Lululemon Athletica Inc (LULU) — Q1 2021 Earnings Call Transcript

Thank you, and good afternoon. Welcome to lululemon's First Quarter Earnings Conference Call. Joining me today to discuss our results are Calvin McDonald, CEO, and Meghan Frank, CFO. Before we begin, I want 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 evaluated, but it is inherently dynamic and can change quickly. Actual results may differ significantly from those contained in or implied by these forward-looking statements due to risks and uncertainties related to our business, including those outlined in our most recent filings with the SEC, such as our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements made on this call are based on assumptions as of today, and we explicitly disclaim any obligation to update or revise these statements due to 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 can be found in our quarterly report on Form 10-Q and in today's earnings press release. Additionally, the comparable sales and store productivity metrics discussed today are presented in constant dollars. The press release and accompanying quarterly report on Form 10-Q are available in the Investors section of our website at www.lululemon.com. Before we start, I encourage our investors to visit our Investor site for a summary of our key financial and operating statistics for the first quarter, as well as our quarterly infographic. Today's call is scheduled for 1 hour. Now, I will turn the call over to Calvin.

Thank you, Howard, and hi, everyone. I'm excited to speak with you about our first quarter results and the momentum we're seeing across the business. As the press release describes, we're off to a particularly strong start to 2021, with revenue growth of 88% over the same period last year. And when you look at our 2-year CAGR, our performance truly stands out and shows sustained momentum in the business. Our first quarter results reflected our strength across all drivers of growth, fueled by continued expansion in our e-commerce business, our performance across categories and geographies, and a rebound in the number of guests shopping in our brick-and-mortar stores. I want to take a moment to recognize the resiliency and agility of our teams across the globe. Their commitment and dedication enable this impressive performance, and it would not be possible without them. On today's call, I will speak to our first quarter results, our Power of Three growth pillars, and the progress toward delivering against our impact initiatives. You'll also hear from Meghan Frank, our CFO, with further details about our Q1 financial performance and our guidance outlook. We'll then be happy to take your questions. Looking at the quarter, our results were driven by strength across channels, regions, and product categories. Here are a few key operating metrics. Firstly, our total revenue of $1.2 billion reflects an increase of 25% on a 2-year CAGR basis. This growth rate represents an acceleration relative to our 3-year CAGR of 19% leading up to the pandemic, and reinforces that we remain early in our life cycle and have a unique business model that allows us to thrive in an ever-changing environment. In addition, our revenue increased across each of our regions, up 23% in North America and up 41% in our international markets, both on a 2-year CAGR basis. Secondly, growth within our e-commerce business remains strong, with comps up 50%, which is on top of the 70% increase in the same quarter last year. And thirdly, adjusted earnings per share were $1.16 versus $0.74 in 2019, significantly ahead of our expectations. And we are also pleased to see our momentum extending into the second quarter. We delivered at this high level while we also strategically managed a number of ongoing macro operating challenges, such as continued store closures, capacity constraints, supply chain challenges at the ports, and reduced air freight capacity. While challenges of all types will no doubt remain going forward, I'm confident we will continue to manage them effectively and deliver outstanding results. In summary, lululemon continues to become stronger quarter after quarter. We are very early in our growth story, and we are well positioned for the post-pandemic world. And the opportunities ahead of us are significant and continue to expand. I will now provide a bit more color on the first quarter results. We are firmly on track to deliver on our commitments contained in our Power of Three growth plan, through our 3 pillars of product innovation, omni-guest experience, and market expansion. Within product innovation, we continue to leverage our Science of Feel platform to deliver technical athletic apparel to our guests. Our sweet spot is creating versatile and stylish products that include technical innovation, comfort, and flexibility. In the first quarter, we saw strength across our assortment with women's revenue increasing 23% and men's growing 27% on a 2-year CAGR basis. I will now share a few more thoughts related to our product. We saw strength in women's across the assortment as guests are responding well to both tops and bottoms. Our performance in tops was driven by core styles and franchise extensions, such as the Align tank. Our male guests returned to our stores as we emerged from the pandemic. Men's growth outpaced women's growth on both a 1- and 2-year basis, and we are seeing very positive momentum in our On The Move assortment. Across both the women's and men's businesses, our sales success reflects our ability to consistently introduce new innovations to our guests as we expand core and newer categories and leverage our spectrum of raw materials. We're in the early days of our product journey with ample opportunity to expand across our 4 key product areas of Yoga, Run, Train, and On The Move. And speaking of Run, this quarter, we launched a global run campaign that highlights how we are making running more accessible and inclusive. And we took a broad-based approach that included messaging that featured male and female athletes in a broad range of products. A platform that highlighted existing ambassadors along with new ambassadors, such as Ultra Marathon Runner, Mirna Valerio; Brooklyn-based filmmaker and founder of Running to Protest, Coffey; Canadian 10,000 meter record holder, Natasha Wodak; and Olympian leader and mentor, Colleen Quigley. I'm pleased with the results of our Run campaign, and it's an example of the leadership Nikki Neuberger, our Chief Brand Officer, is bringing to the company. And I look forward to her joining us on a future call. Let me now turn to our omni-guest pillar and the strength we saw across channels in Q1, with the upside in revenue driven by both our stores and e-commerce businesses. Here are a few highlights I'd like to share. The healthy comps in our e-commerce channel were driven by a mix of new and existing guests. We're also happy to see the investments in our digital business paying off, and we're continuing to improve product education, offer better outfitting solutions, and tell stories in a more compelling way. When looking at our store channel, I remain very enthusiastic about our performance. We are committed to stores, and we are building more stores this year and seeing more and more great real estate opportunities become available in great areas in key cities around the globe. We will continue to be opportunistic in grabbing these locations as they become available. We are also fortunate to have our store teams in a good position as well. The pay protection initiative we implemented last year for employees has allowed us to retain and engage them throughout this period. This meant we could reopen stores quickly, and this agile and dedicated team has allowed us to continue to support the increased traffic momentum in the stores that we are experiencing now. This helped us deliver against our plans to kickstart our stores and re-engage our store-only guests. Here are some details on our performance. Firstly, store productivity improved to 88% of our levels in 2019. This exceeded our expectations and moves us towards our goal to return to productivity levels consistent with 2019. Secondly, even as traffic to our stores increased significantly in the quarter, conversion remains strong and continues to increase in the double digits. And as a reminder, these capacity constraints are just starting to lift in many markets in this quarter. Touching on MIRROR. We continue to be pleased with the performance of MIRROR and the opportunities within the at-home fitness space. MIRROR had a strong Mother's Day and remains on track to deliver $250 million to $275 million in revenue in 2021. We continue to leverage the lululemon ecosystem, and by the middle of this month, MIRROR will be featured in nearly 90 lululemon locations in the United States. We're well on our way to 200 shop-in-shops in time for the holidays later this year. In addition, we now have dedicated MIRROR specialists among our educators in each of these stores, and the early sales results are encouraging. We will have more to share about MIRROR later in the year as we gear up for new features, add more live classes, and expand into Canada, the first international market of several we will see in the future for MIRROR. Switching now to our international growth. We continue to be very pleased with our results and our growth potential across our 3 regions of China, Asia Pacific, and EMEA. Andre Maestrini has hit the ground running as he leads our international team and sets ambitious growth goals, and I look forward to having Andre join us in the future for a call. From our new stores in China to continued growth in Asia Pacific to our online performance in EMEA, the results continue to reinforce that we are early in the growth trajectory. And as I have said before, I can see a time in the near future where our international business grows in size to be equal to our North America business. In closing, I'm proud to share a few details about our latest impact initiatives, which help us to achieve our multi-year goals, including our goal to make 100% of our products with sustainable materials and end-of-use solutions. We launched lululemon Like New last month, our first re-commerce program. This is a trade-in and resale program for our guests, and all of the profits are reinvested in our sustainability initiatives. We have launched in California and Texas, and the response is encouraging. This kind of program reduces carbon, water, and waste and also enables us to attract new guests, particularly younger guests who are fans of thrifting. In the quarter, we also introduced our Earth Dye collection, which is made completely from materials upcycled from plants and uses less water, and is an example of the type of collections we're expanding in the future. In closing, these results and our continued focus on innovation demonstrate our confidence in the future and how we can continue to pull the many levers of growth we have available to us. Let me now hand it over to Meghan for a review of our first quarter financials and our guidance outlook. Meghan?

Thanks, Calvin. Our Q1 results were strong relative to last year's COVID-impacted quarter, but more importantly, relative to Q1 of 2019 as well. On a 2-year CAGR basis, we saw double-digit top line growth across all major regions, with the standout being Mainland China, with an approximately 90% 2-year revenue CAGR. We also saw broad-based strength across merchandise categories, with women's, men's, and accessories all growing in excess of 20% on a 2-year basis. We are proud of these results despite the ongoing impact of COVID-19, and we have strong momentum moving into Q2 as reflected in our updated guidance I will share in a moment. Let me now share with you the details of our Q1 performance. I will also discuss specifics on our balance sheet, including our cash position, liquidity, and inventories. Please note that the adjusted financial metrics I will share include the operating results of MIRROR, but exclude approximately $8 million of acquisition-related costs and their associated tax effects in Q1 2021, and $2 million of acquisition-related costs and their associated tax effects in Q1 2020. You can refer to our earnings release for more information and reconciliations to our GAAP metrics. For Q1, total net revenue increased 88% to $1.2 billion, above our expectations of $1.1 billion to $1.13 billion. This included an 82% increase in North America and a 125% increase in our international business. On a 2-year CAGR basis, total revenue increased 25%. In our digital channel, revenues increased 61% on a 2-year CAGR basis, above our expectations of approximately 50% growth. E-commerce contributed $545 million of top line or 44% of total revenue. We continue to see strength in traffic and conversion. Traffic was driven by both new and existing guests, and conversion continues to benefit from the positive guest response to the enhancements we've been making to our e-commerce space and mobile app. In our store channel, sales increased 3% on a 2-year CAGR basis, above our expectations of flat to slightly negative. Looking at store productivity relative to 2019, Q1 improved to 88% versus 71% in Q4 of 2020. At the end of the first quarter, we had 93% of our stores open. Square footage increased 10% versus last year, driven by the addition of 34 net new stores since Q1 of 2020. During the quarter, we opened 2 net new stores. Gross profit for the first quarter was $700 million or 57.1% of net revenue, compared to 51.3% of net revenue in Q1 2020 and 53.9% of net revenue in Q1 2019. Our gross margin increase of 320 basis points relative to 2019 was driven by 220 basis points of leverage on occupancy, depreciation, and product team costs; an 80 basis point increase in product margin, with the decline in markdowns versus 2019 and despite higher airfreight expense related to COVID-19. In addition, we had 20 basis points of favorability in foreign exchange. Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were $497 million or 40.5% of net revenue compared to 46% of net revenue in Q1 2020 and 37.4% of net revenue in Q1 2019. Leverage in the quarter relative to Q1 2020 resulted from the sales increase relative to the COVID-impacted quarter last year. The deleverage relative to Q1 2019 is the result of the consolidation of MIRROR's results this year, but not in 2019, coupled with higher depreciation due to accelerated investments to support our e-commerce business and COVID-related operating channel costs. Adjusted operating income for the quarter was $202 million, or 16.4% of net revenue compared to 5.3% of net revenue in Q1 2020 and 16.5% of net revenue in Q1 2019. Adjusted tax expense for the quarter was $49.5 million or 24.5% of pretax earnings compared to an adjusted effective tax rate of 14.7% a year ago. In both Q1 2021 and Q1 2020, our tax rate benefited from certain discrete tax deductions related to stock-based compensation. However, since our Q1 2020 profit before tax was significantly lower due to the impact of COVID, this meant that these additional discrete tax deductions had a bigger impact on our tax rate last year. Adjusted net income for the quarter was $152 million or $1.16 per diluted share, compared to adjusted earnings per diluted share of $0.23 in Q1 of 2020 and $0.74 in Q1 of 2019. Capital expenditures were $64 million for the quarter compared to $52 million in the first quarter last year. Q1 spend relates primarily to digital channel and analytics capabilities, supply chain investment, technology spend to support our business growth, and store capital for new locations, relocations, and renovations. Turning to our balance sheet highlights. We ended the quarter with over $1.6 billion of total liquidity. We had approximately $1.2 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory grew 17% versus last year and was $733 million at the end of Q1. On a 2-year CAGR basis, inventory in Q1 increased 29%. While we continue to see some delayed inventory receipts due to issues at the ports, our team is strategically using air freight, and we are comfortable with the level and composition of our inventory as we move into Q2. At the end of Q2, we expect levels to increase approximately 25% to 30% relative to Q2 2020. In Q1, we repurchased 270,000 shares at an average price of $311. At the end of the quarter, we had $416 million of availability remaining on our current share repurchase authorization. Let me shift now to our outlook for Q2 and the full year 2021. Our guests continue to respond well to our merchandise offering, including both tactical and On The Move apparel and MIRROR. As we are welcoming guests back to our stores, we also remain focused on our digital business and omni capabilities to ensure we are there for our guests no matter how they want to engage with us. We also continue to plan for multiple operational scenarios as we navigate the ongoing COVID-19 environment. For Q2, we expect revenue in the range of $1.3 billion to $1.33 billion, representing a 2-year CAGR of 21% to 23%. In terms of stores, we currently have approximately 93% of our stores open. On a 2-year CAGR basis, we expect stores to be approximately flat, with e-commerce growing at approximately 55%. We expect gross margin in Q2 to increase from last year's COVID-impacted quarter and also be 30 to 50 basis points higher than Q2 of 2019. Relative to 2019, our gross margin is benefiting from a higher e-commerce penetration. And leverage on occupancy and depreciation due to pulling back somewhat on new store openings in 2020 as well as the level of rent reductions. Our Q2 guidance reflects continued pressure from air freight costs due to port congestion and capacity constraints. In Q2, we expect SG&A deleverage of approximately 400 basis points relative to 2019. Drivers of the deleverage versus 2019 include higher depreciation due to accelerated investments to support our e-commerce business in 2020 and 2021; consolidation of MIRROR's results this year, but not in 2019; and COVID-related costs, including labor for stores that remain closed. Turning to EPS. We expect adjusted earnings per share in the second quarter to be in the range of $1.10 to $1.15 versus EPS of $0.74 a year ago. This includes operating results from MIRROR but excludes acquisition and integration-related costs. As a reminder, we reported EPS of $0.96 in Q2 of 2019. For the full year 2021, we now expect revenue to be in the range of $5.83 billion to $5.91 billion. This range continues to include $250 million to $275 million for MIRROR and now assumes our e-commerce business grows in the high single digits relative to the outsized strength we experienced in 2020. For e-commerce, we expect a modest decline in Q2 as we anniversary the height of COVID-related channel shifts and our online warehouse sale. And we continue to expect modest growth in Q3 and Q4. When looking at total revenue, our guidance range implies a 2-year CAGR of 21% to 22%, which is higher than our 3-year revenue CAGR of 19% leading up to 2020 and is well ahead of the low teens CAGR contemplated in our Power of Three growth plan. We now expect to open 45 to 55 net new company-operated stores in 2021, up from our prior guidance of 40 to 50. This includes approximately 35 to 40 stores in our international markets and represents a square footage percentage increase in the low teens. We now expect gross margin for the year to expand between 150 to 200 basis points compared to the modest increase we saw in 2020. For the year, the anticipated margin expansion continues to include approximately 50 basis points of negative impact from additional freight costs, but it's still in excess of our Power of Three plan, which assumes modest gross margin expansion annually. The outperformance is expected to be driven primarily by a shift relative to our initial plans and investments from new store openings and remodels towards digital, which impacts SG&A. When looking at SG&A for the full year, we now expect deleverage of 30 to 50 basis points versus 2020. Drivers of the deleverage continued to include consolidation of MIRROR for the full year and investment in MIRROR brand building. We expect our effective tax rate for the year to be similar to 2020. We now expect our fiscal year 2021 adjusted diluted earnings per share to be in the range of $6.73 to $6.86. Our EPS guidance continues to assume modest dilution from MIRROR in the 3% to 5% range, excluding acquisition and integration-related costs. It also excludes the impact of any future share repurchases. We now expect capital expenditures to be approximately $365 million to $375 million for 2021. The increase versus 2020 reflects increased investment in our supply chain, digital capabilities, new store openings and renovations, including MIRROR shop and shops, as well as other technology and general corporate infrastructure projects. Before handing it back to Calvin, I want to thank our teams across the globe for their agility, enthusiasm, and dedication to lululemon that allows us to deliver these consistently strong financial results. And now back to Calvin for some closing remarks.

Thank you, Meghan. Before we take your questions, I just want to say on behalf of the entire management team that we are grateful to our teams who helped us deliver these results, and to you who are helping us raise our expectation about what's possible for lululemon this year and well into the future. And with that, we'll be happy to take your questions. Operator?

And congratulations on the great start to the year and the momentum continuing. Calvin, my first question is for you. It's about, as you become a global brand and now you have MIRROR and you're investing in that for marketing, are there any change in how you philosophically think about the marketing, the advertising expense line, demand creation, so to speak? And when we're thinking about MIRROR, how should we think about the slight dilution coming in the form of increased ad spend? And when might we, in the future, think about sort of a breakeven notion? I guess, another way of asking sort of that probably more simply is when you are building the brand for MIRROR, do you think about investing for top line growth first and maybe not necessarily prioritizing profits given that there's so much opportunity there?

Thanks, Adrienne. I'll try to compartmentalize that question because there's a lot of exciting topics embedded in that. Overall, from a brand perspective, I would tell you, as I highlighted with our Run campaign in this quarter, it's one of many ways we're looking at increasing both awareness and consideration for lululemon moving forward. And that applies to all markets we're in, both U.S., Canada, and internationally. And Nikki and the team are in a variety of different initiatives this year where we're testing and learning ways to do more at top of funnel. That's all included in the guidance that Meghan shared. But we are excited about the different initiatives we have planned because we see a huge opportunity around driving awareness and consideration, both for men's as well as women and in every market we're in, and we're going to lean in and do more of that. And the Run campaign is an example of us marketing ourselves more as a dual gender, showcasing both men and women, as well as leveraging our ambassadors, our community, and the influencers and those key relationships. So there's a lot of work underway, and we absolutely see the ability to drive awareness consideration for lululemon. Similarly, in MIRROR, there's a lot of opportunity around awareness and consideration. That's where we see leveraging synergies within lululemon in the stores and leveraging the 10 million guests that the brand has to help drive that. And we know we're investing as an acquisition vehicle to get guests in and purchase MIRROR. And that's in the guidance as well, but we'll continue to do that. Fast forward, these brands are going to continue to be able to leverage one another, and we see synergies in the community. We see synergies in refer a friend. We see synergies across the ambassadors and the content that we're producing. So we're early in how we bring awareness across both brands to each other brand and excited about what we're seeing in the plans we have moving forward. And I'll let Meghan just pick up a little bit on your question around the investments.

Hi, Adrienne. Regarding our investments and the path to breakeven, we were very pleased with MIRROR's performance in 2020, as it surpassed our sales expectations with $170 million. We're maintaining our guidance for MIRROR in 2021, projecting revenue between $250 million and $275 million, along with an expected EPS dilution of 3% to 5%. We have several exciting initiatives lined up for this year, such as expanding our instructor base, increasing the number of studios, entering the Canadian market, and expanding into over 200 lululemon stores. Given the seasonality of the business and the ramp-up in store openings, it's still early in the year for us, but we are experiencing a positive growth trend in the MIRROR segment. We had a strong Mother's Day and were pleased with the results. While we are not providing specific details on breakeven at this moment, we are optimistic about the future and view it as a profitable business for us in the long run, which is well within our control.

Yes. This is Kate on for Ike. Calvin, I guess, just at a higher level. You spoke to, in the quarter, the business accelerating with a 25% CAGR, I believe, on a 2-year basis versus what you were running pre pandemic. I'm just curious now that we're that much further along in the recovery, how you are evaluating perhaps a widening TAM opportunity on the other side of COVID? That would be helpful.

Thank you, Kate. As I've mentioned previously, we were performing strongly before the pandemic. I believe we outperformed our peers during the pandemic, and we are optimistic about our performance and our ability to sustain it in the post-pandemic environment. This momentum is fueled by a lasting increase in consumer trends focused on healthier living, versatile apparel, at-home workouts, and community engagement, which align with our strengths. We're still in the early stages of growth, and this quarter exemplifies that with growth across all channels, including stores and online, as well as across various categories and demographics. We're early on this journey. The addition of MIRROR has significantly expanded our total addressable market, which we are eager to invest in due to its promising potential and profitability. It will enhance the lululemon brand by fostering community connections and driving apparel sales. Additionally, we are witnessing ongoing trends in sweat. Our focus on running, yoga, and training continues to resonate well, and we see growing interest in hiking and out-of-the-money (OTM) options, especially for women, where we are just beginning to expand our offerings. We recognize the potential for growth in women's OTM, MIRROR, and the introduction of footwear next year, all of which present substantial opportunities that contribute to the evolving trends in our guest base and the overall growth of activewear.

Congrats on the strong start here. Maybe just to start off to follow up on, Calvin, the comments you were just making on the OTM. I guess maybe just from a marketing standpoint, I mean there's been a lot of innovation with the On The Move assortment, and that would seem to be particularly relevant I guess today, as guests are returning to travel and in-person activities. Just can you speak a little bit more about how you plan to amplify that message, both with existing guests as well as for new guest acquisition?

Yes, I'll break it down starting with men's and then women's. In men's, we continue to innovate with our raw materials and key franchises. We have added the Bowline, which is performing well and showing growth. As we increase our top-of-market marketing activities to drive awareness and consideration, we recognize that our On The Move line is a significant factor in attracting new customers to the brand, and from there, we are able to move them into sweat and other categories. This strategy is gaining momentum, and our continued investment in marketing will enhance our progress. For women's, the focus begins with our product offering. We have a limited assortment, but when we introduce new items, the response has been very positive. We are looking forward to expanding our bottoms into the casual off-the-body fit and our sweater initiatives in the second half of the year. We believe that we have great potential to create versatile options for her wardrobe and tap into our existing customer base for additional sales opportunities.

And then for Meghan, as we think about the path to recovery, is it your expectation that the store productivity can return to pre-pandemic levels or even grow from pre-pandemic levels? Or is some of this channel shift permanent? And a lot of different regional trends that are embedded in the productivity metric you shared, just maybe any insight you can share on some of the trends in regions that have perhaps had restrictions relaxed for the longest?

Sure. Thanks, Mark. So we were really pleased with the improvement we saw in store productivity in Q1, at 88% versus 71% in Q4. We did see improvement as capacity restrictions moderated throughout the quarter. And we do fully expect to achieve 2019 levels of store productivity. At this point in time, we're not going to put a time frame on it, just given ongoing uncertainties related to COVID. And we still have a level of store closures in play at this point in time, but we're really encouraged by trends we're seeing in our store base.

And congrats again on the momentum. So maybe first is on the margin front. So on gross margin, first quarter, more than 300 basis points above 2019. I guess, maybe could you just help bridge drivers in the second quarter forecast that you're embedding relative to 2019? And just any back half assumptions for us to consider as we think about the gross margin line through the cadence of the year?

Sure, Matt. So in terms of Q1, and this is relative to 2019, we had 320 basis points of expansion versus our initial expectation of 50 to 100. That 320 basis points was driven by 220 basis points of occupancy and depreciation and product team, leverage really on that higher sales achievement. And then 80 basis points increase in product margin. We did see some good trends relative to 2019 in markdown rates. And we also did experience some pressure, as we've discussed, on higher air freight expense. And then we had 20 basis points of favorability in FX. When we look to Q2, again, relative to 2019, we are looking for 30 to 50 basis points of expansion relative to 2019 and really, we are expecting continued headwinds in air freight. And then we have some level of rent concessions that we're anniversarying from last year. And then our Q2 revenue growth rate is slightly lower than Q1, leading to that delta. In terms of the full year, we've given some color relative to 2020. So we're expecting, for the full year, 150 to 200 basis points expansion versus last year, and that is up from our prior expectation of 100 to 150 basis points.

Great. And then maybe just a follow-up for Calvin. On the outsized growth that you're seeing in e-commerce relative to the sequential improvement that you're also seeing at brick-and-mortar, I guess, any changes in consumer preferences that you saw take place over the first quarter? Or maybe into May, as we think by category, maybe tied more to recovery, the return of sport and some physical activity relative to the lifestyle side as maybe people are thinking about or actually leaving their houses and returning to some normal activity?

Yes, thanks, Matt. As we mentioned, active wear was the main driver of our business last year and continued to be essential in Q1. It was encouraging to see our men's segment return strongly, showing growth throughout 2020 and into 2021, surpassing the women's segment. This growth was largely fueled by sweat-related activities, with shorts performing particularly well. We also noticed an increase in our out-of-the-mainstream offerings, and we’re optimistic about this momentum. Overall, active wear remained the key driver across all categories, with significant growth in both shorts and tops. Our team has focused on enhancing our tops business and expanding our franchises, which is a fundamental part of our strategy. We are now beginning to consistently extend this approach to our bottom wear as well, and the response has been very positive. Overall, our business in tops and shorts performed well, showing balanced growth across all categories, both men's and women's, as well as across different regions.

I wanted to follow up on Mark's question. He was talking about store productivity returning to 2019 levels. And I wanted to ask about the store profitability. You made some further progress there in the first quarter. Is there any reason why the store margins wouldn't get back to 2019 and perhaps surpass them as you move back toward 100% productivity?

Hi Lorraine, it's Meghan. Yes, I think we are still dealing with a degree of COVID-related expense in our store channel as well as the pressure from productivity, so store COVID-related labor as well as PPE. And I don't expect there's any barriers to reaching 2019 store profitability levels once the productivity is normalized.

Congratulations on the excellent progress. Calvin, you've mentioned the Power of Three and the international opportunities, which seem to be developing faster than anticipated, especially given the sizing and category expansion you described. How do you evaluate the international market? Have you gained any insights from the regions you're currently operating in, even though they are small, that could significantly influence growth in the future? Lastly, regarding the COVID-related costs you mentioned, how do you foresee those changing or decreasing in the future?

Great. Thanks, Dana. I'll take international and then hand off to Meghan on the COVID expenses. Obviously, I think the numbers indicate the potential that we have internationally. And I think for the last few calls, I've shared the long-term opportunity of this brand, this business being 50-50 North America-international. And I don't see anything that's going to prevent us from achieving those results. We're seeing good growth in every market. In EMEA, we continue to see growth even with the pressure on stores because our dot com business continued to drive growth. And in every market, we're in Australia, New Zealand, or rest of APAC, very solid momentum in China being one of our biggest potentials and continue to see momentum in there. We were up 200% in the quarter, strong growth in stores, strong growth in dot com and excited about that. So our commitment was to quadruple the business. We are definitely achieving those results and excited to share the next future of growth as we continue to see the maturity of these markets and invest in them. We're in the right markets. And we're early in terms of our share potential in these. So we're really leaning in and focused on maintaining and growing the momentum in these markets. And then with Andre, we'll be able to come back on a later call and share the future plans for continuing to drive growth. And then, Meghan?

Great. Hi, Dana. We are starting to see a reduction in COVID-related costs, although it will largely depend on the broader environment. We remain dedicated to our Power of Three growth plan, focusing on achieving operating profit growth that surpasses sales growth, and we are committed to managing our business accordingly. In the first quarter, we observed operating margins of 16.4%, compared to 16.5% in the first quarter of 2019. This year’s first quarter included MIRROR, which contributed to positive expansion in the lululemon segment and keeps us on track with our Power of Three growth plan.

Curious about input costs, what you're seeing and how we should think about AUC over the next several quarters and into next year? And also just how you're thinking about pricing in a potentially inflationary environment?

Hey Paul, it's Meghan. Regarding input costs, we haven't observed any significant impact on 2021. Any changes we are noticing are already included in our guidance. We are closely monitoring the market and are proactively managing any pressures as we transition into 2022. We'll definitely provide more updates when we share information for 2022.

And then just adding on to that, Paul, as it relates to pricing, because we're not seeing any direct pressure this year, we're comfortable with our pricing strategy through to the end of '21 and the merchants are working with the supply team on any potential changes that we may need to implement moving into '22. But we're constantly evaluating our range, looking at the new innovations coming and pricing accordingly to drive the best value for our guests.

Got it. And can you just talk about your ability to chase product. Just given some supply chain constraints that were mentioned, I'm just curious how quickly you can get back into product.

Yes, definitely. So inventory was certainly one area where we postured to drive for growth, both throughout 2020 as we navigated the pandemic and then into 2021. The team has been really proactive in strategically leveraging air freight to meet guest demand. And we do have the ability to chase categories and keep a close eye on what's going on with the supply chain, but we feel really well positioned to navigate through this year and meet guest demand.

I wanted to just ask the question Matt asked, but a slightly different way. As consumers are starting to emerge and go out, are you seeing a shift in the kinds of products they're buying, let's say, particularly in the April, May time frame? And then a question for Meghan on SG&A. Obviously, this year, you've given some guidance color, which is super helpful, and you're looking for some deleverage relative to 2019 for MIRROR and the other factors that you cited. I'm just wondering if we should think about you starting to leverage SG&A beginning in 2022, if that's a realistic expectation. And I'm just trying to sort through the COVID costs here this year to understand how much of the COVID costs will not recur in 2022? And I think you're putting some store payroll that will be recurring into your COVID costs. So if you could maybe separate that out for us, that would be helpful.

Kimberly, I'll go first and just pick up on the first question. We have not seen a meaningful shift in our active wear categories through the first quarter. As you know, a big piece of our business and sales are in core. It's in athletic active wear. And I think with that, it has an embedded strength to not be purely trend-driven or fashion-driven. He and she are responding well to color. The team's done a wonderful job in introducing color into these core franchises in silhouettes. But our active wear sweats, shorts and tops have really been the uptick in momentum. But overall, the growth is across almost every category equally and very balanced across geographies.

Kimberly, I'll take the second part of that question. So in terms of SG&A, we're expecting for the full year 30 to 50 basis points of deleverage, which is better than our prior expectation of 50 to 100 basis points. And that deleverage is really driven by consolidation of MIRROR for the full year as well as investment behind that business. And then a rebalancing of investments we did in 2020 into 2021, with the acceleration of our e-commerce business, which the expenses are attributed to SG&A and some pullback on the store side of which occupancy sits up in gross margin. We're really focused on managing the business from a bottom-line perspective and managing operating profit in excess of sales growth. We are not going to break out the COVID cost specifically, but really remain committed to managing to that operating profit in excess of sales growth over the longer term.

I wanted to ask a follow-up on the real estate, the decision to accelerate some of those new store openings. What's giving you the confidence there? Is it real estate opportunities? Is it market opportunities? Are you going to use the newer kind of bigger store format that has more room for men? Is the primary format you're using? And then I have a follow-up on MIRROR.

Great. Okay, Omar, let me answer your first question. I believe it’s a combination of several factors. We have consistently expressed our strong confidence in our store business, its performance, its contribution, and its role in connecting the brand with guest acquisition and driving productivity. Throughout the pandemic and as we emerge from it, we have not seen anything that would change that position. We are still in the early stages of rolling out our store fleet in every market, which presents growth opportunities everywhere, including Canada, the U.S., and internationally. We apply a conservative estimate on an annual basis, but we are also being opportunistic regarding opportunities around the globe, where we are securing key locations of the right size in important cities and markets that come our way. We are capturing these opportunities because we have faith in them. Our newer models allow for greater expression for men, but they don’t significantly exceed our optimal store size, which varies by market. In North America, it ranges from 3,000 to 4,000 square feet or 5,000 to 6,000 square feet, depending on the city and location, but we remain very confident in our store business.

I would like to follow up on MIRROR. Who is purchasing MIRROR? Are you seeing a consistent use case? Is it individuals who already have a home gym and are enhancing it with MIRROR, or are they people trying to make the most of their existing space, utilizing it as an efficient interactive home workout solution? I would appreciate some insights on this.

Yes, absolutely. We are observing that many individuals with various at-home fitness solutions are incorporating MIRROR as a versatile option. It appeals particularly to those who may not have a dedicated gym space or a place to attach devices, seeking a multifunctional workout solution. We're also seeing significant interest from lululemon customers, along with a notable number of non-lululemon customers who own MIRROR. This is exciting because it allows us to create synergies where lululemon customers purchase MIRROR while MIRROR customers explore lululemon products. The versatility of our customer base and how they utilize MIRROR is striking. The key opportunity lies in maximizing these synergies as we start to engage our stores more, especially as we move beyond the pandemic, to raise awareness for the product.

Congratulations on the significant increase in guidance for both revenue and earnings. Meghan, if we examine the business from a profit and loss standpoint, excluding the high end of the MIRROR revenue guidance and considering the midpoint of the dilution, the operating margin would be approximately 23%. This is comfortably higher than it was in 2019 for the core business. Can you discuss the long-term potential for margin improvement in the core business, especially as store-level margins recover to previous levels?

Yes. Thanks, John. So as you mentioned, we are headed towards a very healthy operating margin for lululemon-only for the full year, which is in line really with our Analyst Day expectations of operating profit and growth in excess of sales growth. We're really focused on managing that for the long term. And as we look towards the future, investing behind growth opportunities in order to maximize our top and bottom line. So we're maintaining that commitment, and we are firmly on track to those Analyst Day targets, which were really grounded in growth rates. So we'll continue on that trajectory, and we'll update our beyond 2023 plans at the appropriate time.