lululemon athletica, inc.
lululemon athletica inc. (Form: 10-Q, Received: 05/31/2018 16:21:18)
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 29, 2018
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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 28, 2018 , there were 125,914,467 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At May 28, 2018 , there were outstanding 9,776,421 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 28, 2018 , the registrant had outstanding 9,776,421 shares of special voting stock, through which the holders of exchangeable shares of Lulu Canadian Holding, Inc. may exercise their voting rights with respect to the registrant. The special voting stock and the registrant's common stock generally vote together as a single class on all matters on which the common stock is entitled to vote.
 


Table of Contents


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

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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 29,
2018
 
January 28,
2018
ASSETS
Current assets
 
 
 
 
Cash and cash equivalents
 
$
966,571

 
$
990,501

Accounts receivable
 
21,875

 
19,173

Inventories
 
373,445

 
329,562

Prepaid and receivable income taxes
 
46,927

 
48,948

Other prepaid expenses and other current assets
 
44,037

 
48,098

 
 
1,452,855

 
1,436,282

Property and equipment, net
 
472,262

 
473,642

Goodwill and intangible assets, net
 
24,361

 
24,679

Deferred income tax assets
 
30,923

 
32,491

Other non-current assets
 
31,304

 
31,389

 
 
$
2,011,705

 
$
1,998,483

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
16,255

 
$
24,646

Accrued inventory liabilities
 
19,861

 
13,027

Accrued compensation and related expenses
 
54,261

 
70,141

Current income taxes payable
 
19,445

 
15,700

Unredeemed gift card liability
 
69,510

 
82,668

Lease termination liabilities
 
5,523

 
6,427

Other current liabilities
 
82,486

 
79,989

 
 
267,341

 
292,598

Non-current income taxes payable
 
44,078

 
48,268

Deferred income tax liabilities
 
1,582

 
1,336

Other non-current liabilities
 
62,470

 
59,321

 
 
375,471

 
401,523

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; 9,776 and 9,781 issued and outstanding
 

 

Special voting stock, $0.000005 par value: 60,000 shares authorized; 9,776 and 9,781 issued and outstanding
 

 

Common stock, $0.005 par value: 400,000 shares authorized; 125,911 and 125,650 issued and outstanding
 
630

 
628

Additional paid-in capital
 
291,352

 
284,253

Retained earnings
 
1,530,147

 
1,455,002

Accumulated other comprehensive loss
 
(185,895
)
 
(142,923
)
 
 
1,636,234

 
1,596,960

 
 
$
2,011,705

 
$
1,998,483

See accompanying notes to the unaudited interim consolidated financial statements

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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 29, 2018
 
April 30, 2017
Net revenue
 
$
649,706

 
$
520,307

Cost of goods sold
 
304,973

 
263,412

Gross profit
 
344,733

 
256,895

Selling, general and administrative expenses
 
240,428

 
199,141

Asset impairment and restructuring costs
 

 
12,331

Income from operations
 
104,305

 
45,423

Other income (expense), net
 
2,918

 
907

Income before income tax expense
 
107,223

 
46,330

Income tax expense
 
32,070

 
15,084

Net income
 
$
75,153

 
$
31,246

 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
Foreign currency translation adjustment
 
(42,972
)
 
(31,775
)
Comprehensive income (loss)
 
$
32,181

 
$
(529
)
 
 
 
 
 
Basic earnings per share
 
$
0.55

 
$
0.23

Diluted earnings per share
 
$
0.55

 
$
0.23

Basic weighted-average number of shares outstanding
 
135,502

 
137,037

Diluted weighted-average number of shares outstanding
 
135,931

 
137,192

See accompanying notes to the unaudited interim consolidated financial statements
 

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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
 
 
Exchangeable Stock
 
Special Voting Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
 
 
Shares
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
Balance at January 28, 2018
 
9,781

 
9,781

 
$

 
125,650

 
$
628

 
$
284,253

 
$
1,455,002

 
$
(142,923
)
 
$
1,596,960

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
75,153

 
 
 
75,153

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(42,972
)
 
(42,972
)
Common stock issued upon exchange of exchangeable shares
 
(5
)
 
(5
)
 

 
5

 

 

 
 
 
 
 

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
5,193

 
 
 
 
 
5,193

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
333

 
2

 
8,406

 
 
 
 
 
8,408

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(77
)
 

 
(6,500
)
 
 
 
 
 
(6,500
)
Repurchase of common stock
 
 
 
 
 
 
 

 

 

 
(8
)
 
 
 
(8
)
Balance at April 29, 2018
 
9,776

 
9,776

 
$

 
125,911

 
$
630

 
$
291,352

 
$
1,530,147

 
$
(185,895
)
 
$
1,636,234

See accompanying notes to the unaudited interim consolidated financial statements

5

Table of Contents


lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017
Cash flows from operating activities
 
 
 
 
Net income
 
$
75,153

 
$
31,246

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
26,773

 
23,163

Deferred income taxes
 
400

 
(6,927
)
Stock-based compensation expense
 
5,193

 
2,730

Asset impairment for ivivva restructuring
 

 
11,593

Settlement of derivatives not designated in a hedging relationship
 
(211
)
 

Changes in operating assets and liabilities:
 
 
 
 
Inventories
 
(50,770
)
 
(10,127
)
Prepaid and receivable income taxes
 
2,021

 
4,959

Other prepaid expenses and other current and non-current assets
 
979

 
(6,025
)
Accounts payable
 
(7,676
)
 
(15,798
)
Accrued inventory liabilities
 
7,517

 
12,368

Accrued compensation and related expenses
 
(14,157
)
 
(15,038
)
Current income taxes payable
 
4,293

 
(2,240
)
Unredeemed gift card liability
 
(12,299
)
 
(10,367
)
Non-current income taxes payable
 
(4,190
)
 

Lease termination liabilities and other current and non-current liabilities
 
2,811

 
(137
)
Net cash provided by operating activities
 
35,837

 
19,400

Cash flows from investing activities
 
 
 
 
Purchase of property and equipment
 
(34,314
)
 
(19,879
)
Net cash used in investing activities
 
(34,314
)
 
(19,879
)
Cash flows from financing activities
 
 
 
 
Proceeds from settlement of stock-based compensation
 
8,408

 
278

Taxes paid related to net share settlement of stock-based compensation
 
(6,500
)
 
(1,961
)
Repurchase of common stock
 
(8
)
 
(12,804
)
Net cash provided by (used in) financing activities
 
1,900

 
(14,487
)
Effect of exchange rate changes on cash and cash equivalents
 
(27,353
)
 
(21,591
)
Decrease in cash and cash equivalents
 
(23,930
)
 
(36,557
)
Cash and cash equivalents, beginning of period
 
$
990,501

 
$
734,846

Cash and cash equivalents, end of period
 
$
966,571

 
$
698,289

See accompanying notes to the unaudited interim consolidated financial statements


6

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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
Note 10
Note 11


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Table of Contents


lululemon athletica inc.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of operations
lululemon athletica inc., a Delaware corporation ("lululemon" and, together with its subsidiaries unless the context otherwise requires, the "Company") is engaged in the design, distribution, and retail of healthy lifestyle inspired athletic apparel. We primarily conduct our business through company-operated stores and direct to consumer through e-commerce. We also generate net revenue from outlets, sales from temporary locations, sales to wholesale accounts, showrooms, warehouse sales, and license and supply arrangements. The Company operates stores in the United States, Canada, Australia, China, the United Kingdom, New Zealand, Japan, South Korea, Germany, Singapore, Ireland, and Switzerland. There were a total of 411 and 404 company-operated stores in operation as of April 29, 2018 and January 28, 2018 , respectively.
Basis of presentation
The unaudited interim consolidated financial statements as of April 29, 2018 and for the quarters ended April 29, 2018 and April 30, 2017 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 28, 2018 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended January 28, 2018 , which are included in Item 8 in the Company's fiscal 2017 Annual Report on Form 10-K filed with the SEC on March 27, 2018 . 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 2017 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 2018 will end on February 3, 2019 and will be a 53-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

Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,  Revenue from Contracts with Customers ("ASC 606") which supersedes the revenue recognition requirements in ASC 605 Revenue Recognition . This ASU 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.
The Company adopted ASC 606 on January 29, 2018 on a modified retrospective basis. There were no changes to the consolidated statement of operations as a result of the adoption, and the timing and amount of its revenue recognition remained substantially unchanged under this new guidance. Under the provisions of ASC 606, the Company is now required to present its provision for sales returns on a gross basis, rather than a net basis. The Company's liability for sales return refunds is recognized within other current liabilities, and the Company now presents an asset for the value of inventory which is expected to be returned within other current assets on the consolidated balance sheets. Under the modified retrospective approach, the comparative prior period information has not been restated for this change.

8



The effect of adoption of ASC 606 on the Company's consolidated balance sheet as of April 29, 2018 was as follows:
 
 
April 29, 2018
 
 
As Reported
 
Adjustment for ASC 606
 
Balances Without Adoption of ASC 606
 
 
(In thousands)
Other prepaid expenses and other current assets
 
$
44,037

 
$
(2,579
)
 
$
41,458

Current assets
 
1,452,855

 
(2,579
)
 
1,450,276

Total assets
 
2,011,705

 
(2,579
)
 
2,009,126

 
 
 
 
 
 

Other current liabilities
 
82,486

 
2,579

 
85,065

Current liabilities
 
267,341

 
2,579

 
269,920

Total liabilities
 
375,471

 
2,579

 
378,050

In May 2017, the FASB amended ASC 718,  Stock Compensation , to reduce diversity in practice and to clarify when a change to the terms or conditions of a share-based payment award must be accounted for as a modification and will result in fewer changes to the terms of an award being accounted for as modifications. The new guidance was effective beginning in the first quarter of fiscal 2018 and will apply on a prospective basis. The Company does not expect it to have a material impact on its consolidated financial statements.
Accounting policies as a result of recently adopted accounting pronouncements
Revenue recognition
Net revenue is comprised of company-operated store net revenue, direct to consumer net revenue through websites and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via the Company's distribution centers, and other net revenue, which includes revenue from outlets, temporary locations, sales to wholesale accounts, showrooms, warehouse sales, and license and supply arrangement net revenue, which consists of royalties as well as sales of the Company's products to licensees. All revenue is reported net of sales taxes collected from customers on behalf of taxing authorities.
Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the Company's customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the product. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Revenue from company-operated stores and other retail locations is recognized at the point of sale. Direct to consumer revenue and sales to wholesale accounts are recognized upon receipt by the customer.
Revenue is presented net of an allowance for estimated returns, which is based on historic experience. The Company's liability for sales return refunds is recognized within other current liabilities, and an asset for the value of inventory which is expected to be returned is recognized within other prepaid expenses and other current assets on the consolidated balance sheets.
Shipping fees billed to customers are recorded as revenue, and shipping costs are recognized within selling, general and administrative expenses in the same period the related revenue is recognized.
Proceeds from the sale of gift cards are initially deferred and recognized as within unredeemed gift card liability on the consolidated balance sheets, and are recognized as revenue when tendered for payment. Based on historical experience, and to the extent there is no requirement to remit unclaimed card balances to government agencies, an estimate of the gift card balances that will never be redeemed is recognized as revenue in proportion to gift cards which have been redeemed.
Recently issued accounting pronouncements
In February 2016, the FASB issued ASC 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. The Company is continuing to evaluate the impact that this new guidance will have on its consolidated financial statements, including its disclosures, and the method of adoption. 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

9



sheets. This will result in a significant increase in assets and liabilities on the Company's consolidated balance sheets. In preparation for the adoption of ASC 842, the Company is in the process of implementing certain key system changes to enable the preparation of necessary financial information and is evaluating the impact that this new guidance will have on its processes and controls.
In August 2017, the FASB amended ASC 815, Derivatives and Hedging to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. It will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This guidance will be effective for the Company beginning in its first quarter of fiscal 2019, with early application permitted. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements.
In January 2018, the FASB released guidance on the accounting for the global intangible low-taxed income ("GILTI") provisions of the tax bill H.R.1, commonly known as the U.S. Tax Cuts and Jobs Act ("U.S. tax reform"). The GILTI provisions impose a tax on foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary's tangible assets. The guidance indicates that an accounting policy election can be made to treat the GILTI tax as either a current tax in the period in which it is incurred or as a deferred tax. The Company has not yet made its accounting policy election but will do so during the one-year measurement period as allowed by the SEC. In accordance with the FASB guidance, until an accounting policy election is made, any taxes related to the GILTI provisions will be treated as a current income tax expense in the period incurred.
In February 2018, the FASB amended ASC 220,  Income Statement—Reporting Comprehensive Income . ASC 740,  Income Taxes , requires that the effect of a change in tax laws or rates on deferred tax assets and liabilities be included in income from continuing operations. In situations in which the tax effects of a transaction were initially recognized directly in other comprehensive income, this results in "stranded" amounts in accumulated other comprehensive income related to the income tax rate differential. The amendments to ASC 220 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of the U.S. tax reform. The guidance in the ASU is effective for the Company beginning in its first quarter of fiscal 2019 with early adoption permitted. The Company is currently evaluating the impact that this new guidance may have on its statement of shareholders' equity, and the timing of adoption.
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 $5.2 million and $2.7 million for the quarters ended April 29, 2018 and April 30, 2017 , respectively. Total unrecognized compensation cost for all stock-based compensation plans was $62.1 million at April 29, 2018 , which is expected to be recognized over a weighted-average period of 2.5  years.

10



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 29, 2018 , 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 28, 2018
 
1,117

 
$
56.44

 
329

 
$
60.42

 
21

 
$
52.45

 
427

 
$
57.54

Granted
 
297

 
85.63

 
82

 
85.93

 

 

 
207

 
83.95

Exercised/released
 
155

 
54.08

 
39

 
63.04

 

 

 
137

 
59.35

Forfeited/expired
 
240

 
57.13

 
115

 
60.79

 

 

 
16

 
58.33

Balance at April 29, 2018
 
1,019

 
$
65.17

 
257

 
$
68.03

 
21

 
$
52.45

 
481

 
$
68.35

Exercisable at April 29, 2018
 
268

 
$
57.67

 
 
 
 
 
 
 
 
 
 
 
 
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 are weighted averages of the assumptions that were used in calculating the fair value of stock options granted in the first quarter of fiscal 2018 :
 
 
Quarter Ended
 April 29, 2018
Expected term
 
3.75 years

Expected volatility
 
36.88
%
Risk-free interest rate
 
2.46
%
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 authorized to be purchased under the ESPP is 6.0 million  shares. All shares purchased under the ESPP are purchased in the open market. During the quarter ended April 29, 2018 , there were 25.6 thousand  shares purchased.
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

11



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  $1.7 million and $1.4 million in the first quarter of fiscal 2018 and fiscal 2017 , respectively.
NOTE 4 . FAIR VALUE MEASUREMENT
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - defined as observable inputs such as quoted prices in active markets;
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of April 29, 2018 and January 28, 2018 , the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
 
 
April 29, 2018
 
Level 1
 
Level 2
 
Level 3
 
Balance Sheet Classification
 
 
(In thousands)
 
 
Money market funds
 
$
212,629

 
$
212,629

 
$

 
$

 
Cash and cash equivalents
Treasury bills
 
86,637

 
86,637

 

 

 
Cash and cash equivalents
Term deposits
 
371,940

 

 
371,940

 

 
Cash and cash equivalents
Net forward currency contract assets
 
2,047

 

 
2,047

 

 
Other prepaid expenses and other current assets
Net forward currency contract liabilities
 
1,947

 

 
1,947

 

 
Other current liabilities
 
 
January 28, 2018
 
Level 1
 
Level 2
 
Level 3
 
Balance Sheet Classification
 
 
(In thousands)
 
 
Term deposits
 
$
258,238

 
$

 
$
258,238

 
$

 
Cash and cash equivalents
The Company records accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds, Treasury bills, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. They are presented at their gross fair values. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company has impaired certain long-lived assets and recorded them at their estimated fair value on a non-recurring basis. The fair value of these long-lived assets was determined using Level 3 inputs, principally the present value of the estimated future cash flows expected from their use and eventual disposition. Please refer to Note  6  of these unaudited interim consolidated financial statements for further details regarding the impairment of long-lived assets as a result of the ivivva restructuring. Also as a result of the ivivva restructuring, the Company recorded lease termination liabilities at fair value, determined using Level 3 inputs based on remaining lease rentals and reduced by estimated sublease income.

12



NOTE 5 . DERIVATIVE FINANCIAL INSTRUMENTS
Foreign exchange risk
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company currently hedges against changes in the Canadian dollar to U.S. dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign exchange gains and losses which arise on translation of its foreign subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These forward currency contracts are designated as net investment hedges. The effective portions of the hedges are reported in accumulated other comprehensive income or loss and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated. Hedge effectiveness is measured using a method based on changes in forward exchange rates. The Company recorded no ineffectiveness from net investment hedges during the quarter ended April 29, 2018 .
The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.
Derivatives not designated as hedging instruments
The Company is exposed to gains and losses arising from changes in foreign exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the quarter ended April 29, 2018 , the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian subsidiaries on U.S. dollar denominated monetary assets and liabilities. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses.
The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows.
Outstanding notional amounts
The Company had foreign exchange forward contracts outstanding with the following notional amounts:
 
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands)
Derivatives designated as net investment hedges
 
$
262,000

 
$

Derivatives not designated in a hedging relationship
 
240,000

 

The forward currency contracts designated as net investment hedges mature on different dates between June 2018 and October 2018.
The forward currency contracts not designated in a hedging relationship mature on different dates between May 2018 and October 2018.

13



Quantitative disclosures about derivative financial instruments
The Company presents its derivative assets and derivative liabilities at their gross fair values within other prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of April 29, 2018 , there were derivative assets of $1.7 million and derivative liabilities of $1.6 million subject to enforceable netting arrangements.
The fair values of forward currency contracts were as follows:
 
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands)
Net forward currency contract assets, recognized within other prepaid expenses and other current assets:
 
 
 
 
Derivatives designated as net investment hedges
 
$
2,047

 
$

Net forward currency contract liabilities, recognized within other current liabilities:
 
 
 
 
 Derivatives not designated in a hedging relationship
 
1,947

 

The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income are as follows:
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands)
Gains recognized in foreign currency translation adjustment:
 
 
 
 
Derivatives designated as net investment hedges
 
$
10,818

 
$

No gains or losses have been reclassified from accumulated other comprehensive income into net income for derivative financial instruments in a net investment hedging relationship, as the Company has not sold or liquidated (or substantially liquidated) its hedged subsidiary.
The pre-tax net foreign exchange and derivative gains and losses recorded in the consolidated statement of operations are as follows:
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands)
Gains (losses) recognized in selling, general and administrative expenses:
 
 
 
 
Foreign exchange gains
 
$
9,645

 
$
5,792

Derivatives not designated in a hedging relationship
 
(10,048
)
 

Net foreign exchange and derivative (losses) gains
 
$
(403
)
 
$
5,792

Credit risk
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the forward currency contracts. The credit risk amount is the Company's unrealized gains on its derivative instruments, based on foreign currency rates at the time of nonperformance.
The Company's forward currency contracts are entered into with large, reputable financial institutions that are monitored by the Company for counterparty risk.
The Company's derivative contracts contain certain credit risk-related contingent features. Under certain circumstances, including an event of default, bankruptcy, termination, and cross default under the Company's revolving credit facility, the Company may be required to make immediate payment for outstanding liabilities under its derivative contracts.
NOTE  6 . ASSET IMPAIRMENT AND RESTRUCTURING
During fiscal 2017, the Company restructured its ivivva operations. On August 20, 2017 , the Company closed 48 of its 55 ivivva branded company-operated stores and all other ivivva branded temporary locations. As a result of this restructuring, the

14



Company recognized aggregate pre-tax charges  $47.2 million  during fiscal 2017, inclusive of $17.7 million recognized during the first quarter of fiscal 2017. The results for the first quarter of fiscal 2018 did not include any adjustments related to the restructuring of its ivivva operations.
A summary of the pre-tax charges recognized in connection with the Company's restructuring of its ivivva operations is as follows:
 
 
Quarter Ended
 
 
April 29, 2018
 
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

 
 

 
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

Restructuring and related costs
 
$

 
$
17,750

An income tax recovery of $4.7 million was recorded on the above items in the first quarter of fiscal 2017 based on the expected annual tax rate of the applicable tax jurisdictions.
Costs recorded in cost of goods sold
During the first quarter of fiscal 2017, the Company recognized expenses of $5.4 million in cost of goods sold as a result of the restructuring of 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 during the first quarter of fiscal 2017 as a result of the restructuring of 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. These assets were retired during the third quarter of fiscal 2017 in conjunction with the closures of the company-operated stores.
During the first quarter of fiscal 2017, the Company recognized employee related expenses as a result of the restructuring of $0.7 million .
The results for the first quarter of fiscal 2018 did not include any adjustments related to the restructuring of the ivivva operations. As of April 29, 2018 , the Company had lease termination liabilities of $5.5 million .
NOTE  7 . INCOME TAXES
The U.S. tax reform was enacted on December 22, 2017 and introduced significant changes to U.S. income tax laws. The U.S. tax reform reduced the U.S. federal income tax rate from 35% to 21%, introduced a shift to a territorial tax system and changed how foreign earnings are subject to U.S. tax, and imposed a mandatory one-time transition tax on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries. The U.S. tax reform also introduced new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the GILTI tax and the base erosion anti-abuse tax. Accounting for the income tax effects of the U.S. tax reform is complex and requires significant judgement and estimates in the interpretation and calculations of its provisions.

15



The SEC issued Staff Accounting Bulletin 118 ("SAB 118") which allows companies to record provisional estimates of the impacts of the U.S. tax reform within a one year measurement period. As disclosed in Note 14 to the audited consolidated financial statements included in Item 8 of the Company's fiscal 2017 Annual Report on Form 10-K filed with the SEC on March 27, 2018 , the Company recorded certain provisional amounts in the fourth quarter of fiscal 2017 and expects the accounting for the income tax effects of the U.S. tax reform to be completed in fiscal 2018.
As the Company completes its analysis of the U.S. tax reform it may make adjustments to the provisional amounts recognized during fiscal 2017, and will incorporate any additional interpretations or guidance that may be issued. The Company may also identify additional effects not reflected as of  April 29, 2018 . Any such adjustments may materially impact the provision for income taxes and the effective income tax rate in the period in which the adjustments are made.
As of  April 29, 2018 , no deferred income tax liabilities have been recognized on any of the undistributed earnings of the Company's foreign subsidiaries as these earnings were indefinitely reinvested outside of the United States. The Company is continuing to evaluate the impact that the U.S. tax reform will have upon the taxes which may become payable upon repatriation, its reinvestment plans, and the most efficient means of deploying its capital resources globally. As this analysis has not yet been completed, it is possible that amounts determined to be indefinitely reinvested outside of the U.S. may ultimately be repatriated, resulting in additional tax liabilities being recognized.
NOTE 8. EARNINGS PER SHARE
The details of the computation of basic and diluted earnings per share are as follows:
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands, except per share amounts)
Net income
 
$
75,153

 
$
31,246

Basic weighted-average number of shares outstanding
 
135,502

 
137,037

Assumed conversion of dilutive stock options and awards
 
429

 
155

Diluted weighted-average number of shares outstanding
 
135,931

 
137,192

Basic earnings per share
 
$
0.55

 
$
0.23

Diluted earnings per share
 
$
0.55

 
$
0.23

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 29, 2018 and April 30, 2017 , 0.1 million and 0.3 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 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 . This stock repurchase program was completed during the third quarter of fiscal 2017.
On November 29, 2017, the Company's board of directors approved a stock repurchase program for up to  $200.0 million  of its common shares in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements, and the repurchase program is expected to be completed in  two  years. As of April 29, 2018 , the remaining aggregate value of shares available to be repurchased under this program was $199.0 million .
During the quarters ended April 29, 2018 and April 30, 2017 , 100 and 0.2 million shares, respectively, were repurchased under the program at a total cost of $7.5 thousand and $12.8 million , respectively.
Subsequent to April 29, 2018 , and up to May 28, 2018 , no shares were repurchased.

16



NOTE 9. SUPPLEMENTARY FINANCIAL INFORMATION
A summary of certain consolidated balance sheet accounts is as follows:
 
 
April 29,
2018
 
January 28,
2018
 
 
(In thousands)
Inventories:
 
 
 
 
Finished goods
 
$
389,921

 
$
344,695

Provision to reduce inventories to net realizable value
 
(16,476
)
 
(15,133
)
 
 
$
373,445

 
$
329,562

Property and equipment, net:
 
 
 
 
Land
 
$
79,907

 
$
83,048

Buildings
 
38,213

 
39,278

Leasehold improvements
 
305,304

 
301,449

Furniture and fixtures
 
92,739

 
91,778

Computer hardware
 
64,052

 
61,734

Computer software
 
181,409

 
173,997

Equipment and vehicles
 
14,720

 
14,806

Work in progress
 
58,059

 
51,260

Property and equipment, gross
 
834,403

 
817,350

Accumulated depreciation
 
(362,141
)
 
(343,708
)
 
 
$
472,262

 
$
473,642

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

 
$
25,496

Changes in foreign currency exchange rates
 
(1,151
)
 
(890
)
 
 
24,345

 
24,606

Intangible assets, net
 
16

 
73

 
 
$
24,361

 
$
24,679

Other non-current assets:
 
 
 
 
Security deposits
 
$
12,678

 
$
11,599

Deferred lease assets
 
9,742

 
10,458

Other
 
8,884

 
9,332

 
 
$
31,304

 
$
31,389

Other current liabilities:
 
 
 
 
Accrued duty, freight, and other operating expenses
 
$
42,427

 
$
33,695

Sales tax collected
 
12,365

 
11,811

Sales return allowances
 
7,918

 
6,293

Accrued rent
 
5,866

 
7,074

Accrued capital expenditures
 
3,860

 
5,714

Forward currency contract liabilities
 
1,947

 
8,771

Other
 
8,103

 
6,631

 
 
$
82,486

 
$
79,989

Other non-current liabilities:
 
 
 
 
Deferred lease liabilities
 
$
27,230

 
$
27,186

Tenant inducements
 
29,604

 
26,250

Other
 
5,636

 
5,885

 
 
$
62,470

 
$
59,321


17



NOTE 10. 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 and mobile apps. Outlets, temporary locations, sales to wholesale accounts, showrooms, warehouse sale net revenue and license and supply arrangements have been combined into other. During the first quarter of fiscal 2018 , the Company reviewed its general corporate expenses and determined certain costs which were previously classified as general corporate expense are more appropriately classified within the direct to consumer segment. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands)
Net revenue:
 
 
 
 
Company-operated stores
 
$
433,131

 
$
379,099

Direct to consumer
 
157,843

 
97,223

Other
 
58,732

 
43,985

 
 
$
649,706

 
$
520,307

Income from operations before general corporate expense:
 
 
 
 
Company-operated stores
 
$
99,287

 
$
77,499

Direct to consumer
 
62,267

 
34,098

Other
 
11,223

 
2,836

 
 
172,777

 
114,433

General corporate expense
 
68,472

 
51,260

Restructuring and related costs
 

 
17,750

Income from operations
 
104,305

 
45,423

Other income (expense), net
 
2,918

 
907

Income before income tax expense
 
$
107,223

 
$
46,330

 
 
 
 
 
Capital expenditures:
 
 
 
 
Company-operated stores
 
$
19,236

 
$
7,168

Direct to consumer
 
721

 
1,980

Corporate and other
 
14,357

 
10,731

 
 
$
34,314

 
$
19,879

Depreciation and amortization:
 
 
 
 
Company-operated stores
 
$
17,082

 
$
15,200

Direct to consumer
 
2,599

 
1,994

Corporate and other
 
7,092

 
5,969

 
 
$
26,773

 
$
23,163



18



The following table disaggregates the Company's net revenue by geographic area. The economic conditions in these areas could affect the amount and timing of the Company's net revenue and cash flows.
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands)
United States
 
$
462,270

 
$
379,467

Canada
 
112,149

 
91,646

Outside of North America
 
75,287

 
49,194

 
 
$
649,706

 
$
520,307

NOTE  11 . LEGAL PROCEEDINGS
In addition to the legal matters described below, the Company is, from time to time, involved in routine legal matters incidental to the conduct of its business, including legal matters such as initiation and defense of proceedings to protect intellectual property rights, personal injury claims, product liability claims, 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.
On December 20, 2017, former lululemon employee Shayla Famouri filed a lawsuit in Los Angeles Superior Court against the Company and a former employee of the Company. The plaintiff alleges claims for sexual assault and battery, sexual harassment, retaliation, creating a hostile work environment and related claims. The complaint seeks damages in the amount of $3.0 million , as well as non-monetary relief such as policy change and an apology. The Company intends to vigorously defend this matter.
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, 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.

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This information should be read in conjunction with the unaudited interim consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our fiscal 2017 Annual Report on Form 10-K filed with the SEC on March 27, 2018 .
We disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.lululemon.com/), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls, and webcasts.
Overview
lululemon athletica inc. is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. We have a mission to create transformational products and experiences which enable people to live a life they love, and have developed a brand for those pursuing an active, mindful lifestyle. Since our inception, we have fostered a distinctive corporate culture; we promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection, and choosing to have fun. These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose of "elevating the world through the power of practice."
Our healthy lifestyle inspired athletic apparel and accessories are marketed under the lululemon and ivivva brand names. We offer a comprehensive line of apparel and accessories for women, men, and female youth. Our apparel assortment includes items such as pants, shorts, tops, and jackets designed for a healthy lifestyle and athletic activities such as yoga, running, training, and most other sweaty pursuits. We also offer fitness-related accessories, including items such as bags, socks, underwear, yoga mats and equipment, and water bottles.
During fiscal 2017, we restructured our ivivva operations. On August 20, 2017 , we closed 48 of our 55 ivivva branded company-operated stores and all other ivivva branded temporary locations.
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 for the first quarter of fiscal 2017 exclude these charges and their related tax effects. The results for the first quarter of fiscal 2018 did not include any costs related to the restructuring of our ivivva operations.
For the first quarter of fiscal 2018 , compared to the first quarter of fiscal 2017 :
Net revenue increase d 25% to $649.7 million . On a constant dollar basis, net revenue increased 23% .
Total comparable sales, which includes comparable store sales and direct to consumer, increased 20% . On a constant dollar basis, total comparable sales increased 19% .
Comparable store sales increased 8% , or increased 6% on a constant dollar basis.
Direct to consumer net revenue increased 62% , or increased 60% on a constant dollar basis.
Gross profit increase d 34% to $344.7 million . It increased 31% compared to adjusted gross profit for the first quarter of fiscal 2017 .
Gross margin increase d 370 basis points to 53.1% . It increased 270 basis points compared to adjusted gross margin for the first quarter of fiscal 2017 .
Income from operations increase d 130% to $104.3 million . It increased 65% compared to adjusted income from operations for the first quarter of fiscal 2017 .
Operating margin increase d 740 basis points to 16.1% . It increased 400 basis points compared to adjusted operating margin for the first quarter of fiscal 2017 .
Income tax expense increase d 113% to $32.1 million . Our effective tax rate for the first quarter of fiscal 2018 was 29.9% compared to 32.6% for the first quarter of fiscal 2017 . The adjusted effective tax rate was 30.8% in the first quarter of fiscal 2017 .
Diluted earnings per share were $0.55 compared to $0.23 in the first quarter of fiscal 2017 . Adjusted diluted earnings per share were $0.32 for the first quarter of fiscal 2017 .

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Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and adjusted gross profit, gross margin, income from operations, operating margin, income tax expense, effective tax rates, and diluted earnings per share, and the most directly comparable measures calculated in accordance with GAAP.
Results of Operations
First Quarter Results
The following table summarizes key components of our results of operations for the quarters ended April 29, 2018 and April 30, 2017 . The percentages are presented as a percentage of net revenue.
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017

April 29, 2018
 
April 30, 2017
 
 
(In thousands)
 
(Percentages)
Net revenue
 
$
649,706

 
$
520,307

 
100.0
%
 
100.0
%
Cost of goods sold
 
304,973

 
263,412

 
46.9

 
50.6

Gross profit
 
344,733

 
256,895

 
53.1

 
49.4

Selling, general and administrative expenses
 
240,428

 
199,141

 
37.0

 
38.3

Asset impairment and restructuring costs
 

 
12,331

 

 
2.4

Income from operations
 
104,305

 
45,423

 
16.1

 
8.7

Other income (expense), net
 
2,918

 
907

 
0.4

 
0.2

Income before income tax expense
 
107,223

 
46,330

 
16.5

 
8.9

Income tax expense
 
32,070

 
15,084

 
4.9

 
2.9

Net income
 
$
75,153

 
$
31,246

 
11.6
%
 
6.0
%
Net Revenue
Net revenue increase d $129.4  million, or 25% , to $649.7 million for the first quarter of fiscal 2018 from $520.3  million for the first quarter of fiscal 2017 . On a constant dollar basis, assuming the average exchange rates for the first quarter of fiscal 2018 remained constant with the average exchange rates for the first quarter of fiscal 2017 , net revenue increased $120.3 million , or 23% .
The increase in net revenue was primarily due increased direct to consumer net revenue, net revenue generated by new company-operated stores, and an increase in comparable store sales. Total comparable sales, which includes comparable store sales and direct to consumer, increased 20% in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 . Total comparable sales increased 19% on a constant dollar basis.
Net revenue on a segment basis for the quarters ended April 29, 2018 and April 30, 2017 is summarized below. The percentages are presented as a percentage of total net revenue.
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands)
 
(Percentages)
Company-operated stores
 
$
433,131

 
$
379,099

 
66.7
%
 
72.9
%
Direct to consumer
 
157,843

 
97,223

 
24.3

 
18.7

Other
 
58,732

 
43,985

 
9.0

 
8.5

Net revenue
 
$
649,706

 
$
520,307

 
100.0
%
 
100.0
%
Company-Operated Stores.  Net revenue from our company-operated stores segment increase d $54.0 million , or 14% , to $433.1 million in the first quarter of fiscal 2018 from $379.1 million in the first quarter of fiscal 2017 . The following contributed to the increase in net revenue from our company-operated stores segment:
Net revenue from company-operated stores we opened or significantly expanded subsequent to April 30, 2017 , and therefore not included in comparable store sales, contributed $42.7 million to the increase . We opened 48 net new

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lululemon branded company-operated stores since the first quarter of fiscal 2017 , including 28 stores in North America, 14 stores in Asia, three stores in Australia/New Zealand, and three stores in Europe.
A comparable store sales increase of 8% in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 resulted in a $22.9 million increase to net revenue. Comparable store sales increased 6% , or $18.5 million on a constant dollar basis. The increase in comparable store sales was primarily a result of improved conversion rates and increased store traffic. This was partially offset by a decrease in dollar value per transaction.
These increases in net revenue were partially offset by the closure of 48 of our ivivva branded company-operated stores as part of the restructuring of our ivivva operations. These closures reduced our net revenue from company-operated stores for the first quarter of fiscal 2018 by $11.6 million compared to the first quarter of fiscal 2017 .
Direct to Consumer.  Net revenue from our direct to consumer segment increased $60.6 million , or 62% , to $157.8 million in the first quarter of fiscal 2018 from $97.2 million in the first quarter of fiscal 2017 . Direct to consumer net revenue increased 60% on a constant dollar basis. This was primarily a result of increased website traffic, improved conversion, and increased dollar value per transaction.
Other.  Net revenue from our other segment increase d $14.7 million , or 34% , to $58.7 million in the first quarter of fiscal 2018 from $44.0 million in the first quarter of fiscal 2017 . This increase was primarily the result of an increased number of outlets and increased net revenue at existing outlets during the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 . There was also an increase in net revenue from temporary locations, including seasonal stores. The increase in net revenue from our other segment was partially offset by lower net revenue from showrooms, primarily due to a decreased number of showrooms open during the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 .
Gross Profit
Gross profit increase d $87.8 million , or 34% , to $344.7 million for the first quarter of fiscal 2018 from $256.9 million for the first quarter of fiscal 2017 .
Gross profit as a percentage of net revenue, or gross margin, increase d 370  basis points to 53.1% in the first quarter of fiscal 2018 from 49.4% in the first quarter of fiscal 2017 . The increase in gross margin was primarily the result of:
an increase in product margin of 120 basis points, which was primarily due to a favorable mix of higher margin product and lower product costs, lower markdowns, and lower inventory provision expense;
a decrease in fixed costs as a percentage of revenue, including occupancy and depreciation costs and costs related to our product and supply chain departments, of 120 basis points;
a favorable impact of foreign exchange rates of 30 basis points; and
the costs incurred in the first quarter of fiscal 2017 in connection with the restructuring of our ivivva operations, which reduced gross margin in that quarter by 100 basis points.
During the first quarter of fiscal 2017 , as a result of the restructuring of our ivivva operations, we recognized costs totaling $5.4 million within costs of goods sold, as outlined in Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report. Excluding these charges from the comparatives for the first quarter of fiscal 2017 , gross profit increased 31% and gross margin increase d 270 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increase d $41.3 million , or 21% , to $240.4 million in the first quarter of fiscal 2018 from $199.1 million in the first quarter of fiscal 2017 . The increase in selling, general and administrative expenses was primarily due to:
an increase in costs related to our operating channels of $20.6 million , comprised of:
an increase in employee costs of $6.0 million primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher retail bonus expenses as a result of higher net revenues;
an increase in variable costs of $8.7 million primarily due to an increase in distribution costs, packaging costs, and credit card fees as a result of increased net revenue; and
an increase in other costs of $5.9 million primarily due to an increase in digital marketing expenses, brand and community costs, and other costs associated with our operating locations;

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an increase in head office costs of $14.4 million , comprised of:
an increase in employee costs of $10.9 million primarily due to additional employees to support the growth in our business; and
an increase in other costs of $3.5 million primarily due to increases in brand and community costs, partially offset by a decrease in professional fees and other head office costs.
a decrease in net foreign exchange and derivative revaluation gains of $6.2 million . There were net foreign exchange and derivative revaluation losses of $0.4 million in the first quarter of fiscal 2018 compared to net foreign exchange revaluation gains of $5.8 million in the first quarter of fiscal 2017 . The net foreign exchange gains and losses primarily relate to the revaluation of U.S. dollar denominated monetary assets and liabilities held by Canadian subsidiaries. During the second quarter of fiscal 2017, we began entering into forward currency contracts designed to economically hedge these foreign exchange revaluation gains and losses.
As a percentage of net revenue, selling, general and administrative expenses decreased 130 basis points, to 37.0% in the first quarter of fiscal 2018 from 38.3% in the first quarter of fiscal 2017 .
Asset Impairment and Restructuring Costs
During the first quarter of fiscal 2017 , we incurred asset impairment and restructuring costs totaling $12.3 million in connection with the restructuring of our ivivva operations. This included long-lived asset impairment charges of  $11.6 million  and severance costs of  $0.7 million . Please refer to Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
We did not have any asset impairment and restructuring costs in the first quarter of fiscal 2018 .
Income from Operations
Income from operations increase d $58.9 million , or 130% , to $104.3 million in the first quarter of fiscal 2018 from $45.4 million in the first quarter of fiscal 2017 . Operating margin increase d 740 basis points to 16.1% compared to 8.7% in the first quarter of fiscal 2017 .
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 included costs of $5.4 million recognized in cost of goods sold, and asset impairment and restructuring costs totaling $12.3 million . Excluding these charges from the comparatives for the first quarter of fiscal 2017 , income from operations increased 65% and operating margin increased 400 basis points.
On a segment basis, we determine income from operations without taking into account our general corporate expenses and the costs we incurred in connection with the restructuring of our ivivva operations. In the first quarter of fiscal 2018 , we reviewed our general corporate expenses and determined certain costs which were previously classified as general corporate expenses are more appropriately classified within our direct to consumer segment. Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
Segmented income from operations for the quarters ended April 29, 2018 and April 30, 2017 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
 
 
Quarter Ended
 
 
April 29, 2018
 
April 30, 2017
 
April 29, 2018
 
April 30, 2017
 
 
(In thousands)
 
(Percentages)
Company-operated stores
 
$
99,287

 
$
77,499

 
22.9
%
 
20.4
%
Direct to consumer
 
62,267

 
34,098

 
39.4

 
35.1

Other
 
11,223

 
2,836

 
19.1

 
6.4

Segmented income from operations
 
172,777

 
114,433

 
 
 
 
General corporate expense
 
68,472

 
51,260

 
 
 
 
Restructuring and related costs
 

 
17,750

 
 
 
 
Income from operations
 
$
104,305

 
$
45,423

 
 
 
 
Company-Operated Stores . Income from operations from our company-operated stores segment increase d $21.8 million , or 28% , to $99.3 million for the first quarter of fiscal 2018 from $77.5 million for the first quarter of fiscal 2017 . The increase was primarily the result of increase d gross profit of  $31.9 million which was primarily due to increased net revenue and higher

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gross margin. This was partially offset by an increase in selling, general and administrative expenses, primarily due to an increase in store employee costs, and increased store operating expenses including higher credit card fees, and distribution costs as a result of higher net revenues. Income from operations as a percentage of company-operated stores net revenue  increased 250 basis points due to higher gross margin and leverage on selling, general and administrative expenses.
Direct to Consumer.  Income from operations from our direct to consumer segment increase d $28.2 million , or 83% , to $62.3 million for the first quarter of fiscal 2018 from $34.1 million for the first quarter of fiscal 2017 . The increase was primarily the result of increase d gross profit of $41.1 million which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs and credit card fees as a result of higher net revenue, as well as higher digital marketing expenses. Income from operations as a percentage of direct to consumer net revenue increased 430 basis points due to leverage on selling, general and administrative expenses and increased gross margin.
Other.  Other income from operations increase d $8.4 million , or 296% , to $11.2 million for the first quarter of fiscal 2018 from $2.8 million for the first quarter of fiscal 2017 . The increase was primarily the result of  increase d gross profit of  $9.4 million which was primarily due to increased net revenue 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 brand and community costs. Income from operations as a percentage of other net revenue increased 1270 basis points due to leverage on selling, general and administrative expenses and increased gross margin.
General Corporate Expense.  General corporate expense increase d $17.2 million , or 34% , to $68.5 million for the first quarter of fiscal 2018 from $51.3 million for the first quarter of fiscal 2017 . This increase was primarily due to increases in head office employee costs, increased brand and community costs, and a decrease in net foreign exchange and derivative revaluation gains of $6.2 million . There were net foreign exchange and derivative revaluation losses of $0.4 million in the first quarter of fiscal 2018 compared to net foreign exchange revaluation gains of $5.8 million in the first quarter of fiscal 2017 . The net foreign exchange gains and losses primarily relate to the revaluation of U.S. dollar denominated monetary assets and liabilities held by Canadian subsidiaries, and the derivatives are designed to economically hedge these gains and losses. These cost increases were partially offset by decreased professional fees and other head office costs.
Other Income (Expense), Net
Other income, net increase d $2.0 million , or 222% , to $2.9 million for the first quarter of fiscal 2018 from income of $0.9 million for the first quarter of fiscal 2017 . The increase was primarily due to an increase in net interest income, primarily due to higher rates of return on our cash equivalents, including money market funds, treasury bills, and term deposits, and due to an increase in cash and cash equivalents in the first quarter of fiscal 2018 compared to first quarter of fiscal 2017 .
Income Tax Expense
Income tax expense increase d $17.0 million , or 113% , to $32.1 million for the first quarter of fiscal 2018 from $15.1 million for the first quarter of fiscal 2017 .
The U.S. Tax Cuts and Jobs Act ("U.S. tax reform") was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. We recorded certain provisional amounts in the fourth quarter of fiscal 2017 and expect the accounting for the income tax effects of the U.S. tax reform to be completed in fiscal 2018. Please refer to Note 7 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report. We recognized a provisional income tax expense relating to the global intangible low-taxed income ("GILTI") tax in during the first quarter of fiscal 2018 . The results for the first quarter of fiscal 2018 did not include any discrete items related to the U.S. tax reform.
During the first quarter of fiscal 2017 , we recognized in a net income tax recovery of $4.7 million on the costs recognized in connection with the ivivva restructuring. Please refer to Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report.
The effective tax rate for the first quarter of fiscal 2018 was 29.9% compared to 32.6% for the first quarter of fiscal 2017 . Excluding the costs and related tax recoveries which were recognized in connection with the ivivva restructuring, the adjusted effective tax rate was 30.8% for the first quarter of fiscal 2017 . The decrease in the effective tax rate for the first quarter of fiscal 2018 compared to the adjusted effective tax rate for the first quarter of fiscal 2017 was primarily due to the lower U.S. federal income tax rate as a result of the U.S. tax reform, partially offset by the provisional income tax expense relating to the GILTI tax.

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Net Income
Net income increase d $43.9 million , or 141% , to $75.2 million for the first quarter of fiscal 2018 from $31.2 million for the first quarter of fiscal 2017 . This was primarily due to an increase in gross profit of $87.8 million , an increase in other income (expense), net of $2.0 million , and a reduction in asset impairment and restructuring costs of $12.3 million , partially offset by an increase in selling, general and administrative expenses of $41.3 million and an increase in income tax expense of $17.0 million .
Comparable Store Sales and Total Comparable Sales
We separately track comparable store sales, which reflect net revenue from company-operated stores that have been open for at least 12 months, or open for at least 12 months after being significantly expanded. Net revenue from a store is included in comparable store sales beginning with the first month for which the store has a full month of 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, temporary locations, wholesale accounts, showrooms, 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 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, income tax expense, effective tax rates, and diluted earnings per share exclude the costs recognized in connection with the restructuring of our ivivva operations and its related tax effects. We believe these adjusted financial measures are useful to investors as the adjustments do not directly relate to our ongoing business operations and therefore do not contribute to a meaningful evaluation of the trend in our operating performance. Furthermore, we do not believe the adjustments are reflective of our expectations of our future operating performance and believe these non-GAAP measures are useful to investors because of their comparability to our historical information.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP. A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.
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 29, 2018
 
 
(In thousands)
 
(Percentages)
Change in net revenue
 
$
129,399

 
25
 %
Adjustments due to foreign exchange rate changes
 
(9,141
)
 
(2
)
Change in net revenue in constant dollars
 
$
120,258

 
23
 %

 
 
Quarter Ended
 April 29, 2018
Change in total comparable sales (1),(2)
 
20
 %
Adjustments due to foreign exchange rate changes
 
(1
)
Change in total comparable sales in constant dollars (1),(2)
 
19
 %

 
 
Quarter Ended
 April 29, 2018
 
 
(In thousands)
 
(Percentages)
Change in comparable store sales (2)
 
$
22,896

 
8
 %
Adjustments due to foreign exchange rate changes
 
(4,390
)
 
(2
)
Change in comparable store sales in constant dollars (2)
 
$
18,506

 
6
 %

 
 
Quarter Ended
 April 29, 2018
Change in direct to consumer net revenue
 
62
 %
Adjustments due to foreign exchange rate changes
 
(2
)
Change in direct to consumer net revenue in constant dollars
 
60
 %
__________
(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 adjustments relate to the restructuring of our ivivva operations and its related tax effects. Please refer to Note 6 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information on these adjustments.
 
 
Quarter Ended
 April 29, 2018
 
Quarter Ended
 April 30, 2017
 
 
GAAP Results
 
Adjustments
 
Adjusted Results
(Non-GAAP)
 
GAAP Results
 
Restructuring of ivivva Operations Adjustments
 
Adjusted Results
(Non-GAAP)
 
 
(In thousands, except per share amounts)
Gross profit
 
$
344,733

 
$

 
$
344,733

 
$
256,895

 
$
5,419

 
$
262,314

Gross margin
 
53.1
%
 
%
 
53.1
%
 
49.4
%
 
1.0
 %
 
50.4
%
Income from operations
 
104,305

 

 
104,305

 
45,423

 
17,750

 
63,173

Operating margin
 
16.1
%
 
%
 
16.1
%
 
8.7
%
 
3.4
 %
 
12.1
%
Income before income tax expense
 
107,223

 

 
107,223

 
46,330

 
17,750

 
64,080

Income tax expense
 
32,070

 

 
32,070

 
15,084

 
4,684

 
19,768

Effective tax rate
 
29.9
%
 
%
 
29.9
%
 
32.6
%
 
(1.8
)%
 
30.8
%
Diluted earnings per share
 
$
0.55

 
$

 
$
0.55

 
$
0.23

 
$
0.09

 
$
0.32

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 56%, 47%, and 45% of our full year operating profit during the fourth quarters of fiscal 2017 , fiscal 2016 , and fiscal 2015 , respectively. Excluding the costs we incurred in connection with the ivivva restructuring, we generated approximately 51% of our operating profit during the fourth quarter of fiscal 2017.
Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our revolving credit facility. Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, making information technology system 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 well as in money market funds, treasury bills, and term deposits.
As of April 29, 2018 , our working capital, excluding cash and cash equivalents, was $218.9 million , our cash and cash equivalents were $966.6  million, and our capacity under our revolving facility was $148.7 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 29, 2018
 
April 30, 2017
 
 
(In thousands)
Total cash provided by (used in):
 
 
 
 
Operating activities
 
$
35,837

 
$
19,400

Investing activities
 
(34,314
)
 
(19,879
)
Financing activities
 
1,900

 
(14,487
)
Effect of exchange rate changes on cash
 
(27,353
)
 
(21,591
)
Decrease in cash and cash equivalents
 
$
(23,930
)
 
$
(36,557
)

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Operating Activities
Cash flows provided by operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense, and the effect of changes in operating assets and liabilities.
Cash provided by operating activities increased $16.4 million , to $35.8 million for the first quarter of fiscal 2018 compared to $19.4 million for the first quarter of fiscal 2017 , primarily as a result of the following:
Net income and non-cash items
an increase of $43.9 million in net income, and an increase of $1.6 million in non-cash expenses primarily related to an increase in deferred income taxes, and depreciation, partially offset by a decrease in asset impairment costs related to the restructuring of our ivivva operations.
Changes in operating assets and liabilities
a decrease of $29.1 million in the change in operating assets and liabilities, primarily due to the following:
an increase of $45.5 million related to inventory, primarily due to an increase in inventory purchases;
partially offset by a decrease of $15.1 million related to accounts payable, other prepaid expenses and other current and non-current assets.
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 increased $14.4 million to $34.3 million for the first quarter of fiscal 2018 from $19.9 million  for the first quarter of fiscal 2017 . The increase was primarily the result of an increase in capital expenditures related to our company-operated stores, primarily as a result of an increase in renovations and relocations of existing stores, as well as an increased number of new company-operated stores. Increased corporate capital expenditures related to information technology and business systems also contributed to the increase in cash used in investing activities.
Financing Activities
Cash flows used in, or provided by, financing activities consist primarily of cash used to repurchase shares of our common stock and certain cash flows related to stock-based compensation.
Cash used in financing activities decreased $16.4 million , to cash provided of $1.9 million for the first quarter of fiscal 2018 compared to cash used of $14.5 million for the first quarter of fiscal 2017 . The decrease was primarily the result of our stock repurchase programs.
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. This stock repurchase program was completed during the third quarter of fiscal 2017. On November 29, 2017, our board of directors approved a program to repurchase shares of our common stock up to an aggregate value of $200.0 million.
Our cash used in financing activities for the first quarter of fiscal 2018 included $7.5 thousand to repurchase 100 shares of our common stock compared to $12.8 million to repurchase 0.2 million shares for the first quarter of fiscal 2017 . The common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.
We believe that our cash and cash equivalent balances, cash generated from operations, and borrowings available to us under our revolving credit facility will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. Our cash from operations may be negatively impacted by a decrease in demand for our products as well as the other factors described in Item 1 of Part II of this Quarterly Report on Form 10-Q. In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations.

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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, if any, 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 29, 2018 , aside from letters of credit of $1.3 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 29, 2018 , letters of credit and letters of guarantee totaling $1.3 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 fiscal 2017 Annual Report on Form 10-K filed with the SEC on March 27, 2018 , and in Notes  2 , 4 , and 5 included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

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Operating Locations
Our company-operated stores by country as of April 29, 2018 and January 28, 2018 , are summarized in the table below.
 
 
April 29,
2018
 
January 28,
2018
United States (1)
 
274

 
274

Canada
 
60

 
60

Australia
 
29

 
28

China (2)
 
16

 
15

United Kingdom
 
10

 
9

New Zealand
 
6

 
6

Japan
 
4

 
2

South Korea
 
4

 
3

Germany
 
3

 
2

Singapore
 
3

 
3

Ireland
 
1

 
1

Switzerland
 
1

 
1

Total company-operated stores
 
411

 
404

__________
(1)  
Included within the United States as of April 29, 2018 and January 28, 2018 , was one company-operated store in the Commonwealth of Puerto Rico.
(2)  
Included within China as of April 29, 2018 and January 28, 2018 , were three company-operated stores in the Hong Kong Special Administrative Region and one company-operated store in the Taiwan Province.
Retail locations operated by third parties under license and supply arrangements are not included in the above table. As of  April 29, 2018 , there were seven licensed locations, including three in Mexico, three in the United Arab Emirates, and one in Qatar.
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk . The functional currency of our foreign subsidiaries is generally the applicable local currency. Our consolidated financial statements are presented in U.S. dollars. Therefore, the net revenue, expenses, assets, and liabilities of our foreign subsidiaries are translated from their functional currencies into U.S. dollars. Fluctuations in the value of the U.S. dollar affect the reported amounts of net revenue, expenses, assets, and liabilities. Foreign exchange differences which arise on translation of our foreign subsidiaries' balance sheets into U.S. dollars are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
We also have exposure to changes in foreign exchange rates associated with transactions which are undertaken by our subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases denominated in currencies other than the functional currency of the purchasing entity. As a result, we have been impacted by changes in exchange rates and may be impacted for the foreseeable future. The potential impact of currency fluctuation increases as our international expansion increases.
As of April 29, 2018 , we had certain forward currency contracts outstanding in order to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. We also had certain forward currency contracts outstanding in an effort to reduce our exposure to the foreign exchange revaluation gains and losses that are recognized by our Canadian subsidiaries on U.S. dollar denominated monetary assets and liabilities. Please refer to Note 5 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information, including details of the notional amounts outstanding.
In the future, in an effort to reduce foreign exchange risks, we may enter into further derivative financial instruments including hedging additional currency pairs. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.
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 weakening of the U.S. dollar against the Canadian dollar results in:
the following impacts to the consolidated statements of operations:

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an increase in our net revenue upon translation of the sales made by our Canadian operations into U.S. dollars for the purposes of consolidation;
an increase in our selling, general and administrative expenses incurred by our Canadian operations upon translation into U.S. dollars for the purposes of consolidation;
foreign exchange revaluation losses by our Canadian subsidiaries on U.S. dollar denominated monetary assets and liabilities; and
derivative valuation gains on forward currency contracts not designated in a hedging relationship;
the following impacts to the consolidated balance sheets:
an increase in the foreign currency translation adjustment which arises on the translation of our Canadian subsidiaries' balance sheets into U.S. dollars; and
a decrease in the foreign currency translation adjustment from derivative valuation losses on forward currency contracts, entered into as net investment hedges of a Canadian subsidiary.
During the first quarter of fiscal 2018 , the change in the relative value of the U.S. dollar against the Canadian dollar resulted in a $45.8 million increase in accumulated other comprehensive loss within stockholders' equity. 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.
A 10% depreciation 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 2018 would have resulted in additional income from operations of approximately $2.0 million in the first quarter of fiscal 2018 . This assumes a consistent 10% depreciation in the U.S. dollar against the Canadian dollar throughout the first quarter of fiscal 2018 . 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.
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 29, 2018 , aside from letters of credit of $1.3 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.
Our cash and cash equivalent balances are held in the form of cash on hand, bank balances, short-term deposits and treasury bills with original maturities of three months or less, and in money market funds. We do not believe these balances are subject to material interest rate risk.
Credit Risk . We have cash on deposit with various large, reputable financial institutions and have invested in U.S. and Canadian Treasury Bills, and in AAA-rated money market funds. The amount of cash and cash equivalents held with certain financial institutions exceeds government-insured limits. We are also exposed to credit-related losses in the event of nonperformance by the financial institutions that are counterparties to our forward currency contracts. The credit risk amount is our unrealized gains on our derivative instruments, based on foreign currency rates at the time of nonperformance. We have not experienced any losses related to these items, and we believe credit risk to be minimal. We seek to minimize our credit risk by entering into transactions with credit worthy and reputable financial institutions and by monitoring the credit standing of the financial institutions with whom we transact. We seek to limit the amount of exposure with any one counterparty.
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.

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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 principal executive officer and principal financial and 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 principal executive officer and principal financial and accounting 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 April 29, 2018 . Based on that evaluation, our principal executive officer and principal financial and accounting officer concluded that, at April 29, 2018 , our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting during the quarter ended April 29, 2018 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 11 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report and in our fiscal 2017 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 2017 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 or mishandle 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 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 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.