lululemon athletica, inc.
lululemon athletica inc. (Form: 10-Q, Received: 06/01/2017 16:18:08)
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 April 30, 2017
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 May 29, 2017 , there were 126,929,282 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At May 29, 2017 , there were outstanding 9,780,927 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 May 29, 2017 , the registrant had outstanding 9,780,927 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 5.
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)
 
 
April 30,
2017
 
January 29,
2017
ASSETS
Current assets
 
 
 
 
Cash and cash equivalents
 
$
698,289

 
$
734,846

Accounts receivable
 
10,707

 
9,200

Inventories
 
303,950

 
298,432

Prepaid and receivable income taxes
 
76,231

 
81,190

Other prepaid expenses and other current assets
 
43,504

 
39,069

 
 
1,132,681

 
1,162,737

Property and equipment, net
 
398,833

 
423,499

Goodwill and intangible assets, net
 
24,248

 
24,557

Deferred income tax assets
 
32,509

 
26,256

Other non-current assets
 
21,063

 
20,492

 
 
$
1,609,334

 
$
1,657,541

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
8,533

 
$
24,846

Accrued inventory liabilities
 
20,610

 
8,601

Accrued compensation and related expenses
 
39,076

 
55,238

Income taxes payable
 
26,951

 
30,290

Unredeemed gift card liability
 
59,398

 
70,454

Other accrued liabilities
 
51,405

 
52,020

 
 
205,973

 
241,449

Deferred income tax liabilities
 
6,950

 
7,262

Other non-current liabilities
 
48,724

 
48,857

 
 
261,647

 
297,568

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; 9,781 and 9,781 issued and outstanding
 

 

Special voting stock, $0.000005 par value: 60,000 shares authorized; 9,781 and 9,781 issued and outstanding
 

 

Common stock, $0.005 par value: 400,000 shares authorized; 127,131 and 127,304 issued and outstanding
 
636

 
637

Additional paid-in capital
 
267,369

 
266,622

Retained earnings
 
1,312,957

 
1,294,214

Accumulated other comprehensive loss
 
(233,275
)
 
(201,500
)
 
 
1,347,687

 
1,359,973

 
 
$
1,609,334

 
$
1,657,541

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)
 
 
Quarter Ended
 
 
April 30, 2017
 
May 1, 2016
Net revenue
 
$
520,307

 
$
495,516

Cost of goods sold
 
263,412

 
256,385

Gross profit
 
256,895

 
239,131

Selling, general and administrative expenses
 
199,141

 
181,542

Asset impairment and restructuring costs
 
12,331

 

Income from operations
 
45,423

 
57,589

Other income (expense), net
 
907

 
(486
)
Income before income tax expense
 
46,330

 
57,103

Income tax expense
 
15,084

 
11,767

Net income
 
$
31,246

 
$
45,336

 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
Foreign currency translation adjustment
 
(31,775
)
 
73,562

Comprehensive (loss) income
 
$
(529
)
 
$
118,898

 
 
 
 
 
Basic earnings per share
 
$
0.23

 
$
0.33

Diluted earnings per share
 
$
0.23

 
$
0.33

Basic weighted-average number of shares outstanding
 
137,037

 
137,263

Diluted weighted-average number of shares outstanding
 
137,192

 
137,496

See accompanying notes to the unaudited interim consolidated financial statements
 

4

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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 29, 2017
 
9,781

 
9,781

 
$

 
127,304

 
$
637

 
$
266,622

 
$
1,294,214

 
$
(201,500
)
 
$
1,359,973

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
31,246

 
 
 
31,246

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(31,775
)
 
(31,775
)
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
2,730

 
 
 
 
 
2,730

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
101

 
1

 
277

 
 
 
 
 
278

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(40
)
 

 
(1,961
)
 
 
 
 
 
(1,961
)
Repurchase of common stock
 
 
 
 
 
 
 
(234
)
 
(2
)
 
(299
)
 
(12,503
)
 
 
 
(12,804
)
Balance at April 30, 2017
 
9,781

 
9,781

 
$

 
127,131

 
$
636

 
$
267,369

 
$
1,312,957

 
$
(233,275
)
 
$
1,347,687

See accompanying notes to the unaudited interim consolidated financial statements

5

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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
 
 
Quarter Ended
 
 
April 30, 2017
 
May 1, 2016
Cash flows from operating activities
 
 
 
 
Net income
 
$
31,246

 
$
45,336

Items not affecting cash
 
 
 
 
Depreciation and amortization
 
23,163

 
19,185

Stock-based compensation expense
 
2,730

 
3,174

Asset impairment
 
11,593

 

Provision for inventories
 
3,318

 
607

Changes in operating assets and liabilities
 
 
 
 
Inventories
 
(13,445
)
 
12,304

Prepaid and receivable income taxes
 
4,959

 
(348
)
Other prepaid expenses and other current assets
 
(6,770
)
 
(220
)
Other non-current assets
 
(6,182
)
 
(3,053
)
Accounts payable
 
(15,798
)
 
(4,532
)
Accrued inventory liabilities
 
12,368

 
(7,057
)
Accrued compensation and related expenses
 
(15,038
)
 
(11,339
)
Income taxes payable
 
(2,240
)
 
(5,196
)
Unredeemed gift card liability
 
(10,367
)
 
(9,042
)
Other accrued and non-current liabilities
 
(137
)
 
208

Net cash provided by operating activities
 
19,400

 
40,027

Cash flows from investing activities
 
 
 
 
Purchase of property and equipment
 
(19,879
)
 
(26,644
)
Net cash used in investing activities
 
(19,879
)
 
(26,644
)
Cash flows from financing activities
 
 
 
 
Proceeds from settlement of stock-based compensation
 
278

 
3,579

Taxes paid related to net share settlement of stock-based compensation
 
(1,961
)
 
(1,436
)
Repurchase of common stock
 
(12,804
)
 
(15,765
)
Net cash used in financing activities
 
(14,487
)
 
(13,622
)
Effect of exchange rate changes on cash and cash equivalents
 
(21,591
)
 
48,803

(Decrease) increase in cash and cash equivalents
 
(36,557
)
 
48,564

Cash and cash equivalents, beginning of period
 
$
734,846

 
$
501,482

Cash and cash equivalents, end of period
 
$
698,289

 
$
550,046

See accompanying notes to the unaudited interim consolidated financial statements


6

Table of Contents


lululemon athletica inc.
INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9


7

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, temporary locations, warehouse sales, and through license and supply arrangements. The Company operates stores in the United States, Canada, Australia, the United Kingdom, New Zealand, China, Hong Kong, Singapore, South Korea, Germany, Ireland, Japan, Puerto Rico, and Switzerland. There were a total of 411 and 406 company-operated stores in operation as of April 30, 2017 and January 29, 2017 , respectively.
On June 1, 2017, the Company announced a plan to restructure its ivivva operations. As part of this plan, the Company expects to close approximately 40 of the 55 ivivva branded company-operated stores that were in operation as of April 30, 2017 . It is also anticipated that approximately half of the remaining ivivva branded company-operated stores will be converted to lululemon branded stores. The Company will close all of its ivivva branded showrooms and other temporary locations, and will streamline its corporate infrastructure. The Company will continue offering ivivva branded products on its e-commerce websites.
Basis of presentation
The unaudited interim consolidated financial statements as of April 30, 2017 and for the quarters ended April 30, 2017 and May 1, 2016 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 29, 2017 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 29, 2017 , which are included in Item 8 in the Company's fiscal 2016 Annual Report on Form 10-K filed with the SEC on March 29, 2017 . 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 2016 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 2017 will end on January 28, 2018 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. ASC 606 may be adopted either on a full retrospective basis or using a modified retrospective method with a cumulative adjustment to equity. This guidance will be adopted by the Company beginning in its first quarter of fiscal 2018. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements and the method of retrospective adoption that it will elect, but does not expect ASC 606 to materially impact the Company's consolidated financial statements.

8



In July 2015, the FASB amended ASC Topic 330, Inventory 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 became effective for the Company the first quarter of fiscal 2017 and the adoption did not impact 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 will adopt ASC 842 in its first quarter of fiscal 2019. While the Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements, it is expected that the primary impact upon adoption will be the recognition, on a discounted basis, of the Company's minimum commitments under noncancelable operating leases as right of use assets and obligations on the consolidated balance sheets. It is expected that this will result in a significant increase in assets and liabilities on the consolidated balance sheets.
In March 2016, the FASB amended ASC Topic 718, Stock Compensation 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. The Company adopted this amendment in the first quarter of fiscal 2017 and elected to continue to estimate expected forfeitures. The Company is now required to include excess tax benefits and deficiencies as a component of income tax expense, rather than a component of stockholders' equity. Additionally, the Company retrospectively adjusted its consolidated statement of cash flows to reclassify excess tax benefits of $0.3 million from financing activities to operating activities.
NOTE 3. STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, which are provided by the Company directly.
Stock-based compensation expense charged to income for the plans was $2.7 million and $3.2 million for the quarters ended April 30, 2017 and May 1, 2016 , respectively. Total unrecognized compensation cost for all stock-based compensation plans was $60.1 million at April 30, 2017 , which is expected to be recognized over a weighted-average period of 2.6  years.
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 April 30, 2017 , and changes during the first quarter 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 29, 2017
 
918

 
$
59.20

 
390

 
$
61.05

 
14

 
$
70.54

 
360

 
$
62.99

Granted
 
572

 
51.90

 
176

 
51.90

 

 
52.26

 
298

 
52.07

Exercised/released
 
11

 
25.82

 

 

 

 

 
88

 
66.00

Forfeited
 
30

 
60.99

 
147

 
52.50

 

 

 
18

 
58.38

Balance at April 30, 2017
 
1,449

 
$
56.52

 
419

 
$
60.21

 
14

 
$
70.29

 
552

 
$
56.77

Exercisable at April 30, 2017
 
333

 
$
56.97

 
 
 
 
 
 
 
 
 
 
 
 

9



The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following assumptions were used in calculating the fair value of stock options granted in the first quarter of fiscal 2017 :
 
 
Quarter Ended 
 April 30, 2017
Expected term
 
4.00 years

Expected volatility
 
38.28
%
Risk-free interest rate
 
1.72
%
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 quarter ended April 30, 2017 , there were 33.3 thousand  shares purchased in the open market under the ESPP.
Defined contribution pension plans
During the second quarter of fiscal 2016, the Company began offering defined contribution pension plans to its eligible employees in Canada and the United States. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches  50%  to  75%  of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was  $1.4 million in the first quarter of fiscal 2017 .
NOTE 4. EARNINGS PER SHARE
The details of the computation of basic and diluted earnings per share are as follows:
 
 
Quarter Ended
 
 
April 30, 2017
 
May 1, 2016
 
 
(In thousands, except per share amounts)
Net income
 
$
31,246

 
$
45,336

Basic weighted-average number of shares outstanding
 
137,037

 
137,263

Assumed conversion of dilutive stock options and awards
 
155

 
233

Diluted weighted-average number of shares outstanding
 
137,192

 
137,496

Basic earnings per share
 
$
0.23

 
$
0.33

Diluted earnings per share
 
$
0.23

 
$
0.33


10



The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have, in effect, the same rights and share equally in undistributed net income. For the quarters ended April 30, 2017 and May 1, 2016 , 0.3 million and 0.2 million stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.
On 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 . This stock repurchase program was completed during the second quarter of fiscal 2016.
On December 1, 2016, the Company's board of directors approved a program to repurchase shares of the Company's common stock up to an aggregate value of  $100.0 million . The common stock generally is repurchased in the open market at prevailing market prices, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors. The repurchases may be made until December 9, 2018. As of  April 30, 2017 , the remaining aggregate value of shares available to be repurchased under this program was  $86.4 million .
During the quarters ended April 30, 2017 and May 1, 2016 , 0.2 million and 0.2 million shares, respectively, were repurchased under the program at a total cost of $12.8 million and $15.8 million , respectively.
Subsequent to  April 30, 2017 , and up to  May 29, 2017 0.2 million  shares were repurchased at a total cost of  $10.4 million .
NOTE 5. SUPPLEMENTARY FINANCIAL INFORMATION
For the quarters ended April 30, 2017 and May 1, 2016 , there were aggregate revaluation foreign exchange gains of $5.8 million and losses of $13.5 million , respectively, included within selling, general and administrative expenses.

11



A summary of certain consolidated balance sheet accounts is as follows:
 
 
April 30,
2017
 
January 29,
2017
 
 
(In thousands)
Inventories:
 
 
 
 
Finished goods
 
$
314,923

 
$
306,087

Provision to reduce inventories to net realizable value
 
(10,973
)
 
(7,655
)
 
 
$
303,950

 
$
298,432

Property and equipment, net:
 
 
 
 
Land
 
$
75,642

 
$
78,561

Buildings
 
31,368

 
32,174

Leasehold improvements
 
272,397

 
273,801

Furniture and fixtures
 
81,034

 
84,479

Computer hardware
 
57,368

 
58,270

Computer software
 
159,658

 
160,835

Equipment and vehicles
 
14,272

 
13,704

Accumulated depreciation
 
(292,906
)
 
(278,325
)
 
 
$
398,833

 
$
423,499

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

 
$
25,496

Changes in foreign currency exchange rates
 
(1,506
)
 
(1,263
)
 
 
23,990

 
24,233

Intangibles - reacquired franchise rights
 
10,150

 
10,150

Accumulated amortization
 
(9,875
)
 
(9,807
)
Changes in foreign currency exchange rates
 
(17
)
 
(19
)
 
 
258

 
324

 
 
$
24,248

 
$
24,557

Other accrued liabilities:
 
 
 
 
Accrued duty, freight, and other operating expenses
 
$
28,245

 
$
27,477

Sales tax collected
 
11,203

 
10,182

Accrued rent
 
4,561

 
5,562

Other
 
7,396

 
8,799

 
 
$
51,405

 
$
52,020

Other non-current liabilities:
 
 
 
 
Deferred lease liability
 
$
26,546

 
$
26,648

Tenant inducements
 
22,178

 
22,209

 
 
$
48,724

 
$
48,857

As a result of the plan to restructure the ivivva operations, the Company recorded an additional provision of $1.9 million as of April 30, 2017 to reduce the carrying value of certain ivivva branded finished goods inventories to their estimated net realizable value. In addition, the Company recorded a liability for the losses it expects to incur on certain firm inventory and fabric purchase commitments of $3.5 million as of April 30, 2017 . This liability is included within accrued inventory liabilities on the consolidated balance sheets.
Please refer to Note 9 of these unaudited interim consolidated financial statements for further details regarding the ivivva restructuring plans, including impairment of property and equipment, net which was recorded during the first quarter of fiscal 2017 .

12



NOTE 6. LEGAL PROCEEDINGS
In addition to the legal matter 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, employment 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 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 2016 Annual Report on Form 10-K filed with the SEC on March 29, 2017 , the Company finalized a bilateral Advance Pricing Arrangement ("APA") with the Internal Revenue Service ("IRS") and the Canada Revenue Agency ("CRA") during fiscal 2016.
The results for the first quarter of fiscal 2016 included a net interest expense of $1.2 million that was recorded in other income (expense), net, and a net income tax recovery of $5.6 million related to the expected outcome of the APA and taxes associated with the anticipated repatriation of foreign earnings.

13



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, temporary locations, warehouse sales, and license and supply arrangement net revenue have been combined into other. Information for these segments is detailed in the table below:
 
 
Quarter Ended
 
 
April 30, 2017
 
May 1, 2016
 
 
(In thousands)
Net revenue:
 
 
 
 
Company-operated stores
 
$
379,099

 
$
358,704

Direct to consumer
 
97,223

 
97,566

Other
 
43,985

 
39,246

 
 
$
520,307

 
$
495,516

Income from operations before general corporate expense:
 
 
 
 
Company-operated stores
 
$
77,499

 
$
73,259

Direct to consumer
 
35,442

 
38,551

Other
 
2,836

 
2,069

 
 
115,777

 
113,879

General corporate expense
 
52,604

 
56,290

ivivva inventory write downs, and losses on purchase commitments
 
5,419

 

Asset impairment and restructuring costs
 
12,331

 

Income from operations
 
45,423

 
57,589

Other income (expense), net
 
907

 
(486
)
Income before income tax expense
 
$
46,330

 
$
57,103

 
 
 
 
 
Capital expenditures:
 
 
 
 
Company-operated stores
 
$
7,168

 
$
16,750

Direct to consumer
 
1,980

 
1,163

Corporate and other
 
10,731

 
8,731

 
 
$
19,879

 
$
26,644

Depreciation and amortization:
 
 
 
 
Company-operated stores
 
$
15,200

 
$
13,784

Direct to consumer
 
1,994

 
1,329

Corporate and other
 
5,969

 
4,072

 
 
$
23,163

 
$
19,185


14



NOTE 9. ASSET IMPAIRMENT AND RESTRUCTURING
On June 1, 2017, the Company announced a plan to restructure its ivivva operations. As part of this plan, the Company expects to close approximately 40 of the 55 ivivva branded company-operated stores that were in operation as of April 30, 2017 . It is also anticipated that approximately half of the remaining ivivva branded company-operated stores will be converted to lululemon branded stores, and that all of the Company's ivivva branded showrooms and other temporary locations will be closed. The Company will continue offering ivivva branded products on its e-commerce websites.
The Company expects the closures and restructuring to be substantially complete by the end of the third quarter of fiscal 2017.
As a result of the planned closures, the Company currently estimates that it will incur aggregate pre-tax charges of between $50.0 million and $60.0 million in fiscal 2017 , inclusive of $17.7 million recognized during the first quarter of fiscal 2017 . The remaining costs, primarily related to lease terminations and employee related costs, are expected to be recognized in the second and third quarter of fiscal 2017 . These estimates are based on significant assumptions and could change materially.
A summary of the pre-tax charges recognized during the first quarter of fiscal 2017 in connection with the Company's plan to restructure its ivivva operations is as follows:
 
 
Quarter Ended 
 April 30, 2017
 
 
(In thousands)
Costs recorded in cost of goods sold:
 
 
Provision to reduce inventories to net realizable value
 
$
1,942

Expected loss on committed inventory purchases
 
3,477

ivivva inventory write downs, and losses on purchase commitments
 
5,419

 
 
 
Costs recorded in operating expenses:
 
 
Impairment of property and equipment
 
11,593

Employee related costs
 
738

Asset impairment and restructuring costs
 
12,331

 
 
$
17,750

An income tax recovery of $4.7 million was recorded on the above items based on the expected annual tax rate of the applicable tax jurisdictions.
Costs recorded in cost of goods sold
The Company recognized expenses of $5.4 million in cost of goods sold as a result of the plan to restructure its ivivva operations. This included $1.9 million to reduce inventories to their estimated net realizable value, and $3.5 million for the losses the Company expects to incur on certain firm inventory and fabric purchase commitments. The liability for the expected losses is included within accrued inventory liabilities on the consolidated balance sheets.
Costs recorded in operating expenses
The Company recognized asset impairment and restructuring costs of $12.3 million as a result of the plan to restructure its ivivva operations.
As a result of the plan to close the majority of the ivivva branded locations, the long-lived assets of each ivivva branded location were tested for impairment as of April 30, 2017 . For impaired locations, a loss was recognized representing the difference between the net book value of the long-lived assets and their estimated fair value. Impairment losses totaling $11.6 million were recognized during the first quarter of fiscal 2017 . These losses primarily relate to leasehold improvements and furniture and fixtures of the company-operated stores segment.
Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The fair value of the long-

15



lived assets for each store was determined using level 3 inputs, principally the present value of the estimated future cash flows expected from their use and eventual disposition.
The Company also recorded an accrual of $0.7 million for certain contractual employee termination benefits which were considered probable of payment as of April 30, 2017 , as a result of the planned restructuring.
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."
We offer a comprehensive line of apparel and accessories for women and men. We also offer activewear for girls under our ivivva brand name. Our apparel assortment includes items such as pants, shorts, tops and jackets designed for healthy lifestyle and athletic activities such as yoga, running, training, and many other sweaty pursuits. We also offer fitness-related accessories, including an array of items such as bags, socks, underwear, yoga mats, and water bottles.
On June 1, 2017, we announced that we plan to restructure our ivivva operations to a primarily e-commerce focused business, with a select number of stores remaining in key communities across North America. We plan to close approximately 40 of our 55 ivivva branded company-operated stores and to convert approximately half of the remaining stores to lululemon branded stores. We will also close all of our ivivva branded showrooms and other temporary locations and plan to streamline

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our corporate infrastructure. It is anticipated that the closures and restructuring will be substantially complete by the end of the third quarter of fiscal 2017.
Financial Highlights
The summary below provides both GAAP and adjusted non-GAAP financial measures. In connection with the restructuring of our ivivva operations, we recognized pre-tax costs totaling $17.7 million in the first quarter of fiscal 2017 . The adjusted financial measures exclude these charges and their related tax effects, and also exclude certain discrete items related to the Company's transfer pricing arrangements and taxes on repatriation of foreign earnings which were recognized during the first quarter of fiscal 2016 .
For the first quarter of fiscal 2017 :
Net revenue increase d 5% to $520.3 million , from $495.5 million in the first quarter of fiscal 2016 . On a constant dollar basis, net revenue increased 5% . The increase in net revenue was primarily due to the addition of 38 net new company-operated stores since the first quarter of fiscal 2016 , partially offset by decreased comparable store sales.
Total comparable sales, which includes comparable store sales and direct to consumer, decreased 1% compared to the first quarter of fiscal 2016 . On a constant dollar basis, total comparable sales decreased by 1% .
Comparable store sales decreased 2% compared to the first quarter of fiscal 2016 , or decreased by 1% on a constant dollar basis, primarily as a result of decreased traffic, partially offset by increased dollar value per transaction.
Direct to consumer net revenue was flat compared to the first quarter of fiscal 2016 , and was flat on a constant dollar basis, primarily as a result of decreased conversion on our e-commerce websites, partially offset by increased traffic and dollar value per transaction.
Gross profit increase d 7% to $256.9 million , from $239.1 million in the first quarter of fiscal 2016 . Adjusted gross profit increased 10% to $262.3 million .
Gross margin increase d 110 basis points to 49.4% compared to 48.3% in the first quarter of fiscal 2016 . Adjusted gross margin increase d 210 basis points to 50.4% . The increase in gross margin was primarily due to an increase in product margin, primarily due to lower product costs and improved average retail prices.
Income from operations decrease d by 21% to $45.4 million , from $57.6 million in the first quarter of fiscal 2016 . Adjusted income from operations increase d by $5.6 million , or 10% , to $63.2 million .
Operating margin decrease d 290 basis points to 8.7% compared to 11.6% in the first quarter of fiscal 2016 . Adjusted operating margin increased by 50 basis points to 12.1% compared to the first quarter of fiscal 2016 .
Income tax expense increase d 28% to $15.1 million , from $11.8 million in the first quarter of fiscal 2016 . Our effective tax rate for the first quarter of fiscal 2017 was 32.6% compared to 20.6% for the first quarter of fiscal 2016 . The adjusted effective tax rate was 30.8% in the first quarter of fiscal 2017 compared to 29.8% in the first quarter of fiscal 2016 .
Diluted earnings per share were $0.23 compared to $0.33 in the first quarter of fiscal 2016 . Adjusted diluted earnings per share were $0.32 for the first quarter of fiscal 2017 compared to $0.30 for the first quarter of fiscal 2016 .
Refer to the non-GAAP reconciliation tables contained in the "Results of Operations" section of this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and adjusted gross profit, gross margin, income from operations, operating margin, effective tax rates, and diluted earnings per share, and the most directly comparable measures calculated in accordance with GAAP.

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Results of Operations
First Quarter Results
The following table summarizes key components of our results of operations for the quarters ended April 30, 2017 and May 1, 2016 . The percentages are presented as a percentage of net revenue.
 
 
Quarter Ended
 
 
April 30, 2017
 
May 1, 2016

April 30, 2017
 
May 1, 2016
 
 
(In thousands)
 
(Percentages)
Net revenue
 
$
520,307

 
$
495,516

 
100.0
%
 
100.0
 %
Cost of goods sold
 
263,412

 
256,385

 
50.6

 
51.7

Gross profit
 
256,895

 
239,131

 
49.4

 
48.3

Selling, general and administrative expenses
 
199,141

 
181,542

 
38.3

 
36.6

Asset impairment and restructuring costs
 
12,331

 

 
2.4

 

Income from operations
 
45,423

 
57,589

 
8.7

 
11.6

Other income (expense), net
 
907

 
(486
)
 
0.2

 
(0.1
)
Income before income tax expense
 
46,330

 
57,103

 
8.9

 
11.5

Income tax expense
 
15,084

 
11,767

 
2.9

 
2.5

Net income
 
$
31,246

 
$
45,336

 
6.0
%
 
9.0
 %
Net Revenue
Net revenue increase d $24.8  million, or 5% , to $520.3 million for the first quarter of fiscal 2017 from $495.5  million for the first quarter of fiscal 2016 . On a constant dollar basis, assuming the average exchange rates for the first quarter of fiscal 2017 remained constant with the average exchange rates for the first quarter of fiscal 2016 , net revenue increased $26.3 million , or 5% .
The increase in net revenue was primarily due to net revenue generated by new company-operated stores. Total comparable sales, which includes comparable store sales and direct to consumer, decreased 1% in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 . Total comparable sales decreased 1% on a constant dollar basis.
Net revenue on a segment basis for the quarters ended April 30, 2017 and May 1, 2016 is summarized below. The percentages are presented as a percentage of total net revenue.
 
 
Quarter Ended
 
 
April 30, 2017
 
May 1, 2016
 
April 30, 2017
 
May 1, 2016
 
 
(In thousands)
 
(Percentages)
Company-operated stores
 
$
379,099

 
$
358,704

 
72.9
%
 
72.4
%
Direct to consumer
 
97,223

 
97,566

 
18.7

 
19.7

Other
 
43,985

 
39,246

 
8.4

 
7.9

Net revenue
 
$
520,307

 
$
495,516

 
100.0
%
 
100.0
%
Company-Operated Stores.  Net revenue from our company-operated stores segment increase d $20.4 million , or 6% , to $379.1 million in the first quarter of fiscal 2017 from $358.7 million in the first quarter of fiscal 2016 . Net revenue from company-operated stores we opened or significantly expanded subsequent to May 1, 2016 , and therefore not included in comparable store sales, contributed $26.6 million to the increase . We have opened 38 net new company-operated stores since the first quarter of fiscal 2016 , including 22 stores in the United States, four stores in China, three stores in each of Canada and the United Kingdom, two stores in South Korea, and one store in each of Hong Kong, Ireland, Japan, and Switzerland. The increase in net revenue from our company-operated stores segment was partially offset by a comparable store sales decrease of 2% in the first quarter of fiscal 2017 which resulted in a $6.2 million decrease to net revenue. Comparable store sales decreased 1% , or $5.6 million on a constant dollar basis. The decrease in comparable store sales was primarily as a result of decreased traffic, partially offset by increased dollar value per transaction.
Direct to Consumer.  Net revenue from our direct to consumer segment decreased $0.3 million , or 0% , to $97.2 million in the first quarter of fiscal 2017 from $97.6 million in the first quarter of fiscal 2016 . Direct to consumer net revenue decreased

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0% on a constant dollar basis. This was primarily the result of decreased conversion on our e-commerce websites, partially offset by increased traffic and dollar value per transaction.
Other.  Net revenue from our other segment increase d $4.7 million , or 12% , to $44.0 million in the first quarter of fiscal 2017 from $39.2 million in the first quarter of fiscal 2016 . This increase was primarily the result of increased net revenue at existing outlets, and an increased number of temporary locations and outlets during the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 . The increase in net revenue from our other segment was partially offset by a decreased number of showrooms during the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 .
Gross Profit
Gross profit increase d $17.8 million , or 7% , to $256.9 million for the first quarter of fiscal 2017 from $239.1 million for the first quarter of fiscal 2016 . Gross profit as a percentage of net revenue, or gross margin, was 49.4% in the first quarter of fiscal 2017 compared to 48.3% in the first quarter of fiscal 2016 .
During the first quarter of fiscal 2017 , as a result of the plan to restructure the ivivva operations, we recognized an expense of $1.9 million to reduce the carrying value of certain ivivva branded inventories to their estimated net realizable value. In addition, we recognized an expense of $3.5 million for the net loss we expect to realize on certain committed inventory and raw material purchases, as outlined in Notes 5 and 9 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report. Excluding these charges, adjusted gross profit increased 10% to $262.3 million and adjusted gross margin increase d 210 basis points to 50.4% compared to the first quarter of fiscal 2016 .
Gross margin increase d by 110  basis points, to 49.4% in the first quarter of fiscal 2017 from 48.3% in the first quarter of fiscal 2016 . The increase in gross margin was primarily the result of:
an increase in product margin of 380 basis points primarily due to lower product costs and improved average retail prices; and
a favorable impact of foreign exchange rates of 30 basis points.
This was partially offset by an increase in inventory provision expense and anticipated losses related to firm purchase commitments for ivivva branded products of 100 basis points, an increase in occupancy and depreciation costs of 100 basis points, and an increase in costs related to our product and supply chain departments of 100 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increase d $17.6 million , or 10% , to $199.1 million in the first quarter of fiscal 2017 from $181.5 million in the first quarter of fiscal 2016 . The increase in selling, general and administrative expenses was primarily due to:
an increase in head office costs other than employee costs of $13.5 million primarily due to increased professional fees, increased brand and community costs, and increased depreciation;
an increase in employee costs for our operating locations of $10.8 million primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations;
an increase in other costs of $6.9 million for our operating channels including digital marketing expenses, depreciation, repairs and maintenance costs, and software support and licensing costs; and
an increase in head office employee costs of $6.3 million primarily due to additional employees to support the growth in our business.
The increase in selling, general and administrative expenses was partially offset by an increase in net foreign exchange gains of $19.3 million , primarily related to the revaluation of U.S. dollar cash and receivables held in Canadian subsidiaries. There were net foreign exchange gains of $5.8 million in the first quarter of fiscal 2017 compared to net foreign exchange losses of $13.5 million in the first quarter of fiscal 2016 . The increase in selling, general and administrative expenses was also partially offset by a decrease in variable costs of $0.6 million for our operating channels, primarily due to a decrease in packaging and distribution costs, partially offset by an increase in credit card fees.
As a percentage of net revenue, selling, general and administrative expenses increased 170 basis points, to 38.3% in the first quarter of fiscal 2017 from 36.6% in the first quarter of fiscal 2016 .

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Asset Impairment and Restructuring Costs
As a result of the plan to restructure our ivivva operations, we recognized asset impairment and restructuring costs of $12.3 million in the first quarter of fiscal 2017 . This includes long-lived asset impairment charges of $11.6 million and severance costs of $0.7 million . We did not have asset impairment and restructuring costs in the first quarter of fiscal 2016 . Please refer to Note 9 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
Income from Operations
Income from operations decrease d $12.2 million , or 21% , to $45.4 million in the first quarter of fiscal 2017 from $57.6 million in the first quarter of fiscal 2016 . Operating margin decrease d 290 basis points to 8.7% compared to 11.6% in the first quarter of fiscal 2016 .
In connection with the restructuring of our ivivva operations, we recognized pre-tax costs totaling $17.7 million in the first quarter of fiscal 2017 . This includes long-lived asset impairment and restructuring costs of $12.3 million , inventory write downs of $1.9 million , and anticipated losses related to firm inventory purchase commitments of $3.5 million . Excluding these charges, adjusted income from operations increase d by 10% to $63.2 million and adjusted operating margin increased by 50 basis points to 12.1% .
On a segment basis, we determine income from operations without taking into account our general corporate expenses, and the costs we incur in connection with the planned restructuring of our ivivva operations. This includes long-lived asset impairment and restructuring charges, the expense recognized to reduce the carrying value of certain ivivva branded inventories to their estimated net realizable value, and the cost recognized for the net loss we expect to realize on certain firm ivivva branded inventory and raw material purchase commitments.
Segmented income from operations for the quarters ended April 30, 2017 and May 1, 2016 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
 
 
Quarter Ended
 
 
April 30, 2017
 
May 1, 2016
 
April 30, 2017
 
May 1, 2016
 
 
(In thousands)
 
(Percentages)
Company-operated stores
 
$
77,499

 
$
73,259

 
20.4
%
 
20.4
%
Direct to consumer
 
35,442

 
38,551

 
36.5

 
39.5

Other
 
2,836

 
2,069

 
6.4

 
5.3

Segmented income from operations
 
115,777

 
113,879

 
 
 
 
General corporate expense
 
52,604

 
56,290

 
 
 
 
ivivva inventory write downs, and losses on purchase commitments
 
5,419

 

 
 
 
 
Asset impairment and restructuring costs
 
12,331

 

 
 
 
 
Income from operations
 
$
45,423

 
$
57,589

 
 
 
 
Company-Operated Stores . Income from operations from our company-operated stores segment increase d $4.2 million , or 6% , to $77.5 million for the first quarter of fiscal 2017 from $73.3 million for the first quarter of fiscal 2016 . The increase was primarily the result of  increase d gross profit of  $17.3 million  which was primarily due to increased net revenue from new stores, and higher gross margin. The increase in gross margin was primarily due to lower product costs and improved average retail prices. The increase in gross profit 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. Income from operations as a percentage of company-operated stores net revenue was 20.4% for both the first quarter of fiscal 2017 and fiscal 2016 . The increase in gross margin was offset by deleverage of selling, general and administrative expenses.
Direct to Consumer.  Income from operations from our direct to consumer segment decrease d $3.1 million , or 8% , to $35.4 million for the first quarter of fiscal 2017 from $38.6 million for the first quarter of fiscal 2016 . The decrease was primarily due to an increase in selling, general and administrative expenses, including higher digital marketing expenses, and higher head office costs to support the business. Income from operations as a percentage of direct to consumer net revenue decreased by 300 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 $0.8 million , or 37% , to $2.8 million for the first quarter of fiscal 2017 from $2.1 million for the first quarter of fiscal 2016 . The increase was primarily the result of  increase d gross profit of  $3.3

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million which was primarily due to increased net revenue at existing outlets, an increased number of outlets and temporary locations, and higher gross margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased employee costs, and increased operating expenses associated with new locations. Income from operations as a percentage of other net revenue increased by 110 basis points primarily due to an increase in gross margin partially offset by deleverage of selling, general and administrative expenses as a percentage of other net revenue.
General Corporate Expense.  General corporate expense decrease d $3.7 million , or 7% , to $52.6 million for the first quarter of fiscal 2017 from $56.3 million for the first quarter of fiscal 2016 . The decrease was primarily due to an increase in net foreign exchange gains of $19.3 million , primarily related to the revaluation of U.S. dollar cash and receivables held in Canadian subsidiaries. There were net foreign exchange gains of $5.8 million in the first quarter of fiscal 2017 compared to net foreign exchange losses of $13.5 million in the first quarter of fiscal 2016 . This was partially offset by increased employee costs, professional fees, marketing expenses, and depreciation to support the growth of our business.
Other Income (Expense), Net
Other income (expense), net increase d $1.4 million , or 287% , to income of $0.9 million for the first quarter of fiscal 2017 from an expense of $0.5 million for the first quarter of fiscal 2016 . The increase was primarily due to net interest expense of $1.2 million which was recorded in the first quarter of fiscal 2016 in relation 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.
Income Tax Expense
Income tax expense increase d $3.3 million , or 28% , to $15.1 million for the first quarter of fiscal 2017 from $11.8 million for the first quarter of fiscal 2016 .
The first quarters of fiscal 2017 and fiscal 2016 included certain adjustments which resulted in net income tax recoveries of $4.7 million and $5.6 million , respectively. As outlined in Notes 7 and 9 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report, these tax recoveries relate to the tax effect of the costs recognized in connection with the ivivva restructuring, and to the Company's transfer pricing arrangements and taxes on repatriation of foreign earnings.
The effective tax rate for the first quarter of fiscal 2017 was 32.6% compared to 20.6% for the first quarter of fiscal 2016 . The adjusted effective tax rate, was 30.8% for the first quarter of fiscal 2017 compared to 29.8% for the first quarter of fiscal 2016 .
Net Income
Net income decrease d $14.1 million , or 31% , to $31.2 million for the first quarter of fiscal 2017 from $45.3 million for the first quarter of fiscal 2016 . This was primarily due to an increase in selling, general and administrative expenses of $17.6 million , long-lived asset impairment and restructuring costs of $12.3 million , and an increase in income tax expense of $3.3 million , partially offset by an increase in gross profit of $17.8 million , and an increase in other income (expense), net of $1.4 million .



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Comparable Store Sales and Total Comparable Sales
We separately track comparable store sales, which reflect net revenue from company-operated stores that have been open for at least 12 months, or open for at least 12 months after being significantly expanded. Net revenue from a store is included in comparable store sales beginning with the first month for which the store has a full month of sales in the prior year. Comparable store sales exclude sales from new stores that have not been open for at least 12 months, from stores which have not been in their significantly expanded space for at least 12 months, and from stores which have been temporarily relocated for renovations. Comparable store sales also exclude sales from direct to consumer, outlets, showrooms, wholesale accounts, temporary locations, warehouse sales, license and supply arrangements, and sales from company-operated stores that we have closed.
Total comparable sales combines comparable store sales and direct to consumer sales.
The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.
Non-GAAP Financial Measures
Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and the adjusted financial results are non-GAAP financial measures.
A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign exchange rates for the same period of the prior year. We provide constant dollar changes in net revenue, total comparable sales, comparable store sales, and 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.
Adjusted gross profit, gross margin, income from operations, operating margin, effective tax rates, and diluted earnings per share exclude the costs recognized in connection with the plan to restructure the ivivva operations, its related tax effects, and certain discrete items related to the Company's transfer pricing arrangements and taxes on repatriation of foreign earnings. We believe these adjusted financial results and measures provide useful information because these items do not directly relate to our ongoing business operations and therefore do not contribute to a meaningful evaluation of the Company's future operating performance. Furthermore, we believe these adjusted financial results and metrics are useful to investors because of their comparability to our historical information.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP. A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.
The below changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue show the change compared to the corresponding period in the prior year.

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Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue
 
 
Quarter Ended 
 April 30, 2017
 
 
(In thousands)
 
(Percentages)
Change in net revenue
 
$
24,791

 
5
%
Adjustments due to foreign exchange rate changes
 
1,480

 

Change in net revenue in constant dollars
 
$
26,271

 
5
%

 
 
Quarter Ended 
 April 30, 2017
Change in total comparable sales 1,2
 
(1
)%
Adjustments due to foreign exchange rate changes
 

Change in total comparable sales in constant dollars 1,2
 
(1
)%

 
 
Quarter Ended 
 April 30, 2017
 
 
(In thousands)
 
(Percentages)
Change in comparable store sales 2
 
$
(6,176
)
 
(2
)%
Adjustments due to foreign exchange rate changes
 
527

 
1

Change in comparable store sales in constant dollars 2
 
$
(5,649
)
 
(1
)%

 
 
Quarter Ended 
 April 30, 2017
 
 
(Percentages)
Change in direct to consumer net revenue
 
 %
Adjustments due to foreign exchange rate changes
 

Change in direct to consumer net revenue in constant dollars
 
 %
__________
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.


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Adjusted financial measures
The following table reconciles adjusted financial measures with the most directly comparable measures calculated in accordance with GAAP. The amounts are in thousands, except for the per share amounts.
 
 
Quarter Ended 
 April 30, 2017
 
Quarter Ended 
 May 1, 2016
 
 
GAAP Results
 
Adjustments
 
Adjusted Results
(Non-GAAP)
 
GAAP Results
 
Adjustments
 
Adjusted Results
(Non-GAAP)
Net revenue
 
$
520,307

 
$

 
$
520,307

 
$
495,516

 
$

 
$
495,516

Costs of goods sold 1
 
263,412

 
(5,419
)
 
257,993

 
256,385

 

 
256,385

Gross profit 1
 
256,895

 
5,419

 
262,314

 
239,131

 

 
239,131

As a percent of net revenue 1
 
49.4
%
 
1.0
 %
 
50.4
%
 
48.3
%
 
%
 
48.3
%
Selling, general and administrative expenses
 
199,141

 

 
199,141

 
181,542

 

 
181,542

As a percent of net revenue
 
38.3
%
 
 %
 
38.3
%
 
36.6
%
 
%
 
36.6
%
Impairment and restructuring costs 2
 
12,331

 
(12,331
)
 

 

 

 

As a percent of net revenue 2
 
2.4
%
 
(2.4
)%
 
%
 
%
 
%
 
%
Income from operations 1,2
 
45,423

 
17,750

 
63,173

 
57,589

 

 
57,589

As a percent of net revenue 1,2
 
8.7
%
 
3.4
 %
 
12.1
%
 
11.6
%
 
%
 
11.6
%
Other income (expense), net 3
 
907

 

 
907

 
(486
)
 
1,240

 
754

Income before income tax expense 1,2,3
 
46,330

 
17,750

 
64,080

 
57,103

 
1,240

 
58,343

Income tax expense 3,4
 
15,084

 
4,684

 
19,768

 
11,767

 
5,644

 
17,411

Effective tax rate 3,4
 
32.6
%
 
 
 
30.8
%
 
20.6
%
 
 
 
29.8
%
Net income 1,2,3,4
 
$
31,246

 
$
13,066

 
$
44,312

 
$
45,336

 
$
(4,404
)
 
$
40,932

 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share 1,2,3,4
 
$
0.23

 
$
0.09

 
$
0.32

 
$
0.33

 
$
(0.03
)
 
$
0.30

__________
1 During the first quarter of fiscal 2017 , we recognized costs totaling $5.4 million to reduce the carrying value of certain ivivva branded inventories to their estimated net realizable value and to record the expected net loss on certain committed inventory purchases.
2 During the first quarter of fiscal 2017 , we recognized long-lived asset impairment charges of $11.6 million and severance costs of $0.7 million related to our plan to restructure our ivivva operations.
3 The adjustments in the first quarter of fiscal 2016 relate to our transfer pricing arrangements and the associated repatriation of foreign earnings.
4 The adjustment to income tax expense for the first quarter of fiscal 2017 represents the tax effect of the ivivva related restructuring adjustments, calculated based on the expected annual tax rate of the applicable tax jurisdictions.
Please refer to Notes 7 and 9 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information on these adjustments.
Seasonality
Our business is affected by the general seasonal trends common to the retail apparel industry. Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year. As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year. For example, we generated approximately 47%, 45%, and 42% of our full year operating profit during the fourth quarters of fiscal 2016 , fiscal 2015 , and fiscal 2014 , respectively.

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Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our revolving credit facility. Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, making information technology system enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally. We may also use cash to repurchase shares of our common stock. Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions.
As of April 30, 2017 , our working capital (excluding cash and cash equivalents) was $228.4 million , our cash and cash equivalents were $698.3  million and our capacity under our revolving facility was $149.2 million .
The following table summarizes our net cash flows provided by and used in operating, investing and financing activities for the periods indicated:
 
 
Quarter Ended
 
 
April 30, 2017
 
May 1, 2016
 
 
(In thousands)
Total cash provided by (used in):
 
 
 
 
Operating activities
 
$
19,400

 
$
40,027

Investing activities
 
(19,879
)
 
(26,644
)
Financing activities
 
(14,487
)
 
(13,622
)
Effect of exchange rate changes on cash
 
(21,591
)
 
48,803

(Decrease) increase in cash and cash equivalents
 
$
(36,557
)
 
$
48,564

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 decreased $20.6 million , to $19.4 million for the first quarter of fiscal 2017 compared to $40.0 million for the first quarter of fiscal 2016 . The decrease was primarily the result of increased inventory purchases, partially offset by changes in accounts payable and accrued liabilities.
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 buildings, and for opening retail locations other than company-operated stores.
Cash used in investing activities decreased $6.8 million to $19.9 million for the first quarter of fiscal 2017 from $26.6 million  for the first quarter of fiscal 2016 . 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 quarter of fiscal 2017 compared to the first quarter of fiscal 2016 .
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 increased $0.9 million , to $14.5 million for the first quarter of fiscal 2017 compared to $13.6 million for the first quarter of fiscal 2016 .
On June 11, 2014, our board of directors approved a program to repurchase shares of our common stock up to an aggregate value of $450.0 million . This stock repurchase program was completed during the second quarter of fiscal 2016. On December 1, 2016, our board of directors approved a program to repurchase shares of our common stock up to an aggregate value of  $100.0 million over a period of up to two years.
Our cash used in financing activities for the first quarter of fiscal 2017 included $12.8 million to repurchase 0.2 million shares of our common stock compared to $15.8 million to repurchase 0.2 million shares for the first quarter of fiscal 2016 .

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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
On December 15, 2016, we entered into a credit agreement for $150.0 million under an unsecured five-year revolving credit facility. Bank of America, N.A., is administrative agent and HSBC Bank Canada is the syndication agent and letter of credit issuer, and the lenders party thereto. Borrowings under the revolving credit facility may be made, in U.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the approval of the administrative agent and the lenders. Up to $35.0 million of the revolving credit facility is available for the issuance of letters of credit and up to $25.0 million is available for the issuance of swing line loans. Commitments under the revolving credit facility may be increased by up to $200.0 million, subject to certain conditions, including the approval of the lenders. Borrowings under the agreement may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs). The principal amount outstanding under the credit agreement will be due and payable in full on December 15, 2021, subject to provisions that permit us to request a limited number of one year extensions annually.
Borrowings made under the revolving credit facility bear interest at a rate per annum equal to, at our option, either (a) a rate based on the rates applicable for deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) an alternate base rate, plus, in each case, an applicable margin. The applicable margin is determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax depreciation, amortization and rent ("EBITDAR") and ranges between 1.00%-1.75% for LIBOR loans and 0.00%-0.75% for alternate base rate loans. Additionally, a commitment fee of between 0.125%-0.200%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the revolving credit facility.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of our subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.
We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and we are not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be less than 2.00:1.00. The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control). If an event of default occurs, the credit agreement may be terminated and the maturity of any outstanding amounts may be accelerated.
As of April 30, 2017 , aside from letters of credit of $0.8 million , we had no other borrowings outstanding under this credit facility.
Off-Balance Sheet Arrangements
We enter into standby letters of credit to secure certain of our obligations, including leases, taxes and duties. As of April 30, 2017 , letters of credit and letters of guarantee totaling $0.8 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

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Form 10-K for our 2016 fiscal year end filed with the SEC on March 29, 2017 and in Note 2 included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Operating Locations
Our company-operated stores by brand and by country as of April 30, 2017 and January 29, 2017 , are summarized in the table below.
 
 
April 30,
2017
 
January 29,
2017
lululemon
 
 
 
 
United States
 
247

 
245

Canada
 
51

 
51

Australia
 
27

 
27

United Kingdom
 
9

 
9

New Zealand
 
5

 
5

China
 
4

 
3

Hong Kong
 
3

 
3

Singapore
 
3

 
3

South Korea
 
2

 
2

Germany
 
1

 
1

Ireland
 
1

 

Japan
 
1

 

Puerto Rico
 
1

 
1

Switzerland
 
1

 
1

 
 
356

 
351

ivivva
 
 
 
 
United States
 
42

 
42

Canada
 
13

 
13

 
 
55

 
55

Total
 
411

 
406

Retail locations operated by third parties under license and supply arrangements are not included in the above table. As of  April 30, 2017 , there were five licensed stores, including three in the United Arab Emirates, one in Mexico, and one in Qatar.
As part of the plan to restructure our ivivva operations, we plan to close approximately 40 of our 55 ivivva branded company-operated stores and to convert approximately half of the remaining stores to lululemon branded stores.
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

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been impacted by changes in exchange rates and may be impacted for the foreseeable future. The potential impact of currency fluctuation increases as our 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
foreign exchange revaluation gains by our Canadian subsidiaries on U.S. dollar cash and receivables denominated in U.S. dollars.
During the first quarter of fiscal 2017 , the change in the relative value of the U.S. dollar against the Canadian dollar resulted in a $32.7 million increase in accumulated other comprehensive loss within stockholders' equity. During the first quarter of fiscal 2016 , the change in the relative value of the U.S. dollar against the Canadian dollar resulted in a $68.1 million reduction 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 quarter of fiscal 2017 would have resulted in additional income from operations of approximately $3.5 million in the first quarter of fiscal 2017 . This assumes a consistent 10% appreciation in the U.S. dollar against the Canadian dollar throughout the first quarter of fiscal 2017 . 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 these risks, we may enter into derivative financial instruments. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.
Interest Rate Risk . Our revolving credit facility provides us with available borrowings in an amount up to $150.0 million in the aggregate. Because our revolving credit facility bears 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 April 30, 2017 , aside from letters of credit of $0.8 million , we had no other borrowings outstanding under this credit facility. We currently do not engage in any interest rate hedging activity and currently have no intention to do so. 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 and principal accounting 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

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April 30, 2017 . Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at April 30, 2017 , our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting during the quarter ended April 30, 2017 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 2016 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 as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, employment claims, and similar matters. We believe the ultimate resolution of any such current proceeding will not have a material adverse effect on our continued financial position, results of operations or cash flows.
ITEM 1A.  RISK FACTORS
In addition to the other information contained in this Form 10-Q and in our Annual Report on Form 10-K for our 2016 fiscal year, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known to us or that we currently deem immaterial could also impair our business and operations.
Our success depends on our ability to maintain the value and reputation of our brand.
Our success depends on the value and reputation of the lululemon brand. The lululemon name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting, and positioning our brand will depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality product, and guest experience. We rely on social media, as one of our marketing strategies, to have a positive impact on both our brand value and reputation. Our brand and reputation could be adversely affected if we fail to achieve these objectives, if our public image was to be tarnished by negative publicity, if we fail to deliver innovative and high quality products acceptable to our guests, or if we face a product recall. Negative publicity regarding the production methods of any of our suppliers or manufacturers could adversely affect our reputation and sales and force us to locate alternative suppliers or manufacturing sources. Additionally, while we devote considerable efforts and resources to protecting our intellectual property, if these efforts are not successful the value of our brand may be harmed. Any harm to our brand and reputation could have a material adverse effect on our financial condition.
If any of our products are unacceptable to us or our guests, our business could be harmed.
We have occasionally received, and may in the future continue to receive, shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards. We have also received, and may in the future continue to receive, products that are otherwise unacceptable to us or our guests. Under these circumstances, unless we are able to obtain replacement products in a timely manner, we risk the loss of net revenue resulting from the inability to sell those products and related increased administrative and shipping costs. Additionally, if the unacceptability of our products is not discovered until after such products are purchased by our guests, our guests could lose confidence in our products or we could face a product recall and our results of operations could suffer and our business, reputation, and brand could be harmed.
We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of our market share and a decrease in our net revenue and profitability.
The market for technical athletic apparel is highly competitive. Competition may result in pricing pressures, reduced profit margins or lost market share, or a failure to grow or maintain our market share, any of which could substantially harm our business and results of operations. We compete directly against wholesalers and direct retailers of athletic apparel, including large, diversified apparel companies with substantial market share and established companies expanding their production and marketing of technical athletic apparel, as well as against retailers specifically focused on women's athletic apparel. We also face competition from wholesalers and direct retailers of traditional commodity athletic apparel, such as cotton T-shirts and sweatshirts. Many of our competitors are large apparel and sporting goods companies with strong worldwide brand recognition. Because of the fragmented nature of the industry, we also compete with other apparel sellers, including those specializing in yoga apparel and other activewear. Many of our competitors have significant competitive advantages, including longer operating histories, larger and broader customer bases, more established relationships with a broader set of suppliers, greater brand recognition and greater financial, research and development, store development, marketing, distribution, and other resources than we do.

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Our competitors may be able to achieve and maintain brand awareness and market share more quickly and effectively than we can. In contrast to our "grassroots" marketing approach, many of our competitors promote their brands through traditional forms of advertising, such as print media and television commercials, and through celebrity endorsements, and have substantial resources to devote to such efforts. Our competitors may also create and maintain brand awareness using traditional forms of advertising more quickly than we can. Our competitors may also be able to increase sales in their new and existing markets faster than we do by emphasizing different distribution channels than we do, such as catalog sales or an extensive franchise network.
In addition, because we hold limited patents and exclusive intellectual property rights in the technology, fabrics or processes underlying our products, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrication techniques, and styling similar to our products.
Our reliance on suppliers to provide fabrics for and to produce our products could cause problems in our supply chain.
We do not manufacture our products or the raw materials for them and rely instead on suppliers. Many of the specialty fabrics used in our products are technically advanced textile products developed and manufactured by third parties and may be available, in the short-term, from only one or a very limited number of sources. In fiscal 2016, approximately 63% of our products were produced by our top five manufacturing suppliers, and 40% of raw materials were produced by a single manufacturer. We have no long-term contracts with any of our suppliers or manufacturing sources for the production and supply of our fabrics and garments, and we compete with other companies for fabrics, raw materials, and production.
We have experienced, and may in the future continue to experience, a significant disruption in the supply of fabrics or raw materials from current sources and we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significant increased demand, or if we need to replace an existing supplier or manufacturer, we may be unable to locate additional supplies of fabrics or raw materials or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier or manufacturer with sufficient capacity to meet our requirements or to fill our orders in a timely manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with its quality control, responsiveness and service, financial stability, and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing or fabric sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products, and quality control standards. Delays related to supplier changes could also arise due to an increase in shipping times if new suppliers are located farther away from our markets or from other participants in our supply chain. Any delays, interruption or increased costs in the supply of fabric or manufacture of our products could have an adverse effect on our ability to meet guest demand for our products and result in lower net revenue and income from operations both in the short and long term.
An economic downturn or economic uncertainty in our key markets may adversely affect consumer discretionary spending and demand for our products.
Many of our products may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, particularly those in North America, and other factors such as consumer confidence in future economic conditions, fears of recession, the availability and cost of consumer credit, levels of unemployment, and tax rates. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the future. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products. Consumer demand for our products may not reach our targets, or may decline, when there is an economic downturn or economic uncertainty in our key markets, particularly in North America. Our sensitivity to economic cycles and any related fluctuation in consumer demand may have a material adverse effect on our financial condition.
Our sales and profitability may decline as a result of increasing product costs and decreasing selling prices.
Our business is subject to significant pressure on costs and pricing caused by many factors, including intense competition, constrained sourcing capacity and related inflationary pressure, pressure from consumers to reduce the prices we charge for our products, and changes in consumer demand. These factors may cause us to experience increased costs, reduce our prices to consumers or experience reduced sales in response to increased prices, any of which could cause our operating margin to decline if we are unable to offset these factors with reductions in operating costs and could have a material adverse effect on our financial conditions, operating results and cash flows.

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If we are unable to anticipate consumer preferences and successfully develop and introduce new, innovative and updated products, we may not be able to maintain or increase our sales and profitability.
Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. If we are unable to introduce new products or novel technologies in a timely manner or our new products or technologies are not accepted by our guests, our competitors may introduce similar products in a more timely fashion, which could hurt our goal to be viewed as a leader in technical athletic apparel innovation. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of athletic apparel or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. Our failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels. Even if we are successful in anticipating consumer preferences, our ability to adequately react to and address those preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality products. Our failure to effectively introduce new products that are accepted by consumers could result in a decrease in net revenue and excess inventory levels, which could have a material adverse effect on our financial condition.
Our results of operations could be materially harmed if we are unable to accurately forecast guest demand for our products.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with our manufacturers based on our estimates of future demand for particular products. Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decrease in guest demand for our products or for products of our competitors, our failure to accurately forecast guest acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions, and weakening of economic conditions or consumer confidence in future economic conditions. If we fail to accurately forecast guest demand we may experience excess inventory levels or a shortage of products available for sale in our stores or for delivery to guests.
Inventory levels in excess of guest demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margin to suffer and could impair the strength and exclusivity of our brand. Conversely, if we underestimate guest demand for our products, our manufacturers may not be able to deliver products to meet our requirements, and this could result in damage to our reputation and guest relationships.
Our inability to safeguard against security breaches with respect to our information technology systems could disrupt our operations.
Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our business, guests and employees including credit card information. Security breaches could expose us to a risk of loss or misuse of this information and potential liability. We may not have the resources or technical sophistication to be able to anticipate or prevent rapidly evolving types of cyber-attacks. Actual or anticipated attacks may cause us to incur increasing costs including costs to deploy additional personnel and protection technologies, train employees and engage third party experts and consultants. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. Data and security breaches can also occur as a result of non-technical issues including intentional or inadvertent breach by employees or persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant litigation and potential liability and damage to our brand and reputation or other harm to our business.
Any material disruption of our information technology systems or unexpected network interruption could disrupt our business and reduce our sales.
We are increasingly dependent on information technology systems and third-parties to operate our e-commerce websites, process transactions, respond to guest inquiries, manage inventory, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. The failure of our information technology systems to operate properly or effectively, problems with transitioning to upgraded or replacement systems, or difficulty in integrating new systems, could adversely affect our business. In addition, we have e-commerce websites in the United States, Canada, and internationally. Our information technology systems, websites, and operations of third parties on whom we rely, may encounter damage or disruption or slowdown caused by a failure to successfully upgrade systems, system failures, viruses, computer "hackers" or other causes, could cause information, including data related to guest orders, to be lost or delayed which could, especially if the disruption or slowdown occurred during the holiday season, result in delays in the delivery of products to our stores and guests or lost sales, which could reduce demand for our products and cause our sales to decline. In addition, if changes in technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth, we could

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lose guests. We have limited back-up systems and redundancies, and our information technology systems and websites have experienced system failures and electrical outages in the past which have disrupted our operations. Any significant disruption in our information technology systems or websites could harm our reputation and credibility, and could have a material adverse effect on our business, financial condition and results of operations.
If the technology-based systems that give our customers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our e-commerce business globally, could be materially adversely affected.
Many of our customers shop with us through our e-commerce website and mobile commerce applications. Increasingly, customers are using tablets and smart phones to shop online with us and with our competitors and to do comparison shopping. We are increasingly using social media and proprietary mobile applications to interact with our customers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly e-commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with customers, have a material adverse impact on the growth of our e-commerce business globally and could have a material adverse impact on our business and results of operations.
Risks specific to our e-commerce business also include diversion of sales from our company-operated stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our e-commerce business, as well as damage our reputation and brands.
The fluctuating cost of raw materials could increase our cost of goods sold and cause our results of operations and financial condition to suffer.
The fabrics used by our suppliers and manufacturers include synthetic fabrics whose raw materials include petroleum-based products. Our products also include silver and natural fibers, including cotton. Our costs for raw materials are affected by, among other things, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries, and other factors that are generally unpredictable and beyond our control. Increases in the cost of raw materials, including petroleum or the prices we pay for silver and our cotton yarn and cotton-based textiles, could have a material adverse effect on our cost of goods sold, results of operations, financial condition, and cash flows.
Our limited operating experience and limited brand recognition in new international markets may limit our expansion and cause our business and growth to suffer.
Our future growth depends in part on our expansion efforts outside of North America. We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in any new market. In connection with our expansion efforts we may encounter obstacles we did not face in North America, including cultural and linguistic differences, differences in regulatory environments, labor practices and market practices, difficulties in keeping abreast of market, business and technical developments, and foreign guests' tastes and preferences. We may also encounter difficulty expanding into new international markets because of limited brand recognition leading to delayed acceptance of our technical athletic apparel by guests in these new international markets. Our failure to develop our business in new international markets or experiencing disappointing growth outside of existing markets could harm our business and results of operations.
If we encounter problems with our distribution system, our ability to deliver our products to the market and to meet guest expectations could be harmed.
We rely on our distribution facilities for substantially all of our product distribution. Our distribution facilities include computer controlled and automated equipment, which means their operations are complicated and may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, electronic or power interruptions, or other system failures. In addition, because substantially all of our products are distributed from four locations, our operations could also be interrupted by labor difficulties, extreme or severe weather conditions or by floods, fires or other natural disasters near our distribution centers. If we encounter problems with our distribution system, our ability to meet guest expectations, manage inventory, complete sales, and achieve objectives for operating efficiencies could be harmed.
Our fabrics and manufacturing technology generally are not patented and can be imitated by our competitors.
The intellectual property rights in the technology, fabrics, and processes used to manufacture our products generally are owned or controlled by our suppliers and are generally not unique to us. Our ability to obtain intellectual property protection for our products is therefore limited and we do not generally own patents or hold exclusive intellectual property rights in the

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technology, fabrics or processes underlying our products. As a result, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrics and styling similar to our products. Because many of our competitors have significantly greater financial, distribution, marketing, and other resources than we do, they may be able to manufacture and sell products based on our fabrics and manufacturing technology at lower prices than we can. If our competitors do sell similar products to ours at lower prices, our net revenue and profitability could suffer.
We may see higher than anticipated costs associated with, or not realize the benefits of, our efforts to restructure our ivivva business.
In June 2017, we announced that we plan to restructure our ivivva operations to a primarily e-commerce focused business. As part of this effort, we plan to streamline its corporate infrastructure and to close approximately 40 of our 55 ivivva branded company-operated stores. The estimated costs and benefits associated with our restructuring efforts may vary materially based on various factors, including the timing of our execution of the programs, the outcome of negotiations with landlords and other third parties, the accuracy of our sales forecasts, inventory levels, the diversion of management attention from ongoing business activities or a decrease in employee morale, potential employment or other claims and litigation, and changes in management’s assumptions and projections. As a result of these events and circumstances, delays and unexpected costs may occur, which could result in higher costs than we anticipate or our not realizing all, or any, of the anticipated benefits of these restructuring efforts.
Our failure or inability to protect our intellectual property rights could diminish the value of our brand and weaken our competitive position.
We currently rely on a combination of copyright, trademark, trade dress, and unfair competition laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our intellectual property rights. The steps we take to protect our intellectual property rights may not be adequate to prevent infringement of these rights by others, including imitation of our products and misappropriation of our brand. In addition, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States or Canada, and it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our intellectual property rights, the value of our brand could be diminished and our competitive position may suffer.
Changes in tax laws or unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to the income tax laws of the United States, Canada, and several other international jurisdictions. Our effective income tax rates could be unfavorably impacted by a number of factors, including changes in the mix of earnings amongst countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of unremitted earnings for which we have not previously accrued U.S. taxes.
We and our subsidiaries engage in a number of intercompany transactions across multiple tax jurisdictions. Although we believe that these transactions reflect the accurate economic allocation of profit and that proper transfer pricing documentation is in place, the profit allocation and transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates.
Current economic and political conditions make tax rules in any jurisdiction, including the United States and Canada, subject to significant change. There have been proposals to reform U.S. and foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form such proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows.
If we continue to grow at a rapid pace, we may not be able to effectively manage our growth and the increased complexity of our business and as a result our brand image and financial performance may suffer.
We have expanded our operations rapidly since our inception in 1998 and our net revenue has increased from $40.7 million in fiscal 2004 to $2.3 billion in fiscal 2016. If our operations continue to grow at a rapid pace, we may experience difficulties in obtaining sufficient raw materials and manufacturing capacity to produce our products, as well as delays in production and shipments, as our products are subject to risks associated with overseas sourcing and manufacturing. We could be required to continue to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes and technology, and to obtain more space for our expanding workforce. This expansion could increase the strain on our resources, and we could experience operating difficulties, including difficulties

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in hiring, training and managing an increasing number of employees. These difficulties could result in the erosion of our brand image which could have a material adverse effect on our financial condition.
We are subject to risks associated with leasing retail and distribution space subject to long-term and non-cancelable leases.
We lease the majority of our stores under operating leases and our inability to secure appropriate real estate or lease terms could impact our ability to grow. Our leases generally have initial terms of between five and ten years, and generally can be extended only in five-year increments if at all. We generally cannot cancel these leases at our option. If an existing or new store is not profitable, and we decide to close it, as we have done in the past and may do in the future, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Similarly, we may be committed to perform our obligations under the applicable leases even if current locations of our stores become unattractive as demographic patterns change. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could require us to close stores in desirable locations.
We also lease the majority of our distribution centers and our inability to secure appropriate real estate or lease terms could impact our ability to deliver our products to the market.
Increasing labor costs and other factors associated with the production of our products in South and South East Asia could increase the costs to produce our products.
A significant portion of our products are produced in South and South East Asia and increases in the costs of labor and other costs of doing business in the countries in this area could significantly increase our costs to produce our products and could have a negative impact on our operations, net revenue, and earnings. Factors that could negatively affect our business include a potential significant revaluation of the currencies used in these countries, which may result in an increase in the cost of producing products, labor shortage and increases in labor costs, and difficulties in moving products manufactured out of the countries in which they are manufactured and through the ports on the western coast of North America, whether due to port congestion, labor disputes, product regulations and/or inspections or other factors, and natural disasters or health pandemics. A labor strike or other transportation disruption affecting these ports could significantly disrupt our business. Also, the imposition of trade sanctions or other regulations against products imported by us from, or the loss of "normal trade relations" status with any country in which our products are manufactured, could significantly increase our cost of products imported into North America and/or Australia and harm our business.
We may not be able to successfully open new store locations in a timely manner, if at all, which could harm our results of operations.
Our growth will largely depend on our ability to successfully open and operate new stores, which depends on many factors, including, among others, our ability to:
identify suitable store locations, the availability of which is outside of our control;
negotiate acceptable lease terms, including desired tenant improvement allowances;
hire, train and retain store personnel and field management;
immerse new store personnel and field management into our corporate culture;
source sufficient inventory levels; and
successfully integrate new stores into our existing operations and information technology systems.
Successful new store openings may also be affected by our ability to initiate our grassroots marketing efforts in advance of opening our first store in a new market. We typically rely on our grassroots marketing efforts to build awareness of our brand and demand for our products. Our grassroots marketing efforts are often lengthy and must be tailored to each new market based on our emerging understanding of the market. We may not be able to successfully implement our grassroots marketing efforts in a particular market in a timely manner, if at all. Additionally, we may be unsuccessful in identifying new markets where our technical athletic apparel and other products and brand image will be accepted or the performance of our stores will be considered successful.

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Our ability to source our merchandise profitably or at all could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.
The United States and the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. We have expanded our relationships with suppliers outside of China, which among other things has resulted in increased costs and shipping times for some products. Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards, and customs restrictions, could increase the cost or reduce the supply of products available to us or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition and results of operations.
The U.S. government could impose a border adjustment tax, which could have a material adverse effect on our business, financial condition and operating results. We are also dependent on international trade agreements and regulations. If the United States were to withdraw from or materially modify certain international trade agreements, our business could be adversely affected.
Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators and negative publicity.
The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the United States, the Competition Bureau and Health Canada in Canada, as well as by various other federal, state, provincial, local and international regulatory authorities in the countries in which our products are distributed or sold. If we fail to comply with any of these regulations, we could become subject to enforcement actions or the imposition of significant penalties or claims, which could harm our results of operations or our ability to conduct our business. In addition, the adoption of new regulations or changes in the interpretation of existing regulations may result in significant compliance costs or discontinuation of product sales and could impair the marketing of our products, resulting in significant loss of net revenue.
Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery laws applicable to our operations. In many foreign countries, particularly in those with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other U.S. and foreign laws and regulations applicable to us. Although we have implemented procedures designed to ensure compliance with the FCPA and similar laws, some of our employees, agents, or other channel partners, as well as those companies to which we outsource certain of our business operations, could take actions in violation of our policies. Any such violation could have a material and adverse effect on our business.
Our future success is substantially dependent on the continued service of our senior management.
Our future success is substantially dependent on the continued service of our senior management and other key employees. In the last several years, several members of our senior management team have left us and we have focused time and resources on recruiting the new members of our current management team. The continued turnover of senior management and the loss of key members of our executive team could have a negative impact on our ability to manage and grow our business effectively. In addition, if we're not effective with our succession planning, it may have a negative impact on our ability to fill senior management roles in a timely manner.
We do not maintain a key person life insurance policy on any of the members of our senior management team. As a result, we would have no way to cover the financial loss if we were to lose the services of members of our senior management team.
Our business is affected by seasonality.
Our business is affected by the general seasonal trends common to the retail apparel industry. This seasonality may adversely affect our business and cause our results of operations to fluctuate, and, as a result, we believe that comparisons of our operating results between different quarters within a single fiscal year are not necessarily meaningful and that results of operations in any period should not be considered indicative of the results to be expected for any future period.

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Because a significant portion of our net revenue and expenses are generated in countries other than the United States, fluctuations in foreign currency exchange rates have affected our results of operations and may continue to do so in the future.
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 for the foreseeable future. The potential impact of currency fluctuation increases as our 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
foreign exchange revaluation gains by our Canadian subsidiaries on U.S. dollar cash and receivables denominated in U.S. dollars.
During the first quarter of fiscal 2017 , the change in the relative value of the U.S. dollar against the Canadian dollar resulted in a $32.7 million increase in accumulated other comprehensive loss within stockholders' equity. During the first quarter of fiscal 2016 , the change in the relative value of the U.S. dollar against the Canadian dollar resulted in a $68.1 million reduction 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 quarter of fiscal 2017 would have resulted in additional income from operations of approximately $3.5 million in the first quarter of fiscal 2017 . This assumes a consistent 10% appreciation in the U.S. dollar against the Canadian dollar throughout the first quarter of fiscal 2017 . 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 these risks, we may enter into derivative financial instruments. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.
The operations of many of our suppliers are subject to additional risks that are beyond our control and that could harm our business, financial condition, and results of operations.
Almost all of our suppliers are located outside of North America. During fiscal 2016, approximately 47% of our products were produced in South East Asia, approximately 28% in South Asia, approximately 15% in China, approximately 1% in North America, and the remainder in other regions. As a result of our international suppliers, we are subject to risks associated with doing business abroad, including:
political unrest, terrorism, labor disputes, and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;
the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, duties, taxes and other charges on imports, as well as trade restrictions and restrictions on currency exchange or the transfer of funds;
reduced protection for intellectual property rights, including trademark protection, in some countries, particularly China;
disruptions or delays in shipments; and
changes in local economic conditions in countries where our manufacturers, suppliers, or guests are located.

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These and other factors beyond our control could interrupt our suppliers' production in offshore facilities, influence the ability of our suppliers to export our products cost-effectively or at all and inhibit our suppliers' ability to procure certain materials, any of which could harm our business, financial condition, and results of operations.
Our trademarks and other proprietary rights could potentially conflict with the rights of others and we may be prevented from selling some of our products.
Our success depends in large part on our brand image. We believe that our trademarks and other proprietary rights have significant value and are important to identifying and differentiating our products from those of our competitors and creating and sustaining demand for our products. We have obtained and applied for some United States and foreign trademark registrations, and will continue to evaluate the registration of additional trademarks as appropriate. However, some or all of these pending trademark applications may not be approved by the applicable governmental authorities. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge these registrations. Additionally, we may face obstacles as we expand our product line and the geographic scope of our sales and marketing. Third parties may assert intellectual property claims against us, particularly as we expand our business and the number of products we offer. Our defense of any claim, regardless of its merit, could be expensive and time consuming and could divert management resources. Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products. In addition, resolution of claims may require us to redesign our products, license rights from third parties, or cease using those rights altogether. Any of these events could harm our business and cause our results of operations, liquidity, and financial condition to suffer.
We are subject to periodic claims and litigation that could result in unexpected expenses and could ultimately be resolved against us.
From time to time, we are involved in litigation and other proceedings, including matters related to product liability claims, stockholder class action and derivative claims, commercial disputes and intellectual property, as well as trade, regulatory, employment, and other claims related to our business. Any of these proceedings could result in significant settlement amounts, damages, fines or other penalties, divert financial and management resources, and result in significant legal fees. An unfavorable outcome of any particular proceeding could exceed the limits of our insurance policies or the carriers may decline to fund such final settlements and/or judgments and could have an adverse impact on our business, financial condition, and results of operations. In addition, any proceeding could negatively impact our reputation among our guests and our brand image.
Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our securities.
Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our board of directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.
Anti-takeover provisions of Delaware law and our certificate of incorporation and bylaws could delay and discourage takeover attempts that stockholders may consider to be favorable.
Certain provisions of our certificate of incorporation and bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult or impossible for a third-party to acquire control of us or effect a change in our board of directors and management. These provisions include:
the classification of our board of directors into three classes, with one class elected each year;
prohibiting cumulative voting in the election of directors;
the ability of our board of directors to issue preferred stock without stockholder approval;
the ability to remove a director only for cause and only with the vote of the holders of at least 66 2/3% of our voting stock;
a special meeting of stockholders may only be called by our chairman or Chief Executive Officer, or upon a resolution adopted by an affirmative vote of a majority of the board of directors, and not by our stockholders;

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prohibiting stockholder action by written consent; and
our stockholders must comply with advance notice procedures in order to nominate candidates for election to our board of directors or to place stockholder proposals on the agenda for consideration at any meeting of our stockholders.
In addition, we are governed by Section 203 of the Delaware General Corporation Law which, subject to some specified exceptions, prohibits "business combinations" between a Delaware corporation and an "interested stockholder," which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation's voting stock, for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding our purchases of shares of our common stock during the quarter ended April 30, 2017 related to our stock repurchase program:
Period (1)
 
Total Number of Shares Purchased (2)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
January 30, 2017 - February 26, 2017
 

 
$

 

 
$
99,230,880

February 27, 2017 - April 2, 2017
 
54,322

 
63.97

 
54,322

 
95,755,762

April 3, 2017 - April 30, 2017
 
180,083

 
51.78

 
180,083

 
86,431,201

Total
 
234,405

 
 
 
234,405

 
 
__________
(1)  
Monthly information is presented by reference to our fiscal periods during our first quarter of fiscal 2017 .
(2)  
Our stock repurchase program was approved by our board of directors in December 2016. Common shares generally are repurchased in the open market at prevailing market prices, including under written plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of common shares repurchased depending upon market conditions, eligibility to trade, and other factors. The repurchases may be made through and including December 9, 2018, and the maximum dollar value of shares that may be repurchased is $100.0 million.
The following table provides information regarding our purchases of shares of our common stock during the quarter ended April 30, 2017 related to our Employee Share Purchase Plan:
Period (1)
 
Total Number of Shares Purchased (2)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)
January 30, 2017 - February 26, 2017
 
9,871

 
$
66.54

 
9,871

 
5,029,935

February 27, 2017 - April 2, 2017
 
11,062

 
63.40

 
11,062

 
5,018,873

April 3, 2017 - April 30, 2017
 
12,410