Q1 2022 Lululemon Athletica Inc Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the Lululemon Athletica, Inc. First quarter 2022 conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask a question.
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 say coming off greater by pressing star and zero.
I would now like to turn the conference over to Howard Cuban Vice President Investor Relations for Lululemon Athletica. Please.
Please go ahead.
Thank you and good afternoon, welcome to Google Lemons first quarter earnings Conference call. Joining me today to talk about our results are Calvin Mcdonald, CEO and Meghan Frank CFO .
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 of <unk> future.
These statements are based on current information, which we have assessed but by which 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.
Press release and accompanying quarterly report on Form 10-Q are available under the investors section of our website at Www dot.
Dot com.
Before we begin the call I'd like to remind our investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the first quarter as well as our quarterly 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 would like to turn the call over to Kelvin.
Thank you Howard I'm pleased to be here today and share with you the highlights of our quarter. One performance. It's been just over a month since I saw many of you in person at our recent analyst day presentation in New York. These are exciting times for Lulu Lemon as we embark upon our next five year growth plan the power of three <unk>.
<unk> to our teams are energized and deepen the work of the plan. We shared I look forward to providing you with updates on future earnings calls as we make progress on the key initiatives we laid out.
However, I'd like to spend our time today discussing the macro environment and the unique aspects of Lulu lemon, which continue to contribute to our strong performance.
As you saw on our press release the momentum in our business continues and 2022 is off to an impressive start.
Revenue in the first quarter increased 32% versus last year and 27% on a three year CAGR basis, and adjusted earnings per share grew 28% and 26% on the same basis.
There are several notable metrics that underscore our performance this quarter, starting with product the guest response to our core and new merchandise remains very strong.
Our product continues to drive demand and we experienced robust traffic growth in both channels with stores and e-commerce up approximately 40% and finally, we're in a strong inventory position relative to last year, while our levels are higher than our historical norms, we are comfortable with the quality and composition.
All of our inventory this allows us to balance the momentum we're seeing in the business, but the challenges that remain within the global supply chain.
With that in mind I'd like to spend a few minutes on China, given the current conditions related to COVID-19, and its impact on both our operations and supply chain.
Consistent with many retailers in the region, we are seeing modest impacts of the COVID-19 related lockdowns on our stores and with some of our vendors throughout the first quarter and into the second quarter, we have seen up to a third of our 71 stores closed for a period of time.
As I'm sure you've seen this week stores are reopening in Beijing, and we are starting to see restrictions ease and Shanghai.
Even with the closures our business remains solid in the first quarter with revenue growing double digits versus last year and growing over 60% on a three year CAGR basis.
In addition, our growth plans remain on track as the majority of our 40 international New store openings. This year a plan for mainland China.
From a sourcing perspective, when looking at finished goods for the upcoming fall season mainland China represents only 4% to 6% of our total unit volume.
When we include trims and other components the volume increases.
Though the majority of our vendors are now up and running we have experienced delays and expect some level of impact on future receipts.
Our teams are closely monitoring the situation staying in regular contact with our vendors and working to mitigate the current risks having said all of this we remain excited about our business in China and we view. The current situation is short term in nature. Our brand momentum remained strong and we will continue to invest in the region and we're excited about what.
The future holds for Lulu lemon in this important market.
When looking at the global supply chain overall, the environment remains challenging.
Lead times are not improving and airfreight costs remained high too.
To address these issues our team is carefully balancing our business momentum with timeline uncertainties to help ensure we meet guest demand.
This comes with a commensurate investment in air freight, which is important given we see satisfying guest demand as a priority.
Our timelines allow us to pivot when we see trends change from air to Ocean and all costs are included in our guidance, we will continue to carefully assess and manage.
Switching now to inflation as we mentioned last quarter, we are seeing increased input costs on raw materials labor and as I just spoke about airfreight. We continue to monitor the situation closely and are taking actions to mitigate the impact on our P&L.
These include ongoing cost management, working with our vendor partners to identify additional efficiencies and pricing opportunities.
As I've shared previously we are implementing some select price increases and have not seen any negative impact to our sales volume as a result, however, unlike many in the industry, we do not use promotional pricing as a lever to drive topline sales. Therefore, we are very intentional with our pricing strategies and we monitor.
Our guest response, accordingly that said I remain cautious around increasing prices in this period of uncertainty and we will continue to monitor and maintain a measured approach towards this strategy.
Given the times in which we are operating I wanted to highlight for you the unique strengths of Lulu Lemon, which drive our performance quarter after quarter.
We have many attributes that make our brand unique create competitive advantages and lead to the ongoing momentum in our business as I've shared before the pandemic has contributed to a fundamental change in guest needs and behaviors that provide us with compelling opportunities to grow.
These include our guests wanting to live an active and healthy lifestyle and looking for additional support related to well being and recovery and as normalcy returns their desire for versatile apparel has increased plus our D to C model provides a strong and direct connection to our guests with incredible insights across every touch.
Such point and we have a very balanced approach to growth across channels geographies merchandise categories gender and activities and finally, our primary focus on technical athletic apparel creates demand for our product across seasons and mitigates the need for markdowns all of this positions us for continued growth.
And we will continue to take a balanced and holistic view of our business. In fact, our business is in the early innings and all leavers are contributing to our performance. This is unique speaks to the strength of our brand and our opportunity to innovate all while maintaining our momentum.
Finally, let's look further at our product innovation, we continue to leverage our science of feel development platform to solve for the unmet needs of athletes and to bring new technical features into our merchandise assortment.
Our foundational principle is when you fill your basket perform your best we utilize the sciences feel to bring a consistent flow of innovation to our assortment across a variety of activities our product pipeline remains very strong and it's the bedrock of the business.
Quarter, one, we launched footwear golf and tennis, all meeting with Great guest response.
With footwear, we leveraged 20, plus years of experience designing and developing technical apparel to bring a unique solved to the women's footwear space. Many in the industry designed footwear for men and then adapt for women, we designed our shoe for women first.
We introduced our first shoe Bliss feel in March and we were proud that it was named the best women's specifics shoe in 2022 by runners World. The response has been enthusiastic and since we were prudent with our inventory buys we have seen out of stocks.
Though we expect to be in a better inventory position in the coming weeks demand has far exceeded our sales forecast as a result, we do anticipate that we will be chasing into additional inventory for the remainder of the year.
Turning to our play activities golf and tennis, both performed well this quarter. These collections are comprised of pieces from our core assortment as well as styles designed specifically for these activities. This strategy allows us to manage our assortment grow share of wallet, while also leveraging our core and driving sales were.
We're pleased with these results and we'll continue to lean into these strategies.
Looking ahead into quarter, two we have several exciting product stories to tell first as sense net to continue expanding our run apparel assortment. This week, we launched our newest fabric innovation. After four years of research and development, we have brought to market sense net a proprietary fabric that seamlessly engineers.
Jones of support Breathability and mobility directly into the fabric.
Upon collaborative work with our ambassadors and athletes we determined the sensation runners are looking for unrestricted lightweight support while also delivering the technical performance and endurance. They expect from Lulu Lemon and our sense net collection provides this sensation and nine styles for men and women.
Second as hike to leverage the versatility of our core as we've done with golf and tennis, we're on track to launch heighten the coming weeks. This assortment will combine elements of our core assortment with new styles designed specifically for hiking. This is an unmet need we heard from our guests specifically as hiking has gained popularity during the pen.
Dominic next.
Next as throwbacks, our product team has been spending time in our archives to find the best of the best and Rerelease limited editions of some of our guests' favorite styles, including revamped versions of our Astro pad shaped jacket and inspire crop.
And finally footwear as I mentioned, we are excited with the initial response, we just launched our second style. The rest feel slide this week and we remain on track to rollout. Our next two styles. Later this year charge feel and strong Phil. This is just the beginning for us within this category, which has considerable opportunity.
So in summary, our results and our guidance demonstrate the strength of our business and the momentum of our brand. This is enabled by our omni operating model, our product innovation and our balanced approach to growth.
We have shown our ability to successfully manage through what is happening around us and I am continually inspired by how our teams around the globe consistently deliver for our guests for each other and for our stakeholders with that I'll now turn it over to Megan.
Thanks, Kelvin I'll begin by saying how excited I was to host our recent analyst day and got to meet and speak with many of you in person.
We delivered early on our total 2023 revenue goals, we used analyst day to launch our growth plan for the next five years, our new plant builds upon our proven para III formula and it calls for a doubling of total revenue from 6.25 billion in 2021 to $12 5 billion in 2020 sex, hence we've appropriately named the new plan power of three.
Times too.
Our teams are already executing against our new plan and we're off to a solid start despite the ongoing headwinds in the macro environment.
So let me now share with you the details on our Q1 performance I will also discuss specifics on our balance sheet, including our inventory and cash position.
Please note that when comparing our financial metrics for Q1, 2022 with Q1 2021 adjusted operating results for Q1, 2021 exclude approximately $8 million of mirror acquisition related cost and their associated tax effect.
You can refer to our earnings release for more information and reconciliations for our GAAP metrics.
For Q1 total net revenue increased 32% to 1.613 billion ahead of our guidance driven by outperformance in North America.
Comparable sales increased 29%, 24% increase in stores and a 33% increase in digital.
On a three year CAGR basis total revenue increased 27%.
Acceleration from Q4.
In our store channel sales increased 36% on a one year basis and 13% on a three year CAGR basis productivity was above 2019 levels and continues to trend that way to date in Q2.
On average we had 98% of our stores open throughout Q1, we currently have 97% open with current closures related predominantly to the impact of COVID-19 in China.
We're footage increased 16% versus last year driven by the addition of 56 net new stores since Q1 of 2021 during the quarter. We opened five net new stores and completed four co located optimizations.
In our digital channel revenues increased 51% on a three year CAGR basis, and contributed $721 million of top line of 45% of total revenue.
Within North America revenue increased 26% and within international we saw 37% increase both on a three year CAGR basis.
By category men's revenue increased 30% on a three year CAGR basis women's increased 24% and accessories grew 43% on the same basis.
I'm also excited with what we're seeing in traffic across both channels.
Store traffic increased over 40% while at the same time traffic to our e-commerce sites and apps globally increased nearly 40%.
On a three year CAGR basis traffic is up over 10% in stores and nearly 40% in e-commerce.
This speaks to the strength of our army operating model as we engage with our guests in ways most convenient to them.
Gross profit for the first quarter was $870 million or 53, 9% of net revenue compared to 57, 1% of net revenue in Q1 2021.
Gross margin decrease of 320 basis points relative to last year was driven by a 370 basis point decrease in product margin.
Q1 product margin included an increase of approximately 340 basis points in airfreight related to macro supply chain challenges, which was higher than our guidance of 300 basis points due to increased usage relative to our initial plans.
Mark Downs were approximately flat with last year realm.
Relative to 2019 marked downs decreased by 40 basis points.
We also experienced 10 basis points of deleverage from foreign exchange. This was partially offset by 60 basis points of leverage on fixed costs, driven by occupancy and depreciation.
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 $608 million or 37, 7% of net revenue compared to 45% of net revenue in Q1, 2021.
Leverage in the quarter versus Q1, 2021 resulted from leverage in our store and digital channels somewhat offset by increased investments in our corporate SG&A and depreciation.
Operating income for the quarter was $260 million or 16, 1% of net revenue compared to adjusted operating margin of 16, 4% in Q1, 2021 and inclusive of approximately 340 basis points of additional air freight expense.
Tax expense for the quarter was $70 million or 27% of pretax earnings compared to an adjusted effective tax rate of 24, 5% a year ago.
The increase relative to last year is due primarily to a decrease in tax deductions related to stock based compensation.
And an accrual for withholding taxes on a portion of our fiscal 2022 Canadian earnings.
Net income for the quarter was 190 million or $1.48 per diluted share compared to adjusted earnings per diluted share of $1 16 in Q1 of 2021.
Capital expenditures were $111 million for the quarter compared to 64 million in the first quarter last year.
Q1 spend relates primarily to investments to support business growth store capital for new locations relocations and renovations and technology investments.
Turning to our balance sheet highlights we ended the quarter with $649 million in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility.
Inventory grew 74% versus last year and was 1.3 billion at the end of Q1.
Continue to strategically use air freight to help mitigate industry wide supply chain issues and support our topline momentum with these higher costs, having an impact on inventory when looked at on a dollar basis.
We also believe that 2019 is the most relevant comparison point, Kevin supply chain challenges since the beginning of the pandemic.
On a three year CAGR basis unit inventory increased 36% relative to 2019 at the end of Q1 and is well positioned relative to our Q2 2022 topline guidance of a 26% increase on a three year CAGR basis.
Again comparing to 2019.
It's important to mention that due to Ocean Transit times, our in transit inventory is up relative to 2019, and it's contributing approximately five percentage points to the three year unit CAGR of 36%.
I'd also mention that we like those left gas demand on the table last year as we were under inventory due to supply chain issues.
Our product teams have taken this into account if they've planned receipts for this year.
We also continue to leverage our core assortment, which comprises approximately 45% of our inventory.
Looking forward, we expect to see the highest one year inventory growth rate of the year in Q2 on both a dollar and unit basis before levels began to moderate in Q3.
Q2 inventory dollar growth relative to last year will be modestly above the levels at the end of Q1.
On a three year CAGR basis unit growth will remain at approximately 36%.
But Q1, we repurchased approximately 700000 shares at an average price of approximately $328.
At the end of the quarter he had approximately $955 million remaining on our recently authorized $1 billion repurchase program.
Let me shift now to our outlook for Q2, and the full year 2022.
For Q2, we expect revenue in the range of $1 75 to 1.7 75 billion.
Representing one year growth of 21% to 22%.
In a three year CAGR of approximately 26%.
Expect to open 20, net new company operated stores in Q2.
We expect gross margin in Q2 to be down approximately 200 basis points relative to Q2 of 2021.
Our Q2 guidance includes an impact of approximately 150 basis points of pressure from airfreight costs due to port congestion and capacity constraints.
In Q2, we expect our SG&A rate to be relatively flat with Q2 2021.
Turning to EPS, we expect adjusted earnings per share in the second quarter to be in the range of $1 82 to $1 87.
Versus adjusted EPS of $1 65, a year ago.
A range of $1 82 to $1 87 excludes a 7% gain on a real estate sale, we expect to realize in Q2.
For the full year 2022 we now expect revenues to be in the range of $7 six one to 771 billion.
This range assumes our e-commerce business grows in the high teens to low twenties relative to 2021.
When looking at total revenue our guidance implies a three year CAGR of 24% to 25%, which continues to be higher than our three year revenue CAGR of 19%, leading up to 'twenty 'twenty and higher than the target of approximately 15% growth we set forth in our new power of three times to growth plan.
We continue to expect to open approximately 70 net new company operated stores in 2022.
Our new store openings in 2022 include approximately 40 stores in our international markets and represents a square footage increase in the low 20% range in total.
For the full year, we are forecasting gross margins to decrease between 100 to 150 basis points versus 2021.
The reduction relative to last year is driven by increased investment in our DC network and.
A strategic increase in content development costs for Lululemon studio mirror the.
The increased costs in gross margin will be offset by a reduction in digital marketing, which lists the rest G&A.
In addition, we now expect airfreight to have a modest negative impact of approximately 30 basis points versus our prior expectation of flat.
Turning to SG&A for the full year, we are forecasting leverage of 50 to 100 basis points versus 2021 driven by increased sales and the shift in Lulu Lemon studio mirror investments I just mentioned.
And when looking at operating margin for the full year 'twenty 'twenty. Two we now expect it to be approximately flat with last year inclusive of the 30 basis points of incremental air freight expense I just mentioned.
For the full year 2022 we now expect our effective tax rate to be 28 to 28, 5%.
For Q2, we expect our effective tax rate to be approximately 28, 5%.
For the fiscal year 2022 we expect adjusted diluted earnings per share in the range of $9.35 to $9.50 versus adjusted EPS of $7.79 in 2020 one.
Our EPS guidance excludes the impact of any future share repurchases and the gain on a real estate sale, we expect to realize in Q2.
We continue to expect capital expenditures to be approximately 600 to 625 million for 2022.
The increase versus 2021 reflects increased investment in our supply chain digital capabilities, new store openings and renovations as well as other technology in general corporate infrastructure projects.
A range of 600 to 625 million, that's approximately 8% of revenue in line with our current power of three times to target of 7% to 9%.
Thank you and with that I'll turn it back over to Calvin for some closing remarks.
Thank you Megan as you can see from our results Lulu Lemon continues to deliver the kind of performance that sets us apart within the retail industry. Two weeks ago, we held our annual leadership summit and brought together virtually about 2000 of our leaders from around the globe.
We detailed our power of three times to growth plans and spoke to our culture at Lulu lemon into our purpose, which is to elevate human potential by helping people feel their best.
And the passion from every participant the enthusiasm during every breakout was simply incredible it reinforces my confidence in all that lies ahead for Lulu lemon as we both navigate what uncertainty emerges and work toward delivering on our goals to double our business within the next five years.
It's an honor to lead this incredible organization.
And now we'll 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 your telephone keypad.
You will hear a tone acknowledging your request.
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To withdraw your question. Please press Star then two.
We will pause for a moment as callers join the queue.
The first question comes from Matthew Boss with J P. Morgan.
Please go ahead.
Yeah.
Great. Thanks, and congrats on another really nice quarter.
So as Kelvin what I saw was striking about this quarter was the consistency meaning across the 27% top line CAGR you.
You delivered strength across men's women's international and North America. So maybe could you help speak to the momentum of the brand versus maybe the expansion of the overall Tam. What you think is really driving it any comments on may to start the second quarter and then just how best to think about your ability to chase ups.
<unk> demand relative to the inventory that you have.
Thanks, Oh, well I think it has.
You know and you've heard me say before.
We're in early innings of growth and we continue to experienced balanced growth across all of our leavers.
Gender activity category channel.
And end markets and Q1 was no different and it plays to our product innovation.
Plays to where we are in the opportunity and penetration across all of those leavers in how we still have room to grow women's.
While we're working to double our men's business similar in our physical retail store footprint as we double digital and then they're nationally with our momentum in growth in North America. So the narrative that we've been sharing.
Sharing and working towards continues to play out.
And as we look forward to future quarters into the future years and doubling our business, it's where we gained the confidence in our ability knowing what we can continue to create and see that balance across all leavers are inside the organization.
And when I do look forward and in the product pipeline feel very good that we continue to bring innovation into our own categories of run train and yoga. We saw a lot of success are we just launched send smid as you might've seen in the last few days, which is a one.
Therefore, new innovation.
In fabric to help.
Further our strength in run.
And the launch of our play activities in the last quarter with the golf and tennis.
One achieved the goal of.
Driving credibility in those activities as well as lifting the core so are very excited about how product is resonating in the in the pipeline for new innovation and Hell of a lot of confidence that we'll continue to to see those growth opportunities as we move forward.
Matt I'd, just add to that in terms of Mei and you know I think we're pleased with the continued momentum in our business as reflected in our 26% three year CAGR Guide for Q2, and then in terms of inventory relationship to sales as the year progresses, and we feel really I'm comfortable with our inventory position.
As we move into Q2, the team has done a nice job on pulling forward inventory to meet our demand.
And we are guiding to 24% to 25% for the full year I'm, a little bit more conservative in the second half given we have more of a line of sight clearly into Q2, and then some of the macro uncertainty in front of us that they feel well positioned overall.
That's great best of luck and congrats again.
Thank you.
The next question comes from Mark Ultra Omega with Baird.
Please go ahead.
Good afternoon. Thank you for taking my question.
I guess, just first with respect to the updated guidance.
Right to see the momentum you you raised the high end of the guidance you know both on sales and earnings more than flowing through the Q1 upside with some even with some of the incremental macro headwinds that that you and others are facing out there. So I was hoping you could just unpack that a bit more I guess what has changed regarding the plan for the remainder of the.
Year relative to a couple of months ago, and how do you feel about the various levers you have in the business you know should there be you know, perhaps some incremental choppiness with them kind of broader consumer demand.
Yeah. Thanks Mark.
And so in terms of our our guide for the second quarter. You know, we obviously have line of sight on to the second quarter at this point in time, 26% three year CAGR and then as I said, a little more conservative for the second half of the year, but feeling like our Q1 momentum is flowing into Q2 so comfortable.
Falling through some upside there as I mentioned, we do have a little bit of incremental air freight pressure for the year, which we have reflected in our guidance.
All E. P. S. Raise also reflects some benefit from tax rate and in terms of leverage as we move throughout the year as we've been employing over the last couple of years, we're running multiple scenarios to ensure we're able to meet guest demand as it comes and remaining flexible and pushing it out and are afraid, but also being flexible there and matching that.
With demand as well and so certainly using that and muscle that we develop to them throughout the last couple of years in terms of how agile we are and meeting our guest demand.
Hey, Thank you for that and I apologize if I missed this but could you give us just a little bit more perspective on kind of.
China, what you're seeing quarter to date I know, it's just kind of a mid ish single digit percent of your sales, but with the store closures you mentioned I guess, where is that tracking and what what is incorporated in your guidance in terms of how they are getting getting those trends back to full productivity.
Yeah in terms of China, we have approximately 20% of our closed.
Our stores closed currently so 15 out of 71, primarily in Shanghai, and Beijing, and we've taken that into account in our guidance. We did have eight of our 10 stores in Beijing reopened this week and we're also seeing restrictions begin to ease in Shanghai and the overall impact of that revenue in Q1 was more than made up by strengths in other regions.
And we're seeing I would say overall the situation improve their also keeping a close eye I would say on sourcing a small percentage of our total unit volume comes out of China, but continue to monitor closely there.
Thank you and best of luck.
Thank you.
The next question comes from Ike <unk> with Wells Fargo.
Please go ahead.
Thank you good afternoon, just on the inventory of Calvin are making could you maybe just talk a little bit more on.
Are there pockets where you.
Or categories, where you feel like you have a little bit too much is it broad based.
Mens womens and some of the ancillary newer categories. Just is there any area, where theres a little bit more than that.
And others and then does this change any of your thoughts on a potential markdown cadence into <unk> into <unk> and the rest of the year.
Maybe you said markdowns were flat in Q1, but kind of curious what your thinking is rest of the year.
Yep.
Looks like so in terms of inventory I'd say, we feel well positioned and if anything there might be some pockets of inventory wherever we wish we had a little bit more just given the dynamic nature of in that environment, and certainly have been where possible pushing into core inventory, which is about 45% of our assortment it doesn't come with attached markdown liability.
And as I mentioned Q1, so markdowns were relatively flat year over year, and then 40 basis points down to.
For 2019, we don't anticipate we feel confident in our top line trend going into Q2 on a at a 26% three year, CAGR and well aligned with our inventory growth.
When adjusting for the in transit piece on a unit basis and have no plans to change the markdown cadence of our business as we look throughout the year.
Got it thanks.
Thank you.
The next question comes from Kimberly Greenberger with Morgan Stanley .
Please go ahead.
Yeah.
Great. Thank you this is Alex straighten on for Kimberly Greenberger.
To ask a quick question there there's all this chatter in the market and some signs we're seeing a slow down at least on the lower end consumer but your results don't suggest that there's any weakness across your customer base. So maybe could you talk to if you see any signs of weakness across in certain regions or in certain customer demographics and and can.
Can you also just remind us of what the average household income is up a lulu customer.
Hi, Alex it's Kelvin.
Hum.
Uh huh.
Pardon the interruption. This is the conference call operator, please standby as we reconnect the speakers.
Okay.
Okay.
Okay.
Okay.
Pardon the interruption and we do have the speakers back on line with us.
Okay, sorry about that everyone. Our our Wi Fi here at the office are went out. So we are dialed in from a cell phone I'm going to answer Alex Your question and then we will.
We will continue with the call. So we do apologize.
For the interruption, but in terms of the question on help the guest are and how we're seeing their spending behavior I think I got part of my answer out so I'm going to take it from the beginning.
We feel very good about the health of our guests.
New guest acquisition.
Has been a very strong current guests spending.
Been strong both contributing to the momentum in the growth of the company. We shared with you our traffic numbers both in store and online very healthy again, another good indicator of the very engaged guest we.
We did not experience any real benefit from the stimulus checks last year and hence we did not see any material impact as we cycled over that earlier this spring so.
So as we look forward, we continue to monitor the macroeconomic conditions, but.
Q1, beginning Q2 see very healthy guest metrics and remain optimistic.
How our guest is engaging in this category the versatility of this product and where it prioritizes in their spend and their needs are for every day.
Yeah.
Okay.
The next question comes from Lorraine Hutchinson with Bank of America. Please.
Please go ahead.
Okay.
Thanks, Good afternoon.
I wanted to focus on gross margin for a minute it looks like the <unk> guidance is a little better until you were a little worse. So maybe you could go through some of the moving parts. There and then was hoping you could offer some insight on how much of the airfreight pressure do you expect to recoup in both the fourth quarter and then throughout 2023.
Hey, Larry.
And so in terms of gross margin, we are guiding to 200 basis points of pressure and in Q2, and then approximately 100 to 150 basis point decline.
For the full year. The second quarter does include 150 basis points of air freight pressure year over year.
And then we also have increased our outlook for the year in terms of air freight pressure to 30 basis points. We previously had that it's flat.
And when we look at just I would note the operating margin for the full year its modest land or 2019, even inclusive of a 300 basis point impact from air freight pressure. So as you say you know I think we see that moderating over the long term it certainly see opportunity to recoup that but at this point in time came to supply chain prep.
<unk> will be with us for the balance of 2022.
We will continue to keep you updated earnings obviously closely monitoring the environment and the team continues to balance those decisions as Calvin mentioned with our revenue momentum.
Thank you.
The next question comes from Brooke Roach with Goldman Sachs.
Please go ahead.
Good afternoon, and thank you so much for taking our question Calvin I'd like to get your perspective on how you're thinking about consumer wallet share shifts between categories and how consumers are trusting now versus they may have dropped last year. How are you looking to ensure that the brand remains agile as these.
Preferences shift into a potentially living with Covid world. Thank you.
Thanks Brook.
The the most important factor is a core to our product assortment is versatile.
Performance apparel.
Weren't you know although used at times for versatility around the house our gear is designed for activity based.
Youths and.
That we saw an uptick through the pandemic. It has continued as that behavior of activity outdoors sweats lifestyle has continued so that is the essence of the brand in and what drives our innovation through our <unk>.
Categories of Yoga run and train as well as our play activities and that continues as strong now as it was through the pandemic and with the innovation we have in the pipeline and what I shared in what we've seen through Q1 into Q2, we feel very confident in our ability to continue to to to grow.
The the Assortments in our sales as a result of that in men's we have a very strong O T M.
Business, which starts to factor into that lifestyle, you know between two and from the studio and we're excited about the opportunity to grow that within our women's assortment.
But we're seeing strong performance in those categories as well as they do play to trends that have happened in general of how people are choosing versatile functional apparel for every day, but I think the core is we are a performance based athletic brand we are supporting our guests in there.
Sweat activities and that is driving the momentum and growth of the business during the pandemic and post.
And continues to be the biggest fuel our momentum.
Okay.
Yeah.
Yeah.
The next question comes from Paul <unk> with Citigroup. Please go ahead.
Thanks.
Can you give us an update on what you're seeing on your average unit cost for the second half and also into the first half of 'twenty three and I'm curious you know Calvin I think you mentioned some cautiousness about Pat.
Passing through higher prices curious, how much you're willing to absorb.
Versus what you might look to pass through to customers and then second question. I think you mentioned 60 basis points of leverage on occupancy.
Quarter, just curious what your comp leverage point is on the occupancy line at this point thanks.
Hey, Paul So in terms of AUC, if I put airfreight aside them, we're seeing modest increases in raw material prices. So no material change in our underlying AC.
And continue to closely monitor it does impact them closely working with our suppliers and as we as we look into 'twenty two 'twenty three in terms of pricing, we're taking on a modest price increases on about 10% of our assortment you know as we've said before we strategically look at it.
Prices in terms of quality and make up our goods in the competitive landscape and will continue to use that as a strategy as.
As we move forward in terms of occupancy.
Overall, our top line trend and obviously very strong at the 27% a three year sales CAGR.
And leveraging occupancy until large degree given our outperformance on top line as well as the strength of our E Commerce business, we haven't broken out the leverage point.
But continue to see opportunity on that line item as we move throughout 2022.
Thanks for taking just one quick follow up can you just remind me what percent of your raw materials are petroleum based and somehow tied to the oil price of oil.
We haven't broken that out but can follow up with some additional information.
Thanks, Good luck guys.
The next question comes from Michael Binetti with Credit Suisse. Please.
Please go ahead, hey, guys.
Hey, guys. Thanks for taking all of our questions here.
Just one quick housekeeping Megan I think you said to Lauren's question earlier, I think airfreight in first quarter was 340 basis points of pressure 150 basis points of pressure <unk> to get to the 30 basis points of pressure for the year, you're baking in positive leverage in the second half and I know that the.
The comparison is he started paying for airfreight last year helps I just want to make sure that you sounded like Loraine you were saying maybe it will take quite some time to get back some of the air cost Airfreight costs, and then Calvin I guess bigger picture one thing that jumps out here.
Is the e-commerce business.
Actually accelerating versus the prior quarter on a three year basis.
Can't say, we've seen that dynamic with other brands has been a pretty pronounced trend of e-commerce slowing as consumers go back to stores.
And just good old fashioned execution or anything to point out specific in that channel that you think is helping you guys kind of go the other direction of the of the industry.
Yeah, Michael I'll take the first part of that question. So in terms of air freight we are up against.
And some increases last year as we move into the second half of the year and so expect them the airfreight impact them to be a leverage point in Q4, and when we look on a one year basis.
But I would say in terms of how we're looking at the future I think coming off of the full year Airfreight I think too early to say on 'twenty, three and how we see that moderating on but do you expect them to have a leverage point as we lapped the high water line in Q4 of last year.
Okay.
And on on our online performance.
I think it's a number of factors as you said the the growth continues to be very strong cycling over some very large numbers I'll start by just talking about our store performance and the productivity in our stores.
We're above 2019 AR levels so.
The benefit is the his success in e-commerce is incremental not coming at the expense of our store productivity numbers and we are seeing our stores performed back to and above where they were in 2019 as guests continue to come in and as I mentioned traffic in both stores and online we're very healthy and continue.
To be very strong moving forward, specifically online I think there are couple of factors one.
As you know we pulled forward some investments.
That was a combination of foundational as well as our guest experience.
She lives both in how we merchandise some of our shops are the team has done a lot of good work around just basic efficiency on checkout.
Efficiency, reducing friction.
A lot of the guest facing initiatives like the online concierge and educator and it boils down to also product are we saw a very strong engagement on our footwear category through our online channel newness around a golf and tennis.
We performed very well in the channel and you know we've spent a lot of time in and building an omni guest relationship and I think they are shopping both store and online and went online they're really diving into the newness early quickly to ensure they secure it yet still engaging in our store channel. So it's a combination of a lot of ines.
Is that we've been building the team has been utilizing.
And product is definitely the primary or one of the key drivers of it but its boiling down to that behavior and that omni guest relationship that we've been nurturing and building for the last few years.
Okay.
Okay. Thanks for the thoughts.
The next question comes from Adrienne <unk> with Barclays.
Please go ahead. Good afternoon. Good afternoon, let me add my congratulations product looks fantastic Calvin I was wondering if you could share your insights on what did you learn from the capsule launches and tennis golf and footwear. They were obviously stopped out very early on.
Youre waiting for some replenishment there so how these launches informed you about the next generation for footwear and other categories like hike. Thanks.
Great. Thanks Adrian.
Couple of things and I'll start with footwear, and then I'll move into some of the play capsules that we launched with footwear as we've shared it's a test and learn category for US. We're excited about it we think it's an exciting opportunity for the brand moving forward and we're going to.
Take a test and learn approach, which meant you know we sort of went in knowing that demand would be in excess of supply and it far exceeded our expectations and we definitely had a lot more demand than we anticipated encourage.
But definitely impacted supply quicker than we would've wanted in an ideal scenario, but it all points to you know an incredible product that was well received both in the industry with the guest.
And the team is focused and learning.
And adopting.
You know what challenge that a little bit as the global supply chain challenges and we're not going to pay to fly in a footwear. So we're going to we're going to build the category and we're going to learn as we go but you know it would be back in stock on our Bliss feel are this month.
But we expect that we'll be going through these periods. Because we said we have some incredible colors coming that we expect the guests will resonate with we have our slides in both men's and women's that dropped this week and we've already seen a very positive response to that and then charge skill and strong field launch later this summer and fall. So we're excited about how the guest is.
Responding and the teams are learning and and I think it's a very positive.
Indication of our ability and the elasticity of our brands to extend the categories really offer a head to toe solution, when we deliver on that debt needs and golf and tennis really fit into that.
Where we design a small percentage of our products that are designed specifically for those activities.
And then we also leverage our core assortment to drive versatile opportunity and solutions as well if it is in both performed incredibly well as you indicated I mean, having laila Fernandez as our ambassador on our tennis has been fantastic and <unk>.
And leveraging golf during both the Masters and the PGA Championship and futures, a wonderful opportunity to put a spotlight our product in our assortment.
And in hike. So teams teams learning, it's one of those indications where I think that we wish we had more but it's delivering both sales in those products and lifting our core which is the strategy and it's resonating and it's working well in both guest acquisition and expanding share of wallet with our existing guests so where.
We're we're excited about how the guests responded and with newness happening in this quarter and the rest of the year.
Oh, great. Thanks, Good luck. Thank you.
The next question comes from John Kernan with Cowen.
Please go ahead.
Excellent congrats on a great quarter and momentum.
I wanted to go back to the supply chain and.
Paul's average unit cost question, I guess, where are there offsets.
For you in <unk>.
What's a rising supply chain cost environment, obviously, some of the airfreight will come down in the back half.
Markdown rates are very low and you've got pricing power, but.
Where are there areas to offset within the supply chain and what looks like an inflationary environment into 2023.
Yeah.
Yeah, So I'd say there.
To date, we've seen modest increases in terms of our raw materials prices and we have we have started taking some price increases in Q1.
I said modest and will be on less than 10% of our assortment, we haven't seen any price resistance to date.
And we will continue to have a reaction since we've all throughout the year there and so we'll continue to look at that as a lever and you know I think when we look at our operating margin overall.
We are modestly for the year under 2019, even with that 300 basis point pressure of airfreight and feel that that environment moderates and we should have some opportunity in front of in front of us in terms of recouping, they're afraid pressure and then we continue to look across.
You know our business in terms of opportunities to deliver on our five year average target of modest operating margin expansion are they played navigating near.
Near term challenges with airfreight and ensuring them importantly that we continue to drive the momentum in our business through key investments as well.
Understood maybe maybe one quick follow up on inventory as we all look at inventory balances.
Across the sector some of your peers and the competitive set inventory dollars and units are up pretty meaningfully at this point I guess, just the confidence in the ability to maintain full price sell through your confidence in the competitive sets ability to maintain full price sell through as we go into Q3, Q4, and what's going to be much higher.
Sorry levels throughout the sector into the holiday.
Yeah. So I think when we look at our inventory on a one year basis on the the rate the growth rate includes airfreight and packs and then also higher and transact with those longer Ocean durations.
And then also we're comparing to periods of being under inventoried last year, so that would've been relevant for Q1 of 2021.
And we feel the most relevant way to look at inventory as we navigate these supply chain disruptions and the comparisons to the pandemic period is to look at the three year unit CAGR.
And that is really consistent with how we're looking at planning our business.
So that three year CAGR for us at the end of Q1 was up 36% five points impact included in that for longer in transit times. So I'm adjusting for that 31% unit increase and you know we think is well aligned with our topline momentum. So when we look at that three year revenue CAGR.
27% in Q1, and then 26% in terms of our Q2 guide them and then I'd say you know so really pleased with full price momentum our markdown in Q1 were relatively flat year over year, So 40 basis points below our 2019, so really looking at leveraging also the core.
And you know not in sea seasonal nature of our business, which is about 45% of our assortment as well we tend to have low markdowns overall and don't see a change to that posture throughout the year.
All right excellent. Thank you.
Yeah.
The next question comes from Omar Saad with Evercore ISI.
Please go ahead.
Thanks, Good afternoon.
I wanted to dive in a little bit deeper in China.
It's still a relatively small piece of the pie for you guys, but a huge part of the long term growth algorithm.
Putting aside the current kind of Covid lockdowns and things like that.
Maybe talk about what's driving that.
Yeah.
Well over 10 years.
Try to bucket at least.
Seems to be some sort of inflection going on maybe dive in deeper what's going on with the consumer that market too.
These are politically.
Okay.
Thanks Omar.
We've shared that even with the challenges are that you alluded to our year over year growth was still double digit in China, and our three year CAGR of 60%. So there's definitely.
Strong momentum behind the brand.
And very excited about our you know.
The rest of this year and moving forward you know these these are short term operational challenges. We live this in North America and other markets are we continue to support our teams as we did around the globe in these markets through pay protection investing in the culture.
And that's important because that to me is one of the big pillars. That's driving the success of the brand. We have incredibly you know engaged our educators and talent at our S. S C.
In Shanghai, we're investing in people and talent, we're investing in relationships with the community and our ambassador community within that.
That market.
And the product like it is another regions is resonating it's uniquely position that's differentiated as a premium product when you get a chance to go to the market, you'll see how we're positioned differently in malls where position differently.
In terms of how the guest is interacting with the product.
And similar to other markets. The same activity strategy is working the innovation is working the dual gender is working so we definitely are excited about do agree there's been a inflection in the brand and that's been building for for the last few.
Two years and this is just a short term operational challenge that many of US are faced with but the health of the brand is very strong.
And and bodes well for our future growth plans.
Thanks Kelvin.
Operator, we'll take one more question.
The next question comes from Tom Nikki with Wedbush Securities.
Please go ahead.
Oh, Hey, everybody. Thanks for squeezing me in here.
So it sounds like you're pretty happy with.
Some of the new categories you've entered.
Footwear, and golf and tennis concerts et cetera.
What kind of more coming down the pipe.
Is there any concern on your part about kind of dwelling too much stuff at your customer.
A short period of time.
Footwear included your categories.
Yes, the new fabrication et cetera, how do you kind of you know make sure that the.
The storytelling.
Sure.
The.
The experience was there.
Helps the customer.
Yep.
With all these new product offerings.
Uh huh.
Great. Thanks, Tom.
Focusing on storytelling and bringing the guest along with our product innovation journey is definitely a key focus of Nikki and the team. Both the merchants are how we tell the story online and how we tell it to the brand.
Through our relationships that we build with our ambassadors. So it is absolutely a key focus I'm not worried for a few reasons one.
It is minimal.
SKU proliferation, which is designed deliberate because we know we have you know highly productive stores versatile product and we want to continue that it is a big differentiator of our brand versus most others in this space.
And we selectively target.
A small number of innovated product designed for these activities as a means to grow the overall core. So in many cases is how our guests are already sweating and using our products. We are just putting a brand story on it with a small number of design for <unk>.
<unk> that validates craig's credibility already to the product and lifts. It second we focused all categories. Because we know it's how our guests sweat in our product and Ah It as their primary and secondary go to activities. So we are delivering bad.
Innovative products that you know through our approach sites, it feel and an unmet needs in the activities that they are sweating and we're just extending the relationship for a brand that they have affinity and trust and confidence in delivering product that satisfies how they're choosing to sweat. So we're not stepping outside of the <unk>.
Relationship we already have with guests we are not stepping outside of how theyre already sweating in our products.
And we're designing specifically into that and leveraging our overall core and then finally, what I'd say is the immediate response to all this incremental a key activities or categories or items be it footwear tennis and golf were incredibly strong.
Which to me just validates the.
The need are the immediate response and reaction and I'm excited and encouraged with hiking, we know when we bring innovative product that delivers on an unmet need that's focused on these core activities that are the strength of the relationship that he and she has with the brand it it resonates and Ah and I think.
The results, while I know the results validated that it's a strategy, we're going to continue to roll out in the coming quarters.
Yeah.
Sounds good and M. A C J our snack I was one of your Gulf of Bachelors.
Yeah.
Thank you.
That's all the time that we have for questions today.
Thank you for joining the call and have a nice day.
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Yes.
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