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

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 2019 was a 52 week year and fiscal 2018 was a 53 week year. Net revenue includes results from the 53rd week, however, comparable sales are calculated on a one week shifted basis such that the 52 weeks ended February 2, 2020 are compared to the 52 weeks ended February 3, 2019 rather than January 27, 2019. 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.

We have omitted the results of operations and cash flows for fiscal 2017, and the comparison of fiscal 2018 to fiscal 2017. For the omitted results and comparisons please refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our fiscal 2018 Annual Report on Form 10-K filed with the SEC on March 27, 2019.

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 included 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 described in the "Item 1A. Risk Factors" section and elsewhere in this Annual Report on Form 10-K.

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

Our business momentum continued in fiscal 2019. Net revenue grew 21% and total comparable sales increased 17%. In addition, we expanded our operating margin 80 basis points to 22.3% and grew earnings per share 37%, or 28% excluding certain discrete tax items which were recognized in fiscal 2018.

Fueling our performance this year was strength across our product assortment, 18% square footage growth driven by new stores and our remodel program, and a robust e-commerce business. In addition, our local community events and educators continued to connect us with our guests in a truly unique manner.

The Power of Three

We believe the first year of our Power of Three growth plan proved to be particularly successful. The strategic pillars of this plan are product innovation, omni-guest experience, and market expansion.

Product Innovation

Throughout fiscal 2019, response to our product offerings was strong as we continued to grow our core product categories, expand our merchandise range, and deliver new innovation through our Science of Feel development platform. Momentum continued in both our men's and women's pant category, and we continued to expand the important categories of bras and outerwear. In men's, one of our key growth areas, revenue increased 34% in 2019. We also moved beyond test phase with our new assortment of selfcare personal-care products. We rolled out our initial assortment to 50 stores and online.

Omni-Guest Experience

Performance was strong across both our company-operated store and direct to consumer channels in fiscal 2019, with comparable store sales increasing 9% and direct to consumer net revenue growing 35%, each based on a shifted calendar. In fiscal 2019 we began to engage with our guests in new ways. We began testing a new membership program, with four markets tested in fiscal 2019. We also opened and began testing our first two fully experiential stores in 2019, one in the Lincoln Park neighborhood of Chicago and the second at the Mall of America near Minneapolis. These stores were designed to offer dedicated studio space for sweat classes and meditation, locker rooms, healthy foods, and an elevated shopping experience.

In fiscal 2019 we continued to host unique events in North America and in our international markets. In addition to our SeaWheeze half marathon and festival in Vancouver, we hosted 10K races in Toronto, Edmonton, and San Diego, our first in the United States. In Europe, we held Sweatlife festivals in London, Paris, and Berlin, and in Mainland China, we hosted our 4th annual Unroll China event. These festivals and events brought together guests, educators, ambassadors, and other members of the local community to engage in sweat classes, yoga, personal development, and meditation.

Market Expansion

In fiscal 2019, we continued to expand our presence both in North America and in our international markets. During the year, we opened 51 net new company-operated stores, including 19 in North America, 24 in Asia Pacific, and eight in Europe. We expanded into two new markets in Europe during the year, the Netherlands and Norway. We also launched local market e-commerce sites in Germany and France. In Asia, we opened our first stores in Malaysia and launched a local e-commerce site in Japan.

We also expanded our seasonal store strategy in fiscal 2019 with approximately 80 seasonal stores in operation for some period of time during the year. These stores allowed us to better cater to our guests in select markets, particularly during the holidays, while also helping introduce new guests to our brand.

For fiscal 2019, our business in North America grew 20%, while total growth in our international markets was 32%.

Coronavirus (COVID-19)

The outbreak of the COVID-19 coronavirus has been declared a pandemic by the World Health Organization and continues to spread in the United States, Canada, and in many other countries globally. The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers. Government authorities in certain markets in which we operate have also issued orders that require the closure of non-essential businesses and people to remain at home.

We have taken actions to close certain 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. All but one of these locations have since reopened. In March 2020, we temporarily closed all of our retail locations in North America, Europe, Malaysia, New Zealand, and we temporarily closed our distribution center in Sumner, WA. These locations currently remain closed.

There is significant uncertainty regarding the extent and duration of the impact that the COVID-19 coronavirus pandemic will have on the demand for our products and our supply chain. We expect our sales growth trends to experience a meaningful deterioration from those achieved in fiscal 2019 and to experience a material adverse impact on our fiscal 2020 results. 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 February 2, 2020, we had cash and cash equivalents of $1.1 billion and the capacity under our committed revolving credit facility was $398.2 million.

Financial Highlights

The summary below provides both GAAP and non-GAAP financial measures. The adjusted financial measures for fiscal 2018 exclude the amounts recognized in connection with U.S. tax reform and taxes on the repatriation of foreign earnings.

For the fiscal year ended February 2, 2020, compared to the fiscal year ended February 3, 2019:

•	Net revenue increased 21% to $4.0 billion. On a constant dollar basis, net revenue increased 22%.

•	Total comparable sales, which includes comparable store sales and direct to consumer, increased 17%. On a constant dollar basis, total comparable sales increased 18%.

–	Comparable store sales increased 9%, or increased 10% on a constant dollar basis.

–	Direct to consumer net revenue increased 35%, or increased 35% on a constant dollar basis.

•	Gross profit increased 22% to $2.2 billion.

•	Gross margin increased 70 basis points to 55.9%.

•	Income from operations increased 26% to $889.1 million.

•	Operating margin increased 80 basis points to 22.3%.

•	Income tax expense increased 9% to $251.8 million. Our effective tax rate for fiscal 2019 was 28.1% compared to 32.4% for fiscal 2018. The adjusted effective tax rate was 28.0% for fiscal 2018.

•	Diluted earnings per share were $4.93 for fiscal 2019 compared to $3.61 in fiscal 2018. Adjusted diluted earnings per share were $3.84 for fiscal 2018.

Due to the 53rd week in fiscal 2018, comparable sales are calculated on a one week shifted basis such that the 52 weeks ended February 2, 2020 are compared to the 52 weeks ended February 3, 2019 rather than January 27, 2019.

Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and adjusted income tax expense, effective tax rates, and diluted earnings per share, and the most directly comparable measures calculated in accordance with GAAP.

General

Net revenue is comprised of company-operated store sales, direct to consumer sales through www.lululemon.com, other country and region specific websites, and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, and other net revenue, which includes outlet sales, sales from temporary locations, sales to wholesale accounts, license and supply arrangement net revenue which consists of royalties as well as sales of our products to licensees, and warehouse sales.

Cost of goods sold includes the cost of purchased merchandise, including freight, duty, and nonrefundable taxes incurred in delivering the goods to our distribution centers. It also includes occupancy costs and depreciation expense for our company-operated store locations, all costs incurred in operating our distribution centers and production, design, distribution, and merchandise departments, hemming, shrink, and inventory provision expense. The primary drivers of the costs of individual products 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.

Income tax expense depends on the statutory tax rates in the countries where we sell our products and the proportion of taxable income earned in those jurisdictions. To the extent the relative proportion of taxable income in the jurisdictions fluctuates, or the tax legislation in the respective jurisdictions changes, so will our effective tax rate. We also anticipate that, in the future, we may start to sell our products through retail locations in countries in which we have not yet operated, 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. In addition, increases in our Canadian net assets may result in an increase to our effective tax rate due to Canadian withholding taxes that could be payable on future repatriations from our Canadian subsidiaries to the extent that they are not able to be made as a return of capital.

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 2, 2020				February 3, 2019				February 2, 2020			February 3, 2019
		(In thousands)								(Percentages)
Net revenue		$	3,979,296			$	3,288,319			100.0	%		100.0	%
Cost of goods sold		1,755,910				1,472,032				44.1			44.8
Gross profit		2,223,386				1,816,287				55.9			55.2
Selling, general and administrative expenses		1,334,276				1,110,451				33.5			33.8
Income from operations		889,110				705,836				22.3			21.5
Other income (expense), net		8,283				9,414				0.2			0.3
Income before income tax expense		897,393				715,250				22.6			21.8
Income tax expense		251,797				231,449				6.3			7.0
Net income		$	645,596			$	483,801			16.2	%		14.7	%

Comparison of Fiscal 2019 to Fiscal 2018

Net Revenue

Net revenue increased $691.0 million, or 21%, to $4.0 billion in fiscal 2019 from $3.3 billion in fiscal 2018. On a constant dollar basis, assuming the average exchange rates in fiscal 2019 remained constant with the average exchange rates in fiscal 2018, net revenue increased $718.5 million, or 22%.

The increase in net revenue was primarily due to increased direct to consumer net revenue, net revenue generated by new company-operated stores, and an increase in comparable store sales.

Based on a shifted calendar, total comparable sales, which includes comparable store sales and direct to consumer, increased 17% in fiscal 2019 compared to fiscal 2018. Total comparable sales increased 18% on a constant dollar basis.

Net revenue on a segment basis for fiscal 2019 and fiscal 2018 is summarized below. The percentages are presented as a percentage of total net revenue.

		Fiscal Years Ended February 2, 2020 and February 3, 2019
		2019				2018				2019			2018
		(In thousands)								(Percentages)
Company-operated stores		$	2,501,067			$	2,126,363			62.9	%		64.7	%
Direct to consumer		1,137,822				858,856				28.6			26.1
Other		340,407				303,100				8.6			9.2
Net revenue		$	3,979,296			$	3,288,319			100.0	%		100.0	%

Company-Operated Stores. Net revenue from our company-operated stores segment increased $374.7 million, or 18%, to $2.5 billion in fiscal 2019 from $2.1 billion in fiscal 2018. The following contributed to the increase in net revenue from our company-operated stores segment:

•	Net revenue from company-operated stores we opened or significantly expanded subsequent to February 3, 2019, and are therefore not included in comparable store sales, increased net revenue by $238.5 million. During fiscal 2019 we opened 51 net new company-operated stores, including 24 stores in Asia Pacific, 19 stores in North America, and eight stores in Europe.

•	Based on a shifted calendar, a comparable store sales increase of 9% in fiscal 2019 compared to fiscal 2018. Comparable store sales increased 10% on a constant dollar basis. The increase in comparable store sales was primarily a result of increased store traffic and improved conversion rates.

We generated net revenue of $32.7 million in the 53rd week of fiscal 2018 from our company-operated stores segment.

Direct to Consumer. Net revenue from our direct to consumer segment increased $279.0 million to $1.1 billion in fiscal 2019 from $858.9 million in fiscal 2018. We generated net revenue of $20.3 million in the 53rd week of fiscal 2018 from our direct to consumer segment. Based on a shifted calendar, direct to consumer net revenue increased 35%, or increased 35% on a constant dollar basis. The increase in net revenue from our direct to consumer segment was primarily the result of increased traffic on our e-commerce websites and improved conversion rates, partially offset by a decrease in dollar value per transaction.

Other. Net revenue from our other segment increased $37.3 million, or 12%, to $340.4 million in fiscal 2019 from $303.1 million in fiscal 2018. This increase was primarily the result of an increase in net revenue from sales to wholesale accounts, and an increased number of temporary locations, including seasonal stores, open during fiscal 2019 compared to fiscal 2018.

Gross Profit

Gross profit increased $407.1 million, or 22%, to $2.2 billion in fiscal 2019 from $1.8 billion in fiscal 2018.

Gross profit as a percentage of net revenue, or gross margin, increased 70 basis points, to 55.9% in fiscal 2019 from 55.2% in fiscal 2018. The increase in gross margin was primarily the result of an increase in product margin of 110 basis points, which was primarily due to lower product costs, a favorable mix of higher margin product, and lower markdowns.

This was partially offset by an increase in costs as a percentage of revenue related to our distribution centers and our product departments of 30 basis points, an increase in occupancy and depreciation costs as a percentage of revenue of 10 basis points, and an unfavorable impact of foreign exchange rates of 10 basis points.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $223.8 million, or 20%, to $1.3 billion in fiscal 2019 from $1.1 billion in fiscal 2018. The increase in selling, general and administrative expenses was primarily due to:

•	an increase in costs related to our operating channels of $136.6 million, comprised of:

–	an increase in employee costs of $64.7 million primarily from a growth in labor hours and benefits, mainly associated with new company-operated stores and other new operating locations, and due to higher incentive compensation expenses;

–	an increase in variable costs of $49.2 million primarily due to an increase in distribution costs, credit card fees, and packaging costs as a result of increased net revenue; and

–	an increase in other costs of $22.8 million primarily due to increases in digital marketing expenses, information technology costs, security, and other costs associated with our operating locations;

•	an increase in head office costs of $84.3 million, comprised of:

–	an increase in employee costs of $43.0 million primarily due to increased incentive and stock-based compensation expense and due to increased wages, primarily from additional employees to support the growth in our business; and

–	an increase in other costs of $41.3 million primarily due to increases in depreciation, information technology costs, professional fees, brand and community costs, and other head office costs; and

•	an increase in net foreign exchange and derivative revaluation losses of $2.9 million. There were net foreign exchange and derivative revaluation losses of $1.5 million in fiscal 2019 compared to net foreign exchange revaluation gains of $1.4 million in fiscal 2018.

As a percentage of net revenue, selling, general and administrative expenses decreased 30 basis points, to 33.5% in fiscal 2019 from 33.8% in fiscal 2018.

Income from Operations

Income from operations increased $183.3 million, or 26%, to $889.1 million in fiscal 2019 from $705.8 million in fiscal 2018. Operating margin increased 80 basis points to 22.3% compared to 21.5% in fiscal 2018.

On a segment basis, we determine income from operations without taking into account our general corporate expenses.

Segmented income from operations before general corporate expenses for fiscal 2019 and fiscal 2018 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 Years Ended February 2, 2020 and February 3, 2019
		2019				2018				2019			2018
		(In thousands)								(Percentages)
Segmented income from operations:
Company-operated stores		$	689,339			$	575,536			27.6	%		27.1	%
Direct to consumer		482,368				354,107				42.4			41.2
Other		72,559				62,558				21.3			20.6
		1,244,266				992,201
General corporate expenses		355,156				286,365
Income from operations		$	889,110			$	705,836

Company-Operated Stores. Income from operations from our company-operated stores segment increased $113.8 million, or 20%, to $689.3 million for fiscal 2019 from $575.5 million for fiscal 2018. The increase was primarily the result of increased gross profit of $199.5 million which was primarily due to increased net revenue and higher gross margin. This was partially offset by an increase in selling, general and administrative expenses, primarily due to increased employee costs, increased store operating expenses including higher credit card fees, distribution costs, and packaging costs as a result of higher net revenue, and due to increased security, repairs and maintenance costs, and information technology costs. Income from operations as a percentage of company-operated stores net revenue increased by 50 basis points, primarily due to leverage on selling, general and administrative expenses and an increase in gross margin.

Direct to Consumer. Income from operations from our direct to consumer segment increased $128.3 million, or 36%, to $482.4 million in fiscal 2019 from $354.1 million in fiscal 2018. The increase was primarily the result of increased gross profit of $194.0 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 costs as a result of higher net revenue, as well as higher digital marketing expenses, information technology costs, and employee costs. Income from operations as a percentage of direct to consumer net revenue has increased by 120 basis points, primarily due to an increase in gross margin, partially offset by deleverage on selling, general and administrative expenses.

Other. Other income from operations increased $10.0 million, or 16%, to $72.6 million in fiscal 2019 from $62.6 million in fiscal 2018. The increase was primarily the result of increased gross profit of $13.6 million which was primarily due to increased net revenue. The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, including increased employee costs, increased operating expenses including higher credit card fees and higher distribution costs as a result of higher net revenue, and due to higher repairs and maintenance costs and information technology costs. Income from operations as a percentage of other net revenue increased 70 basis points, primarily due to leverage on selling, general and administrative expenses, partially offset by a decrease in gross margin.

General Corporate Expenses. General corporate expenses increased $68.8 million, or 24%, to $355.2 million in fiscal 2019 from $286.4 million in fiscal 2018. This increase was primarily due to increases in head office employee costs, depreciation, brand and community costs, information technology costs, professional fees, and an increase in net foreign exchange and derivative losses of $2.9 million. We expect general corporate expenses to continue to increase in future years as we grow our overall business and require increased efforts at our head office to support our company-operated stores, direct to consumer and other segments.

Other Income (Expense), Net

There was net other income of $8.3 million in fiscal 2019 compared to $9.4 million in fiscal 2018. The decrease was primarily due to a decrease in net interest income, primarily from lower cash balances during the majority of fiscal 2019 compared to fiscal 2018. The decrease in net other income was partially offset by a decrease in interest expense, primarily the result of borrowings on our North American revolving credit facility during fiscal 2018. We did not have any borrowings on our revolving credit facilities during fiscal 2019.

Income Tax Expense

Income tax expense increased $20.3 million, or 9%, to $251.8 million in fiscal 2019 from $231.4 million in fiscal 2018.

U.S. tax reform was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. We completed the accounting for the income tax effects of U.S. tax reform during fiscal 2018. This resulted in the recognition of an additional tax expense of $7.5 million related to the mandatory one-time transition tax on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries.

In fiscal 2018, we also completed our assessment of the impact that U.S. tax reform has upon repatriation taxes, our reinvestment plans, and the most efficient means of deploying our capital resources globally. We concluded that the net investment in a Canadian subsidiary in excess of the amounts necessary to sustain our business operations would no longer be indefinitely reinvested and $778.9 million was repatriated from that subsidiary. This resulted in the recognition of a tax expense of $23.7 million in fiscal 2018.

Further information on the adjustments recognized in fiscal 2018 is outlined in Note 15 to the audited consolidated financial statements included in Item 8 of Part II of this report.

Our effective tax rate for fiscal 2019 was 28.1% compared to 32.4% for fiscal 2018. The effective tax rate excluding the above tax adjustments related to U.S. tax reform was 28.0% for fiscal 2018. The increase in the effective tax rate compared to our adjusted effective tax rate in the prior year was primarily due to accruals for repatriation taxes on unremitted earnings and true-ups upon filing of tax returns. This was partially offset by a reduction in non-deductible stock-based compensation expense.

Net Income

Net income increased $161.8 million, or 33%, to $645.6 million in fiscal 2019 from $483.8 million in fiscal 2018. The increase in net income in fiscal 2019 was primarily due to an increase in gross profit of $407.1 million, partially offset by an increase in selling, general and administrative expenses of $223.8 million, an increase in income tax expense of $20.3 million, and a decrease in other income (expense), net of $1.1 million.

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 over 30 days. Comparable store sales also exclude sales from direct to consumer, outlets, temporary locations, wholesale accounts, through license and supply arrangements, warehouse sales, and sales from company-operated stores that we have closed.

We use comparable store sales to assess the performance of our existing stores. It allows us to monitor the performance of our business without the impact of recently opened or expanded stores. We believe that investors would similarly find this metric useful in assessing the performance of our business.

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. Total comparable sales is an increasingly important metric to us as it allows us to evaluate the performance of our business from an omni-channel perspective. We therefore believe that reporting total comparable sales with comparable store sales and direct to consumer sales combined provides a relevant performance metric to investors.

Various factors affect comparable sales, including:

•	the location of new stores relative to existing stores;

•	consumer preferences, buying trends, foot traffic in the malls in which our stores are located, 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 marketing efforts;

•	the design and ease of use of our websites and mobile apps;

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

•	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.

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.

Opening new stores and expanding existing stores is an important part of our growth strategy. Accordingly, total comparable sales is just one way of assessing the success of our growth strategy insofar as comparable sales do not reflect the performance of stores opened, or significantly expanded, within the last 12 full fiscal months. The comparable sales measures we report may not be equivalent to similarly titled measures reported by other companies.

Non-GAAP Financial Measures

Constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue, and the adjusted financial results are non-GAAP financial measures.

A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign exchange rates for the same period of the prior year. We provide constant dollar changes in net revenue, total comparable sales, comparable store sales, and direct to consumer net revenue because we use these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates. We believe that disclosing

these measures on a constant dollar basis is useful to investors because it enables them to understand the level of growth of our business.

Adjusted income tax expense, effective tax rates, and diluted earnings per share exclude the amounts recognized in connection with U.S. tax reform and taxes on repatriation of foreign earnings. We believe these adjusted financial measures are useful to investors in evaluating the trend in our operating performance as the adjustments do not directly relate to our ongoing business operations. Furthermore, we do not believe the adjustments are reflective of our expectations of our future operating performance and believe these non-GAAP measures are useful to investors because of their comparability to our historical information.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP. A reconciliation of the non-GAAP financial measures follows, which includes more detail on the GAAP financial measure that is most directly comparable to each non-GAAP financial measure, and the related reconciliations between these financial measures.

Constant dollar changes in net revenue

The below changes in net revenue show the change compared to the corresponding period in the prior year.

		Fiscal Year Ended February 2, 2020
		(In thousands)				(Percentages)
Change		$	690,977			21	%
Adjustments due to foreign exchange rate changes		27,487				1
Change in constant dollars		$	718,464			22	%

Constant dollar changes in total comparable sales, comparable store sales, and direct to consumer net revenue

Due to the 53rd week in fiscal 2018, the below changes in total comparable sales, comparable store sales, and direct to consumer net revenue are calculated on a one week shifted basis such that the 52 weeks ended February 2, 2020 are compared to the 52 weeks ended February 3, 2019 rather than January 27, 2019.

		Fiscal Year Ended February 2, 2020
		Total Comparable Sales****1,2			Comparable Store Sales****2			Direct to Consumer Net Revenue
Change		17	%		9	%		35	%
Adjustments due to foreign exchange rate changes		1			1			—
Change in constant dollars		18	%		10	%		35	%

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(1)	Total comparable sales includes comparable store sales and direct to consumer sales.

(2)	Comparable store sales reflects net revenue from company-operated stores that have been open for at least 12 full fiscal months, or open for at least 12 full fiscal months after being significantly expanded.

Adjusted financial measures

The following tables reconcile adjusted financial measures with the most directly comparable measures calculated in accordance with GAAP. The adjustments relate to the amounts recognized in connection with U.S. tax reform and taxes on repatriation of foreign earnings. Please refer to Note 15 to the audited consolidated financial statements included in Item 8 of Part II of this report for further information on these adjustments.

		Fiscal Year Ended February 3, 2019
		GAAP Amounts				Adjustments								Adjusted Amounts (Non-GAAP)
			Tax on Repatriation of Foreign Earnings				U.S. Tax Reform
		(In thousands, except per share amounts)
Income tax expense		$	231,449			$	(23,714	)		$	(7,464	)		$	200,271
Effective tax rate		32.4		%		(3.3		)%		(1.1		)%		28.0		%
Diluted earnings per share		$	3.61			$	0.18			$	0.05			$	3.84

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, investing in information technology and making system enhancements, funding working capital requirements, and making other strategic capital investments both in North America and internationally. We may also use cash to repurchase shares of our common stock. Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions, as well as in money market funds, treasury bills, and term deposits.

As of February 2, 2020, our working capital (excluding cash and cash equivalents) was $94.0 million, our cash and cash equivalents were $1.1 billion and our capacity under our committed revolving credit facility was $398.2 million.

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

		Fiscal Year Ended
		February 2, 2020				February 3, 2019
		(In thousands)
Total cash provided by (used in):
Operating activities		$	669,316			$	742,779
Investing activities		(278,408		)		(242,794		)
Financing activities		(177,173		)		(590,214		)
Effect of exchange rate changes on cash		(1,550		)		(18,952		)
Increase (decrease) in cash and cash equivalents		$	212,185			$	(109,181	)

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.

Net cash provided by operating activities decreased $73.5 million in fiscal 2019 compared to fiscal 2018, primarily as a result of the following:

•	an increase in cash used in operating activities of $306.9 million as a result of changes in operating assets and liabilities, primarily due to the following:

–	$115.9 million related to income taxes, primarily due to payments for withholding taxes on repatriated foreign earnings, as well as timing of tax installments;

–	$86.8 million related to accounts payable, primarily due to a change in our payment terms in the prior fiscal year;

–	$51.0 million related to other prepaid expenses and other current and non-current assets; and

–	$45.6 million related to inventory, primarily due to an increase in inventory purchases to support our growth.

This was partially offset by an increase of $161.8 million in net income, and an increase of $71.7 million in non-cash expenses primarily related to an increase in depreciation, stock-based compensation, the settlement of derivatives not designated in a hedging relationship, and deferred income taxes.

Investing Activities

Cash flows used in investing activities relate to capital expenditures, the settlement of net investment hedges, and other investing activities. Cash used in investing activities increased $35.6 million, to $278.4 million in fiscal 2019 from $242.8 million in fiscal 2018.

Capital expenditures for our company-operated stores segment were $171.5 million and $129.2 million in fiscal 2019 and fiscal 2018, respectively. The capital expenditures for our company-operated stores segment in each period were primarily for the remodeling or relocation of certain stores, for opening new company-operated stores, and ongoing store refurbishment. The increase in capital expenditures for our company-operated stores segment was primarily due to an increased amount spent on store remodels and relocations, including our experiential stores. The capital expenditures for our company-operated stores segment also included $44.3 million to open 57 company-operated stores and $27.1 million to open 39 company-operated stores, in fiscal 2019 and fiscal 2018 respectively.

Capital expenditures for our direct to consumer segment were $15.8 million and $6.4 million in fiscal 2019 and fiscal 2018, respectively. The capital expenditures for our direct to consumer segment in fiscal 2019 were primarily related to our new distribution center in Toronto, Canada as well as other information technology infrastructure and system initiatives, and in fiscal 2018 were primarily related to our global and region specific websites as well as mobile apps.

Capital expenditures related to corporate activities and other were $95.7 million and $90.2 million in fiscal 2019 and fiscal 2018, respectively. The capital expenditures in each fiscal year were primarily related to investments in information technology and business systems, improvements at our head office and other corporate buildings, and for capital expenditures related to opening retail locations other than 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 $413.0 million, to $177.2 million in fiscal 2019 from $590.2 million in fiscal 2018. The decrease was primarily the result of a decrease in our stock repurchases.

During the fiscal years ended February 2, 2020 and February 3, 2019, 1.1 million and 4.9 million, respectively, were repurchased under the programs at a total cost of $173.4 million and $598.3 million, respectively. During the first quarter of fiscal 2019, we repurchased 1.0 million shares in a private transaction, and during the second quarter of fiscal 2018, we repurchased 3.3 million shares in a private transaction. The other common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.

We believe that our cash and cash equivalent balances, cash generated from operations, and borrowings available to us under our revolving credit facilities 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 systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations.

Revolving Credit 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.

On June 6, 2018, we entered into Amendment No. 1 to the credit agreement. The Amendment amends 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 decreases 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%, reduces the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduces fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%.

As of February 2, 2020, aside from letters of credit of $1.8 million, we had no other borrowings outstanding under this credit facility.

Mainland China revolving credit facility

In December 2019, the Company 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. 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. The Company is required to follow certain covenants. As of February 2, 2020, there were no borrowings outstanding under this credit facility.

Contractual Obligations and Commitments

Leases. We lease certain store and other retail locations, distribution centers, offices, and equipment under non-cancellable operating leases. Our leases generally have initial terms of between five and 15 years, and generally can be extended in five-year increments, if at all. The following table details the Company's future minimum lease payments. Minimum lease commitments exclude variable lease expenses including contingent rent payments, common area maintenance, property taxes, and landlord's insurance.

Purchase obligations. The amounts listed for purchase obligations in the table below represent agreements (including open purchase orders) to purchase products and for other expenditures in the ordinary course of business that are enforceable and legally binding and that specify all significant terms. In some cases, values are subject to change, such as for product purchases throughout the production process. The reported amounts exclude liabilities included in our consolidated balance sheets as of February 2, 2020.

One-time transition tax. As outlined in Note 15 to our audited consolidated financial statements included in Item 8 of Part II of this report, U.S. tax reform imposed a mandatory transition tax on accumulated foreign subsidiary earnings which have not previously been subject to U.S. income tax. The one-time transition tax is payable over eight years beginning in fiscal 2018. The table below outlines the expected payments due by fiscal year.

The following table summarizes our contractual arrangements as of February 2, 2020, 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				2020				2021				2022				2023				2024				Thereafter
		(In thousands)
Operating leases (minimum rent)		$	826,096			$	152,440			$	161,519			$	138,188			$	111,877			$	87,275			$	174,797
Purchase obligations		346,542				298,039				4,638				4,538				4,538				15,126				19,663
One-time transition tax payable		53,302				5,076				5,076				5,076				9,518				12,691				15,865

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 2, 2020, letters of credit totaling $1.8 million had been issued.

We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements.

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 comprised of company-operated store net revenue, direct to consumer net revenue through websites and mobile apps, including mobile apps on in-store devices that allow demand to be fulfilled via our distribution centers, and other net revenue, which includes revenue from outlets, temporary locations, sales to wholesale accounts, warehouse sales, and license and supply arrangement net revenue, which consists of royalties as well as sales of our products to licensees. All net revenue is reported net of sales taxes collected from customers on behalf of taxing authorities.

We record an estimated allowance for sales returns. 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 and an asset for estimated returned inventory. Our standard terms for retail sales limit returns to approximately 30 days after sale; however, we accept returns after 30 days where the product fails to meet our guests' quality expectations.

Proceeds from the sale of gift cards are initially deferred and recognized within "Unredeemed gift card liability" on the consolidated balance sheets, and are recognized as revenue when tendered for payment. To the extent there is no requirement to remit unclaimed card balances to government agencies, an estimate of the gift card balances that will never be redeemed is recognized as revenue in proportion to gift cards which have been redeemed. The estimate of gift cards that will never be redeemed is based on the historic trend of unredeemed cards.

Inventory provisions. Inventory is valued at the lower of cost and net realizable value. We periodically review our inventories and make a provision as necessary to appropriately value goods that are obsolete, have quality issues, or are damaged. 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 product quality, damages, future demand, 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.

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 is individually assessed, and estimated to be up to 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		20% - 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 estimated salvage value.

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.

Deferred taxes on undistributed net investment of foreign subsidiaries. We have not recognized U.S. state income taxes and foreign withholding taxes on the net investment in our subsidiaries which we have determined to be indefinitely reinvested. This determination is based on the cash flow projections and operational and fiscal objectives of each of our foreign subsidiaries. Such estimates are inherently imprecise since many assumptions utilized in the projections are subject to revision in the future.

For the portion of our net investment in our Canadian subsidiaries that are not indefinitely reinvested, we have recorded a deferred tax liability for the taxes which would be due upon repatriation. For distributions made by our Canadian subsidiaries, the amount of tax payable is partially dependent on how the repatriation transactions are made. The deferred tax liability has been recorded on the basis that we would choose to make the repatriation transactions in the most tax efficient manner. Specifically, to the extent that the Canadian subsidiaries have sufficient paid-up-capital, any such distributions would be characterized for Canadian tax purposes as a return of capital, rather than as a dividend, and would not be subject to Canadian withholding tax.

As of February 2, 2020, the paid-up-capital balance of the Canadian subsidiaries for tax purposes was $1.5 billion. The net investment in our Canadian subsidiaries was $1.3 billion, of which $0.8 billion was determined to be indefinitely reinvested. The Canadian subsidiaries have sufficient paid-up-capital such that we could choose to repatriate the portion of our net investment that is not indefinitely reinvested without paying Canadian withholding tax.

Deferred tax liabilities of $1.5 million have been recognized in relation to the portion of our net investment in our Canadian subsidiaries that is not indefinitely reinvested, principally representing the U.S. state income taxes which would be due upon repatriation. The unrecognized deferred tax liability on the indefinitely reinvested amount is approximately $2.3 million.

Stock-Based Compensation. We account for stock-based compensation using the fair value method. The fair value of awards granted is estimated at the date of grant. Awards settled in cash or common stock at the election of the employee are remeasured to fair value at the end of each reporting period until settlement. The employee compensation expense is recognized 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 of 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 and estimated expected forfeitures. 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. We evaluate and revise these estimates and assumptions as necessary, to reflect market conditions and our historical experience. The expected term of the options is based upon historical experience of similar awards, giving consideration to expectations of future employee behavior. Expected volatility is based upon the historical volatility of our common stock for the period corresponding with the expected term of the options. In the future, the 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.