lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. fourth 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 Atletica. Please go ahead.

Thank you and good afternoon. Welcome to Lululemon's fourth quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO, 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 10K and our quarterly reports on Form 10Q. 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 annual report on Form 10-K 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 annual report on Form 10-K are available under the Investors 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 fourth quarter, as well as our quarterly infographic. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Calvin.

Thank you, Howard. I am pleased to be here today to discuss our strong finish to another strong year for Lululemon. As you've seen from our press release, our adjusted quarter four results came in ahead of our January guidance update, and our adjusted full year results represent a very solid start to our power three times two growth plan. I'm also excited that we continue to see strength and momentum across the business so far in quarter one. None of this would have been possible without our Lululemon collective, our employees, our vendor partners, our ambassadors, and our guests, all of whom are integral to our continued success. I want to express my gratitude on behalf of all of the senior leaders to our incredible teams around the world. Thank you for your ongoing commitment to Lululemon. We are ready for all the future holds for our brand in 2023 and beyond. On today's call, I plan to cover several topics. Our quarter four and full year results, our product pipeline for 2023, an update on our membership program, our recent market share gains, and finally insights across our international business. So let's get started. Our momentum continued in quarter four with revenue increasing 30% versus last year and 26% on a three-year CAGR basis. We managed the business very well through an environment that was highly promotional and our markdowns were only up a modest 40 basis points versus 2019. I am pleased that as we progressed out of the holidays and began to transition to new spring merchandise, regular price sales returned to our normal levels. This speaks to the power of our brand, the appeal of our merchandise assortment, and the strength of our operating model. And as you can see from our guidance, business remains good in quarter one, and we are looking forward to another strong year in 2023. Our business continues to be well balanced across product category, channel, and region. Revenue increased in quarter four on a three-year CAGR basis as follows. Women's was up 23%. Our men's business was up 26% and accessories was up 44%. We saw a 10% increase in company operated stores and our e-commerce grew 46%. And by region, North America grew 24% and international increased 39%. When looking at adjusted earnings per share, we continue to deliver strong gains as well with quarter four EPS increasing 31% versus last year and 25% on a three-year CAGR basis. I would also like to spend a moment on our four-year 2022 results. As you know, we launched our new five-year power of three times two growth plan last spring. At the highest level, this plan assumes 15% CAGR revenue growth and modest operating margin expansion annually. In 2022, our revenue increased 30% compared to 2021 and 27% on a three-year CAGR basis. Adjusted operating margin increased 10 basis points, while adjusted EPS increased 29% and 27% on a one and three year CAGR basis, respectively. It is a testament to the strength of our brand that for the full year 2022, we were able to significantly exceed our annual revenue goal and deliver adjusted operating margin in line with our target. And we achieved these results despite the challenging macro backdrop, supply chain issues, and the pressure of COVID-19 in China. Now let's shift to product innovation. 2022 was a strong year for product newness and innovation. We continue to expand our core categories with the launch of sense knit fabric technology and cold weather run styles. We grew our play categories with our golf, tennis, and height capsules, and we entered a new category with the launch of footwear. Looking forward into 2023, I continue to be incredibly excited by the pipeline of innovation developed by our product teams. Several of our ideas this year include franchise growth, category expansion, and building upon the success of some recently launched collections. First, in the coming weeks, we will launch our Get Into It campaign, featuring our popular and versatile Align franchise. As you know, Align began with a single style, a legging, which we grew to be our number one performing bottom. We then expanded the collection to include shorts, tanks, and bras. And more recently, we added away-from-body styles, including wide leg and mini flare. We'll support this product story with an integrated global marketing campaign. We will also be expanding our popular men's franchise, License to Train, into women's later this year, which will complement our successful Wonder Train franchise. In men's, we continue to innovate within our core activities with new versions of the metal vent tee and the pace breaker short. Updates to fit, function, and aesthetic have modernized these guest favorites. And in footwear, we recently introduced an updated version of Blissfield, which incorporates learnings from the initial launch, and it's already receiving the same kind of positive media reviews that we have seen throughout our footwear rollout. In May, we will launch Blissfield Trail, our first road to trail shoe, And this summer, we'll introduce an updated version of Charge Field. Related to footwear, we are pleased with our performance and guest response. Looking forward, we're excited to continue expanding our offerings for her and also launch our men's lineup in 2024. These are just a few examples of how we solve for the unmet needs of our guests. The versatility of our merchandise assortment is one of the key competitive advantages for Lululemon. One thing to add is that we do not drive our top line growth through discounts or promotions, and we have no intentions to do so. We run a full price business with markdowns strategically used to clear seasonal and other select product, and this will remain our approach in the future. Now I would like to update you on membership. We launched our new two-tier membership program in North America this past October, and throughout the holiday season, we gained many learnings and insights regarding how our guests engage with our brand. Let me start with our Essentials program, which is offered to guests at no cost. While we do not intend to release this metric regularly, I wanted to share that the number of signups is significantly exceeding our expectations. In the first five months, we have already enrolled more than 9 million members. This demonstrates the significant potential behind this program. While the Essentials tier offers several compelling benefits and access to content, No discounts are involved. The rapid rate of signups speaks to the incredible loyalty of our guests and the early results show our membership program increases the frequency of guests engaging with us. For example, more than 30% of members have already participated in at least one of the benefits of the program. And we expect this engagement to drive retention and incremental purchasing behavior going forward. Related to the Lululemon Studio tier of our membership program, We have also gained valuable insights that are informing our next steps. As we mentioned in our press release, we are taking an impairment charge related to assets and goodwill associated with MIRA. Megan will share more details with you in a moment. As you know, we tested a paid city-based membership program in North America prior to our acquisition of MIRA. Through that experience, we saw how guests were eager to engage with us through some of the sweat options we provided to participants. Not only did members enjoy these benefits, but we also saw increased member engagement, new guest acquisition, and an increase in member spend. These learnings were the basis for our acquisition in 2020. The recent launch of Lululemon Studio has provided a new way to scale a paid membership program. Our best-in-class content helps build on our community of engaged guests, deepens our connection with them, and drives incremental purchases of Lululemon product. In fact, after studying the behavior of members, our initial analysis suggests that their spend on Lululemon product increases approximately 9%, and this 9% is incremental. However, as you know, since our acquisition, the at-home fitness space has been challenging. While members love our content, hardware sales did not match our expectations, and even though our CAC has continued to improve, it has not improved enough to maintain the current level of investment. As we continue to invest prudently in this business, we are evolving the model from being focused on hardware only to offering content through a digital and app-based solution as well. The new, more efficient app-based model will launch this summer at a lower monthly subscription rate, and when combined with our 9 million and growing Essentials members, will allow us to expand our total addressable market for potential members. We view Lululemon Studio in the same way we view any innovation. We test. we learn, and we evolve as necessary. Although the acquisition has not fully materialized as originally intended, we're in a much better position in our understanding of community and our new membership program as a result. Shifting gears, I want to speak to the strength of the Lululemon brand and the gains we are seeing in market share. Let me share a few metrics with you. When looking at transactions, our growth continues to be well-balanced across new and existing guests. In quarter four, we delivered a nearly 30% increase in transactions by new guests and more than 35% increase in transactions by existing guests. For the full year, these results contributed to a mid to high 20% increase for both metrics. Next, I will touch on our recent and continued gain in market share. In fiscal quarter four 2022, the adult active apparel industry decreased its U.S. revenue by 5%. compared to the same period last year. And over this time period, Lululemon gained 2.3 points of market share in the U.S., the most of any brand in this market, according to NPV Group's consumer tracking service. This is the highest quarterly market share gain we've achieved since we began tracking these numbers in 2020, and it caps the year in which we grew our market share every quarter. This speaks to our growth in the U.S., a key market within North America, and as we detail that analyst day, we have significant opportunity to grow our brand awareness in North America and markets around the world. Just since last April, we have seen increases in awareness in some of our key growth regions. We added five points to our unaided awareness in Australia from 19% to 24%, two points in China from 7% to 9%, and two points in the UK taking us to 16% in the market. As you can see from these numbers, significantly more consumers in these regions are currently unaware of our brand compared to those who are, which highlights this meaningful opportunity. As I mentioned earlier, our business remains strong in both our North America and international markets. In quarter four and full year 2022, revenue in North America increased 29% while our international business generated 35% growth in quarter four and for the full year as well. I would like to turn to our results in China, where our potential continues to be significant. We have been investing in foundational infrastructure, people and stores that have fueled considerable growth in the market. As the impacts of COVID-19 normalize, we are seeing our momentum accelerate and we are excited for the opportunities in the region in 2023 and beyond. In quarter four, revenue in China increased more than 30% versus last year and over 50% on a three-year CAGR basis. While COVID-19 impacted revenue in December, we had a strong finish to the quarter and have seen momentum accelerate in quarter one. We have a solid foundation in the region across our brick and mortar and digital channels and supported by exceptional talent on which we continue to build. We recently opened our largest store in Asia Pacific Carey Center in Shanghai. It's an incredible expression of our brand, reflecting our commitment to the market, and it now brings our store count in China to nearly 100 locations. It's clear our growth strategies are on track, and we remain early in our journey across our international markets. With that, I'll now turn it over to Megan.