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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 3, 2020
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
 
lululemon athletica inc.
(Exact name of registrant as specified in its charter)
 
Delaware
20-3842867
(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 class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.005 per share
LULU
Nasdaq 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 Filer
Accelerated 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
At June 5, 2020, there were 124,814,503 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At June 5, 2020, there were outstanding 5,392,512 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, at June 5, 2020, the registrant had outstanding 5,392,512 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 3,
2020
 
February 2,
2020
ASSETS
Current assets
 
 
 
 
Cash and cash equivalents
 
$
823,006


$
1,093,505

Accounts receivable
 
48,684

 
40,219

Inventories
 
625,849

 
518,513

Prepaid and receivable income taxes
 
89,316

 
85,159

Other prepaid expenses and other current assets
 
107,690

 
70,542

 
 
1,694,545

 
1,807,938

Property and equipment, net
 
659,265

 
671,693

Right-of-use lease assets
 
731,883

 
689,664

Goodwill and intangible assets, net
 
24,044

 
24,423

Deferred income tax assets
 
31,190

 
31,435

Other non-current assets
 
60,859

 
56,201

 
 
$
3,201,786

 
$
3,281,354

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
78,940

 
$
79,997

Accrued inventory liabilities
 
9,860

 
6,344

Accrued compensation and related expenses
 
69,455

 
133,688

Current lease liabilities
 
144,646

 
128,497

Current income taxes payable
 
28,729

 
26,436

Unredeemed gift card liability
 
105,286

 
120,413

Other current liabilities
 
194,580

 
125,043

 
 
631,496

 
620,418

Non-current lease liabilities
 
639,242

 
611,464

Non-current income taxes payable
 
48,226

 
48,226

Deferred income tax liabilities
 
40,764

 
43,432

Other non-current liabilities
 
6,271

 
5,596

 
 
1,365,999

 
1,329,136

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; 5,482 and 6,227 issued and outstanding
 

 

Special voting stock, $0.000005 par value: 60,000 shares authorized; 5,482 and 6,227 issued and outstanding
 

 

Common stock, $0.005 par value: 400,000 shares authorized; 124,717 and 124,122 issued and outstanding
 
624

 
621

Additional paid-in capital
 
334,201

 
355,541

Retained earnings
 
1,786,147

 
1,820,637

Accumulated other comprehensive loss
 
(285,185
)
 
(224,581
)
 
 
1,835,787

 
1,952,218

 
 
$
3,201,786

 
$
3,281,354

See accompanying notes to the unaudited interim consolidated financial statements

3



lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited; Amounts in thousands, except per share amounts)
 
 
Quarter Ended
 
 
May 3, 2020
 
May 5, 2019
Net revenue
 
$
651,962

 
$
782,315

Cost of goods sold
 
317,560

 
360,595

Gross profit
 
334,402

 
421,720

Selling, general and administrative expenses
 
301,651

 
292,908

Income from operations
 
32,751

 
128,812

Other income (expense), net
 
1,174

 
2,379

Income before income tax expense
 
33,925

 
131,191

Income tax expense
 
5,293

 
34,588

Net income
 
$
28,632

 
$
96,603

 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
Foreign currency translation adjustment
 
(60,604
)
 
(15,723
)
Comprehensive (loss) income
 
$
(31,972
)
 
$
80,880

 
 
 
 
 
Basic earnings per share
 
$
0.22

 
$
0.74

Diluted earnings per share
 
$
0.22

 
$
0.74

Basic weighted-average number of shares outstanding
 
130,251

 
130,694

Diluted weighted-average number of shares outstanding
 
130,803

 
131,337

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 3, 2020
 
 
Exchangeable Stock
 
Special Voting Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
 
 
Shares
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
Balance at February 2, 2020
 
6,227

 
6,227

 
$

 
124,122

 
$
621

 
$
355,541

 
$
1,820,637

 
$
(224,581
)
 
$
1,952,218

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
28,632

 
 
 
28,632

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(60,604
)
 
(60,604
)
Common stock issued upon exchange of exchangeable shares
 
(745
)
 
(745
)
 

 
745

 
4

 
(4
)
 
 
 
 
 

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
6,128

 
 
 
 
 
6,128

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
371

 
2

 
3,133

 
 
 
 
 
3,135

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(152
)
 
(1
)
 
(30,058
)
 
 
 
 
 
(30,059
)
Repurchase of common stock
 
 
 
 
 
 
 
(369
)
 
(2
)
 
(539
)
 
(63,122
)
 
 
 
(63,663
)
Balance at May 3, 2020
 
5,482

 
5,482

 
$

 
124,717

 
$
624

 
$
334,201

 
$
1,786,147

 
$
(285,185
)
 
$
1,835,787



 
 
Quarter Ended May 5, 2019
 
 
Exchangeable Stock
 
Special Voting Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
 
 
Shares
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
Balance at February 3, 2019
 
9,332

 
9,332

 
$

 
121,600

 
$
608

 
$
315,285

 
$
1,346,890

 
$
(216,808
)
 
$
1,445,975

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
96,603

 
 
 
96,603

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(15,723
)
 
(15,723
)
Common stock issued upon exchange of exchangeable shares
 
(1,951
)
 
(1,951
)
 

 
1,951

 
10

 
(10
)
 
 
 
 
 

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
10,157

 
 
 
 
 
10,157

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
464

 
2

 
12,175

 
 
 
 
 
12,177

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(115
)
 
(1
)
 
(18,938
)
 
 
 
 
 
(18,939
)
Repurchase of common stock
 
 
 
 
 
 
 
(1,000
)
 
(4
)
 
(1,465
)
 
(162,061
)
 
 
 
(163,530
)
Balance at May 5, 2019
 
7,381

 
7,381

 
$

 
122,900

 
$
615

 
$
317,204

 
$
1,281,432

 
$
(232,531
)
 
$
1,366,720


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 3, 2020
 
May 5, 2019
Cash flows from operating activities
 
 
 
 
Net income
 
$
28,632

 
$
96,603

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
43,532

 
32,823

Stock-based compensation expense
 
6,128

 
10,157

Settlement of derivatives not designated in a hedging relationship
 
(5,669
)
 
(4,983
)
Changes in operating assets and liabilities:
 
 
 
 
Inventories
 
(122,810
)
 
(42,856
)
Prepaid and receivable income taxes
 
(4,157
)
 
(32,816
)
Other prepaid expenses and other current and non-current assets
 
(53,358
)
 
(16,164
)
Accounts payable
 
2,222

 
(5,420
)
Accrued inventory liabilities
 
4,016

 
(6,894
)
Accrued compensation and related expenses
 
(60,137
)
 
(32,498
)
Current and non-current income taxes payable
 
3,711

 
(60,533
)
Unredeemed gift card liability
 
(13,640
)
 
(13,641
)
Right-of-use lease assets and current and non-current lease liabilities
 
(16,868
)
 
8,185

Other current and non-current liabilities
 
67,155

 
5,234

Net cash used in operating activities
 
(121,243
)
 
(62,803
)
Cash flows from investing activities
 
 
 
 
Purchase of property and equipment
 
(52,101
)
 
(68,434
)
Settlement of net investment hedges
 
6,475

 
4,657

Other investing activities
 

 
(131
)
Net cash used in investing activities
 
(45,626
)
 
(63,908
)
Cash flows from financing activities
 
 
 
 
Proceeds from settlement of stock-based compensation
 
3,135

 
12,177

Taxes paid related to net share settlement of stock-based compensation
 
(30,059
)
 
(18,939
)
Repurchase of common stock
 
(63,663
)
 
(163,530
)
Net cash used in financing activities
 
(90,587
)
 
(170,292
)
Effect of exchange rate changes on cash and cash equivalents
 
(13,043
)
 
(8,076
)
Decrease in cash and cash equivalents
 
(270,499
)
 
(305,079
)
Cash and cash equivalents, beginning of period
 
$
1,093,505

 
$
881,320

Cash and cash equivalents, end of period
 
$
823,006

 
$
576,241

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 1NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of operations
lululemon athletica inc., a Delaware corporation ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of healthy lifestyle inspired athletic apparel and accessories. The Company primarily conducts its business through company-operated stores and direct to consumer through e-commerce. It also generates net revenue from outlets, sales from temporary locations, sales to wholesale accounts, license and supply arrangements, and warehouse sales. The Company operates stores in the United States, Canada, the People's Republic of China ("PRC"), Australia, the United Kingdom, Japan, New Zealand, Germany, South Korea, Singapore, France, Malaysia, Sweden, Ireland, the Netherlands, Norway, and Switzerland. There were 489 and 491 company-operated stores in operation as of May 3, 2020 and February 2, 2020, respectively.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020.
In line with recommendations by public health officials and in accordance with governmental authority orders, the Company took actions to close the majority of its retail locations and to reduce operating hours. In February 2020, the Company temporarily closed all of its retail locations in Mainland China. All of these locations have since reopened. In March 2020, the Company temporarily closed all of its retail locations in North America, Europe, and certain countries in Asia Pacific. Its distribution centers in Columbus, Ohio and Sumner, Washington were temporarily closed for one and two weeks, respectively, during the first quarter of fiscal 2020 due to COVID-19. Subsequent to May 3, 2020, the Company began reopening stores in certain markets in accordance with local government and public health authority guidelines. These stores are operating with precautionary measures in place such as reduced operating hours and maximum occupancy levels. As of June 10, 2020, 295 of its company-operated stores were open. As of June 10, 2020, all of its distribution centers were open.
In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses. The most significant relief measures which the Company qualifies for are the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in the United States, and the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. During the first quarter of fiscal 2020, the Company recognized payroll subsidies totaling $14.3 million under these wage subsidy programs and similar plans in other jurisdictions. These subsidies were recorded as a reduction in the associated wage costs which the Company incurred, and were recognized in selling, general and administrative expenses.
The Company also qualifies for and has deferred certain corporate income tax payments and employer payroll tax payments. The most significant is the deferral of $56.8 million of Canadian corporate income tax payments which would otherwise have been paid during the first quarter of fiscal 2020 to the third quarter of fiscal 2020.
The Financial Accounting Standards Board ("FASB") staff issued guidance in April 2020 in relation to accounting for lease concessions made in connection with the effects of COVID-19. In accordance with this guidance, the Company has elected to treat COVID-19-related lease concessions as variable lease payments. The Company is actively negotiating commercially reasonable lease concessions. No significant lease concessions have yet been confirmed.
The temporary store closures as a result of COVID-19 and associated reduction in operating income during the first quarter of fiscal 2020 are considered to be an indicator of impairment and the Company performed an assessment of recoverability for the long-lived assets and right-of-use assets associated with its closed retail locations. The Company recognized an insignificant impairment charge as a result of this analysis.
Inventory is valued at the lower of cost and net realizable value. The Company periodically reviews its inventories and makes provisions as necessary to appropriately value goods that are obsolete, have quality issues, or are damaged. The amount of the provision is equal to the difference between the cost of the inventory and its net realizable value based upon assumptions about product quality, damages, future demand, selling prices, and market conditions. The Company did not recognize any significant additional inventory provisions in the first quarter of fiscal 2020 as a result of this analysis.

8



Revenue is presented net of an allowance for expected returns, which is estimated based on historic return rates, trends, and future expectations. In light of the store closures, the Company has extended its return policy and the increase in the sales return allowances reflects an anticipated delay in returns as a result of retail location closures.
The COVID-19 pandemic has materially impacted the Company's statement of operations. The extent to which COVID-19 continues to impacts the Company's results and financial position will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. Continued proliferation of the virus, or resurgence, may result in further or prolonged closures of its retail locations and distribution centers, reduce operating hours, interrupt the Company's supply chain, cause changes in guest behavior, and reduce discretionary spending. Such factors could result in the impairment of long-lived assets and right-of-use assets and the need for an increased provision against the carrying value of the Company's inventories.
Basis of presentation
The unaudited interim consolidated financial statements as of May 3, 2020 and for the quarters ended May 3, 2020 and May 5, 2019 are presented in United States dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of February 2, 2020 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended February 2, 2020, which are included in Item 8 in the Company's fiscal 2019 Annual Report on Form 10-K filed with the SEC on March 26, 2020. 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 2019 Annual Report on Form 10-K. Except as disclosed in Note 2 pertaining to the adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's fiscal 2019 Annual Report on Form 10-K.
The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2020 will end on January 31, 2021 and will be a 52-week year. Fiscal 2019 was a 52-week year.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
Certain comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements
In June 2016, the FASB issued guidance on ASC 326 "Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments". This guidance changes the impairment model for most financial assets and requires the use of a forward-looking expected loss model rather than incurred losses for instruments measured at amortized cost. Under this model, entities are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The Company adopted this update during the first quarter of fiscal 2020 and it did not have a material impact on the Company's consolidated financial statements.
Recently issued accounting pronouncements
In December 2019, the FASB issued guidance on ASC 740, "Income Taxes". The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application and simplify GAAP for other areas of this topic by clarifying and amending existing guidance. This guidance is effective for the Company beginning in its first quarter of fiscal 2021 and early adoption is permitted. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements but does not believe it will have a material impact.
In March 2020, the FASB released guidance on ASC 848, "Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting". This update provides optional expedients and exceptions to the current

9



guidance on contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements but does not believe it will have a material impact.
NOTE 3. CREDIT FACILITIES
North America revolving credit facility
On June 6, 2018, the Company entered into Amendment No. 1 to its credit agreement. This 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 from December 15, 2021 to June 6, 2023.
In addition, this 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%.
The Company is required to follow certain covenants. As of May 3, 2020, the Company was in compliance with these covenants.
The Company had no borrowings outstanding under this credit facility as of May 3, 2020 and February 2, 2020. As of May 3, 2020, the Company had letters of credit of $1.8 million outstanding.
Mainland China revolving credit facility
In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility. The terms are reviewed on an annual basis. The facility includes a revolving loan of up to 100.0 million Chinese Yuan as well as a financial bank guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency. In U.S. dollars, the uncommitted and unsecured revolving credit facility is equivalent to $18.4 million, the revolving loan is equivalent of up to $14.2 million, and the financial bank guarantee facility is equivalent of up to $4.2 million. Loans are available in Chinese Yuan for a period not to exceed 12 months, and interest accrues on them at a rate equal to 105% of the applicable PBOC Benchmark Lending Rate. Guarantees have a commission equal to 1% per annum of the outstanding amount. The Company is required to follow certain covenants. As of May 3, 2020, the Company was in compliance with these covenants. As of May 3, 2020, there were immaterial borrowings outstanding under this credit facility.
NOTE 4. STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, which are provided by the Company directly.
Stock-based compensation expense charged to income for the plans was $6.6 million and $11.0 million for the quarters ended May 3, 2020 and May 5, 2019, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $89.9 million at May 3, 2020, which is expected to be recognized over a weighted-average period of 2.4 years.

10



A summary of the balances of the Company's stock-based compensation plans as of May 3, 2020, and changes during the first quarter then ended, is presented below:
 
 
Stock Options
 
Performance-Based Restricted Stock Units
 
Restricted Shares
 
Restricted Stock Units
 
Restricted Stock Units
(Liability Accounting)
 
 
Number
 
Weighted-Average Exercise Price
 
Number
 
Weighted-Average Grant Date Fair Value
 
Number
 
Weighted-Average Grant Date Fair Value
 
Number
 
Weighted-Average Grant Date Fair Value
 
Number
 
Weighted-Average Fair Value
 
 
(In thousands, except per share amounts)
Balance at February 2, 2020
 
776

 
$
113.41

 
238

 
$
103.52

 
7

 
$
175.82

 
333

 
$
108.44

 
29

 
$
239.39

Granted
 
214

 
188.84

 
137

 
115.58

 

 

 
112

 
189.30

 

 

Exercised/released
 
42

 
75.26

 
171

 
63.03

 

 

 
159

 
86.02

 

 

Forfeited/expired
 

 

 

 

 

 

 
1

 
137.74

 

 

Balance at May 3, 2020
 
948

 
$
132.05

 
204

 
$
145.55

 
7

 
$
175.82

 
285

 
$
152.27

 
29

 
$
218.69

Exercisable at May 3, 2020
 
270

 
$
96.67

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first quarter of fiscal 2020:
 
 
Quarter Ended
 May 3, 2020
Expected term
 
3.75 years

Expected volatility
 
39.62
%
Risk-free interest rate
 
0.34
%
Dividend yield
 
%

The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of two shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the award date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved.
The grant date fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the award date. Restricted stock units that are settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement. This fair value is based on the closing price of the Company's common stock on the last business day before each period end.
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the quarter ended May 3, 2020, there were 22.1 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

11



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 $2.3 million and $2.3 million in the first quarter of fiscal 2020 and fiscal 2019, respectively.
NOTE 5. FAIR VALUE MEASUREMENT
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - defined as observable inputs such as quoted prices in active markets;
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of May 3, 2020 and February 2, 2020, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
 
 
May 3, 2020
 
Level 1
 
Level 2
 
Level 3
 
Balance Sheet Classification
 
 
(In thousands)
 
 
Money market funds
 
$
476,607

 
$
476,607

 
$

 
$

 
Cash and cash equivalents
Term deposits
 
132,222

 

 
132,222

 

 
Cash and cash equivalents
Forward currency contract assets
 
23,511

 

 
23,511

 

 
Other prepaid expenses and other current assets
Forward currency contract liabilities
 
23,766

 

 
23,766

 

 
Other current liabilities

 
 
February 2, 2020
 
Level 1
 
Level 2
 
Level 3
 
Balance Sheet Classification
 
 
(In thousands)
 
 
Money market funds
 
$
610,800

 
$
610,800

 
$

 
$

 
Cash and cash equivalents
Term deposits
 
203,360

 

 
203,360

 

 
Cash and cash equivalents
Forward currency contract assets
 
1,735

 

 
1,735

 

 
Other prepaid expenses and other current assets
Forward currency contract liabilities
 
1,920

 

 
1,920

 

 
Other current liabilities

The Company records 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, Treasury bills, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities.

12



NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
Foreign exchange risk
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company currently hedges against changes in the Canadian dollar to U.S. dollar exchange rate and changes in the Chinese Yuan to U.S. dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign exchange gains and losses which arise on translation of its foreign subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The effective portions of the hedges are reported in accumulated other comprehensive income or loss and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated. Hedge effectiveness is measured using a method based on changes in forward exchange rates. The Company recorded no ineffectiveness from net investment hedges during the first quarter of fiscal 2020.
The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.
Derivatives not designated as hedging instruments
The Company is exposed to gains and losses arising from changes in foreign exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the first quarter of fiscal 2020, the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on U.S. dollar denominated monetary assets and liabilities. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses.
The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows.
Quantitative disclosures about derivative financial instruments
The Company presents its derivative assets and derivative liabilities at their gross fair values within other prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of May 3, 2020, there were derivative assets of $23.5 million and derivative liabilities of $23.8 million subject to enforceable netting arrangements.

13



The notional amounts and fair values of forward currency contracts were as follows:
 
 
May 3, 2020
 
February 2, 2020
 
 
Gross Notional
 
Assets
 
Liabilities
 
Gross Notional
 
Assets
 
Liabilities
 
 
(In thousands)
Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Forward currency contracts
 
$
461,000

 
$
23,364

 
$

 
$
417,000

 
$
1,583

 
$

Derivatives not designated in a hedging relationship:
 
 
 
 
 
 
 
 
 
 
 
 
Forward currency contracts
 
505,000

 
147

 
23,766

 
460,000

 
152

 
1,920

Net derivatives recognized on consolidated balance sheets:
 
 
 
 
 
 
 
 
 
 
 
 
Forward currency contracts
 
 
 
$
23,511

 
$
23,766

 
 
 
$
1,735

 
$
1,920


The forward currency contracts designated as net investment hedges outstanding as of May 3, 2020 mature on different dates between May 2020 and October 2020.
The forward currency contracts not designated in a hedging relationship outstanding as of May 3, 2020 mature on different dates between May 2020 and October 2020.
The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income or loss were as follows:
 
 
Quarter Ended
 
 
May 3, 2020

May 5, 2019
 
 
(In thousands)
Gains (losses) recognized in foreign currency translation adjustment:
 
 
 
 
Derivatives designated as net investment hedges
 
$
28,256

 
$
6,764


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 exchange and derivative gains and losses recorded in the consolidated statement of operations were as follows:
 
 
Quarter Ended
 
 
May 3, 2020
 
May 5, 2019
 
 
(In thousands)
Gains (losses) recognized in selling, general and administrative expenses:
 
 
 
 
Foreign exchange gains
 
$
27,742

 
$
5,697

Derivatives not designated in a hedging relationship
 
(27,520
)
 
(6,631
)
Net foreign exchange and derivative gains (losses)
 
$
222

 
$
(934
)

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.

14



NOTE 7. EARNINGS PER SHARE
The details of the computation of basic and diluted earnings per share are as follows:
 
 
Quarter Ended
 
 
May 3, 2020
 
May 5, 2019
 
 
(In thousands, except per share amounts)
Net income
 
$
28,632

 
$
96,603

Basic weighted-average number of shares outstanding
 
130,251

 
130,694

Assumed conversion of dilutive stock options and awards
 
552

 
643

Diluted weighted-average number of shares outstanding
 
130,803

 
131,337

Basic earnings per share
 
$
0.22

 
$
0.74

Diluted earnings per share
 
$
0.22

 
$
0.74


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 quarters ended May 3, 2020 and May 5, 2019, 97.5 thousand and 75.7 thousand stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.
On January 31, 2019, the Company's board of directors approved a stock repurchase program for up to $500.0 million of the Company's common shares on the open market or in privately negotiated transactions. 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 March 31, 2020, the Company temporarily paused its share repurchase program. As of May 3, 2020, the remaining aggregate value of shares available to be repurchased under this program was $263.6 million.
During the quarters ended May 3, 2020 and May 5, 2019, 0.4 million and 1.0 million shares, respectively, were repurchased under the program at a total cost of $63.7 million and $163.5 million, respectively.
Subsequent to May 3, 2020, and up to June 5, 2020, no shares were repurchased.
NOTE 8. SUPPLEMENTARY FINANCIAL INFORMATION
A summary of certain consolidated balance sheet accounts is as follows:
 
 
May 3,
2020
 
February 2,
2020
 
 
(In thousands)
Inventories:
 
 
 
 
Finished goods
 
$
648,909

 
$
540,580

Provision to reduce inventories to net realizable value
 
(23,060
)
 
(22,067
)
 
 
$
625,849

 
$
518,513



15



 
 
May 3,
2020
 
February 2,
2020
 
 
(In thousands)
Other prepaid expenses and other current assets:
 
 
 
 
Other prepaid expenses
 
$
60,333

 
$
64,568

Forward currency contract assets
 
23,511

 
1,735

Government payroll subsidy receivables
 
13,442

 

Other current assets
 
10,404

 
4,239

 
 
$
107,690

 
$
70,542

Property and equipment, net:
 
 
 
 
Land
 
$
67,545

 
$
71,829

Buildings
 
28,984

 
30,187

Leasehold improvements
 
490,010

 
489,202

Furniture and fixtures
 
108,786

 
109,533

Computer hardware
 
95,250

 
95,399

Computer software
 
339,827

 
336,768

Equipment and vehicles
 
19,302

 
19,521

Work in progress
 
51,445

 
40,930

Property and equipment, gross
 
1,201,149

 
1,193,369

Accumulated depreciation
 
(541,884
)
 
(521,676
)
 
 
$
659,265

 
$
671,693

Other non-current assets:
 
 
 
 
Cloud computing arrangement implementation costs
 
$
31,929

 
$
24,648

Security deposits
 
19,949

 
19,901

Other
 
8,981

 
11,652

 
 
$
60,859

 
$
56,201

Other current liabilities:
 
 
 
 
Accrued duty, freight, and other operating expenses
 
$
76,679

 
$
59,403

Sales return allowances
 
33,962

 
12,897

Deferred revenue
 
27,775

 
12,705

Forward currency contract liabilities
 
23,766

 
1,920

Accrued capital expenditures
 
10,747

 
5,457

Sales tax collected
 
9,485

 
17,370

Accrued rent
 
5,129

 
8,356

Other
 
7,037

 
6,935

 
 
$
194,580

 
$
125,043



16



NOTE 9SEGMENTED INFORMATION AND DISAGGREGATED NET REVENUE
The Company applies ASC Topic 280, Segment Reporting ("ASC 280"), in determining reportable segments for its financial statement disclosure. The Company reports segments based on the financial information it uses in managing its business. The Company's reportable segments are comprised of company-operated stores and direct to consumer. Direct to consumer represents sales from the Company's e-commerce websites and mobile apps. Outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, and warehouse sale net revenue have been combined into other. During the first quarter of fiscal 2020, the Company reviewed its segment and general corporate expenses and determined certain costs that are more appropriately classified in different categories. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
 
 
Quarter Ended
 
 
May 3, 2020
 
May 5, 2019
 
 
(In thousands)
Net revenue:
 
 
 
 
Company-operated stores
 
$
259,970

 
$
506,422

Direct to consumer
 
352,039

 
209,844

Other
 
39,953

 
66,049

 
 
$
651,962

 
$
782,315

Segmented income (loss) from operations:
 
 
 
 
Company-operated stores
 
$
(30,154
)
 
$
120,911

Direct to consumer
 
156,947

 
79,337

Other
 
(269
)
 
12,623

 
 
126,524

 
212,871

General corporate expense
 
93,773

 
84,059

Income from operations
 
32,751

 
128,812

Other income (expense), net
 
1,174

 
2,379

Income before income tax expense
 
$
33,925

 
$
131,191

 
 
 
 
 
Capital expenditures:
 
 
 
 
Company-operated stores
 
$
33,819

 
$
38,710

Direct to consumer
 
2,298

 
6,226

Corporate and other
 
15,984

 
23,498

 
 
$
52,101

 
$
68,434

Depreciation and amortization:
 
 
 
 
Company-operated stores
 
$
25,628

 
$
21,060

Direct to consumer
 
2,684

 
2,462

Corporate and other
 
15,220

 
9,301

 
 
$
43,532

 
$
32,823



17



The following table disaggregates the Company's net revenue by geographic area.
 
 
Quarter Ended
 
 
May 3, 2020
 
May 5, 2019
 
 
(In thousands)
United States
 
$
459,352

 
$
553,647

Canada
 
99,497

 
123,645

Outside of North America
 
93,113

 
105,023

 
 
$
651,962

 
$
782,315


The following table disaggregates the Company's net revenue by category.
 
 
Quarter Ended
 
 
May 3, 2020
 
May 5, 2019
 
 
(In thousands)
Women's product
 
$
480,313

 
$
562,983

Men's product
 
129,129

 
170,219

Other categories
 
42,520

 
49,113

 
 
$
651,962

 
$
782,315


NOTE 10LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
In addition to the legal proceedings described below, the Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows.
On October 9, 2015, certain current and former hourly employees of the Company filed a class action lawsuit in the Supreme Court of New York entitled Rebecca Gathmann-Landini et al v. lululemon USA inc. On December 2, 2015, the case was moved to the United States District Court for the Eastern District of New York. The lawsuit alleges that the Company violated various New York labor codes by failing to pay all earned wages, including overtime compensation. The plaintiffs are seeking an unspecified amount of damages. The Company intends to vigorously defend this matter.
On November 21, 2018, plaintiff David Shabbouei filed in the Delaware Court of Chancery a derivative lawsuit on behalf of the Company against certain of the Company's current and former directors and officers, captioned David Shabbouei v. Laurent Potdevin, et al., 2018-0847-JRS. Plaintiff claims that the defendants breached their fiduciary duties to the Company by allegedly failing to address alleged sexual harassment, gender discrimination, and related conduct at the Company. Plaintiff also claims that the defendants breached their fiduciary duties to the Company and wasted corporate assets with respect to the separation agreement entered into by the Company and Laurent Potdevin in connection with his departure from the Company in February 2018. Plaintiff also further brings an unjust enrichment claim against Mr. Potdevin with respect to the separation agreement. Plaintiff seeks unspecified money damages for the Company for the defendants' alleged breaches of fiduciary duty, waste and unjust enrichment, disgorgement of all profits, benefits and other compensation Mr. Potdevin received as a result of defendants' alleged conduct for the Company, an order directing the Company to implement corporate governance and internal procedures, and an award of plaintiff's attorneys' fees, costs and expenses. On April 2, 2020, the Court granted the motion of the defendants and the Company to dismiss the lawsuit with prejudice.
On March 23, 2020, a former retail employee filed a representative action in the Los Angeles Superior Court alleging violation of the Private Attorney General Act ("PAGA") based on purported California labor code violations including failure to pay wages, failure to pay overtime, failure to provide accurate itemized statements, and failure to provide meal and rest periods. The plaintiff is seeking to recover civil penalties under PAGA. The Company intends to vigorously defend this matter.
On April 9, 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 original and unfair competition. The plaintiff is seeking injunctive relief, monetary damages and declaratory relief. The Company intends to vigorously defend this matter.

18



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, 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 2019 Annual Report on Form 10-K filed with the SEC on March 26, 2020.
We disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.lululemon.com/), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls, and webcasts.
Overview
lululemon athletica inc. is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. We have a 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 the lululemon 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.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020. The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers. Government authorities in certain markets in which we operate have also issued orders that require the closure of non-essential businesses and people to remain at home.

19



We have taken actions to close retail locations and to reduce operating hours, and we continue to monitor the situation and work closely with local authorities to prioritize the safety of our people and guests. In February 2020, we temporarily closed all of our retail locations in Mainland China. All of these locations have since reopened. In March 2020, we temporarily closed all of our retail locations in North America, Europe, and certain countries in Asia Pacific. Subsequent to May 3, 2020, we began reopening our retail locations in these markets in line with the guidance from local authorities. As of June 10, 2020, 295 of our company-operated stores were open. Our distribution centers in Columbus, Ohio and Sumner, Washington were temporarily closed for one and two weeks, respectively, during the first quarter of fiscal 2020 due to COVID-19. As of June 10, 2020, all of our distribution centers were open.
Our retail locations and distribution centers are operating with precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and maximum occupancy levels. This pandemic has also impacted the operations of our third party logistics providers and our manufacturing and supply partners, including through the closure or reduced capacity of facilities, and operational changes to accommodate physical distancing. As the pandemic progresses, we may face further disruptions or increased operational and logistics costs throughout our supply chain.
There is significant uncertainty regarding the extent and duration of the impact that the COVID-19 pandemic will have on our store operations, the demand for our products, and on our supply chain. It had a material adverse impact on our results of operations for the first quarter of fiscal 2020, and we expect it to continue to impact our results of operations, financial position, and liquidity. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.
We remain confident in the long-term growth opportunities and our Power of Three growth plan and believe that we have sufficient cash and cash equivalents, and available capacity under our revolving credit facilities, to meet our liquidity needs. As of May 3, 2020, we had cash and cash equivalents of $823.0 million and the capacity under our committed revolving credit facility was $398.2 million.
Financial Highlights
For the first quarter of fiscal 2020, compared to the first quarter of fiscal 2019:
Net revenue decreased 17% to $652.0 million. On a constant dollar basis, net revenue decreased 16%.
Direct to consumer net revenue increased 68%, or increased 70% on a constant dollar basis.
Gross profit decreased 21% to $334.4 million.
Gross margin decreased 260 basis points to 51.3%.
Income from operations decreased 75% to $32.8 million.
Operating margin decreased 1,150 basis points to 5.0%.
Income tax expense decreased 85% to $5.3 million. Our effective tax rate for the first quarter of fiscal 2020 was 15.6% compared to 26.4% for the first quarter of fiscal 2019.
Diluted earnings per share were $0.22 compared to $0.74 in the first quarter of fiscal 2019.
As the temporary store closures from COVID-19 have resulted in a significant number of stores being removed from our comparable store base, total comparable sales and comparable store sales are not currently representative of the underlying trends of our business. We do not believe these metrics are currently useful to investors in understanding performance, therefore we have not included these metrics in our discussion and analysis of results of operations.
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 and direct to consumer net revenue.

20



Results of Operations
First Quarter Results
The following table summarizes key components of our results of operations for the quarters ended May 3, 2020 and May 5, 2019. The percentages are presented as a percentage of net revenue.
 
 
Quarter Ended
 
 
May 3, 2020
 
May 5, 2019

May 3, 2020
 
May 5, 2019
 
 
(In thousands)
 
(Percentages)
Net revenue
 
$
651,962

 
$
782,315

 
100.0
%
 
100.0
%
Cost of goods sold
 
317,560

 
360,595

 
48.7

 
46.1

Gross profit
 
334,402

 
421,720

 
51.3

 
53.9

Selling, general and administrative expenses
 
301,651

 
292,908

 
46.3

 
37.4

Income from operations
 
32,751

 
128,812

 
5.0

 
16.5

Other income (expense), net
 
1,174

 
2,379

 
0.2

 
0.3

Income before income tax expense