lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Second Quarter 2022 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts who wish to join the question queue may press star then 1 on their telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Howard Toobin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Thank you and good afternoon. Welcome to Lululemon's second quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO, 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 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 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 our 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 would like to turn the call over to Calvin.

Thank you, Howard. I am excited to be here today to highlight our second quarter results and the continued momentum we're experiencing at Lululemon. While the external environment around us has been challenging, We are seeing our guests respond strongly to our product innovations, our community activations, and our Omni operating model, which allows us to meet and exceed their expectations. During the next few minutes, I will discuss the factors that are driving our broad-based strength. Next, I'll discuss the current supply chain environment, then our pipeline of product innovation, and I'll conclude with an update on our growth within the international business. As you've seen from our press release, the momentum in our business remains strong in the second quarter. Revenue increased 29% versus last year and 28% on a three-year CAGR basis, representing an acceleration from quarter one. Adjusted earnings per share increased 33% and 32% on the same basis. And based on our guidance, we anticipate a high level of performance to continue in quarter three. These results are even more compelling considering the difficult macroeconomic environment in which we are operating. Our performance was only possible because of our teams across the globe, their dedication, their agility, and their enthusiasm for our brand, which enable us to consistently deliver for our guests and report these above-planned financial results. Megan will share the detailed performance metrics with you shortly, but I'd like to give you my perspective on what's driving the strength and specifically speak to guest engagement. Given the current macro backdrop, we have been looking closely at our guest data and metrics to identify any shifts in spending patterns, behaviors, or habits. And to date, I am pleased to share that we are not seeing any meaningful variation in cohort behavior or the metrics we track in this area of the business. New guest acquisition remains strong, with transactions by first-time guests increasing over 20% in quarter two. Transactions by existing guests increased in the high teens. Traffic across channels remains robust, with store traffic up over 30% and e-commerce traffic increasing over 40%. And importantly, we are not creating this traffic through markdowns or price promotions. Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy, and we have no plans to do so. While we haven't seen anything on our internal dashboards to suggest any changes, we continue to monitor our guests' behavior closely, and we remain agile in how we plan the business. Shifting topics, like others in the industry, we continue to navigate challenges throughout the supply chain. That said, we are pleased to see some promising signs of improvement yet recognize further normalization within the supply chain will take some time. We currently have no closures across our vendor base, and in China, vendors who had to close their slow production in quarter one due to COVID-19 are beginning to catch up. Ocean delivery times are improving, although they remain significantly elevated compared to the pre-COVID period. And while we continue to strategically leverage air freight to help ensure timely delivery of product into our distribution centers, we are seeing these rates begin to come down. In terms of inventory, we remain comfortable with both our quality and quantity, and we are well positioned for the fall season. As you recall, for much of last year, we were under-inventoried and not able to fully maximize our business. This year, we are in a much better position to deliver product innovation to our guests wherever and however they shop with us. We remain in the early innings of our growth. And we have multiple levers that we can pull to continue our momentum, particularly when looking at product. In quarter two, we drove expansion across our core, play, and new categories. Let me now share some highlights of our recent and upcoming product innovations. In our core product categories, we launched SenseKnit, our new proprietary fabric technology offering zone compression for runners. And we saw great success in our core scuba and defined franchises for women and in our ABC and commission franchises for men. Switching now to our play categories, our strategy is to solve for our guests' unmet needs across their secondary sweat activities, such as golf, tennis, and hike. We roll out targeted innovations while also leveraging the versatility of our core assortment. This not only builds our credibility within the activity, but it also allows us to drive overall sales while effectively managing SKUs. Our hike collection, which we launched in quarter two, is another example of how we are executing our play strategy well. Hike is an activity that grew in popularity with guests during the pandemic, and we are excited to now be able to serve our guests as they hit the trails. We are thrilled by the early reaction to our hike collection with strong response from both guests and the media. And finally, let me update you on footwear. Bliss Feel, the first style we launched in March, continues to perform well. We improved our inventory position after the strong guest response at launch, and we're seeing continued excitement around this technical running shoe. In quarter two, we launched our next two footwear styles, Rest Feel, our dual gender slide, and Charge Feel, our hybrid training shoe for women. Similar to Bliss Feel, Charge Feel was designed specifically for women. Our teams developed a dynamic workout shoe to be used across a wide range of training activities, and we're excited about the initial response from both the media and our guests. Looking forward, our pipeline of innovation remains robust, and I'm excited with what the teams have developed for the second half of the year, including a further expansion of apparel for run, with new styles offering heat retention and reflective detailing to enable outdoor runs in cooler and low-light conditions as the seasons shift. With the exception of a few outerwear styles and accessories, we've never had to solve for cold weather runs. The upcoming expansion of our assortment is a great example of the ongoing opportunity to build out our core categories and provide new solutions for our guests. Next, we will continue to expand our new height category to include heavier styles to protect against the elements during cold weather outings. We will also continue our throwback strategy with the relaunch of our popular Unicorn Tears print in select styles. This print has not been available since 2012 and has been one of the most requested by our guests. And we're thrilled to be bringing it back for a limited time. And finally, we'll launch our fourth footwear style, Strong Feel, a technical training shoe designed to keep the foot anchored and secure during multi-directional training workouts. While our product is clearly a key point of differentiation, Our direct-to-consumer model also provides us with a compelling competitive advantage. Our own channels, both brick and mortar and digital, allow us to connect directly with our guests, foster deeper relationships, and engage with them in many ways beyond just a purchase transaction. During the pandemic, we evolved our approach and developed new ways to connect digitally with our guests and communities. Now, as we're moving into post-COVID world, we're once again connecting with our guests in person while also continuing to leverage new ways to engage digitally. Our new two-tier membership program, which will be launching shortly, is a perfect example of our ability to connect with guests in new ways. As we discussed at our analyst day, we will be rolling out a free program that will offer members benefits across the Lululemon ecosystem, and we will be evolving Mirror into Lululemon Studio, which will represent the paid tier of the program. Community connection is at the core of Lululemon. Our ongoing outreach and engagement with our guests not only deepen our relationship, but also drive purchases. I'm particularly excited with the opportunity we have in front of us with our new membership program in Lululemon Studio to activate our community and enhance the connection to our guests across both our physical and digital platforms. Before turning it over to Megan to discuss our quarter two financials and guidance outlook, Let me share some insights into our international business. Overall momentum in our international business remains strong, with revenue increasing 35% versus last year and 40% on a three-year CAGR basis. In China, after a slower start to the year given COVID-19 related closures and capacity constraints, we have seen a rebound in the region. Revenue grew over 30% versus last year, And we saw a nearly 70% increase on a three-year CAGR basis. We remain in the early innings of growth in China and consistent with our approach in all other markets, we are leveraging our DTC model to grow our brand and attract new guests. In quarter two, in our brick and mortar channel, we opened eight stores in China mainland. We now operate 40 stores in tier one cities, 25 stores in tier two cities, and 14 stores in tier three cities and continue to see strength across this entire portfolio. In our e-commerce channel, we recently launched a digital flagship store on JD.com, a leading online retailer in China. JD's customer base skews more heavily towards men and represents a compelling new guest acquisition tool for us as we continue to grow our brand in the region. I'm also thrilled with how our local teams continue to build community increase our brand awareness, and deepen the relationship we have with our guests. A great illustration of this is our Summer Sweat Games 2022. This event saw more than 2,000 guests participate in over 60 events in 20 cities across the China mainland. Activities included outdoor yoga, dancing, and surfing experiences. In addition, more than 100,000 guests participated in sweat sessions offered by our ambassadors on Keep, a leading fitness app in China. Shifting now to Europe, where our momentum is also strong, revenue increased 20% and 22% on a one- and three-year CAGR basis, respectively. We are all excited that Lululemon is entering Spain, our first new market in the region in three years. Our local e-commerce site is up and running, and our first two stores in Barcelona and Madrid are gearing up to open shortly. And we expect Spain to be a strong market for us going forward. In total, we are now operating 40 stores and five websites in Europe. International expansion is one of the key pillars of our Power of 3x2 growth plan, which calls for a quadrupling of our business from 2021 levels by the end of 2026, and we are off to a great start. With that, I'll now turn it over to Megan.