lululemon athletica inc

Year-to-Date Results of Operations: First Three Quarters Results

The following table summarizes key components of our results of operations for the periods indicated:

Net Revenue

Net revenue increased $562.5 million, or 9%, to $7.0 billion for the first three quarters of 2024 from $6.4 billion for the first three quarters of 2023. Comparable sales increased 4%. The increase in net revenue was primarily due to increased China Mainland and Rest of World net revenue. Americas net revenue also increased.

Net revenue for the first three quarters of 2024 and 2023 is summarized below:

Americas. The increase in Americas net revenue was primarily due to a $180.2 million increase from new or expanded company-operated stores and our other channels. We added 28 net new company-operated stores in the Americas since the third quarter of 2023, including 14 company-operated stores from the acquisition of the Mexico operations. Americas comparable sales decreased 2%, or 1% on a constant dollar basis. The decrease in comparable sales was primarily a result of decreased conversion rates, partially offset by an increase in traffic and a higher dollar value per transaction.

China Mainland. The increase in China Mainland net revenue was primarily due to an increase in comparable sales, which increased 25%, or 27% 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. The increase in China Mainland net revenue was also driven by a $111.6 million increase in net revenue from new or expanded company-operated stores and our other channels. We have opened 24 net new company-operated stores in China Mainland since the third quarter of 2023.

Rest of World. The increase in Rest of World net revenue was primarily due to an increase in comparable sales, which increased 21%, or 22% on a constant dollar basis. The increase in comparable sales was primarily a result of increased traffic and a higher dollar value per transaction, partially offset by a decrease in conversion rates. The increase in Rest of World net revenue was also driven by a $63.3 million increase in net revenue from new or expanded company-operated stores and our other channels. We have opened 11 net new company-operated stores in Rest of World since the third quarter of 2023.

Gross Profit

As a result of our decision to cease selling the lululemon Studio Mirror, we recognized an inventory obsolescence provision of $23.7 million during the third quarter of 2023, which reduced gross margin by 30 basis points. Please refer to Note 4. Impairment of Assets and Restructuring Costs included in Item 1 of Part I of this report.

Gross margin increased 80 basis points, or increased 50 basis points on an adjusted basis. The 50 basis point increase in adjusted gross margin was primarily the result of:

•a net increase in product margin of 90 basis points, primarily due to lower product costs, as well as lower inventory provisions in the current year; and

•a decrease in costs related to our product departments as a percentage of net revenue of 70 basis points.

The increase in adjusted gross margin was partially offset by an increase in occupancy and depreciation costs as a percentage of net revenue of 70 basis points, an increase in distribution center costs as a percentage of net revenue of 30 basis points, and an unfavorable impact of foreign currency exchange rates of 10 basis points.

Selling, General and Administrative Expenses

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

•an increase in costs related to our operating channels of $109.3 million, comprised of:

–an increase in employee costs of $40.1 million primarily due to increased salaries and wages expense and benefit costs for retail employees primarily from the growth in our business, partially offset by decreased incentive compensation;

–an increase in brand and community costs of $24.5 million primarily due to increased digital marketing expenses;

–an increase in other operating costs of $24.2 million primarily due to increased depreciation costs, and repairs and maintenance costs;

–an increase in technology costs of $12.2 million; and

–an increase in variable costs of $8.4 million primarily due to increased credit card fees and packaging costs, primarily as a result of increased net revenue, partially offset by decreased distribution cost rates.

•an increase in head office costs of $99.0 million, comprised of:

–an increase in brand and community costs of $37.7 million primarily due to increased marketing expenses and brand campaigns, partially offset by decreased charitable donations;

–an increase in advisory and professional fees of $35.7 million;

–an increase in technology costs, including cloud computing amortization, of $17.5 million;

–an increase in depreciation of $10.8 million; and

–an increase in other head office costs of $5.6 million.

The increase in costs related to our head office was partially offset by a net decrease in employee costs of $8.3 million primarily due to decreased incentive compensation, partially offset by increased salaries and wages expense.

•an increase in net foreign currency exchange and derivative revaluation losses of $8.2 million.

Impairment of Assets and Restructuring Costs

During the third quarter of 2023, we recognized certain asset impairments and restructuring costs related to lululemon Studio. Please refer to Note 4. Impairment of Assets and Restructuring Costs included in Item 1 of Part I of this report for further information.

Amortization of Intangible Assets

The amortization of intangible assets in 2024 was primarily the result of the amortization of intangible assets recognized upon the acquisition of the Mexico operations. The amortization of intangible assets in 2023 was primarily the result of the amortization of intangible assets recognized upon the acquisition of MIRROR, which we rebranded as lululemon Studio.

Income from Operations

On a segment basis, we determine income from operations without taking into account our general corporate expenses and certain other expenses. General corporate expenses include centrally managed support functions and other head office costs, including product design teams and brand costs which support all regions. Segmented income from operations is summarized below.

Americas. The increase in Americas income from operations was primarily the result of increased gross profit of $45.3 million, driven by increased net revenue, partially offset by lower gross margin. The decrease in gross margin was primarily due to deleverage on distribution center and occupancy costs, partially offset by higher product margin. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to increased marketing expenses and higher depreciation, partially offset by decreased distribution cost rates and lower employee costs. Income from operations as a percentage of Americas net revenue decreased due to lower gross margin and 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 $180.6 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 and increased marketing expenses, as well as increased distribution costs and packaging costs driven by higher net revenue. Income from operations as a percentage of China Mainland net revenue increased primarily due to higher gross margin.

Rest of World. The increase in Rest of World income from operations was primarily the result of increased gross profit of $121.0 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 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 and increased marketing expenses, as well as increased distribution costs and credit card fees driven by higher net revenue. Income from operations as a percentage of Rest of World net revenue increased primarily due to higher gross margin and leverage on selling, general and administrative expenses.

General Corporate Expense. The increase in general corporate expense was primarily due to increased advisory and professional fees, technology costs, and depreciation. The increase was also due to an increase in net foreign currency exchange and derivative revaluation losses of $8.2 million. The increase in general corporate expense was partially offset by decreased charitable donations and a net decrease in employee costs.

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.

Income Tax Expense

The increase in the effective tax rate was primarily due to a decrease in tax benefits related to stock-based compensation, an increase in non-deductible expenses in international jurisdictions, and adjustments upon the filing of certain income tax returns. The increase in the effective tax rate was partially offset by an increase in tax credits, and the income tax impact of certain non-deductible impairment and other charges related to lululemon Studio.

Excluding the income tax effects of the impairment and other charges recognized in relation to lululemon Studio in 2023, our adjusted effective tax rate was 29.0% for the first three quarters of 2023.

Net Income

The increase in net income was primarily due to an increase in gross profit of $382.9 million, impairment and other charges recognized in 2023 of $74.5 million, and an increase in other income (expense), net of $29.8 million, partially offset by an increase in selling, general and administrative expenses of $216.5 million, and an increase in income tax expense of $89.0 million.

Excluding the impairment and other charges recognized in relation to lululemon Studio in 2023, and their tax effects, adjusted net income increased $113.4 million or 12%.