Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion summarizes our consolidated operating results, financial condition and liquidity during the three-year period ending February 1, 2015. Our fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52 week year, but occasionally giving rise to an additional week, resulting in a 53 week year.

Fiscal 2014 and fiscal 2013 were 52 week years whereas fiscal 2012 was a 53 week year. Net revenue numbers for fiscal 2012 include results from the 53rd week; however, total comparable sales and comparable stores sales calculations exclude the 53rd week. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

This discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions set forth in the "Special Note Regarding Forward-Looking Statements." Our actual results and the timing of events may differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth in the "Item 1A. Risk Factors" section and elsewhere in this Annual Report on Form 10-K.

Overview

Fiscal 2014 was a year in which we continued to make investments we believe will help us to drive growth and expand our business. We have strengthened the foundation of our business through continued investments in product quality and supply chain and these investments will continue through fiscal 2015.

Throughout fiscal 2014 we also focused on our product assortment, guest experience, and our go-to-market process for our products. Our improved product assortment helped to enhance our guest experience and contributed to the improved total comparative sales performance we saw in the second half of fiscal 2014. The opening of our new distribution center in Columbus, Ohio in fiscal 2014 has also helped improve guest experience through a reduction in our average transit times for online orders and will also benefit retail distribution to our corporate owned stores in the United States.

We opened 48 net new corporate-owned stores in fiscal 2014, of which 40 were in the United States. In addition to our plans for further new store openings in the United States, we are focused on accelerating our international expansion. During fiscal 2014 we opened corporate-owned stores for the first time in the United Kingdom and Singapore and opened showrooms for the first time in China. We will continue to utilize a community-based approach to building brand awareness and guest loyalty in new countries but will look to do so over a shorter period of time than previously, so that we can accelerate our international growth.

We see potential for further expansion for our men’s category and our ivivva athletica brand. In the men's category we expanded both in-store and online product assortment and we opened our first standalone men’s store in Soho, New York. For ivivva, we opened 10 new stores during fiscal 2014 and will continue to invest in this brand and open further stores through fiscal 2015.

In fiscal 2015, we expect to substantially complete this foundational work and accelerate our investments in innovation to drive sustainable global growth.

Financial Highlights

•	Our net revenue increased from $1.6 billion in fiscal 2013 to $1.8 billion in fiscal 2014, representing an annual growth rate of 13%. Our increase in net revenue from fiscal 2013 to fiscal 2014 resulted from the addition of 48 net new corporate-owned stores and increased direct to consumer net revenue.

•	Total comparable sales, which includes comparable store sales and direct to consumer, increased 1% in fiscal 2014 and increased by 3% on a constant dollar basis.

•	Our direct to consumer segment is an increasingly substantial part of our growth strategy, and now represents 17.9% of our net revenue compared to 16.5% in fiscal 2013 and 14.4% in fiscal 2012. Direct to consumer net revenue increased 24% on a constant dollar basis primarily as the result of increased traffic on our e-commerce websites.

•	Corporate-owned stores accounted for 75.0% of total net revenue in fiscal 2014, 77.3% of total net revenue in fiscal 2013 and 79.6% of total net revenue in fiscal 2012. Comparable store sales decreased by 1% on a constant dollar basis for fiscal 2014 primarily as the result of lower conversion rates and lower units purchased per transaction.

•	Gross profit for fiscal 2014 increased by 9% to $914.2 million, from $840.1 million in fiscal 2013. As a percentage of net revenue, gross profit decreased to 50.9% compared to 52.8% in fiscal 2013. The decrease in the gross margin percentage was primarily due to product mix, increased product costs, and increased air freight usage.

•

Income from operations for fiscal 2014 decreased by 4% to $376.0 million, from $391.4 million in fiscal 2013. As a percentage of net revenue, income from operations decreased to 20.9% compared to 24.6% of net revenue in fiscal 2013. The decrease in income from operations was a result of an increase in selling, general and administration expenses, relative to the increase in net revenue, partially offset by an increase in gross margin.

•

Tax expense for fiscal 2014 increased by 23% to $144.1 million, from $117.6 million in fiscal 2013. Fiscal 2014 includes a tax expense of $33.7 million related to the repatriation of foreign earnings that will be used to fund the share buyback program. The tax rate excluding the $33.7 million tax expense on the repatriation of foreign earnings would have been 28.8%, compared to 29.6% in fiscal 2013. The tax rate for fiscal 2014, including the tax expense on the repatriation of foreign earnings, was 37.6%.

•	Diluted earnings per share for fiscal 2014 were $1.66. compared to $1.91 in fiscal 2013. Excluding the tax expense of $33.7 million on the repatriated foreign earnings, diluted earnings per share were $1.89 for fiscal 2014.

Refer to the non-GAAP reconciliation tables contained in the "Results of Operations" section of this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations of constant dollar total comparable sales, constant dollar comparable store sales, constant dollar changes in direct to consumer net revenue, the fiscal 2014 tax rate excluding the tax expense on the repatriation of foreign earnings, and diluted earnings per share excluding the tax expense on the repatriation of foreign earnings to measures calculated in accordance with United States generally accepted accounting principles ("GAAP").

General

Net revenue is comprised of corporate-owned store net revenue, direct to consumer sales through www.lululemon.com, www.ivivva.com and other country and region specific websites, and other net revenue, which includes outlet sales, showroom sales, sales to wholesale accounts, warehouse sales, and sales from temporary locations.

Cost of goods sold includes the cost of purchased merchandise, including in-bound freight, duty and nonrefundable taxes incurred in delivering the goods to our distribution centers. It also includes occupancy costs and depreciation expense for our corporate-owned store locations, all costs incurred in operating our distribution centers and production, design and merchandise departments, hemming, and shrink and valuation reserves. The primary drivers of the costs of individual goods are the costs of raw materials and labor in the countries where we source our merchandise.

Selling, general and administrative expenses consist of all operating costs not otherwise included in cost of goods sold. We anticipate that our selling, general and administrative expenses will increase in absolute dollars due to anticipated continued growth of our corporate support staff and store-level employees.

Provision for income taxes depends on the statutory tax rates in the countries where we sell our products. We anticipate that in the future we may start to sell our products directly to some customers located in countries that we have not yet operated in, in which case we would become subject to taxation based on the foreign statutory rates in the countries where these sales take place and our effective tax rate could fluctuate accordingly.

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenue:

		Fiscal Year Ended
		February 1, 2015				February 2, 2014				February 3, 2013
		(In thousands)
Consolidated statements of operations:
Net revenue		$	1,797,213			$	1,591,188			$	1,370,358
Cost of goods sold		883,033				751,112				607,532
Gross profit		914,180				840,076				762,826
Selling, general and administrative expenses		538,147				448,718				386,387
Income from operations		376,033				391,358				376,439
Other income (expense), net		7,102				5,768				4,957
Income before provision for income taxes		383,135				397,126				381,396
Provision for income taxes		144,102				117,579				109,965
Net income		239,033				279,547				271,431
Net income attributable to non-controlling interest		—				—				875
Net income attributable to lululemon athletica inc.		$	239,033			$	279,547			$	270,556

		Fiscal Year Ended
		February 1, 2015		February 2, 2014		February 3, 2013
		(% of net revenue)
Net revenue		100.0		100.0		100.0
Cost of goods sold		49.1		47.2		44.3
Gross profit		50.9		52.8		55.7
Selling, general and administrative expenses		30.0		28.2		28.2
Income from operations		20.9		24.6		27.5
Other income (expense), net		0.4		0.4		0.3
Income before provision for income taxes		21.3		25.0		27.8
Provision for income taxes		8.0		7.4		8.0
Net income		13.3		17.6		19.8
Net income attributable to non-controlling interest		—		—		0.1
Net income attributable to lululemon athletica inc.		13.3		17.6		19.7

Comparison of Fiscal 2014 to Fiscal 2013

Net Revenue

Net revenue increased $206.0 million, or 13%, to $1.797 billion in fiscal 2014 from $1.591 billion in fiscal 2013. Assuming the average exchange rates in fiscal 2014 remained constant with the average exchange rates in fiscal 2013, our net revenue would have increased $241.7 million, or 15%.

The net revenue increase was driven by sales from new stores and the growth of our direct to consumer segment. Total comparable sales, which includes comparable store sales and direct to consumer, increased 1% in fiscal 2014 compared to fiscal 2013. Excluding the effect of foreign currency fluctuations, total comparable sales would have increased by 3%.

Our net revenue on a segment basis for fiscal 2014 and fiscal 2013 is summarized below. Net revenue is expressed in dollar amounts. The percentages are presented as a percentage of total net revenue.

		Fiscal Year Ended February 1, 2015 and February 2, 2014
		2014				2013				2014		2013
		(In thousands)								(Percentages)
Corporate-owned stores		$	1,348,225			$	1,228,999			75.0		77.3
Direct to consumer		321,180				263,083				17.9		16.5
Other		127,808				99,106				7.1		6.2
Net revenue		$	1,797,213			$	1,591,188			100.0		100.0

Corporate-Owned Stores. Net revenue from our corporate-owned stores segment increased $119.2 million, or 10%, to $1.348 billion in fiscal 2014 from $1.229 billion in fiscal 2013. Net revenue from corporate-owned stores we opened during fiscal 2014, and during fiscal 2013 prior to sales from such stores becoming part of our comparable stores base, contributed $162.0 million of the increase. Net new store openings in fiscal 2014 included 40 stores in the United States, including eight ivivva branded stores, three stores in Canada, including two ivivva branded stores, one store in Australia, one store in New Zealand, two stores in the United Kingdom and one store in Singapore. The increase in net revenue from our corporate-owned stores segment was partially offset by a comparable store sales decrease of 3% in fiscal 2014 compared to fiscal 2013 which resulted in a $42.8 million decrease to net revenue, including the effect of foreign currency fluctuations. Excluding the effect of foreign currency fluctuations, comparable store sales would have decreased 1%, or $19.1 million, in fiscal 2014. Comparable store sales have decreased, primarily as the result of lower conversion rates and lower units purchased per transaction.

Direct to Consumer. Net revenue from our direct to consumer segment increased $58.1 million, or 22%, to $321.2 million in fiscal 2014 from $263.1 million in fiscal 2013. Excluding the effect of foreign exchange fluctuations, direct to consumer net revenue would have increased 24%. The increase in net revenue from our direct to consumer segment was a result of increasing traffic on our e-commerce websites.

Other. Net revenue from our other segment increased $28.7 million, or 29%, to $127.8 million in fiscal 2014 from $99.1 million in fiscal 2013. The increase in net revenue from our other segment was primarily due to increased sales from our outlets, showrooms, and temporary locations. We continue to employ our other segment strategy to increase interest in our product in markets where we may not have corporate-owned stores.

Gross Profit

Gross profit increased $74.1 million, or 9%, to $914.2 million in fiscal 2014 from $840.1 million in fiscal 2013. Increased net revenue resulted in an increased gross profit. A $17.5 million inventory provision related to the pull-back of black Luon pants was recorded in cost of sales during fiscal 2013.

The increase in gross profit was partially offset by increased costs related to our production, design, distribution and merchandising departments, as well as increases in fixed costs, such as occupancy costs and depreciation.

Gross profit, as a percentage of net revenue, or gross margin, decreased 190 basis points, to 50.9% in fiscal 2014 from 52.8% in fiscal 2013. The decrease in gross margin resulted primarily from:

•	a decrease of 210 basis points due to product mix, increased product costs, and increased air freight costs;

•	an increase in expenses related to our product and supply chain departments, relative to the increase in net revenue, of 70 basis points;

•	an increase in fixed costs, such as occupancy costs and depreciation, relative to the increase in net revenue, of 40 basis points; and

•	an unfavorable impact of foreign exchange rates on product costs which contributed to a decrease in gross margin of 40 basis points.

The decrease in gross margin was partially offset by a decrease in provision for inventories, charged to cost of sales, of 110 basis points related to the pull-back of black Luon pants which was recorded in the first quarter of fiscal 2013. A decrease in markdowns of 60 basis points driven by high sell-through of seasonal items also partially offset the decrease in gross margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $89.4 million, or 20%, to $538.1 million in fiscal 2014 from $448.7 million in fiscal 2013. The increase in selling, general and administrative expenses was principally comprised of:

•	an increase in employee costs of $40.2 million as there were increases in hourly wages and a growth in labor hours associated with new corporate-owned stores, outlets, showrooms and other;

•	an increase in variable store costs of $5.7 million from new corporate-owned stores, outlets, showrooms and other;

•	an increase in variable costs such as distribution costs, credit card fees and packaging related to our direct to consumer segment of $6.0 million as a result of increased sales volume;

•	an increase in administrative costs related to our direct to consumer segment of $4.4 million associated with the growth in this channel and increased head count to support it;

•	an increase in head office employee costs of $5.7 million from increased head count in order to position us for long-term growth, partially offset by decreased stock-based compensation;

•	an increase in other head office costs of $5.2 million as a result of the overall growth of our business and investment in strategic initiatives and projects;

•	an increase in other costs, including occupancy costs not included in cost of goods sold, of $11.4 million; and

•	a decrease in net foreign exchange gains of $10.8 million.

As a percentage of net revenue, selling, general and administrative expenses increased 180 basis points, to 30.0% in fiscal 2014 from 28.2% in fiscal 2013.

We expect selling, general and administrative expenses to increase throughout fiscal 2015 as we add administrative and sales personnel and increase our infrastructure to support the growth in our store base.

Income from Operations

Income from operations decreased $15.3 million, or 4%, to $376.0 million in fiscal 2014 from $391.4 million in fiscal 2013. The decrease was a result of increased selling, general and administrative costs of $89.4 million, partially offset by increased gross profit of $74.1 million. The increase in selling, general and administrative costs was primarily driven by the increase in our business.

On a segment basis, we determine income from operations without taking into account our general corporate expenses. We have reviewed our general corporate expenses and determined some costs previously classified as general corporate are direct segment expenses. Accordingly, all prior year comparable information has been reclassified to conform to the current year classification.

Income from operations before general corporate expenses for fiscal 2014 and fiscal 2013 is summarized below and is expressed in dollar amounts. The percentages are presented as a percentage of net revenue of the respective operating segments.

		Fiscal Year Ended February 1, 2015 and February 2, 2014
		2014				2013				2014		2013
		(In thousands)								(Percentages)
Corporate-owned stores		$	356,589			$	372,267			26.4		30.3
Direct to consumer		132,877				109,999				41.4		41.8
Other		9,499				13,994				7.4		14.1
Income from operations before general corporate expense		498,965				496,260
General corporate expense		122,932				104,902
Income from operations		$	376,033			$	391,358

Corporate-Owned Stores. Income from operations from our corporate-owned stores segment decreased $15.7 million, or 4%, to $356.6 million for fiscal 2014 from $372.3 million for fiscal 2013 primarily due to an increase in selling, general and administrative expenses related to employee costs as well as operating expenses associated with new stores, partially offset by an increase of $31.2 million in gross profit from increased sales. Income from operations as a percentage of corporate-owned stores net revenue decreased by 390 basis points primarily due to higher selling, general and administrative expenses as a

percentage of net revenue as well as lower gross margin resulting from product mix, increased product costs, and increased air freight costs.

Direct to Consumer. Income from operations from our direct to consumer segment increased $22.9 million, or 21%, to $132.9 million in fiscal 2014 from $110.0 million in fiscal 2013. The increase was primarily the result of increased gross profit of $33.1 million primarily due to increased net revenue resulting from increased traffic, partially offset by increased selling, general and administrative expenses related to our long-term strategy for developing this channel. Income from operations as a percentage of direct to consumer net revenue decreased to 41.4% in fiscal 2014 from 41.8% in fiscal 2013.

Other. Income from operations from our other segment decreased $4.5 million, or 32%, to $9.5 million in fiscal 2014 from $14.0 million in fiscal 2013. Income from operations as a percentage of other net revenue decreased by 670 basis points primarily due to an increased number of showrooms in new international markets which have a higher cost structure than North America. We continue to employ our other segment strategy to increase interest in our product in markets we have not otherwise entered with corporate-owned stores.

General Corporate Expense. General corporate expense increased $18.0 million, or 17%, to $122.9 million in fiscal 2014 from $104.9 million in fiscal 2013. This increase was primarily due to a $10.8 million decrease in net foreign exchange gains, primarily from our Canadian operating entity. An increase in expenses related to our head office growth of $7.2 million, which was largely related to additional costs incurred to support the growth of our business, including increased professional fees related to investment in strategic initiatives and projects. General corporate expenses are expected to continue to increase in future years as we grow our overall business and require increased efforts at our head office to support our corporate-owned stores, direct to consumer and other segments.

Other Income (Expense), Net

Other income (expense), net increased $1.3 million, to $7.1 million in fiscal 2014 from $5.8 million in fiscal 2013. The increase was primarily the result of increased interest earned on cash and cash equivalents.

Provision for Income Taxes

Provision for income taxes increased $26.5 million, or 23%, to $144.1 million in fiscal 2014 from $117.6 million in fiscal 2013. In fiscal 2014, our effective tax rate was 37.6% compared to 29.6% in fiscal 2013. The increase in our effective tax rate was a result of a tax expense of $33.7 million recorded during fiscal 2014 to provide for U.S. income and applicable foreign withholding taxes on dividends of $473.7 million which were distributed during fiscal 2014 from foreign subsidiaries to the U.S. parent entity to fund the share repurchase program.

Net Income

Net income decreased $40.5 million, or 15%, to $239.0 million in fiscal 2014 from $279.5 million in fiscal 2013. The decrease in net income in fiscal 2014 was primarily due to an increase of $89.4 million in selling, general and administrative expenses, and an increase of $26.5 million in provision for income taxes, partially offset by a $1.3 million increase in other income (expense), and a $74.1 million increase in gross profit resulting from new stores and the growth of our direct to consumer segment.

Comparison of Fiscal 2013 to Fiscal 2012

Net Revenue

Net revenue increased $220.8 million, or 16%, to $1.591 billion in fiscal 2013 from $1.370 billion in fiscal 2012. Assuming the average exchange rates in fiscal 2013 remained constant with the average exchange rates in fiscal 2012, our net revenue would have increased $247.0 million, or 18%. Total comparable sales, including comparable stores and direct to consumer, and excluding the fifty-third week’s sales of fiscal 2012, increased 7% in fiscal 2013, or 9% excluding the effect of foreign currency fluctuations.

The net revenue increase was driven by sales from new stores, the growth of our direct to consumer segment, and increased sales at locations in our comparable stores base. The constant dollar increase in comparable store sales was driven primarily by the strength of our existing product lines, successful introduction of new products and increasing recognition of the lululemon athletica brand name, especially at our U.S. stores, that drove higher transactions per store in the United States.

Our net revenue on a segment basis for fiscal 2013 and fiscal 2012 are expressed in dollar amounts as well as relevant percentages, presented as a percentage of total net revenue below.

		Fiscal Year Ended February 2, 2014 and February 3, 2013
		2013				2012				2013		2012
		(In thousands)								(Percentages)
Corporate-owned stores		$	1,228,999			$	1,090,181			77.3		79.6
Direct to consumer		263,083				197,255				16.5		14.4
Other		99,106				82,922				6.2		6.0
Net revenue		$	1,591,188			$	1,370,358			100.0		100.0

Corporate-Owned Stores. Net revenue from our corporate-owned stores segment increased $138.8 million, or 13%, to $1.229 billion in fiscal 2013 from $1.090 billion in fiscal 2012. The following contributed to the increase in net revenue from our corporate-owned stores segment:

•

Net revenue from corporate-owned stores we opened during fiscal 2013, and during fiscal 2012 prior to sales from such stores becoming part of our comparable stores base, contributed $138.0 million of the increase. New store openings in fiscal 2013 included three stores in Canada, including one ivivva branded store, 36 stores in the United States, including three ivivva branded stores, two stores in Australia, and two stores in New Zealand; and

•	Comparable store sales increase of 2% in fiscal 2013 resulted in a $19.5 million increase to net revenue, including the effect of foreign currency fluctuations. Excluding the effect of foreign currency fluctuations, comparable store sales increased 4%, or $37.3 million, in fiscal 2013.

The increase in net revenue was partially offset by $18.7 million of net revenue from the 53rd week of fiscal 2012, which was excluded in the calculation of comparable store sales.

Direct to Consumer. Net revenue from our direct to consumer segment increased $65.8 million, or 33%, to $263.1 million in fiscal 2013 from $197.3 million in fiscal 2012, including $4.2 million of net revenue from the 53rd week of fiscal 2012. Excluding the net revenue from the 53rd week of fiscal 2012, net revenue from our direct to consumer segment increased 36%; excluding the effect of foreign exchange fluctuations, direct to consumer net revenue would have increased 38%. The increase in net revenue from our direct to consumer segment was a result of increasing traffic on our e-commerce websites.

Other. Net revenue from our other segment increased $16.2 million, or 20%, to $99.1 million in fiscal 2013 from $82.9 million in fiscal 2012, including $3.3 million of net revenue from the 53rd week of fiscal 2012. The increase in net revenue from our other segment was primarily due to increased sales from our outlets and showrooms sales channels. We continue to employ our other segment strategy to increase interest in our product in markets where we may not have corporate-owned stores.

Gross Profit

Gross profit increased $77.2 million, or 10%, to $840.1 million in fiscal 2013 from $762.8 million in fiscal 2012. Increased net revenue in all of our operating segments resulted in an increased gross profit. A $17.5 million charge related to the pull-back of black Luon pants was recorded in cost of sales during fiscal 2013.

The increase in gross profit was partially offset by increases in fixed costs, such as occupancy costs and depreciation, as well as increased costs related to our design, merchandising, and production departments.

Gross profit, as a percentage of net revenue, or gross margin, decreased 290 basis points, to 52.8% in fiscal 2013 from 55.7% in fiscal 2012. The decrease in gross margin resulted primarily from:

•	a decrease in product margin of 200 basis points due to a lower sales mix of higher margin core items related to the pull-back of black Luon pants, along with higher markdowns and an increase in provision for inventories charged to cost of sales; and

•	a non-recurring charge of 110 basis points related to the pull-back of black Luon pants in the first quarter of fiscal 2013.

The decrease in gross margin was partially offset by a decrease in expenses related to our product and supply chain departments, relative to the increase in net revenue, and by leverage on fixed costs, such as depreciation and occupancy costs, which together contributed to an increase in gross margin of 20 basis points.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $62.3 million, or 16%, to $448.7 million in fiscal 2013 from $386.4 million in fiscal 2012. The increase in selling, general and administrative expenses was principally comprised of:

•	an increase in employee costs of $25.3 million as we experience growth in labor hours associated with new and existing corporate-owned stores, outlets, showrooms and other, as well as an increase in wages as we invest in our employees;

•	an increase in variable store costs of $9.5 million from new and existing corporate-owned stores, outlets, showrooms and other;

•	an increase in variable costs such as distribution costs, credit card fees and packaging related to our direct to consumer segment of $7.3 million as a result of increased sales volume;

•	an increase in administrative costs related to our direct to consumer segment of $5.3 million associated with the growth in this channel and increased head count to support it;

•	an increase in head office employee costs of $5.7 million from increased head count in order to position us for long-term growth, partially offset by decreased management incentive-based compensation and stock-based compensation;

•	an increase in other head office costs of $17.5 million as a result of the overall growth of our business and investment in strategic initiatives and projects; and

•	an increase in other costs, including occupancy costs and depreciation not included in cost of goods sold, of $9.6 million as a result of the expansion of our business and in order to position us for long-term growth.

The increase in selling, general and administrative expenses was partially offset by a $17.9 million increase in net foreign exchange gains which were primarily from our Canadian operating entity.

As a percentage of net revenue, selling, general and administrative expenses remained unchanged at 28.2% in both fiscal 2013 and fiscal 2012.

Income from Operations

Income from operations increased $14.9 million, or 4%, to $391.4 million in fiscal 2013 from $376.4 million in fiscal 2012. The increase was a result of increased gross profit of $77.2 million, partially offset by increased selling, general and administrative costs of $62.3 million. The increase in selling, general and administrative costs was primarily driven by the increase in our business, as seen in our net revenue increases.

On a segment basis, we determine income from operations without taking into account our general corporate expenses. We have reviewed our general corporate expenses and determined some costs previously classified as general corporate are direct segment expenses. Accordingly, all prior year comparable information has been reclassified to conform to the current year classification.

Income from operations before general corporate expenses for fiscal 2013 and fiscal 2012 are expressed in dollar amounts as well as percentages, presented as a percentage of net revenue of their respective operating segments below.

		Fiscal Year Ended February 2, 2014 and February 3, 2013
		2013				2012				2013		2012
		(In thousands)								(Percentages)
Corporate-owned stores		$	372,267			$	373,607			30.3		34.3
Direct to consumer		109,999				85,128				41.8		43.2
Other		13,994				19,787				14.1		23.9
Income from operations before general corporate expense		496,260				478,522
General corporate expense		104,902				102,083
Income from operations		$	391,358			$	376,439

Corporate-Owned Stores. Income from operations from our corporate-owned stores segment decreased $1.3 million, or less than 1%, to $372.3 million for fiscal 2013 from $373.6 million for fiscal 2012 primarily due to an increase in selling, general and administrative expenses related to employee costs as well as operating expenses associated with new stores and a $17.5 million charge related to the pull-back of black Luon pants, which was partially offset by an increase of $38.3 million in gross profit. Income from operations as a percentage of corporate-owned stores net revenue decreased by 400 basis points

primarily from a decrease in gross margin due to a lower mix of higher margin core items related to the pull-back of black Luon pants.

Direct to Consumer. Income from operations from our direct to consumer segment increased $24.9 million, or 29%, to $110.0 million in fiscal 2013 from $85.1 million in fiscal 2012 due to increased sales through our e-commerce websites, with gross profit increasing $36.3 million over fiscal 2012. Income from operations as a percentage of direct to consumer net revenue decreased by 140 basis points in fiscal 2013 compared to fiscal 2012.

Other. Income from operations from our other segment decreased $5.8 million, or 29%, to $14.0 million in fiscal 2013 from $19.8 million in fiscal 2012. We continue to employ our other segment strategy to increase interest in our product in markets we have not otherwise entered with corporate-owned stores.

General Corporate Expense. General corporate expenses increased $2.8 million, or 3%, to $104.9 million in fiscal 2013 from $102.1 million in fiscal 2012. This increase was primarily due to an increase in expenses related to our head office growth of $27.3 million, which was largely related to the growth of our information technology and human resources departments as well as the overall growth of our business, and increased professional fees related to investment in strategic initiatives and projects. Increased depreciation and amortization expense of $3.3 million also contributed to the increase in general corporate expense. The increase in general corporate expense was partially offset by an increase of $17.9 million in net foreign exchange gains which were primarily from our Canadian operating entity as well as decreased management incentive-based compensation of $5.0 million and decreased stock-based compensation expense of $4.9 million.

Other Income (Expense), Net

Other income (expense), net increased $0.8 million, to $5.8 million in fiscal 2013 from $5.0 million in fiscal 2012. The increase was primarily a result of increased interest income earned in fiscal 2013 compared to fiscal 2012 on our increased cash balances.

Provision for Income Taxes

Provision for income taxes increased $7.6 million, or 7%, to $117.6 million in fiscal 2013 from $110.0 million in fiscal 2012. In fiscal 2013, our effective tax rate was 29.6% compared to 28.8% in fiscal 2012.

Net Income

Net income increased $9.0 million, or 3%, to $279.5 million in fiscal 2013 from $270.6 million in fiscal 2012. The increase in net income in fiscal 2013 was primarily due to a $77.2 million increase in gross profit resulting from sales growth at existing and additional corporate-owned stores opened during fiscal 2013 and increasing traffic on our e-commerce websites and the addition of regional websites and a $0.8 million increase in other income (expense), net, partially offset by an increase of $62.3 million in selling, general and administrative expenses, and an increase of $7.6 million in provision for income taxes.

Comparable Sales

We separately track comparable store sales, which reflect net revenue at corporate-owned stores that have been open for at least 12 months. Therefore, net revenue from a store is included in comparable store sales beginning with the first month for which the store has a full month of comparable prior year sales. Non-comparable store sales include sales from new stores that have not been open or otherwise not operated by us for 12 months or from stores which have been significantly remodeled or relocated. Also included in non-comparable stores sales are sales from direct to consumer sales, outlets, wholesale, warehouse sales, showrooms, temporary locations, and sales from corporate-owned stores which we have closed. The 53rd week of fiscal 2012 is excluded from the calculation of comparable store sales.

We began to report total comparable sales in fiscal 2013, which combines comparable store sales and direct to consumer sales, excluding the 53rd week of sales from fiscal 2012. Our direct to consumer segment represents a growing portion of our net revenue as the shopping behavior of our guests evolves. Our approach to our guests supports this as it involves country and region specific websites, mobile/tablet devices in stores, social networks, and product notification emails. We therefore believe that reporting total comparable sales with comparable store sales and direct to consumer sales combined provides a more relevant metric.

By measuring the change in year-over-year net revenue in stores that have been open for 12 months or more as well as direct to consumer sales, total comparable sales allows us to evaluate our performance eliminating the impact of newly opened stores. Various factors affect comparable sales, including:

•	the location of new stores relative to existing stores;

•	consumer preferences, buying trends and overall economic trends;

•	our ability to anticipate and respond effectively to customer preferences for technical athletic apparel;

•	competition;

•	changes in our merchandise mix;

•	pricing;

•	the timing of our releases of new merchandise and promotional events;

•	the effectiveness of our grassroots marketing efforts;

•	the level of customer service that we provide in our stores and on our websites;

•	our ability to source and distribute products efficiently; and

•	the number of stores we open, close (including for temporary renovations) and expand in any period.

Opening new stores is an important part of our growth strategy. Accordingly, total comparable sales has limited utility for assessing the success of our growth strategy insofar as comparable sales do not reflect the performance of stores open less than 12 months.

Non-GAAP Financial Measures

Net revenue changes in constant dollars, total comparable sales in constant dollars, comparable store sales in constant dollars, changes in direct to consumer net revenue in constant dollars, the tax rate excluding the tax expense on the repatriation of foreign earnings, and diluted earnings per share excluding the tax expense on the repatriation of foreign earnings are non-GAAP performance measures.

We provide constant dollar changes in net revenue, total comparable sales, comparable store sales, and changes in direct to consumer net revenue because we use these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates, which are not under management’s control. We believe that disclosing these measures on a constant dollar basis is useful to investors because it enables them to better understand the level of growth of our business.

We disclose the tax rate and diluted earnings per share excluding the tax expense on repatriated foreign earnings because of their comparability to our historical information as well as our diluted earnings per share guidance, which we believe is useful to investors.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior 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.

The below performance measures show the dollar and percentage change compared to the corresponding period in the prior year.

Constant dollar changes in net revenue

		Fiscal Year Ended February 1, 2015							Fiscal Year Ended February 2, 2014
		(In thousands)				(Percentage)			(In thousands)				(Percentage)
Net revenue increase		$	206,024			13	%		$	220,830			16	%
Adjustments due to foreign exchange rate changes		35,656				2	%		26,153				2	%
Net revenue increase in constant dollars		$	241,680			15	%		$	246,983			18	%

Constant dollar total comparable sales

		Fiscal Year Ended February 1, 2015			Fiscal Year Ended February 2, 2014
Total comparable sales		1	%		7	%
Adjustments due to foreign exchange rate changes		2	%		2	%
Total comparable sales in constant dollars		3	%		9	%

Constant dollar comparable store sales

		Fiscal Year Ended February 1, 2015							Fiscal Year Ended February 2, 2014
		(In thousands)				(Percentage)			(In thousands)				(Percentage)
Comparable store sales		$	(42,801	)		(3	)%		$	19,460			2	%
Adjustments due to foreign exchange rate changes		23,712				2	%		17,874				2	%
Comparable store sales in constant dollars		$	(19,089	)		(1	)%		$	37,334			4	%

Constant dollar changes in direct to consumer net revenue

		Fiscal Year Ended February 1, 2015			Fiscal Year Ended February 2, 2014
		(Percentage)
Change in direct to consumer net revenue		22	%		36	%
Adjustments due to foreign exchange rate changes		2	%		2	%
Change in direct to consumer net revenue in constant dollars		24	%		38	%

Tax rate, excluding the tax expense on repatriated foreign earnings

		Fiscal Year Ended February 1, 2015			Fiscal Year Ended February 2, 2014
Tax rate		37.6	%		29.6	%
Tax expense on repatriated foreign earnings		(8.8	)%		—	%
Tax rate, excluding the tax expense on repatriated foreign earnings		28.8	%		29.6	%

Diluted earnings per share, excluding the tax expense on repatriated foreign earnings

		Fiscal Year Ended February 1, 2015				Fiscal Year Ended February 2, 2014
Diluted earnings per share		$	1.66			$	1.91
Tax expense on repatriated foreign earnings		0.23				—
Diluted earnings per share, excluding the tax expense on repatriated foreign earnings		$	1.89			$	1.91

Liquidity and Capital Resources

Our primary sources of liquidity are our current balances of cash and cash equivalents, cash flows from operations and borrowings available under our revolving credit facility. Our primary cash needs are capital expenditures for opening new stores and remodeling existing stores, making information technology system enhancements and funding working capital requirements. Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions.

As of February 1, 2015, our working capital (excluding cash and cash equivalents) was $126.7 million and our cash and cash equivalents were $664.5 million.

The following table summarizes our net cash flows provided by and used in operating, investing and financing activities for the periods indicated:

		Fiscal Year Ended
		February 1, 2015				February 2, 2014				February 3, 2013
		(In thousands)
Total cash provided by (used in):
Operating activities		$	314,449			$	278,339			$	280,113
Investing activities		(119,733		)		(106,408		)		(93,229		)
Financing activities		(149,077		)		8,907				(5,491		)
Effect of exchange rate changes		(79,809		)		(72,368		)		(651		)
(Decrease) increase in cash and cash equivalents		$	(34,170	)		$	108,470			$	180,742

Operating Activities

Operating Activities consist primarily of net income adjusted for certain non-cash items, including depreciation and amortization, stock-based compensation expense and the effect of changes in non-cash working capital items, principally accounts payable, inventories, prepaid expenses, income taxes payable, accrued compensation and related expenses, and deferred gift card revenue.

In fiscal 2014, cash provided by operating activities increased $36.1 million, to $314.4 million compared to cash provided by operating activities of $278.3 million in fiscal 2013. The increase was primarily a result of decreased income taxes paid and an increase in accrued compensation and related benefits, partially offset by a decrease in net income. The net increase in items not affecting cash was primarily due to an increase in depreciation related to our increased number of stores.

Investing Activities

Investing Activities relate primarily to capital expenditures.

Cash used in investing activities increased $13.3 million, to $119.7 million in fiscal 2014 from $106.4 million in fiscal 2013. Capital expenditures for our corporate-owned stores segment were $76.9 million in fiscal 2014 which included $38.1 million to open 49 corporate-owned stores and $60.2 million in fiscal 2013 which included $31.3 million to open 45 corporate-owned stores. The remaining capital expenditures for our corporate-owned stores segment in each period were for ongoing store refurbishment. Capital expenditures for our direct to consumer segment were $10.0 million and $6.0 million in fiscal 2014 and fiscal 2013, respectively. Capital expenditures related to corporate activities and administration were $32.9 million and $40.2 million in fiscal 2014 and fiscal 2013, respectively. The capital expenditures in each period for corporate activities and administration were for improvements at our head office and other corporate buildings as well as investments in information technology and business systems.

Capital expenditures are expected to range between $130 million and $135 million in fiscal 2015.

Financing Activities

Financing Activities consist primarily of cash used to repurchase shares of our common stock, cash received on the exercise of stock options, excess tax benefits from stock-based compensation, taxes paid related to the net share settlement of equity awards, and cash paid to acquire the remaining non-controlling interest in Australia in fiscal 2012. Cash used by financing activities increased $158.0 million, to cash used of $149.1 million in fiscal 2014 from cash provided of $8.9 million in fiscal 2013. The primary cause of this increase is our stock repurchase program which began in the second quarter of fiscal 2014. During fiscal 2014 we repurchased 3.7 million shares for a total cost of $147.4 million.

We believe that our cash and cash equivalent balances, cash generated from operations, and borrowings available to us under our revolving credit facility will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. Our cash from operations may be negatively impacted by a decrease in demand for our products as well as the other factors described in "Item 1A. Risk Factors". In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or other systems, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations.

Revolving Credit Facility

On November 22, 2013, we entered into unsecured demand revolving credit facilities with HSBC Bank Canada and Bank of America, N.A., Canada Branch, which replaced our 2007 credit facility. The credit facilities provide us with available borrowings in a total amount of $15.0 million. Borrowings under the credit facilities must be repaid in full on demand and are available by way of U.S. or Canadian denominated advances, letters of credit or depository bills. Advances denominated in U.S. Dollars bear interest on the outstanding balance at a rate equal to U.S. LIBOR plus 100 basis points or the U.S. prime rate, at our option. Advances denominated in Canadian Dollars bear interest on the outstanding balance at a rate equal to the CDOR Rate plus 100 basis points or the Canadian prime rate, at our option. Borrowings drawn down under standby letters of credit bear a fee of 100 basis points and borrowings drawn down under commercial letters of credit bear the banks' standard pricing. We are also required to pay a quarterly commitment fee of 10 basis points on the unused portion of the facility. Our wholly-owned subsidiary, lululemon usa inc., has provided a guarantee to the bank counter-parties under the facilities. The revolving credit facilities are unsecured, with a negative pledge on assets subject to permitted encumbrances, and no financial covenants. These facilities were renewed for a one year period in November 2014. As of February 1, 2015, aside from letters of credit of $0.6 million, we had no other borrowings outstanding under these credit facilities.

Contractual Obligations and Commitments

Leases. We lease certain store and other retail locations, distribution centers, offices, and equipment under non-cancelable operating leases. Our leases generally have initial terms of between five and 10 years, and generally can be extended only in five-year increments, if at all. Our leases expire at various dates between one and 10 years, excluding extensions at our option. A substantial number of our leases include renewal options and certain of our leases include rent escalation clauses, rent holidays and leasehold rental incentives, none of which are reflected in the table below. Most of our leases for store premises also include contingent rental payments based on sales volume, the impact of which also are not reflected in the table below.

Product purchase obligations. The amounts listed for product purchase obligations in the table below represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and that specify all significant terms. In some cases, prices are subject to change throughout the production process. The reported amounts exclude product purchase liabilities included in accounts payable and accrued inventory liabilities as of February 1, 2015.

The following table summarizes our contractual arrangements as of February 1, 2015, and the timing and effect that such commitments are expected to have on our liquidity and cash flows in future periods:

		Payments Due by Fiscal Year
		Total				2015				2016				2017				2018				2019				Thereafter
		(In thousands)
Operating leases (minimum rent)		$	395,483			$	82,282			$	81,697			$	72,660			$	57,190			$	43,625			$	58,029
Product purchase obligations		$	189,723			$	189,723			$	—			$	—			$	—			$	—			$	—

Off-Balance Sheet Arrangements

We enter into standby letters of credit to secure certain of our obligations, including leases, taxes and duties. As of February 1, 2015, letters of credit and letters of guarantee totaling $0.6 million have been issued.

Other than our operating leases and these standby letters of credit, we do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. In addition, we have not entered into any derivative contracts or synthetic leases.

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 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.

We believe that the following critical accounting policies affect our more significant estimates and judgments used in the preparation of our consolidated financial statements:

Revenue Recognition. Net revenue is recognized net of sales taxes, discounts, and an estimated allowance for sales returns. Sales to customers through corporate-owned stores and other physical locations are recognized at the point of sale, net of an estimated allowance for sales returns. Direct to consumer sales are recognized when goods are shipped and collection is reasonably assured, net of an estimated allowance for sales returns. Other net revenue includes outlet sales, showroom sales, sales to wholesale accounts, warehouse sales, and sales from temporary locations. Revenue is recognized when these sales occur and amounts billed to customers for shipping and handling are recognized at the time of shipment.

Our estimated allowance for sales returns is a subjective critical estimate that has a direct impact on reported net revenue. This allowance is calculated based on a history of actual returns, estimated future returns and any significant future known or anticipated events. Consideration of these factors results in an estimated allowance for sales returns. Our standard terms for retail sales limit returns to approximately 14 days after the sale of the merchandise, however we accept returns after 14 days where the product fails to meet our guests' quality expectations. For our wholesale sales, we allow returns from our wholesale accounts if properly requested and approved. Employee discounts are classified as a reduction of net revenue.

Revenue from our gift cards is recognized when tendered for payment, or upon redemption. Outstanding customer balances are included in "Unredeemed gift card liability" on the consolidated balance sheets. There are no expiration dates on our gift cards, and we do not charge any service fees that cause a decrement to customer balances.

While we will continue to honor all gift cards presented for payment, we may determine the likelihood of redemption to be remote for certain card balances due to, among other things, long periods of inactivity. In these circumstances, to the extent we determine there is no requirement for remitting card balances to government agencies under unclaimed property laws, card balances may be recognized in the consolidated statements of operations in net revenue. The amount to be recognized is an estimate, based on historical customer redemption rates.

Inventory. Inventory is valued at the lower of cost and market. We periodically review our inventories and make provisions as necessary to appropriately value obsolete and damaged goods. The amount of the provision is equal to the difference between the cost of the inventory and its net realizable value based upon assumptions about future demands, selling prices and market conditions. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. In addition, we provide for inventory shrinkage as a percentage of sales, based on historical trends from actual physical inventories. Inventory shrinkage estimates are made to reduce the inventory value for lost or stolen items. We perform physical inventory counts throughout the year and adjust the shrink provision accordingly. In fiscal 2014, we wrote-off $12.4 million of inventory, and in fiscal 2013 we wrote-off $28.1 million of inventory, including $17.5 million related to the pull-back of black Luon pants.

Property and Equipment. Property and equipment are recorded at cost less accumulated depreciation. Buildings are depreciated on a straight-line basis over the expected useful life of the asset, which we estimate to be 20 years. Leasehold improvements are depreciated on a straight-line basis over the lesser of the length of the lease and the estimated useful life of the assets, up to a maximum of five years. All other property and equipment is depreciated using the declining balance method as follows:

Furniture and fixtures		20	%
Computer hardware and software		30	%
Equipment and vehicles		30	%

Changes in circumstances (such as technological advances) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset’s net book value to its salvage value.

Long-Lived Assets. Long-lived assets, including intangible assets with finite useful lives are evaluated for impairment when the occurrence of events or changes in circumstances indicates that the carrying value of the assets may not be recoverable as measured by comparing their net book value to the undiscounted estimated future cash flows generated by their use and eventual disposition. Impaired assets are recorded at fair value, determined principally by the present value of the estimated future cash flows expected from their use and eventual disposition.

Income Taxes. Deferred income tax assets are reduced by a valuation allowance, if based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The recognition of a deferred income tax asset is based upon several assumptions and forecasts, including current and proposed tax legislation, current and anticipated taxable income, utilization of previously unrealized non-operating loss carry forwards and regulatory reviews of tax filings. Given the judgments and estimates required and the sensitivity of the results to the significant assumptions used, we believe the accounting estimates used in relation to the recognition of deferred income tax assets are subject to measurement uncertainty and are susceptible to a material change if the underlying assumptions change.

We have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested outside the United States. We periodically assess the need to utilize these unremitted earnings to finance our foreign operations. This assessment is based on cash flow projections by tax jurisdiction. Such estimates are inherently imprecise since many assumptions utilized in the cash flow projections are subject to revision in the future. The possibility exists that amounts determined to be indefinitely reinvested outside of the United States may ultimately be repatriated. For instance, the cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional income tax expense in the year we determined that amounts were no longer indefinitely reinvested.

We file income tax returns in the United States, Canada and various foreign and state jurisdictions. The 2011 to 2013 tax years remain subject to examination by the U.S. federal and state tax authorities. The 2010 tax year is still open for certain state tax authorities. The 2007 to 2013 tax years remain subject to examination by Canadian tax authorities. The 2008 to 2013 tax years remain subject to examination by tax authorities in certain foreign jurisdictions. Our policy is to recognize interest expense and penalties related to income tax matters as a selling, general and administrative expense. At February 1, 2015, we do not have any significant accruals for interest related to unrecognized tax benefits or tax penalties. Our intercompany transfer pricing policies are currently subject to audits by various foreign tax jurisdictions. Although we believe that our intercompany transfer pricing policies and tax positions are reasonable, the final outcomes of tax audits or potential tax disputes may be materially different from that which is reflected in our income tax provisions and accruals.

Goodwill and Intangible Assets. Intangible assets are recorded at cost. Reacquired franchise rights are amortized on a straight-line basis over their estimated useful lives of 10 years. Goodwill represents the excess of the purchase price over the fair market value of identifiable net assets acquired and is not amortized. Goodwill is tested for impairment annually or more frequently when an event or circumstance indicates that goodwill might be impaired. Goodwill impairment testing requires us to estimate the fair value of our reporting units. We generally base our measurement of the fair value on the present value of future cash flows. Our significant estimates in the discounted cash flows model include: the discount rate and long-term rates of growth. We use our best estimates and judgment based on available evidence in conducting the impairment testing.

Stock-Based Compensation. We account for stock-based compensation using the fair value method. The fair value of the awards is estimated at the date of grant and recognized as employee compensation expense on a straight-line basis over the requisite service period. For awards with service and/or performance conditions, the amount of compensation expense recognized is based on the number of awards that are expected to vest.

The estimation of the number stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider several factors when estimating the number of awards which are expected to vest, including, future profit forecasts, types of awards, size of option holder group and anticipated employee retention. Actual results may differ substantially from these estimates.

The calculation of the grant-date fair value of stock options requires us to make certain estimates and assumptions, including, stock price volatility, and the expected life of the options. These assumptions are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience. The expected term of the options is based upon historical experience of similar awards, giving consideration for expectations of future employee behavior. Expected volatility is based upon the historical volatility of the Company's common stock for the period corresponding with the expected term of the options. In the future, as we gain historical data for volatility in our own stock and the actual term employees hold our options, expected volatility and expected term may change which could substantially change the grant-date fair value of future awards of stock options and, ultimately, the expense we record.

Contingencies. In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships and a variety of other matters. We record contingent liabilities resulting from claims against us, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts.