Title

Presentation

Lululemon Athletica Inc. beats earnings expectations. Reported EPS is $2.68, expectations were $2.53.

Operator: Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Second Quarter 2023 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there’ll be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Howard Tubin: 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 Meghan 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 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 would like to turn the call over to Calvin.

Calvin McDonald: Thank you, Howard. I’m pleased to be here with everyone to discuss our quarter two results. Today, I’ll share the highlights of our recent performance and speak to some of the exciting product launches and activations we have planned for the second half of the year. As you’ve read in our press release, our second quarter results exceeded our expectations as our core product and new launches continue to resonate strongly with guests in markets around the world. On today’s call, I will provide details on our quarter two performance, I’ll then speak to our outlook and the many opportunities we have across the business. Next, I’ll turn it over to Meghan for a review of the financials and the guidance update.

And then, we’ll take your questions. So let’s get started. Our business remained strong in quarter two with both revenue and EPS exceeding our expectations. Revenue increased 18% versus last year with strength across our portfolio. Comparable sales grew 9% in stores and 17% in our e-commerce business and adjusted EPS increased 22% versus the same period last year. These results demonstrate the strength of the business and how we are well positioned for the second half of 2023. In fact, we are seeing our strong momentum continue into quarter three and expect revenue growth in the 17% to 18% range for the quarter. Meghan will share our detailed guidance with you later in the call. Let’s now look at quarter two in more detail as I share some highlights on product innovation, brand building strategies and regional performance.

When looking at product, we posted strong double-digit growth across women’s, men’s and accessories as we bring newness and innovation into our assortment. Specifically in quarter two, women’s increased 16%, men’s was up 15% and accessories increased 44%. In women’s, guests are responding very well to our core franchises as well as our newer play activities. We continue to see strength in our key franchises, including Scuba, Define and our Dance Studio jogger. In addition, Softstreme has emerged as another meaningful franchise for us. In quarter two, we saw strength across the collection with guests responding well to our offering. Turning to play, our tennis and golf collections remain strong performers for us. As we’ve shared before, our strategy with play is to solve for our guests’ unmet needs across their secondary sweat activities.

We introduced styles designed specifically for these activities while continuing to leverage the versatility of our core assortment. In men’s, I’d like to highlight the ongoing strength we’re seeing in our ABC franchise, one of our most popular for him. Our teams continue to expand and evolve the assortment, which now includes 4 styles and 4 fits and is available in 3 proprietary fabrics, Warpstreme, Utilitech and WovenAir with additional fabrics and solves for unmet needs planned for upcoming seasons. As we expand this trusted franchise, we are gaining share of wallet from existing guests, while at the same time attracting new guests to our brand. In accessories, our entire bag assortment is performing well. Crossbody styles, backpacks and small pouches are helping drive these results and contributed to the 44% growth in accessories in quarter two.

Our teams will continue to create innovative solutions over the coming months and seasons as we realize the meaningful opportunity to expand our bag assortment. Looking specifically at the Everywhere Belt Bag, I am pleased we generated strong double-digit growth on top of last year’s strength. Consistent with our strategy to develop franchises from our most popular styles, our accessories team expanded our assortment of Everywhere Belt Bags across multiple sizes, color waves, prints and patterns and the guests are responding incredibly well. Turning to footwear. We are making steady progress in this category, and I’m excited with how our team continues to evolve the offering. We recently introduced Chargefeel 2, an update to our most versatile run to train style, and we are gearing up for the launch of men’s footwear next year.

Looking now at the second half of the year, I am pleased with our pipeline of innovation. In women’s, we will launch an exciting new collection in the fall, which will show our continued ability to address the unmet needs of our guests. Stay tuned for additional details. On the men’s side, recently in quarter three, we launched two new franchises, the Steady State and our Soft Jersey collection, both of which are exceeding our expectations. Steady State is constructed from the same fabric used in our Scuba franchise, and is a great example of how we can leverage our technical fabrics across genders. Our Soft Jersey collection includes several styles, all in our Jersey fabric, which provides guests with incredible softness in his quick drying, stretchy and sweat wicking.

These collections enhance our men’s lounge offering and are consistent with how we view our overall on-the-move assortment. These products are designed for lounge but made from technical fabric and offer performance features. Later in quarter three, we will expand our outerwear offering with new styles of vests, jackets and waterproof down. And in quarter four, we will launch a new performance fabric designed specifically for cold weather runs. These are just a few examples of how we consistently bring innovation into our core while at the same time, expand into new categories. We are still in the early innings of our product journey and have significant opportunity ahead of us as we continue to solve for the unmet needs of our guests. While product innovation is a key tenet of our Power of Three x2 growth plan, we also have a real opportunity to increase our brand awareness.

As we previously discussed, our unaided brand awareness is still only 25% in the United States. And with the exception of the UK and Australia, our unaided awareness remains in the single digits in every market in which we operate outside of North America. In 2023, we have accelerated our efforts to increase awareness and consideration for Lululemon, and we are seeing gains in key growth markets across the globe. Last quarter, we spoke about several initiatives, including the initial phases of our Get Into It campaign, our Dupe Swap event in Los Angeles, and the launch of the FURTHER initiative. In quarter three, we have several activations and campaigns on deck that will support our key product launches, begin to build excitement for the upcoming holiday season and increase overall awareness of the Lululemon brand across the globe.

Let me share some highlights. Given the positive reception to our Get Into It campaign, we’ll continue to highlight our leadership position in bottoms with another installment in quarter three. For women, the campaign will focus on our core franchises and feature our global ambassador and professional tennis player, Leylah Fernandez. And for men, we’ll elevate our ABC franchise with the support from some fun and exciting special guests. The campaign will include digital media assets across our stores and e-commerce sites as well will also test some targeted television in the U.S. In EMEA, we will build on our soft launch with Zalando in June with a larger consumer-facing launch on this popular e-commerce site. Our relationship with Zalando is not wholesale as we fulfill orders ourselves, and it is an excellent way for us to bring new guests into the Lululemon brand across Europe, where Zalando is a strong and leading player.

And finally, we’ll release our Global Wellbeing Index in the coming weeks to raise awareness and celebrate World Mental Health Day in October. We are excited about the ongoing opportunity to grow brand awareness in the U.S. and across all our international markets. Our grassroots approach to building community and engaging with guests remains unchanged, but we are also increasing the number and frequency of larger scale activations and global brand campaigns. And we are doing this within the confines of our P&L and keeping overall marketing spend relatively stable as a percentage to sales on an annual basis. In addition, the continued acceleration in our top line unlocks dollars that we are then able to strategically invest behind our initiatives to drive brand awareness, leveraging both earned and paid media in new and creative ways.

Shifting now to our regional growth drivers. We continue to see broad-based strength. Specifically, revenue in North America grew 11% in quarter two and international increased 52%. Within international, we delivered strong growth across all markets and continue to see great acceptance of our brand in Greater China, where revenue grew 61%. Within North America, we remain pleased with the underlying strength of the business with double-digit growth in quarter two, consistent with our Power of Three x2 target, and we continue to gain market share. In quarter two, the adult active apparel industry decreased its U.S. revenue compared to the same period last year. Over this time period, Lululemon gained 1.3 points of market share in the U.S. with gains in both men’s and women’s according to Circana’s consumer tracking service.

In the back half of 2023, as I mentioned, we have a compelling pipeline of innovation planned. We will continue to focus on acquiring new guests as we solve for their unmet needs. And thus far in quarter three, I can also share that we are seeing our business in North America accelerate relative to quarter two. Turning to international. Our business remains strong and balanced across regions. In quarter two, total international represented 22% of sales versus 17% in quarter two last year. And while expanding nicely, this penetration still remains below our long-term target, which reinforces just how early we are in our growth journey. Let me now share some recent regional highlights. In China, we celebrated the National Fitness Day in August with the third installment of our Summer Sweat Games.

Through this activation, our local teams hosted regional competitions across the country which culminated in a national final held this past weekend in Shenzhen. This year, the games included 3,400 participants from more than 100 stores in 36 cities. Our APAC and EMEA region also continued to perform well. In Australia, we are beginning to reap the benefits of our store optimization program as well as the recent rollout of ship from store in this market. This is our most mature market outside of North America, and we still have ample opportunity to drive growth this year and into the foreseeable future. We also opened our first store in Thailand in July, which marked the 100th location in the APAC region. The pent-up demand for the Lululemon brand in this market was clear and the opening of the store in Bangkok was our strongest ever in the APAC region.

In addition, we’ve seen a noticeable uptick in travel and tourism within APAC, which is also having a positive impact on our business. And in EMEA, in August, we opened our second store in Amsterdam, which reflects our expanding community and our ongoing investment in this key European city to grow the Lululemon brand. It’s incredibly exciting for all of us at Lululemon to see the strong acceptance of our brand across all markets within our international business. With each new store opening, we see a groundswell of support that welcomes Lululemon into the community. Our runway for growth is substantial, and I am optimistic about the future as we continue to expand our business. And with that, I’ll turn it over to Meghan for a review of our financials and our updated guidance.

Meghan Frank: Thanks, Calvin. Our momentum remained strong in Q2, enabling us to exceed both our top and bottom line guidance. In addition, our inventory growth continued to moderate, grew 14% versus our guidance of approximately 20%, and it remains well positioned from both the level and composition standpoint. I’m also excited to see our sales strength continuing into Q3 as guests are responding well to our back-to-school and early fall product innovations. Now, let’s dive into our Q2 financials. For Q2, total net revenue rose 18% to $2.2 billion, driven by broad-based strength across the business. Comparable sales increased 13% with a 9% increase in stores and a 17% increase in e-commerce. In our store channel, total sales increased 21% versus last year.

We ended the quarter with a total of 672 stores across the globe. Square footage increased 19% versus last year, driven by the addition of 72 net new Lululemon stores since Q2 of 2022. During the quarter, we opened 10 net new stores and completed 4 optimizations. In our digital channel, revenues totaled $894 million or 40% of total revenue. Within North America, revenue increased 11% versus last year. Within International, we saw a 52% increase versus last year with Greater China increasing 61%. And by category, women’s revenue increased 16% versus last year, men’s increased 15%, and accessories grew 44%. It’s also great to see ongoing strength in traffic across both channels. In both stores and digital channels, traffic increased over 20%.

This speaks to the strength of our omni operating model as we engage with our guests in ways most convenient to them. Gross profit for the second quarter was $1.3 billion or 58.8% of net revenue compared to 56.5% of net revenue in Q2 2022. The gross profit rate in Q2 increased 230 basis points versus last year and was driven primarily by the following: a 330 basis-point increase in overall product margin resulting from freight favorability. We remain pleased with the product margin strength we continue to realize on top of the strong gains over the last several years. The combination of product and supply chain costs and occupancy deleveraged 70 basis points in the quarter, driven predominantly by ongoing investment in product development and supply chain.

We also saw 30 basis points of unfavorable impact from foreign exchange. Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were approximately $817 million or 37% of net revenue compared to 35.4% of net revenue for the same period last year. We achieved better-than-expected deleverage in the quarter, driven predominantly by our top line strength while continuing to invest behind our strategic initiatives to build brand awareness among additional investments we’ve accelerated to fuel our Power of Three x2 road map. Foreign exchange, both translation and revaluation, contributed 60 basis points of leverage in the quarter.

Operating income for the quarter was approximately $479 million or 21.7% of net revenue compared to adjusted operating margin of 20.9% of net revenue in Q2 2022. Tax expense for the quarter was $145 million, or 29.8% of pretax earnings compared to an effective tax rate of 28.2% a year ago. Net income for the quarter was $342 million or $2.68 per diluted share compared to adjusted EPS of $2.20 for the second quarter of 2022. Capital expenditures were approximately $146 million for the quarter compared to approximately $145 million in the second quarter last year. The spend in Q2 of this year relates primarily to store capital for new locations, relocations and renovations, technology and supply chain costs. Turning to our balance sheet highlights.

We ended the quarter with $1.1 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory was $1.7 billion at the end of Q2, up 14% versus last year. At the end of Q3, we expect inventory to be up in the high single to low double digits versus last year. The relatively low growth rate is due to the provision for Mirror Hardware we took in Q4 2022 and have not yet anniversaried. In Q4, we continue to expect inventory growth to be relatively in line with sales growth. We repurchased approximately 517,000 shares at an average price of $371. At the end of Q2, we had approximately $454 million remaining on our $1 billion repurchase program. Let me shift now to our guidance outlook.

We continue to be very pleased with the strength of our business as Q2 exceeded our expectations and Q3 is off to a solid start. The upside we’ve seen in the first half of the year allows us to invest into our strategic initiatives to set ourselves up for future growth, while at the same time, flowing some of that upside through to the bottom line. With that being said, we remain aware of the uncertainties that exist in the current macro environment. And consistent with our approach over the last several years, we continue to be prudent and plan the business for multiple scenarios. Now, let me begin with Q3. We expect revenue in the range of $2.165 billion to $2.19 billion, representing growth of 17% to 18%. We expect to open 23 net new company-operated stores in Q3.

We expect gross margin in Q3 to increase 160 to 180 basis points relative to Q3 of 2022. This will be driven by lower freight expense, offset somewhat by strategic investments to support future growth, including supply chain, distribution centers and product teams as well as modest deleverage on occupancy and depreciation. In Q3, we expect our SG&A rate to deleverage by 200 to 220 basis points relative to Q3 2022. This deleverage continues to reflect our strategic decision to invest in growth initiatives including those to grow brand awareness globally. When looking at operating margin for Q3, we expect approximately 40 basis points of contraction relative to last year. Turning to EPS. We expect earnings per share in the third quarter to be in the range of $2.23 to $2.28 versus EPS of $2 a year ago.

Shifting to the full year 2023. We now expect revenue to be in the range of $9.51 billion to $9.57 billion. This range represents growth of 17% to 18% relative to 2022 and exceeds the revenue target in our Power of Three x2 growth plan. We now expect to open approximately 55 net new company-operated stores in 2023 and complete approximately 25 colocated remodels. This will contribute to overall square footage growth in the low teens. Our new store openings in 2023 will include approximately 35 stores in our international markets with the majority of these planned for China. For the full year, we now forecast gross margin to increase between 190 and 210 basis points versus 2022. The expansion relative to last year is driven predominantly by lower air freight expense.

For the full year, we now expect airfreight to be down approximately 210 basis points versus 2022. When looking at markdowns for the full year, we continue to expect them to be relatively in line with last year in 2019. Turning to SG&A for the full year. We continue to forecast deleverage of 150 to 170 basis points versus 2022. While we continue to plan the business prudently, our sales trend has been strong. As I mentioned earlier, this gives us the opportunity to invest into our Power of Three x2 growth pillars while also delivering operating margin this year ahead of our goal for modest expansion annually. When looking at operating margin for the full year 2023, we now expect it to increase 40 to 60 basis points versus last year. For the full year 2023, we continue to expect our effective tax rate to be approximately 30%.

For Q3, we expect our effective tax rate to be approximately 30.5%. For the fiscal year 2023, we now expect diluted earnings per share in the range of $12.02 to $12.17 versus adjusted EPS of $10.07 in 2022. Our EPS guidance excludes the impact of any future share repurchases. We now expect capital expenditures to be approximately $670 million to $690 million for 2023. This increase versus 2022 reflects investments to support business growth, including the continuation of our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments. Our range of $670 million to $690 million is approximately 7% of revenue, in line with our current Power of Three x2 target of 7% to 9%. With that, I’ll turn the call back over to Calvin.

Calvin McDonald: Thank you, Meghan. As these results demonstrate, we arrive at the midpoint of 2023 in a very strong position for what’s ahead. We continue to deliver sustained growth in the business through a steady drumbeat of product, category and market expansions that connects us with our guests on a regular basis. We recognize the significant opportunity in front of us and we remain focused on both delivering a successful 2023 and achieving our goals contained within the Power of Three x2 growth plan. My confidence in our leadership and our people remains extremely high as we consistently demonstrate our ability to deliver for our guests and our shareholders. I’m grateful to the many teams across Lululemon, who champion our brand every day and make these results possible. And now, we look forward to taking your questions. Operator?

Operator: [Operator Instructions] The first question comes from Matthew Boss with JP Morgan. Please go ahead.

Matthew Boss: Thanks. And congrats on another nice quarter. So, Calvin, could you elaborate on the broad-based global strength, notably customer demand that you saw in North America and China as the second quarter progressed? And then on more recent trends, could you just speak to drivers of the strong August momentum and the acceleration that you cited in North America?

Calvin McDonald: Great. Thanks, Matt. Similar to the success through the first half of this year, which is really driven from our core product as well as our new innovation across both performance and OTM categories across both women’s and men’s, so it continues to be that balanced growth across categories, channels, both stores, e-com and all markets that’s fueling the business. And heading into Q3, there’s really no change to that formula, and the team is doing a wonderful job and guests are responding to the new innovation that we are launching. I referenced a few on the call, the Soft Jersey, Steady State for him. We have some exciting innovation still to come. So, I think it’s just a continuation of low unaided brand awareness, and we are launching initiatives to get at that opportunity, incredible product opportunity and the teams delivering on that on unmet needs and our international business, which, in addition to North America is still performing very strongly, double-digit in line with our Power of Three x2 growth targets, seeing acceleration across every market in the globe we’re in.

So, it really is a reflection of my consistent message of us being early innings and balanced growth across all opportunity we have and a team that’s delivering on that potential.

Matthew Boss: That’s great. And then, Meghan, could you just speak to the overall health and composition of your current inventory position as we head into the back half? And just how best to think about markdowns in the third quarter, or are there any constraints to recapturing the markdown headwinds that you incurred in the fourth quarter a year ago?

Meghan Frank: Yes, absolutely, Matt. So, in terms of inventory, so we came in up 14 at the end of the quarter, our expectation was approximately 20. relative to our expectation, there were a few items that drove that balance lower. So the first would be revenue upside above our expectations, second being lower air freight costs and then the third being some timing implications. And in terms of how we’re looking at inventory for the balance of the year, at the end of Q3, we’re expecting high single to low double digits. And then in Q4 — end of Q4, relatively in line with sales as we move into 2024. So, I would say overall, we’re really pleased with the currency and also the level of our inventory. In terms of markdowns, nothing really to note on the quarters.

We’re still expecting markdowns to be relatively flat on an annual basis for ‘23 over ‘22, and that’s consistent also with our 2019 levels, which is a normalized healthy level for us. We run a low markdown penetration, high full price penetration business. We were flat in Q2, markdowns year-over-year, and I wouldn’t expect any anomalies in Q3 and Q4.

Operator: The next question comes from Adrienne Yih with Barclays. Please go ahead.

Adrienne Yih: Great. Thank you very much. Congratulations. The results are really — they really stand alone. Calvin, so — the business is being driven by innovation, product launches and newness, whereas sort of the competitive backdrop is a little bit more safe. And I’m just wondering how have you been able to sort of inspire that? It feels like you’re innovating faster. Every time you get on a call, there’s like another list of five new things that we didn’t know about. So I’m just wondering, how you accelerated the innovation turnover time, the pipeline or the investment? And then Meghan, if you can just talk to us about kind of the China, the opportunity there, the sales are almost double sort of what you have in Canada and the year-to-date sales are roughly similar at $0.5 billion, so just kind of talking about the improvement there and what you think about the opportunities there? Thank you very much.

Calvin McDonald: All right. Thanks, Adrienne. In terms of our speed of innovation, I would agree that the pipeline and the launches within each quarter continue to get very strong and excited about the balance across our accessories business, our women’s business, our men’s business. I think it is an execution of a very deliberate innovation strategy that we’ve been working through the Power of Three and into the Power of Three x2 strategy. You’ve heard me reference our play categories and being very deliberate in terms of what we design into and then leveraging our core, how we leverage versatility, but continue to innovate against some of those core hero franchises that he and she loves so that we don’t simply launch and then just allow it to run without enhancements, improvements and adding to sharing across gender.

For instance, in this quarter, we took our famous Scuba fabric and brought that into a Steady State for him, which was an opportunity we saw in our assortment that we were missing. So, I think, what you continue to see is just the team executing on the strategy. We have a horizon of innovation across Horizons 1, 2, 3, which can be anywhere from 1 to 3, 4 years as we keep looking to solve the unmet needs of our guests and where and how, but we have a lot that we’re able to bring forward and commercialize as well as having a lot that the team continues to work on for future quarters and future years and feel very excited about our ability to sell through core, innovate core and then bring true innovation to the guest through that notion of unmet needs versus unmet wants.

And I think that’s driving our business that we’re truly solving, which is a unique standout in this marketplace.

Meghan Frank: And then, Adrienne, in terms of China, we are really pleased with the performance there in the quarter, up 61% in Greater China. We have a 100 stores today in China. We’re opening 35 stores in an international region this year, the majority of those in the China market. As Calvin mentioned, we’ve had some exciting community activations still looking to build brand awareness and drive into that opportunity there. And then, over the longer term, we’ve set approximately 200 stores at the end of our five-year plan, and I think — there’s also beyond there as well in terms of still very early innings on our China growth.

Operator: The next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.

Lorraine Hutchinson: Meghan, you’ve pulled a lot of investments forward into 2023 as gross margins continue to beat. Can you give us some examples of the most successful investments? And then, also talk to your ability to generate leverage on this line item as we move into 2024.

Meghan Frank: So, we’ve been really excited with the revenue momentum we’ve had and then also the progress that we’ve made on recouping air freight expense. So our guidance now on revenue is 17% to 18% growth ahead of our original target and then margin, guiding to 190 to 210 basis points with airfreight really being the driver there. So, what it’s done is it’s given us the ability to invest behind our Power of Three x2 road map. So, that would include market expansion, notably international, specifically China as a key focus there, improving guest experience and omni capabilities and then foundational investments to drive the business forward. And I think coupled with that, what we’re really excited with is, you heard us talk on Analyst Day about the tremendous opportunity we have in brand awareness.

And this upside has given us an opportunity, particularly in the second half of this year to invest in marketing activations to drive that brand awareness, really capitalizing on some of the key innovation moments we have coming up in the second half of the year. So that, we believe, will drive into our long-term opportunity and sustain our momentum. So, we’re a little bit ahead of where we were — we were expecting to be from a Power of Three x2 initiative road map, and then that’s coupled with driving into some upside opportunity on brand awareness. In terms of leverage, we’re really focused on operating margin and feel good about maintaining our commitment to modest operating margin expansion over the longer term. I think as we get closer to ‘24, we’ll put a finer point on where we see the components of the P&L shaping up next year.

Operator: The next question comes from Paul Lejuez with Citi. Please go ahead.

Paul Lejuez: I just want to talk about the China business. Would love to hear about what sort of volatility you saw in China over the quarter. And if you could talk about how stores performed versus e-com? And where are store productivity levels running in China currently versus North America? Thanks.

Meghan Frank: Hey Paul, I would say in terms of China volatility, we really didn’t experience any over the course of the quarter, I would say, really strong healthy growth across each of the three months of the quarter. And then I’ll let Calvin comment on store and e-com performance.

Calvin McDonald: In terms of both channels, they’re performing incredibly well in the market. We now have 107 stores in Mainland China, predominantly Tier 1, Tier 2 cities, but still see opportunity to grow as well as look to opportunities into Tier 3. Every store we’ve opened has exceeded plan. Our optimization of some stores as we did with our Cary Center location, which is really our first bigger, more experiential store in country is performing incredibly well. And as you know, online business in China is different than that of other markets where our .cn is a lower percentage of our overall business, and we do work through partners such as Tmall, JD to grow our business. But on the back of those platforms and leveraging some of the B2B and working direct and selling direct to our guests through their clienteling platform.

The team is doing some incredible initiatives and learnings for us globally and driving the overall e-commerce business. So, very strong in both, great guest acquisition in both. It’s helping us determine new markets, new opportunities and locations that we can continue to open and build into. And our stores are really driving the brand the way in which we traditionally do in all markets, which is grassroots community and through the educators. And from a productivity standpoint, they’re behind North America, but performing very well, just slightly behind. They’re smaller in size, but we see a significant opportunity, obviously, in the success of that — of our store footprint, both productivity driving the brand, coupled with e-com. So, very exciting and good and balanced growth across all of those levers.

Paul Lejuez: So, what’s the profitability in that China market currently versus where you think it can go longer term?

Meghan Frank: Yes. I’d say we haven’t broken out the profitability specifically. It’s very healthy, closest to our North America region. I think in the near term, what we’re really focused on is capitalizing on the opportunity we have in that market, not necessarily maximizing that operating margin, but that would present an opportunity also over the long term as we scale that market.

Operator: The next question comes from John Kernan with TD Cowen. Please go ahead.

John Kernan: Calvin, can you talk to international up 52%? I think it’s 23% of revenue now. I guess, this dovetails into Paul’s question. The margin structure of this business is seemingly very high. I think this is your highest quarterly gross margin in history in the second quarter. So, maybe just talk to internationally broadly about how that’s contributing to the margin expansion you’re seeing this year?

Calvin McDonald: I’ll tee up relative to the market, the success you mentioning at 23% of our sales and where we see the potential across the market. I’ll let Meghan speak to the margin. I think we indicated on the last quarter that in every market, every region we’re in, we’re profitable and early innings of growth didn’t seem that long ago when international was 14% of our total sales, 15% of our total sales. So to be crossing the 20% consistently to have it contributing to the growth of the overall business is incredibly exciting, to see every market we’re in, the business growing double digit and consistently and having some of the lowest unaided brand awareness we have in the company. It’s single digit in every market, except for Australia and the UK where we’ve been in the longest, but even there, it’s in the teens.

So, we have a significant runway of growth in international business. And at 23%, I think we really are just getting started. I’ve shared before that the potential of this brand is, I think, 50-50 beyond our current Power of Three x2. But I don’t see anything that would hold us back from being a global brand to that scale, diversified and balanced in multiple markets and all markets today being profitable with significant growth through product unaided brand awareness. And Meghan, if you want to touch on the margin mix?

Meghan Frank: Yes, absolutely. So, for the full year, we guided a 40 to 60 basis points of expansion in operating margin year-over-year. That’s about 20 to 40 basis points above 2019 levels. So, we’re really pleased with that performance. Within that international is still below North America profitability. As I mentioned, China being the closest really looking to maximize that market. And then APAC and EMEA, still some opportunity in terms of operating margin expansion in the near term as we continue to scale those markets. So, I would say, over the longer term, focused on driving into the brand awareness and revenue opportunity, store expansion we have in the international market, scaling and leveraging over time.

John Kernan: Excellent. My one follow-up is just on other categories. It’s obviously been a bigger driver of revenue. It should be well north of $1 billion annually this year. Can you talk to the growth of that category and line item and how we should think about that going forward?

Meghan Frank: Yes. So within our other categories, we’ve got our franchise businesses as well as seasonal pop-ups, those would be the largest components. We also have outlets in Lululemon Studio. I would say the growth being driven by new franchise markets as well as relatively consistent, I would say, performance in terms of seasonals and pop-ups. And so I would say we’ll continue to scale markets within that bucket and capitalize on the opportunity we have there with our franchise model with another going forward.

Operator: The next question comes from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel: Congrats on another nice quarter. I have two questions, I’ll shove together. I mean first, I apologize if this is — but you talked about the further strengthening of your business here into fiscal Q3, specifically August. So, can you help us understand better? I mean, where — what’s driving that? Are there particular product categories, particularly geographies you’re seeing that happen? Then I have a follow-up.

Calvin McDonald: Thanks, Brian. I think it’s a combination of some of the new innovation that came out at the tail end of Q2 that is set up in position for sort of back half needs in men’s. We’ve seen incredible response to the Soft Jersey and Steady State were geared up for the ABC campaign of Get Into It, which I’m really excited about, having men’s play along with women’s being featured in that. We’ve activated accessories across our bags. We’ve done some digital campaigning in certain regions relative to back-to-campus, which has resonated well and driven some of our core products in terms of the bottoms in both women’s and men’s. So, it’s been a variety of activations, a combination of getting at unaided awareness through campaigning, leveraging our core as well as some newness and innovation that is resonating, and both he and she are responding very well to.

And that’s consistent across all markets, and we’ve seen a nice response in North America. So, it’s a similar formula, a similar approach to that, really driven, I think, from a North American business has responded well, I think, as we head into the fall and back to campus.

Brian Nagel: That’s very helpful, Calvin. I appreciate that. And then my follow-up question with regard to inventory. So just look at the numbers and given your comments, I mean, you’ve done a phenomenal job of really rationalizing, if you will, inventories. So my question, I mean, given the level of concern that was in the marketplace, say, just a few quarters ago about inventory, both on Lulu and in the channel. As you look at your inventories now, we recognize you always have to manage inventories. But are we really now past that critical point? Is there some type of all clear with regard to your inventory and the cleanliness [ph] of that inventory?

Meghan Frank: Yes. I mean, I would say we’ve made some significant progress. We still have some degree of elevated airfreight in our inventory balance on a cost basis. So, I would say not completely optimized and turns are a little bit slower than history, and our goal over the longer term would to get those inventory turns back to normalized historical rates. So still some opportunity, but I think the team has done a nice job in navigating what was a really dynamic supply chain and positioning inventory so that we were able to capitalize on the demand upside that we saw and experienced.

Operator: The next question comes from Dana Telsey with Telsey Group. Please go ahead.

Dana Telsey: Congratulations on your terrific performance. It’s great to see the progress. As you think about the traffic, which was so impactful, both for stores and for e-commerce. Any discussion regarding the loyalty programs? Is that a driver of this? And where do you stand on the loyalty programs with that enhancement? And then, Calvin, as you’re mentioning new product, I know outerwear is a big thing for last year. How do you see the AUR developing? And are we moving into a higher AUR zone going forward with some of the newness? Thank you.

Calvin McDonald: Thanks, Dana. As you mentioned, the traffic was very strong and pretty much completely in line across both stores and e-comm. So continuing to drive that omni strategy and have the guests connect with us wherever is convenient for them, has been a strategy of ours and continues to resonate and drive our business. And we’re cycling over the success of some categories and items last year that really drove traffic. So, very healthy, strong numbers on top of strong numbers, which is very encouraging as we look at just how the guests, both new and existing are engaging with us. I think membership is a part of that. We’ve had it before membership, but what the membership program obviously is allowing us is more deliberate ways to engage with that guest.

And I mentioned that it’s not going to be a number we consistently share. But I will indicate that the program continues to far exceed our expectations. We launched this less than a year ago. And we now have 12 million of our guests signed up in North America to the Essentials membership program, which is a significant unlock for us, our teams, it allows us to play into our strength of community, relationship, allows us to leverage benefits that are unique to that guest to that member, and allows us to interact with data and communicate with them that is very effective for our digital marketing teams as well as our store teams and look at the history and assist the guests in the way in which we do. So, it is an exciting new program for us that we have a lot of ideas and initiatives planned how we will continue to leverage.

I think it’s a part of it. I wouldn’t point all to it. I think ultimately, it’s the success of the brand, success of our product and product innovation, why the guest comes to Lululemon. And we see that continuing through for the Power of Three x2 period and beyond.

Operator: The next question comes from Ike Boruchow with Wells Fargo. Please go ahead.

Ike Boruchow: Hey. Just two clarification questions for me. Just on the quarter-to-date North America acceleration, is that total revenue, comp or both? And then on China, 60% growth was great. Just kind of curious in terms of the revenue guidance for the remainder of the year, what kind of growth are you guys baking in for China for the back half? Thanks.

Meghan Frank: Thanks, Ike. So in terms of the acceleration in North America specifically, it would be total and comp. In terms of China, we haven’t broken out the second half of the year by region. But we are coming off a very strong performance, 61% growth in Q1 — sorry, Q2 in Greater China. And feeling well positioned as we move into the second half of the year, as I mentioned, 107 stores in China today, 35 stores international, and the majority of those being China openings. And I would say we’re pleased with our performance in China as we move.

Operator: The next question comes from Brooke Roach with Goldman Sachs. Please go ahead.

Brooke Roach: Calvin, I was hoping you could elaborate on the composition of North America growth between new and existing customers. How are those customer cohorts performing as they enter the brand? And are you seeing any difference in customer behavior by age or income demographic?

Calvin McDonald: Thanks, Brooke. In terms of the overall composition, I’ll speak directly to sort of how we view the cohorts. And I think I’ve mentioned before, that the new guest cohorts are performing and behaving very similar to how that cohort has behaved in past quarters, past years. That’s very encouraging for us because we did see through the success last year of the Everywhere Belt Bag that it did pull in a younger guest to see them in the cohort in that cohort behaving similar nature of how they engage, the frequency of engagement and the migration of their spend is encouraging. And we still see our business driven by new guests coming in as well as our team’s ability to retain existing guests and increase share of wallet and spend with them.

So nothing that would signal they’re behaving differently and very healthy and contributing factor to the overall business, both with new existing very low retained, very high guest loyalty, longevity and engagement in the brand and responding to the newness and the innovation continues to sort of be that guest formula.

Howard Tubin: Operator, we’ll take one more question.

Operator: The next question comes from Alex Straton with Morgan Stanley. Please go ahead.

Alex Straton: Congrats on another good quarter. One for me. Just on the stores, it looks like they could be at over $6 million of pop in revenue or so on average this year. It’s definitely a high number per box. So, I’m just wondering, maybe Meghan, how do you think about the trajectory from here? What drives that number higher? And on a related note, how do you think about the store growth opportunity from here in North America specifically? Thanks a lot.

Meghan Frank: Thanks, Alex. So in terms of sales per store and sales per square foot, it’s definitely a key part of our strategy to expand our box size in locations where we have high sales per square foot, high traffic to capitalize on that traffic. So, we are opening approximately 25 what we call colocated stores, which are really expansion. It allows us to have a more holistic assortment across men’s, women’s, accessories, footwear and as I mentioned, capitalize on that traffic trend. So it’s a key strategy for us and one that we monitor closely. We’re definitely further along in that strategy in North America than we are in our international markets, we’re still very early days on that. But still runway, I would say, across both our North America and international region in terms of store expansion and a very measured and deliberate strategy. And then, I would say — sorry, can you remind the second half of your question?

Alex Straton: On the store growth opportunity in North America, specifically?

Meghan Frank: We haven’t broken out the specifics, but I would say we’re not dissimilar from this year and square footage growth in the low double digits range; globally, high single digits in North America.

Operator: That’s all the time we have for questions today. Thank you for joining the call, and have a nice day.