Lululemon Athletica Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 1, 2023

There are 11 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. First Quarter 2023 Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded.

Operator

After the presentation, there will be an opportunity to ask questions. Analysts who wish to join the question I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Speaker 1

Thank you, and good afternoon. Welcome to Lululemon's 1st quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO and Megan Frank, CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward looking statements reflecting management's current forecast we are confident that we will be able to provide a detailed update on our financial results. These statements are based on current information, which we have assessed, but by which its nature is dynamic and subject rapid and even abrupt changes.

Speaker 1

Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10 ks and our quarterly reports on Form 10 Q. Any forward looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our quarterly report on Form 10 Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis.

Speaker 1

The press release and accompanying quarterly report on Form 10 Q are available under the Investors section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the quarter as well as our quarterly today's call is scheduled for 1 hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Calvin.

Speaker 2

Thank you, Howard, and welcome everyone to our call today. I'm happy to be here to discuss quarter 1 and share with you our strong start to 2023, which shows the continued momentum in the business. As you've read in our press release, we delivered top and bottom line results that exceeded our guidance. We continue to engage with guests across the globe and drive our business with new and innovative technical products. On today's call, I'll provide updates on our quarter one performance, our community based model, which is powered by our new membership program.

Speaker 2

I'll also share highlights on our product performance as well as our international business. And then I'll turn it over to Megan for a review of our financials and a guidance update, then we'll take your questions. So lots to share, let's get started. In quarter 1, as I mentioned, the business delivered strength across both the top and bottom line. Revenue increased 24% versus last year, balanced across category, channel and region.

Speaker 2

Women's was up 22%, men's was up 17% and accessories was up 67%. Comparable sales grew 16% in stores 18% in our e commerce business. And by region, North America grew 17% and international increased 60%. Within international, we saw a meaningful acceleration in the Greater China business with revenue increasing 79%. EPS was strong as well, increasing 54% versus last year to $2.28 This strength was driven by revenue, gross margin and SG and A all coming in better than our guidance.

Speaker 2

So a great start to the year fueled by our product and people. For today, I'd like to devote some time to talk about our community based model. Not only does our approach allow us to connect uniquely and authentically with our guests, it also drives incrementality of spend and increases LTV as guests engage more with our brand. We are celebrating our 25th anniversary this year the community has been at the core of our brand since day 1. Within North America, 8 months ago, we embarked on an expansion of our model with our Essentials membership program.

Speaker 2

Through this free to join program, we gain deeper knowledge on how our guests like to sweat and what aspects of our brand are most meaningful to them. We can leverage the data and insights to help develop future activations, invite them to the events that are most relevant to them and inform our product our stores are an integral part of this ecosystem as they provide connection points within local communities across the world And serve many purposes, including allowing our guests to interact with our educators, to learn about our products, the technical innovations that can be found within our assortment and the unmet needs they solve. Secondly, our stores act as hubs for our local ambassadors and fitness studios. Guests looking for new ways to sweat in their neighborhood need only enter the local Lululemon store where our educators will point them to the best studios in town. Thirdly, our stores are the focal point for local events that range from hosting run clubs and other sweat sessions to parties and community celebrations.

Speaker 2

And finally, our stores provide support for some of our larger scale activations, such as our 10 ks runs, product launch, including footwear and our Lululemon studio launch last fall. In quarter 1, we saw a meaningful increase in the number of community events compared to the same period last year, And this brings us back to the pre pandemic levels. Key celebrations in the quarter included our Align Campus Hall Pass event to increase awareness of our new aligned styles with our younger guests and exclusively for Essential members, we ran 6 events across 3 cities in Houston, Chicago and Boston, which were a great success and hugely oversubscribed. Most recently, May has been a big month for activations. We went live with our new Lululemon Studio digital app earlier this week.

Speaker 2

The app, which will help us broaden our TAM, offers guests in the U. S. Access to our industry leading content for only $12.99 per month without needing to purchase hardware. We announced our further initiative. Further, we'll demonstrate how far women can go when they're supported with resources and product innovations typically reserved for men.

Speaker 2

This initiative will include a scientific research program, which takes a holistic approach to addressing the existing sex gender data gap and endurance performance, new women's first product innovations, community activations and a give back component to support young women. In addition, the program will culminate in a multi day women's only ultra marathon starting on the International Women's Day 2024. At its core, this initiative supports Lululemon's commitment to innovation, solving for unmet needs and driving brand awareness. In addition, we tapped into dupe culture with our Align Legging dupe swap event in LA. Our team set up a 2 day pop up at the Century City Mall and asked guests to trade in their dupe leggings for a pair of our iconic Align leggings.

Speaker 2

For us, the primary purpose of this event was new guest acquisition and increasing brand awareness for being the original in leggings. Overall, it was a resounding success. It generated more than $1,000,000,000 earned media impressions and was covered by national and international media outlets in addition to creating viral social media buzz. About 50% of the guests who traded in dupes are new to our brand, approximately half of the guests who attended, some of whom started waiting in lines as early as 3 am were under we are 30 years old, and while I won't get into specifics, the leggings that guests traded in ran the gamut in terms of brands and price points. We view our community model as one of our biggest competitive advantages.

Speaker 2

With connection points across both the physical and digital, our ecosystem powered by membership supports our leadership position in developing and cultivating omni guest relationships. We engage with guests in ways that are more than just transactional by creating deeper connections and more holistic relationships. This in turn builds our brand awareness, drives purchases and contributes to our strong financial performance. Let's shift now to our product innovation. Guests responded well to our spring merchandise assortment as we continue to bring compelling innovation across our core and play activities and footwear.

Speaker 2

In women's, we saw continued strength in many of our key franchises, including Skuva, Define and Align. When looking specifically at women's bottoms, we saw growth of 22%. While women's bottoms is our most mature category, our teams continue to update and enhance existing styles, bring innovation via new fabric technologies and create new styles and silhouettes that solve for unmet needs. In quarter 1, our strength in women's bottoms was driven by our iconic dance studio pant, which has always been a guest favorite and is currently We are experiencing a resurgence in popularity, the newest additions to our line franchise, including the mini flare and wide leg and our incredibly soft and smooth soft stream bottoms. In men's, guests continue to respond well to our iconic ABC, Commission and Pacebreaker franchises.

Speaker 2

In accessories, I'm thrilled with the strength we continue to see across our assortment. While it is the smallest of our 3 major merchandise it is a growing piece of our business that we fuel with innovation, just as we do across women's and men's. In quarter 1, guests responded well to our collection of bags, backpacks and duffels. And we continue to bring newness and innovation into our footwear assortment. At quarter 1, we launched an updated and enhanced version of the Blissfield running shoe.

Speaker 2

And just last week, we launched the Blissfield Trail. This shoe is our 1st road to trail running shoe designed to offer traction and durability for guests who love to run on the trails and off the road. Our Be Planet initiatives are also driving product innovation in support of our 2,030 goal to make 100% of our products we are pleased with sustainable materials and end of use solutions. For Earth Day in April, we debuted our first capsule collection made with Dralian and viral tech startup, Samsara Echo, to scale circularity through textile to textile recycling, which is a very cool technology. Together with Samsara, we're working towards recycling our apparel back into new products, bringing us one step closer to our end to end vision of circularity.

Speaker 2

This partnership along with our other Be Planet initiatives including Like New and our collaboration with Gino is the latest example of we are taking a leadership position in our sector and driving toward a circular ecosystem by 2,030. Turning now to our product pipeline, let's take a look at quarter 2. We're continuing to build out our golf and tennis collections with versatile styles that can be worn both on and off the course in court. The 2nd installment of our Get Into It campaign launched 2 weeks ago we featured both technical shorts and new on the move styles for both him and her. And for men, we'll be expanding our offering of train tops with new styles using our dry I'll take a moment to share some geographical highlights with you.

Speaker 2

As you know, one of the 3 key pillars of our Power of 3x2 plan is international. We have a target to quadruple our business outside North America between 2021 2026. This will be driven predominantly And I remain optimistic about our runway of global growth. As I stated earlier, our business remains strong in North America and across our international regions. In quarter 1, revenue in North America increased 17%, while we saw 60% growth in international.

Speaker 2

In Greater China, we experienced a significant sequential acceleration in the business relative to quarter 4 as the effects of COVID-nineteen subsided. In total, revenue in Greater China increased 79% in quarter 1, ahead of our expectations and just one more sign of the potential within this market. I had a chance to visit Shanghai in mid April for the first time in 3 years, and it was great to see how much our brand has grown in the city. We walked through the neighborhoods we serve, visited our new stores, and I was impressed by the incredible brand experiences we are bringing to the local community. In addition, spending time with our educators as they engage with guests and bring our culture to life is always one of my favorite parts of being in market.

Speaker 2

In EMEA, we're off to a great start in Spain, a market that we entered last fall. And with the help of a franchise partner, we we recently opened our first store in Tel Aviv with Israel becoming the 24th market globally for Lululemon. We know that the Israeli guest has been engaging in APAC business remains robust as well and in the coming months I'm pleased that we will enter Thailand with our first store in Bangkok. Our approach to increasing brand awareness and growing revenue internationally is rooted in the same tenets as what has fueled our success in North America. This includes our multi channel direct to consumer model, our community based approach to brand building, our innovative product and the deep and direct connections we have with our guests.

Speaker 2

I'm excited for what the future holds for our global business as we continue to execute the power of 3x2 Growth Plan. And with that, I'll now turn it over to Meghan.

Speaker 3

Thanks, Calvin. I'm happy to be here today to discuss our recent financial performance and provide you with our outlook for Q2 and our updated guidance for the year. In Q1, sales, gross margin, SG and A, EPS and inventory all we connected with our guests via multiple activations throughout the quarter. 2023 is off to a strong start and based on our guidance, we continue to see solid momentum in Q2. Let me now share the details of our Q1 performance.

Speaker 3

Total net revenue rose 24 to $2,000,000,000 driven by continued strong execution across all parts of the business. Comparable sales increased 17%. In our store channel comparable store sales increased 16%. We ended the quarter with total of 6 62 stores across the globe. Square footage increased 22% versus last year, driven by the addition of 83 net new Lululemon stores since Q1 of 2022.

Speaker 3

During the quarter, we opened 7 net new stores and completed 3 optimizations. In our digital channel, comps increased 18% And within international, we saw 60% increase versus last year with Greater China increasing 79%. And by category, women's revenue increased 22% versus last year. Men's increased 17% and accessories grew 67%. It's also great to see ongoing strength in traffic across both channels.

Speaker 3

In both stores and digital channels, traffic increased approximately 30%. This speaks to the strength of our omni operating model as we engage with our guests in ways most convenient to them. Gross profit for the Q1 was $1,150,000,000 our 50 7.5 percent of net revenue compared to 53.9 percent 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 air freight as well as regional mix, markdowns were in line with last year. Occupancy and depreciation leveraged 10 basis points in the quarter.

Speaker 3

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 and A. Moving to SG and A. Our approach continues to be grounded in prudently managing our expenses, while also continuing to strategically invest in our long term growth opportunities. SG and A expenses were approximately $748,000,000 or 30 7% of net revenue for the same period last year.

Speaker 3

SG and A came in better than expected due to leverage on higher than planned sales and to a lesser we have a shift in timing of certain investments. Operating income for the quarter was $401,000,000 or 20.1 percent of net revenue compared to 16.1 net revenue in Q1 2022. Tax expense for the quarter was $119,000,000 or 29.1 percent of pre tax earnings compared to an adjusted effective tax rate of 27% a year ago. The increase relative to last year is due primarily to accruing for withholding tax on our unremitted earnings in Canada and a decrease in tax deductions related to stock based compensation. Net income for the quarter increased 54 percent to $290,000,000 or $2.28 per diluted share compared to $1.48 for the Q1 of 2022.

Speaker 3

Capital expenditures were $137,000,000 for the quarter compared to $111,000,000 in the Q1 last year. The increase relates primarily to store capital for new locations, relocation we continue to see some renovations and also technology and supply chain investments. Turning now to our balance sheet highlights. We ended the quarter with $951,000,000 in cash and cash we expect to be approximately $400,000,000 of available capacity under our revolving credit facility. Inventory grew 24%, in line with sales growth And was $1,580,000,000 at the end of Q1.

Speaker 3

We remain comfortable with our inventories and we're well positioned to continue to fulfill guest demand. At the end of Q2, we expect inventory growth of approximately 20% and we continue to expect inventory growth to be relatively in line with sales growth in the second half of twenty twenty three. We repurchased approximately 300,000 shares at an average price of $3.36 At the end of Q1, we had $646,000,000 remaining on our $1,000,000,000 repurchase program. Let me shift now to our guidance outlook. We continue to be mindful of the uncertainties in the macro environment and as a result, we remain prudent as it relates to planning the business.

Speaker 3

That being said, we're pleased with the strength we experienced across the business in Q1 and also the start we've seen to Q2. The strength affords us to invest in our strategic growth pillars, while also delivering on our financial commitments we've laid out in our Power 3x2 Growth Plan. Let me begin with Q2. We expect revenue in the range of $2,140,000,000 to $2,170,000,000 representing growth of 15% to 16%. We expect to open 9 net new company operated stores in Q2.

Speaker 3

We expect gross margin in Q2 to increase 200 basis points to 220 basis points relative to Q2 of 2022. This will be driven by lower airfreight expense, offset somewhat by strategic investments to support future growth, including supply chain, distribution centers and product teams, as well as modest deleverage on occupancy and depreciation. In Q2, we expect our SG and A rate to deleverage by 190 basis points to 210 basis points relative to Q2 of 2022. While a portion of this deleverage relates to the timing shift of certain investments, it also reflects our strategic decision to invest more in initiatives to grow brand awareness relative to our

Speaker 4

we expect to continue to deliver on

Speaker 3

our expectations. These initiatives include top of funnel brand building and community activations. When looking at Margin for Q2, we expect approximately 10 basis points of expansion inclusive of our decision to increase investment into certain of our strategic initiatives. Turning to EPS, we expect earnings per share in the 2nd quarter to be in the range of $2.47 to $2.52 versus adjusted EPS of $2.20 a year ago. Shifting now to the full year 2023, we now expect revenue to be in the range of $9,440,000,000 to $9,510,000,000 This range represents growth of 16% we expect to open approximately 50 net new company operated we will continue to expect our stores in 2023 and complete approximately 25 co located remodels.

Speaker 3

This will contribute to overall square footage growth in the low teens. Our new store openings in 2023 will include 30 to 35 stores in our international markets with the majority of these being planned for China. For the full year, we now forecast gross margin to increase between 180 basis points to 200 basis points versus 2022. The expansion relative to last year is driven predominantly by lower airfreight expense. For the full year, we now expect we are relatively in line with last year in 2019.

Speaker 3

Turning to SG and A for the full year. We now forecast deleverage of 150 gives us the opportunity to invest behind our power 3x2 growth pillars, while also delivering operating margin this year ahead of our goal for modest expansion annually. When looking at operating margin for the full year 2023, we now expect it to increase by 30 basis points to 50 basis points versus last year. For the full year of 2023, we expect our effective tax rate to be approximately 30%, an increase over the 2022 adjusted tax rate of 28.1 percent. This is in line with our longer term tax rate expectations we provided as part of our Power 3x2 plan reflects the increase we expect as a result of accruing for Canadian withholding taxes.

Speaker 3

For Q2, we expect our effective tax rate to be approximately 30%. For the fiscal year 2023, we now expect diluted earnings per share in the range of $11.74 to $11.94 we expect to be in the range of $10.07 in 2022. Our EPS guidance excludes the impact of any future share repurchases. We continue to expect capital expenditures to be approximately $660,000,000 to $680,000,000 for 2023. The increase versus 2022 reflects investments to support business growth, including a continuation of our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments.

Speaker 3

A range of $660,000,000 to $680,000,000 approximately 7% of revenue, in line with our current Power of 3x2 target of 7% to 9%. With that, I'll turn the call back over to Kelvin.

Speaker 2

Thank you, Megan. Across Lululemon, we are excited about the opportunity ahead of us. We continue to monitor the environment around us, The strength of our product pipeline, our unique approach to building communities, our international growth prospects and our initiatives to grow brand awareness, I'm optimistic that we will continue to deliver on the goals set forth in our Power of 3x2 Growth Plan. And in closing, I want to express my deep gratitude to the leaders and teams across Lululemon, who continue to deliver these results and bring our culture to life. I look forward to taking your questions now.

Speaker 2

Operator?

Operator

Thank you. We will now begin the question and answer session. You will hear a tone acknowledging your request. The first question comes from Rick Patel with Raymond James. Please go ahead.

Speaker 2

Thank you and good morning everyone. Good afternoon rather. 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? Great.

Speaker 2

Thanks, Rick. I'll talk about the drivers overall of our business and then Chat quickly on how I see sort of the different regions continue to perform the rest of the year. At a high level, our business model is uniquely different versus our with some key competitive advantages which begin with our D2C omni operating model. 2nd It's clearly our product driven by our innovation platform of Science of Feel. And then within that, our product assortment is supported with a large portion which is non seasonal, the versatility in multiple wear occasions which cross both Sweat and Social as well as the frequency of our new innovative drops that guests wait for and have come accustomed to.

Speaker 2

And finally, the community connection that we drive through a lot of our initiatives and then recently the launch of our central memberships program and Lululemon Studio. And if we zoom out, the drivers of our business pre, during and post the pandemic are still Very relevant today and that is the importance of product versatility as it relates to apparel, guest living, an active and healthy lifestyle, convenience expected by our guests, which really speaks to our strength in an omni operating model that we've been investing in for many years. And then finally, focus on both physical, mental and social well-being, all supporting the brand positioning. And those continue to be the drivers that separate us from others and fuel our performance. And when I look at regional performance as we shared strong growth in North America, We continue as we see balanced growth in every market across gender category and activity and with the product pipeline I don't see that changing.

Speaker 2

So I think

Operator

the next question comes from Adrienne Yih with Barclays. Please go ahead.

Speaker 5

Great. Thank you. Congratulations on a great start to the year. Excuse me. 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?

Speaker 5

And then how do you think about building price on a long term basis being able to raise those in those markets over time? And then Megan, if you could just talk to us about kind of the relative segment margins, how we should think about the relativity between North America, APACChina, I guess, would be the primary driver there and EMEA. Thank you very much.

Speaker 2

Thanks, Adrian. 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, And there may be a slight shift as a result of local competition and strategically, but a tight ban 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 and positioning of supporting full price.

Speaker 3

Great. And Adrienne, in terms of regional profitability, we saw meaningful expansion in our operating margin for the quarter relative to last year and would have experienced that across both our channels and our regions and then in terms of how we think about the relative margin rates by region, North America is our Profitable, followed by APAC, China within that is the highest and then EMEA.

Speaker 5

Great. Thank you very much. Congrats again. Thanks.

Operator

The next question comes from Mark Altschwager with Baird. Please go ahead.

Speaker 2

Thank you for taking my question. Really nice acceleration in the international business. I guess as we think about the revenue guidance for the year, You raised overall today, but just curious if there have been any changes to your thinking relative to 3 months ago in terms of the contribution from North America versus international over the remaining quarters. And then kind of just drilling down on China, you've had some unique activation events over the past few months. I'm curious your learnings there and any data or anecdotes you have on how the brand is being perceived in some of the newer markets you've entered, any differences in what the product mix looks like in core versus fashion or sweat versus on the move in some of these newer markets and newer consumers.

Speaker 2

Thank you.

Speaker 3

Thanks, Mark. So in terms of top line for the balance of the year, we're obviously coming off of a very strong quarter, which exceeded our expectations at 24% growth. We did guide to 15% to 16% for Q2, and then 16% to 17% for the full year, so both above our power of 3x2 targets. I'm still feeling well positioned for the balance of the year. We're not breaking out the regional performance, but still see meaningful opportunity across both our North America and international regions, obviously, international being a bit outsized, as Calvin mentioned, given the strength we continue to experience and see particularly in our China region.

Speaker 2

And Mark, on China and the activations that you referenced, as you know, our go to market strategy is about building community relationships and connection locally, either through ambassadors and then into and with our guests and that strategy is working incredibly well in China. We've done a number of activations both at the local level, store level as well as larger events. We have a few planned for this summer and into the fall. And those are driving the brand awareness, which I think I've shared with everyone before is in the single digit. So We have a huge opportunity to keep building brand awareness and consideration.

Speaker 2

As we enter new markets, that is one way as well that we are driving brand awareness and consideration. We have good success in our Tier 1 cities and ability to keep building stores as well as in Tier 2 and in each of those cases, stores are performing all stores are performing ahead of plan. So we're very pleased with the way the brand is being received built upon that community model and driving momentum in all new markets we now have 101 stores with plans to continue to open this year and then into next moving forward. When I look at the overall mix, I'd say our men's and women's business is almost similar to that of North America, Which is good considering the age of the brand there. So it's becoming quicker earlier, the North America dual gender brand.

Speaker 2

And we're pleased with the balance between both OTM and Sweat. The brand is still rooted as a performance premium brand And it's playing to our strength of versatility in wear occasions across lounge and social that we're seeing in that market. So very pleased with how product is being received and the momentum and it really is built upon community activations as you alluded to. Thank you.

Operator

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

Speaker 6

Thank you. Good afternoon.

Speaker 3

Megan, can you talk about some of the investments that you're pulling forward? What do they pertain to? And then maybe just a little bit more detail on plans to increase brand awareness in China outside of just opening stores? Thank you. Great.

Speaker 3

Thanks, Lorraine. So in terms of SG and A Investments, we're obviously experiencing strong top line and we've seen some recovery in our air freight expense for the balance of the year. So we see an opportunity to push into investments I'm into our road map behind our Power of 3x2 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 opportunities where we continue to push in there for the balance of the year and then also higher depreciation on current and Your investments in terms of capital expenditure. And then can you remind me the second part of your question, Lorraine?

Speaker 3

The plans to build brand awareness in China?

Speaker 2

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 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, they also will create a market specific activation and campaign which we're in right now called Worn by Us, which is a fantastic campaign where they are celebrating and highlighting all the ambassadors that we have relationships with their favorite products and telling their story of inspiration and how they live a well-being life.

Speaker 2

And we have many more of those planned, so we definitely invest in campaign and traditional Brand marketing in that market to achieve the awareness and consideration opportunity and leveraging digital, Which is a big part of our business, we expanded channels. We have Dot CN, we have Tmall, we added JD. We continue to innovate And to a variety of initiatives across WeChat, leveraging the WeComm platform for a lot of our one to 1 and one to many initiatives and plugging in So there are a lot of exciting things. And as you know, we have a leader in Shenzhen that is based in Mainland China and Shanghai, we have a specific SSC office, where we have talent and resources that are specifically focused on driving these initiatives and building the business in Greater China and Mainland China. So those are just a few of the initiatives that That have been executed executing, but we have a team on the ground that's empowered to build that business.

Speaker 6

Thank you.

Operator

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

Speaker 6

Good afternoon, everyone, and 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 you're planning AUR? And are you seeing any difference regionally and even globally in terms of level of reception to new products and consumer differentiation. Thank you.

Speaker 3

Thanks, Dana. In terms of airfreight, so we are expecting it to be down 190 basis points now for the year. So that is now 50 basis points above 2019 levels, we made some great headway there. We did experience 430 basis points product margin expansion in Q1, which was primarily driven by airfreight, we will see the year over year comparison moderate throughout the year, With Q4 being close to flat to last year and we'll continue to monitor and push into opportunities there. I'd say in terms of AUR, we're not expecting any material change to our AUR strategy in terms of assortment and then I'll let Calvin take the last part.

Speaker 2

Yes. Hi, 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 design in So one in particular in APAC is fit, where we have a whole different fit for our leggings, for our bras, and for inseams, on the men's bottoms, and we introduced that a few years ago, and it has really helped in driving those categories in those markets.

Speaker 2

Footwear, as you know, we've rolled out in only a few international markets. So even though we see demand for that category and guests asking for As of now, it's in Mainland China, it's in the U. K. And in North America. Seasonality is an obvious factor.

Speaker 2

And then the only other difference that I would call out is, we can see and do see differences globally based on the power of social media and certain platforms. So in markets in which a lot of the U. S.-based social influencers have a large voice. We see similar trends, the Everwear Belt Bag, the Define jacket, And in markets where we don't see the same type of U. S.-based social media influence, there are other trends and we don't see quite the distortion in these items.

Speaker 2

But overall, I think the main message is outside of fit, which is by Design a global assortment strategy that is more similar than not and drives the momentum across every market.

Speaker 6

Thank you.

Operator

The next question comes from Paul Lejuez with Citigroup. Please go ahead.

Speaker 7

Thanks. It's Tracy Kogan filling in for Paul. First, I was wondering if you could tell us the progression in the quarter by month and whether you saw any falloff at all in the U. S. Business as some others have seen.

Speaker 7

And then secondly, I was just hoping you could give us your current views on the competitive landscape in the U. S. And the macro backdrop. Thanks.

Speaker 3

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. 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.

Speaker 2

And in terms of competitive and macro, we continue to, as we always have, monitor that are taking place both in the competitive landscape. I think I've talked before about pricing. That was a strategic decision last year to take very minimal price activity and that allowed us to continue to support our full price selling in particular when most others had to course correct and pulled the promotional lever to adjust, and we're going to continue to manage that. We are seeing inventory levels come in better positioning. So although I am anticipating further discounting in the marketplace, I don't expect it will be worse than it has been and our business has continued to perform well during that heavily promoted period.

Speaker 2

And as you saw, we got our inventory this quarter ahead of guidance and in line with our revenue number. So from a competitive perspective, I think we're well positioned and have an exciting innovative pipeline of product to come for the back half of this year and that always fuels our business and I'm excited with what I see and what's coming for both the male guests and our female guests. On macro, with the uncertainty, as we've done for the past 2 years, we're going to continue to plan the business for multiple scenarios, monitor it. Our guest metrics were healthy in Q1 in terms of both traffic, transaction and new guest acquisition, But we're continuing to monitor and we'll adjust as we need to.

Speaker 7

Great. Thank you.

Operator

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

Speaker 8

Great. Thanks and congrats on another great quarter.

Speaker 5

Thanks.

Speaker 8

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 Side store comps that you're seeing and just any overall change in global momentum that you've seen here in May? And then Megan, with markdowns 40 basis points favorable to 2019 in the Q1. I guess can you elaborate on full price selling trends, your better than planned inventory?

Speaker 8

And just Does this create potential opportunity in the back half of the year as we think about markdowns and the opportunity in terms of a year ago?

Speaker 2

I'll take the first part. In terms of our guest metrics, they remain very we've seen no change in our cohort behavior in terms of frequency of purchase or engagement. In addition, in quarter 1, transactions our 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 ecom up approximately 30%. And when I look globally across every region, that behavior, we don't share the numbers specifically, but the general behavior of very healthy new guest acquisition, very healthy transaction and engagement with existing guests as well as traffic to both channels continue.

Speaker 2

Some of the differences, what's driving, 1, brand awareness and consideration is low and represents a significant runway of growth and opportunity for our business. And as we build new doors, as we continue to feed incredible exciting innovative product that is helping to fuel our business and will continue to as I've alluded to. I mean international was 16% of our revenue and represents a significant opportunity for us as we all know going forward for this brand. And then from a store performance versus our peer set, while we're equally able to continue to grow our online business speaks to the strength of our omni guest relationship and strategies. It's really immaterial where they choose to shop, and the technology links both channels together for a very frictionless fluid flow, and we have guests coming to us and into both channels and interacting with the brand accordingly.

Speaker 2

And that's obviously supported by a D2C model that allows them to do that and not have any other intermediary getting in the way of the relationships we have. So I think those are a few of the drivers, but very, Very strong guest metrics shared across the regions with opportunity with brand awareness to keep building our business moving forward.

Speaker 3

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 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 close monitor.

Speaker 8

Great. Best of luck. Thanks.

Operator

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

Speaker 4

Hey, thank you. Megan, so just two quick ones on the model for me. Just to kind of Follow-up Matt's question. 3 months ago, you expected higher markdowns year over year in 1Q through 3Q. They were flat in 1Q.

Speaker 4

Now you're kind of saying that they 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? Thanks.

Speaker 3

Great. Thanks. Yes, I'd say the change in markdown performance really came through the outperformance on top line and the portion of that that came through full price sales. So when we look at the balance of the year, we're expecting generally in line for the full year, but there is an outperformance in Q1. And then for airfreight, we are now 190 basis points down to last year, still 50 basis points above 2019 levels.

Speaker 3

We do expect over the longer term to continue to push into recouping all of that airfreight amount. I think too soon to put a fine point on 2024, but we continue to make good progress on that line item and we'll continue to look for opportunities to optimize.

Operator

The next question comes from Alex Stratton with Morgan Stanley. Please go ahead.

Speaker 9

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 100 of basis points above pre COVID levels. It's really amazing. So can you just walk us through the puts and takes of that?

Speaker 9

Is it just sales leverage or other pieces moving pieces there would be helpful? Thanks a lot.

Speaker 3

Great. In terms of guest metrics, nothing material by household income. We were pleased, I would say, overall with guest metrics, both existing And new gas metric trends above 20% for the quarter. And then can you remind me, sorry, the second part of your question?

Speaker 9

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

Speaker 3

And sorry, are you speaking specifically to gross margins?

Speaker 9

Both gross and operating.

Speaker 3

Yes. So our operating margin is pretty flat to 2019 levels. And then I'd say in terms of gross margin, we're well above given the composition of our business has shifted to be we pulled back somewhat on new store openings, the cost of that is within gross margin, And we've invested more deeply behind the digital portions of our business that sit in SG and A, and then obviously a big piece through scale and revenue outperformance.

Speaker 9

Perfect. Thank you.

Operator

The next question comes from Brooke Roche with Goldman Sachs. Please go ahead.

Speaker 10

Good afternoon. Thank you for taking our question. Talpin, I was hoping you could speak to the opportunity to build on the success of the Forms that can be built upon in the future. And then Megan, can you elaborate on your inventory outlook? What is the path to improve inventory from here and how should we be thinking about the timeline to repacing that pre pandemic inventory turnover rate?

Speaker 10

Thank you.

Speaker 2

Hi, Brook. In terms of product, we definitely think of it through the lens of a hero item strategy, a franchise expansion strategy And then newness that could either show up as a new item and or franchise. So that's what has been fueling our business and then equally in that not only bringing newness, but going back as well as updating like we did in this quarter, for instance, on our and we've innovated it with a number of changes that have been incredibly well received. In the franchise lineup, we're always looking at strengths, ways in which the positioning of that either through fit, versatility, And or fabric can be extended into additional unmet needs. For the gas, the Align being one of our strongest franchises, we introduced the Align dress this quarter, which was incredibly well received and equally building new franchises, either through the introduction like we did last year with footwear, which we've declared as a test and learn for us, but we're excited with the initial results and success and being able to build that forward into a very Positive business in general and there are additional ones that we'll be launching later this year that really fit into that franchise category that we're really, really excited about.

Speaker 2

So we definitely take a strategy across category activity, hero item franchise, Look for ways to expand, look for ways to update, and then obviously ways to create new and build from that.

Speaker 3

Great. And then in terms of inventory, so our expectation is it will 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

Operator

the next question comes from Abby Zwiniks with Piper Sandler. Please go ahead.

Speaker 3

Great. Thanks for taking my question. 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 Yes. In terms of the other segment, we aren't breaking out, Lululemon Studios, a portion of that, but that bucket also contains strategic sales, seasonal stores and outlets, which would be

Speaker 2

a larger revenue component and the material driver in that bucket. And then in terms of early statistics. Well, we just launched 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 guest 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.

Speaker 2

Last quarter, I talked to the membership number of Essentials, which after 6 months it was a real strong start over $8,000,000 We're not going to share that number quarterly, but I will indicate it's continued very strong momentum continue to grow. So we're excited about essential memberships, how it's going to support our community, fit into Lululemon Studios, the benefit Sweat and other means to interact with our guests and drive both LTV and incrementality, and early with having these The tools all supporting the membership program will share more as we move forward, but excited as we continue to see strength in that essential membership base grow.

Operator

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

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Earnings Conference Call
Lululemon Athletica Q1 2024
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