LULULEMON ATHLETICA INC. 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 2018 Annual Report on Form 10-K filed with theSEC onMarch 27, 2019 . 21
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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. Overviewlululemon athletica inc. is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. We have a vision to be the experiential brand that ignites a community of people through sweat, grow, and connect, which we call "living the sweatlife." Since our inception, we have fostered a distinctive corporate culture; we promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection, and choosing to have fun. These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose "to elevate the world by unleashing the full potential within every one of us." Our healthy lifestyle inspired athletic apparel and accessories are marketed under thelululemon brand. We offer a comprehensive line of apparel and accessories for women and men. Our apparel assortment includes items such as pants, shorts, tops, and jackets designed for a healthy lifestyle including athletic activities such as yoga, running, training, and most other sweaty pursuits. We also offer fitness-related accessories. Financial Highlights The summary below provides both GAAP and adjusted non-GAAP financial measures. The adjusted financial measures exclude the tax expense recognized during the third quarter of fiscal 2018 related to theU.S. tax reform. For the third quarter of fiscal 2019, compared to the third quarter of fiscal 2018: • Net revenue increased 23% to$916.1 million . On a constant dollar basis,
net revenue increased 23%.
• Total comparable sales, which includes comparable store sales and direct
to consumer, increased 16%. On a constant dollar basis, total comparable
sales increased 17%.
- Comparable store sales increased 10%, or increased 11% on a constant
dollar basis.
- Direct to consumer net revenue increased 29%, or increased 30% on a
constant dollar basis.
• Gross profit increased 24% to
• Gross margin increased 70 basis points to 55.1%.
• Income from operations increased 29% to
• Operating margin increased 100 basis points to 19.2%.
• Income tax expense increased 19% to
for the third quarter of fiscal 2019 was 29.1% compared to 31.6% for the
third quarter of fiscal 2018. The adjusted effective tax rate for the
third quarter of fiscal 2018 was 27.8%.
• Diluted earnings per share were
quarter of fiscal 2018. Adjusted diluted earnings per share for the third
quarter of fiscal 2018 were
Due to the 53rd week in fiscal 2018, comparable sales are calculated on a one week shifted basis such that the 13 weeks and 39 weeks endedNovember 3, 2019 are compared to the 13 weeks and 39 weeks endedNovember 4, 2018 rather thanOctober 28, 2018 . 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 effective tax rates and diluted earnings per share, and the most directly comparable measures calculated in accordance with GAAP. 22
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Table of Contents Results of Operations Third Quarter Results The following table summarizes key components of our results of operations for the quarters endedNovember 3, 2019 andOctober 28, 2018 . The percentages are presented as a percentage of net revenue. Quarter Ended November 3, 2019 October 28, 2018 November 3, 2019 October 28, 2018 (In thousands) (Percentages) Net revenue $ 916,138 $ 747,655 100.0 % 100.0 % Cost of goods sold 411,094 340,878 44.9 45.6 Gross profit 505,044 406,777 55.1 54.4 Selling, general and administrative expenses 329,215 270,874 35.9 36.2 Income from operations 175,829 135,903 19.2 18.2 Other income (expense), net 1,925 2,044 0.2 0.3 Income before income tax expense 177,754 137,947 19.4 18.5 Income tax expense 51,772 43,534 5.7 5.8 Net income $ 125,982 $ 94,413 13.8 % 12.6 % Net Revenue Net revenue increased$168.5 million , or 23%, to$916.1 million for the third quarter of fiscal 2019 from$747.7 million for the third quarter of fiscal 2018. On a constant dollar basis, assuming the average exchange rates for the third quarter of fiscal 2019 remained constant with the average exchange rates for the third quarter of fiscal 2018, net revenue increased$175.3 million , or 23%. The increase in net revenue was primarily due to increased company-operated store net revenue, including from new company-operated stores as well as an increase in comparable store sales, increased direct to consumer net revenue, and an increase in net revenue from our other retail locations. Based on a shifted calendar, total comparable sales, which includes comparable store sales and direct to consumer, increased 16% in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. Total comparable sales increased 17% on a constant dollar basis. Net revenue on a segment basis for the quarters endedNovember 3, 2019 andOctober 28, 2018 is summarized below. The percentages are presented as a percentage of total net revenue. Quarter Ended November 3, 2019 October 28, 2018 November 3, 2019 October 28, 2018 (In thousands) (Percentages) Company-operated stores $ 579,521 $ 476,877 63.3 % 63.8 % Direct to consumer 246,697 189,375 26.9 25.3 Other 89,920 81,403 9.8 10.9 Net revenue $ 916,138 $ 747,655 100.0 % 100.0 % Company-Operated Stores. Net revenue from our company-operated stores segment increased$102.6 million , or 22%, to$579.5 million in the third quarter of fiscal 2019 from$476.9 million in the third quarter of fiscal 2018. 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 toOctober 28, 2018 contributed$61.1 million to the increase. We opened 53 net new company-operated stores since the third quarter of fiscal 2018, including 22 stores inAsia , 21 stores inNorth America , seven stores inEurope , and three stores inAustralia /New Zealand . 23
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• Based on a shifted calendar, a comparable store sales increase of 10% in
the third quarter of fiscal 2019 compared to the third quarter of fiscal
2018. Comparable store sales increased 11% on a constant dollar basis. The
increase in comparable store sales was primarily a result of increased
store traffic.
Direct to Consumer. Net revenue from our direct to consumer segment increased$57.3 million to$246.7 million in the third quarter of fiscal 2019 from$189.4 million in the third quarter of fiscal 2018. Based on a shifted calendar, direct to consumer net revenue increased 29%, or increased 30% on a constant dollar basis. This was primarily a result of increased website traffic. Other. Net revenue from our other segment increased$8.5 million , or 10%, to$89.9 million in the third quarter of fiscal 2019 from$81.4 million in the third quarter of fiscal 2018. This increase was primarily the result of an increase in sales to wholesale accounts in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. Gross Profit Gross profit increased$98.3 million , or 24%, to$505.0 million for the third quarter of fiscal 2019 from$406.8 million for the third quarter of fiscal 2018. Gross profit as a percentage of net revenue, or gross margin, increased 70 basis points to 55.1% in the third quarter of fiscal 2019 from 54.4% in the third quarter of fiscal 2018. The increase in gross margin was primarily the result of: • an increase in product margin of 120 basis points which was primarily due to lower product costs, a favorable mix of higher margin product, and lower markdowns; and
• a decrease in occupancy and depreciation costs as a percentage of revenue
of 10 basis points.
This was partially offset by an increase in costs as a percentage of revenue related to our distribution centers and our product departments of 40 basis points, and an unfavorable impact of foreign exchange rates of 20 basis points. Selling, General and Administrative Expenses Selling, general and administrative expenses increased$58.3 million , or 22%, to$329.2 million in the third quarter of fiscal 2019 from$270.9 million in the third quarter of fiscal 2018. The increase in selling, general and administrative expenses was primarily due to: • an increase in costs related to our operating channels of$34.0 million , comprised of: - an increase in employee costs of$17.8 million primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher incentive compensation expenses; - an increase in variable costs of$12.0 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$4.2 million primarily due to increases in digital marketing expenses, information technology costs, and other costs associated with our operating locations;
• an increase in head office costs of
- an increase in employee costs of$14.2 million due to increased incentive and stock-based compensation expense and due to increased wages, primarily from additional employees to support the growth in our business; and - an increase in other costs of$8.4 million primarily due to increases in depreciation, information technology costs, and other head office costs; and
• an increase in net foreign exchange and derivative revaluation losses of
As a percentage of net revenue, selling, general and administrative expenses decreased 30 basis points, to 35.9% in the third quarter of fiscal 2019 from 36.2% in the third quarter of fiscal 2018. Income from Operations Income from operations increased$39.9 million , or 29%, to$175.8 million in the third quarter of fiscal 2019 from$135.9 million in the third quarter of fiscal 2018. Operating margin increased 100 basis points to 19.2% compared to 18.2% in the third quarter of fiscal 2018. 24
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On a segment basis, we determine income from operations without taking into account our general corporate expenses. Segmented income from operations for the quarters endedNovember 3, 2019 andOctober 28, 2018 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments. Quarter Ended November 3, 2019 October 28, 2018 November 3, 2019 October 28, 2018 (In thousands) (Percentage of segment revenue) Segmented income from operations: Company-operated stores $ 147,734 $ 117,804 25.5 % 24.7 % Direct to consumer 103,282 76,435 41.9 40.4 Other 16,944 15,019 18.8 18.5 267,960 209,258 General corporate expense 92,131 73,355 Income from operations $ 175,829 $ 135,903 Company-Operated Stores. Income from operations from our company-operated stores segment increased$29.9 million , or 25%, to$147.7 million for the third quarter of fiscal 2019 from$117.8 million for the third quarter of fiscal 2018. The increase was primarily the result of increased gross profit of$53.8 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, primarily due to an increased number of company-operated stores and higher incentive compensation expenses. Additionally, there were increased store operating expenses including higher credit card fees, distribution costs, and packaging costs primarily as a result of higher net revenue. Income from operations as a percentage of company-operated stores net revenue increased 80 basis points primarily due to leverage on selling, general and administrative expenses and higher gross margin. Direct to Consumer. Income from operations from our direct to consumer segment increased$26.8 million , or 35%, to$103.3 million for the third quarter of fiscal 2019 from$76.4 million for the third quarter of fiscal 2018. The increase was primarily the result of increased gross profit of$41.9 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, as well as higher information technology costs, digital marketing expenses, and employee costs. Income from operations as a percentage of direct to consumer net revenue increased 150 basis points primarily due to higher gross margin, partially offset by deleverage on selling, general and administrative expenses. Other. Other income from operations increased$1.9 million , or 13%, to$16.9 million for the third quarter of fiscal 2019 from$15.0 million for the third quarter of fiscal 2018. The increase was primarily the result of increased gross profit of$2.6 million which was due to increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to increased employee costs, primarily due to an increased number of temporary locations, and increased operating expenses, partially offset by a decrease in marketing costs. Income from operations as a percentage of other net revenue increased 30 basis points primarily due to leverage on selling, general and administrative expenses, partially offset by a decrease in gross margin. General Corporate Expense. General corporate expense increased$18.8 million , or 26%, to$92.1 million for the third quarter of fiscal 2019 from$73.4 million for the third quarter of fiscal 2018. This increase was primarily due to increases in head office employee costs, depreciation, information technology costs, and an increase in net foreign exchange and derivative revaluation losses of$1.7 million . Other Income (Expense), Net Other income, net decreased$0.1 million , or 6%, to$1.9 million for the third quarter of fiscal 2019 from income of$2.0 million for the third quarter of fiscal 2018. The decrease was primarily due to a decrease in net interest income. The decrease in other income, net was partially offset by a decrease in interest expense, primarily the result of borrowings on our revolving credit facility during the third quarter of fiscal 2018. 25
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Income Tax Expense Income tax expense increased$8.2 million , or 19%, to$51.8 million for the third quarter of fiscal 2019 from$43.5 million for the third quarter of fiscal 2018. 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 imposed byU.S. tax reform. This resulted in the recognition of an additional tax expense of$5.2 million . Additional information is outlined in Note 8 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 2019 was 29.1% compared to 31.6% for the third quarter of fiscal 2018. Excluding the above tax adjustment, the adjusted effective tax rate for the third quarter of fiscal 2018 was 27.8%. The increase in the adjusted effective tax rate was primarily due to adjustments made upon filing theU.S. federal income tax returns in each year, partially offset by an increase in tax deductions related to stock-based compensation. Net Income Net income increased$31.6 million , or 33%, to$126.0 million for the third quarter of fiscal 2019 from$94.4 million for the third quarter of fiscal 2018. This was primarily due to an increase in gross profit of$98.3 million , partially offset by an increase in selling, general and administrative expenses of$58.3 million , an increase in income tax expense of$8.2 million , and a decrease in other income (expense), net of$0.1 million . First Three Quarters Results The following table summarizes key components of our results of operations for the first three quarters endedNovember 3, 2019 andOctober 28, 2018 . The percentages are presented as a percentage of net revenue. Three Quarters Ended November 3, October 28, 2019 2018 November 3, 2019 October 28, 2018 (In thousands) (Percentages) Net revenue$ 2,581,805 $ 2,120,861 100.0 % 100.0 % Cost of goods sold 1,169,245 973,157 45.3 45.9 Gross profit 1,412,560 1,147,704 54.7 54.1 Selling, general and administrative expenses 939,937 773,288 36.4 36.5 Income from operations 472,623 374,416 18.3 17.7 Other income (expense), net 6,154 6,553 0.2 0.3 Income before income tax expense 478,777 380,969 18.5 18.0 Income tax expense 131,202 115,633 5.1 5.5 Net income$ 347,575 $ 265,336 13.5 % 12.5 % Net Revenue Net revenue increased$460.9 million , or 22%, to$2.582 billion for the first three quarters of fiscal 2019 from$2.121 billion for the first three quarters of fiscal 2018. On a constant dollar basis, assuming the average exchange rates for the first three quarters of fiscal 2019 remained constant with the average exchange rates for the first three quarters of fiscal 2018, net revenue increased$488.7 million , or 23%. The increase in net revenue was primarily due to increased company-operated store net revenue, including from new company-operated stores as well as an increase in comparable store sales, increased direct to consumer net revenue, and an increase in net revenue from our other retail locations. Based on a shifted calendar, total comparable sales, which includes comparable store sales and direct to consumer, increased 15% in the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. Total comparable sales increased 16% on a constant dollar basis. 26
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Net revenue on a segment basis for the first three quarters endedNovember 3, 2019 andOctober 28, 2018 is summarized below. The percentages are presented as a percentage of total net revenue. Three Quarters Ended November 3, October 28, November 3, October 28, 2019 2018 2019 2018 (In thousands) (Percentages) Company-operated stores$ 1,669,699 $ 1,396,376 64.7 % 65.8 % Direct to consumer 674,177 514,623 26.1 24.3 Other 237,929 209,862 9.2 9.9 Net revenue$ 2,581,805 $ 2,120,861 100.0 % 100.0 % Company-Operated Stores. Net revenue from our company-operated stores segment increased$273.3 million , or 20%, to$1.670 billion in the first three quarters of fiscal 2019 from$1.396 billion in the first three quarters of fiscal 2018. 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
increase. We opened 53 net new company-operated stores since the third
quarter of fiscal 2018, including 22 stores in
America, seven stores in Europe , and three stores in Australia /New
Zealand .
• Based on a shifted calendar, a comparable store sales increase of 9% in
the first three quarters of fiscal 2019 compared to the first three
quarters of fiscal 2018. Comparable store sales increased 10% on a
constant dollar basis. The increase in comparable store sales was
primarily a result of increased store traffic.
Direct to Consumer. Net revenue from our direct to consumer segment increased
$159.6 million to $674.2 million in the first three quarters of fiscal 2019 from
$514.6 million in the first three quarters of fiscal 2018. Based on a shifted
calendar, direct to consumer net revenue increased 30%, or increased 32% on a
constant dollar basis. This was primarily a result of increased website traffic,
partially offset by a decrease in dollar value per transaction.
Other. Net revenue from our other segment increased $28.1 million , or 13%, to
$237.9 million in the first three quarters of fiscal 2019 from $209.9 million in
the first three quarters of fiscal 2018. This increase was primarily the result
of an increase in net revenue from sales to wholesale accounts, and an increased
number of temporary locations, including seasonal stores, open during the first
three quarters of fiscal 2019 compared to the first three quarters of fiscal
2018.
Gross Profit
Gross profit increased $264.9 million , or 23%, to $1.413 billion for the first
three quarters of fiscal 2019 from $1.148 billion for the first three quarters
of fiscal 2018.
Gross profit as a percentage of net revenue, or gross margin, increased 60 basis
points, to 54.7% in the first three quarters of fiscal 2019 from 54.1% in the
first three quarters of fiscal 2018. The increase in gross margin was primarily
the result of an increase in product margin of 130 basis points which was
primarily due to lower product costs, a favorable mix of higher margin product,
and lower markdowns.
This was partially offset by an increase in costs as a percentage of revenue
related to our distribution centers and our product departments of 40 basis
points, an unfavorable impact of foreign exchange rates of 20 basis points, and
an increase in occupancy and depreciation costs as a percentage of revenue of 10
basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $166.6 million , or 22%,
to $939.9 million in the first three quarters of fiscal 2019 from $773.3 million
in the first three quarters of fiscal 2018. The increase in selling, general and
administrative expenses was primarily due to:
• an increase in costs related to our operating channels of $99.4 million ,
comprised of:
- an increase in employee costs of $52.1 million primarily from a
growth in labor hours and benefits, mainly associated with new
company-operated stores and other new operating locations, and due
to higher incentive compensation expenses;
- an increase in variable costs of $30.1 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$17.1 million primarily due to an increase in digital marketing expenses, information technology costs, security costs, repairs and maintenance costs, and other costs associated with our operating locations;
• an increase in head office costs of
- an increase in employee costs of$41.6 million primarily due to increased incentive and stock-based compensation expense, increased wages, and increased travel expenses, primarily from additional employees to support the growth in our business; and - an increase in other costs of$26.6 million primarily due to an increase in depreciation, professional fees, information technology costs, brand and community costs, and other head office costs. The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign exchange and derivative revaluation losses of$1.0 million . As a percentage of net revenue, selling, general and administrative expenses decreased 10 basis points, to 36.4% in the first three quarters of fiscal 2019 from 36.5% in the first three quarters of fiscal 2018. Income from Operations Income from operations increased$98.2 million , or 26%, to$472.6 million in the first three quarters of fiscal 2019 from$374.4 million in the first three quarters of fiscal 2018. Operating margin increased 60 basis points to 18.3% compared to 17.7% in the first three quarters of fiscal 2018. On a segment basis, we determine income from operations without taking into account our general corporate expenses. Segmented income from operations for the first three quarters endedNovember 3, 2019 andOctober 28, 2018 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments. Three Quarters Ended November 3, October 28, 2019 2018 November 3, 2019 October 28, 2018 (In thousands) (Percentage of segment revenue) Segmented income from operations: Company-operated stores$ 422,973 $ 342,959 25.3 % 24.6 % Direct to consumer 268,038 205,735 39.8 40.0 Other 46,196 39,336 19.4 18.7 737,207 588,030 General corporate expense 264,584 213,614 Income from operations$ 472,623 $ 374,416 Company-Operated Stores. Income from operations from our company-operated stores segment increased$80.0 million , or 23%, to$423.0 million for the first three quarters of fiscal 2019 from$343.0 million for the first three quarters of fiscal 2018. The increase was primarily the result of increased gross profit of$147.6 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, primarily due to an increased number of company-operated stores and higher incentive compensation expenses. Additionally, there were increased store operating expenses including higher credit card fees, distribution costs, and packaging costs primarily as a result of higher net revenue, as well as increases in security and repairs and maintenance costs. Income from operations as a percentage of company-operated stores net revenue increased by 70 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 increased$62.3 million , or 30%, to$268.0 million for the first three quarters of fiscal 2019 from$205.7 million for the first three quarters of fiscal 2018. The increase was primarily the result of increased gross profit of$107.3 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 higher variable costs including distribution costs, credit card fees, and packaging costs as a result of higher net revenue, as well as higher digital marketing expenses, information technology costs, and employee costs. Income from operations as a percentage of direct to consumer net revenue decreased 20 basis points, primarily due to deleverage on selling, general and administrative expenses, partially offset by an increase in gross margin. 28
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Other. Other income from operations increased$6.9 million , or 17%, to$46.2 million for the first three quarters of fiscal 2019 from$39.3 million for the first three quarters of fiscal 2018. The increase was primarily the result of increased gross profit of$10.0 million which was primarily due to increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses including increased employee costs and increased operating expenses, partially offset by a decrease in marketing costs. Income from operations as a percentage of other net revenue increased 70 basis points, primarily due to leverage on selling, general and administrative expenses, partially offset by a decrease in gross margin. General Corporate Expense. General corporate expense increased$51.0 million , or 24%, to$264.6 million for the first three quarters of fiscal 2019 from$213.6 million for the first three quarters of fiscal 2018. This increase was primarily due to increases in head office employee costs, depreciation, professional fees, information technology costs, and brand and community costs, partially offset by a decrease in net foreign exchange and derivative revaluation losses of$1.0 million . Other Income (Expense), Net Other income, net decreased$0.4 million , or 6%, to$6.2 million for the first three quarters of fiscal 2019 from income of$6.6 million for the first three quarters of fiscal 2018. The decrease was primarily due to a decrease in net interest income, primarily due to a decrease in cash and cash equivalents in the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. The decrease in other income, net was partially offset by a decrease in interest expense, primarily the result of borrowings on our revolving credit facility during the first three quarters of fiscal 2018. Income Tax Expense Income tax expense increased$15.6 million , or 13%, to$131.2 million for the first three quarters of fiscal 2019 from$115.6 million for the first three quarters of fiscal 2018. 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 imposed byU.S. tax reform. This resulted in the recognition of an additional tax expense of$5.2 million . Additional information is outlined in Note 8 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 2019 was 27.4% compared to 30.4% for the first three quarters of fiscal 2018. Excluding the above tax adjustment, the effective tax rate for the first three quarters of fiscal 2018 was 29.0%. The decrease in the effective tax rate was primarily due to changes in legislation and guidance related to the global intangible low-taxed income tax which were released during the fourth quarter of fiscal 2018 and an increase in tax deductions related to stock-based compensation. Net Income Net income increased$82.2 million , or 31%, to$347.6 million for the first three quarters of fiscal 2019 from$265.3 million for the first three quarters of fiscal 2018. This was primarily due to an increase in gross profit of$264.9 million , partially offset by an increase in selling, general and administrative expenses of$166.6 million , an increase in income tax expense of$15.6 million , and a decrease in other income (expense), net of$0.4 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 full fiscal months, or open for 12 full fiscal months after being significantly expanded. Comparable store sales exclude sales from our direct to consumer and other segments. Total comparable sales combines comparable store sales and direct to consumer sales. In fiscal years following a 53 week year, the prior year period is shifted by one week to compare similar calendar weeks. 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, 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 29
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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 income tax expense, effective tax rates, and diluted earnings per share exclude the amounts recognized in connection with theU.S. tax reform. 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. Constant dollar changes in net revenue The below changes in net revenue show the change compared to the corresponding period in the prior year. Quarter Ended Three Quarters Ended November 3, 2019 November 3, 2019 (In thousands) (Percentages) (In thousands) (Percentages) Change$ 168,483 23 %$ 460,944 22 % Adjustments due to foreign exchange rate changes 6,776 - 27,744 1 Change in constant dollars$ 175,259 23 %$ 488,688 23 % Constant dollar changes in total comparable sales, comparable store sales, and direct to consumer net revenue Due to the 53rd week in fiscal 2018, the below changes in total comparable sales, comparable store sales, and direct to consumer net revenue are calculated on a one week shifted basis such that the 13 weeks and 39 weeks endedNovember 3, 2019 are compared to the 13 weeks and 39 weeks endedNovember 4, 2018 rather thanOctober 28, 2018 . Quarter Ended Three Quarters Ended November 3, 2019 November 3, 2019 Direct to Direct to Total Comparable Comparable Consumer Net Total Comparable Comparable Store Consumer Net Sales1,2 Store Sales2 Revenue Sales1,2 Sales2 Revenue Change 16 % 10 % 29 % 15 % 9 % 30 % Adjustments due to foreign exchange rate changes 1 1 1 1 1 2 Change in constant dollars 17 % 11 % 30 % 16 % 10 % 32 % __________
(1) Total comparable sales includes comparable store sales and direct to
consumer sales.
(2) Comparable store sales reflects net revenue from company-operated stores
that have been open for at least 12 full fiscal months, or open for at least
12 full fiscal months after being significantly expanded.
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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 toU.S. tax reform. Please refer to Note 8 of the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information on these adjustments. Quarter Ended Three Quarters Ended October 28, 2018 October 28, 2018 Adjusted Results Adjusted Results GAAP Results U.S. Tax Reform (Non-GAAP) GAAP Results U.S. Tax Reform (Non-GAAP) (In thousands, except per share amounts) Income tax expense$ 43,534 $ (5,163 ) $ 38,371 $ 115,633 $ (5,163 ) $ 110,471 Effective tax rate 31.6 % (3.8 )% 27.8 % 30.4 % (1.4 )% 29.0 % Diluted earnings per share$ 0.71 $ 0.04 $ 0.75$ 1.97 $ 0.04 $ 2.01 Seasonality Our business is affected by the general seasonal trends common to the retail apparel industry. Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year. As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year. For example, we generated approximately 47%, 56%, and 47% of our full year operating profit during the fourth quarters of fiscal 2018, fiscal 2017, and fiscal 2016, 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 inNorth 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 ofNovember 3, 2019 , our working capital, excluding cash and cash equivalents, was$290.8 million , our cash and cash equivalents were$586.2 million , and our capacity under our revolving facility was$398.0 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 November 3, 2019 October 28,
2018
(In thousands)
Total cash provided by (used in):
Operating activities $ 95,106 $ 316,876
Investing activities (212,475 ) (165,914 )
Financing activities (179,555 ) (406,361 )
Effect of exchange rate changes on cash 1,757
(31,495 )
Decrease in cash and cash equivalents
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.
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Cash provided by operating activities decreased$221.8 million , to$95.1 million for the first three quarters of fiscal 2019 compared to$316.9 million for the first three quarters of fiscal 2018, primarily as a result of the following: • an increase in cash used in operating activities of$350.1 million as a result of changes in operating assets and liabilities, primarily due to the following: -$113.9 million related to income taxes, primarily due to payments for
withholding taxes on repatriated foreign earnings, as well as timing of
tax installments;
-
in our payment terms in the prior fiscal year;
-
inventory purchases to support our growth; and
-
non-current assets.
This was partially offset by an increase of$82.2 million in net income, and an increase of$46.1 million in non-cash expenses primarily related to an increase in depreciation and stock-based compensation expense. 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$46.6 million to$212.5 million for the first three quarters of fiscal 2019 from$165.9 million for the first three quarters of fiscal 2018. The increase was primarily the result of an increase in capital expenditures related to our company-operated stores, primarily as a result of an increased number of new company-operated stores as well as an increase in renovations and relocations of existing stores. Increased capital expenditures related to our direct to consumer channel as well as increased corporate capital expenditures also contributed to the increase in cash used in investing activities. 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 decreased$226.8 million to$179.6 million for the first three quarters of fiscal 2019 compared to$406.4 million for the first three quarters of fiscal 2018. The decrease was primarily the result of a decrease in our stock repurchases. Our cash used in financing activities for the first three quarters of fiscal 2019 included$173.1 million to repurchase 1.1 million shares of our common stock compared to$414.3 million to repurchase 3.4 million shares for the first three quarters of fiscal 2018. During the first quarter of fiscal 2019, we repurchased 1.0 million shares in a private transaction, and 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 OnDecember 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 andHSBC 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, inU.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the approval of the administrative agent and the lenders. Up to$35.0 32
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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 onDecember 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 forU.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. OnJune 6, 2018 , we entered into Amendment No. 1 to the credit agreement. The Amendment amended 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 fromDecember 15, 2021 toJune 6, 2023 . In addition, the Amendment decreased 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%, reduced the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduced fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%. As ofNovember 3, 2019 , aside from letters of credit of$2.0 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 ofNovember 3, 2019 , letters of credit and letters of guarantee totaling$2.0 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 withU.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 2018 Annual Report 33
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on Form 10-K filed with theSEC onMarch 27, 2019 , and in Notes 2, 5, 6, and 7 included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Operating Locations Our company-operated stores by country as ofNovember 3, 2019 andFebruary 3, 2019 are summarized in the table below. November 3, February 3, 2019 2019 United States 301 285 Canada 63 64 China (1) 34 22 Australia 31 29 United Kingdom 14 12 Japan 7 5 New Zealand 7 7 Germany 6 5 South Korea 5 4 Singapore 4 3 France 2 1 Sweden 2 1 Ireland 1 1 Netherlands 1 - Switzerland 1 1 Total company-operated stores 479 440
__________
(1) Included within
stores in the
stores in the
store in the
company-operated stores in the
company-operated store in the Macao Special Administration 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 November 3, 2019 , there were eight
licensed locations, including four in Mexico , three in the United Arab Emirates ,
and one in Qatar .
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