10-Q 1 lulu-20220501.htm 10-Q lulu-20220501
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-33608

lulu-20220501_g1.jpg
lululemon athletica inc.
(Exact name of registrant as specified in its charter)
Delaware20-3842867
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1818 Cornwall Avenue, Vancouver, British Columbia V6J 1C7
(Address of principal executive offices)

Registrant's telephone number, including area code:
604-732-6124
Former name, former address and former fiscal year, if changed since last report:
N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.005 per shareLULUNasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (of for such shorter period that the registrant was required to submit such files).    Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated FilerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes No ☑
As of May 27, 2022, there were 122,439,795 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
As of May 27, 2022, there were outstanding 5,203,012 exchangeable shares of Lulu Canadian Holding, Inc., a wholly-owned subsidiary of the registrant. Exchangeable shares are exchangeable for an equal number of shares of the registrant's common stock.
In addition, as of May 27, 2022, the registrant had outstanding 5,203,012 shares of special voting stock, through which the holders of exchangeable shares of Lulu Canadian Holding, Inc. may exercise their voting rights with respect to the registrant. The special voting stock and the registrant's common stock generally vote together as a single class on all matters on which the common stock is entitled to vote.


TABLE OF CONTENTS
 
2

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
May 1,
2022
January 30,
2022
ASSETS
Current assets
Cash and cash equivalents
$649,016 $1,259,871 
Accounts receivable78,391 77,001 
Inventories1,275,040 966,481 
Prepaid and receivable income taxes116,281 118,928 
Prepaid expenses and other current assets184,512 192,572 
2,303,240 2,614,853 
Property and equipment, net974,784 927,710 
Right-of-use lease assets819,998 803,543 
Goodwill386,837 386,880 
Intangible assets, net69,103 71,299 
Deferred income tax assets6,090 6,091 
Other non-current assets137,160 132,102 
$4,697,212 $4,942,478 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$308,086 $289,728 
Accrued liabilities and other362,938 330,800 
Accrued compensation and related expenses119,482 204,921 
Current lease liabilities178,273 188,996 
Current income taxes payable22,279 133,852 
Unredeemed gift card liability183,910 208,195 
Other current liabilities31,923 48,842 
1,206,891 1,405,334 
Non-current lease liabilities726,270 692,056 
Non-current income taxes payable28,555 38,074 
Deferred income tax liabilities53,061 53,352 
Other non-current liabilities14,385 13,616 
2,029,162 2,202,432 
Commitments and contingencies
Stockholders' equity
Undesignated preferred stock, $0.01 par value: 5,000 shares authorized; none issued and outstanding
  
Exchangeable stock, no par value: 60,000 shares authorized; 5,203 and 5,203 issued and outstanding
  
Special voting stock, $0.000005 par value: 60,000 shares authorized; 5,203 and 5,203 issued and outstanding
  
Common stock, $0.005 par value: 400,000 shares authorized; 122,732 and 123,297 issued and outstanding
614 616 
Additional paid-in capital
412,713 422,507 
Retained earnings
2,471,432 2,512,840 
Accumulated other comprehensive loss
(216,709)(195,917)
2,668,050 2,740,046 
$4,697,212 $4,942,478 
See accompanying notes to the unaudited interim consolidated financial statements
3

lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
Quarter Ended
May 1,
2022
May 2,
2021
Net revenue$1,613,463 $1,226,465 
Cost of goods sold743,070 526,151 
Gross profit870,393 700,314 
Selling, general and administrative expenses607,851 496,634 
Amortization of intangible assets2,195 2,195 
Acquisition-related expenses 7,664 
Income from operations260,347 193,821 
Other income (expense), net(22)227 
Income before income tax expense260,325 194,048 
Income tax expense70,327 49,092 
Net income$189,998 $144,956 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment$(25,848)$67,241 
Net investment hedge gains (losses)5,056 (23,605)
Other comprehensive income (loss), net of tax$(20,792)$43,636 
Comprehensive income$169,206 $188,592 
Basic earnings per share$1.48 $1.11 
Diluted earnings per share$1.48 $1.11 
Basic weighted-average number of shares outstanding128,077 130,358 
Diluted weighted-average number of shares outstanding128,541 130,984 
See accompanying notes to the unaudited interim consolidated financial statements
4

lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
Quarter Ended May 1, 2022
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance as of January 30, 20225,203 5,203 $ 123,297 $616 $422,507 $2,512,840 $(195,917)$2,740,046 
Net income189,998 189,998 
Other comprehensive income (loss), net of tax(20,792)(20,792)
Stock-based compensation expense18,358 18,358 
Common stock issued upon settlement of stock-based compensation239 2 5,141 5,143 
Shares withheld related to net share settlement of stock-based compensation(96)— (32,059)(32,059)
Repurchase of common stock(708)(4)(1,234)(231,406)(232,644)
Balance as of May 1, 20225,203 5,203 $ 122,732 $614 $412,713 $2,471,432 $(216,709)$2,668,050 

Quarter Ended May 2, 2021
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance as of January 31, 20215,203 5,203 $ 125,150 $626 $388,667 $2,346,428 $(177,155)$2,558,566 
Net income144,956 144,956 
Other comprehensive income (loss), net of tax43,636 43,636 
Stock-based compensation expense14,932 14,932 
Common stock issued upon settlement of stock-based compensation324 2 4,493 4,495 
Shares withheld related to net share settlement of stock-based compensation(135)(1)(42,898)(42,899)
Repurchase of common stock(270)(2)(451)(83,378)(83,831)
Balance as of May 2, 20215,203 5,203 $ 125,069 $625 $364,743 $2,408,006 $(133,519)$2,639,855 
See accompanying notes to the unaudited interim consolidated financial statements
5

lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
Quarter Ended
May 1, 2022May 2, 2021
Cash flows from operating activities
Net income$189,998 $144,956 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization64,470 50,485 
Stock-based compensation expense18,358 14,932 
Settlement of derivatives not designated in a hedging relationship(10,378)21,515 
Changes in operating assets and liabilities:
Inventories(320,607)(74,218)
Prepaid and receivable income taxes2,646 767 
Prepaid expenses and other current assets4,296 (11,104)
Other non-current assets(4,523)1,105 
Accounts payable20,630 19,623 
Accrued liabilities and other28,113 38,181 
Accrued compensation and related expenses(84,123)22,764 
Current and non-current income taxes payable(119,959)(5,433)
Unredeemed gift card liability(23,816)(15,838)
Right-of-use lease assets and current and non-current lease liabilities7,115 1,820 
Other current and non-current liabilities(15,476)4,554 
Net cash provided by (used in) operating activities(243,256)214,109 
Cash flows from investing activities
Purchase of property and equipment(111,352)(64,225)
Settlement of net investment hedges10,024 (21,239)
Net cash used in investing activities(101,328)(85,464)
Cash flows from financing activities
Proceeds from settlement of stock-based compensation5,143 4,495 
Shares withheld related to net share settlement of stock-based compensation(32,059)(42,899)
Repurchase of common stock(232,644)(83,831)
Net cash used in financing activities(259,560)(122,235)
Effect of foreign currency exchange rate changes on cash and cash equivalents(6,711)22,812 
Increase (decrease) in cash and cash equivalents(610,855)29,222 
Cash and cash equivalents, beginning of period$1,259,871 $1,150,517 
Cash and cash equivalents, end of period$649,016 $1,179,739 
See accompanying notes to the unaudited interim consolidated financial statements

6

lululemon athletica inc.
INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS

7

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 technical athletic apparel, footwear, and accessories, which are sold through a chain of company-operated stores, direct to consumer through e-commerce, outlets, sales from temporary locations, sales to wholesale accounts, and license and supply arrangements. The Company operates stores in the United States, the People's Republic of China ("PRC"), Canada, Australia, the United Kingdom, South Korea, Germany, New Zealand, Japan, Singapore, Ireland, France, Malaysia, Sweden, the Netherlands, Norway, and Switzerland. There were 579 and 574 company-operated stores as of May 1, 2022 and January 30, 2022, respectively. The Company also engages in the design and retail of in-home fitness equipment and associated content subscriptions through its MIRROR brand.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") caused governments and public health officials to impose restrictions and recommend precautions to mitigate the spread of the virus. While most of the Company's retail locations were open throughout the first quarter of fiscal 2022 and 2021, certain locations were temporarily closed based on government and health authority guidance. Certain stores and the Company's third party distribution center in the PRC experienced temporary closures during the first quarter of 2022, and there is uncertainty regarding the ongoing impact of COVID-19 on its operations in the PRC. The pandemic has impacted its suppliers and its distribution and logistics providers, including in the PRC. There has been disruption in transportation and port congestion, an increase in freight costs, and the Company has increased its use of air freight.
Basis of presentation
The unaudited interim consolidated financial statements as of May 1, 2022 and for the quarters ended May 1, 2022 and May 2, 2021 are presented in U.S. dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of January 30, 2022 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 30, 2022, which are included in Item 8 in the Company's fiscal 2021 Annual Report on Form 10-K filed with the SEC on March 29, 2022. 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 2021 Annual Report on Form 10-K. Note 2. Recent Accounting Pronouncements sets out the impact of recent accounting pronouncements.
The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2022 will end on January 29, 2023 and will be a 52-week year. Fiscal 2021 was a 52-week year and ended on January 30, 2022. Fiscal 2022 and fiscal 2021 are referred to as "2022," and "2021," respectively. The first quarter of 2022 and 2021 ended on May 1, 2022 and May 2, 2021, respectively.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
Note 2. Recent Accounting Pronouncements
Recently adopted accounting pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates ("ASUs"). ASUs adopted by the Company during the first quarter of 2022 not listed below were assessed, and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations.
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In November 2021, the FASB issued ASC 832, Government Assistance to require annual disclosures about the nature of certain government assistance received, the accounting policy used to account for the transactions, the location in the financial statements where such transactions were recorded and significant terms and conditions associated with such transactions. The Company adopted this update prospectively during the first quarter of 2022 and it did not have a material impact on the Company's consolidated financial statements.
Recently issued accounting pronouncements
ASUs recently issued were assessed and determined to be either not applicable or are expected to have minimal impact on its consolidated financial position or results of operations.
Note 3. Acquisition-Related Expenses
On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. In connection with the acquisition, the Company recognized certain acquisition-related expenses which were expensed within acquisition-related expenses in the consolidated statements of operations. The following table summarizes the acquisition-related expenses recognized:
First Quarter
20222021
(in thousands)
Acquisition-related expenses:
Transaction and integration costs$ $496 
Acquisition-related compensation 7,168 
$ $7,664 
Income tax effects of acquisition-related expenses$ $(372)
Note 4. Revolving Credit Facilities
North America revolving credit facility
On December 14, 2021, the Company entered into an amended and restated credit agreement extending its existing credit facility, which provides for $400.0 million in commitments under an unsecured five-year revolving credit facility. The credit facility has a maturity date of December 14, 2026, subject to extension under certain circumstances. Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs).
As of May 1, 2022, aside from letters of credit of $3.1 million, the Company had no other borrowings outstanding under this credit facility.
Borrowings made under the credit facility bear interest at a rate per annum equal to, at the Company's option, either (a) a rate based on the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York ("SOFR"), 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 1.000%-1.375% for SOFR loans and 0.000%-0.375% for alternate base rate or Canadian prime rate loans. Additionally, a commitment fee of between 0.100%-0.200%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility.
The applicable interest rates and commitment fees are subject to adjustment based on certain sustainability key performance indicators ("KPIs"). The two KPIs are based on greenhouse gas emissions intensity reduction and gender pay equity, and the Company's performance against certain targets measured on an annual basis could result in positive or negative sustainability rate adjustments of 2.50 basis points to its drawn pricing and positive or negative sustainability fee adjustments of 0.50 basis points to its undrawn pricing.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of the Company's subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.
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The Company's financial covenants include maintaining an operating lease adjusted leverage ratio of not greater than 3.25:1.00 and the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) of not 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. As of May 1, 2022, the Company was in compliance with the covenants of the credit facility.
China Mainland revolving credit facility
In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan ($19.7 million) revolving credit facility with terms that are reviewed on an annual basis. The credit facility was increased to 230.0 million Chinese Yuan ($34.8 million) during 2020. It is comprised of a revolving loan of up to 200.0 million Chinese Yuan ($30.3 million) and a financial guarantee facility of up to 30.0 million Chinese Yuan ($4.5 million), or its equivalent in another currency. Loans are available for a period not to exceed 12 months, at an interest rate equal to the loan prime rate plus a spread of 0.5175%. The Company is required to follow certain covenants. As of May 1, 2022, the Company was in compliance with the covenants and, aside from letters of credit of 6.1 million Chinese Yuan ($0.9 million), there were no other borrowings or guarantees outstanding under this credit facility.
Note 5. Stock-Based Compensation and Benefit Plans
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, provided directly by the Company.
Stock-based compensation expense charged to income for the plans was $18.2 million and $16.2 million for the first quarter of 2022 and 2021, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $170.0 million as of May 1, 2022, which is expected to be recognized over a weighted-average period of 2.5 years.
A summary of the balances of the Company's stock-based compensation plans as of May 1, 2022, and changes during the first quarter then ended, is presented below:
Stock OptionsPerformance-Based Restricted Stock UnitsRestricted SharesRestricted Stock Units
NumberWeighted-Average Exercise PriceNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Grant Date Fair Value
(In thousands, except per share amounts)
Balance as of January 30, 2022789 $186.10 167 $225.27 4 $326.70 238 $265.90 
Granted172 376.92 114 273.49   93 376.92 
Exercised/released36 142.09 114 170.04   89 214.60 
Forfeited/expired5 261.38 2 304.24   4 317.78 
Balance as of May 1, 2022920 $223.21 165 $295.62 4 $326.70 238 $327.25 
Exercisable as of May 1, 2022415 $152.79 
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 grant 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 grant date.
The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The closing price of the Company's common stock on the grant date is used in the 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 exercise 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
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following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first quarter of 2022:
First Quarter
 2022
Expected term3.75 years
Expected volatility40.00 %
Risk-free interest rate2.51 %
Dividend yield %
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the first quarter of 2022, there were 21.6 thousand shares purchased.
Defined contribution pension plans
The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches 50% to 75% of the contribution depending on the 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 $3.4 million and $2.8 million in the first quarter of 2022 and 2021, respectively.
Note 6. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - defined as observable inputs such as quoted prices in active markets;
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of May 1, 2022 and January 30, 2022, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
May 1, 2022Level 1Level 2Level 3Balance Sheet Classification
(In thousands)
Money market funds$200,316 $200,316 $ $ Cash and cash equivalents
Term deposits136,127  136,127  Cash and cash equivalents
Forward currency contract assets21,722  21,722  Prepaid expenses and other current assets
Forward currency contract liabilities15,353  15,353  Other current liabilities

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January 30, 2022Level 1Level 2Level 3Balance Sheet Classification
(In thousands)
Money market funds$38,475 $38,475 $ $ Cash and cash equivalents
Term deposits318,698  318,698  Cash and cash equivalents
Forward currency contract assets19,077  19,077  Prepaid expenses and other current assets
Forward currency contract liabilities18,985  18,985  Other current liabilities
The Company records cash, accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities.
Note 7. Derivative Financial Instruments
Foreign currency exchange risk
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company currently hedges against changes in the Canadian dollar and Chinese Yuan to the U.S. dollar exchange rate and changes in the Euro and Australian dollar to the Canadian dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign currency exchange gains and losses which arise on translation of its international subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as other comprehensive income (loss), net of tax in accumulated other comprehensive income or loss within stockholders' equity.
The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges during the first quarter of 2022.
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 currency 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 foreign currency exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the first quarter of 2022, the Company entered into certain forward currency contracts designed to economically hedge the foreign currency exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on specific monetary assets and liabilities denominated in currencies other than the functional currency of the entity. The
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Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses.
The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows.
Quantitative disclosures about derivative financial instruments
The Company presents its derivative assets and derivative liabilities at their gross fair values within prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of May 1, 2022, there were derivative assets of $21.7 million and derivative liabilities of $15.4 million subject to enforceable netting arrangements.
The notional amounts and fair values of forward currency contracts were as follows:
May 1, 2022January 30, 2022
Gross NotionalAssetsLiabilitiesGross NotionalAssetsLiabilities
(In thousands)
Derivatives designated as net investment hedges:
Forward currency contracts$1,081,000 $15,290 $ $1,502,000 $18,468 $ 
Derivatives not designated in a hedging relationship:
Forward currency contracts1,195,495 6,432 15,353 1,597,878 609 18,985 
Net derivatives recognized on consolidated balance sheets:
Forward currency contracts$21,722 $15,353 $19,077 $18,985 
The forward currency contracts designated as net investment hedges outstanding as of May 1, 2022 mature on different dates between May 2022 and February 2023.
The forward currency contracts not designated in a hedging relationship outstanding as of May 1, 2022 mature on different dates between May 2022 and February 2023.
The pre-tax gains and losses on foreign currency exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows:
First Quarter
20222021
(In thousands)
Gains (losses) recognized in net investment hedge gains (losses):
Derivatives designated as net investment hedges$6,847 $(31,986)
No gains or losses have been reclassified from accumulated other comprehensive income or loss into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary.
The pre-tax net foreign currency exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows:
First Quarter
20222021
(In thousands)
Gains (losses) recognized in selling, general and administrative expenses:
Foreign currency exchange gains (losses)$(1,743)$(33,540)
Derivatives not designated in a hedging relationship(892)30,592 
Net foreign currency exchange and derivative gains (losses) $(2,635)$(2,948)
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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 8. Earnings Per Share
The details of the computation of basic and diluted earnings per share are as follows:
First Quarter
20222021
(In thousands, except per share amounts)
Net income$189,998 $144,956 
Basic weighted-average number of shares outstanding128,077 130,358 
Assumed conversion of dilutive stock options and awards464 626 
Diluted weighted-average number of shares outstanding128,541 130,984 
Basic earnings per share$1.48 $1.11 
Diluted earnings per share$1.48 $1.11 
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 first quarter of 2022 and 2021, 0.1 million and 0.1 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 January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $500.0 million of the Company's common shares. On December 1, 2020, it approved an increase in the remaining authorization from $263.6 million to $500.0 million, and on October 1, 2021, it approved an increase in the remaining authorization from $141.2 million to $641.2 million. During the first quarter of 2022, the Company completed the remaining stock repurchases under this program.
On March 23, 2022, the Company's board of directors approved a stock repurchase program for up to $1.0 billion of the Company's common shares on the open market or in privately negotiated transactions. The repurchase plan has no time limit and does not require the repurchase of a minimum number of shares. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements. As of May 1, 2022, the remaining authorized value of shares available to be repurchased under this program was $954.8 million.
During the first quarter of 2022 and 2021, 0.7 million and 0.3 million shares, respectively, were repurchased under the program at a total cost of $232.6 million and $83.8 million, respectively.
Subsequent to May 1, 2022, and up to May 27, 2022, 0.3 million shares were repurchased at a total cost of $87.9 million.
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Note 9. Supplementary Financial Information
A summary of certain consolidated balance sheet accounts is as follows:
May 1,
2022
January 30,
2022
(In thousands)
Inventories:
Inventories, at cost$1,326,659 $1,004,526 
Provision to reduce inventories to net realizable value(51,619)(38,045)
$1,275,040 $966,481 
Prepaid expenses and other current assets:
Prepaid inventories$ $42,691 
Other prepaid expenses117,707 98,254 
Forward currency contract assets21,722 19,077 
Other current assets45,083 32,550 
$184,512 $192,572 
Property and equipment, net:
Land$70,353 $74,297 
Buildings27,764 30,880 
Leasehold improvements709,800 676,762 
Furniture and fixtures132,111 125,213 
Computer hardware136,399 130,393 
Computer software615,290 532,819 
Equipment and vehicles27,567 23,060 
Work in progress126,151 163,420 
Property and equipment, gross1,845,435 1,756,844 
Accumulated depreciation(870,651)(829,134)
$974,784 $927,710 
Other non-current assets:
Cloud computing arrangement implementation costs$94,765 $89,334 
Security deposits23,968 24,083 
Other18,427 18,685 
$137,160 $132,102 
Accrued liabilities and other:
Accrued operating expenses$116,638 $116,822 
Accrued freight73,192 71,390 
Sales return allowances47,838 41,690 
Accrued duty28,121 27,182 
Forward currency contract liabilities15,353 18,985 
Sales tax collected15,131 13,540 
Accrued rent12,446 11,254 
Accrued capital expenditures15,949 9,616 
Accrued inventory liabilities21,965 4,005 
Other16,305 16,316 
$362,938 $330,800 
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Note 10. Segmented Information
The Company's segments are based on the financial information it uses in managing its business and comprise two reportable segments: (i) company-operated stores and (ii) direct to consumer. The remainder of its operations which includes outlets, temporary locations, MIRROR, sales to wholesale accounts, and license and supply arrangements are included within Other.
First Quarter
20222021
(In thousands)
Net revenue:
Company-operated stores$731,604 $536,584 
Direct to consumer721,253 545,089 
Other160,606 144,792 
$1,613,463 $1,226,465 
Segmented income from operations:
Company-operated stores$160,706 $99,148 
Direct to consumer285,107 236,933 
Other19,527 14,506 
465,340 350,587 
General corporate expense202,798 146,907 
Amortization of intangible assets2,195 2,195 
Acquisition-related expenses 7,664 
Income from operations260,347 193,821 
Other income (expense), net(22)227 
Income before income tax expense$260,325 $194,048 
Capital expenditures:
Company-operated stores$24,946 $18,565 
Direct to consumer20,339 26,581 
Corporate and other66,067 19,079 
$111,352 $64,225 
Depreciation and amortization:
Company-operated stores$31,310 $26,800 
Direct to consumer8,669 5,748 
Corporate and other24,491 17,937 
$64,470 $50,485 
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Note 11. Net Revenue by Geography and Category
The following table disaggregates the Company's net revenue by geographic area.
First Quarter
20222021
(In thousands)
United States$1,098,329 $849,614 
Canada244,944 167,729 
Outside of North America270,190 209,122 
$1,613,463 $1,226,465 
In addition to the disaggregation of net revenue by reportable segment, the following table disaggregates the Company's net revenue by category.
First Quarter
20222021
(In thousands)
Women's product$1,073,924 $849,645 
Men's product374,998 274,307 
Other categories164,541 102,513 
$1,613,463 $1,226,465 
Note 12. Legal Proceedings and Other Contingencies
In addition to the legal proceedings described below, the Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. The Company has recognized immaterial provisions related to the expected outcome of legal proceedings.
In April 2020, Aliign Activation Wear, LLC filed a lawsuit in the United States District Court for the Central District of California alleging federal trademark infringement, false designation of origin and unfair competition. The plaintiff is seeking injunctive relief, monetary damages and declaratory relief. The Company obtained summary judgment that the Company did not infringe upon any of the plaintiff's rights and the district court entered judgment in the Company's favor on all claims. The plaintiff has filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit. The Company intends to defend its win at the appellate level.
In April 2021, DISH Technologies L.L.C., and Sling TV L.L.C. (DISH) filed a complaint in the United States District Court for the District of Delaware and, along with DISH DBS Corporation, also with the United States International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930 against the Company and its Curiouser Products subsidiary (MIRROR), along with ICON Health & Fitness, Inc., FreeMotion Fitness, Inc., NordicTrack, Inc., and Peloton Interactive, Inc., alleging infringement of various patents related to fitness devices containing internet-streaming enabled video displays. In the ITC complaint, DISH seeks an exclusion order barring the importation of MIRROR fitness devices, streaming components and systems containing components that infringe one or more of the asserted patents as well as a cease and desist order preventing the Company from carrying out commercial activities within the United States related to those products. In the District of Delaware complaint, DISH is seeking an order permanently enjoining the Company from infringing the asserted patents, an award of damages for the infringement of the asserted patents, and an award of damages for lost sales. The ITC investigation is ongoing and the Delaware litigation remains stayed pending resolution to the ITC investigation. The Company intends to vigorously defend this matter.
Note 13. Subsequent Event
Subsequent to May 1, 2022, the Company completed the sale of an administrative office building. As of May 1, 2022, the building's carrying value of $5.4 million was classified as a held for sale and was recognized within other current assets. The sale resulted in a pre-tax gain of $10.2 million which will be recognized during the second quarter of 2022.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, the impact of the COVID-19 pandemic on our business and results of operations, expectations related to our acquisition of MIRROR, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.
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 2021 Annual Report on Form 10-K filed with the SEC on March 29, 2022. Fiscal 2022 and fiscal 2021 are referred to as "2022," and "2021," respectively. The first quarter of 2022 and 2021 ended on May 1, 2022 and May 2, 2021, respectively. Components of management's discussion and analysis of financial condition and results of operations include:
We disclose material non-public information through one or more of the following channels: our investor relations website (http://corporate.lululemon.com/investors), 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 technical athletic apparel, footwear, and accessories. We have a vision to create transformative products and experiences that build meaningful connections, unlocking greater possibility and wellbeing for all. 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, acting with courage, valuing connection and inclusion, and choosing to have fun. These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose "to elevate human potential by helping people feel their best."
Our performance apparel and footwear are marketed under the lululemon brand. We offer a comprehensive line of apparel and accessories. Our apparel assortment includes items such as pants, shorts, tops, and jackets designed for a healthy lifestyle including athletic activities such as yoga, running, training, and most other activities. We also offer apparel designed
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for being On the Move and fitness-related accessories. We expect to continue to broaden our merchandise offerings through expansion across these product areas. We also offer in-home fitness equipment and associated content subscriptions, including live and on-demand classes, through our MIRROR brand.
COVID-19 Update
COVID-19 continues to impact the global economy and cause disruption and volatility. While most of our retail locations were open throughout the first quarter of fiscal 2022 and 2021, certain locations were temporarily closed based on government and health authority guidance. Certain stores and our third party distribution center in the People's Republic of China ("PRC") experienced temporary closures during the first quarter of 2022, and there is uncertainty regarding the ongoing impact of COVID-19 on our operations in the PRC. We believe we will continue to experience differing levels of disruption and volatility, market by market. The pandemic has impacted our suppliers and our distribution and logistics providers, including in the PRC. There has been disruption in transportation and port congestion, an increase in freight costs, and we have increased our use of air freight. We expect this disruption and these increased costs to continue throughout 2022.
Financial Highlights
For the first quarter of 2022, compared to the first quarter of 2021:
Net revenue increased 32% to $1.6 billion. On a constant dollar basis, net revenue increased 32%.
Total comparable sales increased 28%, or 29% on a constant dollar basis.
Comparable store sales increased 24%, or 24% on a constant dollar basis.
Direct to consumer net revenue increased 32%, or 33% on a constant dollar basis.
Gross profit increased 24% to $870.4 million.
Gross margin decreased 320 basis points to 53.9%.
Income from operations increased 34% to $260.3 million.
Operating margin increased 30 basis points to 16.1%.
Income tax expense increased 43% to $70.3 million. Our effective tax rate for the first quarter of 2022 was 27.0% compared to 25.3% for the first quarter of 2021.
Diluted earnings per share were $1.48 compared to $1.11 in the first quarter of 2021. The first quarter of 2021 includes $7.3 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.05. There were no acquisition-related expenses in the first quarter of 2022.
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 the most directly comparable measures calculated in accordance with GAAP.
19

Quarter-to-Date Results of Operations: First Quarter Results
The following table summarizes key components of our results of operations for the periods indicated:
 First Quarter
 2022202120222021
 (In thousands)(Percentage of net revenue)
Net revenue$1,613,463 $1,226,465 100.0 %100.0 %
Cost of goods sold743,070 526,151 46.1 42.9 
Gross profit870,393 700,314 53.9 57.1 
Selling, general and administrative expenses607,851 496,634 37.7 40.5 
Amortization of intangible assets2,195 2,195 0.1 0.2 
Acquisition-related expenses— 7,664 — 0.6 
Income from operations260,347 193,821 16.1 15.8 
Other income (expense), net(22)227 — — 
Income before income tax expense260,325 194,048 16.1 15.8 
Income tax expense70,327 49,092 4.4 4.0 
Net income$189,998 $144,956 11.8 %11.8 %
Net Revenue
Net revenue increased $387.0 million, or 32%, to $1.6 billion for the first quarter of 2022 from $1.2 billion for the first quarter of 2021. On a constant dollar basis, assuming the average foreign currency exchange rates for the first quarter of 2022 remained constant with the average foreign currency exchange rates for the first quarter of 2021, net revenue increased $394.1 million, or 32%.
The increase in net revenue was primarily due to increased company-operated store net revenue, including from increased comparable store sales and new company-operated stores. Direct to consumer net revenue and other net revenue also increased.
Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 28% for the first quarter of 2022 compared to the first quarter of 2021. Total comparable sales increased 29% on a constant dollar basis.
Net revenue for the first quarter of 2022 and 2021 is summarized below.
 First Quarter
 2022202120222021Year over year change
 (In thousands)(Percentages)