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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 November 1, 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 December 4, 2020, there were 125,122,533 shares of the registrant's common stock, par value $0.005 per share, outstanding.
Exchangeable and Special Voting Shares:
At December 4, 2020, there were outstanding 5,215,512 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 December 4, 2020, the registrant had outstanding 5,215,512 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.


Table of Contents

TABLE OF CONTENTS
 
  Page
Item 1.
Item 2.
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Item 4.
Item 1.
Item 1A.
Item 2.
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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)
November 1,
2020
February 2,
2020
ASSETS
Current assets
Cash and cash equivalents$481,581 $1,093,505 
Accounts receivable59,772 40,219 
Inventories770,990 518,513 
Prepaid and receivable income taxes168,272 85,159 
Prepaid expenses and other current assets120,198 70,542 
1,600,813 1,807,938 
Property and equipment, net719,880 671,693 
Right-of-use lease assets714,086 689,664 
Goodwill386,632 24,182 
Intangible assets, net82,276 241 
Deferred income tax assets31,562 31,435 
Other non-current assets92,671 56,201 
$3,627,920 $3,281,354 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$160,779 $79,997 
Accrued inventory liabilities10,654 6,344 
Other accrued liabilities 190,366 112,641 
Accrued compensation and related expenses96,527 133,688 
Current lease liabilities138,082 128,497 
Current income taxes payable5,818 26,436 
Unredeemed gift card liability104,760 120,413 
Other current liabilities23,892 12,402 
730,878 620,418 
Non-current lease liabilities635,386 611,464 
Non-current income taxes payable43,150 48,226 
Deferred income tax liabilities47,199 43,432 
Other non-current liabilities8,354 5,596 
1,464,967 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; 5,216 and 6,227 issued and outstanding
  
Special voting stock, $0.000005 par value: 60,000 shares authorized; 5,216 and 6,227 issued and outstanding
  
Common stock, $0.005 par value: 400,000 shares authorized; 125,121 and 124,122 issued and outstanding
626 621 
Additional paid-in capital374,352 355,541 
Retained earnings2,016,591 1,820,637 
Accumulated other comprehensive loss(228,616)(224,581)
2,162,953 1,952,218 
$3,627,920 $3,281,354 
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 EndedThree Quarters Ended
November 1, 2020November 3, 2019November 1, 2020November 3, 2019
Net revenue$1,117,426 $916,138 $2,672,330 $2,581,805 
Cost of goods sold490,072 411,094 1,221,073 1,169,245 
Gross profit627,354 505,044 1,451,257 1,412,560 
Selling, general and administrative expenses411,662 329,208 1,064,172 939,930 
Amortization of intangible assets2,241 7 2,965 7 
Acquisition-related expenses8,531  22,040  
Income from operations204,920 175,829 362,080 472,623 
Other income (expense), net(580)1,925 250 6,154 
Income before income tax expense204,340 177,754 362,330 478,777 
Income tax expense60,697 51,772 103,254 131,202 
Net income$143,643 $125,982 $259,076 $347,575 
Other comprehensive income:
Foreign currency translation adjustment2,269 9,880 (4,035)(1,329)
Comprehensive income$145,912 $135,862 $255,041 $346,246 
Basic earnings per share$1.10 $0.97 $1.99 $2.67 
Diluted earnings per share$1.10 $0.96 $1.98 $2.65 
Basic weighted-average number of shares outstanding130,318 130,282 130,271 130,420 
Diluted weighted-average number of shares outstanding130,924 130,805 130,842 130,975 
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 November 1, 2020
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance at August 2, 20205,393 5,393 $ 124,917 $625 $358,414 $1,872,948 $(230,885)$2,001,102 
Net income143,643 143,643 
Foreign currency translation adjustment2,269 2,269 
Common stock issued upon exchange of exchangeable shares(177)(177)— 177 1 (1)— 
Stock-based compensation expense15,186 15,186 
Common stock issued upon settlement of stock-based compensation30 1 1,678 1,679 
Shares withheld related to net share settlement of stock-based compensation(3)(1)(925)(926)
Balance at November 1, 20205,216 5,216 $ 125,121 $626 $374,352 $2,016,591 $(228,616)$2,162,953 


Quarter Ended November 3, 2019
 Exchangeable StockSpecial Voting StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal
 SharesSharesPar ValueSharesPar Value
Balance at August 4, 20197,381 7,381 $ 122,921 $615 $329,915 $1,404,866 $(228,017)$1,507,379 
Net income125,982 125,982 
Foreign currency translation adjustment9,880 9,880 
Common stock issued upon exchange of exchangeable shares(421)(421)— 421 2 (2)— 
Stock-based compensation expense14,065 14,065 
Common stock issued upon settlement of stock-based compensation50 — 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, 20196,960 6,960 $ 123,336 $617 $343,335 $1,522,921 $(218,137)$1,648,736 

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Three Quarters Ended November 1, 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 income259,076 259,076 
Foreign currency translation adjustment(4,035)(4,035)
Common stock issued upon exchange of exchangeable shares(1,011)(1,011)— 1,011 5 (5)— 
Stock-based compensation expense37,098 37,098 
Common stock issued upon settlement of stock-based compensation515 3 14,139 14,142 
Shares withheld related to net share settlement of stock-based compensation(158)(1)(31,882)(31,883)
Repurchase of common stock(369)(2)(539)(63,122)(63,663)
Balance at November 1, 20205,216 5,216 $ 125,121 $626 $374,352 $2,016,591 $(228,616)$2,162,953 

Three Quarters Ended November 3, 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 income347,575 347,575 
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 expense36,070 36,070 
Common stock issued upon settlement of stock-based compensation547 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, 20196,960 6,960 $ 123,336 $617 $343,335 $1,522,921 $(218,137)$1,648,736 

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)
Three Quarters Ended
November 1, 2020November 3, 2019
Cash flows from operating activities
Net income$259,076 $347,575 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization133,209 114,444 
Stock-based compensation expense37,098 36,070 
Settlement of derivatives not designated in a hedging relationship(9,841)(3,375)
Changes in operating assets and liabilities:
Inventories(234,154)(225,124)
Prepaid and receivable income taxes(83,113)(77,330)
Prepaid expenses and other current assets(66,778)(47,660)
Other non-current assets(36,419)(15,447)
Accounts payable73,596 21,085 
Accrued inventory liabilities4,240 (5,940)
Other accrued liabilities69,496 6,486 
Accrued compensation and related expenses(37,077)(10,223)
Current and non-current income taxes payable(25,611)(48,573)
Unredeemed gift card liability(15,624)(24,183)
Right-of-use lease assets and current and non-current lease liabilities6,577 9,794 
Other current and non-current liabilities10,729 17,507 
Net cash provided by operating activities85,404 95,106 
Cash flows from investing activities
Purchase of property and equipment(170,830)(214,217)
Settlement of net investment hedges5,867 3,378 
Acquisition, net of cash acquired(452,581) 
Other investing activities1,000 (1,636)
Net cash used in investing activities(616,544)(212,475)
Cash flows from financing activities
Proceeds from settlement of stock-based compensation14,142 15,030 
Taxes paid related to net share settlement of stock-based compensation(31,883)(21,493)
Repurchase of common stock(63,663)(173,092)
Net cash used in financing activities(81,404)(179,555)
Effect of exchange rate changes on cash and cash equivalents620 1,757 
Decrease in cash and cash equivalents(611,924)(295,167)
Cash and cash equivalents, beginning of period$1,093,505 $881,320 
Cash and cash equivalents, end of period$481,581 $586,153 
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. The Company had 515 and 491 company-operated stores as of November 1, 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. Almost all of the Company's stores were open during the third quarter of fiscal 2020. The Company's stores are operating with restrictive measures in place such as reduced operating hours and limited occupancy levels. 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. Subsequent to November 1, 2020, while almost all of the Company's retail locations have remained open, it has experienced some temporary closures and is currently operating with tighter capacity restrictions in certain markets.
In response to the COVID-19 pandemic, various government programs have been announced which 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 third quarter of fiscal 2020 and the first three quarters of fiscal 2020, the Company recognized payroll subsidies totaling $1.4 million and $37.0 million, respectively, 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 deferred certain corporate income tax payments and employer payroll tax payments. The most significant was the deferral of $127.5 million of Canadian corporate income tax payments from the first and second quarters of fiscal 2020 to the third quarter of fiscal 2020. The Canadian corporate income payments during the third quarter of fiscal 2020 removed the balance previously included within income taxes payable on the consolidated balance sheets and resulted in a balance being recognized within prepaid and receivable income taxes on the consolidated balance sheets.
The Financial Accounting Standards Board ("FASB") 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. Lease concessions of $2.4 million and $5.5 million were recognized during the third quarter of fiscal 2020 and the first three quarters of fiscal 2020, respectively.
Temporary closures as a result of COVID-19 and associated reduction in operating income during the first two quarters of fiscal 2020 were considered to be an indicator of impairment and the Company performed an assessment of recoverability
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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. 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 locations.
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 the Company's 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 November 1, 2020 and for the quarters and three quarters ended November 1, 2020 and November 3, 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 adopted 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
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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.
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 
November 1, 2020
Three Quarters Ended 
November 1, 2020
(in thousands)
Acquisition-related expenses:
Transaction and integration costs$1,017 $10,263 
Gain on existing investment (782)
Acquisition-related compensation7,514 12,559 
$8,531 $22,040 
Income tax effects of acquisition-related expenses$(896)$(2,862)
In the first three quarters of fiscal 2020, the Company recognized $9.7 million related to deferred consideration, and recognized an expense of $2.9 million for the partial acceleration of vesting of certain stock options held by MIRROR employees.
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(42)
Balance as of November 1, 2020$386,632 
NOTE 5. INTANGIBLE ASSETS, NET
The carrying value of intangible assets, and their estimated remaining useful lives as of November 1, 2020 were as follows:
November 1,
2020
February 2,
2020
Remaining Useful Life
(In thousands)
Intangible assets, net:
Brand$26,058 $ 19.7 years
Customer relationships27,033  9.7 years
Technology24,344  7.2 years
Content4,667  4.7 years
Other174 241 1.9 years
$82,276 $241 
NOTE 6. CREDIT FACILITIES
North America revolving 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 is required to follow certain covenants. As of November 1, 2020, the Company was in compliance with these covenants.
The Company had no borrowings outstanding under this credit facility as of November 1, 2020 and February 2, 2020. As of November 1, 2020, the Company had letters of credit of $2.7 million outstanding.
Mainland China revolving credit facility
In December 2019, the Company entered into an uncommitted and unsecured 130.0 million Chinese Yuan revolving credit facility. The terms are reviewed on an annual basis. The facility includes a revolving loan of up to 100.0 million Chinese Yuan as well as a financial bank guarantee facility of up to 30.0 million Chinese Yuan, or its equivalent in another currency. In U.S. dollars, the uncommitted and unsecured revolving credit facility is equivalent to $19.4 million, the revolving loan is equivalent of up to $14.9 million, and the financial bank guarantee facility is equivalent of up to $4.5 million. Loans are available in Chinese Yuan for a period not to exceed 12 months, and interest accrues on them at a rate equal to 105% of the applicable PBOC Benchmark Lending Rate. Guarantees have a commission equal to 1% per annum of the outstanding amount.
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The Company is required to follow certain covenants. As of November 1, 2020, the Company was in compliance with these covenants. As of November 1, 2020, there were no borrowings outstanding under this credit facility.
364-Day revolving credit facility
On June 29, 2020, the Company entered into a 364-day credit agreement providing for a $300.0 million committed and unsecured revolving credit facility. The credit agreement matures on June 28, 2021. Bank of America, N.A., is administrative agent and swing line lender. Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs).
Borrowings made under the credit facility bear interest at a rate per annum equal to, at the Company's option, either (1) 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 (2) 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 1.50%-2.25% for LIBOR loans and 0.50%-1.25% for alternate base rate or Canadian prime rate loans. Additionally, a commitment fee of between 0.25%-0.55%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of the Company's 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.
The Company is also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and the Company is 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 November 1, 2020, the Company was in compliance with the covenants. As of November 1, 2020, there were no borrowings outstanding under this credit facility. On December 4, 2020, the Company gave notice to terminate this 364-day unsecured revolving credit facility. It will be terminated without penalty on December 11, 2020.
NOTE 7. 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 $41.9 million and $35.7 million for the three quarters ended November 1, 2020 and November 3, 2019, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $86.1 million at November 1, 2020, which is expected to be recognized over a weighted-average period of 2.1 years.
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A summary of the balances of the Company's stock-based compensation plans as of November 1, 2020, and changes during the first three quarters then ended, is presented below:
Stock OptionsPerformance-Based Restricted Stock UnitsRestricted SharesRestricted Stock UnitsRestricted Stock Units
(Liability Accounting)
NumberWeighted-Average Exercise PriceNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Grant Date Fair ValueNumberWeighted-Average Fair Value
(In thousands, except per share amounts)
Balance at February 2, 2020776 $113.41 238 $103.52 7 $175.82 333 $108.44 29 $239.39 
Granted238 180.83 138 117.60 4 296.36 127 205.76   
Exercised/released168 84.42 171 63.03 7 175.82 172 87.00 14 366.42 
Forfeited/expired26 157.71 7 158.76   10 163.30   
Balance at November 1, 2020820 $137.49 198 $146.25 4 $296.36 278 $164.21 15 $319.29 
Exercisable at November 1, 2020176 $107.43 
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 2020:
 Three Quarters Ended 
November 1, 2020
Expected term3.61 years
Expected volatility40.02 %
Risk-free interest rate0.32 %
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 1, 2020, there were 16.0 thousand shares purchased.
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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 $6.7 million and $6.4 million in the first three quarters of fiscal 2020 and fiscal 2019, respectively.
NOTE 8. 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.
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 1, 2020 and February 2, 2020, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis:
November 1, 2020Level 1Level 2Level 3Balance Sheet Classification
(In thousands)
Money market funds$30,528 $30,528 $ $ Cash and cash equivalents
Term deposits76,428  76,428  Cash and cash equivalents
Forward currency contract assets7,491  7,491  Prepaid expenses and other current assets
Forward currency contract liabilities9,688  9,688  Other current liabilities
February 2, 2020Level 1Level 2Level 3Balance Sheet Classification
(In thousands)
Money market funds$610,800 $610,800 $ $ Cash and cash equivalents
Term deposits203,360  203,360  Cash and cash equivalents
Forward currency contract assets1,735  1,735  Prepaid expenses and other current assets
Forward currency contract liabilities1,920  1,920  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.
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NOTE 9. 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 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 2020.
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 2020, 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 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 1, 2020, there were derivative assets of $7.5 million and derivative liabilities of $9.7 million subject to enforceable netting arrangements.
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The notional amounts and fair values of forward currency contracts were as follows:
November 1, 2020February 2, 2020
Gross NotionalAssetsLiabilitiesGross NotionalAssetsLiabilities
(In thousands)
Derivatives designated as net investment hedges: