Q3 2019 Earnings Call

Thank you for spending by this is the conference operator.

Welcome to the Lumileds Athletic <unk> third quarter 2019 conference call.

As a reminder, oh parties depends on in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions.

And at least who wish to join the question Q May Press Star then one under telephone keypad.

She didn't need assistance during the conference call you May see got an operator by pressing star in theater.

I wouldn't like to turn to compress over to Howard Tubin, Vice President Investor Relations for Lunarlon when the Politico. Please go ahead Sir.

Thank you and good afternoon welcome to the limited third quarter earnings Conference call. Joining me today to talk about our results our Calvin Mcdonald CEO Sunshade, Chief product officer, and PJ Guy to see up.

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 certain aspects of media lemons future.

These statements are based on current information, which we have assessed which by its nature is dynamic and subject to rapid and either abrupt change.

Actual results may differ materially from those contained in our implied by these forward looking statements due to the risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the FCC, including our annual report on Form 10-K at 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 disclaims any obligation or undertaking to update or revise any of these statements as a result of your information or future events.

During this call we will present, both GAAP and non-GAAP financial measures reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q , and in todays earnings press release.

The press release and accompanying accompanying quarterly report on Form 10-Q .

Available under the Investor section of our website at Www Dot Lululemons Dot com.

Are 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 third quarter as well as our quarterly in program.

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 turn the call already Kelly.

Thank you Howard and I'd like to welcome everyone to our third quarter earnings call. We're proud of the continued momentum in our business and excited to share there were some results with you today.

Consistently impressed by the strong performance of the brand and the ability of our teams to execute a high level.

On today's call will provide an overview of the results within the framework of our power of three growth pillars product innovation omni guest experiences and market expansion and I'm pleased to be joined on today's call by two members of our senior leadership team.

Okay, our chief product officer, and PJ, Gidel, our Chief Financial Officer.

I'd also like to take a moment to think Stewart handle 10 for his contributions over the past five years as we announced this week Stuart will be leaving little I'm in early January to take on a leadership role at a company outside of the apparel industry.

He has been instrumental in helping us build our capabilities within supply chain finance and I T and more recently, we have worked together on our long term growth strategy for our international markets. We are grateful for stewards. Many contributions to the 11, we wish him the baseness next chapter.

Moving forward, we have a number of experienced leaders ready to take on more responsibility I'm pleased that Julie Aprile, our chief Technology Officer, and Ted Dag Navy, our chief supply chain Officer have joined our senior leadership team report to me in terms of our international business, our regional leadership structure remains in place and the.

Teams will continue to execute against our growth plans as we identify the ideal leader with proven experience to serve as our new head of international.

Me now share some details about our third quarter results. We're pleased with the strength in the business with continued growth across product categories channels and regions. Our results for the third quarter include total revenue growth of 23% constant dollar comp increase of 17% on top of an 18% increase.

Just last year and an earnings per share increase of 28% compared to adjusted earnings per share last year. I also want to mentioned, how our momentum it's extended into quarter four with record setting days over the Thanksgiving weekend in into cyber Monday as guests responded well to our range of product offerings I was thrilled to be.

Well to visit six of our stores in four cities over the holiday weekend and I was very impressed to see how our strategies came to life.

These results keep us firmly on track to deliver on our power of three growth plan as we discussed at our analyst day earlier this year as you'll recall, our five year vision details our path to grow our core business in the low double digits annually, while also doubling our mens doubling our digital in quadrupling, our international business as by the end of 22.

23, our organization is aligned behind these priorities and we are focused on the key strategic pillars that will enable us to live into and deliver against these goals.

So I will take you through our product highlights shortly but I'm thrilled by the considerable progress we made this quarter within our product innovation pillar guests responded well to our product offerings, which we continue to refresh and diversify momentum continues in our pant category in both men's and women's comps outperforming the overall chain in it.

Question, we continue to expand the key categories of bras in outerwear with comps in outerwear being particularly strong and in men's I'm proud that we increased our revenue 38% this quarter, which is the largest increase of the year.

Let me shift gears now to our omni guest experience pillar.

You know last quarter, we opened in the Lincoln Park neighborhood of Chicago, and we couldn't be more pleased with the initial performance. This quarter, we launched our membership test in Chicago, and we're seeing a halo effect across the entire market. It is the combination of these offerings that creates a unique experientially expression into loyalty.

We hit our membership goal within one month and participation continues to include both new and existing gas we've seen approximately one third of our members take sweat classes offered in the store with over 90% of them sweating with us for the first time.

And for both medium and high value gas, we're providing an opportunity to engage with the new lemon in new ways as we've seen frequency of visits for these gas increased significantly.

Building upon these learnings on November 20, yet just in time for Black Friday, We opened our second experience will store at mall of America dislocation has been adopted to this mall based environment and to what's unique in this market, including a higher volume of tourists, we'll share more with you over the coming quarters, but we're pleased with the early performance.

Mall of America, we're confident that as we invest in the experiential elements of our brand we can enhance our guest engagement across the market.

Beyond the four walls of our stores guests are eager to participate in the events, we create along with our experience will stores in our membership task our events allow guests to engage with us in ways that deepened loyalty beyond a simple in store transaction.

Building upon the success of Seawheeze and our annual 10-K runs in Toronto in Edmonton, We sponsored our first race in the United States in San Diego last month, which sold out within 72 hours I participated and love being part of this experience with more than 5000 runners so powerful realize Asian of our vision.

To be the experience so Brad that ignited community of people living this wed like to sweat grow and connect with stood out to me was the remarkable engagement of both our ambassadors and guests a key component of how our goal to create an omni social community that fosters human connection.

Our events and loyalty strategies extend beyond North America and in October we hosted our third European Sweat Life's festival of the year in Paris. These festivals are great expression of our brand and we brought together over a thousand attendees for a day of sweat classes personal development and connection.

Let me now speak to our digital channel the investments we've been making continued to pay off with comps this quarter of 30%. That's on top of the 46% increase in the same quarter last year and growth of 25% two years ago.

We enhanced our digital shopping experience in several ways during this quarter, including launching new product display pages, both online and within our mobile App. These pages provide more detail about our products and educate our gas about the unique attributes each style offers.

Improving our search platform, which makes search more relevant on an individualized basis and moves us forward with personalization enhancing overall website performance and continuing to increase the breadth of our online assortment.

Finally, I'd like to highlight our relatively new BOPUS capabilities, we were in nearly all of our North American stores for the entire corridor and are pleased with the results consistent with what we saw from our initial BOPUS enabled stores, 80% of orders placed online are ready for guests picked up within one hour. In addition.

Approximately 20% of these guests are making an additional purchase when they come into the store to pick up their online order. We're excited with our guest engagement here and expected only to grow and importance during the holiday season.

I will now move on to highlight the success within our market expansion pillar. We have discussed how we see considerable growth remaining in our core market of North America and this quarter revenue increased 21% as traffic remains a key driver.

Existing and new guests continue to connect with us across both our physical stores and digital channels.

Right if components of the business, our leading to this success, including our engaging and agile store environments distinct brand activations and compelling merchandise assortments.

Our brick and mortar strategy continues to provide us with flexibility.

Prior to Black Friday, we opened our largest store ever on fifth Avenue in New York.

The 23000 square foot space is spread across four floors, including a men's floor to levels of women's and a dedicated flex space, where we will activate a number of exciting product stories and currently were showcasing our lot collection. So beautiful expression of our product and we're pleased with the performance to date.

Our mainline and co located stores continue to perform well and given the time of year, our seasonal store strategy comes into play in a meaningful way.

These locations afford us the opportunity to engage with Ghassan communities, where we don't have a year round physical presence. While also testing these markets for potential permanent store and a very low cost effective manner, our existing gas in these markets respond well and appreciate the opportunity to connect with us directly in in person during the holiday season, but these stores also.

Bring a new gas into the Brad with approximately 30% of transactions and these stores coming from gas who were not previously known to us.

Q4 will be operating just over 50 seasonal locations.

Turning now to our international results, which demonstrates how our brand in our vision appeal to guess across markets and geographies consistent with our strategy, we're growing our store count across Europe , and Asia, the expanding base, coupled with our local e-commerce sites in brand Activations is increasing our guests awareness in each market and importantly.

Our traffic.

This is fueling our strong revenue momentum across our international markets and we're also pleased by our 35% increase in quarter three.

In Europe . This quarter total revenue grew 29% to build upon our brand momentum. We recently opened a new store in the Moray District of Paris. This is our second mainline store in Paris and Leverages. Upon the success, we've seen from our store in saying is your math, which opened earlier. This year. In addition, just this past week, we entered Norway.

The new market for us with the store in Oslo.

I'd now like to focus on China, where we continue to see considerable opportunities for further expansion.

I was recently in market with the team and we visited several cities in and around Shanghai not only did we see the continued momentum of our more established stores, but we saw the significant opportunities with tier two cities such as hung show, where we opened our first are located in hung Joe Tower, We had our best opening day performance to date of.

Any store in China, and it has performed well ever since.

This speaks to the growing brand strength and awareness 11 is realizing in this important country, we will double our store base in China. This year and we believe we are only scratching the surface of our potential within China and Asia overall.

Our digital channel remains robust with China ecommerce business growing over 60%. This quarter, we had a record setting singles day in November where we surpassed the entire volume of last year's event and just 69 minutes, while we leverage this event to move through markdowns in seasonal inventory, we still realize full price sell through.

In the strong double digits and also acquired over 30000, new guests.

I'd like to pause here and mentioned the situation in Hong Kong, we're monitoring events closely and as other companies have reported we've seen a minimal impact on our overall business. However, this has been offset by the continued strength across the APAC region.

We're excited about the results across our international markets and we know this is just the beginning for losing them and around the world will continue to invest in these regions as we live in to our goal of quadrupling our revenue outside of North America by 2023, Let me now turn it over to side to share some highlights with you from our product innovation pillar Sun.

Thanks, Calvin I'm thrilled to be here today to speak with you about the exciting things we have going on within the product function at Lulu Lemon response to our assortment was strong across the board as they continue to grow our core expand key categories delight, our guests at pinnacle of product and deliver new innovation through the science to feel.

As Kevin mentioned, we were pleased with guest response to our offering over Thanksgiving weekend.

Guest love the special edition Manifesto print, we offered in our lender under tight energy bra and define jacket. We also introduced holiday in spite of fabrications and key franchises across men's and women's to drive full price selling during a period that is highly promotional.

Focusing now on Q3 women's comps grew in the mid teens protect with particular strength and panton outerwear.

We further leveraged our science a feel innovation platform with the launch of the mapped out type which offers our new sensor technology.

This technology engineered ventilation and compression and direct varying levels of support and visibility throughout the legging. We're excited with this new innovation and look forward to leveraging it across additional styles over the coming seasons, but also pleased with the strength we continue to see in our big three proprietary fabrics developed through our science, a Z olin's Nulu new lax.

Nevertheless, engineered for yoga run and train respectively.

We brought newness into our new luck fabric. There are slated technique to address our guest cold weather run needs. This is incredibly successful and gives us more opportunity to offer solutions and thermal comfort.

Shifting to mens one of our key growth pillars total revenue increased 38%.

We saw strength across the board with outerwear pants second layers and underwear all standouts.

Performance in outerwear was particularly encouraging with concept 100%.

Let me now share highlights on some of our key category expansions outerwear abroad. As I mentioned are male guests responded exceptionally well to our outerwear offering during the quarter. We were also happy on the women side are lighter weight transitional pieces rain repellent and Otcs styles are stronger early in the quarter with our heavier weight styles accelerating toward the end of.

Q3 in Bras, we continue to push further into high support we entered this category within Libra and launch the runtime style. In Q3, we continue to believe the opportunity in high support meaningful for us and you'll see us continue to build out this offering in 2020.

I'd also like to highlight Iraq signed a collection. This is a great example of how we use collaborations to acquire new guests and gain wallet share from existing guess.

With this collection, we collaborated with London based design or rests on the Illinois, which is known for modern feminine silhouettes and our trademark color blocking the collection span 17 pieces and performed well for us in both North America, and our international markets.

Yes, Love Exxon does take on our popular defined jacket and they were responded well to be Infinity code.

This co can be 126 different ways and retail for $998 with exciting here that this is another proof point, which tells us that when we bring newness and innovation into the assortment price doesn't appear to be a limiting factor.

Looking ahead, we are excited to solve for our guests unmet needs through our continued focus and proprietary fabric innovation relenza science to feel.

Thank you and ill pass it onto PJ.

Thanks, John before I provide highlights on Q3, and our guidance outlook I will refer you to the financial supplement posted on our Investor site for additional details.

For Q3 total net revenue rose, 23% to 916.1 million driven by continued strong execution across all parts of the business.

And our store channel, we delivered an 11% constant dollar comp store sales increase on top of a 7% increase in Q3 of last year.

Square footage increased 18% versus last year, driven by the addition of 53 net new Lululemons stores since Q3 of 2018.

During the quarter, we opened 19 net new stores and completed six optimizations.

In our digital channel, we posted a 30% constant dollar comp increase on top of a very strong 46% increase last year for the quarter E. Com contributed contributed approximately 247 million of topline or nearly 27% of total revenue.

Increased traffic in Q3 continues to drive comps both in store and online with increases in the high single digits and over 30% respectively.

At the impact of foreign exchange decreased revenues by 6.8 million in the quarter compared to Q3 last year.

Gross profit for the third quarter was 505 million or 55.1% of net revenue compared to 54.4% of net revenue in Q3 2018.

The gross profit rate in Q3 increased 70 basis points versus gross margin last year and was driven primarily by the filing.

A 120 basis point increase in overall product margin, resulting from lower product cost favorability in product mix and lower markdowns.

We remain pleased with the product margin strength, we continue to realize on top of the strong gains over the last several years.

Occupancy and depreciation leveraged 10 basis points in the quarter.

These improvements were partially offset by a 40 basis point increase in product and supply chain costs, driven by additional investment and product development and supply chain.

We also saw a 20 basis points of unfavorable impact from foreign exchange.

Moving down the PML SGN, a expenses were approximately 329 million or 35.9% of net revenue compared to 36.2% of net revenue for the same period last year.

We're happy to have achieved leverage inline with our guidance in Q3, while at the same time continuing to use the strength in the business to invest in initiatives that fuel current and long term growth, including data and analytics loyalty self care and men's.

Foreign exchange translation and revaluation contributed 30 basis points of de leveraged in the quarter.

Operating income for the quarter was approximately 176 million or 19.2% of net revenue compared to 18.2% of net revenue in Q3 2018.

Tax expense for the quarter was $51.8 million were 29.1% of pre tax earnings compared to an adjusted effective tax rate of 27.8% year ago.

The increase in our effective tax rate relative to our guidance relates to certain adjustments as a result of the recent filing of our fiscal year 2018 US Federal income tax return this reduced EPS in Q3 by approximately one cents you sense. We now expect our full year 2019 tax rate to be approximately 28.

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Net income for the quarter was 126 million or 96 cents per diluted share compared to adjusted earnings per diluted share of 75 cents for the third quarter of 2018.

Capital expenditures were approximately $78 million for the quarter compared to approximately 73 million in the third quarter last year increase relates primarily to store capital for new locations relocations, and renovations and IP and supply chain investment.

Turning to our balance sheet highlights we ended the quarter with 586 million in cash and cash equivalents inventory grew 26% and was $627 million at the end of Q3.

We repurchased approximately 44.5 thousand shares this quarter at a cost just under 8 million.

Coming into 2019, our board authorized a new 500 million dollar share repurchase plan of which approximately 328 million authorization remains at the end of Q3.

Turning now to our outlook for Q4, we expect revenues to be in the range of 1.315 to 1.33 billion.

This is based on a comparable sales percentage increase in the low double digits on a constant dollar basis compared to the fourth quarter of 2018.

This also assumes 12 net new store openings in the quarter.

We expect gross margin to be up modestly versus Q4 last year for the full year. We continue to expect a four to five cents negative impact within gross margin related to tariffs and incremental freight air freight costs, we incurred approximately 1% of this.

Four to five cents in Q2, one cents in Q3 and expect the remaining two to three cents to impact Q4.

We remain excited with the opportunities we see to drive further increases in product margin and we continue to believe that are overall gross margin will expand modestly on an annual basis through 2023.

We expect the SGN a rate in Q4 to leverage modestly as we balance investments for future growth with efficient management of our cost structure.

Seeming a tax rate of 28.5% Approx approximately 131 million diluted weighted average shares outstanding we expect diluted earnings per share in the fourth quarter to be in the range of 2010 cents to $2.13 versus adjusted EPS of $1.85 cents a year ago.

For the full year 2019, we now expect revenue to be in the range of 3.895 to 3.91 billion.

This is based on a comparable sales percentage increase in the mid teens on a constant dollar basis.

We expect to open approximately 50 net company operated stores in 2019. This includes approximately 30 stores in our international markets and represents square footage percentage increase in the high teens range.

We expect gross margin for the year to expand modestly primarily driven by continued product margin improves.

We expect as DNA for the full year to leverage modestly.

We expect our fiscal year 2019 diluted earnings per share to be in the range of $4.75 to $4 in 78 cents.

Our EPS guidance is based on 131 million diluted weighted average shares outstanding for the year.

This range takes into account approximately four to five cents of additional costs within gross margin related to the tariffs and air freight that I mentioned earlier.

We expect our effective tax rate to be approximately 28% in 2019.

We have assumed the Canadian dollar at 75 cents to the U.S. dollar for 2019 as well as Q4, we now expect capital expenditures to be approximately 300 million for the fiscal year 2019, the increase versus 2018 reflects a ramp up our store renovation and relocation program new store openings technology invest.

Men's and other general corporate infrastructure projects.

In closing we're excited with the continued strength, we're seeing in the business and we remain optimistic about Q4 and beyond.

And now back to calendar for some closing remarks.

Thanks, PJ and signing for providing these insights in our business and performance before we take your questions I'd like to express my sincere gratitude to our teams around the world I believe that one of our greatest assets is the direct in authentic connection we have with our guest this connection has created in nurtured by the educators in our stores.

Guest education centers and our teams in our distribution in store support centers.

Constantly inspired by the passion of our teams around the world and I want to thank each and every member of the Lululemons organization, which drives the performance we're sharing with you today operator, we can now open it up for questions.

Thank you we will now begin the question and answer session.

He joined a question to you we press Star then one on your telephone keypad.

You will hear atone and all the junior request.

If you're using to speakerphone, please pick up your handset before pressing any Keith.

Two we throw your question. Please press Star then too.

We will pause for a moment as coldest join the queue.

Our first question is from Ike Boruchow with Wells Fargo. Please go ahead.

Hey, everyone. Congrats on the I really really really strong quarter I'm, just two quick ones, one guess PJ, our Calvin any chance you could you give some color on the men's category curious have amends comps were and then maybe Calvin. This is for you. The comp guide is started Nit pick it it's a little slower than it was for last.

Quarter I'm, just kind of curious maybe is there anything you can share about black Friday or or things you've seen quarter to date I am just to inform us little bit on current trends on the business.

Absolutely. Thanks Ike.

For the for the questions.

And I'll answer the second sort of teeing up my my sort of view of Q3 were all sort of touch on our men's business. Our men's business continues to be very strong in fact in the quarter. We saw an acceleration of the up the growth in coming so we're very happy with.

How that continues to to grow and as I've mentioned before we're just getting started on our product assortment.

As well as our Activations to drive both awareness and consideration, where we see a significant amount of opportunity.

In terms of the guidance, we gave for Q4.

First start with a quick view of what the growth drivers were in Q3 and as we look at the power of three we're very pleased with the balance across all of those three strategic pillars under product innovation as I mentioned, we saw an acceleration in our men's business and a very strong continuation of growth.

And our women's.

On our omni guest experience our digital performance continued at a very strong rate and we saw an acceleration of our growth in our stores and across market expansion. We saw an acceleration of our international business in North America continued its very strong performance.

So very very happy with the balance of growth in Q3.

And I'm Super excited with the start of Q4. This momentum is extended into the quarter. We had record performance over the Thanksgiving weekend, and we're happy all the way that the holiday season has begun.

We've always given guidance that we believes realistic an appropriate and our guidance for the full year as always contemplated the comps in this range and our view hasn't changed obviously, what I'd want to draw everyone's attention to is the majority of the quarters still ahead. There are six fewer shopping days between Thanksgiving and Christmas This year.

Which is a unique calendar shift and is reflected in a in our Q4 comp guidance.

Thanks, so much.

Our next question is from Matt Boss with Jpmorgan. Please go ahead.

Thanks, and congrats on another great quarter.

Thanks, Matt.

I guess, maybe first on the gross margin to 120 basis points of product margin expansion. This quarter, what's your best two year stack in more than a year. So maybe PJ, how best to think about fourth quarter product margins relative to the third quarter and then Calvin after 800 basis points of improvement over the.

Past four years, how best to rank the remaining drivers of product margin from here.

Yeah, Matt as TJ, So, yes project Mark Mark product margin was up.

120 basis points Act that drove the gross margin.

Increase in that on continued lower product costs.

We had a slight benefit from from product mix.

Lower markdowns drone.

Roughly 20 basis points of that improvement.

I'd say going forward the opportunities still remains for us on the product margin side, we'll continue to do expand through scale segmenting the supply chain better cost visibility greater efficiency across the distribution network. So so happy with.

Q3, and where gross margin shake out we were able to leverage occupancy.

On higher volume and at the same time, we continue to make investments in product development bras accessories outerwear.

So I mean, the way to think about it in Q4, we're guiding to.

Again modest gross margin expansion.

That will be.

We continue to see the tailwind in product costs, but we're also going to continue to to invest in product development to to keep the top top line fuel so I think again.

The guidance modest expansion.

Tailwinds of product margin.

If theres R&D headwinds, it's being about additional investment, we're making again to fuel topline.

Great and then just a follow up on the expense side, what's the best way to weigh the puts and takes on the SGN a line in the fourth quarter and just as importantly, any unique strategic investments that we should consider next year there would be outside of that plan for modest SGN a leverage at low teens revenue growth.

Yes sure so.

The puts and takes in SGN a.

The the put this quarter and throughout the year been we're leveraging our our overhead. So we're we're picking up leverage leverage there.

The chat, we're picking up benefit from channel mix.

Regional mix is is a little bit of of the headwinds.

Alright. Thank.

The key investments that we are making we're expanding testing a new growth vehicles such as loyalty.

We're going to continue to invest in our North American online guest experience, which which has been driving conversion.

Put incremental investment behind.

Our our power of three aren't particularly our mens our men's business and we'll continue to invest in our omni platform.

So.

That will continue into Q4 and.

And probably beyond.

Great Best of luck.

Thank you.

Our next question is from Matt Mcclintock with Raymond James. Please go ahead.

Yes, hey, everyone. Congrats on another quarter and best of luck Stewart.

So I'm going to start with a short term question I'm. So apologize for that but just there was a lot of noise. This quarter about intense promotional activity a lot of people believed that your promotions were higher year over year and yet you said that you had lower markdown. So I was wondering if you could maybe we could pick your brains in terms of why maybe people are getting the wrong read from there.

I will checks on terms of your promotional activity. Thanks.

Yes.

Thanks for the question, Matt. So first I would just reiterate that lower markdowns have been a tailwind all year and contributed to gross margin expansion in Q3, I would also call out that our inventory was in great shape at the ended the quarter and heading into Q4 with.

Good balance a core and seasonal product and very low age stock so with that with regards to markdown activity I think it's important to note that our omni capabilities such as ship from store and our our RF I'd technology allows us to pool, the markdown product in stores in outlet.

Dcs on our website for full availability to the gas.

So this combined with a growing assortment.

It does result in a breadth of style or on markdown online, but theres, just not much depth or units behind them.

In fact, we have the ability to clear markdowns faster and better sell through rates by offering a digitally consolidated pool of inventory. So you can't really conclude that were more promotional by scraping the website when in reality, we're creating better value.

For the guest while clearing what little markdown inventory, we have more efficient.

Thanks for that that's very helpful. In Calvin I was just wondering for international now that you're looking for leadership there what traits are expertise specifically are you looking for there's there's been a lot of volatility in terms of international growth for a lot of brands over the years, maybe athletic less so, but Tom it'd be interesting.

To see how you think about what you need there. Thanks.

Thanks, Matt.

Oh, great question, and a and I'm excited about.

The potential, but I would start with.

Reminding all of us that.

We have some very tenured strong leaders in place that are running these regions Gareth who's been running our European and Middle East markets up for the past three years can who's been running a pack has been with us for six years, four and a half enroll a and send yen.

It has been running.

Our mainland China market has been with those two year, so very strong leadership and they will continue to drive a these businesses as they have and I have a huge respecting confidence in their ability and this will give us an opportunity to bring in.

In an executive that.

As.

A added experience in these markets in particular in Asia Pac where we can just.

Build upon the talent in the strength, we have but build and bring a unique perspective that they've been in the market and in can contribute to our continue growth story. So.

For me, we're going to make sure that we select where no rush, we're going to select the right to executive talent that has in market experience and add to the very strong bench that we have already that have been and we'll continue to drive the markets for us.

Really appreciate the color best of luck.

Our next question is from Erinn Murphy with Piper Jaffray. Please go ahead.

Great. Thanks. Good afternoon, I guess my question is around the loyalty program now that you're in four cities could you just talk a little bit more about what your biggest learnings have been sounds like you're bringing in an incremental customer and in some of the things that you would maybe change if you think about rolling that out broader scale and then maybe just update us on kind of the key hurdle rate things that you need to see before.

Did that happen.

Absolutely thank turn for the question.

So as you know we've extended the past into the Chicago market, which was our most recent in September and that provided us with a unique learning opportunity in that it's a much larger market for us up to that point, we had been in Edmonton Denver and Austin. In addition, we had.

Our experience actual store. So we can understand the connection with that strategy and I would tell you. The result equal to any other markets proved to be very strong.

We sold and hit our.

Numbers within the first four weeks.

And we continue to see very very positive results across all metrics and those are.

One the engagement of our high value guest the amount of new gas. We're seeing through this program continues to be very strong and we over index on men relative to our share of sales of men within our business. So it's proving to be a great a loyalty and engagement with our high value loyal guests, but.

Also on acquisition of new and building our mens guest in a in a very positive way and what we learned in Chicago was just the connection.

To the to the experiential store and having the sweat studio in place just strengthens the engagement that the gas have overall.

They the gas metrics across most leavers have been very very positive on this and we're very encouraged.

And as we look towards 2020, we are planning on a broader rollout for next year and we'll share more of that in the coming in the coming months, but our intention is to take these learnings and develop a the program and expanded into more cities next year.

Got it. Thank you that's helpful. And then just if I can follow up on but I think we're thinking that store with health care. It seems like you guys have been adding a few third party brand can you just talk a little bit about kind of the balance your strength trying to strike between both of them and just generally kind of what the rollout strategy from here as the self care. Thank you so much.

Sure on air and I'll take that question. Thanks, I'd say, we're really excited about self care as a category overall as we test into this and for next year. We are planning to increase our store distribution. So currently it's available and 50 stores and online as far as third party.

It is only offered on our U.S. E Com site I mean, it is a fairly limited selection at approximately eight skews and the intention there has to partner with brands that we feel offer against the more complete assortment in terms of stopping sweaty solutions for athletes.

Great. Thank you all and happy holidays.

Thank you.

Our next question is from Sam Poser with Susquehanna. Please go ahead.

Good afternoon, and thank you. Thank you for taking my questions. Many of the questions have been answered, but I mean.

Can you give us.

Some more details on sort of how you plan the events over Thanksgiving weekend, because it did look a little more promotional than it did a year ago, but it also seems like was very controlled could you can you give us some idea of oh sort of a thought and.

How that all came together.

I think about thought on that we like basis as well.

Yeah, absolutely Sam I would tell you.

And I was in market I had the opportunity to ER visit a number of our stores across cities. Both what was exciting that we obviously without is opening up a mall of America or second experiential store.

And our fifth location in in New York.

And the there was no change to our execution.

We did take opportunity to to to utilize Mark downs that that we have as a means to make those available to the gas.

But interestingly over the weekend, although our markdown performed well our core growth was greater than our growth in March down. So we continue even though we had a very strong weekend as I mentioned earlier a record setting it was still driven by costs.

Our leveraging markdowns as an opportunity to to clearance to some inventory.

And and really put our innovation front and center, which responded well and no change in strategy and the gas responded.

In a very positive fashion to that strategy.

Thank you and then and then we are on the loyalty program.

You said, you're attracting more men or at least in Chicago, you had you attracted more men and and so on can you give us some idea of.

I think that's what 12 and Aarons question some more of what those lines of the Sandguard to <unk>.

Where do you have to surpass wouldn't like could you give us some idea of some of the but the matrix of what you're looking for if it's a if the if this notion of line in the sand is is there a hurdle or number we need to hit before we decide to go or not go.

I would tell you there isn't a metric in the markets we've been in that hasn't exceeded our expectations and showing a high engagement.

With the gas.

We're just being a responsibly a cautious as we tweak the program and our ability to make sure that we'd delight. The guest but there are a lot a different types of membership loyalty programs out there in majority of them are very easy to operate and execute and the reason I think the gas is responding so well.

To ours, it fits with who we are as a brand being experientially. They are joining a cohort of other guests and joining the community, which brings them both event experiences access to product and access to the sweat life, which is very unique and different.

And they're responding in a very favorably way and we're very excited about it.

And we just want to make sure that as we scale. It that knowing that we are offering a product to our high value gas that so we're delivering on the commitment of the expectation. They have so it really is us being cautious in scaling as we do which is right and prudent on something that I think the so unique special.

That we're not at or we're not rushing we have no need to rush and the metrics are very positive. So there is no line in the stand in that regard.

And our incentive plan next year is to use to broad net and a and we will move forward and I think a responsible fashion, but theres no line that would indicate a metric it they're all very very positive and encouraging exciting.

And just one quick follow up I mean does that mean like part of this to it to really surprise and delight as you put it. Your your your guess is this really also that about trading your own people to be able to then go and sort of spread the word as you roll to other cities. So that you have.

Or cities, where you could then bring people would trade them to go out what do you had one newer litigated thinking about that sort of the right way because you know you did that with your show eating out when you showrooms and trade.

Customers.

Is that a similar type of.

Manner that you're you're rolling this out to your own folks need to be train.

So now, let's say the list well.

Yes, there's an element of the role that the educators play, but in fact, one of the one of the strength to our brand is we have a long history of our educators being connected in the community and and that's one of the big sources of how we grow and build our ambassador base. So that's actually not.

The not the.

Factor that would cause us to just go at a pace.

You know it really is our decision and controlled big part of the membership program and the benefits is we'd like to host local sweat opportunities into community with studio partners and.

So there's an element of us wanting to make sure that we sourced the right that we are able to post these events in these parties if you'd like and then bring our cohorts together.

And therefore, it's just a you know a unique.

Aspect to the program that that we've been doing in the four cities and we want to make sure that as we scale we're doing it in.

In the right effective manner, that's going to deliver the right experience for our guest.

Thank you very much happy holidays.

Thank you.

Our next question is from John Kernan with Cowen. Please go ahead.

Hey, good afternoon, and congrats on another great quarter and thanks for taking my question.

The Calvin you talked a little bit about the new.

Experience will stores both in Lincoln Park in the Mall of America. Just wondering if you can expand upon it a little bit how many how much of the square footage of of Lululemons. Do you think these types of stores can ultimately represent I think so last on the previous call talked a little bit about it but any new color in any learnings that you have on this would be helpful. Thank you Greg.

Thanks, John appreciate that.

I think the or there are really three key elements to the NIM benefited experiential stores that I'll touch on in the first is they really are the pinnacle expression of our vision of the gas living the sweat life second is they create a a positive impact across the market.

There really is a halo impact.

And third would be the brand strength.

So if I take those each individually from a living in in creating our vision, we know through the Lincoln Park and early indication on mall of America is that our high value guest.

It interacts and frequent these stores on a more a frequent basis that they spend more time that they're both coming back to participate in the sweat activity and or Ah stay and hang with others at the fuel and that's also translating into shopping.

As we're seeing very healthy conversion and growing share of wallet as well as attracting and building new gas. So in terms of the general metrics. There very positive we just purely look at it through the operational lens on what you'd want from the Cape size.

Equally and the second being the positive impact within the market.

In Chicago, and we're anticipating the same within a Minneapolis is that Oh, we do see the overall market left and that's a frac a factor of the ambassador community. These are hubs for them, where they are spending time in building out both their influence as well as how they influence.

Latin and the sweat life community.

And overall, just brand awareness and consideration in both online and physical so we're very very pleased with that and third is the brand strength. So if you think of what I believe is truly a our unique approach to this loyalty if you'd like it.

Starts with our stores be a co located our current base or in these pinnacle expressions. The experiential then you factor in our Ambassador community then you layer in our membership then you layer in our events. It really is creating a layered halo that's impacting not just.

Loyalty engagement, but.

Our strength within these marketplaces in these experimental stores are really helping to create a hub to drive that and I'll reiterate what I said on analyst day, which is that experience will stores could represent approximately 10% of our store base in the future. We're excited about the early indication we're equally.

Cited about how our store base factors into that loyalty equation I just shared with you with the multiple layers of connecting with ambassador membership an event.

But experiential will play a key role in tier cities and you know, we're going to test and learn and see but they are performing well out of the gate.

Excellent happy out I think.

Thank you.

Our next question is from Mark Altschwager Weve <unk> Baird. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

I wanted to first ask about just the seasonal stores as you've continued to invest in the CRM capabilities curious how the strategy around those seasonal stores have evolved I'm earlier I believe you said, 30% of transactions are from guess new to Lulu, which sounds like a big opportunity, if you're able to capture and leverage that data.

Absolutely. Thanks for the question Mark.

So as you as you mentioned.

The pop up or the seasonal stores serve a variety of.

Really interesting strategies for us one they allow us to go in and as very low cost manner to test a either new real estate locations within a market and or a new market. All together. So we've been using that for a number of years and it's proven to be very effective way.

Where we can either determine the risk or no risk of cannibalization the opportunity of concentration of multiple stores or to really test the opportunity of the new market.

And in that not only are we seeing current gas being able to shop and interact more with us but it is proving to be a very very cost effective way up to acquiring a new guest a and then either we turn that seasonal store under a permanent location and we continue to nurture that relationship or in some case.

He says.

You know, we may not sustain it throughout the year, but continue to come back into the market at an AD hoc basis, but we do maintain their relationships with those guests and then try to transition them into becoming an omni gast, where they would shop with us online and mainly we would capture that through.

Our email file growth and obviously given the seasonal our educators know that one of the key metrics. When we go in is E mail capture so although we monitor that across our network of stores in particular in seasonal with it being such a an important part of the strategy.

That is one of those really important metrics that we work with our educators and our teams to make sure that we're capturing once we have it depending upon the outcome of the location.

We would determine to to utilize that information relationship with the gas in a variety of ways.

2018, we offered operated 63 this year, we have 74.

Thats sort of the run rate, we're seeing a I think about a third transitioned to mainline stores. So thats sort of our are going in rate. So it's I think it's a really exciting strategy and as alluded on.

On new guest acquisition and validation of markets.

Thank you and then Calvin.

Several times in this call you've spoken to the the powerful impact of events. So hoping you could just update us on your thoughts on scaling that event strategy I know, it's always been a piece of the community building sounds like it's kind of even bigger ones loyalty rolls out, but I mean is this specific to loyalty or maybe just bigger picture.

How are events going to be a bigger part of what lose doing thanks.

Great. Thanks, Mark.

I think the first thing is to recognize that you know.

One of the beauty that this brand is that we host.

A ton of events globally on an annual basis now the the size of that event.

He is very different from what a local store may do on a Sunday, bringing in gas to the pinnacle event at Seawheeze or what we're starting to do with our run events to the sweat life Festival that are happening Europe and events in Asia. So you know there has always been.

Rooted in this brand in the community is hosting of events.

The opportunity with membership is too.

Build upon that.

We know that the guests love.

The ability to connect with one another the ability to connect with our educators and our basket or is within a community either through sweat or through grow which is another aspect of the sweat life and membership just allows us to create even more events, we do see creating more of these pinnacle event the 10-K event.

San Diego I was down there for the weekend was so incredibly powerful and when you're there and you visit the stores and all three stores in city over the weekend had fantastic results vibrant ambassadors. We're in the community 5000 people running I was surprised you know pleasantly.

Surprised with the number that are running in our gear. So we are attracting are our our guests that are really engaged in the absence of what we're creating around the brand.

And if so energetic and electric.

Membership will have some unique events or they will have easy and quicker access to other events and some of the local sweat a studio classes that we host will be exclusive for them or they can bring a friend too. So it's not going to being exclusive but there will be unique opportunities but.

Event is an area that we continue to see an opportunity to strengthen the relationship with the guests and drive that loyalty and a very unique way for this brand and in our community that where we're really excited energized about.

Thanks for all the detail and happy holidays. Thank you.

Operator, we'll take we'll take one more question.

Sure. Our last question is from Kate Fitzsimmons with RBC capital markets. Please go ahead.

Yes, Hi, I'll add my congratulations as well I tell them, we read about the investment that you guys made me youre in the quarter.

Analyst day, you spoke to ways to garner greater share of that three trillion dollar global honest pie I, just curious to how you're evaluating lifestyle experiential opportunities beyond the core LIBOR lemon apparel offering in the next 12 to 18 months, certainly we talked a lot about loyalty today and the experiential stores, but just any additional.

Detail about whats getting the most excited whitespace whitespace perspective would be helpful. There. Thank you.

Great. Thank you.

I'll first just mentioned on the the small investments that we made into mirror.

And why I'm excited about that and working with brin, the CEO with that business, who some of you may or may not know was actually.

He is a legacy ambassador she was an ambassador of Lululemons, a few years ago I am I'm very interested in the space of in home fitness and not experience.

What mirror provided which is interesting for us is the opportunity to learn how the gas are interacting with the content that is very similar to a lot of how our gas are choosing to sweat.

Through.

Hi impact meditation yoga or other train activities in home.

So it really is an opportunity for us to learn both the balance of how the hardware works and then potentially app and other opportunities down the road. So it's really a front row to work with a wonderful person being brand that we have a lot a strong relationship with a and C and I do think when.

I look at membership and the opportunity that we have.

There is.

In this area of content, what we know the gas is responding to is our curations of content in the physical sweat space and that is really exciting and experiential and events allow us to cure rate other physical opportunities for those cohorts to come together, but.

Equally interesting is how we can provide content in the unique way.

In the digital space.

We ran seaways 10000 runners.

Participated but 6000 runners globally ran fee we've virtually around the world. So there is beautiful and very exciting balance between physical and virtual that we're interested in exploring and membership brings it to life.

Both in the physical and we are we are leaning in and learning and seeing white space opportunity around the digital virtual opportunities in which how that content can be equally translate.

Into the membership program men and beyond so it's an interesting opportunities to learn in an area that I am excited about and we are we're paying attention to it.

That's really helpful. Best of luck for holidays. Thank you. Thank you.

This concludes time allocated for questions I would like to turn the conference back over to the presenters for any closing remarks.

Thanks, everyone for joining us today happy holidays, and we look forward to speaking to you in a few months when we report our fourth quarter results. Thanks.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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