lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. third 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 then zero. I would now like to turn the conference over to Howard Toobin, Vice President, Investor Relations for Lululemon. Please go ahead.

Thank you and good afternoon. Welcome to Lululemon's third quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO, 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. 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, 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 third quarter, as well as our quarterly infographic. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Calvin.

Thank you, Howard. I'm happy to be here today to discuss our third quarter results, which, as you've seen from our press release, continue to be strong and resilient while we navigate an external environment that remains challenging. At Lululemon, innovation is at our core. We create apparel, footwear, and gear that offers technical solutions to our guests as well as versatility and comfort with a variety of end uses. But that's just the starting point for us. Lululemon is a brand that stands for community with connection firmly at our core. We connect with guests through our educators and ambassadors, through our well-being offerings and local events, and now through our new membership program and Lululemon Studio. It is this combination of innovation and connection that differentiates Lululemon from our peers and contributes meaningfully to the continued and sustained momentum we see across the business. Over the next few minutes, I'll highlight for you the trends we've experienced over the recent Thanksgiving weekend and what we're seeing in our business at the start of the holiday season. Then I'll discuss quarter three and speak to the balance strength we continue to see across our business in terms of geography, channel, and merchandise categories. Next, I'll update you on the supply chain environment and our inventories And then I'll speak to our product pipeline. And finally, I'll speak to the benefits of our direct-to-consumer model and several of the unique ways we enabled connection with our community. So let's jump in. I will start with our performance over Thanksgiving, as I'm sure it's top of mind for all of you. I'm pleased with our results and performance over the extended Thanksgiving weekend and as we start the holiday season. Over the past two weeks, I have traveled with several senior leaders across North America to cities including Phoenix, Tampa, Orlando, New York, and Toronto. We visited several stores in each market and saw a tremendous level of engagement from our team members, our guests, and every store. In fact, Black Friday was the biggest day ever in our history in terms of revenue and traffic, driven by our results in both North America and around the world. with guests responding well to the innovation we offer across our product assortment. Our performance across markets and geographies shows that consumers are seeking brands like Lululemon that offer innovative, versatile product and a strong community connection that they can't find anywhere else. We also recognize that the external environment remains challenging with several high-volume weeks still in front of us. That being said, I'm encouraged with the beginning of our holiday season and I am confident in how our brand is positioned in the near and long term. Now I will speak to our performance in quarter three. Megan will go through the details in a few moments, but I'll share with you some of the financial highlights. Our revenue growth remains strong and balanced across several drivers as follows, all on a three-year CAGR basis. Stores increased 16% while e-commerce grew 46%. By region, North America grew 24%, and internationally increased 42%. Revenue in mainland China grew nearly 70%, and we experienced strength across merchandise categories with men's up 28%, women's up 23%, and accessories growing at 52%. Adjusted earnings per share increased 23% versus last year and 28% on a three-year CAGR basis. And our market share gains continue. While the adult active apparel industry decreased its U.S. revenue by 4% in fiscal quarter 3-22 compared to the same period last year, Lululemon gained 1.5 points of market share in the U.S. over this time, the most of any brand in this market, according to the NPD Group's Consumer Tracking Service. These results are only possible due to the strength and dedication of our people around the world, to our teams in our stores, in our distribution centers and call centers, and in our store support centers, I'd like to express my gratitude on behalf of the entire leadership team. You connect with our guests every day, execute against our growth plan, and continue to support one another, all of which enable the financial results we deliver quarter after quarter. Turning now to supply chain and our inventories, we continue to see improvements across our supply chain. Our factories have now returned to pre-pandemic levels of production efficiency. In addition, ocean delivery times are continuing to improve from the 70 days we experienced last quarter. I'm also excited to share that we recently opened our Tilbury Distribution Centre, located near Vancouver, to support demand in Western Canada. This DC is a great example of our ongoing investment in strategic foundational infrastructure projects that will help fuel our Power 3x2 growth plan. In terms of inventory, we ended quarter three with dollar inventory up 85% on a one-year basis and units up 38% on a three-year CAGR basis, both metrics in line with our expectations. As we discussed, our inventory levels were too lean last year, and we made the strategic decision to build inventories this year, which enabled the strong top-line growth we have delivered. Megan will share additional details, and we remain comfortable with both the quality and quantity of our inventory. We continue to leverage our core styles, which account for approximately 45% of our total inventory and carry limited seasonal markdown risk. I'd also note that quarter three will represent the high point for our inventory on a one-year dollar basis. And as we enter quarter four, we are well positioned to be in stock throughout the holiday season. I will now spend a few minutes speaking about product. As you know, innovation at Lululemon is fueled by our science of field development platform. Our teams focus first on identifying the unmet needs of our guests, and then we view them through the lens of activities to develop new franchises and other hero items that are versatile and innovative. Quarter three had some great examples of how we bring this strategy to life. In footwear, we launched our fourth style, Strongfeel. Like the other technical styles rolled out this year, Strongfeel was designed for women first. which differentiates us from many of our peers who create shoes for men and then adapt them for women. Strong Feel is a technical training shoe designed to keep the foot anchored and secure during workouts, and we're encouraged by the initial guest response. As I've mentioned before, footwear is a test and learn category for us, and it represents a small portion of the growth we anticipate over the next five years. This allows us to build into the potential at an appropriate pace as we learn and make adjustments. That being said, we're excited about the potential opportunity in this category, and we were pleased to be recognized by Footwear News with the Launch of the Year Award presented during their 36th Annual Achievement Awards last week in New York. Turning now to franchises, it's great to see how our teams continue to build out our range of Wonder Puff offerings. We started with a single women's jacket and have expanded into 11 styles within this outerwear franchise, across women's, men's, and accessories. Our results show that our guests respond extremely well to the breadth of options. While last year we were constrained in terms of inventory, particularly in outerwear, we are well positioned with Wonder Puffs for the holiday season and expect to meet guest demand. As we look forward, franchise development represents a unique and distinctive opportunity for Lululemon, with Align, Scuba, and Define as a few examples. all of them beginning with a singular style and then expanding into popular multiple style offerings. And this is just the beginning. We will continue to introduce, expand, and grow our franchise business into the future. Let me now shift gears and speak to another one of Lululemon's key competitive advantages, our D2C model. Our ability to connect directly with guests in real time and across both our physical and digital channels gives us a number of ways to engage beyond a purchase transaction. In quarter three, we launched our new membership program, began to hold local 10K races for the first time since the pandemic began, and we brought focus to World Mental Health Day around the world with a notable activation in China. Some highlights are, in early October, we successfully launched our new two-tier membership program in North America. The essentials tier is free to everyone and offers unique benefits to members, including early access to product drops, exchange or credit on sale items, and invitations to virtual community events. The premium tier of the program, Lululemon Studio, represents the evolution of Mirror into a much more engaging hybrid fitness offering. We've extended our collective by partnering with some of the best fitness studios and instructors to bring even more classes to our members, both digitally and in real life. To join, members purchase a Lululemon Studio Mirror agreed to a $39 monthly subscription and received many exciting new benefits. Another way we engage with guests is through our 10k runs. We sponsored two races in Atlanta and in Houston and we're excited by the response. We paused these experiences during the pandemic so I'm thrilled that we have been able to hold these large-scale community activations once again bringing together our guests, local teams and ambassadors to extend our community connection. And in China, we brought attention to World Mental Health Day in October with a month-long campaign aimed at inspiring people to take positive actions towards improving their physical, mental, and social well-being. This included in-real-life events focused on wellness, media partnerships, and the launch of a digital well-being hub on WeChat. These examples bring to light the unique ways we connect with our guests and our communities across the globe. This enduring strength of Lululemon demonstrates our ability to be globally strong and regionally relevant as we foster a deeper relationship with Lululemon for existing and importantly new guests. All of this increases brand awareness, drives traffic to our stores and websites, and ultimately results in higher purchase consideration engagement with Lululemon. Before handing it over to Megan, I wanted to speak further about our international business. As you know, our plans call for a quadrupling of international revenue over five years from 2021 to 2026. And I'm very pleased with how our leaders and local teams are executing against that goal. This was reinforced for me during my recent visits to the United Kingdom and Australia. I toured both markets with our local leaders and team members and got to experience firsthand the energy and excitement of our stores and our recently optimized locations in Australia. It's also exciting to see how we are elevating the guest experience in these markets with the recent rollout of ship from store and enhanced endless aisle capabilities in both regions. With strong leaders in each of these markets and across our international business, I'm energized by our ability to continue to strategically expand Lululemon across geographies. The potential is considerable. And building upon the momentum from our recent market entry into Spain, we opened another iconic location in Europe just last week. with a store on the Champs-Élysées in Paris. In the heart of one of the city's main shopping districts, this store will enable us to grow brand awareness both in France and across Europe, given this is such a popular tourist destination. While our growth prospects are balanced across geographies, international represents a key piece of our power of three times two growth plan. We're off to a great start, and I look forward to sharing more with you on future earning calls. With that, I'll now turn it over to Megan.