Q1 2021 Lululemon Athletica Inc Earnings Call
Okay.
[music].
Okay.
[music].
Thank you for standing by to.
At the conference operator.
Welcome to the Lululemon Athletica first quarter at 'twenty 'twenty, 1 earnings conference call.
As a reminder, all participants are in listen only mode on the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
Analysts to wish to join the question to you May Press Star then 1 on their telephone keypad.
Should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I would now like to turn the conference over to Howard <unk>, Vice President Investor Relations for Lululemon Athletica.
Please go ahead.
Thank you and good afternoon, welcome to Lulu Lemon first quarter earnings Conference call. Joining me today to talk about our results of our Calvin Mcdonald CEO and Meghan Brown CFO.
Before we get started I'd like to take this opportunity to remind you to our remarks. Today will include forward looking statements, reflecting management's current forecast of certain aspects of a little on its future.
These statements are based on current information, which had which we have assessed of which by its nature is dynamic and subject to rapid and even abrupt change at <unk>.
Results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on form 10-K on our quarterly reports on form 10-Q.
Any forward looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result, new information or future events.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our quarterly report on form 10-Q and in today's earnings press release.
In addition, the comparable sales and store productivity metrics given on today's call are in constant dollars.
The press release and accompanying quarterly report on form 10-Q are available under the investors section of our website at Www Dot Lululemon thoughtful.
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 first quarter as well as our quarterly info back at.
As call of scheduled for 1 hour. So please limit yourself to 1 question at a time to give others the opportunity to have their questions addressed and now I'd like to turn the call over to Kal.
Thank you Howard and hi, everyone I'm excited to speak with you about our first quarter results and the momentum we're seeing across the business at.
The press release describes we're off to a particularly strong start to 'twenty 'twenty, 1 with revenue growth of 88% over the same period last year.
And when you look at our to your CAGR, our performance truly stands out and shows the sustained momentum in the business.
Our first quarter results reflected our strength across all drivers of growth fueled by the continued expansion in our e-commerce business, our performance across categories and geographies and a rebound in the number of guests shopping in a brick and mortar stores.
I want to take a moment to recognize the resiliency and agility of our teams across the globe. There are commitments and dedication enabled this impressive performance and it would not be possible without them.
On today's call I will speak to our first quarter results, our power of 3 growth pillars, and our progress towards delivering against our impact initiatives.
You'll also hear from Meghan, Frank our CFO with further details about our Q1 financial performance and our guidance outlook will then be happy to take your questions.
Looking at the quarter, our results were driven by strength of cross channels regions and product categories.
Here are a few key operating metrics.
Firstly, our total revenue of 1.2 billion reflects an increase of 25% on a 2 year CAGR basis.
This growth rate represents an acceleration relative to our 3 year CAGR of 19% leading up to the pandemic and reinforces that we remain early in our lifecycle and have a unique business model that allows us to thrive in an ever changing environment.
In addition, our revenue increased across each of our regions up 23% of North America, and up 41 per cent and our international markets. Both on a 2 year CAGR basis.
Secondly growth within our E Commerce business remains strong with comps up 50%, which is on top of the 70% increase in the same quarter last year.
And thirdly adjusted earnings per share were $1.16 versus 74 cents in 2019 significantly ahead of our expectations.
And we are also pleased to see our momentum extending into the second quarter.
We delivered at this high level, while we also strategically managed a number of ongoing macro operating challenges such as continued store closures capacity constraints supply chain challenges at the ports and reduced air freight capacity.
While challenges of all types will no doubt remain going forward I'm confident we will continue to manage them effectively and deliver outstanding results.
In summary, Lululemon continues to become stronger quarter after quarter.
We are very early in our growth story, and we are well positioned for the post pandemic world and the opportunities ahead of us are significant and continued to expand.
I will now provide a bit more color on our first quarter results were.
We are firmly on track to deliver on our commitments contained in our power of 3 growth plan through our 3 pillars of product innovation omni guest experience and market expansion.
Within product innovation, we continue to leverage our science of feel platform to deliver technical athletic apparel to our guests.
Our sweet spot is creating versatile and stylish products that include technical innovation comfort and flexibility.
In the first quarter, we saw strength across our assortment with women's revenue, increasing 23 per cent and men's growing 27% on a 2 year CAGR basis.
I will now share a few more thoughts related to our product.
We saw strength in women's across the assortment as guests are responding well to both tops and bottoms.
Our performance in tops was driven by core styles and franchise extensions such as the aligned tank.
Our male guests to return to our stores as we emerged from the pandemic men's growth outpaced womens growth on both of 1 and 2 year basis, and we are seeing very positive momentum and are on the move to assortment.
Across both the women's and men's businesses. Our sales success reflects our ability to consistently introduce new innovation to our guests as we expand core of newer categories and leverage our spectrum of raw materials.
We're in the early days of our product journey with ample opportunity to expand across our 4 key product areas of yoga run train and on the move.
And speaking of run this quarter, we launched a global run campaign that highlights how we are making running more accessible and inclusive and we took a broad based approach that included messaging that featured male and female athletes and a broad range of products of <unk>.
Platform that highlight at existing ambassadors, along with new ambassadors, such as Ultra marathon runner mirna, they'll Ariel Brooklyn, based filmmaker and founder of running to protest coffee Canadian 10000 meter record holder, Natasha Whoa, DAC and Olympian leader and mentor Colleen Quigley.
<unk>.
I am pleased with the results of our brand campaign and it's an example of the leadership Nicky New Berger, our Chief brand officer is bringing to the company and I look forward to her joining us on a future call.
Let me now turn to our omni guest pillar and the strength we saw across channels in Q1 with the upside in revenue driven by both our stores and e-commerce businesses.
Here are a few highlights I'd like to share.
The healthy comps and our E Commerce channel were driven by a mix of new and existing guests.
We're also happy to see the investments in our digital business paying off and we're continuing to improve product education offer better outfitting solutions and tell stories in a more compelling way.
When looking at our store channel I remain very enthusiastic about our performance. We are committed to stores and we are building more stores this year and seeing more and more great real estate opportunities become available and great areas in key cities around the globe, we will continue to be opportunistic and grabbing these locations as they become available.
We are also fortunate to have our store teams at a good position as well to pay protection initiative, we implemented last year for employees has allowed us to retain and engage them. Throughout this period. This meant we could reopen stores quickly and this agile and dedicated team has allowed us to continue to support the increased traffic momentum.
The stores that we are experiencing now.
This helped us deliver against our plans to kick start our stores and Reengage our store only guess here of some details on our performance.
Firstly store productivity improved to 88% of our levels in 2019.
This exceeded our expectation at moves us towards our goal to return to productivity levels consistent with 2019.
Secondly, even as traffic to our stores increased significantly in the quarter conversion remained strong at continues to increase in the double digits.
And as a reminder, these capacity constraints are just starting to lift in many markets in this quarter.
Touching on mirror, we continue to be pleased with the performance of Mir and the opportunities within the knee at home fitness space.
Mir had a strong mother's day and remains on track to deliver 250 to 275 million in revenue in 2020.1.
We continue to leverage the lululemon ecosystem and by the Middle of this month mirror will be featured in nearly 90 lululemon locations in the United States, We're well on our way to 200 shop in shops in time for the holidays later this year in.
In addition, we now have dedicated mirror specialists among our educators in each of these stores and the early sales results are encouraging.
We will have more to share about mirror later in the year as we gear up for new features at.
More live classes and expanded to Canada. The first international market of several we will see in the future premiere.
Switching now to our international growth, we continue to be very pleased with our results and our growth potential across our 3 regions of China Asia Pacific and EMEA.
Andre <unk> has hit the ground running as he leads our international team and sets ambitious growth goals and I look forward to having Andre join us in the future for our call.
From our new stores in China to continued growth in Asia Pacific to our online performance in EMEA. The results continue to reinforce that we are early in the growth trajectory and as I have said before I can see of time in the near future, where our international business grows in size to be equal to our North America business.
In closing I am proud to share a few details about our latest impact initiatives, which helps us to achieve our multi year goals, including our goal to make 100 per cent of our products with sustainable materials and end of use solutions.
We launched Lululemon like new last month, our first re commerce program.
This is of trade in and resale program for our gas and all of the profits of reinvested in our sustainability initiatives, we have launched in California, and Texas and the response is encouraging this kind of program reduces carbon water and waste and also enables us to attract new guests, particularly younger guests who are fans of thrifty.
In the quarter. We also introduced our Earth day collection, which is made completely from materials up cycled from plants and uses less water and is an example of the type of collections, we're expanding in the future.
In closing these results and our continued focus on innovation demonstrate our confidence in the future and how we can continue to pull the many levers of growth we have available to us let.
Let me now hand, it over to Megan for a review of our first quarter financials on our guidance outlook Megan.
Thanks, Calvin our Q1 results were strong relative to last year's Covid impacted quarter, but more importantly relative to Q1 of 2019 as well on a 2 year CAGR basis, we saw double digit top line growth across all major regions, but the standout being mainland China with an approximately 90% to year revenue CAGR. We also saw broad.
Based strength across merchandise categories with women's men's and accessories, all growing in excess of 20% on a 2 year basis. We are proud of these results. Despite the ongoing impact of COVID-19, and we have strong momentum moving into Q2 as reflected in our updated guidance I'll share in a moment let.
Let me now share with you the details of our Q1 performance I will also discuss specifics on our balance sheet, including our cash position liquidity and inventories. Please note that the adjusted financial metrics I'll share include the operating results of mirror that exclude approximately 8 million of acquisition related costs and their associated tax effects of <unk>.
<unk> 'twenty 'twenty, 1 and 2 million of acquisition related costs and their associated tax effects in Q1 'twenty 'twenty.
You can refer to our earnings release for more information and reconciliations to our GAAP metrics for Q1 total net revenue increased 88% to $1.2 billion above our expectations of 1.1 to 1.13 billion. This included at 82% increase in North America and of 125% increase.
In our international business on a 2 year CAGR basis total revenue increased 25 per cent and.
In our digital channel revenue increased 61% on a 2 year CAGR basis above our expectations of approximately 50% growth E. Comm contributed $545 million of topline or 44% of total revenue to.
Continue to see strength in traffic and conversion traffic was driven by both new and existing guests and conversion continues to benefit from positive guest response to the enhancements, we've been making to our E com sites and mobile App and.
In our store channel sales increased 3% on a 2 year CAGR basis above our expectations of flat to slightly negative looking at store productivity relative to 2019, Q on improved to 88% versus 71% in Q4 of 'twenty 'twenty.
At the end of the first quarter, we had 93% number of stores open.
Square footage increased 10% versus last year, driven by the addition of 34 net new stores since Q1 of 'twenty 'twenty during.
During the quarter, we opened to net new stores gross profit for the first quarter was 700 million or 57, 1% of net revenue compared to 51, 3% of net revenue in Q1, 'twenty 'twenty and 53, 9% of net revenue in Q1.2019.
Our gross margin increased to 320 basis points relative to 2019 was driven by 220 basis points of leverage on occupancy depreciation of product team costs, an 80 basis point increase in product margin with the decline in markdowns versus 2019 at.
And despite higher airfreight expenses related to COVID-19.
In addition, we had 20 basis points of favorability on foreign exchange.
Moving to SG&A, our approach continues to be granted and prudently managing our expenses, while also continuing to strategically invest in our long term growth opportunities.
SG&A expenses expenses were $497 million or 45 per cent of net revenue compared to 46% of net revenue in Q1 'twenty to 'twenty at 37, 4% of net revenue in Q1.2019 Ladd.
Leverage in the quarter relative to Q1, 'twenty 'twenty resulted from the sales increase relative to the Covid COVID-19 impacted quarter last year. The deleverage relative to Q1.2019 is the result of consolidation of mirrors of results. This year, but not in 2019, coupled with higher depreciation due to accelerated investments to support our E.
On business and Covid related operating channel costs, adjusted operating income for the quarter was $202 million or $16.4 per cent of net revenue compared to 5.3% of net revenue in Q1, 'twenty 'twenty and 16, 5% of net revenue in Q on 2019 adjust.
Adjusted tax expense for the quarter was $49.5 million or $24.5 per cent of pretax earnings compared to an adjusted effective tax rate of 14, 7% of year ago.
In both Q1.2021 in Q1, 'twenty 'twenty, our tax rate benefited from certain discrete tax deductions related to stock based compensation.
However, since our Q1 'twenty to 'twenty profit before tax was significantly lower due to the impact of Covid. This meant that these additional discrete tax deductions had a bigger impact on our tax rate last year.
Adjusted net income for the quarter was 152 million or of $1.16 per diluted share compared to adjusted earnings per diluted share of <unk> 23 cents in Q1 of 2020 and 74 cents in Q1 of 2019 cap.
Capital expenditures were 64 million for the quarter compared to 52 million in the first quarter last year.
Q1 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 over $1.6 billion of total liquidity, we had approximately 1.2 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility.
Inventory grew 17% versus last year and was $733 million at the end of Q1.
On a 2 year CAGR basis inventory in Q1 increased 29%.
While we continue to see some delayed inventory receipts due to issues at the ports are team of strategically using airfreight and we're comfortable with the level of on composition of our inventory as we move into Q2.
At the end of Q2, we expect levels to increase approximately 25% to 30% relative to Q2 'twenty 'twenty.
In Q1, we repurchased 270000 shares at an average price of $311 at the end, it's a quarter, we had 416 million of available availability remaining on our current share repurchase authorization.
Shifting now to our outlook for Q2, and the full year 'twenty 'twenty, 1 our guests continued to respond well to our merchandise offering including both tactical and on the move of apparel and mirror.
We are welcoming guests back to our stores. We also remain focused on our digital business and omni capabilities to ensure we were there for our guests no matter how they want to engage with US. We also continue to plan from multiple operational scenarios as we navigate the ongoing COVID-19 environment.
For Q2, we expect revenue on the range of 1.3 to 1.33 billion, representing a 2 year CAGR of 21% to 23%.
In terms of stores, where we currently have approximately 93 per cent of our stores open.
On a 2 year CAGR basis, we expect stores to be approximately flat with E com growing at approximately 55 per cent.
Spec gross margin in Q2 to increase from last year's Covid impacted corridor and also be 30 to 50 basis points higher than Q2.2019.
Relative to 2019, our gross margin is benefiting from a higher E comm penetration and leverage on occupancy and depreciation due to pulling back somewhat on new store openings in 2020, as well as the level of rent reductions.
Our Q2 guidance reflects continued pressure from airfreight costs due to port congestion at capacity constraints in Q2, we expect SG&A deleverage of approximately 400 basis points relative to 2019 drivers of the deleverage versus 2019 include higher depreciation due to accelerated investments to support our ecommerce business in <unk>.
<unk> 2020 'twenty, 1 consolidation of mirrors the results of this year, but not in 2019 and COVID-19 related costs, including labor for stores that remain closed.
Turning to EPS, we expect adjusted earnings per share on the second quarter to be in the range of $1.10 to $1.15 versus EPS of <unk> 74 cents a year ago.
This includes operating results from mirror, but excludes acquisition and integration related costs. As a reminder, we reported EPS of <unk> 96 cents in Q2 of 2019.
For the full year 'twenty 'twenty, 1 we now expect revenue to be in the range of 5.83 to 5.91 billion. This range continues to include 250 to 275 million from here and now assumes our E. Commerce business grows on the high single digits relative to the outsized strength, we experienced in 'twenty to 'twenty.
For E Com, we expect a modest decline in Q2 as we anniversary of the height of Covid related channel shift and our online warehouse sale and we continue.
To expect modest growth in Q3 and Q4.
When looking at total revenue our guidance range implies a 2 year CAGR of 21% to 22%.
Which is higher than our 3 year revenue CAGR of 19%, leading up to 'twenty 'twenty and is well ahead of the low teens CAGR of contemplated in our para III growth plan.
We now expect to open 45 to 55 net new company operated stores in 'twenty 'twenty 1 at from our prior guidance of 40 to 50.
This includes approximately 35 to 40 stores in our international markets and represents of square footage of percentage increase from the low teens.
Now expect gross margin for the year to expand between 150 to 200 basis points compared to the modest increase we saw on 'twenty 'twenty for the year. The anticipated margin expansion continues to include approximately 50 basis points of negative impact from additional freight costs, but it's still in excess of our power of free plan, which assumes modest gross margin expansion.
Okay.
The outperformance is expected to be driven primarily by of chefs relative to our initial plans and investment from new store openings and remodels towards digital which impacts SG&A.
When looking at SG&A for the full year, we now expect deleverage of 30 to 50 basis points versus 'twenty 'twenty drivers of the deleverage to continue to include consolidation of mirror for the full year and investment in mirror of brand building, we expect our effective tax rate for the year to be similar to 'twenty 'twenty. We now expect our fiscal year 'twenty 'twenty 1 adjusted.
At earnings per share to be in the range of $6.73 to $6.86 or EPS guidance continues to assume modest dilution from here in the 3 to 5 per cent range, excluding acquisition and integration related costs. It also excludes the impact of any future share repurchases.
We now expect capital expenditures to be approximately $365 million to $375 million for 'twenty 'twenty, 1 to increase versus 2020 reflects increased investment in our supply chain digital capabilities, new store openings and renovations, including their shop in shops as well as other technology in general corporate infrastructure projects.
Before handing it back to Calvin I want to thank our teams across the globe for their agility enthusiasm and dedication to Lululemon that allows us to delivery of these consistently strong financial results and now back to Calvin for some closing remarks.
Thank you Megan before we take your questions I just want to say on behalf of the entire management team that we are grateful to our teams who helped US deliver these results and who are helping us raise our expectation about what's possible for Lulu lemon this year and well into the future.
With that we'd be happy to take your questions operator.
Thank you.
Well now begin the question answer session.
Analysts who wish to join the question queue May Press Star then 1 on the telephone keypad.
You were here at tone acknowledging your request.
Youre using a speakerphone please pick up your handset before pressing any cheese.
To withdraw your question. Please press star and then to.
We will pause for a moment as callers join the queue.
The first question comes from Adrian day with Barclays.
Please go ahead.
Good afternoon, and congratulations on the great start to the year and the momentum continuing.
On Calvin I first question for you. Its about you know as you become a global brand to now you have mirror.
On your investing in that from marketing are there any changes at have you philosophically do you think about the marketing of the advertising expense line demand creation so to speak at.
And when we're thinking about mirror, how should we think about the slight dilution coming in the form of increased AD spend and when might we in the future to think about sort of a breakeven notion I guess.
Another way of asking sort of that type of more simply at.
Is when you are building the brand from there do you think about investing for top line growth first and maybe not necessarily prioritizing profit given that there's so much opportunity to that.
Yeah.
Thanks, Adrian I'll try to I'll try to.
Compartmentalize that question, because theres, a theres a lot of exciting topics of embedded in that overall from a brand perspective I would tell you.
As I highlighted with our run campaign.
In this quarter, it's 1 of many ways, we're looking at increasing both awareness and consideration for Lulu Lemon moving forward on that applies to all markets were in both U S, Canada and internationally.
And Nick and the team are in a variety of different initiatives. This year, where we're testing and learning ways to.
To do more at top of funnel.
That's all included in the in the guidance at Megan shared.
But we are excited about a different to initiatives. We have planned because we see a huge opportunity around driving awareness and consideration of both from mens as.
As well as women and in every market, we're in and we're going to lean in to do more of that in the run campaigns and example of us marketing ourselves more as a dual gender.
Showcasing.
Showcasing both men and women as.
As well as leveraging our ambassadors our community of the Influencers in those key relationships. So theres a lot of work under under way and we absolutely see the ability to drive awareness consideration for Lululemon. Similarly in mirror, there's a lot of opportunity around awareness and consideration, that's where we see leveraging synergies within lululemon.
In the stores and leveraging the 10 million guests that are that the brand has to.
To help drive that and we know we're investing at.
The acquisition vehicle to get guests in and end purchase mirror.
And that's in the guidance as well, but we'll continue to do that fast forward.
These brands are going to continue to be able to as you know.
Leverage 1 another and we see synergies in the community, we see synergies and refer a friend, we see synergies across the ambassadors and the content that we're producing so we're early in how we bring awareness across both brands to each other brand and excited about what we're seeing in the plans we have moving forward.
I'll, let Megan just pick up a little bit on your question around the investments.
Hey, Andrea so in terms of the investments and the path to breakeven. So we were really pleased by what we saw with mirror of performance in 'twenty 'twenty and it exceeded our expectations for sales of $170 million and then we're reiterating our guidance for our guidance color from mirror for 2020, 1 a revenue range of $2 to.
To 275 in EPS dilution of 3% to 5 per cent, we of a number of exciting initiatives on teed up for this year, including expanding instructor of expanding studios on moving it to Canada, and then going into over 200 Lululemon stores. It's still early in the year for us on just given the seasonality.
At that business the ramp in store openings as well as just that growth curve, we're experiencing to mirror business. We did have a strong mother's day pleased with their performance and in terms of breakeven, we arent foot at putting a fine point on it right now, but excited about the future of their definitely see at as a profitable business for us over the longer.
Term and very much within our control.
Great. Thank you so much super helpful and best of luck.
Thank you.
The next question comes from Ek Bar of Chow with Wells Fargo. Please.
Please go ahead.
Yes, Hi, this is Kate on for Ike Thanks, very much for taking our question at.
Calvin I guess just at a higher level you know you spoke to in the quarter on the business accelerating with a 25% CAGR I believe on it to your basis versus what you were running pre pandemic. Just curious now that we're that much further along in the recovery. How you are evaluating perhaps of widening Tam opportunity you know on the <unk>.
Other side of Covid and that would be helpful. Thank you.
Great. Thanks, Ken.
I definitely and I as I've stated before or we were performing well before the pandemic I think we led the.
Of the peer group during the pandemic and we're excited about the performance and confidence in our ability to continue to perform post pandemic and that's driven by the sustainable acceleration of consumer trends of living a healthier life versatile apparel at home sweat.
And the connection of community and community Sweat all play into our strength.
And we're early innings of growth. This quarter is of Great example of that growth across channels stores and dotcom stores of growth cross categories across gender men and women in our geographies. So very much early innings on that and as that impacts and relates to.
<unk> Mirror by addition creates a sizable Tam for us at we're excited about we're investing in because we see of meaningful business there of profitable business of Standalone P&L that equally will impact the lululemon brand through strengthening the community.
And and helping to influence and drive apparel sales so that clearly as you know.
1 addition to our Tam that we've that we've.
We're excited about it and we've added to and then I think with sweat in general we're seeing ongoing trends our positioning around run yoga.
And train continue to resonate and be the key activities, we at versatility and see some excitement and hike.
As well as O T L and O T M for her we're just getting started we know it's a good business for our men's business as we were building at adding but we really have a limited O T M assortment of for her and we are leaning in to that we have dropped some with a real plan to continue to grow that out so I would say.
Oh T M for Womens Mirror and then you know we're bringing footwear next year are 3 sizable tam opportunities that we're adding to the ongoing mix of what the trend in the guest is happening at adding to the overall growth in activewear.
Great. Thanks very much.
The next to question comes from Mark at Swagger with Baird.
Please go ahead.
Hey, good afternoon. Thanks for taking my question and congrats on the strong start here maybe.
Maybe just to start off to follow up on Calvin to comments you were just making on the the O T M I guess.
Maybe just from a marketing standpoint, I mean, theres been a lot of innovation with you on the move of assortment in and that would seem to be particularly relevant I guess today as guests are returning to travel and in person activities. Just can you speak a little bit more about how you plan to amplify that message both with existing guests as well as for new guest acquisition.
Yeah, no for sure Mark.
I'll break it break it down from product and then into womens mens and then as to women's so with with our men. We continue to innovate into our raw material as well as some of our key franchises. So building out on our a b C and commuter we've added the bold line.
Which we continue to see respond very well.
And see growth in that as we.
To do more top of market of top of funnel of activity through marketing and drive that awareness and consideration. We know O. T. M is 1 of our big hooks that gets him into the brand and then we migrate them into the sweat and at the other categories. So I think that flywheel is working.
Is gaining momentum and as we continue to invest top of funnel will only pick up steam on the women's side of O T. M at really starts with product for us and.
And we have limited assortment and when we drop at she responded incredibly well to it we're excited about our ongoing.
Of wing expansion of our bottoms more in to the O T M. A.
Casual off the body fit we're excited about our sweater initiatives in the back half and we're excited about 'twenty 2 and beyond as we really look to create versatile solutions for those slots and her wardrobe.
And that I think we absolutely have an opportunity to tap into our existing guest.
And sell those are those incremental opportunities to her so with with women. It's really about assortment and we were early with plans to expand end with him we're going to keep adding an innovative but we have a good base to start and top of funnel of activity will help fuel that even further.
Thank you and then from Meghan.
As we think about the path to recovery is at your expectation at the store productivity can return to pre pandemic levels or even even grow from pre pandemic levels or is some of this channel shift permanent.
You know a lot of different regional trends that are embedded in the productivity metric to share just maybe any insight you can share on some of the trends in regions that have perhaps had restrictions relaxed for the longest thank you.
Sure. Thanks, Mark on them. So we were really pleased with the improvement we saw end store productivity on Q1 of them at 88%.
Versus 71% in Q4, we did see improvement as capacity restrictions are moderated throughout the quarter and then we do fully expect to achieve 2019 levels of store productivity at this point in time, we're not going to put a.
A timeframe on it just given ongoing uncertainties related to Covid and we still have a level of store closures in play at this point in time, but we're really encouraged by trends, we're seeing and in our store base.
Thanks, a lot and best of luck.
Thank you.
The next question comes from Matthew Boss with J P. Morgan.
These go ahead.
Great. Thanks, and congrats again on the momentum.
So maybe first on is he is on the margin front. So on gross margin first quarter more than 300 basis points about 20 of 19, I guess, maybe could you just help bridge drivers in the second quarter forecast that you're on betting relative to 2019.
Just any back half of assumptions for us to consider as we think about the gross margin line through the 3 of the cadence of the year.
To remind them. So in terms of Q1 of them and this is relative to 2019, we had 320 basis points of expansion versus our initial expectation of 50 to 100 <unk> at 320 basis points was driven by 220 basis points of occupancy and depreciation of product.
Team leverage really on that higher sales achievement, and then 80 basis points increase in product margin. We did see some good trends relative to 2019 of Mark down rates and we also did experience on some pressure on as we've discussed on higher airfreight expense them and then we had 20 basis.
Points of favorability at my facts, when we look to Q2 again relative to 2019.
And we are looking for 30 to 50 basis points of expansion relative to 2019, and really and we are expecting continued headwinds in airfreight and then we have some level of rent concessions that we're anniversarying from last year and then our to Q2 revenue growth rate is slightly less.
And then Q1, leading to that Delta.
In terms of the full year, we've given some color relative to 'twenty 'twenty on so we're expecting for the full year of 150 to 200 basis points of expansion.
On versus last year and that is up from our prior expectation of 100 to 150 basis points.
Great and then maybe just to follow up for for Calvin on on the outsized growth that youre seeing any e-commerce relative to the sequential improvement that you're also seeing at brick and mortar I guess any changes in consumer preferences that you saw at take place over the first quarter or maybe into may.
We think by category, maybe tied more to recovery.
On the return of sport and some physical activity relative to at the lifestyle side as maybe people are thinking about or actually leaving their houses and returning to sort of normal activity.
Yeah, great. Thanks, Matt.
As we shared of our active.
Well, we define as our active wear was still the predominant driver of our business last year. It's the core of our Assortments and it was the core of our drivers in Q1.
It was good to see our men's business come back as strong as it did.
We saw at continued to accelerate through 2020 and into 'twenty 'twenty, 1 and in the quarter end and then get back to its position of driving.
The overall growth ahead of slightly ahead of women's.
And that was really all through the sweat activity shorts performed incredibly well and we did see an uptick in O T M and very encouraged with that momentum continuing and then with her.
Again activewear was the driver very balanced across all of our categories shorts and tops did see a very nice acceleration in growth. The team has been doing a lot of work in our top business building out our franchises, which is a big part of our French.
Strategies that I've shared with everybody that we are early in taking the franchise of our bottoms end end and extending that fuel stay through science of feel head to toe align tank being an example of 1 but we have not done that consistently across the others and we're starting to and when we do she responds incredibly well to our tops.
Business really performed nicely as.
As well as shorts, but it was very much balanced across all categories men's and women's and geography.
It's great to hear of Festival Ark.
Yeah.
The next question comes from Lorraine Hutchinson with Bank of America.
Please go ahead.
Thanks, Good afternoon.
I wanted to follow up on Mark's question. He was talking about store productivity returning to 2019 level of and wanted to ask about the store profitability.
To further progress there on the first quarter is there any reason why the storm margins Wouldnt get back to 2019, and perhaps surpassed them as you move back towards 100% to productivity.
Hi, Laurie and its Megan Yeah, I think we are still we're still dealing with a degree of COVID-19 related expense in our store channel as well as the pressure from productivity to store, a COVID-19 related labor as well as P. P.
And I don't expect there's any barriers to reaching our 2019, our store profitability levels. Once the productivity is is normalized.
Thank you.
Okay.
The next question comes from Dana Telsey with Telsey Advisory group. Please.
Go ahead.
Good afternoon, everyone and congratulations on the nice progress.
Calvin is part of the power of 3 on what you've talked about is international and it sounds as if the international opportunity could be even a little bit occur a little bit faster than expected with the sizing that you talked to that and also now at with category expansion. How do you. How do you size up international on any learnings from what you've seen in any of the regions.
To currently and even those small that could be impactful for growth going forward and lastly, as he talked about Covid class had mentioned Covid class how do you see those adjusting of winding down moving forward. Thank you.
Great. Thanks, Dan I'll take our international then handoff to Megan on the Covid expenses.
Obviously I think the numbers are.
<unk> indicate the potential that we have internationally and you know I think for the last few calls I've shared the long term.
The opportunity of of this brand this business being 50.50, North America International end and I don't see anything that's going to prevent us from achieving those results.
We're seeing good growth in every market and.
EMEA, we continue to see growth, even with the pressure on stores because of our dotcom business continued to drive growth.
And in every market, we're in Australia, New Zealand or rest of APAC very solid momentum in China being you.
You know 1 of our biggest potentials.
Potentials and continue to see momentum in there we were up 200 per cent in the quarter strong growth in stores strong growth in dot com and and excited about that so our commitment was to quadruple the business.
We are definitely achieving those results are and are excited to share.
The next future of growth as we continue to to see the maturity of these markets and investing them. We're in the right markets and we're early in terms of our share potential in these so we're really leaning in and focused on maintaining and growing the momentum in these markets and then with Andre will be able to come back.
Back on a later call and share of the the future plans for continuing to drive growth on the Mega great.
Hi, Dana.
And so in terms of Covid costs are we are beginning to see those wind down at will really be dependent on the environment.
We remain committed to our power of 3 growth plan operating profit growth in excess of sales growth and really focused on managing our business to that on we did see operating margins for Q1 at 16, 4% on which compared to $16.5 per cent in Q1 of <unk>.
19 of this year as of Q1 included near on so we saw underlying that some really nice expansion and in Lulu lemon and lime and the lululemon side of the business and to really on track on to that power of 3 growth plan.
Thank you.
The next question comes from of Paul Glitches with Citi.
Please go ahead.
Hey, Thanks, guys I'm curious about input costs.
What you're seeing and how we should think about.
You see over the next several quarters on into next year and also just how you're thinking about pricing and at.
Potentially inflationary environment. Thanks.
Hey, Paul its Megan so in terms of input costs, we're not seeing any material impact on 2020, 1 and anything we are experiencing is reflected on our guidance and we definitely have a close eye on the market and are managing and mitigating any pressures is to move into 2020, 1 or sorry 2000.
22, and we'll certainly to come back and share more when we provide twenty-twenty to color.
And then just adding on to that Paul as it relates to pricing because.
Because we're not seeing any direct pressure this year, we're comfortable with our pricing strategy through to the end of 'twenty, 1 and the merchants are working with the supply team on any of our.
Potential changes that we may need to.
To to implement moving into 'twenty to but we're constantly evaluating our range looking at the new innovation coming in pricing Accordingly to drive the best value of for our guests.
Got it and can you just talk about your ability to chase product.
Just a given from supply chain constraints at all mentioned I'm just curious how quickly you can get back into product.
Yeah definitely.
So inventory at was certainly 1 area, where we posture to drive for growth both threat to 'twenty 'twenty as we navigate it depend on that and then into 'twenty 'twenty 1 on.
The team has been really proactive and strategically leveraging air freight to meet guest demand and we do have the ability on to chase categories and keeping a close eye on what's going on with the supply chain, but we felt really well positioned to navigate through this year and meet guest at Mt.
Got it thanks, a lot guys. Good luck.
Okay.
The next question comes from Kimberly Greenberger with Morgan Stanley.
Please go ahead.
Oh.
Thank you so much I wanted to just ask the question, Matt asked but at a slightly different way as as consumers are starting to emerge end and go out are you seeing a shift in the kinds of products they're buying.
Let's say, particularly in the April may time frame.
And then a question from Megan on SG&A, obviously this year, you've given us some.
Some guidance color, which is super helpful and end Youre looking for some deleverage relative to 2019.
Premier and the other factors that you cited.
I'm just wondering if we should think about you're starting to leverage SG&A beginning in 2020 to if that's a realistic expectation and and I'm just trying to sort through the COVID-19 costs are here this year to understand.
How much of the Covid costs will not recur in 2020 to.
And I think you're you're putting some store payroll that will be recurring into your COVID-19 costs. So if you could maybe separate that out for us that would be helpful.
Hi, Kimberly all of them I'll go first and just pick up on the the first question.
We.
We have not seen a meaningful shift in our activewear categories to the first quarter.
As you know are a big piece of our business and sales are in core it's an athletic active wear.
And I think with that at a it has a.
Embedded.
<unk> strength to not be purely trend driven or fashion driven.
He and share responding well to color of the team's done a wonderful job in introducing color into these core franchises and silhouettes.
But our active wear sweats shorts in tops have really been the uptick in momentum, but overall the growth is across almost every category equally.
And very balanced and very balanced across geographies.
I can't really I'll take the second part of that question. So in terms of SG&A, we're expecting for the full year of 30 to 50 basis points of deleverage, which is better than our prior expectation of 50 to 100 basis points and not to leverage is really driven by consolidation of mirror for the full year as well on this investment behind that business.
And then a rebalancing of investment we did in 'twenty 'twenty into 'twenty 'twenty, 1 on with the acceleration of our E Commerce business, which on the expenses are attributed to SG&A and some pull back on the store side of which occupancy sits up on gross margin, we're really focused on managing the business from a bottom line.
Perspective, and managing operating profit in excess of sales growth.
<unk> growth, we are not going to break out the COVID-19 costs, specifically on but really remain committed to managing to that operating profit in excess of sales growth of over the longer term.
Thank you.
The next question comes from Omar Saad with Evercore.
Please go ahead.
Thanks for taking my question.
I wanted to ask a follow up on the real estate the decision to accelerate some of those new store openings.
What's giving you the confidence there is at real estate opportunities at market opportunities are you going to use the newer kind of a bigger store format that has more room for men's at the primary format Youre using.
Then I have a follow up on Mir. Thanks.
Right. Okay on Marvel Let me, let me address the first I think it's a combination of all the above.
You know, we've stated and remain very confident in our store business units.
And its performance and its contribution.
And the role it plays of connecting to brand guest acquisition and driving productivity numbers and.
We've seen nothing through the pandemic and emerging coming out of.
That would get us off of that position.
We equally are very early in every market in our store fleet rollout. So we do have opportunity for growth in every market, including Canada and the U S as well as internationally. So.
We apply a conservative number on an annual basis, and we are being opportunistic as a result with the opportunities in and around the globe, where we're getting key locations with the right size in key cities and markets as a result of our opportunities that are coming our way.
And where we're recapturing them because we believe in them.
And are at in that it is our newer models that allow for more of a of men and expression of <unk>.
But it's not significantly above sort of our sweet spot of stores and it does vary by market are in the 3 to 4000 range of the 5 to 6000 K range in North America, but it depends on the city on the location, but very I'm.
Very still are confident in our store business.
Got it thanks, Liz I'll take all of it then.
And then on here I just wanted to do a quick follow up on Muir, who.
Who is buying mirror is at is it are you seeing of consistent use cases of people who already have a home gym in there you know.
Mack Daddy at out with adding mirror to at or is it people, who were trying to squeeze out of their existing space and at such an efficient kind of interactive home.
Workout solution I'd love some color there. Thanks.
Yeah, no for sure and I'd say, it's a you know again, it's it's all of the above we're seeing you know individuals that have.
On a number of at home fitness solutions, and they add mirror as a versatile workout solution to round that out.
And it's definitely caters well to individuals' that don't have a distinct Jim who may not have a stud to attach a of device to and wants something that can function. Both in a space that is versatile end.
And and sweat.
And we're equally seeing you know a nice to overlap with lululemon guests, but interestingly a large number of non lululemon guests.
You know owning mirrors, so that's where we get excited as we as we build out the synergies of having the lululemon guests.
Buy into a mirror and have the mirror gas buy into lemon as their sweat solutions, but there is really of versatility and who's buying at how they're using it and the fundamental opportunity is on locking these synergies, which we're just getting started as we were able to tap into the stores now that we're.
Emerging out of the pandemic and and drive the awareness for the for the product.
Thanks.
The next question comes from John Kernan with Cowen.
Please go ahead.
John Kernan your line is open.
Yeah, Hey, sorry about that.
Thanks for taking my question and congrats on that of the big guidance increase on the top end bottom line.
I guess Meghan.
If you look at where the business is operating from a P&L perspective, if I were to take out the high end of.
Mirror.
Revenue guidance and maybe at the midpoint of the dilution you'd be somewhere around 23% operating margin, which for the core business, which is above comfortably above where it wasn't at 2019 can you just talk to the long term upside to the margin potential for the core business, particularly at the store.
Level margins on what you talked about earlier recover to previous levels.
Yeah. Thanks, John So you know as you mentioned.
We are headed towards at very healthy operating margin for Lululemon only for the full year, which is on line really with our analyst day expectations of operating profit and growth in excess of sales growth on we're really focused on managing not for the long term on and as we look towards the future and investing behind growth.
Opportunities in order to maximize our top and bottom line and so we're maintaining that commitment on and we are firmly on track to those analyst day targets on which we're really grounded in growth rates. So we'll continue on that trajectory and we'll update our beyond 'twenty to 'twenty 3 plans on at.
The appropriate time.
Got it thank you.
That is all the time that we have for questions today.
Thank you for joining the call and have a nice day.
Okay.
Mhm.
Okay.
Okay.
Yeah.
Okay.
[music].
Yes.
[music].
Okay.