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Table of Contents

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 August 2, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-33608
lululemon athletica inc.
(Exact name of registrant as specified in its charter)
Delaware20-3842867
(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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.005 per shareLULUNasdaq 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 FilerAccelerated 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 September 1, 2020, there were 124,920,793 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At September 1, 2020, there were outstanding 5,392,512 exchangeable shares of Lulu Canadian Holding, Inc., a wholly-owned subsidiary of the registrant. Exchangeable shares are exchangeable for an equal number of shares of the registrant's common stock.
In addition, at September 1, 2020, the registrant had outstanding 5,392,512 shares of special voting stock, through which the holders of exchangeable shares of Lulu Canadian Holding, Inc. may exercise their voting rights with respect to the registrant. The special voting stock and the registrant's common stock generally vote together as a single class on all matters on which the common stock is entitled to vote.


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TABLE OF CONTENTS
 
  Page
Item 1.
Item 2.
Item 3.
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Item 1.
Item 1A.
Item 2.
Item 6.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
August 2,
2020
February 2,
2020
ASSETS
Current assets
Cash and cash equivalents$522,998 $1,093,505 
Accounts receivable48,922 40,219 
Inventories672,773 518,513 
Prepaid and receivable income taxes125,019 85,159 
Prepaid expenses and other current assets120,043 70,542 
1,489,755 1,807,938 
Property and equipment, net698,514 671,693 
Right-of-use lease assets725,805 689,664 
Goodwill386,593 24,182 
Intangible assets, net84,471 241 
Deferred income tax assets31,591 31,435 
Other non-current assets77,298 56,201 
$3,494,027 $3,281,354 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$122,767 $79,997 
Accrued inventory liabilities31,675 6,344 
Other accrued liabilities 177,436 112,641 
Accrued compensation and related expenses84,102 133,688 
Current lease liabilities147,941 128,497 
Current income taxes payable75,153 26,436 
Unredeemed gift card liability106,425 120,413 
Other current liabilities17,810 12,402 
763,309 620,418 
Non-current lease liabilities632,646 611,464 
Non-current income taxes payable43,150 48,226 
Deferred income tax liabilities46,901 43,432 
Other non-current liabilities6,919 5,596 
1,492,925 1,329,136 
Commitments and contingencies
Stockholders' equity
Undesignated preferred stock, $0.01 par value: 5,000 shares authorized; none issued and outstanding
  
Exchangeable stock, no par value: 60,000 shares authorized; 5,393 and 6,227 issued and outstanding
  
Special voting stock, $0.000005 par value: 60,000 shares authorized; 5,393 and 6,227 issued and outstanding
  
Common stock, $0.005 par value: 400,000 shares authorized; 124,917 and 124,122 issued and outstanding
625 621 
Additional paid-in capital358,414 355,541 
Retained earnings1,872,948 1,820,637 
Accumulated other comprehensive loss(230,885)(224,581)
2,001,102 1,952,218 
$3,494,027 $3,281,354 
See accompanying notes to the unaudited interim consolidated financial statements
3

Table of Contents

lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
Quarter EndedTwo Quarters Ended
August 2, 2020August 4, 2019August 2, 2020August 4, 2019
Net revenue$902,942 $883,352 $1,554,904 $1,665,667 
Cost of goods sold413,441 397,556 731,001 758,151 
Gross profit489,501 485,796 823,903 907,516 
Selling, general and administrative expenses352,904 317,814 652,510 610,722 
Amortization of intangible assets724  724  
Acquisition-related expenses11,464  13,509  
Income from operations124,409 167,982 157,160 296,794 
Other income (expense), net(344)1,850 830 4,229 
Income before income tax expense124,065 169,832 157,990 301,023 
Income tax expense37,264 44,842 42,557 79,430 
Net income$86,801 $124,990 $115,433 $221,593 
Other comprehensive income:
Foreign currency translation adjustment54,300 4,514 (6,304)(11,209)
Comprehensive income$141,101 $129,504 $109,129 $210,384 
Basic earnings per share$0.67 $0.96 $0.89 $1.70 
Diluted earnings per share$0.66 $0.96 $0.88 $1.69 
Basic weighted-average number of shares outstanding130,245 130,285 130,248 130,489 
Diluted weighted-average number of shares outstanding130,799 130,783 130,802 131,060 
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)
Quarter Ended August 2, 2020
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance at May 3, 20205,482 5,482 $ 124,717 $624 $334,201 $1,786,147 $(285,185)$1,835,787 
Net income86,801 86,801 
Foreign currency translation adjustment54,300 54,300 
Common stock issued upon exchange of exchangeable shares(89)(89) 89    
Stock-based compensation expense15,784 15,784 
Common stock issued upon settlement of stock-based compensation114  9,328 9,328 
Shares withheld related to net share settlement of stock-based compensation(3)1 (899)(898)
Balance at August 2, 20205,393 5,393 $ 124,917 $625 $358,414 $1,872,948 $(230,885)$2,001,102 


Quarter Ended August 4, 2019
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance at May 5, 20197,381 7,381 $ 122,900 $615 $317,204 $1,281,432 $(232,531)$1,366,720 
Net income124,990 124,990 
Foreign currency translation adjustment4,514 4,514 
Stock-based compensation expense11,848 11,848 
Common stock issued upon settlement of stock-based compensation33 1 1,336 1,337 
Shares withheld related to net share settlement of stock-based compensation(2) (461)(461)
Repurchase of common stock(10)(1)(12)(1,556)(1,569)
Balance at August 4, 20197,381 7,381 $ 122,921 $615 $329,915 $1,404,866 $(228,017)$1,507,379 

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Two Quarters Ended August 2, 2020
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance at February 2, 20206,227 6,227 $ 124,122 $621 $355,541 $1,820,637 $(224,581)$1,952,218 
Net income115,433 115,433 
Foreign currency translation adjustment(6,304)(6,304)
Common stock issued upon exchange of exchangeable shares(834)(834) 834 4 (4) 
Stock-based compensation expense21,912 21,912 
Common stock issued upon settlement of stock-based compensation485 2 12,461 12,463 
Shares withheld related to net share settlement of stock-based compensation(155) (30,957)(30,957)
Repurchase of common stock(369)(2)(539)(63,122)(63,663)
Balance at August 2, 20205,393 5,393 $ 124,917 $625 $358,414 $1,872,948 $(230,885)$2,001,102 

Two Quarters Ended August 4, 2019
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance at February 3, 20199,332 9,332 $ 121,600 $608 $315,285 $1,346,890 $(216,808)$1,445,975 
Net income221,593 221,593 
Foreign currency translation adjustment(11,209)(11,209)
Common stock issued upon exchange of exchangeable shares(1,951)(1,951) 1,951 10 (10) 
Stock-based compensation expense22,005 22,005 
Common stock issued upon settlement of stock-based compensation497 3 13,511 13,514 
Shares withheld related to net share settlement of stock-based compensation(117)(1)(19,399)(19,400)
Repurchase of common stock(1,010)(5)(1,477)(163,617)(165,099)
Balance at August 4, 20197,381 7,381 $ 122,921 $615 $329,915 $1,404,866 $(228,017)$1,507,379 

See accompanying notes to the unaudited interim consolidated financial statements
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lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
Two Quarters Ended
August 2, 2020August 4, 2019
Cash flows from operating activities
Net income$115,433 $221,593 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization84,176 70,422 
Stock-based compensation expense21,912 22,005 
Settlement of derivatives not designated in a hedging relationship(13,538)(5,430)
Changes in operating assets and liabilities:
Inventories(138,194)(93,358)
Prepaid and receivable income taxes(39,860)(63,187)
Prepaid expenses and other current and non-current assets(76,811)(45,539)
Accounts payable35,967 15,791 
Accrued inventory liabilities25,322 (7,069)
Other accrued liabilities53,868 3,367 
Accrued compensation and related expenses(49,037)(7,486)
Current and non-current income taxes payable43,926 (55,508)
Unredeemed gift card liability(13,848)(19,413)
Right-of-use lease assets and current and non-current lease liabilities7,388 9,625 
Other current and non-current liabilities3,358 4,229 
Net cash provided by operating activities60,062 50,042 
Cash flows from investing activities
Purchase of property and equipment(104,723)(135,764)
Settlement of net investment hedges10,981 5,062 
Acquisition, net of cash acquired(452,581) 
Other investing activities1,000 (1,267)
Net cash used in investing activities(545,323)(131,969)
Cash flows from financing activities
Proceeds from settlement of stock-based compensation12,463 13,514 
Taxes paid related to net share settlement of stock-based compensation(30,957)(19,400)
Repurchase of common stock(63,663)(165,099)
Net cash used in financing activities(82,157)(170,985)
Effect of exchange rate changes on cash and cash equivalents(3,089)(4,670)
Decrease in cash and cash equivalents(570,507)(257,582)
Cash and cash equivalents, beginning of period$1,093,505 $881,320 
Cash and cash equivalents, end of period$522,998 $623,738 
See accompanying notes to the unaudited interim consolidated financial statements

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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
Note 12
Note 13

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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, and license and supply arrangements. The Company operates stores in the United States, Canada, the People's Republic of China ("PRC"), Australia, the United Kingdom, Japan, Germany, New Zealand, South Korea, Singapore, France, Malaysia, Sweden, Ireland, the Netherlands, Norway, and Switzerland. There were 506 and 491 company-operated stores in operation as of August 2, 2020 and February 2, 2020, respectively.
On July 7, 2020, the Company acquired Curiouser Products Inc., dba MIRROR, ("MIRROR") which has been consolidated from the date of acquisition. MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions. Please refer to Note 3 for further information.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020.
In line with recommendations by public health officials and in accordance with governmental authority orders, the Company took actions to temporarily close the majority of its retail locations and to reduce operating hours. In February 2020, the Company temporarily closed all of its retail locations in Mainland China, and in March 2020, the Company temporarily closed all of its retail locations in North America, Europe, and certain countries in Asia Pacific. The stores in Mainland China reopened during the first quarter of fiscal 2020, and stores in other markets began reopening in accordance with local government and public health authority guidelines during the second quarter of fiscal 2020. The Company's stores are operating with restrictive measures in place such as reduced operating hours and limited occupancy levels. As of August 2, 2020, 492 of its company-operated stores were open. The Company's distribution centers in Columbus, Ohio and Sumner, Washington were temporarily closed for one and two weeks, respectively, during the first quarter of fiscal 2020 due to COVID-19.
In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses. The most significant relief measures which the Company qualifies for are the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in the United States, and the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. During the first two quarters of fiscal 2020, the Company recognized payroll subsidies totaling $35.5 million under these wage subsidy programs and similar plans in other jurisdictions. These subsidies were recorded as a reduction in the associated wage costs which the Company incurred, and were recognized in selling, general and administrative expenses.
The Company also qualifies for and has deferred certain corporate income tax payments and employer payroll tax payments. The most significant is the deferral of $127.5 million of Canadian corporate income tax payments which would otherwise have been paid during the first and second quarters of fiscal 2020 to the third quarter of fiscal 2020.
The Financial Accounting Standards Board ("FASB") staff issued guidance in April 2020 in relation to accounting for lease concessions made in connection with the effects of COVID-19. In accordance with this guidance, the Company has elected to treat COVID-19-related lease concessions as variable lease payments. The Company is actively negotiating commercially reasonable lease concessions. No significant lease concessions were recognized in the first two quarters of fiscal 2020.
Temporary store closures as a result of COVID-19 and associated reduction in operating income during the first two quarters of fiscal 2020 are considered to be an indicator of impairment and the Company performed an assessment of recoverability for the long-lived assets and right-of-use assets associated with closed retail locations. In the first quarter of fiscal 2020, the Company recognized an insignificant impairment charge as a result of this analysis.
Revenue is presented net of an allowance for expected returns, which is estimated based on historic return rates, trends, considering shifts towards increased online shopping by guests, and future expectations. In light of the store closures, the
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Company has extended its return policy. The increase in the sales return allowance reflects the higher proportion of direct to consumer net revenue and anticipated delays in returns as a result of reduced capacity at retail location and closures.
The COVID-19 pandemic has materially impacted the Company's operations. The extent to which COVID-19 continues to impact the Company's operations, and in turn, its operating results and financial position will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. Continued proliferation of the virus, or resurgence, may result in further or prolonged closures of its retail locations and distribution centers, reduce operating hours, interrupt the Company's supply chain, cause changes in guest behavior, and reduce discretionary spending. Such factors could result in the impairment of long-lived assets and right-of-use assets and the need for an increased provision against the carrying value of the Company's inventories.
Basis of presentation
The unaudited interim consolidated financial statements as of August 2, 2020 and for the quarters and two quarters ended August 2, 2020 and August 4, 2019 are presented in United States dollars and have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information is presented in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, does not include all of the information and footnotes required by GAAP for complete financial statements. The financial information as of February 2, 2020 is derived from the Company's audited consolidated financial statements and related notes for the fiscal year ended February 2, 2020, which are included in Item 8 in the Company's fiscal 2019 Annual Report on Form 10-K filed with the SEC on March 26, 2020. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 in the Company's fiscal 2019 Annual Report on Form 10-K. Changes in the significant accounting policies of the Company compared to those described in the Company's fiscal 2019 Annual Report on Form 10-K as a result of the acquisition of MIRROR are described below, and Note 2 sets out the impact of recent accounting pronouncements.
The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. Fiscal 2020 will end on January 31, 2021 and will be a 52-week year. Fiscal 2019 was a 52-week year.
The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its operating profit in the fourth fiscal quarter of each year as a result of increased net revenue during the holiday season.
Certain comparative figures have been reclassified to conform to the financial presentation adopted for the current year.
Accounting policies related to the acquisition of MIRROR
Business combinations
The purchase price of an acquisition is measured as the aggregate of the fair value of the consideration transferred including the acquisition-date fair value of the Company's previously held equity interests. The purchase price is allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess recorded as goodwill. These fair value determinations require judgment and may involve the use of significant estimates and assumptions. The purchase price allocation may be provisional during a measurement period of up to one year to provide reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. Any such measurement period adjustments are recognized in the period in which the adjustment amount is determined. Transaction costs associated with the acquisition are expensed as incurred.
Goodwill and intangible assets
Acquired finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, and are reviewed for impairment when events or circumstances indicate that the asset group to which the intangible assets belong might be impaired. The Company revises the estimated remaining useful life of these assets when events or changes in circumstances warrant a revision. If the Company revises the useful life, the unamortized balance is amortized over the remaining useful life on a prospective basis.
Goodwill represents the excess of the aggregate of the consideration transferred over the net assets acquired and liabilities assumed and is tested annually for impairment, or more frequently if there are indicators of impairment.
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Revenue recognition and cost of goods sold
MIRROR generates net revenue from the sale of in-home fitness equipment and associated content subscriptions. Certain in-home fitness contracts contain multiple performance obligations, including hardware and a subscription service commitment. For customer contracts that contain multiple performance obligations the Company accounts for individual performance obligations if they are distinct. The transaction price is allocated to each performance obligation based on its standalone selling price.
The cost of digital content subscription services, including the costs of content creation, studio overhead, and related production departments is recorded in costs of goods sold.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements
In June 2016, the FASB issued guidance on ASC 326 "Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments". This guidance changes the impairment model for most financial assets and requires the use of a forward-looking expected loss model rather than incurred losses for instruments measured at amortized cost. Under this model, entities are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The Company adopted this update during the first quarter of fiscal 2020 and it did not have a material impact on the Company's consolidated financial statements.
Recently issued accounting pronouncements
In December 2019, the FASB issued guidance on ASC 740, "Income Taxes". The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application and simplify GAAP for other areas of this topic by clarifying and amending existing guidance. This guidance is effective for the Company beginning in its first quarter of fiscal 2021 and early adoption is permitted. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements but does not believe it will have a material impact.
In March 2020, the FASB released guidance on ASC 848, "Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting". This update provides optional expedients and exceptions to the current guidance on contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements but does not believe it will have a material impact.
NOTE 3. ACQUISITION
On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. The results of operations, financial position, and cash flows of MIRROR have been included in the Company's consolidated financial statements since the date of acquisition.
The following table summarizes the fair value of the consideration transferred at the date of acquisition, as well as the calculation of goodwill based on the excess of consideration over the provisional fair value of net assets acquired. As part of the transaction, the Company assumed $30.1 million of MIRROR's outstanding debt. This included $15.1 million of external debt that was settled as part of the transaction and $15.0 million of debt previously owed by MIRROR to the Company, which
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represents the effective settlement of a preexisting relationship. The debt was determined to be at market terms and was recognized as a component of the consideration transferred, and no gain or loss was recorded on settlement.
July 7, 2020
(in thousands)
Fair value of consideration transferred:
Cash paid to shareholders$428,261 
Employee options attributed to pre-combination vesting4,569 
Acquired debt settled on acquisition30,122 
Fair value of existing lululemon investment1,782 
464,734 
Less cash and cash equivalents acquired(12,153)
Fair value of consideration transferred, net of cash and cash equivalents acquired$452,581 
Less net assets acquired:
Assets acquired:
Inventories$16,734 
Prepaid expenses and other current assets3,492 
Intangible assets85,000 
Other non-current assets5,648 
$110,874 
Liabilities assumed:
Current liabilities$(13,465)
Current and non-current lease liabilities(3,246)
Net deferred income tax liability(4,074)
$(20,785)
Net assets acquired$90,089 
Goodwill$362,492 
The purchase price allocation remains provisional as the Company is still obtaining all information necessary to finalize the fair value of acquired intangibles, deferred taxes, certain contingencies, and resulting amount of goodwill as of the date of acquisition.
Goodwill relates to benefits expected as a result of the acquisition to MIRROR's business and has been allocated to the MIRROR reporting unit within the Company's other channels. None of the goodwill is expected to be deductible for income tax purposes.
The Company assigned a fair value to and estimated useful lives for the intangible assets acquired as part of the MIRROR business combination. The fair value of the separately identifiable intangible assets, and their estimated useful lives as of the acquisition date were as follows:
Estimated Fair ValueEstimated Useful Life
(In thousands)
Intangible assets:
Brand $26,500 20.0 years
Customer relationships28,000 10.0 years
Technology25,500 7.5 years
Content5,000 5.0 years
$85,000 
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Accounting for business combinations requires significant estimates and assumptions to derive the fair value of acquired assets and liabilities, and in the case of MIRROR, this is with specific reference to acquired intangible assets. The fair value of intangible assets was based upon widely-accepted valuation techniques, including discounted cash flows and relief from royalty and replacement cost methods, depending on the nature of the assets acquired or liabilities assumed. Inherent in each valuation technique are critical assumptions, including future revenue growth rates, gross margin, royalty rates, discount rates, and terminal value assumptions. The recognition of deferred tax assets in relation to the historic net operating losses of MIRROR relied on assumptions and estimates of the future profitability of the Company's US operations.
The Company has not disclosed pro forma information of the combined business as the transaction is not material to revenue or net earnings.
Acquisition-related expenses
In connection with the acquisition, the Company recognized certain acquisition-related expenses which are expensed as incurred. These expenses are recognized within acquisition-related expenses in the consolidated statements of operations include the following amounts:
transaction and integration costs, including fees for advisory and professional services incurred as part of the acquisition and integration costs subsequent to the acquisition;
acquisition-related compensation, including the partial acceleration of vesting of certain stock options, and amounts due to selling shareholders that are contingent upon continuing employment; and
gain recognized on the Company's existing investment in the acquiree as of the acquisition date.
The following table summarizes the acquisition-related expenses recognized during fiscal 2020:
Quarter Ended 
August 2, 2020
Two Quarters Ended 
August 2, 2020
(in thousands)
Acquisition-related expenses:
Transaction and integration costs$7,201 $9,246 
Gain on existing investment(782)(782)
Acquisition-related compensation5,045 5,045 
$11,464 $13,509 
Income tax effects of acquisition-related expenses$(1,967)$(1,967)
In the first two quarters of fiscal 2020, the Company recognized an expense of $2.9 million for the partial acceleration of vesting of certain stock options held by MIRROR employees, and recognized $2.1 million related to deferred consideration.
The Company will recognize a total expense of $57.1 million for deferred consideration which is due to certain continuing MIRROR employees, subject to the continued employment of those individuals through various vesting dates up to three years from the acquisition date. This acquisition-related compensation is expensed over the vesting periods as service is provided, and consists of cash payments, which are included within accrued compensation and related expenses until payments are made, and stock-based compensation awards that have been granted under the Company's 2014 Equity Incentive Plan to replace certain unvested options as of the acquisition date.
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NOTE 4. GOODWILL
The Company's goodwill is assigned to its company-operated stores and other segments. The changes in the carrying amounts of goodwill were as follows:
Goodwill
(In thousands)
Balance as of February 2, 2020$24,182 
MIRROR acquisition362,492 
Effect of foreign currency translation(81)
Balance as of August 2, 2020$386,593 
NOTE 5. INTANGIBLE ASSETS, NET
The carrying value of intangible assets, and their estimated remaining useful lives as of August 2, 2020 were as follows:
August 2,
2020
February 2,
2020
Remaining Useful Life
(In thousands)
Intangible assets, net:
Brand$26,390 $ 19.9 years
Customer relationships27,758  9.9 years
Technology25,211  7.4 years
Content4,917  4.9 years
Other195 241 2.2 years
$84,471 $