lululemon athletica inc

Net Revenue

Net revenue increased $1.5 billion, or 19%, to $9.6 billion in 2023 from $8.1 billion in 2022. On a constant dollar basis, net revenue increased 20%. Comparable sales increased 13%, or 14% on a constant dollar basis. The increase in net revenue was primarily due to increased Americas net revenue. China Mainland and Rest of World net revenue also increased.

Net revenue for 2023 and 2022 is summarized below, and reflects our updated segments, including comparatives.

Americas. The increase in Americas net revenue was primarily due to an increase in comparable sales, which increased 8%, or 9% on a constant dollar basis. The increase in comparable sales was primarily a result of increased traffic, partially offset by a lower dollar value per transaction and a decrease in conversion rates. The increase in Americas net revenue was also driven by a $327.6 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2022 as well as increased outlet, wholesale, and license and supply arrangement net revenue, partially offset by fewer temporary locations and lower lululemon Studio net revenue.

China Mainland. The increase in China Mainland net revenue was primarily due to an increase in comparable sales, which increased 39%, or 46% on a constant dollar basis. The increase in comparable sales was primarily a result of increased traffic, partially offset by a decrease in conversion rates and a lower dollar value per transaction. The increase in China Mainland net revenue was also driven by a $180.6 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2022 as well as increased net revenue from outlets.

Rest of World. The increase in Rest of World net revenue was primarily due to an increase in comparable sales, which increased 32%, or 33% on a constant dollar basis. The increase in comparable sales was primarily a result of increased traffic, partially offset by a decrease in conversion rates. The increase in Rest of World net revenue was also driven by a $118.9 million increase in non-comparable sales, primarily from our company-operated stores that were opened or significantly expanded since 2022 as well as increased license and supply arrangements and outlets net revenue.

Gross Profit

During 2022, we decided to shift our lululemon Studio strategy to focus on providing digital app-based services. While we continued to sell at-home hardware in 2023, we reached the decision to cease selling the lululemon Studio Mirror during the third quarter of 2023. These strategy shifts resulted in the recognition of an inventory obsolescence provision of $62.9 million in 2022 and a further provision of $23.7 million in 2023. These provisions reduced gross margin by 80 basis points and 30 basis points in 2022 and 2023 respectively. Please refer to Note 8. Impairment of Goodwill and Other Assets, Restructuring Costs included in Item 8 of Part II of this report.

Gross margin increased 290 basis points, or excluding the impact of the lululemon Studio obsolescence provisions detailed above, increased 240 basis points. This 240 basis point net increase was primarily a result of:

•a net increase in product margin of 290 basis points, primarily due to lower freight costs from rate reductions and reduced air freight, as well as lower duty costs, modestly offset by higher inventory provisions and shrink in the current year;

•an unfavorable impact of foreign currency exchange rates of 20 basis points; and

•deleverage on occupancy costs of 20 basis points and an increase in costs related to our distribution centers as a percentage of net revenue of 10 basis points.

Selling, General and Administrative Expenses

The increase in selling, general and administrative expenses was primarily due to:

•an increase in head office costs of $327.7 million, comprised of:

–an increase in employee costs of $108.8 million primarily due to increased salaries and wages expense as well as increased stock-based compensation and incentive compensation, primarily as a result of headcount growth and increased wage rates;

–an increase in brand and community costs of $95.4 million primarily due to increased marketing expenses;

–an increase in depreciation of $46.0 million;

–an increase in other head office costs of $40.4 million, primarily due to increased professional fees; and

–an increase in technology costs, including cloud computing amortization, of $37.1 million.

•an increase in costs related to our operating channels of $319.1 million, comprised of:

–an increase in employee costs of $145.1 million primarily due to increased salaries and wages expense, incentive compensation, and benefit costs for retail employees, primarily from the growth in our business and increased wage rates;

–an increase in other operating costs of $67.7 million primarily due to increased depreciation costs, technology costs, and repairs and maintenance costs;

–an increase in variable costs of $66.8 million primarily due to increased credit card fees, distribution costs, and packaging costs, primarily as a result of increased net revenue; and

–an increase in brand and community costs of $39.5 million primarily due to increased digital marketing expenses.

The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $7.0 million.

Impairment of Goodwill and Other Assets, Restructuring Costs

During 2023, we recognized certain asset impairments and restructuring costs, and during 2022, we recognized impairment of goodwill and other assets, each in relation to lululemon Studio. Please refer to Note 8. Impairment of Goodwill and Other Assets, Restructuring Costs included in Item 8 of Part II of this report for further information.

Amortization of Intangible Assets

The amortization of intangible assets was primarily the result of the amortization of intangible assets recognized upon the acquisition of MIRROR, which we rebranded as lululemon Studio.

During the second quarter of 2022, we completed the sale of an administrative office building, which resulted in a pre-tax gain of $10.2 million.

Income from Operations

On a segment basis, we determine income from operations without taking into account our general corporate expenses and certain other expenses. Segmented income from operations is summarized below. Our prior year segment results have been recast to reflect our new segment reporting structure.

Americas. The increase in Americas income from operations was primarily the result of increased gross profit of $691.7 million, driven by increased net revenue and higher gross margin. The increase in gross margin was primarily due to higher product margin, partially offset by deleverage on distribution center costs. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher employee costs, increased digital marketing expenses, increased credit card fees, packaging costs, and distribution costs driven by higher net revenue, and increased depreciation, and technology costs. Income from operations as a percentage of Americas net revenue increased due to higher gross margin, partially offset by deleverage on selling, general and administrative expenses.

China Mainland. The increase in China Mainland income from operations was primarily the result of increased gross profit of $228.1 million, driven by increased net revenue. Gross margin was consistent year over year, primarily due to leverage on occupancy and other costs, partially offset by unfavorable foreign currency exchange rates and lower product margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses primarily due to higher employee costs, as well as increased digital marketing expenses, increased packaging costs, distribution costs, and credit card fees driven by higher net revenue, and increased technology costs. Income from operations as a percentage of China Mainland net revenue increased due to leverage on selling, general and administrative expenses.

Rest of World. The increase in Rest of World income from operations was primarily the result of increased gross profit of $190.2 million, driven by increased net revenue and higher gross margin. The increase in gross margin was primarily due to higher product margin as well as leverage on occupancy and other costs, partially offset by unfavorable foreign currency exchange rates. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses primarily due to higher employee costs, as well as increased digital marketing expenses, increased distribution costs, credit card fees, and packaging costs driven by higher net revenue, and increased technology costs. Income from operations as a percentage of Rest of World net revenue increased due to higher gross margin and leverage on selling, general and administrative expenses.

General Corporate Expenses. The increase in general corporate expenses was primarily due to increased employee costs, as well as increased brand and community costs, depreciation, technology costs, professional fees, and product team costs. The increase in general corporate expenses was partially offset by a decrease in net foreign currency exchange and derivative losses of $7.0 million.

Other Income (Expense), Net

The increase in other income, net was primarily due to an increase in interest income as a result of higher cash balances and higher interest rates.

Income Tax Expense

The decrease in the effective tax rate was primarily due the income tax impact of certain non-deductible impairment and other charges recognized in 2022 and 2023 related to lululemon Studio, partially offset by a lower tax rate on the gain on the sale of an administrative building in 2022. These items increased the effective tax rate by 780 basis points and 10 basis points in 2022 and 2023, respectively.

Excluding the income tax effects of the impairment and other charges recognized in 2022 and 2023 in relation to lululemon Studio, and excluding the tax effect of the gain on the sale of the administrative building in 2022, the adjusted effective tax rate increased to 28.7% in 2023 from 28.1% in 2022.

The increase in the adjusted effective tax rate was primarily due to withholding taxes on unremitted earnings which are not considered to be permanently reinvested, partially offset by adjustments upon the filing of certain income tax returns, and a decrease in U.S. state taxes.

Net Income

The increase in net income in 2023 was primarily due to an increase in gross profit of $1.1 billion, an increase in other income (expense), net of $38.9 million, and impairment and restructuring charges recognized in 2023 of $74.5 million compared to impairment charges of $407.9 million recognized in 2022, partially offset by an increase in selling, general and administrative expenses of $639.8 million, an increase in income tax expense of $147.8 million, and a gain on disposal of assets of $10.2 million in the prior year.

Excluding certain inventory provisions, goodwill and other asset impairments, and restructuring costs recognized in relation to lululemon Studio in 2023 and 2022 and the gain on sale of an administrative building in 2022, and their tax effects, adjusted net income increased $333.4 million or 26%.