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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Lululemon athletica Inc.    LULU

LULULEMON ATHLETICA INC.

(LULU)
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LULULEMON ATHLETICA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

09/08/2020 | 04:21pm EST
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, the impact of the COVID-19
pandemic on our business and results of operations, expectations related to our
acquisition of MIRROR, 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.
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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 2019 Annual Report
on Form 10-K filed with the SEC on March 26, 2020.
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 brand. We offer a comprehensive line of apparel and
accessories for women and men. 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.
During the second quarter of fiscal 2020, we acquired Curiouser Products Inc.,
dba MIRROR, for a purchase price of approximately $500.0 million, of which
approximately $57.1 million is due to certain continuing employees subject to
their continued employment through various vesting dates up to three years after
the closing date of the transaction. MIRROR is a leading in-home fitness company
with an interactive workout platform that features live and on-demand classes.
The acquisition of MIRROR will bolster our digital sweatlife offerings and bring
immersive and personalized in-home sweat, and mindfulness solutions to new and
existing lululemon guests.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global
pandemic by the World Health Organization in March 2020. The spread of COVID-19
has caused public health officials to impose restrictions and to recommend
precautions to mitigate the spread of the virus, especially when congregating in
heavily populated areas, such as malls and lifestyle centers.
We have taken actions to temporarily close retail locations and to reduce
operating hours, and we continue to monitor the situation and work closely with
local authorities to prioritize the safety of our people and guests. In February
2020, we temporarily closed all of our retail locations in Mainland China. In
March 2020, we temporarily closed all of our retail locations in North America,
Europe, and certain countries in Asia Pacific. The stores in Mainland China
reopened during the first quarter of fiscal 2020, and stores in other markets
began reopening in accordance with local government and public health authority
guidelines during the second quarter of fiscal 2020. As of August 2, 2020, 492
of our company-operated stores were open. Our distribution centers in Columbus,
Ohio and Sumner, Washington were temporarily closed for one and two weeks,
respectively, during the first quarter of fiscal 2020 due to COVID-19. As of
August 2, 2020, all of our distribution centers were open.
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Our retail locations and distribution centers are operating with restrictive and
precautionary measures in place such as reduced operating hours, physical
distancing, enhanced cleaning and sanitation, and limited occupancy levels. This
pandemic has also impacted the operations of our third party logistics providers
and our manufacturing and supply partners, including through the closure or
reduced capacity of facilities, and operational changes to accommodate physical
distancing. As the pandemic continues, we may face further disruptions or
increased operational and logistics costs throughout our supply chain.
There is significant uncertainty regarding the extent and duration of the impact
that the COVID-19 pandemic will have on our store operations, the demand for our
products, and on our supply chain. It had a material adverse impact on our
results of operations for the first two quarters of fiscal 2020, and we expect
it to continue to impact our results of operations, financial position, and
liquidity. The extent to which COVID-19 impacts our results will depend on
future developments, which are highly uncertain and cannot be predicted,
including new information that may emerge concerning the severity of COVID-19
and the actions taken to contain it or treat its impact.
We remain confident in the long-term growth opportunities and our Power of Three
growth plan and believe that we have sufficient cash and cash equivalents, and
available capacity under our revolving credit facilities, to meet our liquidity
needs. As of August 2, 2020, we had cash and cash equivalents of $523.0 million
and the capacity under our committed revolving credit facilities was $697.7
million.
Financial Highlights
For the second quarter of fiscal 2020, compared to the second quarter of fiscal
2019:
•Net revenue increased 2% to $902.9 million. On a constant dollar basis, net
revenue increased 3%.
•Company-operated stores net revenue decreased 51% to $287.2 million.
•Direct to consumer net revenue increased 155% to $554.3 million, or increased
157% on a constant dollar basis. We held an online warehouse sale during the
second quarter of fiscal 2020 which generated net revenue of $43.3 million.
•Gross profit increased 1% to $489.5 million.
•Gross margin decreased 80 basis points to 54.2%.
•Acquisition-related expenses of $11.5 million were recognized.
•Income from operations decreased 26% to $124.4 million.
•Operating margin decreased 520 basis points to 13.8%.
•Income tax expense decreased 17% to $37.3 million. Our effective tax rate for
the second quarter of fiscal 2020 was 30.0% compared to 26.4% for the second
quarter of fiscal 2019.
•Diluted earnings per share were $0.66 compared to $0.96 in the second quarter
of fiscal 2019. This includes $9.5 million of after-tax costs related to the
MIRROR acquisition, which reduced diluted earnings per share by $0.08 for the
second quarter of fiscal 2020.
As the temporary store closures from COVID-19 have resulted in a significant
number of stores being removed from our comparable store base, total comparable
sales and comparable store sales are not currently representative of the
underlying trends of our business. We do not believe these metrics are currently
useful to investors in understanding performance, therefore we have not included
these metrics in our discussion and analysis of results of operations.
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 and direct to consumer net revenue and
the most directly comparable measures calculated in accordance with GAAP.
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Results of Operations
Second Quarter Results
The following table summarizes key components of our results of operations for
the quarters ended August 2, 2020 and August 4, 2019. The percentages are
presented as a percentage of net revenue.
                                                                                                        Quarter Ended
                                                                 August 2, 2020           August 4, 2019          August 2, 2020            August 4, 2019
                                                                             (In thousands)                                                     (Percentages)
Net revenue                                                    $       902,942$       883,352                  100.0  %                      100.0  %
Cost of goods sold                                                     413,441                  397,556                   45.8                          45.0
Gross profit                                                           489,501                  485,796                   54.2                          55.0
Selling, general and administrative expenses                           352,904                  317,814                   39.1                     

36.0

Amortization of intangible assets                                          724                        -                    0.1                             -
Acquisition-related expenses                                            11,464                        -                    1.3                             -
Income from operations                                                 124,409                  167,982                   13.8                     

19.0

Other income (expense), net                                               (344)                   1,850                      -                        

0.2

Income before income tax expense                                       124,065                  169,832                   13.7                          19.2
Income tax expense                                                      37,264                   44,842                    4.1                           5.1
Net income                                                     $        86,801$       124,990                    9.6  %                       14.1  %


Net Revenue
Net revenue increased $19.6 million, or 2%, to $902.9 million for the second
quarter of fiscal 2020 from $883.4 million for the second quarter of fiscal
2019. On a constant dollar basis, assuming the average exchange rates for the
second quarter of fiscal 2020 remained constant with the average exchange rates
for the second quarter of fiscal 2019, net revenue increased $26.6 million, or
3%.
The increase in net revenue was primarily due to increased direct to consumer
net revenue. This was partially offset by a decrease in company-operated store
revenue, as well as a decrease in net revenue from our other channels driven by
temporary retail location closures as well as reduced operating hours and
limited guest occupancy levels as a result of COVID-19.
Net revenue on a segment basis for the quarters ended August 2, 2020 and
August 4, 2019 is summarized below. The percentages are presented as a
percentage of total net revenue.
                                                                                                     Quarter Ended
                                                              August 2, 2020           August 4, 2019          August 2, 2020            August 4, 2019
                                                                          (In thousands)                                                     (Percentages)
Company-operated stores                                     $       287,201$       583,756                   31.8  %                       66.1  %
Direct to consumer                                                  554,302                  217,636                   61.4                          24.6
Other                                                                61,439                   81,960                    6.8                           9.3
Net revenue                                                 $       902,942$       883,352                  100.0  %                      100.0  %


Company-Operated Stores. Net revenue from our company-operated stores segment
decreased $296.6 million, or 51%, to $287.2 million in the second quarter of
fiscal 2020 from $583.8 million in the second quarter of fiscal 2019. The
decrease in net revenue from our company-operated stores segment was primarily
due to the impact of COVID-19, including temporary store closures, reduced
operating hours, and occupancy restrictions.
Direct to Consumer. Net revenue from our direct to consumer segment increased
$336.7 million, or 155%, to $554.3 million in the second quarter of fiscal 2020
from $217.6 million in the second quarter of fiscal 2019. Direct to consumer net
revenue increased 157% on a constant dollar basis. The increase in net revenue
from our direct to consumer segment was primarily a result of increased website
traffic and improved conversion rates. This was partially offset by a decrease
in dollar value per transaction. The shift in the way guests are shopping
continued in the second quarter of fiscal 2020 as a result of COVID-19, with
more guests shopping online instead of in-store. During the second quarter of
fiscal 2020, we held an online warehouse sale in the United States and Canada
which generated net revenue of $43.3 million. We did not hold any warehouse
sales during the second quarter of fiscal 2019.
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Other. Net revenue from our other segment decreased $20.5 million, or 25%, to
$61.4 million in the second quarter of fiscal 2020 from $82.0 million in the
second quarter of fiscal 2019. This decrease was primarily the result of
COVID-19, including temporary location closures, reduced operating hours, and
occupancy restrictions.
Gross Profit
Gross profit increased $3.7 million, or less than 1%, to $489.5 million for the
second quarter of fiscal 2020 from $485.8 million for the second quarter of
fiscal 2019.
Gross profit as a percentage of net revenue, or gross margin, decreased 80 basis
points to 54.2% in the second quarter of fiscal 2020 from 55.0% in the second
quarter of fiscal 2019. The decrease in gross margin was primarily the result
of:
•an increase in costs as a percentage of revenue related to our distribution
centers of 130 basis points; and
•an unfavorable impact of foreign exchange rates of 20 basis points.
This was partially offset by a decrease in costs related to our product
departments as a percentage of revenue of 40 basis points, and a decrease in
depreciation and occupancy costs as a percentage of revenue of 30 basis points.
Product margin was consistent with the second quarter of fiscal 2019 primarily
due to lower product costs and product mix, offset by higher markdowns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $35.1 million, or 11%, to
$352.9 million in the second quarter of fiscal 2020 from $317.8 million in the
second quarter of fiscal 2019. The increase in selling, general and
administrative expenses was primarily due to:
•an increase in costs related to our operating channels of $38.7 million,
comprised of:
-an increase in variable costs of $36.9 million primarily due to an increase in
distribution costs as a result of increased direct to consumer net revenue;
-an increase in other costs of $19.2 million primarily due to increased digital
marketing expenses; and
-a decrease in employee costs of $17.4 million primarily due to lower incentive
compensation expenses in our company-operated store and other channels;
•an increase in head office costs of $14.3 million, comprised of:
-an increase of $15.8 million primarily due to increases in information
technology costs, professional fees, and depreciation; and
-a decrease in employee costs of $1.5 million primarily due to decreased travel
and decreased incentive compensation expense, partially offset by increased
salaries and wages expense as a result of headcount growth, and stock-based
compensation expense; and
• an increase in net foreign exchange and derivative revaluation losses of $3.0
million.
The increase in selling, general and administrative expenses was partially
offset by $20.9 million of government payroll subsidies which were recognized
during the second quarter of fiscal 2020.
As a percentage of net revenue, selling, general and administrative expenses
increased 310 basis points, to 39.1% in the second quarter of fiscal 2020 from
36.0% in the second quarter of fiscal 2019.
Amortization of intangible assets
Amortization of intangible assets was $0.7 million in the second quarter of
fiscal 2020. This was primarily the result of the recognition of intangible
assets of $85.0 million in the second quarter of fiscal 2020 as a result of our
acquisition of MIRROR. We did not recognize an expense for the amortization of
intangible assets in the second quarter of fiscal 2019.
Acquisition-related expenses
As a result of our acquisition of MIRROR in the second quarter of fiscal 2020,
we recognized acquisition-related expenses of $11.5 million in the second
quarter of fiscal 2020. This included transaction and integration related costs
of $7.2 million for advisory and professional services, and integration costs
subsequent to the acquisition. This also included acquisition-related
compensation of $5.0 million for the partial acceleration of vesting of certain
options and deferred
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consideration due to certain continuing MIRROR employees. Acquisition-related
expenses were partially offset by a $0.8 million gain recognized on our existing
investment. We did not have acquisition-related expenses in the second quarter
of fiscal 2019. Please refer to Note 3 to the unaudited interim consolidated
financial statements included in Item 1 of Part I of this report for further
information.
Income from Operations
Income from operations decreased $43.6 million, or 26%, to $124.4 million in the
second quarter of fiscal 2020 from $168.0 million in the second quarter of
fiscal 2019. Operating margin decreased 520 basis points to 13.8% compared to
19.0% in the second quarter of fiscal 2019.
On a segment basis, we determine income from operations without taking into
account our general corporate expenses. During the first quarter of fiscal 2020,
we reviewed our segment and general corporate expenses and determined certain
costs that are more appropriately classified in different categories.
Accordingly, comparative figures have been reclassified to conform to the
financial presentation adopted for the current year.
Segmented income (loss) from operations for the quarters ended August 2, 2020
and August 4, 2019 is summarized below. The percentages are presented as a
percentage of net revenue of the respective operating segments.
                                                                                                      Quarter Ended
                                                                 August 2, 2020           August 4, 2019         August 2, 2020           August 4, 2019
                                                                                                                                         (Percentage of segment
                                                                             (In thousands)                                                     

revenue)

Segmented income (loss) from operations:
Company-operated stores                                        $        (5,293)$       154,316                  (1.8) %                    26.4  %
Direct to consumer                                                     237,595                   86,618                  42.9                       39.8
Other                                                                    2,587                   16,418                   4.2                       20.0
                                                                       234,889                  257,352
General corporate expense                                               98,292                   89,370
Amortization of intangible assets                                          724                        -
Acquisition-related expenses                                            11,464                        -
Income from operations                                         $       124,409$       167,982


Company-Operated Stores. Income from operations from our company-operated stores
segment decreased $159.6 million, or 103%, to a loss of $5.3 million for the
second quarter of fiscal 2020 from income of $154.3 million for the second
quarter of fiscal 2019. The decrease was primarily the result of decreased gross
profit of $209.3 million which was primarily due to lower net revenue as a
result of the impact of COVID-19 restrictions, and lower gross margin, which was
primarily due to deleverage on occupancy and depreciation costs as a result of
lower net revenue. This was partially offset by a decrease in selling, general
and administrative expenses, primarily due to decreased store operating expenses
including lower incentive compensation, credit card fees, packaging costs, and
distribution costs primarily as a result of lower net revenue, and due to the
recognition of government payroll subsidies and lower community costs. Income
from operations as a percentage of company-operated stores net revenue decreased
primarily due to lower gross margin and deleverage on selling, general and
administrative expenses.
Direct to Consumer. Income from operations from our direct to consumer segment
increased $151.0 million, or 174%, to $237.6 million for the second quarter of
fiscal 2020 from $86.6 million for the second quarter of fiscal 2019. The
increase was primarily the result of increased gross profit of $222.2 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 to higher variable costs including distribution costs,
credit card fees, and packaging as a result of higher net revenue, as well as
higher digital marketing expenses. Income from operations as a percentage of
direct to consumer net revenue increased 310 basis points primarily due to
leverage on selling, general and administrative expenses and higher gross
margin.
Other. Income from operations from our other channels decreased $13.8 million,
or 84%, to $2.6 million for the second quarter of fiscal 2020 from $16.4 million
for the second quarter of fiscal 2019. The decrease was primarily the result
of decreased gross profit of $9.2 million which was primarily due to decreased
net revenue. This was partially offset by an increase in selling, general and
administrative expenses primarily due to an increase in marketing costs,
partially offset by decreased operating expenses including lower incentive
compensation, credit card fees, packaging costs, and distribution costs
primarily as a result of lower net revenue. Income from operations as a
percentage of other net revenue decreased primarily due to deleverage on
selling, general and administrative expenses.
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General Corporate Expense. General corporate expense increased $8.9 million, or
10%, to $98.3 million for the second quarter of fiscal 2020 from $89.4 million
for the second quarter of fiscal 2019. This increase was primarily due to
increases in depreciation, information technology costs, and professional fees,
and an increase in net foreign exchange and derivative revaluation losses of
$3.0 million. The increase in general corporate expense was partially offset by
a decrease in incentive compensation and the recognition of government payroll
subsidies.
Other Income (Expense), Net
Other income, net decreased $2.2 million, or 119%, to an expense of $0.3 million
for the second quarter of fiscal 2020 from income of $1.9 million for the second
quarter of fiscal 2019. The decrease was primarily due to a decrease in net
interest income.
Income Tax Expense
Income tax expense decreased $7.6 million, or 17%, to $37.3 million for the
second quarter of fiscal 2020 from $44.8 million for the second quarter of
fiscal 2019. The effective tax rate for the second quarter of fiscal 2020 was
30.0% compared to 26.4% for the second quarter of fiscal 2019.
The increase in the effective tax rate was due to certain non-deductible
expenses related to the MIRROR acquisition which increased the effective tax
rate by 110 basis points, 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 decreased $38.2 million, or 31%, to $86.8 million for the second
quarter of fiscal 2020 from $125.0 million for the second quarter of fiscal
2019. This was primarily due to an increase in selling, general and
administrative expenses of $35.1 million, acquisition-related expenses of $11.5
million, amortization of intangible assets of $0.7 million, and a decrease in
other income (expense), net of $2.2 million, partially offset by an increase in
gross profit of $3.7 million, and a decrease in income tax expense of $7.6
million.
First Two Quarters Results
The following table summarizes key components of our results of operations for
the first two quarters ended August 2, 2020 and August 4, 2019. The percentages
are presented as a percentage of net revenue.
                                                                                                      Two Quarters Ended
                                                                 August 2, 2020           August 4, 2019          August 2, 2020            August 4, 2019
                                                                             (In thousands)                                                     (Percentages)
Net revenue                                                    $     1,554,904$     1,665,667                  100.0  %                      100.0  %
Cost of goods sold                                                     731,001                  758,151                   47.0                          45.5
Gross profit                                                           823,903                  907,516                   53.0                          54.5
Selling, general and administrative expenses                           652,510                  610,722                   42.0                     

36.7

Amortization of intangible assets                                          724                        -                      -                             -
Acquisition-related expenses                                            13,509                        -                    0.9                             -
Income from operations                                                 157,160                  296,794                   10.1                     

17.8

Other income (expense), net                                                830                    4,229                    0.1                         

0.3

Income before income tax expense                                       157,990                  301,023                   10.2                          18.1
Income tax expense                                                      42,557                   79,430                    2.7                           4.8
Net income                                                     $       115,433$       221,593                    7.4  %                       13.3  %


Net Revenue
Net revenue decreased $110.8 million, or 7%, to $1.555 billion for the first two
quarters of fiscal 2020 from $1.666 billion for the first two quarters of fiscal
2019. On a constant dollar basis, assuming the average exchange rates for the
first two quarters of fiscal 2020 remained constant with the average exchange
rates for the first two quarters of fiscal 2019, net revenue decreased $96.1
million, or 6%.
The decrease in net revenue was primarily due to a decrease in company-operated
store net revenue as well as a decrease in net revenue from our other locations
driven by temporary retail location closures as well as reduced operating hours
and
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limited guest occupancy levels as a result of COVID-19. This was partially offset by an increase in direct to consumer net revenue. Net revenue on a segment basis for the first two quarters ended August 2, 2020 and August 4, 2019 is summarized below. The percentages are presented as a percentage of total net revenue.

                                                                                                   Two Quarters Ended
                                                              August 2, 2020           August 4, 2019          August 2, 2020            August 4, 2019
                                                                          (In thousands)                                                     (Percentages)
Company-operated stores                                     $       547,171$     1,090,178                   35.2  %                       65.4  %
Direct to consumer                                                  906,341                  427,480                   58.3                          25.7
Other                                                               101,392                  148,009                    6.5                           8.9
Net revenue                                                 $     1,554,904$     1,665,667                  100.0  %                      100.0  %


Company-Operated Stores. Net revenue from our company-operated stores segment
decreased $543.0 million, or 50%, to $547.2 million in the first two quarters of
fiscal 2020 from $1.090 billion in the first two quarters of fiscal 2019. The
decrease in net revenue from our company-operated stores segment was primarily
due to the impact of COVID-19. All of our stores in North America, Europe, and
certain countries in Asia Pacific were temporarily closed for a significant
portion of the first two quarters of fiscal 2020. Since re-opening our
company-operated store net revenues have been impacted by COVID-19 restrictions
including reduced operating hours and occupancy limits.
Direct to Consumer. Net revenue from our direct to consumer segment increased
$478.9 million, or 112%, to $906.3 million in the first two quarters of fiscal
2020 from $427.5 million in the first two quarters of fiscal 2019. Direct to
consumer net revenue increased 114% on a constant dollar basis. The increase in
net revenue from our direct to consumer segment was primarily a result of
increased website traffic and improved conversion rates. This was partially
offset by a decrease in dollar value per transaction. There was a shift in the
way guests shopped in the first two quarters of fiscal 2020 as a result of
COVID-19, with more guests shopping online instead of in-store. During the
second quarter of fiscal 2020, we held an online warehouse sale in the United
States and Canada which generated net revenue of $43.3 million. We did not hold
any warehouse sales during the first two quarters of fiscal 2019.
Other. Net revenue from our other segment decreased $46.6 million, or 31%, to
$101.4 million in the first two quarters of fiscal 2020 from $148.0 million in
the first two quarters of fiscal 2019. This decrease was primarily the result of
COVID-19, including temporary location closures, reduced operating hours, and
occupancy restrictions.
Gross Profit
Gross profit decreased $83.6 million, or 9%, to $823.9 million for the first two
quarters of fiscal 2020 from $907.5 million for the first two quarters of fiscal
2019.
Gross profit as a percentage of net revenue, or gross margin, decreased 150
basis points, to 53.0% in the first two quarters of fiscal 2020 from 54.5% in
the first two quarters of fiscal 2019. The decrease in gross margin was
primarily the result of:
•an increase in occupancy and depreciation costs as a percentage of revenue of
120 basis points;
•an increase in costs as a percentage of revenue related to our distribution
centers of 110 basis points; and
•an unfavorable impact of foreign exchange rates of 20 basis points.
This was partially offset by an increase in product margin of 80 basis points
primarily due to lower product costs, and a favorable mix of higher margin
product, partially offset by higher markdowns, and a decrease in costs related
to our product departments as a percentage of revenue of 20 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $41.8 million, or 7%, to
$652.5 million in the first two quarters of fiscal 2020 from $610.7 million in
the first two quarters of fiscal 2019. The increase in selling, general and
administrative expenses was primarily due to:
•an increase in costs related to our operating channels of $55.2 million,
comprised of:
-an increase in variable costs of $47.3 million primarily due to an increase in
distribution costs as a result of increased direct to consumer net revenue;
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-an increase in other costs of $30.6 million primarily due to increased digital
marketing expenses; and
-a decrease in employee costs of $22.7 million primarily due to lower incentive
compensation expenses in our company-operated store and other channels;
•an increase in head office costs of $20.0 million, comprised of:
-an increase of $32.1 million primarily due to increases in information
technology costs, depreciation, and brand and community costs; and
-a decrease in employee costs of $12.1 million primarily due to decreased
incentive compensation expense and decreased travel, partially offset by
increased salaries and wages expense as a result of headcount growth; and
• an increase in net foreign exchange and derivative revaluation losses of $1.8
million.
The increase in selling, general and administrative expenses was partially
offset by $35.2 million of government payroll subsidies which were recognized
during the first two quarters of fiscal 2020.
As a percentage of net revenue, selling, general and administrative expenses
increased 530 basis points, to 42.0% in the first two quarters of fiscal 2020
from 36.7% in the first two quarters of fiscal 2019.
Amortization of intangible assets
Amortization of intangible assets was $0.7 million in the first two quarters of
fiscal 2020. This was primarily the result of the recognition of intangible
assets of $85.0 million in the second quarter of fiscal 2020 as a result of our
acquisition of MIRROR. We did not recognize an expense for the amortization
intangible assets in the first two quarters of fiscal 2019.
Acquisition-related expenses
As a result of our acquisition of MIRROR in the second quarter of fiscal 2020,
we recognized acquisition-related expenses of $13.5 million in the first two
quarters of fiscal 2020. This included transaction and integration related costs
of $9.2 million for advisory and professional services, and integration costs
subsequent to the acquisition. This also included acquisition-related
compensation of $5.0 million for the partial acceleration of vesting of certain
options and deferred consideration to certain continuing MIRROR employees.
Acquisition-related expenses were partially offset by a $0.8 million gain
recognized on our existing investment. We did not have acquisition-related
expenses in the first two quarters of fiscal 2019. Please refer to Note 3 to the
unaudited interim consolidated financial statements included in Item 1 of Part I
of this report for further information.
Income from Operations
Income from operations decreased $139.6 million, or 47%, to $157.2 million in
the first two quarters of fiscal 2020 from $296.8 million in the first two
quarters of fiscal 2019. Operating margin decreased 770 basis points to 10.1%
compared to 17.8% in the first two quarters of fiscal 2019.
On a segment basis, we determine income from operations without taking into
account our general corporate expenses. During the first quarter of fiscal 2020,
we reviewed our segment and general corporate expenses and determined certain
costs that are more appropriately classified in different categories.
Accordingly, comparative figures have been reclassified to conform to the
financial presentation adopted for the current year.
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Segmented income (loss) from operations for the first two quarters ended
August 2, 2020 and August 4, 2019 is summarized below. The percentages are
presented as a percentage of net revenue of the respective operating segments.
                                                                                                    Two Quarters Ended
                                                                 August 2, 2020           August 4, 2019         August 2, 2020           August 4, 2019
                                                                                                                                         (Percentage of segment
                                                                             (In thousands)                                                     

revenue)

Segmented income (loss) from operations:
Company-operated stores                                        $       (35,447)$       275,227                  (6.5) %                    25.2  %
Direct to consumer                                                     394,542                  165,955                  43.5                       38.8
Other                                                                    2,318                   29,041                   2.3                       19.6
                                                                       361,413                  470,223
General corporate expense                                              190,020                  173,429
Amortization of intangible assets                                          724                        -
Acquisition-related expenses                                            13,509                        -
Income from operations                                         $       157,160$       296,794


Company-Operated Stores. Income from operations from our company-operated stores
segment decrease $310.7 million, or 113%, to a loss of $35.4 million for the
first two quarters of fiscal 2020 from income of $275.2 million for the first
two quarters of fiscal 2019. The decrease was primarily the result of decreased
gross profit of $386.8 million which was primarily due to lower net revenue as a
result of the impact of COVID-19 restrictions, and lower gross margin, which was
primarily due to deleverage on occupancy and depreciation costs as a result of
lower net revenue. This was partially offset by a decrease in selling, general
and administrative expenses, primarily due to decreased store operating expenses
including lower incentive compensation, credit card fees, packaging costs, and
distribution costs primarily as a result of lower net revenue, as well as
decreases in security and repairs and maintenance costs, and due to the
recognition of government payroll subsidies. Income from operations as a
percentage of company-operated stores net revenue decreased, primarily due to
lower gross margin and deleverage on selling, general and administrative
expenses.
Direct to Consumer. Income from operations from our direct to consumer segment
increased $228.6 million, or 138%, to $394.5 million for the first two quarters
of fiscal 2020 from $166.0 million for the first two quarters of fiscal 2019.
The increase was primarily the result of increased gross profit of $325.3
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 higher variable costs including
distribution costs and credit card fees as a result of higher net revenue, as
well as higher digital marketing expenses and employee costs. Income from
operations as a percentage of direct to consumer net revenue increased 470 basis
points, primarily due to leverage on selling, general and administrative
expenses and higher gross margin.
Other. Income from operations from our other channels decreased $26.7 million,
or 92%, to $2.3 million for the first two quarters of fiscal 2020 from $29.0
million for the first two quarters of fiscal 2019. The decrease was primarily
the result of decreased gross profit of $22.2 million which was primarily due to
decreased net revenue, and an increase in selling, general and administrative
expenses primarily due to an increase in marketing costs, partially offset by
decreased operating expenses including lower incentive compensation, credit card
fees, and packaging costs primarily as a result of lower net revenue. Income
from operations as a percentage of other net revenue decreased primarily due to
deleverage on selling, general and administrative expenses, partially offset by
an increase in gross margin.
General Corporate Expense. General corporate expense increased $16.6 million, or
10%, to $190.0 million for the first two quarters of fiscal 2020 from $173.4
million for the first two quarters of fiscal 2019. This increase was primarily
due to increases in information technology costs, depreciation, professional
fees, and brand and community costs, and an increase in net foreign exchange and
derivative revaluation losses of $1.8 million. The increase in general corporate
expense was partially offset by a decrease in incentive compensation and the
recognition of government payroll subsidies.
Other Income (Expense), Net
Other income, net decreased $3.4 million, or 80%, to $0.8 million for the first
two quarters of fiscal 2020 from $4.2 million for the first two quarters of
fiscal 2019. The decrease was primarily due to a decrease in net interest
income.
Income Tax Expense
Income tax expense decreased $36.9 million, or 46%, to $42.6 million for the
first two quarters of fiscal 2020 from $79.4 million for the first two quarters
of fiscal 2019. The effective tax rate for the first two quarters of fiscal 2020
was 26.9% compared to 26.4% for the first two quarters of fiscal 2019.

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The increase in the effective tax rate was due to certain non-deductible
expenses related to the MIRROR acquisition which increased the effective tax
rate by 90 basis points and due to new regulations which resulted in additional
foreign tax credits being recognized in the first two quarters of fiscal 2019.
This was partially offset by an increase in tax deductions related to
stock-based compensation.
Net Income
Net income decreased $106.2 million, or 48%, to $115.4 million for the first two
quarters of fiscal 2020 from $221.6 million for the first two quarters of fiscal
2019. This was primarily due to a decrease in gross profit of $83.6 million, an
increase in selling, general and administrative expenses of $41.8 million,
acquisition-related expenses of $13.5 million, amortization of intangible assets
of $0.7 million, and a decrease in other income (expense), net of $3.4 million,
partially offset by a decrease in income tax expense of $36.9 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, or open after being significantly
expanded, for at least 12 full fiscal months. Net revenue from a store is
included in comparable store sales beginning with the first fiscal month for
which the store has a full fiscal month of sales in the prior year. Comparable
store sales exclude sales from new stores that have not been open for at least
12 full fiscal months, from stores which have not been in their significantly
expanded space for at least 12 full fiscal months, and from stores which have
been temporarily relocated for renovations or temporarily closed for at least 30
days. Comparable store sales also exclude sales from direct to consumer and
other segments, as well as sales from company-operated stores that we have
closed.
Total comparable sales combines comparable store sales and direct to consumer
sales. We are evolving towards an omni-channel approach to support the shopping
behavior of our guests. This involves country and region specific websites,
mobile apps, including mobile apps on in-store devices that allow demand to be
fulfilled via our distribution centers, social media, product notification
emails, and online order fulfillment through stores.
In fiscal years with 53 weeks, the 53rd week of net revenue is excluded from the
calculation of comparable sales. In the year 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.
We typically use comparable store sales to assess the performance of our
existing stores as it allows us to monitor the performance of our business
without the impact of recently opened or expanded stores. We typically use total
comparable sales to evaluate the performance of our business from an
omni-channel perspective. We therefore typically believe that investors would
similarly find these metrics useful in assessing the performance of our
business. However, as the temporary store closures from COVID-19 have resulted
in a significant number of stores being removed from our comparable store base,
we believe total comparable sales and comparable store sales are not currently
representative of the underlying trends of our business. We do not believe these
metrics are currently useful to investors in understanding performance,
therefore we have not included these metrics in our discussion and analysis of
results of operations.
Non-GAAP Financial Measures
Constant dollar changes in net revenue 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 our results to
help investors understand the underlying growth rate of net revenue excluding
the impact of changes in foreign exchange rates.
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.
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Constant dollar changes in net revenue and direct to consumer net revenue
The below changes in net revenue show the change compared to the corresponding
period in the prior year.
                                                                                       Quarter Ended
                                                                                       August 2, 2020
                                                                                                                                        Direct to
                                                                                                                                        Consumer
                                                                          Net Revenue                                                  Net Revenue
                                                           (In thousands)             (Percentages)               (Percentages)
Change                                                   $        19,590                           2  %                      155  %
Adjustments due to foreign exchange rate changes                   6,976                           1                           2
Change in constant dollars                               $        26,566                           3  %                      157  %



                                                                                      Two Quarters Ended
                                                                                         August 2, 2020
                                                                                                                                        Direct to
                                                                                                                                        Consumer
                                                                            Net Revenue                                                Net Revenue
                                                             (In thousands)           (Percentages)               (Percentages)
Change                                                       $  (110,763)                         (7) %                      112  %
Adjustments due to foreign exchange rate changes                  14,650                           1                           2  %
Change in constant dollars                                   $   (96,113)                         (6) %                      114  %


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% of our full year operating profit during each of the
fourth quarters of fiscal 2019 and fiscal 2018.
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
facilities. 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 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 2, 2020, our working capital, excluding cash and cash equivalents,
was $203.4 million, our cash and cash equivalents were $523.0 million, and our
capacity under our committed revolving credit facilities was $697.7 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 2, 2020       August 4, 2019
                                                              (In thousands)
     Total cash provided by (used in):
     Operating activities                         $        60,062$        50,042
     Investing activities                                (545,323)            (131,969)
     Financing activities                                 (82,157)            (170,985)
     Effect of exchange rate changes on cash               (3,089)              (4,670)
     Decrease in cash and cash equivalents        $      (570,507)$      (257,582)


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Operating Activities
Cash flows provided by 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 increased $10.0 million, to $60.1 million
for the first two quarters of fiscal 2020 compared to $50.0 million for the
first two quarters of fiscal 2019, primarily as a result of the following:
•an increase of $110.6 million in changes in operating assets and liabilities,
primarily due to the following:
-an increase of $122.8 million related to income taxes, primarily due to the
deferral of Canadian income tax payments to the third quarter of fiscal 2020 as
well as payments for withholding taxes on repatriated foreign earnings in the
first quarter of fiscal 2019;
-an increase of $50.5 million related to other accrued liabilities, primarily
due to increases in accrued duty, freight, and other operating expenses as well
as an increase in the sales return allowance as a result of COVID-19 reducing
in-period returns; and
-an increase of $20.2 million related to accounts payable.
The increase in changes in operating assets and liabilities was partially offset
by the following:
-a decrease of $41.6 million related to accrued compensation related expenses;
-a decrease of $31.3 million related to prepaid expenses and other current and
non-current assets, primarily due to government payroll subsidy receivables
related to COVID-19; and
-a decrease of $12.4 million related to inventories, primarily due to lower than
expected net revenue as a result of temporary store closures and other COVID-19
restrictions.
•an increase of $5.6 million from adjustments to reconcile net income to net
cash provided by operating activities other than changes in operating assets and
liabilities, primarily related to an increase in depreciation and amortization,
partially offset by a decrease in the settlement of derivatives not designated
in a hedging relationship.
The increase in cash provided by operating activities was partially offset by a
decrease of $106.2 million in net income, primarily due temporary retail
location closures as well as reduced operating hours and limited guest occupancy
levels as a result of COVID-19.
Investing Activities
Cash flows used in investing activities relate to the acquisition of MIRROR,
capital expenditures, the settlement of net investment hedges, and other
investing activities. Capital expenditures primarily relate to 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 $413.4 million to $545.3 million for
the first two quarters of fiscal 2020 from $132.0 million for the first two
quarters of fiscal 2019. The increase was primarily the result of the
acquisition of MIRROR, partially offset by a decrease in capital expenditures
for our company-operated stores.
Financing Activities
Cash flows used in financing activities consist primarily of cash used to
repurchase shares of our common stock, certain cash flows related to stock-based
compensation, and other financing activities.
Cash used in financing activities decreased $88.8 million to $82.2 million for
the first two quarters of fiscal 2020 compared to $171.0 million for the first
two quarters of fiscal 2019. The decrease was primarily the result of a decrease
in stock repurchases.
Cash used in financing activities for the first two quarters of fiscal 2020
included $63.7 million to repurchase 0.4 million shares of our common stock
compared to $165.1 million to repurchase 1.0 million shares for the first two
quarters of fiscal 2019. During the first two quarters of fiscal 2019, 1.0
million shares were repurchased in a private transaction. We did not purchase
any shares in a private transaction during the first two quarters of fiscal
2020. 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. The share repurchase program was
temporarily paused as of March 31, 2020.
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We believe the cash and cash equivalent balances, cash flows from operations,
and borrowings available under the revolving credit facilities are adequate to
meet our liquidity needs and capital expenditure requirements for at least the
next 12 months. The cash from operations may be negatively impacted by a
decrease in demand for our products, the continuing impact of COVID-19, as well
as the other factors described in Item 1 of Part II of this Quarterly Report on
Form 10-Q. In addition, discretionary capital improvements may be made with
respect to the stores, distribution facilities, headquarters, or systems.
Strategic investments or repurchase of shares under an approved stock repurchase
program may be made, 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 Facilities
North America revolving credit facility
On December 15, 2016, we entered into a credit agreement for $150.0 million
under a committed and 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. As of August 2,
2020, we were in compliance with the covenants of the credit facility.
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 2, 2020, aside from letters of credit of $2.3 million, we had no
other borrowings outstanding under this credit facility.
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Mainland China revolving credit facility
In December 2019, we entered into an uncommitted and unsecured 130.0 million
Chinese Yuan revolving credit facility. The terms are reviewed on an annual
basis. The facility includes a revolving loan of up to 100.0 million Chinese
Yuan as well as a financial bank guarantee facility of up to 30.0 million
Chinese Yuan, or its equivalent in another currency. In U.S. dollars, the
uncommitted and unsecured revolving credit facility is equivalent to $18.6
million, the revolving loan is equivalent of up to $14.3 million, and the
financial bank guarantee facility is equivalent of up to $4.3 million. Loans are
available in Chinese Yuan for a period not to exceed 12 months, and interest
accrues on them at a rate equal to 105% of the applicable PBOC Benchmark Lending
Rate. Guarantees have a commission equal to 1% per annum of the outstanding
amount. We are required to follow certain covenants. As of August 2, 2020, we
were in compliance with the covenants. As of August 2, 2020, there were no
borrowings outstanding under this credit facility.
364-Day revolving credit facility
On June 29, 2020, we entered into a 364-day credit agreement providing for a
$300.0 million committed and unsecured revolving credit facility. The credit
agreement matures on June 28, 2021. Bank of America, N.A., is administrative
agent and swing line lender. Borrowings under the credit facility may be prepaid
and commitments may be reduced or terminated without premium or penalty (other
than customary breakage costs).
Borrowings made under the credit facility bear interest at a rate per annum
equal to, at our option, either (1) a rate based on the rates applicable for
deposits on the interbank market for U.S. Dollars or the applicable currency in
which the borrowings are made ("LIBOR") or (2) an alternate base rate, plus, in
each case, an applicable margin. The applicable margin is determined by
reference to a pricing grid, based on the ratio of indebtedness to earnings
before interest, tax depreciation, amortization, and rent ("EBITDAR") and ranges
between 1.50%-2.25% for LIBOR loans and 0.50%-1.25% for alternate base rate or
Canadian prime rate loans. Additionally, a commitment fee of between
0.25%-0.55%, also determined by reference to the pricing grid, is payable on the
average daily unused amounts under the credit facility.
The credit agreement contains negative covenants that, among other things and
subject to certain exceptions, limit the ability of 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. As of August 2,
2020, we were in compliance with the covenants. As of August 2, 2020, there were
no 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 2, 2020, letters of credit and
letters of guarantee totaling $2.3 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 2019 Annual Report
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on Form 10-K filed with the SEC on March 26, 2020, and in Notes 1, 2, 3, 8, and
9, 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 2, 2020 and February 2, 2020
are summarized in the table below.
                                                   August 2,      February 2,
                                                     2020             2020
              United States                          309              305
              Canada                                  61               63
              People's Republic of China(1)           46               38
              Australia                               31               31
              United Kingdom                          15               14
              Japan                                    8                7
              Germany                                  7                6
              New Zealand                              7                7
              South Korea                              7                5
              Singapore                                4                4
              France                                   3                3
              Malaysia                                 2                2
              Sweden                                   2                2
              Ireland                                  1                1
              Netherlands                              1                1
              Norway                                   1                1
              Switzerland                              1                1
              Total company-operated stores          506              491


__________
(1)Included within PRC as of August 2, 2020, were seven company-operated stores
in the Hong Kong Special Administrative Region, two company-operated stores in
the Macao Special Administration Region, and two company-operated store in
Taiwan, PRC. As of February 2, 2020, there were six company-operated stores in
the Hong Kong Special Administrative Region, two company-operated stores in the
Macao Special Administration Region, and one company-operated store in Taiwan,
PRC.
Our retail locations have experienced temporary closures during the first two
quarters of fiscal 2020 as a result of COVID-19. As of August 2, 2020, 492 of
our company-operated stores were open.
Retail locations operated by third parties under license and supply arrangements
are not included in the above table. As of August 2, 2020, there were eight
licensed locations, including four in Mexico, three in the United Arab Emirates,
and one in Qatar.

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