Q2 2023 Lululemon Athletica Inc Earnings Call
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Thank you for standing by this is the conference operator welcome to the Lululemon Athletica, Inc. Second quarter 2023 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 add.
Ask questions.
Analysts who wish to join the question you May Press Star then one on the 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 Athletica. Please go ahead.
Thank you and good afternoon welcome to Lululemon second 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 lululemon in 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, comparable sales metrics even on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the investors section of our website at Www Dot Lululemon 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 second quarter as well as our quarterly Infographic today's call is scheduled for one hour. So please limit yourself to one question at a time to give others the opportunity to have their questions addressed and now I would like to turn the call over to Calvin.
Thank you Howard I'm pleased to be here with everyone to discuss our quarter. Two results today I will share the highlights of our recent performance and speak to some of the exciting product launches in Activations, we have planned for the second half of the year.
Now as you've read in our press release, our second quarter results exceeded our expectations as our core products and new launches continue to resonate strongly with guests in markets around the world on today's call I will provide details on our quarter two performance.
I'll, then speak to our outlook and the many opportunities we have across the business next I'll turn it over to Meghan for a review of the financials and our guidance update.
And then we'll take your questions. So let's get started.
Our business remains strong in quarter, two with both revenue and EPS exceeding our expectations revenue increased 18% versus last year with strength across our portfolio.
Comparable sales grew 9% in stores and 17% in our E Commerce business and adjusted EPS increased 22% versus the same period last year. These results demonstrate.
Demonstrate the strength of the business and how we are well positioned for the second half of 2023.
In fact, we are seeing our strong momentum continue into quarter, three and expect revenue growth in the 17% to 18% range for the quarter, Megan we'll share our detailed guidance with you later in the call.
Let's now look at quarter two in more detail as I share some highlights on product innovation and brand building strategies and regional performance when looking at.
Product, we posted strong double digit growth across women's men's and accessories, as we bring newness and innovation into our assortment.
Specifically in quarter, two women's increased 16% men's was up 15% and accessories increased 44%.
In womens guests are responding very well to our core franchises as well as our newer play activities. We continue to see strength in our key franchises, including scuba define and our dance studio Jogger. In addition, soft stream has emerged as another meaningful franchise for us.
Quarter, two we saw strength across the collection with guests responding well to our offering.
Turning to play our tennis and golf collections remained strong performers for us as we've shared before our strategy with place to solve for our guests' unmet needs across their secondary sweat activities. We introduced styles designed specifically for these activities, while continuing to leverage the versatility of our core assortment.
In mens I'd like to highlight the ongoing strength, we're seeing in our a b C franchise, one of our most popular for him. Our teams continued to expand and evolve the assortment, which now includes four styles in for fits and is available in three proprietary fabrics warped stream utilitarian and woven air with additional.
Fabrics and solve for unmet needs plan for upcoming seasons as we expand this trusted franchise, we are gaining share of wallet from existing guests while at the same time, attracting new guests to our brand and.
In accessories, our entire bag assortment is performing well cross body styles backpacks and small pouches are helping drive these results and contributed to the 44% growth in accessories in quarter two.
Our teams will continue to create innovative solutions over the coming months and seasons as we realize the meaningful opportunity to expand our bag assortments.
Looking specifically at the Everwhere belt bag I'm pleased we generated strong double digit growth on top of last year's strike consistent with our strategy to develop franchises from our most popular styles are accessories team expanded our assortment of everywhere belt bags across multiple sizes color waves prints and patterns and the guests.
Responding incredibly well.
Turning to footwear, we're making steady progress in this category and I'm excited with how our team continues to evolve the offering we recently introduced charged field to an update to our most versatile run to train style and we are gearing up for the launch of men's footwear and next year.
Looking now at the second half of the year I am pleased with our pipeline of innovation in women's we will launch an exciting new collection in the fall, which will show our continued ability to address the unmet needs of our guests stay tuned for additional details.
On the men's side recently in quarter, three we launched two new franchises the steady state in our soft Jersey collection, both of which are exceeding our expectations steady state is constructed from the same fabric used in our scuba franchise and is a great example of how we can leverage our technical fabrics across genders are.
Soft Jersey collection includes several styles all in our Jersey fabric, which provides guests with incredible softness in his quick drying stretchy and sweat wicking.
These collections enhance our men's lounge offering and are consistent with how we view our overall on the move assortment.
These products are designed for lounge, but made from technical fabric and offer performance features.
Later in quarter, three we will expand our outerwear offering with new styles of best Jackets, and waterproof down and in quarter. Four we will launch a new performance fabric designed specifically for cold weather right.
These are just a few examples of how we consistently bring innovation into our core while at the same time expanding into new categories. We are still in the early innings of our product journey and have significant opportunity ahead of us as we continue to solve for the unmet needs of our guests.
While product innovation is a key tenant of our power of three times to growth plan. We also have a real opportunity to increase our brand awareness.
As we previously discussed our unaided brand awareness is still only 25% in the United States and with the exception of the U K and Australia, our unaided awareness remains in the single digits in every market in which we operate outside of North America.
In 'twenty to 'twenty, three we have accelerated our efforts to increase awareness and consideration for Lulu Lemon and we are seeing gains in key growth markets across the globe last quarter, we spoke about several initiatives, including the initial phases of our get into a campaign or duped swap event in Los Angeles and the launch of the further initiatives.
In quarter, three we have several activations and campaigns on deck that will support our key product launches begin to build excitement for the upcoming holiday season, and increase overall awareness of the Lululemon brand across the globe, Let me share some highlights.
Given the positive reception to our get Intuit campaign will continue to highlight our leadership position in bottoms with another installment in quarter three for women. The campaign will focus on our core franchises and feature our global Ambassador in professional tennis player Laila Fernandez and for men will elevate our a b C.
Franchise with the support from some fun and exciting special guests. The campaign will include digital media assets across our stores and e-commerce sites as well, we'll also test some targeted TV in the U S.
In EMEA, we will build on our soft launch with Orlando in June with a larger consumer facing launch on this popular E Commerce site, our relationship with Orlando was not wholesale as we fulfill orders ourselves and it is an excellent way for us to bring new guests into the Lululemon brand across Europe , whereas Atlanta was a strong.
And leading player.
And finally, we will release, our global well being index in the coming weeks to raise awareness and celebrate world mental health day in October .
We are excited about the ongoing opportunity to grow brand awareness in the U S and across all our international markets, our grassroots approach to building community and engaging with guests remains unchanged, but we are also increasing the number and frequency of larger scale Activations and global brand campaigns and we are doing this within the confines.
Of our P&L and keeping overall marketing spend relatively stable as a percentage of sales on an annual basis. In addition, the continued acceleration in our topline unlocks dollars that we are then able to strategically invest behind our initiatives to drive brand awareness leveraging both earned and paid media in new and creative.
Boys.
Shifting now to our regional growth drivers, we continue to see broad based strength, specifically revenue in North America grew 11% in quarter, two and international increased 52% within international we delivered strong growth across all markets and continue to see great acceptance of our brand in greater China, where.
Revenue grew 61% within.
Within North America, we remain pleased with the underlying strength of the business with double digit growth in quarter, two consistent with our power of three times to target and.
And we continue to gain market share in quarter, two the adult active apparel industry decreased its U S revenue compared to the same period last year over this time period, Lulu Lemon gained 1.3 points of market share in the U S with gains in both mens and womens According to Sir Canas consumer tracking service.
In the back half of 2023 as I mentioned, we have a compelling pipeline of innovation planned we will continue to focus on acquiring new guests as we solve for the unmet needs.
And thus far in quarter three I can also share that we are seeing our business in North America accelerate relative to quarter two.
Turning to international our business remains strong and balanced across regions.
Quarter to total international represented 22% of sales versus 17% in quarter two last year.
And while expanding nicely this penetration still remains below our long term target, which reinforces just how early we are in our growth journey.
Let me now share some recent regional highlights.
In China, we celebrated national fitness day in August with the third installment of our summer sweat games through this activation our local teams hosted regional competitions across the country, which culminated in a national final held this past weekend in Shenzhen. This year. The games included 3400 participants from more.
And then 100 stores in 36 cities, our APAC and EMEA region also continued to perform well in Australia. We are beginning to reap the benefits of our store optimization program as well as the recent rollout of ship from store in this market.
This is our most mature market outside of North America, and we still have ample opportunity to drive growth this year and into the foreseeable future.
We also opened our first store in Thailand in July which marked the 100th location in the APAC region. The pent up demand for the Lululemon brand in this market was clear in the opening of the store in Bangkok was our strongest ever in the APAC region. In addition, we've seen a noticeable uptick in travel and tourism within APAC, which is also having a.
Positive impact on our business and in EMEA in August we opened our second store in Amsterdam, which reflects our expanding community and our ongoing investment in this key European city to grow the Lululemon brand.
It's incredibly exciting for all of us at Lululemon to see the strong acceptance of our brand across all markets within our international business with each new store opening we see a groundswell of support that welcomes Lulu lemon into the community our runway for growth is substantial and I am optimistic about the future as we.
To expand our business and with that I'll turn it over to Meghan for a review of our financials and our updated guidance.
Thanks, Kelvin our momentum remains strong in Q2, enabling us to exceed both our top and bottom line guidance. In addition, our inventory growth continued to moderate around 14% versus our guidance of approximately 20% and it remains well positioned from both the level and composition standpoint.
I'm also excited to see ourselves strength continuing into Q3 as guests are responding well to our back to school in early fall product innovations.
Now, let's dive into our Q2 financials for Q2 total net revenue rose, 18% to $2 2 billion driven by broad based strength across the business.
Parable sales increased 13% with a 9% increase in stores and a 17% increase in e-commerce.
And our store channel total sales increased 21% versus last year.
We ended the quarter with a total of 672 stores across the globe.
Square footage increased 19% versus last year, driven by the addition of 72 net new Lululemon stores since Q2 of 2022.
During the quarter, we opened 10 net new stores and completed four optimizations.
And our digital channel revenues totaled 894 million or 40% of total revenue.
Within North America revenue increased 11% versus last year.
In international we saw 52% increase versus last year with greater China, increasing 61%.
And by category Women's revenue increased 16% versus last year men's increased 15% and accessories grew 44%.
It's also great to see ongoing strength in traffic across both channels.
In both stores and digital channels traffic increased over 20%.
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 second quarter was $1 3 billion or 58, 8% of net revenue compared to 56, 5% of net revenue in Q2 2022.
The gross profit rate in Q2 increased 230 basis points versus last year and went to drive every primarily by the following.
At 330 basis point increase in overall product margin, resulting from freight favorability. We remain pleased with the product margin strength, we continue to realize on top of strong gains over the last several years.
Combination of product and supply team costs and occupancy Deleveraged 70 basis points in the quarter.
If you're gonna predominantly by ongoing investment in product development and supply chain.
We also saw 30 basis points of unfavorable impact from foreign exchange.
Moving to SG&A, our approach continues to be granted and prudently managing our expenses, while also continuing to strategically invest in our long term growth opportunities.
SG&A expenses were approximately $817 million or 37% of net revenue compared to 35, 4% of net revenue for the same period last year.
We achieved better than expected deleverage in the quarter driven predominantly by our top line strength, while continuing to invest behind our strategic initiatives to build brand awareness among additional investments we've accelerated to fuel our power of three times to roadmap.
Foreign exchange, both translation and revaluation contributed 60 basis points of leverage in the quarter.
Operating income for the quarter was approximately $479 million or 21, 7% of net revenue compared to adjusted operating margin of 29% of net revenue in Q2 2022.
Tax expense for the quarter was $145 million or 29, 8% of pretax earnings compared to an effective tax rate of 28, 2% a year ago.
Net income for the quarter was $342 million or $2.68 per diluted share compared to adjusted EPS of $2.20 for the second quarter of 2022.
Capital expenditures were approximately 146 million for the quarter compared to approximately $145 million in the second quarter last year.
Spend in Q2 of this year relates primarily to store capital for new locations relocations, and renovations technology and supply chain costs.
Turning to our balance sheet highlights we ended the quarter with $1 1 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility.
Inventory was $1 7 billion at the end of Q2 up 14% versus last year.
At the end of Q3, we expect inventory to be up in the high single to low double digits versus last year.
The relatively low growth rate is due to the provision for mirror hardware. We took in Q4, 2022 and have not yet anniversaried.
In Q4, we continue to expect inventory growth to be relatively in line with sales growth.
We repurchased approximately 517000 shares at an average price of $371.
At the end of Q2, we had approximately $454 million remaining on our 1 billion repurchase program.
Let me shift now to our guidance outlook, we continue to be very pleased with the strength of our business as Q2 exceeded our expectations in Q3 is off to a solid start.
The upside we've seen in the first half of the year allows us to invest into our strategic initiatives et cetera ourselves up for future growth while at the same time flowing some of that upside through to the bottom line.
With that being said, we remain aware of the uncertainties that exist in the current macro environment and consistent with our approach over the last several years, we continue to be prudent and plan the business for multiple scenarios.
Let me begin with Q3.
We expect revenue in the range of 2.1 65 to 2.19 billion.
Representing growth of 17% to 18%.
Spec to open 23, net new company operated stores in Q3.
We expect gross margin in Q3, the increase of 160 to 180 basis points relative to Q3 of 2022.
This will be driven by lower freight expense offset somewhat by strategic investments to support future growth, including supply chain distribution centers and product teams as well as modest deleverage on occupancy and depreciation.
In Q3, we expect our SG&A rate to deleverage by 200 to 220 basis points relative to Q3 2022.
This deleverage continues to reflect our strategic decision to invest in growth initiatives, including those to grow brand awareness globally.
When looking at operating margin for Q3, we expect approximately 40 basis points of contraction relative to last year.
Turning T P S.
We expect earnings per share in the third quarter to be in the range of $2.23 to $2.28 versus EPS of $2 a year ago.
Shifting to the full year 2023.
Now expect revenue to be in the range of 9.51 to $9 five 7 billion.
This range represents growth of 17% to 18% relative to 2022 and exceeds the revenue target and our power of three times to growth plan.
We now expect to open approximately 55 net new company operated stores in 2023 and complete approximately 25 co located remodels.
This will contribute to overall square footage growth in the low teens.
Our new store openings in 2023 will include approximately 35 stores in our international markets with the majority of these planned for China.
For the full year, we now forecast gross margin to increase between 190, and 210 basis points versus 2022.
The expansion relative to last year is driven predominantly by lower airfreight expense.
For the full year, we now expect air freight to be down approximately 210 basis points versus 2022.
I'm looking at Mark Downs for the full year, we continue to expect them to be relatively in line with last year in 2019.
Turning to SG&A for the full year, we continue to forecast deleverage of 150 to 170 basis points versus 2022.
Well, we continue to plan the business prudently our sales trend has been strong as I mentioned earlier. This gives us the opportunity to invest into our power of three times two growth pillars. While also delivering operating margin. This year ahead of our goal for modest expansion annually.
When looking at operating margin for the full year 2023, we now expect it to increase 40 to 60 basis points versus last year.
For the full year 2023, we continue to expect our effective tax rate to be approximately 30%.
For Q3, we expect our effective tax rate to be approximately 35%.
For the fiscal year 'twenty to 'twenty three we now expect diluted earnings per share in the range of $12.02 to $12.17 versus adjusted EPS of $10 seven from 'twenty to 'twenty two.
Our EPS guidance excludes the impact of any future share repurchases.
We now expect capital expenditures to be approximately 670 to 690 million for 2020 three.
This increase versus 2022 reflects investments to support business growth.
Including the continuation of our multiyear distribution Center project store capital for new locations relocations, and renovations and technology investments a range of $6 76 to 90 is approximately 7% of revenue in line with our current power of three times to target of 7% to 9%.
With that I'll turn the call back over to kill them.
Thank you Megan as these results demonstrate we arrived at the mid point of 2023, and a very strong position for what's ahead, we continue to deliver sustained growth in the business through a steady drumbeat of product category and market expansions that connect us with our guests on a regular basis.
We recognized the significant opportunity in front of us and we remain focused on both delivering a successful 2023 and achieving our goals contained within the power of three times to growth plan my confidence in our leadership and our people remains extremely high as we consistently demonstrate our ability to deliver.
For our guests and our shareholders I'm grateful to the many teams across Lululemon, who champion our brand every day and make these results possible and now we look forward to taking your questions operator.
Thank you we will now begin the question and answer session analysts who wish to join the question queue. Please press Star then one on the telephone keypad, you will hear that tone acknowledging your request.
We'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 comes from Matthew Boss with JP Morgan. Please go ahead.
Thanks, and congrats on another nice quarter.
Yeah.
So Calvin could you elaborate on the broad based global strength, notably customer demand that you saw in North America, and China is the second quarter progressed and then on more recent trends could you just speak to drivers of the strong August momentum and the acceleration that you cited in North America.
Great. Thanks, Matt.
Similar to our success.
The success through the first half of this year, which is really driven from our.
Core product as well as our new innovation.
Across both performance and O T M categories across both women's and men's.
So it continues to be that that balanced growth across categories channels, both stores E com and all markets are that are fueling the business.
And and heading into Q3, there's really no change to that formula and the team is doing a wonderful job and guests are responding to the new innovation that we are launching I referenced a few on the call. The soft Jersey, a steady state for him we have some exciting innovation still to come.
So I think it's just a continuation of.
Low unaided brand awareness and we are.
Launching initiatives to get at that opportunity incredible product opportunity and the team is delivering on that on unmet needs are and our international business, which in addition to North America is still performing very strongly double digit are in line with our power of three times to growth targets are seeing acceleration across every market.
And the globe we're in so.
It really is a reflection of my consistent message of us being early innings and balanced growth across all opportunity, we have and a team that's delivering on that are on that potential.
That's great and then Megan could you just speak to the overall health and composition of your current inventory position as we head into the back half and just how best to think about markdowns in the third quarter or are there any constraints to recapturing the markdown headwinds that you incurred in the fourth quarter a year ago.
Yeah, absolutely Matt so in terms of inventories. So we came in at 14 at the end of the quarter, our expectation was approximately 20.
And relative to our expectation there were a few items that drove that balance lower so the first would be revenue upside above our expectations second being lower airfreight costs and then the third being some timing implications and in terms of how we're looking at inventory for the balance of the year at the end of Q3, we're expecting high.
Single to low double digits and then in Q4 end of Q4 relatively in line with sales as we move into 2024, and so I would say overall, we're really pleased.
With the currency and also the level of our inventory and in terms of markdowns and nothing really to note on the quarters, we're still expecting markdowns to be relatively flat on an annual basis for 23 over 22, and that's consistent also with our 2019 levels, which is a you know normalized healthy level for us we run.
Our low markdown penetration high full price penetration of business, we were flat in Q2, our markdowns year over year and you know I wouldn't expect any anomalies in Q3 and Q4.
Congrats again best of luck.
Thanks, Matt.
The next question comes from Adrienne <unk> with Barclays. Please go ahead.
Great. Thank you very much congratulations with the results are really are they really stand alone Calvin.
So you know the the business is being driven by innovation product launches and new niche, whereas sort of the competitive backdrop is a little bit more safe and I'm. Just wondering how have you been able to sort of inspired that.
It feels like you're innovating faster every time you get on the call. There's like another list of five new things that we didn't know about.
Just wondering have you accelerated the innovation turnover time, the pipeline or the investment and then Megan if you could just talk to us about kind of the China you know the opportunity there. The sales are almost double what you have in Canada and the year to date sales are roughly similar at half a billion.
Kind of talking about the improvement there and what you think about the opportunities there. Thank you very much.
Alright, Thanks Adrian.
In terms of our speed of innovation I I would agree that the the.
Pipeline and the launches within each quarter.
Continue to get very strong.
And excited about the balance across our accessories business, our women's business, our mens business.
I think it is a.
Execution of a very deliberate innovation strategy that are that we've been working through the power of three and into the power of our three times to strategy. You've heard me reference are play categories and being very deliberate in terms of what we designed into and then leveraging our core.
How we leverage versatility, but continue to innovate are again some of those core hero franchises that he and she loves so that we don't simply launch and then just allow it to to run without enhancements improvements at adding to sharing across gender.
You know for instance in this quarter, we took our our our famous.
Scuba fabric.
Brought that into a into a steady state for him, which was an opportunity we saw in our assortment that we were missing so.
So I think what you continue to see is a just a the team executing on the strategy we have.
A a horizon of innovation across horizon, 123, which can be anywhere from one to three or four years as we keep looking to solve are the unmet needs of our guests and where and how but we have a lot that we're able to bring forward and commercialize as well as having a lot that the team continues to work on for future quarters.
In future years.
And feel very excited about our ability to sell through core.
Innovate core and then bring true innovation to the guest through that notion of unmet needs versus unmet wants and I think that's driving our business that were truly solving.
As a unique standout in this marketplace.
And then Adrienne in terms of China, we were really pleased with the performance there in the quarter sub 61% in greater China, and we have 100 stores today in China. We're opening 35 stores in international region. This year the majority of those in the China market.
As Kelvin mentioned, we've had some exciting community activations still I'm looking to build brand awareness and drive until that opportunity there and then over the longer term you know we've set approximately 200 stores at the end of our five year plan and I think there's also a beyond there as well in terms of still very early innings on our China growth.
Okay.
Fantastic results best of luck.
Thank you.
The next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.
Thank you good afternoon.
Can you talk a lot of investments forward into 2023 gross margins continue to be can you give us. Some example of the most successful investments and then also talk to your ability to generate leverage on this line item as we move into 2024.
Absolutely high learning them. So you know we've been really excited with our revenue momentum. We've had and then also the progress that we've made on recouping airfreight expense.
So you know our guidance now on revenue was 17% to 18% growth ahead of our original target and then margin are guiding to 190 to 210 basis points with airfreight really being the driver there and so what it's done is it's given us the ability to invest behind our power of three times to our roadmap. So that would include market expansion.
International specifically, China him as a key focus there on improving guest experience and omni capabilities and our foundational investments to drive the business forward and I think coupled with that what we're really excited with US you know you've heard us talk on the analyst day about the tremendous opportunity we have in brand awareness and this upside it's given us an opportunity.
<unk> in the second half of this year to invest them in marketing Activations to drive that breast up that brand awareness and really capitalizing on some of the key innovation moments, we have coming up in the second half of the year. So that we believe will drive into our long term opportunity and sustain our momentum.
So we're a little bit ahead of where we were we want we were expecting to be from our power of three times to initiative roadmap and then that's coupled with driving into some upside opportunity on our brand awareness.
In terms of leverage we're really focused on operating margin and and and I feel good about maintaining our commitment to modest operating margin expansion over the longer term I think as we get closer to 24, we'll put a finer point on where we see the components of the P&L shaping up next year.
Thank you.
The next question comes from Paul is U S. But Citi. Please go ahead.
Hey, Thanks, guys I'm, just what I'm talking about the China business would love to hear about what sort of volatility you saw in China over the quarter.
And if you could talk about.
Stores performed versus E com, and whereas we're store productivity levels running in China currently purses North America. Thanks.
Yeah.
Hey, Paul I would say in terms of China volatility, we really didn't experience any over the course of the quarter I would say really strong healthy growth across each of the three months of the quarter and then I'll, let Calvin comment on our store and E Com AR.
Our performance.
In terms of both our channels are performing incredibly well in the market.
We now have 107 stores in mainland China.
Predominantly tier one tier two cities, but still see opportunity to grow as well as oh look to opportunities and to tier three.
Every store we've opened has exceeded plan.
Our optimization of some stores as we did with our Kari Center location, which is really our first bigger more experiential store in.
In country.
Is performing incredibly well.
And as you know our online business in China is different than that of other markets where.
C N is a lower percentage of our overall business and we do our work through partners such as Tmall JD are to grow our business, but.
But on the back of those platforms and leveraging some of the B to B and worked in direct and selling direct to our guests through their their clientele ing platform.
The team is doing some incredible initiatives and learnings for us globally.
Driving the overall ecommerce business. So a very strong and both are great guest acquisition in both Ah, it's helping us determine new markets and new opportunities in locations that we can continue to open and build into.
And in our stores or are really driving the brand the way in which we traditionally do in all markets, which is grassroots community and through the educators and from a productivity standpoint, they're behind our North America, but performing very well just slightly behind they're smaller in size.
But we see a significant opportunity obviously and the success of that of our store footprint, both productivity driving the brand coupled with our E com so very exciting.
And good and balanced growth across all of those leavers.
So what's the profitability in the China market currently versus where do you think it can go longer term.
Yeah, I'd say, we haven't broken out the profitability specifically, it's very healthy I'm closest to our North America region. I'm, you know I think in the near term what we're really focused on is capitalizing on the opportunity we have in that market I'm not necessarily maximizing that operating a merchant that would present an opportunity to also have at the long term.
As we scale that market.
Thanks, guys. Good luck.
Okay.
The next question comes from John Kernan with TD Cowen. Please go ahead.
Excellent good afternoon, and thanks for taking my question.
Thompson, you talked to international up 52% I think it's 23% of revenue now I guess, if this dovetails into Paul's question, just the margin structure of this business.
Seemingly very high I think this is your highest quarterly.
Gross margin in history.
In the second quarter. So maybe just talk to internationally broadly about how that's contributing to the margin expansion you're seeing this year.
I'll I'll I'll I'll tee up relative to the market are the success, you're mentioning at 23% of our sales and where we see the potential across the markets I'll, let Megan speaks to the to the margin I think we indicated on the last quarter that in every market every region. We're in we're profitable.
And and the early innings of of growth didn't seem that long ago. When international was a you know 14% of our total sales 15% of our total sales.
It would be crossing the 20% consistently the habit are contributing to the growth of the overall business is.
Credibly exciting to see every market we're in.
The business growing double digit and and and consistently and having some of the lowest unaided brand awareness we have in the company.
It's single digit in every market, except for Australia, and the U K, where we've been in the longest but even there it's in the teens.
So we have a significant runway of growth in our international business and a 23% I think we really are just getting started I've shared before that the potential of this brand is Ah I think 50 50 beyond our current power of three times to but I don't see anything that would.
Hold us back from being a.
Global brand to that scale diversified imbalanced in multiple markets.
And all markets today being profitable with significant growth through product unaided brand awareness.
Megan if you want to touch on the margin mix absolutely. So for the full year, we guided 40 to 60 basis points of expansion in operating margin year over year, and that's about 20 to 40 basis points above 2019 levels. So we're really pleased with that performance within that international.
Or it's still below North America product profitability as I mentioned, China being the closest really looking to maximize that market and then APAC and EMEA are still some opportunity in terms of operating margin expansion in the near term as we continue to scale those markets and so I would say over the longer term.
I'm focused on driving into the brand awareness and revenue opportunity store expansion, we have an international market on scaling and leveraging overtime.
Excellent and my one follow up is just on other categories. It's obviously been a bigger driver of revenue it should be well north of $1 billion annually. This year.
Talk to the growth of that category in line item and how we should thinking about that going forward.
Yeah, so within other our other category, we've got our franchise businesses as well as seasonal pop ups those would be the largest components and we also have outlets and Lululemon studio and you know I would say the growth being driven by new franchise markets and as well as relatively consistent I would say.
Performance in terms of seasonal and pop ups.
And so I would say, we'll continue to scale, you know markets within that bucket and capitalize on the opportunity we have there with our franchise model with another going forward.
Understood. Thank you.
The next question comes from Brian Nagel with Oppenheimer. Please go ahead.
Congrats on another nice quarter.
So I think you need to.
Two questions all show up together I mean first of all I apologize. If this is you talked about the further strengthening of your business or the fiscal Q3 simply August so.
Q2 that is set up in position for sort of back half.
The needs are in men's we've seen incredible response to the soft Jersey in steady state.
We're geared up for the ABC a campaign of get into it which I'm really excited about having men's play along with with women's being featured in that.
Activated accessories across our bags, we've done some digital campaigning in certain regions relative to <unk>.
Back to campus.
In terms of the bottoms in both womens.
And men so.
It's a it's been a variety of Activations, a combination of getting out unaided awareness through campaigning leveraging our core <unk>.
As well as some newness and innovation that is resonating and both he and share responding very well to and Thats consistent.
Consistent across all markets and we've seen a nice.
Our response in North America, So it's a similar.
Formula similar approach to that.
Really driven I think from a from a from a north American business has responded well I think as we head into the fall and back to campus.
No. That's very helpful. Calvin I appreciate that and then my follow up question with regard to inventory. So just look at the numbers.
Given your comments that you have done a phenomenal job of really rationalizing if you will inventories.
So my question would be given the level of concern there was zero in the marketplace. So just a few quarters ago about inventory broker Lulu and the channel as you work. Your inventories now are we recognize you're always you always have to manage inventories, but are we really now past that a critical point is there's some type of all clear with regard to your inventory.
This was I ever got inventory.
Yeah, I mean, I would say we've made some significant progress we still have some degree of elevated airfreight or in our inventory balance on a cost basis, and so you know I would say not completely optimized and turns are a little bit slower than history and our goal over the longer term would typically get to get those inventory turns.
Back to normalized historical rates and so there's still some opportunity, but I think the team has done a nice job in navigating what was a really dynamic supply chain and positioning inventories. So that we were able to capitalize on the demand upside that we saw and experienced.
Okay.
I appreciate it congrats again thank you.
Thank you Brian .
The next question comes from Dana Telsey with Telsey Group. Please go ahead.
Yeah.
Please go ahead.
Hi, It's hi, congratulations on your terrific performance, it's great to see the progress as you think about the traffic, which was so impactful both for stores and for ecommerce.
He discussion regarding the loyalty programs is that a driver of this and where do you stand on the loyalty program. So that enhancement and then Calvin as you're mentioning new product I know outerwear is a big thing for last year, how do you see the AUR developing and are we moving into a higher AUR zone going forward with <unk>.
Some of the newness. Thank you.
Thanks Dana.
Ah as you.
<unk> the traffic was a very strong and pretty much completely in line across both our stores and E com.
So continuing to drive that omni strategy and have the gas connect with us wherever.
Is convenient for them has been a strategy of ours and continues to resonate and drive our business and we're cycling over a you know the success of some categories and items last year that really drove traffic so very healthy strong numbers on top of strong.
Numbers are which is very encouraging as we look at just how the guests both new and existing are engaging with US I think membership is a part of that we've had it before membership but with the membership program obviously.
Is allowing us is more deliberate ways to two engage with that guest and I mentioned that it's not going to be a number we consistently share.
But I will indicate that the program continues to far exceed our expectations. We launched this less than a year ago, and we now have $12 million of our guests signed up in North America because of the Essentials membership program, which is a significant unlock for us our teams it allows.
For us to play into our strength of community relationship.
Allows us to leverage benefits that are unique to that to that so that guests to that member and allows us to interact with data and communicate with them that is very effective for our digital marketing teams as well as our store teams in and look at the history and assist the guests and the way in which we do so.
It is an exciting new program for us that we have a lot of ideas and initiatives plan. How we will continue to leverage I think it's a part of it I Wouldnt point all to it I think ultimately it's the success of the brand success of our product and product innovation why the gas comes to London.
And and we see that continuing through for you know the power of three times to period and beyond.
Thank you.
Thanks Dana.
The next question comes from Ike <unk> Wells Fargo. Please go ahead.
Yeah.
Hey, just two clarification questions for me just on the quarter to date are North America acceleration, because that total revenue comp or both and then on China.
60% growth was great just kind of curious in terms of our revenue guidance for the remainder of the year, what kind of growth rate are you guys baking in for China for the back half. Thanks.
It looks like so in terms of the acceleration in North America, specifically, it would be total and comp.
In terms of China, we haven't broken out the second half of the year by region and but you know we are coming off a very strong performance, 61% growth in in Q1, sorry, Q2 in greater China.
And feeling well positioned as we move into the second half of the areas I mentioned, a 107 stores in China today 35 stores International.
And the majority of those being China openings and I would say you know we're pleased with our performance in China as we move into it.
Great. Thanks.
Thank you.
Yeah.
The next question comes from Brookfield with Goldman Sachs. Please go ahead.
Good afternoon, and thank you for taking our question.
Hoping you could elaborate on the composition of North America growth between new and existing customers. How are those customer cohorts performing as they enter the brand and are you incorporating customer behavior by age or income demographic.
Thanks Brook.
In terms of the overall composition I'll speak directly to sort of how we view the cohorts and I think I've mentioned before that the new guest cohorts are forming and behaving very similar to how that cohort has.
Behaved in past quarters past years, that's very encouraging for us because we did see through the success last year.
Of the everywhere belt bag that it it did pull in a younger guests to see them in the cohort in that cohort behaving similar nature of how they engage the frequency of engagement and the migration of their spend.
Is is encouraging.
And.
We still see our business driven by new guests coming in as well as our team's ability to retain existing guests and increase our share of wallet and spend with them. So nothing that would signal they behaving differently and very healthy.
And contributing factor to the overall business, both with new existing a very low retained very high guest loyalty longevity and engagement.
In the brand and responding to the newness and the innovation continues to sort of be that guest formula.
Great. Thank you.
Operator, we'll take one more question.
The next question comes from Alex <unk> with Morgan Stanley . Please go ahead.
Great. Thanks, Congrats on another good quarter one for me just on the store is it it looks like there could be at over 6 million a pop in revenue or so on average this year and its definitely a high number per box. So I'm just wondering maybe Megan how do you think about the trajectory from here what drives that number higher and on a related.
No how do you think about the store growth opportunity from here in North America, specifically, thanks a lot.
Thanks, Alex.
So in terms of our sales per store in sales per square foot and it's definitely a key part of our strategy to expand.
Our box size in locations, where we have high sales per square foot high traffic and to capitalize on that traffic. So we are opening approximately 25, what we call co located stores, which are really expansion and it allows us to have a more holistic assortment across men's women's accessories footwear.
And as I mentioned capitalize on that traffic trend. So it's it's a key strategy for us and one that we monitor closely we are definitely further along in that strategy in North America and then we are in our international markets, where it's still very early days on that but still runway I would say across both our North America and international region in terms of store expansion.
And in a very measured and deliberate strategy.
And then I would say sorry can you remind me the second half of your question.
On the store growth opportunity in North America, specifically.
We haven't broken out the specifics, but I would say were on you know not dissimilar from this year and square footage growth in the low double digits range globally.
Globally high single digit outside North America.
Alright, Thanks, a lot.
That's all the time, we have for questions today. Thank you for joining the call and have a nice day.
Yeah.
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