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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 3, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-33608
 
lululemon athletica inc.
(Exact name of registrant as specified in its charter)
 
Delaware
20-3842867
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1818 Cornwall Avenue, Vancouver, British Columbia V6J 1C7
(Address of principal executive offices)

Registrant's telephone number, including area code:
604-732-6124
Former name, former address and former fiscal year, if changed since last report:
N/A
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.005 per share
LULU
Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (of for such shorter period that the registrant was required to submit such files).    Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes No
At December 6, 2019, there were 123,334,595 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At December 6, 2019, there were outstanding 6,960,312 exchangeable shares of Lulu Canadian Holding, Inc., a wholly-owned subsidiary of the registrant. Exchangeable shares are exchangeable for an equal number of shares of the registrant's common stock.
In addition, at December 6, 2019, the registrant had outstanding 6,960,312 shares of special voting stock, through which the holders of exchangeable shares of Lulu Canadian Holding, Inc. may exercise their voting rights with respect to the registrant. The special voting stock and the registrant's common stock generally vote together as a single class on all matters on which the common stock is entitled to vote.
 




TABLE OF CONTENTS
 

2



PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
 
 
November 3,
2019
 
February 3,
2019
ASSETS
Current assets
 
 
 
 
Cash and cash equivalents
 
$
586,153


$
881,320

Accounts receivable
 
35,744

 
35,786

Inventories
 
627,102

 
404,842

Prepaid and receivable income taxes
 
126,715

 
49,385

Other prepaid expenses and other current assets
 
75,962

 
57,949

 
 
1,451,676

 
1,429,282

Property and equipment, net
 
656,372

 
567,237

Right-of-use lease assets
 
652,492

 

Goodwill
 
24,478

 
24,239

Deferred income tax assets
 
26,339

 
26,549

Other non-current assets
 
43,787

 
37,404

 
 
$
2,855,144

 
$
2,084,711

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
116,281

 
$
95,533

Accrued inventory liabilities
 
10,074

 
16,241

Accrued compensation and related expenses
 
98,442

 
109,181

Current lease liabilities
 
131,385

 

Current income taxes payable
 
12,351

 
67,412

Unredeemed gift card liability
 
75,025

 
99,412

Other current liabilities
 
131,211

 
112,698

 
 
574,769

 
500,477

Non-current lease liabilities
 
563,925

 

Non-current income taxes payable
 
48,226

 
42,099

Deferred income tax liabilities
 
14,190

 
14,249

Other non-current liabilities
 
5,298

 
81,911

 
 
1,206,408

 
638,736

Commitments and contingencies
 


 


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

 

Exchangeable stock, no par value: 60,000 shares authorized; 6,960 and 9,332 issued and outstanding
 

 

Special voting stock, $0.000005 par value: 60,000 shares authorized; 6,960 and 9,332 issued and outstanding
 

 

Common stock, $0.005 par value: 400,000 shares authorized; 123,336 and 121,600 issued and outstanding
 
617

 
608

Additional paid-in capital
 
343,335

 
315,285

Retained earnings
 
1,522,921

 
1,346,890

Accumulated other comprehensive loss
 
(218,137
)
 
(216,808
)
 
 
1,648,736

 
1,445,975

 
 
$
2,855,144

 
$
2,084,711

See accompanying notes to the unaudited interim consolidated financial statements

3



lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
 
 
Quarter Ended
 
Three Quarters Ended
 
 
November 3, 2019
 
October 28, 2018
 
November 3, 2019
 
October 28, 2018
Net revenue
 
$
916,138

 
$
747,655

 
$
2,581,805

 
$
2,120,861

Cost of goods sold
 
411,094

 
340,878

 
1,169,245

 
973,157

Gross profit
 
505,044

 
406,777

 
1,412,560

 
1,147,704

Selling, general and administrative expenses
 
329,215

 
270,874

 
939,937

 
773,288

Income from operations
 
175,829

 
135,903

 
472,623

 
374,416

Other income (expense), net
 
1,925

 
2,044

 
6,154

 
6,553

Income before income tax expense
 
177,754

 
137,947

 
478,777

 
380,969

Income tax expense
 
51,772

 
43,534

 
131,202

 
115,633

Net income
 
$
125,982

 
$
94,413

 
$
347,575

 
$
265,336

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
9,880

 
(7,318
)
 
(1,329
)
 
(68,539
)
Comprehensive income
 
$
135,862

 
$
87,095

 
$
346,246

 
$
196,797

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.97

 
$
0.71

 
$
2.67

 
$
1.98

Diluted earnings per share
 
$
0.96

 
$
0.71

 
$
2.65

 
$
1.97

Basic weighted-average number of shares outstanding
 
130,282

 
132,406

 
130,420

 
133,964

Diluted weighted-average number of shares outstanding
 
130,805

 
133,077

 
130,975

 
134,512

See accompanying notes to the unaudited interim consolidated financial statements
 

4



lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
 
 
Quarter Ended November 3, 2019
 
 
Exchangeable Stock
 
Special Voting Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
 
 
Shares
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
Balance at August 4, 2019
 
7,381

 
7,381

 
$

 
122,921

 
$
615

 
$
329,915

 
$
1,404,866

 
$
(228,017
)
 
$
1,507,379

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
125,982

 
 
 
125,982

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9,880

 
9,880

Common stock issued upon exchange of exchangeable shares
 
(421
)
 
(421
)
 

 
421

 
2

 
(2
)
 
 
 
 
 

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
14,065

 
 
 
 
 
14,065

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
50

 

 
1,516

 
 
 
 
 
1,516

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(12
)
 

 
(2,093
)
 
 
 
 
 
(2,093
)
Repurchase of common stock
 
 
 
 
 
 
 
(44
)
 

 
(66
)
 
(7,927
)
 
 
 
(7,993
)
Balance at November 3, 2019
 
6,960

 
6,960

 
$

 
123,336

 
$
617

 
$
343,335

 
$
1,522,921

 
$
(218,137
)
 
$
1,648,736



 
 
Quarter Ended October 28, 2018
 
 
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 July 29, 2018
 
9,776

 
9,776

 
$

 
122,656

 
$
613

 
$
299,702

 
$
1,224,044

 
$
(204,144
)
 
$
1,320,215

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
94,413

 
 
 
94,413

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(7,318
)
 
(7,318
)
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
5,568

 
 
 
 
 
5,568

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
87

 
1

 
3,504

 
 
 
 
 
3,505

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(11
)
 
(1
)
 
(1,536
)
 
 
 
 
 
(1,537
)
Repurchase of common stock
 
 
 
 
 
 
 
(65
)
 

 
(84
)
 
(8,005
)
 
 
 
(8,089
)
Balance at October 28, 2018
 
9,776

 
9,776

 
$

 
122,667

 
$
613

 
$
307,154

 
$
1,310,452

 
$
(211,462
)
 
$
1,406,757


5



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

 
9,332

 
$

 
121,600

 
$
608

 
$
315,285

 
$
1,346,890

 
$
(216,808
)
 
$
1,445,975

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
347,575

 
 
 
347,575

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,329
)
 
(1,329
)
Common stock issued upon exchange of exchangeable shares
 
(2,372
)
 
(2,372
)
 

 
2,372

 
12

 
(12
)
 
 
 
 
 

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
36,070

 
 
 
 
 
36,070

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
547

 
3

 
15,027

 
 
 
 
 
15,030

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(129
)
 
(1
)
 
(21,492
)
 
 
 
 
 
(21,493
)
Repurchase of common stock
 
 
 
 
 
 
 
(1,054
)
 
(5
)
 
(1,543
)
 
(171,544
)
 
 
 
(173,092
)
Balance at November 3, 2019
 
6,960

 
6,960

 
$

 
123,336

 
$
617

 
$
343,335

 
$
1,522,921

 
$
(218,137
)
 
$
1,648,736


 
 
Three Quarters Ended October 28, 2018
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
265,336

 
 
 
265,336

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(68,539
)
 
(68,539
)
Common stock issued upon exchange of exchangeable shares
 
(5
)
 
(5
)
 

 
5

 

 

 
 
 
 
 

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
18,616

 
 
 
 
 
18,616

Common stock issued upon settlement of stock-based compensation
 
 
 
 
 
 
 
524

 
3

 
17,254

 
 
 
 
 
17,257

Shares withheld related to net share settlement of stock-based compensation
 
 
 
 
 
 
 
(92
)
 
(1
)
 
(8,537
)
 
 
 
 
 
(8,538
)
Repurchase of common stock
 
 
 
 
 
 
 
(3,420
)
 
(17
)
 
(4,432
)
 
(409,886
)
 
 
 
(414,335
)
Balance at October 28, 2018
 
9,776

 
9,776

 
$

 
122,667

 
$
613

 
$
307,154

 
$
1,310,452

 
$
(211,462
)
 
$
1,406,757

See accompanying notes to the unaudited interim consolidated financial statements

6



lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
 
 
Three Quarters Ended
 
 
November 3, 2019
 
October 28, 2018
Cash flows from operating activities
 
 
 
 
Net income
 
$
347,575

 
$
265,336

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
114,444

 
87,115

Stock-based compensation expense
 
36,070

 
18,616

Settlement of derivatives not designated in a hedging relationship
 
(3,375
)
 
(4,670
)
Changes in operating assets and liabilities:
 
 
 
 
Inventories
 
(225,124
)
 
(177,890
)
Prepaid and receivable income taxes
 
(77,330
)
 
(27,645
)
Other prepaid expenses and other current and non-current assets
 
(63,107
)
 
(18,402
)
Accounts payable
 
21,085

 
129,617

Accrued inventory liabilities
 
(5,940
)
 
(392
)
Accrued compensation and related expenses
 
(10,223
)
 
18,009

Current income taxes payable
 
(54,700
)
 
9,817

Unredeemed gift card liability
 
(24,183
)
 
(17,827
)
Non-current income taxes payable
 
6,127

 
5,844

Right-of-use lease assets and current and non-current lease liabilities
 
9,794

 

Other current and non-current liabilities
 
23,993

 
29,348

Net cash provided by operating activities
 
95,106

 
316,876

Cash flows from investing activities
 
 
 
 
Purchase of property and equipment
 
(214,217
)
 
(156,746
)
Settlement of net investment hedges
 
3,378

 
(8,397
)
Other investing activities
 
(1,636
)
 
(771
)
Net cash used in investing activities
 
(212,475
)
 
(165,914
)
Cash flows from financing activities
 
 
 
 
Proceeds from settlement of stock-based compensation
 
15,030

 
17,257

Taxes paid related to net share settlement of stock-based compensation
 
(21,493
)
 
(8,538
)
Repurchase of common stock
 
(173,092
)
 
(414,335
)
Other financing activities
 

 
(745
)
Net cash used in financing activities
 
(179,555
)
 
(406,361
)
Effect of exchange rate changes on cash and cash equivalents
 
1,757

 
(31,495
)
Decrease in cash and cash equivalents
 
(295,167
)
 
(286,894
)
Cash and cash equivalents, beginning of period
 
$
881,320

 
$
990,501

Cash and cash equivalents, end of period
 
$
586,153

 
$
703,607

See accompanying notes to the unaudited interim consolidated financial statements


7



lululemon athletica inc.
INDEX FOR NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS


8



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 and accessories. The Company primarily conducts its business through company-operated stores and direct to consumer through e-commerce. It also generates net revenue from outlets, sales from temporary locations, sales to wholesale accounts, license and supply arrangements, and warehouse sales. The Company operates stores in the United States, Canada, China, Australia, the United Kingdom, Japan, New Zealand, Germany, South Korea, Singapore, France, Sweden, Ireland, the Netherlands, and Switzerland. There were 479 and 440 company-operated stores in operation as of November 3, 2019 and February 3, 2019, respectively.
Basis of presentation
The unaudited interim consolidated financial statements as of November 3, 2019 and for the quarters and three quarters ended November 3, 2019 and October 28, 2018 are presented in United States dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of February 3, 2019 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended February 3, 2019, which are included in Item 8 in the Company's fiscal 2018 Annual Report on Form 10-K filed with the SEC on March 27, 2019. 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 2018 Annual Report on Form 10-K. Except as disclosed in Note 2 of these unaudited interim consolidated financial statements pertaining to the adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's fiscal 2018 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 2019 will end on February 2, 2020 and will be a 52-week year. Fiscal 2018 was a 53-week year.
In accordance with the Disclosure Modernization and Simplification final rule issued by the SEC and effective for the Company beginning with the quarter ended May 5, 2019, a reconciliation of the changes of stockholders' equity is presented for all periods for which the results of operations are presented.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
Certain comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements
In 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. The Company adopted ASC 842 on February 4, 2019 using the modified retrospective approach and has elected not to restate comparative periods.

9



The Company has chosen to apply the transition package of three practical expedients which allow companies not to reassess whether agreements contain leases, the classification of leases, and the capitalization of initial direct costs. The Company did not elect the practical expedient to use hindsight when determining the lease term.
The primary financial statement impact upon adoption was the recognition, on a discounted basis, of the Company's minimum payments under noncancelable operating leases as right-of-use assets and obligations on the consolidated balance sheets. As of February 4, 2019, right-of-use assets and lease liabilities were $619.6 million and $651.1 million, respectively. Pre-existing lease balances of $34.8 million from current assets, $9.3 million from non-current assets, and $75.5 million from non-current liabilities were reclassified to right-of-use assets and lease liabilities as part of the adoption of the new standard. There was no cumulative earnings effect adjustment on transition.
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 makes more financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. The Company adopted this guidance in the first quarter of fiscal 2019, and it did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB clarified ASC 350-40, Intangibles - Goodwill and Other - Internal-Use Software, for certain aspects of accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. Under the update, an entity expenses costs incurred in the preliminary-project and post-implementation-operation stages. An entity also capitalizes certain costs incurred during the application-development stage, as well as certain costs related to enhancements. The ASU does not change the accounting for the service component of a cloud computing arrangement. This standard is effective beginning in the first quarter of 2020, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2019, and it did not have a material impact on the Company's consolidated financial statements.
Accounting policies as a result of the adoption of ASC 842
Operating leases
At lease commencement, which is generally when the Company takes possession of the asset, the Company records a lease liability and corresponding right-of-use asset. Lease liabilities represent the present value of minimum lease payments over the expected lease term, which includes options to extend or terminate the lease when it is reasonably certain those options will be exercised. The present value of the lease liability is determined using the Company’s incremental collateralized borrowing rate at the lease commencement.
Minimum lease payments include base rent, fixed escalation of rental payments, and rental payments that are adjusted periodically depending on a rate or index. In determining minimum lease payments, the Company does not separate non-lease components for real estate leases. Non-lease components are generally services that the lessor performs for the Company associated with the leased asset, such as common area maintenance.
Right-of-use assets represent the right to control the use of the leased asset during the lease and are initially recognized in an amount equal to the lease liability. In addition, prepaid rent, initial direct costs, and adjustments for lease incentives are components of the right-of-use asset. Over the lease term the lease expense is amortized on a straight-line basis beginning on the lease commencement date. Right-of-use assets are assessed for impairment as part of the impairment of long-lived assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
Variable lease payments, including contingent rental payments based on sales volume, are recognized when the achievement of the specific target is probable. A right-of-use asset and lease liability are not recognized for leases with an initial term of 12 months or less, and the lease expense is recognized on a straight-line basis over the lease term.
Recently issued accounting pronouncements
In August 2018, the FASB released guidance on ASC 350-40, "Intangibles-Goodwill and Other-Internal-Use Software". This update requires a customer in a cloud computing service arrangement to follow the internal-use software guidance in order to determine which implementation costs to defer and recognize as an asset. This guidance is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements but does not believe it will have a material impact.

10



NOTE 3. CREDIT FACILITY
On June 6, 2018, the Company entered into Amendment No. 1 to its credit agreement. This amended the credit agreement to provide for (i) an increase in the aggregate commitments under the unsecured five-year revolving credit facility to $400.0 million, with an increase of the sub-limits for the issuance of letters of credit and extensions of swing line loans to $50.0 million for each, (ii) an increase in the option, subject to certain conditions as set forth in the credit agreement, to request increases in commitments under the revolving facility from $400.0 million to $600.0 million, and (iii) an extension in the maturity of the revolving facility from December 15, 2021 to June 6, 2023.
In addition, this amendment decreased the applicable margins for LIBOR loans from 1.00%-1.75% to 1.00%-1.50% and for alternate base rate loans from 0.00%-0.75% to 0.00%-0.50%, reduced the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduced fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%.
The Company had no borrowings outstanding under this credit facility as of November 3, 2019 and February 3, 2019. As of November 3, 2019, the Company had letters of credit of $2.0 million outstanding.
NOTE 4. STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based compensation plans
The Company's eligible employees participate in various stock-based compensation plans, which are provided by the Company directly.
Stock-based compensation expense charged to income for the plans was $35.7 million and $19.0 million for the three quarters ended November 3, 2019 and October 28, 2018, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $70.3 million at November 3, 2019, which is expected to be recognized over a weighted-average period of 2.2 years.
A summary of the balances of the Company's stock-based compensation plans as of November 3, 2019, and changes during the first three quarters then ended, is presented below:
 
 
Stock Options
 
Performance-Based Restricted Stock Units
 
Restricted Shares
 
Restricted Stock Units
 
Restricted Stock Units
(Liability Accounting)
 
 
Number
 
Weighted-Average Exercise Price
 
Number
 
Weighted-Average Grant Date Fair Value
 
Number
 
Weighted-Average Grant Date Fair Value
 
Number
 
Weighted-Average Grant Date Fair Value
 
Number
 
Weighted-Average Fair Value
 
 
(In thousands, except per share amounts)
Balance at February 3, 2019
 
870

 
$
73.34

 
280

 
$
78.01

 
6

 
$
124.19

 
440

 
$
73.73

 
44

 
$
146.12

Granted
 
324

 
167.99

 
93

 
142.29

 
7

 
175.82

 
121

 
168.41

 

 

Exercised/released
 
247

 
60.95

 
97

 
72.04

 
6

 
124.19

 
182

 
70.38

 
15

 
179.67

Forfeited/expired
 
54

 
88.90

 
15

 
94.30

 

 

 
29

 
95.27

 

 

Balance at November 3, 2019
 
893

 
$
110.17

 
261

 
$
102.23

 
7

 
$
175.82

 
350

 
$
106.39

 
29

 
$
200.69

Exercisable at November 3, 2019
 
152

 
$
72.32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


11



The grant date fair value of each stock option granted is estimated on the date of grant using the Black-Scholes model. The assumptions used to calculate the fair value of the options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon the historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve for the period corresponding with the expected term of the options. The following are weighted averages of the assumptions that were used in calculating the fair value of stock options granted during the first three quarters of fiscal 2019:
 
 
Three Quarters Ended
 November 3, 2019
Expected term
 
3.75 years

Expected volatility
 
38.43
%
Risk-free interest rate
 
2.19
%
Dividend yield
 
%

The Company's performance-based restricted stock units are awarded to eligible employees and entitle the grantee to receive a maximum of two shares of common stock per performance-based restricted stock unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance-based restricted stock units is based on the closing price of the Company's common stock on the award date. Expense for performance-based restricted stock units is recognized when it is probable that the performance goal will be achieved.
The grant date fair value of the restricted shares and restricted stock units is based on the closing price of the Company's common stock on the award date. Restricted stock units that are settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement. This fair value is based on the closing price of the Company's common stock on the last business day before each period end.
Employee share purchase plan
The Company's board of directors and stockholders approved the Company's Employee Share Purchase Plan ("ESPP") in September 2007. Contributions are made by eligible employees, subject to certain limits defined in the ESPP, and the Company matches one-third of the contribution. The maximum number of shares authorized to be purchased under the ESPP is 6.0 million shares. All shares purchased under the ESPP are purchased in the open market. During the quarter ended November 3, 2019, there were 21.5 thousand shares purchased.
Defined contribution pension plans
The Company offers defined contribution pension plans to its eligible employees. Participating employees may elect to defer and contribute a portion of their eligible compensation to a plan up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. The Company matches 50% to 75% of the contribution depending on the participant's length of service, and the contribution is subject to a two year vesting period. The Company's net expense for the defined contribution plans was $6.4 million and $4.7 million in the first three quarters of fiscal 2019 and fiscal 2018, respectively.
NOTE 5. FAIR VALUE MEASUREMENT
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - defined as observable inputs such as quoted prices in active markets;
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

12



Assets and liabilities measured at fair value on a recurring basis
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input. As of November 3, 2019 and February 3, 2019, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
 
 
November 3, 2019
 
Level 1
 
Level 2
 
Level 3
 
Balance Sheet Classification
 
 
(In thousands)
 
 
Money market funds
 
$
278,080

 
$
278,080

 
$

 
$

 
Cash and cash equivalents
Treasury bills
 
26,619

 
26,619

 

 

 
Cash and cash equivalents
Term deposits
 
66,736

 

 
66,736

 

 
Cash and cash equivalents
Forward currency contract assets
 
2,934

 

 
2,934

 

 
Other prepaid expenses and other current assets
Forward currency contract liabilities
 
3,964

 

 
3,964

 

 
Other current liabilities

 
 
February 3, 2019
 
Level 1
 
Level 2
 
Level 3
 
Balance Sheet Classification
 
 
(In thousands)
 
 
Money market funds
 
$
471,888

 
$
471,888

 
$

 
$

 
Cash and cash equivalents
Treasury bills
 
99,958

 
99,958

 

 

 
Cash and cash equivalents
Term deposits
 
63,522

 

 
63,522

 

 
Cash and cash equivalents
Forward currency contract assets
 
516

 

 
516

 

 
Other prepaid expenses and other current assets
Forward currency contract liabilities
 
1,042

 

 
1,042

 

 
Other current liabilities

The Company records accounts receivable, accounts payable, and accrued liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
The Company has short-term, highly liquid investments classified as cash equivalents, which are invested in money market funds, Treasury bills, and term deposits. The Company records cash equivalents at their original purchase prices plus interest that has accrued at the stated rate.
The fair values of the forward currency contract assets and liabilities are determined using observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and interest rates. The fair values consider the credit risk of the Company and its counterparties. The Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. However, the Company records all derivatives on its consolidated balance sheets at fair value and does not offset derivative assets and liabilities.
NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
Foreign exchange risk
The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative financial instruments to manage its exposure to certain of these foreign currency exchange rate risks. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company currently hedges against changes in the Canadian dollar to U.S. dollar exchange rate and changes in the Chinese Yuan to U.S. dollar exchange rate using forward currency contracts.
Net investment hedges
The Company is exposed to foreign exchange gains and losses which arise on translation of its foreign subsidiaries' balance sheets into U.S. dollars. These gains and losses are recorded as a foreign currency translation adjustment in accumulated other comprehensive income or loss within stockholders' equity.
The Company holds a significant portion of its assets in Canada and enters into forward currency contracts designed to hedge a portion of the foreign currency exposure that arises on translation of a Canadian subsidiary into U.S. dollars. These

13



forward currency contracts are designated as net investment hedges. The effective portions of the hedges are reported in accumulated other comprehensive income or loss and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated. Hedge effectiveness is measured using a method based on changes in forward exchange rates. The Company recorded no ineffectiveness from net investment hedges during the first three quarters of fiscal 2019.
The Company classifies the cash flows at settlement of its net investment hedges within investing activities in the consolidated statements of cash flows.
Derivatives not designated as hedging instruments
The Company is exposed to gains and losses arising from changes in foreign exchange rates associated with transactions which are undertaken by its subsidiaries in currencies other than their functional currency. Such transactions include intercompany transactions and inventory purchases. These transactions result in the recognition of certain foreign currency denominated monetary assets and liabilities which are remeasured to the quarter-end or settlement date exchange rate. The resulting foreign currency gains and losses are recorded in selling, general and administrative expenses.
During the first three quarters of fiscal 2019, the Company entered into certain forward currency contracts designed to economically hedge the foreign exchange revaluation gains and losses that are recognized by its Canadian and Chinese subsidiaries on U.S. dollar denominated monetary assets and liabilities. The Company has not applied hedge accounting to these instruments and the change in fair value of these derivatives is recorded within selling, general and administrative expenses.
The Company classifies the cash flows at settlement of its forward currency contracts which are not designated in hedging relationships within operating activities in the consolidated statements of cash flows.
Quantitative disclosures about derivative financial instruments
The Company presents its derivative assets and derivative liabilities at their gross fair values within other prepaid expenses and other current assets and other current liabilities on the consolidated balance sheets. However, the Company's Master International Swap Dealers Association, Inc., Agreements and other similar arrangements allow net settlements under certain conditions. As of November 3, 2019, there were derivative assets of $2.9 million and derivative liabilities of $4.0 million subject to enforceable netting arrangements.
The notional amounts and fair values of forward currency contracts were as follows:
 
 
November 3, 2019
 
February 3, 2019
 
 
Gross Notional
 
Assets
 
Liabilities
 
Gross Notional
 
Assets
 
Liabilities
 
 
(In thousands)
Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Forward currency contracts
 
$
196,000

 
$

 
$
3,317

 
$
328,000

 
$

 
$
1,042

Derivatives not designated in a hedging relationship:
 
 
 
 
 
 
 
 
 
 
 
 
Forward currency contracts
 
241,000

 
2,934

 
647

 
309,000

 
516

 

Net derivatives recognized on consolidated balance sheets:
 
 
 
 
 
 
 
 
 
 
 
 
Forward currency contracts
 
 
 
$
2,934

 
$
3,964

 
 
 
$
516

 
$
1,042


The forward currency contracts designated as net investment hedges outstanding as of November 3, 2019 mature on different dates between November 2019 and March 2020.
The forward currency contracts not designated in a hedging relationship outstanding as of November 3, 2019 mature on different dates between November 2019 and March 2020.

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The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income were as follows:
 
 
Quarter Ended

Three Quarters Ended
 
 
November 3, 2019

October 28, 2018

November 3, 2019

October 28, 2018
 
 
(In thousands)
(Losses) gains recognized in foreign currency translation adjustment:
 
 
 
 
 
 
 
 
Derivatives designated as net investment hedges
 
$
(839
)
 
$
2,291

 
$
1,103

 
$
18,829


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 were as follows:
 
 
Quarter Ended
 
Three Quarters Ended
 
 
November 3, 2019
 
October 28, 2018
 
November 3, 2019
 
October 28, 2018
 
 
(In thousands)
(Losses) gains recognized in selling, general and administrative expenses:
 
 
 
 
 
 
 
 
Foreign exchange (losses) gains
 
$
(2,945
)
 
$
395

 
$
(1,700
)
 
$
12,999

Derivatives not designated in a hedging relationship
 
(94
)
 
(1,715
)
 
(1,603
)
 
(17,301
)
Net foreign exchange and derivative (losses) gains
 
$
(3,039
)
 
$
(1,320
)
 
$
(3,303
)
 
$
(4,302
)

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 7LEASES
The Company has obligations under operating leases for its store and other retail locations, distribution centers, offices, and equipment. As of November 3, 2019, the lease terms of the various leases range from two to 15 years. The majority of the Company's leases include renewal options at the sole discretion of the Company. In general, it is not reasonably certain that lease renewals will be exercised at lease commencement and therefore lease renewals are not included in the lease term.

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The following table details the Company's net lease expense. Certain of the Company's leases include rent escalation clauses, rent holidays, and leasehold rental incentives. The majority of the Company's leases for store premises also include contingent rental payments based on sales volume. The variable lease expenses disclosed below include contingent rent payments and other non-fixed lease related costs, including common area maintenance, property taxes, and landlord's insurance.


Quarter Ended

Three Quarters Ended


November 3, 2019

November 3, 2019


(In thousands)
Net lease expense:




Operating lease expense

$
44,497


$
130,171

Short-term lease expense

2,680


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