Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. First Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Calvin McDonald:

Thank you, Howard. I'm happy to be here to discuss our quarter one results. As you've seen from our press release, our revenue growth was modestly ahead of our expectations, while EPS came in even stronger. On today's call, I'll share some highlights regarding our performance in quarter one, including my perspective on our U.S. business and what our teams have been working on. Next, I'll speak to the recent departure of our Chief Product Officer and the opportunities our new structure unlocks for us. Then I'll provide some details on our product innovations and brand activation. In addition, Meghan will review our financials, and we will close out our time today by taking your questions. So let's get started. In the first quarter, total revenue increased 10%, or 11% in constant currency. By region, we saw continued strong momentum in our international business with revenue in China Mainland up 52% and rest of the world up 30%, both in constant currency. In the Americas, revenue increased 4% in constant currency with Canada up 12% and the U.S. up 2%. By merchandise category, women's increased 10%, men's increased 15%, and accessories remains positive and up 2%, which is impressive given the exceptionally strong performance last year. Earnings per share were $2.54 versus EPS of $2.28 in quarter one last year. In addition, we repurchased nearly $300 million of stock in quarter one, an additional $230 million in the second quarter thus far, and our board recently increased our authorization by $1 billion, bringing our capacity to repurchase shares up to approximately $1.7 billion. As you can see, our business remains strong and our brand continues to resonate with guests around the world. We are engaging with them through our unique and compelling activations and brand campaigns, and we continue to drive the business with new product innovations. Let me now share some additional quarter one details by region. As I mentioned, our business remains strong in every international market in which we operate as our brand is resonating with guests across regions and geographies. Our approach to growth follows the model we've implemented so successfully in North America and includes omnichannel distribution via highly productive stores and e-commerce sites, a product assortment which offers technical and versatile styles and is frequently updated with new innovations to enable our guests to sweat in any way they choose and a unique and compelling approach to building brand awareness, which includes local activations as well as larger-scale brand campaigns. Our international business remains under-penetrated and continues to represent a significant growth opportunity. For the full year 2023, international was only 21% of our business, and over the long run, I see the potential for it to grow to 50% as we continue to expand our presence outside of North America. Shifting now to the U.S. As we mentioned on our last call, we've seen a slower start to the year due to several internal factors, including missed opportunity in women's and bags, which we are actively addressing, and some ongoing choppiness in the consumer environment. Our men's business has maintained its momentum, driven by strong guest response to our innovations across performance, lounge, and our ABC franchise. Our market share gains were strong in men's in quarter one, and with unaided brand awareness of less than 20% in the U.S., our opportunity to continue to grow this business remains significant. When looking at women's, we did not maximize the business in the U.S., which was the result of several missed opportunities, including a color palette and our core assortment, particularly in leggings, that was too narrow. Where we had color, guests responded well, we just needed more as they are looking for additional choices. And we are also out of stock in some of our smaller sizes. And in addition, we saw a fantastic guest response to our newer styles of bags such as the two-tone tote, but did not buy these styles with enough depth to fully capture the demand. Meghan will share our guidance with you later in the call, but as you've seen, we are maintaining our revenue guidance for the year. In quarter two, we expect revenue growth of 9% to 10%, roughly in line with our quarter one growth rate. Our guidance for the full year continues to call for revenue growth of 10% to 11%, excluding the 53rd week, and includes a modest step-up in the second-half. In summary, we are moving in the right direction and understand the root cause of the issues. And with the lead times, we expect to be in a more optimal inventory position in the second-half of 2024. In addition, our upcoming product launches and innovation flows, which I'll speak to shortly, are skewed toward the back half of the year, which is another reason for our optimism. Looking out further, our growth opportunities in the U.S. remain compelling. Our unaided brand awareness is only in the low-30s. Using our unique approach, which combines local engagement, community activations, and larger scale brand campaigns, we continue to have a significant runway to introduce new guests to lululemon and drive them to our stores and e-commerce sites. We are just beginning to leverage the power of our membership program, which now has approximately 20 million members in North America. By offering benefits like early access to product and invitations to exclusive events, we are increasing our member base and powerfully engaging with them, which will ultimately drive both spend and long-term value. Our stores remain highly productive with new locations performing well, and we continue to be pleased with our store optimization program. As a reminder, in 2024, our plan calls for five to 10 new store openings and 15 to 20 optimizations. Looking beyond 2024, our real estate opportunities in the U.S. remain significant, and our plans include continuing both of our new store opening program and our optimization strategy. And we continue to gain market share with outsized strength in men's where we outpaced the overall market in quarter one. Now let me speak about product innovation and some of the current shifts we recently announced within our organizational structure. As you know, our Chief Product Officer, Sun Choe, recently decided to leave lululemon to take a job elsewhere in the industry. Sun and I had been in regular conversations, so I understood her personal and career goals. We regularly update our succession plans, which allowed us to seamlessly step into our new plan leadership structure. I'm excited about how the new structure will bring new perspectives, curiosity, and leadership across our product teams. This approach will drive several meaningful benefits in the near and long term, including increasing our speed of innovation, stimulating creativity, and enhancing team accountability around product flows and assortment. We have a strong and dynamic product team led by Jonathan Cheung, our Global Creative Director, who now reports to me, and Liz Binder, our Chief Merchandising Officer, who now reports to Nikki Neuburger, as she steps into her expanded role as Chief Brand and Product Activation Officer. Jonathan, Liz, and the entire product team will continue to drive innovation, design technical product that looks great, and solve for the unmet needs of our guests. And under Nikki's proven leadership, the merchant and the brand teams will be more fully integrated, which will streamline decision-making and ensure we show up powerfully and consistently for our guests across all markets. All of this is intended to speed the ideation process with regard to product storytelling and further improve our speed-to-market. And these shifts will help maintain and enhance our pipeline of innovation. I want to now share several recent and upcoming product launches that continue to show our team's ability to create compelling product. In quarter one, in women's, our guests continued to respond very well to our key second-layer franchises, including Define, Scuba, and Softstreme. In addition, we continued to see strength in bottoms led by bike shorts and our away from body styles. Looking forward, we're on track to bring significant innovation into our assortment beginning the end of quarter two and into the second-half of the year. Within women's, we have some exciting new launches planned within our leggings assortment. These include a new innovation designed for hot, low-impact workouts, and made from a new performance fabric, one of our quickest drawing and lightest weight to date. And later in the year, we'll launch another new type, our most versatile swimsuit line, providing a completely different feel state, which will bring newness and innovation into our train assortment. The upcoming newness in leggings is a perfect example of how we continue to bring innovation into our core categories where we already have significant strength. Our teams continue to expand our product offerings with new technical solutions, and I'm excited for you to see these new styles. Let's now take a look at men's. In quarter one, we continued to see strong response to our lounge offering, including steady state and soft jersey. In addition, we recently launched a Smooth Spacer hoodie, which provides a cooling sensation and is a great recovery piece to wear home after a workout. We are pleased with the variety of and performance of our lounge offerings. We plan to fuel this strength by building our inventory levels and expanding the silhouettes offered in all three of these collections for fall. On the technical side of men's, we continued to see great response to our Pace Breaker and Zeroed In franchises, both of which we will expand later this year. Zeroed In is following in the footsteps of our other key technical styles for men and is quickly becoming a top performer in train. I also want to mention our new Show Zero technology, which we just launched in men's polo shirts. This fabric uses innovative construction to hide the appearance of sweat on the outside of the shirt. These polos are highly versatile and can be worn on the golf course to the office or many other occasions. And in footwear, our new cityverse style has done extremely well, particularly in men's where demand has exceeded our expectations. These are just the latest examples of the disruptive innovations we are known for and will continue to create. Shifting now to brand awareness. As you know, our unaided brand awareness remains low in every country where we operate, except our home market of Canada. We will continue to activate across our grassroots and global platforms to increase awareness and bring new guests into the lululemon brand. Let me share just a few examples. In quarter one, we held several successful earned media activations, including launching our new cityverse and Beyondfeel footwear styles in New York, hosting our further women's Ultramarathon event near Palm Springs, California, and unveiling our kit for the Canadian Olympic and Paralympic Athletes in Toronto. In quarter two, we will again host our successful Summer Sweat Games in China while also bringing a version of this event to our Essentials members in North America with our Membership Summer Series. And in quarter three, we'll strategically test TV again with another men's campaign. Building on the success of last year's campaign, this year's spot will focus on men and feature some high-profile personalities. Before I hand it over to Meghan to discuss our financials and guidance outlook, I'd like to share some additional thoughts about the rest of the year. Our pipeline of innovation and our launch cadence for the second-half of 2024 is particularly strong. In the U.S., our teams have been making the appropriate adjustments in closing the inventory gaps in terms of color and sizing. Our brand awareness remains low but is growing and our store productivity remains among the best in the industry. We continue to engage with our guests in unique and compelling ways and inspire them with our differentiated product innovations. I'm optimistic with regards to our performance in the second-half of the year and beyond as we continue to execute well against our Power of Three times 2 goal of doubling our revenue in five years. Meghan, over to you.

Calvin McDonald:

Thanks, Meghan. In closing, I want to say I am energized by the opportunities in front of us and excited for what the future holds for lululemon. I was in China last week, and when I'm traveling in markets around the world, I see how powerfully our brand resonates across cultures and geographies. While we make some strategic adjustments in the U.S., our leadership team continues to challenge ourselves and our teams by asking how high is high. It's that mentality and passion for our brand that will enable us to navigate the near term as we build towards the long-term opportunities for lululemon that we know exist. In closing, I want to thank the senior leaders of lululemon as well as our teams in every market around the world for your unyielding focus on creating amazing products and experiences for our guests. I look forward to taking your questions now. Operator?

Brooke Roach:

Good afternoon, and thank you for taking our question. Calvin, you spoke about making some strategic adjustments in the U.S. Can you speak to your confidence in the Lululemon brand and the growth trajectory that you see in the U.S. going forward as well as the timing and magnitude of some of those strategic adjustments that you're making? And then perhaps contextualize the traffic and conversion trends that you saw in your U.S. business as you move throughout the quarter? Thank you very much.

Brooke Roach:

Thanks so much. I'll pass it on.

Alex Stratton:

Perfect. Thanks for taking the question. I've got one for Calvin and maybe one for Meghan. Maybe, Calvin, just bigger-picture, I feel like we rarely hear of assortment missteps in lulu's history. So kind of what changed, or maybe what do you think provokes that this year? And then bigger-picture maybe for Meghan, China, obviously a key growth area for you all. Can you talk about how the competitive landscape is different or similar? And then how you think about the revenue potential for lulu in that market over time? Thanks a lot.

Meghan Frank:

Yes. And thanks, Alex. From a China standpoint, we're very pleased with our business in that market. Continue to see very strong trends in Q1, so plus 52% constant currency China Mainland. And I would say from a competitive landscape, we continue to see strong business on our side. Definitely closely monitoring the environment, but we're really still early in our growth journey there, and no concerns at this point in time.

Operator:

The next question is from Matthew Boss with JPMorgan. Please go ahead.

Calvin McDonald:

Great. Thanks, Matt. I'll start with absolutely nothing has changed in terms of the growth potential of this brand, not just internationally across all markets, but in the U.S. As you know, 2023 was a very strong market for us. Quarter four was a very strong quarter for us in the U.S. and have identified some missed opportunities in Q1. We saw success in our men's business where we did bring newness, innovation, color, and we had less of an impact on the size, status, and very pleased with that growth as well as that growth relative to the market and the outsized gains we saw in share. In the accessories business, we know that we're cycling over the success of the Everywhere Belt Bag, which is incredible. It really validates and shows what's possible for our brand in accessories in particular in bags. And although that bag continues to perform well, not quite to the levels of last year, but the team has introduced a number of new styles of bags that the guests responded incredibly well to. We just didn't have the depth of inventory to satisfy the demand that could have offset the -- some of the headwind of the Everywhere Belt Bag success last year. That is something we can control. We know the newness is resonating and the guest is moving beyond just an Everywhere Belt Bag. And we have opportunity and the teams have been chasing into that and expect to be in a better in-stock position in the back half. The Two-Tone bag is a good example of that, sold out almost immediately. We were able to chase, bring some in, offer it as an Essentials member early access. It again sold and did incredibly well and we continue to chase into that. So we have a number of exciting, very successful bags in our accessory business that we are chasing inventory in and excited to see how that will contribute -- continue to contribute to our growth. And then in the women's business, traffic, as I mentioned, was positive, engagement in the brand was positive where we had newness. She engaged incredibly well in some of the new innovation we brought. She continued to perform very well in some of the new activities that we've continued to lean in on, tennis, golf, as well as our position in yoga and train and run have seen strength. We can really attribute the missed opportunity to a handful of categories, leggings in particular, as I've mentioned, and really linked to color and less color than last year, which was a choice in the palette, more narrow and based on where the consumer is this year a missed opportunity for us. But nothing from a brand, from an opportunity to grow unaided awareness, and engagement in the brand has fundamentally shifted and changed. And I remain as optimistic and excited about our growth potential in the U.S. as I am in all of our international markets. And we see that in the performance of this quarter with fantastic growth in Mainland China, strong growth in the rest of the world, how the brand is continuing to grow, continuing to acquire guests and resonate and the uniqueness of our product. And I don't see anybody with product comparable from a from a positioning perspective. So I do believe the differentiation of the brand is the same, and we know what the opportunities are and what we can control. And that's what the teams are focused on, and definitely we'll get stronger as we as we trade through this year.

Meghan Frank:

Yes, sure. So inventory, we were down 15% at the end of the quarter. So that was on the lower end of the range that we provided of high-single-digit to low-double-digit decline. And we do expect the second-half inventory will grow year-over-year relatively in line with sales. I would say at this point in time, we're very pleased with the currency and composition of our inventory outside of some of the opportunity areas that Calvin mentioned. So well-positioned there from an overall perspective. In terms of markdowns, we were up 50 basis points year-over-year in Q1. We believe Q2 will be slightly above last year as well, though less than Q1, and we are still expecting essentially flat markdowns for the year. And with that, some of the opportunity areas that Calvin described in terms of color and sizing. And we are continuing to chase into as well as some other items that are working for us for the second-half of the year and we've got some innovation teed up and believe that will drive the gas towards the full-price component of our assortment and a lot markdowns for the year.

Meghan Frank:

Thank you.

Michael Binetti:

Hey, thanks. Congrats on a nice quarter, guys. So maybe I can just continue that last question, Meghan. Could you speak a little bit to your confidence in the sustainability of the product margins in the U.S.? And then I guess, I'd be curious what you think are some of the differences driving the gap in results between Canada and the U.S., a little bit of notable difference there. And then maybe just a little help understanding the U.S. consumer dynamics. Calvin, bigger-picture, how has purchase frequency, UPT, AUR changed, if at all? Looking -- as you look across the cohorts that you acquired pre-COVID, during COVID, after COVID, are there any change in key customer behaviors or KPIs to point out?

Calvin McDonald:

And with the consumer, I sort of mentioned that obviously, we're monitoring the environment and it remains dynamic. But we do know that the guest is being more selective, but will spend where they choose. So we believe our product is differentiated in the marketplace, stands out in terms of quality as well as the versatility, which I think is a key element of the product of how it can be worn multiple wear occasions and use cases across either performance activities and/or through social and lounge, which these are unique positions. And the missed opportunity is really what that we did not provide her in terms of the assortment she was looking for in certain areas. Obviously, where we did, she responded incredibly well and he continued to. When I look at the overall mix, nothing really to call out. UPT and AUR, no change, no fundamental shifts and changes there. Really, traffic was positive, as I mentioned. In the quarter, it was conversion that we just saw an opportunity on with guests coming in and either not acquiring as much and/or as they didn't necessarily see the color in that product. But we believe the loyalty and the engagement with our guests over multiple years, which we've continued. And coming off of Q4, this is a very short transition as we course-correct and adjust some of these product opportunities and the teams have been in that work. So nothing that I'm concerned about long term in terms of our ability. We have a very sticky guest. We have a brand that there's a lot of love for and differentiated product. And we know where the opportunity is, and the teams have been chasing that for the back half of this year. So I'm not -- have not seen anything and I'm not concerned with any fundamental shifts in the guest or the guest loyalty or attention with this brand.

Operator:

The next question is from Ike Boruchow with Wells Fargo. Please go ahead.

Meghan Frank:

Yes. Hi, Ike. So in terms of markdowns for the first quarter. So I would say the challenges we saw with assortment and color and sizing, and in addition to that, the environment, we did see gaps gravitate more towards the markdown proportion of our assortment. So we saw 50 basis points increase. We believe Q2 will be still up to last year, but lower than -- a lower increase than Q1. Q1 is a relatively small portion of our markdowns for the year. So when we think about the full year, we are maintaining that essentially flat markdown rate for the full year, but we would see some opportunity in the second-half just given some of the actions we're taking to correct those pieces of the assortment in terms of the color sizing, and then also some exciting innovation that Calvin spoke to as well as other portions of the assortment that we're chasing into that are working for us today. So feel well-positioned headed into the second-half of the year.

Meghan Frank:

Yes.

Operator:

The next question is from Paul Lejuez with Citi. Please go ahead.

Meghan Frank:

Thanks, Paul. I would say from a regional and country level. A little bit of feedback. [Technical Difficulty] Sorry about that. So from a regional and country-specific perspective, we have not changed our outlook materially for the balance of the year. I would say the slight Q1 overperformance would have come from international region and primarily China.

Operator:

The next question is from Sharon Zackfia with William Blair. Please go ahead.

Meghan Frank:

Thanks, Sharon. I would say in terms of U.S. performance, it did come in as we expected in Q1. And so I would say to that from that standpoint, it was in line with our expectations.

Operator:

The next question is from Dana Telsey with Telsey Advisory Group. Please go ahead.

Meghan Frank:

Thanks, Dana. I would say in terms of new store openings, we continue to see opportunity and runway across all of our geographies. In the U.S. specifically, we see sales -- very productive sales per square foot above our average, which is around $1,600 per square foot. We tend to look at new stores as ramping into their full mature volume over a two- to four-year period. I would say we're continuing to see that, and we see ample runway in both the U.S. as well as importantly, our international region.

Dana Telsey:

Thank you.

Operator:

And that question is from John Kernan with TD Cowen. Please go ahead.

Calvin McDonald:

I think from a geography perspective, we haven't broken it out. Obviously, Mainland China, which continues to perform well for us. And we're still early in terms of the potential when we look at the number of doors we have, the potential of store locations, the success of our business online, unaided awareness internationally being as low as it is in every market we're in. So really the growth possibility is on stores. Digital, where we have a different degree of penetration of our digital channel, but I think all markets can be hitting 40%-plus on our digital channel in the years to come as a support and driver of that as we build out our store network and opportunity. The addition of new markets, but we're in the bulk of the right markets that are going to drive fundamentally the majority of that growth across EMEA, APAC, and Mainland China. And we are just so early in that growth that when I look at the performance and the adoption and the reception of the brand, where we are in unaided awareness, where we are in store penetration and growth and that potential, and then look at some competitive other brands and where their ratio is, that's where our aspiration is and see that opportunity. Obviously, not in the current Power of Three times two where, our goal is to quadruple our business again on top of quadrupling it. But there is nothing systemic that's preventing the brand from achieving a 50% international, 50% North America penetration in the future.

Meghan Frank:

Yes. So we haven't put a fine point on stores versus e-comm. What we shared in our current five-year plan is we expected e-comm to grow slightly ahead of our 15% CAGR and stores slightly below. And but we are remaining agile and going to where the guest wants to shop with us. As you mentioned, we've invested in omnichannel capabilities and really look at it as a seamless experience across both. And so see slightly more opportunity in e-commerce over the longer term. And -- but we'll remain agile in how we approach the business.

Meghan Frank:

Thank you.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Fourth Quarter 2023 Conference Call. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Calvin McDonald:

Thank you, Meghan. In summary, I'm proud of how we closed out 2023 and the way in which we have continued to expand around the world, deliver against our Power of Three x2 strategies and create momentum in the business. I'm optimistic that the investments we're making in the business will contribute to another year of growth in 2024.

Alexandra Straton:

Great. I just wanted to hone in on the comments on the challenging consumer behavior. Just wondering, are you seeing that in some pockets of the business more than others? Or is it broad-based? Is it a traffic or a conversion problem? Or how do you see that?

Calvin McDonald:

Thanks, Alex. In terms of what we're seeing, as I mentioned, all international markets, including Canada, are continuing their strong momentum into Q1. And in the U.S. is where we're really navigating the dynamic retail environment with the consumer. That is a little soft coming into the year.

Operator:

The next question comes from Lorraine Hutchinson with Bank of America.

Calvin McDonald:

Great. Thanks, Lorraine. As I mentioned, I'm very excited about the product pipeline for men's this year. Last year, our men's business did increase, as you indicated, in the Q4, which was great to see that momentum back into our men's business.

We've added Steady State and Smooth Spacer. So our Lounge offering for him is the strongest it's been. And we've equally launched some performance product that's performing incredibly well:

Zeroed In, which is a new train franchise; and the Pace Breaker, which is our most versatile hero short item, bringing that into a track bottom and top to round out the needs for him.

Operator:

The next question comes from Brooke Roach with Goldman Sachs.

Calvin McDonald:

Thanks, Brooke. I'll take the first half. We remain excited about the potential for lululemon in China. In Q4, our revenue increased 78% in Mainland China. Part of that was driven by the COVID-related store closures we experienced in quarter '22. But in the full year, our business grew 67%.

Meghan Frank:

And then, Brooke, I'd add, though we don't break out regional outlooks, in terms of China, we believe that growth rate will be significantly above our guide of 10% to 11% for the full year, excluding the 53rd week. So coming off of a 78% growth in Q4 and feel well positioned as we move into '24.

Operator:

The next question comes from Mark Altschwager with Baird.

Matthew Boss:

Could you speak to multiyear drivers of positive comp growth in the Americas maybe relative to the high single digits last year or just areas that you see could take continued market share regardless of the macro?

Matthew Boss:

Yes, sure. Yes, I think the operator held it on. So what I was asking is on the early innings growth story that I know, Calvin, that you speak to, just how the Americas fits into that? And as we think about same-store sales growth in the Americas relative to the high singles this year, just how best to think about multiyear drivers or areas to take continued market share regardless of what the Americas macro may look like?

Meghan Frank:

And Matt, I'd just add, we shared a long-term target of low double-digit CAGR for North America. We're tracking ahead of that to date in our plan. I feel comfortable with that long-term target. And then from a sales per square foot perspective, the U.S. is the highest in terms of sales per square foot by store. So -- and was -- continue to grow when we went through 2023. So we still feel like stores are an important part of that strategy.

Meghan Frank:

Yes. So we guided for the year to 10 basis points operating margin expansion. We were up against a 110 basis point expansion in 2023. So really pleased with the leverage we saw in 2023.

Operator:

The next question comes from Dana Telsey with Telsey Group.

Calvin McDonald:

Dana, from a marketing campaign perspective, as we've signaled, we continue to lean in to a variety of activations as a means to get at that unaided brand awareness. Building on the successes that we saw last year, we continue to test and learn. We did an Align campaign beginning of last year, very pleased with the results, followed up with an ABC campaign for him in the fall. Very pleased with that activation.

Operator:

The next question comes from John Kernan with Cowen.

Calvin McDonald:

Yes. Thanks, John. I'll break that down into how I view it, which is really 2 components. One is what's fueling the momentum in the business? And obviously, what are the unique strengths or the moat of the brand and how unique are we when we look and compare ourselves to others?

We've seen, I would say, strength in both channels coming off of '23:

e-comm total growth, 17%, stores 21%; e-comm comped at 17%, and stores at 9%. So continue to see opportunity across both channels and leveraging that on the ecosystem.

Kelly Crago:

This is Kelly on for Paul. Just wanted to follow up on the slowdown that you're seeing in the U.S. currently. Is one category or gender driving the slowdown? Or is it more broad-based?

Meghan Frank:

Kelly, I would say, the slowdown we're experiencing in the U.S. is fairly broad-based. As Calvin mentioned, we have identified some opportunities that we can go after and product specifically on color and on women sizing, so on the 0 to 4 size range.

Kelly Crago:

And just to clarify, is that being driven by what you would expect to be an improvement in the U.S. relative to what you're seeing in 1Q?

Operator:

The next question comes from Abbie Zvejnieks with Piper Sandler.

Meghan Frank:

Yes. I would say it's a modest acceleration Q2 through Q4 and really points to some of the investments we're making on the marketing side in terms of new guest acquisition as well as some of the product opportunities that Calvin pointed to would be drivers of that.

Operator:

The last question comes from Ike Boruchow with Wells Fargo.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Third Quarter 2023 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Calvin McDonald:

Thank you, Howard. I'd like to welcome everyone to the call today, and I'm happy to discuss our quarter 3 results. On today's call, I'll share some highlights regarding our performance over the Thanksgiving weekend and the start of the holiday season. Next, I'll speak to our quarter 3 results, then you'll hear from Meghan with a review of the financials and an update on guidance, and finally, we'll take your questions. So let's get started with Thanksgiving. We are very pleased with our results over the holiday weekend. In fact, this Black Friday was the single biggest day in company history, with strength across our store and e-commerce channels.

Now let's look at quarter 3 in more detail as I share highlights in 3 areas:

product innovation, brand building strategies and regional performance. Let's begin with product. One of our competitive advantages is our ability to consistently bring newness and innovation into our assortment. Our product teams work with our athletes and ambassadors, leverage our Science of Feel innovation platform and solve for the unmet needs of our guests. Quarter 3 was no exception as we introduced several new styles into our assortment. Let me highlight just a few.

Meghan Frank:

Thanks, Calvin. We continue to be pleased with our performance across channel, geography and merchandise category. Despite an uncertain macro backdrop, our teams are executing at a high level, which contributed to our upside in Q3. As Calvin mentioned, we're happy with our start to the holiday season, but with nearly 2/3 of the quarter still in front of us, we remain prudent in our planning. Let me now share the details of our Q3 performance.

Calvin McDonald:

Thank you, Meghan. As you can see, Lululemon had another strong quarter, and we are energized about the many opportunities ahead. We are pleased with the strength and resilience of our brand across markets, channels and categories, and are well positioned to deliver against our Power of Three x2 growth strategy. In addition, we are happy with the start to the holiday season, and our teams are ready to deliver for our guests in quarter 4. And I want to mention that as we have demonstrated over recent years, we are actively planning the business so that we respond to any changes in guest behavior that could occur related to the dynamic macro environment.

Operator:

[Operator Instructions] The first question is from Alex Straton with Morgan Stanley.

Meghan Frank:

Thanks, Alex. We've got about 150 stores co-located. Our plans this year have ticked up slightly to 25 to 30 co-located remodels, up from 25. These are stores where we have very high traffic and sales productivity and see an opportunity to capitalize on that traffic and drive incremental volume. We tend to look over a 2- to 3-year time horizon in terms of maturation of store, and we will see a slightly lower sales productivity from those boxes, but very strong returns and healthy sales per square foot. And so pleased overall with that strategy. And you'll continue to see more of that from us. We are much further along on that in North America, and that strategy is still largely in front of us in our international business.

Rakesh Patel:

Just had a question on what's implied with fourth quarter guidance. So I'm just hoping if you can provide some guardrails on how we should think about stores versus direct and North America versus international? I'm curious which segments may have a different trend versus the growth that you've seen year-to-date?

Operator:

The next question is from Lorraine Hutchinson with Bank of America.

Meghan Frank:

Yes. Thanks, Lorraine. Yes, I would say coming off of a strong Q3 performance, we did experience some very strong performance during our Cyber Five period. We are mindful of the macroeconomic environment as we move into the balance of Q4 and still with 2/3 of the quarter in front of us, being mindful of the pressures out there and contemplating that and how we are guiding. We are also planning the business for multiple scenarios to be able to capitalize on any potential upside.

Brooke Roach:

Calvin, I was hoping you could talk a little bit more about what you're seeing in terms of the consumer behavior with the brand. You've talked a little bit about being mindful about the macro backdrop a few times. But has there been any shift in consumer behavior conversion or engagement with the brand that shifted relative to what you saw 90 days ago?

Calvin McDonald:

The only one I'd add, Brooke, relative to when we look at the overall market is, as I mentioned, in the men's business. And that is our business internationally remains very strong, our growth well above industry average and putting on share in North America. But when we look at the macro category within North America, we do see that he is spending less in apparel in general. We continue to put on market share. But if I was to point to just one trend that we're observing and monitoring, it is that guest behavior that we're seeing in a macro condition.

Matthew Boss:

Great. And congrats on another nice quarter. So maybe, Calvin, could you just elaborate on the cadence of business that you saw as the third quarter progressed in North America? Maybe if you could speak to stores versus digital. And where do you see the largest market share opportunities next year across the assortment? And then Meghan, any constraints to modest operating margin expansion on the mid-teens revenue growth multi-year? Or are there just -- are there any geography considerations on the margin front as we think about gross margin relative to SG&A beyond this year that we should be thinking about?

Meghan Frank:

And then in terms of operating margin expansion, so we're up 70 basis points -- our guide of 70 basis points above 2022 on an annual basis. So we're really pleased with our performance this year, which is above our target. We remain committed to our target. We still see opportunities with scale of business and efficiencies in our cost structure, e-com penetration is a benefit to us. And then air freight that we've largely recovered the air freight spend. We still have about 20 basis points above 2019 levels. So obviously, we'll share more on '24 as we close out the year, but still remain comfortable with our long-term posture there.

Adrienne Yih-Tennant:

Great. Let me add my congratulations to the stores, look great, and I love the [indiscernible]. Calvin, so my question for you is on the Power of Three x2, the portion that is 4x international. Obviously, we see the strength in China. Just wondering what role does Europe play in that? And is there a time when we'll hear from you a little bit more aggressive rollout in Europe? And then my second one is pretty quick. Meghan, just remind us of the timing of the gross margin pressure last year. I think it was post Christmas that we start to see some liquidation activity. And does that remain sort of an opportunity as we get to the latter part of the quarter?

Meghan Frank:

And then in terms of margin and markdowns, yes, you're correct. It was those peak Christmas week where we started to see guest behavior gravitate towards -- more towards markdown sales and more towards the more highly discounted goods that we're offering with similar in penetration to 2019. We were comparing to Q4 of 2021, which was a low point in terms of markdown rate. So in the end, Q4 was just slightly above 2019. At this point in time, just given we've got about 2/3 of the quarter in front of us, we are guiding to 90 to 120 basis points of gross margin expansion and markdowns essentially in line with last year as part of that, being mindful of the proportion of the quarter that's still ahead.

Abigail Zvejnieks:

Great. Just 2 questions for me to follow up on the previous question on gross margins. Just -- was there any strategy for Black Friday or maybe being a little bit more visible for that shopping occasion and shifting some of those promotions maybe more towards the Black Friday period versus those Christmas weeks last year? And then secondly, can you just talk about your inventory management, I think that was a little bit better than expected and how you got there?

Paul Lejuez:

Can you talk about store comps, how it shook out from a traffic versus ticket perspective and I guess the same question for e-com. And then I'm curious if you can share any early thoughts on store growth for '24 specifically, how are you thinking about China?

Paul Lejuez:

Can you talk about in-store productivity in China in this year's [indiscernible]?

Unknown Analyst:

Congrats on a great quarter. I just want to go back, I know you spoke to North America high single digits in the fourth quarter. I know you said that -- Calvin, you later mentioned that trends are accelerating nicely with some newness in October. I guess [indiscernible] that the fourth quarter deceleration baked into the guidance is maybe just being prudent against the macro you're seeing here. But it's a little bit below the Power of Three algorithm that you gave us. Is there any reason that North America wouldn't be at that low double-digit algorithm you gave us in 2024. Is it conservative and contained to the fourth quarter? And then I'm curious if there's anything you're seeing in the business today on the competitive set to inform you as to whether you may or may not see the consumer break towards some of those value purchases that you saw right before the holiday last year?

Calvin McDonald:

And I'll just chat a little bit about the competitiveness and the guest behavior. We have not seen a dramatic shift as it relates to our product and our assortment. I've mentioned the men's behavior from a macro perspective within the category within North America. But within our assortment, our guests, we continue to see very healthy full price, continue to see very healthy reaction to newness and innovation. I think those are both very positive signs that indicate if the guest is trading down to value, they are equally trading up or holding onto purchases that I think play to the strength of our product, which is versatility, quality and innovation.

Operator:

The next question is from Dana Telsey with Telsey Group.

Calvin McDonald:

All right. Thanks, Dana. In terms of market share gains, by the very nature of where we are in our product innovation and creation and unneeded awareness, we really do continue to grow across both men's and women's across all categories in all markets, including North America and especially internationally. Now market share data internationally in certain markets, it's harder to get than in North America, but our growth when we compare it to other peers that report, we know is definitely above and therefore, putting on both through our guest acquisition market share gains.

Operator:

The next question is from Jay Sole with UBS.

Calvin McDonald:

Great. Thanks, Jay. In terms of competitiveness in the marketplace, what I saw was a lot of discounting. I saw a lot of discounting early. I saw deeper discounts. And I saw some early and young players in this space discount consistently in days, weeks leading into and over the Cyber Five weekend. That's what I observed. We didn't change our approach or strategy, as I mentioned. We didn't use sale language. We led with an early access, which had great value in the downloads of the app, which we know delivers a much greater value with our guests.

Operator:

That's all the time we have for questions today. Thank you for joining the call, and have a nice day.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica Inc. Second Quarter 2023 Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

Howard Tubin:

Thank you, and good afternoon. Welcome to lululemon's second quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO.

Calvin McDonald:

Thank you, Howard. I'm pleased to be here with everyone to discuss our quarter 2 results. Today, I'll share the highlights of our recent performance and speak to some of the exciting product launches and activations we have planned for the second half of the year. As you've read in our press release, our second quarter results exceeded our expectations as our core product and new launches continue to resonate strongly with guests in markets around the world.

Calvin McDonald:

Thank you, Meghan. As these results demonstrate, we arrive at the midpoint of 2023 in a very strong position for what's ahead. We continue to deliver sustained growth in the business through a steady drumbeat of product category and market expansions that connects us with our guests on a regular basis. We recognize the significant opportunity in front of us and we remain focused on both delivering a successful 2023 and achieving our goals contained within the Power of Three x2 growth plan.

Operator:

[Operator Instructions] The first question comes from Matthew Boss with JPMorgan.

Calvin McDonald:

Great. Thanks, Matt. Similar to the success through the first half of this year, which is really driven from our core product as well as our new innovation across both performance and OTM categories across both women's and men's -- so it continues to be that balanced growth across categories, channels, both stores, e-comm and all markets that's fueling the business.

Meghan Frank:

Yes, absolutely, Matt. So in terms of inventory, so we came in up 14% at the end of the quarter, our expectation was approximately 20%. Relative to our expectation, there were a few items that drove that balance lower. So the first would be revenue upside above our expectations. Second being lower air freight costs and then the third being some timing implications. And in terms of how we're looking at inventory for the balance of the year, at the end of Q3, we're expecting high single to low double digits.

Operator:

The next question comes from Adrienne Yih with Barclays.

Adrienne Yih-Tennant:

Fantastic results. Best of luck.

Operator:

The next question comes from Lorraine Hutchinson with Bank of America.

Meghan Frank:

Absolutely, Lorraine. So we've been really excited with the revenue momentum we've had and then also the progress that we've made on recouping air freight expense.

Operator:

The next question comes from Paul Lejuez with Citi.

Meghan Frank:

Paul, I would say in terms of China volatility, we really didn't experience any over the course of the quarter. I would say, really strong healthy growth across each of the 3 months of the quarter. And then I'll let Calvin comment on store and e-comm performance.

Paul Lejuez:

So what's the profitability in that China market currently versus where you think it can go longer term?

Operator:

The next question comes from John Kernan with TD Cowen.

Calvin McDonald:

I'll tee up relative to the market, the success you mentioning at 23% of our sales and where we see the potential across the market. I'll let Meghan speak to the margin. I think we indicated on the last quarter that in every market, every region we're in, we're profitable and early innings of growth didn't seem that long ago when international was 14% of our total sales, 15% of our total sales.

John Kernan:

Excellent. My 1 follow-up is just on other categories. It's obviously been a bigger driver of revenue. It should be well north of $1 billion annually this year. You talk to the growth of that category line item and how we should think about that going forward?

Operator:

The next question comes from Brian Nagel with Oppenheimer.

Calvin McDonald:

Thanks, Brian. I think it's a combination of some of the new innovation that came out at the tail end of Q2 that is set up in position for sort of back half needs in men's. We've seen incredible response to the soft jersey and steady state. We're geared up for the ABC campaign of Get Into It, which I'm really excited about, having men's play along with women's being featured in that. We've activated accessories across our bags.

Brian Nagel:

That's very helpful, Calvin. I appreciate that. And then my follow-up question with regard to inventory. So just look at the numbers and given your comments, I mean, you've done a phenomenal job of really rationalizing if you will, inventories. So my question, I mean, given the level of concern that was in the marketplace, say, just a few quarters ago about inventory, both on lulu and in the channel.

Meghan Frank:

Yes. I mean I would say we've made some significant progress. We still have some degree of elevated airfreight in our inventory balance on a cost basis. And so I would say not completely optimized and turns are a little bit slower than history, and our goal over the longer term would to get those inventory turns back to normalized historical rates. So still some opportunity, but I think the team has done a nice job in navigating what was a really dynamic supply chain and positioning inventory so that we were able to capitalize on the demand upside that we saw and experienced.

Dana Telsey:

Congratulations on your terrific performance. It's great to see the progress. As you think about the traffic, which was so impactful, both for stores and for e-commerce. Any discussion regarding the loyalty programs? Is that a driver of this? And where do you stand on the loyalty programs with that enhancement? And then Calvin, as you're mentioning new product, I know outerwear is a big thing for last year. How do you see the AUR developing? And are we moving into a higher AUR zone going forward with some of the newness?

Irwin Boruchow:

Just 2 clarification questions for me. Just on the quarter-to-date North America acceleration, is that full revenue comp or both? And then on China, 60% growth was great. Just kind of curious in terms of the revenue guidance for the remainder of the year, what kind of growth are you guys baking in for China for the back half?

Operator:

The next question comes from Brooke Roach with Goldman Sachs.

Calvin McDonald:

Thanks, Brooke. In terms of the overall composition, I'll speak directly to sort of how we view the cohorts. And I think I've mentioned before, that the new guest cohorts are performing and behaving very similar to how that cohort has behaved in past quarters, past years. That's very encouraging for us because we did see through the success last year of the Everywhere Belt Bag that it did pull in a younger guest to see them in the cohort and that cohort behaving similar nature of how they engage the frequency of engagement and the migration of their spend is encouraging.

Howard Tubin:

Operator, we'll take 1 more question.

Alexandra Straton:

Congrats on another good quarter. One for me. Just on the stores, it looks like they could be at over $6 million a pop in revenue or so on average this year. It's definitely a high number per box. So I'm just wondering, maybe Meghan, how do you think about the trajectory from here? What drives that number higher? And on a related note, how do you think about the store growth opportunity from here in North America specifically?

Meghan Frank:

We haven't broken out the specifics, but I would say we're not dissimilar from this year and square footage growth in the low double digits range. Globally, high single digits in North America.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. First Quarter 2023 Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

Howard Tubin:

Thank you, and good afternoon. Welcome to lululemon's first quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO.

Gross profit for the first quarter was $1.15 billion or 57.5% of net revenue compared to 53.9% of net revenue in Q1 2022. The gross profit rate in Q1 increased 360 basis points versus last year and was driven primarily by the following:

a 430 basis point increase in product margin, resulting predominantly from lower airfreight as well as regional mix. Markdowns were in line with last year. Occupancy and depreciation leveraged 10 basis points in the quarter. These improvements were partially offset by a 30 basis point increase in product and supply chain costs driven by ongoing investment in product development and supply chain. In addition, FX deleveraged by 50 basis points, which was predominantly offset by a 40 basis point FX benefit within SG&A.

Rakesh Patel:

Can you dig a little deeper into the sources of the revenue beat versus your expectations? And as you look ahead, which categories and geographies do you have the most confidence in as we think about the rest of the year?

Adrienne Yih-Tennant:

Congratulations on a great start to the year. Calvin, I wanted to talk about sort of kind of entry-level pricing strategy as you enter new markets, China, Spain. How do you price into those markets at the onset? And then how do you think about building price on a long-term basis, being able to raise those in those markets over time?

Calvin McDonald:

Thanks, Adrienne. On pricing, we enter markets with our similar premium positioning of the brand with the intent to sell at full price with markdowns being used only as a means to exit through seasonal shifts in product and not leverage promotional discounting in order to fuel and create demand. We go in with the intent of having parity -- a close range of parity around markets. And then we make adjustments either because of cost of operating within the market, it could be import taxes or other elements. And there may be a slight shift as a result of local competition and strategically. But a tight band and always with the intent of selling full price with moderate discounting, leveraging markdowns as a typical course to exit. So a very similar policy in positioning of supporting full price.

Adrienne Yih-Tennant:

Great. Congrats again.

Operator:

The next question comes from Mark Altschwager with Baird.

Operator:

The next question comes from Lorraine Hutchinson with Bank of America.

Meghan Frank:

Great. Thanks, Lorraine. So in terms of SG&A investments, we're obviously experiencing strong top line, and we've seen some recovery in our airfreight expense for the balance of the year. So we see an opportunity to push into investments into our road map behind our Power of Three x2 growth pillars. So specifically, those would be in market expansion in our international regions, enhancing, I would say, guest experience, omni capabilities as well as digital and guest support and then important foundational investments across the business. And these would also include brand awareness opportunities where we continue to push in there for the balance of the year and then also higher depreciation on current and prior year investments in terms of capital expenditure. And then can you remind me the second part of your question, Lorraine?

Calvin McDonald:

I'll take that, Lorraine. So in addition to the stores, as you mentioned, which are one of our top vehicles to do and achieve brand awareness and consideration, we also activate a number of campaigns and do so locally. So they may take a global campaign and then activate it locally, build upon it. That's the example of the Get Into It campaign that we did globally, which was all around our women's leggings initiative.

Dana Telsey:

Congratulations on the results. As you think about the benefit in the margin of the 430 basis points, I believe, of freight reduction, how should we think of that through the year? And what are you seeing in terms of AUR? And with the extensive product innovation this year, how are you planning AUR? And are you seeing any difference regionally, and even globally, in terms of level of reception to new products and consumer differentiation?

Calvin McDonald:

Yes. Dana, in terms of product newness and how it may differ globally, one of the benefits of our business is that, predominantly, a global assortment strategy drives the momentum across every market and region. And obviously, there's a huge number of benefits to that. And there are a few nuances by market and some that we designed into.

Operator:

The next question comes from Paul Lejuez with Citigroup.

Meghan Frank:

Thanks, Tracy. In terms of months, so we don't break out monthly performance specifically. But what I would share is that we saw double-digit comp increases each month of the quarter. February was our strongest month, followed by April and then March. And coming off of the 24% sales growth, we're pleased to be able to guide to 15% to 16% in Q2 and then 16% to 17% for the full year. Obviously, planning multiple scenarios as we move into the balance of the year but feel well positioned.

Matthew Boss:

Congrats on another great quarter. So Calvin, on the broad-based global strength of the brand, have you seen any change with the North America core consumer? Can you elaborate on drivers of the outside store comps that you're seeing? And just any overall change in global momentum that you've seen here in May?

Calvin McDonald:

I'll take the first part. In terms of our guest metrics, they remain very strong. We've seen no change in our cohort behavior in terms of frequency of purchase or engagement. In addition, in quarter 1, transactions by existing guests increased 22%, and our transactions by new guests increased 28%. And traffic was also strong across both channels with stores up over 30% and e-comm up approximately 30%.

Meghan Frank:

Great. And then in terms of markdowns, so we were pleased with our performance in Q1. So markdowns flat to 2022, and then as you mentioned, slightly under 2019. Our expectation right now embedded in our guidance is that we continue to expect markdowns to be generally flat year-over-year, which will also make a slot to 2019 levels. And really pleased with our performance in top line in Q1 as well as the full-price trend that was embedded in that. And we'll continue to closely monitor.

Irwin Boruchow:

Meghan, just 2 quick ones on the model for me just to kind of follow up Matt's question. 3 months ago, you had said you expected higher markdowns year-over-year in 1Q through 3Q. They were flat in 1Q. Now you're kind of saying that it should be flat the rest of the year. So just where did that -- I'm just kind of curious if you could comment on the improvement that you thought versus 3 months ago. And then now with the airfreight up to 190, is there any additional airfreight potential upside into fiscal '24? Or would that kind of give you like fully recaptured freight dynamics at that point?

Alexandra Straton:

Congrats on another great quarter. Just firstly, did you guys observe any deviation in purchase behavior by household income level across the quarter? And then secondly, just zooming out, margins sit hundreds of basis points above pre-COVID levels. It's really amazing. So can you just walk us through the puts and takes of that? Is it just sales leverage or other pieces -- moving pieces there would be helpful.

Alexandra Straton:

Just margin sitting so much higher than pre-COVID levels, yes, the key puts and takes there.

Alexandra Straton:

Both gross and operating.

Operator:

The next question comes from Brooke Roach with Goldman Sachs.

Meghan Frank:

Great. And then in terms of inventory, so our expectation is we'll be approximately 20% at the end of Q2 and then inventory in line with sales in the second half of the year. We will still have opportunities, as you mentioned, to get our inventory turns back to historical levels. We have seen some material improvements in supply chain and lead times but not all the way back to historical positioning. So too soon to say when we'll move back to those levels, but that would be the goal over the longer term.

Abigail Zvejnieks:

Just on the growth of the Other segment, can you break out, I guess, or just comment on what of that is driven by lululemon Studio versus other components? And then any numbers you can give on early subscriptions or learnings or loyalty numbers?

Calvin McDonald:

Well, we just launched -- so a couple of things in terms of that. We just launched a few days ago our digital app for lululemon Studio, which is $12.99 a month and gives guests access to the same content that you can get but without the hardware purchase. We're excited to introduce that. We think it will expand the TAM and allow us to offer that offering into the membership program.

Operator:

That's all the time we have for questions today. Thank you for joining the call, and have a nice day.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Fourth Quarter 2022 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

On today's call, I plan to cover several topics:

our quarter 4 and full year results; our product pipeline for 2023; an update our membership program; our recent market share gains; and finally, insights across our international business. So let's get started.

Adjusted gross profit for the fourth quarter was $1.59 billion or 57.4% of net revenue compared to 58.1% of net revenue in Q4 2021. Adjusted gross margin decreased 70 basis points relative to last year. This was driven primarily by the following factors:

50 basis points of deleverage from foreign exchange within gross margin, which was offset by a 50 basis point FX benefit within SG&A and 50 basis points of deleverage on fixed costs. This was driven primarily by investments in our product teams and DC, offset somewhat by leverage on occupancy and depreciation. These were partially offset by a 30 basis point increase in product margin. This increase was driven primarily by lower air freight expense, partially offset by higher markdowns and merchandise mix.

Adrienne Yih-Tennant:

Congratulations, everybody, for stellar year and great momentum coming into the first quarter. Calvin, I was wondering if you can help expand upon that notion of unaided brand awareness. I think that's a really powerful concept there. What was your advertising spend as a percent of sales last year? And what avenues are you going to be using sort of to expand that brand awareness.

Calvin McDonald:

Thanks, Adrienne. In terms of unaided brand awareness, as you highlighted, it's exciting to see both our improvements in it, but also the runway of growth and potential we have. So we know that our approach is working as well as we know that it's going to continue to fuel our ability to acquire guests and drive the overall momentum in the business across all markets, including North America and the U.S.

Meghan Frank:

In terms of markdowns, our full year 2022 markdowns came in, in line with 2019. And we're expecting to be relatively flat in 2023 on a full year basis. We do have the biggest opportunity in Q4, which will be offset somewhat by Q1 through Q3 markdowns. But that 2019 waterline, we view, is a healthy level for us. And then we'll also see inventory, as we mentioned, 30% to 35% growth at the end of Q1 and then coming in line with sales in the second half of 2023.

Lorraine Maikis:

I wanted to focus on China for a minute. It was about 8% of sales last year. How are you thinking about the growth cadence there? And can you give an update for us on profitability of the region?

Operator:

The next question comes from Brian Nagel from Oppenheimer.

Meghan Frank:

Thank you.

Meghan Frank:

Yes. So in terms of inventory, we've been navigating obviously the dynamic supply chain environment. And we did place a number of core buys earlier to try to manage our air freight expense. We do have a higher proportion of our inventory in core, 45% versus 40% historically. We also saw increased air freight impacting our cost inventory balances. And then we also saw vendors who were shipping later than historically pivot to shipping more on time. So the team is still navigating and adjusting to that new reality.

Operator:

The next question comes from Paul Lejuez from Citi.

Meghan Frank:

Yes. I would say nothing notable by geography in terms of inventory balances. We're pleased overall with the content composition, and we plan to, as we mentioned, have a healthy full price penetration as we move throughout the year. In terms of product costs, we haven't experienced any significant increases, and we don't expect any significant changes as we move throughout 2023, relatively stable.

Irwin Boruchow:

Congrats, everyone. Two-part question. Maybe first for Calvin just on the MIRROR hardware decision. Can you walk us through a little bit more about what you saw in the holiday, and I guess, the past several quarters that kind of informed your decision that you guys ultimately made to eliminate the hardware piece of the business? And then, Meghan, is there anything you can quantify in the P&L? What kind of revenue or operating losses are being removed by eliminating that piece of the business this year?

Operator:

The next question comes from Alex Straton from Morgan Stanley.

Calvin McDonald:

Thanks, Alex. In terms of the new guests, we have -- one of the benefits of the brand is we see good success across guests across all age demographics. So that remains very healthy, both acquisition as well as engagement. We have seen a very healthy growth in our younger guest base, in particular, over the past 12 and 18 months, and that continued. But overall, we would wait a little bit on the younger but very healthy overall and seeing, as I indicated, very healthy numbers in terms of engagement of existing guests, the new guests, how those cohorts are shopping and engaging on a frequent basis and migrating up through the category offering that we have.

Operator:

The next question comes from Rick Patel from Raymond James.

Meghan Frank:

So in terms of North America, we're looking at achieving our low double-digit expectation that we shared as part of our Power of Three x2. And sorry, can you remind me the second half of your question?

Meghan Frank:

Yes. I would say I'd frame that also in that context. So we have our 15% average growth rate annually as part of that plan, with a goal of the 4x international business, double our men's business, double our e-commerce business, and that also included low double-digit North America growth as well as low double-digit women's and store growth.

Dana Telsey:

Congratulations on the results. As you think about the product margin puts and takes for 2023, how do you think about them and the markdowns which are normalized with 2019 levels, how do you see that evolving as we go through the year? Is there any cadence or shape that we should be mindful of?

Calvin McDonald:

In terms of the product, what I'm anticipating is similar to what we've been seeing, which is balanced growth across men's and women's, across categories and activities. The innovation, a little bit of what I've shared is a balance of continuing to innovate on our core styles and franchises like the recent update to the men's Metal Vent and Pace Breaker short as well as adding additional styles to proven franchises like the Align campaign that I'm really energized and excited about. It's a fantastic expression of one of our powerhouses and excited to use it as a way to continue to recruit new guests and then building on new launches like footwear and then bringing successes in our men's business with the License to Train into our women's assortment.

Operator:

The next question comes from Brooke Roach from Goldman Sachs.

Meghan Frank:

Brooke, in terms of markdown and full price penetration, we did see that normalize as we moved through the balance of January and then into Q1. We haven't seen any material differences by customer segment, and we do expect that we'll maintain that relationship of healthy full price in line with history that's reflected in the color we provided on markdowns being flat year-over-year, also flat to 2019, which we view as a healthy waterline for us.

Michael Binetti:

I'll add my congrats on a nice quarter and a nice update since ICR, Meghan. I guess on China, you built a lot of stores there since pre-COVID, and I think you've done -- I think you've -- you haven't had much time over there over the past 3 years, those stores operating in any kind of normal capacity. So if China was 8% of sales but it's 15% of your global store count, I'm just curious, if China was operating at normal productivity, would revenues be closer to that 15% store mix. Or do you think those stores -- any reason to think they should trend above or below global averages on sales per store or sales per flow? Just anything -- any way for us to think about the opportunity there with the assets you already have?

Meghan Frank:

Yes. In terms of China stores, definitely, we were impacted by COVID as we move throughout 2023. So I would expect that percentage to be higher. I would say our stores are highly productive there. They tend to be smaller than the balance of our fleet, particularly in North America, and we view that as an opportunity over time. We continue to have a long pipeline of store openings there. We also are very early in terms of store expansion strategy, which we've employed in North America to capitalize on where we see very strong and healthy sales per square foot and opportunities to expand the market.

Omar Saad:

Just a couple of quick follow-ups. Calvin, maybe you could touch on the strategy to use paid media and how that's going for you guys. The efficacy, is that something you're using in other markets like China as well? And maybe a quick update on some of the new categories, footwear, hike, golf, et cetera, would be helpful.

Omar Saad:

Just an update on some of the new categories, footwear, hike, golf.

Operator:

Last question comes from Jay Sole from UBS.

Calvin McDonald:

And on accessories and the Everywhere Belt Bag, our accessories business is very healthy, and it's very balanced as well. It's not a one-hit wonder. That team has done a great job in building a compelling total bag business, not just that one particular item.

Operator:

That's all the time we have for questions today. Thank you for joining the call, and have a nice day.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Third Quarter 2022 Conference Call. [Operator Instructions] The conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

Howard Tubin:

Thank you, and good afternoon. Welcome to Lululemon's third quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO.

Now I will speak to our performance in quarter 3. Meghan will go through the details in a few moments, but I'll share with you some of the financial highlights. Our revenue growth remains strong and balanced across several drivers as follows:

all on a 3-year CAGR basis. Stores increased 16%, while e-commerce grew 46%, by region, North America grew 24% and international increased 42%. Revenue in Mainland China grew nearly 70% and we experienced strength across merchandise categories with men's up 28%, women's up 23% and accessories growing at 52%. Adjusted earnings per share increased 23% versus last year and 28% on a 3-year CAGR basis. And our market share gains continue. While the adult active apparel industry decreased its U.S. revenue by 4% in fiscal quarter 3 '22 compared to the same period last year, Lululemon gained 1.5 points of market share in the U.S. over this time, the most of any brand in this market according to the NPD Group's consumer tracking service.

Calvin McDonald:

Thank you, Meghan. In closing, I just want to reiterate how pleased we are to see the continued momentum in the business and our strong start to our "Power of Three x2" growth strategy. As we look to quarter 4 and into 2023, I am confident in both our near- and long-term plans that will enable us to deliver on our goals while continuing to successfully navigate whatever comes our way. I look forward to taking your questions now. Operator?

Adrienne Yih-Tennant:

And may I say congratulations, very well done. Calvin, I wanted to focus a little bit on China. You talked about kind of strong growth there. You're opening lots of stores out there [indiscernible] probably for next year. What are you seeing then-- what is the breakdown between stores and e-commerce [indiscernible].

Adrienne Yih-Tennant:

Okay. Can you give the percent of sales [indiscernible]?

Operator:

The next question is from Alex Straton with Morgan Stanley.

Calvin McDonald:

Thanks for the question. I'll break it into 2 parts that are driving the momentum both in Q3 as well as to the start of Q4, where our guest metrics have been consistent, as I've shared and remain very healthy across traffic, new guest acquisition, dollar spend, and the balance across our regions, our channels, our categories and activities.

Alexandra Straton:

That's super great color. Maybe one just final one for me. I wanted to touch on inventory. Similarly, juxtaposing you guys against some of the peers, we've seen many be able to work inventory levels down on a year-over-year basis. Can you just talk about why Lulu is more similar to the last quarter? And then also I think you may have taken the fourth quarter outlook up a little bit on inventory, maybe from 60% to 55% -- from 55% to 60%. So I think a little bit higher than last time. Correct me if I'm wrong, but can you guys just talk about that dynamic for us?

Brooke Roach:

Calvin, the innovation pipeline at Lululemon has been particularly strong this year. I was wondering if you could talk a little bit more about that into next year? And where you think the product resonance can really improve as you think about managing consistent growth across your business and particularly in North America. Maybe within that, you could reflect on the glide path between the very strong 1- and 3-year CAGRs that you're performing now versus the longer-term target of 15% and how you think about that growth may be normalizing over the course of the next few years to that long-term target?

Meghan Frank:

Yes. So as we look at Q4, we do expect that overall operating margin will have similar pressure as we did in Q3 in terms of FX. So we had a net pressure of 40 basis points in Q3. We're expecting something similar for Q4. When we look overall at our operating margin for Q4, we see it expanding year-over-year in the 40 to 70 basis point range with our guidance versus last year in gross margin, we gave color of 10 to 20 basis points. We're seeing a benefit on product margin driven by lower air freight, which will be partially offset by normalized markdowns in line with our 2019 levels and then also mix of business. We also had that negative impact from FX. And then we'll also have some pressure in gross margin related to fixed costs, particularly the timing of our DC investments, which are really positioned to enable our scale of the business over the next 5 years.

Operator:

The next question is from Matthew Boss with JPMorgan.

Calvin McDonald:

Thanks, Matt. So on the last piece in terms of the start of the quarter and what we're seeing, traffic was very strong for us across both our online channel as well as stores in Q3, and we're pleased with the continuation of strong traffic numbers into this quarter. And there's still a lot of the quarter ahead. So as we shared, we had a very strong Thanksgiving shopping weekend and saw good results of our regular priced merchandise and there are some critical weeks ahead. So the teams just remain focused in managing accordingly as we get ready for the holiday season. So that's our approach and how we're monitoring and managing through.

Lorraine Maikis:

Just wanted to ask a few more follow-ups on gross margin. Do you still expect airfreight to be a 10 basis point benefit to the full year? And have you changed your view at all on markdowns for the fourth quarter given the more promotional environment?

Operator:

The next question is from Rick Patel with Raymond James.

Meghan Frank:

Thanks, Rick. So we are profitable across both our international and North America regions. We were pleased that Europe hit profitability last year. We continue to see opportunity across both North America and international over the longer term. We're obviously in earlier stages in our international business. So we'd expect to see more expansion there as we scale, but the opportunities with scale across both regions.

Abigail Zvejnieks:

I was wondering if you had any category commentary. I know that last year, you were significantly under inventory in some categories like outerwear, but any shifts you're seeing there? And then maybe commentary on Everywhere Belt Bag.

John Kernan:

Congrats on navigating a tricky environment. Thanks for all the commentary on gross margin and inventory. I guess when we look at the level of units but also the cost on the balance sheet, is there anything lingering in the cost of goods sold into next year from some of the higher sourcing costs earlier this year that might be a source of pressure on gross margin? Or do you -- are there offsets to that as we -- from supply chain as we go into next year?

John Kernan:

Got it. I guess just a quick follow-up. Would supply chain cost being more of a benefit this year -- or next year, excuse me, as some of the container costs come down, airfreight, obviously, already coming down [indiscernible]?

Operator:

The next question is from Mark Altschwager with Baird.

Calvin McDonald:

Great. Thanks for the question. So with the Like New, it's currently live in 50 states in an approximately 390 stores and we're not sharing specific performance details, but where we are pleased with the results we're seeing is really a twofold

Operator:

The next question is from Michael Binetti with Credit Suisse.

Meghan Frank:

Great. Thanks. I would say in terms of FX, our outlook is that Q4 is more similar than not to Q3. I think hard to put a fine point on next year, but I would view it as an opportunity over the longer-term time horizon.

Meghan Frank:

Yes, we didn't break down the channels for Q4. What we did offer was 23% to 24% sales growth overall. And we did give some color for the year on e-commerce at approximately 30% growth, which would embed both our Q3 results and our expectations for Q4.

Omar Saad:

I wanted to ask my first question on pricing, actually. I know you guys have been -- haven't been too aggressive or haven't had really the need to use pricing lever even in this inflationary environment. But as you see COGS, inflation, freight, FX impacting the gross margin. Maybe talk about your appetite and the brand strength and the brand's capability to use pricing as a tool as needed? And then maybe also dive in deeper on China. It seems like the form they were pretty solid despite all the COVID closures going on there? Maybe talk about what the outlook will be once -- what your expectations are for that business once the -- who knows when it will be, but once the kind of market and economy and consumer spending and retail environment opens up there?

Omar Saad:

Just to clarify, in terms of pricing, so it's not that you don't think the Lululemon brand has the pricing power, but you just don't see the need given some of the transitional nature of some of the inflation going on there to chase pricing given the environment. Is that a fair characterization?

Jay Sole:

Great. Calvin, I'm just wondering if you could talk a little bit more about what you've seen from the footwear business when you think about the Strongfeel versus Blissfeel versus Chargefeel? Have you seen the consumer adopt one style versus the other? I mean, have you seen certain colors or SKUs do better? And are you looking to expand the assortment as you get into next year?

Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Second Quarter 2022 Conference Call. [Operator Instructions] and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

Howard Tubin:

Thank you, and good afternoon. Welcome to lululemon's second quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO.

Calvin McDonald:

Thank you, Howard. I am excited to be here today to highlight our second quarter results and the continued momentum we're experiencing at lululemon. While the external environment around us has been challenging, we are seeing our guests respond strongly to our product innovations, our community activations and our omni operating model, which allows us to meet and exceed their expectations. During the next few minutes, I will discuss the factors that are driving our broad-based strength. Next, I'll discuss the current supply chain environment, then our pipeline of product innovation, and I'll conclude with an update on our growth within the international business.

And finally, let me update you on footwear. Blissfeel, the first style we launched in March, continues to perform well. We improved our inventory position after the strong guest response at launch, and we're seeing continued excitement around this technical running shoe. In quarter 2, we launched our next 2 footwear styles:

Restfeel, our dual gender slide; and Chargefeel, our hybrid training shoe for women.

Calvin McDonald:

Thanks, Meghan. As you can see from our results, lululemon continues to perform at a high level, and I am consistently impressed by the ability of our teams to anticipate, meet and exceed the needs of our guests. And across the business, we're seeing that our guests are eager to welcome us into new categories, styles and markets, which speaks to the significant growth potential for lululemon going forward. We are off to a very good start as we embark upon our Power of Three x2 growth plan, and there's a clarity and focus on the work underway across the company.

Operator:

[Operator Instructions] The first question is from Adrienne Yih with Barclays.

Calvin McDonald:

Thanks, Adrienne. In terms of methods, there's been no change to our approach on markdowns. As you know, we were -- we took modest price increases on a small percentage of our range of product. We continue to closely monitor that. And our markdown activity is in line with past penetrations 2019 pre-pandemic. And it really is -- our momentum is driven through the pillars of growth and innovation of our product. So the positioning around unique innovative products through our core is resonating with our guests and our markdown behavior has not changed with no plans to change and the quarter's results were driven by full price selling prices.

Mark Altschwager:

So really encouraging to hear you haven't seen any major shifts in consumer behavior. Given the choppier macro backdrop versus a few months ago that many others have called out, maybe just speak a little bit more to what you're seeing in your business that's giving you the confidence to actually raise the implied back half growth outlook?

Mark Altschwager:

Great. And congrats to you and the team on the strong results.

Alexandra Straton:

Great. And congrats on another great quarter. I wanted to dig into the international result, amazing at 35% year-over-year. Can you just talk about the key drivers there? If there were specific geographies or more broad-based? And also, as it becomes a bigger part of lululemon's revenue over time, can you just talk about what the margin implications would be?

Matthew Boss:

Congrats on a really nice quarter. So Calvin, on the high 20s revenue CAGR that you posted in the first half and taking into account the new customer acquisition metrics that you cited, so do you think the performance that you're seeing relative to the remainder of the market, is this a combination of a larger TAM, but then also company-specific market share gains? And then Meghan, I guess more near term, have you seen any notable change in momentum in either stores or digital so far in August?

Meghan Frank:

And Matt, I'd add on Q3 -- so we're happy with the start of the quarter. I'm comfortable with the guidance we provided, which was a 3-year revenue CAGR of 25%. And as Calvin mentioned, we are seeing continued strength in our guest behavior and metrics there, which we continue to monitor closely. And I'd say within that, pleased with the performance of stores and digital that you asked about. And obviously, the macro environment is dynamic. We continue to plan the business based on multiple scenarios and feel well positioned as we enter Q3.

Operator:

The next question is from Brooke Roach with Goldman Sachs.

Calvin McDonald:

Thanks, Brooke. As you've indicated, very healthy new guest acquisition numbers at plus 24%. And I would say the majority of their first purchases have been very consistent with our traditional categories that we're seeing, very strong bottoms business and very strong in women's and new guest in men. So very pleased with the balance. The success of the everywhere belt bag has added to new guest acquisition. So we're excited to see that as a way to bring even more into our collective and with our guests.

Operator:

The next question is from Lorraine Hutchinson with Bank of America.

Meghan Frank:

Lorraine, as we mentioned, we've taken modest increases -- or we were taking throughout the year of modest increases on approximately 10% of the assortment. We haven't, to date, experienced any price resistance. We continue to closely monitor and don't have any plans to change our markdown cadence as we move throughout the year, still very high, healthy full price sell-throughs.

Dana Telsey:

Congratulations on the impressive results. As you see -- as you take a look at freight, it seems like it's moderated from the first quarter to the second quarter. How do you see freight going through the balance of the year? And then just next thing on -- Calvin, the core product, obviously, is 45% of sales. The new collections that are coming in are certainly driving conversion and interest. How do you see core as a percent of the business going forward given the solid receptivity to new categories?

John Kernan:

Congrats on phenomenal results. Maybe if you go back to international, it's obviously a huge portion of your future growth when you quadruple that. Just curious what is enabling you to outperform all of your peers in China to such an extent in the most recent quarter?

Operator:

The next question is from Michael Binetti with Credit Suisse.

Meghan Frank:

Yes. Thanks, Michael. So we guided to 10 basis points under last year in airfreight versus the 30 basis points higher than we experienced that we had shared on the last call. So we are starting to see both the impact of the early deliveries as well as the rates coming down, and the team continues to look for opportunities there. We will continue as the business expands to look at pulling forward investments that are part of our road map as we move to our next 5-year trajectory.

Operator:

The next question is from Sharon Zackfia with William Blair.

Meghan Frank:

Yes. So in terms of SG&A, we haven't previously provided Q4 guidance. We've got some timing, I would say, on investments. And again, as we look at our full year outlook, looking to pull forward some investments that are part of our road map as we look towards our next 5-year trajectory. So we are guiding now to 100 to 130 basis points of leverage for the full year versus our prior guide at 50 to 100. We -- yes. And then Calvin is going to chime in here on the marketing.

Tom Nikic:

Meghan, I want to ask about the inventory growth. I know that there's kind of a lot of puts and takes here. And one of the things is increased transit times and things like that. When we kind of look at inventory, I guess, beyond the end of this year, like I mean, do you think that just structurally, you're going to carry more inventory on the balance sheet relative to the sales level? Or do you think when we kind of get beyond this year and things kind of normalize a little bit, maybe going forward, you would grow inventory at a slower rate relative to sales and you would see turnover improve?

Operator:

The next question is from Jay Sole with UBS.

Meghan Frank:

Yes. There's a couple of dynamics going on. One would be we are seeing vendor readiness metrics improve. So that's one impact. And then the other impact, I would say, is ocean lead times. So we typically have seen, and this is on average about 45 days. These have gone up to 90 days plus during the kind of peak disruption. We've seen them drop approximately to 70 days. So not back to where they were, but definitely improvement to what we've seen. So that, coupled with the earlier vendor readiness provides some opportunities for us to switch modes, which you see reflected in our guidance.

Calvin McDonald:

Yes. No. We're excited about the opportunity in our accessories business and definitely have plans across a number of the categories. Everywhere belt bag is a lower price point item. We're seeing it being a great driver across existing guests as well as guest acquisition. I think accessories, in general, has played a role like that and could continue to play a stronger role.

Operator:

The next question is from Paul Lejuez with Citi.

Meghan Frank:

Thanks, Paul. Yes, I'd say there's a nuance there and looking at it from an omni perspective with our -- the size of our e-commerce business. That said, what I'd share is we're really pleased with the productivity of both our existing store base. We've gotten above 2019 levels. We continue to see opportunity for further expansion over the longer term.

Operator:

That's all that we have -- that's all the time we have for questions today. Thank you for joining the call, and have a nice day.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. First Quarter 2022 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]

Howard Tubin:

Thank you, and good afternoon. Welcome to lululemon's first quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO.

Calvin McDonald:

Thank you, Meghan. As you can see from our results, lululemon continues to deliver the kind of performance that sets us apart within the retail industry. Two weeks ago, we held our Annual Leadership Summit and brought together virtually about 2,000 of our leaders from around the globe. We detailed our Power of Three x2 growth plans and spoke to our culture at lululemon and to our purpose, which is to elevate human potential by helping people feel their best.

Matthew Boss:

Great. And congrats on another really nice quarter. So Calvin, what I thought was striking about this quarter was the consistency, meaning across the 27% top line CAGR, you delivered strength across men's, women's, international and North America. So maybe could you help speak to the momentum of the brand versus maybe the expansion of the overall TAM, what you think is really driving it? Any comments on May to start the second quarter? And then just how best to think about your ability to chase upside demand relative to the inventory that you have?

Meghan Frank:

And Matt, I'd just add to that in terms of May, I think we're pleased with the continued momentum in our business as reflected in our 26% 3-year CAGR guide for Q2. And then in terms of inventory relationship to the sales as the year progresses, we feel really comfortable with our inventory position as we move into Q2. The team has done a nice job pulling forward inventory to meet our demand. And we are guiding to 24% to 25% for the full year, a little bit more conservative in the second half, given we have more of a line of sight clearly to Q2 and some of the macro uncertainty in front of us. I feel well positioned overall.

Operator:

The next question comes from Mark Altschwager with Baird.

Meghan Frank:

Yes. Thanks, Mark. So in terms of our guide for the second quarter, we obviously have line of sight to the second quarter at this point in time, 26% 3-year CAGR and then it's a little more conservative for the second half of the year, but feeling like our Q1 momentum is flowing into Q2, so comfortable flowing through some upside there. As I mentioned, we do have a little bit of incremental air freight pressure for the year, which we've reported in our guidance. And overall EPS raise also reflects some benefit from tax rate.

Mark Altschwager:

And I apologize if I missed this, but could you give us just a little bit more perspective on kind of China, what you're seeing quarter-to-date? I know it's just kind of a mid-ish single-digit percent of your sales, but with the store closures you mentioned, I guess, where is that tracking and what is incorporated in your guidance in terms having -- getting those trends back to full productivity?

Operator:

The next question comes from Ike Boruchow with Wells Fargo.

Meghan Frank:

Yes. Thanks, Ike. So in terms of inventory, I'd say we feel well positioned. If anything, there might be some pockets of inventory where we wish we had a little bit more just given the dynamic nature of the environment and certainly have been where possible pushing into core inventory, which is about 45% of our assortment and doesn't come with attached markdown liability.

Operator:

The next question comes from Kimberly Greenberger with Morgan Stanley.

Calvin McDonald:

Alex, it's Calvin. In terms of the question on health of guest and how we're seeing their spending behavior, I think I got part of my answer out, so I'm going to take it from the beginning. We feel very good about the health of our guests. New guest acquisition has been very strong, current guest spending has been strong, both contributing to the momentum and the growth of the company. We shared with you our traffic numbers, both in-store and online, very healthy.

Operator:

The next question comes from Lorraine Hutchinson with Bank of America.

Meghan Frank:

Lorraine, so in terms of gross margin, we're guiding to 200 basis points of pressure in Q2 and then approximately 100 to 150 basis point decline for the full year. The second quarter does include 150 basis points of air freight pressure year-over-year. And then we also have increased our outlook for the year in terms of air freight pressure to 30 basis points. We previously had that as flat. When we look at -- just I would note the operating margin for the full year, it's modestly under 2019, even inclusive of a 300 basis point impact from air freight pressure.

Operator:

The next question comes from Brooke Roach with Goldman Sachs.

Calvin McDonald:

Thanks, Brooke. I think the most important factor is core to our product assortment is versatile performance apparel where, although used at times for versatility around the house, our gear is designed for activity-based use. And that we saw an uptick through the pandemic. It has continued as that behavior of activity, outdoor sweats, lifestyle has continued. So that is the essence of the brand and what drives our innovation through our key categories of yoga, run and train as well as our play activities. And that continues as strong now as it was through the pandemic.

Paul Lejuez:

Guys, can you give us an update on what you're seeing on your average unit costs for the second half and also into the first half of '23. And I'm curious, Calvin, I think you mentioned some cautiousness about passing through higher prices. Curious to how much you're willing to absorb versus what you might look to pass through to customers. And then second question, I think you mentioned 60 basis points of leverage on occupancy this quarter. Just curious what your comp leverage point is on the occupancy line at this point?

Meghan Frank:

We haven't quite broken that out, but I can follow up with some additional information.

Michael Binetti:

Just one quick housekeeping. Meghan, I think you said, to Lorraine's question earlier, I think air freight in first quarter was 340 basis points of pressure, 150 basis points of pressure in 2Q. To get to the 30 basis points of pressure for the year, you're baking in positive leverage in the second half. And I know the comparison as you started paying for air freight last year helps. I just want to make sure I heard that because it sounded like to Lorraine you were saying maybe it would take quite some time to get back some of the air cost -- air freight costs.

Meghan Frank:

Michael, I'll take the first part of that question. So in terms of air freight, we are up against some increases last year as we move into the second half of the year. So expect the air freight impact to be a leverage point in Q4 when we look on a 1-year basis. But I would say in terms of how we're looking at the future, I think coming off of the full year air freight, I think too early to say on '23 how we see that moderating, but do expect to have a leverage point as we lap the high water line in Q4 of last year.

Adrienne Yih-Tennant:

Let me add my congratulations. Product looks fantastic. Calvin, I was wondering if you could share your insights on what have you learned from the capsule launches in tennis, golf and footwear? They were obviously stocked out very early. You're waiting for some replenishment there. So how have these launches informed you about the next iteration for footwear and other new categories like hike?

Operator:

The next question comes from John Kernan with Cowen.

Meghan Frank:

Yes. So I'd say there, to date, we've seen modest increases in terms of raw material prices. And we have started taking some price increases in Q1, as I said, modest and will be less than 10% of our assortment. We haven't seen any price resistance to date. And we'll continue to have a few actions as we roll throughout the year there. So we'll continue to look at that as a lever.

John Kernan:

Understood. Maybe one quick follow-up on inventory. As we all look at inventory balances across the sector, some of your peers in the competitive set, inventory dollars and units are up pretty meaningfully at this point. I guess, just the confidence in the ability to maintain full price sell-through, confidence in the competitive sets, ability to maintain full price sell-through as we go into Q3, Q4 and what's going to be much higher inventory levels throughout the sector into the holiday.

Operator:

The next question comes from Omar Saad with Evercore ISI.

Calvin McDonald:

Thanks, Omar. I think we've shared that even with the challenges that you alluded to, our year-over-year growth was still double digit in China and our 3-year CAGR is 60%. So there's definitely strong momentum behind the brand and very excited about the rest of this year and moving forward. These are short-term operational challenges. We've lived this in North America and other markets. We continue to support our teams as we did around the globe in these markets through pay protection, investing in the culture and that's important because that to me is one of the big pillars that's driving the success of the brand.

Operator:

The next question comes from Tom Nikic with Wedbush Securities.

Calvin McDonald:

Great. Thanks, Tom. Focusing on storytelling and bringing the guests along with our product innovation journey is definitely a key focus of Nikki and the team, both the merchants, how we tell the story online and how we tell it through the brand, through our relationships that we build with our ambassadors. So it is absolutely a key focus.

Calvin McDonald:

Thank you.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Fourth Quarter and Year-End 2021 Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Meghan Frank:

Thanks, Calvin.

Calvin McDonald:

Thank you, Meghan.

Operator:

[Operator Instructions] Our first question comes from Ike Boruchow of Wells Fargo.

Calvin McDonald:

Right. Thanks, Ike. I mean we continue to be strategic with our pricing strategy as we have been in the past. We are taking modest selective price increases over the course of the year. Some will go in place in Q2. And as we look forward, into additional quarters. As I mentioned, it's a very small portion of our styles that are impacted, about 10%. And this will help offset some of the pressure we're seeing on AUC. But we are constantly looking at multiple factors, such as the value of innovation, our range within our own product categories as well as in the marketplace and making sure that the performance of our apparel is always at a higher index than our pricing is relative to competitive options in the marketplace. So we are taking selective, but it's not a drastic move.

Operator:

Our next question comes from Brooke Roach of Goldman Sachs.

Calvin McDonald:

Sure. Thanks, Brooke. Majority of our growth will continue to come from core. As you've heard me say before, we're early innings of growth across all of our growth levers. That starts with product and that's core within men's. That's core within women's that includes, obviously, the strength in our bottoms business and our core activities that we've identified, Run, Yoga, Train and OTM, where we still have opportunity to keep innovating and developing and bringing new innovation to the guests.

Operator:

Our next question comes from Adrienne Yih of Barclays.

Calvin McDonald:

Great. Thanks, Adrienne. There's no change in our store expansion strategy, and that includes both the addition of new stores, testing new markets and new opportunities through our seasonal store initiative as well as expanding existing stores where we go in. We validate the market through seasonal. We move to a permanent location. And as we grow the business, we look to expand it, all within a moderate range relative to others, but very much within the square footage that we know can continue to prove, deliver on the productivity numbers, the economics that we're looking for as well as show up and represent the brand in the way we want between men's, women's, in particular, and we're seeing great success in doing that.

Meghan Frank:

And Adrienne, I'd add, we have very healthy four-wall margins north of 20% for our store fleet and feel really confident in these openings as well as strong productivity. And we're healthy levels with the store productivity reaching back to 2019 levels quarter-to-date. So feel optimistic about store performance as we move forward, an important part of our strategy.

Lorraine Maikis:

I was just hoping for an update on the international business, both Europe and Asia, where you stand profitability-wise and how you expect that to unfold in the coming years?

Operator:

Our next question comes from John Kernan of Cowen.

Meghan Frank:

Yes. Thanks, John. So we did share overall revenue growth of 20% to 22% on a 1-year basis. And within that, e-commerce growing in the mid-teens on an annual basis. And that would contemplate store productivity above 2019 levels, which we are seeing currently in Q1. I would say we continue to plan our business from an omni perspective and multiple channel scenarios to be able to meet the demand and where it comes to us and also navigating COVID-19 impacts were relevant. But that's our current outlook in terms of mid-teens growth for e-com and then stores above 2019 productivity.

Meghan Frank:

Yes. It's really 2 key pieces. So the step-up in stores is one of them. And then we're also beginning a multiyear DC expansion strategy to support the long-term growth of our business. That capital range that we provided is 8% of sales, so in line with the 6% to 8% target that we provided on our last Analyst Day.

Matthew Boss:

Congrats on the continued momentum. So Calvin, maybe could you just speak to drivers of the recent top line acceleration that you cited in the business? Maybe touch on categories. What are you most excited about as we think about the core innovation pipeline and how that potentially sets up for the potential halo as room to these additional categories across the store?

Matthew Boss:

Great. Looking forward to the celebration in a few weeks.

Dana Telsey:

Congratulations on the nice results. As you think about new customer acquisition and new customer expansion. What are you seeing there? What do you see in digital versus stores? And any updates to your enhancements of how you're thinking to reintroduce the loyalty program and progress on re-commerce and what that can do to sales and margins?

Calvin McDonald:

Yes. I'll quickly touch on both loyalty and reCommerce. Again, we'll probably sound, I apologize to the group, a bit of a broken record, but there are a lot of exciting initiatives that we've been testing and piloting and learning from and they play into our 5-year vision. And I do want to save for our time together in New York. But on loyalty, clearly, this brand has very strong loyalty with our guests. And uniquely and interestingly, it's been built the way we'd want it to through relationships, incredible product.

Operator:

Our next question comes from Michael Binetti of Credit Suisse.

Meghan Frank:

Michael, it's Meghan. So in terms of SG&A for 2022, so we are really pleased that we are guiding to operating margin that's just modestly under 2019, including the consolidation of MIRROR and then also inclusive of a 280 basis point impact from air freight pressure. We're really focused on optimizing that op margin expansion. And we have made some shifts in our investment profile, so investing more behind digital as we navigated the pandemic, which those expenses hit predominantly in SG&A. And then we pulled back to some degree on new store openings and renovations and saw that benefit within our gross margin.

Operator:

Our next question comes from Mark Altschwager of Baird.

Meghan Frank:

Thanks, Mark. So at this point in time, until we update in a few weeks, we are maintaining that commitment to the low teens growth rate. We are expecting higher growth this year. We've been talking about -- we thought we had some missed demand in 2021 as we navigated through some supply chain challenges. So feel comfortable with our guide, which is above expectations of 23% to 24% on a 3-year CAGR basis and really broad-based overperformance category, region and channel, and we'll share more work with you in a couple of weeks.

Operator:

Our next question comes from Paul Lejuez of Citi.

Meghan Frank:

Paul, it's Meghan. So in terms of footwear, we're not putting a number on 2022 and we'll share more on how we're thinking about that business. It's a small portion. And again, just a test-and-learn category for us. In addition to the 70 new store openings, we are also planning on 35 co-located remodels, which is up from 22 in 2021. So that continues to be a strong strategy for us and allows us to expand our footprint and maximize our revenue opportunity where we have high sales per square foot and help to showcase a broader assortment of our women's and also men's product.

Meghan Frank:

Yes. We haven't broken out that specifically, but we do see -- we do target those optimizations in areas where the sales per square foot is above our average. And do expect to see a meaningful lift from a revenue perspective, adding on a more meaningful portion of our men's revenue.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Third Quarter 2021 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Calvin McDonald:

Thank you, Howard, and welcome, everyone, to our third quarter conference call. I'm excited to be here to discuss our results and share highlights of our performance at the start of the holiday season.

Our strength continues to be broad-based and balanced across every facet of our business, including channel, category, activity, gender and geography. Before discussing more details about quarter 3, I would like to share some highlights on the 3 topics:

our performance over the recent Thanksgiving holiday, inventory levels and the current labor market.

Meghan Frank:

Thanks, Calvin.

Calvin McDonald:

Thank you, Meghan.

Operator:

[Operator Instructions] Our first question comes from Adrienne Yih of Barclays.

Calvin McDonald:

Thanks, Adrienne. On pricing, we have no plans to change our pricing strategy at this time. As you know, we lead with technical innovation and price our garments accordingly. We're always studying the marketplace and make pricing adjustments as necessary based on the competitive dynamics and opportunities that exist, but we have no plans to make a change heading into 2022.

Operator:

Our next question comes from Matthew Boss of JPMorgan.

Calvin McDonald:

Yes. Thanks, Matthew. There are a number of the overall driving metrics that point to that. The obvious one is the challenge we've seen in inventory. And even though we've been able to achieve these results, product drops, some of the product innovation and the way in which the design team's intended our activities and our categories to be launched for the guest just haven't materialized pretty much the entire and we've been chasing into that. So we know there's an upside to being able to represent and present the product the way in which it was designed and intended to.

Matthew Boss:

That's great color. It's perfect lead into my second question on the product positioning. Could you elaborate on trends that you've seen so far in the fourth quarter? And given your inventory position, but then the proactive steps that you took to airfreight in product, what is your ability to chase demand if momentum exceeds plan? And to your point on product positioning, what do you wish you had more of or maybe changes that in an ideal world to meet that outsized demand?

Meghan Frank:

Matt, and I'd just add on there. We did with inventory up 22%, which was above our expectation of 15% to 20% growth and really reflective of the team's supply chain and product teams leveraging airfreight. We do make those decisions about 6 weeks out. Certainly don't have as much flexibility as a normal environment just with supply chain constraints, but it is something we're actively managing where we do have opportunity.

Irwin Boruchow:

I guess, Meghan, I just wanted to dig into the airfreight dynamic a bit more. Is there any way you could possibly share with us based on spring orders, what kind of pressure you guys should expect or we should expect you guys to see in the first half of next year? And then I guess if you don't want to get too specific, I guess for the full year, you're saying 200 to 250 basis points of pressure. How much of that based on what you know today is reasonable for us to expect for you guys to kind of recapture in 2022?

Irwin Boruchow:

Meghan, is it fair to say that this should be the peak of the airfreight pressure in Q4?

Operator:

Our next question comes from Mark Altschwager of Baird.

Calvin McDonald:

Thanks, Mark. In terms of our Thanksgiving shopping over Black Friday and Cyber Monday, there was really no change to our strategy and tactic. In that by, I mean, we didn't take further markdowns. We don't play promotionally, as you know. The teams definitely worked hard to get the stores and online in a good inventory position. To satisfy demand, we made sure that we were ready. We've been investing for months, quite frankly, going back to the beginning of the pandemic to get our digital channel ready to anticipate the sort of volume.

Mark Altschwager:

And just a quick follow-up on MIRROR, if I could. Can you just give us some perspective on how you're thinking about balancing the growth and profitability for the platform for 2022? I guess, would you expect it to be net dilutive to EPS next year?

Operator:

Our next question comes from Erinn Murphy of Piper Sandler.

Calvin McDonald:

Yes. Thanks, Erinn. We haven't seen any notable change from our brand perspective in the China market. As you heard in my opening remarks in terms of the performance, we continue to be very pleased with the results, 2-year CAGR of 70%. We continue to invest in China, opening stores, invest in our headquarters in Shanghai and creating in-country roles and jobs to really help support that business. Continue to connect with the community, which is our unique way of working with. And we see a real opportunity to continue and to push for the sweat life and the healthy initiatives that exist within that market and feel we play a very unique role in doing that. So from our perspective, we're pleased and pleased with the investments we're making in the connection with the community.

Erinn Murphy:

Great. And then if I could just follow up on your footwear initiative. Is that still planned for next year? And how material are you thinking about the investment behind building that platform out?

Operator:

Our next question comes from Lorraine Hutchinson of Bank of America.

Meghan Frank:

Lorraine, thanks. We are profitable in our international business overall. We are still on the path to profitability in Europe. We had pushed out that date to '22 just given the impact of store closures that we experienced throughout 2020 and then continuing into the first half of '21. And sorry, can you remind me the second half of your question?

Meghan Frank:

Yes. We certainly see opportunity in the international margin. That said, we also see opportunity for expansion in our North America margin. So expect it to sit below, and there are some structural rent items that are a little bit more pressure, I would say, in our international region relative to North America.

John Kernan:

Nice job on the quarter. So what enabled you to outperform your expectations by this much given the reduction to MIRROR -- I guess in the core business, what outperformed your expectations from the last time you gave revenue guidance versus where we are now and what's a pretty difficult environment out there given the supply chain headwinds?

John Kernan:

Excellent. Quick follow-up, just on SG&A dollars. It looks like the expectations implied for SG&A expense are a little bit lower versus where they were last quarter. Can you talk to the drivers of that? Are you dialing back some of the investments in MIRROR and some of the acquisition costs there? Any comments on SG&A as obviously, the gross margin headwinds picked up a bit on airfreight.

Operator:

Our next question comes from Paul Lejuez of Citi.

Calvin McDonald:

Thanks, Paul. We did achieve our goal of 200 stores, that's both across the U.S. and in Canada. I think the Canadian number is around 48 is the final number. So call it 152 and 48. We have been and we're almost at the full MIRROR leads in each of those stores, which is a critical component to really activating the MIRROR and driving guest engagement and demonstrations. We saw -- we're very pleased with the results in Canada when we launched, which has only been the last few weeks. And we really wanted to test and learn and launch just through the lululemon channels and synergies, leveraging both online already guest relationships that we had in the store channel and very pleased with the start of the results of that initiative.

Calvin McDonald:

I think there's definitely the aspirational, which is we want everybody sweating on a MIRROR to be in lululemon, and we want everybody sweating with lululemon to be engaging and using a MIRROR. And that's an aspirational vision, but it's to say there's opportunity on both sides. As we continue to move forward, more and more of these guests are already or have shopped with lululemon, which is good because a big part of the role MIRROR plays with us is as a membership community that drives loyalty, retention and spend with our lululemon guests.

Operator:

Our next question comes from Michael Binetti of Credit Suisse.

Meghan Frank:

Michael, thanks it's Meghan. So in terms of store productivity for Q4, we are managing our business from an omni perspective and really looking at multiple scenarios. I would say store productivity, I would say, flat to 2019 to up slightly. It's probably a good baseline scenario, though, again, we are planning for multiple scenarios to flex where the demand comes to us. And I'll also take the long-term question in terms of SG&A.

Meghan Frank:

So we did have modest SG&A expansion in our long-term plan. At this point, we remain on that commitment. And what we're really focused on is our operating income and growing our operating income in excess of sales growth. We have had some shift in dynamic of our business with more investment in e-comm to support the accelerated growth there, of which depreciation sits in SG&A and we've also had some lower occupancy and expenses, and so some more gross margin leverage come through. We'll continue to balance our investments to grow our operating income, and we'll share more on our next 5-year outlook again in spring of '22.

Brooke Roach:

You spoke in your prepared remarks earlier to strong new guest acquisition and retention. As you think about the profile of the guests that you're acquiring today, can you talk to how that incremental new guest might differ in terms of demographics or preferred activities versus the customer that you acquired in prior years? What is your outlook for new guest acquisition going forward?

So when we look at activity, 2 points:

one, the versatility of our product is our -- one of our greatest strengths, and it allows for guests to find what they need for their sweat life across multiple categories, be it bottoms, tops, second layer, shorts. And as you know, we've defined a very clear activities that we want to own and have significant share of mind, share of wallet position in and that is Run, Train and Yoga. And then we've identified what we call play categories, be it golf, tennis, and hike.

Operator:

Certainly. Our final question comes from Kimberly Greenberger of Morgan Stanley.

Meghan Frank:

Kimberly, I would think about also if you're looking for a baseline for future planning, just that we had historically high full-price sell-throughs and lower markdown rates. So when we look into the future, we will have some puts and takes within our gross margin rates. And right now, we're committed to that modest margin expansion as we outlined in our Power of Three growth plan.

Meghan Frank:

Yes, we did. So 450 basis points of pressure in Q4 relative to 2019. And then also for the full year, 200 to 250 basis points relative to 2020.

Calvin McDonald:

I mean, I think -- we really do price to market, and there are obviously a variety of inputs and considerations, and you've alluded to some. But as a business that is positioned as a premium brand that has much innovation built into the product. We look at a variety of factors to make our pricing decisions and it's just not -- we won't just do it unilaterally because of those pressures, we'll look at other ways to manage the overall mix and maintain our committed margins.

Operator:

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica Second Quarter 2021 Earnings Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Celeste Burgoyne:

Thank you, Calvin. I'm happy to be on the call today to speak to our omni guest experience pillar and to share some additional details on our second quarter performance.

Meghan Frank:

Thanks, Celeste. Our momentum continued in Q2 with our top and bottom line results exceeding our expectations. Strong guest response to our merchandise offering and improving store trend and continued strength in e-commerce fueled our growth, and contributed to our increased outlook for the year, which I will take you through in a moment. As Calvin mentioned, we continue to navigate industry-wide challenges with COVID-related factory closures, slowdowns at the ports and reduced airfreight capacity impacting our business as we move into the second half of the year.