lululemon athletica inc. — 2023 Q3

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.

Yes. Rick, so in terms of Q4 guidance, we're guiding at 13% to 14% growth. As Calvin mentioned, very pleased with the Thanksgiving weekend, still have about 2/3 of the quarter in front of us, so being prudent in our planning there. We haven't broken down specifics, but what I'd share is very strong continued double-digit growth in international and then on North America, high single digits.

I wanted to follow up on the prior question. The high single-digit North America sales guidance is below your typical algorithm [indiscernible] guidance. Can you talk to what you're seeing in the business or hearing from your customer that's informing this posture?

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, in terms of guest metrics, we're still seeing growth in both spend from new and existing guests. So still really pleased, I would say, overall, and just looking out over Q4, again, 2/3 of the quarter in front of us, so planning the business prudently. But I would say, overall, really pleased with what we're seeing in terms of guest behavior.

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.

Thanks, Matt. I'll talk about sort of just the trends through the quarter and then share gains, and then I'll let Meghan pick up the other part of it. I think you snuck in 5 or 6 questions there, but let's take our time.

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.

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?

Thanks, Adrienne. In terms of our international growth and the markets that -- regions that will contribute to the quadruple, it really is balanced across all. Clearly, China has emerged as the significant region outside of North America. But every market we're in within APAC and within EMEA is growing double digit, contributing to growth and has single-digit unaided brand awareness. So I believe every market will continue to contribute next year. We are leaning in on certain markets, continue to lean on China to accelerate that growth potential.

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.

Thanks, Abbie. I'll take the first part. We did pull some volume forward on Black Friday, making it available in early access to our central members. It was an initiative to have a membership of reward benefit. Exciting behind that was we saw a significant increase in app downloads, which was the way in which members needed to be able to access that and obviously did that at no incremental cost. So I think over 250,000 app downloads into that membership base. So it was a benefit of reward. We pulled some volume forward, which allowed our infrastructure and DCs to manage very well through the weekend.

And then in terms of inventory management, so we ended the quarter down 4% in inventory, and it was lower than our expectation of high single to low double-digit increase. That was driven by higher sales, the studio inventory write-off, some timing on receipts as well as FX. Important to keep in mind, we still have opportunity in our inventory turns relative to 2019. That is our goal over the longer term. And then looking at our inventory CAGR relative to 2019 versus our sales, we're relatively in line at the end of the quarter.

Paul, so in terms of KPIs in stores and e-com, we saw similar to the start of the year, very strong traffic performance, so up 20% plus in both channels. With that traffic, we're still pleased with the absolute conversion but seeing a little bit of a comp decrease in terms of conversion and then relatively stable basket size. We haven't shared any specifics. Obviously, we'll do that at the end of the quarter in terms of store growth for '24, but we remain committed overall to our store growth target in the low double digits.

The stores in China continue to exceed [indiscernible] as we open. So we're pleased with both the new stores we're opening. They are beating pro forma, both on a total revenue perspective, obviously, on a dollar per square foot, and that's across Tier 1, Tier 2, Tier 3 cities, which we continue to test into. We went back and optimized and continue to see opportunity, as Meghan alluded to, predominantly in Shanghai and Beijing to go back in and start optimizing and collating some of our locations.

Thanks. So right at this point in time, we're guiding to 13% to 14% for Q4. I'm just being mindful of the proportion of the quarter that's in front of us. We were really pleased with our Q3 performance in North America despite some macro challenges in North American market, still picking up share, still growing at 12%, so in line with Power of Three x2 target. We remain committed to that, I would say, for the year and as we move forward and managing from a portfolio approach perspective, any near-term pressures, but I think appropriate and prudent, given where we are in the quarter at this point.

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.

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.

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.