lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. fourth quarter and year-end 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 one 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 fourth quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO, Sun Che, Chief Product Officer, Megan Frank, CFO, and Alex Greve, VP and 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 by which 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 the call, we will present both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in our annual report on Form 10-K 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 annual report on Form 10-K are available under the investor section of our website at 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 operating statistics for the fourth 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.

Thanks, Howard. I'm excited to be with you today. I'm proud of how Lululemon navigated this past year and delivered for our employees, guests, and shareholders. I believe 2020 has been a pinnacle moment for Lululemon as we developed and delivered exciting new innovations that create even more opportunities for us into the future. Our continued growth demonstrates our ability to win both before, during, and after COVID-19. Our business has many strengths and growth opportunities. We are just in the early innings of our potential. In fact, the pandemic has accelerated our progress and the opportunities we have within each of our Power of Three growth initiatives. Over the course of today's call, we'll discuss our strong performance in the fourth quarter and the full year, and we'll also share our roadmap for 2021. I'm pleased to be joined on the call today by Sun Hsieh, our Chief Product Officer, who will provide an update on our product innovations. Megan Frank, our Chief Financial Officer, who will speak to our fourth quarter financials and offer our guidance outlook for quarter one and the fiscal year of 2021. And Alex Greve, our Controller, will also be available to answer any questions that you may have during the Q&A portion of the call. Let me start now by looking at 2020. Last year was another good reminder of the strength of our core product assortment. Even as guests' apparel needs evolved throughout the year, our positioning around technical athletic product remained extremely relevant. People will always want to sweat and stay active, and our focus on innovative performance fabrics will continue to deliver unique solutions. We continue to execute against our growth plans, culminating with several notable wins in the fourth quarter. Megan will share the financial metrics with you, but I wanted to give you a couple of highlights. Starting with our e-commerce performance, which grew 92% on top of 41% growth in the previous year. We grew our women's business by nearly 20%, fueled by strong performance across all categories. And our international revenues grew 47%, with growth across all regions, indicating just how well our brand translates across cultures and geographies. When looking at the full year, a few accomplishments really stand out for me. We grew total revenue by 11% in 2020, and with our second half growth accelerating to 23%, in the full year, we more than doubled our e-commerce business. We continue to bring product innovation to our guests, including a relaunch of our Everlux fabric, our recent launch of DrySense, as well as further strengthening our assortment and our key activities of run, train, and yoga. The guest response was very strong across all these product initiatives, and we'll continue to strengthen our pipeline of innovation in 2021 and beyond. We gained market share over the course of the fiscal year, as indicated by our nearly one-point gain in retailer market share of the adult activewear market in the U.S., according to the NPD Group consumer tracking service. This was our largest annual share gain in recent history and was driven by gains in both men's and women's. We led powerfully through COVID-19, providing pay protection to our employees, creating our ambassador relief fund, and honoring our financial commitments to both landlords and vendors. We successfully completed the mirror acquisition. We accelerated our work related to inclusion, diversity, and equity. We released our first impact agenda, which details our goals related to how we will create positive change to support people, create access to wellbeing and our sustainability initiatives. And we achieved all of this and strengthened our financial position, ending the year with 1.2 billion of cash. When looking back at 2020, the fundamental drivers of our performance have been the same for the past three years. And the pandemic has only accelerated their importance in the lives of our guests. In addition, the trends that existed before the pandemic are even more important now and will only continue to grow post the pandemic. For example, people wanting to live an active and healthy lifestyle combined with the growth in demand for technical athletic apparel that performs. And finally, the innate need to feel part of a community. and to share a human connection with one another. Even with these growing trends, you might have expected our on the move and casual products to have had a compelling impact on our success in 2020. However, that was not the case. In fact, our product design for performance represented approximately 67% of our total merchandise mix last year, which was a four point increase in penetration from the previous year. We keep creating unique and differentiated product solutions for our guests and their evolving needs. This success in developing technical innovation is guided by our proprietary science of field platform. Consumer and health trends are only increasing, and we are in the early innings of our growth potential across channels, across regions, across genders, and across activities. So let's look at the year ahead. The foundational strategies of our Power of Three growth plan remain unchanged and continue to drive the innovation across the business. I'll now touch on our plans for stores, e-commerce, product, international, and mirror. Our stores and the physical connection they provide to our guests remain incredibly important to us and are an integral part of our Omni vision. In 2021, we'll be implementing a number of exciting initiatives, starting with the initiative to kickstart our stores. As operating constraints are removed, our teams are focused on accelerating our store productivity. We have a number of guests that only shop our stores, and we are focused on reengaging with them at the frequency they shopped with us before COVID-19. In addition, we have a significant number of new guests who engaged with us for the first time online last year. We are focused on extending our Omni relationship with them so they can more fully experience the brand and community connection our stores offer. We will also be expanding our store base. We continue to be underpenetrated from a brick-and-mortar perspective across all our markets, including North America and around the world. We benefit considerably from the agile retail formats, and in 2021, we will fully leverage this strength opening 40 to 50 new mainline Lululemon locations globally. And finally, we will continue to enhance our Omni capabilities. I'm excited to build upon the success of these new strategies we rolled out toward the end of last year, including curbside pickup, virtual waitlist, and the appointment shopping. These became guest favorites that elevated our in-store experience and demonstrated an area of opportunity going forward. I look forward to sharing more with you next quarter as Celeste Burgoyne and her team demonstrate the power of our stores. 2020 was an outstanding year for our e-commerce business as guest behavior accelerated. As a result, we are now able to reevaluate how high is high for our digital growth, especially in our international markets. 2020 has reset our expectations for what is possible. For example, Our digital comps more than doubled for the full year and grew 92% in the fourth quarter, driven by a healthy combination of increases in traffic and conversion. These results were significantly ahead of our initial expectations and enabled us to achieve three years early our 2023 goal of doubling our e-commerce revenue from 2018 levels. We now have a very meaningful e-commerce business. that is driving both new guest acquisition as well as strengthening our omni guest relationships. Our channel investments will continue to focus on elevating the guest experience and further strengthening our foundation while we also test and learn new capabilities. The relationship we have with our guests in store is unique and special for our brand. And our e-commerce vision is to create our online version of that relationship as well. Specifically in 2021, our key e-commerce strategies are to elevate the guest experience by introducing more immersive category and franchise shops, investing in our product details page, and enhancing our storytelling to bring the science and feel to life with new types of content and creative. We will continue to drive conversion by continuing to optimize the guest experience with further enhancements to search, browse, checkout, personalization, and payment methods. We will accelerate our investments into the strength of our international business as we expand our omni capabilities and localize the guest experience through local payment and delivery options. And we will keep investing to scale our foundation and enhance the guest experience by evolving our BOPIS and curb pickup capabilities, piloting same-day delivery from our stores in nine key markets, and refining and scaling our digital educator program. Turning now to product, I couldn't be more excited with the pipeline and innovation the teams have on tap for 2021 and beyond. As I mentioned, we launched several new items last year, a combination of new fabrics, additional offerings in our key activities, as well as ongoing enhancements to our core assortments. What's exciting about our product launch strategies is that they are bigger than just any single item. These launches, whether new franchise opportunities or strengthening our position within our key activities, provide significant future growth opportunities that we will keep innovating on. Building upon this momentum, in 2021, we will continue to leverage the science of field platform to bring new technical solves across our assortments for both men and women. We are launching our dual gender run campaign this week. We're also introducing new tops within train and on the move. We are further expanding our core franchises, including Align. And we are building towards the early 2022 launch of our technical footwear, which will allow us to provide guests with head-to-toe solutions. We expect another strong year of growth in 2021, with exciting launches planned across men's, women's, key categories, and activities, all driven through innovations. We will have more to share with you as the year proceeds and Sun will speak to you further in just a moment. I would now like to shift to our business outside of North America. In 2020, our international revenues grew 31% and we remain on track to quadruple the business from 2018 levels in 2023. At only 14% penetration, we are in the very early days of our journey outside of North America. The growth is incredibly strong and we are showing how well our brand translates across cultures and geographies. Our key 2021 strategies include organizing into three regions led by our new EVP of international, Andre Mestrini. The regions, EMEA, Asia Pacific, and China, each have respected regional leaders with clear accountability and responsibility for driving distinct growth plans. In EMEA, this includes building upon the strong online growth in 2020, as well as leaning into key markets such as Germany and the United Kingdom. In Asia Pacific, the opportunities include growing in critical markets such as Korea and Japan, and in our long-established market of Australia and New Zealand. And in China, We will open our largest number of new stores this year, with the goal of adding 15 to 20 stores across both Tier 1 and Tier 2 cities in the mainland. The health and wellness trend is growing in this market, yet remains nascent, so there are considerable opportunities ahead for us. And on a regional basis, similar to how we currently operate in North America, we'll have a singular view of inventory by the end of the year. Not only will this enable us to leverage inventory across channels, but it will pave the way for the implementation of transactional Omni capabilities, starting with ship from store in the UK and Australia by the end of the year. I look forward to having Andre join us on some upcoming calls. I will now turn to the newest member of the family, Mirror. We are very pleased with the performance of Mirror in quarter four. and over the course of the entire year as well. Mirror generated approximately 170 million in revenue in 2020, including the period prior to our acquisition. I'm excited about the long-term outlook for the at-home sweat industry. We started the process to purchase Mirror before the global pandemic began because we believe in the opportunity to strengthen our community, further connect with our guests in their homes, and provide new solutions for their workout needs. I don't expect the pandemic tailwinds to disappear once mass vaccinations have occurred. Guests were seeking more convenient at-home options before COVID-19, and they will continue to seek these options post the pandemic. And simply put, Mirror is the most versatile at-home fitness platform available on the market today. We offer more live classes across more workouts than any other product. And our guests are responding with more than two users per household and the average member taking over six different types of workouts each month. This versatility drives frequent engagement and truly positions Mirror as having something for everyone within every household. This unique position will continue to translate into meaningful growth as we strengthen our member relations further engage with our community, and drive financial performance. And we plan to continue to invest further into this advantage by adding even more live classes across more workout options, while also investing in the overall guest experience in building this powerful community. I would like now to share some of our key 2021 mirror strategies, starting with studios. We are adding two more production studios, so that by the end of the year, we will have three studios allowing us to triple the number of live classes compared to our current offering. We now have 15 instructors on Mirror with plans to add up to seven more across multiple workout activities. And all instructors are Lululemon ambassadors. We'll continue to launch community engagement initiatives. We recently added the community camera feature, allowing members and instructors to see each other during the workouts. This month, we added the face-off feature, which allows two members to compete head-to-head during a class. We are kicking off our international expansion plans, starting with Canada, launching in time for the holiday period this year. And we will continue to leverage the Lululemon ecosystem to raise awareness for Mirror, which remains one of our biggest opportunities. We will expand our shop-and-shop strategy to more than 200 locations in North America this year. We have many more exciting guest-facing innovations planned that we'll share throughout the year. Bryn Putnam and her team at Mirror continue to drive these exciting results and initiatives. I'm very pleased with the performance of Mirror, a business that launched only three years ago. We see the opportunity to strategically invest in the business further by continuing to innovate the guest experience, drive guest acquisition, and leverage the Lululemon ecosystem for further market expansion. Megan will provide some additional financial detail in a few moments, but we're anticipating another year of strong growth for MIRROR with revenue expected to increase 50 to 65% to 250 to 275 million in 2021. Let me now turn it over to Sun. But before I do, I want to acknowledge the incredible work this team continues to create. I'm proud of how Sun and the team adjusted plans this past year to ensure a strong flow of product newness in 2020. In March and April last year, our teams re-evaluated and re-flowed our merchandise buys for the second half of the year. We continued to bring a new innovation to our guests while we leaned into our core styles and reduced the more seasonal elements of the assortment. Looking forward, we're using our learnings from last year to inform future buys. I'm excited with our product strategies that include an increased flow of newness and technical innovations relative to last year. Sun, over to you.