lululemon athletica inc. — 2023 Q2

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.

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.

Great. Congratulations. The results are really -- they really stand-alone. Calvin, so the business is being driven by innovation, product launches and newness, whereas sort of the competitive backdrop is a little bit more safe. And I'm just wondering how -- have you been able to sort of inspire that? It feels like you're innovating faster. Every time you get on a call, there's like another list of 5 new things that we didn't know about.

All right. Thanks, Adrienne. In terms of our speed of innovation, I would agree that the pipeline and the launches within each quarter continue to get very strong and excited about the balance across our accessories business, our women's business, our men's business. I think it is an execution of a very deliberate innovation strategy that we've been working through the Power of Three and into the Power of Three x2 strategy.

And then, Adrienne, in terms of China, we are really pleased with the performance there in the quarter, up 61% in Greater China. We have 100 stores today in China. We're opening 35 stores in an international region this year, the majority of those in the China market. As Calvin mentioned, we've had some exciting community activations still looking to build brand awareness and drive into that opportunity there. And then over the longer term, we've set approximately 200 stores at the end of our 5-year plan, and I think -- there's also a beyond there as well in terms of still very early innings on our China growth.

Fantastic results. Best of luck.

Thank you.

Meghan, you've pulled a lot of investments forward into 2023 as gross margins continue to be. Can you give us some examples of the most successful investments? And then also talk to your ability to generate leverage on this line item as we move into 2024?

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.

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.

In terms of both channels, they're performing incredibly well in the market. We now have 107 stores in Mainland China, predominantly Tier 1, Tier 2 cities, but still see opportunity to grow as well as look to opportunities into Tier 3. Every store we've opened has exceeded plan, our optimization of some stores as we did with our Kerry Center location, which is really our first bigger, more experiential store in country is performing incredibly well. And as you know, online business in China is different than that of other markets where our .cn is a lower percentage of our overall business, and we do work through partners such as Tmall, JD to grow our business. But on the back of those platforms and leveraging some of the B2B and working direct and selling direct to our guests through their clienteling platform.

Yes. I'd say we haven't broken out the profitability specifically. It's very healthy. Closest to our North America region. I think in the near term, what we're really focused on is capitalizing on the opportunity we have in that market, not necessarily maximizing that operating margin, but that would present an opportunity also over the long term as we scale that market.

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.

Yes, absolutely. So for the full year, we guided a 40 to 60 basis points of expansion in operating margin year-over-year. That's about 20 to 40 basis points above 2019 levels. So we're really pleased with that performance. Within that international is still below North America profitability. As I mentioned, China being the closest really looking to maximize that market. And then APAC and EMEA, still some opportunity in terms of operating margin expansion in the near term as we continue to scale those markets. So I would say, over the longer term, focused on driving into the brand awareness and revenue opportunity, store expansion we have in the international market, scaling and leveraging over time.

Yes. So within our other categories that are franchise businesses as well as seasonal pop-ups, those would be the largest components. We also have outlets in lululemon Studio. I would say the growth being driven by new franchise markets as well as relatively consistent, I would say, performance in terms of seasonals and pop-ups. And so I would say we'll continue to scale markets within that bucket and capitalize on the opportunity we have there with our franchise model with another going forward.

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.

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.

Thanks, Dana. As you mentioned, the traffic was very strong and pretty much completely in line across both stores and e-comm. So continuing to drive that omni strategy and have the guests connect with us wherever is convenient for them, has been a strategy of ours and continues to resonate and drive our business. And we're cycling over the success of some categories and items last year that really drove traffic. So very healthy, strong numbers on top of strong numbers, which is very encouraging as we look at just how the guests both new and existing are engaging with us.

Thanks, Ike. So in terms of the acceleration in North America specifically, it would be total and comp. In terms of China, we haven't broken out the second half of the year by region. But we are coming off a very strong performance, 61% growth in Q1 -- sorry, Q2 in Greater China. And feeling well positioned as we move into the second half of the year, as I mentioned, 107 stores in China today, 35 stores international. And the majority of those being China openings. And I would say we're pleased with our performance in China as we move into this.

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.

Operator, we'll take 1 more question.

Thanks, Alex. So in terms of sales per store and sales per square foot, it's definitely a key part of our strategy to expand our box size in locations where we have high sales per square foot, high traffic to capitalize on that traffic. So we are opening approximately 25 what we call co-located stores, which are really expansion. It allows us to have a more holistic assortment across men's, women's accessories, footwear and as I mentioned, capitalize on that traffic trend. So it's a key strategy for us and one that we monitor closely. We're definitely further along in that strategy in North America than we are in our international markets, we're still very early days on that.

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.