lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. First Quarter 2076 Earnings 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 the telephone keypad. Should you need assistance during the conference call, you may reach an operator by pressing star then 0. 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 are Megan Frank, Interim Co-CEO and CFO, and Andre Mastrini, Interim Co-CEO, President and Chief Commercial Officer. 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 10Q 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 10Q are available under the Investors section of our website at www.lululemon.com. On today's call, Megan will begin with some remarks addressing current business trends and our updated guidance. Then she and Andre will speak to the plans and strategies we are implementing to drive improved performance and also share some Q1 highlights. Megan will then discuss our detailed financials and guidance outlook. And then the team will be happy to take your questions. Before I turn the call over to Megan, I'd like to remind investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the first quarter, as well as our quarterly infographic. Megan, over to you.

Thanks, Howard, and welcome everyone to our Q1 call. Before we dive into our results and current business trends, I want to say how excited we are to welcome incoming CEO Heidi O'Neill to the company in September. Andre and I both spent time with Heidi. It's clear to me she has a true passion for the Lululemon brand, a deep understanding of product excellence, extensive experience driving growth and transformation at scale, and will be a strong leader for our organization. I'm looking forward to working with her to help Lululemon achieve the opportunities in front of us. I also want to give a warm welcome on behalf of the leadership team to our newest director, Acie Eggleston Bracey, who joined the board in April, as well as to Laura Gentile and Mark Maurer, who will join the board following our annual meeting later this month. We appreciate the support of the full board, including these new directors, as we continue to advance our plans and strategies. Turning to the business, Andre and I remain deeply engaged with our teams with a clear focus on discipline execution and brand vision. Our priorities are straightforward. Strengthen performance in North America while continuing to expand our global growth engine. We saw encouraging signs in Q1 that reinforced we're moving in the right direction. But as we closed Q1 and entered Q2, we faced a few headwinds and a moderating sales trend. Based on our early analysis, there are two key factors impacting our trend. First, we experienced spikes of negative commentary in the media and on social channels with regard to our brand, which had an impact on traffic and overall top line performance. And second, not all of our product launches have met our expectations. While we've had several successful launches so far this year, we've seen others as we start Q2 not generate the anticipated guest response. Taken together, these factors impacted performance and are reflected in our updated guidance. I want to emphasize that we are not sitting still and we are moving with urgency to make the necessary adjustments to re-accelerate momentum, particularly in North America. With that, let's turn to the work already in motion to strengthen our top-line trajectory and position ourselves for long-term sustainable growth. Let's begin with our product creation pillar. As a reminder, our intent with this work stream is to raise the bar on product design, including bringing a new creative energy into our key franchises, deliver a consistent flow of innovation, increase our speed to market, and ensure a relentless focus on product quality. Across the assortment in Q1, we saw good guest response to the updates we brought into some of our key run franchises, including Fast and Free, Swiftly, and Metalvent. Other standouts I'd mention include Daydrift and Define. where we offered expanded silhouettes and new and elevated colors. However, more recently, our new look of yoga campaign didn't drive top line results in line with our expectations. As part of the campaign, we featured away from body styles across our line and group franchises. These styles were met with good guest response, but so far the campaign hasn't had the expected halo effect on other areas of our assortment. We're pleased with our overall product pipeline and in Q2, you will see more warm weather styles across some of our key activities, including run, tennis, golf, and our lifestyle offerings. Over the course of the year, we'll continue to bring newness, excitement, and new fabrics into the assortment, with focus areas including outerwear and lounge. To help improve the sales trend, we are leaning into our chase capabilities now and over the balance of the year. As we discussed on prior calls, our faster chase times improve our ability to read and react to guest demand trends and get back into certain strong performing styles more quickly. We are chasing 20% more volume this year relative to last year, and we see this as an important capability going forward. And with inventory units down approximately 4%, when we see strong guest reaction to new styles, we can get back into them more quickly, which we expect can help accelerate our momentum. We have also reduced our mainline product development process from 18 to 24 months to 15 to 16 months, and we were working to further reduce it down to 12 to 14 months. Our product teams are focused on bringing new innovations to our guests, updating our iconic franchises and leveraging our increased speed to market capabilities to better anticipate meat and fuel demand. I also want to reiterate the product quality is foundational to our brand, and we will continue to lean into this principle and enduring strength of Lululemon. Turning now to our product activation pillar. Andre will share the details of our regional activations in a moment, but I want to speak at a high level to some of our brand and marketing initiatives. To shift the narrative in this competitive market, we are moving with speed to invest more in marketing, community experiences, and product stories to connect with and deepen engagement with our guests. You will see us be bolder in the second half of the year with more brand activations, similar to last week's yoga experience on the Great Wall of China, And in August, we were excited to see the return of Seaweez, our iconic half marathon event in Vancouver, which was a near instant sellout. You will see additional product expressions like new collaborations to drive energy and excitement for guests in key cities around the world. You will also see grassroots community activations, a particular strength of our brand, as well as new and exclusive experiences for press and partners. All of this will be underpinned by an innovative media and advertising strategy store and brand experience elevation, additional partnerships and a creative direction for Lululemon that will inspire our guests around the world to sweat, grow and connect. Next, I wanted to share an update on our enterprise enablement pillar. This is a broad initiative across the enterprise to ensure we are operating as efficiently and effectively as possible as we look at process, technology and our operating model. To drill down a bit, projects we are continuing to advance include analyzing our current global supply chain network, to ensure the structure is fully optimized, reducing indirect spend through our procurement process, including price and terms optimization, volume consolidation and rationalization, and implementing new technology, including AI-powered systems and automation to drive efficiencies across the enterprise. We're pleased with how our teams are implementing the initiatives in these areas, and we expect to see benefits over time. In summary, we expect our actions to help rebuild momentum, expand share, and reassert our leadership position. I'll now hand it over to Andre, who will share some more details with you regarding our guest engagement strategies and our regional highlights. Andre.