Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica inc.

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 the 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 and operating statistics for the quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I would like to turn the call over to Calvin.

Thank you, Howard, and welcome to our quarter 2 earnings call. As you've seen from our press release, while EPS this quarter exceeded our expectations, revenue fell short of our guidance, and we are reducing our revenue and earnings expectations for the year. While we continue to see positive momentum overall in our international regions, we're not happy with the current results in the U.S. business. lululemon has been in a period of hyper growth for several years, more than tripling our revenue in just 6 years, and we have successfully managed through a number of market shifts. We are facing yet another shift today within the industry related to tariffs and the cost of doing business. The increased rates and removal of the de minimis provision have played a large part in our guidance reduction for the year. As we navigate current market dynamics, I see an opportunity to reset some key areas of the business as we continue to drive long-term growth. During our time together today, I will provide an update on our business and my perspective on the near term as we continue to plan and adapt for the future. Specifically, I will share my insights on the state of the U.S. business, our assessment of our current product offering, what we've learned has worked and what has not worked and the actions our teams are taking to reaccelerate growth in the U.S., my perspective on our strength globally and the opportunities this continues to create for our brand going forward and the impact of the new trade environment, implications of higher tariffs and the removal of the de minimis exemption on our revised guidance. Finally, we'll conclude by taking your questions. So let's begin. As I speak to the U.S., I'd like to set some…

Thanks, Calvin. While Q2 earnings per share exceeded guidance, our top line results fell short of our expectations, driven predominantly by underperformance in North America. As you heard Calvin say, we have opportunity within our product assortment and the teams are in action on bringing in style newness, differentiation and increased agility. And you'll see the most meaningful impact of this work in 2026. In addition, we are navigating increased costs related to tariffs and the removal of the de minimis exemption. Given these factors, we believe it's appropriate to be prudent in our planning and financial outlook for the remainder of the year. We are taking actions in both the near term and long term to mitigate the increased tariff costs, including strategic pricing actions, supply chain initiatives, including vendor negotiations and enterprise-wide expense savings initiatives. While implementing these cost-saving strategies, we do not plan to take our eye off the long-term growth potential for lululemon. Given the strength of our balance sheet and strong cash flow generation, we will continue to invest strategically in our growth initiatives to help ensure we realize the full potential of our brand while also navigating today's dynamic environment. I'll share our detailed guidance with you in a moment, but let's first take a look at our Q2 results in detail. For Q2, total net revenue rose 7% or 6% in constant currency to $2.5 billion. Comparable sales increased 1%. Within our regions, results were as follows: Americas revenue increased 1% on both a reported and constant currency basis with comparable sales down 3%. By country, revenue increased 1% in Canada on both a reported and constant currency basis and was flat in the U.S. China Mainland revenue increased 25% or 24% in constant currency, with comparable sales increasing 16% and in the…

Thanks, Meghan. We look forward to taking your questions in just a moment. As you heard me say, we are not satisfied with the results for the quarter, and we know our brand can and will perform better than these results. We are clear on our assessment of the situation, which takes into account the current dynamics within the consumer environment and competitive landscape. We are learning and adapting and are focused on the path forward to create and deliver product that lives into our high-performance and high-style philosophy. I feel confident in our leadership team and the plans we have in place. The guest is responding well to many of our new styles. Our future pipeline is strong and the positive impact of our new design vision remains in front of us. We will navigate this period successfully given the passion, commitment and agility of our leaders and teams. We will now take your questions.

[Operator Instructions] The first question is from Janine Stichter with BTIG.

Would love to hear more about the product assortment changes you're making. First, I would love to hear about how you can impact the back half. It sounds like there's a lot of expectations around the first half of next year. But what should we expect to see in the back half of the year? And then maybe help us understand how much of the assortment, this casual piece where you're seeing the slower sales trend, how much of the assortment is that? And what gives you confidence that this is the piece that needs to be fixed?

Janine, in terms of the product pipeline, the team is focused really across 3 key areas supported by innovation and solving the unmet needs of our guests. The first is maintaining momentum in the performance activities, as I mentioned, those apparel categories are positive and growing through the quarter, and we want to continue that. Team is focused on designing into several new styles across lounge and social. We do have in the back half 2 new items launching Loungeful and Big cozy. And then third is continue to give a fresh perspective to some iconic items that we know our guests love. And the Scuba waffle that was launched a few weeks ago is a good example of that. Through the back half of this year, there is more new styles than we had in the first half. And as I mentioned, the spring 2026 has really been the focus of Jonathan since he joined last year and the team in bringing that new fresh energy across the product playbook, and we're very excited about these new styles and what we're seeing relative to the assortment and that mix of newness moving from 23% to 35%. From a casual perspective, it's about 40% of the mix, 60% is performance. On that performance, as I mentioned, sales are positive across those 5 key activities. And then within casual, there are new styles that are performing well, Daydrift, BeCalm and there are core franchises like Scuba, Softstream and Dance Studio, where we're seeing fatigue with the consumer, particularly our high-value consumer who's been with us longer. And that's the split of the sales and where we're seeing some of those product headwinds within that casual mix of the assortment.

Great. And then maybe just a follow-up on tariffs. I'm curious what you've seen so far with some of the price increases you've taken. And it sounds like you're cautious on raising price, but just would be curious if the recent increase in tariffs change your view on pricing into next year at all.

Thanks, Janine. So we are instituting modest price increases on a small portion of our assortment as we discussed last quarter. What's reflected in our guidance is still that positioning. We continue to look at pricing. I would say those actions are in the process of rolling out, and we're pleased with them to date, but some still in front of us. We'll continue to look at it as a lever as we move through the second half of this year and into next.

The next question is from Alex Straton with Morgan Stanley.

Perfect. Maybe a follow-up. Just on that lifestyle point of being 40% or so of the assortment. Is that the right mix, do you think over time? And are there any differences by geography? And then just separately, just on the performance versus casual kind of deviation. It just feels like the performance franchises are longer dated versus like your later entry into casual. So I'm just a little bit surprised by the fatigue there. So any color or thoughts on what's different would be helpful.

In terms of the right mix, I do think a 60-40 split. It's what we've historically seen is a good benchmark. We'll let the guest sort of judge based on the new styles that we bring as well as I've shared before, we have plans to continue to develop into the activity strategy where we see opportunity. We have a very good position in run and yoga. We see an opportunity to continue to gain market share in train, golf and tennis, not just in North America, U.S., but around the globe. So as we innovate and lean into those, we see that driving growth. And on the casual side of the business, it really is split between social and lounge. Social has been an opportunity for us in our women's assortment. Daydrift is a good example of us playing with that high-performance high-style blend. There are new styles planned for that. And we've had a very strong lounge business supported by some of these key franchises that, as I mentioned, are doing well with newer guests and our high-value guests that have these in their wardrobe are looking and reacting more to new, and we have new lounge coming. So the 60-40 split, I think, is a good starting position for us, but we're constantly learning and adapting as we introduce new styles, we'll continue to do that through improved agility. Relative to growing in performance versus casual, we have a number of franchises in both of those segments that I would say, vary depending upon length of time. Within performance, because of the very nature of the fabrics and the innovations and solving the unmet needs of our guests, we've been able to update and provide a variety of variations as well as continue to bring in new solutions. So it has been new styles and new innovation that has driven a lot of that growth and success that we're seeing, especially in some of the newer activities for us. So I'm not surprised that we're seeing and able to generate growth on that side of the business. And on the casual, it is attributed to some of these core franchises that we've had for a while that she's responding less to the core seasonal color interpretations and obviously to new and updates to those like the Scuba waffle that I mentioned when it is truly something she has not seen before responding well.

The next question is from Brooke Roach with Goldman Sachs.

Calvin, I was hoping that you could contextualize the magnitude of these key franchises that are down trending within the 40% of your business that is casual. How are you thinking about the time line that it might take for new innovation to scale in your spring '26 innovation pipeline to a large enough magnitude in which that newness will fully offset the incremental pressure that you're seeing from these select lounge and social platforms?

Thanks, Brooke. When we look at the merchandising mix heading into spring and the shift from 23% to 35%, that will be new styles that the guest has not seen and I would say that slightly over-indexes into the areas of opportunity we've seen, which has been social and lounge, plus the newness that we've introduced this year that she has responded well to, Daydrift, the BeCalm franchise, plus those that we have coming, which Big Cozy, Loungeful being a couple of those. I feel that the mix is good to offset to give the guest choice and options around some of those core franchises. And we're obviously going to test and learn. And one of the key areas that I also mentioned is the agility to be able to chase into quicker the items that are successful. But I do think the mix of the assortment allows us to have the right new style and learn and see how the guest responds to it.

The next question is from Jay Sole with UBS.

Calvin, you talked a lot about supply chain initiatives in your prepared remarks, specifically around speed and getting faster. Can you talk specifically about how much faster lead times need to get where they are today, where you really want to take them ultimately? And how you're going to manage that process of getting a company that's worked one way for a really long time around creating product, both in line and innovation into doing something really sounds pretty different.

Yes. Thanks, Jay. The teams have been in that work, and we've been able to improve our go-to-market calendar over the last few quarters with plans to continue to be able to adapt how they work. A couple of examples is aligning at the beginning of the season across our supply chain with our vendor partners and our merchants, some of the key new items and fabrics and having our vendor base pull in some of those fabrics so we can move more quickly into action when we see and get a read from our guests. We've improved the ability to adjust within the process from a PO and a cut and sew into a different style or into a different silhouette depending upon, again, the read of the guest. So it is definitely a new way of working. It has been an area and focus for the team because we're excited about the new styles that we're bringing. We're excited about the percentage of our merchandising mix. And obviously, we know that agility and our ability to react quickly is an important muscle and the teams have been focusing on that, working both with vendor partner themselves. Equally, and as I mentioned, Ranju joins in a new role, which I'm very excited about, which really is a continuation of the focus that we put on our processes and technology to enable the teams to be able to have the right tools and processes to support this change and to move more quickly. And he'll be an important partner to the teams in driving that and leveraging technology to move even quicker.

Got it. And then if I could just ask a little bit about marketing because you mentioned, I think, in the prepared remarks that if you get the product right, everything else kind of takes care of itself. But are there -- is there anything you feel like you can do with on the marketing side? Would you be willing to increase marketing as a percent of sales to maybe create some more traffic in the store and more excitement around the brand?

We don't have plans to increase. It's 5% of our revenue. Plan is to maintain that. We definitely continue to test and learn, but lean into our grassroots community, local with some event activations. And we're pleased with the engagement and the guest metrics on a year-to-date basis. Our brand remains very healthy, and our guests are very loyal, as you know. And when I look at the guest data, we've continued to grow our guest base in the U.S. across all age demographics through the quarter and year-to-date. And within our most recent guest cohort, those that are in our low to mid-spend range, all are spending more with us year-over-year. opportunities are high-value guests. They're over-indexing on new styles and retention remains strong, but the opportunity is they're spending less with us linked, as I mentioned, to these core franchises, predominantly in lounge and social. And with this group, they've almost all opted in for direct marketing. So the teams are really focused on our ability to proactively showcase and present the new styles to them as they launch and we'll maintain our in-market activations around community and local, and we're seeing good success on brand awareness, and we'll continue playing that formula.

The next question is from Paul Lejuez with Citi.

Can you maybe talk about the gross pressure from the reciprocal tariffs as well as the de minimis on an annualized basis? And maybe can you just share how much are you relying on pricing as a mitigation tool? And maybe just help me maybe connect the dots between using price, but then also guiding for higher markdowns year-over-year.

Yes. Thanks, Paul. So in terms of 2026, we shared $320 million mitigated impact. We are offsetting about half of the growth within that impact. I would say about half of the offset would be expense actions and the balance would be pricing and vendor negotiations, pricing being a little bit bigger than the vendor negotiation piece. I would say we're being very mindful on a style-by-style basis looking at elasticities. I don't feel like there's overlap with the markdown pressure we're seeing this year. I think that's really related to -- we have more seasonal inventory than we need based on our sales trend, and we're focused on clearing that by end of year. We definitely have an eye on the relationship between those 2 pieces and feel well positioned today. As I said, we'll keep our eye on pricing as both our pricing rolls out and the performance of that as well as how the competitive environment evolves.

Got it. And then will the pricing changes be isolated to the U.S.? Or do you think you have some pricing power globally that can help as a mitigation tool?

At this point, isolated to...

The next question is from Adrienne Yih with Barclays.

Calvin, I guess my question is on the inventory kind of that's in the pipeline. What can you be doing sort of between now and 2026 when the fixes come into play? How can you kind of chase into things that are suggesting that they're working and make any kind of like course corrections kind of before we get to that point? And then my other question is on the de minimis, and I'm not sure if we have enough information to back into it, but the e-commerce is roughly, let's call it, mid- to high 40% depending on the quarter. A portion of that comes into the U.S. So how should we think about what was being used on the de minimis exemption?

On the inventory, a lot of what I laid out before, the new approach to being able to be quicker, faster has been in place. And although we still have some work and believe we can continue to refine and improve those items that we introduced through the second half of this year that we get a good read on, we'll be able to move quicker than we have in the past. Some of the new processes I mentioned such as upfront working with vendors on fabrications and having them ready allow us to eliminate up to 2 months through our chase process. So those are in place, and we'll be able to react, and we continue to look at ways in which we can improve that agility even more moving forward.

And then in terms of de minimis, so we fulfill approximately 2/3 of our U.S. e-commerce orders through Canada. Most of those shipments would have been under $800 and would have qualified for the exemption. So it's a meaningful impact for us. I would share that we are looking actively at our DC network and part of our mitigation strategy is inventory placement and making sure we're most efficient as we move forward.

The next question is from Matthew Boss with JPMorgan.

So Calvin, on your revised outlook in both the U.S. and China for the year, could you elaborate on what you saw or how you saw traffic trends progress over the course of the second quarter? And any change so far in the third quarter that informed the more cautious outlook for the year?

Matt, so in terms of KPI trends throughout the quarter, May was our strongest month and July was our weakest. So we did see the trend decelerate as we move through the quarter. We did see store and e-commerce traffic slow a bit as we move throughout the quarter. Conversion was relatively consistent and then AOV flat to slightly worse. I would share quarter-to-date, the U.S. trend is generally in line with our annual guide. Canada is a little bit lower than our annual guide for the Canada region. And then China is on the higher end. We do expect Q4 China will be on the lower end just given the shift of Chinese New Year out of Q4 and into Q1.

Great. And then, Calvin, could you maybe just elaborate on some of your comments before on changes in the industry that I think you said is challenging your core assortment. And then regionally, I mean, what do you think is different here in the U.S. relative to what you're seeing from the brand overseas?

Thanks, Matt. So from an industry or competitive position, what I'd say is our brand remains strong. Our guests are loyal and our product is uniquely positioned. And as I've said before, there's lots of opportunity for us to keep growing across many categories. Competition in our space has always been intense, and there's lots of share for us to gain. And that said, competition is different today. There are more players across all of specialty, and they're offering athleisure and performance solutions. Our product is uniquely positioned. And as we continue to drive our unique approach of solving that needs of our guests, when we deliver, we win and continuing to grow our performance apparel this quarter, I think, is a good example of that. And as we've learned and I've shared the opportunity with some of our lounge and social core franchises is a reminder to the team that when we don't and the need for us to continue to create new styles so that we can stay ahead of those that are copying our successes. And we know we can do better for our guests, especially in these categories, and that's the focus. From a regional perspective, as I shared, our low to mid-value consumers, the newer guest cohorts in the U.S., we continue to see increase in spend. And when I look across international regional markets, we are earlier in our growth, earlier in share, earlier in guest acquisition and our relationship with those guests. So I think the overall assortment continues to resonate and drive our momentum and our international business was strong in the quarter. And all the changes that the team has been in for next year will benefit and serve the entire globe because we know new styles are resonating everywhere. So very positive that, that will just have an impact across all of our markets.

The next question is from Michael Binetti with Evercore.

Just a couple since we're on the international theme. Could you speak a little bit to Canada? I know in previous quarters, you said some of the issues you identified were isolated to the U.S., but your comment on the Canada trend recently. I just wanted to check if you're starting to see some of those issues in Canada or what's causing some slower trends there. And in China, maybe just a thought on where store profitability is today versus prior peak, so we can think about some of the guidance you gave within the context of how that market will affect the margins. And then I guess, Meghan, I don't want to exhaust this, but as you -- you gave us a lot of components to think about on the margin for 2026 between tariffs and de minimis. But it strikes me as the mix of new product keeps moving higher that usually comes with a placeholder for higher markdowns as well as you don't have as much data on what sell-through will be as you do for legacy products. Is that a fair assumption? Or any other building blocks we should be mindful of that wrap into next year?

Thanks, Michael. I'll quickly go on Canada. We did see similar macro conditions in the Canadian market this quarter regarding some of the consumer uncertainties. And as guests are spending less overall, they are reacting well to new styles and spending less on styles they already have. And I expect the changes we're making in the U.S. will benefit our business across all the important markets, including Canada.

On China, we did see expansion in our operating margin in Q2. I would say in terms of where the growth came from, it was predominantly e-com, while our stores were a little bit more pressured in the quarter. So a little bit of opportunity, I would say, in our stores as we see the traffic there recover. From a margin perspective, we are actively planning 2026. There's 2 components really that are impacting us. So the first is revenue, and we're focused on driving that U.S. inflection. We will see a healthy flow-through on operating margin as we see that business recover. However, acknowledging, as you mentioned, newness and managing that dynamic, we are going to be very mindful of inventory as we get performance in on the new styles and chase that trend on the upside. So definitely looking to maintain our focus on full price component of our business and managing the markdown piece. And then the second large impact to our business is obviously tariffs and de minimis. So we continue to work on mitigation strategies there and mentioned right now, our expectation is $320 million impact. And then there'll be some puts and takes as we go through our planning process. There are some pieces of expense that we've pulled up this year that will contemplate add-backs as appropriate and obviously, all with protecting long-term brand health and our potential for the brand.

The last question is from Sharon Zackfia with William Blair.

I was curious, we saw e-commerce outpace retail stores for the first time, I think, since '23 in terms of growth. Are you seeing a change in the way the customer is shopping the brand? Or is that reflective of where you were choosing to do kind of the clearance activity?

Yes. I would say we saw traffic decline slightly in both stores and e-com. We did see a conversion uptick on e-com. I would say a little bit of consumer behavior. And then also we did see higher markdowns in the quarter. We tend to clear those more through our e-commerce channels, so that would be reflective there.

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