Lululemon Athletica Inc (LULU) — Q2 2024 Earnings Call Transcript

Thank you, and good afternoon. Welcome to Lululemon 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 its nature are dynamic and subject to rapid 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 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 made on this call are based on assumptions as of today, and we expressly disclaim any obligation 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 Investor section of our website. 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 one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Calvin.

Thank you, Howard. I'm glad you could all join us on the call today to discuss our business in quarter two and a revised outlook for the second half of the year. On today's call, I will speak to the strength in our international business. I will also spend time discussing our business in the U.S., including some missed opportunities in women's, our assessment of the root causes, the plans underway to address these in the near term, and the many reasons for our continued optimism regarding our growth potential in the U.S. Next, I will speak to our recent brand campaigns and activations. Meghan will review our financials, and we will close by taking your questions. So let's get started. In the second quarter, total revenue increased by 7% or 8% in constant currency. By merchandise category, women's increased by 6%, men's grew by 11%, and accessories increased by 7%. Earnings per share increased by 18% driven by strong gross margin, which contributed to 110 basis point increase in operating margin. In addition, demonstrating our continued confidence in the business, we repurchased $584 million of stock in quarter two, bringing us to $1.2 billion year-to-date. Let's now discuss our regional performance, beginning with our international business. In quarter two, we continued to see strength in our international markets as the Lululemon brand resonates with guests around the world. Growing our business outside of North America remains one of our largest opportunities, and we remain on track to quadruple international revenue from 2021 levels by the end of 2026. Momentum remains strong, with total international revenue increasing 29% or 31% in constant currency. By region, our results were as follows: China mainland increased by 34% or 37% in constant currency. Rest of the World grew by 24% or 27% in constant currency. In China mainland, our business remained robust in the second quarter as we continued to bring new guests into the brand through our stores and multiple e-commerce platforms. In addition to our innovative product offering and operating model, we are engaging guests through our unique, made to field positioning, which comes to life through our commitment to movement and community. All of which supports the Healthy China 2030 initiative. In quarter two, we built upon the success of our summer sweat game series with our largest activation yet. This year, we expanded the games to more than 70 stores in nearly 40 cities, with approximately 10,000 guests signing up to participate. The national finals were held this past weekend in Beijing. Looking to quarter three, we will build upon last year's success and bring attention to World Mental Health Day in October, with unique activations across several cities in China Mainland. In addition, we will expand our activations to other markets this fall, including South Korea, Germany, the U.K. and the U.S. This is a great example of how our teams from around the world share ideas and activate global campaigns. Shifting to our Rest of World segment, where we continue to perform well in both EMEA and APAC. We expanded further in Southeast Asia with the opening of our second store in Thailand and our fourth in Malaysia. In France, our Paris stores and the Lululemon brand overall benefited from the energy and excitement of the Olympics, which I'll speak to in more detail shortly. Turning to our business in the Americas, revenue increased by 1% or 2% in constant currency. We continued to perform well in Canada with revenue growth of 8% or 11% in constant currency, while revenue in the U.S. was flat. This is a key area of focus for us, and I will now dive deeper into our U.S. business. Our brand remains strong in the U.S. market. Traffic was up across both channels and Google search queries remain positive. Guests are looking for our product, coming into our stores, and visiting our e-commerce sites. While we continue to see growth in our men's business, we have experienced a slowdown in women's. We have improved our inventory levels in smaller sizes through Q2 and are entering Q3 better positioned. As we've analyzed our women's business in more detail, we determined the most significant factor was a product plan that introduced less newness across core and seasonal styles. By newness, I'm referring to seasonal updates we typically express as color, print, patterns, and silhouettes. I'm not referring to our pipeline of innovation, which remains full and the details of which I will share shortly. As we learned more, it became clear to us that this reduced newness, which is below our historical levels and stems from earlier product decisions, has impacted conversion rates given the fewer new options available to our female guests. While this reduction was seen across our women's assortment, it had a more pronounced impact in bottoms and in our online channel. The newness that we had performed well; we simply did not have enough to inspire her to purchase. As most of you know, we announced changes within our product organization in May of this year. We implemented a new reporting structure in which our Global Creative Director, Jonathan Cheung reports to me, and our Chief Merchant, Liz Binder, reports to Nikki Neuburger in her expanded role as Chief Brand and Product Activation Officer. Since this shift, Nikki and I have both spent considerable time with the teams, and we are pleased that this new structure puts design and merchandising on equal footing, reestablishing the healthy balance within a product organization. The teams are working well together and already in action. Our near-term action plan leverages our capabilities in chase and fast track design to bring more seasonal newness into our women's assortment as quickly as possible. The teams have been chasing into some of our strong performers, including aligned leggings in colors and prints, our gold zip scuba in softstreme and new silhouettes and seasonal fabrications. Our fast track design capability allows us to bring newness into our assortment quicker while also testing and learning from new silhouettes. For 2025, we are fast tracking several new styles within performance shorts, tops, and tracksuits. We are optimistic that we will begin to see the benefits of these strategies over the upcoming quarters and return to our historical levels of newness no later than Spring 2025. Moving forward, I feel confident that the new structure and relationship between design and merchandising will lead to more ongoing conversations and consistent decision-making, and I'm excited about the newness and innovation that will be flowing into our upcoming product assortments. While we are disappointed with the recent performance in women's, we see many strengths in our U.S. business. Our store portfolio remains highly productive with significant opportunities ahead. Our industry-leading sales per foot, the success of our new stores, and the positive results from our optimization program all underpin our comfort with our Power Three times Two target of approximately 5% square footage growth annually in the Americas through 2026. We are only beginning to leverage the power of our membership program, which allows us to engage more deeply with our guests, drive loyalty, and increase long-term value. We now have more than 20 million essential members. I'll share more in a moment about how we're expanding our offerings. While we have experienced positive increases across our brand funnel metrics in the market, there is still substantial opportunity to drive unaided brand awareness, introducing Lululemon to new guest segments. As you can see, there are many reasons we feel optimistic about our U.S. business and its growth potential. Let's shift now to our recent and upcoming product innovations. Beginning with men's, the business remains robust and we continue to gain market share. In quarter two, we saw strength across the assortment, including Zeroed In, which was launched this past spring and has quickly become a guest favorite in a top three performance franchise. Our Pace Breaker received positive responses to our shorts, and our recently launched pant and jacket are performing very well. Our new Show Zero Polo, which virtually eliminates the appearance of sweat, also launched this spring and has resonated well with guests and will benefit from increased inventory commitments this fall and into next year. In our lounge offering, including Soft Jersey, Steady State, and Smooth Spacer, continued to perform well and we will fuel the momentum with additional styles and deeper inventory buys. In women's, I'm excited about our product roadmap for fall, which includes an expansion of our train offering with the introduction of a new performance fabric innovation in a tight and expansion of our Wunder Under franchise, offering our iconic legging in different fabrics, seasonal updates within our line franchise, and an updated version of our Chargefeel footwear style. Our accessories business remains positive on top of last year's strong performance. We have diversified into a compelling assortment of bags, including our new crew and double zip backpacks, and additional styles within the Everywhere franchise, including a backpack and crossbody bag, which is fueling continued momentum in the category. One of our goals is to solve for the unmet needs of our guests with new and compelling technical innovations, and this will continue to separate us from other brands. With this in mind, I want to touch on Breeze Through, a new product offering this quarter for guests who participate in hot yoga and other heat-intensive workouts. It was a small buy. We view this as a test and learn. While guests were excited by the fabric, the design didn't meet their expectations. Listening to our guests is central to who we are and how we grow our brand. We took the right step of pausing sales and look forward to reintroducing the fabric in the future. This decision had a negligible impact on our performance in this quarter. I'd now like to spend a few minutes speaking about our recent brand campaigns and activations. Increasing brand awareness and consideration remains one of our single biggest opportunities in almost every market in which we operate. So let me highlight a few examples now. As mentioned earlier, we continue to offer many benefits to members of our free essentials program. In early June, we hosted a members-only weekend at Peloton Studios, New York. This exclusive sold-out event featured live classes, a 5K run, sessions with our Peloton ambassadors, and a wrap-up party. We also launched partner perks for members. We partnered with 12 brands, including Aura and Berries, that offer our members exclusive perks and benefits. Early feedback from guests has been very positive. These strategies illustrate just a few of the ways we engage with our guests beyond a simple purchase transaction by offering exclusive experiences and benefits that help them feel their best, all of which drives and deepens loyalty. Our partnership with the Canadian Olympic and Paralympic teams came to life with the games in Paris and continues for the next several days during the Paralympics. As a Canadian, I'm incredibly proud of our athletes and how our brand showed up during the games. Through our partnership, we outfitted athletes for their off-field activities, and the Lululemon brand clearly benefited from the podium time the team achieved and the exposure during the opening and closing ceremonies. We further leveraged our partnership with a popup shop in Canada House and by offering our Team Canada collection in our nearby stores in Paris, across Canada in both stores and e-commerce, and in the U.S. through our e-commerce channel. This partnership is a great example of how we are elevating the Lululemon brand on the world stage by associating with leading athletes, gaining significant earned media, and growing brand awareness globally. Another area of focus for us is back to school. Bringing younger guests, and particularly men, into the brand remains an opportunity as we increase awareness regarding the versatility of our merchandise and the breadth of our offering. Football players DK Metcalf and Odell Beckham Jr. starred in this year's campaign in North America, featuring our loungewear offering for both men and women, and our Cityverse sneaker. Before I hand it over to Megan to discuss our financials, let me share our high-level thinking on our guidance for the remainder of the year. For quarter three and the full year, excluding the 53rd week, we expect revenue growth of 6% to 7%, relatively in line with quarter two performance. Our full-year revenue guidance acknowledges the uncertainty around the shorter holiday shopping season and the U.S. election in quarter four. Our teams remain focused on the actions I detailed for you. We plan to improve our penetration of newness in the second half of 2024, and we expect to return to our historical levels of newness as we start 2025. While we focus on the U.S., other aspects of our business remain strong, and we are committed to delivering on our Power of Three Times Two target of doubling revenue from $6.25 billion in '21 to $12.5 billion in '26. Based on our revised guidance for this year, our three-year revenue growth CAGR from '21 through '24 is 19%, ahead of the 15% CAGR we laid out in our plan. I'm excited about our new leadership structure, driving product direction for '25 and our future pipeline of innovation. I feel optimistic we can accelerate growth in our U.S. women's business while continuing to deliver strong performance in men's and international. Meghan, over to you.

Thanks, Calvin. While revenue in Q2 remained strong in all of our international regions and Canada, the U.S. business was softer for the reasons Calvin just detailed. Earnings per share exceeded our expectations, driven predominantly by strong gross margin. Markdowns were flat versus the prior year and better than expected. Let me now share the details of Q2 performance. For Q2, total net revenue rose 7% to $2.4 billion, and constant dollar comparable sales increased by 3%. Within our regions, results were as follows: Americas revenue increased by 1% or 2% in constant currency, and comparable sales declined by 2%; China Mainland revenue increased by 34% or 37% in constant currency, with comparable sales increasing by 23%; and in our Rest of World segment, revenue grew by 24% or 27% in constant currency, with comparable sales increasing by 20%. In our store channel, total sales increased by 11%, and we ended the quarter with 721 stores globally. Square footage increased by 14% versus last year, driven by the addition of 49 net new Lululemon stores since Q2 of 2023. During the quarter, we opened 10 net new stores and completed 6 optimizations. In our digital channel, revenues increased by 2% and contributed $900 million of top line revenue, or 38% of total revenue. By category, men's revenue increased by 11% versus last year and women's increased by 6%, while accessories grew by 7%. Gross profit for the second quarter was $1.4 billion or 59.6% of net revenue compared to 58.8% of net revenue in Q2 2023. The gross profit rate in Q2 increased by 80 basis points, significantly better than our guidance, and was driven primarily by: a 130 basis point increase in product margin, driven primarily by favorable IMU from lower product costs; markdowns were flat year-over-year and better than expected; 30 basis points of net deleverage on fixed costs; and 20 basis points of unfavorable impact from foreign exchange. I would also note that our pause on the sale of Breeze Through had a negligible impact on gross margin in the quarter. Relative to our guidance, which was a decline in gross margin of 100 to 110 basis points, the upside was driven predominantly by prudent management of fixed expenses and lower-than-expected markdowns. 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 approximately $872 million or 36.8% of net revenue compared to 37% of net revenue for the same period last year. Foreign exchange contributed 10 basis points of deleverage. Overall, the 20 basis points of leverage in the quarter was below our guidance of 40 to 60 basis points and resulted from lower-than-expected top-line revenue. Operating income for the quarter was approximately $540 million or 22.8% of net revenue compared to 21.7% of net revenue in Q2 2023. Tax expense for the quarter was $165.3 million or 29.6% of pre-tax earnings compared to an effective tax rate of 29.8% a year ago. Net income for the quarter was $393 million or $3.15 per diluted share compared to $2.68 for the second quarter of 2023. Capital expenditures were approximately $145 million for the quarter compared to approximately $146 million in the second quarter last year. Q2 spend relates primarily to investments that support business growth, including our multiyear distribution center project, store capital for new locations, relocations and renovations, and technology investments. Turning to our balance sheet highlights, we ended the quarter with $1.6 billion in cash and cash equivalents. Inventory declined by 14%, in line with our expectations, with units declining in the mid-single-digit range. We repurchased nearly 1.9 million shares in Q2 at an average price of $310. Year-to-date, we've repurchased approximately $1.2 billion of stock. Share repurchases remain our preferred method to return cash to shareholders, and currently, we have approximately $1 billion remaining on our repurchase program. Let me now share our detailed guidance outlook for the remainder of the year. At the highest level, we are assuming that revenue trends in the second half of the year remain fairly consistent with Q2, excluding the 53rd week and the impact of a shorter holiday shopping season in Q4. I would also note that our pause on the sale of Breeze Through had a negligible impact on our revenue and gross margin guidance for the year. We feel optimistic with the work our teams are doing to improve the newness we offer within our U.S. women's assortment. So we continue to acknowledge uncertainties in the macro environment and plan the business prudently. Starting with the full-year 2024, we now expect revenue to be in the range of $10.375 billion to $10.475 billion. This range represents growth of 8% to 9% relative to 2023. Excluding the 53rd week that we have in the fourth quarter of 2024, we expect revenue to grow 6% to 7%. Also relating to Q4, we are assuming a negative impact of approximately 3 percentage points resulting from a shorter holiday shopping season relative to last year. We continue to expect to open 35 to 40 net new company-operated stores in 2024 and complete approximately 40 co-located optimizations. This will contribute to overall square footage growth in the low double digits. Our new store openings in 2024 will include five to 10 stores in the Americas with the rest in our international markets, primarily in China Mainland. For the full year, we now expect gross margin to be approximately 20 basis points below our adjusted gross margin in 2023, due prominently to deleverage on fixed costs associated with lower forecasted sales and an increase in freight costs relative to our prior estimates. We continue to expect markdowns to be relatively flat with last year. Turning now to SG&A for the full year. We now expect it to be approximately flat versus 2023. We are prudently managing our expenses while continuing to invest strategically into our Power of Three times Two roadmap, including investments in marketing and brand building, increasing our awareness and acquiring new guests, investments to support our international growth and market expansion, and continued investment in technology infrastructure and data analytics capabilities. When looking at operating margin for the full year 2024, we now expect a decrease of 10 to 20 basis points versus adjusted operating margin in 2023, which expanded 110 basis points versus 2022. For the fiscal year 2024, we now expect diluted earnings per share in the range of $13.95 to $14.15 versus adjusted EPS of $12.77 in 2023. Our EPS guidance excludes the impact of any future share repurchases but does include the impact of our repurchases year-to-date. From looking at inventory, we expect dollar inventory to increase in the mid-teens in Q3 as we begin to anniversary last year's decline. We continue to expect capital expenditures to be approximately $670 million to $690 million for 2024. This spend relates to investments to support business growth, including a continuation of our multiyear distribution center project, store capital for new locations, relocations and renovations, and technology investments. Shifting now to Q3, we expect revenue in the range of $2.34 billion to $2.365 billion, representing growth of 6% to 7%. We expect to open 14 net new company-operated stores in Q3. We expect gross margin in Q3 to decrease 50 to 60 basis points relative to Q3 2023. The decrease will be driven predominantly by deleverage on fixed costs and our ongoing investment in our multiyear distribution center project. We expect product margin to be relatively flat with last year, inclusive of approximately 60 basis points of higher freight costs. We expect markdowns to be relatively flat with Q3 2023. In Q3, we expect our SG&A rate to leverage by 40 to 50 basis points relative to Q3 2023. This will be driven predominantly by leverage on top line and ongoing prudent expense management. When looking at operating margin for Q3, we expect deleverage of approximately 10 to 20 basis points. Turning to EPS, we expect earnings per share in the third quarter to be in the range of $2.68 to $2.73 versus adjusted EPS of $2.53 a year ago. We expect our effective tax rate in Q3 to be approximately 30%. And with that, I will turn it back over to Calvin.

Thanks, Meghan. Lululemon remains a strong and healthy brand, and we have shown our ability to responsibly manage the business while seizing the many growth opportunities in front of us. We have a strong track record, and we will continue to work to deliver for our shareholders, employees, and guests. Challenges are a natural part of accelerated growth, and I feel confident about emerging stronger from this period as we innovate for and inspire our guests. In closing, I want to thank our leaders and our people for their passion and dedication to our brand and our business, both during this past quarter and with all bets ahead. Thank you for joining us today. We will now take your questions.

Great, thanks. And I appreciate all the color, Calvin. Maybe larger picture, what do you see as the revenue growth algorithm in North America once the dust settles? I think you talked about color sizing, some near-term execution. I think you cited this as more or less optimal on the women's side by the spring. So maybe what do you see as the right revenue growth algorithm in North America once the dust is settled? And then what guardrails have you put in place to drive greater consistency over time in the region?

Matt. So in terms of how we view North America growth over time, we're still committed to our Power of Three Times Two plan, which had North America low double-digit growth. What I would share is that it's too soon to put a fine point on 2025. But I would share that we'll obviously be up against an easier comparison this year, and we still are excited about the long-term growth opportunity we have in that market, particularly in terms of U.S. brand awareness. So we have to continue to protect investments that are aimed at building into that long-term opportunity.

Yes, Matt, in terms of the second part, the new product organization definitely sets a new balance between, as I mentioned, design and merchandising, which is going to lead to more creative conversations and outcomes. I've been in these meetings with the teams, and already we're seeing the benefit of the new working relationships. There is definitely clarity around the ratio of newness tied to our product plans, which is a key part of that conversation, and I'm excited about the road map ahead to deliver on those opportunities.

Great. And then Meghan, maybe just a follow-up. If you could just speak to your comfort with inventory on hand today exiting the quarter. Maybe just touch on markdowns relative to plan in the second quarter or any change for the back half?

In terms of inventory, we came in with inventory down 14%. It was in line with expectations. Just a reminder, we're lapping some increases in the last couple of years in terms of inventory, with turns still slightly slower than history. As we move into the second half of the year, we do expect inventory to be in the mid-teens at the end of Q3 and a similar growth rate slightly higher as we end the year. I would say in terms of comfort with inventory, I’m pleased with where we came in, in line with expectations. The opportunity would be in composition and that mixture that Calvin described in terms of newness, which the team is adjusting now. In terms of markdowns, we did come in favorable relative to our expectations in Q2. We expected to see markdowns slightly lower in Q2. We did come in flat year-over-year. That was driven by strong sell-throughs on seasonal, which is where we usually take markdowns to clear seasonal goods. When we look at the second half of the year, Q3 markdowns, I'd expect them to be relatively in line with last year, and then Q4 slightly under last year, and we're still expecting flat markdowns for the full year.

Great color. Best of luck.

Thank you.

Perfect. Thanks a lot for taking the question. Just on the revised full-year guidance and where it's coming out of, it feels like that's mostly concentrated in the fourth quarter. Is that right? Or did your view on the third quarter change as well? And if you could just walk us through the puts and takes for looks like almost a $0.50 reduction, that would be very helpful. Thanks a lot.

Thanks, Alex. I would say that our view on the relationship between Q3 and Q4 have not changed. Our guidance for the second half is essentially in line with the trend we're seeing in Q2. Q4 is adjusted for the shorter holiday selling period and days between Thanksgiving and Christmas, which we estimate to impact by about three percentage points as well as the macroeconomic environment and the election in Q4. So the relationship between the two quarters has not changed, but we have lowered our outlook on the aggregate bottom line for the second half.

Got it. Maybe just one for Calvin. How much do you attribute sort of the revenue shortcoming in the quarter versus your expectation to like your own mistakes versus the macro? There's been a lot of discussion of kind of a weakening consumer. So just curious your thoughts on that.

I definitely see this as an opportunity based on decisions that we made that are within our control and being addressed. As I alluded to, it's focused primarily on our U.S. women's business with the gap in newness that we brought across color, print and silhouettes. The newness we had sold very well; guests were coming in, traffic was positive across all channels, and the opportunity was in conversion. I see that as an opportunity that they were there with intent to spend, but we had a noticeable reduction in those historical levels of newness, which were product decisions made earlier. The new teams are in action, and as I mentioned, the pursuit is strong, but the majority of this is within our control.

Thanks a lot. Good luck.

Thank you.

Hey guys. Can you talk about how the quarter progressed as you move through by region? What the exit rates were? Any comments on quarter-to-date, and are there any pockets of higher inventory? Just curious how you handle the whole Breeze Through, where the product goes, any financial impact on the back half? Thanks.

Thanks, Paul. In terms of Q2, our May trend was relatively in line with what we experienced in Q1, and we saw softer performance in June and July, with July being slightly above June. We haven't provided any color on a regional basis within that. But I would say in terms of quarter-to-date, we don't break down performance by month. Given what we experienced in Q2 and the macroeconomic uncertainty in the second half of the year, we feel our guidance at 6% to 7% is appropriate at this time. Regarding inventory, again, we're comfortable with the overall level, and Breeze Through had a negligible impact, a small test and learn, and not a material financial impact.

Thanks. Good luck.

Hey guys, thanks for taking our questions here. I guess maybe one for each; Meghan, can you just walk us through how the mechanics of the P&L work? I know you do a lot of scenario planning that you could keep the EBIT margins for the total company positive while we have this slower near-term run rate in the U.S. And then, Calvin, just some of the comments you made earlier, I’m wondering if you could give us an example of how design and merchandising teams were previously not on that equal footing and how that impacted the strategy in the consumer's eyes. Maybe just some of what prompted you to make changes in the org chart that you did?

In terms of P&L management, we're monitoring business closely. We run multiple scenarios. Our intention is to stay agile based on how business unfolds. Looking at this year and our revenue outlook, we are continuing to invest behind international performance key to our long-term strategy and an area of our business that's currently performing well. Our outlook has not changed on the long-term opportunity in terms of brand awareness globally and within North America. So we've continued to protect investments in long-term brand building. At the same time, we're looking for efficiency opportunities across the P&L and discretionary spend buckets, as well as slowing down where that makes sense in terms of our capabilities moving forward, all in line with our Power of Three times Two plan. We feel we're well positioned as we navigate this year with the right balance of navigating the short term while protecting investments in our long-term.

In terms of your question, as you know, the previous structure had both design and merchandising rolling up to a single leader. That product organization served us well as a high-growth company with a 24% CAGR over the last five years from '18 to '23, reaching $10 billion in revenue. But as we look forward, we saw it as an opportunity to reset and take a different approach. The new organization creates a stronger balance between design and merchandising, leading to more creative conversations and outcomes. I've observed the meetings with the teams, and we're already seeing improvements in collaboration. You'll see differences in product creation, the challenging of the ratio between newness and core in the assortment, and the relationship between those two teams in terms of what's being created and how we mix it into the assortment and then bring it to market. We're also seeing a much tighter relationship between the brand/marketing organization and merchandising, which is now under one leader, where before this was a handoff. Those conversations happen much sooner and align better to the opportunities we see in terms of what we're buying and creating plans for demand creation early in the process.

Okay. Thanks a lot for all the information. I appreciate it, guys.

Thank you.

Hi, thank you for taking my questions. A couple of questions on the product innovation for the back half. I guess first on Breeze Through, it seems to us that the consumer really likes the fabric. They just weren't in love with the fit. What's the timeline for getting that back with some new fits and silhouettes? And then any parameters you can provide around some of these new launches coming in the back half. It seems like the launch in training will be pretty big. Just how to think about that in terms of size and potential impact?

Thanks, Janine. Regarding Breathe Through and the fabric, you're right. We're excited about the guest response, particularly in our APAC market. The fabric was designed specifically for hot yoga, but we see it as versatile for various activities. It's a unique, exciting new fabric, and the teams are working to bring it back in either a style that guests already know with the new fabric or with sharper design lines. We received feedback that the fabric resonated well. It's a priority for the team to reintroduce the fabric in the future. You won't see it in '24, but we look forward to bringing it back. Looking at other innovations in the training category, we have the Wunder Under style with new fabrics that we're excited about. There will also be a new performance trained legging launching at the end of the year. We're very excited about it, and we'll get the guests' feedback once it's introduced, along with seasonal updates that have been missing in the first half, reporting new styles relevant to our top franchises that guests resonate with.

Thanks for the color. Best of luck.

Thanks, good afternoon. I know you said that it won't be until spring 2025 to get back to the historic levels of newness. But can you ramp that at all in the second half by accelerating orders? Does the guidance include any benefit from accelerating newness in the women's assortment in the coming quarters?

In terms of the action plan that we put in place and how the teams have been adjusting, we’ve seen positive movement in our women's business. Coming out of Q1, we identified opportunities. The learning curve in Q2 was about missed opportunities in silhouettes, and our teams have been working on this action plan, pursuing deeper inventory for both the inventory we’ve already purchased and fast-tracking some designs. Our momentum in product creation will build throughout the second half of this period and should lead us to return to our historical levels by spring 2025. Our guidance does not include any significant benefit from newness in the second half of the year.

Thank you.

Hi, as you think about your inventory positioning for the back half of the year, how do you break apart the third quarter and the fourth quarter? And with the Breathe Through, which was a small launch that you talked about, Calvin, is there any markdowns or any resets on the inventory numbers or gross margin impact of taking that down and eliminating it?

Thanks, Dana. In terms of inventory in Q3, we're expecting a mid-teens increase in Q4 at or slightly above that level and feel well positioned as we move into the second half of the year. As Calvin mentioned, we're ramping newness through the second half of this year and will reach historical levels by spring 2025. For Breeze Through, it was a very small test and learn initiative, so it has a negligible impact on both Q2 and our guidance for the balance of the year.

Good afternoon. Thank you for taking our question. Calvin, I was hoping you could speak to the trends that you saw in your U.S. women's business by demographic or consumer type. Has the change in conversion that you've seen year-to-date over-indexed to any one age group or household income? And as you look to increase the level of newness over the next few quarters, do you see any specific opportunities to adapt your marketing and membership organization to better serve customers by demographic?

In terms of the guest profile, we haven’t seen any significant shifts; we continue to grow our new guest base across all age demographics. The conversion missed opportunity was primarily with our existing guests, where she was looking for newness to add to her collection. We did see some challenges across core products in color, print, and silhouettes, which were where we had missed an opportunity for conversion. Our guests were still visiting and spending but were looking for newness that was not adequately available for these core items. We're continuing to adjust our marketing to capture this and improve overall engagement.

Okay. Thanks so much. I will pass it on.

Good afternoon. Thank you for taking my question. I was hoping you could provide more perspective on China. Clearly, some strong growth rates there, but I think about a 10-point comp slowdown against an easier comparison. How should we think about sustainable comp growth rates there? I think others have talked about some more macro consumer pressure because you're feeling that as well. Any color on what's going on in stores and digital? More broadly, how are you planning comp growth by region for the remainder of the year?

Thanks, Mark. We did still see very strong growth in China in Q2, up 37% on a constant currency basis. The variance between Q1 and Q2 growth rates is primarily due to the shift in Chinese New Year, which was in Q1 2024. In 2022, it was in Q4, which is not comparable. We had healthy growth across both channels, and we haven't broken out our forward-looking guidance by region, but I would say that we continue to see outsized growth in international markets, with China being the key driver.

We remain excited about the potential for Lululemon in Mainland China. While we are monitoring the macro environment in the region, our business remains strong. We believe several factors will continue to benefit us; one, it's still a relatively small size compared to the overall market, with a store base of 132 on the Mainland at the end of the quarter. We take a localized approach to the brand, building relationships through local fitness instructors and influencers, along with unique events that enhance our community engagement through our unique positioning in wellness. So while monitoring, we have not seen any material impact to the business, and I do believe it's because we're early in our growth process and see continued success across Tier 1, Tier 2, and Tier 3 cities.

Thank you.

Thank you. Good afternoon. A question on the performance of core products. You called out a lack of inventory for certain styles and sizes entering the year. Did the same headwinds intensify in the second quarter? Did you see new headwinds related to other products? Some clarity would be great. Secondly, you're still seeing good growth for accessories. How should we think about the outlook there?

In terms of the shift from Q1 to Q2, color, print, and pattern continue to be opportunities for us. We think of those through a couple of strategies in execution: core styles, adding updates through color, print, silhouettes, and fabric extensions. That has been an effective driver in keeping our guest engaged with our products. The notable shift from Q1 to Q2 saw a more significant gap historically in Q2 than in Q1. Additionally, regarding accessories, we discussed previously that the Everywhere Belt Bag has been a strong driver for us; we have cycled over some peak volume, however it continues to perform well. As mentioned, accessories grew by 7%, and the team continues to launch new styles, including more from the Everywhere Belt Bag and backpack collections.

Great. Thank you.

Operator, we'll take one more question.

Good afternoon. Thanks for taking the questions. Meghan, I think a big fear of pricing into the valuation of the company right now is the gross margin rate has peaked and your SG&A rate may need to move higher. How would you address those fears given the competitive environment in the category right now?

Yes, I think we continue to see strength in both gross margin and SG&A. This year, with our revenue growth guide at 8% to 9% and then 6% to 7% excluding the 53rd week, we are still delivering gross margin relatively in line with 2023 and approximately flat SG&A. Our operating margin remains strong, 100 basis points above our 2020 results after two years. We're focused on driving into the bottom line and optimizing our performance. We're still committed to our Power of Three Times Two plan for modest operating margin expansion over the five-year period. It's too soon to definitively comment on the outer years, but there's certainly runway ahead in terms of, most importantly, revenue, along with growth and efficiencies across our P&L, and we'll keep you updated.

Understood. And then Calvin, maybe a follow-up for you. Has your core customer in women's changed over the years? It seems like it's a more diverse cohort. Are they more challenging to plan and allocate for in terms of sizing and color, and what are you learning surrounding some of the new customers you've acquired?

We continue to acquire guests across various age demographics, and we are adapting our planning to better serve them. Changes in our women's core customer have come in the size profile, but the response has been positive. Our focus has been on improving our offerings to better align with the needs of our guests, but I wouldn’t say there’s been any significant macro shift that we’re behind on. We continue to recruit and acquire guests across the age and size spectrum.

Understood. Thank you.