lululemon athletica inc.

thank you for standing by this is the conference operator welcome to the lululemon athletica inc third 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 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 third quarter earnings conference call. Joining me to talk about our results are Calvin McDonald, CEO, and Megan Frank, CFO. 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 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 at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor sites where you'll find the 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. Now, I'd like to turn the call over to Calvin.

Thank you, Howard, and welcome everyone to our third quarter conference call. I'm excited to be here to discuss our results and share highlights of our performance at the start of the holiday season. Our momentum remains strong in the quarter, reflecting the continued growth potential for Lululemon in both the near term and the long term. I'm especially pleased with how our leaders and teams continue to successfully execute against our Power of Three growth plan while we navigate the supply chain issues within the industry. Relative to last year, revenue grew 30% and on a two-year CAGR basis increased 26%. Our strength continues to be broad-based and balanced across every facet of our business, including channel, category, activity, gender, and geography. Before discussing more details about quarter three, I would like to share some highlights on the three topics. Our performance over the recent Thanksgiving holiday, inventory levels, and the current labor market. Starting with Thanksgiving, we were pleased with our performance over the holiday weekend. For the five days spanning Thanksgiving through Cyber Monday, both our digital and brick and mortar channels performed well. E-commerce delivered record-breaking days in several key metrics, including sales, traffic, and conversion. And I'm excited to share that this year, Thanksgiving Day was our highest volume e-commerce day ever. The investments we have made over the last several years are enabling the acceleration we're seeing in the digital business, and contributing to the growth this year on top of last year's outsized performance. While we still have several large volume weeks ahead of us, it was great to see our guests respond well to our merchandise offering as we kicked off the holiday season. Shifting to our supply chain, we continue to face the same issues as much of the industry, including port slowdowns and increased costs associated with air freight. In Vietnam, I am pleased to share that all of our factories have reopened and continue to ramp up their capacity. While the summer closures caused some delays, our total inventory at the end of Q3 was up 22%, slightly ahead of our most recent expectations of 15% to 20%. As you are aware, approximately 40% of our inventory is comprised of core, seasonless product, which helps us make our inventory management and flow decisions. This coupled with the well-established partnerships we have with our vendors is allowing us to mitigate many of the current supply chain risks. I'm extremely proud of how our teams have and continue to successfully navigate through this dynamic environment. While we're comfortable with both the quality and quantity of our inventory, I continue to believe that demand for our brand is outpacing supply and our business could have been even stronger without the supply chain challenges. Turning to the labor market, we are well positioned this holiday to meet guest demand. As you know, the hiring environment has been very competitive this season, and I'm pleased that we have been able to hire more than 7,000 employees within our stores, DCs, and guest education centers in the lead up to the holiday. Our strong employee offering, highlighted by our pay protection program through COVID-19 and recent increases in minimum wage, has enabled us to perform well in the current environment. Let me now share some highlights from our Q3 results. First, our total revenue of $1.5 billion represents growth of 26% on a two-year CAGR basis. Second, we continue to build on the strength in our store channel with productivity levels above what we achieved in 2019. Third, our e-commerce business comped up 21%, which, on top of the 93% last year, translates into a two-year CAGR of 54%. And finally, our adjusted earnings per share were $1.62 versus 96 cents in 2019, which was above expectations. This level of performance continues to demonstrate how Lululemon is a brand position for consistent growth quarter after quarter. Next, I will provide some additional details on our results starting with product innovation. Our momentum remains strong across all of our major categories with women's revenue increasing 24%, men's growing 29%, and accessories up 40%, all on a two-year CAGR basis. We continue to leverage the science of field to bring product newness and innovation to our guests. I'm particularly proud of our recently announced multi-year partnership with the Canadian Olympic Committee and Paralympic Committee. This is important to us in several ways. First, it allows us to showcase the Lululemon brand and our technical expertise within apparel on the world stage. Next, it is a compelling platform that we can leverage to continue to grow our brand presence in Canada, our most mature market. And finally, it offers a new and exciting test and learn opportunity to increase our brand awareness and consideration with men, both inside and outside of Canada. Our product teams worked with athletes for 18 months and developed more than 30 styles to help each team member feel and perform their best during the games. As a Canadian and lifelong fan of the games, I want to share that all of us at Lululemon are honored to play a role in helping to inspire and unite people through sport. Let me now move on to Mirror. Our core Lululemon business continues to be strong. Driving innovation and growth in our core remains our primary focus and our results demonstrate the ongoing effectiveness of our initiatives. This success allows us to invest in new opportunities to enable future growth, and Mirror is one of those examples. Our vision for Mirror is to assist in building and extending our Lululemon community and helping us drive both retention and spend. It's an evolution of our membership program to propel our core business at Lululemon for Lululemon. We have only just begun our journey with Mirror, and we will continue to roll out initiatives that deliver on this goal. As you know, 2021 has been a challenging year for digital fitness. And as I mentioned on our last earnings call, we have seen increasing pressures on CAC that are impacting the entire industry. One of the unique advantages we bring to the space is the many ways we can build brand awareness for Mirror. As we unlock these synergies, we see a clear path to engage with the more than 10 million Lululemon guests who live the sweat life. We will not chase growth at any cost. We simply don't need to. But we will invest to define our unique proposition and to bring Mirror to market through our own marketing channels. We demonstrated this with our recent launch in Canada and the introduction of our innovative connected weights, both of which are off to a great start. We can and will stand out in a crowded space and leverage all that's unique about Lululemon. With this context, we are lowering our revenue guidance for Mirror for the year to $125 to $130 million. Given the seasonality of their business, which skews heavily to quarter four, the timing of this revision is appropriate given the line of sight we have on its performance. Importantly, we are maintaining our dilution estimate of 3% to 5%. With this said, I'm pleased that we will have grown our subscribers by 40% year over year and will end 2021 with a meaningful subscription base to build upon. Mirror represents less than 3% of our revenue this year. Although we do not require it to deliver our Power of Three goals, we see Mirror as an opportunity to engage with our guests in new ways that we will continue to evolve and refine over time. We are still early in creating our vision of a loyalty community that captures the best of Lululemon. This is not a sprint for us and we will maintain a steady pace forward that realizes our vision. Switching now to our store channel, total revenue increased 38% versus last year and 10% on a two-year CAGR basis. Traffic increased over 50% versus last year. We're pleased with the start of the holiday season in stores and our educators are thrilled to be engaging with the guests in person. We continue to leverage and enhance our in-store and omni capabilities, including enhancing our mobile app to facilitate curbside pickup for guests, make our in-store handheld units more intuitive for our educators to help speed guests through transactions, and continue to offer our online digital educator service at no cost, providing a personal shopping experience for guests who can't make it into our stores. Turning to our e-commerce business, sales trends remain robust with total digital comps up 21% in Q3. This result comes on top of the 93% increase in the same quarter last year. We continue to enhance the experience for our guests on our websites and apps, which is the direct result of the investments we have made over the last 18 months. And it is paying off for us. For example, when I was in stores over Thanksgiving weekend, each store was doing an impressive volume of orders through both BOPIS and BBR. This is enabled by the visibility we have to our inventory across our network, which allows us to meet guest demand and exceed their expectations. It's a great example of how we are realizing our omni vision and potential. Looking forward to the fourth quarter, we feel good about our ability to handle the increased volume of traffic based on the significant investments we've made over the last several years in technology, IT infrastructure, our guest education center, and DCs, all which continue to produce results. Regarding our international business, we continue to be excited by the level of performance across each region, which shows how well our brand translates across borders and beyond North America. It's clear that there is a vast opportunity for Lululemon as we expand further into EMEA, in China, and in the Asia Pacific region. In Q3, we saw strength across every major region, with each generating strong double-digit sales growth on a two-year CAGR basis. In China, our two-year CAGR growth of more than 70% significantly outpaced the performance we saw overall in international, as we continue to see compelling guest response to our merchandise assortment online and in our stores. Our team also continues to maintain a steady pace of new store openings in the market. And in Europe, our two-year CAGR revenue growth of over 20% was driven by broad-based strength across most of our key markets, coupled with an improving brick and mortar business in the United Kingdom following very prolonged COVID-19 related closures. We are on track to open 40 to 45 stores in our international regions this year, and are excited by the significant runway for growth across our key markets outside of North America. Before handing it over to Megan, who will provide additional details on our Q3 financials and our guidance outlook, I want to bring our inaugural impact report to your attention. One year ago, we published our impact agenda, which details our vision and strategy to help transform our industry and create a healthier world. It is structured into three interconnected pillars, be human, be well, and be planet, each with a set of specific goals and strategies. We will report annually on our progress towards these goals, and I hope you will take the time to visit the sustainability section of our website to learn more. We recognize that it will take continuous learning and sustained dedication to achieve our goals. We are firmly committed to accountability, transparency, and doing the necessary work to help build a safer and healthier world. And with that, I'll turn it over to Megan.