ITEM 1.
FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
October 28,
2018
|
|
January 28,
2018
|
ASSETS
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
703,607
|
|
|
$
|
990,501
|
|
Accounts receivable
|
|
29,448
|
|
|
19,173
|
|
Inventories
|
|
495,991
|
|
|
329,562
|
|
Prepaid and receivable income taxes
|
|
76,593
|
|
|
48,948
|
|
Other prepaid expenses and other current assets
|
|
57,828
|
|
|
48,098
|
|
|
|
1,363,467
|
|
|
1,436,282
|
|
Property and equipment, net
|
|
531,250
|
|
|
473,642
|
|
Goodwill and intangible assets, net
|
|
24,237
|
|
|
24,679
|
|
Deferred income tax assets
|
|
28,155
|
|
|
32,491
|
|
Other non-current assets
|
|
33,902
|
|
|
31,389
|
|
|
|
$
|
1,981,011
|
|
|
$
|
1,998,483
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
153,140
|
|
|
$
|
24,646
|
|
Accrued inventory liabilities
|
|
11,446
|
|
|
13,027
|
|
Accrued compensation and related expenses
|
|
85,446
|
|
|
70,141
|
|
Current income taxes payable
|
|
24,545
|
|
|
15,700
|
|
Unredeemed gift card liability
|
|
63,474
|
|
|
82,668
|
|
Other current liabilities
|
|
105,620
|
|
|
86,416
|
|
|
|
443,671
|
|
|
292,598
|
|
Non-current income taxes payable
|
|
54,112
|
|
|
48,268
|
|
Deferred income tax liabilities
|
|
1,582
|
|
|
1,336
|
|
Other non-current liabilities
|
|
74,889
|
|
|
59,321
|
|
|
|
574,254
|
|
|
401,523
|
|
Stockholders' equity
|
|
|
|
|
Undesignated preferred stock, $0.01 par value: 5,000 shares authorized; none issued and outstanding
|
|
—
|
|
|
—
|
|
Exchangeable stock, no par value: 60,000 shares authorized; 9,776 and 9,781 issued and outstanding
|
|
—
|
|
|
—
|
|
Special voting stock, $0.000005 par value: 60,000 shares authorized; 9,776 and 9,781 issued and outstanding
|
|
—
|
|
|
—
|
|
Common stock, $0.005 par value: 400,000 shares authorized; 122,667 and 125,650 issued and outstanding
|
|
613
|
|
|
628
|
|
Additional paid-in capital
|
|
307,154
|
|
|
284,253
|
|
Retained earnings
|
|
1,310,452
|
|
|
1,455,002
|
|
Accumulated other comprehensive loss
|
|
(211,462
|
)
|
|
(142,923
|
)
|
|
|
1,406,757
|
|
|
1,596,960
|
|
|
|
$
|
1,981,011
|
|
|
$
|
1,998,483
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
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|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
Net revenue
|
|
$
|
747,655
|
|
|
$
|
619,018
|
|
|
$
|
2,120,861
|
|
|
$
|
1,720,379
|
|
Cost of goods sold
|
|
340,878
|
|
|
297,056
|
|
|
973,157
|
|
|
844,100
|
|
Gross profit
|
|
406,777
|
|
|
321,962
|
|
|
1,147,704
|
|
|
876,279
|
|
Selling, general and administrative expenses
|
|
270,874
|
|
|
215,367
|
|
|
773,288
|
|
|
640,032
|
|
Asset impairment and restructuring costs
|
|
—
|
|
|
21,007
|
|
|
—
|
|
|
36,524
|
|
Income from operations
|
|
135,903
|
|
|
85,588
|
|
|
374,416
|
|
|
199,723
|
|
Other income (expense), net
|
|
2,044
|
|
|
1,052
|
|
|
6,553
|
|
|
2,771
|
|
Income before income tax expense
|
|
137,947
|
|
|
86,640
|
|
|
380,969
|
|
|
202,494
|
|
Income tax expense
|
|
43,534
|
|
|
27,696
|
|
|
115,633
|
|
|
63,593
|
|
Net income
|
|
$
|
94,413
|
|
|
$
|
58,944
|
|
|
$
|
265,336
|
|
|
$
|
138,901
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
(7,318
|
)
|
|
(31,018
|
)
|
|
(68,539
|
)
|
|
10,061
|
|
Comprehensive income
|
|
$
|
87,095
|
|
|
$
|
27,926
|
|
|
$
|
196,797
|
|
|
$
|
148,962
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.71
|
|
|
$
|
0.44
|
|
|
$
|
1.98
|
|
|
$
|
1.02
|
|
Diluted earnings per share
|
|
$
|
0.71
|
|
|
$
|
0.43
|
|
|
$
|
1.97
|
|
|
$
|
1.02
|
|
Basic weighted-average number of shares outstanding
|
|
132,406
|
|
|
135,364
|
|
|
133,964
|
|
|
136,191
|
|
Diluted weighted-average number of shares outstanding
|
|
133,077
|
|
|
135,578
|
|
|
134,512
|
|
|
136,357
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable Stock
|
|
Special Voting Stock
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total
|
|
|
Shares
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
|
|
|
Balance at January 28, 2018
|
|
9,781
|
|
|
9,781
|
|
|
$
|
—
|
|
|
125,650
|
|
|
$
|
628
|
|
|
$
|
284,253
|
|
|
$
|
1,455,002
|
|
|
$
|
(142,923
|
)
|
|
$
|
1,596,960
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,336
|
|
|
|
|
265,336
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,539
|
)
|
|
(68,539
|
)
|
Common stock issued upon exchange of exchangeable shares
|
|
(5
|
)
|
|
(5
|
)
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
18,616
|
|
|
|
|
|
|
18,616
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
524
|
|
|
3
|
|
|
17,254
|
|
|
|
|
|
|
17,257
|
|
Shares withheld related to net share settlement of stock-based compensation
|
|
|
|
|
|
|
|
(92
|
)
|
|
(1
|
)
|
|
(8,537
|
)
|
|
|
|
|
|
(8,538
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
(3,420
|
)
|
|
(17
|
)
|
|
(4,432
|
)
|
|
(409,886
|
)
|
|
|
|
(414,335
|
)
|
Balance at October 28, 2018
|
|
9,776
|
|
|
9,776
|
|
|
$
|
—
|
|
|
122,667
|
|
|
$
|
613
|
|
|
$
|
307,154
|
|
|
$
|
1,310,452
|
|
|
$
|
(211,462
|
)
|
|
$
|
1,406,757
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
Cash flows from operating activities
|
|
|
|
|
Net income
|
|
$
|
265,336
|
|
|
$
|
138,901
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
87,115
|
|
|
80,129
|
|
Deferred income taxes
|
|
2,382
|
|
|
(18,385
|
)
|
Stock-based compensation expense
|
|
18,616
|
|
|
13,048
|
|
Asset impairment for ivivva restructuring
|
|
—
|
|
|
11,593
|
|
Settlement of derivatives not designated in a hedging relationship
|
|
(4,670
|
)
|
|
4,178
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Inventories
|
|
(177,890
|
)
|
|
(95,475
|
)
|
Prepaid and receivable income taxes
|
|
(27,645
|
)
|
|
3,565
|
|
Other prepaid expenses and other current and non-current assets
|
|
(20,538
|
)
|
|
(6,759
|
)
|
Accounts payable
|
|
129,617
|
|
|
(11,141
|
)
|
Accrued inventory liabilities
|
|
(392
|
)
|
|
14,602
|
|
Accrued compensation and related expenses
|
|
18,009
|
|
|
6,579
|
|
Current income taxes payable
|
|
9,817
|
|
|
(26,420
|
)
|
Unredeemed gift card liability
|
|
(17,827
|
)
|
|
(18,272
|
)
|
Non-current income taxes payable
|
|
5,844
|
|
|
—
|
|
Lease termination liabilities
|
|
(3,285
|
)
|
|
12,164
|
|
Other current and non-current liabilities
|
|
32,387
|
|
|
23,002
|
|
Net cash provided by operating activities
|
|
316,876
|
|
|
131,309
|
|
Cash flows from investing activities
|
|
|
|
|
Purchase of property and equipment
|
|
(156,746
|
)
|
|
(107,128
|
)
|
Settlement of net investment hedges
|
|
(8,397
|
)
|
|
(4,599
|
)
|
Other investing activities
|
|
(771
|
)
|
|
(8,324
|
)
|
Net cash used in investing activities
|
|
(165,914
|
)
|
|
(120,051
|
)
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from settlement of stock-based compensation
|
|
17,257
|
|
|
1,648
|
|
Taxes paid related to net share settlement of stock-based compensation
|
|
(8,538
|
)
|
|
(3,086
|
)
|
Repurchase of common stock
|
|
(414,335
|
)
|
|
(99,269
|
)
|
Other financing activities
|
|
(745
|
)
|
|
—
|
|
Net cash used in financing activities
|
|
(406,361
|
)
|
|
(100,707
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(31,495
|
)
|
|
4,657
|
|
Decrease in cash and cash equivalents
|
|
(286,894
|
)
|
|
(84,792
|
)
|
Cash and cash equivalents, beginning of period
|
|
$
|
990,501
|
|
|
$
|
734,846
|
|
Cash and cash equivalents, end of period
|
|
$
|
703,607
|
|
|
$
|
650,054
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
Note 1
|
|
|
Note 2
|
|
|
Note 3
|
|
|
Note 4
|
|
|
Note 5
|
|
|
Note 6
|
|
|
Note 7
|
|
|
Note 8
|
|
|
Note 9
|
|
|
Note 10
|
|
|
Note 11
|
|
|
Note 12
|
|
|
lululemon athletica inc.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of operations
lululemon athletica inc., a Delaware corporation ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of healthy lifestyle inspired athletic apparel. The Company primarily conducts its business through company-operated stores and direct to consumer through e-commerce. It also generates net revenue from outlets, sales from temporary locations, sales to wholesale accounts, showrooms, warehouse sales, and license and supply arrangements. The Company operates stores in the United States, Canada, Australia, China, the United Kingdom, New Zealand, Germany, Japan, South Korea, Singapore, France, Ireland, Sweden, and Switzerland. There were
426
and
404
company-operated stores in operation as of
October 28, 2018
and
January 28, 2018
, respectively.
Basis of presentation
The unaudited interim consolidated financial statements as of
October 28, 2018
and for the
quarters and three quarters ended
October 28, 2018
and
October 29, 2017
are presented in United States dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of
January 28, 2018
is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended
January 28, 2018
, which are included in Item 8 in the Company's fiscal
2017
Annual Report on Form 10-K filed with the SEC on
March 27, 2018
. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal
2017
Annual Report on Form 10-K.
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
2018
will end on
February 3, 2019
and will be a 53-week year.
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.
Certain comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
NOTE
2
. RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers
("ASC 606") which supersedes the revenue recognition requirements in ASC 605
Revenue Recognition
. This ASU requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company adopted ASC 606 on January 29, 2018 on a modified retrospective basis. There were no changes to the consolidated statement of operations as a result of the adoption, and the timing and amount of its revenue recognition remained substantially unchanged under this new guidance. Under the provisions of ASC 606, the Company is now required to present its provision for sales returns on a gross basis, rather than a net basis. The Company's liability for sales return refunds is recognized within other current liabilities, and the Company now presents an asset for the value of inventory which is expected to be returned within other prepaid expenses and other current assets on the consolidated balance sheets. Under the modified retrospective approach, the comparative prior period information has not been restated for this change.
The effect of adoption of ASC 606 on the Company's consolidated balance sheet as of
October 28, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2018
|
|
|
As Reported
|
|
Adjustment for ASC 606
|
|
Balances Without Adoption of ASC 606
|
|
|
(In thousands)
|
Other prepaid expenses and other current assets
|
|
$
|
57,828
|
|
|
$
|
(3,090
|
)
|
|
$
|
54,738
|
|
Current assets
|
|
1,363,467
|
|
|
(3,090
|
)
|
|
1,360,377
|
|
Total assets
|
|
1,981,011
|
|
|
(3,090
|
)
|
|
1,977,921
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
105,620
|
|
|
3,090
|
|
|
108,710
|
|
Current liabilities
|
|
443,671
|
|
|
3,090
|
|
|
446,761
|
|
Total liabilities
|
|
574,254
|
|
|
3,090
|
|
|
577,344
|
|
In May 2017, the FASB amended ASC 718,
Stock Compensation
, to reduce diversity in practice and to clarify when a change to the terms or conditions of a share-based payment award must be accounted for as a modification and will result in fewer changes to the terms of an award being accounted for as modifications. The new guidance was effective beginning in the first quarter of fiscal 2018 and will apply on a prospective basis. The Company does not expect it to have a material impact on its consolidated financial statements.
Accounting policies as a result of recently adopted accounting pronouncements
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 outlets, temporary locations, sales to wholesale accounts, showrooms, 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 sales taxes collected from customers on behalf of taxing authorities.
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 and sales to wholesale accounts are recognized upon receipt by the customer.
Revenue is presented net of an allowance for estimated returns, which is based on historic experience. 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. Based on historical experience, and to the extent there is no requirement to remit unclaimed card balances to government agencies, an estimate of the gift card balances that will never be redeemed is recognized as revenue in proportion to gift cards which have been redeemed.
Recently issued accounting pronouncements
In February 2016, the 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 for most leases. This guidance will be effective for the Company beginning in its first quarter of fiscal 2019, with early application permitted. The new guidance can be applied using a modified retrospective approach at the beginning of the earliest period presented, or at the beginning of the period in which it is adopted.
The Company will adopt ASC 842 on February 4, 2019 and anticipates applying the modified retrospective approach from the beginning of the period in which the standard is adopted.
The Company expects 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 expects to make an accounting policy election to recognize lease expense for leases with a term of 12 months or less on a straight-line basis over the lease term and recognize no right of use asset or lease liability for those leases.
The Company is nearing completion of the implementation of new lease accounting software and continues to evaluate the impact this standard will have on its consolidated financial statements, disclosures, and internal controls. It is expected that the primary financial statement impact upon adoption will be the recognition, on a discounted basis, of the Company's minimum commitments under noncancelable operating leases as right of use assets and obligations on the consolidated balance sheets. It is expected that this will result in a significant increase in assets and liabilities on the consolidated balance sheets. The standard is not expected to have a material impact on the Company's net income or cash flows.
In August 2017, the FASB amended ASC 815,
Derivatives and Hedging
to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. It will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This guidance will be effective for the Company beginning in its first quarter of fiscal 2019, with early application permitted. This standard is not expected to have a material impact on the Company's consolidated financial statements.
In January 2018, the FASB released guidance on the accounting for the global intangible low-taxed income ("GILTI") provisions of the tax bill H.R.1, commonly known as the U.S. Tax Cuts and Jobs Act ("U.S. tax reform"). The GILTI provisions impose a tax on foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary's tangible assets. The guidance indicates that an accounting policy election can be made to treat the GILTI tax as either a current tax in the period in which it is incurred or as a deferred tax. The Company has not yet made its accounting policy election but will do so during the one-year measurement period as allowed by the SEC. In accordance with the FASB guidance, until an accounting policy election is made, any taxes related to the GILTI provisions will be treated as a current income tax expense in the period incurred.
In February 2018, the FASB amended ASC 220,
Income Statement—Reporting Comprehensive Income
. ASC 740,
Income Taxes
, requires that the effect of a change in tax laws or rates on deferred tax assets and liabilities be included in income from continuing operations. In situations in which the tax effects of a transaction were initially recognized directly in other comprehensive income, this results in "stranded" amounts in accumulated other comprehensive income related to the income tax rate differential. The amendments to ASC 220 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of the U.S. tax reform. The guidance in the ASU is effective for the Company beginning in its first quarter of fiscal 2019 with early adoption permitted. The Company does not expect to elect to reclassify "stranded" amounts from accumulated other comprehensive income to retained earnings.
NOTE 3. CREDIT FACILITY
On June 6, 2018, the Company entered into Amendment No. 1 to its credit agreement. This amends the credit agreement to provide for (i) an increase in the aggregate commitments under the unsecured
five
-year 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 as set forth in the credit agreement, to request increases in commitments under the revolving facility from
$400.0 million
to
$600.0 million
, and (iii) an extension in the maturity of the revolving facility from December 15, 2021 to June 6, 2023.
In addition, this amendment decreases the applicable margins for LIBOR loans from
1.00%
-
1.75%
to
1.00%
-
1.50%
and for alternate base rate loans from
0.00%
-
0.75%
to
0.00%
-
0.50%
, reduces the commitment fee on average daily unused amounts under the revolving facility from
0.125%
-
0.200%
to
0.10%
-
0.20%
, and reduces fees for unused letters of credit from
1.00%
-
1.75%
to
1.00%
-
1.50%
.
The Company had no borrowings outstanding under this credit facility as of
October 28, 2018
and
January 28, 2018
. As of
October 28, 2018
, the Company had letters of credit of
$1.2 million
outstanding.
NOTE 4. STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, which are provided by the Company directly.
Stock-based compensation expense charged to income for the plans was
$19.0 million
and
$13.0 million
for the
three quarters ended
October 28, 2018
and
October 29, 2017
, respectively. Total unrecognized compensation cost for all stock-based compensation plans was
$63.7 million
at
October 28, 2018
, which is expected to be recognized over a weighted-average period of
2.2
years.
A summary of the balances of the Company's stock-based compensation plans as of
October 28, 2018
, and changes during the first
three quarters
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 at January 28, 2018
|
|
1,117
|
|
|
$
|
56.44
|
|
|
329
|
|
|
$
|
60.42
|
|
|
21
|
|
|
$
|
52.45
|
|
|
427
|
|
|
$
|
57.54
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
382
|
|
|
96.70
|
|
|
122
|
|
|
102.40
|
|
|
6
|
|
|
124.19
|
|
|
253
|
|
|
88.34
|
|
|
44
|
|
|
134.82
|
|
Exercised/released
|
|
307
|
|
|
56.25
|
|
|
39
|
|
|
63.04
|
|
|
21
|
|
|
52.45
|
|
|
170
|
|
|
58.83
|
|
|
—
|
|
|
—
|
|
Forfeited/expired
|
|
299
|
|
|
59.07
|
|
|
130
|
|
|
61.47
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
65.59
|
|
|
—
|
|
|
—
|
|
Balance at October 28, 2018
|
|
893
|
|
|
$
|
72.84
|
|
|
282
|
|
|
$
|
77.78
|
|
|
6
|
|
|
$
|
124.19
|
|
|
454
|
|
|
$
|
73.22
|
|
|
44
|
|
|
$
|
134.82
|
|
Exercisable at October 28, 2018
|
|
168
|
|
|
$
|
55.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first
three quarters
of fiscal
2018
:
|
|
|
|
|
|
|
Three Quarters Ended
October 28, 2018
|
Expected term
|
|
3.75 years
|
|
Expected volatility
|
|
36.87
|
%
|
Risk-free interest rate
|
|
2.46
|
%
|
Dividend yield
|
|
—
|
%
|
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.
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007.
Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution.
The maximum number of shares authorized to be purchased under the ESPP is
6.0 million
shares. All shares purchased under the ESPP are purchased in the open market. During the quarter ended
October 28, 2018
, there were
17.7 thousand
shares purchased.
Defined contribution pension plans
The Company offers defined contribution pension plans to its eligible employees in Canada and the United States. 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
$4.7 million
and
$3.9 million
in the first
three quarters
of fiscal
2018
and fiscal
2017
, respectively.
NOTE
5
. FAIR VALUE MEASUREMENT
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
|
|
•
|
Level 1 - defined as observable inputs such as quoted prices in active markets;
|
|
|
•
|
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
|
|
|
•
|
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
Assets and liabilities measured at fair value on a recurring basis
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of
October 28, 2018
and
January 28, 2018
, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
73,198
|
|
|
$
|
73,198
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
Treasury bills
|
|
15,266
|
|
|
15,266
|
|
|
—
|
|
|
—
|
|
|
Cash and cash equivalents
|
Term deposits
|
|
357,013
|
|
|
—
|
|
|
357,013
|
|
|
—
|
|
|
Cash and cash equivalents
|
Net forward currency contract assets
|
|
1,661
|
|
|
—
|
|
|
1,661
|
|
|
—
|
|
|
Other prepaid expenses and other current assets
|
Net forward currency contract liabilities
|
|
4,743
|
|
|
—
|
|
|
4,743
|
|
|
—
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
|
(In thousands)
|
|
|
Term deposits
|
|
$
|
258,238
|
|
|
$
|
—
|
|
|
$
|
258,238
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
Net forward currency contract assets
|
|
7,889
|
|
|
—
|
|
|
7,889
|
|
|
—
|
|
|
Other prepaid expenses and other current assets
|
Net forward currency contract liabilities
|
|
8,771
|
|
|
—
|
|
|
8,771
|
|
|
—
|
|
|
Other current liabilities
|
The Company records accounts receivable, accounts payable, accrued liabilities, and borrowings under the revolving credit facility at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds, Treasury bills, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. They are presented at their gross fair values. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions.
Assets and liabilities measured at fair value on a non-recurring basis
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company has impaired certain long-lived assets and recorded them at their estimated fair value on a non-recurring basis. The fair value of these long-lived assets was determined using Level 3 inputs, principally the present value of the estimated future cash flows expected from their use and eventual disposition. Please refer to Note
7
of these unaudited interim consolidated financial statements for further details regarding the impairment of long-lived assets as a result of the ivivva restructuring.
The Company has also recorded certain 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. As of
October 28, 2018
and
January 28, 2018
, the Company had lease termination liabilities of
$2.8 million
and
$6.4 million
, respectively. This was primarily as a result of the ivivva restructuring.
NOTE
6
. DERIVATIVE FINANCIAL INSTRUMENTS
Foreign exchange risk
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company currently hedges against changes in the Canadian dollar 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 enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The effective portions of the hedges are reported in accumulated other comprehensive income or loss 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 recorded no ineffectiveness from net investment hedges during the first
three quarters
of fiscal
2018
.
The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.
Derivatives not designated as hedging instruments
The Company is exposed to gains and losses arising from changes in foreign exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the first
three quarters
of fiscal
2018
, 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 subsidiaries on U.S.
dollar denominated 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.
Outstanding notional amounts
The Company had foreign exchange forward contracts outstanding with the following notional amounts:
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2018
|
|
January 28, 2018
|
|
|
(In thousands)
|
Derivatives designated as net investment hedges
|
|
$
|
389,000
|
|
|
$
|
262,000
|
|
Derivatives not designated in a hedging relationship
|
|
340,000
|
|
|
240,000
|
|
The forward currency contracts designated as net investment hedges outstanding as of
October 28, 2018
mature on different dates between December 2018 and April 2019.
The forward currency contracts not designated in a hedging relationship outstanding as of
October 28, 2018
mature on different dates between November 2018 and March 2019.
Quantitative disclosures about derivative financial instruments
The Company presents its derivative assets and derivative liabilities at their gross fair values within other prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of
October 28, 2018
, there were derivative assets of
$1.7 million
and derivative liabilities of
$4.7 million
subject to enforceable netting arrangements.
The fair values of forward currency contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2018
|
|
January 28, 2018
|
|
|
(In thousands)
|
Net forward currency contract assets, recognized within other prepaid expenses and other current assets:
|
|
|
|
|
Derivatives designated as net investment hedges
|
|
$
|
1,661
|
|
|
$
|
—
|
|
Derivatives not designated in a hedging relationship
|
|
—
|
|
|
7,889
|
|
Net forward currency contract liabilities, recognized within other current liabilities:
|
|
|
|
|
Derivatives designated as net investment hedges
|
|
—
|
|
|
8,771
|
|
Derivatives not designated in a hedging relationship
|
|
4,743
|
|
|
—
|
|
The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
Gains (losses) recognized in foreign currency translation adjustment:
|
|
|
|
|
|
|
|
|
Derivatives designated as net investment hedges
|
|
$
|
2,291
|
|
|
$
|
1,424
|
|
|
$
|
18,829
|
|
|
$
|
(7,501
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
Gains (losses) recognized in selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
Foreign exchange gains
|
|
$
|
395
|
|
|
$
|
3,871
|
|
|
$
|
12,999
|
|
|
$
|
360
|
|
Derivatives not designated in a hedging relationship
|
|
(1,715
|
)
|
|
(1,137
|
)
|
|
(17,301
|
)
|
|
6,497
|
|
Net foreign exchange and derivative (losses) gains
|
|
$
|
(1,320
|
)
|
|
$
|
2,734
|
|
|
$
|
(4,302
|
)
|
|
$
|
6,857
|
|
Credit risk
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance.
The Company's forward currency contracts are entered into with large, reputable financial institutions that are monitored by the Company for counterparty risk.
The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts.
NOTE
7
. ASSET IMPAIRMENT AND RESTRUCTURING
During fiscal 2017, the Company restructured its ivivva operations. On
August 20, 2017
, the Company closed
48
of its
55
ivivva branded company-operated stores and all other ivivva branded temporary locations. As a result of this restructuring, the Company recognized aggregate pre-tax charges of
$47.2 million
during fiscal 2017, inclusive of
$45.4 million
recognized during the first
three quarters
of fiscal 2017.
A summary of the pre-tax charges recognized in connection with the Company's restructuring of its ivivva operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
Costs recorded in cost of goods sold:
|
|
|
|
|
|
|
|
|
Provision to reduce inventories to net realizable value
|
|
$
|
—
|
|
|
$
|
1,934
|
|
|
$
|
—
|
|
|
$
|
4,838
|
|
Loss (reversal of loss) on committed inventory purchases
|
|
—
|
|
|
(2,286
|
)
|
|
—
|
|
|
250
|
|
Accelerated depreciation
|
|
—
|
|
|
1,530
|
|
|
—
|
|
|
3,753
|
|
|
|
—
|
|
|
1,178
|
|
|
—
|
|
|
8,841
|
|
Costs recorded in operating expenses:
|
|
|
|
|
|
|
|
|
Lease termination costs
|
|
—
|
|
|
19,441
|
|
|
—
|
|
|
19,884
|
|
Impairment of property and equipment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,593
|
|
Employee related costs
|
|
—
|
|
|
804
|
|
|
—
|
|
|
4,000
|
|
Other restructuring costs
|
|
—
|
|
|
762
|
|
|
—
|
|
|
1,047
|
|
Asset impairment and restructuring costs
|
|
—
|
|
|
21,007
|
|
|
—
|
|
|
36,524
|
|
Restructuring and related costs
|
|
$
|
—
|
|
|
$
|
22,185
|
|
|
$
|
—
|
|
|
$
|
45,365
|
|
Income tax recoveries of
$5.8 million
and
$11.9 million
were recorded on the above items in the
third
quarter and the first
three quarters
of fiscal 2017, respectively. These income tax recoveries were based on the expected annual tax rate of the applicable tax jurisdictions.
Costs recorded in cost of goods sold
During the first
three quarters
of fiscal 2017, the Company recognized expenses of
$8.8 million
in cost of goods sold as a result of the restructuring of its ivivva operations. This included
$4.8 million
to reduce inventories to their estimated net realizable value, and
$0.3 million
for the losses the Company expected to incur on certain inventory and fabric purchase commitments.
During the second and third quarters of fiscal 2017, the Company took delivery of inventory that it had previously committed to purchase. As a result, there was a reduction in the Company's liability for expected losses on committed inventory purchases and a corresponding increase in its provision to reduce inventories to net realizable value.
The Company also recorded accelerated depreciation charges of
$3.8 million
during the first
three quarters
of fiscal 2017, primarily related to leasehold improvements and furniture and fixtures for company operated-stores that closed during the third quarter of fiscal 2017.
Costs recorded in operating expenses
The Company recognized asset impairment and restructuring costs of
$36.5 million
during the first
three quarters
of fiscal 2017 as a result of the restructuring of its ivivva operations.
As a result of the plan to close the majority of the ivivva branded locations, the long-lived assets of each ivivva branded location were tested for impairment as of April 30, 2017. For impaired locations, a loss was recognized representing the difference between the net book value of the long-lived assets and their estimated fair value. Impairment losses totaling
$11.6 million
were recognized during the first quarter of fiscal 2017. These losses primarily relate to leasehold improvements and furniture and fixtures of the company-operated stores segment. These assets were retired during the third quarter of fiscal 2017 in conjunction with the closures of the company-operated stores.
During the first
three quarters
of fiscal 2017, the Company recognized lease termination costs of
$19.9 million
, employee related expenses as a result of the restructuring of
$4.0 million
as well as other restructuring costs of
$1.0 million
.
NOTE
8
. INCOME TAXES
The U.S. tax reform was enacted on December 22, 2017 and introduced significant changes to U.S. income tax laws. The U.S. tax reform reduced the U.S. federal income tax rate from 35% to 21%, introduced a shift to a territorial tax system and changed how foreign earnings are subject to U.S. tax, and imposed a mandatory one-time transition tax on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries. The U.S. tax reform also introduced new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the GILTI tax and the base erosion anti-abuse tax. Accounting for the income tax effects of the U.S. tax reform is complex and requires significant judgement and estimates in the interpretation and calculations of its provisions.
The SEC issued Staff Accounting Bulletin 118 ("SAB 118") which allows companies to record and adjust provisional estimates of the impacts of the U.S. tax reform within a one year measurement period. As disclosed in Note 14 to the audited consolidated financial statements included in Item 8 of the Company's fiscal
2017
Annual Report on Form 10-K filed with the SEC on
March 27, 2018
, the Company recorded certain provisional amounts in the fourth quarter of fiscal 2017.
During the third quarter of fiscal 2018, the Company adjusted the provisional amount recorded for the mandatory one-time transition tax as a result of completing its U.S. federal income tax return and incorporating recently issued guidance into its calculations. This resulted in the recognition of an additional tax expense of
$5.2 million
during the third quarter of fiscal 2018 which increased the Company’s effective tax rate by
380
basis points during the
third
quarter and by
140
basis points during the first
three quarters
of fiscal
2018
. The Company continues to analyze additional interpretations and guidance that are issued, and is continuing to assess the impact of the mandatory one-time transition tax on U.S. state income taxes. Any additional adjustments may materially impact the provision for income taxes and the effective income tax rate in the period in which the adjustments are made.
As of
October 28, 2018
, no deferred income tax liabilities have been recognized on any of the undistributed earnings of the Company's foreign subsidiaries as these earnings were indefinitely reinvested outside of the United States. The Company is continuing to evaluate the impact that the U.S. tax reform will have upon the taxes which may become payable upon repatriation, its reinvestment plans, and the most efficient means of deploying its capital resources globally. As this analysis has not yet been completed, it is possible that amounts determined to be indefinitely reinvested outside of the U.S. may ultimately be repatriated, resulting in additional tax liabilities being recognized.
The Company expects the accounting for the income tax effects of the U.S. tax reform to be completed in fiscal 2018.
NOTE 9. EARNINGS PER SHARE
The details of the computation of basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands, except per share amounts)
|
Net income
|
|
$
|
94,413
|
|
|
$
|
58,944
|
|
|
$
|
265,336
|
|
|
$
|
138,901
|
|
Basic weighted-average number of shares outstanding
|
|
132,406
|
|
|
135,364
|
|
|
133,964
|
|
|
136,191
|
|
Assumed conversion of dilutive stock options and awards
|
|
671
|
|
|
214
|
|
|
548
|
|
|
166
|
|
Diluted weighted-average number of shares outstanding
|
|
133,077
|
|
|
135,578
|
|
|
134,512
|
|
|
136,357
|
|
Basic earnings per share
|
|
$
|
0.71
|
|
|
$
|
0.44
|
|
|
$
|
1.98
|
|
|
$
|
1.02
|
|
Diluted earnings per share
|
|
$
|
0.71
|
|
|
$
|
0.43
|
|
|
$
|
1.97
|
|
|
$
|
1.02
|
|
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 the
three quarters ended
October 28, 2018
and
October 29, 2017
,
41.5 thousand
and
0.2 million
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 December 1, 2016, the Company's board of directors approved a program to repurchase shares of the Company's common stock up to an aggregate value of
$100.0 million
. This stock repurchase program was completed during the third quarter of fiscal 2017.
On November 29, 2017, the Company's board of directors approved a stock repurchase program for up to
$200.0 million
. 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 on the open market or in privately negotiated transactions. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements, and the repurchase program is expected to be completed by November 2019. As of
October 28, 2018
, the remaining aggregate value of shares available to be repurchased under this program was
$184.7 million
.
During the
three quarters ended
October 28, 2018
and
October 29, 2017
,
3.4 million
and
1.8 million
shares, respectively, were repurchased under the program at a total cost of
$414.3 million
and
$99.3 million
, respectively.
Subsequent to
October 28, 2018
, and up to
December 3, 2018
,
41.5 thousand
shares were repurchased at a total cost of
$5.2 million
.
NOTE 10. SUPPLEMENTARY FINANCIAL INFORMATION
A summary of certain consolidated balance sheet accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
October 28,
2018
|
|
January 28,
2018
|
|
|
(In thousands)
|
Inventories:
|
|
|
|
|
Finished goods
|
|
$
|
513,800
|
|
|
$
|
344,695
|
|
Provision to reduce inventories to net realizable value
|
|
(17,809
|
)
|
|
(15,133
|
)
|
|
|
$
|
495,991
|
|
|
$
|
329,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28,
2018
|
|
January 28,
2018
|
|
|
(In thousands)
|
Property and equipment, net:
|
|
|
|
|
Land
|
|
$
|
78,608
|
|
|
$
|
83,048
|
|
Buildings
|
|
38,020
|
|
|
39,278
|
|
Leasehold improvements
|
|
330,501
|
|
|
301,449
|
|
Furniture and fixtures
|
|
98,681
|
|
|
91,778
|
|
Computer hardware
|
|
63,033
|
|
|
61,734
|
|
Computer software
|
|
216,783
|
|
|
173,997
|
|
Equipment and vehicles
|
|
14,874
|
|
|
14,806
|
|
Work in progress
|
|
74,689
|
|
|
51,260
|
|
Property and equipment, gross
|
|
915,189
|
|
|
817,350
|
|
Accumulated depreciation
|
|
(383,939
|
)
|
|
(343,708
|
)
|
|
|
$
|
531,250
|
|
|
$
|
473,642
|
|
Goodwill and intangible assets, net:
|
|
|
|
|
Goodwill
|
|
$
|
25,496
|
|
|
$
|
25,496
|
|
Changes in foreign currency exchange rates
|
|
(1,259
|
)
|
|
(890
|
)
|
|
|
24,237
|
|
|
24,606
|
|
Intangible assets, net
|
|
—
|
|
|
73
|
|
|
|
$
|
24,237
|
|
|
$
|
24,679
|
|
Other non-current assets:
|
|
|
|
|
Security deposits
|
|
$
|
14,402
|
|
|
$
|
11,599
|
|
Deferred lease assets
|
|
9,409
|
|
|
10,458
|
|
Other
|
|
10,091
|
|
|
9,332
|
|
|
|
$
|
33,902
|
|
|
$
|
31,389
|
|
Other current liabilities:
|
|
|
|
|
Accrued duty, freight, and other operating expenses
|
|
$
|
50,952
|
|
|
$
|
33,695
|
|
Sales tax collected
|
|
11,286
|
|
|
11,811
|
|
Sales return allowance
|
|
9,718
|
|
|
6,293
|
|
Accrued capital expenditures
|
|
9,121
|
|
|
5,714
|
|
Accrued rent
|
|
5,978
|
|
|
7,074
|
|
Forward currency contract liabilities
|
|
4,743
|
|
|
8,771
|
|
Lease termination liabilities
|
|
2,845
|
|
|
6,427
|
|
Other
|
|
10,977
|
|
|
6,631
|
|
|
|
$
|
105,620
|
|
|
$
|
86,416
|
|
Other non-current liabilities:
|
|
|
|
|
Deferred lease liabilities
|
|
$
|
32,499
|
|
|
$
|
27,186
|
|
Tenant inducements
|
|
36,858
|
|
|
26,250
|
|
Other
|
|
5,532
|
|
|
5,885
|
|
|
|
$
|
74,889
|
|
|
$
|
59,321
|
|
NOTE
11
. SEGMENT REPORTING
The Company applies ASC Topic 280,
Segment Reporting
("ASC 280"), in determining reportable segments for its financial statement disclosure. The Company reports segments based on the financial information it uses in managing its business. The Company's reportable segments are comprised of company-operated stores and direct to consumer. Direct to consumer represents sales from the Company's e-commerce websites and mobile apps. Outlets, temporary locations, sales to wholesale accounts, showrooms, warehouse sale net revenue, and license and supply arrangements have been combined into other. During the first quarter of fiscal
2018
, the Company reviewed its general corporate expenses and determined certain costs which were previously classified as general corporate expense are more appropriately classified within the direct to consumer segment. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
Net revenue:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
476,877
|
|
|
$
|
425,084
|
|
|
$
|
1,396,376
|
|
|
$
|
1,218,127
|
|
Direct to consumer
|
|
189,375
|
|
|
131,181
|
|
|
514,623
|
|
|
341,453
|
|
Other
|
|
81,403
|
|
|
62,753
|
|
|
209,862
|
|
|
160,799
|
|
|
|
$
|
747,655
|
|
|
$
|
619,018
|
|
|
$
|
2,120,861
|
|
|
$
|
1,720,379
|
|
Segmented income from operations:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
117,804
|
|
|
$
|
97,015
|
|
|
$
|
342,959
|
|
|
$
|
267,178
|
|
Direct to consumer
|
|
76,435
|
|
|
50,229
|
|
|
205,735
|
|
|
123,045
|
|
Other
|
|
15,019
|
|
|
9,319
|
|
|
39,336
|
|
|
19,076
|
|
|
|
209,258
|
|
|
156,563
|
|
|
588,030
|
|
|
409,299
|
|
General corporate expense
|
|
73,355
|
|
|
48,790
|
|
|
213,614
|
|
|
164,211
|
|
Restructuring and related costs
|
|
—
|
|
|
22,185
|
|
|
—
|
|
|
45,365
|
|
Income from operations
|
|
135,903
|
|
|
85,588
|
|
|
374,416
|
|
|
199,723
|
|
Other income (expense), net
|
|
2,044
|
|
|
1,052
|
|
|
6,553
|
|
|
2,771
|
|
Income before income tax expense
|
|
$
|
137,947
|
|
|
$
|
86,640
|
|
|
$
|
380,969
|
|
|
$
|
202,494
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
38,053
|
|
|
$
|
29,747
|
|
|
$
|
85,054
|
|
|
$
|
53,549
|
|
Direct to consumer
|
|
540
|
|
|
7,582
|
|
|
1,854
|
|
|
16,423
|
|
Corporate and other
|
|
34,146
|
|
|
19,910
|
|
|
69,838
|
|
|
37,156
|
|
|
|
$
|
72,739
|
|
|
$
|
57,239
|
|
|
$
|
156,746
|
|
|
$
|
107,128
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
19,383
|
|
|
$
|
16,549
|
|
|
$
|
54,954
|
|
|
$
|
47,630
|
|
Direct to consumer
|
|
2,336
|
|
|
3,740
|
|
|
7,237
|
|
|
10,087
|
|
Corporate and other
|
|
9,967
|
|
|
8,271
|
|
|
24,924
|
|
|
22,412
|
|
|
|
$
|
31,686
|
|
|
$
|
28,560
|
|
|
$
|
87,115
|
|
|
$
|
80,129
|
|
The accelerated depreciation related to the restructuring of the ivivva operations is included in corporate and other in the above breakdown of depreciation and amortization.
The following table disaggregates the Company's net revenue by geographic area. The economic conditions in these areas could affect the amount and timing of the Company's net revenue and cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
United States
|
|
$
|
527,331
|
|
|
$
|
433,509
|
|
|
$
|
1,502,013
|
|
|
$
|
1,226,610
|
|
Canada
|
|
137,991
|
|
|
125,564
|
|
|
374,418
|
|
|
325,656
|
|
Outside of North America
|
|
82,333
|
|
|
59,945
|
|
|
244,430
|
|
|
168,113
|
|
|
|
$
|
747,655
|
|
|
$
|
619,018
|
|
|
$
|
2,120,861
|
|
|
$
|
1,720,379
|
|
NOTE
12
. LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
In addition to the legal proceedings described below, the Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows.
On October 9, 2015, certain current and former hourly employees of the Company filed a class action lawsuit in the Supreme Court of New York entitled
Rebecca Gathmann-Landini et al v. lululemon USA inc.
On December 2, 2015, the case was moved to the United States District Court for the Eastern District of New York. The lawsuit alleges that the Company violated various New York labor codes by failing to pay all earned wages, including overtime compensation. The plaintiffs are seeking an unspecified amount of damages. The Company intends to vigorously defend this matter.
On December 20, 2017, former lululemon employee Shayla Famouri filed a lawsuit in Los Angeles Superior Court against the Company and a former employee of the Company. The plaintiff alleges claims for sexual assault and battery, sexual harassment, retaliation, creating a hostile work environment and related claims. The complaint seeks damages in the amount of
$3.0 million
, as well as non-monetary relief such as policy change and an apology. The Company intends to vigorously defend this matter.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q and any documents incorporated herein by reference reflect our current views about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in "Risk Factors" and elsewhere in this report.
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q. Except as required by applicable securities law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
This information should be read in conjunction with the unaudited interim consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our fiscal
2017
Annual Report on Form 10-K filed with the SEC on
March 27, 2018
.
We disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.lululemon.com/), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls, and webcasts.
Overview
lululemon athletica inc. is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. We have a mission to create transformational products and experiences which enable people to live a life they love, and have developed a brand for those pursuing an active, mindful lifestyle. Since our inception, we have fostered a distinctive corporate culture; we promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection, and choosing to have fun. These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose of "elevating the world through the power of practice."
Our healthy lifestyle inspired athletic apparel and accessories are marketed under the lululemon and ivivva brand names. We offer a comprehensive line of apparel and accessories for women, men, and female youth. Our apparel assortment includes items such as pants, shorts, tops, and jackets designed for a healthy lifestyle and athletic activities such as yoga, running, training, and most other sweaty pursuits. We also offer fitness-related accessories, including items such as bags, socks, underwear, yoga mats and equipment, and water bottles.
During fiscal 2017, we restructured our ivivva operations. On
August 20, 2017
, we closed
48
of our
55
ivivva branded company-operated stores and all other ivivva branded temporary locations. We now operate ivivva primarily as an e-commerce business.
Financial Highlights
The summary below provides both GAAP and adjusted non-GAAP financial measures. During the
third
quarter of fiscal
2018
, we adjusted the provisional amount recorded for the transition tax under the U.S. Tax Cuts and Jobs Act, resulting in the recognition of an additional tax expense of
$5.2 million
. In the
third
quarter of fiscal 2017, in connection with the restructuring of our ivivva operations, we recognized pre-tax costs totaling
$22.2 million
, and a related tax recovery of
$5.8 million
. The adjusted financial measures for the
third
quarters of fiscal
2018
and
2017
exclude these items.
For the
third
quarter of fiscal
2018
, compared to the
third
quarter of fiscal
2017
:
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|
•
|
Net revenue
increase
d
21%
to
$747.7 million
. On a constant dollar basis, net revenue
increased
22%
.
|
|
|
•
|
Total comparable sales, which includes comparable store sales and direct to consumer,
increased
17%
. On a constant dollar basis, total comparable sales
increased
18%
.
|
|
|
–
|
Comparable store sales
increased
6%
, or
increased
7%
on a constant dollar basis.
|
|
|
–
|
Direct to consumer net revenue
increased
44%
, or
increased
46%
on a constant dollar basis.
|
|
|
•
|
Gross profit
increase
d
26%
to
$406.8 million
. It increased
26%
compared to adjusted gross profit for the
third
quarter of fiscal
2017
.
|
|
|
•
|
Gross margin
increase
d
240
basis points to
54.4%
. It increased
220
basis points compared to adjusted gross margin for the
third
quarter of fiscal
2017
.
|
|
|
•
|
Income from operations
increase
d
59%
to
$135.9 million
. It increased
26%
compared to adjusted income from operations for the
third
quarter of fiscal
2017
.
|
|
|
•
|
Operating margin
increase
d
440
basis points to
18.2%
. It increased
80
basis points compared to adjusted operating margin for the
third
quarter of fiscal
2017
.
|
|
|
•
|
Income tax expense
increase
d
57%
to
$43.5 million
. Our effective tax rate for the
third
quarter of fiscal
2018
was
31.6%
compared to
32.0%
for the
third
quarter of fiscal
2017
. The adjusted effective tax rate was
27.8%
compared to
30.8%
in the
third
quarter of fiscal
2017
.
|
|
|
•
|
Diluted earnings per share were
$0.71
compared to
$0.43
in the
third
quarter of fiscal
2017
. Adjusted diluted earnings per share were
$0.75
compared to
$0.56
for the
third
quarter of fiscal
2017
.
|
Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and adjusted gross profit, gross margin, income from operations, operating margin, income tax expense, effective tax rates, and diluted earnings per share, and the most directly comparable measures calculated in accordance with GAAP.
Results of Operations
Third
Quarter Results
The following table summarizes key components of our results of operations for the quarters ended
October 28, 2018
and
October 29, 2017
. The percentages are presented as a percentage of net revenue.
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Quarter Ended
|
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|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
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|
(In thousands)
|
|
(Percentages)
|
Net revenue
|
|
$
|
747,655
|
|
|
$
|
619,018
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
340,878
|
|
|
297,056
|
|
|
45.6
|
|
|
48.0
|
|
Gross profit
|
|
406,777
|
|
|
321,962
|
|
|
54.4
|
|
|
52.0
|
|
Selling, general and administrative expenses
|
|
270,874
|
|
|
215,367
|
|
|
36.2
|
|
|
34.8
|
|
Asset impairment and restructuring costs
|
|
—
|
|
|
21,007
|
|
|
—
|
|
|
3.4
|
|
Income from operations
|
|
135,903
|
|
|
85,588
|
|
|
18.2
|
|
|
13.8
|
|
Other income (expense), net
|
|
2,044
|
|
|
1,052
|
|
|
0.3
|
|
|
0.2
|
|
Income before income tax expense
|
|
137,947
|
|
|
86,640
|
|
|
18.5
|
|
|
14.0
|
|
Income tax expense
|
|
43,534
|
|
|
27,696
|
|
|
5.8
|
|
|
4.5
|
|
Net income
|
|
$
|
94,413
|
|
|
$
|
58,944
|
|
|
12.6
|
%
|
|
9.5
|
%
|
Net Revenue
Net revenue
increase
d
$128.6
million, or
21%
, to
$747.7
million for the
third
quarter of fiscal
2018
from
$619.0
million for the
third
quarter of fiscal
2017
. On a constant dollar basis, assuming the average exchange rates for the
third
quarter of fiscal
2018
remained constant with the average exchange rates for the
third
quarter of fiscal
2017
, net revenue
increased
$138.0 million
, or
22%
.
The
increase
in net revenue was primarily due to increased direct to consumer net revenue, increased company-operated store net revenue, including from new company-operated stores as well as an increase in comparable store sales, and an increase in net revenue from our other retail locations. Total comparable sales, which includes comparable store sales and direct to consumer,
increased
17%
in the
third
quarter of fiscal
2018
compared to the
third
quarter of fiscal
2017
. Total comparable sales
increased
18%
on a constant dollar basis.
Net revenue on a segment basis for the quarters ended
October 28, 2018
and
October 29, 2017
is summarized below. The percentages are presented as a percentage of total net revenue.
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Quarter Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
476,877
|
|
|
$
|
425,084
|
|
|
63.8
|
%
|
|
68.7
|
%
|
Direct to consumer
|
|
189,375
|
|
|
131,181
|
|
|
25.3
|
|
|
21.2
|
|
Other
|
|
81,403
|
|
|
62,753
|
|
|
10.9
|
|
|
10.1
|
|
Net revenue
|
|
$
|
747,655
|
|
|
$
|
619,018
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Company-Operated Stores.
Net revenue from our company-operated stores segment
increase
d
$51.8 million
, or
12%
, to
$476.9 million
in the
third
quarter of fiscal
2018
from
$425.1 million
in the
third
quarter of fiscal
2017
. The following contributed to the increase in net revenue from our company-operated stores segment:
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•
|
Net revenue from company-operated stores we opened or significantly expanded subsequent to
October 29, 2017
, and therefore not included in comparable store sales, contributed
$41.3 million
to the
increase
. We opened
38
net new lululemon branded company-operated stores since the
third
quarter of fiscal
2017
, including
18
stores in North America,
11
stores in Asia,
seven
stores in Europe, and
two
stores in Australia/New Zealand.
|
|
|
•
|
A comparable store sales
increase
of
6%
in the
third
quarter of fiscal
2018
compared to the
third
quarter of fiscal
2017
resulted in a
$16.7 million
increase
to net revenue. Comparable store sales
increased
7%
, or
$21.4 million
on a constant dollar basis. The
increase
in comparable store sales was primarily a result of increased store traffic and improved conversion rates. This was partially offset by a decrease in dollar value per transaction.
|
The increase in net revenue was partially offset by the closure of
48
of our ivivva branded company-operated stores as part of the restructuring of our ivivva operations. These closures reduced our net revenue from company-operated stores for the
third
quarter of fiscal
2018
by
$6.2 million
compared to the
third
quarter of fiscal
2017
.
Direct to Consumer.
Net revenue from our direct to consumer segment
increased
$58.2 million
, or
44%
, to
$189.4 million
in the
third
quarter of fiscal
2018
from
$131.2 million
in the
third
quarter of fiscal
2017
. Direct to consumer net revenue
increased
46%
on a constant dollar basis. This was primarily a result of increased website traffic and improved conversion rates. This was partially offset by a decrease in dollar value per transaction.
Other.
Net revenue from our other segment
increase
d
$18.7 million
, or
30%
, to
$81.4 million
in the
third
quarter of fiscal
2018
from
$62.7 million
in the
third
quarter of fiscal
2017
. This
increase
was primarily the result of an increased number of temporary locations, including seasonal stores, open during the
third
quarter of fiscal
2018
compared to the
third
quarter of fiscal
2017
.
Gross Profit
Gross profit
increase
d
$84.8 million
, or
26%
, to
$406.8 million
for the
third
quarter of fiscal
2018
from
$322.0 million
for the
third
quarter of fiscal
2017
.
Gross profit as a percentage of net revenue, or gross margin,
increase
d
240
basis points to
54.4%
in the
third
quarter of fiscal
2018
from
52.0%
in the
third
quarter of fiscal
2017
. The
increase
in gross margin was primarily the result of:
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•
|
an increase in product margin of 280 basis points, which was primarily due to lower product costs, a favorable mix of higher margin product, lower markdowns, and lower inventory provision expense; and
|
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•
|
the costs incurred in the
third
quarter of fiscal 2017 in connection with the restructuring of our ivivva operations, which reduced gross margin in that quarter by 20 basis points.
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This was partially offset by an increase in costs as a percentage of revenue related to our distribution centers and additional costs related to our product departments of 30 basis points, and an unfavorable impact of foreign exchange rates of 30 basis points.
During the
third
quarter of fiscal
2017
, as a result of the restructuring of our ivivva operations, we recognized costs totaling
$1.2 million
within costs of goods sold, as outlined in Note
7
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report. Excluding these charges from the comparatives for the
third
quarter of fiscal
2017
, gross profit increased
26%
and gross margin
increase
d
220
basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increase
d
$55.5 million
, or
26%
, to
$270.9 million
in the
third
quarter of fiscal
2018
from
$215.4 million
in the
third
quarter of fiscal
2017
. The
increase
in selling, general and administrative expenses was primarily due to:
|
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•
|
an increase
in costs related to our operating channels of
$28.6 million
, comprised of:
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–
|
an increase
in employee costs of
$12.9 million
primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher retail bonus expenses;
|
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|
–
|
an increase
in variable costs of
$10.8 million
primarily due to an increase in distribution costs, credit card fees, and packaging costs as a result of increased net revenue; and
|
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|
–
|
an increase
in other costs of
$5.0 million
primarily due to an increase in digital marketing expenses and other costs associated with our operating locations;
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•
|
an increase
in head office costs of
$22.9 million
, comprised of:
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|
–
|
an increase
in employee costs of
$10.0 million
primarily due to additional employees to support the growth in our business and increased incentive and stock-based compensation expense; and
|
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|
–
|
an increase
in other costs of
$12.8 million
primarily due to increases in brand and community costs, information technology costs, professional fees, depreciation, and other head office costs; and
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•
|
an increase
in net foreign exchange and derivative revaluation losses of
$4.1 million
.
|
As a percentage of net revenue, selling, general and administrative expenses
increased
140
basis points, to
36.2%
in the
third
quarter of fiscal
2018
from
34.8%
in the
third
quarter of fiscal
2017
.
Asset Impairment and Restructuring Costs
During the
third
quarter of fiscal
2017
, we incurred asset impairment and restructuring costs totaling
$21.0 million
in connection with the restructuring of our ivivva operations. This included lease termination costs of
$19.4 million
, employee related costs of
$0.8 million
, and other restructuring costs of
$0.8 million
. Please refer to Note
7
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
We did not have any asset impairment and restructuring costs in the
third
quarter of fiscal
2018
.
Income from Operations
Income from operations
increase
d
$50.3 million
, or
59%
, to
$135.9 million
in the
third
quarter of fiscal
2018
from
$85.6 million
in the
third
quarter of fiscal
2017
. Operating margin
increase
d
440
basis points to
18.2%
compared to
13.8%
in the
third
quarter of fiscal
2017
.
In connection with the restructuring of our ivivva operations, we recognized pre-tax costs totaling
$22.2 million
in the
third
quarter of fiscal
2017
. This included costs of
$1.2 million
recognized in cost of goods sold, and asset impairment and restructuring costs totaling
$21.0 million
. Excluding these charges from the comparatives for the
third
quarter of fiscal
2017
, income from operations increased
26%
and operating margin increased
80
basis points.
On a segment basis, we determine income from operations without taking into account our general corporate expenses and the costs we incurred in connection with the restructuring of our ivivva operations. In the first quarter of fiscal
2018
, we reviewed our general corporate expenses and determined certain costs which were previously classified as general corporate expenses are more appropriately classified within our direct to consumer segment. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
Segmented income from operations for the quarters ended
October 28, 2018
and
October 29, 2017
is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
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Quarter Ended
|
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|
October 28, 2018
|
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October 29, 2017
|
|
October 28, 2018
|
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October 29, 2017
|
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|
(In thousands)
|
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(Percentage of segment revenue)
|
Segmented income from operations:
|
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Company-operated stores
|
|
$
|
117,804
|
|
|
$
|
97,015
|
|
|
24.7
|
%
|
|
22.8
|
%
|
Direct to consumer
|
|
76,435
|
|
|
50,229
|
|
|
40.4
|
|
|
38.3
|
|
Other
|
|
15,019
|
|
|
9,319
|
|
|
18.5
|
|
|
14.9
|
|
|
|
209,258
|
|
|
156,563
|
|
|
|
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|
General corporate expense
|
|
73,355
|
|
|
48,790
|
|
|
|
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|
Restructuring and related costs
|
|
—
|
|
|
22,185
|
|
|
|
|
|
Income from operations
|
|
$
|
135,903
|
|
|
$
|
85,588
|
|
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Company-Operated Stores
. Income from operations from our company-operated stores segment
increase
d
$20.8 million
, or
21%
, to
$117.8 million
for the
third
quarter of fiscal
2018
from
$97.0 million
for the
third
quarter of fiscal
2017
. The increase was primarily the result of
increase
d gross profit of
$32.3 million
which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses, primarily due to an increase in employee costs as well as increased store operating expenses including higher credit card fees, distribution costs, and packaging costs as a result of higher net revenue. Income from operations as a percentage of company-operated stores net revenue
increased
190
basis points due to higher gross margin and leverage on selling, general and administrative expenses.
Direct to Consumer.
Income from operations from our direct to consumer segment
increase
d
$26.2 million
, or
52%
, to
$76.4 million
for the
third
quarter of fiscal
2018
from
$50.2 million
for the
third
quarter of fiscal
2017
. The
increase
was primarily the result of
increase
d gross profit of
$38.3 million
which was primarily due to increased net revenue. This was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs and credit card fees as a result of higher net revenue, as well as higher digital marketing expenses and increased employee costs. Income from operations as a percentage of direct to consumer net revenue
increased
210
basis points primarily due to leverage on selling, general and administrative expenses.
Other.
Other income from operations
increase
d
$5.7 million
, or
61%
, to
$15.0 million
for the
third
quarter of fiscal
2018
from
$9.3 million
for the
third
quarter of fiscal
2017
. The increase was primarily the result of
increase
d gross profit of
$13.1 million
which was primarily due to increased net revenue and higher gross margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to increased employee costs, increased operating expenses including increases in professional fees, repairs and maintenance costs, security costs, and higher distribution costs and credit card fees as a result of higher net revenue, and higher community costs. Income from operations as a percentage of other net revenue
increased
360
basis points due to higher gross margin and leverage on selling, general and administrative expenses.
General Corporate Expense.
General corporate expense
increase
d
$24.6 million
, or
50%
, to
$73.4 million
for the
third
quarter of fiscal
2018
from
$48.8 million
for the
third
quarter of fiscal
2017
. This increase was primarily due to increases in head office employee costs, brand and community costs, information technology costs, professional fees, depreciation, and an
increase
in net foreign exchange and derivative revaluation losses of
$4.1 million
.
Other Income (Expense), Net
Other income, net
increase
d
$1.0 million
, or
94%
, to
$2.0 million
for the
third
quarter of fiscal
2018
from income of
$1.1 million
for the
third
quarter of fiscal
2017
. The
increase
was primarily due to an increase in net interest income, primarily due to higher rates of return on our cash and cash equivalents, including money market funds, treasury bills, and term deposits, and due to an increase in cash and cash equivalents in the
third
quarter of fiscal
2018
compared to
third
quarter of fiscal
2017
. This was partially offset by an increase in interest expense primarily related to borrowings on our revolving credit facility during the
third
quarter of fiscal
2018
. We repaid the outstanding balance on our revolving credit facility during the
third
quarter of fiscal
2018
and had no borrowings outstanding under this credit facility as of
October 28, 2018
.
Income Tax Expense
Income tax expense
increase
d
$15.8 million
, or
57%
, to
$43.5 million
for the
third
quarter of fiscal
2018
from
$27.7 million
for the
third
quarter of fiscal
2017
.
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. We recorded certain provisional amounts in the fourth quarter of fiscal 2017. During the
third
quarter of fiscal
2018
, we adjusted the provisional amount recorded for the mandatory one-time transition tax on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries. This resulted in the recognition of an additional tax expense of
$5.2 million
. We expect the accounting for the income tax effects of the U.S. tax reform to be completed in fiscal 2018. Please refer to Note
8
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
During the
third
quarter of fiscal
2017
, we recognized a net income tax recovery of
$5.8 million
on the costs recognized in connection with the ivivva restructuring. Please refer to Note
7
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
The effective tax rate for the
third
quarter of fiscal
2018
was
31.6%
compared to
32.0%
for the
third
quarter of fiscal
2017
. Excluding the above tax adjustments, the adjusted effective tax rate was
27.8%
compared to
30.8%
for the
third
quarter of fiscal
2017
. The
decrease
in the adjusted effective tax rate was primarily due to the lower U.S. federal income tax rate as a
result of the U.S. tax reform, partially offset by the amounts recognized for global intangible low-taxed income ("GILTI") taxes. During the third quarter of fiscal 2018 we reduced our expected effective tax rate for fiscal 2018 as a result of a more favorable mix of earnings amongst jurisdictions with differing statutory tax rates, certain adjustments resulting from the filing of tax returns, and higher than expected tax credits related to research and development. This reduced the effective tax rate for the third quarter of fiscal 2018.
Net Income
Net income
increase
d
$35.5 million
, or
60%
, to
$94.4 million
for the
third
quarter of fiscal
2018
from
$58.9 million
for the
third
quarter of fiscal
2017
. This was primarily due to
an increase
in gross profit of
$84.8 million
, a reduction in asset impairment and restructuring costs of
$21.0 million
, and
an increase
in other income (expense), net of
$1.0 million
, partially offset by
an increase
in selling, general and administrative expenses of
$55.5 million
and
an increase
in income tax expense of
$15.8 million
.
First
Three Quarters
Results
The following table summarizes key components of our results of operations for the first
three quarters
ended
October 28, 2018
and
October 29, 2017
. The percentages are presented as a percentage of net revenue.
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|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
|
(Percentages)
|
Net revenue
|
|
$
|
2,120,861
|
|
|
$
|
1,720,379
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
973,157
|
|
|
844,100
|
|
|
45.9
|
|
|
49.1
|
|
Gross profit
|
|
1,147,704
|
|
|
876,279
|
|
|
54.1
|
|
|
50.9
|
|
Selling, general and administrative expenses
|
|
773,288
|
|
|
640,032
|
|
|
36.5
|
|
|
37.2
|
|
Asset impairment and restructuring costs
|
|
—
|
|
|
36,524
|
|
|
—
|
|
|
2.1
|
|
Income from operations
|
|
374,416
|
|
|
199,723
|
|
|
17.7
|
|
|
11.6
|
|
Other income (expense), net
|
|
6,553
|
|
|
2,771
|
|
|
0.3
|
|
|
0.2
|
|
Income before income tax expense
|
|
380,969
|
|
|
202,494
|
|
|
18.0
|
|
|
11.8
|
|
Income tax expense
|
|
115,633
|
|
|
63,593
|
|
|
5.5
|
|
|
3.7
|
|
Net income
|
|
$
|
265,336
|
|
|
$
|
138,901
|
|
|
12.5
|
%
|
|
8.1
|
%
|
Net Revenue
Net revenue
increase
d
$400.5 million
, or
23%
, to
$2.121 billion
for the first
three quarters
of fiscal
2018
from
$1.720 billion
for the first
three quarters
of fiscal
2017
. On a constant dollar basis, assuming the average exchange rates for the first
three quarters
of fiscal
2018
remained constant with the average exchange rates for the first
three quarters
of fiscal
2017
, net revenue
increased
$397.9 million
, or
23%
.
The
increase
in net revenue was primarily due to increased direct to consumer net revenue, net revenue generated by new company-operated stores, and an increase in comparable store sales. Total comparable sales, which includes comparable store sales and direct to consumer,
increased
19%
in the first
three quarters
of fiscal
2018
compared to the first
three quarters
of fiscal
2017
. Total comparable sales
increased
19%
on a constant dollar basis.
Net revenue on a segment basis for the first
three quarters
ended
October 28, 2018
and
October 29, 2017
is summarized below. The percentages are presented as a percentage of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
1,396,376
|
|
|
$
|
1,218,127
|
|
|
65.8
|
%
|
|
70.8
|
%
|
Direct to consumer
|
|
514,623
|
|
|
341,453
|
|
|
24.3
|
|
|
19.8
|
|
Other
|
|
209,862
|
|
|
160,799
|
|
|
9.9
|
|
|
9.4
|
|
Net revenue
|
|
$
|
2,120,861
|
|
|
$
|
1,720,379
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Company-Operated Stores
. Net revenue from our company-operated stores segment
increase
d
$178.2 million
, or
15%
, to
$1.396 billion
in the first
three quarters
of fiscal
2018
from
$1.218 billion
in the first
three quarters
of fiscal
2017
. The following contributed to the increase in net revenue from our company-operated stores segment:
|
|
•
|
Net revenue from company-operated stores we opened or significantly expanded subsequent to
October 29, 2017
, and therefore not included in comparable store sales, contributed
$134.5 million
to the increase. We opened
38
net new lululemon branded company-operated stores since the
third
quarter of fiscal
2017
, including
18
stores in North America,
11
stores in Asia,
seven
stores in Europe, and
two
stores in Australia/New Zealand.
|
|
|
•
|
A comparable store sales
increase
of
8%
in the first
three quarters
of fiscal
2018
compared to the first
three quarters
of fiscal
2017
resulted in a
$75.4 million
increase
to net revenue. Comparable store sales
increased
8%
, or
$74.5 million
on a constant dollar basis. The
increase
in comparable store sales was primarily a result of increased store traffic and improved conversion rates.
|
The increase in net revenue was partially offset by the closure of
48
of our ivivva branded company-operated stores as part of the restructuring of our ivivva operations. These closures reduced our net revenue from company-operated stores for the first
three quarters
of fiscal
2018
by
$31.6 million
compared to the first
three quarters
of fiscal
2017
.
Direct to Consumer.
Net revenue from our direct to consumer segment
increased
$173.2 million
, or
51%
, to
$514.6 million
in the first
three quarters
of fiscal
2018
from
$341.5 million
in the first
three quarters
of fiscal
2017
. Direct to consumer net revenue
increased
50%
on a constant dollar basis. This was primarily a result of increased website traffic and improved conversion rates, and due to increased dollar value per transaction. During the second quarter of fiscal 2017, we held an online warehouse sale in the United States and Canada which generated net revenue of
$12.3 million
. We did not hold any online warehouse sales during the first
three quarters
of fiscal
2018
.
Other.
Net revenue from our other segment
increase
d
$49.1 million
, or
31%
, to
$209.9 million
in the first
three quarters
of fiscal
2018
from
$160.8 million
in the first
three quarters
of fiscal
2017
. This
increase
was primarily the result of an increase in net revenue from new and existing outlets during the first
three quarters
of fiscal
2018
compared to the first
three quarters
of fiscal
2017
. There was also an increased number of temporary locations, including seasonal stores, open during the first
three quarters
of fiscal
2018
compared to the first
three quarters
of fiscal
2017
. The
increase
in net revenue from our other segment was partially offset by lower net revenue from showrooms, primarily due to a decreased number of showrooms open during the first
three quarters
of fiscal
2018
compared to the first
three quarters
of fiscal
2017
.
Gross Profit
Gross profit
increased
$271.4 million
, or
31%
, to
$1.148 billion
for the first
three quarters
of fiscal
2018
from
$876.3 million
for the first
three quarters
of fiscal
2017
.
Gross profit as a percentage of net revenue, or gross margin,
increase
d
320
basis points, to
54.1%
in the first
three quarters
of fiscal
2018
from
50.9%
in the first
three quarters
of fiscal
2017
. The
increase
in gross margin was primarily the result of:
|
|
•
|
an increase in product margin of 230 basis points, which was primarily due to lower product costs, a favorable mix of higher margin product, lower markdowns, and lower inventory provision expense;
|
|
|
•
|
a decrease in occupancy and depreciation costs as a percentage of revenue of 50 basis points; and
|
|
|
•
|
the costs incurred in the first
three quarters
of fiscal 2017 in connection with the restructuring of our ivivva operations, which reduced gross margin in that quarter by 50 basis points.
|
This was partially offset by an increase in costs as a percentage of revenue related to our distribution centers of 10 basis points.
During the first
three quarters
of fiscal
2017
, as a result of the restructuring of our ivivva operations, we recognized costs totaling
$8.8 million
within costs of goods sold, as outlined in Note
7
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report. Excluding these charges from the comparatives for the first
three quarters
of fiscal
2017
, gross profit increased
30%
and gross margin
increase
d
270
basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increase
d
$133.3 million
, or
21%
, to
$773.3 million
in the first
three quarters
of fiscal
2018
from
$640.0 million
in the first
three quarters
of fiscal
2017
. The
increase
in selling, general and administrative expenses was primarily due to:
|
|
•
|
an increase
in costs related to our operating channels of
$80.9 million
, comprised of:
|
|
|
–
|
an increase
in employee costs of
$35.3 million
primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher retail bonus expenses;
|
|
|
–
|
an increase
in variable costs of
$28.4 million
primarily due to an increase in distribution costs, credit card fees, and packaging costs as a result of increased net revenue; and
|
|
|
–
|
an increase
in other costs of
$17.1 million
primarily due to an increase in digital marketing expenses, brand and community costs, and other costs associated with our operating locations including security and repairs and maintenance;
|
|
|
•
|
an increase
in head office costs of
$41.3 million
, comprised of:
|
|
|
–
|
an increase
in employee costs of
$22.8 million
primarily due to additional employees to support the growth in our business and increased incentive and stock-based compensation expense; and
|
|
|
–
|
an increase
in other costs of
$18.5 million
primarily due to an increase in brand and community costs, information technology costs, depreciation, professional fees, and other head office costs; and
|
|
|
•
|
an
increase
in net foreign exchange and derivative revaluation losses of
$11.2 million
.
|
As a percentage of net revenue, selling, general and administrative expenses
decrease
d
70
basis points, to
36.5%
in the first
three quarters
of fiscal
2018
from
37.2%
in the first
three quarters
of fiscal
2017
.
Asset Impairment and Restructuring Costs
During the first
three quarters
of fiscal
2017
, we incurred asset impairment and restructuring costs totaling
$36.5 million
in connection with the restructuring of our ivivva operations. This included lease termination costs of
$19.9 million
, long-lived asset impairment charges of
$11.6 million
, employee related costs of
$4.0 million
, and other restructuring costs of
$1.0 million
.
Please refer to Note
7
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
We did not have any asset impairment and restructuring costs in the first
three quarters
of fiscal
2018
.
Income from Operations
Income from operations
increase
d
$174.7 million
, or
87%
, to
$374.4 million
in the first
three quarters
of fiscal
2018
from
$199.7 million
in the first
three quarters
of fiscal
2017
. Operating margin
increase
d
610
basis points to
17.7%
compared to
11.6%
in the first
three quarters
of fiscal
2017
.
In connection with the restructuring of our ivivva operations, we recognized pre-tax costs totaling
$45.4 million
in the first
three quarters
of fiscal
2017
. This included costs of
$8.8 million
recognized in cost of goods sold, and asset impairment and restructuring costs totaling
$36.5 million
. Excluding these charges from the comparatives for the first
three quarters
of fiscal
2017
, income from operations
increased
53%
and operating margin
increased
350
basis points.
On a segment basis, we determine income from operations without taking into account our general corporate expenses and the costs we incurred in connection with the restructuring of our ivivva operations. In the first quarter of fiscal
2018
, we reviewed our general corporate expenses and determined certain costs which were previously classified as general corporate expenses are more appropriately classified within our direct to consumer segment. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
Segmented income from operations for the first
three quarters
ended
October 28, 2018
and
October 29, 2017
is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
|
(Percentage of segment revenue)
|
Segmented income from operations:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
342,959
|
|
|
$
|
267,178
|
|
|
24.6
|
%
|
|
21.9
|
%
|
Direct to consumer
|
|
205,735
|
|
|
123,045
|
|
|
40.0
|
|
|
36.0
|
|
Other
|
|
39,336
|
|
|
19,076
|
|
|
18.7
|
|
|
11.9
|
|
|
|
588,030
|
|
|
409,299
|
|
|
|
|
|
|
|
General corporate expense
|
|
213,614
|
|
|
164,211
|
|
|
|
|
|
|
|
Restructuring and related costs
|
|
—
|
|
|
45,365
|
|
|
|
|
|
Income from operations
|
|
$
|
374,416
|
|
|
$
|
199,723
|
|
|
|
|
|
|
|
Company-Operated Stores.
Income from operations from our company-operated stores segment
increased
$75.8 million
, or
28%
, to
$343.0 million
for the first
three quarters
of fiscal
2018
from
$267.2 million
for the first
three quarters
of fiscal
2017
. The increase was primarily the result of
increase
d gross profit of
$110.5 million
which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses, primarily due to increased employee costs, increased store operating expenses including higher credit card fees, distribution costs, and packaging costs as a result of higher net revenue, and due to increased community costs. Income from operations as a percentage of company-operated stores net revenue
increased
by
270
basis points, primarily due to an increase in gross margin and leverage on selling, general and administrative expenses.
Direct to Consumer.
Income from operations from our direct to consumer segment
increase
d
$82.7 million
, or
67%
, to
$205.7 million
for the first
three quarters
of fiscal
2018
from
$123.0 million
for the first
three quarters
of fiscal
2017
. The
increase
was primarily the result of
increase
d gross profit of
$118.9 million
which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses primarily due
to higher variable costs including distribution costs, credit card fees, and packaging costs as a result of higher net revenue, higher digital marketing expenses, and increased employee costs. Income from operations as a percentage of direct to consumer net revenue
increased
400
basis points, primarily due to leverage on selling, general and administrative expenses and an increase in gross margin.
Other.
Other income from operations
increase
d
$20.3 million
, or
106%
, to
$39.3 million
for the first
three quarters
of fiscal
2018
from
$19.1 million
for the first
three quarters
of fiscal
2017
. The
increase
was primarily the result of
increase
d gross profit of
$33.2 million
which was primarily due to increased net revenue and higher gross margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased employee costs, increased operating expenses including higher distribution costs and higher credit card fees as a result of higher net revenue, and due to higher community costs. Income from operations as a percentage of other net revenue
increased
680
basis points, primarily due to an increase in gross margin and leverage on selling, general and administrative expenses.
General Corporate Expense.
General corporate expense
increase
d
$49.4 million
, or
30%
, to
$213.6 million
for the first
three quarters
of fiscal
2018
from
$164.2 million
for the first
three quarters
of fiscal
2017
. This increase was primarily due to increases in head office employee costs, brand and community costs, information technology costs, professional fees, and depreciation and an
increase
in net foreign exchange and derivative revaluation losses of
$11.2 million
.
Other Income (Expense), Net
Other income, net
increase
d
$3.8 million
, or
136%
, to
$6.6 million
for the first
three quarters
of fiscal
2018
from income of
$2.8 million
for the first
three quarters
of fiscal
2017
. The
increase
was primarily due to an increase in net interest income, primarily due to higher rates of return on our cash and cash equivalents, including money market funds, treasury bills, and term deposits, and due to an increase in cash and cash equivalents in the first
three quarters
of fiscal
2018
compared to the first
three quarters
of fiscal
2017
. This was partially offset by an increase in interest expense, primarily related to borrowings on our revolving credit facility during the first
three quarters
of fiscal
2018
. We repaid the outstanding balance on our revolving credit facility during the
third
quarter of fiscal
2018
and had no borrowings outstanding under this credit facility as of
October 28, 2018
.
Income Tax Expense
Income tax expense
increased
$52.0 million
, or
82%
, to
$115.6 million
for the first
three quarters
of fiscal
2018
from
$63.6 million
for the first
three quarters
of fiscal
2017
.
U.S. tax reform was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. We recorded certain provisional amounts in the fourth quarter of fiscal 2017. During the
third
quarter of fiscal
2018
, we adjusted the provisional amount recorded for the mandatory one-time transition tax on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries. This resulted in the recognition of an additional tax expense of
$5.2 million
. We expect the accounting for the income tax effects of the U.S. tax reform to be completed in fiscal 2018. Please refer to Note
8
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
During the first
three quarters
of fiscal
2017
, we recognized a net income tax recovery of
$11.9 million
on the costs recognized in connection with the ivivva restructuring. Please refer to Note
7
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
The effective tax rate for the first
three quarters
of fiscal
2018
was
30.4%
compared to
31.4%
for the first
three quarters
of fiscal
2017
. Excluding the above tax adjustments, the adjusted effective tax rate was
29.0%
for the first
three quarters
of fiscal
2018
compared to
30.5%
for the first
three quarters
of fiscal
2017
. The
decrease
in the adjusted effective tax rate was primarily due to the lower U.S. federal income tax rate as a result of the U.S. tax reform, as well as increased tax deductions related to stock-based compensation and increased research and development tax credits. This was partially offset by the amounts recognized for GILTI taxes.
Net Income
Net income
increased
$126.4 million
, or
91%
, to
$265.3 million
for the first
three quarters
of fiscal
2018
from
$138.9 million
for the first
three quarters
of fiscal
2017
. This was primarily due to
an increase
in gross profit of
$271.4 million
, a reduction in long-lived asset impairment and restructuring costs of
$36.5 million
, and
an increase
in other income (expense), net of
$3.8 million
, partially offset by
an increase
in selling, general and administrative expenses of
$133.3 million
and
an increase
in income tax expense of
$52.0 million
.
Comparable Store Sales and Total Comparable Sales
We separately track comparable store sales, which reflect net revenue from company-operated stores that have been open for at least 12 months, or open for at least 12 months after being significantly expanded. Net revenue from a store is included in comparable store sales beginning with the first month for which the store has a full month of sales in the prior year. Comparable store sales exclude sales from new stores that have not been open for at least 12 months, from stores which have not been in their significantly expanded space for at least 12 months, and from stores which have been temporarily relocated for renovations. Comparable store sales also exclude sales from direct to consumer, outlets, temporary locations, wholesale accounts, showrooms, warehouse sales, license and supply arrangements, and sales from company-operated stores that we have closed. Total comparable sales combines comparable store sales and direct to consumer sales. The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.
Non-GAAP Financial Measures
Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and the adjusted financial results are non-GAAP financial measures.
A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign exchange rates for the same period of the prior year. We provide constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue because we use these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates. We believe that disclosing these measures on a constant dollar basis is useful to investors because it enables them to better understand the level of growth of our business.
Adjusted gross profit, gross margin, income from operations, operating margin, income tax expense, effective tax rates, and diluted earnings per share exclude the amounts recognized in connection with the U.S. tax reform and the costs and related tax effects recognized in connection with the restructuring of our ivivva operations. We believe these adjusted financial measures are useful to investors as the adjustments do not directly relate to our ongoing business operations and therefore do not contribute to a meaningful evaluation of the trend in our operating performance. Furthermore, we do not believe the adjustments are reflective of our expectations of our future operating performance and believe these non-GAAP measures are useful to investors because of their comparability to our historical information.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP. A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.
The below changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, show the change compared to the corresponding period in the prior year.
Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 28, 2018
|
|
Three Quarters Ended
October 28, 2018
|
|
|
(In thousands)
|
|
(Percentages)
|
|
(In thousands)
|
|
(Percentages)
|
Change in net revenue
|
|
$
|
128,637
|
|
|
21
|
%
|
|
$
|
400,482
|
|
|
23
|
%
|
Adjustments due to foreign exchange rate changes
|
|
9,324
|
|
|
1
|
|
|
(2,567
|
)
|
|
—
|
|
Change in net revenue in constant dollars
|
|
$
|
137,961
|
|
|
22
|
%
|
|
$
|
397,915
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 28, 2018
|
|
Three Quarters Ended
October 28, 2018
|
Change in total comparable sales
(1),(2)
|
|
17
|
%
|
|
19
|
%
|
Adjustments due to foreign exchange rate changes
|
|
1
|
|
|
—
|
|
Change in total comparable sales in constant dollars
(1),(2)
|
|
18
|
%
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 28, 2018
|
|
Three Quarters Ended
October 28, 2018
|
|
|
(In thousands)
|
|
(Percentages)
|
|
(In thousands)
|
|
(Percentages)
|
Change in comparable store sales
(2)
|
|
$
|
16,719
|
|
|
6
|
%
|
|
$
|
75,376
|
|
|
8
|
%
|
Adjustments due to foreign exchange rate changes
|
|
4,674
|
|
|
1
|
|
|
(847
|
)
|
|
—
|
|
Change in comparable store sales in constant dollars
(2)
|
|
$
|
21,393
|
|
|
7
|
%
|
|
$
|
74,529
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 28, 2018
|
|
Three Quarters Ended
October 28, 2018
|
Change in direct to consumer net revenue
|
|
44
|
%
|
|
51
|
%
|
Adjustments due to foreign exchange rate changes
|
|
2
|
|
|
(1
|
)
|
Change in direct to consumer net revenue in constant dollars
|
|
46
|
%
|
|
50
|
%
|
__________
|
|
(1)
|
Total comparable sales includes comparable store sales and direct to consumer sales.
|
|
|
(2)
|
Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 months, or open for at least 12 months after being significantly expanded.
|
Adjusted financial measures
The following tables reconcile the adjusted financial measures with the most directly comparable measures calculated in accordance with GAAP. The adjustments relate to U.S. tax reform and the restructuring of our ivivva operations and its related tax effects. Please refer to Notes
7
and
8
to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information on these adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
October 28, 2018
|
|
Quarter Ended
October 29, 2017
|
|
|
GAAP Results
|
|
U.S. Tax Reform
|
|
Adjusted Results
(Non-GAAP)
|
|
GAAP Results
|
|
Restructuring of ivivva Operations Adjustments
|
|
Adjusted Results
(Non-GAAP)
|
|
|
(In thousands, except per share amounts)
|
Gross profit
|
|
$
|
406,777
|
|
|
$
|
—
|
|
|
$
|
406,777
|
|
|
$
|
321,962
|
|
|
$
|
1,178
|
|
|
$
|
323,140
|
|
Gross margin
|
|
54.4
|
%
|
|
—
|
%
|
|
54.4
|
%
|
|
52.0
|
%
|
|
0.2
|
%
|
|
52.2
|
%
|
Income from operations
|
|
135,903
|
|
|
—
|
|
|
135,903
|
|
|
85,588
|
|
|
22,186
|
|
|
107,774
|
|
Operating margin
|
|
18.2
|
%
|
|
—
|
%
|
|
18.2
|
%
|
|
13.8
|
%
|
|
3.6
|
%
|
|
17.4
|
%
|
Income before income tax expense
|
|
137,947
|
|
|
—
|
|
|
137,947
|
|
|
86,640
|
|
|
22,185
|
|
|
108,825
|
|
Income tax expense
|
|
43,534
|
|
|
(5,163
|
)
|
|
38,371
|
|
|
27,696
|
|
|
5,813
|
|
|
33,509
|
|
Effective tax rate
|
|
31.6
|
%
|
|
(3.8
|
)%
|
|
27.8
|
%
|
|
32.0
|
%
|
|
(1.2
|
)%
|
|
30.8
|
%
|
Diluted earnings per share
|
|
$
|
0.71
|
|
|
$
|
0.04
|
|
|
$
|
0.75
|
|
|
$
|
0.43
|
|
|
$
|
0.13
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
October 28, 2018
|
|
Three Quarters Ended
October 29, 2017
|
|
|
GAAP Results
|
|
U.S. Tax Reform
|
|
Adjusted Results
(Non-GAAP)
|
|
GAAP Results
|
|
Restructuring of ivivva Operations Adjustments
|
|
Adjusted Results
(Non-GAAP)
|
|
|
(In thousands, except per share amounts)
|
Gross profit
|
|
$
|
1,147,704
|
|
|
$
|
—
|
|
|
$
|
1,147,704
|
|
|
$
|
876,279
|
|
|
$
|
8,841
|
|
|
$
|
885,120
|
|
Gross margin
|
|
54.1
|
%
|
|
—
|
%
|
|
54.1
|
%
|
|
50.9
|
%
|
|
0.5
|
%
|
|
51.4
|
%
|
Income from operations
|
|
374,416
|
|
|
—
|
|
|
374,416
|
|
|
199,723
|
|
|
45,365
|
|
|
245,088
|
|
Operating margin
|
|
17.7
|
%
|
|
—
|
%
|
|
17.7
|
%
|
|
11.6
|
%
|
|
2.6
|
%
|
|
14.2
|
%
|
Income before income tax expense
|
|
380,969
|
|
|
—
|
|
|
380,969
|
|
|
202,494
|
|
|
45,365
|
|
|
247,859
|
|
Income tax expense
|
|
115,633
|
|
|
(5,163
|
)
|
|
110,471
|
|
|
63,593
|
|
|
11,886
|
|
|
75,479
|
|
Effective tax rate
|
|
30.4
|
%
|
|
(1.4
|
)%
|
|
29.0
|
%
|
|
31.4
|
%
|
|
(0.9
|
)%
|
|
30.5
|
%
|
Diluted earnings per share
|
|
$
|
1.97
|
|
|
$
|
0.04
|
|
|
$
|
2.01
|
|
|
$
|
1.02
|
|
|
$
|
0.24
|
|
|
$
|
1.26
|
|
Seasonality
Our business is affected by the general seasonal trends common to the retail apparel industry. Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year. As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year. For example, we generated approximately 56%, 47%, and 45% of our full year operating profit during the fourth quarters of fiscal
2017
, fiscal
2016
, and fiscal
2015
, respectively. Excluding the costs we incurred in connection with the ivivva restructuring, we generated approximately 51% of our operating profit during the fourth quarter of fiscal 2017.
Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our revolving credit facility. Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, making information technology system investments and enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally. We may also use cash to repurchase shares of our common stock. Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions, as well as in money market funds, treasury bills, and term deposits.
As of
October 28, 2018
, our working capital, excluding cash and cash equivalents, was
$216.2 million
, our cash and cash equivalents were
$703.6 million
, and our capacity under our revolving facility was
$398.8 million
.
The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
October 28, 2018
|
|
October 29, 2017
|
|
|
(In thousands)
|
Total cash provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
316,876
|
|
|
$
|
131,309
|
|
Investing activities
|
|
(165,914
|
)
|
|
(120,051
|
)
|
Financing activities
|
|
(406,361
|
)
|
|
(100,707
|
)
|
Effect of exchange rate changes on cash
|
|
(31,495
|
)
|
|
4,657
|
|
Decrease in cash and cash equivalents
|
|
$
|
(286,894
|
)
|
|
$
|
(84,792
|
)
|
Operating Activities
Cash flows provided by operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense, and the effect of changes in operating assets and liabilities.
Cash provided by operating activities
increased
$185.6 million
, to
$316.9 million
for the first
three quarters
of fiscal
2018
compared to
$131.3 million
for the first
three quarters
of fiscal
2017
, primarily as a result of the following:
Net income and non-cash items
|
|
•
|
an
increase
of
$126.4 million
in net income, and an
increase
of
$12.9 million
in non-cash expenses primarily related to an increase in deferred income taxes, depreciation, and stock-based compensation, partially offset by a decrease in asset impairment costs related to the restructuring of our ivivva operations and the settlement of derivatives not designated in a hedging relationship.
|
Changes in operating assets and liabilities
|
|
•
|
an
increase
of
$46.3 million
in the change in operating assets and liabilities, primarily due to the following:
|
|
|
–
|
an increase
of
$140.8 million
related to accounts payable, primarily due to a change in our payment terms;
|
|
|
–
|
partially offset by
an increase
of
$97.4 million
related to inventory, primarily due to an increase in inventory purchases.
|
Investing Activities
Cash flows used in investing activities relate to capital expenditures, the settlement of net investment hedges, and other investing activities. The capital expenditures were primarily for opening new company-operated stores, remodeling or relocating certain stores, and ongoing store refurbishment. We also had capital expenditures related to information technology and business systems, related to corporate buildings, and for opening retail locations other than company-operated stores.
Cash used in investing activities
increased
$45.9 million
to
$165.9 million
for the first
three quarters
of fiscal
2018
from
$120.1 million
for the first
three quarters
of fiscal
2017
. The increase was primarily the result of an increase in corporate capital expenditures related to information technology and business systems. Increased capital expenditures related to our company-operated stores also contributed to the increase in cash used in investing activities, primarily as a result of an increase in renovations and relocations of existing stores. The increase in cash used in investing activities was partially offset by a decrease in direct to consumer capital expenditures.
Financing Activities
Cash flows used in financing activities consist primarily of cash used to repurchase shares of our common stock, certain cash flows related to stock-based compensation, and other financing activities.
Cash used in financing activities
increased
$305.7 million
to
$406.4 million
for the first
three quarters
of fiscal
2018
compared to
$100.7 million
for the first
three quarters
of fiscal
2017
. The increase was primarily the result of our stock repurchases.
On December 1, 2016, our board of directors approved a program to repurchase shares of our common stock up to an aggregate value of $100.0 million. This stock repurchase program was completed during the third quarter of fiscal 2017. On November 29, 2017, our board of directors approved a program to repurchase shares of our common stock up to an aggregate value of $200.0 million. 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 our common shares on the open market or in privately negotiated transactions.
Our cash used in financing activities for the first
three quarters
of fiscal
2018
included
$414.3 million
to repurchase
3.4 million
shares of our common stock compared to
$99.3 million
to repurchase
1.8 million
shares for the first
three quarters
of fiscal
2017
. During the second quarter of fiscal 2018, we repurchased
3.3 million
shares in a private transaction. The other common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.
We believe that our cash and cash equivalent balances, cash generated from operations, and borrowings available to us under our revolving credit facility will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. Our cash from operations may be negatively impacted by a decrease in demand for our products as well as the other factors described in Item 1 of Part II of this Quarterly Report on Form 10-Q. In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations.
Revolving Credit Facility
On December 15, 2016, we entered into a credit agreement for $150.0 million under an unsecured five-year revolving credit facility. Bank of America, N.A., is administrative agent and HSBC Bank Canada is the syndication agent and letter of credit issuer, and the lenders party thereto. Borrowings under the revolving credit facility may be made, in U.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the approval of the administrative agent and the lenders. Up to $35.0 million of the revolving credit facility is available for the issuance of letters of credit and up to $25.0 million is available for the issuance of swing line loans. Commitments under the revolving credit facility may be increased by up to $200.0 million, subject to certain conditions, including the approval of the lenders. Borrowings under the agreement may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs). The principal amount outstanding under the credit agreement, if any, will be due and payable in full on December 15, 2021, subject to provisions that permit us to request a limited number of one year extensions annually.
Borrowings made under the revolving credit facility bear interest at a rate per annum equal to, at our option, either (a) a rate 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, in each case, an applicable margin. The applicable margin is 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%-1.75% for LIBOR loans and 0.00%-0.75% for alternate base rate loans. Additionally, a commitment fee of between 0.125%-0.200%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the revolving credit facility.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of our subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.
We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and we are not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be less than 2.00:1.00. 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). If an event of default occurs, the credit agreement may be terminated and the maturity of any outstanding amounts may be accelerated.
On June 6, 2018, we entered into Amendment No. 1 to the credit agreement. The Amendment amends the credit agreement to provide for (i) an increase in the aggregate commitments under the unsecured five-year 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 as set forth in the credit agreement, to request increases in commitments under the revolving facility from $400.0 million to $600.0 million and (iii) an extension in the maturity of the revolving facility from December 15, 2021 to June 6, 2023.
In addition, the Amendment decreases the applicable margins for LIBOR loans from 1.00%-1.75% to 1.00%-1.50% and for alternate base rate loans from 0.00%-0.75% to 0.00%-0.50%, reduces the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduces fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%.
As of
October 28, 2018
, aside from letters of credit of
$1.2 million
, we had no other borrowings outstanding under this credit facility.
Off-Balance Sheet Arrangements
We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties. As of
October 28, 2018
, letters of credit and letters of guarantee totaling
$1.2 million
had been issued.
We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in our fiscal
2017
Annual Report on Form 10-K filed with the SEC on
March 27, 2018
, and in Notes
2
,
5
, and
6
included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Operating Locations
Our company-operated stores by country as of
October 28, 2018
and
January 28, 2018
are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
October 28,
2018
|
|
January 28,
2018
|
United States
(1)
|
|
282
|
|
|
274
|
|
Canada
|
|
61
|
|
|
60
|
|
Australia
|
|
29
|
|
|
28
|
|
China
(2)
|
|
17
|
|
|
15
|
|
United Kingdom
|
|
12
|
|
|
9
|
|
New Zealand
|
|
6
|
|
|
6
|
|
Germany
|
|
4
|
|
|
2
|
|
Japan
|
|
4
|
|
|
2
|
|
South Korea
|
|
4
|
|
|
3
|
|
Singapore
|
|
3
|
|
|
3
|
|
France
|
|
1
|
|
|
—
|
|
Ireland
|
|
1
|
|
|
1
|
|
Sweden
|
|
1
|
|
|
—
|
|
Switzerland
|
|
1
|
|
|
1
|
|
Total company-operated stores
|
|
426
|
|
|
404
|
|
__________
|
|
(1)
|
Included within the United States as of
January 28, 2018
, was
one
company-operated store in the Commonwealth of Puerto Rico. This store permanently closed during the second quarter of fiscal 2018.
|
|
|
(2)
|
Included within China as of
October 28, 2018
and
January 28, 2018
, were
three
company-operated stores in the Hong Kong Special Administrative Region and
one
company-operated store in the Taiwan Province.
|
Retail locations operated by third parties under license and supply arrangements are not included in the above table. As of
October 28, 2018
, there were
seven
licensed locations, including
three
in Mexico,
three
in the United Arab Emirates, and
one
in Qatar.