lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica second quarter 2021 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 stars and 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 second quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO, Megan Frank, CFO, and Celeste Berloin, President, Americas, and Global Guest Innovation. 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 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. A 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 in constant dollars. The press release and accompanying quarterly reports 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 our 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 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, and I'd like to welcome everyone to our second quarter earnings call. Our momentum continued into this quarter and our results remain robust, with revenue growing more than 60% when compared to the same period last year. And on a two-year CAGR basis, we are pleased to see an acceleration relative to our first quarter. These results reflect the ongoing strength across all major areas of the business. Our stores continue to rebound, generating a two-year revenue CAGR of 9%, which is ahead of our expectations. We delivered positive growth in e-commerce, which is even more impressive given the strong performance one year ago, and we continue to deliver at a high level across all major categories and geographies. I also want to give some context around these numbers in the quarter-after-quarter performance we have been delivering. We are updating our guidance for the full year, and based upon this revised forecast, I am pleased to share that we will surpass our 2023 revenue target by the end of this year, two years ahead of schedule. And we achieve these results based upon our performance before, during, and as we emerge from COVID-19. A few more details related to these results. In 2020, we achieved our goal to double our e-commerce business. This year, we will likely achieve the goal we set to double our men's business, and we remain on track to quadruple our international business by 2023, if not sooner. I am proud of our leaders and teams for enabling us to meet and exceed these goals. As I've said before, Lululemon remains in the early innings of our growth story, and I continue to be inspired and excited with the momentum we're seeing across the business. Results of this caliber enable us to now develop our next five-year growth plan, and we'll come back to you next year with an updated view of what the future can hold for Lululemon. Looking at the second quarter, our results reflected broad-based strength across our channels, regions, and product categories. A few key metrics tell the story. First, we grew total revenue 28% on a two-year CAGR basis to $1.5 billion. This growth rate continues to outpace our three-year CAGR of 19% leading up to the pandemic and also represents an acceleration from the 25% two-year CAGR we reported in quarter one of this year. In addition, our revenue increased across each of our major regions up 26% in North America and up 43% in our international markets, both on a two-year CAGR basis. Second, we saw a further improvement in our brick and mortar channel with open stores generating productivity in line with 2019. I'm very pleased to achieve this milestone faster than we anticipated. Third, even with the recovery in our stores, our e-commerce business remains solid. Comps increased 4% on top of the 157% increase last year. And finally, I am pleased to share that our adjusted earnings per share for the quarter were $1.65 versus $0.96 in 2019, which is significantly ahead of our expectations. Let me now share more color on our second quarter results, starting with product innovation. From a performance standpoint, our momentum continued across categories with women's revenue increasing 26% and men's growing 31% on a two-year CAGR basis. From a product standpoint, I'd like to take a moment to highlight two key launches, the Air Support Bra and our latest yoga franchise, Instill. Bras remain an important expansion opportunity for us. Thanks to our unique innovations across both fabrics and construction, Empowered by our proprietary research, we're very excited about our product positioning, and we know that bras is a wonderful category to drive loyalty with our guests. Currently, the category represents mid-single digit penetration, and we see an opportunity to grow this category into the low to mid-teens in the coming years. This quarter, we launched the Air Support Bra, our most tested bra to date, which was developed following five years of advanced research and development. It's made from a proprietary ultra-lue fabric and expands our offering into the high-impact training category. As I've mentioned before, Lululemon's unique approach to product innovation is driven by our science-to-feel innovation platform. With this strategy firmly in place, we've introduced fabrics and products that engineer specific on-body sensations. Our popular Align franchise offers our most distraction-free and weightless sensation and we've expanded to include tops and bras in addition to our popular tights. Just last week, we continued to build out our yoga offering through the introduction of the Instill franchise. Made from our newest innovation in technical performance fabric called Smooth Cover, this fabric offers our hug sensation, which provides incredible support through every pose in your practice. It's a powerful and distinctive companion to our hugely successful Align product line, and we will further solidify our leadership position within the yoga category. Last October, we launched our impact agenda, which outlines our strategies to address critical social environmental issues over a multi-year period. I'm proud of our recent announcements to develop advanced raw materials that will help us live into our goals and create a healthier world. These include our participation in the Milo Consortium, that will allow us to make products using an infinitely renewable material made from the root structure of mushrooms. We expect to launch our first products using Milo next year. Our partnership with Lanzatech, a biotech company which allows us to create the world's first yarn and fabric using recycled carbon emissions. And just a few weeks ago, we announced our multi-year collaboration with Genomatica, a recognized leader in sustainable materials to create a lower impact plant-based nylon. I'm excited with these three new partnerships and it's just the beginning of Lululemon's commitment to be a leader in the industry related to product sustainability and innovation. I would now like to speak to our supply chain and the issues facing the entire industry. Another wave of COVID-19 and related factory closures in Vietnam Ongoing issues at the ports and reduced air freight capacity are contributing to some disruptions within the supply chain as well as increased costs. We are monitoring this closely and leaning into the agility of our supply chain, the strength of our planning and allocations team, and the powerful partnerships with our vendors to help mitigate the risks where we can. Our business was particularly strong in quarter two and our guidance calls for momentum to continue in the back half of the year. But I think it's fair to say that our business would have been even stronger without these challenges facing the industry. Megan will have more to share regarding inventory and costs in a few moments. Let me now shift to Mirror. We continue to be pleased with the performance of Mirror, and let me highlight several initiatives we have on track for this year. We now have Mirror Shop and Shops in 150 Lululemon stores. and our plans call for 200 shops in time for the holiday season. We will soon introduce Mirror to guests in Canada, where Lululemon has an impressive level of recognition. We recently opened our second production studio in New York, allowing us to double the number of live classes. And Mirror will launch a new e-commerce site in time for the holiday season this year. We are monitoring how macro factors currently impacting the costs of digital marketing are creating some pressure on customer acquisition costs at Mirror. We're enthusiastic about the opportunities that exist for the business. We'll continue monitoring the rising costs associated with CAC while we move ahead with launching exciting new innovations and leveraging the synergies Lululemon brings to the relationship. Combined, these give us a unique strength to keep growing Mirror. We will be competitive to attract new members, and we will continue to take a measured and responsible approach to the business. We are playing the long game and have much to unlock in the coming years. We're also excited about how Mira can be the vehicle through which we offer long-term benefits to our guests, such as membership programs and special experiences. Given this strategic opportunity, we will suspend our membership test that has been underway and apply the learnings to how we build out the mirror platform for guests. The learnings from our membership test are considerable. Some examples include digital sweat classes and community events were top drivers of overall program engagement. Guests want to engage deeper with us and each other, and they are willing to shift into the digital space to do so. And the program was embraced by men at a higher rate than we were expecting. These learnings were integral to our decision to complete the mirror acquisition and hold true today. We look forward to sharing more with you on the evolution of our loyalty programs at a later date. Switching now to international, our sales trends continue to be robust with all major regions generating strong double-digit sales growth on a two-year CAGR basis. We opened eight stores outside of North America in quarter two and remain on track to open 35 to 40 stores this year internationally. As you know, we also see continued growth opportunities within North America, and I am pleased to now hand it over to Celeste, who will share some additional details with you on our stores and e-commerce business. Celeste?

Thank you, Calvin. I'm happy to be on the call today to speak to our Omni Guest Experience Pillar and to share some additional details on our second quarter performance. Looking at our store channel, total revenue increased 142% versus last year and 9% on a two-year CAGR basis. Traffic was strong and increased over 150% versus last year. In addition, I am thrilled that we are able to achieve productivity in our open stores equal to levels we saw in 2019 and happy to see these results sooner than we expected. This performance not only speaks to the success of our Kickstarting Our Stores initiative and the strength of our merchandise assortment, but it also speaks to our educators and store teams who bring our brand to life every day for our guests. Now let me take a moment to share with you a few highlights from several exciting community activations we recently hosted throughout the quarter. In Atlanta, we co-hosted a charity event created in partnership with leading Atlanta fitness influencers, Mecca Day and EJ Houston. Guests took three back-to-back classes and Lululemon matched all ticket sales, which were then donated to the Black Women's Health Imperatives. In Chicago, beginning in July and running through October, Lululemon is partnering with Urban Juncture Foundation to host a community pop-up on Chicago's south side in the Boxville Marketplace. Boxville is a very unique collection of shipping containers designed as a space for the community to gather and local businesses to engage in commerce. Our activation pairs our ambassadors with fitness instructors from the local community to lead over 140 complimentary fitness classes. The turnout for these classes has been really positive. And I'm really excited that we're celebrating the 10-year anniversary of our iconic CWIES event with a virtual run later this month. We are really proud to be able to bring the Lululemon brand to our guests in these unique and compelling ways, and we are excited about what is yet to come. Switching now to e-commerce. As Calvin mentioned, sales trends remain positive with total digital comps up 4% in Q2. This result comes on top of the 157% increase in Q2 of last year, which benefited from our online warehouse sale, an event that we did not repeat this year. The enhancements we're continuing to make to our desktop and mobile sites, which include expanding our alternative payment methods, improved storytelling, more predictive search, and a more seamless checkout, all combine to continue to elevate the online guest experience. Before I hand it over to Megan, I'd like to speak for a minute on labor and what we're seeing regarding store and call center staffing. We have always supported and invested in our people. This was never more true than last year during the pandemic. We prioritized our people and kept our teams intact by offering pay protection, sick pay, and other key people investments. Not only were these initiatives the right thing to do for our people, but they kept our workforce whole and have enabled us to reopen stores with a full complement of educators and leadership teams. and they are directly contributing to the strong results we've generated over the last several quarters. That being said, we are carefully monitoring the current developments in labor markets, particularly in North America, and we remain committed to doing what's right for our store and DC teams. We've recently announced that we will raise the minimum base pay for our store and guest education center roles in North America, taking our new base pay to $15 to $17 per hour, depending on the location and role. Plus, all levels are eligible for a monthly bonus on top of base pay. Our teams are incredibly deserving of this new rate, and we feel it sets us up strongly going into what will be a busy Q4. In closing, I'd like to thank the entire Lululemon family, especially our teams in stores, in our guest education center, and in our distribution centers around the world. These teams are the heart and soul of our brand, and they are responsible for the elevated experience our guests enjoy each and every time they engage with us. We are so grateful for everyone's hard work and dedication, and for that, I'd like to say thank you. I will now turn it over to Megan.

Thanks, Celeste. Our momentum continued in Q2, with our top and bottom line results exceeding our expectations. Strong guest response to our merchandise offering and improving store trend and continued strength in e-commerce fueled our growth and contributed to our increased outlook for the year, which I will take you through in a moment. As Calvin mentioned, we continue to navigate industry-wide challenges with COVID-related factory closures, slowdowns at the ports, and reduced air freight capacity impacting our business as we move into the second half of the year. I'll share some of the specific impacts of these issues with you as I take you through our Q2 financials and our guidance. Despite these headwinds, we expect both strong revenue and EPS for the year, and we remain on track to deliver or in some cases even exceed our goals as set forth in our Power 3 growth plan. Let me now share with you the details of our Q2 performance. I will also discuss specifics on our balance sheet, including our cash position, liquidity, and inventories. Please note that the adjusted financial metrics I will share include the operating results of MIRROR, but exclude approximately $8.1 million of acquisition-related costs and their associated tax effect in Q2 2021, and $11.5 million of acquisition-related costs and their associated tax effect in Q2 2020. You can refer to our earnings release for more information and reconciliations to our gap metrics. For Q2, total net revenue increased 61% to $1.5 billion, above our expectations of $1.3 to $1.33 billion. This included a 63% increase in North America and a 49% increase in our international business. On a two-year CAGR basis, total revenue increased 28%, with North America up 26%, and international increasing 43%. In our digital channel, revenues increased 66% on a two-year CAGR basis, above our expectations of approximately 55% growth. Ecom contributed $597 million of top line, or 41% of total revenue. In our store channel, sales increased 9% on a two-year CAGR basis above our expectations of approximately flat. Productivity in stores returned to 2019 levels, representing continued improvement versus 88% productivity we realized in Q1 of this year. At the end of the second quarter, we had 95% of our stores open. Square footage increased 8% versus last year, driven by the addition of 28 net new stores since Q2 of 2020. During the quarter, we opened 11 net new stores. Gross profit for the second quarter was $843 million, or 58.1% of net revenue, compared to 54.2% of net revenue in Q2 2020, and 55% of net revenue in Q2 2019. Our gross margin increase of 310 basis points relative to 2019 was driven by 290 basis points of leverage on occupancy, depreciation, and product team costs, and 60 basis points of favorability in foreign exchange. which was partially offset by a 40 basis point decrease in product margin, driven by a 120 basis point increase in air freight related to COVID-19. I would also note that markdowns declined relative to 2019. Moving to SG&A, our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were 541 million, or 37.3% of net revenue, compared to 39.1% of net revenue in Q2 2020 and 36% of net revenue in Q2 2019. The leverage in the quarter versus Q2 2020 resulted from the sales increase relative to the COVID-impacted quarter last year. The deleverage relative to Q2 2019 is the result of consolidation of MIR's results this year, but not in 2019, and deleverage on foreign exchange. Suggested operating income for the quarter was $299 million. or 20.6% of net revenue compared to 15% of net revenue in Q2 2020, and 19% of net revenue in Q2 2019. Adjusted tax expense for the quarter was $83.5 million, or 27.9% of pre-tax earnings compared to an adjusted effective tax rate of 28.9% a year ago. The reduction relative to last year is due primarily to deductions related to stock-based compensation. Adjusted net income for the quarter was $216 million, or $1.65 per diluted share, compared to adjusted earnings per diluted share of 74 cents in Q2 of 2020 and 96 cents in Q2 of 2019. Capital expenditures were $80 million for the quarter, compared to $53 million in the second quarter last year. Q2 spend relates primarily to store capital for new locations, relocations and renovations, supply chain investment, and technology spend to support our business growth. Turning to our balance sheet highlights, we ended the quarter with $1.6 billion of total liquidity. We had approximately $1.2 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory grew 17% versus last year and was $790 million at the end of Q2. This is below our expectations for a 25% to 30% increase due to our top line outperformance coupled with industry-wide supply chain disruptions. However, on a two-year CAGR basis, this represents inventory growth of 26% versus our expectation for 24% to 25% revenue growth in Q3 on a two-year CAGR basis. As we've mentioned, we are seeing some delayed inventory receipts due to issues at the ports and also the recent COVID-related closures of certain factories in southern Vietnam. Our supply chain and product teams are working diligently to mitigate these risks by shifting production out of Vietnam where possible with our vendors who operate in multiple countries. prioritizing production to ensure key fall holiday styles are produced first, and strategically increasing our use of air freight. At the end of Q3, we expect inventory levels to increase approximately 15% to 20% relative to Q3 2020. While this level of inventory can support our increased revenue guidance I'm going to walk through in a moment, it is lower than we had initially targeted due to supply chain challenges. In Q2, we repurchased 506,000 shares at an average price of $338. At the end of the quarter, we had 245 million of availability remaining on our current share repurchase authorization. Let me shift now to our outlook for Q3 in the full year of 2021. The underlying demand for our brand is strong, and while we are navigating temporary headwinds in our supply chain, which are impacting both top line and gross margin, we are pleased with our momentum headed into the second half. We currently have approximately 95% of our stores open globally. We're engaging with guests inside our stores and through our community activations, and our e-commerce business remains strong. For Q3, we expect revenue in the range of $1.4 to $1.43 billion, representing a two-year CAGR of 24% to 25%. We expect gross margin in Q3 to increase 50 to 100 basis points versus Q3 of 2019. Relative to 2019, our gross margin is benefiting from a higher e-comm penetration and leverage on occupancy and depreciation. Our Q3 guidance reflects an impact of approximately 200 basis points of pressure from air freight costs due to port congestion and capacity constraints. In Q3, we expect SG&A deleverage of approximately 300 to 350 basis points relative to 2019. Drivers of the deleverage versus 2019 include... consolidation of MIR's results this year, but not in 2019, increased investments in brand building to support our growth initiatives, and higher depreciation due to accelerated investment to support our e-commerce business in 2020 and 2021. Turning to EPS, we expect adjusted earnings per share in the third quarter to be in the range of $1.33 to $1.38 versus adjusted EPS of $1.16 a year ago. This includes operating results for Mirror, but excludes acquisition and integration-related costs. As a reminder, we reported EPS of 96 cents in Q3 of 2019. For the full year of 2021, we now expect revenue to be in the range of $6.19 to $6.26 billion. This range now assumes our e-commerce business grows in the mid-teens relative to the outside strength we experienced in 2020. Our annual range also assumes the factories we use to source product in Vietnam begin a phased reopening in mid-September. When looking at total revenue, our guidance range implies a two-year CAGR of approximately 25%, which is higher than our three-year revenue CAGR of 19% leading up to 2020, and is well ahead of the low-teens CAGR we contemplated in our Power 3 growth plan. We continue to expect to open 45 to 55 net new company-operated stores in 2021. This includes approximately 35 to 40 stores in our international markets and represents a square footage percentage increase in the low teens. We continue to expect gross margin for the year to expand between 150 to 200 basis points compared to the modest increase we saw in 2020. For the year, the anticipated margin expansion now includes 150 to 200 basis points of negative impact from additional air freight costs, but it's still in excess of our free growth plan, which assumes modest gross margin expansion annually. When looking at SG&A for the full year, we now expect deleverage of 10 to 30 basis points versus 2020. Drivers of the deleverage continue to include our investment in mirror brand building. We expect our adjusted effective tax rate for the year to be similar to 2020. We now expect our fiscal year 2021 adjusted diluted earnings per share to be in the range of $7.38 to $7.48. Our EPS guidance continues to assume modest dilution from nearer in the 3 to 5% range, excluding acquisition and integration-related costs. It also excludes the impact of any future share repurchases. We continue to expect capital expenditures to be approximately $365 to $375 million for 2021. The increase versus 2020 reflects increased investment in our supply chain, digital capabilities, new store openings and renovations, including mirror shop and shops, as well as other technology and general corporate infrastructure projects. Before handing it back to Calvin, I want to express my gratitude to the entire Lululemon Collective. It is you who brings our brand to life every day and enables our strong financial results. And now back to Calvin for some closing remarks.

Thank you, Megan and Celeste. Before I open it up to questions, I wanted to take a look back on these results in the previous quarters and speak for a moment about the unique business model that drives our success, enables our strong performance, and allows us to navigate COVID-19 and the current headwinds impacting our supply chain. Our vertically integrated model and high margin structure allows us to use more air freight while still delivering gross margin expansion. Our focus on technical athletic apparel allows us to benefit from trends in consumer behavior that are becoming more important year after year. And our inventory, which leverages many key core styles with less seasonality, helps us navigate and mitigate disruptions within the supply chain. Looking at our business over the course of the second quarter and the first half of the year, I continue to be excited about our day-to-day progress. our ability to sustain momentum quarter after quarter and year after year, and the incredible long-term prospects for our brand. And with that, we'll be happy to take your questions. Operator?

Thank you. We will now begin the question and answer session. Analysts who wish to join the question queue may press stars and one on their telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star and two. We'll pause for a moment as callers join the queue. The first question comes from Adrienne Yee with Barclays. Please go ahead.

Yes, good afternoon and congratulations. I mean, these are just really stellar results. I mean, so much is going on, right? So many puts and takes. Calvin, I guess my question is, you know, with lead times that are generally, let's call it six months plus, I'm wondering if you can give us some more details on the amount of exposure that you have maybe to Vietnam. Is it really just product coming out of that country or is it bleeding into the region? And though you're going to air freight product, is that air freight for upside or is that air freight to potentially meet holiday demand? Thank you very much.

Hi, Adrian. It's Megan. I'll actually take that. So in terms of Vietnam, we sourced approximately 30% of our finished goods. And the impact of the southern Vietnam closure is currently impacting approximately 20% of our second half inventory. We are leveraging air freight to meet our guidance. And what's contemplated in our guidance is $150 to $150 sorry, 150 to 200 basis points of deleverage for the full year in terms of air freight impact. To the extent possible, the team is looking to multi-source and leverage other countries, as well as prioritize fall holiday key styles to the best of their ability. And air freight is a muscle that, as a growth company, we often leverage, and we continue to do so as we navigate these supply chain challenges in the second half.

Fantastic. Best of luck for holiday. It was great. Thank you.

The next question comes from Mark Altschwager with Baird. Please go ahead.

Good afternoon. Thanks for taking my question, and congrats on the results here. So great to hear you're on track to pass the 2023 revenue target sooner than anticipated. Understanding we'll be hearing more next year, but just any initial thoughts you can share on how we should be thinking about your top-line growth algorithm beyond 2021 and how, if at all, the drivers may change versus the prior plan.

Hi, Mark. Thanks. And as you mentioned, With the revised guidance, we're looking to achieve between $6.2 billion and $6.3 billion this year, putting us two years ahead. We achieved doubling our e-commerce business last year. We will double our men's business this year, and our international business is ahead of the four-time growth we put out to be completed by the end of 2023. So it really supports the early innings in growth across multiple levers. The power of three initiatives focusing on product, guest experience, and market expansion are still the key areas of focus that we will drive our innovation through. And the growth targets within that is what you should continue to look forward beyond 21, but we do plan to come back with our long-term thinking next year and share more with you at that point.

Thank you. And, Calvin, just a quick follow-up. Can you expand a little bit on the plans for membership? I imagine it was a challenge to get reads on the tests, given everything that's been going on the last 18 months. But do you still see an opportunity to have a loyalty program that exists outside of the MIR platform, or what form might that take? Thank you.

Great, yeah, no, absolutely, Mark, and thanks for the question. I'll break it into two things. One, the membership test, we learned a lot. In particular, the way the test was set up, as you know, is it was a paid membership program, and our guests received a number of benefits linked to sweat. And from that, some of the behaviors that we were able to observe was... How it drove brand love, their connection to the community, both the brand as well as to each other, which is really important. And you want that in these type of membership programs to drive that loyalty and the impact on their spend. And in fact, those behaviors is what gave us the conviction and confidence to go ahead with the mirror acquisition. Because we saw a natural synergy between the two. A paid membership program focused on sweat. And the membership tests, although very effective, the challenge, COVID aside, was that it was challenged to scale, it was rooted in physical, and we couldn't offer it everywhere. And we always had visions of being able to bring that to the digital platform. And seeing what we saw within the physical and our relationship with the mirror team gave us the confidence to proceed with that. And really, we always saw a convergence between these two strategies. The membership test uh, gave us, you know, access to thousands of guests that were behaving in this way and mirror, um, at the end of this year is going to give us access to hundreds of thousands. Um, and we're excited, uh, about the ability to scale it. Uh, we're early, we're thinking longterm. and that convergence was natural. Outside of a paid subscription, the opportunity around loyalty absolutely exists and is something that we will share later as we share our plans for the future.

Thank you for the detail and best of luck.

The next question comes from Brooke Roach with Goldman Sachs. Please go ahead.

Hi, good afternoon and thank you so much for taking the question. I wanted to follow up on the international business and the momentum that you're seeing there. Can you provide some additional insight about what's working really well in those geographies and perhaps a little bit more detail on your outlook for China momentum into the second half? Thank you.

Thank you, Brooke. I'm very pleased with our international business. Very pleased with growth across every market we are in. Now, different markets have been impacted differently from COVID. As you know, Australia, New Zealand in particular right now is where the bulk of our global store closures are taking place. But even with that, our online business is doing very well. So overall, what's very exciting is the balance of growth across all international markets, meaning they are all contributing significant growth and into our goal of quadrupling our international business by 23. China in particular is a market where we have leaned in on an investment. We've opened... a head office in Shanghai. We are leaning in in hiring and supporting local teams within that market and in our store expansion, as well as our digital innovation and support. So China is definitely one of our key markets. We are seeing good growth. We are investing in the country, supporting the teams and overall the international business like our business in North America. and some of our category opportunities very early and growth across all channels in the markets and product categories. So excited about what the future continues to hold for our international business.

Thank you. And if I could just follow up with a question for Megan on the SG&A leverage outlook. There are a lot of moving pieces within the outlook, some investments in brand building, higher wages. Can you help us think through some of the puts and takes of that leverage component and SG&A into the back half of this year? Thank you.

Hi, Brooke. So, in terms of SG&A, we guided for Q3 the 300 to 350 basis points of deleverage relative to 2019. So, and that includes near consolidated in this year's numbers and not in 2019. as well as brand building, which would include both that mirror piece as well as our current field campaign. And then we also have higher depreciation relative to 2019, just given our investments behind digital and the strength of that business. When we look at the full year, we've got 10 to 30 basis points of deleverage for relative to 2020. And that is better than the 30 to 50 basis points that we disclosed previously. And really driving that deleverage would be the consolidation of MIR for the full year, as well as investments, again, behind our digital channel. But really pleased overall, I would say, with the operating flow through of our business and remain on track to our power-free growth plan, as we've discussed.

The next question comes from Erin Murphy with Piper Sandler.

Please go ahead.

Great. Thanks. Good afternoon. And let me add my congratulations. Excellent results. I had a follow-up first on the supply chain. And just as you look forward, could you just talk about if you see any of the current issues bleeding into spring? And when do some of the facilities that have currently been shuttered in Vietnam need to start kind of ramping to hit kind of later holiday demand as well as spring? And then secondly, for Megan, on the second quarter comment you called out on open store productivity back at 2019 levels, how are you planning that for the back half? Thank you so much.

Yep, thanks, Erin. Hi. So in terms of supply chain, we are assuming that southern Vietnam begins a phased reopening mid-September, and that's what's implied in our guidance. Closely monitoring the situation at this point, we do anticipate that the air freight supply environment will not improve for the balance of the year, and thus we've guided to the 150 to 200 basis points impact for this year, and we'll continue to update you as we move into 22. And then in terms of open store productivity, can you just remind me of the details of your question there?

I was just curious. You said you were back in 2019 levels in the second quarter, which was ahead of plan. How are you planning store productivity for open stores in the back half?

So for Q3, we are planning to be slightly above last year's 2019 levels for the quarter. When we look to Q4, we're really pushing into our omni-channel strength and will be agile across both channels, meeting the demand where it comes to us. But we are sharing slightly above 2019 productivity for Q3.

Great. Thank you so much. All the best.

The next question comes from with Wells Fargo. Please go ahead.

Excuse me. Good afternoon. Let me add my congrats. Great, great results. Calvin or Megan, I guess could you elaborate a little bit on the CAC? commentary you gave. Can you just talk about the IDFA changes and how it's impacted mirror? Are the opt-in rates, you know, a little bit lower than what you would have expected? Is this kind of what you thought? And then I guess just to wrap that question up, how does this impact the concept's ability to reach break-even? Does it kind of push it out a little bit more? Do you view this as transitory? Just any color around that would be really helpful.

Great thanks, I'll handle the first half and then handle the second part to your question on break even over to Megan. I'm continue to be very encouraged with the usage numbers and engagement numbers that we're seeing with the mirror community and I'll start there because I think those to me are the most important and signal the health and the engagement of the community both with each other as well as mirror the product. And we continue to see the members' use of mirror, number of sweats, number of members per household sweating increase and hold very high numbers. So very excited about how any guest, any member that purchases it is using it and all the things we love about the versatility, the genre. an appeal to a number are all playing out. As well as our conversion numbers are very healthy. The challenge right now with a variety of changes that have happened in the digital marketing space is the cost, CPM, the cost to get Mirror, which has low awareness right now, and we're working towards in front of guests, those costs in the market are rising which has an impact ultimately into CAC. But the number of guests that are converting when they see those ads and ultimately convert to buy once they work their way down through the funnel are all at or above where we've been trending and very healthy. So it is a reflection of the industry. We are, as I mentioned, managing accordingly. We have our eyes on the long game with Mirror and the community we're building. We're just ramping up synergies like the 200 stores that play to our strength and the key leads in each of those locations. So we're excited heading into the holiday, but I didn't want to call it out because we're monitoring it. And as I mentioned, we're going to stay within the guidance we gave on dilution, and we're going to leverage the strengths of the synergy and learn a ton this holiday. But the general metrics and guest member usage are very, very strong.

In terms of breakeven, we haven't put a fine point on that, but we are focused, as Calvin mentioned, on rolling out initiatives for 2021, including store ramp, Canada entry, and e-commerce website revamp. The path to profitability there for MIR is very much within our control, and we're investing behind the strength and momentum in that business, as well as our overall financial strength. And we'll share more as we move through the peak holiday season and into 2022.

Thank you.

The next question comes from Michael Benetti with Credit Suisse. Please go ahead.

Hey, guys. Let me add my congrats on a really nice quarter. Two quick ones, I guess, on gross margin sustainability. The gross margins in 2Q, they're above what you typically do for a holiday quarter pre-COVID, which is where there's a lot of leverage in the business. Can you talk about your confidence in sustaining 2Q? this level, you know, beyond the recovery period. And what we should think about is puts and takes for gross margin, just thematically, as we look out beyond 21. And then Calvin on international, when we, when we gathered for the analyst day and you gave us the initial guidance of quadrupling revenues by 2023, I think the, I think the comment was that international was going to reach break even in 2018 and would, would be 10 to 15% of earnings by 2023. So I, I think that embedded about 1,000 to 1,500 basis points of margin expansion in international. You told us tonight you're on track to quadruple the revenues, but maybe you could just give us some thoughts on the path of the profitability of the international business to go with that comment just to bring us up to date.

Hi, Michael. I'll take the first part of that question.

So in terms of gross margin, 150 basis points to 200 basis points expansion was where we guided for the full year. And we're pleased, I would say, overall with that relative to 2020 performance. It's really driven throughout performance on top line and leverage on occupancy and depreciation. And then we do, at this point in time, we're maintaining our power-free growth plan, which calls for modest expansion and gross margin as we look out. And as Calvin mentioned, we'll come back and update that plan as we move into next year. And in terms of overall international profitability, we are profitable overall and international and still see a lot of opportunity there relative to the maturation of the international business in terms of its comparison to North America. Particularly pleased with the growth rate we're experiencing in China and see opportunity for both revenue and gross margin expansion and operating margin as that business expands.

The next question comes from Lorraine Hutchinson with Bank of America.

Please go ahead. Hi, thank you.

I wanted to focus on the MEND business for a minute. The two-year CAGR continues to accelerate. I was just curious where you've seen success and then what you're excited about for the back half and into next year, B2B MENDs.

Hi, Lorraine. It's Calvin. As you alluded, we're very happy with the overall growth in our men's business. Two-year CAGR of 31%. I'm sure you remember last year when heading into COVID, our men's business was leading growth over women's. And then with the shutting of our stores and other shifts that were happening as a result, we saw that business slow, both in the industry as well as with ourselves, even though we were putting on market share. And at the time, I sort of indicated that it would just be a matter of time. We didn't see anything systemic in our men's business that raised any concerns for us. And those scenarios played out as stores opened. He came back into the store, which stores still remain a wonderful acquisition vehicle for us to get new men into the business and into the brand. And it has just continued to gain momentum through each quarter. And then with Q2 being sort of back at that, you know, great growth where, you know, we're going to double our business at the end of this year, two years early from when we started at the beginning of 2019. And when I look at the growth, it is balanced across all the categories, which is very healthy. They're obviously between bottoms and tops and shorts and outerwear and some of the accessories. You see a slight variance in growth, but overall, they're all double-digit, all very strong, and it's a reflection of building deeper relationships with our existing guys, them spending more, and continuing to acquire and bring in a new male guest into the business. And we will share... the role men's plays in our future growth plans early next year when we sort of reset. But it continues to be very strong, very strong across all markets around the globe. And it's driven both by current spending more and our acquisition of new gas.

Thank you.

The next question comes from Matthew Boss with JP Morgan.

Please go ahead.

Thanks and congrats on another great quarter.

So maybe Calvin, as we think about 28% revenue growth relative to 2019 in the second quarter, mid twenties in the first quarter, is there a way to rank the drivers of the outperformance that you're seeing relative to that 19% pre-pandemic or maybe said differently, do you believe the TAM coming out of this crisis is larger broadly multi-year for the Lulu brand?

or are you taking accelerated market share, or is it a combination of both?

Great. Thanks, Matt. It's definitely a combination of both. We've shared and continue to see our brand gaining market share across categories, men's and women's. Equally, we know that the pandemic drove forward accelerated uh, some of the guest behaviors that play to the strength of our brand. Uh, one is, uh, general fitness awareness to, uh, being well living well to, um, the importance of functional apparel, uh, which, uh, which is critical. Uh, and again, um, you know, plays to, to our strength. Uh, and third, uh, is really the, um, the, uh, roles and categories that our brand play in and how the guests are wearing and using the gear. So I think the, I know the TAM has been impacted by those macro trends. We're well positioned within that TAM to address it in a very effective leading way. And I think that combined with our ability to gain market share against our competitors is fantastic. helping to fuel the business, and will continue as we look forward to the years. And, you know, you've heard me say this before. This brand is early innings across product with activities where we focus on run, train, yoga, and OTM categories within those activities and both our men's and women's businesses. markets, North American International, and channels online and store. So we are early innings in our growth. That's why we see such balanced growth across markets, channels, and product categories. And the impact that COVID has had on TAM plays to these strengths and plays to our growth story and the opportunity that we see ahead for our brand.

Great.

Congrats again. Early innings is a great thing. Thank you.

The next question comes from Jay Sol with UBS. Please go ahead.

Great. Thank you so much. I just wanted to follow up on that last answer. You know, there's some large public companies who have bought athleisure brands over the past couple of months. Just wondering how you think that impacts, you know, the company's ability to continue to reach its goals? And can you remind us, you know, what is it about Lululemon that continues to allow you to be a leader when a lot of other companies are going to be, you know, big companies with big resources are going to be making investments in this category?

Great. Thanks, Jay. There's a lot in that question, and I'll unpack a bit of it. But You know, those brands that have been acquired have been in the market. We've competed against them before. And we've always liked our unique and differentiation within what has been a crowded marketplace. And yet we continue to put up the results we've put up in the past number of years. And that really is rooted in a number of very unique attributes to our brand. One, starting with our product, the premium nature of it, the focus and obsession on innovation through science of feel that truly creates product that performs in a unique way to the guests and provides a sensorial experience that's unique and different with the quality that they know they're getting for what they buy and pay. And that has always driven our business. It's what separates us from others. And I don't see that changing with the landscape of who's out there and who owns who's out there. Our obsession with raw material and our investment in our product is what we do. It's what we obsess about. And it's really what drives why the guests feel, you know, different and continue to sort of be loyal to this product and brand. And the second is the power of, you know, human connection through our educators to the strength of our community and the investments we make at grassroots through our people through our, uh, ambassador community, uh, and then the exciting addition of mirror into that community. But everything we do around human connection, science and field, that's feeling that, um, that continues to differentiate the brand, uh, and its unique position as premium, um, but through quality innovation, uh, we believe continue to be unique differentiators and drivers of the brand. Um, and, uh, and have obviously been in place and fueled the growth that we've seen so far.

Got it. That's helpful. If I could just ask one more question, switching gears for a second. If we think about the holiday environment, Calvin, how are you thinking about maybe some opportunities that could be presented around pricing if we are in an environment where a lot of companies are having trouble sourcing the units they need or they would want to really fulfill the demand, the consumer demand that's out there? does it create opportunity to take some pricing to offset, you know, cost increases, whether it's in labor or other areas? And how do you think that the overall environment will respond to a, you know, to a situation where everybody's being challenged by supply chain issues in Asia?

Yeah, we take pricing, you know, obviously seriously in that we're constantly monitoring and testing supply driven out of the innovation of the product. We're well aware of the inputs of inflation and costs and have that in our guidance that Megan has provided. We look for opportunities both where we could price up and or price down to be positioned in the marketplace based on assortment and range work. So it's pretty fluid, Matt, and we're comfortable Sorry, Jay, very fluid, and we're comfortable with, you know, sort of how we're positioned today in addressing it, but all and any pricing changes would be in Megan's guidance, and there's nothing of significant plan or that you should expect.

Got it. Thank you so much.

The next question comes from John Kernan with Cohen.

Please go ahead.

Excellent. Thanks for squeezing me in. Congrats on all the momentum. Calvin, can you talk about the investments in renewable materials and the stance on sustainability that you're taking? How much of a percentage of the assortment can this represent over time? How's the margin profile of the sustainable product look versus the current assortment? I have a quick follow-up for Megan. Thanks.

Good. Thanks, John. As you know, in our impact agenda that we published our first one last year on our Be Human, Be Well, Be Planet pillars, in our Be Planet, our commitment is to make 100% of our products with sustainable materials by 2030, as well as investing into circularity, which is extending the life of our products and providing options and choices to our guests. And there's been a lot of you know, fantastic innovations and partnerships in that space with the pilot around our resale program, the partnerships, be it with Milo, Lantatech, or Genomatica announced this past quarter in the super cluster. So it is a very important driver of innovation for our business. We've established, you know, plans to improve the planet that we're committed to. And as these scale and as we continue to drop collections and learn, we are not anticipating or have we factored in a margin pressure result. And, you know, we've established multi-year targets. We are working with the right partners to help in the manufacturing and the creation and therefore the commercialization of these goods. So I would not factor in any margin. marginal impact and our goals speak for themselves. We want to be by 2030, 100% of our products made with sustained materials. And that's what these partnerships are, you know, gearing and working towards for us.

That's exciting. Thanks. And Megan, maybe just a quick follow up on the increased outlook for air freight that everybody's seeing. I think it's now 150 to 200 basis point of negative impact for the year. How should we think about this in terms of recovery? It seems like most of this is cyclical and much of this can be recovered fairly quickly as the supply chain begins to open up. Is that the right way to think about this? Is that the gross margin would obviously be a lot higher without some of these supply chain pressures and that some of this is just cyclical rather than structural?

Yes, I would say definitely view it as temporary in nature. Obviously, the environment's really dynamic and fluid today. As I mentioned, we anticipate it will be with us for the balance of the year, and we'll update on 2022. There will be likely some puts and takes in margin as we move forward, and we do remain committed to the margin target that was in our power-free growth plan of modest expansion annually.

Excellent. Thank you. Congrats.

Thank you.

That's all the time we have for questions today. Thank you for joining the call and have a nice day.