Lululemon 2010 Annual Report Download - page 64

Table of Contents
lululemon athletica inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue recognition
Net revenue includes sales of apparel to customers through corporate-owned and operated retail stores, direct to
consumer through www.lululemon.com and phone sales, initial license and franchise fees, royalties from franchisees
and sales of apparel to franchisees, sales through a network of wholesale accounts, and sales from company-operated
showrooms.
Sales to customers through corporate-owned retail stores and phone sales 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.
Franchise royalties are calculated as a percentage of franchise sales and are recognized in the month that the
franchisee makes the sale.
Sales of apparel to franchisees and wholesale accounts are recognized when goods are shipped and collection is
reasonably assured.
All revenues are reported net of sales taxes collected for various governmental agencies.
Revenues from the Company’s gift cards are 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 30, 2011, January 31, 2010 and February 1,
2009, net revenue recognized on unredeemed gift card balances was $1,406, $2,183, and $nil, 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
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