lululemon athletica, inc.
lululemon athletica inc. (Form: 10-Q, Received: 12/07/2016 16:15:42)
Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 2016
or
o
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)
(Zip Code)
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
 
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
 
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No þ
At December 2, 2016 , there were 127,295,920 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At December 2, 2016 , there were outstanding 9,784,239 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 December 2, 2016 , the registrant had outstanding 9,784,239 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


TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 

2

Table of Contents


PART I
FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
 
 
October 30,
2016
 
January 31,
2016
ASSETS
Current assets
 
 
 
 
Cash and cash equivalents
 
$
480,386

 
$
501,482

Accounts receivable
 
11,910

 
13,108

Inventories
 
364,514

 
284,009

Prepaid and receivable income taxes
 
123,362

 
91,453

Other prepaid expenses and other current assets
 
42,738

 
26,987

 
 
1,022,910

 
917,039

Property and equipment, net
 
399,658

 
349,605

Goodwill and intangible assets, net
 
24,567

 
24,777

Deferred income tax assets
 
12,446

 
11,802

Other non-current assets
 
19,359

 
10,854

 
 
$
1,478,940

 
$
1,314,077

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
9,132

 
$
10,381

Accrued inventory liabilities
 
32,146

 
25,451

Accrued compensation and related expenses
 
53,641

 
43,524

Income taxes payable
 
21,953

 
37,736

Unredeemed gift card liability
 
44,173

 
57,736

Other accrued liabilities
 
51,663

 
50,676

 
 
212,708

 
225,504

Deferred income tax liabilities
 
11,064

 
10,759

Other non-current liabilities
 
50,699

 
50,332

 
 
274,471

 
286,595

Stockholders' equity
 
 
 
 
Undesignated preferred stock, $0.01 par value: 5,000 shares authorized; none issued and outstanding
 

 

Exchangeable stock, no par value: 60,000 shares authorized; 9,784 and 9,804 issued and outstanding
 

 

Special voting stock, $0.000005 par value: 60,000 shares authorized; 9,784 and 9,804 issued and outstanding
 

 

Common stock, $0.005 par value: 400,000 shares authorized; 127,296 and 127,482 issued and outstanding
 
636

 
637

Additional paid-in capital
 
262,440

 
245,533

Retained earnings
 
1,158,834

 
1,019,515

Accumulated other comprehensive loss
 
(217,441
)
 
(238,203
)
 
 
1,204,469

 
1,027,482

 
 
$
1,478,940

 
$
1,314,077

See accompanying notes to the unaudited interim consolidated financial statements

3

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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
 
 
Thirteen Weeks Ended 
 October 30, 2016
 
Thirteen Weeks Ended 
 November 1, 2015
 
Thirty-Nine Weeks Ended 
 October 30, 2016
 
Thirty-Nine Weeks Ended 
 November 1, 2015
Net revenue
 
$
544,416

 
$
479,693

 
$
1,554,452

 
$
1,356,247

Cost of goods sold
 
265,990

 
254,896

 
782,734

 
713,548

Gross profit
 
278,426

 
224,797

 
771,718

 
642,699

Selling, general and administrative expenses
 
185,451

 
156,619

 
547,195

 
439,906

Income from operations
 
92,975

 
68,178

 
224,523

 
202,793

Other income (expense), net
 
628

 
(2,890
)
 
720

 
(1,519
)
Income before income tax expense
 
93,603

 
65,288

 
225,243

 
201,274

Income tax expense
 
25,318

 
12,135

 
57,997

 
52,643

Net income
 
$
68,285

 
$
53,153

 
$
167,246

 
$
148,631

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(24,748
)
 
(665
)
 
20,762

 
(17,427
)
Comprehensive income
 
$
43,537

 
$
52,488

 
$
188,008

 
$
131,204

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.50

 
$
0.38

 
$
1.22

 
$
1.05

Diluted earnings per share
 
$
0.50

 
$
0.38

 
$
1.22

 
$
1.05

Basic weighted-average number of shares outstanding
 
137,033

 
140,282

 
137,095

 
141,198

Diluted weighted-average number of shares outstanding
 
137,237

 
140,457

 
137,321

 
141,470

See accompanying notes to the unaudited interim consolidated financial statements
 

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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
 
 
Exchangeable Stock
 
Special Voting Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
 
 
Shares
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
Balance at January 31, 2016
 
9,804

 
9,804

 
$

 
127,482

 
$
637

 
$
245,533

 
$
1,019,515

 
$
(238,203
)
 
$
1,027,482

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
167,246

 
 
 
167,246

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,762

 
20,762

Common stock issued upon exchange of exchangeable shares
 
(20
)
 
(20
)
 

 
20

 

 

 
 
 
 
 

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
12,939

 
 
 
 
 
12,939

Tax benefits from stock-based compensation
 
 
 
 
 
 
 
 
 
 
 
1,328

 
 
 
 
 
1,328

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
278

 
1

 
5,958

 
 
 
 
 
5,959

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(41
)
 

 
(2,691
)
 
 
 
 
 
(2,691
)
Repurchase of common stock
 
 
 
 
 
 
 
(443
)
 
(2
)
 
(627
)
 
(27,927
)
 
 
 
(28,556
)
Balance at October 30, 2016
 
9,784

 
9,784

 
$

 
127,296

 
$
636

 
$
262,440

 
$
1,158,834

 
$
(217,441
)
 
$
1,204,469

See accompanying notes to the unaudited interim consolidated financial statements

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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
 
 
Thirty-Nine Weeks Ended 
 October 30, 2016
 
Thirty-Nine Weeks Ended 
 November 1, 2015
Cash flows from operating activities
 
 
 
 
Net income
 
$
167,246

 
$
148,631

Items not affecting cash
 
 
 
 
Depreciation and amortization
 
63,641

 
52,498

Stock-based compensation expense
 
12,939

 
6,639

Tax benefits from stock-based compensation
 
(1,328
)
 
(666
)
Changes in operating assets and liabilities
 
 
 
 
Inventories
 
(73,660
)
 
(151,317
)
Prepaid and receivable income taxes
 
(30,580
)
 
(83,564
)
Other prepaid expenses and other current assets
 
(13,471
)
 
(6,097
)
Accounts payable
 
(1,558
)
 
(3,448
)
Accrued inventory liabilities
 
5,270

 
18,415

Accrued compensation and related expenses
 
8,835

 
14,448

Income taxes payable
 
(17,563
)
 
27,166

Unredeemed gift card liability
 
(14,123
)
 
(11,023
)
Other accrued liabilities
 
376

 
4,416

Other non-current assets and liabilities
 
(8,693
)
 
9,842

Net cash provided by operating activities
 
97,331

 
25,940

Cash flows from investing activities
 
 
 
 
Purchase of property and equipment
 
(106,168
)
 
(108,061
)
Net cash used in investing activities
 
(106,168
)
 
(108,061
)
Cash flows from financing activities
 
 
 
 
Proceeds from settlement of stock-based compensation
 
5,959

 
4,440

Tax benefits from stock-based compensation
 
1,328

 
666

Taxes paid related to net share settlement of stock-based compensation
 
(2,691
)
 
(2,439
)
Repurchase of common stock
 
(28,556
)
 
(169,974
)
Registration fees associated with prospectus supplement
 

 
(145
)
Net cash used in financing activities
 
(23,960
)
 
(167,452
)
Effect of exchange rate changes on cash and cash equivalents
 
11,701

 
(11,460
)
Decrease in cash and cash equivalents
 
(21,096
)
 
(261,033
)
Cash and cash equivalents, beginning of period
 
$
501,482

 
$
664,479

Cash and cash equivalents, end of period
 
$
480,386

 
$
403,446

See accompanying notes to the unaudited interim consolidated financial statements


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Table of Contents


lululemon athletica inc.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of operations
lululemon athletica inc., a Delaware corporation ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of healthy lifestyle inspired athletic apparel, which is sold through a chain of company-operated stores, direct to consumer through e-commerce, outlets, showrooms, sales to wholesale accounts, warehouse sales, temporary locations, and through a license and supply arrangement. The Company operates stores in the United States, Canada, Australia, the United Kingdom, New Zealand, Singapore, Hong Kong, South Korea, Germany, Puerto Rico, and Switzerland. There were a total of 389 and 363 company-operated stores in operation as of October 30, 2016 and January 31, 2016 , respectively.
Basis of presentation
The unaudited interim consolidated financial statements as of October 30, 2016 and for the thirteen and thirty-nine weeks ended October 30, 2016 and November 1, 2015 are presented in United States dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of January 31, 2016 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 31, 2016 , which are included in Item 8 in the Company's fiscal 2015 Annual Report on Form 10-K filed with the SEC on March 30, 2016 . 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 2015 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 2016 will end on January 29, 2017 and will be 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 2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), which supersedes the revenue recognition requirements in ASC Topic 605 Revenue Recognition , including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. This guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and expands the related disclosure requirements. In 2015, the FASB deferred the effective date for this guidance, and in 2016, the FASB issued several updates that clarify the guidance in this topic. This guidance will be effective for the Company beginning in its first quarter of fiscal 2018, with early application permitted if adopted in its first quarter of fiscal 2017. The Company is currently evaluating the timing of adoption and the impact that this new guidance may have on its consolidated financial statements.
In June 2014, the FASB amended ASC Topic 718, Compensation - Stock Compensation ("ASC 718") for share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This guidance became effective for the Company beginning in its first quarter of fiscal 2016 and it was adopted prospectively. The adoption did not have an impact on the Company's consolidated financial statements.

7



In April 2015, the FASB amended ASC Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software ("ASC 350-40") to provide guidance to customers about whether a cloud computing arrangement includes a software license. This guidance requires that if a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance became effective for the Company beginning in its first quarter of fiscal 2016 and it was adopted prospectively. The adoption did not have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB amended ASC Topic 330, Inventory ("ASC 330") to simplify the measurement of inventory. The amendments require that an entity measure inventory at the lower of cost and net realizable value instead of the lower of cost and market. This guidance will be effective for the Company beginning in its first quarter of fiscal 2017, with early application permitted. The Company will adopt this amendment in fiscal 2017 and does not expect the adoption to have a material impact on its consolidated financial statements.
In February 2016 the FASB issued ASC Topic 842, Leases ("ASC 842") to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. This guidance will be effective for the Company beginning in its first quarter of fiscal 2019, with early application permitted. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements but it is expected that the adoption will result in a significant increase in assets and liabilities on the consolidated balance sheets.
In March 2016, the FASB amended ASC 718, simplifying the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance also allows an entity to account for forfeitures when they occur. This guidance will be effective for the Company beginning in its first quarter of fiscal 2017, with early application permitted. The Company will adopt this amendment in fiscal 2017 and is currently evaluating the impact that this new guidance will have on its consolidated financial statements.
NOTE 3. STOCK-BASED COMPENSATION
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 $12.9 million and $6.6 million for the thirty-nine weeks ended October 30, 2016 and November 1, 2015 , respectively. Total unrecognized compensation cost for all stock-based compensation plans was $42.7 million at October 30, 2016 , which is expected to be recognized over a weighted-average period of 2.4  years.

8



Company stock options, performance-based restricted stock units, restricted shares and restricted stock units
A summary of the Company's stock option, performance-based restricted stock unit, restricted share and restricted stock unit activity as of October 30, 2016 , and changes during the thirty-nine week period then ended is presented below:
 
 
Stock Options
 
Performance-Based Restricted Stock Units
 
Restricted Shares
 
Restricted Stock Units
 
 
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
 
 
(In thousands, except per share amounts)
Balance at January 31, 2016
 
867

 
$
49.54

 
395

 
$
58.58

 
31

 
$
57.67

 
333

 
$
55.91

Granted
 
420

 
68.66

 
160

 
68.66

 
17

 
69.94

 
209

 
68.14

Exercised/vested
 
170

 
35.02

 
7

 
64.36

 
20

 
66.16

 
84

 
57.27

Forfeited
 
142

 
58.01

 
143

 
62.46

 

 

 
73

 
54.35

Balance at October 30, 2016
 
975

 
$
59.08

 
405

 
$
61.10

 
28

 
$
59.07

 
385

 
$
62.53

Exercisable at October 30, 2016
 
230

 
$
50.59

 
 
 
 
 
 
 
 
 
 
 
 
The fair value of each stock option granted is estimated on date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of 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 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 assumptions were used in calculating the fair value of stock options granted in fiscal 2016 :
 
 
Stock Options Granted During
Fiscal 2016
Expected term
 
4 years

Expected volatility
 
40.07
%
Risk-free interest rate
 
1.08
%
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 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.
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 available under the ESPP is 6.0 million  shares. During the thirteen weeks ended October 30, 2016 , there were 28.8 thousand  shares purchased in the open market under the ESPP.

9



NOTE 4. EARNINGS PER SHARE
The details of the computation of basic and diluted earnings per share are as follows:
 
 
Thirteen Weeks Ended 
 October 30, 2016
 
Thirteen Weeks Ended 
 November 1, 2015
 
Thirty-Nine Weeks Ended 
 October 30, 2016
 
Thirty-Nine Weeks Ended 
 November 1, 2015
 
 
(In thousands, except per share amounts)
Net income
 
$
68,285

 
$
53,153

 
$
167,246

 
$
148,631

Basic weighted-average number of shares outstanding
 
137,033

 
140,282

 
137,095

 
141,198

Assumed conversion of dilutive stock options and awards
 
204

 
175

 
226

 
272

Diluted weighted-average number of shares outstanding
 
137,237

 
140,457

 
137,321

 
141,470

Basic earnings per share
 
$
0.50

 
$
0.38

 
$
1.22

 
$
1.05

Diluted earnings per share
 
$
0.50

 
$
0.38

 
$
1.22

 
$
1.05

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 each of the thirty-nine weeks ended October 30, 2016 and November 1, 2015 , 0.1 million stock options and awards were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.
On June 11, 2014, the Company's board of directors approved a program to repurchase shares of the Company's common stock up to an aggregate value of $450.0 million . The common stock was repurchased in the open market at prevailing market prices, with the timing and actual number of shares repurchased depending upon market conditions and other factors. During the thirty-nine weeks ended October 30, 2016 and November 1, 2015 , 0.4 million and 2.9 million shares, respectively, were repurchased under the program at a total cost of $28.6 million and $170.0 million , respectively. This stock repurchase program was completed during the second quarter of fiscal 2016.
NOTE 5. SUPPLEMENTARY FINANCIAL INFORMATION
For the thirteen weeks ended October 30, 2016 and November 1, 2015 , there were net foreign exchange gains of $4.3 million and net foreign exchange losses of $1.2 million , respectively, included within selling, general and administrative expenses.
For the thirty-nine weeks ended October 30, 2016 and November 1, 2015 , there were net foreign exchange losses of  $4.1 million and less than $0.1 million , respectively, included within selling, general and administrative expenses.

10



A summary of certain consolidated balance sheet accounts is as follows:
 
 
October 30,
2016
 
January 31,
2016
 
 
(In thousands)
Inventories:
 
 
 
 
Finished goods
 
$
373,385

 
$
290,791

Provision to reduce inventory to market value
 
(8,871
)
 
(6,782
)
 
 
$
364,514

 
$
284,009

Property and equipment, net:
 
 
 
 
Land
 
$
77,107

 
$
55,488

Buildings
 
31,773

 
30,885

Leasehold improvements
 
254,528

 
225,604

Furniture and fixtures
 
82,649

 
73,254

Computer hardware
 
52,538

 
44,085

Computer software
 
143,880

 
112,161

Equipment and vehicles
 
13,390

 
11,929

Accumulated depreciation
 
(256,207
)
 
(203,801
)
 
 
$
399,658

 
$
349,605

Goodwill and intangible assets, net:
 
 
 
 
Goodwill
 
$
25,496

 
$
25,496

Changes in foreign currency exchange rates
 
(1,384
)
 
(1,666
)
 
 
24,112

 
23,830

Intangibles - reacquired franchise rights
 
10,150

 
10,150

Accumulated amortization
 
(9,659
)
 
(9,074
)
Changes in foreign currency exchange rates
 
(36
)
 
(129
)
 
 
455

 
947

 
 
$
24,567

 
$
24,777

Other accrued liabilities:
 
 
 
 
Accrued duty, freight, and other operating expenses
 
$
30,324

 
$
26,017

Sales tax collected
 
10,005

 
10,506

Accrued rent
 
5,192

 
6,070

Other
 
6,142

 
8,083

 
 
$
51,663

 
$
50,676

Other non-current liabilities:
 
 
 
 
Deferred lease liability
 
$
26,569

 
$
25,723

Tenant inducements
 
24,130

 
24,609

 
 
$
50,699

 
$
50,332

NOTE 6. LEGAL PROCEEDINGS
In addition to the legal matters described below, the Company is, from time to time, involved in routine legal matters incidental to the conduct of its business, including legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, and similar matters. The Company believes the ultimate resolution of any such current proceeding will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows.
On July 15, 2015, plaintiffs Hallandale Beach Police Officers and Firefighters' Personnel Retirement Fund and Laborers' District Council Industry Pension Fund filed in the Delaware Court of Chancery a derivative lawsuit on behalf of lululemon against certain current and former directors of lululemon, captioned Laborers' District Council Industry Pension Fund v. Bensoussan, et al., C.A. No. 11293-CB. Plaintiffs claim that the individual defendants breached their fiduciary duties to

11



lululemon by allegedly failing to investigate certain trades of lululemon stock owned by Dennis J. Wilson in 2013. Plaintiffs also claim that Mr. Wilson breached his fiduciary duties by making his broker aware of certain non-public, material events prior to executing sales of lululemon stock on Mr. Wilson's behalf. On June 14, 2016 the Court dismissed the action for failure to adequately plead that demand on the board was excused and for failure to state a claim upon which relief may be granted. The plaintiffs have appealed the dismissal to the Supreme Court of the state of Delaware.
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.
NOTE 7. INCOME TAXES
As disclosed in Note 15 to the audited consolidated financial statements included in Item 8 of the Company's fiscal 2015 Annual Report on Form 10-K filed with the SEC on March 30, 2016 , the Company was in the process of finalizing a bilateral Advance Pricing Arrangement ("APA") with the Internal Revenue Service ("IRS") and the Canada Revenue Agency ("CRA"). The APA was finalized with the IRS and the CRA during the third quarter of fiscal 2016.
The final outcome of the APA resulted in an income tax recovery in the United States and an income tax payment in Canada for fiscal 2011 through fiscal 2015 and an intercompany debt between one of the Company's U.S. subsidiaries and a Canadian subsidiary. During the third quarter of fiscal 2016, $156.0 million was distributed from a Canadian subsidiary to the U.S. parent entity to finance the settlement of this intercompany debt.
The Company updated its income tax calculations with respect to the APA and the repatriation of $156.0 million for the exchange rates in effect as of the date of the repatriation, changes in the foreign tax credit pools, and changes in the effective state tax rates. These income tax adjustments resulted in a net income tax recovery of $4.0 million in the third quarter of fiscal 2016 , and $11.6 million in the first three quarters of fiscal 2016 .
The Company also recorded a related net interest expense of $0.2 million in the third quarter of fiscal 2016 in other income (expense), net, and $1.7 million in the first three quarters of fiscal 2016 . This primarily represents accrued interest on the Canadian income tax payable related to the APA.
The results for the third quarter of fiscal 2015 included a net income tax recovery of $7.7 million as well as a net interest expense of $3.6 million that was recorded in other income (expense), net, related to the expected outcome of the APA and taxes associated with the anticipated repatriation of foreign earnings.

12



NOTE 8. SEGMENT REPORTING
The Company applies ASC Topic 280, Segment Reporting ("ASC 280"), in determining reportable segments for its financial statement disclosure. The Company reports segments based on the financial information it uses in managing its business. The Company's reportable segments are comprised of company-operated stores and direct to consumer. Direct to consumer represents sales from the Company's e-commerce websites. Outlets, showrooms, sales to wholesale accounts, warehouse sales, temporary locations, and a license and supply arrangement have been combined into other. Information for these segments is detailed in the table below:
 
 
Thirteen Weeks Ended 
 October 30, 2016
 
Thirteen Weeks Ended 
 November 1, 2015
 
Thirty-Nine Weeks Ended 
 October 30, 2016
 
Thirty-Nine Weeks Ended 
 November 1, 2015
 
 
(In thousands)
Net revenue:
 
 
 
 
 
 
 
 
Company-operated stores
 
$
393,506

 
$
353,399

 
$
1,133,599

 
$
1,007,272

Direct to consumer
 
104,013

 
89,330

 
288,978

 
255,205

Other
 
46,897

 
36,964

 
131,875

 
93,770

 
 
$
544,416

 
$
479,693

 
$
1,554,452

 
$
1,356,247

Income from operations before general corporate expense:
 
 
 
 
 
 
 
 
Company-operated stores
 
$
91,497

 
$
70,729

 
$
245,056

 
$
207,393

Direct to consumer
 
43,588

 
37,985

 
114,744

 
105,106

Other
 
5,709

 
1,569

 
12,430

 
4,370

 
 
140,794

 
110,283

 
372,230

 
316,869

General corporate expense
 
47,819

 
42,105

 
147,707

 
114,076

Income from operations
 
92,975

 
68,178

 
224,523

 
202,793

Other income (expense), net
 
628

 
(2,890
)
 
720

 
(1,519
)
Income before income tax expense
 
$
93,603

 
$
65,288

 
$
225,243

 
$
201,274

 
 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
 
Company-operated stores
 
$
18,932

 
$
30,909

 
$
47,197

 
$
72,541

Direct to consumer
 
3,711

 
3,744

 
9,425

 
5,676

Corporate and other
 
12,263

 
8,290

 
49,546

 
29,844

 
 
$
34,906

 
$
42,943

 
$
106,168

 
$
108,061

Depreciation and amortization:
 
 
 
 
 
 
 
 
Company-operated stores
 
$
15,735

 
$
13,126

 
$
44,030

 
$
36,139

Direct to consumer
 
1,854

 
1,759

 
4,908

 
4,894

Corporate and other
 
6,370

 
4,822

 
14,703

 
11,465

 
 
$
23,959

 
$
19,707

 
$
63,641

 
$
52,498


13



NOTE 9. SUBSEQUENT EVENT
The Company evaluates events or transactions that occur after the balance sheet date through to the date which the financial statements are issued, for potential recognition or disclosure in its unaudited interim consolidated financial statements in accordance with ASC Topic 855, Subsequent Events ("ASC 855").
On December 1, 2016 the Company's board of directors approved a stock repurchase program for up to  $100 million of its common shares in the open market at prevailing market prices. The timing and actual number of common shares to be repurchased will depend upon market conditions and other factors, in accordance with Securities and Exchange Commission requirements, and the repurchase program is expected to be completed in two years . Shares may be repurchased from time to time on the open market, through block trades or otherwise. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.
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 Section 27A of the Securities Act of 1933 and the Private Securities Litigation Reform Act of 1995. 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 Annual Report on Form 10-K.
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 is a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel. Since our inception, we have developed a distinctive corporate culture, and we have a mission to produce products which create transformational experiences for people to live happy, healthy, fun lives. 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 succeed and share our purpose of "elevating the world from mediocrity to greatness."
Our healthy lifestyle inspired athletic apparel is marketed under the lululemon and ivivva brand names. We offer a comprehensive line of apparel and accessories for women, men and female youth. Our apparel assortment includes items such as pants, shorts, tops and jackets designed for healthy lifestyle and athletic activities such as yoga, running, training, most other sweaty pursuits, and athletic wear for female youth.

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Financial Highlights
Net revenue for third quarter of fiscal 2016 increase d by 13% to $544.4 million , from $479.7 million in the third quarter of fiscal 2015 .
Total comparable sales, which includes comparable store sales and direct to consumer, increased 7% in the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015 .
Company-operated stores represented 72.3% of net revenue in the third quarter of fiscal 2016 compared to 73.7% of net revenue in the third quarter of fiscal 2015 . Comparable store sales increased by 4% in the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015 , primarily as a result of increased dollar value per transaction and improved conversion rates.
Our direct to consumer segment represented 19.1% of our net revenue in the third quarter of fiscal 2016 compared to 18.6% in the third quarter of fiscal 2015 . Direct to consumer net revenue increased by 16% in the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015 , primarily as a result of increased traffic on our e-commerce websites, improved conversion rates, and increased dollar value per transaction.
Gross profit for the third quarter of fiscal 2016 increase d by 24% to $278.4 million , from $224.8 million in the third quarter of fiscal 2015 . Gross profit as a percentage of net revenue, or gross margin, increase d to 51.1% compared to 46.9% in the third quarter of fiscal 2015 . The increase in gross margin was primarily due to lower product costs and improved average retail prices, partially offset by increased expenses related to our product and supply chain departments.
Income from operations for the third quarter of fiscal 2016 increase d by 36% to $93.0 million , from $68.2 million in the third quarter of fiscal 2015 . As a percentage of net revenue, income from operations increased to 17.1% compared to 14.2% of net revenue in the third quarter of fiscal 2015 .
Income tax expense for the third quarter of fiscal 2016 increase d by 109% to $25.3 million , from $12.1 million in the third quarter of fiscal 2015 . Our effective tax rate for the third quarter of fiscal 2016 was 27.0% compared to 18.6% for the third quarter of fiscal 2015 . The third quarter of fiscal 2016 included a net income tax recovery of $4.0 million and the third quarter of fiscal 2015 included a net income tax recovery of $7.7 million related to our transfer pricing arrangements and taxes associated with the repatriation of foreign earnings. In addition, related net interest expenses of $0.2 million and $3.6 million were recorded in other income (expense), net in the third quarters of fiscal 2016 and fiscal 2015, respectively. Our effective tax rate excluding these adjustments was 31.3% in the third quarter of fiscal 2016 compared to 28.8% in the third quarter of fiscal 2015 .
Diluted earnings per share for the third quarter of fiscal 2016 were $0.50 compared to $0.38 in the third quarter of fiscal 2015 . Excluding the above tax and related interest adjustments, diluted earnings per share were $0.47 for the third quarter of fiscal 2016 compared to $0.35 for the third quarter of fiscal 2015 .
Refer to the non-GAAP reconciliation tables contained in the "Results of Operations" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and the effective tax rate and diluted earnings per share excluding certain tax and related interest adjustments, and the most directly comparable measures calculated in accordance with GAAP.

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Results of Operations
Thirteen Week Results
The following table summarizes key components of our results of operations for the thirteen weeks ended October 30, 2016 and November 1, 2015 . The percentages are presented as a percentage of net revenue.
 
 
Thirteen Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016

2015

2016

2015
 
 
(In thousands)
 
(Percentages)
Net revenue
 
$
544,416

 
$
479,693

 
100.0
%
 
100.0
 %
Cost of goods sold
 
265,990

 
254,896

 
48.9

 
53.1

Gross profit
 
278,426

 
224,797

 
51.1

 
46.9

Selling, general and administrative expenses
 
185,451

 
156,619

 
34.1

 
32.7

Income from operations
 
92,975

 
68,178

 
17.1

 
14.2

Other income (expense), net
 
628

 
(2,890
)
 
0.1

 
(0.6
)
Income before income tax expense
 
93,603

 
65,288

 
17.2

 
13.6

Income tax expense
 
25,318

 
12,135

 
4.7

 
2.5

Net income
 
$
68,285

 
$
53,153

 
12.5
%
 
11.1
 %
Net Revenue
Net revenue increase d $64.7  million, or 13% , to $544.4 million for the third quarter of fiscal 2016 from $479.7  million for the third quarter of fiscal 2015 . On a constant dollar basis, assuming the average exchange rates for the third quarter of fiscal 2016 remained constant with the average exchange rates for the third quarter of fiscal 2015 , net revenue increased $64.0 million , or 13% .
Net revenue increase d across all segments, and the increase was primarily from our company-operated stores, including net revenue from new stores and increased comparable store sales. Total comparable sales, which includes comparable store sales and direct to consumer, increased 7% in the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015 . Total comparable sales increased 7% on a constant dollar basis.
Net revenue on a segment basis for the thirteen weeks ended October 30, 2016 and November 1, 2015 is summarized below. The percentages are presented as a percentage of total net revenue.
 
 
Thirteen Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
 
(Percentages)
Company-operated stores
 
$
393,506

 
$
353,399

 
72.3
%
 
73.7
%
Direct to consumer
 
104,013

 
89,330

 
19.1

 
18.6

Other
 
46,897

 
36,964

 
8.6

 
7.7

Net revenue
 
$
544,416

 
$
479,693

 
100.0
%
 
100.0
%
Company-operated Stores.  Net revenue from our company-operated stores segment increase d $40.1 million , or 11% , to $393.5 million in the third quarter of fiscal 2016 from $353.4 million in the third quarter of fiscal 2015 . 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 November 1, 2015 , and therefore not included in comparable store sales, contributed $27.0 million to the increase . We have opened 35 net new company-operated stores since the third quarter of fiscal 2015 , including 26 stores in the United States, three stores in each of Canada and the United Kingdom, two stores in South Korea, and one store in each of Singapore and Switzerland. There was one net closure in Australia.
A comparable store sales increase of 4% in the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015 resulted in a $13.1 million increase to net revenue. Comparable store sales increased 4% , or $12.4 million on a constant dollar basis. The increase in comparable store sales was primarily as a result of increased dollar value per transaction and improved conversion rates.

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Table of Contents


Direct to Consumer.  Net revenue from our direct to consumer segment increase d $14.7 million , or 16% , to $104.0 million in the third quarter of fiscal 2016 from $89.3 million in the third quarter of fiscal 2015 . Direct to consumer net revenue increased 16% on a constant dollar basis. This increase was primarily the result of increased traffic on our e-commerce websites, improved conversion rates, and increased dollar value per transaction.
Other.  Net revenue from our other segment increase d $9.9 million , or 27% , to $46.9 million in the third quarter of fiscal 2016 from $37.0 million in the third quarter of fiscal 2015 . This increase was primarily the result of an increased number of outlets and increased net revenue at existing outlets during the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015 . This increase was partially offset by warehouse sales held during the third quarter of fiscal 2015 .
Gross Profit
Gross profit increase d $53.6 million , or 24% , to $278.4 million for the third quarter of fiscal 2016 from $224.8 million for the third quarter of fiscal 2015 .
Gross profit as a percentage of net revenue, or gross margin, increase d by 420  basis points, to 51.1% in the third quarter of fiscal 2016 from 46.9% in the third quarter of fiscal 2015 . The increase in gross margin was primarily the result of:
an increase in product margin of 450 basis points primarily due to lower product costs and improved average retail prices; and
a favorable impact of foreign exchange rates of 20 basis points.
This was partially offset by an increase in fixed costs, including costs related to our product and supply chain departments, relative to the increase in net revenue, of 50 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increase d $28.8 million , or 18% , to $185.5 million in the third quarter of fiscal 2016 from $156.6 million in the third quarter of fiscal 2015 . The increase in selling, general and administrative expenses was primarily due to:
an increase in employee costs for our operating locations of $11.3 million primarily from a growth in labor hours, benefits, and bonuses, mainly associated with new company-operated stores and other new operating locations;
an increase in head office employee costs of $10.3 million primarily due to additional employees to support the growth in our business;
an increase in head office costs other than employee costs of $8.1 million primarily due to increased professional fees, increased brand and community costs, and increased depreciation;
an increase in other costs of $3.4 million for our operating channels including digital marketing expenses and repairs and maintenance costs; and
an increase in variable costs of $1.2 million for our operating channels such as credit card fees and distribution costs, primarily as a result of increased sales.
The increase in selling, general and administrative expenses was partially offset by an increase in net foreign exchange gains of $5.5 million , primarily related to the revaluation of U.S. dollar cash and receivables held in Canadian subsidiaries. There were net foreign exchange gains of $4.3 million in the third quarter of fiscal 2016 compared to net foreign exchange losses of $1.2 million in the third quarter of fiscal 2015 .
As a percentage of net revenue, selling, general and administrative expenses increased 140 basis points, to 34.1% in the third quarter of fiscal 2016 from 32.7% in the third quarter of fiscal 2015 .
Income from Operations
Income from operations increase d $24.8 million , or 36% , to $93.0 million in the third quarter of fiscal 2016 from $68.2 million in the third quarter of fiscal 2015 . The increase was primarily the result of an increase in gross profit of $53.6 million , partially offset by an increase in selling, general and administrative costs of $28.8 million .
On a segment basis, we determine income from operations without taking into account our general corporate expenses.

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Table of Contents


Income from operations before general corporate expenses for the thirteen weeks ended October 30, 2016 and November 1, 2015 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
 
 
Thirteen Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
 
(Percentages)
Company-operated stores
 
$
91,497

 
$
70,729

 
23.3
%
 
20.0
%
Direct to consumer
 
43,588

 
37,985

 
41.9

 
42.5

Other
 
5,709

 
1,569

 
12.2

 
4.2

Income from operations before general corporate expense
 
140,794

 
110,283

 
 
 
 
General corporate expense
 
47,819

 
42,105

 
 
 
 
Income from operations
 
$
92,975

 
$
68,178

 
 
 
 
Company-operated Stores.  Income from operations from our company-operated stores segment increase d $20.8 million , or 29% , to $91.5 million for the third quarter of fiscal 2016 from $70.7 million for the third quarter of fiscal 2015 . The increase was primarily the result of increase d gross profit of $37.0 million primarily due to increased net revenue from new stores as well as increased comparable store sales, which was primarily a result of increased dollar value per transaction and improved conversion rates. This was partially offset by an increase in selling, general and administrative expenses, including increased store employee costs and increased operating expenses associated with new stores and increased net revenue at existing stores. Income from operations as a percentage of company-operated stores net revenue increased by 330 basis points primarily due to increased gross margin, partially offset by deleverage of selling, general and administrative expenses.
Direct to Consumer.  Income from operations from our direct to consumer segment increase d $5.6 million , or 15% , to $43.6 million for the third quarter of fiscal 2016 from $38.0 million for the third quarter of fiscal 2015 . The increase was primarily the result of increase d gross profit of $10.2 million primarily due to increased net revenue primarily resulting from increased traffic on our e-commerce websites, improved conversion rates and increased dollar value per transaction. This was partially offset by an increase in selling, general and administrative expenses including higher digital marketing expenses and higher variable costs such as credit card fees and distribution costs as a result of increased net revenue. Income from operations as a percentage of direct to consumer net revenue decreased by 60 basis points primarily due to deleverage of selling, general and administrative expenses, partially offset by increased gross margin.
Other.  Other income from operations increase d $4.1 million , or 264% , to $5.7 million for the third quarter of fiscal 2016 from $1.6 million for the third quarter of fiscal 2015 . The increase was primarily the result of increase d gross profit of $6.4 million , partially offset by increased selling, general and administrative expenses primarily due to increased employee costs. Income from operations as a percentage of other net revenue increased by 800 basis points primarily due to an increase in gross margin and decreased selling, general and administrative expenses as a percentage of other net revenue. There were also warehouse sales held during the third quarter of fiscal 2015 which reduced gross margin.
General Corporate Expense.  General corporate expense increase d $5.7 million , or 14% , to $47.8 million for the third quarter of fiscal 2016 from $42.1 million for the third quarter of fiscal 2015 . The increase was primarily due to increased employee costs, professional fees, information technology costs, and investment in strategic initiatives and projects to support the growth of our business. The increase was partially offset by an increase in net foreign exchange gains of $5.5 million , primarily related to the revaluation of U.S. dollar cash and receivables held in Canadian subsidiaries.
Other Income (Expense), Net
Other income (expense), net increase d $3.5 million , or 122% , to income of $0.6 million for the third quarter of fiscal 2016 from an expense of $2.9 million for the third quarter of fiscal 2015 . The increase was primarily due to a reduction in the net interest expense related to certain tax adjustments that are outlined in Note 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report from $3.6 million in the third quarter of fiscal 2015 to $0.2 million in the third quarter of fiscal 2016 .
Income Tax Expense
Income tax expense increase d $13.2 million , or 109% , to $25.3 million for the third quarter of fiscal 2016 from $12.1 million for the third quarter of fiscal 2015 . The third quarters of fiscal 2016 and fiscal 2015 included certain tax adjustments which resulted in net income tax recoveries of $4.0 million and $7.7 million , respectively, as outlined in Note 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.

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Table of Contents


The effective tax rate for the third quarter of fiscal 2016 was 27.0% compared to 18.6% for the third quarter of fiscal 2015 . The effective tax rate excluding the above tax and related interest adjustments was 31.3% for the third quarter of fiscal 2016 compared to 28.8% for the third quarter of fiscal 2015 .
Net Income
Net income increase d $15.1 million , or 28% , to $68.3 million for the third quarter of fiscal 2016 from $53.2 million for the third quarter of fiscal 2015 . The increase in net income was primarily the result of an increase in gross profit of $53.6 million and an increase in other income (expense), net of $3.5 million partially offset by an increase in selling, general and administrative expenses of $28.8 million and an increase in income tax expense of $13.2 million .
Thirty-Nine Week Results
The following table summarizes key components of our results of operations for the thirty-nine week periods ended October 30, 2016 and November 1, 2015 . The percentages are presented as a percentage of net revenue.
 
 
Thirty-Nine Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
 
(Percentages)
Net revenue
 
$
1,554,452

 
$
1,356,247

 
100.0
%
 
100.0
 %
Cost of goods sold
 
782,734

 
713,548

 
50.4

 
52.6

Gross profit
 
771,718

 
642,699

 
49.6

 
47.4

Selling, general and administrative expenses
 
547,195

 
439,906

 
35.2

 
32.4

Income from operations
 
224,523

 
202,793

 
14.4

 
15.0

Other income (expense), net
 
720

 
(1,519
)
 
0.1

 
(0.1
)
Income before income tax expense
 
225,243

 
201,274

 
14.5

 
14.9

Income tax expense
 
57,997

 
52,643

 
3.7

 
3.9

Net income
 
$
167,246

 
$
148,631

 
10.8
%
 
11.0
 %
Net Revenue
Net revenue increase d $198.2 million , or 15% , to $1.554 billion for the first three quarters of fiscal 2016 from $1.356 billion for the first three quarters of fiscal 2015 . On a constant dollar basis, assuming the average exchange rates for the first three quarters of fiscal 2016 remained constant with average exchange rates for the first three quarters of fiscal 2015 , net revenue increased $210.0 million , or 15% .
Net revenue increase d across all segments, and the increase was primarily from our company-operated stores, including net revenue from new stores and increased comparable store sales. Total comparable sales, which includes comparable store sales and direct to consumer, increased 6% in the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015 . Total comparable sales increased 6% on a constant dollar basis.
Our net revenue on a segment basis for the thirty-nine week periods ended October 30, 2016 and November 1, 2015 is summarized below. The percentages are presented as a percentage of total net revenue.
 
 
Thirty-Nine Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
 
(Percentages)
Company-operated stores
 
$
1,133,599

 
$
1,007,272

 
72.9
%
 
74.3
%
Direct to consumer
 
288,978

 
255,205

 
18.6

 
18.8

Other
 
131,875

 
93,770

 
8.5

 
6.9

Net revenue
 
$
1,554,452

 
$
1,356,247

 
100.0
%
 
100.0
%
Company-operated Stores . Net revenue from our company-operated stores segment increased $126.3 million , or 13% , to $1.134 billion in the first three quarters of fiscal 2016 from $1.007 billion in the first three quarters of fiscal 2015 . 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 November 1, 2015 , and therefore not included in comparable store sales, contributed $94.2 million to the increase. We have opened 35 net new

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company-operated stores since the third quarter of fiscal 2015 , including 26 stores in the United States, three stores in each of Canada and the United Kingdom, two stores in South Korea, and one store in each of Singapore and Switzerland. There was one net closure in Australia.
A comparable store sales increase of 3% in the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015 resulted in a $32.2 million increase to net revenue. Comparable store sales increased 4% , or $39.2 million on a constant dollar basis. The increase in comparable store sales was primarily as a result of improved conversion rates and increased dollar value per transaction.
Direct to Consumer.  Net revenue from our direct to consumer segment increase d $33.8 million , or 13% , to $289.0 million in the first three quarters of fiscal 2016 from $255.2 million in the first three quarters of fiscal 2015 . Direct to consumer net revenue increased 14% on a constant dollar basis. This increase in net revenue was primarily the result of increased traffic on our e-commerce websites and an increase in dollar value per transaction.
Other.  Other net revenue increase d $38.1 million , or 41% , to $131.9 million in the first three quarters of fiscal 2016 from $93.8 million in the first three quarters of fiscal 2015 . This increase was primarily the result of an increased number of outlets and increased net revenue at existing outlets during the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015 .
Gross Profit
Gross profit increased $129.0 million , or 20% , to $771.7 million for the first three quarters of fiscal 2016 from $642.7 million for the first three quarters of fiscal 2015 .
Gross profit as a percentage of net revenue, or gross margin, increase d by 220  basis points, to 49.6% in the first three quarters of fiscal 2016 from 47.4% in the first three quarters of fiscal 2015 . The increase in gross margin was primarily the result of an increase in product margin of 290 basis points, primarily due to lower product costs, improved average retail prices, and lower costs related to our raw material commitments.
The increase in gross margin was partially offset by an increase in expenses related to our product and supply chain departments of 30 basis points, an unfavorable impact of foreign exchange rates of 20 basis points, and an increase in occupancy costs and depreciation, relative to the increase in net revenue, of 20 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $107.3 million , or 24% , to $547.2 million in the first three quarters of fiscal 2016 from $439.9 million in the first three quarters of fiscal 2015 . The increase in selling, general and administrative expenses was primarily due to:
an increase in employee costs for our operating locations of $36.2 million primarily from a growth in labor hours and bonuses associated with new company-operated stores and other new operating locations;
an increase in head office employee costs of $27.8 million primarily due to additional employees to support the growth in our business;
an increase in head office costs other than employee costs of $19.8 million primarily due to increased professional fees, including supply chain consulting, increased brand and community costs, increased information technology costs, and increased depreciation;
an increase in other costs of $11.7 million for our operating channels such as digital marketing expenses, repairs and maintenance, and professional fees;
an increase in variable costs of $7.7 million for our operating channels such as credit card fees and distribution costs, primarily as a result of increased sales; and
an increase in net foreign exchange losses of $4.1 million , primarily related to the revaluation of U.S. dollar cash and receivables held in Canadian subsidiaries. There were net foreign exchange losses of $4.1 million in the first three quarters of fiscal 2016 compared to net foreign exchange losses of less than $0.1 million in the first three quarters of fiscal 2015 .
As a percentage of net revenue, selling, general and administrative expenses increased 280 basis points, to 35.2% in the first three quarters of fiscal 2016 from 32.4% in the first three quarters of fiscal 2015 .

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Income from Operations
Income from operations increase d $21.7 million , or 11% , to $224.5 million in the first three quarters of fiscal 2016 from $202.8 million  in the first three quarters of fiscal 2015 . The increase was primarily the result of increased gross profit of $129.0 million , partially offset by an increase in selling, general and administrative costs of $107.3 million .
On a segment basis, we determine income from operations without taking into account our general corporate expenses.
Income from operations before general corporate expenses for the thirty-nine week periods ended October 30, 2016 and November 1, 2015 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
 
 
Thirty-Nine Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
 
(Percentages)
Company-operated stores
 
$
245,056

 
$
207,393

 
21.6
%
 
20.6
%
Direct to consumer
 
114,744

 
105,106

 
39.7

 
41.2

Other
 
12,430

 
4,370

 
9.4

 
4.7

Income from operations before general corporate expense
 
372,230

 
316,869

 
 

 
 

General corporate expense
 
147,707

 
114,076

 
 

 
 

Income from operations
 
$
224,523

 
$
202,793

 
 

 
 

Company-operated Stores.  Income from operations from our company-operated stores segment increased $37.7 million , or 18% , to $245.1 million for the first three quarters of fiscal 2016 from $207.4 million for the first three quarters of fiscal 2015 . The increase was primarily the result of increase d gross profit of $85.5 million primarily due to increased net revenue from new stores as well as increased comparable store sales, which was primarily a result of improved conversion rates and increased dollar value per transaction. This was partially offset by an increase in selling, general and administrative expenses, including increased employee costs and increased operating expenses associated with new stores and increased net revenue at existing stores. Income from operations as a percentage of company-operated stores net revenue increased by 100 basis points, primarily due to an increase in gross margin, partially offset by deleverage of selling, general and administrative expenses.
Direct to Consumer.  Income from operations from our direct to consumer segment increase d $9.6 million , or 9% , to $114.7 million for the first three quarters of fiscal 2016 from $105.1 million for the first three quarters of fiscal 2015 . The increase was primarily the result of increase d gross profit of $25.9 million primarily due to increased net revenue resulting from increased traffic on our e-commerce websites and an increase in dollar value per transaction. This was partially offset by an increase in selling, general and administrative expenses including higher digital marketing expenses and higher variable costs such as distribution costs and credit card fees as a result of increased net revenue. Income from operations as a percentage of direct to consumer net revenue decreased by 150 basis points, primarily due to deleverage of selling, general and administrative expenses, partially offset by an increase in gross margin.
Other.  Other income from operations increase d $8.1 million , or 184% , to $12.4 million for the first three quarters of fiscal 2016 from $4.4 million for the first three quarters of fiscal 2015 . The increase was primarily the result of increase d gross profit of $17.7 million , partially offset by increased selling, general and administrative expenses primarily due to increased employee costs. Income from operations as a percentage of other net revenue increased by 470 basis points, primarily due to decreased selling, general and administrative expenses as a percentage of other net revenue and an increase in gross margin.
General Corporate Expense. General corporate expense increased $33.6 million , or 29% , to $147.7 million for the first three quarters of fiscal 2016 from $114.1 million for the first three quarters of fiscal 2015 . This was primarily due to increased employee costs, professional fees, including increased professional fees related to supply chain consulting, information technology costs, investment in strategic initiatives and projects to support the growth of our business, and due to an increase in net foreign exchange losses of  $4.1 million , primarily related to the revaluation of U.S. dollar cash and receivables held in Canadian subsidiaries.
Other Income (Expense), Net
Other income (expense), net increase d $2.2 million , or 147% , to income of $0.7 million for the first three quarters of fiscal 2016 from an expense of $1.5 million for the first three quarters of fiscal 2015 . The increase was primarily due to a reduction in the net interest expense related to certain tax adjustments that are outlined in Note 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report from $3.6 million in the first three quarters of fiscal 2015 to $1.7 million in the first three quarters of fiscal 2016 .

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Income Tax Expense
Income tax expense increased $5.4 million , or 10% , to $58.0 million for the first three quarters of fiscal 2016 from $52.6 million for the first three quarters of fiscal 2015 . The first three quarters of fiscal 2016 and fiscal 2015 included certain tax adjustments resulting in net income tax recoveries of $11.6 million and $7.7 million , respectively, as outlined in Note 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
The effective tax rate in the first three quarters of fiscal 2016 was 25.7% compared to 26.2% in the first three quarters of fiscal 2015 . The effective tax rate excluding the above tax and related interest adjustments was 30.7% in the first three quarters of fiscal 2016 compared to 29.5% in the first three quarters of fiscal 2015 .
Net Income
Net income increased $18.6 million , or 13% , to $167.2 million for the first three quarters of fiscal 2016 from $148.6 million for the first three quarters of fiscal 2015 . The increase in net income was primarily a result of an increase in gross profit of $129.0 million and an increase in other income (expense), net of $2.2 million , partially offset by an increase in selling, general and administrative expenses of $107.3 million and an increase in income tax expense of $5.4 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 months, or open for at least 12 months after being significantly expanded. Net revenue from a store is included in comparable store sales beginning with the first month for which the store has a full month of comparable sales in the prior year. Comparable store sales exclude sales from new stores that have not been open for at least 12 months, from stores which have not been in their significantly expanded space for at least 12 months, and from stores which have been temporarily relocated for renovations. Comparable stores sales also exclude sales from direct to consumer, outlets, showrooms, wholesale accounts, warehouse sales, temporary locations, a license and supply arrangement, and sales from company-operated stores that we have closed.
Total comparable sales combines comparable store sales and direct to consumer sales. By measuring the change in year-over-year net revenue in stores that have been open, or in their significantly expanded space, for 12 months or more as well as the change in direct to consumer sales, total comparable sales allows us to evaluate our sales performance eliminating the impact of newly opened or expanded stores.
Non-GAAP Financial Measures
Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and the effective tax rate and diluted earnings per share excluding certain tax and related interest adjustments, are non-GAAP financial measures.
A constant dollar basis assumes the average foreign exchange rates for the current 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 changes in direct to consumer net revenue because we use these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates. We believe that disclosing these measures on a constant dollar basis is useful to investors because it enables them to better understand the level of growth of our business.
We disclose the effective tax rate and diluted earnings per share excluding certain tax and related interest adjustments because of their comparability to our historical information, which we believe is useful to investors.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP. A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.
The below changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue show the change compared to the corresponding period in the prior year.

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Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue
 
 
Thirteen Weeks Ended 
 October 30, 2016
 
Thirty-Nine Weeks Ended 
 October 30, 2016
 
 
(In thousands)
 
(Percentages)
 
(In thousands)
 
(Percentages)
Net revenue increase
 
$
64,723

 
13
%
 
$
198,205

 
15
%
Adjustments due to foreign exchange rate changes
 
(750
)
 

 
11,792

 

Net revenue increase in constant dollars
 
$
63,973

 
13
%
 
$
209,997

 
15
%

 
 
Thirteen Weeks Ended 
 October 30, 2016
 
Thirty-Nine Weeks Ended 
 October 30, 2016
Increase in total comparable sales 1,2
 
7
%
 
6
%
Adjustments due to foreign exchange rate changes
 

 

Increase in total comparable sales in constant dollars 1,2
 
7
%
 
6
%

 
 
Thirteen Weeks Ended 
 October 30, 2016
 
Thirty-Nine Weeks Ended 
 October 30, 2016
 
 
(In thousands)
 
(Percentages)
 
(In thousands)
 
(Percentages)
Increase in comparable store sales 2
 
$
13,077

 
4
%
 
$
32,157

 
3
%
Adjustments due to foreign exchange rate changes
 
(637
)
 

 
7,047

 
1

Increase in comparable store sales in constant dollars 2
 
$
12,440

 
4
%
 
$
39,204

 
4
%

 
 
Thirteen Weeks Ended 
 October 30, 2016
 
Thirty-Nine Weeks Ended 
 October 30, 2016
Increase in direct to consumer net revenue
 
16
%
 
13
%
Adjustments due to foreign exchange rate changes
 

 
1

Increase in direct to consumer net revenue in constant dollars
 
16
%
 
14
%
__________
1 Total comparable sales includes comparable store sales and direct to consumer sales.
2 Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 months, or open for at least 12 months after being significantly expanded.

Effective tax rate and diluted earnings per share, excluding tax and related interest adjustments
 
 
Thirteen Weeks Ended October 30, 2016 and November 1, 2015
 
Thirty-Nine Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016
 
2015
 
2016
 
2015
 
 
(Percentages)
Effective tax rate
 
27.0
%
 
18.6
%
 
25.7
%
 
26.2
%
Tax and related interest adjustments 1
 
4.3

 
10.2

 
5.0

 
3.3

Effective tax rate, excluding tax and related interest adjustments
 
31.3
%
 
28.8
%
 
30.7
%
 
29.5
%


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Thirteen Weeks Ended October 30, 2016 and November 1, 2015
 
Thirty-Nine Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016
 
2015
 
2016
 
2015
Diluted earnings per share
 
$
0.50

 
$
0.38

 
$
1.22

 
$
1.05

Tax and related interest adjustments 1
 
(0.03
)
 
(0.03
)
 
(0.07
)
 
(0.03
)
Diluted earnings per share, excluding tax and related interest adjustments
 
$
0.47

 
$
0.35

 
$
1.15

 
$
1.02

_________
1 Please refer to Note 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for an explanation as to the nature of these items.
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.
Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash equivalents and cash flows from operations. Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, making information technology system enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally. We may also use cash to repurchase shares of our common stock. Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions.
At October 30, 2016 , our working capital (excluding cash and cash equivalents) was $329.8 million and our cash and cash equivalents were $480.4  million.
The following table summarizes our net cash flows provided by and used in operating, investing and financing activities for the periods indicated:
 
 
Thirty-Nine Weeks Ended October 30, 2016 and November 1, 2015
 
 
2016
 
2015
 
 
(In thousands)
Total cash provided by (used in):
 
 
 
 
Operating activities
 
$
97,331

 
$
25,940

Investing activities
 
(106,168
)
 
(108,061
)
Financing activities
 
(23,960
)
 
(167,452
)
Effect of exchange rate changes on cash
 
11,701

 
(11,460
)
Decrease in cash and cash equivalents
 
$
(21,096
)
 
$
(261,033
)
Operating Activities
Cash flows provided by operating activities consist primarily of net income adjusted for certain items not affecting cash and the effect of changes in operating assets and liabilities.
Cash provided by operating activities increased $71.4 million , to $97.3 million for the first three quarters of fiscal 2016 compared to $25.9 million for the first three quarters of fiscal 2015 . The increase was primarily the result of decreased inventory purchases during the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015 .
Investing Activities
Cash flows used in investing activities relate entirely to capital expenditures. 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 land and buildings, and for opening retail locations other than company-operated stores.

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Cash used in investing activities decreased $1.9 million to $106.2 million for the first three quarters of fiscal 2016 from $108.1 million  for the first three quarters of fiscal 2015 . The decrease was primarily the result of reduced capital expenditures related to our company-operated stores, primarily as a result of opening fewer company-operated stores in the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015 . The decrease was partially offset by the purchase of a land parcel in Vancouver, BC during the second quarter of fiscal 2016 for $19.7 million for general corporate purposes.
Financing Activities
Cash flows used in or provided by financing activities consist primarily of cash used to repurchase shares of our common stock and certain cash flows related to stock-based compensation.
Cash used in financing activities decreased $143.5 million , to $24.0 million for the first three quarters of fiscal 2016 compared to $167.5 million for the first three quarters of fiscal 2015 . Our cash used in financing activities for the first three quarters of fiscal 2016 included $28.6 million to repurchase 0.4 million shares of our common stock compared to $170.0 million to repurchase 2.9 million shares for the first three quarters of fiscal 2015 .
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, 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
In November 2013, we entered into unsecured demand revolving credit facilities with HSBC Bank Canada and Bank of America, N.A., Canada Branch, for up to $15.0 million in the aggregate to support the issuance of letters of credit and to fund our working capital requirements. Borrowings under the uncommitted credit facilities are made on a when-and-as-needed basis at our discretion. These facilities were renewed for a one year period in November 2015.
Borrowings under the credit facility can be made either as (i) U.S. Dollar Loans - U.S. Dollar Loans bear interest a rate equal to U.S. LIBOR plus 100 basis points or U.S. Base Rate, at our option; (ii) Letters of Credit - Borrowings drawn down under standby letters of credit issued by the banks bear a fee of 100 basis points; and (iii) CDN Dollar Loans - CDN Dollar Loans bear interest at a rate equal to the CDOR Rate plus 100 basis points or the Canadian Prime Rate, at our option.
At October 30, 2016 , aside from letters of credit, there were no borrowings outstanding under these credit facilities.
Off-Balance Sheet Arrangements
We enter into standby letters of credit to secure certain of our obligations, including leases, taxes and duties. As of October 30, 2016 , letters of credit and letters of guarantee totaling $1.5 million had been issued.
We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for our 2015 fiscal year end filed with the SEC on March 30, 2016 and in Note 2 included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

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Operating Locations
Our company-operated stores by brand and by country as of October 30, 2016 and January 31, 2016 , are summarized in the table below.
 
 
October 30,
2016
 
January 31,
2016
lululemon
 
 
 
 
United States
 
237

 
229

Canada
 
50

 
48

Australia
 
25

 
26

United Kingdom
 
8

 
6

New Zealand
 
5

 
5

Singapore
 
3

 
2

Hong Kong
 
2

 
2

South Korea
 
2

 

Germany
 
1

 
1

Puerto Rico
 
1

 
1

Switzerland
 
1

 

 
 
335

 
320

ivivva
 
 
 
 
United States
 
41

 
31

Canada
 
13

 
12

 
 
54

 
43

Total
 
389

 
363

As of  October 30, 2016 , there were three retail locations in the United Arab Emirates operated by a third party under a license and supply arrangement, which are not included in the above table.
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk . The functional currency of our foreign subsidiaries is generally the applicable local currency. Our consolidated financial statements are presented in U.S. dollars. Therefore, the net revenue, expenses, assets, and liabilities of our foreign subsidiaries are translated from their functional currencies into U.S. dollars. Fluctuations in the value of the U.S. dollar affect the reported amounts of net revenue, expenses, assets, and liabilities. Foreign exchange differences which arise on translation of our foreign subsidiaries' balance sheets into U.S. dollars are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
We also have exposure to changes in foreign exchange rates associated with transactions which are undertaken by our subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases denominated in currencies other than the functional currency of the purchasing entity. As a result, we have been impacted by changes in exchange rates and may be impacted materially for the foreseeable future. The potential impact of currency fluctuation increases as international expansion increases.
We currently generate a significant portion of our net revenue and incur a significant portion of our expenses in Canada. We also hold a significant portion of our net assets in Canada. The reporting currency for our consolidated financial statements is the U.S. dollar. A strengthening of the U.S. dollar against the Canadian dollar results in:
a decrease in our net revenue upon translation of the sales made by our Canadian operations into U.S. dollars for the purposes of consolidation;
a decrease in our selling, general and administrative expenses incurred by our Canadian operations upon translation into U.S. dollars for the purposes of consolidation; and

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foreign exchange revaluation gains by our Canadian subsidiaries on U.S. dollar cash and receivables denominated in U.S. dollars.
During the first three quarters of fiscal 2016 , the change in the relative value of the U.S. dollar against the Canadian dollar resulted in a $25.3 million reduction in accumulated other comprehensive loss within stockholders' equity. During the first three quarters of fiscal 2015 , the change in the relative value of the U.S. dollar against the Canadian dollar resulted in a $17.3 million increase in accumulated other comprehensive loss within stockholders' equity.
A 10% appreciation in the relative value of the U.S. dollar against the Canadian dollar compared to the exchange rates in effect for the first three quarters of fiscal 2016 would have resulted in additional income from operations of approximately $2.6 million in the first three quarters of fiscal 2016 . This assumes a consistent 10% appreciation in the U.S. dollar against the Canadian dollar throughout the first three quarters of fiscal 2016 . The timing of changes in the relative value of the U.S. dollar combined with the seasonal nature of our business, can affect the magnitude of the impact that fluctuations in foreign exchange rates have on our income from operations.
We have not historically hedged foreign currency fluctuations. However, in the future, in an effort to mitigate losses associated with these risks, we may at times enter into derivative financial instruments, although we have not historically done so. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.
Interest Rate Risk . Our revolving credit facilities provide us with available borrowings in an amount up to $15.0 million in the aggregate. Because our revolving credit facilities bear interest at a variable rate, we will be exposed to market risks relating to changes in interest rates, if we have a meaningful outstanding balance. As of October 30, 2016 , aside from letters of credit, we had no outstanding balances under our revolving facilities. We currently do not engage in any interest rate hedging activity and currently have no intention to do so in the foreseeable future. However, in the future, if we have a meaningful outstanding balance under our revolving facility, in an effort to mitigate losses associated with these risks, we may at times enter into derivative financial instruments, although we have not historically done so. These may take the form of forward contracts, option contracts, or interest rate swaps. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenue if the selling prices of our products do not increase with these increased costs.
ITEM 4.  CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions to be made regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. The Disclosure Committee meets on a quarterly basis, and as needed.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at October 30, 2016 . Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at October 30, 2016 , our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting during the thirteen weeks ended October 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION
ITEM 1.  LEGAL PROCEEDINGS
In addition to the legal matters described in Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report and in our fiscal 2015 Annual Report on Form 10-K, we are, from time to time, involved in routine legal matters incidental to the conduct of our business, including legal matters such