lululemon athletica inc. — 2023 Q1

Great. 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 peers with some key competitive advantages, which begin with our D2C omni operating model.

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?

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.

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 most profitable, followed by APAC, China within that is the highest, and then EMEA.

Great. Congrats again.

Thanks.

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 Three x2 targets. So feeling well positioned for the balance of the year.

I'll -- on China and the activations that you referenced, as you know, our go-to-market strategy is about building community relationships in 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.

Meghan, 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.

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?

The plans to build brand awareness in China.

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.

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. So 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 the assortment. And then I'll let Calvin take the last part.

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.

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. 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, 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.

And in terms of competitive and macro, we continue to, as we always have, monitor the actions that are taking place both in the competitive land -- 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 pull the promotional lever to adjust. And we're going to continue to manage that.

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%.

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.

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.

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

And sorry, are you speaking specifically to gross margin?

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 then we've invested more deeply behind the digital portions of our business. It's in SG&A. And then, obviously, a big piece through scale and revenue outperformance.

Brooke, 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 Pace Breaker short, for instance, for him where we took a fantastic single hero item and we've innovated it with a number of changes that have been incredibly well received.

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.

Yes. In terms of the Other segment, we aren't breaking out lululemon Studio as a portion of that. But that bucket also contains strategic sales, seasonal stores and outlets, which would be a larger revenue component and the material driver in that bucket. And then in terms of early statistics?

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.