1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of operations

lululemon athletica inc., a Delaware corporation (“lululemon” or “LAI” and, together with its subsidiaries unless the context otherwise requires, the “Company”) is engaged in the design, manufacture and distribution of healthy lifestyle inspired athletic apparel, which is sold through a chain of corporate-owned and operated retail stores, direct to consumer through e-commerce, and a network of wholesale accounts. The Company’s primary markets are Canada, the United States, Australia, and New Zealand, where 47, 108, 18, and 1 corporate-owned store(s), respectively, were in operation as at January 29, 2012. There were 174, 133, and 110 corporate-owned stores in operation as at January 29, 2012, January 30, 2011, and January 31, 2010, respectively.

Basis of presentation

The accompanying consolidated financial statements include the financial position, results of operations and cash flows of the Company and its subsidiary companies during the three-year period ended January 29, 2012. The consolidated financial statements have been prepared using the U.S. dollar and are presented in accordance with United States generally accepted accounting principles (“GAAP”).

The Company has experienced, and expects to continue to experience, significant seasonal variations in net revenue and income from operations. Seasonal variations in revenue are primarily related to increased sales of products during the fourth fiscal quarter, reflecting historical strength in sales during the holiday season. Historically, seasonal variations in income from operations have been driven principally by increased net revenue in the fourth fiscal quarter.

The Company’s 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 2011, 2010 and 2009 ended on January 29, 2012, January 30, 2011, and January 31, 2010, respectively.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The consolidated financial statements include the accounts of lululemon athletica inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated. The results of operations of lululemon athletica australia Pty attributable to the non-controlling interest are presented within equity and net income, and are shown separately from the Company’s equity and net income attributable to the Company. In the opinion of management, all adjustments, consisting primarily of normal recurring accruals, considered necessary for a fair presentation of the Company’s results of operations for the periods reported and of its financial condition as of the date of the balance sheet have been included.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, bank balances and short-term deposits with original maturities of less than three months. The Company has not experienced any losses related to these balances, and management believes its credit risk to be minimal.

Accounts receivable

Accounts receivable primarily arise out of sales to wholesale accounts and landlord deferred lease inducements. The allowance for doubtful accounts represents management’s best estimate of probable credit losses in accounts receivable and is reviewed monthly. Receivables are written off against the allowance when management believes that the amount receivable will not be recovered. As at January 29, 2012, January 30, 2011 and January 31, 2010 the Company recorded an insignificant allowance for doubtful accounts.

Inventories

Inventories, consisting of finished goods and raw materials, are stated at the lower of cost and market value. Cost is determined using weighted-average costs. For finished goods, market is defined as net realizable value, and for raw materials, market is defined as replacement cost. Cost of inventories includes acquisition and production costs including raw material and labor, as applicable, and all costs incurred to deliver inventory to the Company’s distribution centers including freight, non-refundable taxes, duty and other landing costs.

The Company periodically reviews its inventories and makes provisions as necessary to appropriately value obsolete or damaged goods. The amount of the provision is equal to the difference between the cost of the inventory and its estimated net realizable value based upon assumptions about future demand, selling prices and market conditions. In addition, as part of inventory valuations, the Company accrues for inventory shrinkage based on historical trends from actual physical inventory counts. Inventory shrinkage estimates are made to reduce the inventory value for lost or stolen items. The Company performs physical inventory counts and cycle counts throughout the year and adjusts the shrink reserve accordingly.

Property and equipment

Property and equipment are recorded at cost less accumulated depreciation. Direct internal and external costs related to software used for internal purposes which are incurred during the application development stage or for upgrades that add functionality are capitalized. All other costs related to internal use software are expensed as incurred.

Buildings are amortized on a straight-line basis over the expected useful life of the asset. Leasehold improvements are amortized on a straight-line basis over the lesser of the length of the lease, without consideration of option renewal periods, and the estimated useful life of the assets, to a maximum of five years. All other property and equipment are amortized using the declining balance method as follows. Amortization commences when an asset is ready for its intended use.

 

 

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

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 net assets acquired and liabilities assumed over the aggregate of the consideration transferred, the fair value of any non-controlling interest in the acquiree and the acquisition-date fair value of the Company’s previously held equity interest. Goodwill and intangible assets with indefinite lives are tested annually for impairment or more frequently when an event or circumstance indicates that goodwill or indefinite life intangible assets might be impaired. The Company’s operating segment for goodwill is its corporate-owned stores.

Impairment of long-lived assets

Long-lived assets, including intangible assets with finite lives, held for use are evaluated for impairment when the occurrence of events or a change in circumstances indicates that the carrying value of the assets may not be recoverable as measured by comparing their carrying value to the estimated undiscounted future cash flows generated by their use and eventual disposition. Impaired assets are recorded at fair value, determined principally by discounting the future cash flows expected from their use and eventual disposition. Reductions in asset values resulting from impairment valuations are recognized in income in the period that the impairment is determined. Long-lived assets, including intangible assets with finite lives, held for sale are reported at the lower of the carrying value of the asset and fair value less cost to sell. Any write-downs to reflect fair value less selling cost is recognized in income when the asset is classified as held for sale. Gains or losses on assets held for sale and asset dispositions are included in provision for impairment and lease exit costs.

Leased property and equipment

The Company leases corporate-owned stores and distribution centers and administrative offices. Minimum rental payments, including any fixed escalation of rental payments and rent premiums, are amortized on a straight-line basis over the life of the lease beginning on the possession date. Rental costs incurred during a construction period, prior to store opening, are recognized as rental expense. The difference between the recognized rental expense and the total rental payments paid is reflected on the consolidated balance sheet as a deferred lease liability or a prepaid lease asset.

Deferred lease inducements, which include leasehold improvements paid for by the landlord and free rent, are recorded as liabilities on the consolidated balance sheet and recognized as a reduction of rent expense on a straight-line basis over the term of the lease.

Contingent rental payments based on sales volumes are recorded in the period in which the sales occur.

The Company recognizes a liability for the fair value of a required asset retirement obligation (“ARO”) when such obligation is incurred. The Company’s AROs are primarily associated with leasehold improvements which, at the end of a lease, the Company is contractually obligated to remove in order to comply with the lease agreement. At the inception of a lease with such conditions, the Company records an ARO liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. The liability is estimated based on a number of assumptions requiring management’s judgment, including store closing costs, cost inflation rates and discount rates, and is accreted to its projected future value over time. The capitalized asset is depreciated using the convention for depreciation of leasehold improvement assets. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement costs incurred is recognized as an operating gain or loss in the consolidated statements of operations.

The Company recognizes a liability for a cost associated with a lease exit or disposal activity when such obligation is incurred. A lease exit or disposal activity is measured initially at its fair value in the period in which the liability is incurred. The Company estimates fair value at the cease-use date of its operating leases as the remaining lease rentals, reduced by estimated sublease rentals that could be reasonably obtained for the property, even where the Company does not intend to enter into a sublease. Estimating the cost of certain lease exit costs involves subjective assumptions, including the time it would take to sublease the leased location and the related potential sublease income. The estimated accruals for these costs could be significantly affected if future experience differs from that used in the initial estimate. Lease exit costs are included in provision for impairment and lease exit costs.

Deferred revenue

Receipts from the sale of gift cards are treated as deferred revenue. Amounts received in respect of gift cards are recorded as unredeemed gift card liability. When gift cards are redeemed for apparel, the Company recognizes the related revenue.

 

Revenue recognition

Net revenue includes sales of apparel to customers through corporate-owned and operated retail stores, direct to consumer through www.lululemon.com, sales through a network of wholesale accounts, and sales from company-operated showrooms.

Sales to customers through corporate-owned retail stores are recognized at the point of sale, net of an estimated allowance for sales returns.

Sales of apparel to customers through the Company’s retail internet site are recognized when goods are shipped, net of an estimated allowance for sales returns.

Sales of apparel to wholesale accounts are recognized when goods are shipped and collection is reasonably assured.

All revenue is reported net of sales taxes collected for various governmental agencies.

Revenue from the Company’s 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 the Company’s gift cards, and lululemon does not charge any service fees that cause a decrement to customer balances.

While the Company will continue to honor all gift cards presented for payment, management 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 management determines 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.” For the years ended January 29, 2012, January 30, 2011 and January 31, 2010, net revenue recognized on unredeemed gift card balances was $1,775, $1,406, and $2,183, respectively.

Cost of goods sold

Cost of goods sold includes the cost of purchased merchandise, including in-bound freight, duty and nonrefundable taxes incurred in delivering the goods to the Company’s distribution centers. It also includes all occupancy costs such as minimum rent, contingent rent where applicable, property taxes, utilities and depreciation expense for the Company’s corporate-owned store locations and all costs incurred in operating the Company’s distribution centers and production, design and merchandise departments, hemming and shrink and valuation reserves. Production, design, merchandise and distribution center costs include salaries and benefits as well as operating expenses, which include occupancy costs and depreciation expense for the Company’s distribution centers.

Store pre-opening costs

Operating costs incurred prior to the opening of new stores are expensed as incurred.

Income taxes

The Company follows the liability method with respect to accounting for income taxes. Deferred income tax assets and liabilities are determined based on temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates that are expected to be in effect when these differences are anticipated to reverse. Deferred income tax assets are reduced by a valuation allowance, if based on the weight of available 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 primarily on management’s forecasts, including current and proposed tax legislation, current and anticipated taxable income, utilization of previously unrealized non-operating loss carryforwards and regulatory reviews of tax filings. Given the judgments and estimates required and the sensitivity of the results to the significant assumptions used, 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.

The Company provides for taxes at the rate applicable for the appropriate tax jurisdiction. Because present intentions are to reinvest the unremitted earnings into foreign operations, the Company does not provide U.S. income taxes on unremitted earnings of foreign subsidiaries. Management periodically assesses the need to utilize these unremitted earnings to finance foreign operations. This assessment is based on cash flow projections that are the result of estimates of future production, fiscal requirements by tax jurisdiction of our operations and operational and fiscal objectives by tax jurisdiction for our operations. Such estimates are inherently imprecise since many assumptions utilized in the cash flow projections are subject to revision in the future.

The Company files income tax returns in the United States, Canada and various foreign and state jurisdictions. The Company is subject to income tax examination by tax authorities in all jurisdictions from our inception to date. Our policy is to recognize interest expense and penalties related to income tax matters as a selling, general and administrative expense. At January 29, 2012, the Company does not have any significant accruals for interest related to unrecognized tax benefits or tax penalties. Intercompany transfer pricing policies are currently subject to audits by various foreign tax jurisdictions. Although management believes that the Company’s intercompany transfer pricing policies and tax positions are reasonable, the final determination of tax audits or potential tax disputes may be materially different from that which is reflected in the Company’s income tax provisions and accruals.

Currency translation

The functional currency for each entity included in these consolidated financial statements that is domiciled outside of the United States (the foreign entities) is the applicable local currency. Assets and liabilities of each foreign entity are translated into U.S. dollars at the exchange rate in effect on the balance sheet date. Revenue and expenses are translated at the average rate in effect during the period. Unrealized translation gains and losses are recorded as a cumulative translation adjustment, which is included in other comprehensive income or loss, which is a component of accumulated other comprehensive income included in stockholders’ equity.

Foreign currency transactions denominated in a currency other than an entity’s functional currency are remeasured into the functional currency with any resulting gains and losses included in income, except for gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature.

Fair value of financial instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, trade accounts payable, accrued liabilities, and other liabilities. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. All foreign exchange gains or losses are recorded in the consolidated statements of operations under selling, general and administrative expenses. The fair value of these financial instruments approximates their carrying value, unless otherwise noted.

Foreign exchange risk

A significant portion of the Company’s sales are denominated in Canadian dollars. The Company’s exposure to foreign exchange risk is mainly related to fluctuations between the Canadian dollar and the U.S. dollar. This exposure is partly mitigated by a natural hedge in that a significant portion of the Company’s operating costs are also denominated in Canadian dollars. The Company is also exposed to changes in interest rates. The Company does not hedge foreign currency and interest rate exposure in a manner that would entirely eliminate the effect of changes in foreign currency exchange rates, or interest rates on net income and cash flows.

The aggregate foreign exchange gains (losses) included in income amount to $(759), $477, and $174 for the years ended January 29, 2012, January 30, 2011, and January 31, 2010, respectively.

Concentration of credit risk

The Company is not exposed to significant credit risk on its cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are held with high quality financial institutions. Trade accounts receivable are primarily from certain franchisees and wholesale accounts. The Company does not require collateral to support the trade accounts receivable; however, in certain circumstances, the Company may require parties to provide payment for goods prior to delivery of the goods. The accounts receivable are net of an allowance for doubtful accounts, which is established based on management’s assessment of the credit risks of the underlying accounts.

Stock-based compensation

The Company accounts for stock-based compensation using the fair value method. The fair value of awards granted is estimated at the date of grant and recognized as employee compensation expense on a straight-line basis over the requisite service period with the offsetting credit to additional paid-in capital. For awards with service and/or performance conditions, the total amount of compensation expense to be recognized is based on the number of awards expected to vest and is adjusted to reflect those awards that do ultimately vest. For awards with performance conditions, the Company recognizes the compensation expense if and when the Company concludes that it is probable that the performance condition will be achieved. The Company reassesses the probability of achieving the performance condition at each reporting date. For awards with market conditions, all compensation expense is recognized irrespective of whether such conditions are met.

Certain employees are entitled to share-based awards from the principal stockholder of the Company. These awards are accounted for by the Company as employee compensation expense in accordance with the above-noted policies.

Earnings per share

Earnings per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders for the period by the diluted weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution from common shares issuable through stock options and performance share units using the treasury stock method.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period.

Recently issued accounting standards

In April 2010, the Financial Accounting Standards Board (“FASB”) amended Accounting Standards Codification (“ASC”) Topic 718 Compensation (“ASC 718”) to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a market, performance or service condition. Therefore, an entity should not classify such an award as a liability if it otherwise qualifies for classification in equity. This guidance is effective for interim and annual periods beginning on or after December 15, 2010 and is to be applied prospectively. The Company adopted the amendment in the first quarter of fiscal 2011 with no material impact on the Company’s consolidated financial statements.

In May 2011, the FASB amended ASC Topic 820 Fair Value Measurement (“ASC 820”) to clarify requirements for how to measure fair value and for disclosing information about fair value measurements common to US GAAP and International Financial Reporting Standards. This guidance is effective for interim and annual periods beginning on or after December 15, 2011. The Company will adopt the amendment in the first quarter of fiscal 2012 and expects no material impact on the Company’s consolidated financial statements.

In June 2011, the FASB amended ASC Topic 220 Comprehensive Income (“ASC 220”) to require (i) that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and (ii) presentation of reclassification adjustments from other comprehensive income (“OCI”) to net income on the face of the financial statements. This guidance eliminates the option to present the components of OCI as part of the statement of changes in stockholders’ equity, but does not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income. This guidance is effective for years, and interim periods within those years, beginning after December 15, 2011. The Company will adopt the amendment in fiscal 2012 and expects no material impact on the Company’s consolidated financial statements.

In September 2011, the FASB amended ASC Topic 350 Intangibles—Goodwill and Other (“ASC 350”) to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment, a company would not be required to calculate the fair value of a reporting unit unless the company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendment includes a number of events and circumstances for a company to consider in conducting the qualitative assessment. This guidance is effective for annual periods beginning on or after December 15, 2011. The Company will adopt the amendment in the first quarter of fiscal 2012 and expects no material impact on the Company’s consolidated financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform to fiscal 2011 presentation.

3 INVENTORIES

 

 

		January 29, 2012				January 30, 2011
Finished goods		$	105,462			$	59,138
Raw materials			2,531				1,913
Provision for obsolescence and shrink			(3,896	)			(3,582	)
		$	104,097			$	57,469

 

4 PROPERTY AND EQUIPMENT

 

 

		January 29, 2012				January 30, 2011
Land		$	60,014			$	—
Buildings			5,018				—
Leasehold improvements			113,931				84,773
Furniture and fixtures			22,512				17,940
Computer hardware and software			51,657				34,581
Equipment and vehicles			1,285				1,038
Accumulated amortization and depreciation			(91,476	)			(67,378	)
		$	162,941			$	70,954

Included in the cost of property and equipment are capitalized software costs of $14,150 and $17,252 at January 29, 2012 and January 30, 2011, respectively, associated with internally developed software.

Depreciation expense related to property and equipment was $28,709, $23,549 and $19,758 for the years ended January 29, 2012, January 30, 2011, and January 31, 2010, respectively.

5 GOODWILL AND INTANGIBLE ASSETS

 

 

		January 29, 2012				January 30, 2011
Goodwill		$	23,609			$	18,437
Changes in foreign currency exchange rates			2,727				1,837
			26,336				20,274
Intangibles—reacquired franchise rights		$	10,709			$	10,709
Non-competition agreements			694				694
Accumulated amortization			(7,676	)			(6,355	)
Changes in foreign currency exchange rates			1,809				1,790
			5,536				6,838
Total goodwill and intangibles		$	31,872			$	27,112

Amortization expense related to intangible assets was $1,311, $1,065, and $1,074 for the years ended January 29, 2012, January 30, 2011, and January 31, 2010, respectively. The estimated aggregate amortization expense is as follows:

 

 

Fiscal Year
2012		$	1,327
2013			1,145
2014			1,011
2015			895
2016			809
Thereafter			349
		$	5,536

During September 2011, the Company reacquired in asset purchase transactions four franchised stores for a total cash consideration of $5,654 plus working capital adjustments of $170. Included in the Company’s consolidated statements of operations for the year ended January 29, 2012 are the results of the reacquired franchised stores from the dates of acquisition to January 29, 2012.

 

The following table summarizes the preliminary fair values of the net assets acquired as of January 29, 2012:

 

 

Inventory		$	617
Prepaid and other assets			24
Property and equipment			239
Goodwill			5,168
Total assets acquired			6,048
Unredeemed gift card liability			224
Total liabilities assumed			224
Total identifiable net assets		$	5,824

In May 2010, the Company increased its investment in lululemon athletica australia Pty (“lululemon australia”) from 13 percent to 80 percent. The transaction provides the Company control over lululemon australia, which became a subsidiary of the Company on this date. lululemon australia is engaged in the distribution of healthy lifestyle inspired athletic apparel, which is sold through a chain of corporate-owned retail locations and through a network of wholesale accounts, in Australia. The Company previously accounted for its 13 percent interest in lululemon australia as an equity investment.

The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on February 1, 2009:

 

 

		Fiscal Year Ended
		January 29, 2012				January 30, 2011				January 31, 2010
Net revenue		$	1,000,839			$	716,328			$	463,506
Income from operations		$	286,958			$	180,832			$	85,854

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of lululemon australia to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to inventory and intangible assets had been applied from February 1, 2010, together with the consequential tax effects.

In fiscal 2010, the Company incurred $181 of acquisition-related costs. These costs are included in general and administrative expenses in the Company’s consolidated statements of operations for the year ended January 30, 2011.

The following tables summarize the consideration transferred to acquire lululemon australia and the amounts of identified assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the non-controlling interest in lululemon australia at the acquisition date:

Fair value of consideration transferred:

 

 

Cash		$	5,872
Conversion of note receivable to equity			3,481
Total			9,353
Investment in lululemon australia held prior to the business combination			2,345
Fair value of the non-controlling interest in lululemon australia			3,554
		$	15,252

 

The following table summarizes the fair values of the net assets acquired at the date of acquisition:

 

 

Inventory		$	3,053
Prepaid and other assets			709
Property and equipment			1,812
Goodwill and intangible assets			11,874
Total assets acquired			17,448
Current and non-current liabilities			2,196
Total liabilities assumed			2,196
Total identifiable net assets		$	15,252

As a result of the Company obtaining control over lululemon australia, the Company’s previously held 13 percent interest was remeasured to fair value, resulting in a gain of $1,792. This gain has been recognized in the line item Other income (expense), net in the Company’s consolidated statements of operations.

The fair value of the non-controlling interest of $3,554 in lululemon australia was estimated by applying a market approach and an income approach. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). The fair value estimates use standard valuation techniques, including discounted cash flows, comparable transactions and internal projections, and include assumed adjustments due to the lack of control or lack of marketability that market participants would consider when estimating the fair value of the non-controlling interest in lululemon australia.

In July 2010, the Company reacquired in an asset purchase transaction a franchised store in Saskatoon, Saskatchewan for total cash consideration of $6,610. Included in the Company’s consolidated statements of operations for the year ended January 30, 2011 are the results of the reacquired Saskatoon franchised store from the date of acquisition to January 30, 2011.

The following table summarizes the fair values of the net assets acquired at the date of acquisition:

 

 

Inventory		$	325
Prepaid and other current assets			9
Property and equipment			174
Goodwill			6,371
Total assets acquired			6,879
Current and non-current liabilities			269
Total liabilities assumed			269
Net assets acquired		$	6,610

The acquisition of the franchised stores is part of management’s vertical retail growth strategy. The reacquired franchise rights are amortized on a straight-line basis over their estimated useful lives. Goodwill is reviewed for impairment annually, or as events occur or circumstances arise which may reduce the fair value of goodwill below carrying value. The weighted-average remaining useful lives of the reacquired franchise rights was 4.25 as at January 29, 2012 and 5.24 years as at January 30, 2011.

 

6 ACCRUED LIABILITIES

 

 

		January 29, 2012				January 30, 2011
Inventory purchases		$	9,648			$	11,925
Sales tax collected			12,740				4,505
Accrued rent			5,343				2,750
Other			6,804				6,086
		$	34,535			$	25,266

7 OTHER NON-CURRENT LIABILITIES

 

 

		January 29, 2012				January 30, 2011
Deferred lease liability		$	15,302			$	13,129
Tenant Inducements			9,712				6,516
		$	25,014			$	19,645

8 LONG-TERM DEBT AND CREDIT FACILITIES

In April 2007, the Company executed a credit facility with a lending institution that provided for a CDN$20,000 uncommitted demand revolving credit facilities to fund the working capital requirements of the Company. Borrowings under the uncommitted credit facilities are made on a when-and-as-needed basis at the discretion of the Company.

Borrowings under the credit facility can be made either as i) Revolving Loans—Revolving loan borrowings will bear interest at a rate equal to the Bank’s CDN$ or USD$ annual base rate (defined as zero% plus the lender’s annual prime rate) per annum, ii) Offshore Loans—Offshore rate loan borrowings will bear interest at a rate equal to a base rate based upon LIBOR for the applicable interest period, plus 1.125 percent per annum, iii) Bankers Acceptances—Bankers acceptance borrowings will bear interest at the bankers acceptance rate plus 1.125 percent per annum and iv) Letters of Credit and Letters of Guarantee—Borrowings drawn down under letters of credit or guarantee issued by the banks will bear a 1.125 percent per annum fee.

At January 29, 2012, there were no borrowings outstanding under this credit facility. As well, at January 29, 2012, letters of credit totaling USD$nil and guarantees totaling USD$1,466 had been issued under the facility, which reduced the amount available by a corresponding amount.

9 STOCKHOLDERS’ EQUITY

Authorized share capital

On June 8, 2011 the Company’s stockholders approved a two-for-one stock split (the “Stock Split”) of the Company’s common stock and an increase in the Company’s authorized common stock from 200,000 shares to 400,000 shares. Shares of the Company’s common stock began trading on a post-split basis on July 12, 2011 on the Nasdaq Stock Market and July 6, 2011 on the Toronto Stock Exchange. In connection with the Stock Split, the stockholders also approved a two-for-one split of the Company’s special voting stock and an increase in the Company’s authorized special voting stock from 30,000 to 60,000. Lulu Canadian Holding, Inc., a wholly-owned subsidiary of the Company, effected a two-for-one stock split of the exchangeable shares (which are exchangeable for an equal number of shares of the Company’s common stock) in connection with the Stock Split.

 

The holders of the special voting stock are entitled to one vote for each share held. The special voting shares are not entitled to receive dividends or distributions or receive any consideration in the event of a liquidation, dissolution or wind-up. To the extent that exchangeable shares as described below are exchanged for common stock, a corresponding number of special voting shares will be cancelled without consideration.

The holders of the exchangeable shares have dividend and liquidation rights equivalent to those of holders of the common shares of the Company. The exchangeable shares can be converted on a one for one basis by the holder at any time into common shares of the Company plus a cash payment for any accrued and unpaid dividends. Holders of exchangeable shares are entitled to the same or economically equivalent dividend as declared on the common stock of the Company. The exchangeable shares are non-voting. The Company has the right to convert the exchangeable shares into common shares of the Company at any time after the earlier of July 26, 2047, the date on which less than 4,188 exchangeable shares are outstanding or in the event of certain events such as a change in control.

10 STOCK-BASED COMPENSATION

Share option plans

The Company’s employees participate in various stock-based compensation plans which are either provided by a principal stockholder of the Company or the Company.

During the year ended January 31, 2006, LIPO and LIPO USA, entities controlled by a principal stockholder of the Company, created a stockholder sponsored stock-based compensation plans (“LIPO Plans”) for certain eligible employees of the Company in order to provide incentive to increase stockholder value. Under the provisions of the LIPO plans, the eligible employees were granted options to acquire shares of LIPO and LIPO USA, respectively. LIPO and LIPO USA held shares in LACI and the Company, respectively. Shares of the Company that are or will be issued to holders of the options or restricted shares under the LIPO Plans are currently held by LIPO USA, an affiliate of a principal stockholder. The exercise, vesting or forfeiture of any of these awards will not have any impact on the outstanding common shares of the Company.

In July 2007, the Company’s Board of Directors adopted, and the Company’s stockholders approved the 2007 Equity Incentive Plan (“2007 Plan”). The 2007 Plan provides for the grants of stock options, stock appreciation rights, performance share units, restricted stock or restricted stock units to employees (including officers and directors who are also employees) of the Company. The majority of stock options granted to date have a four-year vesting period and vest at a rate of 25% each year on the anniversary date of the grant. Performance share units issued under the 2007 Plan generally vest three years from the grant date and restricted stock issued under the 2007 Plan vest one year from the grant date. To date, 90 shares of restricted stock have been issued under the 2007 Plan to certain directors and consultants of the Company.

The Company’s policy is to issue shares upon the exercise of Company options from treasury. Any shares issued to employees related to stockholder sponsored plans are provided by the principal stockholder and are not issued from treasury or repurchased by the Company.

Stock-based compensation expense charged to income for the plans was $10,340, $7,273 and $5,616 for the years ended January 29, 2012, January 30, 2011, and January 31, 2010, respectively.

Total unrecognized compensation cost for all stock option plans was $18,619 as at January 29, 2012, which is expected to be recognized over a weighted-average period of 2.2 years, and was $15,399 as at January 30, 2011 over a weighted-average period of 2.7 years.

Employee stock purchase plan

The Company’s Board of Directors and stockholders approved the Company’s Employee Share Purchase Plan (“ESPP”) in September 2007. The ESPP allows for the purchase of common stock of the Company by all eligible employees at a 25% discount from fair market value subject to certain limits as defined in the ESPP. The maximum number of shares available under the ESPP is 6,000 shares. During the year ended January 29, 2012, 18 shares were purchased under the ESPP, which were funded by the Company through open market purchases.

Stockholder sponsored stock options

On December 1, 2005, LIPO and LIPO USA each granted 10,592 Class A options with an exercise price of CDN$0.000005 and an expiry date of December 31, 2009 and 22,124 Class B options with an expiry date of December 31, 2010, respectively, prior to the reorganization. The LIPO and LIPO USA Class B options originally had exercise prices of CDN$0.495 and $0.005, respectively. Each Class A option and each Class B option entitled the holder to acquire one share of common stock of LIPO and LIPO USA respectively.

While all of the Class A options of both companies vested on December 5, 2005 and were immediately exercised, 7,098 of the common shares of LIPO and LIPO USA issued were designated as forfeitable. These forfeitable shares were considered to be non-vested for accounting purposes and were considered not to be earned as of December 5, 2005. These non-vested shares became non-forfeitable over a four-year requisite service period to December 5, 2009. In addition, on December 5, 2005, 4,478 of the Series B options vested, with the remaining options vesting over a five-year period ending December 5, 2010.

In connection with the reorganization of the Company, modifications were made to the LIPO and LIPO USA plans. The 10,570 LIPO Class A awards and the 8,222 vested LIPO Class B awards were exchanged for a total of 3,920 exchangeable shares of the Company through a series of transactions. At the time of the reorganization, 2,836 of the new awards were considered to be vested and the remaining 1,082 new awards were considered to be unvested. The unvested exchangeable shares are held in trust by the principal stockholder and are subject to the same vesting schedule as the original LIPO award.

The following table summarizes the shares granted under the stockholder sponsored plan. Amounts are presented on a post reorganization basis.

 

 

		Number of Exchangeable Shares				Number of LIPO USA Shares
Unvested balance at February 1, 2009			76				16
Granted			—				—
Vested			76				16
Cancelled			—				—
Non-forfeitable balance at January 31, 2010			—				—
Granted			—				—
Vested			—				—
Cancelled			—				—
Non-forfeitable balance at January 30, 2011			—				—
Granted			—				—
Vested			—				—
Cancelled			—				—
Non-forfeitable balance at January 29, 2012			—				—

The total unrecognized compensation cost related to shares was $nil at January 29, 2012.

 

The following table summarizes the LIPO USA options granted under the stockholder sponsored plan. Amounts are presented on a post reorganization basis and are shown in lululemon share equivalents.

 

 

		Number of LIPO USA Options				Weighted- Average Exercise Price
Unvested balance at February 1, 2009			582			$	0.005
Granted			—				—
Vested			368			$	0.005
Cancelled			—			$	0.005
Unvested balance at January 31, 2010			214			$	0.005
Granted			—				—
Vested			214			$	0.005
Cancelled			—			$	0.005
Unvested balance at January 30, 2011			—			$	—
Granted			—				—
Vested			—				—
Cancelled			—				—
Unvested balance at January 29, 2012			—			$	—

The total unrecognized compensation cost related to LIPO USA options was $nil at January 29, 2012.

The Company records compensation expense for shares issued under the stockholder sponsored awards, over the requisite service periods.

The vesting schedule of the stockholder sponsored awards in lululemon share equivalents is as follows:

 

 

		Exchangeable Shares				LIPO USA Shares				LIPO USA Options
December 5, 2005			1,576				174				210
December 5, 2006			1,262				120				192
December 5, 2007			552				120				786
December 5, 2008			398				86				786
December 5, 2009			132				28				630
December 5, 2010			—				—				364
December 5, 2011			—				—				—
Total			3,920				528				2,950

The fair value of the non-forfeitable and forfeitable shares issued under LIPO Class A was measured at the fair value of the underlying stock on the grant date. The fair value of the LIPO Class B options was determined using the Black-Scholes option pricing model with the following assumptions:

 

 

Dividend yield			0	%
Expected volatility			45	%
Risk-free interest rate			5	%
Weighted-average expected life of option (years)			5.0 years

The expected volatility was based on available information on volatility from a peer group of publicly traded U.S. and Canadian retail apparel companies. The expected life of the options was determined by reviewing data about exercise patterns of employees in the retail industry as well as considering the probability of a liquidity event such as the sale of the Company or an IPO and the potential impact of such an event on the exercise pattern. The risk-free interest rate approximates the yield on benchmark Government of Canada bonds for terms similar to the contract life of the options.

The total fair value of awards under the stockholder sponsored plans that vested during the years ended January 29, 2012, January 30, 2011 and January 31, 2010 was $nil, $261, and $464 , respectively.

Company stock options and performance share units

A summary of the Company’s stock options, performance share units and restricted shares activity as of January 29, 2012, January 30, 2011, and January 31, 2010, and changes during the years then ended is presented below:

 

 

		Number of Stock Options				Weighted- Average Exercise Price				Number of Performance Share Units				Weighted- Average Grant Fair Value				Number of Restricted Shares				Weighted- Average Grant Fair Value
Balance at February 1, 2009			3,809			$	5.42				—			$	—				18			$	12.02
Granted			1,917				7.40				—				—				30				6.92
Exercised			1,113				1.12				—				—				18				12.02
Forfeited			226				11.79				—				—				—				—
Balance at January 31, 2010			4,387			$	7.04				—			$	—				30			$	6.92
Granted			501				25.23				183				20.94				11				19.37
Exercised			1,369				4.38				—				—				29				7.66
Forfeited			249				8.72				9				20.61				4				6.92
Balance at January 30, 2011			3,270			$	10.83				174			$	20.96				8			$	21.22
Granted			183				45.47				231				40.99				9				47.74
Exercised			1,150				8.36				—				—				—				—
Forfeited			50				16.62				21				41.00				1				60.54
Balance at January 29, 2012			2,253			$	14.77				384			$	31.90				16			$	33.96

The Company’s performance share units are awarded to eligible employees and entitle the grantee to receive a maximum of 1.5 shares of common stock per performance share unit if the Company achieves specified performance goals and the grantee remains employed during the vesting period. The fair value of performance share units is based on the closing price of the Company’s common stock on the award date. Expense for performance share units is recognized when it is probable the performance goal will be achieved.

The following table summarizes information about stock options outstanding and exercisable at January 29, 2012:

 

		Outstanding												Exercisable
Range of Exercise Prices		Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Life (Years)				Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Life (Years)
$0.25 – $0.30			143			$	0.29				4.9				143			$	0.29				4.9
$3.49 – $9.00			655				4.98				4.6				103				6.55				5.5
$9.46 – $14.60			747				11.96				6.7				262				11.59				6.9
$16.16 – $25.23			335				18.80				5.4				137				17.73				5.5
$33.50 – $57.25			373				39.51				6.1				47				34.33				5.9
			2,253			$	14.77				5.7				692			$	11.27				6.0
Intrinsic Value		$	111,207											$	36,572

 

As of January 29, 2012, the unrecognized compensation cost related to these options was $10,387, which is expected to be recognized over a weighted-average period of 2.4 years; and the total aggregate intrinsic value for stock options outstanding and exercisable was $36,572. The intrinsic value of stock options exercised during the years ended January 29, 2012, January 30, 2011, and January 31, 2010 was $42,783, $28,463, and $8,093. The weighted-average grant date fair value of options granted during the years ended January 31, 2011, January 30, 2011, and January 31, 2010 was $22.51, $25.66, and $8.07, respectively.

The fair value of options with service conditions was determined at the date of grant using the Black-Scholes model. Expected volatilities are based on a review of a peer group of publicly traded apparel retailers. The expected term of options with service conditions is the simple average of the term and the requisite service period as stated in the respective option contracts. The risk-free interest rate is the Federal Reserve federal funds rate. The following assumptions were used in calculating the fair value of stock options issued in fiscal 2011:

 

 

		lululemon athletica  inc.
Dividend yield			0	%
Expected volatility			64.65	%
Risk-free interest rate			0.72	%
Weighted-average life			4.06 years