Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Fourth Quarter and Year-End 2021 Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's Fourth 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's 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. Reconciliation of GAAP to non-GAAP measures is included in our annual report on Form 10-K and in today's earnings press release. In addition, comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying annual report on Form 10-K are available under our Investors section of our website at www.lululemon.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 operating statistics for the fourth quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour, so please limit yourself to 1 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. It's my pleasure to welcome everyone to our earnings conference call. The fourth quarter was a strong finish to a strong year. Once again, we delivered revenue growth in excess of our Power of Three targets, and we grew adjusted earnings per share of 31% compared to last year and 22% on a 2-year CAGR basis. Looking at our full year results, I'm particularly proud that we crossed the $6 billion in annual revenue milestone, and we accomplished this despite the ongoing challenges in the macro environment. And we have seen our momentum continue and accelerate as we enter the first quarter. Our guidance calls for 24% to 26% top line growth and 19% to 23% adjusted EPS growth in quarter 1. For 2022 overall, we are also guiding to another strong year for the company, and I'm optimistic about our performance and opportunities going forward as we continue to build upon our unique strengths and bring technical innovation to our guests. I'm pleased to walk you through the key highlights of our fourth quarter and annual performance on today's call. And I look forward to speaking with you again in a few weeks when we host our Analyst Day, where we will share our vision and outlook for the next 5 years. But before I begin, I want to take a moment to acknowledge the horrific situation in Ukraine and the humanitarian crisis that is unfolding. While we do not operate in Ukraine, we have made a donation to the relief efforts and are also supporting our employees who have family and friends in the region. In addition, as we look around the world, we continue to closely monitor our markets that are experiencing the surging impacts of COVID-19. As we have done throughout the pandemic,…

Thanks, Calvin. We delivered solid performance in Q4 while navigating supply chain challenges and the impacts of COVID-19. And I'm encouraged that we've seen trends accelerate in Q1. We are positioned well for spring despite the challenges that continue to exist in the macro environment, and I'm excited about what's in store for lululemon in 2022. I'm also thrilled that I'll get the chance to see many of you in person at our Analyst Day next month. We have a new 5-year plan, and I'm looking forward to sharing our updated long-term financial targets with you at that time. Let me now share with you the details of our Q4 performance. I will also discuss specifics on our balance sheet, including our inventory and cash position. Please note that the adjusted financial metrics I will share include the operating results of MIRROR that exclude approximately $1.5 million of acquisition-related costs and their associated tax effect in Q4 2021 and $7.8 million of acquisition-related costs and their associated tax effect in Q4 2020. You can refer to our earnings release for more information and reconciliations to our GAAP metrics. For Q4, total net revenue increased 23% to $2.1 billion, in line with our guidance. Comparable sales increased 22% with a 32% increase in stores and a 16% increase in digital. On a 2-year CAGR basis, total revenue increased 23%. In our store channel, sales increased 47% on a 1-year basis and 3% on a 2-year CAGR basis. Productivity was slightly below 2019 levels due to impacts from the Omicron variant, including increased capacity constraints, more -- limited staff availability and reduced operating hours in certain locations. On average, we had 99% of our stores opened throughout Q4. We currently have 97% open with current closures related to the impact of COVID-19…

Thank you, Meghan. As you can see from these results in the early start to 2022, this is an exciting time for lululemon as we build upon the momentum in the business and the across-the-board performance of our products, channels and markets. We look forward to sharing more with you during our Analyst Day, which will be held in person in New York and available through a live stream. We will go into more details on the strength of the brand and speak to our next 5-year growth plan. And the fact that we have achieved our current growth targets ahead of schedule bodes well for the opportunities ahead. In closing, I want to thank everyone across lululemon for continuing to consistently deliver at such a high level. I'm honored to work alongside each of you as we continue to deliver for our guests, shareholders and one another. And with that, we are happy to take your questions. Operator?

[Operator Instructions] Our first question comes from Ike Boruchow of Wells Fargo.

Congrats on the performance. I guess, Calvin, I was just wondering if you could elaborate a little bit more on the pricing initiatives that you mentioned. Could you just kind of talk us through timing, how you're kind of surgically looking there? And then how do you think about pricing into the footwear collection as well, that would be great.

Right. Thanks, Ike. I mean we continue to be strategic with our pricing strategy as we have been in the past. We are taking modest selective price increases over the course of the year. Some will go in place in Q2. And as we look forward, into additional quarters. As I mentioned, it's a very small portion of our styles that are impacted, about 10%. And this will help offset some of the pressure we're seeing on AUC. But we are constantly looking at multiple factors, such as the value of innovation, our range within our own product categories as well as in the marketplace and making sure that the performance of our apparel is always at a higher index than our pricing is relative to competitive options in the marketplace. So we are taking selective, but it's not a drastic move. And then from a pricing on footwear, we definitely as you saw with the introduction of Blissfeel opened in a competitive position. We will apply the same approach to our footwear as we have our entire lineup, meaning very little discounting. We priced it effectively based on the innovation. Immediate response has been incredible. So we feel well priced. I don't plan to take any additional actions on footwear this year, and we'll manage the category as we look forward with additional innovation as well as evolution of the category over the years ahead.

Our next question comes from Brooke Roach of Goldman Sachs.

Calvin, I'd love to hear a little bit more about how you're contemplating the different levers of growth throughout the brand this year. How are you thinking about the contribution from the core product line relative to growth in new products, such as footwear, tennis, golf and OTM?

Sure. Thanks, Brooke. Majority of our growth will continue to come from core. As you've heard me say before, we're early innings of growth across all of our growth levers. That starts with product and that's core within men's. That's core within women's that includes, obviously, the strength in our bottoms business and our core activities that we've identified, Run, Yoga, Train and OTM, where we still have opportunity to keep innovating and developing and bringing new innovation to the guests. Then you factor in the growth potential across our channels, be it digital stores and then our regions. These are the drivers of the business, and it is rooted in core in the key categories and activities that we're known for. We're excited about not just the pipeline behind those and how we'll continue to expand, but our ability to reach and extend into new categories as we're pulled into them with our guests and what their sweat needs are. Very excited with the introduction of footwear, and we're taking a very disciplined long-term approach to building that category. And as you've heard me reference before, we have a number of play activities, which we know are the secondary sweat activities of our core loyal guests. Tennis, golf, hike are some of those. And we're excited to be able to bring, again, some innovation that delivers on unmet needs. Now in these activities, the versatility of our product is where we really play to our strength. There are a lot of golfers out there in ABC pants and ABC shorts, metal event shirts. And we see a select opportunity to bring some very distinct innovation to that activity, in particular, builds credibility and it will lift both the activity, our credibility in the activity as well as the core versatile product that we have. So that's been the strategy, and we're just further down the development of it in this year and excited about the newness that we're going. But the majority of the growth is still coming from core where we have a significant opportunity to continue to bring innovation behind those key activities.

Our next question comes from Adrienne Yih of Barclays.

It's great to hear the momentum accelerating into the first quarter. So congrats. Calvin, I believe this is probably for you. Just wanted to get some more color on kind of the potential in the North American market. This is the most stores that you've opened in quite some years, 70, with 40 internationally. Just wondering, is there a new target for North America or maybe you'll give that to us in April? And should we expect this to be sort of the new steady state? And then Meghan, any metrics around those four-wall margins or in the size, I'm assuming is considerably larger than the average that you have in the opening.

Great. Thanks, Adrienne. There's no change in our store expansion strategy, and that includes both the addition of new stores, testing new markets and new opportunities through our seasonal store initiative as well as expanding existing stores where we go in. We validate the market through seasonal. We move to a permanent location. And as we grow the business, we look to expand it, all within a moderate range relative to others, but very much within the square footage that we know can continue to prove, deliver on the productivity numbers, the economics that we're looking for as well as show up and represent the brand in the way we want between men's, women's, in particular, and we're seeing great success in doing that. So we still see for that strategy, significant opportunity in North America. Predominantly driven by the U.S. with some select opportunity in Canada, but reinvesting in our fleet for the expansion, as I mentioned as well, is very much the balanced approach. And then on Analyst Day, we'll be able to share more over the next 5 years how we see. But we still have a lot of opportunity for growth in all markets, including North America, across stores as well as digital.

And Adrienne, I'd add, we have very healthy four-wall margins north of 20% for our store fleet and feel really confident in these openings as well as strong productivity. And we're healthy levels with the store productivity reaching back to 2019 levels quarter-to-date. So feel optimistic about store performance as we move forward, an important part of our strategy.

Our next question comes from Lorraine Hutchinson of Bank of America.

I was just hoping for an update on the international business, both Europe and Asia, where you stand profitability-wise and how you expect that to unfold in the coming years?

Yes. Lorraine, it's Meghan. We reached, as Calvin mentioned, profitability in Europe, which would put us profitable overall for international region. Still see opportunity with scale as we expand that business, and we'll share more on our international strategy in a few weeks on Analyst Day.

Our next question comes from John Kernan of Cowen.

Congrats on a phenomenal year and a great start to 2022. Looking forward to the Analyst Day. Meghan, did you give guidance for DTC in terms of the full year revenue guidance? I think I heard mid-teens? And if that's the case -- that does seem to imply that store productivity is now ramping above 2019 levels even as you open a lot of new stores internationally, and we're still not even fully out of a pandemic. So maybe if you could talk to DTC growth within guidance and store productivity within full year guidance and then what you're seeing from some of the newer stores that are coming online in terms of productivity?

Yes. Thanks, John. So we did share overall revenue growth of 20% to 22% on a 1-year basis. And within that, e-commerce growing in the mid-teens on an annual basis. And that would contemplate store productivity above 2019 levels, which we are seeing currently in Q1. I would say we continue to plan our business from an omni perspective and multiple channel scenarios to be able to meet the demand and where it comes to us and also navigating COVID-19 impacts were relevant. But that's our current outlook in terms of mid-teens growth for e-com and then stores above 2019 productivity.

Got it. And then maybe one quick follow-up. The CapEx is stepping up a bit this year and obviously, stores growth is accelerating. But can you talk to other investments that might be going in the CapEx?

Yes. It's really 2 key pieces. So the step-up in stores is one of them. And then we're also beginning a multiyear DC expansion strategy to support the long-term growth of our business. That capital range that we provided is 8% of sales, so in line with the 6% to 8% target that we provided on our last Analyst Day.

Our next question comes from Matthew Boss of JPMorgan.

Congrats on the continued momentum. So Calvin, maybe could you just speak to drivers of the recent top line acceleration that you cited in the business? Maybe touch on categories. What are you most excited about as we think about the core innovation pipeline and how that potentially sets up for the potential halo as room to these additional categories across the store?

Great. Thanks, Matthew, and that's -- I'll try to share some of my excitement and make sure that I hold enough for us celebrating in a few weeks when we come together on Analyst Day. But clearly, we know that product fuels our business and our momentum, and it has and it will continue to. And we are early innings on that product development opportunity. And there has been no fundamental change in the strategy of the key categories of Run, Train, Yoga and OTM and some of the key play activities, as I mentioned. What has driven our momentum in the business is really the continual introduction of those activities, gaining credibility behind those activities as well as color and flow. We have continued to work through the logistical challenges, saw a greater disruption in the fourth quarter, although still very pleased with our results. And the team continues to get better. So flow is better, core solid and the new innovation in either franchise supporting activities or in the new innovation that I alluded to. Both men's and women's saw very strong double-digit growth. Every category within men's and women's, very strong outerwear second layer and technical shorts were some of the standout in fourth quarter. Obviously, COC, the Canadian Olympic Committee gear performed very well, introduction of footwear is off to a great start. These are small in relative terms, but we know our position to create brand awareness, consideration, drive loyalty with our existing guests and attract new guests and very encouraged with how well they're performing in those metrics as well. And then as I look forward into '22, we have some exciting additions to existing powerful franchises, scuba, our Define, OTM, as our guests go back to work. The team has been working and building that out. We see men's is -- we're more developed than OTM for him and the team has been working on building out the assortment for her in terms of the versatility functionality of our gear. It really is a completely open space and opportunity for us. And then some of the play categories that are fun. But more importantly, and I alluded to them before, is they build credibility in these activities and 80% of the assortment of these activities is our core product. So this is all geared and designed around remaining narrow and focused on assortment, driving consideration awareness and the key activities that we focused on and using both core and newness to drive that credibility and ultimately, the sales back to core. The formula is working and continues to build momentum, and we're excited, and we'll share a lot more on Analyst Day, but that gives you a little bit of flavor for the start of this year, at least until we get into the longer play.

Great. Looking forward to the celebration in a few weeks.

Our next question comes from Dana Telsey of Telsey Advisory Group.

Congratulations on the nice results. As you think about new customer acquisition and new customer expansion. What are you seeing there? What do you see in digital versus stores? And any updates to your enhancements of how you're thinking to reintroduce the loyalty program and progress on re-commerce and what that can do to sales and margins?

Dana, we saw growth across both new and existing guests in Q4. We've also experienced, as we've mentioned previously, more cross-shopping throughout the pandemic period, and we see higher value from our guests who come to us both on e-commerce and stores. So we continue to see that as an opportunity long term, and then I'll let Calvin take the loyalty question.

Yes. I'll quickly touch on both loyalty and reCommerce. Again, we'll probably sound, I apologize to the group, a bit of a broken record, but there are a lot of exciting initiatives that we've been testing and piloting and learning from and they play into our 5-year vision. And I do want to save for our time together in New York. But on loyalty, clearly, this brand has very strong loyalty with our guests. And uniquely and interestingly, it's been built the way we'd want it to through relationships, incredible product. We tested a loyalty program that extended that relationship into sweat and strengthened our position of community in our stores. And that led to our confidence around the MIRROR acquisition, which is really an opportunity for us to position it in that membership base as a means to drive loyalty and retention with the lululemon guests. And that's what we'll be sharing is the opportunity of further driving that through synergy and integration and we see a very unique and exciting proposition there. So more on loyalty to come. And then on reCommerce, we're excited with the test that we did this year. We were in 2 states, California and Texas. We had 80 stores participating. Basic program is gently used, guests can bring in product. They get a gift card on a predetermined dollar rate for the items they bring in. Those go to a third party. Those items, they get washed, they get posted. And we are very encouraged with what we're seeing in terms of not just existing gas bringing in sort of an incentive to clean out the closet and get some of those still very good and quality product into someone else's hands and see them redeem the gift cards, renew their wardrobe and then new guests being acquired through the pricing of the reCommerce product on our website. So we'll share more of our thinking moving forward. But the program is performing very well. It's meeting and exceeding in terms of its goal, which is getting at current guests to spend more, acquisition of new guests with a more approachable entry price point and supporting our planetary initiatives and offering end-of-life solutions for our guests and being leaders in those goals. So very encouraged more to share in a few weeks.

Our next question comes from Michael Binetti of Credit Suisse.

Congrats on a great quarter. I guess just for coming up on the Analyst Day, I know the SG&A plan for 2023 was about $2 billion. In that, you're on about $6 billion to $6.3 billion of revenues. You did the revenue number this year you pointed out, which is nice to see. But the SG&A was about $2.2 billion, so a little higher than you thought on similar revenues. I know, Calvin, we've talked about this on a few other conference calls. But some of the big investment buckets in there and especially e-commerce, you had to pull forward to service all the demand you had in 2020. But did you -- I mean, are some of the investments that you were thinking about beyond '23 in the original framework? Have you already started those investments? And then I guess on international margins, you said -- oh sorry, international margins, I think at Analyst Day, last time you said international would quadruple. And then I think you said international margins had just broken even in 2018 and that international will be 10% to 15% of earnings by 2023. So a lot of margin expansion was baked in at that time. Maybe some of the comments today made it sound like you hit a lot of your domestic targets early, but maybe there's some room left as an opportunity on international. Maybe you could orient us on where the margins are in international where you see the opportunity?

Michael, it's Meghan. So in terms of SG&A for 2022, so we are really pleased that we are guiding to operating margin that's just modestly under 2019, including the consolidation of MIRROR and then also inclusive of a 280 basis point impact from air freight pressure. We're really focused on optimizing that op margin expansion. And we have made some shifts in our investment profile, so investing more behind digital as we navigated the pandemic, which those expenses hit predominantly in SG&A. And then we pulled back to some degree on new store openings and renovations and saw that benefit within our gross margin. So confident in our investment profile and that sets us up for long-term sustainable growth, and we'll continue to take that approach going forward. And then in terms of international, we did guide to revenue quadrupling by 2023. So we, as Calvin mentioned, we'll reach that goal in 2022. And then our earnings are on track to what we expected. And overall, I would say our business has performed, overperformed in North America as well. So in terms of overall dollars have reached that goal and penetration may differ slightly.

Our next question comes from Mark Altschwager of Baird.

Congrats on the strong year. So the initial revenue guidance this year is quite a bit ahead of the Power of Three growth targets. And I know we'll need to wait a few weeks here to hear the details on the new 5-year plan. But I'm wondering if we should read from the 2022 guidance that you're confident the business is in a place to sustain this higher level of growth that you've been delivering over the last few years and that you're planning for 2022?

Thanks, Mark. So at this point in time, until we update in a few weeks, we are maintaining that commitment to the low teens growth rate. We are expecting higher growth this year. We've been talking about -- we thought we had some missed demand in 2021 as we navigated through some supply chain challenges. So feel comfortable with our guide, which is above expectations of 23% to 24% on a 3-year CAGR basis and really broad-based overperformance category, region and channel, and we'll share more work with you in a couple of weeks.

Operator, we'll take 1 more question.

Our next question comes from Paul Lejuez of Citi.

Two quick ones. One, just curious if you can share how big you expect the footwear business to be in '22. And second, can you talk about real estate projects that you're planning for '22 beyond just the store openings that you mentioned? How many expansions, relocations, remodels and any data you can provide on the remodels that you've done?

Paul, it's Meghan. So in terms of footwear, we're not putting a number on 2022 and we'll share more on how we're thinking about that business. It's a small portion. And again, just a test-and-learn category for us. In addition to the 70 new store openings, we are also planning on 35 co-located remodels, which is up from 22 in 2021. So that continues to be a strong strategy for us and allows us to expand our footprint and maximize our revenue opportunity where we have high sales per square foot and help to showcase a broader assortment of our women's and also men's product.

And then can you talk about the lift that you see when you do those remodels, both in aggregate, total volume and sales per square foot?

Yes. We haven't broken out that specifically, but we do see -- we do target those optimizations in areas where the sales per square foot is above our average. And do expect to see a meaningful lift from a revenue perspective, adding on a more meaningful portion of our men's revenue.

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