lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. third quarter 2020 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 Cuban, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Thank you, and good afternoon. Welcome to Lululemon's third quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO, Celeste Berloin, President of Americas and Global Guest Innovations, Megan Frank, CFO, and Alex Green, 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 Lululemon'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 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. In addition, the comparable sales and store productivity metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the investor section of our website, 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 third quarter, as well as our quarterly infographic. 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 am pleased to speak with you today about our performance in the third quarter, which exceeded our expectations. I'm incredibly proud of how our teams around the globe have continued to execute on the strategies that underpin our Power of Three growth plan as we navigate this unprecedented year. Joining me on the call today is Celeste Burgoyne, who was recently appointed to serve as our first president and will provide an update on our Omni guest experiences. In addition, Megan Frank, who was recently promoted to Chief Financial Officer at will speak to our third quarter financials and provide some color on our outlook for the fourth quarter. And Alex Greve, our VP Controller, will be available for Q&A. On today's call, I will provide an overview of our third quarter results and share some highlights with you from our Thanksgiving week. Then I'll give an update on our international business and product innovations, including Mirror, before turning the call over to Celeste and Megan. Let me begin by providing an overview of our business performance in the third quarter. Total revenue increased 22% to $1.1 billion, driven by a combined comp increase of 18%. Revenue increased across our major regions with growth of 19% in North America and 45% in our international markets. In the store channel, productivity increased to 82% of last year's volume, better than our expectation of 75%. Our e-commerce business remained strong with comps of 93%. In addition, gross margin increased 100 basis points. And adjusted earnings per share increased 21% to $1.16 versus $0.96 last year, significantly ahead of our expectations. I'm also excited that in fiscal Q3, our share performance continued, with our strongest quarterly market share gain in recent history. We grew our retailer market share of the U.S. adult active apparel market by 1.4 points over last year, according to the NPD Group's consumer tracking service. In summary, these results demonstrate that our brand is becoming stronger, and I'd like to touch on the six key drivers of our performance this quarter. First, Many of our loyal female guests are shopping our entire collection, extending beyond bottoms as we continue to innovate our offering across categories, including bras and on the move. Second, we continue to deliver a steady pipeline of new products to our guests every month as we leverage our science of field development platform. Third, Our teams managed our inventory flows extremely well through the COVID store closures to ensure we had ample inventory to support the increased demand. Fourth, we provided pay protection to our educators to protect their well-being, which ensured we were ready to reopen stores and successfully launch new guest-facing services, such as our virtual waitlist, appointment shopping, and mobile POS. Fifth, We have been investing in our digital capabilities and enhancing the experience of our e-commerce sites for several years, which enabled us to quickly respond to the accelerated shift to Omni this year. And finally, we successfully showed how well Lululemon translates and connects with guests across cultures and geographies, with growth in both North America and around the world. These drivers will continue to carry us forward into 2021 and beyond. as we work to fuel our momentum. Before providing broad comments by category and channel, I wanted to also touch on our performance over the recent holiday. For the week that included Thanksgiving and Black Friday, we delivered a record-breaking performance in our e-commerce channel, which offset declines in store traffic. Response to our full-price offering was extremely good, with many of our classic franchise items, such as the Align Pants, the Define Jacket, and the ABC Jogger, as well as new franchises including Wonder Train and Invigorate, all performing well. And our markdown penetration was relatively in line with last year. There are several large volume weeks ahead for us in the fourth quarter, and we recognize that uncertainties remain due to COVID-19. As we have throughout the year, we continue to plan for multiple scenarios, yet the unknowns make forecasting the business more difficult. That being said, we are focused on the levers we control, such as pulling forward our holiday messaging and leveraging the key drivers I mentioned a few moments ago that led to our success in the third quarter. We are excited about how the holiday season has begun with continued demand for our product offerings, and we have confidence in our ability to execute during this period. Switching now to international, I'd like to start by mentioning that Andre Mastrini will join Lululemon in January to serve as our new EVP international. He will have responsibility for leading and driving growth in our international markets, including China and the broader APEC and EMEA regions. I speak for myself as well as our leaders in the regions when I say I'm thrilled to have Andre as part of the team. He's joining us at an exciting time in our international business. and we remain committed to quadrupling revenues from 2018 levels by 2023. Looking at our international business in the third quarter, I'm especially pleased that total revenue increased 45%. In APEC, business was strong across all major markets, and particularly in China, where total revenue increased by more than 100%. This was driven by the performance in both our store and e-commerce channels. Over the last two years, we have tripled the number of stores we operate in mainland China, and I'm thrilled with how our brand is resonating across both Tier 1 and Tier 2 cities. In Europe, guests continue to actively engage with us online as our store traffic remains below last year's level. E-commerce comps increased by nearly 160%, and for the second quarter in a row, these results more than offset declines in our store channel to drive positive revenue growth in the region. Shifting now to product innovation, we continue to leverage our science of field platform to bring new technical merchandise to our guests. Since the early days of the pandemic, our guests have been demanding technical product that offers comfort and versatility as they spend more time working and sweating from home. Within women's, business was particularly strong as we saw a return to pre-COVID growth rates. In total, women's grew 22% with strength in both tops and bottoms. Within men's, total revenue grew 14%, which represents further improvement from the trends in Quarter 1 and Quarter 2. I'm excited that we're seeing strength in the bottoms category, with our male guests returning to our fixed waistband styles, including ABC and Commission, while our joggers also continue to perform well. And within accessories, we will continue to lean into our strong performance with opportunities to grow our equipment offerings with new products. As an example, in the coming months, we will launch a 3D yoga mat, one of the first in the world designed with a textured surface to better enable body alignment during your practice. Looking forward, I'm thrilled with our pipeline of innovation. For the holidays, we are offering special edition product in many of our key franchises. And over the course of 2021, you'll see us scaling the sciences field to bring more technical innovations across our major categories. As I've said before, we're in the early stages of growth within our product innovation pillar, and we have ample ways to expand our key categories of run, train, yoga, and on the move. I'm also happy to share an update on Mirror. Since the acquisition five months ago, we have made steady progress on the integration, and we are pleased with the brand's performance in Q3, and with how the holiday season has begun. We continue to expect Mirror to generate in excess of $150 million in revenue in 2020. Over the course of the third quarter, we began to leverage the Lululemon ecosystem to raise awareness for Mirror. We launched a dedicated Mirror tab on our USECOM site, including a hyperlink for guests to complete a purchase transaction, and we have included Mirror in our email marketing campaigns. Also in November, we created Shop and Shops in 18 of our U.S. locations to test and learn how to refine our in-store selling experience, and we plan to expand this to several hundred stores next year. One of our store managers in Santa Monica described it best. Our guests are blown away by the sleek design and functionality of Mirror that is as innovative and unique as our own products. We are just at the beginning of our journey with Mirror, and we are thrilled with the current momentum and excited with what this can mean for next year and beyond. Before turning the call over to Celeste, I want to highlight the launch of our impact agenda in October. This is our first long-term strategy focused on how Lululemon will become a more sustainable and equitable business, minimize harm to the environment, and accelerate positive change both inside and outside of our company over time. To help us deliver on these commitments, Stacia Jones joined Lululemon this quarter and will lead our work related to inclusion, diversity, equity, and action, what we call IDEA. Stacia has extensive experience in this area, including having served in the role of Chief Diversity and Inclusion Officer. I look forward to sharing with you our progress on the impact agenda and IDEA commitments going forward. Let me now turn it over to Celeste to speak to our Omni Guest Experience Pillar. Our approach toward guest engagement and our ability to deliver unique experiences across both physical and digital environments is a key competitive advantage for Lululemon. Celeste?