Q2 2021 Lululemon Athletica Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Lululemon Athletica second quarter 2021 earnings conference call.
All participants are in listen only mode and the conference is being recorded after the presentation. There will be an opportunity to ask questions analysts who wish to join the question. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal an operator.
Pressing star and zero I would now like to turn the conference over to Howard to bin Vice President Investor Relations for Lululemon Athletica. Please go ahead.
Thank you and good afternoon, welcome to Lulu Lemon second quarter earnings Conference call.
Joining me today to talk about our results are Calvin Mcdonald CEO, Megan break CFO and Celeste for Boeing President Americas, and global guest innovation.
Before we get started I'd like to take this opportunity to remind you that our remarks today will include forward looking statements, reflecting management's current forecast of certain aspects little image feature these.
These statements are based on current information, which we have assessed but which by its nature is dynamic and subject to rapid and even abrupt changes.
Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K, and our quarterly reports on Form 10-Q.
Any forward looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result, 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 Lulu lemon 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 second quarter as well as our quarterly infographic.
Today's call is scheduled for one hour. So please limit yourself to one question at a time to give others the opportunity to have their questions addressed and now I'd like to turn the call over to Kal.
Thank you Howard and I'd like to welcome everyone to our second quarter earnings call. Our momentum continued into this quarter and our results remained robust with revenue growing more than 60% when compared to the same period last year and on a two year CAGR basis, we were pleased to see an acceleration relative to our first quarter.
These results reflect the ongoing strength across all major areas of the business.
Our stores continued to rebound generating a two year revenue CAGR of 9%, which is ahead of our expectations.
We delivered positive growth in e-commerce, which is even more impressive given the strong performance one year ago and.
And we continue to deliver at a high level across all major categories and geographies.
I also want to give some context around these numbers and the quarter after quarter performance we've been delivering.
We are updating our guidance for the full year and based upon this revised forecast I am pleased to share that we will surpass our 2023 revenue target by the end of this year.
Two years ahead of schedule.
And we achieved these results based upon our performance before during and as we emerge from COVID-19.
A few more details related to these results.
In 2020, we achieved our goal to double our E Commerce business. This year, we will likely achieve the goal we set to double our men's business.
And we remain on track to quadruple our international business by 2023, if not sooner.
I am proud of our leaders and teams for enabling us to meet and exceed these goals as I've said before little laminate remains in the early innings of our growth story and I continue to be inspired and excited with the momentum we're seeing across the business.
Results of this caliber enable us to now develop our next five year growth plan and we'll come back to you next year with an updated view of what the future can hold for Lulu lemon.
Looking at the second quarter, our results reflected broad based strength across our channels regions and product categories. A few key metrics tell the story.
First we grew total revenue, 28% on a two year CAGR basis to $1.5 billion. This growth rate continues to outpace our three year CAGR of 19% leading up to the pandemic and also represents an acceleration from the 25% two year CAGR, we reported in quarter one of this.
Year in.
In addition, our revenue increased across each of our major regions up 26% in North America and up 43% in our international markets. Both on a two year CAGR basis.
Second we saw a further improvement in our brick and mortar channel with open stores generating productivity in line with 2019, I'm very pleased to achieve this milestone faster than we anticipated.
Third even with the recovery in our stores our E Commerce business remains solid comps increased 4% on top of the 157% increase last year.
And finally, I am pleased to share that our adjusted earnings per share for the quarter were a dollar in 65 cents versus 96 cents in 2019, which is significantly ahead of our expectations.
Let me now share more color on our second quarter results, starting with product innovation.
From a performance standpoint, our momentum continued across categories with women's revenue, increasing 26% and men's growing 31% on a two year CAGR basis.
From a product standpoint, I'd like to take a moment to highlight two key launches the air support bra and our latest yoga franchise instill.
Roz remain an important expansion opportunity for us thanks to our unique innovations across both fabrics and construction empowered by our proprietary research. We're very excited about our product positioning and we know that Broz is a wonderful category to drive loyalty with our guests.
Currently the category represents mid single digit penetration and we see an opportunity to grow this category into the low to mid teens in the coming years.
This quarter, we launched the air support Bra are most tested brought to date, which was developed following five years of advanced research and development. It's made from our proprietary ultra Lou fabric and expands our offering into the high impact training category.
As I've mentioned before Lulu lemons unique approach to product innovation is driven by our science of feel innovation platform.
With this strategy firmly in place, we've introduced fabrics and products that engineer specific on body sensations.
Our popular aligned franchise offers are most distraction free and weightless sensation and we've expanded to include tops and Bras. In addition to our popular type.
Just last week, we continued to build out our yoga offering through the introduction of the instill franchise.
From our newest innovation and technical performance fabric called smooth cover. This fabric offers are hug sensation, which provides incredible support through every pose in your practice.
It's a powerful and distinctive companion to our hugely successful align product line and we will further solidify our leadership position within the yogurt category.
Last October we launched our impact agenda, which outlines our strategies to address critical social environmental issues over a multiyear period I'm proud of our recent announcements to developed advanced raw materials that will help us live into our goals and create a healthier world. These include our participation in the Milo consortium.
That will allow us to make products using an infinitely renewable material made from the route structure of mushrooms.
We expect to launch our first products using Milo next year.
Our partnership with lands attack, a biotech company, which allows us to create the world's first yarn and fabric using recycled carbon emissions.
And just a few weeks ago, we announced our multi year collaboration with genome Attica, a recognized leader in sustainable materials to create a lower impact plant based nylon.
I'm excited with these three new partnerships and it's just the beginning of Lulu lemons commitment to be a leader in the industry related to product sustainability and innovation.
I would now like to speak to our supply chain and the issues facing the entire industry.
Another wave of COVID-19, and related factory closures in Vietnam ongoing issues at the ports and reduced air freight capacity are contributing to some disruptions within the supply chain as well as increased costs.
We are monitoring this closely and leaning into the agility of our supply chain.
The strength of our planning and allocations team and the powerful partnerships with our vendors to help mitigate the risks where we can.
Our business was particularly strong in quarter, two and our guidance calls for momentum to continue in the back half of the year, but I think it's fair to say that our business would have been even stronger without these challenges facing the industry Meg.
Megan will have more to share regarding inventory and costs in a few moments.
Let me now shift to mirror.
We continue to be pleased with the performance of mirror, but let me highlight several initiatives we have on track for this year.
We now have mirror shop in shops in 150, Lululemon stores and our plans call for 200 shops in time for the holiday season.
We will soon introduce mirror to gas in Canada with Lulu Lemon has an impressive level of recognition.
We recently opened our second production studio in New York, allowing us to double the number of live classes and mirror will launch a new E Commerce site in time for the holiday season this year.
We are monitoring how macro factors currently impacting the cost of digital marketing are creating some pressure on customer acquisition costs. It mirror, we're enthusiastic about the opportunities that exist for the business. We'll continue monitoring the rising costs associated with CAC, while we move ahead with launching exciting new.
Bashan and leveraging the synergies Lulu lemon brings to the relationship.
Combined these give us a unique strength to keep growing mirror, we will be competitive to attract new members and we will continue to take a measured and responsible approach to the business. We are playing the long game and have much to unlock in the coming years.
We're also excited about how mirror can be the vehicle through which we offer long term benefits to our guests such as membership programs and special experiences.
Given this strategic opportunity, we will suspend our membership test that has been underway and apply the learnings to how we build out the mirror platform for gas the learnings from our membership test are considerable.
Some examples include digital sweat classes and community events, we're top drivers of overall program engagement.
Guests want to engage deeper with us and each other and they are willing to shift into the digital space to do so and the program was embraced by men at a higher rate than we were expecting.
These learnings were integral to our decision to complete the mirror acquisition and hold true today.
We look forward to sharing more with you on the evolution of our loyalty programs at a later date.
Switching now to international our sales trends continued to be robust with all major regions generating strong double digit sales growth on a two year CAGR basis.
We opened eight stores outside of North America in quarter, two and remain on track to open 35 to 40 stores this year internationally.
As you know we also see continued growth opportunities within North America, and I am pleased to now hand, it over to Celeste, who will share. Some additional details with you on our stores and ecommerce business Celeste.
Cal then I'm happy to be on the call today to speak to our omni guest experience pillar and to share some additional details on our second quarter performance.
Looking at our store channel total revenue increased 142% versus last year and 9% on a two year CAGR basis traffic was strong and increased over 150% versus last year. In addition, I am thrilled that we are able to achieve productivity in our open stores equal to levels, we saw in 2019 and <unk>.
Happy to see these results sooner than we expected this performance not only speaks to the success of our kick starting our stores initiative and the strength of our merchandize assortment, but it also speaks to our educators and store teams, who bring our brand to life every day for our GAAP.
Now, let me take a moment to share with you a few highlights from several exciting community Activations, we recently hosted throughout the quarter.
In Atlanta, we co hosted a charity event created in partnership with leading Atlanta, fitness, Influencers, Mecca day, and EJ Houston GAAP.
<unk> kept three back to back classes and Lulu Lemon matched all ticket sales, which were then donated to the black womens health imperative.
In Chicago, beginning in July and running through October laminates, partnering with urban juncture foundation to host to community pop up on Chicago's South side in the box, though marketplace. Knoxville is a very unique collection of shipping containers designed at this space for the community together and local businesses to engage in commerce.
Our activation Perez, our ambassadors with fitness instructors from the local community to lead over 140 complementary fitness classes.
It turned out for these classes has been really positive.
And I'm really excited that we're celebrating the 10 year anniversary of our iconic series event with a virtual run later this month.
We are really proud to be able to bring the lululemon brand to our guests in these unique and compelling ways and we are excited about what is yet to come.
Switching now to e-commerce as Calvin mentioned sales trends remain positive with total digital comps up 4%. In Q2. This result comes on top of the 157% increase in Q2 of last year, which benefited from our online warehouse sale in event that we did not repeat this year the enhancements we're continue.
We need to make to our desktop and mobile sites, which include expanding our alternative payment methods improved storytelling more predictive search and a more seamless checkout all combine to continue to elevate their online guest experience.
Before I hand, it over to Megan I'd like to speak for a minute on labor and what were seeing regarding store and call Center staffing we have always supported and invested in our people. This was never more true than last year. During the pandemic, we prioritized our people and kept our teams intact by offering pay protection SEC PE and other key people investments not only were there.
These initiatives the right thing to do for our people, but they kept our workforce hole and have enabled us to reopen stores with the skull complement of educators and leadership teams and they are directly contributing to the strong results. We've generated over the last several quarters that being said we are carefully monitoring the current development in labor markets, particularly in North America.
And we remain committed to doing what's right for our store and DC teams. We've recently announced that we will raise the minimum base pay for our store and guest Education Center roles in North America, taking our new base pay to $15 to $17 per hour, depending on the location enroll plus all levels are eligible for a monthly bonus.
On top of base pay our teams are incredibly deserving of this new rate and we feel it sets us up strongly going into what will be a busy Q4.
In closing I'd like to thank the entire Lou Lemons family.
Especially our teams in stores and our guests Education center and in our distribution centers around the world. These teens are the heart and soul of our brand and they are responsible for the elevated experience our guests enjoy each and every time they engage with US we are so grateful for everyone's hard work and dedication and for that I'd like to say thank you.
I will now turn it over to Megan.
Thanks, Phil asked our momentum continued in Q2 with our top and bottom line results exceeding our expectations strong guest response to our merchandise offering and improving store trend and continued strength in e-commerce fueled our growth and contributed to our increased outlook for the year, which I will take you through in a moment as Kelvin mentioned, we continue to navigate.
Industry wide challenges with Covid related factory closures slowdowns at the ports and reduced air freight capacity impacting our business as we move into the second half of the year.
I'll share some of the specific impacts of these issues with you as I take you through our Q2 financials and our guidance. Despite these headwinds we expect both strong revenue and EPS for the year and we remain on track to deliver or in some cases, even exceed our goals are set forth in our power of three growth plan.
Let me now share with you the details of our Q2 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 will share include the operating results of mirror, but exclude approximately $9.0 million of acquisition related costs and their associated tax effect in Q2 two.
$2037.0 million of acquisition related costs and their associated tax effect in Q2 'twenty 'twenty.
You can refer to our earnings release for more information and reconciliations to our GAAP metrics for Q2 total net revenue increased 61% to $6.0 billion above our expectations of 1.3 to 1.33 billion. This included a 63% increase in North America, and a 49% increase in our international Biz.
Enough.
On a two year CAGR basis total revenue increased 28% with North America up 26% and international increasing 43%.
And our digital channel revenues increased 66% on a two year CAGR basis above our expectations of approximately 55% growth E. Comm contributed $597 million of top line of 41% of total revenue in our store channel sales increased 9% on a two year CAGR basis above our expectations of approximately.
Right.
Productivity in stores returned to 2019 levels, representing continued improvement versus <unk> 88 per cent productivity, we realized in Q1 of this year.
At the end of the second quarter, we had 95% of our stores open.
Square footage increased 8% versus last year, driven by the addition of 28 net new stores since Q2 of 'twenty 'twenty.
During the quarter, we opened 11 net new stores gross profit for the second quarter was $843 million or 58, 1% of net revenue compared to 54, 2% of net revenue in Q2, 'twenty 'twenty and 55% of net revenue in Q2 2019.
Our gross margin increase of 310 basis points relative to 2019 was driven by 290 basis points of leverage on occupancy depreciation and product team costs and 60 basis points of favorability in foreign exchange, which was partially offset by a 40 basis point decrease in product margin driven by a 120 basis point increase in <unk>.
Airfreight related to COVID-19.
I would also note that markdowns declined relative to 2019 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 were $541 million or 37, 3% of net revenue compared to 39.
0.1% of net revenue in Q2, 2020, and 36% of net revenue in Q2 2019.
Leverage in the quarter versus Q2, 'twenty 'twenty resulted from the sales increase relative to the COVID-19 impacted quarter last year.
The deleverage relative to Q2 2019 is the result of consolidation of mirrors our results this year, but not in 2019 and deleverage on foreign exchange.
Adjusted operating income for the quarter was $299 million or 26% of net revenue compared to 15% of net revenue in Q2, 'twenty 'twenty and 19% of net revenue in Q2 2019.
Adjusted tax expense for the quarter was $88.0 million or 27, 9% of pretax earnings compared to an adjusted effective tax rate of 28, 9% a year ago. The.
The reduction relative to last year is due primarily to deductions related to stock based compensation.
Adjusted net income for the quarter was 216 million or $66.0 per diluted share compared to adjusted earnings per diluted share of <unk> 74 cents in Q2 of 2116 cents in Q2 of 2019.
Capital expenditures were $80 million for the quarter compared to 53 million in the second quarter last year.
Q2 spend relates primarily to store capital for new locations relocations and renovations supply chain investment and technology spend to support our business growth.
Turning to our balance sheet highlights we ended the quarter with $7.0 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 $790 million at the end of Q2. This is below our expectations for a 25% to 30% increase due to our top line outperformance coupled with industry wide supply chain disruptions. However on a two year CAGR basis. This represents inventory growth of 26% versus our.
Expectation for 24% to 25% revenue growth in Q3 on a two year CAGR basis. As we've mentioned we are seeing some delayed inventory receipts due to issues at the ports and also the recent COVID-19 related closures of certain factories in southern Vietnam.
Our supply chain and product teams are working diligently to mitigate these risks by shifting production out of Vietnam, where possible with our vendors who operate in multiple countries prioritizing production to ensure key fall holiday styles or produce first and strategically increasing our use of air freight at.
At the end of Q3, we expect inventory levels to increase approximately 15% to 20% relative to Q3 'twenty 'twenty.
While this level of inventory can support our increased revenue guidance I'm going to walk through in a moment. It is lower than we had initially targeted due to supply chain challenges.
In Q2, we repurchased 506000 shares at an average price of $338.
At the end of the quarter, we had $245 million of availability remaining on our current share repurchase authorization.
Let me shift now to our outlook for Q3, and the full year 2021 the underlying demand for our brand is strong and while we are navigating temporary headwinds in our supply chain, which are impacting both topline and gross margin. We were pleased with our momentum headed into the second half. We currently have approximately 95% of our stores opened globally, we're engaging with guests in.
Sider stores and through our community Activations and our ecommerce business remained strong for.
For Q3, we expect revenue in the range of one four to 1.43 billion, representing a two year CAGR of 24% to 25%.
We expect gross margin in Q3 to increase 50 to 100 basis points versus Q3 of 2019.
<unk> 2019, our gross margin is benefiting from a higher E comm penetration and leverage on occupancy and depreciation our Q3 guidance reflects an impact of approximately 200 basis points of pressure from airfreight costs due to port congestion and capacity constraints.
In Q3, we expect SG&A deleverage of approximately 300 to 350 basis points relative to 2019.
Drivers of the deleverage versus 2019 include consolidation of mirrors our results this year, but not in 2019 increased investments in brand building to support our growth initiatives and higher depreciation due to accelerated investment to support our e-commerce business in 'twenty, 'twenty and 2021.
Turning to EPS, we expect adjusted earnings per share in the third quarter to be in the range of $34.0 to $39.0 versus adjusted EPS of $17.0, 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 Q3 of 2019.
For the full year of 2021 we now expect revenue to be in the range of $6. One nine to 6.26 billion. This range now assumes our e-commerce business grows in the mid teens relative to the outsized strength, we experienced in 2020.
Our annual range also assumes the factories, we used to source product in Vietnam began a phased reopening in mid September when looking at total revenue our guidance range implies a two year CAGR of approximately 25%, which is higher than our three year revenue CAGR of 19% leading up to 'twenty 'twenty and is well ahead of the low teens CAGR, we contemplated in our prior.
There are three growth plan, we continue.
Do you expect to open 45 to 55 net new company operated stores in 2020. One. This includes approximately 35 to 40 stores that our international markets and represents a square footage percentage increase in the low teens. We continue to expect gross margin for the year to expand between 150 to 200 basis points compared to the modest increase we saw in 'twenty two.
For the year the anticipated margin expansion now includes 150 to 200 basis points of negative impact from additional airfreight costs, but it's still an excess of power of three growth plan, which assumes modest gross margin expansion annually.
When looking at SG&A for the full year, we now expect deleverage of 10 to 30 basis points versus 'twenty 'twenty drivers of the deleverage continue to include our investment in mirror of brand building.
We expect our adjusted effective tax rate for the year to be similar to 2020.
We now expect our fiscal year 2021 adjusted diluted earnings per share to be in the range of $7.38 to $7.48.
EPS guidance continues to assume modest dilution from mirror in the 3% to 5% range, excluding acquisition and integration related costs. It also excludes the impact of any future share repurchases.
We continue to expect capital expenditures to be approximately $365 million to $375 million for 'twenty 'twenty. One then.
The increase versus 'twenty 'twenty reflects increased investment in our supply chain digital capabilities, new store openings and renovations, including mirror shop in shops as well as other technology in general corporate infrastructure projects before handing it back to Calvin I want to express my gratitude to the entire Lululemon collective is you brings our brand to life every day.
And enables our strong financial results and now back to Calvin for some closing remarks.
Thank you Meghan and Celeste before I open it up to questions I wanted to take a look back on these results in the previous quarters and speak for a moment about the unique business model that drives their success enables our strong performance and allows us to navigate COVID-19, and the current headwinds impacting our supply chain.
Our vertically integrated model and high margin structure allows us to use more airfreight, while still delivering gross margin expansion.
Our focus on technical athletic apparel allows us to benefit from trends in consumer behavior that are becoming more important year after year.
And our inventory, which leverages many key core styles with less seasonality helps us navigate and mitigate disruptions within the supply chain.
Looking at our business over the course of the second quarter and the first half of the year I continue to be excited about our day to day progress our ability to sustain momentum quarter after quarter and year after year and the incredible long term prospects for our brand.
And with that we'll be happy to take your questions operator.
Thank you we will now begin the question and answer session analysts who wish to join the question. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any key to withdraw.
Your question. Please press Star then two.
We'll pause for a moment as callers join the queue.
The first question comes from Adrienne <unk> with Barclays. Please go ahead.
Good afternoon.
Okay.
It's really all resolved.
I mean, so much.
Okay.
Yeah.
<unk> is.
Yeah.
Generally let's call it.
Six months.
He can give us some more detail.
The exposure that you have maybe to Vietnam.
It really just product coming out of that country, leading into the region and.
Airfreight.
Airfreight for.
I hate to potentially eight holiday. Thank you very much.
Yeah.
Hi, Adrienne, it's Mac and I'll actually take that so in terms of a Vietnam, we sourced approximately 30% of our finished goods.
And the impact of the southern Vietnam closure mm is currently impacting approximately 20% of our second half inventory.
We are leveraging airfreight to meet our guidance and what's contemplated in our guidance is 150 to 100, sorry, 150 to 200 basis points of deleverage for the full year in terms of air freight impact and to the extent possible. The team is looking to multi source and leverage other countries.
And as well it was prioritized them fall holiday key styles to the best of their ability on airfreight is is a muscle that as a growth company, we often leverage them and we continue to do so as we navigate these supply chain challenges in the second half.
Fantastic Best of luck for holiday.
Yeah.
Okay.
The next question comes from Mark our Trucker with Baird. Please go ahead.
Hi, good afternoon. Thanks for taking my question and congrats on the results here.
So great to hear you're on track to pass the 'twenty to 'twenty three revenue target sooner than anticipated understanding will be hearing more next year, but just any initial thoughts you can share on how we should be thinking about your topline growth algorithm beyond 2021, and how if at all the drivers may change versus the player prior plan.
Hi, Mark Thanks, and as you mentioned.
With the revised guidance.
We're looking to achieve between $6 to $9.0 billion. This year, putting us two years ahead a.
We achieved doubling our e-commerce business last year.
We will double our men's business this year and our international business.
Is ahead of our the four time growth, we put out to be completed by the end of 'twenty three so it really supports the early innings in growth across multiple levers the power of three.
Initiatives, focusing on product guest experience and market expansion.
Still the key areas of focus that we will drive our innovation through AR.
And the growth targets within that is is what you should continue to look forward beyond.
Beyond 'twenty one.
But we do plan to come back.
With our long term thinking next year and share more with you at that point.
Thank you and Kevin just a quick follow up can you expand a little bit on the plans for membership I guess I imagine it was a challenge to get reads on the tests given everything that's been going on in the last 18 months, but do you still see an opportunity to have a loyalty program that exists outside of the mirror platform or what form.
Or might that take thank you.
Great, Yes, no absolutely Mark and thanks for the question I'll break it into two things one.
The membership test we learned a lot in particular the way the test was set up as you know is it was a paid membership program.
And our guests received a number of benefits linked to sweat.
And from that some of the behaviors that we were able to observe was.
It drove brand love their connection to the community both the brand as well as to each other which is really important and you want that in these type of membership programs to drive that loyalty and the impact on their spend and in fact those behaviors is what gave us the conviction and confidence to go ahead with the.
Your acquisition, because we saw a natural synergy between the two a paid membership program focused on sweat and the membership tests, although very effective the challenge Covid aside was that it.
It was challenge to scale it was rooted in physical and we couldn't offer it everywhere and we always had visions are being able to bring that.
To the digital platform and seeing what we saw within the physical and our relationship with the mirror team gave us the confidence to proceed with that and really we always saw a convergence between these two strategies.
Membership test gave us access to thousands of guests that were behaving in this way and mirror.
At the end of this year is going to give us access to hundreds of thousands and we're excited about the ability to scale. It. We're early we're thinking long term.
And that convergence was natural outside of a paid subscription the opportunity around loyalty absolutely exists and it's something that we will share later as we share our plans for the future.
Thank you for the detail and best of luck.
Yeah.
The next question comes from Brooke Roach with Goldman Sachs. Please go ahead.
Hi, good afternoon, and thank you so much for taking the question I wanted to follow up on the international business and the momentum that you're seeing there can you provide some additional insight about what's working really well in those geographies and perhaps a little bit more detail on your outlook for China momentum into the second half. Thank you.
Great. Thank you Brook.
Very pleased with our international business are very pleased with growth across every market. We are in now different markets have been impacted had been impacted differently from COVID-19.
As you know Australia, New Zealand in particular, right now is where the bulk of our global store closures are taking place, but even with that our online business is doing very well. So overall, what's very exciting is the balance of growth across all international markets, meaning.
They are all contributing significant growth and into our goal of quadrupling our international business by 23, China in particular is a market where we have.
Leaned in on an investment we've opened our head office in Shanghai, we are leaning in in hiring and supporting local teams within that market.
And in our store expansion as well as our digital innovation and support so.
China is definitely one of our key markets we are seeing.
Good growth.
Vesting in the country.
Supporting the teams.
And overall the international business like our AR business in North America.
Some of our category opportunities very early and growth across all channels in the markets and product categories. So excited about with the future continues to hold for our international business.
Thank you and if I could just follow up with a question for Mike on the SG&A leverage outlook that there are a lot of moving pieces pieces within that within the outlook on some investments in brand building higher wages can you help us think through some of the puts and takes of that leverage component and in SG&A into the back half of this year. Thank you.
Yeah, Hi broke them. So in terms of SG&A are we guided for Q3 to 300 to 350 basis points of deleverage relative to 2019, so and that includes mirror consolidated in this year's numbers and not in 2019 as well as brand.
Building on which would include both that mirror piece as well as or our current feel campaign and then we also have higher depreciation relative to 2019, just given our investments behind digital and the strength of that business and when we look at the full year, we've got 10 to 30 basis points of deleverage.
Four relative to 'twenty 'twenty and that is better than the 30 to 50 basis points that we disclosed previously and really driving that deleverage would be the consolidation of mirror for the full year <unk> as well as investments again behind our digital channels, but really pleased overall I would say with the operating flow.
Remember our business and remain on track to our power for your growth plan as we've discussed.
The next question comes from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks, Good afternoon, and let me add my congratulations excellent result, I have a follow up first on the supply chain and just as you look forward could you just talk about if you see any of that current issue is bleeding into spring and when do some of the facilities that have currently been shuttered and Vietnam need to start kind of ramping hits kind of later holiday demand.
As well as spring and then secondly for Megan on the second quarter comment you called out on Oaken store productivity back at 2019 levels. How are you planning that for the back half. Thank you so much.
Yep. Thanks, Darren Hi, so in terms of supply chain, we are assuming that southern ASEAN Nam begins a phased reopening in mid September and that's what's implied in our guidance and closely monitoring the situation at this point, we do anticipate that the air freight environment will will not.
Crew for the balance of the year and thus we've guided to the 150 to 200 basis points impact on for this year and we'll continue to update you as we move into 'twenty to them and then in terms of open store productivity can you just remind me of the details of your question there.
I was just curious you said you were back in 2019 levels in the second quarter, which was ahead of plan. How are you planning store productivity for oaken stores in the back half.
So for Q3, and we are planning to be slightly above last year 2019 levels for the quarter. When we look to Q4, we're really pushing into our omnichannel strength and we'll be agile across both channels meeting the demand where it comes to us, but we are we are sharing.
Slightly above 2019 productivity for Q3.
Great. Thank you so much all the best.
The next question comes from Ikea Barge Hall with Wells Fargo. Please go ahead.
Yeah.
Excuse me good afternoon, let me add my congrats great great results from Calvin or Megan I guess could you elaborate a little bit a little bit on the CAC.
Commentary you gave can you just talk about the idea of a changes and how it's impacted mirror.
Are the opt in rates.
A little bit lower than what you would expected. This is kind of what you thought and then I guess just to wrap that question up how does this impact the <unk>.
Concepts ability to reach breakeven does it kind of push it out a little bit more or do you view. This as transitory just just any color around that would be really helpful.
Great. Thanks, Mike I'll I'll handle the first half and then handle the second part of your question on breakeven over to Megan.
I'm continue to be very encouraged with the usage numbers.
And the engagement numbers that we're seeing with the mirror community and I'll start there because I think those to me are the most important and signal the health and the engagement of the community both with each other as well as near the product and we continue to see.
The members use it mirror number of sweats number of.
Members per household sweating increase and hold very high numbers. So very excited about how it any guests and you remember that purchases. It is using it and all the things we love about the versatility that genre and appeal to a number.
All playing out.
As well as our conversion numbers are very healthy the challenge right now with a variety of changes that have happened in the digital marketing space.
Is the cost C. P M. The cost to get mirror, which has low awareness right now and we're working towards in front of our guests those costs in the market are rising which has an impact ultimately into CAC, but the number of gas that are.
Converting when they see those ads and ultimately convert to buy once they work their way down through the funnel are all at or above where we've been trending and very healthy.
So it is a reflection of the industry we are.
As I mentioned managing accordingly, we have our eyes on the long game with mirror in the community. We're building, we're just ramping up synergies like the 200 stores that play to our strength in the key leads in each of those locations. So we're excited heading into the holiday, but I did want to call it out because we're monitoring it.
And as I mentioned, we're going to stay within the guidance, we gave on dilution and we're going to leverage the strengths of the synergy and learned a ton this holiday, but the the the general metrics and gas member usage are very very strong.
In terms of breakeven and we haven't put a fine point on that but we are focused as Kelvin mentioned unrolling in initiatives for 2020, one including store ramp Canada entry in ecommerce website rebound.
On the path to profitability there for mirrors very much within our control and we're investing behind the strength and momentum in that business as well as our overall financial strength.
We'll share more as we move through the peak holiday season and into 'twenty two.
Okay. Thank you.
The next question comes from Michael Binetti with Credit Suisse. Please go ahead.
Hey, guys, let me add my congrats on a really nice quarter.
Two quick ones I guess on gross margin sustainability, the gross margins into Q3.
What you typically do for holiday quarter, pre Covid, which is where there's a lot of leverage in the business can you talk about your confidence is sustaining this level you know beyond the recovery period, and what we should think about the puts and takes for gross margin just thematic Lee as we look out beyond 'twenty, one and then Calvin on international when we when we gather.
At the Analyst day, and you gave us the initial guidance of quadrupling revenues by 2023.
I think the comment was that international is going to reach breakeven in 2018, and wood would be 10% to 15% of earnings by 2023. So I think that embedded about 1500 basis points of margin expansion in international you told us like Youre on track to quadruple the revenues, but are you know maybe you could just give us some thoughts on.
On the path to profit.
The profitability of the international business to go with that comment just to bring us up to date.
And Michael I'll take the first part of that question. So in terms of gross margin a 150 basis points to 200 basis points of expansion was where we guided for the full year and were pleased I would say overall with that relative to 'twenty 'twenty performance and it's really driven through outperformance on topline.
And leverage on occupancy and depreciation and then we do at this point in time, we're maintaining our power of three growth plan, which caused calls for modest expansion in gross margin and as we look out and and as Kathleen mentioned, we'll come back and update that plan as we move into next year and in terms of over.
They're all on international profitability I'm, we are profitable overall in international.
And I still see a lot of opportunity there relative to the maturation of the international business in terms of its comparison to North America, I'm, particularly pleased with the growth rates, we're experiencing in China and see an opportunity for both revenue and gross margin expansion and.
Operating margin as that business expands.
Thanks Rodney.
The next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.
Hi, Thank you I wanted to focus.
On the men's business for a minute the.
The two year CAGR continues to accelerate I was just curious where you've seen success and what you're excited about for the back half and into next year.
Ltd.
Other than it's Kelvin.
As you are as you alluded we're very happy.
With the overall growth in our men's business to your CAGR of 31% I'm sure you remember last year.
When heading into Covid.
Covid, our men's business was leading growth over womens and then with the.
Shutting in our stores and other shifts that were happening as a result, we saw that business slow both in the industry as well as with ourself, even though we were putting on market share and.
And at the time I sort of indicated that it would just be a matter of time, we didn't see anything systemic.
In our men's business that raise any concerns for us and those scenarios played out of stores opened.
He came back into the store, which stores still remain a wonderful acquisition vehicle for us to get new men into the business and into the brand.
And it has just continued to gain momentum through each quarter, and then with Q2 being sort of back at that are you know great growth, where you know we're going to double our business at the end of this year or two years early from when we started at the beginning of 2019 and when I look at the growth it is balanced.
Cross all the categories, which is very healthy.
They're obviously between bottoms, and tops and shorts and and outerwear and some of the accessories. You see is a slight variance in growth, but overall, they're all double digit all very strong and it's a reflection of you know.
Building deeper relationships with our existing guys them spending more in continuing to acquire and bring in a new male guests into the business.
And we will share.
The Romans plays in our future growth plans early next year, when we sort of reset but it continues to be very strong very strong across all markets around the globe and it's driven both by our current spending more and our acquisition of new guests.
Thank you.
The next question comes from Matthew Boss with J P. Morgan. Please go ahead.
Thanks, and congrats on another great quarter.
So maybe Calvin as we think about 28% revenue growth relative to 2019 in the second quarter mid Twenty's in the first quarter.
Is there a way to rank the drivers of the outperformance that you're seeing relative to that 19% pre pandemic or maybe said differently do you believe the Tam coming out of this crisis with larger broadly multiyear for the Lulu brand or you're taking the accelerated market share or is it a combination of both.
Okay.
Yeah.
Great. Thanks, Matt it's definitely.
A combination of both we've shared and continue to see our brand gaining market share across categories mens and womens.
Equally we know that a pandemic.
Drove forward accelerated some of the guests behaviors that play to the strength of our brands are one is a general fitness awareness to being well living well too the importance of functional apparel.
<unk>, which which is critical.
And again, you know plays to our strength.
And third is really the.
D a.
Yes.
Rolls in categories that are our bread and play in and how the guests are wearing and using the gears. So I think the I know the Tam has has been impacted by those macro trends, we're well positioned within our.
Is that a tam to address it in a in a very effective leading way and.
And I think that combined with our ability to gain market share against our competitors is.
Helping to fuel the business and we'll continue as we as we look forward to the years and you know you've heard me say this before this brand is early innings across product.
With activities, where we focus on run train yoga.
T M categories within those activities and both our men's and women's business.
Markets, North American International and channels online in stores. So we are early innings in our growth. That's why we see such balanced growth across markets channels and product categories.
And the impact that Covid has had on Tam plays to the strengths and plays to our growth story and the opportunity that we see ahead for our bread.
Great. Congrats again early innings is a great thing.
Thank you.
The next question comes from Jay sole with UBS. Please go ahead.
Great. Thank you so much Kevin I just wanted to follow up on that last answer you know theres some large public companies who have bought.
Please your brands over the past couple of months just wondering how you think that impacts the company's ability to continue to reach schools and can you remind us what what is it about I mean that continues to allow you to be a leader when a lot of other companies are going to be a big companies with big resources are going to be making investments in this category.
Great. Thanks, a J, there's a there's a lot in that question.
And I'll.
Unpack a bit of it but you know those brands that had been acquired have had been in the market. We've competed against them before.
And we've always liked our unique and differentiation within what has been a crowded marketplace and yet we continue to put up the results we put up.
In the in the past number of years and that really is rooted in a number of very unique attributes to our Brad one starting with our product.
Premium nature of it the focus an obsession on innovation through science of feel that.
That truly creates product that performs.
<unk> in a unique way to the gas and provides.
A sensorial experience, that's unique and different with the quality that they know they're getting for what they buy and pay and that has always driven our business, it's what separates us from others and.
And I don't see that changing with the landscape of who's out there and who owns who's out there our obsession with raw material and our investment in our product is what we do it's what we obsess about and it's really what drives why the guests feel a different and continue to sort of be loyal to this product and brand and the SEC.
Is the power of human connection through our educators to the strength of our community and the investments we make a grassroots through our people through our ambassador community.
And then the exciting addition of mirror into that community, but everything we do around human connection science it feel that's fueling that.
That continues to differentiate the brand and.
And its unique position as premium but through quality innovation, we believe continue to be unique differentiators and drivers of the brand.
And have obviously been in place and fueled the growth that we've seen so far.
Got it that's helpful. If I could just ask one more question switching gears for a second you know if you think about the holiday environment. Kevin how are you thinking about maybe some opportunities that could be presented around pricing. If we are in an environment, where a lot of companies are having trouble sourcing the units they need or they would want to really fulfill the demand the consumer demand that's out there does it does it create.
Opportunity to take some pricing to offset cost increases whether it's in labor or other areas and how do you think that the overall environment will respond to it to a to a situation where everybody is being challenged by supply chain issues in Asia.
Yeah, we take pricing.
No, obviously seriously and that we're calling is constantly monitoring and testing driven out of the innovation of the product, we're well aware of the inputs of of inflation in costs and have that in our guidance that Megan has provided a you know we look.
For opportunities, both where we could price up <unk> price down to be positioned in the marketplace based on assortment and range work. So it's pretty fluid, Matt and were comfortable I'm, sorry, Jay a very fluid and we're comfortable with the you know sort of how we're positioned today in <unk>.
Dressing it, but all and any pricing changes would be in Megan guidance and theres nothing of significance plan or that you should expect.
Got it thank you so much.
The next question comes from John Kernan with Cowen. Please go ahead.
Excellent. Thanks for squeezing me in congrats.
Congrats on all the momentum.
Kelvin can you talk about the investments in renewable materials and stance on sustainability that you're taking how much of a percentage of the assortment can this represent over time.
The margin profile of the sustainable product look versus the current assortment and I have a quick follow up for Megan. Thanks.
Great. Thanks, John as you know in our impact agenda that we published our first one last year on our b human be well be planet, our pillars and our be planet. Our commitment is to make 100% of our products with sustainable materials by 2030 as well as <unk>.
Investing into circularity wishes, extending the life of our products.
In providing options and choices for our guests and theres been a lot of Oh fantastic innovations and partnerships in that space with the pilot around a resell program are the partnerships be it with Milo lands attack urge you nomadic AR announced this past quarter and the supercluster. So it is a very important draw.
<unk> or of innovation for our business we've established.
You know plans to improve the planet that we're committed to.
And as the scale and as we continue to drop collections and learn we are not anticipating or how we factored in a margin pressure results are and we've established multi year targets. We are working with the right partners to help in the manufacturing and the creation and therefore the commercialization of these.
Goods so.
So I would not factor in any marginal impact in our goals speak for themselves, we want to be by 2030 or 100% of our products are made with sustained materials and that's what these partnerships are you know gearing and working towards for us.
That's exciting things and then.
Maybe just a quick follow up on the increase.
The increased outlook for airfreight, I think that everybody's seen I think it's now a 150 to 200 basis points of negative impact for the year.
How should we think about this in terms of recovery. It seems like most of this is cyclical and much of this can be recovered fairly.
Fairly quickly as the supply chain begins to open up is that is that the right way to think about this is it.
The gross margin will obviously be a lot higher without some of these supply chain crushers and that some of this is just cyclical.
Cyclical rather than structural.
Yes, I would say are definitely view it as temporary in nature, obviously, the environment is very dynamic and fluid today as I mentioned, we anticipate it will be with us for the balance of the ear and we'll update on 'twenty 'twenty two there will be some likely some puts and takes in margin as we move forward and we do remain committed to the margin.
That was in our prior three growth plan of modest expansion annually.
Yeah.
Excellent. Thank you congrats.
Thank you.
That's all the time, we have for questions today. Thank you for joining the call and have a nice day.
Okay.
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