lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Second Quarter 2020 Earnings 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. Analysts who wish to join the question queue may press star then 1 on their telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Howard Toobin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

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, Megan Frank, SVP, Financial Planning and Analysis, and Alex Greaves, VP Controller. 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 of certain aspects of New England's future. These statements are based on current information, which we have assessed, but which by its nature is dynamic and subject to rapid and even abrupt changes. 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-K 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. Reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. The press release and accompanying quarterly report on Form 10-Q are available under the investor section of our website at www.lululemon.com. Before we begin the call, I'd like to remind investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the second quarter as well as our quarterly info graphic. Today's call is scheduled for one 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.

Thank you, Howard. I'm excited to be here with you today to provide an update on our performance for the second quarter, share our learnings as we continue to adapt to and navigate the uncertain COVID-19 environment, and highlight trends we're seeing in the business as we look forward to the back half of the year. The results we're sharing today demonstrate the strength of the Lululemon brand as we face these unexpected times and see the future of retail accelerate through an expansion of e-commerce and digital sweat offerings. Our product, built with technical innovation and performance fabrics, is ideal for enabling the work-from-home and versatile lifestyle that has grown exponentially in the COVID-19 world. Building upon these components, our acquisition of at-home fitness innovator mirror and our continued expansion globally demonstrates our ability to navigate the near term while planning for the long-term growth. Today I'm joined by Megan Frank, our SVP of Financial Planning and Analysis, who continues to be a supportive partner as she works with me and the team on strategic and operational finance, while our CFO search is ongoing. Alex Grieve, our VP and Controller, is also on the call today and will be available to answer your questions during the Q&A portion. Before I detail our results, I'd like to speak for a moment about the importance of diversity and inclusion at Lululemon. As I mentioned on our last call, we are committed to increasing our investment in education, behavior change, and diverse representation within our organization. The Black Lives Matter movement has ignited Lululemon in our collective, serving as a powerful catalyst to critically examine our culture and practices. Back in June, we created IDEA, a commitment to create real and lasting change through inclusion, diversity, equity, and action. As a company, we are focused on meaningful transformation, shifting our mindsets and behaviors, and living into our core value of inclusion every day. I look forward to sharing our progress on this going forward as the diversity of our workforce truly begins to reflect the global communities in which we operate. Let me turn now to our business performance in the second quarter, which exceeded our expectations. Total revenue increased 2%. Consistent with quarter one, we are not reporting same-store sales due to the significant number of stores that remain closed during the beginning of the quarter. Our e-commerce business continued to accelerate, with comps in quarter two increasing 157%. Gross margin declined 80 basis points, and our product margin was flat with last year. Adjusted earnings per share were $0.74 versus $0.96 last year, and our financial position remains strong as we end the quarter with $1.2 billion in total liquidity. As we continue to operate and move through the COVID-19 environment, we are seeing a shift in behavior in terms of working from home, sweating from home, and the increased importance of living an active and healthy lifestyle. These trends play to our strengths and set up an opportunity for us to continue to innovate and gain market share. We are learning how our guests are changing their behaviors, and we're adapting and engaging with them in new ways. We remain committed to our Power of Three growth plan, including the doubling of men's, doubling of e-commerce, and quadrupling international by 2023. But we also recognize that 2020 is likely an inflection point for retail and for Lululemon, with certain changes in guest behaviors likely to endure in the post-COVID-19 world. We believe Lululemon is uniquely positioned to engage with our guests when, where, and how they want based on the strength of our brand, the strength of our operating model, and the investments we've been making across the business. One of our key strengths is our omni-operating model. For the last several years, we've been investing in our ecosystem to ensure we have the capabilities to enable a seamless and enjoyable experience, whether guests want to engage with us virtually, in stores, or in the community. What we're learning now during the COVID-19 environment is that Omni means much more to our guests than simply enabling purchase transactions across our channels. While our recent investments in transactional Omni capabilities are clearly paying off, as evidenced by our recent results, we have begun to view other areas of our business, including sweat and events, through an Omni lens. Let me now share some of the details. As our stores continue to recover, our e-commerce business has accelerated from a 41% comp in quarter four of last year to 157% comp in the current quarter. Similar to quarter one, we've seen a healthy mix of new guests, existing e-commerce guests, and historically retail-only guests now shopping with us online. In order to support growth in the business, capture a potential further increase in demand in quarter four, and ensure our guests continue to receive the highest level of service, we've accelerated investments this year within our e-commerce channel. These investments include developing site enhancements, building our transactional omni functionality, and increasing fulfillment capabilities. These further enhancements were on our roadmap for the next two years, and given our e-commerce business has currently accelerated beyond our expectations, we prioritize and pull forward these investments. We're also continuing to grow our brand and engage with our guests across our international markets. In China, we're experiencing a strong rebound in store, with same-store sales up over 30%, coupled with strength in e-commerce, which grew over 130% in quarter two. And in Europe, a greater than 160% lift in e-commerce is driving our business, as guests are engaging with us more online than ever. When looking at store growth in our regions in quarter two, we opened nine new locations across Asia and Europe, including our 100th location in APAC, an exciting milestone for our brand in this key growth market. Let me shift now to speak about the recovery of our store business. While this period continues to be unpredictable, we currently have approximately 97% of our stores open across the globe to serve our guests. On average, our reopened stores are performing at 75% of last year's volume. As you know, our stores are small and designed to be an efficient use of space with high levels of traffic, which results in high productivity. While these are appealing attributes, the current capacity constraints understandably limit the number of guests who can be in the store at one time. While we're seeing traffic declines relative to last year and expect these constraints to endure at least through the end of the year, the underlying health of our brand remains strong. Guests are patiently lining up to get into our stores, both physically and through our virtual tools. Our product continues to resonate well as evidenced by the strength of our e-commerce channel. And while we expect productivity for stores that we've reopened to remain consistent with the current levels for the remainder of the year, we still expect to grow our top line in quarter three and quarter four. We continue to believe physical stores are and always will be an extremely important part of our ecosystem. From a sales standpoint, our stores are highly productive, and they enable so much more than simply the purchase of apparel by our guests. Our stores are our local hub and communities across the globe, gathering spots for our ambassadors and our connection to local studios, facilitate e-commerce transactions via our ship-from-store and buy-online pickup in-store capabilities, and are a portal to bring new guests into our brand, particularly men. This year we plan to open 30 to 35 net new stores while also accelerating our seasonal store strategy. In quarter two, we operated just over 50 seasonal stores, and we plan to increase to approximately 70 in the second half of the year. Our strategy this holiday will include seasonal stores in key centers and markets where we have existing stores to help us mitigate the current capacity constraints. That being said, we're building new and leveraging our current transactional Omni capabilities to ensure a quick and seamless shopping experience for both our store and e-commerce guests. Some of our actions include, first, we have evolved our buy online, pick up in store functionality to buy online, pick up at curbside. Second, we have enabled virtual wait lists so guests no longer have to wait in line and instead can be notified via text when it is their turn to enter the store. This functionality has been particularly well received. In the month of August alone, we had nearly 400,000 individual guests utilizing our virtual waitlist across nearly 280 locations where we implemented the technology. Third, we have continued to expand the number of our Omni educators who receive special training enabling them to help guests in-store and virtually through our Guest Education Center. And fourth, We continue to offer our digital educator and virtual concierge programs, and both initiatives continue to be well-received by guests. This innovation demonstrates our consistent ability to be agile and anticipate the evolving needs of our guests. We've also enabled Omni Sweatlight capabilities to help our guests stay active, both physically and digitally. Many of our ambassadors have been offering live streams on our social channels, and we now offer digital content as part of our membership program in the cities where our tests are underway. I'm also excited that in August, we were able to convert our annual Seaweeds half marathon into an extremely successful virtual event in which over 23,000 people from more than 100 countries participated, including myself. We partnered with the running app Strava and offered a 10K distance in addition to our half marathon. We also curated virtual training programs for both races to help runners prepare and compete at the height of their ability. Shifting now to product innovation, our guests are now working and sweating from home more than ever, and we continue to be there for them with merchandise that offers versatility and flexibility powered by the technical innovation of Science of Field. I'm excited to share the ways in which we are making our assortment relevant to more of our guests. Last month, we expanded our On the Move collection with the introduction of new pant styles for both women and men, supported by our Every Day is a Workout campaign. These styles leverage our expertise in technical construction and developing technical fabrics, but they were explicitly designed for out-of-studio use. For women, we launched the City Sleek 5 Pocket, powered by our WarpStream fabric, and for men, we rolled out the Bull Line Pant in our new Utility-Tacked fabric. Initial response to these new styles has been strong. In particular, the City Sleek has exceeded our expectations by a factor of two, was the number one performing style in the company during the initial days of the launch, and we're chasing into additional inventory to help keep up with demand. While we will always lead with performance-based apparel and technical innovations, we see continued opportunity to grow the on-the-move portion of the business for both women and men. I'm also pleased with our move toward more inclusive sizing. This is an important step forward for Lululemon, and I'm excited that later this month we will start to offer some of our core styles in sizes 0 to 20, and this is just the beginning. By the end of 2021, the majority of our women's assortment will be available in our more inclusive size range. When looking at the men's business overall, we saw a sequential improvement relative to quarter one, although it lagged behind the growth in the women's business. As the work-from-home and sweat-from-home environment continues, we have seen our male guests respond more enthusiastically to shorts, sweats, and hoodies. Our merchant teams are chasing into these categories so we can maximize these businesses based on the current shift in demand. And our brand teams are focused on continuing to raise awareness among men, and our dual-gender lines such as On the Move provide an opportunity to grow in both the men's and women's business. Our opportunity within product remains in the early innings. We have only just begun to leverage our work within the science of fuel innovation platform, and we have ample ways to expand our key categories, run, train, yoga, and on the move. In addition, the Lululemon brand is positioned well to take advantage of the shifts we're seeing in the marketplace towards apparel that provides versatility, comfort, and technical innovation. Before shifting to our outlook, let me update you on two of our OmniGuest initiatives, mirror and membership. Mirror is a further example of how we're considering and evolving new aspects of our business through an omni lens. As you know, we closed on the Mirror transaction in early July, and I couldn't be more excited with the potential Mirror brings to Lululemon and the opportunities Lululemon brings to Mirror. As I stated when we announced the acquisition, Mirror is a standalone revenue-generating company, and their management team will continue to operate the business from their offices in New York. There's no need for heavy integration work, and we have begun the process of bringing them into the Lululemon family so that we benefit from our collective strengths. We're on track to begin offering the mirror in 10 to 15 Lululemon stores in the United States by early quarter four, when we'll also begin leveraging our digital channels to help build the brand awareness. From a financial standpoint, we continue to believe that mirror will be modestly dilutive to earnings this year. We plan to ramp up marketing and advertising spend in the second half of the year to fuel Mirror's momentum during the holiday season and into 2021. The initial work we're doing with Mirror during the upcoming fall season will set the stage for next year when we expect to be more aggressively leveraging the power of the Lululemon ecosystem to grow the Mirror business. Megan will provide you with more details in a moment. Shifting to membership, I'm excited to announce we are continuing to test our program in Edmonton, Chicago, and Denver. And starting this week, we'll also bring the program to our guests in Toronto for the first time. The membership program continues to celebrate community connection and provides a range of offering, such as special product dedicated online sweat classes and inspiring guest speakers to extend the Lululemon experience. With COVID-19 in mind, I'm proud of how our teams have evolved to a virtual event format with plans to return to studio classes and physical gatherings once safe to do so. As we continue to test and learn through membership and integrate mirror into the Lululemon family, we are gaining valuable insights on guest behavior that can help us further improve our offering and enhance the ability of our guests to fully experience the sweat life. Let me now share our thoughts on how we're approaching the second half of the year. Megan will share some specifics regarding our financial outlook, but I wanted to provide you with our planning framework for the fall season. Our starting point is that the environment remains uncertain. COVID is not yet contained in many of the markets where we operate, and while we expect the recovery to advance, we continue to plan for multiple scenarios this fall and particularly for the holiday season. We have pulled forward several IT investments related to our e-commerce business, increased our DC and fulfillment capabilities, and are continuing to grow the ranks of our Omni educators to ensure our guests receive the service and experience they are accustomed to should our e-commerce business spike even more in quarter four. We continue to work with our vendors to ensure the proper timing of upcoming merchandise flows and can pull forward deliveries of select styles should unanticipated demand develop. And we continue to protect our downside by tightly managing expenses and the outlay of capital. Let me now turn it over to Megan.