Q3 2023 Lululemon athletica inc Earnings Call

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Thank you for standing by this is the conference operator, welcome to the Lulu Lemon Athletica, Inc. Third 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 ask questions.

That's 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 Toobin, Vice President Investor Relations for Lululemon Athletica. Please go ahead.

Thank you and good afternoon welcome to visit Lemons 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.

A certain aspects of the lemons future piece.

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.

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.

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 store sales metrics given on today's call are on a constant dollar basis.

This release and accompanying quarterly report on Form 10-Q are available under the investors section of our website at Www Dot Dot com before.

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

Today's call is scheduled for one hour. So please limit yourself to one question at a time to give others the opportunity to have their questions addressed.

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

Thank you Howard I'd like to welcome everyone to the call today, and I'm happy to discuss our quarter three results.

On today's call I'll share some highlights regarding our performance over the Thanksgiving weekend and the start of the holiday season next I'll speak to our quarter. Three results then you'll hear from Megan with a review of the financials and an update on guidance and finally, we will take your questions. So let's get started with Thanksgiving.

We are very pleased with our results over the holiday weekend. In fact, this black Friday was the single biggest stay in company history with strength across our store and e-commerce channels, along with several members of the leadership team I visited stores in Houston, Dallas, and Los Angeles, and we were thrilled to join our local teams and experience there.

Our energy and excitement firsthand.

Our stores were very busy in our overall performance was driven by strength across both full price and markdown merchandise. This.

This year, we extended an additional benefit to our essentials members, who received early access to our Black Friday styles via our shop out this strategy drove a significant spike in app downloads with virtually no incremental marketing costs.

We also visited several recently remodeled locations that show the benefits of our ongoing co located optimization strategy, including enhanced merchandising of men's increase traffic flow and improved throughput due to additional guest service isn't fitting rooms.

Finally, our overall success was enabled by the ongoing foundational investments, we've been making to our DC network and it infrastructure to enhance the guest experience both in stores and online.

And while there is nearly two thirds of the quarter still ahead of US we are encouraged by our trends at the start of the holiday season.

Now looking back at quarter three as you saw from our press release, our results remained strong and balanced as both our top and bottom line exceeded our expectations.

Revenue increased 19% versus last year comparable sales grew 9% in stores and 19% in our E Commerce business and adjusted EPS increased 27% versus the same period last year.

And our board recently authorized a new 1 billion share repurchase program, which reflects our optimism in the growth trajectory of the business.

Megan will share the detailed financials later in the call and I think it's clear our performance continues to speak to the strong response to the Lululemon brand in our markets across the globe and how we remain in the early innings of our growth story.

Now, let's look at quarter three in more detail as I share highlights in three areas product innovation brand building strategies and regional performance.

Let's begin with product one of our competitive advantages is our ability to consistently bring newness and innovation into our assortment our product teams work with our athletes and ambassadors leverage our science of feel innovation platform and solve for the unmet needs of our guests quarter. Three was no exception as we introduced several new styles in.

To our assortment.

Let me highlight just a few.

In quarter, three our women's business increased 19% fueled by new product launches strengthened bottoms and ongoing performance in key franchises.

As we shared on our last earnings call. We mentioned the launch of a new franchise for women in quarter. Three we introduced wonder most are new collection of body were made in our softest fabric ever by leveraging our expertise in raw materials development fabric innovation and technical construction, our product teams engineered a brand new sin.

Station and unique solves for our guests I'm pleased to share that wonder most launch has been met with great. Initial response from our guests and we're excited to keep bringing innovation into this new franchise.

Other quarters III product highlights on the womens side include bottoms, and second layers within bottoms, both tights and away from body styles performed well, including aligned Wonder train in the dance studio Jogger. In addition, we continue to see success in our key second layer franchises, including defined scuba and soft stream.

Looking at quarter four you will see fresh seasonal takes on several of our guests' favorite franchises, including scuba align and wonder train.

Shifting now to men's we saw growth of 15% in quarter three.

Similar to during the COVID-19 period, we see that when there is some uncertainty in the macro environment men can become a bit more conservative in their apparel purchases. However growth in our international regions remains very strong and in North America, our market share gains continue and we know our guests respond well to product innovation and <unk>.

Telling marketing campaigns in quarter, three we launched two new men's franchises steady state and soft Jersey. These collections build out our lounge offering and continue to bring versatility across our men's assortments guest response has been very strong and we are chasing into additional inventory for these two new hit franchises.

Following the holidays, our stores and e-commerce sites will have a back to Jim focus for men will feature items from our pace breaker and license to train franchises to support our guests as they live in to their new year fitness and well being resolutions.

We're also gearing up to launch men's footwear in the first quarter of 2024, which will be an important moment for Lulu lemon well have much more to share as our pipeline of innovation continues to generate newness and versatility for our male guest.

When looking at men's brand awareness remains low approximately 13% in the U S, 12% in Australia and single digits everywhere else outside of North America building awareness and consideration remains top of mind for us and we see ample opportunity to increase the media and brand building commitment to the men's business.

An example of this strategy is our recent targeted TV campaign in quarter three we tested TV in the U S. With a campaign focused on bringing new male guests into the brand and featuring our iconic ABC bottoms. We are encouraged by the early results and the Buzz created by this targeted investment and we plan to continue the campaign.

Next year.

In 2024, our marketing calendar has other men's moments planned such as the footwear launch and we will continue to leverage ways that paid media can raise our awareness among men, who have yet to where I live in London.

I would also like to mention our accessories business, which continues to perform well in quarter three our bag assortment grew in the strong double digits and the everywhere belt bag posted solid growth on top of last year's standout performance.

We remain excited with our pipeline of innovation for the remainder of quarter four and into next year. Our foundational principle remains when you feel your best you perform your best our teams continue to live in to that principle for our technical gear and we are also leveraging it as we expand our lounge and on the move offerings.

I'd now like to spend a few minutes and share some of the ways, we connect with our local communities in quarter three as we've discussed in the past we continue to lean into our grassroots approach to building community and engaging with guests on a local and one on one basis. In addition, we recognize the opportunity to raise the unaided awareness and attract new guests through large.

Your scale Activations and brand campaigns, both within North America and across our international markets, Let me share a few examples.

To bring attention to world Mental Health day, we released our third annual global well being report in September. This global survey conducted in 14 markets looks at how people around the world are approaching their physical mental and social wellbeing and while the majority of people say they are making well being a priority do you feel it is where it.

It should be.

To support our guests, we created well being focused experiences in key markets and a highlight was a one of a kind activation in China that encompass 32 cities in 76 stores. The pinnacle expression took place in Shanghai as we took over the west Bund for an entire week with events and experiences over a three.

Kilometer stretch of this popular destination on the waterfront. The results of this activation were phenomenal and included more than 600 pieces of press coverage with 3 billion impressions significant engagement on social media and approximately 12000 guests participating in person. This event was it.

Very unique and compelling way to drive unaided brand awareness in the market.

So in October to support and help launch our new partnership with peloton, we hosted a three day experience at our Lincoln Park store in Chicago more than 2000 guests joined us and it was exciting to see our local Lulu Lemon community come together with the peloton community to celebrate our new relationship the success of this event.

<unk> the potential of the partnership to leverage the strength of both our highly engaged communities.

As you can see we are taking multiple paths to building brand awareness and consideration across our global markets quarter. Three was a terrific example of this strategy and you can expect more of this type of marketing execution from us going forward.

Shifting now to our regional performance, we continue to see solid results across markets with revenue in North America, growing 12% and international increasing 49%.

We remain pleased with our business in North America, which is in line with our power of three times to targets. Despite the dynamic operating environment. The quarter began strong as guests responded well to our back to school product innovation and our strategies to connect with younger guests through dedicated digital marketing and targeted activations.

And our market share gains continued.

In quarter three 2023, the adult active apparel industry decreased its U S revenue compared to the same period last year over the same time period. We've 11 gained one five points of market share in the U S with gains in both mens and womens According to Sir Canada's consumer tracking service.

North America remains a significant and compelling opportunity for Lulu lemon with unaided awareness of only 25% we have several ways to bring new guests into the brand, including ongoing innovation within our product assortment, new store openings and optimizations and our unique approach toward connection encompassing both local activation.

<unk> and larger scale marketing campaigns.

Switching now to international we remain excited and optimistic regarding the potential for the Lululemon brand in quarter. Three all regions grew in strong double digits, including a 53% increase in greater China, while we're keeping a close eye on the macro environment in China. Our business remains strong we believe several factors.

Benefit us in this important market, including our relatively small size with room to grow beyond our 114 stores in mainland China at the end of the quarter.

Localized nature of our brand as we leverage our relationships with local fitness studios and instructors and Influencers and our local and community based events.

We are excited with the brand acceptance, we're seeing globally as we continue to execute against our plan to quadruple our international business from 2021 levels by the end of 2026 and with that I'll turn it over to Megan for a review of our financials and our updated guidance.

Thanks, Kelvin we continue to be pleased with our performance across channels geography, and merchandise category. Despite an uncertain macro backdrop. Our teams are executing at a high level, which contributed to our upside in Q3.

As Kelvin mentioned, we're happy with our start to the holiday season, but with nearly two thirds of the quarter saw in front of US we remain prudent in our planning.

Let me now share the details of our Q3 performance. Please note that when comparing our financial metrics for Q3 2023 with Q3 2022.

Earnings per share for Q3, 2023 excludes $72 1 million of after tax expense related to the impairment and restructuring costs associated with the Lululemon studio business.

I'll provide more detail on these charges shortly and you can refer to our earnings release and Form 10-Q for more information and reconciliations to our GAAP metrics.

For Q3 total net revenue rose, 19% to $2 2 billion.

Terrible sales increased 14% with a 9% increase in stores and a 19% increase in digital.

In our store channel sales increased 19%.

We ended the quarter with a total of 686 stores across the globe.

We're footage increased 17% versus last year driven by the addition of 63 net new Lululemon stores since Q3 of 2022.

During the quarter, we opened 14 net new stores and completed eight optimizations.

And our digital channel revenues totaled $908 1 million or 41% of total revenue.

But then North America revenue increased 12% versus last year, but then international we saw 49% increase versus last year with greater China, increasing 53%.

By category Women's revenue increased 19% versus last year, that's increased 15% and accessories grew 29%.

It's also great to see ongoing strength in traffic across channels with stores up nearly 25% and ecommerce increasing 20%.

This speaks to the strength of our omni operating model as we engage with our guests in ways most convenient to them.

Adjusted gross profit for the third quarter was 1.28 billion or 58, 1% of net revenue compared to 55, 9% of net revenue in Q3 2022.

The adjusted gross profit rate in Q3 increased 220 basis points versus last year, unless driven primarily by the following a 250 basis point increase in overall product margin driven primarily by lower freight costs as well as lower airfreight usage.

Fixed costs, Deleveraged 20 basis points in the quarter.

So far 10 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 $843 million or 38, 2% of net revenue compared to 36, 8% of net revenue for the same period last year.

We achieved better than expected deleveraged in the quarter, while at the same time 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 translation, and revaluation contributed 30 basis points of leverage in the quarter.

Adjusted operating income was 436 million or 19, 8% of net revenue an increase of 80 basis points compared to Q3 2022.

Adjusted tax expense for the quarter was $125 3 million or 28, 1% of pretax earnings compared to an effective tax rate of 27, 6% a year ago.

Adjusted net income for the quarter was $328 million or $2 53 per diluted share compared to $2 for the third quarter of 2022.

Capital expenditures were approximately 163 million for the quarter compared to approximately 176 nine for the third quarter last year.

Spend relates primarily to store capital for new locations, relocations, and renovations and technology and supply chain investment.

Before turning to our balance sheet highlights, let me spend a moment on the charges, we took related to the Lou Lemons studio business.

As you know in September we announced a new five year partnership with peloton.

Under this arrangement peloton has become the exclusive digital fitness content provider for Lululemon studio.

And we have becomes a peloton primary apparel provider.

In addition, while we will still provide service and support to owners of the Lululemon studio Merit device, we've recently stopped selling the hardware.

As we all know longer be producing content or selling mirror hardware, we recognize the post tax asset impairment and other charges related to lululemon studio totaling $72 1 million during the third quarter.

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 six 6 billion at the end of Q3.

Down 4% versus last year and lower than our guidance.

The lower inventory relative to our guidance relates predominantly to higher revenue. The provision we took against our remaining Lou wanted studio hardware inventory timing of certain receipts and foreign exchange on.

We remain comfortable with both the quality and quantity of our inventory at the end of Q4, we expect inventory on a dollar basis to be flat to down slightly versus last year with units flat to up slightly.

We repurchased approximately 553000 shares at an average price of $381.

At the end of Q3, we had approximately $243 million remaining on our prior repurchase program.

In addition, as Calvin mentioned, our board of Directors recently authorized a new $1 billion plan.

We remain optimistic in our outlook for the business and continue to use share repurchases as our preferred method to return cash to shareholders over.

Over the last five years, we've repurchased approximately 2 billion worth of our shares.

Let me shift now to our guidance outlook.

As I mentioned, we're pleased with the trends we've seen at the start of the holiday season staffing.

That being said the majority of the quarter remains in front of US we remain aware of the uncertainties in the macro environment and we continue to plan that business for multiple scenarios.

So let me begin with Q4.

We expect revenue in the range of $3 135 to $3, one 7 billion.

Representing growth of 13% to 14%.

We expect to open approximately 25 net new company operated stores in Q4.

<unk> gross margin in Q4 to increase 90 to 120 basis points relative to Q4 of 2022. This will be driven by lower freight expense and regional mix offset somewhat by strategic investments to support future growth.

Supply chain distribution centers and product teams as well as modest deleverage on occupancy and depreciation.

In Q4, we expect our SG&A rate Deleveraged by 160 to 190 basis points relative to Q4 of 2022.

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 Q4, we expect approximately 70 basis points of contraction relative to last year.

Turning to EPS, we expect earnings per share in the fourth quarter to be in the range of $4 85 to $4 93 versus adjusted EPS of $4.40 a year ago.

Shifting to full year 2023, we now expect revenue to be in the range of $9 five for nine to 958 4 billion.

This range represents growth of 18% relative to 2022 and exceeds the revenue target and our power of three times to growth plan.

We expect to open approximately 55 net new company operated stores in 2023 and complete approximately 25 to 30 co located remodels. This will contribute to overall square footage growth in the low to mid 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 continue to forecast adjusted gross margin to increase between 190 to 210 basis points versus 2022.

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 220 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 now forecast deleverage of 120 to 140 basis points versus trying to 'twenty two.

While we continue to plan that business prudently our sales trend has enabled us to invest into our power of three times two growth pillars. While also delivering operating margin ahead of our goal for modest expansion annually.

When looking at adjusted operating margin for the full year 2023, we now expect it to increase approximately 70 basis points versus last year.

Full year 2023, we expect our effective tax rate to be approximately 29, 5%.

For Q4, we expect our effective tax rate to be approximately 30%.

For the fiscal year 2023, we now expect adjusted diluted earnings per share in the range of $12 34 to $12.42 versus adjusted EPS of $10 seven from 'twenty to 'twenty two.

Our EPS guidance excludes the impact of any future share repurchases.

We expect capital expenditures to be approximately $670 million to $690 million for 2023, the increase versus 2022 reflects investments to support business growth, including a continuation of a multiyear distribution Center project store capital for new locations relocations and renovations and technology investments.

A range of $670 million to $690 million is approximately 7% of revenue in line with our current power of three times to target a 79%.

With that I will turn it back over to Calvin.

Thank you Megan as you can see Lulu Lemon had another strong quarter and we are energized about the many opportunities ahead. We are pleased with the strength and resilience of our brand across markets channels and categories and are well positioned to deliver against our power of three times to growth strategy. In addition.

We are happy with the start to the holiday season, and our teams are ready to deliver for our guests in quarter, four and I want to mention that as we have demonstrated over recent years. We are actively planning the business. So that we respond to any changes in guest behavior that could occur related to the dynamic macro environment.

In closing I want to express my sincere gratitude to our people across the London, who make these consistently strong results possible as we deliver for our guests and build towards the future with that we can now take your questions operator.

Thank you.

We will now begin the question and answer session and.

Analysts who wish to join the question queue. You May Press Star then one on their telephone keypad, you'll hear a tone acknowledging your request.

Youre using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

The first question is from Alex Stratton with Morgan Stanley. Please go ahead.

Perfect. My question was actually on the remodeled locations with the co location. Within then I was wondering if there are any metrics you can share on how those stores performed compared to the legacy fleet and also if you have any update on how much of the fleet is in that format now in North America.

And if all the new locations are in that format. Thanks a lot.

I think we've got about 150 stores are co located our plans this year have ticked up slightly to.

25% to 38 co located Remodels up from 25, and these are stores, where we have very high traffic and sales productivity and see an opportunity to capitalize on that traffic and drive incremental volume and we tend to look over a two to three year time horizon in terms of maturation of <unk>.

Sure and then we will.

We'll see a slightly lower sales productivity.

Those boxes, but very strong returns and healthy sales per square foot and so pleased overall with that strategy and you'll continue to see more of that from us and we are much further along on that in North America and that strategy is still largely in front of us in our international business.

Yeah.

Great. Thanks, a lot.

Our next question is from Rick Patel with Raymond James. Please go ahead.

Thank you and good afternoon, everyone just had a question on what's implied.

Fourth quarter guidance. So I'm, just hoping you can provide some guardrails on how we should think about stores versus direct in North America versus international I'm curious, which segments may have different trend versus the growth that you've seen year to date.

Yeah, Hi, Rick So in terms of Q4 guidance, we're guiding at 13% to 14% growth as Kelvin mentioned very pleased with the Thanksgiving weekend I still have about two thirds of the quarter in front of us so being prudent on our planning there and we haven't broken down the specifics, but what I would share.

Is you know very strong.

Continued double digit growth in international and then on.

North America high single digits.

Thanks very much.

Yep.

The next question is from Lorraine Hutchinson with Bank of America. Please go ahead.

Thank you good afternoon I wanted to follow up on the prior question.

High single digit North America sales guidance is below the typical algorithm as it supports.

<unk> can you talk to what you're seeing in that business.

Or hearing from your customer that's informing this posture.

Yeah. Thanks Lauren.

Yeah, I would say coming off of a strong Q3 performance we did experience.

It's a very strong performance during our cyber five period.

We are mindful of the macroeconomic environment.

As we move into the balance of Q4 and still with two thirds of the quarter in front of us.

Being mindful of the pressures out there and contemplating that and how we are guiding and we are also planning the business for multiple scenarios.

To be able to capitalize on any potential upside.

Thank you.

The next question is from Brooke Roach with Goldman Sachs. Please go ahead.

Good afternoon, and thank you for taking our question.

I was hoping you could talk a little bit more about what you're seeing in terms of the consumer behavior with the brand.

It's a little bit about being mindful about the macro backdrop, a few times, but has there been any shift in consumer behavior conversion or engagement with the brand, but shifted relative to what you saw 90 days ago.

Hey Brook, so in terms of guest metrics, we're still seeing.

Growth in both spend from new and existing guests.

It's still really pleased I would say overall and just looking out over our Q4 again two thirds of the quarter in front of us. So are planning the business prudently and but I would say overall really pleased with what we're seeing in terms of guest behavior.

The only one I'd I'd add brook relative.

Relative to when we look at the overall market.

Is as I mentioned in the men's business and that is our business internationally remains very strong.

Our growth well above industry average and putting on share in North America, but when we look at the macro.

The category within North America, we do see that he is spending less in apparel in general.

We continue to put on market share, but if I was deploying to just one trend that we're observing.

And in monitoring it is that guests behavior that we're seeing in the macro condition.

Thank you very much.

The next question is from Matthew Boss with Jpmorgan. Please go ahead.

Great Thanks, and congrats on another nice quarter.

So.

And maybe Calvin could you just elaborate on the cadence of business that you saw in the third quarter progressed and in North America, and maybe if you could speak to stores versus digital and where do you see the largest market share opportunities next year across the assortment and then Megan any constraints.

A modest operating margin expansion on the mid teens revenue growth multiyear or they're just are there any geography considerations on the margin front as we think about gross margin relative to SG&A beyond this year that we should be thinking about.

Thanks, Matt I'll talk about sort of just the trends through the quarter.

And then share gains and then I'll, let Meg and pick up the other part of I think I think you snuck in five or six questions there, but let's let's let's take our time, we have a little bit of we had some time to hear about.

But on the quarter.

We dropped some new innovation to begin in August.

And had.

Some targeted campaigns both digitally some activations.

Around back to school and the guests are both in our female and male guests responded incredibly well to that and the newness.

I would say that momentum moderated a little bit in September and then accelerated again in October when once again, some newness and innovation was dropped with wonder most reactivated with our men's campaign.

Around the ABC franchise targeted for top of funnel and guest acquisition. So.

It definitely has sort of progressed through the quarter like that healthy across but with the peak sort of being in August in October and driven by either newness.

And our campaign to activate and go after unaided awareness.

Think of share next year our.

Our plans are still very much reflective of the being early innings across our.

Our business, we do expect.

To see our mens business continued to be strong and put on share at unaided awareness below 25%. It's 13% are in fact in North America.

We're going to continue to put on share across all of our categories and playing to our strengths in bottoms and some of our core franchises and the new franchises like soft Jersey in steady state, which is really resonating were chasing into that inventory.

And we're seeing both our existing guests and new guests come in through that franchise, and then with women's and accessories similar story.

We have a lot of runway and opportunity in our in our bottoms business as well as tops and accessories. So theres not a specific category that we think will drive share, but a very balanced approach and performance as we've experienced and really pointing to the fact that we're early innings of growth across all of those categories in both genders.

And then in terms of operating margin expansion. So we're up 70 basis points. Our guide of 70 basis points above 2022 on an annual basis. So we're really pleased with our performance this year, which is above our target and we remain committed to our target, we still see opportunities with scale of business ink and efficiencies in our cost structure.

Sure E comm penetration as a benefit to us and then airfreight, though largely recovered the airfreight span, we still have about 20 basis points about 2019 levels.

So obviously, we'll share more on 24, as we closed out the year, but still remain comfortable with our long term posture there.

That's great color on all five questions best of luck.

The next question is from Adrienne <unk> with Barclays. Please go ahead.

Great. Let me add my congrats on the stores look great and I love the top bars.

Kelvin.

So my my question for you is on the.

How are you tied to the portion that it's for Titan International obviously, we see the strength in China, just wondering what role did Europe play in that and is there a time when we'll hear from you a little bit more aggressive rollout in Europe.

Then my second one is pretty quick now you can just remind us of the timing of the gross margin pressure last year I can post Christmas that we start to see some liquidation activity and does that remain sort of an opportunity as we get to the latter part of the quarter. Thank you.

Thanks, Adrienne in terms of our international growth and the markets.

Markets that will in regions that were contributed to quadruple it really is balanced across all clearly China.

<unk> has emerged as the significant region outside of North America.

But every market we're in within APAC and within EMEA.

Is growing double digit contributing Ah.

To growth and high single digit unaided brand awareness. So I believe every market will continue to contribute next year.

We are leaning in on certain markets continue to lean out in China to accelerate that growth potential as you know we've opened up some markets.

In our EMEA will continue to invest behind those continue as Megan mentioned see co located opportunities in some of our key markets as we go back and reinvest and open our stores the ones we've done that in be it Sean Let me say in Paris.

<unk> performed incredibly well, we see some opportunities in London.

To bring that co located strategy to some of our proven doors there.

We're seeing success, both locally and with tourism and then in the APAC markets.

We've opened up Thailand, but all of our key markets, Australia is an interesting one where a few years ago, we prioritized and leaned in with a optimization strategy and seeing.

Significant benefits and gains from that and what had been our most mature international markets. We've opened up a new DC that allowed us to service better service the stores, we've optimized the number of our doors, they're performing incredibly well and very pleased so it really shows our ability to keep growing in our most mature, but still very underdeveloped and growth is coming from.

Every market, we're in and the double digit and.

And we will continue to 'twenty, four and beyond and contribute to that quadrupled.

And then in terms of margin and markdowns, yes, you're correct. It was the peak Christmas weeks, where we started to see guest behavior gravitate towards more towards markdown sales and more towards the more highly discounted goods that were offering that we're offering with similar and penetration into 2019, we were comparing to.

<unk> Q4 of 2021, which was a low point in terms of markdown rate and so in the end Q4 was just slightly above 2019 at this point in time, just given we've got about two thirds of the quarter in front of US and we are guiding to 90 to 120 basis points of gross margin expansion and markdowns essentially in line with last year as part of that.

And being mindful of the proportion of that part of it is still ahead.

Fantastic best of luck.

Thank you.

The next question is from abbey's ethnics with Piper Sandler. Please go ahead.

Great and just two questions for me to follow up on the previous question on the gross margin was there any charges that black Friday, or maybe being a little bit more visible or that that shopping occasion and shifting some of the promotions maybe more towards the black Friday period versus those Christmas week last year, and then secondly can.

You just talked about on your inventory management, I think that was a little bit better than expected.

And how you got there thank you.

Thanks, Savi I'll take the first part.

We did pull some volume forward on Black Friday, making it available in early access to our central members. A it was an initiative to have a membership or reward benefit.

Exciting behind that was we saw a significant increase in app downloads, which was the way in which members needed to be able to access that and obviously you did that at no incremental cost.

So I think over 250000 app downloads into that membership base. So it was a benefit of reward we pulled some volume forward, which allowed our infrastructure and D. CS to manage very well through the weekend, but in terms of other than that our initiative.

You would have seen on our sites the similar language not calling out of sale you would've seen in our stores no signage traditional merchandising full priced product at the front of the store I thought the stores look fantastic the winter whites and the newness and the product really punched through and we saw some very nice.

<unk> sales as I alluded to in terms of regular price and our and our markdown and markdowns were at the back traditionally done a really didn't deploy anything more.

And happy with how the guests responded to to both options.

And through the entire cyber five weekend.

And then in terms of inventory management. So we ended the quarter down 4% in inventory and it was lower than our expectation of high single to low double digit increase.

That was driven by higher sales and the studio inventory write off and.

Some timing on receipts as well as FX.

You know important to keep in mind, we still have opportunity and are in our inventory turns relative to 2019 that is our goal over the longer term and then looking at our our inventory CAGR relative to 2019 versus our sales were relatively in line at the end of the quarter our expectation at the end of.

Q4 will.

It will be inventory balance flat to slightly down on a cost basis, and then flat to slightly up on a unit basis again, I'm still opportunity from a turn perspective, and we feel pleased with the level and currency of inventory. Both at the end of Q3, and then at the end of Q4 as well.

Yeah.

Great. Thank you.

The next question is from Paul unless you with Citi. Please go ahead.

Okay.

Thanks, guys.

Talk about store comps, how it shook out from a traffic versus ticket perspective, and I guess the same question for E com.

I'm curious if you can share any early thoughts on store growth.

For 24, specifically, how you're thinking about China.

Yeah.

Hey, Paul So in terms of our Kpis in stores and E Com we saw.

They started the year very strong traffic performance, so up 20% plus in both channels.

With that traffic, we're still pleased with the absolute conversion, but seeing a little bit of a comp decrease in terms of conversion and then relatively stable basket size and we haven't shared any specifics obviously, we'll do that at the end of the quarter in terms of store growth for 'twenty four.

But we remain committed overall to our store growth target in the low double digits.

Perfect and you talk about that.

In store productivity in China.

This year's class.

The stores in China continue to exceed their pro forma and plan as we open. So we're pleased with both the new stores. We're opening they are beating pro forma both on a total revenue perspective, obviously on a on a dollar per square foot.

And that's across tier one tier two tier three cities, which we continue to test into.

We went back and optimized and continue to see opportunity as Megan alluded to predominantly in Shanghai and Beijing to go back in and start optimizing and collecting some of our locations. We did our Kari center store in Shanghai and the results have been very very strong.

So we know that.

Our business there is growing.

And in a lot of these locations, we've hit that productivity level, where its time to go back and invest in expanding the assortment and continue to to drive the overall results in those stores, but the openings of these new stores continue to sort of exceed a b plan, which is very encouraging.

And and excited to see the ability to go back and optimize the locations.

Hi, Thanks, Good luck.

Yeah.

The next question is from Michael Binetti with Evercore ISI. Please go ahead.

Hey, guys congrats on a great quarter.

I just want to go back I know you spoke to the North America high single digits in fourth quarter. I know you said that Calvin you later mentioned that trends are accelerating nicely with some of the animals in October.

You can tell us that the fourth quarter of deceleration baked into the guidance, maybe just being prudent against the macro are you seeing here, but it's a little bit below the power of three algorithm that you that you gave US is there any reason that north America would be that low double digit.

Algorithm you gave us in 2024.

Is it conservative and contained to the fourth quarter.

And then I'm curious if there's anything you're seeing in the business today.

The competitive sets and inform you as to why you may or may not see the consumer breakthrough towards some of those value purchases that you saw right before the holiday last year.

Thanks, So on right at this point in time, we're guiding to 13% to 14% for Q4, I'm just being mindful of the proportion of the quarter. That's in front of US and we were really pleased with our Q3 performance in North America. Despite some macro challenges.

I'm still picking up share and still growing at 12%. So in line with a pair of three times to target them. We remain committed to that I would say for the year and as we move forward and you know managing from a portfolio approach perspective, and you know any near term pressures, but I think.

Corporate and prudent given where we are in the corner at this point.

And Michael I'll, just to chat a little bit about the competitiveness and the guest.

Behavior I.

We have not seen a dramatic shift as it relates to our product in our assortment.

I've mentioned the men's behavior.

From a macro perspective within the category within North America, but within our assortment. Our guests we continue to see very healthy full price.

<unk> see very healthy reaction to newness and innovation.

I think those are both very positive signs that indicate if the gas is trading down to value.

They are equally trading up or holding onto purchases that I think play to the strength of our product which is <unk>.

First utility quality and innovation.

When you purchase our product you get multiple wearing occasions multiple uses out of it that's the versatility.

And in the quality and the innovation behind it still is resonating.

And he and she is still responding very well to the newness that we dropped be it the new franchises in mens which were chasing into far exceeded our expectations a.

Launch of new initiatives like Wonder most or just how we are assembling and bringing product of our core be it through our winter whites or other initiatives are responding very well. So encouraged we'll continue to monitor be agile, but not seeing a behavioral shift within our assortment mix with our guests.

Okay. Thanks best of luck over holiday.

Thank you.

The next question is from Dana Telsey with Tesla Group. Please go ahead.

Hi, Good afternoon, everyone. When you think about the market can obviously your market share opportunity Calvin and you're continuing to gain market share, although new players who you see that you are taking market share from and what you.

We see opportunity moving forward.

It is a different market share opportunities in different areas of the world that you'd say well the philosophy that when you think about categories in outerwear, which has been a focus how walk category performing how is it contributing to AUR. Thank you.

Alright, Thanks Dana.

In terms of market share gains.

But the very nature of where we are in our product innovation and creation and I needed awareness, we really do continue to grow across both.

Both men's and women's across all categories, and all markets, including North American, especially internationally no market share data internationally in certain markets, it's harder to get than in North America, but our growth.

When we compare it to other peers that report, we know is definitely above and therefore.

Putting on both through our guest acquisition market share gain so feel very.

Encouraged by that continuation the balanced nature of where we're growing market share couple of callouts I don't see any shift and change within men's and women's in the core strengths of the brand has be it bottoms and in our AR performance activities.

And there are a lot of categories as you mentioned, where we have below market share when I compare some of those strengths to us accessories is one good example.

It's 110 billion dollar global category, we have less than 1% share and what we're proving and continuing to see through newness and innovation is it's more than just the everywhere belt bag that has a core item that is resonated has and continues to perform incredibly well for us, but we're building out a very solid bag busy.

With a lot of opportunity of growth move.

Moving forward and we think you know other players have 2% to 3% in that category. So we see that as being a nice contributor and driver of growth and and our other categories be it lounge and you mentioned outerwear, we have a we have a very sizable.

Sizable outerwear business as we look across all not just cold weather productivity base rain, we don't report the category, specifically, but if we were to.

We are we are a significant player in outerwear and see a lot of opportunity to continue to develop into those across the performance needs of our guests a rain as an opportunity.

And then building upon our growing credibility and success in cold weather with the Wonder Puff, which we're seeing very good success internationally.

In China.

In particular right now.

I'm very pleased how we're set up in North America with success in and obviously climate has been slightly different but we're not pointing to that and we're excited where our where we see opportunity to grow that business. So outerwear will be another key.

A key growth driver for us bags, but look to the core to continue to grow continue to put our market share.

Thank you Greg we'll take one more question.

The next question is from Jay sole with UBS. Please go ahead.

Great. Thank you so much I just had a two part question first.

You touched on competition, but just in Q3 and over the Black Friday holiday weekend hadn't been competitive landscape impact.

Your approach to pricing.

Promotions, and some time, Calvin which gives us a little bit of a deeper dive on footwear, what you see in the women's footwear business. What gives you confidence to launch the men's footwear business that'd be super helpful. Thank you so much.

Great Thanks, Jay and.

In terms of our competitiveness in the marketplace, what I what I saw.

Was a lot of discounting.

I saw a lot of discounting early Ah I saw deeper discounts and I saw some early and young players in this space a discount.

Consistently and in days weeks, leading into and over the cyber five weekend, that's what I observed we didn't change our our approach or strategy as I mentioned, we didn't use sale language.

We lead with a early access which had great value and the downloads of the App, which we know delivers a much greater value with our guests. We're excited to be able to use a benefit to drive that strategy within our central membership base and we continue to sell and see very good regular price.

So I definitely saw more dynamic promotional driven environment by some of our peers by some of the new entries into this category. We didn't deviate we didn't change our and our results are I talked to I was very pleased with an indicated we didn't need to guess still responds to.

Innovative product.

Our growth into a into the oncoming quarters into our power of three tons too.

Strategy.

And then relative to footwear.

We're early and we're pleased where we are in our footwear journey.

It's a small.

Category for us, especially in our power of three times to growth plan in terms of.

The role that it plays in our in our growth targets.

I'm glad we're in footwear I'm excited with what we're learning and how we're seeing in some of the early successes as we continue to test and learn we updated bliss feel in charge feel this year, we continue to see success with our rest feel across both men's and women's were trying a an open sell on rest feel in additional locations seeing great response.

This holiday period, so we continue to be excited about footwear.

And the newness that the team has in the in the category that will be bringing forward and our current plans are to launch a men's in quarter. One of 2024 will continue to test and learn but we're seeing enough positive signals in response from the guests.

That are that we have an opportunity in this category and we're going to take a long term view and build it but excited about what we're seeing so far.

Okay. Thank you so much.

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

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