Lululemon (LULU) Q1 2026 Earnings Transcript

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Date

Thursday, June 4, 2026 at 4:30 p.m. ET

Call participants

• Interim Co-CEO and Chief Financial Officer — Meghan Frank
• Interim Co-CEO, President, and Chief Commercial Officer — Andre Maestrini

Takeaways

• Net Revenue -- $2.5 billion, up 4%, with constant currency growth of 2%.
• North America Revenue -- Decreased 3%, with comparable sales down 6%.
• China Mainland Revenue -- Increased 30%, or 23% in constant currency; comparable sales rose 13% with Chinese New Year timing contributing 8 percentage points to growth.
• Rest of World Revenue -- Increased 13%, or 9% in constant currency, and comparable sales up 1%.
• Total Store Sales -- Up 3%, ending the quarter with 816 stores and 11% square footage growth after 5 net new openings and 6 optimizations.
• Digital Revenue -- Rose 4% to $1 billion, accounting for 40% of total revenue.
• Men's and Women's Revenue -- Men's increased 7%; Women's increased 4%; Accessories and Other decreased 1%.
• Gross Profit -- $1.34 billion (54.2% of net revenue), with gross margin down 410 basis points driven by a 33 basis point decline in product margin, 280 basis points negative tariff impact, partially offset by 100 basis points in enterprise efficiency gains, and 140 basis points due to fixed cost deleverage.
• SG&A Expenses -- $1.06 billion (42.9% of net revenue), up 310 basis points due to higher store labor hours, increased incentive compensation, brand activation timing, and proxy contest costs.
• Operating Income -- $277 million, or 11.2% of net revenue, compared to 18.5% the prior year.
• Net Income and EPS -- $195 million, with diluted EPS at $1.69 compared to $2.60 the previous year.
• Capital Expenditures -- $127 million, mainly for store expansion, distribution center projects, and technology investments.
• Inventory -- Ended at $1.7 billion, a 2% increase in dollars and a 4% decrease in units; gap primarily due to tariff rates and foreign exchange impact.
• Share Repurchases -- 2.2 million shares repurchased at an average price of $165.
• Q2 Revenue Guidance -- Anticipated $2.45 billion to $2.475 billion, a decline of 2%-3%, with North America and U.S. expected to decline in low double digits, China Mainland to grow mid to high teens, and Rest of World to increase high single to low double digits.
• Q2 Gross Margin -- Guided down by approximately 410 basis points due to higher tariffs and ongoing investments, with markdowns projected up 50 basis points.
• Q2 SG&A and Operating Margin Guidance -- SG&A rate anticipated to deleverage by 500 basis points; operating margin targeted at 11.6% versus 20.7% previous year.
• Q2 EPS Outlook -- Expected in the range of $1.76 to $1.81, compared to $3.10 a year prior.
• Full-Year Revenue Guidance -- Forecast $11 billion to $11.15 billion, flat to down 1%, with North America to decline high single digits, China Mainland to increase approximately 20%, and Rest of World mid-teens growth.
• Full-Year Gross Margin Guidance -- Expected to decrease 90 basis points, mainly from fixed cost deleverage and investments in distribution and new stores.
• Full-Year Operating Margin -- Projected to decrease by 380 basis points to approximately 11.6%.
• Inventory Outlook -- Dollar growth in low to mid single digits for the year, with units expected slightly down.
• Capital Allocation -- Full-year capital expenditures forecast at $700 million to $720 million; $1 billion remaining available for share repurchases.
• Product Mix -- Penetration of newness targeted to rise to 35% of assortment this year from 23% prior year; current running rate at approximately 30%.
• Chase Program -- 20% more volume chased this year compared to last to increase speed and flexibility in inventory management.
• Product Lead Time -- Mainline product development process reduced from 18-24 months to 15-16 months, with ongoing efforts to shorten further to 12-14 months.
• Square Footage Growth -- Net new store openings projected closer to the low end of the 40-45 range in 2026, with majority planned in China; global square footage expected to grow in the low double digits.

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Risks

• Meghan Frank stated, "we faced a few headwinds and a moderating sales trend," citing negative brand commentary impacting traffic and underperformance of certain product launches.
• Gross margin decreased 410 basis points, with a 280 basis point negative tariff impact and 140 basis point fixed cost deleverage cited as primary drivers.
• Operating margin guidance lowered to approximately 11.6% for Q2, down from 20.7% in the prior year quarter, reflecting lower sales and continued expense pressures.
• Full year North America revenue now expected to decline in the high single digits, with the U.S. "Slightly lower" than Canada, reflecting ongoing top-line challenges in the core region.

Summary

Lululemon Athletica (NASDAQ:LULU) reported modest total revenue growth, driven by China Mainland and Rest of World, while North American sales declined. Product innovation efforts continued but some major product launches underperformed expectations, and amplified social media criticism reduced customer traffic. Guidance for revenue, margin, and earnings was revised down across the balance of 2026, and management highlighted additional short-term cost increases from tariffs, seasonal clearance, and proxy contest-related expenses.

• Management observed a pronounced shift toward higher marketing and community engagement spend, intending to be "bolder in the second half" through flagship events and collaborations.
• Reduced store-level SKU density by 15% and emphasized performance and lifestyle merchandising to improve guest experience, alongside a significant reduction in markdowns.
• In China Mainland, the business remains a growth driver with management projecting approximately 20% annual revenue growth, benefiting from ongoing community and brand activations.
• The enterprise enablement pillar includes supply chain network reviews, procurement optimization, and deployment of AI-powered initiatives targeting increased operational efficiency.

Industry glossary

• Chase Program: Inventory management strategy to replenish fast-selling products by reacting swiftly to customer demand signals, increasing flexibility and responsiveness.
• SKU: Stock Keeping Unit; unique identifier for each distinct product and service that can be purchased.
• Omni capabilities: Integrated approach to retail that provides customers with a seamless experience across physical and digital channels.
• Optimization: In retail, refers to enhancing store performance through renovations, relocations, or changes to the store format to improve efficiency, customer experience, or sales productivity.

Full Conference Call Transcript

Meghan Frank, Interim Co CEO and CFO and Andre Maestrini, interim co CEO, president, and chief commercial officer. Before we get started, I would 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 change 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. 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 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. Today's call, Megan will begin with some remarks addressing current business trends and our updated guidance. Then she and Andre will speak to the plans and strategies we are implementing to drive improved performance also share some Q1 highlights.

Megan will then discuss our detailed financials and guidance outlook. And then the team will be happy to take your questions. Before I turn the call over to Meghan, I would like to remind investors to visit our investor site where you will find a summary of our key financial and operating statistics for the first quarter as well as our quarterly infographic.

Meghan Frank. Thanks, Howard, and welcome everyone to our Q1 call. Before we dive into our results and current business trends, I want to say how excited we are to welcome incoming CEO, Heidi O’Neill to the company in September. Andre and I both spent time with Heidi. it is clear to me she has a true passion for the Lululemon brand, a deep understanding of product excellence, extensive experience driving growth and transformation at scale, and will be a strong leader for our organization. I am looking forward to working with her to help Lululemon achieve the opportunities in front of us.

I also want to give a warm welcome on behalf of the leadership team to our newest director, AC Eggleston-Bracey, who joined the board in April. As well as to Laura Gentile, and Mark Maurer, who will join the board following our annual meeting later this month. We appreciate the support of the full board, including these new directors, as we continue to advance our plans and strategies. Turning to the business, Andre and I remain deeply engaged with our teams with a clear focus on disciplined execution and brand vision. Our priorities are straightforward. Strength and performance in North America, while continuing to expand our global growth engine.

We saw encouraging signs in Q1 that reinforce we are moving in the right direction. But as we closed Q1 and entered Q2, we faced a few headwinds and a moderating sales trend. Based on our early analysis, there are 2 key factors impacting our trend. First, we experienced spikes of negative commentary in the media and on social channels with regard to our brand. Which had an impact on traffic and overall top line performance. And second, not all of our product launches have met our expectations. While we have had several successful launches so far this year, we have seen others as we start Q2 not generate the anticipated guest response.

Taken together, these factors impact performance and are reflected in our updated guidance. I want to emphasize that we are not sitting still. We are moving with urgency to make the necessary adjustments to reaccelerate momentum. Particularly in North America. With that, let's turn to the work already in motion to strengthen our top line trajectory and position ourselves for long term sustainable growth. Let's begin with our product creation pillar. As a reminder, our intent with this work stream is to raise the bar on product design, including bringing a new creative energy into our key franchises. Deliver a consistent flow of innovation, increase our speed to market, and ensure relentless focus on product quality.

Across the assortment in Q1, we saw good guest response to the updates we brought into some of our key run franchises. Including Fast and Free, Swiftly, and Metal Vent. Other standouts I would mention include Daydrift and Define. Where we offered expanded silhouettes and new and elevated colors. However, more recently, our new Look of Yoga campaign did not drive top line results in line with our expectations. As part of the campaign, we featured Away From Body styles across our align and grouped franchises. These styles were met with good guest response, but so far, the campaign has not had the expected halo effect on other areas of our assortment.

We are pleased with our overall product pipeline, And in Q2, you will see more warm weather styles across some of our key activities, including run, tennis, golf, and our lifestyle offerings. Over the course of the year, we will continue to bring newness excitement, and new fabrics into the assortment, with focus areas including outerwear and lounge. To help improve the sales trend, we are leaning into our Chase capabilities now and over the balance of the year. As we discussed on prior calls, our faster chase times improve our ability to read and react to guest demand trends and get back into certain strong-performing styles more quickly.

We are chasing 20% more volume this year relative to last year. We see this as an important capability going forward. And with inventory units down approximately 4%, when we see strong guest reaction to new styles, we can get back into them more quickly. Which we expect can help accelerate our momentum. We have also reduced our mainline product development process from 18 to 24 months to 15 to 16 months. And we were working to further reduce it down to 12 to 14 months. Our product teams are focused on bringing new innovations to our guests, updating our iconic franchises and leveraging our increased speed to market capabilities to better anticipate, meet, and fuel demand.

I also want to reiterate the product quality is foundational to our brand. And we will continue to lean into this principle and enduring strength of Lululemon. Turning now to our product activation pillar. Andre will share the details of our regional activations in a moment. But I want to speak at a high level to some of our brand and marketing initiatives. To shift the narrative in this competitive market, we are moving with speed to invest more in marketing, community experiences and product stories to connect with and deepen engagement with our guests.

You will see us be bolder in the second half of the year with more brand activations, similar to last week's yoga experience on the Great Wall Of China. And in August, we are excited to see the return of SeaWheeze. Our iconic half marathon event in Vancouver. Which was a near instant sellout. You will see additional product expressions like new collaborations to drive energy and excitement for guests in key cities around the world. You will also see grassroot community activations, a particular strength of our brand. As well as new and exclusive experiences for press and partners. All of this will be underpinned by an innovative media and advertising strategy.

Store and brand experience elevation, additional partnerships and a creative direction for Lululemon that will inspire our guests around the world to sweat, grow, and connect. Next, I wanted to share an update on our enterprise enablement pillar. This is a broad initiative across the enterprise to ensure we are operating as efficiently and effectively as possible as we look at process, technology, and our operating model. To drill down a bit, projects we are continuing to advance include analyzing our current global supply chain network, to ensure the structure is fully optimized.

Reducing indirect spend through our procurement process including price and terms optimization, volume consolidation and rationalization, and implementing new technology, including AI powered systems and automation to drive efficiencies across the enterprise. We are pleased with how our teams are implementing the initiatives in these areas, and we expect to see benefits over time. In summary, we expect our actions to help rebuild momentum, expand share, and reassert our leadership position. I will now hand it over to Andre, who will share some more details with you regarding our guest engagement strategies and our regional highlights. Andre?

Andre Maestrini: Thank you, Meghan, and good afternoon, everyone. it is good to be here with you again. I will start by noting that I am also excited to welcome Heidi as a new CEO and I am looking forward to working with her. As our entire team continues our effort to realize Lululemon's full potential. Let's get to a regional review of Q1 performance and start with North America. In Q1, I am encouraged that we have experienced a sequential improvement in our full price sales relative to Q4. In Q2, based on recent sales trend, our guidance assumes higher levels of seasonal clearance, but looking forward, driving full price sales remain a primary focus.

Let me now share some of the highlights and progress we are making across our product activation pillar in America and speak to some of the unique experiences we have lined up to engage our guests and help drive improved brand momentum. In addition to the successful Studio and our Indian Wells tennis activations, we further engage with guests during the quarter through our run activations during the Los Angeles and Boston Marathon. We designed and launched limited edition race kits for several of these events and featured additional innovation across our Swiftly, Milemaker and go further product collection. We are pleased with the high level of guest engagement and demand for these events and special products.

Reinforcing the power of our community efforts. Looking ahead, have several exciting events planned across North America. Including our Yoga Summer Series. We will kick it off with an exclusive New York City event and follow-up with free yoga classes throughout the summer which will serve tens of thousands of guests around the region. And in August, I am excited that we are bringing back our popular SeaWheeze Half Marathon and Festival. We saw unprecedented demand to participate as we gather in our hometown for a weekend of sweat and connection. These events are a few examples of the powerful yet unique way we inspire and engage with new and existing guests.

Let me also update you on the progress we have made to enhance the guest experience across our selling channels. Starting with the in store strategies aimed at elevating the shopping experience for our guests. When looking at our store fleet in North America, you can already see several enhancements. These include first, less dense presentation of products featuring 15% fewer SKUs, which allows us to better highlight new styles and innovation. Second, a sharper focus on merchandising by performance and lifestyle products. Which allow for improved storytelling better visual merchandising, and makes the store easier to navigate and shop.

And third, a significant reduction in markdowns which allows the guests to focus more on our new and full price offerings and contribute to our premium shopping experience. In addition to these strategic shifts, across all stores in the market, we have a smaller subset of doors where we are testing additional enhancements. These include further SKU reductions, more curated assortment based on local taste and preferences, new feature packages, and updated imagery in mannequins. With regard to e commerce, we are continuing our work to elevate the guest experience on our digital channels. The teams are working to increase conversion with sharper visual merchandising, better storytelling, and by offering a more premium shopping experience.

This shows how our North America teams have been working to ensure our guests have the premium shopping experience they expect from Lululemon. While we are pleased with the initial response, we expect that these initiatives will gain more traction over time. Let me now shift to our international business beginning with China Mainland. In China, we had a strong start of the year. Supported by successful product and brand activations during Chinese New Year, run and tennis campaigns. But experienced a slowing of momentum towards the end of Q1 as we saw spikes of negative commentary. Which has now subsided. The team is focused on building brand awareness and distinction through our mindful performance position and community activations.

In yoga, 1 of the most powerful examples of this took place just a few days ago in Beijing on the Great Wall Of China where more than 2,000 guests and 70 ambassadors practiced yoga at the flagship event that launched a series of global activations. And beginning in late June through August, we will host our sixth annual summer sweat games. This is another pinnacle run and train activation our China team has designed to engage our community across the country culminating in a national championship in Hangzhou. Clearly, there continues to be a lot of energy in this market and the teams are bringing unique experiences to our guests that only Lululemon can offer.

For Q2, we expect sales to increase in the mid to high teens and we continue to expect approximately 20% growth for the year, demonstrating the ongoing momentum in the business in China and Mainland. Let me finish my recap with our Rest of the World segment. We remain pleased with our business in APAC and EMEA. In Q1, revenue increased 13% or 9% in constant currency. We have seen some disruption in our Middle East franchise business due to the conflict in Iran and we have also seen some softer tourism in Europe and Japan. We view these as temporary, and we remain excited for our brand's potential in both APAC and EMEA.

With the help of our franchise partner, we recently opened the first location in Greece and plans are well underway to open in India later this year. Before I hand it back to Meghan, I would like to reiterate that we are focused across the regions on building brand relevance and momentum. Delivering product excellence. And actively engaging with our community. And we are grateful to our employees who stayed focused on these top priorities and on delivering for our guests. Recently, we gather our leaders from around the world in Vancouver and the passion clarity, and determination from this group of people is what gives us confidence in the near, mid, and long term. For Lululemon. Meghan?

Now back to you.

Meghan Frank: Thanks, Andre. Let me now get into the Q1 financial review and our updated guidance outlook. For Q1, total net revenue rose 4% or 2% constant currency to $2.5 billion and comparable sales decreased 2%. Within our regions and channels, results were as follows: North America revenue decreased 3% or 4% in constant currency comparable sales were down 6%. By country, revenue decreased 3% in constant currency in Canada and decreased 4% in the U.S. China Mainland revenue increased 30% or 23% in constant currency with comparable sales increasing 13%. The shift of Chinese New Year into Q1 added 8 percentage points to the growth rate in the quarter.

And in our Rest of World segment, revenue increased by 13% or 9% in constant currency with comparable sales increasing 1%. In our store channel, total sales increased 3% and we ended the quarter with 816 stores globally. Square footage increased 11% versus last year, driven by the addition of 46 net new Lululemon stores since Q1 of 25. During the quarter, we opened 5 net new stores and completed 6 optimizations. In our digital channel, revenues increased 4% and contributed $1 billion of top line or 40% of total revenue. And by category, Men's revenue increased 7% versus last year and Women's increased 4%. While accessories and other declined by 1%.

Gross profit for the first quarter was $1.34 billion or 54.2% of net revenue compared to 58.3% in Q1 25. Our gross margin decreased 410 basis points compared to last year and was driven primarily by the following. A 33 basis point decline in overall product margin, driven predominantly by tariff impact and markdowns. Tariffs had a gross negative impact of 280 basis points in the quarter offset by 100 basis points related to our enterprise efficiency initiatives. Mark increased 40 basis points. Deleverage on fixed costs was 140 basis points, driven by ongoing investments in our store fleet, and regional mix and foreign exchange had 60 basis points of favorable impact. Moving to SG&A.

Our approach continues to be grounded in prudently managing our expenses, while also strategically investing in our plans and strategies to improve sales trend in North America. While also strengthening our foundation and positioning Lululemon for long term growth. SG&A expenses were approximately $1.06 billion or 42.9% of net revenue, compared to 39.8% of net revenue for the same period last year. The increase of 310 basis points relates to expenses that we reduced last year, but layered back this year including store labor hours and incentive comp, timing of certain brand activations, and costs related to the proxy contest. These were partially offset by our ongoing initiatives to prudently manage costs across the enterprise.

Operating income for the quarter was $277 million or 11.2% of net revenue compared to 18.5% of net revenue in Q1 25. Tax expense for the quarter was $91 million or 31.8% of pretax earnings, compared to an effective tax rate of 30.2% a year ago. The increase relates to lower stock based compensation deductions compared to last year. Net income for the quarter was $195 million or $1.69 per diluted share compared to $2.60 for the first quarter of 25. Capital expenditures were approximately $127 million for the quarter, compared to approximately $152 million in the first quarter last year.

Q1 spend relates primarily to investments to support business growth, including our multi year 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 $1.5 billion in cash and cash equivalents, and nearly $600 million of available capacity under our revolving credit facility. Inventory at the end of Q1 is $1.7 billion, an increase of 2% on a dollar basis. On a unit basis, inventory decreased approximately 4%. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff rates relative to last year and foreign exchange.

We repurchased approximately 2.2 million shares at an average price of $165 Let me shift now to our guidance for Q2. Which takes into account the business trends I spoke to earlier. We expect revenue in the range of $2.45 billion to $2.475 billion, representing a decline of 2% to 3%. We expect to open approximately 13 net new company operated stores complete 13 optimizations. By region, we expect North America to decline in the low double digits with The U. S. Also in that range. We expect China Mainland to increase in the mid to high teens and Rest of World to increase in the high single to low double digits.

We expect gross margin in Q2 to decrease approximately 410 basis points compared to Q2 of 25. This decrease will be driven predominantly by higher tariff costs, ongoing investments in store openings and optimizations in our distribution network. We expect increased tariffs to have a gross negative impact of 150 basis points with offsets of approximately 100 basis points. We expect markdowns to be up approximately 50 basis points versus last year. While we continue to expect markdowns to improve modestly year over year in the second half, The slower than expected top line trends in Q2 will necessitate additional seasonal clearance. In Q2, we expect our SG&A rate to deleverage by 500 basis points relative to Q2 25.

This increase will be driven in part by deleverage associated with lower sales than initially expected discrete costs related to our proxy contest, increased marketing and expenses that we have reduced last year, but are layering back this year including store labor hours. And we will continue to invest strategically in our growth initiatives in IT infrastructure. When looking at operating margin for Q2, we expect it to be approximately 11.6% versus 20.7% Q2 25 for the reasons I just mentioned. Turning to EPS. We expect earnings per share in the second quarter to be in the range of $1.76 to $1.81 versus EPS of $3.10 a year ago.

We expect our effective tax rate in Q2 to be approximately 30%. Turning to our full-year 2026 guidance outlook. We now expect revenue to be in the range of $11 billion to $11.15 billion, flat to down 1% relative to 2025. By region, we now expect revenue in North America to be down in the high single digits with The U. S. Slightly lower and Canada better. We continue to expect revenue in China Mainland to be up approximately 20%. And in Rest of World, we continue to expect revenue to increase in the mid teens.

Globally, we now expect to be closer to the low end of the 40 to 45 range for net new company operated stores in 2026. And continue to expect to complete approximately 35 optimizations. This will contribute to overall square footage growth in the low double digits. Our new store openings in 2026 will include approximately 10 to 15 stores in North America, including 8 in Mexico and 25 to 30 in our international markets. With the majority of these planned for China. While we are taking a disciplined approach to capital spending, and looking at all real estate deals on a case by case basis, we continue to see good returns from new store openings and store expansions.

As these strategies contribute to an improved shopping experience for existing guests new guest acquisition, building brand awareness, and community engagement. For the full year, we now expect gross margin to decrease 90 basis points relative to last year. Driven predominantly by deleverage on fixed costs, and ongoing investment in new store openings, optimizations, our distribution center network. We expect markdowns for the full year to be flat to slightly improved, and tariffs to have a gross impact of 30 basis points. Of which we expect to be able to offset almost all of it. When looking at tariffs for the full year, our guidance now assumes an incremental rate of 10% for Q2.

This is down from our prior assumption of approximately 20%. For the back half of 26, we continue to assume a 20% incremental rate. In addition, while we are participating in the refund process, our guidance assumes no recovery of tariffs paid under IEPA. Turning now to SG&A for the full year. While we intend to realize significant savings related to the enterprise enablement pillar of our action plan, We now expect deleverage of approximately 290 basis points versus 2025. Including incentive comp, store labor hours and continued strategic investments in our business to support future growth. These investments include market expansion, improving the guest experience by enhancing our omni capabilities and growing brand awareness.

As mentioned, we are absorbing additional costs relative to last year as we layered back in certain expenses, and have 1-time costs associated with the proxy contest. In addition, based on recent trends, we are increasing our marketing spend to drive brand heat. When looking at operating margin for the full year 2026, we now expect it to decrease by approximately 380 basis points versus last year. For the full year 2026, we expect our effective tax rate to be approximately 30% versus our 2025 effective tax rate of 29.5%. For the fiscal year 2026, we now expect diluted earnings per share in the range of $10.95 to $11.15 versus EPS of $13.26 in 2025.

Our EPS guidance excludes the impact of any future share repurchases. When looking at inventory, we now expect dollar growth to be in the low to mid single digit range through 2026 with units slightly down. We have approximately $1 billion remaining on our share repurchase program. Which we will continue to utilize. Sharon repurchases remain our preferred method of returning cash to shareholders. And we continue to expect our repurchase levels in 2026 to be in line with 2025. Finally, for the full year, we now expect capital expenditures to be approximately $700 million to $720 million. The spend reflects investments to support business growth, including capital for new locations, relocations and renovations, DC and technology investments.

Before we open it up for Q&A, as we look at the second quarter and the back half, we will continue to be agile as we take actions that will drive our performance and engage with our guests. We are pleased that some of the recent distractions have been removed, and we remain sharply focused on returning the business to a position of strength in North America. By chasing into strong performing styles, investing more in brand moments to engage with and excite our guests, and continuing to execute on our action plan. There is significant potential ahead for Lululemon, we are taking the steps necessary to realize it. Operator?

Operator: We will now begin the question and answer session. The first question comes from Dana Telsey with Telsey Group. Please go ahead.

Analyst (Dana Telsey): Hi, good afternoon everyone. Thank you for the update. As you think about the product assortment, the brand, how much of the weakness in the top line is coming from maybe the shift to more fashion versus what Lulu's doing. And how do you think of the new items that you have introduced What percentage of the assortment is it? And how do you see adjustments given the learnings you have from the initial the initial entries that you have had? And just lastly, on the margins, the go forward look of what margins should stabilize at Is clearance accelerating in the back half, or are you looking for it to decelerate? Thank you.

Meghan Frank: Hey, Dana, Thank you. I would say overall in terms of our performance relative to market, which I think was your first question. We are seeing relative stability in the trend of the athletic space. And what we really experienced was a drop off in primarily in traffic, into a lesser degree conversion over the last 6 to 7 weeks. And as I mentioned, our analysis indicated it came from 2 key areas. So the first being spikes in negative commentary around the brand. From a number of factors, really at the end of Q1 and entering Q2. I mentioned that is now subsided, but we do believe it impacted our traffic and top line to a degree.

And then in addition, while we have seen some of our product launches perform to expectations, we did see some recent product launches, which performed under expectations. So we are really focused on what we can do to action that. In terms of go forward margins, and how much is driven by clearance, we are expecting gross margin down 90 basis points under last year. Our prior expectation was down 130. Within that, we are expecting a modest flat to modest improvement in markdowns for the full year. So we are having a bigger impact in spring-summer clearance in Q2 with an expectation of markdowns up 50 basis points and then some recovery as we move into the second half.

Can you remind me of the question on percent of assortment? Howard much is the percent of assortment is new versus how much is core styles? And is the weakness in performance more related to core or the new? Is there a way to assess it? Thank you. Yep. Yep. So as we set out this year, our aim was to increase our penetration of newness to 20% from 23% last year to 35% over the course of this year. Right now, we sit at about 30%. It will fluctuate as we move throughout 2026. I would say, I mentioned we have seen some of that newness perform to expectation and some be a little short.

And I would say our recent performance is impacting all areas of our business from a product perspective. Thank you.

Operator: The next question comes from Rick Patel with Raymond James. Please go ahead.

Analyst: Thank you. Good afternoon. Question on new products. Not meeting expectations. Can you share if you see this as a risk for international markets? Curious if overseas customers are more drawn to core franchises and they are less sensitive to newness. If this is something that you would expect headwinds from a little further down the road. So just some color on how new products resonating with international consumers would be great.

Andre Maestrini: Yeah. So Thank you, Rick, for the question. Andre here. We see that the portfolio that we have in international markets with more recent is more diversified in the composition of the sales And yes, you are right, by bringing the core franchise to life, with different colors, different iterations, is still a growth driver in international that plays stronger in those markets than our original North American market. So both, we play on the strength of our well known global franchises and we have this diversified newness portfolio in those markets operating to a bigger extent.

Meghan Frank: Great. And then just a follow-up on, the question on markdowns. Can you help us understand the assumptions for the back half, which imply an improvement in markdowns? Is that just a function of easier comparisons? Or are you assuming demand improves in the back half? Yep. In terms of the second half, I would say it will be a sequential improvement to Q2 and then we expect markdowns in Q4, to be under last year. Given that was our high water level from a markdown perspective. So I would say sequentially better as we improve throughout the year. And again, for the full year flat to modest improvement. So Q2 will be our high watermark this year.

Thanks very much.

Operator: Thank you. The next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.

Analyst (Lorraine Hutchinson): Thank you. Good afternoon. I was hoping to dig into the China business a little bit more. Can you talk about what happened there, if it was different than the experience in the U.S.? And also, the factors that give you confidence that it will improve as the year goes on?

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