Q3 2020 Lululemon Athletica Inc Earnings Call
[music].
Thank you Chris standing by this is the conference operator, welcome and liver Lemon Athletica, Inc. Third quarter of Twentytwenty Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be opportunity to ask a question and.
Analysts who wish to join the question you May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal and operator by pressing star and zero Oh.
I would now like to turn the conference over to Howard Tubin, Vice President Investor Relations for Lululemon Athletica. Please go ahead.
Thank you and good afternoon, welcome to really limited third quarter earnings Conference call.
Joining me today to talk about our results our Calvin Mcdonald CEO Celeste Burgoyne President of Americas, and go global guest innovation and.
Great CFO and at what screen VP controller.
Let me get started I'd like to take this opportunity to remind you that our remarks today will include forward looking statements.
The managements current forecast of certain aspects of <unk> and its future.
These statements are based on current information, which we have assessed but which by its nature dynamic and subject to rapid and even abrupt change at.
Actual results may differ materially from those contained and or implied by these forward looking statements due to risks and uncertainties associated with our business and.
And we didn't goes we have disclosed and our most recent filings with the FCC, including our annual report on form 10-K, and our quarterly reports on form 10-Q and.
Any forward looking statements 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 the state and as a result of new 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 today's earnings press release.
In addition, the comparable sales and store productivity metrics given on todays call on on a constant dollar basis.
The press release and accompanying quarterly report on form 10-Q are available on the Investor section of our website Www dot when we went into last call before.
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 third quarter as well as our quarterly and 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 of trust and now I'd like to turn the call over to Calvin.
Thank you Howard I am pleased to speak with you today about our performance and the third quarter, which exceeded our expectations.
I'm incredibly proud of how our teams around the globe have continued to execute on the strategies that underpin our power of Threeq growth plan as we navigate this unprecedented year.
Joining me on the call today is Celeste Burgoyne, who was recently appointed to serve as our first president and to provide an update on our omni guest experiences.
In addition, Meg and Frank who was recently promoted to Chief Financial Officer will speak to our third quarter financials and provide some color on our outlook for the fourth quarter and Alex Grieve, our VP controller will be available for Q and at.
On today's call I will provide an overview of our third quarter results and share some highlights with you from our Thanksgiving week.
And then I'll give an update on our international business and product innovations, including mirror before turning the call over to Celeste and Megan.
Let me begin by providing an overview of our business performance and the third quarter.
Total revenue increased 22% to $1.1 billion, driven by a combined comp increase of 18%.
Revenue increased across our major regions with growth of 19% in North America, and 45% and our international markets.
In the store channel productivity increased to 82% of last year's volume.
Better than our expectation of 75%.
Our E Commerce business remains strong with comps of 93% and.
In addition, gross margin increased 100 basis points.
And adjusted earnings per share increased 21% to a dollar and 16 cents versus 96 cents last year significantly ahead of our expectations.
I'm also excited that in fiscal Q3, our share performance continued with our strongest quarterly market share gain in recent history.
We grew our retail or market share of the U.S. Adult act of apparel market by 1.4 points over last year. According to the end PD groups consumer tracking service.
In summary, these results demonstrate that our brand is becoming stronger and I'd like to touch on the six key drivers of per performance this quarter.
First and many of our loyal female guests are shopping our entire collection extending beyond bottoms as we continue to innovate our offering across categories, including bras and on the move.
Second we continued to deliver a steady pipeline of new products to our guests every month as we leverage our science at field development platform.
Third our teams managed our inventory flow is extremely well through the corporate store closures to ensure we had ample inventory to support the increased demand.
Fourth we provided pay protection to our educators to protect their wellbeing, which ensured we were ready to reopen stores and successfully launched new guest facing services, such as our virtual waitlist appointment shopping and mobile Pos.
Fifth we have been investing and our digital capabilities and enhancing the experience of our E. Commerce sites for several years, which enabled us to quickly respond to the accelerated shift to omni this year.
And finally, we successfully showed how well Lou lemon translates and connects with guests across cultures and geographies with growth in both North America and around the world.
These drivers will continue to carry us forward into 2021 and be on as we work to fuel our momentum.
Before providing broad comments by category and channel I wanted to also touch on our performance over the recent holiday so.
So the week that included Thanksgiving and Black Friday, we delivered a record breaking performance and our ecommerce channel, which offset declines in store traffic.
Responds to our full price offering was extremely good with many of our classic franchise items, such as the align Pat the defined jacket and the a b C jogger as well as new franchises, including Wonder train and Invigorates all performing well.
And our markdown penetration was relatively in line with last year.
There are several large volume weeks ahead for us in the fourth quarter and we recognize that uncertainties remain due to cope at 19.
As we have throughout the year, we continue to plan from multiple scenarios, yet the unknowns make forecasting the business more difficult.
That being said we are focused on the levers we control such as pulling forward, our holiday messaging and leveraging the key drivers I mentioned, a few moments ago that led to our success and the third quarter.
We are excited about how the holiday season has begun with continued demand for our product offerings, and we have confidence and our ability to execute during this period.
Switching now to international I'd like to start by mentioning that Andre mystery and he will join the dilemma and in January to serve as our new EVP International.
Will have responsibility for leading and driving growth and our international markets, including China, and the broader a APAC and EMEA regions I.
I speak for myself as well as our leaders and the regions when I say I'm thrilled to have Andre as part of the team.
He is joining us at an exciting time and our international business and we remain committed to quadrupling revenues from 2018 levels by 2023.
Looking at our international business and the third quarter Im, especially pleased that total revenue increased 45%.
And APAC business was strong across all major markets and particularly in China, where total revenue increased by more than 100%.
This was driven by the performance in both our store in ecommerce channels over.
Over the last two years, we have tripled the number of stores, we operate in mainland China and I'm thrilled with how our brand is resonating across both tier one tier two cities.
In Europe guests continue to actively engaged with us on line as our store traffic remains below last year's level.
E Commerce comps increased by nearly 160% and for the second quarter in a row. These results more than offset declines in our store channel to drive positive revenue growth in the region.
Shifting now to product innovation, we continue to leverage our science of field platform to bring new technical merchandise to our guests.
Since the early days of the pandemic, our guests have been demanding technical product that offers comfort and versatility as they spend more time working and sweating from home.
Within women's business was particularly strong as we saw a return to pre cope at growth rates and total women's grew 22% with strength in both tops and bottoms.
Within men's total revenue grew 14%, which represents further improvement from the trends in quarter one in quarter two.
Im excited that we are seeing strength and the bottoms category with our male guests returning to our fixed waist band styles, including a B C and commission, while our joggers also continued to perform well.
And with and accessories, we will continue to lean into our strong performance with opportunities to grow our equipment offerings with new products.
As an example, and the coming months, we will launch at Threed Yoga Mat one of the first and the world designed with at textured surface to better enable body and Lyman during your practice.
Looking forward I'm thrilled with our pipeline of innovation.
For the holidays, we are offering special edition product and many of our key franchises and over the course of 2021, you will see a scaling the science of field to bring more technical innovations across our major categories. As I've said before we're in the early stages of growth within our product innovation pillar and we have ample ways to expand our key.
Categories of ride and train yoga and on the move.
I'm also happy to share an update on mirror since.
Since the acquisition five months ago, we have made steady progress on the integration and we are pleased with the brands performance and Q3 and with how the holiday season has begun.
We continue to expect married to generate in excess of $150 million and revenue and Twentytwenty.
Over the course of the third quarter, we began to leverage the lululemons ecosystem to raise awareness from mirror we.
We launched the dedicated merit tab on our U.S E Com site include.
Including a hyper link for guests to complete a purchase transaction.
And we have included mirror and our email marketing campaigns.
Also in November we created shop in shops, and 18 of our U.S locations to test and learn how to refine our in store selling experience and we plan to expand this to several hundred stores next year.
One of our store managers and Santa Monica described at best our guests are blown away by the sleek design and functionality of mirror that is as innovative and unique as our own products.
We are just at the beginning of our journey with mirror and we are thrilled with the current momentum and excited with what this can mean for next year and beyond.
Before turning the call over to Celeste I want to highlight the launch of our impact agenda. In October. This is our first long term strategy focused on how Lou lemon and will become a more sustainable and equitable business minimize harm to the environment and accelerate positive change both inside and outside of our company over time.
To help us deliver on these commitments station Jones joined move 11, this quarter and will lead our work related to inclusion diversity equity and action, what we call idea.
Station has extensive experience in this area, including having served and the role of chief diversity and inclusion officer.
I look forward to sharing with you our progress on the impact agenda and idea commitments going forward.
Let me now turn it over to Celeste to speak to our omni guest experience pillar.
Our approach toward guest engagement and our ability to deliver unique experiences across both physical and digital environments is a key competitive advantage for lululemons selling.
Celeste.
Thank you Calvin I'm pleased to be on the call today to speak to our omni GAAP experience pillar and to share some details on our third quarter performance, both at our store and our ecommerce channel over.
Over the past several years, we have shifted our organization and can be focused on the omni guest experience rather than focusing on specific channel.
It's served us very well and the Cove at 19 environment, We know that guest behavior is dynamic and our goal is to create opportunities in both of physical and digital worlds that offer compelling experience at.
We have leveraged our channels at the gas at the center of all we do and have enhanced the way, we engage with our GAAP letter.
At our vs transaction of personal development fashion community connection or on the mirror platform.
Looking at our store channel, we are bullish on stores as physical retail remains an important part of the Loulo and growth story, we continue to be focused on and investing in our in store experience.
Our stores, our hubs of our local communities, creating a space for engagement, among our GAAP educators, and and profit and allowing us to educate and story power product and a powerful.
In addition, we leverage our stores to facilitate our omni capabilities, including BOPUS and ship from store and they continue to be an important vehicle for new guest acquisition. We remain on track to opened 30 to 35 net new stores globally and 2020.
In Q3, we at 97% of our stores opened currently we are still on approximately 97%, but we've seen a tightening of capacity constraints in several markets due to spikes and COVID-19.
While these constraints can lead to line that five stores during peak shopping times I'm proud of how we have successfully implemented several strategies to improve the GAAP experience and reduce wait times.
These include first the virtual weight loss, so GAAP no longer need to physically wait in line and can be notified by tax when it's their turn to enter the store stuck.
Stuck at mobile Pos, which allowed certain transactions such as return to exchanges and purchasing gift cards to all occurred just outside of the store.
Third by online pickup and store door or at curbside operating flexibility and choice for GAAP.
Fourth appointment shopping at can be schedule of both before and during and after of stores normal operating hours and staff is our digital education program, which is designed to assess gas who at rather continue engaging with us on line. This allows of gas to have a quick online chat or schedule unemployment for our personal or group shopping experience.
I'm also excited that we continue to successfully execute our ship from store capabilities to leverage our inventory across channel.
In fact, we achieved our highest volume ever with ship from store orders over the Thanksgiving and Black Friday holiday week I'm. So proud of Howard educators are embracing and executing these new initiatives and further enhancing the guest experience.
On other strategic area for us and been leaning more aggressively into our pop up stores strategy with our largest number of seasonal stores. This holiday in.
In Q3, and nearly 70 were operating and in Q4, we plan to increase that number to approximately 100.
We have leveraged pop at successfully for the last several years to bring our product and community to life and markets, where we don't have a year round physical presence.
In addition, this year raising pop ups to help alleviate capacity constraints at high volume stores and chemo all across North America, including centers, such a summary of that collection near Detroit and sure enough centre in Calgary in total we have opened 14 pops of pop ups within close proximity to existing stores and we're on.
Also operating nine gifting hubs and malls, where we already have on mainline location.
These temporary locations not only helps support and improved guest experience, but they also attract new gas into the price.
Switching now to E commerce as Calvin mentioned sales trends remain robust with total digital comp at 93% in Q3, driven by a healthy mix of new and existing GAAP.
Even with stores being opened for a majority of the quarter. We continued to see historically retail only gas now shopping with us on line.
And this spring as we recognize the dramatic behavior shift towards E. Commerce, we layered on additional investments in infrastructure fulfillment capabilities and our guests Education Center all to ensure we are ready for a spike and traffic over the holiday season.
And on 12 that we are seeing these investments of paid off.
Throughout Q3, we continued to see both traffic and conversion remains strong and even adds and majority of our stores were opened throughout the quarter.
Enhancements, we're delivering to our gas and crude increased and improved storytelling and product education more predictive search and a more seamless checkout.
In addition, we recently partnered with after pay at North America, which is now live on our site and we have enabled direct checkout functionality on Instagram and Facebook.
These features offer gas new methods to engage and transact with us, which while also helping us acquire new GAAP.
Before handing it over to Meg and to take you through our financials. Let me give you a quick update on our membership program and.
In September we launched in Toronto and began enrolling members for the second year of the program in Denver, Chicago and Atlanta.
We are very pleased with the number of GAAP to of joined US across these four cities as they enjoy a higher level of engagement with low 11 and gain access to a more complete expression of our brand.
We remain and test and learn mode of with membership and we continue to at a rate the program such as the recent expansion of our digital offerings.
Benefits now include virtual workshops focused on emotional fitness, including a recent session hosted by our global Ambassador and Gabi Bernstein, which was attended by over 500 members.
We will continue to study the waste gas are engaging with us and our test cities and will use these learnings as we evolve the program going forward.
Im also very excited about the opportunities near or could bring to our membership program. We look forward to share and more in the future about how we plan to leverage these two platforms to bring new experiences to our GAAP and near of members.
In closing I'd like to thank the entire lemon family and truly takes and village from our product teams to our E. Commerce teams to our technology teams and to sell many across the company. We are so grateful for everyone's hard work and dedication and I would like to especially thank our store GAAP Education Center and dish.
Terminations and our team who are on the front lines, providing an amazing GAAP experience during a challenging year and with that I also want to congratulate my colleagues Megan Frank on being named to serve as our CFO I will now turn it over to Megan.
Thanks, Celeste, let me first say, how happy I am to be here at Lou Lemons newly appointed CFO I'm excited to continue to partner with Calvin and our talented senior leadership team to execute on our power of free growth plan and I look forward to keeping you up to date on our progress on future earnings calls, let me now provide you with the details on our Q.
Three performance and although we are not operating specific item I will provide some color on our outlook for the remainder of the year.
I will also discuss specifics on our balance sheet, including our cash position liquidity and inventories. Please note that the adjusted Q3 financial metrics I will share and could be operating results of mirror, but exclude $8.5 million of acquisition related costs and their associated tax effect, you can refer to our earnings release and form 10-Q.
From our information and reconciliations for non-GAAP metrics.
For Q3 total net revenue increased 22% to $1.1 billion above our expectations from mid to high single digit increase and our digital channel, we posted a 93% comp increase on top of of 30% increase last year.
And our store channel, we had 97% of our stores opened and saw productivity increased to 82% of last year's volume.
Better than our expectation of 75%.
Square footage increased 13% versus last year, driven by the addition of 36 net new stores since Q3 of 2019.
During the quarter, we opened nine net new stores and completed five plan optimizations.
In terms of our digital channel E Com contributed $478 million of topline or 43% of total revenue, we continue to see notable strength and traffic and conversion.
Traffic was driven by channel shift coupled with investments in digital marketing and conversion continues to benefit from guest response to our product and the investments we have made and our global digital platforms to improve guest experience gross.
Gross profit for the third quarter was $627 million or 56.1% of net revenue compared to 55.1% of net revenue in Q3 2019 number.
The gross margin increase of 100 basis points was driven by 170 basis points of leverage on occupancy and depreciation and 10 basis points of favorability and foreign exchange. This was partially offset by 80 basis points of deleverage on product margin per.
Merrily due to higher airfreight costs related to cover the 19 and higher markdowns.
Moving to SGN at our approach on the current environment has been to protect against downside. While also ensuring we continue to invest on our long term growth opportunities and.
Moving to expenses were 412 million or 36.8% of net revenue compared to 35.9% of net revenue in Q3 2019.
The de leverage on the quarter results at predominantly from marketing investment associated with mirror, partially offset by leverage on higher than expected sales.
Adjusted operating income for the quarter was $213 million or 19.1% of net revenue compared to 19.2% of net revenue in Q3 2019.
Adjusted tax expense for the quarter was $62 million or 28.9% of pre tax earnings compared to an effective tax rate of 29.1% of year ago at.
Adjusted net income for the quarter was $151 million per $1.16 per diluted share compared to earnings per diluted share of 96 cents and Q3 of 2019.
Capital expenditures were $66 million for the quarter compared to 78 million and the third quarter last year Q.
Q3 spend relates primarily to digital channel and analytics capabilities supply chain investment technology spend to support our business growth and store capital for new locations relocations and renovations.
Turning to our balance sheet highlights we ended the quarter with nearly $1.2 billion of total liquidity.
We at 482 million of cash and cash equivalents and 700 million of available capacity under our committed revolving credit facilities.
However, subsequent to quarter end and based on the strength of our financial position and our outlook for future cash flows we have given notice to cancels at $300 million short term credit facility, we put in place at the time of the merger acquisition.
We continue to maintain our five year revolving credit facility of $400 million, which matures and 2023.
Inventory grew 23% versus last year and was $771 million at the end of Q3.
We continue to expect levels at the end of Q4 of the increase in the 20% to 30% range.
As we announced today our board of directors has authorized an increase on our share repurchase program from 264 million to $500 million we've.
We have repurchased nearly $1.4 billion of our stock over the last six years and we continue to believe share repurchases on effective method of returning cash to shareholders.
Let me now shift of current trends and share with you. Some color on how we are looking at the fourth quarter.
Due to the dynamic nature of the macro environment, we're not at returning to our historical cadence of providing specific guidance for the current quarter and fiscal year.
We remain focused on leveraging our on new model and digital strengths as we navigate the uncertainty stemming from cope and 19.
While the majority of our stores remain open we've continued to see gas shift between channel, which has driven outsize growth on our ecommerce sites as we've mentioned, we pull forward investments and our digital channel to ensure our guests continue to receive and elevated experience on shopping our sites and to maximize holiday business.
In terms of stores. We currently have approximately 97% of our stores opened across the globe and line with Q3.
However, as we are seeing a resurgence of cove at 19, and several markets. We've experienced a higher number of government mandated capacity of restrictions and November and December relative to Q3.
Given our historically high levels of productivity, particularly during the holiday season. These constraints clearly limit the number of guests who can on to our stores at any given time.
Therefore, when looking at Q4 overall, we're expecting productivity to be approximately 70% of last year's levels with trends in line with Q3 during non peak week.
When looking at new store openings for 2020.
We remain on track to opened 30 to 35 net new stores with 24 net new stores opened through the end of Q3.
These openings will contribute to a low double digit increase and square footage for the year.
In addition, we continue to execute on our seasonal store strategy with nearly 70 seasonal stores operating and Q3 and plants to operate at approximately 100 and Q4 looking.
Looking at Q4, specifically, we expect total sales to increase and the mid to high teens. This is above our prior expectation of a high single to low double digit increase and assumes ecommerce growth remains strong, but likely moderates modestly from levels. We saw on Q3.
This also assumes the majority of our stores remain open throughout the fourth quarter.
When looking at and here, we continue to expect revenue for the full year 2020 to be in excess of $115 million.
The strong results during Thanksgiving week, we're excited with the momentum were seeing on this business, particularly the growing community of people sweating with mirror, which contributes to increase brand awareness and strong long term financial returns.
In terms of gross margin, we continue to believe it will be flat to up modestly versus last year and Q4 when looking at M&A. We continue to expect deleverage and Q4 at store traffic remains below last years levels, and we continue to invest and marketing from mirror to take advantage of current trends toward sweating from home to drive the long term value of this business.
Given the seasonality of this investment we expect to deleverage and Q4 to exceed what we experienced in Q3.
With regard to Q4 earnings per share compared to a year ago, the growth rate and adjusted EPS is now expected to increase from the mid single digit range of from our prior expectation from modest decline. This.
This includes operating results from mirror, but excludes acquisition and integration related costs.
In terms of capital spending we now expect Capex for 2020 to come and somewhat below last year's level.
Before handing it back to Calvin I'd like to reiterate that we believe we are well positioned from an omni perspective for the high volume weeks of remain ahead of US. This holiday season, we're excited with the performance we saw over Thanksgiving week and acknowledge the environment remains uncertain, particularly given cove at 19 related capacity constraints.
We have planned from multiple scenarios and we will continue to be agile as we serve our guests where and when they want to shop I'd also like to thank our teams for their dedication and hard work and for enabling these results we reported today.
And now back to Calvin for some closing remarks.
Thanks, Megan before we take your questions I also wanted to mention that this quarter. We were pleased to welcome Courtney Gibson to our board of directors.
Courtney as president of loop capital markets, one of the largest privately held investment banking brokerage and advisory firms headquartered in the United States.
He brings a wealth of consumer and market insights to Lulu Lemon and I look forward to of Council.
Let me close by reiterating that we are positioned well for the big volume days during the holiday season.
Since the early days of COVID-19, our management team has been preparing from multiple possible scenarios and we are ready to serve our guests where and when they want to connect with us.
And our store channel, we will leverage our seasonal stores virtual weightless mobile point of sale and appointment shopping to ease capacity constraints and continue to protect the safety of our store teams.
And in E Commerce, our investments are paying off as our sights of demonstrated the ability to more than handle the anticipated spike and volume.
In closing I want to once again, thank our teams around the world for continuing to be there for our gas and from one another.
Their resilience tenacity and creativity throughout 2020 have been a continued source of inspiration from me and our entire leadership team does.
Sets us up well for the coming months in quarters ahead.
And with that we'll be happy to take your questions operator.
Thank you we will now begin the question and answer session and analysts who wish to join the question queue May Press Star then one on your telephone keypad.
We'll share talent acknowledging your request if you are using of speakerphone. Please pick up your handset before pressing and Keith to withdraw your question. Please press Star then two.
Well pause for a momentous callers join the queue.
The first question comes from Mark Altschwager at with Baird. Please go ahead.
Good afternoon, Thanks for taking my question and.
Congrats on the strong results here.
Really nice to see the digital momentum was hoping you could talk about E commerce capacity, and Q4, and and really your ability to sustain the type of growth rates, you've been seeing given the much higher sales space in the fourth quarter.
And then separately just wanted to touch on mens I think the growth rate there has legs of the.
Overall company year to date.
I was hoping you could dig into the drivers there a bit more just a function of just the work from home and lower demand for some of the core products like a b C or just any other high levels learnings there and how you see the men's business potentially re accelerating from here. Thank you.
Great. Thanks, Mark its Mike and I am also at the E Com capacity, and then hand, it over to Calvin from men.
And so as we mentioned we have been planning from multiple scenarios on for Q4, and we feel well positioned to capture on E.
Opportunity at.
Depending on where the gas wants to shop with us and we do see at moderating slightly from what we experienced in Q3 to us and aligned with our overall guidance of mid to high teens growth relative to our 22% and creates and Q3.
Great and on mens Mark we're really happy with the progression we've seen through Q1 Q2 through to Q3.
Moving from Q to Q on Q2 to Q3, the men's business accelerated almost at the same rate as women's.
So although its slightly behind our womens growth. It is in fact accelerated faster from the Q1 impact.
The impact from co bid on.
And it's predominantly driven by.
He just wasnt shopping to the same degree out of the gate as she was and Thats in the market and we continue to put on share with our men's business. We've seen him respond well to strengthen our shorts are sweats, and our hoodies and we have seen in Q3.
Our fixed waste and pant business getting much stronger so I'm very pleased with the acceleration of the men's business. His response to the product and and see no concern and we remain committed to our power of three doubling our men's business by 23.
That's great. Thank you and maybe Calvin just a quick bigger picture one just thinking ahead to next year and vaccine on on the way, but probably sometime before we return to normal buying patterns and you just speak to how you're planning the business in terms of inventory flows from maybe pace of product introductions and anything on the marketing.
So on just as we head into spring of 2021. Thank you.
Yes and.
In terms of.
As we look through multiple scenarios into next year.
We talked earlier about our inventory position coming out of Q1, and where we are coming out of Q3.
And we continue to feel very good about our position up 23% down from 41 and Q1, we have the product to satisfy the demand and our products predominantly core less seasonal so we're well positioned and we've continued to lean and to make sure that we have the product to satisfy the demand our newness and innovation pipeline.
Lines remain healthy very strong and we haven't pulled back on any of those.
And that will continue to hit and flow. So we feel very good and we're excited about the opportunity with.
New gas entering this category the new guests of Weve acquired through 2020 continued to build upon that.
And look for ways to amplify the brand so.
Again, not knowing of.
The next few months, we feel very good about our position in the flow of product our guest engagement on our ability to continue to flow.
All of the business and growth forward.
That's great best of luck to end of congrats Meg and on the new role.
Thank you.
The next question comes from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks, Good afternoon, I guess first just a clarification from Megan on the productivity and the fourth quarter stepping down to 70% and store and what is all being taken account to here and that just what you're seeing currently or does your anticipation of further capacity constraint to come and then Calvin and we just think about the product.
[noise] roadmap into next year any update on footwear and any other kind of key product innovation and things we should be mindful of thank you.
Thanks, Darren I'll start on productivity on so we did see average productivity and our stores and Q3 at 82%, which was higher than our expectation of 75, but.
But given we are seeing a resurgence of coke in 19, and some markets and we are also seeing stricter capacity constraints government mandated capacity constraints and several markets as we head into these peak weeks and we are expecting productivity overall for the quarter to be at approximately 70%, but reaching on trends and lie.
And with Q3 and during non peak week, and that's really driven by on just the volume of store sales and Q4 and a typical year, we see a 40% to 50% of lift from Q3 to Q4 of which given capacity constraints on on traffic impact clearly limits on our opportunity to on service at Tropicana.
Stores.
And on our product pipeline.
Ill first touch on footwear, so we anticipate the back half of next year introducing.
From the.
Our and our our introduction into the category with selling and early 22. So we're excited to share our unique point of view and innovation in that category and as it relates to all others. The pipeline is full and we will continue through.
What weve expressed before of OTM.
Sizing expansion, but as we continue to invest in our activity based fee at Ryan and train or yoga across the categories Theres a number of innovations that will introduce throughout the year that will continue to fuel growth business.
Great. Thank you all.
And Sir.
And next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.
Thanks, Good afternoon.
Follow up on your comments and on the air freight pressure in Q.
At this time.
And then can you comment on the availability of airfreight capacity and just to make sure that you can land enough inventory to be at holiday from arms on them into their homes.
Great.
Yes, sure Halleran of Phygen, and so we have seen higher air costs and market rate, but generally sufficient availability. We do expect that we will continue to have some air freight.
On rate pressure and Q4 and that is and that is reflected on the guidance that we provide at of a modest increase and Q4.
And you handle this company will come on.
I'm sorry, I think on this the second part of that question can you repeat that.
Sure and we've been able to find and possibly the nickel norm of a holiday and on the income early spring lots of.
Yes, yes, we don't have any capacity and limitations at this point.
Great. Thank you.
Your next question comes from Matt from a claim talk with Raymond James. Please go ahead.
Hi, everyone and congrats both of Celeste, Megan and even Courtney I guess service and good news and 2020.
Of the.
The question I have actually Calvin and it's a little bit different and gold and what Mark went with.
Got you.
Do you you're one of the still seems to be growing pretty exceptionally and and there's a lot of people out there that seek that's on your ultimately going to need men to grow fast at some point, but.
You are one of its business has proven at that.
Distantly grow faster than anyone ever hot per year. So you actually put up on on my slide back at that Investor Day, a couple of years ago.
And at talking about on total addressable market. So how have your your thoughts on the total addressable market from change or evolve on now that we're in a cold rolled or a post coverable. That's my first question Chris.
Great. Thanks, Matt.
I mean, it's definitely with the inflections that we've seen this year through co bit.
And with guests living a more active healthy life and looking for more versatility in their apparel clothing.
I think that all bodes well for the addressable market that we shared at the time and what we shared at the time was.
We are early innings of our share of that addressable market. So I do think there are two forces we will continue to gain share within the addressable market as we did in this quarter and we shared achieve.
Achieving among our largest gains.
And our recent history, so that says even with gas coming in and looking for versatility, we are winning at a greater rate than others and I do believe that addressable market will only get larger so I think both we will continue to add fuel for our business and we are happy with our men's business and the acceleration and the growth.
Moving forward, we know that's a big opportunity for us as a percentage of share of sales as well as just awareness and as you've indicated our women's business is far from.
At its potential and what we saw this quarter was.
New guests coming in and our existing gas broadening out from some of the core categories. As we've introduced newness as we also innovate behind those we introduced the cloud broth brought this has been a big opportunity for us that we see with our female guests and they responded incredibly well at response.
And at the new total category lifted and we saw of.
Really strong share growth. So I'm excited about the continued growth and women's both through new guests as well as migrating them into new categories fueled by our innovation fueled by versatility of Herald, the growth of Tam and our market share potential.
Thanks for that Talbot, and just as a follow up question on your specifically you meaningfully increased your guidance from your last quarter.
I think 50% of 100 million at 250 million plus the this year.
And yet you kept the on the earnings of saying the accretion dilution sales.
In terms of guidance and you said that was going to go into marketing. So I'm actually curious can you give us an update in terms of the returns that you are seeing on the marketing dollars that you're actually putting to work at year. Thanks.
No absolutely, where we're really pleased with.
The holiday that mirrors, having.
We guided and raised it in the last earnings call and we have reinforced the and access to that number.
We're off to a very good holiday with.
With mirror through November Theres lots of content and experience on channel innovation, that's rolling out of that we're announcing for example, sweat dates which is very unique and differentiated on the platform. We've only started of rolling it out within the Lululemons network, we have on 18 stores today.
That we're learning and is becoming a great beacon and brand building opportunity and rolling it into on other new lemon channels with plans next year of going to hundreds of stores continuing to build upon the platform.
And there are some big weeks ahead.
So I like our position on like where we are in the quarter and.
And there is very solid momentum behind it and we bet with the team on on inventory numbers that allow us to have units. So we're in a good stock position with a two week SLS. So.
So I'm encouraged and there are some big weeks ahead with some uncertainty.
But.
All indication is very positive with guest response and the momentum that's fueling and building behind.
And your.
Thanks, Chris that a lot I actually look forward to using wearing why we wanted to set our Murphy talked about with my view of sex price.
The next question comes from Paul Lejuez with Citi. Please go ahead.
Thanks, and thanks.
Thanks, Thanks, guys.
Chris You mentioned stores operating at around down 18% I just want to make sure I understand at that number is being heard more and by weaker traffic or not being able to handle the traffic that that is showing up just given the at the smaller store size and I think and maybe related to that.
At these pop up stores I, just want to make sure I understand the accounting of of those sales or are those secondly included and comps if they are near two and existing store and just how that how does that tie end to the to the spread that we see between comps and total sales as we look to.
Fourq. Thanks.
Thanks, Paul.
So I would say on terms of store traffic and there are lower industry trends and I think generally speaking more traffic and shifting to E com.
I think that said, we do have capacity constraints and that's impacting also our ability to put traffic to our stores of you mentioned we are opening on approach.
And similarly, 100 and seasonal locations that will have an operation through Q4 of those do not show up and our comp sales on they will show up on our other channel.
And as you mentioned some of those are with end markets and on centers, where we have existing locations and then we can capitalize on that traffic flow for Q4.
The next question comes from Paul Trussell with Deutsche Bank. Please go ahead.
Good afternoon, and my congratulations as well on the quarter and.
The new roles and volume also less Mogens station Cordoning off.
My question is on them E Commerce and you.
Continue to experience, obviously really strong growth.
In that channel was over 40% of sales this period.
You know one of that likely changes when the environment normalizes.
Has your view on investing in and rolling out stores changed if at all and.
Are there areas of capabilities on line, where you need to invest further.
And just lastly on that how does at higher ecommerce mix.
And the impact of TNL over the long term.
Great. Thanks, Paul.
All all talk to the our current strategic thinking through the balance of the channels and hand, it off to Meg and to talk about mix.
We are we are obviously incredibly excited about.
The omni guest that has joined.
Joined.
Lululemons this year.
Equally.
The stores will remain a very important of.
Sales strategy and presence within how we service our guests, how we recruit and acquire new guests and.
Theres been no dramatic change to our forward view of that we always opened a conservative number of new stores on an annual basis. They are small highly productive and have the role of more than just transacting.
They are building and the community connecting to our guests and our ambassador community and really being a marketing drive for while at the same point servicing.
And and selling at high productivity and we're early in the size of our store network. So we're going to continue to be opportunistic I think theres going be exciting opportunities for us next year with the state of retail.
And our balance of cities, our balance of mall to non mall is healthy.
And our fleet remains healthy and we will continue to take that conservative opportunistic view and then with digital we did a lot of innovation. This year that the team will just build upon.
You can go to the site today, you can interact with one of our incredible store educators and live on demand through video you can schedule a concierge is not to mention the traditional omni connectivity of buying online picking up and store. So we're going to continue to invest and that digital connection of the ecosystem.
Look on how the guest transact, but also bring to our digital the human connection that.
So unique within our store environment. So we're excited about our innovation and continue to fuel.
The success and both channels, both which play a key critical role and our omni strategy and Meg and if you want to talk a lot about mix, yes on terms of E com penetration impacts on operating margin and we do as you as you noted and see a higher operating margin in that channel Harper stores on.
Which have historically been approximately 70% of our mix and have seen declining traffic and revenue. So that's contributed to some deal at French and impact at the overall profitability and the near term as we look into the future and we do and to manage the business on the omnibank Cliff and remain committed to our power of freight growth plan, which is.
Operating margin slightly above revenue growth of the long term and as we mentioned weve and planning into multiple scenarios and that channel penetration dynamic as an important piece of that.
Thank you for that color on you.
You mentioned the on loyalty program earlier.
Just provide any additional details on sales per shopper enrolled in the program versus others.
Some of the color on rollout plans to additional cities and and just any tweaks or changes you've made to the program of late.
Yes, thanks, Matt at so I'll take that question. So obviously as I mentioned, we are operating currently in four cities across North America with our membership program and we are really pleased with not only the number of gas, but also the engagement of gas on so we're not going to talk about any specific on spend or any of that stuff at really happy overall with our engage.
Net.
I did have a really great event in October we at Gabi Bernstein, one of our global ambassador and to lead our long while.
Well net and mental wellbeing session. We had over 500 members from a cost of four cities join on so just an example of how we're really leveraging that program and our guests are really enjoying and participating and connecting with us across our entire because of.
And on and really through the entire sweat life on.
We're really using these market in the city to continue to test and iterate, obviously at pivot to digital during this current environment has been a huge area of.
David but one of the things are really excited about is also the opportunity that and your can bring to our membership program. So we'll have more to share on not and future, but definitely the teams are hard at work ensuring that we really create and continue to reiterate this program.
Thanks Best of luck.
Thank you.
The next question comes from Matthew Boss with JP Morgan. Please go ahead.
Great Thanks, and congrats on another nice quarter.
Thank you.
Calvin could you elaborate on comp trends that you've seen since the close of the third quarter Black Friday I think you said record weeks sounds great have you seen overall comps accelerate and relative to high teens performance and the third quarter and has store performance to date exceeded the embedded 70% full quarter.
Forecast.
Hi, Matt its Mike and I'll take that and so we were pleased with the on performance. We saw during Thanksgiving week, and we did intentionally pull forward on some seasonal activity and.
Just given the capacity constraints as we move further into the quarter.
And we remain on.
Comfortable with the level of guidance. We gave for Q4 of that said there are there is some uncertainty ahead of us both with the virus and impact on store closure on.
As well as Stuart trends on guest behavior and so.
So that's why our outlook for the balance of the quarter is a little lower than what we've seen today.
Okay, Great and then just maybe for SGN a on the accelerated E commerce investments that I believe are tied to the higher digital penetration that you're seeing is this spending or is this basically incremental dollars relative to the five year plan laid out at your analyst day or should we think about this as more of a pull from.
Forward of some of the multiyear and expenses and investments that were already pretty from pre planned within that five year plan.
I would think about it and as more of a pull forward and and as I mentioned on we'll look at we look to manage the business from an omni perspective, and as E. Com has accelerated and we've also somewhat pulled back on store openings and so we'll look to balance our portfolio of a longer term as well.
Okay, that's great color best of luck.
The next question comes from Michael is being on T. with Credit Suisse. Please go ahead.
Hey, guys, let me add my congrats on nice quarter.
And maybe I'll just.
Dovetail off Matts question could you could you talk about how the cash in a in the fourth quarter with maybe at the book ends at the different range of of the scenarios you you planned or what were some of the what are some of the big swing factors between the high end of the low end of scenarios, you're thinking about in the quarter and I guess looking out to next year Calvin allergy Stratify I guess.
You know what you've learned at this year and how your customers change outs stratify, what you think of the incremental.
Gross driver selling into and and I guess from referencing matts question.
As you think about investing coming off this given that the growth next year pivots back to stores, that's where you have of the majority of your fixed cost and leverage is there a scenario where.
Yes, you and could grow faster than revenues next year to get back on track to that five year plan.
And so I'll take the first part of your question on so in terms of SGN and we're not providing specific guidance for Q4 on but as I mentioned and we do expect Q4 to de leverage on slightly more than what we experienced in Q3 and and we do plan on.
We do plan of business prudently and manage cost effectively as we move through the fourth quarter and that really of driven by two pieces at the leverage for the first would be on day to start the pressure on store traffic of remaining below last years levels and the impact of hasn't appeared on the second piece would be our investment and Mira at.
And so as we mentioned, we see mirror of being modestly dilutive to earnings and 2020 and.
The majority of that dilution will impact Q3, and Q4 and given the seasonality of the business and the investment that we've been discussing on terms of marketing and.
To capture at new guests on and with the benefit really coming up at the long term and that business.
And I'll just add in terms of of the multiple scenarios we've.
We've looked at.
There are a number of growth drivers that we anticipate will continue and accelerate from 20 to 21.
As I mentioned we're.
Excited about the growth in womens growth coming from not just a strong bottoms business, but an acceleration in the additional adjacent categories and those categories are ones in which the team has been working on newness and innovation for the past few years.
In Brause in tops for example in OTN and next year.
The innovation and the addition into those categories continues as we also continue to launch newness into our bottoms business. So I see a continual.
Growth in the women's business men's is showing.
The pace at which its re accelerating and I anticipate next year that it will be back.
Back at its momentum coming into 20.
As we resume to some degree of normalcy the international business income.
Incredibly strong we've learned so much this year, but the power of E Commerce, and I think that will continue to allow us to drive our omni initiatives across many markets and to next year and then I'll just final end with guest.
Weve acquired.
A number of exciting guests through through co of it. This year, one that came to us through E commerce, and haven't shopped or physical store because of a variety of constraints and the ability to migrate them into the store and how that become and omni guest and then the increase in our omni gas portfolio within our existing assets.
Store, only guess became omni and shopped with us on line and how we.
Leveraged those opportunities and continue to drive the share of us and with thoughts going into next year's from multiple scenarios, but all very positive on the back of product and the innovation that we're launching head into heading into next year.
Thanks, Robert He told us.
Thank you operator, we'll take we'll take one more question.
Certainly the next question comes from a drag on the with Barclays. Please go ahead.
Great. Thank you very much and congratulations on the performance and everybody on their promotions well well aren't on.
On top of and I guess my first question for you is you know traditionally share rooms and brand strength itself has been the driving force of advertising wondering at de become of global brand with the huge little footprint, what's your philosophy on investing more on demand creation.
And then make and for you what have you learned about attachment rate of product purchases in combination with mirror sales on.
And what portion of the mere customer file overlaps with that of thank you very much.
Thanks Adrian.
I believe we have.
And exciting opportunity with our brand.
To drive awareness to therefore drive consideration and help fuel guest acquisition and add to the growth potential of that that Lou lemon highs we.
We talk a lot about the unaided awareness within men's and the opportunity to recruit more men to drive the awareness behind the brand.
And recruit but that also exists for women and it exists even in our more mature markets like the us and Canada not to mention international So as you know Nikki Neuberger joined us in the new role of Chief brand Officer earlier this year.
And she has already made an impact and assembling the talent to that team.
And I am excited how were positioned heading into next year to.
Dr.
Into some of those initiatives and opportunities, we see a huge opportunity around earned media.
And doing more with side as well as just the current initiatives, we deployed and drive awareness and recruit.
So you will definitely see and 21 and increased effort.
And tactics of how we go within North America, both internationally to tackle some of the opportunities we have with the brand and driving awareness and consideration.
Very helpful.
And in terms of on mirror and overlap of Blue Lemon and I'd say, we're still very early and our integration with 18 stores opened on learning a lot there on but look we did see and diligence was approximately a 50% overlap and.
And we do believe at the brands and very compatible on and we're excited about low it can create and the future.
Great. Thank you very much and happy holidays.
Yes.
Thats all the time, we have for questions today. Thank you for joining the call and have a nice day.
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