Q3 2022 Lululemon Athletica Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Little Lemon Athletica, Inc. Third quarter 2022 conference call.
As a reminder, all participants are in listen only mode and this conference is being recorded.
After the presentation there'll be an opportunity to ask questions analysts who wish to join the question you 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 then zero I would now like to turn the conference over to Howard to Ben Vice President Investor Relations for Lululemon. Please go ahead.
Thank you and good afternoon, welcome to Lulu Lemon third 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 Lulu lemon 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. The press release and accompanying quarterly report on Form 10-Q are.
Available under the investors section of our website www dot Google I'm in 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 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 and now I'd like to turn the call over to Calvin.
Thank you Howard I'm happy to be here today to discuss our third quarter results, which as you've seen from our press release continued to be strong and resilient, while we navigate an external environment that remains challenging I Lulu Lemon innovation is at our core we create apparel footwear and gear that offers technical solutions to our guest.
As well as versatility and comfort with a variety of end users, but that's just the starting point for US Lulu Lemon is a brand that stands for community with connection firmly at our core we connect with guests through our educators and ambassadors through our wellbeing offerings and local events and now through our new membership program and Lulu Lemon Stu.
It is this combination of innovation and connection that differentiates lululemon from our peers and contribute meaningfully to the continued and sustained momentum we see across the business over.
Over the next few minutes I'll highlight for you the trends we've experienced over the recent Thanksgiving weekend and what we're seeing in our business at the start of the holiday season, then I'll discuss quarter, three and speak to the balanced strength, we continue to see across our business in terms of geography channel and merchandise categories next I'll update.
You on the supply chain environment, and our inventories and then I'll speak to our product pipeline and finally I'll speak to the benefits of our direct to consumer model and several of the unique ways. We enabled connection with our community. So let's jump in I will start with our performance over Thanksgiving as I'm sure. It's top of mind for all of you.
I'm pleased with our results and performance over the extended Thanksgiving weekend and as we start the holiday season over the past two weeks I've traveled with several senior leaders across North America to cities, including Phoenix, Tampa, Orlando, New York and Toronto, We visited several stores in each market and saw a tremendous level of engaged.
From our team members our guests in every store.
In fact, Black Friday was the biggest day ever in our history in terms of revenue and traffic driven by our results in both North America and around the world with guests responding well to the innovation, we offer across our product assortment.
Our performance across markets and geographies shows that consumers are seeking brands like Lulu lemon that offer innovative versatile product and a strong community connection that they cant find anywhere else. We also recognize that the external environment remains challenging.
With several high volume weeks still in front of us that being said I'm encouraged with the beginning of our holiday season, and I'm confident and how our brand is positioned in the near and long term.
Now I will speak to our performance in quarter three Megan will go through the details in a few moments, but I will share with you some of the financial highlights.
Our revenue growth remained strong and balanced across several drivers as follows all on a three year CAGR basis stores increased 16% while E. Commerce grew 46% by region North America grew 24% and international increased 42%.
Revenue in mainland China grew nearly 70% and we experienced strength across merchandise categories with men's up 28% women's up 23% and accessories growing at 52%.
Adjusted earnings per share increased 23% versus last year, and 28% on a three year CAGR basis, and our market share gains continue while the adult active apparel industry decreased its U S revenue by 4% in fiscal quarter 322, compared to the same period last year Lulu Lemon gained one.
Five points of market share in the U S. Over this time the most of any brand in this market. According to the NPD groups consumer tracking service.
These results are only possible due to the strength and dedication of our people around the world to our teams in our stores and our distribution centers and call centers and in our store support centers I'd like to express my gratitude on behalf of the entire leadership team you connect with our guests everyday execute.
Against our growth plans and continue to support one another all of which enable the financial results, we deliver quarter after quarter.
Turning now to supply chain of our inventories we continue to see improvements across our supply chain. Our factories have now returned to pre pandemic levels of production efficiency. In addition, ocean delivery times are continuing to improve from the 70 days, we experienced last quarter.
I'm also excited to share that we recently opened our Tilbury distribution center located near Vancouver to support demand in Western Canada. This D. C is a great example of our ongoing investment in strategic foundational infrastructure projects that will help fuel our power of three times to growth plan in.
In terms of inventory, we ended quarter three with dollar inventory up 85% on a one year basis and units up 38% on a three year CAGR basis, both metrics in line with our expectations as we discussed our inventory levels were too lean last year, and we made the strategic decision to build inventories this year, which.
Enabled the strong topline growth we have delivered.
Megan will share additional details and we remain comfortable with both the quality and quantity of our inventory we continue to leverage our core styles, which account for approximately 45% of our total inventory and carry limited seasonal markdown risk I'd also note that quarter three will represent the high point for our inventory on a one year dollar basis.
And as we enter quarter four we are well positioned to be in stock throughout the holiday season.
I will now spend a few minutes speaking about product as you know innovation out Lulu Lemon is fueled by our science of feel development platform. Our teams focus first on identifying the unmet needs of our guests and then we view them through the lens of activities to develop new franchises and other hero items.
That are versatile and innovative.
Quarter three at some great examples of how we bring this strategy to life and footwear, we launched our fourth style strong field like the other technical styles rolled out this year strong field was designed for women first which differentiates us from many of our peers, who create shoes for men and then adapt them for women strong field.
Technical training shoe designed to keep the foot anchored and secure during workouts and we're encouraged by the initial guest response as I've mentioned before footwear as a test and learn category for us and it represents a small portion of the growth we anticipate over the next five years. This allows us to build into the potential at an appropriate pace.
As we learn and make adjustments that being said, we're excited about the potential opportunity in this category and we were pleased to be recognized by footwear news with the launch of the year Award presented during their 36th annual Achievement Awards last week in New York.
Turning now to franchises, it's great to see how our teams continue to build out our range of wonder Puff offerings. We started with a single women's jacket and have expanded into 11 styles within this outerwear franchise across women's men's and accessories. Our results show that our guests respond extremely well to the <unk>.
Let the vault <unk>, while last year, we were constrained in terms of inventory, particularly in outerwear, we are well positioned with wonder Pops for the holiday season, and expect to meet guest demand.
As we look forward franchise developed represents a unique and distinctive opportunity for Lulu lemon with align scuba and define as a few examples all of them beginning with a singular style and then expanding into popular multiple style offerings and this is just the beginning we will continue to introduce.
<unk> and grow our franchise business into the future.
Let me now shift gears and speak to another one of Blue Lemons key competitive advantages our D to C model, our ability to connect directly with guests in real time and across both our physical and digital channels gives us a number of ways to engage beyond the purchase transaction.
Quarter, three we launched our new membership program began to hold local 10-K races for the first time since the pandemic began and we brought focus to world mental health day around the world with a notable activation in China.
Some highlights are in early October we successfully launched our new two tiered membership program in North America.
Essentials terrorists free to everyone and offers unique benefits to members, including early access to product drops exchange or credit on sale items and invitations to virtual community events.
The premium tier of the program Lulu Lemon studio represents the evolution of mirror into a much more engaging hybrid fitness offering we've extended our collective by partnering with some of the best fitness studios and instructors to bring even more classes to our members both digitally and in real life.
To join members purchase a little Lemon studio mirror agreed to a $39 monthly subscription and receive many exciting new benefits.
Another way, we engage with gases through our 10-K runs we sponsored two races in Atlanta and in Houston, and we're excited by the response, we paused. These experiences during the pandemic. So I'm thrilled that we have been able to hold these large scale community activations once again, bringing together our guests local teams and ambassadors to extend our.
And in China, we brought attention to world Mental Health day in October with a month long campaign aimed at inspiring people to take positive actions towards improving their physical mental and social wellbeing. This included in real life events focused on wellness media partnerships and the launch of a digital wellbeing hub on wechat.
These examples bring to life the unique ways, we connect with our guests and our communities across the globe. This enduring strength of Lulu lemon demonstrates our ability to be globally strong and regionally relevant as we foster a deeper relationship with Lulu lemon for existing and importantly, new guests all of this increases brand awareness.
Drives traffic to our stores and websites and ultimately results in higher purchase consideration engagement with Lulu lemon.
Before handing it over to Megan I wanted to speak further about our international business.
You know our plans call for a quadrupling of international revenue over five years from 'twenty to 'twenty, one to 'twenty to 'twenty, six and I'm very pleased with how our leaders and local teams are executing against that goal.
This was reinforced for me during my recent visits to the United Kingdom, and Australia I toured both markets with our local leaders and team members got to experience firsthand, the energy and excitement of our stores and our recently optimized locations in Australia. It's also exciting to see how we are elevating the guest experience in these markets with the recent rule.
Out of ship from store and enhanced endless aisle capabilities in both regions with strong leaders in each of these markets and across our international business I'm energized by our ability to continue to strategically expand lulu lemon across geographies the potential is considerable and.
Building upon the momentum from our recent market entry into Spain, We opened another iconic location in Europe , just last week with the store on the shone suddenly say in Paris, and the heart of one of the city's main shopping districts. This store will enable us to grow brand awareness, both in France and across Europe . Given this is such a popular tourist destination.
While our growth prospects are balanced across geographies international represents a key piece of our power of three times to growth plan, we're off to a great start and I look forward to sharing more with you on future, earning calls with that I'll now turn it over to Megan.
Thanks, Calvin I'm pleased that our momentum continued in Q3, and we were able to deliver both top and bottom line results, which exceeded our guidance. The holiday season is also off to a good start with strong traffic over the extended Thanksgiving weekend and a positive guest response to our holiday merchandise assortment. In addition, we're in a much better inventory position this year to me.
Guest demand. However, I also want to acknowledge that we have several large volume weeks ahead of us and our teams remain focused on connecting and engaging with our guests.
Let me now share the details of our Q3 performance I'll also discuss specifics on our balance sheet, including our inventory and cash position. Please note that when comparing our financial metrics for Q3, 2022 with Q3 2021 the adjusted operating results for Q3, 2021 exclude 18th sensitive expense related to the acquisition of mirror.
You can refer to our earnings release for more information and reconciliations for our GAAP metrics.
For Q3 total net revenue increased 28% to 1.86 billion ahead of our guidance.
<unk> sales increased 25% with a 17% increase in stores and a 34% increase in digital.
A three year CAGR basis total revenue increased 27%.
In our store channel sales increased 28% on a one year basis and 16% on a three year CAGR basis productivity continues to trend about 20, and 19 levels and although we had 22 stores closed in mainland China in the last week of November . We currently have 99% of our fleet open globally.
We ended the quarter with a total of 623 stores across the globe.
Square footage increased 19% versus last year, driven by the addition of 71 net new stores since Q3 of 2021.
During the quarter, we opened 23 net new stores and completed seven co located optimizations and.
In our digital channel revenues increased 46% on a three year CAGR basis, and contributed $767 million of top line.
A 41% of total revenue.
Within North America revenue increased 24% and within international we saw 42% increase both on a three year CAGR basis.
By category men's revenue increased 28% on a three year CAGR basis women's increased 23% and accessories grew 52% on the same basis.
I'm also excited that we continue to see strength in traffic across both channels and store traffic increased nearly 25% and then our digital business traffic to our e-commerce sites and apps globally increased nearly 50%.
On a three year CAGR basis traffic is up 9% in stores and over 41% in E Commerce.
This speaks to the strength of our omni operating model as we engage with our guests in ways most convenient to them.
Gross profit for the third quarter was one point O 4 billion or 55, 9% of net revenue compared to 57, 2% of net revenue in Q3 2021.
Our gross margin decrease of 130 basis points relative to last year was driven primarily by 60 basis points of deleverage from foreign exchange within gross margin.
It was somewhat offset by a 20 basis point FX benefit within SG&A.
A 40 basis point decrease in product margin, driven primarily by higher markdowns and inventory provisions relative to low levels last year.
Partially offset by lower airfreight expense.
And 30 basis points of deleverage on fixed costs, driven primarily by investments in our product teams and distribution centers.
That somewhat by leverage on occupancy and depreciation.
When looking at markdowns versus 2019, they were relatively flat and in line with our expectations.
The decline in gross margin was larger than our guidance of 50 to 70 basis points driven predominantly by FX in regional revenue mix from a regional standpoint, while revenue growth in China was strong for the quarter. It was below our expectations due to COVID-19 impacts.
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 684 million or 36, 8% of net revenue compared to 37, 6% of net revenue in Q3 2021.
The leverage in the quarter versus Q3, 2021 resulted from leverage in our stores and other channels on corporate SG&A and on foreign exchange.
This was offset somewhat by an increase in depreciation and amortization.
Operating income for the quarter was $352 million or 19% of net revenue compared to adjusted operating margin of 19, 4% last year.
Tax expense for the quarter was 97 million or 27, 6% of pretax earnings compared to an adjusted effective tax rate of 25, 1% a year ago.
The increase relative to last year is due primarily to an accrual for withholding taxes on a portion of fiscal 2022s Canadian earnings and a decrease in tax deductions related to stock based compensation.
Net income for the quarter was $255 million or $2 per diluted share compared to adjusted earnings per diluted share of $1 62 in Q3 of 2020 one.
Capital expenditures were 176 million for the quarter compared to $123 million in the third quarter last year.
Q3 spend relates primarily to investments to support business growth, including our multiyear distribution Center project store capital for new locations relocations and renovations and technology investments.
Turning to our balance sheet highlights we ended the quarter with $353 million in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility.
Inventory at the end of Q3 was $1 7 billion in line with our expectations.
This reflects one year dollar growth of 85% and a three year CAGR of 38% in.
In transit inventory is up relative to 2019 and it is contributing approximately three percentage points to the three year unit growth rate.
I'd also note that course, he has been less product continues to make up approximately 45% of our inventory.
We remain pleased with our inventory levels, which position us well to fulfill guest demand in Q4, okay.
Looking for it on a one year dollar basis, we expect the inventory growth rate at the end of Q4, it should begin to moderate and increased approximately 60% relative to last year.
On a three year CAGR basis, we expect unit growth to be approximately 39% at the end of Q4.
During the quarter, we repurchased approximately 55000 shares at an average price of approximately $311.
The end of Q3, we had approximately $812 million remaining on our recently authorized $1 billion repurchase program.
Let me now shift to our guidance outlook.
So they started the holiday season, however, the environment remains dynamic and we still have approximately two thirds of a quarter ahead of us for.
For Q4, we expect revenue in the range of 2.6 O five to 2.655 billion Rep.
Representing one year growth of 22% to 25% and a three year CAGR of 23% to 24%.
We expect to open approximately 30 net new company operated stores in Q4.
We expect gross margin in Q4 to increase 10 to 20 basis points relative to Q4 of 2020. One we expect to see an improvement year over year in product margin driven by lower airfreight expense, which will be partially offset by continued FX pressure and the timing of expenses related to our supply chain investments.
Check Mark downs to be inline with 2019 levels.
In Q4, we expect our SG&A rate to leverage 30 to 50 basis points relative to Q4 2021.
Turning to EPS, we expect adjusted earnings per share in the fourth quarter to be in the range of $4.20 to $4 30 versus adjusted EPS of $3.37 a year ago.
For the full year 2022 we now expect revenue to be in the range of 794 four to 7.994 billion.
This range assumes our e-commerce business continues to grow approximately 30% relative to 2021.
When looking at total revenue our guidance implies a three year CAGR of 26%.
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 now expect to open 79, net new company operated stores in 'twenty 'twenty tail up modestly from our prior guidance of 75.
Our new store openings in 'twenty 'twenty. Two will include 45 to 50 stores in our international markets and represents a square footage increase in the low 20% range in total.
For the full year, we forecast gross margin to decrease between 100, and 140 basis points versus 2021.
The reduction relative to last year is driven predominantly by foreign exchange a more normalized level of markdowns relative to the low levels, we experienced last year and increased investment in our D. C network.
Turning to SG&A for the full year, we forecast leverage of 100 to 140 basis points versus 2021 driven predominantly by increased sales.
And when looking at adjusted operating margin for the full year 2022 we expect it to be approximately flat versus last year.
For the full year 2022 we expect our effective tax rate to be 28 to 28, 5% for Q4, 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 $9.87 to $9.97 versus adjusted EPS of $7.79 in 2021.
Our EPS guidance excludes the impact of any future share repurchases and the gain on the real estate sale, we realized in Q2.
We now expect capital expenditures to be approximately 630 to 655 million for 'twenty 'twenty tail, the increase versus 2021 and reflects increased investment in our supply chain digital capabilities, new store openings and renovations as well as other technology in general corporate infrastructure projects, including our multi year.
To increase our distribution capabilities to support our future volume and growth and.
And we are also ramping up our square footage growth relative to last year and now intend to open 79 stores versus our prior expectation of 75 or.
A range of $630 million to $655 million is approximately 8% of revenue in line with our current power of three times to target a 79%.
Thank you and with that I'll turn it back over to Calvin for some closing remarks.
Thank you Meghan and closing I just want to reiterate how pleased we are to see the continued momentum in the business and our strong start to our power of three times to growth strategy.
As we look to quarter four and into 'twenty 'twenty three I am confident in both our near and long term plans that will enable us to deliver on our goals, while continuing to successfully navigate whatever comes our way I look forward to taking your questions now 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'll hear a tone acknowledging your request if you're using a speakerphone. Please pick up your handset before pressing any keys.
To withdraw your question. Please press Star then two.
Our first question is from Adrian <unk> with Barclays. Please go ahead.
Thank you very much and can make.
Congratulations.
And then I wanted to take it.
Okay.
You know kind of how you're.
Opening.
The stores that are committed to it here and obviously I think probably for next year.
What are you seeing.
What.
Between stores.
It does.
Okay.
Yeah.
Okay.
Hadrian. Thanks for the question, we're seeing very good growth across both our store channel and our Dotcom channel. We don't we don't share the ratio between those two.
But both contributed to growth in the quarter.
And as a as you indicated the the market continued to grow.
Very strongly for us even with their ongoing.
The challenges with with the with Covid, where we saw store closures reduced operating hours are comparable to what we saw in quarter two.
They're improving but just recently and the team is doing a wonderful job managing through that but the momentum in the brand across the categories in both genders and both channels remains very strong and we're very excited about the potential of the brand to be able to continue to drive it through.
This year as we have and how the guest is responding to it so remain very very excited about the potential and the role that will play and quadrupling, our international business with mainland China, playing a big part of that our performance.
Okay. Thank you very much can you get the percent of sales.
In terms of.
In the quarter or.
Oh, no sorry don't show that.
Okay. Thank you very much best of luck.
Yes.
The next question is from Alex <unk> with Morgan Stanley . Please go ahead.
Great. Thanks, so much for taking my question and of course, congrats on another great quarter I wanted to just start with what you mentioned on the early holiday performance. It sounds like you guys have been delivering a really impressive result, compared to what we've heard across other specialty retailers this earning season and even at our conference earlier this week.
So you guys are really kind of bucking the trend here, what would you attribute lose a quarter to date out to outperformance to so far.
Hum. Thanks for the question I'll break it into a two two parts that are driving the momentum both in Q3 as well as to the start of Q4, where our guest metrics have been consistent as I've shared.
And remain very healthy across traffic, new guest acquisition dollar spend and the balance across our regions or channels or categories and activities, but I think one of the primary drivers of our brand and momentum relative to others are really sits with the brand positioning and the uniqueness.
Of our brand with product focused on technical.
Solutions fabrics are through our innovative approach of science of feel and the versatility of how the guest.
<unk> uses our product from not just sweating, but through on the move our D to C model.
And and community and that connection that we have with the Gaston in quarter. Three we were able to turn some of those physical connections back on and connected to the launch of membership so they're really distinct aspects of the brand that separate us from many others in this space.
And within the athletic within retail, hence I think the share gains and the overall success I also think some of the decisions we made as a management team early on.
Decisions around pricing.
Decisions around balance of air to have the products and our decision around inventory has allowed us to continue to deliver on the demand side that we're seeing as we continue to see new guest acquisition strong and the pricing decisions are to really.
<unk>, you know manage pricing to not move pricing aggressively has allowed us to continue to sell our regular price not be forced into unnecessary markdowns or course correcting with promotional play like we're seeing happen in the marketplace. So great products regular price is is.
Still selling driven off of the uniqueness of the overall brand and position in the market.
That's not super Great color, maybe one just final one for me I wanted to touch on the inventory. Similarly, juxtaposing you guys against some of the peers. We've seen many be able to work inventory levels down on a year over year basis can you just talk about why lose are more similar to the last quarter and then I'll.
So I think he may have taken in the fourth quarter outlook up a little bit on inventory, maybe from 60% to 55% from 55 to 60, and so I think a little bit higher than last time, correct me if I'm wrong, but you guys can just talk about that dynamic for us. Thanks, so much.
Yeah, absolutely and so end of Q4 inventory was in line with our expectations. We were under inventory last year and so as Calvin mentioned, we strategically positioned inventory to be able to capture guest demand this year.
And we've really been focused on that three year unit CAGR, which is 38% at the end of the corridor with three points driven by in transit. I mean is we are continuing to experience supply chain environment, improving and and vendor readiness improving them.
So the team is adjusting to that new reality and that is reflected in the 60% color that we gave for year end and so as he said a little bit higher than the 55% to 60%. We gave them at the end of last quarter for our end of year inventory driven by that improving supply chain environment and.
Underwriting loss.
Thanks, so much good luck.
Thank you a question pardon me. The next question is from Brooke Roach with Goldman Sachs. Please go ahead.
Good afternoon, and thank you so much for taking our question.
On the innovation pipeline that Lululemon has been particularly strong. This year I was wondering if you could talk a little bit more about that into next year and where you think the product residents can really improve as you think about managing that consistent growth across your business and particularly in North America and maybe within that.
You could reflect on the glide path between the very strong one and three year CAGR that you're performing now versus the longer term target of 15% and how you think about that growth maybe normalizing over the course of the next few years to that long term target. Thank you.
Great. Thanks Brook, so in terms of the product pipeline.
This year was definitely.
And exciting year across both our own categories and activities are plagued <unk> launch of footwear Q3, like the first half of this year.
So a number of new innovations both in new fabrics fabrications into our proven franchises like the align.
And Q4 equally we have some exciting innovation that has hit.
And we'll continue to and the guest is responding very well that's a proven formula for us and when I look forward to 'twenty to 'twenty three we continue to and will continue to drop innovation across the core activities that we've identified a run train yoga of the play.
A tennis golf and hike and it's both new franchise or hear items as well as extensions of some of our proven very successful franchise is great example of that is the align franchise one of our strongest with the new Lou fabrication.
And there's new Lou ribs that dropped at the end of Q3 available now in Q4 and the guests are responding incredibly well to that so.
So we have a number of innovative opportunities to cross, creating completely new items and category extensions through franchise as well as building on the ones in <unk> and 'twenty threes are another very strong year of innovative launches, which I'm excited about our.
Continuing to bring to market.
And as you mentioned, we are you know after the first.
Three quarters of this year trending above the guidance of the power of three times to growth plan, which we're excited to see how the brand is responding and the guests are reacting.
Reacting to the newness in our new guest acquisition.
We haven't changed our outlook and the commitment on the power of three times to.
But obviously very pleased with our performance to date and as we look forward into next year.
Thank you and if I could just squeeze one more in for Megan Megan can you help us with approximate sizing of the airfreight FX and supply chain investment that is going into the gross margin and <unk> and remind us how much of those are pressures will be persisting into 2023.
Okay.
Yeah. So as we look at our Q4, we do expect that overall on operating margin will have similar pressure as we did in Q3 in terms of FX.
So we had a net a net pressure of 40 basis points in Q3, we're expecting something similar for Q4 and when we look overall at our operating margin for Q4, we see it expanding year over year in the 40 to 70 basis point range with our guidance.
Versus last year and gross margin, we gave color of 10 to 20 basis points, we're seeing a benefit in product margin driven by lower airfreight them, which will be partially offset by normalized markdowns in line with our 2019 levels and then also the mix of business and we also had that negative impact from FX.
And then we'll also have some pressure in gross margin related to fixed costs, particularly the timing of our D. C investments, which are really positioned to.
Enable our scale of the business over the next five years and then on the SG&A side, we're expecting a 30 to 50 basis points of leverage which would be different by higher sales as well as a little bit of a benefit on the FX side within SG&A.
Thank you very much.
Thanks Robert.
The next question is from Matthew Boss with J P. Morgan. Please go ahead.
Great Thanks, and congrats on another nice quarter.
So calvin on the material market share gains that you cited where do you see the largest share opportunities remaining maybe across categories and then just to elaborate on the start of the fourth quarter could you just provide any color on the cadence of shopping that youre seeing maybe stores versus digital and then.
Just given the comments on the encouraging start to <unk> is it fair to say you've embedded moderation in the growth CAGR for the remaining two thirds of the quarter relative to your start.
Thanks Pat.
So on the on the last piece in terms of the start of the quarter and what we're seeing a traffic.
It was very very strong for us across both our online channel as well as stores in Q3, and we're pleased with the a continuation of strong traffic numbers into a into this quarter.
And Theres still a lot of the quarter ahead.
So you know as we shared we had a very strong Thanksgiving shopping weekend.
And and saw good results of our regular price merchandise and there are some you know critical weeks ahead. So the teams just remained focused in managing accordingly.
As we are you know get ready for for the holiday season. So that's that's our approach and how we're monitoring and managing.
Through.
And the first part of the question.
Alright, Marketshare got it thank you.
Hmm.
When I look forward in terms of our continual opportunity to grow market share. It's a combination of both in men's and women's categories and our key activities that we've identified across run train yoga.
Tennis golf and hike we.
We shared at our analyst day, our opportunity in unaided brand awareness with him.
We have seen a a a a improvement in that but it's you know well below what are the potential is and other brands in our category space. So we know as we continue to drive awareness behind the brand in consideration is having an impact on our men's business pleased with the growth in the quarter of 28%.
But really just getting started in terms of the potential of more being aware of and considering Lulu Lemon. In addition to as we continue to build out some of the assortment and unmet needs that we have around those core activities that we've focused on and for her although we have a better unaided brand awareness we are still built.
Flow again, others are in art category space. So, we still have opportunity and women's O T. M. For US is an exciting opportunity to expand that relationship a share of wallet and continue to drive market share so market share gains one through our unaided awareness.
Ernest in an in an improving that to continue to drive our new guest acquisition innovating within our core activities as we've identified as I've mentioned before we're still early innings on the unmet needs and the potential that we see are to continue to bring to market and then the option and the opportunity we have around women's.
Zoe T M is a really exciting one for us for her as well so a lot of opportunities that we have to continue to drive market share.
Okay.
Thank you.
The next question is from Lorraine Hutchinson with Bank of America. Please go ahead.
Good afternoon, just wanted to ask a few more follow ups on gross margin do you still expect air freight to be a 10 basis point benefit to the full year and have you changed your view at all on markdowns for the fourth quarter, given the more promotional environment.
Hillary and so we are expecting airfreight to be slightly better for the full year. We had said 10 basis points last time minutes come up to 50 that is being offset by a negative impact from FX and both for Q3 and Q4 and then in terms of markdowns we've been expecting.
Mark Downs to be in line with 2019 levels and we did see that in Q3 and that remains our expectation in Q4, and we think that is a more normalized.
Level for us as compared to 2019 and still as Calvin mentioned very healthy full price sell throughs I'm in no changes and plans for our markdown cadence.
Thank you.
Okay.
The next question is from Rick Patel with Raymond James. Please go ahead.
Thank you good afternoon can.
Can you help us think about profitability by region I'm, just curious how that's tracking given your strong demand globally versus strategic investments that you're also making and where you see the most opportunity as you look out to next year.
Thanks, Rick and so we are profitable across both our international and North America regions, and we were pleased that Europe hit profitability last year.
And we continue to see opportunity across both North America and international over the longer term and we're obviously in earlier stages in our international business and so we would expect to see more expansion there as we scale up let's see opportunities with scale across both regions.
Thanks very much.
Thanks.
The next question is from abbey's that snacks with Piper Sandler. Please go ahead.
Great. Thanks for taking my question I was wondering if you had any category commentary I know that last year, you are genetically under inventoried in some categories like outerwear, but any shifts you're seeing there and then maybe commentary on belt bag as well. Thank you.
Yeah, I would say in terms of categories, and we are seeing pretty balanced growth across our men's women's and accessories business all in the double digit.
Range, we did have pockets of inventory where are we.
Under last year, notably.
There were where we've seen more positive performance and believe we're in a strong inventory position as we enter and Q4 in terms of everywhere about back on it's been a great style for us accessories growth, obviously very strong it's our number one cell.
Then you have to innovate across all of our assortment as we went to Q4 and then into 'twenty 'twenty three as well.
Thanks.
The next question is from John Kernan with Cowen. Please go ahead.
Hey, good afternoon. Thanks for taking my question and congrats on navigating a tricky environment.
Thanks, John and thanks for all that.
Thanks for all the commentary on gross margin and inventory I guess.
When we look at the level of units, but also the cost and the balance sheet is there.
Anything lingering in the cost of goods sold into next year.
Some of the higher sourcing costs earlier this year that might.
Be a source of pressure on gross margin or do you are there offsets that is we from supply chain as we go into next year.
Yeah, Thanks, John and I would say, we're pleased with our inventory level as we move into Q4, we're obviously seeing some improvement in the supply chain environment in terms of air freight we have seen that moderate throughout the year. We do have a large portion of our inventory that is key.
Core about 45% so that benefits us.
We're not putting a fine point on margin for next year, but remain committed to a modest operating margin expansion over the longer term and I will come back and share more details on our outlook on our March call.
Got it I guess, just a quick follow up you would.
Wood supply chain costs be more of a benefit this year or next year excuse me.
Some of the container costs come down Airfreight, obviously alright.
Already coming down.
Our supply chain cost benefit so.
Yeah. So I, there's two pieces of the supply chain costs. There. One is the usage and then when as C. P. U and we are seeing lead times improve we had called out 70 days on average last quarter were seeing them improve modestly I'd say, they're still not back to historical levels there but.
Where we are seeing some positive movement on the CPU front.
And so we continue to view that as an opportunity as we move into next year.
Excellent. Thank you Beth will walk through the rest of the holiday.
Great. Thanks, John .
The next question is from Mark all swagger with Baird. Please go ahead.
Great. Thanks for taking my question.
I'm curious what the early takeaways have been from the broader rollout of the.
Like New initiative, you know what are you seeing in terms of guest to spend for those who have turned in used product and similarly curious if you can share anything else regarding the Lulu Lemon studio launch and maybe shed some light on your expectations for the studio mirror revenue.
For for this year and next thank you.
Yeah.
Great. Thanks for the question.
So with the like New it's currently live in 50 states and an approximately 390 stores.
And we're not sharing specific performance details, but where we are pleased with the results. We're seeing is really a two fold one guest acquisition on the resale side are new to the brand and the opportunity to enter a at a different price point and then with our current guests are theirs.
Spending based on trade and where they come in.
And get a variety of different trade in values and gift cards, we are monitoring and seeing a positive response to that so.
It's a new pilot rollout initiative for us and we're pleased with the early results and we'll continue to monitor but early it's been a positive.
And.
From.
Sorry on the studio side I'll break it down into two <unk> from the essential membership tier which is our free membership program. If you remember on the analyst day, we indicated that we aimed to have 80% of our guests to sign up for the program and.
Based on our glide path to that as guests come in to our channels be it online or in store. We're running ahead of that so we're very happy with the sign ups are at this point and that's going to allow us to engage with that guest base through a variety of our new benefits that we offer in a very you know an exciting positive way.
And with the introduction of the rebranding of our mirror into a studio as well very pleased with the the response are continuing to test and learn but we're excited how the platform fits within community fits within our central membership program.
And allows us to continue to innovate behind community in the connection with our guests. So its early only a few months, but I'm encouraged with the results we're seeing.
Yeah.
Great. Thank you and congrats on the strong results.
Thank you.
The next question is from Michael Binetti with Credit Suisse. Please go ahead.
Hey, guys. Thanks for taking my question Congrats on a great quarter, Megan and I guess, just a housekeeping one what do you think or what do you think FX pressure to the gross margin can start to get.
Get better here, given where rates are moving lately and then I guess I'm just curious if you could help us unpack the gross margin a little bit more for next year I mean is it a little bit but it seems like the industry is looking to get clean on inventory. So there should be some recapture opportunity. There obviously afraid you spoke about a little bit.
And I am curious how long you think that that pressure on the fixed cost line within gross margin that flipped over to a negative this quarter and a nice comp is that does that roll forward with us for a few quarters.
Great. Thanks, and I would say in terms of FX. Our outlook is that Q4 is more similar than not to Q3.
And I think hard to put a fine point on next year, but I wouldn't view it as an opportunity to go for the longer term time horizon.
And in terms of gross margin next year again do view airfreight as it benefits them, but we're also committed really to that bottom line operating income expansion on a modest basis will continue to balance them opportunities and investments in that business is really focused on driving into our long term goals.
The revenue growth and being able to scale with the business and support them that long term opportunity that we see and then I would say fixed costs on a particular on the D. C side, we have some upfront investments in our D C capabilities and footprint in order to support that long term volume.
So we will see some pressure in the near term and then see that start to leverage over time as we move through our five year plan. It is a multi year roadmap. We will continue to offer some color there as they move through that.
If I could sneak one in our fourth quarter and just.
Yeah.
Think about what you've embedded in the comp for fourth quarter particular between the channels stores and E comm, considering where where traffic is how much itself based on some of the metrics you gave us and and how busy your stores get during you know over the next few weeks here.
Maybe just a little bit on how you're thinking about the two channels.
Yeah, we didn't breakdown the channels for Q4, and what we did offer was 23% to 24% sales growth overall, and we did give some color for the year on ecommerce at approximately 30% growth, which would impact both our Q3 results and expectations for Q.
Sure.
Okay. Thanks, a lot.
Thank you.
The next question is from Omar Saad with Evercore partners. Please go ahead.
Thanks, Good evening I wanted to ask my first question on pricing actually I know you guys have been I haven't been too aggressive or havent havent really the need to use pricing lever, even this inflationary environment, but as you see it.
Cogs inflation freight FX impacting the gross margin maybe talk about your appetite and the brand strength. So the brand's capability to use pricing as a tool as needed and then maybe also dive in deeper on China. It seems like the point there was pretty solid despite of all.
All the Covid closures going on there you know maybe talk about what the outlook will be you know once you know what your expectations are for that business. Once the you know who knows what it'll be but once the kind of market and economy and consumer spending and retail environment opens up there. Thanks.
Hi, Omar on pricing.
Hum.
As we've stated we we only increased around 10% of our assortment mix this year as we priced in.
And you know, we continue to evaluate and look for opportunity.
And we separate cost of goods and any pressure, we're seeing there with short term cost of supply chain logistics and what we don't want to do is react too aggressively.
And and and.
Create any impact on the demand of our of our product and we're going to continue to take that approach.
Comfortable on the inflationary pressures, we're seeing on cost of goods and how we're priced in.
And as I said, we'll adjust on the other and I think as we've seen through the three quarters of this year. The decision. So far has has been the right decision where others that probably stop are now.
Heavily discounting and giving away any of that you know perceived gain and more so and having to mark goods down where we're able to continue to sell our product at regular price not react and our mark down our performance has been in our guidance in line with what we indicated we would be from a 20 <unk>.
19 perspective, so I, we continue to monitor it but our pricing decisions Ah I think have a have helped to fuel our momentum this year and will continue to take a similar approach as we look out to next year and on China. We remain very excited our you know our new store openings, we opened nine stores.
In the in the quarter in mainland China. We have 88 are now in our in market.
Their performance continues to exceed beat expectations are in markets, where we don't have constraints are related to COVID-19 are the store performance in online performance is very strong. So we remain very excited about the market committed to the markets and.
And know that it will play a strong role in our growth through quadrupling international through a power of two times to growth strategy.
Thank you Kevin just to clarify in terms of pricing. So it's not that you don't think the Lululemon brand has the pricing power.
But you just don't see the need given some of the transitional nature of some of the inflation going on there to chase pricing.
Given the environment is that a fair characterization.
It's a fair characteristic but I'd also indicate when we mentioned the 10% of assortment that we've moved pricing on.
Throughout this year, we've looked at our new innovation and priced it accordingly are relative to where we see opportunity in the marketplace. So you know we absolutely know that you know this is a premium brand we have pricing power.
We're able to launch and introduce exciting new innovation.
That is priced to support the technology and the innovation that is into the the product and we were being cautious in managing our our regular pricing accordingly, with the promotional nature of the market. So that we're able to continue to you know sort of drive the demand at regular price.
Rice that we're seeing and we'll manage accordingly, but absolutely it's not a reflection of what we believe the pricing power of the brand is in fact I think the way the brand is performing in a heavily promoted environment actually supports the power of the pricing.
Position that we have at Lululemon.
Thank you for clarifying have a great holiday.
Operator, we'll take one more question.
Certainly.
The next question is from Jay sole with UBS. Please go ahead.
Great. Thank you so much for taking my question I'm, just wondering if you could talk a little bit more about you know what you've seen from the footwear business. You know when you think about the strong fuel Splitsville overcharge feel have you seen the consumer.
One style versus the other I mean have you seen sort of colors or skus do better.
Looking to expand the assortment as you get into next year. Thank you.
Thanks Jay.
We're pleased with the with the results to date are as you indicated we have for.
Skus within our footwear and each have performed well.
It's a combination we're seeing certain guests a purchase multiple styles and we're seeing new guests enter either into blues feel are charged feel or into strong feel a restful rest feel being our our our first dual gender offering for both him and her and the other three being.
Specific for our female guests built off of our last designed on her foot.
As we look forward I'm excited about continuing to test and learn as we indicated it doesn't play a.
A big role in our power of three times to a growth plan that we shared on analyst day, and it's an exciting category for us and we have the ability and will take the ability to to pace to learn but we started with a very innovative unique positioning and we'll build from that.
And colors from the color waves site. She has been responding very well to the colors I think that's one of the unique positioning of it is you know our core colors of black and white are strong, but a lot of the unique color waves.
She has responded very well too. So it's early for US are excited about the results and we'll continue to test and learn and share more.
Great. Thank you so much.
That's all the time, we have for questions today. Thank you for joining the call and have a great day.
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