Q3 2021 Lululemon Athletica Inc Earnings Call

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Thank you for standing by this is the conference operator, welcome to the Lululemon Athletica, Inc. Third quarter 2021 earnings Conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation there'll be an opportunity to ask questions analysts who wish to join the question queue May Press Star then one 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 Shubin Vice.

President Investor Relations for Lulu Lemon Athletica. Please go ahead.

Thank you and good afternoon, welcome to Lulu Lemon third quarter earnings Conference call. Joining me to talk about heart results for Calvin Mcdonald, CEO and Meghan Frank CFO.

We get started I'd like to take this opportunity to remind you that our remarks today will include forward looking statements, reflecting management's current forecast of certain aspects of <unk> future.

Payments 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 of new information or future events.

During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis.

The press release and accompanying quarterly report on Form 10-Q are available under the investors section of our website at Www Dot Lulu Lemon dotcom.

Before we begin the call I'd like to remind our investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the third quarter as well as our quarterly 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 now.

Now I'd like to turn the call over to Kal.

Thank you Howard and welcome everyone to our third quarter conference call.

I'm excited to be here to discuss our results and share highlights of our performance at the start of the holiday season.

Our momentum remains strong in the quarter, reflecting the continued growth potential for lululemon in both the near term and the long term.

I'm, especially pleased with how our leaders and teams continue to successfully execute against our power of three growth plan, while we navigate the supply chain issues within the industry.

All it tipped to last year revenue grew 30% and on a two year CAGR basis increased 26%.

Our strength continues to be broad based and balanced across every facet of our business, including channel category activity gender and geography.

Before discussing more details about quarter, three I would like to share some highlights on the three topics our performance over the recent Thanksgiving holiday inventory levels in the current labor market.

Starting with Thanksgiving, we were pleased with our performance over the holiday weekend.

Five days spanning Thanksgiving through cyber Monday, both our digital and brick and mortar channels performed well.

Commerce delivered record breaking days in several key metrics, including sales traffic and conversion.

And I'm excited to share that this year Thanksgiving day was our highest volume E Commerce day ever.

The investments we have made over the last several years are enabling the acceleration we're seeing in the digital business and contributing to the growth. This year on top of last year's outsized performance.

While we still have several large volume weeks ahead of us it was great to see our guests respond well to our merchandise offering as we kicked off the holiday season.

Shifting to our supply chain, we continue to face the same issues as much of the industry, including port slowdowns in increased cost associated with airfreight.

In Vietnam, I am pleased to share that all of our factories have reopened and continued to ramp up their capacity.

While the summer closures caused some delays our total inventory at the end of Q3 was up 22% slightly ahead of our most recent expectations of 15% to 20%.

As you are aware approximately 40% of our inventory is comprised of core seasonal less product, which helps us make our inventory management and flow decisions.

This coupled with the well established partnerships, we have with our vendors is allowing us to mitigate many of the current supply chain risks.

I'm extremely proud of how our teams have and continue to successfully navigate through this dynamic environment.

We're comfortable with both the quality and quantity of our inventory I continue to believe that demand for our brand is outpacing supply and our business could have been even stronger without the supply chain challenges.

Turning to the labor market, we are well positioned this holiday to meet guest demand as you know the hiring environment has been very competitive this season and I am pleased that we have been able to hire more than 7000 employees within our stores Dcs and guest education centers in the lead up to the holiday our strong employee offering.

Highlighted by our pay protection program through COVID-19, and recent increases in minimum wage has enabled us to perform well in the current environment.

Let me now share some highlights from our Q3 results.

First our total revenue of 1.5 billion represents growth of 26% on a two year CAGR basis.

We continued to build on the strength in our store channel with productivity levels above what we achieved in 2019.

Third our e-commerce business, Comped up 21%, which on top of the 93% last year translates into a two year CAGR of 54%.

Finally, our adjusted earnings per share were $1 62 versus 96 cents in 2019, which was above expectations.

This level of performance continues to demonstrate how little lemon is the brand positioned for consistent growth quarter after quarter.

Next I will provide some additional details on our results starting with product innovation.

Our momentum remains strong across all of our major categories with women's revenue increasing 24%.

Men's growing 29% and accessories up 40% all on a two year CAGR basis.

We continue to leverage the science of feel to bring product newness and innovation to our guests.

I'm, particularly proud of our recently announced multi year partnership with the Canadian Olympic Committee and Paralympic Committee. This is important to us in several ways first it allows us to showcase the lemon brand and our technical expertise within apparel on the world stage.

Next it is compelling platform that we can leverage to continue to grow our brand presence in Canada, our most mature market and finally, it offers a new and exciting test and learn opportunity to increase our brand awareness and consideration with men both inside and outside of Canada.

Our product teams worked with athletes for 18 months and developed more than 30 styles to help each team member feel and perform their best during the games.

As a Canadian and lifelong fans of the games I wanted to share that all of us at Lululemon are honored to play a role in helping to inspire and unite people through sport.

Let me now move on to mirror.

Our core a little lemon business continues to be strong driving innovation and growth in our core remains our primary focus and our results demonstrate the ongoing effectiveness of our initiatives.

This success allows us to invest in new opportunities to enable future growth and mirrors one of those examples.

Our vision for Mir is to assist in building and extending our Lulu lemon community and helping us drive both retention and spend.

It's an evolution of our membership program to propel our core business out Lulu Lemon for Lulu Lemon.

We have only just begun our journey with mirror and we will continue to rollout initiatives that deliver on this goal.

As you know 2021 has been a challenging year for digital fitness and as I mentioned on our last earnings call. We have seen increasing pressures on CAC that are impacting the entire industry.

One of the unique advantages we bring to the space is the many ways, we can build brand awareness for mirror.

As we unlock these synergies we see a clear path to engage with the more than 10 million Lululemon guests, who live the sweat life.

We will not chase growth at any cost, we simply don't need to but we will invest to define our unique proposition and to bring mirror to market through our owned marketing channels. We demonstrated this with our recent launch in Canada and the introduction of our innovative connected weights both of which are off to a great start.

We can and will stand out in a crowded space and leverage all that's unique about Lulu lemon.

With this context, we are lowering our revenue guidance for me or for the year to $125 million to $130 million.

Given the seasonality of their business, which skews heavily to quarter for the timing of this revision is appropriate given the line of sight. We have on its performance importantly, we are maintaining our dilution estimate of 3% to 5%.

With this said I am pleased that we will have grown our subscribers by 40% year over year and will end 2021 with a meaningful subscription base to build upon.

Mir represents less than 3% of our revenue this year, although we do not require it to deliver our power of three goals, we see mirror as an opportunity to engage with our guests in new ways that we will continue to evolve and refine over time.

We are still early in creating our vision of a loyalty community that captures the best of Lulu Lemon. This is not a sprint for us and we will maintain a steady pace forward that realizes our vision.

Switching now to our store channel total revenue increased 38% versus last year and 10% on a two year CAGR basis.

Traffic increased over 50% versus last year.

We're pleased with the start of the holiday season in stores and our educators are thrilled to be engaging with the guests in person, we continue to leverage and enhance our in store and omni capabilities, including enhancing our mobile app to facilitate curbside pickup for guests make our in store handheld units more intuitive.

For our educators to help speed guests through transactions and continue to offer online digital educators service at no cost, providing a personal shopping experience for guests who can't make it into our stores.

Turning to our ecommerce business sales trends remain robust with total digital comps up 21% in Q3.

This result comes on top of the 93% increase in the same quarter last year, we continue to enhance the experience for our guests on our websites and apps, which is the direct result of the investments we have made over the last 18 months.

And it is paying off for US for example, when I was in stores over Thanksgiving weekend. Each store was doing an impressive volume of orders through both <unk> and B B R. This.

This is enabled by the visibility we have to our inventory across our network, which allows us to meet guest demand and exceed their expectations.

It's a great example of how we are realizing our omni vision and potential.

Looking forward to the fourth quarter, we feel good about our ability to handle the increased volume of traffic based on the significant investments we've made over the last several years in technology infrastructure.

Infrastructure, our guest Education Center and D. CS all which continued to produce results.

Regarding our international business, we continue to be excited by the level of performance across each region, which shows how well our brand translates across borders and beyond North America. It's clear that there is a vast opportunity for lululemon as we expand further into EMEA and China and in the Asia.

Pacific region.

In Q3, we saw strength across every major region with each generating strong double digit sales growth on a two year CAGR basis in.

In China, our two year CAGR growth of more than 70% significantly outpaced the performance. We saw overall in international as we continue to see compelling guest response to our merchandise assortment online and in our stores. Our team also continues to maintain a steady pace of new store openings in the market and.

In Europe, our two year CAGR revenue growth of over 20% was driven by broad based strength across most of our key markets, coupled with an improving brick and mortar business in the United Kingdom, following very prolonged COVID-19 related closures.

We are on track to open 40 to 45 stores in our international regions. This year and are excited by the significant runway for growth across our key markets outside of North America.

Before handing it over to Megan who will provide additional details on our Q3 financials and our guidance outlook I want to bring our inaugural impact report to your attention.

One year ago, we published our impact agenda, which details our vision and strategy to help transform our industry and create a healthier world. It is structured into three interconnected pillars, the human be well and be planet, each with a set of specific goals and strategies.

We will report annually on our progress towards these goals and I Hope you will take the time to visit the sustainability section of our website to learn more we recognize that it will take continuous learning and sustained dedication to achieve our goals. We are firmly committed to accountability transparency and doing the necessary work to help build a safer.

And healthier world and with that I'll turn it over to Megan.

Thanks, Kelvin our business remained strong in Q3 the trend in stores continue to improve with productivity of about 2019, our E. Commerce business continues to comp positively over the growth we experienced last year.

Sure our guidance outlook with you in a few minutes, but I think it's important for investors to know that we are raising our guidance for the year, despite increasing air freight costs and a more conservative view on revenue from here. This is a testament to the underlying strength of our core business and to our teams around the globe, who enable this impressive performance.

Let me now share with you the details on our Q3 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, but exclude approximately 24 million of acquisition related costs and their associated tax effects in Q3, 2021.

$8 5 million of acquisition related costs and their associated tax effects in Q3 2020.

You can refer to our earnings release for more information and reconciliations for our GAAP metrics.

Q3, total net revenue increased 30% to 1.45 billion above our expectations of 1.4 to $1 43 billion. This included a 28% increase in North America, and a 40% increase in our international business on a two year CAGR basis total revenue increased 26% this is better than our.

And of the 24% to 25% two year CAGR growth continues to outpace our three year CAGR of 19% leading up to the pandemic within North America revenue increased 23% and we then internationally saw a 42% increase both on a two year CAGR basis, and our digital channel revenues increased 54% on a two year CAGR based.

Yes contributed $587 million topline or 40% of total revenue in our store channel sales increased 10% on a two year CAGR basis productivity in stores exceeded 2019 levels and continues the trend of improving productivity we've seen throughout the year.

On average we had 96% of our stores open throughout Q3, and 99% opened at the end of the quarter.

Square footage increased 11% versus last year, driven by the addition of 37 net new stores since Q3 of 2020.

During the quarter reopened 18 net new stores.

Gross profit for the third quarter was $829 million or 57, 2% of net revenue compared to 56, 1% of net revenue in Q3 'twenty 'twenty.

55, 1% of net revenue in Q3 2019.

Our gross margin increase of 210 basis points relative to 2019 was driven by 230 basis points of leverage on occupancy depreciation and product team costs and 30 basis points of favorability in foreign exchange, which was partially offset by a 50 basis point decrease in product margin.

Excluding a 230 basis point increase in airfreight, the latest to industry supply chain challenges product margin would've increased versus 2019.

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 $545 million or 37, 6% of net revenue compared to 36, 8% of net revenue in Q3, 2020 and $35.

9% of net revenue in Q3 2019.

The deleverage in the quarter versus Q3, 'twenty 'twenty resulted from increased investments in people and brand building to support our growth initiatives, coupled with deleverage on foreign exchange.

The deleverage relative to Q3 2019 is primarily the result of consolidation mirrors our results this year, but not in 2019 and modest deleverage on depreciation amortization and foreign exchange.

Adjusted operating income for the quarter was $282 million or 19, 4% of net revenue compared to 19, 1% of net revenue in Q3, 'twenty 'twenty and 19, 2% event net revenue in Q3 2019.

Adjusted tax expense for the quarter was $71 million or 25, 1% of pretax earnings compared to an adjusted effective tax rate of 28, 9% a year ago.

The reduction relative to last year is due primarily to a reduction in nondeductible expenses in international jurisdictions and increase in tax deductions related to stock based compensation and a reduction in adjustments upon the filing of certain tax returns.

Adjusted net income for the quarter was $211 million or $1 62 per diluted share compared to adjusted earnings per diluted share of $1 16 in Q3 of 'twenty 'twenty and 96 cents in Q3 of 2019.

Capital expenditures were 122 million for the quarter compared to $66 million in the third quarter last year.

Q3 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 $1 4 billion of total liquidity, we had approximately 1 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility.

Inventory grew 22% versus last year and was $944 million at the end of Q3.

This is slightly higher than our expectations for 15, or 20% increase reflecting the efforts of our supply chain and product teams to mitigate industry wide supply chain risk by prioritizing production to ensure key styles or produce first and strategically increasing our use of air freight.

At the end of Q4, we expect inventory levels to increase approximately 20% to 25% relative to Q4 of 'twenty 'twenty.

Q3, we repurchased approximately 582000 shares at an average price of $406 at the end of the quarter, we had approximately $509 million availability remaining on our current share repurchase authorization.

Which includes the recent $500 million increase our board of directors approved in early October.

Let me shift now to our outlook for Q4, and the full year 2021.

While we're pleased with our performance over Thanksgiving, it's important to acknowledge that the macro environment remains uncertain and we have several large volume weeks ahead of US I'd also note that as the industry wide supply chain issues have been well publicized consumers may have started their holiday shopping early this year.

To account for these variables as we've done throughout the Covid period, we continue to plan the business for multiple scenarios.

For Q4, we expect revenue in the range of 2.125 to 2.165 billion, representing a two year CAGR of 23% to 24%.

We expect gross margin in Q4 to be flat with Q4 of 2019 our.

Our Q4 guidance reflects an impact of approximately 450 basis points of pressure from airfreight costs due to port congestion and capacity constraints. This represents an increase in airfreight expense relative to our prior guidance.

In Q4, we expect SG&A deleverage of approximately 200 to 250 basis points relative to 2019.

Drivers of the deleverage versus 2019 include consolidation of mirrors results this year, but not in 2019 and higher depreciation due to accelerated investments to support our e-commerce business in 'twenty, 'twenty and 2021.

Turning to EPS, we expect adjusted earnings per share in the fourth quarter to be in the range of $3.25 to $3.32 versus adjusted EPS of $2.58 a year ago.

This includes operating results from here, but excludes acquisition and integration related costs. As a reminder, we reported EPS of $2.28 in Q4 of 2019.

For the full year 2021 we expect revenue to be in the range of $6. Two five to 6.29 billion. This represents an increase from our prior guidance range of $6, one nine to 6.26 billion.

Includes a more conservative view on mirror revenue for the year of approximately $125 million to $130 million.

This range also assumes our e-commerce business grows in the mid teens relative to the outsized strength, we experienced in 2020.

When looking at total revenue guidance range implies a two year CAGR of approximately 25% to 26%, 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 contemplated in our Paris or your growth plan.

We now expect to open 50 to 55 net new company operated stores in 2020 one.

This includes approximately 40 to 45 stores in our international markets and represents a square footage percentage increase in the low teens.

For the full year, we are forecasting gross margin to expand between 100 to 150 basis points compared to the modest increase we saw in 2020.

The reduction relative to our prior guidance of an increase of 150 to 200 basis points is driven by an increase in air freight expense to 200 to 250 basis points for the year.

Despite the increase in airfreight expense year over year, we continue to anticipate gross margin expansion in excess of her para three growth plan, which assumes modest gross margin expansion annually.

When looking at SG&A for the full year, we are forecasting leverage of 50 to 100 basis points versus 2020, we now expect our adjusted effective tax rate for the year to be approximately 27%.

For the fiscal year 2021 our revised range for adjusted diluted earnings per share of $7.69 to $7.76 versus our prior range of $7.38 to $7.48 or EPS guidance continues to assume modest dilution from mirror in the 3% to 5% range excluding.

This shouldn't and integration related costs. Despite a more conservative view on Mir revenue, we were being prudent with our expenditures, particularly related to digital marketing and this is enabling us to maintain the dilution percentage and the range, we've been guiding to all year.

Our updated EPS range also excludes the impact of any future share repurchases. We now expect capital expenditures to be approximately $375 million to $385 million for 2021 the.

The increase versus 2020 reflects increased investment in our supply chain digital capabilities, new store openings and renovations, including Mira shop in shops as well as other technology in general corporate infrastructure projects.

Thank you and with that I'll turn the call back over to Calvin for some closing remarks.

Thank you Megan I am very pleased with the high level performance of Lulu Lemon across every major metric and category, which allows us to deliver such a strong quarter.

We have begun the fourth quarter with the inventory staffing and strategies in place to enable us to finish 2021 and a position of strength as we expect to pass the $6 billion annual revenue level for the first time.

The way, we continue to grow and expand as a testament to the commitment and passion of the people of Lulu Lemon I'm, particularly proud of our agility throughout this year and over the course of the pandemic and how the leadership team continues to build upon the momentum in the business 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 queue May Press Star then one on their telephone keypad you will.

Here atone acknowledging your request if you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

Our first question comes from Adrienne <unk> of Barclays. Please go ahead.

Good afternoon.

Great job.

A tremendously difficult environment.

Kevin I wanted to start by talking about you know average initial retails, what you think the pricing power. There is and you know most of retail didn't really touch their initial retails in 2020, one, but they are going to start touching the like for likes in 'twenty 'twenty. Two so just wondering kind of how you were thinking.

About that and what are the 11th relative to that pricing.

Given that 40% is core.

Ongoing supply chain issues is there an increase in weeks of supply. It's scheduled for spring of 2022 as a safety stock. Thank you very much.

Thanks, Adrian on pricing, we have no plans to change your pricing strategy.

At this time as you know, we lead with technical innovation and price our garments. Accordingly, we're always studying the marketplace and make pricing adjustments as necessary based on the competitive dynamics and opportunities that exist, but we have no plans to make a change heading into 2020.

Two.

Great and in terms of inventory and we do have an advantage in the proportion of our inventory that sits in core product and while we aren't sharing details on our 2022 plans today. The team is actively looking at opportunities to capitalize on that on that core assortment and pull that forward where that makes sense.

For us.

Great. Thank you very much.

For holiday.

Thank you. Thank you.

Our next question comes from Matthew Boss of Jpmorgan. Please go ahead.

Great Thanks, and congrats on another nice quarter.

So calvin revenues year to date.

Year to date up 60% versus 2019, and you've mentioned demand exceeding supply now for the second straight quarter could you speak to new customer acquisition and drivers of the balance that you're seeing between stores and digital which point in your view to sustainable strength of the brand.

Yeah. Thanks Matthew.

There are a number of the the overall driving metrics that point to that the obvious one.

Is the challenge we've seen in inventory.

And even though we've been able to achieve these results.

Product drops are some of the product innovation and the way in which the design teams intended.

Our activities in our categories are too.

To be launched for the guest just haven't materialized to pretty much the entire and we've been chasing into that so we know, there's a and upside to being able to represent and present the product the way in which it was designed intended to that said.

When we look at our our new guest acquisition. It remains very strong has before the pandemic during and post.

We continue to see a new guests come into the brand.

We continue to have success migrating those new guests up through different categories and their spend journey.

And the retention of our high spending loyal Lululemon guests remain incredibly strong what.

What we alluded to during the early pandemic when stores were closed was that we were seeing more of our store only shift into omni we were seeing our omni guest spend more and because we have such a strong position with digital that enabled them to to engage in the brand and do purchasing.

And we know there were some store only guests that could not have access or chose not to and now that the stores are up and operating a we're very pleased with with seeing them return back to the brand as we continue to grow.

We referenced stores being great acquirer of mens now that they're up and you've seen our men's business has come back incredibly strong and we see new guests through that.

And having our stores perform above our 2019 numbers, while maintaining our digital is really a factor of all of those inputs predominantly new gas migration of guests and retention of guests all very healthy and we know are our product.

<unk> Ah is only going to get stronger and and the team did a wonderful job chasing it but you know it wasn't our best.

It was a good foot and it was you know we had a bigger our intention even behind what we were able to get out.

That's great color, it's perfect lead into my second question on the product positioning could you elaborate on trends that you've seen so far in the fourth quarter and given your inventory position, but then the proactive steps that you took to air freight and product what is your ability to chase demand if momentum exceeded plan and.

To your point on product positioning what do you wish you had more of or maybe changes in.

In an ideal world to meet that outsized demand.

Yeah no. Thank you.

Overall on product there haven't been any dramatic <unk>.

Yes to the the trends that we saw coming in we've seen great growth across men's and women's very balanced growth across categories top second layer, a bottoms shorts skirts and into the mens sweat categories and across our activities.

So again as I've mentioned before our growth remains very balanced across men's women's across each category across all the activities. We've identified in our innovating into and across every region that we are doing business in and across our channels be it stores and digital.

What would I have wanted more of them. There are some products that we are light on outerwear is a category that has performed incredibly well for us. This season, and we didn't have the depth. There that we would have wanted a.

Some of our second layer categories, Oh T M leading into the holiday have had been delayed some of our early fall receipts.

But overall because of our balanced inventory core we've been able to them we have leaned in and we've made sure through airfreight to have those goods and they are our fuel and drivers and they continued to be and we're in a good position, but there are definitely certain items and areas, where we've seen that.

Delay as a result of the shutdown, but we have more than enough balance in key growth across our.

Entire portfolio that is able to keep fueling the results that we achieved.

Matt and I think that on their we did and inland with inventory up 22%, which was above our expectation of 15% to 20% growth and really reflective of the teams in supply chain and product teams leveraging airfreight, we do make those decisions about six weeks out and certainly don't have as much flexibility as a normal environment.

The supply chain constraints, but it is something we're actively managing where we do have opportunity.

That's great color congrats again.

Thank you.

Our next question comes from Ike <unk> of Wells Fargo. Please go ahead.

Hey, good afternoon, everyone I guess, maybe I just wanted to dig into the air free dynamic a bit more.

Is there any way you could possibly share with us based on spring orders.

What kind of pressure you guys should expect or we should expect to see you guys see in the first half of next year and then I guess, you don't want to get too specific I guess for the full year, you're saying 200 to 250 basis points of pressure.

How much of that based on what you know today is reasonable for us to expect for you guys to kind of recapture in 2022.

Thanks, Mike and I think a little soon to put a fine point on 2022 I, but we do expect that the supply chain pressures will be with us since we move them into the first half of the year on that side, we think there'll be some puts and takes in our gross margin and we are right.

Now maintaining our commitment to modest margin expansion next year, certainly airfreight presents an opportunity over the long term, but there will be some normalization of historically high full price sell throughs and low markdowns as well as other investments in our business and maintain that a modest margin expansion goal and we'll share more.

In spring 'twenty two on our next five year outlook.

Megan is it fair to say this this should be the peak of the airfreight pressure in Q4.

I believe so.

Thanks.

Thanks.

Our next question comes from Mark All tracker of Baird. Please go ahead.

Good afternoon. Thanks for taking my question. So just to start out I mean, you sound very pleased with the start to the holiday season, where there any changes to your approach to the Black Friday cyber Monday period, this year versus prior years, especially in light of the supply chain disruption.

And then Relatedly you've talked about how you may have left some sales on the table.

In the quarter, given the inventory constraints, but you're also mindful of some potential pull forward in.

In sales that might be happening. So maybe just talk about your level of confidence of potentially building on the Q3 growth rates. Thank you.

Thanks, Mark in terms of our.

Thanks, giving shopping over Black Friday, and cyber Monday, there was really no change to our strategy and tactic in that by I mean, we didn't take further markdowns are we don't play promotion as you know.

The team's definitely worked hard to get the stores and online in a good inventory position to satisfy demand. We made sure that we were ready we've been investing a four months quite frankly are going back to the beginning of the pandemic to get our digital channel ready.

To anticipate the sort of volume.

And as I as I alluded to in my opening remarks, we had the largest volume day in the history of Blue Lemon on on Thursday, AR and AR and the site performed incredibly well as.

Has our D CS and full support so there wasn't anything unique.

Unique there wasn't anything artificial to drive demand just.

Just all good work and hard work to get ready for the demand and getting our core product out there with traditional markdown activity and in it and we saw that to the volume and we are anticipating a you know a pull forward.

So we are continuing to monitor the weeks ahead as Megan mentioned there are some big weeks ahead.

We're pleased with our position we're pleased coming out of November we knew that we needed to to have a strong start to the quarter and we achieved that and we're continuing to monitor AR and AR and get ready for the coming weeks.

Mark I'd just add in terms of Q3 growth in next year I think the guest metrics.

Growth that Calvin was pointing to in both new and existing and engagement.

And give us confidence in our ability to continue to grow on top of this baseline as well as our international and North America on the expansion strategies and again, we'll share more in spring 'twenty two on our next five year outlook.

Thank you and just a quick follow up on mirror, if I could can you just give us some perspective on how youre thinking about balancing the growth and profitability for the platform for 2022, I guess would you expect it to be net dilutive to EPS next year. Thank you.

Sure and so in terms of nearer in 2020 two I'm, we're not going to share specifics today, but I would offer that we the path to profitability is very much within our control will remain prudent in our investments as we have been this year and we do expect dilution to begin to decrease next year.

Great happy holidays. Thank you.

Okay. Thanks, Eric.

Our next question comes from Erinn Murphy of Piper Sandler. Please go ahead.

Great. Thanks. Good afternoon, I was hoping you could talk a little bit more about what you're seeing in the competitive landscape in China. So the Lulu brands and just are you seeing any change in dynamic between global brands versus National brands. There and then Relatedly any early read on 11 11 in that market.

Yep. Thanks Erin.

We haven't seen any notable change from from our brand perspective.

In our in the China market as you are as you heard in my opening remarks in terms of the performance. We continue to be very pleased with the results two year CAGR of 70%.

We continue to invest in China opening stores in.

Invest in our headquarters in Shanghai, and creating a in country rolls and jobs to to really help support that business.

<unk> to connect with the community.

<unk>, which is our unique way.

Of working with and we see a real opportunity to to continue and to push for you know are the sweat life in the healthy initiatives that exists within that market and feel we play a very unique role in doing that so.

So from our perspective, we're pleased I'm pleased with the investments, we're making in the connection with the community.

Yeah, and I'd say in terms of 11 11, Aaron and generally in line with our expectations for not going to share specifics, but as Calvin mentioned strong performance in China with approximately 70% to your CAGR them in Q3, so we've been placed.

Great and then if I could just follow up.

On your footwear initiative is that still planned for next year and how material are you thinking about the investment behind our building that platform out. Thanks, so much.

Great. Thanks, Erin Yes, we're still on track for spring 'twenty two launch.

And just as a reminder, and consistent with our with how we've shared it it's a test and learn for US. We're excited about it excited about the opportunity and our unique position.

But it's not required and the power of three growth commitments that we've shared and and therefore are taking a a growth approach to this new initiative.

Excellent. Thank you so much and happy holidays.

You too.

Our next question comes from Lorraine Hutchinson of Bank of America. Please go ahead.

Thanks, Good afternoon.

Just building on Aaron's question can you give us an update on the margin performance of the international business and how do you think about the path to parity with North America margins, given the investments Youre, making there.

Hi, Lorraine. Thanks, we are profitable in our international business overall, and we are still on the path to profitability in Europe, we had pushed out that date to 'twenty, two and just given the impact of store closures that we experienced throughout 2020, and then continuing into the first half of <unk>.

'twenty one I'm sorry can you remind me the second half favorite question.

Yeah, just looking in the past the parent to parity overall, given all the investments you're planning to make in Asia.

Yeah, we certainly see opportunity and their international margin that said, we also see opportunity for expansion in our North American margin and so you know expected to sit below and there are some some structural rent and items that are a little bit more pressure I would say in our.

What region relative to North America.

Thank you.

Okay.

Our next question comes from John Kernan of Cowen. Please go ahead.

Excellent. Thanks for taking my question and nice job on the quarter.

So what enabled you to outperform.

Your expectations by this much given the reduction to me or I guess in the core business what outperformed your expectations from the last time.

You gave revenue guidance.

This is where we are now in what's a pretty difficult environment out there given the supply chain headwinds.

Yeah, I'd say, John it's really been broad based and so we are our performance has come both from channels and E con as well as across women's men's and accessories and and I think we've been particularly pleased I'd say with our store performance.

Exceeding 2019 productivity in Q3, which was up from flat in Q2, and then 88% of 2019 in Q1. So we've seen some nice acceleration there at the same time E. Commerce business has continued to be very strong. So we were up 22% on a year over year and in Q3, and then 54% on a two year CAGR.

I assess them, so really pleased I would say across the board.

Excellent and a quick follow up just on SG&A dollars. It looks like your expectations implied rest G&A expenses are a little bit lower versus where they were last quarter.

Can you talk to the drivers of that are you dialing back some of the investments in mirror and some of the the acquisition cost there.

Any comments on SG&A it is.

Obviously, the gross margin headwinds picked up a bit on air freight.

Yep. So we did experience cacks for a mirror on in excess of our L. T V. The cash CAC ratio parameters I'm at Q3 that continued into Q4. So we have made a strategic to pull back on there and then there then also some efficiencies identified on the Lulu Lemon side.

That are contributing to that SG&A line as well.

Got it thank you.

Our next question comes from Paul leg worth of Citi. Please go ahead.

Hey, Thanks, guys I'm just curious can you just give us an update on the number of mirror shop in shops. You have currently anything you could share in terms of what that does to the stores that they're in connectivity to the customer.

And maybe just what your future plans are for shop in shops as you look out to next year. Thanks.

Thanks, Paul we did achieve our goal of 200 stores.

That's both across the U S and in Canada.

I think the Canadian numbers around 48 is the final number so call it $1 52, and <unk> 48.

We have been and we're almost at the full mirror leads in each of those stores, which is a critical component to really activating the mirror and driving.

Guest engagement and demonstrations.

We saw a you know we're very pleased with the results in Canada, when we launched which has only been the last few weeks and we really wanted to test and learn and launched just through the Lulu lemon channels and synergies leveraging both online already guessed relationships that we had in the store channel and in very.

Pleased with the start of the results of that initiative and then I'd say across all you know very encouraging and it's early in this but we know it is one of our huge advantages of how we unlock synergies and tackle you know what remains the number one opportunity which is just general awareness behind this product in this category.

And the uniqueness of our proposition. One example is in store demonstrations are have a 6% conversion to.

Sale, which is very encouraging.

When you think of traditional retail conversion numbers of foot traffic in our ability to convert.

Convert 6% of those engaging in demonstrations.

With the mirror, it's a very encouraging number which is why that mirror key lead is critical in higher volume doors, having two key mirror leads to support the store in seven days a week operation and again, we're early we see our unique point of view and the impact it's having on performances and and we're going to continue to.

First where it makes sense and play a unique role and and keep building this business forward.

Thanks for the how is your thinking evolved just in terms of maybe using the existing customer base of the merits actually sell Lulu product because that's something on the horizon that you're going to be doing a little bit more.

Oh, I think there's there's definitely the aspirational, which as you know we want everybody sweating on a merit of being Lulu Lemon and we want everybody sweating with London to be you know engaging and using a mirror and that's an aspirational vision, but it's to say there's opportunity on both sides.

As we continue to move forward more and more of these guests are already or have shopped with us lemon, which is which is good because a big part of the role mirror plays with US is as a membership community that drives a loyalty retention and spur.

And with our Lululemon guests, we know them more they sweat with us the more they spend with us in our core business is our priority and will always remain our priority in mirror is a way in which we drive that business forward. So we are seeing those dynamics play out there is an opportunity there are new guests, we acquire and see come in to the.

Families through mirror, and we'll be able to convert them over but.

But the collective play is about retention loyalty and increased spend and we're pleased with those those dynamics so far.

Great. Thank you good luck.

Okay.

Our next question comes from Michael Binetti of Credit Suisse. Please go ahead.

Hey, guys. Thanks for all the detail here and thanks for taking our question.

Would you could you just give us some thoughts on what you think are some of the realistic scenarios for that store productivity number you referenced a few times as you look into <unk> I know they get quite crowded and you get very close to the holiday.

But maybe if there was a pull forward maybe that actually would have helped if there was any capacity issues at a normal season, but I don't you know how should we think about what you know some of the scenarios you've thought about as far as what the stores can do them on a productivity basis fourth quarter and then.

Kelvin if you help us just back up if we think to the to the 'twenty 'twenty. Three plan you know with the SG&A I think if we look at the financial model from the Analyst day. The thought was 13, 14% type revenue growth and some SG&A leverage every year, maybe 10 basis points about and I think you've delivered you know obviously revenue growth has been much different than that because they were much higher.

And that because of the pandemic, but I know a lot of moving parts in there, but you mentioned a lot of times you pulled forward a lot of spend particularly to fulfill on e-commerce.

As we look out excluding the Mira business just at the core.

Is it is it or is the back end of that analyst day period, a bigger SG&A leverage period, because you got to those investments earlier than they generated bigger revenue returns than you thought or do you start looking at 'twenty, four and 'twenty five investments and pulling those in as you look at 22 and 'twenty three.

Hi, Michael Thanks, It's Matt again, so in terms of store productivity for Q4, and you know we are managing our business from an omni perspective, and really looking at multiple scenarios and I would say store productivity I would say flat to 2019 to up slightly and it's <unk>.

<unk> a good baseline scenario, though again, we are planning for multiple scenarios to flex where the demand comes to Austin I'll I'll also take the long term.

In terms of SG&A and so we did have modest SG&A expansion in our long term plan and at this point and we remain on that commitment and what we're really focused on is our operating income and growing our operating income in excess of sales growth and we have had some shift in dynamic of our business and with more investment in <unk>.

Com to support the accelerated growth there of which depreciation and hits in SG&A and we've also had some lower occupancy expenses and so some more gross margin leverage comes through and we will continue to balance our investments and to grow our operating income and we will share more on our next five year outlook.

Again I'm in spring of 'twenty two.

Thanks, a lot.

Yeah.

Yeah.

Our next question comes from Brooke Roach of Goldman Sachs. Please go ahead.

Good afternoon, and thank you so much for taking our question.

You spoke in your prepared remarks earlier, two strong new guest acquisition and retention.

As you think about the profile of the guests that you're acquiring today can you talk to how that incremental new guests might differ in terms of demographics are preferred activities versus the customer that you acquired in prior years, what is your outlook for new guest acquisition going forward.

Thanks Brook.

From a from a general demographic perspective.

We remain.

Healthy across all the different demographic profiles from age.

Gender.

And I will touch on the activities lens, but a lot of the initiatives we continue.

Continue to deploy are resonating with younger consumers very you know very pleased with the health of new younger guest acquisition into the brand and then as I mentioned, the migration and retention of the guests are very very strong here at Lulu Lemon.

So when we look at activity two points one the versatility of our product.

Is our one of our greatest strengths and it allows for guests to find what they need for their sweat life across multiple categories be it bottoms tops second layers shorts and as you know we've defined a very clear activities that we want.

One and have a significant share of mind share of wallet are positioned in and that is run train and yoga and then we've identified what we call play categories be it golf tennis and hike and these are our.

Businesses that are equally we're seeing our guests spend into and are helping to drive but its the versatility of the product in a very defined activity strategy linked to our product innovation, that's helping to drive not just new guests, but spend with existing guests and we are very early.

In those strategies as you know, we just launched a brand new yoga franchise for our female guest at the beginning of this quarter, the instill tight which delivers a completely different feel sensation through our smooth cover our material.

And it's just one example of our approach of building franchises that deliver on field states through these key core activities that are driving both new guest acquisition and spend with our existing guests.

Thank you I'll pass it on.

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

Certainly our final question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead.

Okay, great. Thanks, so much Megan can I just start on a follow up on gross margin I think you indicated that you had.

230 basis points of airfreight here in the third quarter and that are.

Really accounted for more than the 50 basis point decline in your product margin.

Back that inbound airfreight charge or cost out.

Am I right in doing so to get to let's say.

A gross merchandise margin increased in the quarter of 180 basis points is that an okay way for me to think about it.

And Kimberly and I would think about it also and if you're looking for a baseline for future plant anxious that we had historically high full price sell throughs.

And lower markdown rates, so when we look into the future and we will have some puts and takes within our gross margin rate and right now we're committed to that modest margin expansion as we outlined in our power of three growth plan.

Okay got it so you'll hopefully get back a good chunk of that airfreight next year in the third quarter, but perhaps the 100 meter there'll be as well, maybe a small bit of give back on the on markdowns or the pure merchandise margin. Okay. Understood did you quantify.

The potential air freight costs for Q4 and in basis points, making I'm not sure if I heard that.

Yes, we did so 450 basis points of pressure on them in Q4 relative to 2019, and then also for the full year 200 to 250 basis points relative to 2020.

Okay. Thanks, So much my my last question for Calvin.

I you.

You know heard you on the on the pricing philosophy and that that makes a ton of sense Calvin I think to price for the performance that you're putting into the the product year after year I, where we're starting to hear from some of our colleagues in supply chain that some of the Oems in Asia.

Are experiencing higher costs.

For either labor utilities raw materials wood.

I would lose and then philosophically.

Try to price for any actual increase in the cost of goods.

Good that you or your suppliers might be feeling a would you would you think that that would be inappropriate weighed to also raise price to the end consumer.

I mean, I think we really do price to market and there are obviously, a variety of inputs and considerations and you've alluded to some but it is a business that is positioned.

Positioned as a premium brand that has much AR innovation built into the product we look at a variety of factors to make our pricing decisions and it's just not we won't just do it unilaterally because of those pressures will look at other ways to manage the overall.

Mix and and maintain our committed margins.

Fantastic Thanks for the color.

Alright, thank you.

That is all the time, we have for questions today. Thank you for joining the call and have a nice day.

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