lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. second quarter 2024 results 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 of 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 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 second quarter, as well as our quarterly infographics. 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 glad you could all join us on the call today to discuss our business in quarter two and our revised outlook for the second half of the year. On today's call, I will speak to the strength in our international business. I also will spend time discussing our business in the US, including some missed opportunities in women's, our assessment of the root causes, the plans underway to address these in the near term, and the many reasons for our continued optimism regarding our growth potential in the US. Next, I will speak to our recent brand campaigns and activations. Megan will review our financials, and we will close by taking your questions. So let's get started. In the second quarter, total revenue increased 7% or 8% in constant currency. By merchandise category, women's increased 6%, men's grew 11%, and accessories increased 7%. Earnings per share increased 18% driven by strong gross margin, which contributed to 110 basis point increase in operating margin. In addition, demonstrating our continued confidence in the business, We repurchased $584 million of stock in quarter two, which brings us to $1.2 billion year to date. Let's now discuss our regional performance beginning with our international business. In quarter two, we continue to see strength in our international markets as the Lululemon brand resonates with guests around the world. Growing our business outside of North America remains one of our largest opportunities. and we remain on track to quadruple international revenue from 2021 levels by the end of 2026. Momentum remains strong with total international revenue increasing 29% or 31% in constant currency. By region, our results were as follows. China mainland increased 34% or 37% in constant currency. Rest of the world grew 24% or 27% in constant currency. In China mainland, our business remained robust in the second quarter as we continued to bring new guests into the brand through our stores and multiple e-commerce platforms. In addition to our innovative product offering and omni-operating model, we are acquiring guests through our unique made-to-field positioning, which comes to life through our commitment to movement and community, all of which supports the Healthy China 2030 initiative. In quarter two, we built upon the success of our Summer Sweat Games series with our largest activation yet. This year, we expanded the games to more than 70 stores in nearly 40 cities with approximately 10,000 guests signing up to participate. The national finals were held this past weekend in Beijing. Looking to quarter three, we will build upon last year's success and bring attention to the World Mental Health Day in October with unique activations across several cities in China mainland. In addition, we will expand our activations to other markets this fall, including South Korea, Germany, the UK, and the US. This is a great example of how our teams from around the world share ideas and activate global campaigns. Shifting to our rest of world segment, where we continue to perform well in both EMEA and APEC. We expanded further in Southeast Asia with the opening of our second store in Thailand and our fourth in Malaysia. And in France, our Paris stores and the Lululemon brand overall benefited from the energy and excitement of the Olympics, which I'll speak to in more detail shortly. Turning to our business in the Americas, revenue increased 1% or 2% in constant currency. We continued to perform well in Canada with revenue growth of 8% or 11% in constant currency, while revenue in the U.S. was flat. This is a key area of focus for us and I will now dive deeper into our U.S. business. Our brand remains strong in the U.S. market. Traffic was up across both channels and Google search queries remain positive. Guests are looking for our product, coming into our stores, and visiting our e-commerce sites. While we continue to see growth in our men's business, we have experienced a slowdown in women's. We have improved our in-stocks in smaller sizes through Q2 and are entering Q3 better positioned. As we've analyzed our women's business in more detail, we have determined the most significant factor was a product plan that introduced less newness across core and seasonal styles. By newness, I'm referring to the seasonal updates we bring into the assortment, typically expressed as color, print, patterns, and silhouettes. I'm not referring to our pipeline of innovation, which remains full and the details of which I will share with you shortly. As we have learned more, it's become clear to us that this reduced newness, which is below our historical levels and stems from earlier product decisions, has impacted conversion rates given the fewer new options available to our female guests. While this reduction was seen across our women's assortment, it had a more pronounced impact in Bottoms and in our online channel. The newness that we had performed well, we simply did not have enough to inspire her to purchase. As most of you know, we announced changes within our product organization in May of this year. We implemented a new reporting structure in which our global creative director, Jonathan Chung, reports to me and our chief merchant, Liz Binder, reports to Nikki Neuberger in her expanded role as chief brand and product activation officer. Since this shift, Nikki and I have both spent considerable time with the teams. and we are pleased that this new structure puts design and merchandising on equal footing and reestablishes the healthy balance that must exist within a product organization. The teams are working well together and already in action. Our near-term action plan leverages our capabilities in chase and fast-track design to bring more seasonal newness into our women's assortment as quickly as possible. The teams have been chasing into some of our strong performers including aligned leggings in colors and prints, our gold zip scuba, and soft stream in new silhouettes and seasonal fabrications. Our fast track design capability allows us to bring newness into our assortment quicker while also testing and learning from new silhouettes. For 2025, we are fast tracking several new styles within performance shorts, tops, and track suits. We are optimistic that we will begin to see the benefits of these strategies over the upcoming quarters and return to our historical levels of newness no later than spring 2025. Moving forward, I feel confident that the new structure and relationship between design and merchandising will lead to more ongoing conversations and consistent decision-making. And I'm excited about the newness and innovation that will be flowing into our upcoming product assortments. While we are disappointed with the recent performance in women's, we see many strengths in our U.S. business. our store portfolio remains highly productive with significant opportunities ahead. Our industry-leading sales per foot, the success of our new stores, and the positive results from our optimization program all underpin our comfort with our Power 3x2 target of approximately 5% square footage growth annually in the Americas through 2026. We are only beginning to leverage the power of our membership program, which allows us to engage more deeply with our guests drive loyalty, and increase long-term value. We now have more than 20 million essential members, and I'll share more in a moment about how we're expanding our offerings. And while we have experienced positive increases across our brand funnel metrics in the market, there is still substantial opportunity to drive unaided brand awareness, introducing Lululemon to new gas segments. As you can see, there are many reasons we feel optimistic about our U.S. business and its growth potential. Let's shift now to our recent and upcoming product innovations. Beginning with men's, the business remains robust and we continue to gain market share. In quarter two, we saw strength across the assortment, including Zeroed In, which was launched this past spring and has quickly become a guest favorite and a top three performance franchise. Our pace breaker with the positive response to our shorts and our recently launched pant and jacket is performing very well. Our new Show Zero Polo, which virtually eliminates the appearance of sweat, also launched this spring and has resonated well with guests and will benefit from increased inventory commitments this fall and into next year. And our lounge offering, including soft jersey, steady state, and smooth spacer, continue to perform well, and we will fuel the momentum with additional styles and deeper inventory buys. In women's, I'm excited with our product roadmap for fall, which includes an expansion of our train offering with the introduction of a new performance fabric innovation in a tight, an expansion of our Wonder Under franchise offering our iconic legging in different fabrics, seasonal updates within our line franchise, and an updated version of our charge-fuel footwear style. And our accessories business also remains positive on top of last year's strong performance. We have diversified into a compelling assortment of bags, including our new crew and double zip backpacks and additional styles within the everywhere franchise, including a backpack and crossbody bag, which is fueling continued momentum in the category. One of our goals is to solve for the unmet needs of our guests with new and compelling technical innovations. And this will continue to separate us from other brands. With this in mind, I want to touch on breeze through. a new product offering this quarter for guests who participate in hot yoga and other heat intensive workouts. It was a small buy. We viewed this as a test and learn. And while guests were excited by the fabric, the design didn't meet their expectations. Listening to our guests is central to who we are and how we grow our brand. And we took the right step of pausing on sales and look forward to reintroducing the fabric in the future. This decision had a negligible impact on our performance in this quarter. I'd now like to spend a few minutes speaking about our recent brand campaigns and activations. Increasing brand awareness and consideration remains one of our single biggest opportunities in almost every market in which we operate. So let me highlight a few examples now. As I mentioned earlier, we continue to offer many benefits to members of our free essentials program. In early June, we hosted a members-only weekend at Peloton Studios New York. This exclusive sold-out event featured live classes, a 5K run, sessions with our Peloton ambassadors, and a wrap-up party. We also launched partner perks for members. We partnered with 12 brands, including Aura and Berries, that offer our members exclusive perks and benefits, and the early feedback from guests has been very positive. These strategies illustrate just a few of the ways we engage with our guests beyond a simple purchase transaction by offering exclusive experiences and benefits and helping them feel their best, all of which drives and deepens loyalty. Our partnership with the Canadian Olympic and Paralympic teams came to life at the Games in Paris and continues for the next several days during the Paralympics. As a Canadian, I'm incredibly proud of our athletes and how our brand showed up during the Games. Through our partnership, we outfit athletes for their off-field activities and the Lululemon brand clearly benefit from the podium time the team achieved and the exposure during the opening and closing ceremonies. We further leveraged our partnership with a pop-up shop in Canada House and by offering our Team Canada collection in our nearby stores in Paris, across Canada in both stores in e-commerce and in the US through our e-commerce channel. This partnership is a great example of how we are elevating the Lululemon brand on the world stage by associating with elite athletes, gaining significant earned media and growing brand awareness globally. Another area of focus for us is back to school. Bringing younger guests, and particularly men, into the brand remains an opportunity as we increase awareness regarding the versatility of our merchandise and the breadth of our offering. Football players DK Metcalf and Odell Beckham Jr. star in this year's campaign in North America, and it features our loungewear offering for both men and women and our Cityverse sneaker. Before I hand it over to Megan to discuss our financials, let me share our high-level thinking on our guidance for the remainder of the year. For quarter three and the full year, excluding the 53rd week, we expect revenue growth of 6% to 7% relatively in line with quarter two performance. Our full year revenue guidance acknowledges the uncertainty around the shorter holiday shopping season and the U.S. election in quarter four. Our teams remain focused on the actions I detailed for you. We plan for our penetration of newness to improve in the second half of 2024 and we expect to be back to our historical levels of newness as we start 2025. While you can see our focus on the U.S., other aspects of our business remain strong and we are committed to delivering on our power of three times two target of doubling revenue from $6.25 billion in 21 to $12.5 billion in 26. Using our revised guidance for this year, our three-year revenue growth CAGR from 21 through 24 is 19%, ahead of the 15% CAGR we laid out in our plan. I'm excited with our new leadership structure driving product direction for 25 and our future pipeline of innovation. I feel optimistic we can accelerate growth in our U.S. women's business while continuing to deliver strong performance in men's and international. Megan, over to you.