lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica, Inc. first quarter 2023 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 Athletica. Please go ahead.

Thank you and good afternoon. Welcome to Lululemon's first 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 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 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 welcome everyone to our call today. I'm happy to be here to discuss quarter one and share with you our strong start to 2023, which shows the continued momentum in the business. As you've read in our press release, we delivered top and bottom line results that exceeded our guidance. We continue to engage with guests across the globe and drive our business with new and innovative technical products. On today's call, I'll provide updates on our quarter one performance, our community-based model, which is powered by our new membership program. I'll also share highlights on our product performance as well as our international business. And then I'll turn it over to Megan for a review of our financials and a guidance update. Then we'll take your questions. So lots to share. Let's get started. In quarter one, as I mentioned, the business delivered strength across both the top and bottom line. Revenue increased 24% versus last year, balanced across category, channel, and region. Women's was up 22%, men's was up 17%, and accessories was up 67%. Comparable sales grew 16% in stores and 18% in our e-commerce business. And by region, North America grew 17%, and international increased 60%. Within international, we saw a meaningful acceleration in the greater China business with revenue increasing 79%. EPS was strong as well, increasing 54% versus last year to $2.28. This strength was driven by revenue, gross margin, and SG&A, all coming in better than our guidance. So a great start to the year fueled by our product and people. For today, I'd like to devote some time to talk about our community-based model. Not only does our approach allow us to connect uniquely and authentically with our guests, it also drives incrementality of spend and increases LTV as guests engage more with our brand. We are celebrating our 25th anniversary this year, and community has been at the core of our brand since day one. Within North America, eight months ago, we embarked on an expansion of our model with our Essentials membership program. Through this free-to-join program, we gain deeper knowledge on how our guests like to sweat. and what aspects of our brand are most meaningful to them. We can leverage the data and insights to help develop future activations, invite them to the events that are most relevant to them, and inform our product pipeline with opportunities around unmet needs. Our stores are an integral part of this ecosystem, as they provide connection points within local communities across the world and serve many purposes, including allowing our guests to interact with our educators, to learn about our product, the technical innovations that can be found within our assortment, and the unmet needs they solve. Secondly, our stores act as hubs for our local ambassadors and fitness studios. Guests looking for new ways to sweat in their neighborhood need only enter the local Lululemon store where our educators will point them to the best studios in town. Thirdly, our stores are the focal point for local events that range from hosting run clubs and other sweat sessions to parties and community celebrations. And finally, our stores provide support for some of our larger scale activations, such as our 10K runs, product launches, including footwear, and our Lululemon Studio launch last fall. In quarter one, we saw a meaningful increase in the number of community events compared to the same period last year. And this brings us back to the pre-pandemic levels. Key celebrations in the quarter included our Align Campus Hall Pass event to increase awareness of our new Align styles with our younger guests, And exclusively for essential members, we ran six events across three cities in Houston, Chicago, and Boston, which were a great success and hugely oversubscribed. Most recently, May has been a big month for activations. We went live with our new Lululemon Studio digital app earlier this week. The app, which will help us broaden our TAM, offers guests in the U.S. access to our industry-leading content for only $12.99 per month without needing to purchase hardware. We announced our further initiative. Further will demonstrate how far women can go when they're supported with resources and product innovations typically reserved for men. This initiative will include a scientific research program, which takes a holistic approach to addressing the existing sex and gender data gap and endurance performance, new women's first product innovations, community activations, and a give back component to support young women. In addition, the program will culminate in a multi-day women's only ultra marathon starting on the International Women's Day 2024. At its core, this initiative supports Lululemon's commitment to innovation, solving front met needs, and driving brand awareness. In addition, we tapped into dupe culture with our Align Legging dupe swap event in LA. Our team set up a two-day pop-up at the Century City Mall and asked guests to trade in their dupe leggings for a pair of our iconic Align leggings. For us, the primary purpose of this event was new guest acquisition and increasing brand awareness for being the original in leggings. Overall, it was a resounding success. It generated more than a billion earned media impressions and was covered by national and international media outlets in addition to creating viral social media buzz. About 50% of the guests who traded in dupes are new to our brand Approximately half of the guests who attended, some of whom started waiting in lines as early as 3 a.m., were under 30 years old. And while I won't get into specifics, the leggings that guests traded in ran the gamut in terms of brands and price points. We view our community model as one of our biggest competitive advantages, with connection points across both the physical and digital, Our ecosystem powered by membership supports our leadership position in developing and cultivating Omni guest relationships. We engage with guests in ways that are more than just transactional by creating deeper connections and more holistic relationships. This in turn builds our brand awareness, drives purchases and contributes to our strong financial performance. Let's shift now to our product innovation. Guests responded well to our spring merchandise assortment as we continue to bring compelling innovation across our core and play activities and footwear. In women's, we saw continued strength in many of our key franchises, including Scuba, Define, and Align. When looking specifically at women's bottoms, we saw growth of 22%. While women's bottoms is our most mature category, our teams continue to update and enhance existing styles, bring innovation via new fabric technologies, and create new styles and silhouettes that solve for unmet needs. In quarter one, our strength in women's bottoms was driven by our iconic dance studio pant, which has always been a guest favorite and is currently experiencing a resurgence in popularity. The newest additions to our line franchise, including the mini flare and wide leg, and our incredibly soft and smooth soft stream bottoms. In men's, guests continue to respond well to our iconic ABC, Commission, and Pacebreaker franchises. In accessories, I'm thrilled with the strength we continue to see across our assortment. While it is the smallest of our three major merchandise categories, it is a growing piece of our business that we fuel with innovation, just as we do across women's and men's. In quarter one, guests responded well to our collection of bags, backpacks, and duffels. And we continue to bring newness and innovation into our footwear assortment. In quarter one, we launched an updated and enhanced version of the Blissfield running shoe, And just last week, we launched the Blissfield Trail. This shoe is our first road to trail running shoe designed to offer traction and durability for guests who love to run on the trails and off the road. Our B-Planet initiatives are also driving product innovation in support of our 2030 goal to make 100% of our products with sustainable materials and end of use solutions. For Earth Day in April, we debuted our first capsule collection made with plant-based nylon in collaboration with Geno, a leader in the sustainable material space. More recently, we announced a new partnership with Australian and viral tech startup Samsara Echo to scale circularity through textile to textile recycling, which is a very cool technology. Together with Samsara, we're working towards recycling our apparel back into new products bringing us one step closer to our end-to-end vision of circularity. This partnership, along with our other be-planted initiatives including Like New and our collaboration with Geno, is the latest example of how we are taking a leadership position in our sector and driving toward a circular ecosystem by 2030. Turning now to our product pipeline, let's take a look at quarter two. We're continuing to build out our golf and tennis collections with versatile styles that can be worn both on and off the course in court. The second installment of our Get Into It campaign launched two weeks ago and featured both technical shorts and new on-the-move styles for both him and her. And for men, we'll be expanding our offering of train tops with new styles using our DrySense fabric technology. These are just a few examples of how we continue to bring innovation into all areas of our assortment solve for the unmet needs of our guests, increase wallet share, and grow our brand awareness. Before I turn it over to Megan to discuss our financials, I'll take a moment to share some geographical highlights with you. As you know, one of the three key pillars of our power of three times two plan is international. We have a target to quadruple our business outside North America between 2021 and 2026. This will be driven predominantly by our existing markets but we'll be entering some exciting new markets as well. In 2022, international represented only 16% of our revenue, and I remain optimistic about our runway of global growth. As I stated earlier, our business remains strong in North America and across our international regions. In quarter one, revenue in North America increased 17%, while we saw 60% growth in international. In Greater China, we experienced a significant sequential acceleration in the business relative to quarter four, as the effects of COVID-19 subsided. In total, revenue in Greater China increased 79% in quarter one, ahead of our expectations, and just one more sign of the potential within this market. I had a chance to visit Shanghai in mid-April for the first time in three years, and it was great to see how much our brand has grown in the city. We walked through the neighborhoods we served, visited our new stores, and I was impressed by the incredible brand experiences we are bringing to the local community. In addition, spending time with our educators as they engage with guests and bring our culture to life is always one of my favorite parts of being in market. In AMEA, we're off to a great start in Spain, a market that we entered last fall. And with the help of a franchise partner, we recently opened our first store in Tel Aviv, with Israel becoming the 24th market globally for Lululemon. We know that the Israeli guest has been engaging with their brand while traveling to other regions, and now we'll be able to bring our product, innovation, and community and guest experiences directly to them in their home market. In APEC, business remains robust as well, and in the coming months, I'm pleased that we will enter Thailand with our first store in Bangkok. Our approach to increasing brand awareness and growing revenue internationally is rooted in the same tenets as what has fueled our success in North America. This includes our multi-channel, direct-to-consumer model, our community-based approach to brand building, our innovative product assortment, and the deep and direct connections we have with our guests. I'm excited for what the future holds for our global business as we continue to execute the Power of 3x2 growth plan. And with that, I'll now turn it over to Megan.