Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Second Quarter 2022 Conference Call. [Operator Instructions] and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [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 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'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. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under our Investors section of our website at www.lulemon.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 1 hour. [Operator Instructions] And now I would like to turn the call over to Calvin.

Thank you, Howard. I am excited to be here today to highlight our second quarter results and the continued momentum we're experiencing at lululemon. While the external environment around us has been challenging, we are seeing our guests respond strongly to our product innovations, our community activations and our omni operating model, which allows us to meet and exceed their expectations. During the next few minutes, I will discuss the factors that are driving our broad-based strength. Next, I'll discuss the current supply chain environment, then our pipeline of product innovation, and I'll conclude with an update on our growth within the international business. As you've seen from our press release, the momentum in our business remained strong in the second quarter. Revenue increased 29% versus last year and 28% on a 3-year CAGR basis representing an acceleration from quarter 1. Adjusted earnings per share increased 33% and 32% on the same basis. And based on our guidance, we anticipate a high level of performance to continue in quarter 3. These results are even more compelling considering the difficult macroeconomic environment in which we are operating. Our performance was only possible because of our teams across the globe. Their dedication, their agility and their enthusiasm for our brand, which enable us to consistently deliver for our guests and report these above-plan financial results. Meghan will share the detailed performance metrics with you shortly, but I'd like to give you my perspective on what's driving the strength and specifically speak to guest engagement. Given the current macro backdrop, we have been looking closely at our guest data and metrics to identify any shifts in spending patterns, behaviors or habits. And to date, I'm pleased to show that we are not seeing any meaningful variation in cohort behavior or the metrics we…

Thanks, Calvin. I'm pleased that we continue to see broad-based strength across our business. Traffic to both our stores and digital channels is strong and guests are responding well to our product innovations. We're in a better inventory position relative to last year, which is also helping to drive our top line strength. And looking at Q3, we're happy with the start to the fall season, which is reflected in the updated guidance I'll take you through shortly. Let me now share with you the details of our Q2 performance. I will also discuss specifics on our balance sheet, including our inventory and cash position. Please note that when comparing the financial metrics for Q2 2022 and Q2 2021, the adjusted operating results for Q2 2022 exclude a $0.06 gain related to the disposition of an office building, while the adjusted operating results for Q2 2021 excludes $0.06 of expense related to the acquisition of MIRROR. You can refer to our earnings release for more information and reconciliations to our GAAP metrics. For Q2, total net revenue increased 29% to $1.87 billion, ahead of our guidance. Comparable sales increased 25% with an 18% increase in stores and a 32% increase in digital. On a 3-year CAGR basis, total revenue increased 28%, an acceleration from our 27% 3-year CAGR in Q1. In our store channel, sales increased 30% on a 1-year basis and 16% on a 3-year CAGR basis. Productivity continues to trend above 2019 levels. On average, we had 98% of our stores opened throughout Q2, and we currently have 99% open. We ended the quarter with a total of 600 stores across the globe, a milestone we are all extremely proud of. Square footage increased 19% versus last year, driven by the addition of 66 net new stores since…

Thanks, Meghan. As you can see from our results, lululemon continues to perform at a high level, and I am consistently impressed by the ability of our teams to anticipate, meet and exceed the needs of our guests. And across the business, we're seeing that our guests are eager to welcome us into new categories, styles and markets, which speaks to the significant growth potential for lululemon going forward. We are off to a very good start as we embark upon our Power of Three x2 growth plan, and there's a clarity and focus on the work underway across the company. And in closing, I want to express my gratitude to everyone at lululemon for your hard work and the passion that continues to show all of us the power of our people and company. Operator?

[Operator Instructions] The first question is from Adrienne Yih with Barclays.

Congratulations, another just remarkable quarter. Calvin, I guess I wanted to talk about there was a lot of intra-quarter chatter about kind of promotions across the space and kind of a slowing in the athleisure. We've obviously talked about how lulu is more of a brand rather than sort of a retailer. But I really want to understand what are -- what is the method that you're using to address some of the promotions that are going on around you? You no longer do warehouse sales. You're just doing sort of the online clearance, but you're not even calling that out as an online warehouse sale. So just what are the methods that you're using to move through the aged inventory that's allowing you to keep up the brand equities?

Thanks, Adrienne. In terms of methods, there's been no change to our approach on markdowns. As you know, we were -- we took modest price increases on a small percentage of our range of product. We continue to closely monitor that. And our markdown activity is in line with past penetrations 2019 pre-pandemic. And it really is -- our momentum is driven through the pillars of growth and innovation of our product. So the positioning around unique innovative products through our core is resonating with our guests and our markdown behavior has not changed with no plans to change and the quarter's results were driven by full price selling prices.

The next question is from Mark Altschwager with Baird.

So really encouraging to hear you haven't seen any major shifts in consumer behavior. Given the choppier macro backdrop versus a few months ago that many others have called out, maybe just speak a little bit more to what you're seeing in your business that's giving you the confidence to actually raise the implied back half growth outlook?

Thanks, Alex. One of the areas that continue to fuel our momentum and give us the confidence and the momentum heading into the back half of this year is the balanced growth that we're seeing across all of our pillars in the Power of Three x2 growth initiatives. And I'll quickly break them down because it really does support that narrative and the fact that we're in early innings of growth, and we have multiple levers to pull to grow our business that we are innovating into through our strategies, and they are resonating. So from a product perspective, when you look at our business across activities, categories and gender, where our men's business was up 27%, our women's business was up 24%, accessories was up 80%. We were seeing very balanced growth in all of those activities driving and through innovation. On the guest side, the omni guest key initiatives, our new guests were up 24% existing. We're transacting at a 17% increase rate. Traffic was incredibly strong with stores up 30%, e-com up 40 and strong sales comps across both our e-com in-store business, again, very balanced. And then at the regional level, North America, up 28%; international up 35%. So the plan that we've been working on is we are early innings of the execution, but it's resonating, it's working and the business is growing across all of these levers in a very balanced way that's allowing us to achieve the results, contributing the momentum. In the back half, when I look at product innovation and innovation across the guest with the launch of our membership program and our expansion into the regions gives us the confidence that we can keep the momentum in our business strong and hence, the guidance that we've shared.

Great. And congrats to you and the team on the strong results.

The next question is from Alex Straton with Morgan Stanley.

Great. And congrats on another great quarter. I wanted to dig into the international result, amazing at 35% year-over-year. Can you just talk about the key drivers there? If there were specific geographies or more broad-based? And also, as it becomes a bigger part of lululemon's revenue over time, can you just talk about what the margin implications would be?

Well, absolutely. Very pleased with our international business. As you know, our 5-year plan is to quadruple it. And across every market we're in, we continue to see very strong results for the brand, the way it's resonating in the market. And excited about the investment strategies we have in a rolling out across -- in Europe. We're seeing good growth across all countries. We opened our dot-com site in Spain. We actually opened our first store in Barcelona tomorrow. We opened Madrid in a few weeks. We're opening in Champs-Elysees later this year. So excited about the opportunities we continue to see in Europe. Across Asia Pacific, in Australia with some of the new stores that we've opened. And China, which continues to be one of our big market opportunities even with ongoing operational challenges, we saw an acceleration in the quarter, with China growing 30%. And excited about the way the new stores are working in the market, the way that product continues to resonate, new guest acquisition and activating through communities. So in every market where we're in, we're seeing a very balanced contribution to our growth and are early in the opportunities that we see in each of these markets.

The next question is from Matthew Boss with JPMorgan.

Congrats on a really nice quarter. So Calvin, on the high 20s revenue CAGR that you posted in the first half and taking into account the new customer acquisition metrics that you cited, so do you think the performance that you're seeing relative to the remainder of the market, is this a combination of a larger TAM, but then also company-specific market share gains? And then Meghan, I guess more near term, have you seen any notable change in momentum in either stores or digital so far in August?

Thanks, Matthew. I'll take the first half. We've definitely seen market share gain according to NPD. We've -- we are the largest share gainer in the quarter at 1.4 points. So we're very pleased with our performance, our performance relative to our peer sets. And I think the first half of this year is really a consistent narrative of new category expansion, driving awareness through a number of earned media opportunities as well as us continuing our investment in collective and community and reactivating some events, great product that's driving new guest acquisition and an existing guest that continues to be engaged in the expansion of both our core and play activities, be it golf, tennis, hike, those are resonating very well. They're lifting our core sales. So it's a combination of the levers that we've been working towards, and it has translated into market share gain in the quarter.

And Matt, I'd add on Q3 -- so we're happy with the start of the quarter. I'm comfortable with the guidance we provided, which was a 3-year revenue CAGR of 25%. And as Calvin mentioned, we are seeing continued strength in our guest behavior and metrics there, which we continue to monitor closely. And I'd say within that, pleased with the performance of stores and digital that you asked about. And obviously, the macro environment is dynamic. We continue to plan the business based on multiple scenarios and feel well positioned as we enter Q3.

Congrats again. Best of luck.

The next question is from Brooke Roach with Goldman Sachs.

Calvin, I was wondering if you could reflect on the very strong new customer acquisition trends that you've been seeing in this quarter. Can you speak to more detail on what specifically is driving that new guest acquisition? Are the demographics of that customer changing versus your historical new guests? And how important are these new product categories or select accessory items in driving that engagement?

Thanks, Brooke. As you've indicated, very healthy new guest acquisition numbers at plus 24%. And I would say the majority of their first purchases have been very consistent with our traditional categories that we're seeing, very strong bottoms business and very strong in women's and new guest in men. So very pleased with the balance. The success of the everywhere belt bag has added to new guest acquisition. So we're excited to see that as a way to bring even more into our collective and with our guests. But the bulk and the majority of the driver as it is with our sales growth is our core traditional. When we expand into new categories and as we expand deeper into play, it really resonates with our existing guests, which is a big part of the positioning of the strategy, and we saw that through existing guests increasing transactions with us at plus 17%, very healthy. So the strategy is, obviously, bring them in, new guests, migrate them up and expand and increase the share of wallet. And innovation is doing both in pulling new guests in as well as migrating them up in their spend. And we're seeing a very healthy balance across all of those levers.

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

Can you talk a little bit about the reaction to the limited price increases you've taken so far this year? And then any expectations for the back half or into '23 to continue along the path of price increases?

Lorraine, as we mentioned, we've taken modest increases -- or we were taking throughout the year of modest increases on approximately 10% of the assortment. We haven't, to date, experienced any price resistance. We continue to closely monitor and don't have any plans to change our markdown cadence as we move throughout the year, still very high, healthy full price sell-throughs.

The next question is from Dana Telsey with Telsey Advisory Group.

Congratulations on the impressive results. As you see -- as you take a look at freight, it seems like it's moderated from the first quarter to the second quarter. How do you see freight going through the balance of the year? And then just next thing on -- Calvin, the core product, obviously, is 45% of sales. The new collections that are coming in are certainly driving conversion and interest. How do you see core as a percent of the business going forward given the solid receptivity to new categories?

Thanks, Dana. So in terms of airfreight, yes, we've started to see it moderate. As I mentioned, we are starting to see higher on-time deliveries from our vendors as well as some shorter lead times. So we have amended the color that we provided on airfreight to be 10 basis points under last year for the full year. And then that compares to 30 basis points above that we previously guided to. We still see airfreight as an opportunity over the longer term. It still sits 280 basis points above 2019. But we'll continue to see that moderate through the second half of the year, and the team is looking for opportunities wherever possible to be as efficient as fees well there.

And Dana, on the question around core, we have not seen a material shift in that nor does the strategy and the success of the strategy to suggest we should. If anything, as we continue to create depth and strength in our core, it could increase as a percentage of our overall business. And as I shared, we have opportunity within some of our core own activities such as run, train and yoga to keep developing core items. And the play activities that we launched across golf, tennis and hike are designed to and absolutely achieved in the results, the goal of using unique innovation to bring in awareness, interest, credibility into these activities, but to ultimately still drive core as much of our core and the versatility of the product can be used in those sweat activities. And the strategy has worked in the first half of the year as we continue to innovate and lean in. So very niche and small number of SKUs, leveraging core, which holds at 45%. And as we expand opportunities in some of the core activities, I expect that number to hold, if not improve.

The next question is from John Kernan with Cowen & Company.

Congrats on phenomenal results. Maybe if you go back to international, it's obviously a huge portion of your future growth when you quadruple that. Just curious what is enabling you to outperform all of your peers in China to such an extent in the most recent quarter?

Thanks, John. I think it's no different than the ability of us to put on market share and outperform the market -- in our most mature market being North America, where we are still early and have the opportunity to grow. We are early in brand awareness. The product led by innovation is resonating. Our investment in our guest relationships, I shared a little bit about the sweat games and the number of guests that participate in that both physical as well as digitally, over 100,000 online with us. And the investment [indiscernible] exciting to keep seeing the success, share the tier cities. We're in now in Tier 1 and Tier 2 and Tier 3, all resonating, responding well. So our D2C model is unique versus our peers and other brands in that market. It's rooted in relationships, building the community, which has how we built our business and great innovative product that is differentiated and unique in the marketplace. So it is our formula. It is resonating in that, and we have an incredible team led by [ San Yan ] leading it and across the stores and a very strong culture. So we're excited, but it really is the lululemon formula that's resonating and delivering the results.

The next question is from Michael Binetti with Credit Suisse.

Congrats on a great quarter. Meghan, on the gross margin, we're just trying to do a little bit of the math you gave us here in the second half. It looks like the overall gross margin range you're giving us for the back half is pretty close to what it was before. But I think you have about 60 basis points less airfreight pressure on a 1-year basis in the back half. Any callouts as to the offset there just so we can kind of track along with you on the build there? And then in the back half on airfreight pressure, how locked in are you in the guidance that you gave versus -- fixed versus variable that could change here given how much spot rates have been moving around lately?

Yes. Thanks, Michael. So we guided to 10 basis points under last year in airfreight versus the 30 basis points higher than we experienced that we had shared on the last call. So we are starting to see both the impact of the early deliveries as well as the rates coming down, and the team continues to look for opportunities there. We will continue as the business expands to look at pulling forward investments that are part of our road map as we move to our next 5-year trajectory. So we have improved our margin guide for the year from 100 to 150 basis points down year-over-year to 100 to 130. So continue to feel like we're moving in the right direction, and airfreight represents a big opportunity for us over the longer term, still 280 basis points above 2019 levels.

The next question is from Sharon Zackfia with William Blair.

I guess, first on the SG&A. I think, Meghan, originally, you expected SG&A leverage in the fourth quarter. I heard you say flattish now. I'm just wondering if you're pulling forward or accelerating any investments? And then kind of a conjunct to that. I know at the Analyst Day, you had talked about a coordinated marketing campaign this fall. Is that still on tap? And can you give us kind of an idea of what we'll see when that launches?

Yes. So in terms of SG&A, we haven't previously provided Q4 guidance. We've got some timing, I would say, on investments. And again, as we look at our full year outlook, looking to pull forward some investments that are part of our road map as we look towards our next 5-year trajectory. So we are guiding now to 100 to 130 basis points of leverage for the full year versus our prior guide at 50 to 100. We -- yes. And then Calvin is going to chime in here on the marketing.

Yes. On the marketing, there's a couple of exciting initiatives planned in the back half. One is around our launch of our 2-tier membership program shortly. And that is more of a North American focus, but we're excited to bring that to our guests. And Nikki was referencing, as we continue to look at ways of just bringing a coordinated global message, our approach to holiday this year in some key categories. There's not a material change in spend, but we continue to find effective ways to deliver a strong, powerful product, community-led message around the globe. We're making gains on that. Helped in the first half, and we'll continue to do so in the second half and moving forward.

The next question is from Tom Nikic with Wedbush.

Meghan, I want to ask about the inventory growth. I know that there's kind of a lot of puts and takes here. And one of the things is increased transit times and things like that. When we kind of look at inventory, I guess, beyond the end of this year, like I mean, do you think that just structurally, you're going to carry more inventory on the balance sheet relative to the sales level? Or do you think when we kind of get beyond this year and things kind of normalize a little bit, maybe going forward, you would grow inventory at a slower rate relative to sales and you would see turnover improve?

Thanks, Tom. Yes. So inventory this year, when you look at it on a 1-year basis includes higher usage of airfreight impacting our AUC as well as comparisons to out of stocks last year. And then as I mentioned, we're starting to experience earlier deliveries, both vendor readiness and then also lead times. So there is quite a bit of a dynamic nature when specifically looking on a 1-year basis, which is why we've been really focused on that 3-year unit CAGR. I do see opportunity over the longer term for us to manage inventory below at some point, our sales trend -- as some of these trends normalize. And then over the longer term, we aim to manage our inventory in line with sales.

The next question is from Jay Sole with UBS.

Great. I want to -- Meghan, I want to follow up on the last point. Just talking about receiving inventory sooner. Can you give us an idea of how long it's taking now to receive goods and sort of how long it was taking it to peak? And what would be normal going forward? What would be a normal amount of time to receive the goods?

Yes. There's a couple of dynamics going on. One would be we are seeing vendor readiness metrics improve. So that's one impact. And then the other impact, I would say, is ocean lead times. So we typically have seen, and this is on average about 45 days. These have gone up to 90 days plus during the kind of peak disruption. We've seen them drop approximately to 70 days. So not back to where they were, but definitely improvement to what we've seen. So that, coupled with the earlier vendor readiness provides some opportunities for us to switch modes, which you see reflected in our guidance.

Got it. And if I can just maybe, Calvin, asked you one question about accessories. You mentioned the belt bag, and just the success overall of the company adding new categories. Can you just talk about accessories, what's the opportunity to continue to segment that category to offer price points in bags maybe above $200 versus kind of what you're offering now, which is sort of like lower price relative to a lot of the competition that's out there selling tool bags and backpacks and things like that?

Yes. No. We're excited about the opportunity in our accessories business and definitely have plans across a number of the categories. Everywhere belt bag is a lower price point item. We're seeing it being a great driver across existing guests as well as guest acquisition. I think accessories, in general, has played a role like that and could continue to play a stronger role. The team has done a wonderful job in the last few years, bringing great innovation into the sock business, and we have a very strong growing innovative product line in the sock category. Bags, being one of the biggest opportunities, we are dropping and innovating incrementally in the pipeline for the foreseeable future is to continue to develop out that category where we all agree we can do even more and have a great opportunity across. As you said, backpacks, we have a lot of on-the-move bags for sport, but also a variety of unmet needs that the teams are innovating into. So bags is definitely on our road map of product pipeline, building on the everywhere belt bag, but accessories in general is a great opportunity to keep growing, contributing and guest acquisition.

Operator, we'll take one more.

The next question is from Paul Lejuez with Citi.

Just looking at the reported sales numbers and comps, I think you got a spread of about 600 basis points, but your square footage is up around 19%. So just wanted to understand what accounts for the difference there, why there isn't a bigger between comps and total sales growth and maybe tie in how you're feeling about the new store performance as you're opening in some of these international markets.

Thanks, Paul. Yes, I'd say there's a nuance there and looking at it from an omni perspective with our -- the size of our e-commerce business. That said, what I'd share is we're really pleased with the productivity of both our existing store base. We've gotten above 2019 levels. We continue to see opportunity for further expansion over the longer term. I'm really pleased with our new store expansion strategy. We did raise our guidance from 70 new stores to 75 for the full year with some exciting opportunity in front of us, both in our North America and international regions. So stores, I would say, remain a very important and productive part of our business model, including the operating margin, which we've seen get into the high 20s in the quarter.

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