. Deferred income tax assets and liabilities are determined based on the temporary differences between the carrying amounts and the tax basis of assets and liabilities, and for tax losses, tax credit carryforwards, and other tax attributes. Deferred income tax assets and liabilities are
measured using enacted tax rates, for the appropriate tax jurisdiction, that are expected to be in effect when these differences are anticipated to reverse.
The Company has not recognized U.S. income taxes and foreign withholding taxes on undistributed earnings of foreign subsidiaries which the Company has determined to be indefinitely reinvested.
Deferred income tax assets are reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The evaluation as to the likelihood of realizing the benefit of a deferred income tax asset is based on the timing of scheduled reversals of deferred tax liabilities, taxable income forecasts, and tax-planning strategies. The recognition of a deferred income tax asset is based upon several assumptions and forecasts, including current and anticipated taxable income, the utilization of previously unrealized non-operating loss carryforwards, and regulatory reviews of tax filings.
The Company evaluates its tax filing positions and recognizes the largest amount of tax benefit that is considered more likely than not to be sustained upon examination by the relevant taxing authorities based on the technical merits of the position. This determination requires the use of significant judgment. Income tax expense is adjusted in the period in which an uncertain tax position is effectively settled, the statute of limitations expires, facts or circumstances change, tax laws change, or new information becomes available. The Company's policy is to recognize interest expense and penalties related to income tax matters as part of other income (expense), net. Accrued interest and penalties are included within the related tax liability on the Company's consolidated balance sheets.
The U.S. Tax Cuts and Jobs Act ("U.S. tax reform") was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. The Company completed the accounting for the income tax effects of U.S. tax reform during 2018. U.S. tax reform changes and their impact to the Company are outlined in Note 17. Income Taxes. The Company treats the global intangible low-taxed income ("GILTI") tax as an in period tax.
Fair value of financial instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
•Level 1 - defined as observable inputs such as quoted prices in active markets;
•Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
•Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input.
The Company records cash, accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
The Company holds certain assets and liabilities that are required to be measured at fair value on a recurring basis, which are outlined in Note 14. Fair Value Measurement.
Foreign currency
The functional currency for each entity included in these consolidated financial statements that is domiciled outside of the United States is generally the applicable local currency. Assets and liabilities of each foreign entity are translated into U.S. dollars at the exchange rate in effect on the balance sheet date. Net revenue and expenses are translated at the average rate in effect during the period. Unrealized translation gains and losses are recorded as a foreign currency translation adjustment, which is included in other comprehensive income or loss, which is a component of accumulated other comprehensive income or loss included in stockholders' equity.
Foreign currency transactions denominated in a currency other than an entity's functional currency are remeasured into the functional currency with any resulting gains and losses recognized in selling, general and administrative expenses, except for gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature, which are recorded as a foreign currency translation adjustment in other comprehensive income or loss.
Derivative financial instruments
The Company uses derivative financial instruments to manage its exposure to certain foreign currency exchange rate risks.
Net investment hedges. The Company enters into certain forward currency contracts that are designated as net investment hedges. The effective portions of the hedges are reported in accumulated other comprehensive income or loss, net of tax, and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated. Hedge effectiveness is measured using a method based on changes in forward exchange rates. The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.
Derivatives not designated as hedging instruments. The Company also enters into certain forward currency contracts that are not designated as net investment hedges. They are designed to economically hedge the foreign exchange revaluation gains and losses of certain monetary assets and liabilities. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses. The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows.
The Company presents its derivative assets and derivative liabilities at their gross fair values within prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions.
The Company does not enter into derivative contracts for speculative or trading purposes. Additional information on the Company's derivative financial instruments is included in Note 14. Fair Value Measurement and Note 15. Derivative Financial Instruments.
Concentration of credit risk
Accounts receivable are primarily from inventory duty receivables, wholesale accounts, and from license and supply arrangements. The Company generally does not require collateral to support the accounts receivable; however, in certain circumstances, the Company may require parties to provide payment for goods prior to delivery of the goods or to provide letters of credit. The accounts receivable are net of an allowance for doubtful accounts, which is established based on management's assessment of the credit risk of the underlying accounts.
Cash and cash equivalents are held with high quality financial institutions. The amount of cash and cash equivalents held with certain financial institutions exceeds government-insured limits. The Company is also exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance. The Company has not experienced any losses related to these items, and it believes credit risk to be minimal. The Company seeks to minimize its credit risk by entering into transactions with credit worthy and reputable financial institutions and by monitoring the credit standing of the financial institutions with whom it transacts. It seeks to limit the amount of exposure with any one counterparty.
The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's North American revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts.
Stock-based compensation
The Company accounts for stock-based compensation using the fair value method. The fair value of awards granted is estimated at the date of grant. Awards settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement. The employee compensation expense is recognized on a straight-line basis over the requisite service period with the offsetting credit to additional paid-in capital for awards that are settled in common shares, and with the offsetting credit to accrued compensation and related expenses for awards that are settled in cash or common stock at the election of the employee.
For awards with service and/or performance conditions, the amount of compensation expense recognized is based on the number of awards expected to vest, reflecting estimated expected forfeitures, and is adjusted to reflect those awards that do ultimately vest. For awards with performance conditions, the Company recognizes the compensation expense if and when the Company concludes that it is probable that the performance condition will be achieved. The Company reassesses the probability of achieving the performance condition at each reporting date.
The grant date fair value of each stock option granted is estimated on the award date using the Black-Scholes model, and the grant date fair value of restricted shares, performance-based restricted stock units, and restricted stock units is based on the closing price of the Company's common stock on the award date. Restricted stock units that are settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until
settlement. This fair value is based on the closing price of the Company's common stock on the last business day before each period end.
Earnings per share
Earnings per share is calculated using the weighted-average number of common and exchangeable shares outstanding during the period. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have in effect the same rights and share equally in undistributed net income. Diluted earnings per share is calculated by dividing net income available to stockholders for the period by the diluted weighted-average number of shares outstanding during the period. Diluted earnings per share reflects the potential dilution from common shares issuable through stock options, performance-based restricted stock units that have satisfied their performance factor, restricted shares, and restricted stock units using the treasury stock method.
Contingencies
In the ordinary course of business, the Company is involved in legal proceedings regarding contractual and employment relationships and a variety of other matters. The Company records contingent liabilities resulting from claims against us, when a loss is assessed to be probable and the amount of the loss is reasonably estimable.
Use of estimates
The preparation of financial statements in conformity with GAAP in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of net revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently adopted accounting pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates ("ASUs"). ASUs adopted during 2020 were assessed, and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations.
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASC 842, Leases ("ASC 842") to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet. The Company adopted ASC 842 on February 4, 2019 using the modified retrospective approach with no restatement of comparative periods.
The Company has chosen to apply the transition package of three practical expedients which allow companies not to reassess whether agreements contain leases, the classification of leases, and the capitalization of initial direct costs. The Company did not elect the practical expedient to use hindsight when determining the lease term.
The primary financial statement impact upon adoption was the recognition, on a discounted basis, of the Company's minimum payments under noncancelable operating leases as right-of-use assets and obligations on the consolidated balance sheets. As of February 4, 2019, right-of-use assets and lease liabilities were $619.6 million and $651.1 million, respectively. Pre-existing lease balances of $34.8 million from current assets, $9.3 million from non-current assets, and $75.5 million from non-current liabilities were reclassified to right-of-use assets and lease liabilities as part of the adoption of the new standard. There was no cumulative earnings effect adjustment on transition.
Recently issued accounting pronouncements
ASUs recently issued not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations.
In December 2019, the FASB issued guidance on ASC 740, Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application and simplify GAAP for other areas of this topic by clarifying and amending existing guidance. This Company is evaluating the impact of this update.
NOTE 3. INVENTORIES
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January 31, 2021
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|
February 2, 2020
|
|
|
(In thousands)
|
Inventories, at cost
|
|
$
|
678,200
|
|
|
$
|
540,580
|
|
Provision to reduce inventories to net realizable value
|
|
(30,970)
|
|
|
(22,067)
|
|
Inventories
|
|
$
|
647,230
|
|
|
$
|
518,513
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|
The Company had net write-offs of $20.5 million, $28.6 million, and $25.3 million of inventory in 2020, 2019, and 2018, respectively for goods that were obsolete, had quality issues, or were damaged.
NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
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|
|
|
|
|
|
|
|
January 31, 2021
|
|
February 2, 2020
|
|
|
(In thousands)
|
Prepaid expenses
|
|
$
|
82,164
|
|
|
$
|
64,568
|
|
Forward currency contract assets
|
|
17,364
|
|
|
1,735
|
|
Government payroll subsidy receivables
|
|
13,309
|
|
|
—
|
|
Other current assets
|
|
12,270
|
|
|
4,239
|
|
Prepaid expenses and other current assets
|
|
$
|
125,107
|
|
|
$
|
70,542
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|
NOTE 5. PROPERTY AND EQUIPMENT
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|
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|
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|
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January 31, 2021
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|
February 2, 2020
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|
|
(In thousands)
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Land
|
|
$
|
74,261
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|
|
$
|
71,829
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|
Buildings
|
|
30,870
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|
|
30,187
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|
Leasehold improvements
|
|
583,305
|
|
|
489,202
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|
Furniture and fixtures
|
|
117,334
|
|
|
109,533
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|
Computer hardware
|
|
116,239
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|
|
95,399
|
|
Computer software
|
|
427,313
|
|
|
336,768
|
|
Equipment and vehicles
|
|
17,105
|
|
|
19,521
|
|
Work in progress
|
|
69,847
|
|
|
40,930
|
|
Property and equipment, gross
|
|
1,436,274
|
|
|
1,193,369
|
|
Accumulated depreciation
|
|
(690,587)
|
|
|
(521,676)
|
|
Property and equipment, net
|
|
$
|
745,687
|
|
|
$
|
671,693
|
|
Included in the cost of computer software are capitalized costs of $23.5 million and $20.7 million as of January 31, 2021 and February 2, 2020, respectively, associated with internally developed software.
Depreciation expense related to property and equipment was $180.1 million, $161.8 million, and $122.4 million for 2020, 2019, and 2018, respectively.
NOTE 6. ACQUISITION
On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. The results of operations, financial position, and cash flows of MIRROR have been included in the Company's consolidated financial statements since the date of acquisition.
The following table summarizes the fair value of the consideration transferred at the date of acquisition, as well as the calculation of goodwill based on the excess of consideration over the provisional fair value of net assets acquired. As part of the transaction, the Company assumed $30.1 million of MIRROR's outstanding debt. This included $15.1 million of external debt that was settled as part of the transaction and $15.0 million of debt previously owed by MIRROR to the Company, which
represents the effective settlement of a preexisting relationship. The debt was determined to be at market terms and was recognized as a component of the consideration transferred, and no gain or loss was recorded on settlement.
|
|
|
|
|
|
|
|
|
|
|
July 7, 2020
|
|
|
(in thousands)
|
Fair value of consideration transferred:
|
|
|
Cash paid to shareholders
|
|
$
|
428,261
|
|
Employee options attributed to pre-combination vesting
|
|
4,569
|
|
Acquired debt settled on acquisition
|
|
30,122
|
|
Fair value of existing lululemon investment
|
|
1,782
|
|
|
|
$
|
464,734
|
|
Less cash and cash equivalents acquired
|
|
(12,153)
|
|
Fair value of consideration transferred, net of cash and cash equivalents acquired
|
|
$
|
452,581
|
|
Less net assets acquired:
|
|
|
Assets acquired:
|
|
|
Inventories
|
|
$
|
16,734
|
|
Prepaid expenses and other current assets
|
|
3,492
|
|
Intangible assets
|
|
85,000
|
|
Other non-current assets
|
|
5,648
|
|
|
|
$
|
110,874
|
|
Liabilities assumed:
|
|
|
Current liabilities
|
|
$
|
(13,465)
|
|
Current and non-current lease liabilities
|
|
(3,246)
|
|
Net deferred income tax liability
|
|
(4,074)
|
|
|
|
$
|
(20,785)
|
|
Net assets acquired
|
|
$
|
90,089
|
|
Goodwill
|
|
$
|
362,492
|
|
Goodwill relates to benefits expected as a result of the acquisition to MIRROR's business and has been allocated to the MIRROR reporting unit which is included within Other in the Company's segment disclosures. None of the goodwill is expected to be deductible for income tax purposes.
The Company assigned a fair value to and estimated useful lives for the intangible assets acquired as part of the MIRROR business combination. The fair value of the separately identifiable intangible assets, and their estimated useful lives as of the acquisition date were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Estimated Useful Life
|
|
|
(In thousands)
|
|
|
Intangible assets:
|
|
|
|
|
Brand
|
|
$
|
26,500
|
|
|
20.0 years
|
Customer relationships
|
|
28,000
|
|
|
10.0 years
|
Technology
|
|
25,500
|
|
|
7.5 years
|
Content
|
|
5,000
|
|
|
5.0 years
|
|
|
$
|
85,000
|
|
|
|
Accounting for business combinations requires estimates and assumptions to derive the fair value of acquired assets and liabilities, and in the case of MIRROR, this is with specific reference to acquired intangible assets. The fair value of intangible assets was based upon widely-accepted valuation techniques, including discounted cash flows and relief from royalty and replacement cost methods, depending on the nature of the assets acquired or liabilities assumed. Inherent in each valuation technique are critical assumptions, including future revenue growth rates, royalty rates, and the discount rate. The recognition of deferred tax assets in relation to the historic net operating losses of MIRROR relied on assumptions and estimates of the future profitability of the Company's U.S. operations.
The Company has not disclosed pro forma information of the combined business as the transaction is not material to revenue or net earnings.
Acquisition-related expenses
In connection with the acquisition, the Company recognized certain acquisition-related expenses which are expensed as incurred. These expenses are recognized within acquisition-related expenses in the consolidated statements of operations include the following amounts:
•transaction and integration costs, including fees for advisory and professional services incurred as part of the acquisition and integration costs subsequent to the acquisition;
•acquisition-related compensation, including the partial acceleration of vesting of certain stock options, and amounts due to selling shareholders that are contingent upon continuing employment; and
•gain recognized on the Company's existing investment in the acquiree as of the acquisition date.
The following table summarizes the acquisition-related expenses recognized during 2020:
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
(in thousands)
|
Acquisition-related expenses:
|
|
|
Transaction and integration costs
|
|
$
|
10,548
|
|
Gain on existing investment
|
|
(782)
|
|
Acquisition-related compensation
|
|
20,076
|
|
|
|
$
|
29,842
|
|
|
|
|
Income tax effects of acquisition-related expenses
|
|
$
|
(3,133)
|
|
In 2020, the Company recognized $17.2 million related to deferred consideration, and recognized an expense of $2.9 million for the partial acceleration of vesting of certain stock options held by MIRROR employees.
The Company will recognize a total expense of $57.1 million for deferred consideration which is due to certain continuing MIRROR employees, subject to the continued employment of those individuals through various vesting dates up to three years from the acquisition date. This acquisition-related compensation is expensed over the vesting periods as service is provided, and consists of cash payments, which are included within accrued compensation and related expenses until payments are made, and stock-based compensation awards that have been granted under the Company's 2014 Equity Incentive Plan to replace certain unvested options as of the acquisition date.
NOTE 7. GOODWILL
The changes in the carrying amounts of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(In thousands)
|
Balance as of February 2, 2020
|
|
$
|
24,182
|
|
MIRROR acquisition
|
|
362,492
|
|
Effect of foreign currency translation
|
|
203
|
|
Balance as of January 31, 2021
|
|
$
|
386,877
|
|
Of the Company's goodwill, $362.5 million relates to the MIRROR reporting unit that is included within Other in the Company's segment disclosures. The remaining $24.4 million relates to the company-operated stores segment.
NOTE 8. INTANGIBLE ASSETS
The carrying value of intangible assets, and their estimated remaining useful lives as of January 31, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
February 02, 2020
|
|
Remaining Useful Life
|
|
|
(In thousands)
|
|
|
Intangible assets, net:
|
|
|
|
|
|
|
Brand
|
|
$
|
25,727
|
|
|
$
|
—
|
|
|
19.4 years
|
Customer relationships
|
|
26,308
|
|
|
—
|
|
|
9.4 years
|
Technology
|
|
23,478
|
|
|
—
|
|
|
6.9 years
|
Content
|
|
4,417
|
|
|
—
|
|
|
4.4 years
|
Other
|
|
150
|
|
|
241
|
|
|
1.7 years
|
|
|
$
|
80,080
|
|
|
$
|
241
|
|
|
|
NOTE 9. OTHER NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
February 02, 2020
|
|
|
(In thousands)
|
Cloud computing arrangement implementation costs
|
|
$
|
74,631
|
|
|
$
|
24,648
|
|
Security deposits
|
|
23,154
|
|
|
19,901
|
|
Other
|
|
8,841
|
|
|
11,652
|
|
Other non-current assets
|
|
$
|
106,626
|
|
|
$
|
56,201
|
|
NOTE 10. OTHER ACCRUED LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
February 02, 2020
|
|
|
(In thousands)
|
Accrued freight and other operating expenses
|
|
$
|
97,335
|
|
|
$
|
43,225
|
|
Accrued duty
|
|
17,404
|
|
|
16,178
|
|
Sales tax collected
|
|
15,246
|
|
|
17,370
|
|
Sales return allowances
|
|
32,560
|
|
|
12,897
|
|
Accrued rent
|
|
8,559
|
|
|
8,356
|
|
Accrued capital expenditures
|
|
8,653
|
|
|
5,457
|
|
Forward currency contract liabilities
|
|
18,766
|
|
|
1,920
|
|
Other
|
|
13,388
|
|
|
7,238
|
|
Other accrued liabilities
|
|
$
|
211,911
|
|
|
$
|
112,641
|
|
NOTE 11. REVOLVING CREDIT FACILITIES
North America revolving credit facility
During 2016, the Company obtained a $150.0 million committed and unsecured five-year revolving credit facility with major financial institutions. During 2018, the Company amended the credit agreement to provide for:
i.an increase in the aggregate commitments under the revolving credit facility to $400.0 million, with an increase of the sub-limits for the issuance of letters of credit and extensions of swing line loans to $50.0 million for each;
ii.an increase in the option, subject to certain conditions, to request increases in commitments from $400.0 million to $600.0 million; and
iii.an extension in the maturity of the facility from December 15, 2021 to June 6, 2023. Borrowings under the facility may be made in U.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the lenders' approval.
As of January 31, 2021, aside from letters of credit of $2.4 million, there were no other borrowings outstanding under this facility.
Borrowings under the facility bear interest at a rate equal to, at the Company's option, either (a) based on the rates applicable for deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) an alternate base rate, plus, an applicable margin determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax, depreciation, amortization, and rent ("EBITDAR") and ranges between 1.00%-1.50% for LIBOR loans and 0.00%-0.50% for alternate base rate loans. Additionally, a commitment fee of between 0.10%-0.20% is payable on the average unused amounts under the revolving credit facility, and fees of 1.00%-1.50% are payable on unused letters of credit.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of the Company's subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.
The Company is also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.5:1 and to maintain the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) below 2:1. The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control). As of January 31, 2021, the Company was in compliance with the covenants of the credit facility.
Mainland China revolving credit facility
In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility with terms that are reviewed on an annual basis. The credit facility was increased to 230.0 million Chinese Yuan during 2020. It comprises of a revolving loan of up to 200.0 million Chinese Yuan and a financial guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency. Loans are available for a period not to exceed 12 months, at an interest rate equal to the loan prime rate plus a spread of 0.5175%. The Company is required to follow certain covenants. As of January 31, 2021, the Company was in compliance with the covenant and there were no borrowings or guarantees outstanding under this credit facility.
364-Day revolving credit facility
In June 2020, the Company obtained a 364-day $300.0 million committed and unsecured revolving credit facility. In December 2020, the Company elected to terminate this credit facility.
NOTE 12. STOCKHOLDERS' EQUITY
Special voting stock and exchangeable shares
The holders of the special voting stock are entitled to one vote for each share held. The special voting shares are not entitled to receive dividends or distributions or receive any consideration in the event of a liquidation, dissolution, or wind-up. To the extent that exchangeable shares as described below are exchanged for common stock, a corresponding number of special voting shares will be cancelled without consideration.
The holders of the exchangeable shares have dividend and liquidation rights equivalent to those of holders of the common shares of the Company. The exchangeable shares can be converted on a one for one basis by the holder at any time into common shares of the Company plus a cash payment for any accrued and unpaid dividends. Holders of exchangeable shares are entitled to the same or economically equivalent dividend as declared on the common stock of the Company. The exchangeable shares are non-voting. The Company has the right to convert the exchangeable shares into common shares of the Company at any time after the earliest of July 26, 2047, the date on which fewer than 4.2 million exchangeable shares are outstanding, or in the event of certain events such as a change in control.
NOTE 13. STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, provided directly by the Company.
In June 2014, the Company's stockholders approved the adoption of the lululemon athletica inc. 2014 Equity Incentive Plan ("2014 Plan"). The 2014 Plan provides for awards in the form of stock options, stock appreciation rights, restricted stock purchase rights, restricted share bonuses, restricted stock units, performance shares, performance-based restricted stock units, cash-based awards, other stock-based awards, and deferred compensation awards to employees (including officers and directors who are also employees), consultants, and directors of the Company.
The awards granted under the 2007 Equity Incentive Plan ("2007 Plan") remain outstanding and continue to vest under their original conditions. No further awards will be granted under the 2007 Plan.
The Company has granted stock options, performance-based restricted stock units, restricted stock units, and restricted shares. Stock options granted to date generally have a four-year vesting period and vest at a rate of 25% each year on the anniversary date of the grant. Stock options generally expire on the earlier of seven years from the date of grant, or a specified period of time following termination. Performance-based restricted stock units issued generally vest three years from the grant date and restricted shares generally vest one year from the grant date. Restricted stock units granted generally have a three-year vesting period and vest at a certain percentage each year on the anniversary date of the grant.
The Company issues previously unissued shares upon the exercise of Company options, vesting of performance-based restricted stock units or restricted stock units that are settled in common stock, and granting of restricted shares.
Stock-based compensation expense charged to income for the plans was $56.6 million, $46.1 million, and $29.6 million for 2020, 2019, and 2018, respectively.
Total unrecognized compensation cost for all stock-based compensation plans was $75.7 million as of January 31, 2021, which is expected to be recognized over a weighted-average period of 1.9 years, and was $63.4 million as of February 2, 2020 over a weighted-average period of 2.0 years.
A summary of the balances of the Company's stock-based compensation plans as of January 31, 2021, February 2, 2020, and February 3, 2019, and changes during the fiscal years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Performance-Based Restricted Stock Units
|
|
Restricted Shares
|
|
Restricted Stock Units
|
|
Restricted Stock Units
(Liability Accounting)
|
|
|
Number
|
|
Weighted-Average Exercise Price
|
|
Number
|
|
Weighted-Average Grant Date Fair Value
|
|
Number
|
|
Weighted-Average Grant Date Fair Value
|
|
Number
|
|
Weighted-Average Grant Date Fair Value
|
|
Number
|
|
Weighted-Average Fair Value
|
|
|
(In thousands, except per share amounts)
|
Balance as of January 28, 2018
|
|
1,117
|
|
|
$
|
56.44
|
|
|
329
|
|
|
$
|
60.42
|
|
|
21
|
|
|
$
|
52.45
|
|
|
427
|
|
|
$
|
57.54
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
388
|
|
|
96.96
|
|
|
123
|
|
|
102.49
|
|
|
6
|
|
|
124.19
|
|
|
257
|
|
|
88.75
|
|
|
44
|
|
|
136.67
|
|
Exercised/vested
|
|
316
|
|
|
56.29
|
|
|
39
|
|
|
63.04
|
|
|
21
|
|
|
52.45
|
|
|
174
|
|
|
58.94
|
|
|
—
|
|
|
—
|
|
Forfeited/expired
|
|
319
|
|
|
59.76
|
|
|
133
|
|
|
61.71
|
|
|
—
|
|
|
—
|
|
|
70
|
|
|
66.90
|
|
|
—
|
|
|
—
|
|
Balance as of February 3, 2019
|
|
870
|
|
|
$
|
73.34
|
|
|
280
|
|
|
$
|
78.01
|
|
|
6
|
|
|
$
|
124.19
|
|
|
440
|
|
|
$
|
73.73
|
|
|
44
|
|
|
$
|
146.12
|
|
Granted
|
|
325
|
|
|
168.14
|
|
|
93
|
|
|
142.33
|
|
|
7
|
|
|
175.82
|
|
|
124
|
|
|
170.15
|
|
|
—
|
|
|
—
|
|
Exercised/vested
|
|
299
|
|
|
60.75
|
|
|
97
|
|
|
72.04
|
|
|
6
|
|
|
124.19
|
|
|
186
|
|
|
70.69
|
|
|
15
|
|
|
179.67
|
|
Forfeited/expired
|
|
120
|
|
|
102.37
|
|
|
38
|
|
|
91.03
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
95.46
|
|
|
—
|
|
|
—
|
|
Balance as of February 2, 2020
|
|
776
|
|
|
$
|
113.41
|
|
|
238
|
|
|
$
|
103.52
|
|
|
7
|
|
|
$
|
175.82
|
|
|
333
|
|
|
$
|
108.44
|
|
|
29
|
|
|
$
|
239.39
|
|
Granted
|
|
241
|
|
|
182.78
|
|
|
140
|
|
|
122.21
|
|
|
4
|
|
|
299.09
|
|
|
130
|
|
|
208.35
|
|
|
—
|
|
|
—
|
|
Exercised/vested
|
|
182
|
|
|
83.89
|
|
|
171
|
|
|
63.03
|
|
|
7
|
|
|
175.82
|
|
|
175
|
|
|
87.31
|
|
|
14
|
|
|
366.42
|
|
Forfeited/expired
|
|
31
|
|
|
155.33
|
|
|
8
|
|
|
155.08
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
162.60
|
|
|
—
|
|
|
—
|
|
Balance as of January 31, 2021
|
|
804
|
|
|
$
|
139.27
|
|
|
199
|
|
|
$
|
149.20
|
|
|
4
|
|
|
$
|
299.09
|
|
|
275
|
|
|
$
|
166.50
|
|
|
15
|
|
|
$
|
328.68
|
|
A total of 12.9 million shares of the Company's common stock have been authorized for future issuance under the Company's 2014 Equity Incentive Plan.
The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of two shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the award date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved.
The grant date fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the award date. Restricted stock units that are settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement. This fair value is based on the closing price of the Company's common stock on the last business day before each period end.
The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted in 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Expected term
|
|
3.61 years
|
|
3.75 years
|
|
3.75 years
|
Expected volatility
|
|
40.01
|
%
|
|
38.43
|
%
|
|
36.87
|
%
|
Risk-free interest rate
|
|
0.32
|
%
|
|
2.19
|
%
|
|
2.46
|
%
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The following table summarizes information about stock options outstanding and exercisable as of January 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Range of Exercise Prices
|
|
Number of Options
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Life (Years)
|
|
Number of Options
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Life (Years)
|
|
|
(In thousands, except per share amounts and years)
|
$2.78-$81.22
|
|
147
|
|
|
$
|
57.03
|
|
|
3.6
|
|
61
|
|
|
$
|
62.04
|
|
|
3.0
|
$85.96-$124.19
|
|
129
|
|
|
88.16
|
|
|
4.2
|
|
26
|
|
|
89.77
|
|
|
4.2
|
$136.67-$155.97
|
|
73
|
|
|
137.22
|
|
|
4.6
|
|
36
|
|
|
137.09
|
|
|
4.6
|
$167.54-$167.54
|
|
230
|
|
|
167.54
|
|
|
5.2
|
|
40
|
|
|
167.54
|
|
|
5.2
|
$174.52-$356.93
|
|
226
|
|
|
194.03
|
|
|
6.1
|
|
2
|
|
|
182.81
|
|
|
5.4
|
|
|
804
|
|
|
$
|
139.27
|
|
|
4.9
|
|
165
|
|
|
$
|
109.79
|
|
|
4.1
|
Intrinsic value
|
|
$
|
152,342
|
|
|
|
|
|
|
$
|
36,081
|
|
|
|
|
|
As of January 31, 2021, the unrecognized compensation cost related to these options was $23.1 million, which is expected to be recognized over a weighted-average period of 2.4 years. The weighted-average grant date fair value of options granted during 2020, 2019, and 2018 was $74.91, $54.09, and $30.30, respectively.
The following table summarizes the intrinsic value of options exercised and awards that vested during 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Stock options
|
|
$
|
37,022
|
|
|
$
|
36,188
|
|
|
$
|
17,268
|
|
Performance-based restricted stock units
|
|
32,384
|
|
|
16,003
|
|
|
3,413
|
|
Restricted shares
|
|
2,115
|
|
|
1,048
|
|
|
2,600
|
|
Restricted stock units
|
|
37,791
|
|
|
31,300
|
|
|
17,142
|
|
Restricted stock units (liability accounting)
|
|
5,309
|
|
|
2,603
|
|
|
—
|
|
|
|
$
|
114,621
|
|
|
$
|
87,142
|
|
|
$
|
40,423
|
|
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During 2020, there were 0.1 million shares purchased.
Defined contribution pension plans
The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches 50% to 75% of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was $9.2 million, $8.5 million, and $6.4 million during 2020, 2019, and 2018, respectively.
NOTE 14. FAIR VALUE MEASUREMENT
Assets and liabilities measured at fair value on a recurring basis
As of January 31, 2021 and February 2, 2020, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
671,817
|
|
|
$
|
671,817
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Term deposits
|
|
183,015
|
|
|
—
|
|
|
183,015
|
|
|
—
|
|
|
Cash and cash equivalents
|
Forward currency contract assets
|
|
17,364
|
|
|
—
|
|
|
17,364
|
|
|
—
|
|
|
Prepaid expenses and other current assets
|
Forward currency contract liabilities
|
|
18,767
|
|
|
—
|
|
|
18,767
|
|
|
—
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
610,800
|
|
|
$
|
610,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Term deposits
|
|
203,360
|
|
|
—
|
|
|
203,360
|
|
|
—
|
|
|
Cash and cash equivalents
|
Forward currency contract assets
|
|
1,735
|
|
|
—
|
|
|
1,735
|
|
|
—
|
|
|
Prepaid expenses and other current assets
|
Forward currency contract liabilities
|
|
1,920
|
|
|
—
|
|
|
1,920
|
|
|
—
|
|
|
Other current liabilities
|
The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds, Treasury bills, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities.
Assets and liabilities measured at fair value on a non-recurring basis
The Company has also recorded lease termination liabilities at fair value on a non-recurring basis, determined using Level 3 inputs based on remaining lease rentals and reduced by estimated sublease income.
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
The Company currently hedges against changes in the Canadian dollar to U.S. dollar exchange rate and changes in the Chinese Yuan to U.S. dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign exchange gains and losses which arise on translation of its foreign subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
The Company holds a significant portion of its assets in Canada and during 2020, it entered into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges during 2020.
Derivatives not designated as hedging instruments
During 2020, the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on U.S. dollar denominated monetary assets and liabilities.
Quantitative disclosures about derivative financial instruments
The notional amounts and fair values of forward currency contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
February 2, 2020
|
|
|
Gross Notional
|
|
Assets
|
|
Liabilities
|
|
Gross Notional
|
|
Assets
|
|
Liabilities
|
|
|
(In thousands)
|
Derivatives designated as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
985,000
|
|
|
$
|
—
|
|
|
$
|
18,099
|
|
|
$
|
417,000
|
|
|
$
|
1,583
|
|
|
$
|
—
|
|
Derivatives not designated in a hedging relationship:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
1,055,000
|
|
|
17,364
|
|
|
668
|
|
|
460,000
|
|
|
152
|
|
|
1,920
|
|
Net derivatives recognized on consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
|
|
$
|
17,364
|
|
|
$
|
18,767
|
|
|
|
|
$
|
1,735
|
|
|
$
|
1,920
|
|
As of January 31, 2021, there were derivative assets of $17.4 million and derivative liabilities of $18.8 million subject to enforceable netting arrangements.
The forward currency contracts designated as net investment hedges mature on different dates between February 2021 and September 2021.
The forward currency contracts not designated in a hedging relationship mature on different dates between February 2021 and September 2021.
The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Gains (losses) recognized in foreign currency translation adjustment:
|
|
|
|
|
|
|
Derivatives designated as net investment hedges
|
|
$
|
(34,289)
|
|
|
$
|
2,972
|
|
|
$
|
23,946
|
|
No gains or losses have been reclassified from accumulated other comprehensive income into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary.
The pre-tax net foreign exchange and derivative gains and losses recorded in the consolidated statement of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Gains (losses) recognized in selling, general and administrative expenses:
|
|
|
|
|
|
|
Foreign exchange gains (losses)
|
|
$
|
(26,053)
|
|
|
$
|
2,701
|
|
|
$
|
23,642
|
|
Derivatives not designated in a hedging relationship
|
|
22,949
|
|
|
(4,209)
|
|
|
(22,249)
|
|
Net foreign exchange and derivative gains (losses)
|
|
$
|
(3,104)
|
|
|
$
|
(1,508)
|
|
|
$
|
1,393
|
|
NOTE 16. LEASES
The Company has obligations under operating leases for its store and other retail locations, distribution centers, offices, and equipment. As of January 31, 2021, the lease terms of the various leases range from two to fifteen years. The majority of the Company's leases include renewal options at the sole discretion of the Company. In general, it is not reasonably certain
that lease renewals will be exercised at lease commencement and therefore lease renewals are not included in the lease term.
The following table details the Company's net lease expense. Certain of the Company's leases include rent escalation clauses, rent holidays, and leasehold rental incentives. The majority of the Company's leases for store premises also include contingent rental payments based on sales volume. The variable lease expenses disclosed below include contingent rent payments and other non-fixed lease related costs, including common area maintenance, property taxes, and landlord's insurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
(In thousands)
|
Net lease expense:
|
|
|
|
|
Operating lease expense
|
|
$
|
193,498
|
|
|
$
|
176,367
|
|
Short-term lease expense
|
|
11,721
|
|
|
9,358
|
|
Variable lease expense
|
|
60,991
|
|
|
70,957
|
|
|
|
$
|
266,210
|
|
|
$
|
256,682
|
|
The following table presents future minimum lease payments and the impact of discounting.
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
|
(In thousands)
|
2021
|
|
$
|
189,907
|
|
2022
|
|
177,819
|
|
2023
|
|
151,668
|
|
2024
|
|
127,834
|
|
2025
|
|
71,670
|
|
After 2026
|
|
155,619
|
|
Future minimum lease payments
|
|
$
|
874,517
|
|
Impact of discounting
|
|
(75,836)
|
|
Present value of lease liabilities
|
|
$
|
798,681
|
|
|
|
|
Balance sheet classification:
|
|
|
Current lease liabilities
|
|
$
|
166,091
|
|
Non-current lease liabilities
|
|
632,590
|
|
|
|
$
|
798,681
|
|
The weighted-average remaining lease term and weighted-average discount rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
Weighted-average remaining lease term
|
|
5.59 years
|
Weighted-average discount rate
|
|
3.42
|
%
|
Disclosures related to periods prior to adoption of ASC 842
The following table details the Company's total rent expense prior to the adoption of ASC 842 as well as the property taxes for leased locations.
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
(in thousands)
|
Total rent expense:
|
|
|
Minimum rent expense
|
|
$
|
161,847
|
|
Common area expenses
|
|
23,269
|
|
Rent contingent on sales
|
|
12,846
|
|
|
|
$
|
197,962
|
|
|
|
|
Property taxes for leased locations
|
|
$
|
17,826
|
|
NOTE 17. INCOME TAXES
The Company's domestic and foreign income before income tax expense and current and deferred income taxes from federal, state, and foreign sources are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Income before income tax expense
|
|
|
|
|
|
|
Domestic
|
|
$
|
122,573
|
|
|
$
|
180,043
|
|
|
$
|
132,563
|
|
Foreign
|
|
696,777
|
|
|
717,350
|
|
|
582,687
|
|
|
|
$
|
819,350
|
|
|
$
|
897,393
|
|
|
$
|
715,250
|
|
Current income tax expense
|
|
|
|
|
|
|
Federal
|
|
$
|
70
|
|
|
$
|
45,765
|
|
|
$
|
73,213
|
|
State
|
|
10,439
|
|
|
11,480
|
|
|
16,153
|
|
Foreign
|
|
185,803
|
|
|
170,158
|
|
|
123,129
|
|
|
|
$
|
196,312
|
|
|
$
|
227,403
|
|
|
$
|
212,495
|
|
Deferred income tax expense (recovery)
|
|
|
|
|
|
|
Federal
|
|
$
|
19,754
|
|
|
$
|
(5,683)
|
|
|
$
|
(13,068)
|
|
State
|
|
5,923
|
|
|
(150)
|
|
|
(8,566)
|
|
Foreign
|
|
8,448
|
|
|
30,227
|
|
|
40,588
|
|
|
|
$
|
34,125
|
|
|
$
|
24,394
|
|
|
$
|
18,954
|
|
Income tax expense
|
|
$
|
230,437
|
|
|
$
|
251,797
|
|
|
$
|
231,449
|
|
The Company's income tax expense for 2018 included certain discrete tax amounts, as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
(In thousands)
|
U.S. tax reform:
|
|
|
One-time transition tax
|
|
$
|
7,464
|
|
Tax on repatriation from foreign subsidiaries
|
|
23,714
|
|
Total discrete amounts
|
|
$
|
31,178
|
|
U.S. tax reform
The U.S. tax reforms enacted in December 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.
One-time transition tax. U.S. tax reform required the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% on cash and cash equivalents and 8% on the remaining earnings, net of foreign tax credits. The one-time transition tax is payable over eight years.
As a result of completing its fiscal 2017 U.S. tax returns and incorporating newly issued guidance into its calculations the Company recognized an additional current tax expense of $7.5 million during 2018 for the mandatory one-time transition tax.
The Company completed the accounting for the income tax effects of U.S. tax reform in 2018.
Tax on repatriation from foreign subsidiaries
U.S. tax reform and the shift to a territorial tax system in fiscal 2017 eliminated U.S. federal income taxes upon the repatriation of foreign earnings. However, U.S. tax reform did not eliminate foreign withholding taxes, or certain state income taxes.
During 2018, the Company completed its evaluation of the impact that U.S. tax reform has upon repatriation taxes, its reinvestment plans, and the most efficient means of deploying its capital resources. As a result of these evaluations, the Company repatriated $778.9 million from a Canadian subsidiary to the U.S. parent entity in 2018. A net current tax expense of $23.7 million was recognized in 2018 on this distribution.
As of January 31, 2021, the Company's net investment in its Canadian subsidiaries was $1.8 billion, of which $0.8 billion was determined to be indefinitely reinvested. A deferred income tax liability of $3.0 million has been recognized in relation to the portion of the Company's net investment in its Canadian subsidiaries that is not indefinitely reinvested, principally representing the U.S. state income taxes which would be due upon repatriation. This deferred tax liability has been recorded on the basis that the Company 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 as a return of capital for Canadian tax purposes, and therefore not subject to Canadian withholding tax. The unrecognized deferred tax liability on the indefinitely reinvested amount is approximately $2.4 million.
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 January 31, 2021 were $89.7 million.
As of January 31, 2021, the Company had cash and cash equivalents of $508.7 million outside of the United States.
A summary reconciliation of the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(Percentages)
|
Federal income tax at statutory rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Foreign tax rate differentials
|
|
4.6
|
|
|
4.6
|
|
|
4.7
|
|
U.S. state taxes
|
|
0.8
|
|
|
1.0
|
|
|
0.9
|
|
Non-deductible compensation expense
|
|
1.3
|
|
|
0.6
|
|
|
0.8
|
|
Permanent and other
|
|
0.4
|
|
|
0.9
|
|
|
0.6
|
|
U.S. tax reform
|
|
—
|
|
|
—
|
|
|
1.1
|
|
Tax on repatriation from foreign subsidiaries
|
|
—
|
|
|
—
|
|
|
3.3
|
|
Effective tax rate
|
|
28.1
|
%
|
|
28.1
|
%
|
|
32.4
|
%
|
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities as of January 31, 2021 and February 2, 2020 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
February 2, 2020
|
|
|
(In thousands)
|
Deferred income tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
14,149
|
|
|
$
|
2,354
|
|
Inventories
|
|
14,093
|
|
|
8,763
|
|
Property and equipment, net
|
|
2,715
|
|
|
5,444
|
|
Intangible assets, net
|
|
937
|
|
|
975
|
|
Non-current lease liabilities
|
|
160,015
|
|
|
144,412
|
|
Stock-based compensation
|
|
7,266
|
|
|
4,961
|
|
Accrued bonuses
|
|
1,948
|
|
|
3,509
|
|
Unredeemed gift card liability
|
|
6,629
|
|
|
6,815
|
|
Foreign tax credits
|
|
4,829
|
|
|
4,827
|
|
Other
|
|
8,640
|
|
|
1,784
|
|
Deferred income tax assets
|
|
221,221
|
|
|
183,844
|
|
Valuation allowance
|
|
(6,464)
|
|
|
(5,655)
|
|
Deferred income tax assets, net of valuation allowance
|
|
$
|
214,757
|
|
|
$
|
178,189
|
|
Deferred income tax liabilities:
|
|
|
|
|
Property and equipment, net
|
|
$
|
(97,717)
|
|
|
$
|
(57,280)
|
|
Intangible assets, net
|
|
(21,556)
|
|
|
(611)
|
|
Right-of-use lease assets
|
|
(134,245)
|
|
|
(132,059)
|
|
Other
|
|
(13,263)
|
|
|
(236)
|
|
Deferred income tax liabilities
|
|
(266,781)
|
|
|
(190,186)
|
|
Net deferred income tax (liabilities) assets
|
|
$
|
(52,024)
|
|
|
$
|
(11,997)
|
|
|
|
|
|
|
Balance sheet classification:
|
|
|
|
|
Deferred income tax assets
|
|
$
|
6,731
|
|
|
$
|
31,435
|
|
Deferred income tax liabilities
|
|
(58,755)
|
|
|
(43,432)
|
|
Net deferred income tax (liabilities) assets
|
|
$
|
(52,024)
|
|
|
$
|
(11,997)
|
|
As of January 31, 2021, the Company had net operating loss carryforwards of $59.1 million. The majority of the net operating loss carryforwards expire, if unused, between fiscal 2026 and fiscal 2039.
The Company files income tax returns in the U.S., Canada, and various foreign, state, and provincial jurisdictions. The 2017 to 2019 tax years remain subject to examination by the U.S. federal and state tax authorities. The 2013 tax year is still open for certain state tax authorities. The 2013 to 2019 tax years remain subject to examination by Canadian tax authorities. The 2013 to 2019 tax years remain subject to examination by tax authorities in certain foreign jurisdictions. The Company does not have any significant unrecognized tax benefits arising from uncertain tax positions taken, or expected to be taken, in the Company's tax returns.
NOTE 18. EARNINGS PER SHARE
The details of the computation of basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands, except per share amounts)
|
Net income
|
|
$
|
588,913
|
|
|
$
|
645,596
|
|
|
$
|
483,801
|
|
Basic weighted-average number of shares outstanding
|
|
130,289
|
|
|
130,393
|
|
|
133,413
|
|
Assumed conversion of dilutive stock options and awards
|
|
582
|
|
|
562
|
|
|
558
|
|
Diluted weighted-average number of shares outstanding
|
|
130,871
|
|
|
130,955
|
|
|
133,971
|
|
Basic earnings per share
|
|
$
|
4.52
|
|
|
$
|
4.95
|
|
|
$
|
3.63
|
|
Diluted earnings per share
|
|
$
|
4.50
|
|
|
$
|
4.93
|
|
|
$
|
3.61
|
|
The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have in effect the same rights and share equally in undistributed net income. For 2020, 2019, and 2018, 30.8 thousand, 48.0 thousand, and 32.2 thousand stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.
On November 29, 2017, the Company's board of directors approved a stock repurchase program for up to $200.0 million and on June 6, 2018, the board of directors approved an increase to this stock repurchase program, authorizing the repurchase of up to a total of $600.0 million of the Company's common shares. These programs were completed during the first quarter of 2019.
On January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $500.0 million of the Company's common shares on the open market or in privately negotiated transactions. On December 1, 2020, the Company's board of directors approved an increase in the remaining authorization of the existing stock repurchase program from $263.6 million to $500.0 million. The repurchase plan has no time limit and does not require the repurchase of any minimum number of shares. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements. As of January 31, 2021, the remaining value of shares available to be repurchased under this program was $500.0 million.
During 2020, 2019, and 2018, 0.4 million, 1.1 million, and 4.9 million shares, respectively, were repurchased under the programs at a total cost of $63.7 million, $173.4 million, and $598.3 million, respectively.
Subsequent to January 31, 2021, and up to March 24, 2021, no shares were repurchased.
NOTE 19. COMMITMENTS AND CONTINGENCIES
Commitments
Leases. The Company has obligations under operating leases for its store and other retail locations, distribution centers, offices, and equipment. Please refer to Note 16. Leases for further details regarding lease commitments and the timing of future minimum lease payments.
License and supply arrangements. The Company has 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. The Company retains the rights to sell lululemon products through its e-commerce websites in these countries. Under these arrangements, the Company supplies the partners with lululemon products, training, and other support. An extension to the initial term of the agreement for the Middle East was signed in 2020 and it extends the arrangement to December 2024. The initial term of the agreement for Mexico expires in November 2026. As of January 31, 2021, there were four licensed retail locations in Mexico, three in the United Arab Emirates, and one in Qatar.
The following table summarizes the Company's contractual arrangements as of January 31, 2021, and the timing and effect that such commitments are expected to have on its liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
|
Total
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
|
|
(In thousands)
|
Deferred consideration
|
|
$
|
49,544
|
|
|
$
|
25,194
|
|
|
$
|
24,341
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
One-time transition tax payable
|
|
$
|
48,226
|
|
|
$
|
5,076
|
|
|
$
|
5,076
|
|
|
$
|
9,518
|
|
|
$
|
12,691
|
|
|
$
|
15,865
|
|
|
$
|
—
|
|
Deferred consideration. The amounts listed for deferred consideration in the table above represent expected future cash payments for certain continuing MIRROR employees, subject to the continued employment of those individuals up to three years from the acquisition date as outlined in Note 6. Acquisition.
One-time transition tax. As outlined in Note 17. Income Taxes, U.S. tax reform imposed a mandatory transition tax on accumulated foreign subsidiary earnings which have not previously been subject to U.S. income tax. The one-time transition tax is payable over eight years beginning in 2018. The one-time transition tax payable is net of foreign tax credits, and the table above outlines the expected payments due by fiscal year.
Contingencies
Legal proceedings. In addition to the legal proceedings described below, the Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. The Company has recognized immaterial provisions related to the expected outcome of legal proceedings.
In March 2020, a former retail employee filed a representative action in the Los Angeles Superior Court alleging violation of the Private Attorney General Act ("PAGA") based on purported California labor code violations including failure to pay wages, failure to pay overtime, failure to provide accurate itemized statements, and failure to provide meal and rest periods. The plaintiff is seeking to recover civil penalties under PAGA. The Company intends to vigorously defend this matter.
In April 2020, Aliign Activation Wear, LLC filed a lawsuit in the United States District Court for the Central District of California alleging federal trademark infringement, false designation of origin and unfair competition. The plaintiff is seeking injunctive relief, monetary damages and declaratory relief. The Company intends to vigorously defend this matter.
NOTE 20. SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Cash paid for income taxes
|
|
$
|
260,886
|
|
|
$
|
305,493
|
|
|
$
|
177,040
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
180,536
|
|
|
177,144
|
|
|
—
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
|
178,504
|
|
|
222,448
|
|
|
—
|
|
Interest paid
|
|
110
|
|
|
325
|
|
|
1,394
|
|
NOTE 21. SEGMENTED INFORMATION
The Company's segments are based on the financial information it uses in managing its business and comprise two reportable segments: (i) company-operated stores and (ii) direct to consumer. The remainder of its operations which includes outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, and MIRROR are included within Other.
During the first quarter of 2020, the Company reviewed its segment and general corporate expenses and determined certain costs that are more appropriately classified in different categories. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Net revenue:
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
1,658,807
|
|
|
$
|
2,501,067
|
|
|
$
|
2,126,363
|
|
Direct to consumer
|
|
2,284,068
|
|
|
1,137,822
|
|
|
858,856
|
|
Other
|
|
459,004
|
|
|
340,407
|
|
|
303,100
|
|
|
|
$
|
4,401,879
|
|
|
$
|
3,979,296
|
|
|
$
|
3,288,319
|
|
Segmented income from operations:
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
212,592
|
|
|
$
|
689,339
|
|
|
$
|
575,523
|
|
Direct to consumer
|
|
1,029,102
|
|
|
484,146
|
|
|
357,489
|
|
Other
|
|
10,502
|
|
|
72,013
|
|
|
62,336
|
|
|
|
1,252,196
|
|
|
1,245,498
|
|
|
995,348
|
|
General corporate expenses
|
|
397,208
|
|
|
356,359
|
|
|
289,440
|
|
Amortization of intangible assets
|
|
5,160
|
|
|
29
|
|
|
72
|
|
Acquisition-related expenses
|
|
29,842
|
|
|
—
|
|
|
—
|
|
Income from operations
|
|
819,986
|
|
|
889,110
|
|
|
705,836
|
|
Other income (expense), net
|
|
(636)
|
|
|
8,283
|
|
|
9,414
|
|
Income before income tax expense
|
|
$
|
819,350
|
|
|
$
|
897,393
|
|
|
$
|
715,250
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
134,203
|
|
|
$
|
171,496
|
|
|
$
|
129,155
|
|
Direct to consumer
|
|
37,245
|
|
|
15,813
|
|
|
6,420
|
|
Corporate and other
|
|
57,778
|
|
|
95,739
|
|
|
90,232
|
|
|
|
$
|
229,226
|
|
|
$
|
283,048
|
|
|
$
|
225,807
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
100,776
|
|
|
$
|
97,896
|
|
|
$
|
76,303
|
|
Direct to consumer
|
|
14,847
|
|
|
12,469
|
|
|
10,018
|
|
Corporate and other
|
|
69,855
|
|
|
51,568
|
|
|
36,163
|
|
|
|
$
|
185,478
|
|
|
$
|
161,933
|
|
|
$
|
122,484
|
|
Intercompany amounts are excluded from the above table as they are not included in the materials reviewed by the chief operating decision maker. The amortization of intangible assets for 2020 in the above table includes $5.1 million related to MIRROR. MIRROR is included within Other in the Company's segment disclosures.
Property and equipment, net by geographic area as of January 31, 2021 and February 2, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
February 2, 2020
|
|
|
(In thousands)
|
United States
|
|
$
|
267,328
|
|
|
$
|
259,485
|
|
Canada
|
|
394,861
|
|
|
346,305
|
|
Outside of North America
|
|
83,498
|
|
|
65,903
|
|
|
|
$
|
745,687
|
|
|
$
|
671,693
|
|
NOTE 22. NET REVENUE BY CATEGORY AND GEOGRAPHY
The following table disaggregates the Company's net revenue by geographic area.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
United States
|
|
$
|
3,105,133
|
|
|
$
|
2,854,364
|
|
|
$
|
2,363,374
|
|
Canada
|
|
672,607
|
|
|
649,114
|
|
|
565,105
|
|
Outside of North America
|
|
624,139
|
|
|
475,818
|
|
|
359,840
|
|
|
|
$
|
4,401,879
|
|
|
$
|
3,979,296
|
|
|
$
|
3,288,319
|
|
The following table disaggregates the Company's net revenue by category. During the fourth quarter of 2020, the Company determined that a portion of certain sales returns which had been recorded within Other categories were more appropriately classified within Women's product and Men's product. Accordingly, comparative figures have been reclassified to conform to the presentation adopted for the current year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Women's product
|
|
$
|
3,049,906
|
|
|
$
|
2,767,826
|
|
|
$
|
2,334,582
|
|
Men's product
|
|
953,183
|
|
|
927,240
|
|
|
690,530
|
|
Other categories
|
|
398,790
|
|
|
284,230
|
|
|
263,207
|
|
|
|
$
|
4,401,879
|
|
|
$
|
3,979,296
|
|
|
$
|
3,288,319
|
|