ITEM 1. FINANCIAL STATEMENTS
lululemon athletica inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited; Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
August 4,
2019
|
|
February 3,
2019
|
ASSETS
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
623,738
|
|
|
$
|
881,320
|
|
Accounts receivable
|
|
27,659
|
|
|
35,786
|
|
Inventories
|
|
494,294
|
|
|
404,842
|
|
Prepaid and receivable income taxes
|
|
112,572
|
|
|
49,385
|
|
Other prepaid expenses and other current assets
|
|
74,750
|
|
|
57,949
|
|
|
|
1,333,013
|
|
|
1,429,282
|
|
Property and equipment, net
|
|
617,090
|
|
|
567,237
|
|
Right-of-use lease assets
|
|
657,044
|
|
|
—
|
|
Goodwill
|
|
24,184
|
|
|
24,239
|
|
Deferred income tax assets
|
|
26,296
|
|
|
26,549
|
|
Other non-current assets
|
|
37,117
|
|
|
37,404
|
|
|
|
$
|
2,694,744
|
|
|
$
|
2,084,711
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
110,513
|
|
|
$
|
95,533
|
|
Accrued inventory liabilities
|
|
8,778
|
|
|
16,241
|
|
Accrued compensation and related expenses
|
|
100,735
|
|
|
109,181
|
|
Current lease liabilities
|
|
130,182
|
|
|
—
|
|
Current income taxes payable
|
|
5,090
|
|
|
67,412
|
|
Unredeemed gift card liability
|
|
79,629
|
|
|
99,412
|
|
Other current liabilities
|
|
117,682
|
|
|
112,698
|
|
|
|
552,609
|
|
|
500,477
|
|
Non-current lease liabilities
|
|
568,311
|
|
|
—
|
|
Non-current income taxes payable
|
|
48,226
|
|
|
42,099
|
|
Deferred income tax liabilities
|
|
14,114
|
|
|
14,249
|
|
Other non-current liabilities
|
|
4,105
|
|
|
81,911
|
|
|
|
1,187,365
|
|
|
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; 7,381 and 9,332 issued and outstanding
|
|
—
|
|
|
—
|
|
Special voting stock, $0.000005 par value: 60,000 shares authorized; 7,381 and 9,332 issued and outstanding
|
|
—
|
|
|
—
|
|
Common stock, $0.005 par value: 400,000 shares authorized; 122,921 and 121,600 issued and outstanding
|
|
615
|
|
|
608
|
|
Additional paid-in capital
|
|
329,915
|
|
|
315,285
|
|
Retained earnings
|
|
1,404,866
|
|
|
1,346,890
|
|
Accumulated other comprehensive loss
|
|
(228,017
|
)
|
|
(216,808
|
)
|
|
|
1,507,379
|
|
|
1,445,975
|
|
|
|
$
|
2,694,744
|
|
|
$
|
2,084,711
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited; Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
Net revenue
|
|
$
|
883,352
|
|
|
$
|
723,500
|
|
|
$
|
1,665,667
|
|
|
$
|
1,373,206
|
|
Cost of goods sold
|
|
397,556
|
|
|
327,306
|
|
|
758,151
|
|
|
632,279
|
|
Gross profit
|
|
485,796
|
|
|
396,194
|
|
|
907,516
|
|
|
740,927
|
|
Selling, general and administrative expenses
|
|
317,814
|
|
|
261,986
|
|
|
610,722
|
|
|
502,414
|
|
Income from operations
|
|
167,982
|
|
|
134,208
|
|
|
296,794
|
|
|
238,513
|
|
Other income (expense), net
|
|
1,850
|
|
|
1,591
|
|
|
4,229
|
|
|
4,509
|
|
Income before income tax expense
|
|
169,832
|
|
|
135,799
|
|
|
301,023
|
|
|
243,022
|
|
Income tax expense
|
|
44,842
|
|
|
40,029
|
|
|
79,430
|
|
|
72,099
|
|
Net income
|
|
$
|
124,990
|
|
|
$
|
95,770
|
|
|
$
|
221,593
|
|
|
$
|
170,923
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
4,514
|
|
|
(18,249
|
)
|
|
(11,209
|
)
|
|
(61,221
|
)
|
Comprehensive income
|
|
$
|
129,504
|
|
|
$
|
77,521
|
|
|
$
|
210,384
|
|
|
$
|
109,702
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.96
|
|
|
$
|
0.71
|
|
|
$
|
1.70
|
|
|
$
|
1.27
|
|
Diluted earnings per share
|
|
$
|
0.96
|
|
|
$
|
0.71
|
|
|
$
|
1.69
|
|
|
$
|
1.26
|
|
Basic weighted-average number of shares outstanding
|
|
130,285
|
|
|
133,986
|
|
|
130,489
|
|
|
134,744
|
|
Diluted weighted-average number of shares outstanding
|
|
130,783
|
|
|
134,530
|
|
|
131,060
|
|
|
135,230
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended August 4, 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 May 5, 2019
|
|
7,381
|
|
|
7,381
|
|
|
$
|
—
|
|
|
122,900
|
|
|
$
|
615
|
|
|
$
|
317,204
|
|
|
$
|
1,281,432
|
|
|
$
|
(232,531
|
)
|
|
$
|
1,366,720
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,990
|
|
|
|
|
124,990
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,514
|
|
|
4,514
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
11,848
|
|
|
|
|
|
|
11,848
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
33
|
|
|
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, 2019
|
|
7,381
|
|
|
7,381
|
|
|
$
|
—
|
|
|
122,921
|
|
|
$
|
615
|
|
|
$
|
329,915
|
|
|
$
|
1,404,866
|
|
|
$
|
(228,017
|
)
|
|
$
|
1,507,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended July 29, 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 April 29, 2018
|
|
9,776
|
|
|
9,776
|
|
|
$
|
—
|
|
|
125,911
|
|
|
$
|
630
|
|
|
$
|
291,352
|
|
|
$
|
1,530,147
|
|
|
$
|
(185,895
|
)
|
|
$
|
1,636,234
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,770
|
|
|
|
|
95,770
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,249
|
)
|
|
(18,249
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
7,855
|
|
|
|
|
|
|
7,855
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
104
|
|
|
—
|
|
|
5,344
|
|
|
|
|
|
|
5,344
|
|
Shares withheld related to net share settlement of stock-based compensation
|
|
|
|
|
|
|
|
(4
|
)
|
|
—
|
|
|
(501
|
)
|
|
|
|
|
|
(501
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
(3,355
|
)
|
|
(17
|
)
|
|
(4,348
|
)
|
|
(401,873
|
)
|
|
|
|
(406,238
|
)
|
Balance at July 29, 2018
|
|
9,776
|
|
|
9,776
|
|
|
$
|
—
|
|
|
122,656
|
|
|
$
|
613
|
|
|
$
|
299,702
|
|
|
$
|
1,224,044
|
|
|
$
|
(204,144
|
)
|
|
$
|
1,320,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended August 4, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,593
|
|
|
|
|
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 expense
|
|
|
|
|
|
|
|
|
|
|
|
22,005
|
|
|
|
|
|
|
22,005
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
497
|
|
|
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, 2019
|
|
7,381
|
|
|
7,381
|
|
|
$
|
—
|
|
|
122,921
|
|
|
$
|
615
|
|
|
$
|
329,915
|
|
|
$
|
1,404,866
|
|
|
$
|
(228,017
|
)
|
|
$
|
1,507,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended July 29, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,923
|
|
|
|
|
170,923
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,221
|
)
|
|
(61,221
|
)
|
Common stock issued upon exchange of exchangeable shares
|
|
(5
|
)
|
|
(5
|
)
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
13,048
|
|
|
|
|
|
|
13,048
|
|
Common stock issued upon settlement of stock-based compensation
|
|
|
|
|
|
|
|
437
|
|
|
2
|
|
|
13,750
|
|
|
|
|
|
|
13,752
|
|
Shares withheld related to net share settlement of stock-based compensation
|
|
|
|
|
|
|
|
(81
|
)
|
|
—
|
|
|
(7,001
|
)
|
|
|
|
|
|
(7,001
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
(3,355
|
)
|
|
(17
|
)
|
|
(4,348
|
)
|
|
(401,881
|
)
|
|
|
|
(406,246
|
)
|
Balance at July 29, 2018
|
|
9,776
|
|
|
9,776
|
|
|
$
|
—
|
|
|
122,656
|
|
|
$
|
613
|
|
|
$
|
299,702
|
|
|
$
|
1,224,044
|
|
|
$
|
(204,144
|
)
|
|
$
|
1,320,215
|
|
See accompanying notes to the unaudited interim consolidated financial statements
lululemon athletica inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
Cash flows from operating activities
|
|
|
|
|
Net income
|
|
$
|
221,593
|
|
|
$
|
170,923
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
70,422
|
|
|
55,429
|
|
Stock-based compensation expense
|
|
22,005
|
|
|
13,048
|
|
Settlement of derivatives not designated in a hedging relationship
|
|
(5,430
|
)
|
|
(1,807
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
Inventories
|
|
(93,358
|
)
|
|
(73,065
|
)
|
Prepaid and receivable income taxes
|
|
(63,187
|
)
|
|
(13,255
|
)
|
Other prepaid expenses and other current and non-current assets
|
|
(45,539
|
)
|
|
(5,506
|
)
|
Accounts payable
|
|
15,791
|
|
|
86,885
|
|
Accrued inventory liabilities
|
|
(7,069
|
)
|
|
615
|
|
Accrued compensation and related expenses
|
|
(7,486
|
)
|
|
(4,926
|
)
|
Current income taxes payable
|
|
(61,635
|
)
|
|
(11,828
|
)
|
Unredeemed gift card liability
|
|
(19,413
|
)
|
|
(17,043
|
)
|
Non-current income taxes payable
|
|
6,127
|
|
|
(4,190
|
)
|
Right-of-use lease assets and current and non-current lease liabilities
|
|
9,625
|
|
|
—
|
|
Other current and non-current liabilities
|
|
7,596
|
|
|
14,746
|
|
Net cash provided by operating activities
|
|
50,042
|
|
|
210,026
|
|
Cash flows from investing activities
|
|
|
|
|
Purchase of property and equipment
|
|
(135,764
|
)
|
|
(84,007
|
)
|
Settlement of net investment hedges
|
|
5,062
|
|
|
(4,514
|
)
|
Other investing activities
|
|
(1,267
|
)
|
|
(771
|
)
|
Net cash used in investing activities
|
|
(131,969
|
)
|
|
(89,292
|
)
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from settlement of stock-based compensation
|
|
13,514
|
|
|
13,752
|
|
Taxes paid related to net share settlement of stock-based compensation
|
|
(19,400
|
)
|
|
(7,001
|
)
|
Repurchase of common stock
|
|
(165,099
|
)
|
|
(406,246
|
)
|
Net increase in revolving credit facility
|
|
—
|
|
|
100,000
|
|
Other financing activities
|
|
—
|
|
|
(744
|
)
|
Net cash used in financing activities
|
|
(170,985
|
)
|
|
(300,239
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(4,670
|
)
|
|
(33,155
|
)
|
Decrease in cash and cash equivalents
|
|
(257,582
|
)
|
|
(212,660
|
)
|
Cash and cash equivalents, beginning of period
|
|
$
|
881,320
|
|
|
$
|
990,501
|
|
Cash and cash equivalents, end of period
|
|
$
|
623,738
|
|
|
$
|
777,841
|
|
See accompanying notes to the unaudited interim consolidated financial statements
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
|
|
|
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, Australia, China, the United Kingdom, New Zealand, Japan, Germany, South Korea, Singapore, France, Ireland, the Netherlands, Sweden, and Switzerland. There were 460 and 440 company-operated stores in operation as of August 4, 2019 and February 3, 2019, respectively.
Basis of presentation
The unaudited interim consolidated financial statements as of August 4, 2019 and for the quarters and two quarters ended August 4, 2019 and July 29, 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 2. RECENT 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.
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.
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 August 4, 2019 and February 3, 2019. As of August 4, 2019, the Company had letters of credit of $1.8 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 $23.5 million and $13.0 million for the two quarters ended August 4, 2019 and July 29, 2018, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $82.4 million at August 4, 2019, which is expected to be recognized over a weighted-average period of 2.3 years.
A summary of the balances of the Company's stock-based compensation plans as of August 4, 2019, and changes during the first two 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
|
|
322
|
|
|
167.77
|
|
|
93
|
|
|
142.29
|
|
|
7
|
|
|
175.82
|
|
|
119
|
|
|
167.97
|
|
|
—
|
|
|
—
|
|
Exercised/released
|
|
221
|
|
|
61.12
|
|
|
97
|
|
|
72.04
|
|
|
6
|
|
|
124.19
|
|
|
173
|
|
|
70.17
|
|
|
—
|
|
|
—
|
|
Forfeited/expired
|
|
50
|
|
|
87.90
|
|
|
15
|
|
|
94.30
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
93.73
|
|
|
—
|
|
|
—
|
|
Balance at August 4, 2019
|
|
921
|
|
|
$
|
108.50
|
|
|
261
|
|
|
$
|
102.23
|
|
|
7
|
|
|
$
|
175.82
|
|
|
363
|
|
|
$
|
105.04
|
|
|
44
|
|
|
$
|
178.93
|
|
Exercisable at August 4, 2019
|
|
133
|
|
|
$
|
64.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 two quarters of fiscal 2019:
|
|
|
|
|
|
|
Two Quarters Ended
August 4, 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 August 4, 2019, there were 18.5 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 $4.3 million and $3.1 million in the first two 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.
|
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 August 4, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
347,590
|
|
|
$
|
347,590
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash and cash equivalents
|
Term deposits
|
|
40,606
|
|
|
—
|
|
|
40,606
|
|
|
—
|
|
|
Cash and cash equivalents
|
Forward currency contract assets
|
|
3,838
|
|
|
—
|
|
|
3,838
|
|
|
—
|
|
|
Other prepaid expenses and other current assets
|
Forward currency contract liabilities
|
|
4,162
|
|
|
—
|
|
|
4,162
|
|
|
—
|
|
|
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 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 two 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 two 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 August 4, 2019, there were derivative assets of $3.8 million and derivative liabilities of $4.2 million subject to enforceable netting arrangements.
The notional amounts and fair values of forward currency contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2019
|
|
February 3, 2019
|
|
|
Gross Notional
|
|
Assets
|
|
Liabilities
|
|
Gross Notional
|
|
Assets
|
|
Liabilities
|
|
|
(In thousands)
|
Derivatives designated as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
217,000
|
|
|
$
|
—
|
|
|
$
|
4,162
|
|
|
$
|
328,000
|
|
|
$
|
—
|
|
|
$
|
1,042
|
|
Derivatives not designated in a hedging relationship:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
211,000
|
|
|
3,838
|
|
|
—
|
|
|
309,000
|
|
|
516
|
|
|
—
|
|
Net derivatives recognized on consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
|
|
$
|
3,838
|
|
|
$
|
4,162
|
|
|
|
|
$
|
516
|
|
|
$
|
1,042
|
|
The forward currency contracts designated as net investment hedges outstanding as of August 4, 2019 mature on different dates between August 2019 and December 2019.
The forward currency contracts not designated in a hedging relationship outstanding as of August 4, 2019 mature on different dates between August 2019 and December 2019.
The pre-tax gains and losses on foreign exchange forward contracts recorded in accumulated other comprehensive income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
Gains (losses) recognized in foreign currency translation adjustment:
|
|
|
|
|
|
|
|
|
Derivatives designated as net investment hedges
|
|
$
|
(4,822
|
)
|
|
$
|
5,721
|
|
|
$
|
1,941
|
|
|
$
|
16,538
|
|
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
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
Gains (losses) recognized in selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
Foreign exchange (losses) gains
|
|
$
|
(4,452
|
)
|
|
$
|
2,960
|
|
|
$
|
1,245
|
|
|
$
|
12,605
|
|
Derivatives not designated in a hedging relationship
|
|
5,121
|
|
|
(5,539
|
)
|
|
(1,510
|
)
|
|
(15,587
|
)
|
Net foreign exchange and derivative gains (losses)
|
|
$
|
669
|
|
|
$
|
(2,579
|
)
|
|
$
|
(265
|
)
|
|
$
|
(2,982
|
)
|
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 7. LEASES
The Company has obligations under operating leases for its store and other retail locations, distribution centers, offices, and equipment. As of August 4, 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.
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
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
August 4, 2019
|
|
|
(In thousands)
|
Net lease expense:
|
|
|
|
|
Operating lease expense
|
|
$
|
43,429
|
|
|
$
|
85,674
|
|
Short-term lease expense
|
|
2,407
|
|
|
4,316
|
|
Variable lease expense
|
|
17,504
|
|
|
33,689
|
|
|
|
$
|
63,340
|
|
|
$
|
123,679
|
|
The following table presents future minimum lease payments and the impact of discounting.
|
|
|
|
|
|
|
|
August 4, 2019
|
|
|
(In thousands)
|
Final two quarters of fiscal 2019
|
|
$
|
81,143
|
|
2020
|
|
141,047
|
|
2021
|
|
141,259
|
|
2022
|
|
117,444
|
|
2023
|
|
91,165
|
|
After 2024
|
|
213,965
|
|
Future minimum lease payments
|
|
$
|
786,023
|
|
Impact of discounting
|
|
(87,530
|
)
|
Present value of lease liabilities
|
|
$
|
698,493
|
|
|
|
|
Balance sheet classification:
|
|
|
Current lease liabilities
|
|
$
|
130,182
|
|
Non-current lease liabilities
|
|
568,311
|
|
|
|
$
|
698,493
|
|
The weighted-average remaining lease term and weighted-average discount rate were as follows:
|
|
|
|
|
|
|
August 4, 2019
|
Weighted-average remaining lease term
|
|
6.11 years
|
|
Weighted-average discount rate
|
|
3.75
|
%
|
The following table presents supplemental cash flow information related to our leases.
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
August 4, 2019
|
|
|
(In thousands)
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
42,965
|
|
|
$
|
84,672
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
|
69,140
|
|
|
107,874
|
|
Disclosures related to periods prior to adoption of ASC 842
The following table details the Company's total rent expense prior to the adoption of ASC 842 as well as the property taxes for leased locations.
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
|
July 29, 2018
|
|
July 29, 2018
|
|
|
(In thousands)
|
Total rent expense:
|
|
|
|
|
Minimum rent expense
|
|
$
|
39,411
|
|
|
$
|
76,608
|
|
Common area expenses
|
|
5,496
|
|
|
10,671
|
|
Rent contingent on sales
|
|
3,526
|
|
|
6,472
|
|
|
|
$
|
48,433
|
|
|
$
|
93,751
|
|
|
|
|
|
|
Property taxes for leased locations
|
|
$
|
4,191
|
|
|
$
|
8,415
|
|
The table below summarizes the Company's contractual arrangements as of February 3, 2019, and the timing and effect that such commitments are expected to have on its liquidity and cash flows in future periods. Minimum annual basic rent payments excluding other executory operating costs, pursuant to lease agreements are approximately as laid out in the table below. These amounts include commitments in respect of lease agreements have been executed, but have not yet commenced.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
|
(In thousands)
|
Operating leases (minimum rent)
|
|
$
|
783,913
|
|
|
$
|
169,822
|
|
|
$
|
147,541
|
|
|
$
|
123,032
|
|
|
$
|
99,471
|
|
|
$
|
73,213
|
|
|
$
|
170,834
|
|
NOTE 8. EARNINGS PER SHARE
The details of the computation of basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands, except per share amounts)
|
Net income
|
|
$
|
124,990
|
|
|
$
|
95,770
|
|
|
$
|
221,593
|
|
|
$
|
170,923
|
|
Basic weighted-average number of shares outstanding
|
|
130,285
|
|
|
133,986
|
|
|
130,489
|
|
|
134,744
|
|
Assumed conversion of dilutive stock options and awards
|
|
498
|
|
|
544
|
|
|
571
|
|
|
486
|
|
Diluted weighted-average number of shares outstanding
|
|
130,783
|
|
|
134,530
|
|
|
131,060
|
|
|
135,230
|
|
Basic earnings per share
|
|
$
|
0.96
|
|
|
$
|
0.71
|
|
|
$
|
1.70
|
|
|
$
|
1.27
|
|
Diluted earnings per share
|
|
$
|
0.96
|
|
|
$
|
0.71
|
|
|
$
|
1.69
|
|
|
$
|
1.26
|
|
The Company's calculation of weighted-average shares includes the common stock of the Company as well as the exchangeable shares. Exchangeable shares are the equivalent of common shares in all material respects. All classes of stock have, in effect, the same rights and share equally in undistributed net income. For the two quarters ended August 4, 2019 and July 29, 2018, 0.1 million and 48.5 thousand stock options and awards, respectively, were anti-dilutive to earnings per share and therefore have been excluded from the computation of diluted earnings per share.
On November 29, 2017, the Company's board of directors approved a stock repurchase program for up to $200.0 million and on June 6, 2018, the board of directors approved an increase to this stock repurchase program, authorizing the repurchase of up to a total of $600.0 million of the Company's common shares. On January 31, 2019, the Company's board of directors approved an additional stock repurchase program for up to $500.0 million of the Company's common shares on the open market or in privately negotiated transactions. Common shares repurchased on the open market are at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934. The timing and actual number of common shares to be repurchased will depend upon market conditions, eligibility to trade, and other factors, in accordance with Securities and Exchange Commission requirements, and the repurchase program is expected to be completed by January 2021. As of August 4, 2019, the remaining aggregate value of shares available to be repurchased under these programs was $335.6 million.
During the two quarters ended August 4, 2019 and July 29, 2018, 1.0 million and 3.4 million shares, respectively, were repurchased under the program at a total cost of $165.1 million and $406.2 million, respectively.
Subsequent to August 4, 2019, and up to August 30, 2019, 34.1 thousand shares were repurchased at a total cost of $6.1 million.
NOTE 9. SUPPLEMENTARY FINANCIAL INFORMATION
A summary of certain consolidated balance sheet accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
August 4,
2019
|
|
February 3,
2019
|
|
|
(In thousands)
|
Inventories:
|
|
|
|
|
Finished goods
|
|
$
|
518,180
|
|
|
$
|
420,931
|
|
Provision to reduce inventories to net realizable value
|
|
(23,886
|
)
|
|
(16,089
|
)
|
|
|
$
|
494,294
|
|
|
$
|
404,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4,
2019
|
|
February 3,
2019
|
|
|
(In thousands)
|
Property and equipment, net:
|
|
|
|
|
Land
|
|
$
|
71,847
|
|
|
$
|
78,636
|
|
Buildings
|
|
30,192
|
|
|
38,030
|
|
Leasehold improvements
|
|
402,965
|
|
|
362,571
|
|
Furniture and fixtures
|
|
106,834
|
|
|
103,733
|
|
Computer hardware
|
|
80,707
|
|
|
69,542
|
|
Computer software
|
|
274,922
|
|
|
230,689
|
|
Equipment and vehicles
|
|
20,281
|
|
|
15,009
|
|
Work in progress
|
|
84,615
|
|
|
74,271
|
|
Property and equipment, gross
|
|
1,072,363
|
|
|
972,481
|
|
Accumulated depreciation
|
|
(455,273
|
)
|
|
(405,244
|
)
|
|
|
$
|
617,090
|
|
|
$
|
567,237
|
|
Other non-current assets:
|
|
|
|
|
Security deposits
|
|
$
|
16,297
|
|
|
$
|
15,793
|
|
Deferred lease assets
|
|
—
|
|
|
9,286
|
|
Other
|
|
20,820
|
|
|
12,325
|
|
|
|
$
|
37,117
|
|
|
$
|
37,404
|
|
Other current liabilities:
|
|
|
|
|
Accrued duty, freight, and other operating expenses
|
|
$
|
57,654
|
|
|
$
|
49,945
|
|
Sales tax collected
|
|
13,058
|
|
|
16,091
|
|
Accrued capital expenditures
|
|
12,561
|
|
|
11,295
|
|
Deferred revenue
|
|
9,186
|
|
|
8,045
|
|
Sales return allowances
|
|
8,752
|
|
|
11,318
|
|
Accrued rent
|
|
7,093
|
|
|
7,331
|
|
Forward currency contract liabilities
|
|
4,162
|
|
|
1,042
|
|
Lease termination liabilities
|
|
420
|
|
|
2,293
|
|
Other
|
|
4,796
|
|
|
5,338
|
|
|
|
$
|
117,682
|
|
|
$
|
112,698
|
|
Other non-current liabilities:
|
|
|
|
|
Tenant inducements
|
|
$
|
—
|
|
|
$
|
42,138
|
|
Deferred lease liabilities
|
|
—
|
|
|
33,406
|
|
Other
|
|
4,105
|
|
|
6,367
|
|
|
|
$
|
4,105
|
|
|
$
|
81,911
|
|
NOTE 10. SEGMENTED INFORMATION AND DISAGGREGATED NET REVENUE
The Company applies ASC Topic 280, Segment Reporting ("ASC 280"), in determining reportable segments for its financial statement disclosure. The Company reports segments based on the financial information it uses in managing its business. The Company's reportable segments are comprised of company-operated stores and direct to consumer. Direct to consumer represents sales from the Company's e-commerce websites and mobile apps. Outlets, temporary locations, sales to wholesale accounts, license and supply arrangements, and warehouse sale net revenue have been combined into other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
Net revenue:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
583,756
|
|
|
$
|
486,368
|
|
|
$
|
1,090,178
|
|
|
$
|
919,499
|
|
Direct to consumer
|
|
217,636
|
|
|
167,405
|
|
|
427,480
|
|
|
325,248
|
|
Other
|
|
81,960
|
|
|
69,727
|
|
|
148,009
|
|
|
128,459
|
|
|
|
$
|
883,352
|
|
|
$
|
723,500
|
|
|
$
|
1,665,667
|
|
|
$
|
1,373,206
|
|
Segmented income from operations:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
154,332
|
|
|
$
|
125,868
|
|
|
$
|
275,239
|
|
|
$
|
225,155
|
|
Direct to consumer
|
|
86,081
|
|
|
67,033
|
|
|
164,756
|
|
|
129,300
|
|
Other
|
|
16,619
|
|
|
13,094
|
|
|
29,252
|
|
|
24,317
|
|
|
|
257,032
|
|
|
205,995
|
|
|
469,247
|
|
|
378,772
|
|
General corporate expense
|
|
89,050
|
|
|
71,787
|
|
|
172,453
|
|
|
140,259
|
|
Income from operations
|
|
167,982
|
|
|
134,208
|
|
|
296,794
|
|
|
238,513
|
|
Other income (expense), net
|
|
1,850
|
|
|
1,591
|
|
|
4,229
|
|
|
4,509
|
|
Income before income tax expense
|
|
$
|
169,832
|
|
|
$
|
135,799
|
|
|
$
|
301,023
|
|
|
$
|
243,022
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
42,026
|
|
|
$
|
27,765
|
|
|
$
|
80,736
|
|
|
$
|
47,001
|
|
Direct to consumer
|
|
7,584
|
|
|
593
|
|
|
13,810
|
|
|
1,314
|
|
Corporate and other
|
|
17,720
|
|
|
21,335
|
|
|
41,218
|
|
|
35,692
|
|
|
|
$
|
67,330
|
|
|
$
|
49,693
|
|
|
$
|
135,764
|
|
|
$
|
84,007
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
23,712
|
|
|
$
|
18,489
|
|
|
$
|
44,772
|
|
|
$
|
35,571
|
|
Direct to consumer
|
|
2,970
|
|
|
2,302
|
|
|
5,432
|
|
|
4,901
|
|
Corporate and other
|
|
10,917
|
|
|
7,865
|
|
|
20,218
|
|
|
14,957
|
|
|
|
$
|
37,599
|
|
|
$
|
28,656
|
|
|
$
|
70,422
|
|
|
$
|
55,429
|
|
The following table disaggregates the Company's net revenue by geographic area. The economic conditions in these areas could affect the amount and timing of the Company's net revenue and cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
United States
|
|
$
|
621,843
|
|
|
$
|
512,413
|
|
|
$
|
1,175,490
|
|
|
$
|
974,683
|
|
Canada
|
|
145,605
|
|
|
124,278
|
|
|
269,250
|
|
|
236,427
|
|
Outside of North America
|
|
115,904
|
|
|
86,809
|
|
|
220,927
|
|
|
162,096
|
|
|
|
$
|
883,352
|
|
|
$
|
723,500
|
|
|
$
|
1,665,667
|
|
|
$
|
1,373,206
|
|
NOTE 11. LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
In addition to the legal proceedings described below, the Company is, from time to time, involved in routine legal matters, and audits and inspections by governmental agencies and other third parties which are incidental to the conduct of its business. This includes legal matters such as initiation and defense of proceedings to protect intellectual property rights,
personal injury claims, product liability claims, employment claims, and similar matters. The Company believes the ultimate resolution of any such legal proceedings, audits, and inspections will not have a material adverse effect on its consolidated balance sheets, results of operations or cash flows.
On October 9, 2015, certain current and former hourly employees of the Company filed a class action lawsuit in the Supreme Court of New York entitled Rebecca Gathmann-Landini et al v. lululemon USA inc. On December 2, 2015, the case was moved to the United States District Court for the Eastern District of New York. The lawsuit alleges that the Company violated various New York labor codes by failing to pay all earned wages, including overtime compensation. The plaintiffs are seeking an unspecified amount of damages. The Company intends to vigorously defend this matter.
On November 21, 2018, plaintiff David Shabbouei filed in the Delaware Court of Chancery a derivative lawsuit on behalf of the Company against certain of the Company's current and former directors and officers, captioned David Shabbouei v. Laurent Potdevin, et al., 2018-0847-JRS. Plaintiff claims that the defendants breached their fiduciary duties to the Company by allegedly failing to address alleged sexual harassment, gender discrimination, and related conduct at the Company. Plaintiff also claims that the defendants breached their fiduciary duties to the Company and wasted corporate assets with respect to the separation agreement entered into by the Company and Laurent Potdevin in connection with his departure from the Company in February 2018. Plaintiff also further brings an unjust enrichment claim against Mr. Potdevin with respect to the separation agreement. Plaintiff seeks unspecified money damages for the Company for the defendants' alleged breaches of fiduciary duty, waste and unjust enrichment, disgorgement of all profits, benefits and other compensation Mr. Potdevin received as a result of defendants' alleged conduct for the Company, an order directing the Company to implement corporate governance and internal procedures, and an award of plaintiff's attorneys' fees, costs and expenses. The defendants and lululemon have moved to dismiss the action.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q and any documents incorporated herein by reference reflect our current views about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in "Risk Factors" and elsewhere in this report.
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q. Except as required by applicable securities law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
This information should be read in conjunction with the unaudited interim consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our fiscal 2018 Annual Report on Form 10-K filed with the SEC on March 27, 2019.
We disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.lululemon.com/), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls, and webcasts.
Overview
lululemon athletica inc. is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. We have a vision to be the experiential brand that ignites a community of people through sweat, grow, and connect, which we call "living the sweatlife." Since our inception, we have fostered a distinctive corporate culture; we promote a set of core values in our business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection, and choosing to have fun. These core values attract passionate and motivated employees who are driven to achieve personal and professional goals, and share our purpose "to elevate the world by unleashing the full potential within every one of us."
Our healthy lifestyle inspired athletic apparel and accessories are marketed under the lululemon and ivivva brand names. We offer a comprehensive line of apparel and accessories for women, men, and female youth. Our apparel assortment includes items such as pants, shorts, tops, and jackets designed for a healthy lifestyle including athletic activities such as yoga, running, training, and most other sweaty pursuits. We also offer fitness-related accessories.
Financial Highlights
For the second quarter of fiscal 2019, compared to the second quarter of fiscal 2018:
|
|
•
|
Net revenue increased 22% to $883.4 million. On a constant dollar basis, net revenue increased 23%.
|
|
|
•
|
Total comparable sales, which includes comparable store sales and direct to consumer, increased 15%. On a constant dollar basis, total comparable sales increased 17%.
|
|
|
–
|
Comparable store sales increased 10%, or increased 11% on a constant dollar basis.
|
|
|
–
|
Direct to consumer net revenue increased 30%, or increased 31% on a constant dollar basis.
|
Due to the 53rd week in fiscal 2018, comparable sales are calculated on a one week shifted basis such that the 13 weeks and 26 weeks ended August 4, 2019 are compared to the 13 weeks and 26 weeks ended August 5, 2018 rather than July 29, 2018.
|
|
•
|
Gross profit increased 23% to $485.8 million.
|
|
|
•
|
Gross margin increased 20 basis points to 55.0%.
|
|
|
•
|
Income from operations increased 25% to $168.0 million.
|
|
|
•
|
Operating margin increased 50 basis points to 19.0%.
|
|
|
•
|
Income tax expense increased 12% to $44.8 million. Our effective tax rate for the second quarter of fiscal 2019 was 26.4% compared to 29.5% for the second quarter of fiscal 2018.
|
|
|
•
|
Diluted earnings per share were $0.96 compared to $0.71 in the second quarter of fiscal 2018.
|
Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and the most directly comparable measures calculated in accordance with GAAP.
Results of Operations
Second Quarter Results
The following table summarizes key components of our results of operations for the quarters ended August 4, 2019 and July 29, 2018. The percentages are presented as a percentage of net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
|
(Percentages)
|
Net revenue
|
|
$
|
883,352
|
|
|
$
|
723,500
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
397,556
|
|
|
327,306
|
|
|
45.0
|
|
|
45.2
|
|
Gross profit
|
|
485,796
|
|
|
396,194
|
|
|
55.0
|
|
|
54.8
|
|
Selling, general and administrative expenses
|
|
317,814
|
|
|
261,986
|
|
|
36.0
|
|
|
36.2
|
|
Income from operations
|
|
167,982
|
|
|
134,208
|
|
|
19.0
|
|
|
18.5
|
|
Other income (expense), net
|
|
1,850
|
|
|
1,591
|
|
|
0.2
|
|
|
0.2
|
|
Income before income tax expense
|
|
169,832
|
|
|
135,799
|
|
|
19.2
|
|
|
18.8
|
|
Income tax expense
|
|
44,842
|
|
|
40,029
|
|
|
5.1
|
|
|
5.5
|
|
Net income
|
|
$
|
124,990
|
|
|
$
|
95,770
|
|
|
14.1
|
%
|
|
13.2
|
%
|
Net Revenue
Net revenue increased $159.9 million, or 22%, to $883.4 million for the second quarter of fiscal 2019 from $723.5 million for the second quarter of fiscal 2018. On a constant dollar basis, assuming the average exchange rates for the second quarter of fiscal 2019 remained constant with the average exchange rates for the second quarter of fiscal 2018, net revenue increased $168.3 million, or 23%.
The increase in net revenue was primarily due to increased company-operated store net revenue, including from new company-operated stores as well as an increase in comparable store sales, increased direct to consumer net revenue, and an increase in net revenue from our other retail locations.
Based on a shifted calendar, total comparable sales, which includes comparable store sales and direct to consumer, increased 15% in the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. Total comparable sales increased 17% on a constant dollar basis.
Net revenue on a segment basis for the quarters ended August 4, 2019 and July 29, 2018 is summarized below. The percentages are presented as a percentage of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
583,756
|
|
|
$
|
486,368
|
|
|
66.1
|
%
|
|
67.2
|
%
|
Direct to consumer
|
|
217,636
|
|
|
167,405
|
|
|
24.6
|
|
|
23.1
|
|
Other
|
|
81,960
|
|
|
69,727
|
|
|
9.3
|
|
|
9.6
|
|
Net revenue
|
|
$
|
883,352
|
|
|
$
|
723,500
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Company-Operated Stores. Net revenue from our company-operated stores segment increased $97.4 million, or 20%, to $583.8 million in the second quarter of fiscal 2019 from $486.4 million in the second quarter of fiscal 2018. The following contributed to the increase in net revenue from our company-operated stores segment:
|
|
•
|
Net revenue from company-operated stores we opened or significantly expanded subsequent to July 29, 2018 contributed $55.8 million to the increase. We opened 45 net new company-operated stores since the second quarter of fiscal 2018, including 21 stores in North America, 16 stores in Asia, five stores in Europe, and three stores in Australia/New Zealand.
|
|
|
•
|
Based on a shifted calendar, a comparable store sales increase of 10% in the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. Comparable store sales increased 11% on a constant dollar basis. The increase in comparable store sales was primarily a result of increased store traffic and improved conversion rates.
|
Direct to Consumer. Net revenue from our direct to consumer segment increased $50.2 million to $217.6 million in the second quarter of fiscal 2019 from $167.4 million in the second quarter of fiscal 2018. Based on a shifted calendar, direct to consumer net revenue increased 30%, or increased 31% on a constant dollar basis. This was primarily a result of increased website traffic, partially offset by a decrease in dollar value per transaction and lower conversion rates.
Other. Net revenue from our other segment increased $12.2 million, or 18%, to $82.0 million in the second quarter of fiscal 2019 from $69.7 million in the second quarter of fiscal 2018. This increase was primarily the result of an increase in sales to wholesale accounts, and an increased number of temporary locations, including seasonal stores, open during the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018.
Gross Profit
Gross profit increased $89.6 million, or 23%, to $485.8 million for the second quarter of fiscal 2019 from $396.2 million for the second quarter of fiscal 2018.
Gross profit as a percentage of net revenue, or gross margin, increased 20 basis points to 55.0% in the second quarter of fiscal 2019 from 54.8% in the second quarter of fiscal 2018. The increase in gross margin was primarily the result of an increase in product margin of 90 basis points which was primarily due to lower product costs, a favorable mix of higher margin product, and lower markdowns.
This was partially offset by an increase in costs as a percentage of revenue related to our distribution centers and our product departments of 30 basis points, an increase in occupancy and depreciation costs as a percentage of revenue of 20 basis points, and an unfavorable impact of foreign exchange rates of 20 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $55.8 million, or 21%, to $317.8 million in the second quarter of fiscal 2019 from $262.0 million in the second quarter of fiscal 2018. The increase in selling, general and administrative expenses was primarily due to:
|
|
•
|
an increase in costs related to our operating channels of $32.3 million, comprised of:
|
|
|
–
|
an increase in employee costs of $17.3 million primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher incentive compensation expenses;
|
|
|
–
|
an increase in variable costs of $10.3 million primarily due to an increase in distribution costs, credit card fees, and packaging costs as a result of increased net revenue; and
|
|
|
–
|
an increase in other costs of $4.7 million primarily due to increases in information technology costs, repairs and maintenance, and other costs associated with our operating locations;
|
|
|
•
|
an increase in head office costs of $26.8 million, comprised of:
|
|
|
–
|
an increase in employee costs of $15.4 million primarily due to additional employees to support the growth in our business, and due to increased incentive and stock-based compensation expense; and
|
|
|
–
|
an increase in other costs of $11.3 million primarily due to increases in depreciation, brand and community costs, professional fees, information technology costs, and other head office costs; and
|
|
|
•
|
an increase in net foreign exchange and derivative revaluation gains of $3.2 million. There were net foreign exchange and derivative revaluation gains of $0.7 million in the second quarter of fiscal 2019 compared to net foreign exchange revaluation losses of $2.6 million in the second quarter of fiscal 2018.
|
As a percentage of net revenue, selling, general and administrative expenses decreased 20 basis points, to 36.0% in the second quarter of fiscal 2019 from 36.2% in the second quarter of fiscal 2018.
Income from Operations
Income from operations increased $33.8 million, or 25%, to $168.0 million in the second quarter of fiscal 2019 from $134.2 million in the second quarter of fiscal 2018. Operating margin increased 50 basis points to 19.0% compared to 18.5% in the second quarter of fiscal 2018.
On a segment basis, we determine income from operations without taking into account our general corporate expenses.
Segmented income from operations for the quarters ended August 4, 2019 and July 29, 2018 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
|
(Percentage of segment revenue)
|
Segmented income from operations:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
154,332
|
|
|
$
|
125,868
|
|
|
26.4
|
%
|
|
25.9
|
%
|
Direct to consumer
|
|
86,081
|
|
|
67,033
|
|
|
39.6
|
|
|
40.0
|
|
Other
|
|
16,619
|
|
|
13,094
|
|
|
20.3
|
|
|
18.8
|
|
|
|
257,032
|
|
|
205,995
|
|
|
|
|
|
General corporate expense
|
|
89,050
|
|
|
71,787
|
|
|
|
|
|
Income from operations
|
|
$
|
167,982
|
|
|
$
|
134,208
|
|
|
|
|
|
Company-Operated Stores. Income from operations from our company-operated stores segment increased $28.5 million, or 23%, to $154.3 million for the second quarter of fiscal 2019 from $125.9 million for the second quarter of fiscal 2018. The increase was primarily the result of increased gross profit of $52.4 million which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses, primarily due to an increase in employee costs, primarily due to an increased number of company-operated stores and higher incentive compensation expenses, increased store operating expenses including higher credit card fees, packaging costs, and distribution costs as a result of higher net revenue, as well as increases in repairs and maintenance costs, security, and information technology costs. Income from operations as a percentage of company-operated stores net revenue increased 50 basis points primarily due to higher gross margin and leverage on selling, general and administrative expenses.
Direct to Consumer. Income from operations from our direct to consumer segment increased $19.0 million, or 28%, to $86.1 million for the second quarter of fiscal 2019 from $67.0 million for the second quarter of fiscal 2018. The increase was primarily the result of increased gross profit of $33.2 million which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses primarily due higher variable costs including distribution costs, credit card fees, and packaging costs as a result of higher net revenue, as well as higher professional fees, increased employee costs, and higher information technology costs. Income from operations as a percentage of direct to consumer net revenue decreased 40 basis points primarily due to deleverage on selling, general and administrative expenses, partially offset by higher gross margin.
Other. Other income from operations increased $3.5 million, or 27%, to $16.6 million for the second quarter of fiscal 2019 from $13.1 million for the second quarter of fiscal 2018. The increase was primarily the result of increased gross profit of $4.0 million which was due to increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to increased employee costs, primarily due to an increased number of temporary locations, and increased operating expenses including distribution costs and credit card fees as a result of higher net revenue, partially offset by a decrease in marketing costs. Income from operations as a percentage of other net revenue increased 150 basis points primarily due to leverage on selling, general and administrative expenses, partially offset by a decrease in gross margin.
General Corporate Expense. General corporate expense increased $17.3 million, or 24%, to $89.1 million for the second quarter of fiscal 2019 from $71.8 million for the second quarter of fiscal 2018. This increase was primarily due to increases in head office employee costs, depreciation, professional fees, information technology costs, and an increase in net foreign exchange and derivative revaluation gains of $3.2 million.
Other Income (Expense), Net
Other income, net increased $0.3 million, or 16%, to $1.8 million for the second quarter of fiscal 2019 from income of $1.6 million for the second quarter of fiscal 2018. The increase was primarily due to a decrease in interest expense primarily related to borrowings on our revolving credit facility during the second quarter of fiscal 2018. The increase in other income, net was partially offset by a decrease in net interest income.
Income Tax Expense
Income tax expense increased $4.8 million, or 12%, to $44.8 million for the second quarter of fiscal 2019 from $40.0 million for the second quarter of fiscal 2018. The effective tax rate for the second quarter of fiscal 2019 was 26.4% compared to 29.5% for the second quarter of fiscal 2018. The decrease in the effective tax rate was primarily due to changes in legislation
and guidance related to global intangible low-taxed income ("GILTI") taxes which were released during the fourth quarter of fiscal 2018, and due to new regulations which resulted in additional foreign tax credits being recognized in the second quarter of fiscal 2019.
Net Income
Net income increased $29.2 million, or 31%, to $125.0 million for the second quarter of fiscal 2019 from $95.8 million for the second quarter of fiscal 2018. This was primarily due to an increase in gross profit of $89.6 million, and an increase in other income (expense), net of $0.3 million, partially offset by an increase in selling, general and administrative expenses of $55.8 million, and an increase in income tax expense of $4.8 million.
First Two Quarters Results
The following table summarizes key components of our results of operations for the first two quarters ended August 4, 2019 and July 29, 2018. The percentages are presented as a percentage of net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
|
(Percentages)
|
Net revenue
|
|
$
|
1,665,667
|
|
|
$
|
1,373,206
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
758,151
|
|
|
632,279
|
|
|
45.5
|
|
|
46.0
|
|
Gross profit
|
|
907,516
|
|
|
740,927
|
|
|
54.5
|
|
|
54.0
|
|
Selling, general and administrative expenses
|
|
610,722
|
|
|
502,414
|
|
|
36.7
|
|
|
36.6
|
|
Income from operations
|
|
296,794
|
|
|
238,513
|
|
|
17.8
|
|
|
17.4
|
|
Other income (expense), net
|
|
4,229
|
|
|
4,509
|
|
|
0.3
|
|
|
0.3
|
|
Income before income tax expense
|
|
301,023
|
|
|
243,022
|
|
|
18.1
|
|
|
17.7
|
|
Income tax expense
|
|
79,430
|
|
|
72,099
|
|
|
4.8
|
|
|
5.3
|
|
Net income
|
|
$
|
221,593
|
|
|
$
|
170,923
|
|
|
13.3
|
%
|
|
12.4
|
%
|
Net Revenue
Net revenue increased $292.5 million, or 21%, to $1.666 billion for the first two quarters of fiscal 2019 from $1.373 billion for the first two quarters of fiscal 2018. On a constant dollar basis, assuming the average exchange rates for the first two quarters of fiscal 2019 remained constant with the average exchange rates for the first two quarters of fiscal 2018, net revenue increased $313.4 million, or 23%.
The increase in net revenue was primarily due to increased company-operated store net revenue, including from new company-operated stores as well as an increase in comparable store sales, increased direct to consumer net revenue, and an increase in net revenue from our other retail locations.
Based on a shifted calendar, total comparable sales, which includes comparable store sales and direct to consumer, increased 15% in the first two quarters of fiscal 2019 compared to the first two quarters of fiscal 2018. Total comparable sales increased 16% on a constant dollar basis.
Net revenue on a segment basis for the first two quarters ended August 4, 2019 and July 29, 2018 is summarized below. The percentages are presented as a percentage of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
|
(Percentages)
|
Company-operated stores
|
|
$
|
1,090,178
|
|
|
$
|
919,499
|
|
|
65.4
|
%
|
|
67.0
|
%
|
Direct to consumer
|
|
427,480
|
|
|
325,248
|
|
|
25.7
|
|
|
23.7
|
|
Other
|
|
148,009
|
|
|
128,459
|
|
|
8.9
|
|
|
9.3
|
|
Net revenue
|
|
$
|
1,665,667
|
|
|
$
|
1,373,206
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Company-Operated Stores. Net revenue from our company-operated stores segment increased $170.7 million, or 19%, to $1.090 billion in the first two quarters of fiscal 2019 from $919.5 million in the first two quarters of fiscal 2018. The following contributed to the increase in net revenue from our company-operated stores segment:
|
|
•
|
Net revenue from company-operated stores we opened or significantly expanded subsequent to July 29, 2018 contributed $100.1 million to the increase. We opened 45 net new company-operated stores since the second quarter of fiscal 2018, including 21 stores in North America, 16 stores in Asia, five stores in Europe, and three stores in Australia/New Zealand.
|
|
|
•
|
Based on a shifted calendar, a comparable store sales increase of 8% in the first two quarters of fiscal 2019 compared to the first two quarters of fiscal 2018. Comparable store sales increased 9% on a constant dollar basis. The increase in comparable store sales was primarily a result of increased store traffic and improved conversion rates.
|
Direct to Consumer. Net revenue from our direct to consumer segment increased $102.2 million to $427.5 million in the first two quarters of fiscal 2019 from $325.2 million in the first two quarters of fiscal 2018. Based on a shifted calendar, direct to consumer net revenue increased 31%, or increased 33% on a constant dollar basis. This was primarily a result of increased website traffic, partially offset by a decrease in dollar value per transaction and lower conversion rates.
Other. Net revenue from our other segment increased $19.6 million, or 15%, to $148.0 million in the first two quarters of fiscal 2019 from $128.5 million in the first two quarters of fiscal 2018. This increase was primarily the result of an increased number of temporary locations, including seasonal stores, open during the first two quarters of fiscal 2019 compared to the first two quarters of fiscal 2018 and an increase in net revenue from sales to wholesale accounts.
Gross Profit
Gross profit increased $166.6 million, or 22%, to $907.5 million for the first two quarters of fiscal 2019 from $740.9 million for the first two quarters of fiscal 2018.
Gross profit as a percentage of net revenue, or gross margin, increased 50 basis points, to 54.5% in the first two quarters of fiscal 2019 from 54.0% in the first two quarters of fiscal 2018. The increase in gross margin was primarily the result of an increase in product margin of 140 basis points which was primarily due to lower product costs, a favorable mix of higher margin product, and lower markdowns.
This was partially offset by an increase in costs as a percentage of revenue related to our distribution centers and our product departments of 40 basis points, an unfavorable impact of foreign exchange rates of 30 basis points, and an increase in occupancy and depreciation costs as a percentage of revenue of 10 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $108.3 million, or 22%, to $610.7 million in the first two quarters of fiscal 2019 from $502.4 million in the first two quarters of fiscal 2018. The increase in selling, general and administrative expenses was primarily due to:
|
|
•
|
an increase in costs related to our operating channels of $65.4 million, comprised of:
|
|
|
–
|
an increase in employee costs of $34.3 million primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher incentive compensation expenses;
|
|
|
–
|
an increase in variable costs of $18.2 million primarily due to an increase in distribution costs, credit card fees, and packaging costs as a result of increased net revenue; and
|
|
|
–
|
an increase in other costs of $12.9 million primarily due to an increase in digital marketing expenses, information technology costs, repairs and maintenance costs, security costs, and other costs associated with our operating locations;
|
|
|
•
|
an increase in head office costs of $45.6 million, comprised of:
|
|
|
–
|
an increase in employee costs of $27.4 million primarily due to additional employees to support the growth in our business and increased incentive and stock-based compensation expense; and
|
|
|
–
|
an increase in other costs of $18.2 million primarily due to an increase in professional fees, depreciation, brand and community costs, information technology costs, and other head office costs.
|
The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign exchange and derivative revaluation losses of $2.7 million.
As a percentage of net revenue, selling, general and administrative expenses increased 10 basis points, to 36.7% in the first two quarters of fiscal 2019 from 36.6% in the first two quarters of fiscal 2018.
Income from Operations
Income from operations increased $58.3 million, or 24%, to $296.8 million in the first two quarters of fiscal 2019 from $238.5 million in the first two quarters of fiscal 2018. Operating margin increased 40 basis points to 17.8% compared to 17.4% in the first two quarters of fiscal 2018.
On a segment basis, we determine income from operations without taking into account our general corporate expenses.
Segmented income from operations for the first two quarters ended August 4, 2019 and July 29, 2018 is summarized below. The percentages are presented as a percentage of net revenue of the respective operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
|
(Percentage of segment revenue)
|
Segmented income from operations:
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
$
|
275,239
|
|
|
$
|
225,155
|
|
|
25.2
|
%
|
|
24.5
|
%
|
Direct to consumer
|
|
164,756
|
|
|
129,300
|
|
|
38.5
|
|
|
39.8
|
|
Other
|
|
29,252
|
|
|
24,317
|
|
|
19.8
|
|
|
18.9
|
|
|
|
469,247
|
|
|
378,772
|
|
|
|
|
|
|
|
General corporate expense
|
|
172,453
|
|
|
140,259
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
296,794
|
|
|
$
|
238,513
|
|
|
|
|
|
|
|
Company-Operated Stores. Income from operations from our company-operated stores segment increased $50.1 million, or 22%, to $275.2 million for the first two quarters of fiscal 2019 from $225.2 million for the first two quarters of fiscal 2018. The increase was primarily the result of increased gross profit of $93.8 million which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses, primarily due to increased employee costs, primarily due to an increased number of company-operated stores and higher incentive compensation expenses, increased store operating expenses including higher credit card fees, distribution costs, and packaging costs as a result of higher net revenue, as well as increases in repairs and maintenance costs and security costs. Income from operations as a percentage of company-operated stores net revenue increased by 70 basis points, primarily due to an increase in gross margin and leverage on selling, general and administrative expenses.
Direct to Consumer. Income from operations from our direct to consumer segment increased $35.5 million, or 27%, to $164.8 million for the first two quarters of fiscal 2019 from $129.3 million for the first two quarters of fiscal 2018. The increase was primarily the result of increased gross profit of $65.4 million which was primarily due to increased net revenue. This was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs, credit card fees, and packaging costs as a result of higher net revenue, as well as higher digital marketing expenses, employee costs, professional fees, and information technology costs. Income from operations as a percentage of direct to consumer net revenue decreased 130 basis points, primarily due to deleverage on selling, general and administrative expenses and a decrease in gross margin.
Other. Other income from operations increased $4.9 million, or 20%, to $29.3 million for the first two quarters of fiscal 2019 from $24.3 million for the first two quarters of fiscal 2018. The increase was primarily the result of increased gross profit of $7.4 million which was primarily due to increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased employee costs, increased operating expenses including higher credit card fees and higher distribution costs as a result of higher net revenue, partially offset by lower community costs. Income from operations as a percentage of other net revenue increased 90 basis points, primarily due to leverage on selling, general and administrative expenses, partially offset by a decrease in gross margin.
General Corporate Expense. General corporate expense increased $32.2 million, or 23%, to $172.5 million for the first two quarters of fiscal 2019 from $140.3 million for the first two quarters of fiscal 2018. This increase was primarily due to increases in head office employee costs, professional fees, depreciation, information technology costs, and brand and community costs, partially offset by a decrease in net foreign exchange and derivative revaluation losses of $2.7 million.
Other Income (Expense), Net
Other income, net decreased $0.3 million, or 6%, to $4.2 million for the first two quarters of fiscal 2019 from income of $4.5 million for the first two quarters of fiscal 2018. The decrease was primarily due to a decrease in net interest income, primarily due to a decrease in cash and cash equivalents in the first two quarters of fiscal 2019 compared to the first two quarters of fiscal 2018. The decrease in other income, net was partially offset by a decrease in interest expense, primarily related to borrowings on our revolving credit facility during the first two quarters of fiscal 2018.
Income Tax Expense
Income tax expense increased $7.3 million, or 10%, to $79.4 million for the first two quarters of fiscal 2019 from $72.1 million for the first two quarters of fiscal 2018. The effective tax rate for the first two quarters of fiscal 2019 was 26.4% compared to 29.7% for the first two quarters of fiscal 2018. The decrease in the effective tax rate was primarily due to changes in legislation and guidance related to GILTI taxes which were released during the fourth quarter of fiscal 2018, new regulations which resulted in additional foreign tax credits, and due to an increase in tax deductions related to stock-based compensation.
Net Income
Net income increased $50.7 million, or 30%, to $221.6 million for the first two quarters of fiscal 2019 from $170.9 million for the first two quarters of fiscal 2018. This was primarily due to an increase in gross profit of $166.6 million, partially offset by an increase in selling, general and administrative expenses of $108.3 million, an increase in income tax expense of $7.3 million, and a decrease in other income (expense), net of $0.3 million.
Comparable Store Sales and Total Comparable Sales
We separately track comparable store sales, which reflect net revenue from company-operated stores that have been open for at least 12 full fiscal months, or open for 12 full fiscal months after being significantly expanded. Comparable store sales exclude sales from our direct to consumer and other segments. Total comparable sales combines comparable store sales and direct to consumer sales. In fiscal years following a 53 week year, the prior year period is shifted by one week to compare similar calendar weeks.
The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.
Non-GAAP Financial Measures
Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue are non-GAAP financial measures.
A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign exchange rates for the same period of the prior year. We provide constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue because we use these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates. We believe that disclosing these measures on a constant dollar basis is useful to investors because it enables them to better understand the level of growth of our business.
The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP. A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.
Constant dollar changes in net revenue
The below changes in net revenue show the change compared to the corresponding period in the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
August 4, 2019
|
|
Two Quarters Ended
August 4, 2019
|
|
|
(In thousands)
|
|
(Percentages)
|
|
(In thousands)
|
|
(Percentages)
|
Change
|
|
$
|
159,852
|
|
|
22
|
%
|
|
$
|
292,461
|
|
|
21
|
%
|
Adjustments due to foreign exchange rate changes
|
|
8,437
|
|
|
1
|
|
|
20,968
|
|
|
2
|
|
Change in constant dollars
|
|
$
|
168,289
|
|
|
23
|
%
|
|
$
|
313,429
|
|
|
23
|
%
|
Constant dollar changes in total comparable sales, comparable store sales, and direct to consumer net revenue
Due to the 53rd week in fiscal 2018, the below changes in total comparable sales, comparable store sales, and direct to consumer net revenue are calculated on a one week shifted basis such that the 13 weeks and 26 weeks ended August 4, 2019 are compared to the 13 weeks and 26 weeks ended August 5, 2018 rather than July 29, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
August 4, 2019
|
|
Two Quarters Ended
August 4, 2019
|
|
|
Total Comparable Sales1,2
|
|
Comparable Store Sales2
|
|
Direct to Consumer Net Revenue
|
|
Total Comparable Sales1,2
|
|
Comparable Store Sales2
|
|
Direct to Consumer Net Revenue
|
Change
|
|
15
|
%
|
|
10
|
%
|
|
30
|
%
|
|
15
|
%
|
|
8
|
%
|
|
31
|
%
|
Adjustments due to foreign exchange rate changes
|
|
2
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Change in constant dollars
|
|
17
|
%
|
|
11
|
%
|
|
31
|
%
|
|
16
|
%
|
|
9
|
%
|
|
33
|
%
|
__________
|
|
(1)
|
Total comparable sales includes comparable store sales and direct to consumer sales.
|
|
|
(2)
|
Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 full fiscal months, or open for at least 12 full fiscal months after being significantly expanded.
|
Seasonality
Our business is affected by the general seasonal trends common to the retail apparel industry. Our annual net revenue is weighted more heavily toward our fourth fiscal quarter, reflecting our historical strength in sales during the holiday season, while our operating expenses are more equally distributed throughout the year. As a result, a substantial portion of our operating profits are generated in the fourth quarter of our fiscal year. For example, we generated approximately 47%, 56%, and 47% of our full year operating profit during the fourth quarters of fiscal 2018, fiscal 2017, and fiscal 2016, respectively. Excluding the costs we incurred in connection with the ivivva restructuring, we generated approximately 51% of our operating profit during the fourth quarter of fiscal 2017.
Liquidity and Capital Resources
Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations, and capacity under our revolving credit facility. Our primary cash needs are capital expenditures for opening new stores and remodeling or relocating existing stores, making information technology system investments and enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally. We may also use cash to repurchase shares of our common stock. Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions, as well as in money market funds, treasury bills, and term deposits.
As of August 4, 2019, our working capital, excluding cash and cash equivalents, was $156.7 million, our cash and cash equivalents were $623.7 million, and our capacity under our revolving facility was $398.2 million.
The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
|
(In thousands)
|
Total cash provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
50,042
|
|
|
$
|
210,026
|
|
Investing activities
|
|
(131,969
|
)
|
|
(89,292
|
)
|
Financing activities
|
|
(170,985
|
)
|
|
(300,239
|
)
|
Effect of exchange rate changes on cash
|
|
(4,670
|
)
|
|
(33,155
|
)
|
Decrease in cash and cash equivalents
|
|
$
|
(257,582
|
)
|
|
$
|
(212,660
|
)
|
Operating Activities
Cash flows provided by or used in operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense, and the effect of changes in operating assets and liabilities.
Cash provided by operating activities decreased $160.0 million, to $50.0 million for the first two quarters of fiscal 2019 compared to $210.0 million for the first two quarters of fiscal 2018, primarily as a result of the following:
|
|
•
|
an increase in cash used in operating activities of $231.0 million as a result of the change in operating assets and liabilities, primarily due to the following:
|
|
|
–
|
$89.4 million related to income taxes, primarily due to payments for withholding taxes on repatriated foreign earnings, as well as timing of tax installments;
|
|
|
–
|
$71.1 million related to accounts payable, primarily due to a change in our payment terms in the prior fiscal year;
|
|
|
–
|
$40.0 million related to other prepaid expenses and other current and non-current assets; and
|
|
|
–
|
$28.0 million related to inventory, primarily due to an increase in inventory purchases.
|
This was partially offset by an increase of $50.7 million in net income, and an increase of $20.3 million in non-cash expenses primarily related to an increase in depreciation and stock-based compensation expense.
Investing Activities
Cash flows used in investing activities relate to capital expenditures, the settlement of net investment hedges, and other investing activities. The capital expenditures were primarily for opening new company-operated stores, remodeling or relocating certain stores, and ongoing store refurbishment. We also had capital expenditures related to information technology and business systems, related to corporate buildings, and for opening retail locations other than company-operated stores.
Cash used in investing activities increased $42.7 million to $132.0 million for the first two quarters of fiscal 2019 from $89.3 million for the first two quarters of fiscal 2018. The increase was primarily the result of an increase in capital expenditures related to our company-operated stores, primarily as a result of an increased number of new company-operated stores as well as an increase in renovations and relocations of existing stores. Increased capital expenditures related to our direct to consumer channel, as well as increased corporate capital expenditures primarily related to information technology and business systems, also contributed to the increase in cash used in investing activities.
Financing Activities
Cash flows used in financing activities consist primarily of cash used to repurchase shares of our common stock, changes in our revolving credit facility, certain cash flows related to stock-based compensation, and other financing activities.
Cash used in financing activities decreased $129.3 million to $171.0 million for the first two quarters of fiscal 2019 compared to $300.2 million for the first two quarters of fiscal 2018. The decrease was primarily the result of a decrease in our stock repurchases, partially offset by a decrease of net borrowings on our revolving credit facility.
On November 29, 2017, our board of directors approved a program to repurchase shares of our common stock up to an aggregate value of $200.0 million, and on June 6, 2018, the board of directors approved an increase to this stock repurchase program, authorizing the repurchase of up to a total of $600.0 million of our common shares. On January 31, 2019, our board
of directors approved an additional stock repurchase program for up to $500.0 million of our common shares on the open market or in privately negotiated transactions.
Our cash used in financing activities for the first two quarters of fiscal 2019 included $165.1 million to repurchase 1.0 million shares of our common stock compared to $406.2 million to repurchase 3.4 million shares for the first two quarters of fiscal 2018. During the first quarter of fiscal 2019, we repurchased 1.0 million shares in a private transaction, and during the second quarter of fiscal 2018, we repurchased 3.3 million shares in a private transaction. The other common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.
We believe that our cash and cash equivalent balances, cash generated from operations, and borrowings available to us under our revolving credit facility will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. Our cash from operations may be negatively impacted by a decrease in demand for our products as well as the other factors described in Item 1 of Part II of this Quarterly Report on Form 10-Q. In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations.
Revolving Credit Facility
On December 15, 2016, we entered into a credit agreement for $150.0 million under an unsecured five-year revolving credit facility. Bank of America, N.A., is administrative agent and HSBC Bank Canada is the syndication agent and letter of credit issuer, and the lenders party thereto. Borrowings under the revolving credit facility may be made, in U.S. Dollars, Euros, Canadian Dollars, and in other currencies, subject to the approval of the administrative agent and the lenders. Up to $35.0 million of the revolving credit facility is available for the issuance of letters of credit and up to $25.0 million is available for the issuance of swing line loans. Commitments under the revolving credit facility may be increased by up to $200.0 million, subject to certain conditions, including the approval of the lenders. Borrowings under the agreement may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs). The principal amount outstanding under the credit agreement, if any, will be due and payable in full on December 15, 2021, subject to provisions that permit us to request a limited number of one year extensions annually.
Borrowings made under the revolving credit facility bear interest at a rate per annum equal to, at our option, either (a) a rate based on the rates applicable for deposits on the interbank market for U.S. Dollars or the applicable currency in which the borrowings are made ("LIBOR") or (b) an alternate base rate, plus, in each case, an applicable margin. The applicable margin is determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax depreciation, amortization, and rent ("EBITDAR") and ranges between 1.00%-1.75% for LIBOR loans and 0.00%-0.75% for alternate base rate loans. Additionally, a commitment fee of between 0.125%-0.200%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the revolving credit facility.
The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of our subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.
We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and we are not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be less than 2.00:1.00. The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control). If an event of default occurs, the credit agreement may be terminated and the maturity of any outstanding amounts may be accelerated.
On June 6, 2018, we entered into Amendment No. 1 to the credit agreement. The Amendment 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, the 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%.
As of August 4, 2019, aside from letters of credit of $1.8 million, we had no other borrowings outstanding under this credit facility.
Off-Balance Sheet Arrangements
We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties. As of August 4, 2019, letters of credit and letters of guarantee totaling $1.8 million had been issued.
We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in our fiscal 2018 Annual Report on Form 10-K filed with the SEC on March 27, 2019, and in Notes 2, 5, 6, and 7 included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Operating Locations
Our company-operated stores by country as of August 4, 2019 and February 3, 2019 are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
August 4,
2019
|
|
February 3,
2019
|
United States
|
|
292
|
|
|
285
|
|
Canada
|
|
64
|
|
|
64
|
|
Australia
|
|
31
|
|
|
29
|
|
China (1)
|
|
28
|
|
|
22
|
|
United Kingdom
|
|
13
|
|
|
12
|
|
New Zealand
|
|
7
|
|
|
7
|
|
Japan
|
|
6
|
|
|
5
|
|
Germany
|
|
5
|
|
|
5
|
|
South Korea
|
|
5
|
|
|
4
|
|
Singapore
|
|
4
|
|
|
3
|
|
France
|
|
1
|
|
|
1
|
|
Ireland
|
|
1
|
|
|
1
|
|
Netherlands
|
|
1
|
|
|
—
|
|
Sweden
|
|
1
|
|
|
1
|
|
Switzerland
|
|
1
|
|
|
1
|
|
Total company-operated stores
|
|
460
|
|
|
440
|
|
__________
|
|
(1)
|
Included within China as of August 4, 2019, were six company-operated stores in the Hong Kong Special Administrative Region, one company-operated store in the Macao Special Administration Region, and one company-operated store in the Taiwan Province. As of February 3, 2019, there were five company-operated stores in the Hong Kong Special Administrative Region, one company-operated store in the Macao Special Administration Region, and one company-operated store in the Taiwan Province.
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Retail locations operated by third parties under license and supply arrangements are not included in the above table. As of August 4, 2019, there were eight licensed locations, including four in Mexico, three in the United Arab Emirates, and one in Qatar.