lululemon (LULU) Q1 2025 Earnings Call Transcript

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DATE

Thursday, June 5, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Calvin McDonald

Chief Financial Officer — Meghan Frank

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RISKS

Chief Financial Officer Frank stated, "We did lower our op margin for the full year from 100 basis points decline year over year to 160. That's all driven by the net impact of tariffs."

Frank said, "We expect gross margin in Q2 to decline approximately 200 basis points compared to Q2 2024," citing increased occupancy, depreciation, tariffs, higher markdowns, and foreign exchange.

Frank said, "SG&A was above our guidance of 120 basis points of deleverage due predominantly to the negative impact from an FX revaluation loss."

Frank noted, "given consumer confidence and macroeconomic as we move into the second half of the year, we feel it's prudent to tick up our forecast slightly on the markdown line."

TAKEAWAYS

Revenue: lululemon athletica inc. (NASDAQ:LULU) reported $2.4 billion, up 7%, or 8% in constant currency.

Comparable Sales: Increased 1%; Americas comparable sales declined 1%, China Mainland increased 8%, Rest of World increased 7%.

Americas Revenue: Rose 3%, or 4% in constant currency; Canada up 4% (9% in constant currency), U.S. up 2%.

China Mainland Revenue: Grew 21%, or 22% in constant currency; management attributed a four-point impact to the Chinese New Year calendar shift.

Rest of World Revenue: Increased 16%, or 17% in constant currency.

Store Network: 770 global stores at quarter-end; three net new stores opened, square footage up 14% year over year.

Digital Revenue: $961 million, representing 41% of total revenue.

Category Growth: Men's revenue up 8%, women's up 7%, accessories and other up 8%.

Gross Margin: Increased 60 basis points to 58.3% (GAAP), driven by lower product cost, improved damages, improved markdowns, and leverage on fixed costs; 130 basis points improvement in product margin offset by 50 basis points deleverage on fixed costs and 20 basis points of FX pressure.

SG&A Expenses: $943 million, or 39.8% of revenue; deleveraged 120 basis points year over year (GAAP), above guidance due to FX revaluation loss.

Operating Income: $439 million, 18.5% of net revenue; operating margin declined from 19% in the prior year period.

Diluted EPS: $2.60 per diluted share, up from $2.54 in the prior year; full-year diluted EPS (GAAP) guidance is $14.58 to $14.78, compared to $14.64 in the prior year.

Inventory: Dollar value up 23%, units up 16%; increases attributed to higher average unit cost due to tariffs and FX.

Share Repurchases: 1,360,000 shares repurchased for $430 million at an average price of $316; $1.1 billion remaining in share repurchase authorization.

Balance Sheet: $1.3 billion in cash, no debt.

Full-Year Revenue Guidance: $11.15 billion to $11.3 billion, implying 5%-7% growth, or 7%-8% excluding the prior year’s fifty-third week.

Store Growth Guidance: 40-45 net new company-operated stores expected for the year; majority of new stores international, mainly China.

Gross Margin Guidance: Full-year gross margin (GAAP) expected to decrease 110 basis points due to tariffs and slightly higher markdowns; Q2 gross margin expected to decline 200 basis points from the prior year period.

SG&A Guidance: Full-year SG&A deleverage of 50 basis points expected; Q2 deleverage of 170-190 basis points from the prior year period.

Operating Margin Guidance: Operating margin (GAAP) expected to fall by 160 basis points year over year.

Capital Expenditures: $152 million in the quarter; full-year guidance of $740 million-$760 million, targeting growth, distribution centers, store expansion, and technology.

Tariff Mitigation: Management is planning "modest" price increases on select items, supply chain efficiency actions, and targeted sourcing shifts, with mitigation expected mainly in the second half of the year.

Brand Awareness: Unaided U.S. brand awareness rose from the mid-30% range in the prior quarter to 40% in the current quarter.

Product Innovation: New products such as Align No Line, Daydrift, Glow Up, and Be Calm received positive responses, with key launches selling out and full distribution planned for the back half.

SUMMARY

Management maintained full-year revenue guidance and highlighted international momentum, with China Mainland revenue up 22% in constant currency despite a calendar shift. Operating and gross margin guidance were revised downward, as management cited tariff impacts and plans for only modest, targeted price increases on a limited portion of the assortment. Digital revenue contributed 41% of the mix, and product innovation was a focus, with several new launches receiving rapid sell-through and positive guest feedback.

Chief Executive Officer McDonald said, "we gained market share across both men's and women's in the premium athletic wear market in the United States."

Management confirmed strategic investments remain on track across distribution, new markets, and technology, supported by $1.3 billion in cash and no debt.

Tariff mitigation actions—including pricing and sourcing—are expected to have greater impact in the second half of the year, with gross margin pressure front-loaded into Q2.

Inventory growth in dollars outpaced units, with management attributing the differential to tariffs and FX, but asserting inventory quality and composition remain healthy.

Brand activations and campaigns, such as Summer of Align, contributed to the sequential rise in unaided U.S. awareness, reflecting ongoing investment in grassroots and omni-channel engagement.

INDUSTRY GLOSSARY

Optimization: Reconfiguration or relocation of existing store sites to improve productivity, size, or guest experience.

Co-located Strategy: Approach of expanding or opening larger-format stores within high-traffic locations to offer a fuller assortment across categories.

Daydrift/Align No Line/Glow Up/Be Calm: Proprietary product franchises or new lines referenced by name, representing recent innovations in lululemon athletica inc.’s assortment.

Fifty-third Week: An additional fiscal week in the prior reporting year, impacting year-over-year comparisons.

Full Conference Call Transcript

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 which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-Ks and our quarterly reports on Form 10-Q.

Any forward-looking statements that we make on this call are based on assumptions as of today. We expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com.

Before we begin the call, I'd like to remind our investors to visit our Investor site where you'll find a summary of our key financial and operating statistics for the first 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 would like to turn the call over to Calvin.

Calvin McDonald: Thank you, Howard. It's good to be here with you today to discuss our first quarter results. As you've seen from our press release, our revenue growth for the quarter came in at the high end of our guidance range. I'm pleased with this performance, which was relatively consistent with quarter four. I'd also note that our revenue in the United States grew 2%, which is an improvement in the trend we've seen over the last several quarters. Based on our quarter one revenue performance and what we're seeing thus far in quarter two, we are maintaining our revenue guidance for the full year.

As we look ahead, we will continue to leverage our financial strength and our position in the marketplace to play offense, remain agile, and successfully manage the environment around us. I'll begin by sharing the details of our quarter one performance, including high-level financial metrics and key highlights regarding our regional performance, product innovation, and our brand campaigns and activations. Next, I'll provide insights into the planning and strategies we're deploying related to the increase in tariffs. Meghan will speak to the specific financial implications, and I'll share some insights into the opportunities we have across the business. I'll then share my thoughts on quarter two and the remainder of the year.

Meghan will review our financials and our updated guidance, and we will conclude by taking your questions. Let's get started. In quarter one, total revenue increased 7% or 8% on a constant currency basis. Gross margin increased 60 basis points to 58.3%, and earnings per share were $2.60, ahead of our expectations. In addition, in quarter one, we continued repurchasing shares and bought back another $430 million of stock. Our ongoing repurchases demonstrate the strength of our balance sheet and our continued confidence in the long-term prospects for Lululemon.

Looking at our regional performance, we continue to see strength across markets driven by our high-performance, high-style merchandise and the compelling ways we engage with our guests through brand activations and community events. In North America, momentum continued in Canada, where sales grew 9% in constant currency, and in the United States, revenue growth improved to 2%. We're making progress on our assortment, and we've seen good response to many of our new innovations. But my sense is that in the U.S., consumers remain cautious right now, and they are being very intentional about their buying decisions. Even with this, we gained market share across both men's and women's in the premium athletic wear market in the United States.

In China Mainland, revenue increased 22% in constant currency. As you are aware, Chinese New Year shifted from quarter one of this year to Q4 of last year. While we estimate that this calendar shift had a negative impact of about four percentage points on Q1 revenue growth, we remain pleased with the underlying momentum in this very important growth market. And in the rest of the world, revenue increased 17% in constant currency as we continue to see a strong acceptance of our brand by guests across the APAC and EMEA regions. We are executing against our strategy to maximize our existing markets, expand in newer markets, while also seeding others for future growth.

I'm excited by the recent store openings in two of our franchise markets, Denmark and Turkey, which are off to a strong start, and we remain on track to enter Italy as a new company-operated market and Belgium and the Czech Republic under a franchise model later this year. When looking at the full year, our view on revenue is unchanged, and we continue to expect 7% to 8% growth. By region, we continue to anticipate revenue in North America to increase in the low to mid-single-digit range, China Mainland to grow in the 25% to 30% range, and revenue in the Rest of World segment to increase about 20%.

Key to our success within all our markets is our product, which offers unique and innovative solutions for guests across both athletic and lifestyle product categories. Throughout quarter one, guests responded well to the newness we introduced into our assortment. For women, our defined franchise continues to perform well across our markets globally, and we are pleased with the response to our recent launches, including Daydrift, Shake It Out, and Be Calm. For men, we're seeing strength in several of our key franchises, including Zeroed In, Smooth Spacer, and Show Zero.

In May, to celebrate the ten-year anniversary of our Align franchise, we launched Align No Line, which offers the same fit and feel as the iconic legging but without a front seam. We're pleased with the guest response both online and in the 80 doors where it was offered. We plan to build on this momentum for the fall when we roll it to all stores. I'm excited with the innovations we've rolled out this year and will continue to bring to market going forward. We have significant opportunity to expand all five of our key activities: yoga, run, train, golf, and tennis, and become the top-of-mind destination for guests who enjoy these activities.

Recent examples include our new Fast and Free running short for men, and for women, we launched additional styles which leveraged the research and development our teams conducted last year for our further ultra-marathon event. Switching now to our brand activations. Our teams continue to develop unique and compelling brand campaigns and community events that engage our guests, increase brand awareness, and support our product launches. Let me highlight a recent example. To support the launch and to celebrate Align's anniversary, we created our Summer of Align campaign. This fully integrated campaign included traditional and social media, exclusive experiences and events, and featured several influencers and ambassadors.

We hosted events around the world, including our Lululemon roller rink activation at the Bottle Rock Festival in Napa Valley and our largest-ever yoga experience in China, attended by 5,000 people in Beijing. This campaign and the other events we activated in quarter one is a great example of how we remain focused on our grassroots approach to guest engagement while at the same time leveraging traditional media assets and our roster of ambassadors to support product launches and build our brand. In fact, our unaided brand awareness in the United States grew from the mid-30s in quarter four to 40% in quarter one. I would now like to talk for a moment about the current environment related to tariffs.

Meghan will speak to our assumptions and the implications of potential higher rates during her guidance discussion. But I first want to spend a few minutes sharing our approach. The current tariff paradigm has brought uncertainty into the retail environment. As consumers try to assess the impact they will have on daily life, as businesses evaluate these impacts as well, I believe we are better positioned than most to navigate the near term while also maintaining our focus on investing in our growth potential over the long term. We are operating from a position of strength. Our brand remains strong, our guest engagement is high, we offer a compelling value proposition, and we are a highly profitable business.

Let me share a few details. We have an industry-leading operating margin. This allows us to continue investing across our strategic roadmap to enable long-term growth while managing any increased costs associated with tariffs. Our balance sheet is strong with $1.3 billion in cash and no debt, which provides us significant financial flexibility. We are making progress with our newness, have a robust pipeline of innovation, and our guests are responding well to many of the new solutions we are bringing into our assortment. And our premium positioning in the performance athletic apparel category yields different elasticity for our products relative to fashion-oriented brands.

We believe our guests will continue to live an active and healthy lifestyle and turn to us for the technical apparel we are known for. Shifting now to how we have been navigating this situation. Over the past few months, our teams have been looking across the enterprise for how we can offset increased tariff rates. Our work streams include prudently managing expenses, identifying efficiencies within our supply chain, and evaluating our position in the marketplace related to pricing. During COVID, we developed a strong muscle across our teams to be agile, pull levers across the business within a rapidly changing external environment, and simultaneously plan for multiple scenarios.

We are applying the same approach now as we maintain a disciplined focus on expenses, look across our supply chain, leverage our dual sourcing capabilities, engage in costing discussions with our vendors, and review pricing scenarios to ensure we sit where we want in the market, are pricing appropriately for the innovation in our assortment, and maximize any opportunity to gain market share. We have always been and will continue to be very intentional with our pricing decisions. These actions will be targeted and will reflect the work we've done on style elasticity. We remain nimble in our approach and feel we are well positioned during this period with many levers to pull.

Before handing it over to Meghan to discuss our financials, I wanted to share my perspective on quarter two and the remainder of the year. It's been approximately a year since we've made the changes in our product organization, and I'm pleased with our evolved structure, the way the teams are working together, and the efficiencies we're seeing across our processes. We still have work to do to create new products that have the potential to grow into core franchises and further optimize our merchandise mix. However, we are moving in the right direction.

And looking at the remainder of 2025, our teams are focused on strengthening our product pipeline and bringing more innovation into our core assortment while also introducing new styles with the potential to become key franchises and core items in the future, expanding deeper and bringing new technical solutions into our five key activities while further developing our lifestyle assortment, engaging more deeply with our guests through community activations, brand campaigns, and leveraging our membership program, and expanding our highly productive square footage profile through new store openings and optimizations.

As I hand it over to Meghan, I want to also say that while we recognize that quarter two has some pressures related to our planned business investments and additional expenses related to tariffs, we feel good about the full year and our ability to maintain our revenue guidance for 2025. There is considerable opportunity ahead for Lululemon, and we're intent on successfully navigating the near term while we plan for and invest in the long term. With that, I'll now hand it over to Meghan.

Meghan Frank: Thanks, Calvin. I'm happy we delivered Q1 results that exceeded our expectations. Guests are responding well to our product newness and innovations. As a result, we are maintaining our revenue guidance for the full year. Given the uncertainties in the macro environment, our approach to planning remains balanced on managing the dynamics of the current year while also maintaining our focus on the long term. We are managing expenses prudently while also continuing to invest to drive long-term growth and set ourselves up for future success. This includes new store openings and optimizations, new market entries, growing brand awareness, and ensuring we have adequate capacity across our supply chain. I'll share our detailed guidance with you in a moment.

But let's first take a look at our Q1 results in detail. For Q1, total net revenue rose 7% or 8% in constant currency to $2.4 billion. Comparable sales increased 1%. Within our regions, results were as follows: Americas revenue increased 3% or 4% in constant currency with comparable sales down 1%. By country, revenue increased 4% or 9% in constant currency in Canada and increased 2% in the U.S. China Mainland revenue increased 21% or 22% in constant currency with comparable sales increasing 8%, and in the rest of the world, revenue grew by 16% or 17% in constant currency with comparable sales increasing by 7%.

In our store channel, total sales increased 8%, and we ended the quarter with 770 stores globally. Square footage increased 14% versus last year, driven by the addition of 59 net new Lululemon stores since Q1 2024. During the quarter, we opened three net new stores and completed four optimizations. In our digital channel, revenue increased percent and contributed $961 million of top or 41% of total revenue. And by category, men's revenue increased 8% versus last year, while women's increased 7%, and accessories and other grew 8%. Gross profit for the first quarter was $1.4 billion or 58.3% of net revenue compared to a gross margin of 57.7% in Q1 2024.

The gross profit rate in Q1 was ahead of our guidance and increased 60 basis points driven primarily by the following: a 130 basis point increase in product margin driven predominantly by lower product cost, improved damages, and improved markdowns offset somewhat by higher airfreight. A 20 basis points negative impact from foreign exchange and 50 basis points of net deleverage on fixed costs. Relative to our guidance, which was for gross margin approximately flat with last year, the upside was driven predominantly by lower product costs, leverage on fixed costs, and slightly better 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 $943 million or 39.8% of net revenue compared to 38.1% of net revenue for the same period last year. SG&A was above our guidance of 120 basis points of deleverage due predominantly to the negative impact from an FX revaluation loss. Operating income for the quarter was $439 million or 18.5% of net revenue compared to an operating margin of 19% in Q1 2024. Tax expense for the quarter was $136 million or 30.2% of pre-tax earnings, compared to an effective tax rate of 29.5% a year ago. Net income for the quarter was $315 million or $2.60 per diluted share compared to EPS of $2.54 for the first quarter of 2024.

Capital expenditures were $152 million for the quarter compared to $131 million for the first quarter last year. Q1 spend relates primarily to investments that 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 approximately $1.3 billion in cash and cash equivalents. Dollar inventory, which was impacted by higher AUC related to tariffs and foreign exchange, increased 23%. When looking at units, increased 16%. We repurchased 1,360,000 shares in Q1 at an average price of $316.

Share repurchases remain our preferred method to return cash to shareholders, and we currently have approximately $1.1 billion remaining on a repurchase program. Let me now share our updated guidance outlook for the full year 2025. We continue to expect revenue in the range of $11.15 to $11.3 billion. This range represents growth of 5% to 7% relative to 2024. Excluding the fifty-third week that we had in the fourth quarter of last year, we expect revenue to grow 7% to 8%. We continue to expect 40 to 45 net new company-operated stores in 2025 and to complete approximately 40 optimizations. We expect overall square footage growth in the low double digits.

Our new store openings in 2025 will include approximately 10 to 15 stores in The Americas, with the rest of our openings planned in our international markets, the majority of which will be in China. For the full year, we now expect gross to decrease approximately 110 basis points versus 2024. Relative to our prior guidance for a 60 basis point decrease, we expect the additional 50 basis points of deleverage to be driven predominantly by increased tariffs offset somewhat by our enterprise-wide efforts to mitigate these costs and slightly higher markdowns. When looking specifically at tariffs, the assumptions we've made regarding rates include 30% incremental tariffs on China, and an incremental 10% on the remaining countries where we source.

From a mitigation standpoint, as Calvin said, we've looked across the enterprise and have identified several levers which will help offset much of the impact of these higher rates. Based on our implementation strategies, we expect our mitigation efforts to be most impactful in the second half of the year. Turning to SG&A for the full year. We expect deleverage of approximately 50 basis points versus 2024. Relatively in line with our prior guidance. Driven by FX headwinds and ongoing investments into our Power of Three times Two roadmap, including investments in marketing and brand building aimed at increasing our awareness and acquiring new guests, investments to support our international growth and market expansion, and continued investment in technology.

When looking at operating margin for the full year 2025, we now expect a decrease of approximately 160 basis points versus 2024. For the full year 2025, we continue to expect our effective tax rate to be approximately 30%. For the fiscal year 2025, we now expect diluted earnings per share in the range of $14.58 to $14.78 versus EPS of $14.64 in 2024. Our EPS guidance excludes the impact of any future share repurchases but does include the impact of our repurchases year to date. We expect capital expenditures to be approximately $740 million to $760 million in 2025.

The spend relates to investments to support business growth, including a continuation of our multi-year distribution center project, store capital for new locations, relocations and renovations, and technology investments. Shifting now to Q2. We expect revenue in the range of $2.535 billion to $2.56 billion, representing growth of 7% to 8%. We expect to open 14 net new company-operated stores in Q2 and complete nine optimizations. We expect gross margin in Q2 to decline approximately 200 basis points relative to Q2 2024. Driven predominantly by increased occupancy and depreciation, higher tariff rates, modestly higher markdowns, and foreign exchange. In Q2, we expect our SG&A rate to deleverage by 170 to 190 basis points relative to Q2 2024.

This will be driven predominantly by increased foundational investments and related depreciation, and strategic investments, including those to build brand awareness. In addition, as I mentioned last quarter, we were layering back on certain expenses, including store labor hours, which are having a more pronounced impact on Q2 relative to the remainder of the year. When looking at operating margin for Q2, we expect a year-over-year decrease of approximately 380 basis points. I wanted to add some additional context on our operating margin guidance. In Q2 last year, margin improved by 110 basis points, which was our strongest performance of the year.

This year, as I mentioned, we are also being impacted by external factors, namely tariffs, where our mitigation efforts are more pronounced in the back half, and foreign exchange. In addition, we are continuing to invest in our strategic roadmap to set ourselves up for ongoing success. While these items are having an outsized impact on Q2, when looking at the full year, the decrease in operating margin is significantly less. Turning to EPS, we expect earnings per share in the second quarter to be in the range of $2.85 to $2.90 versus EPS of $3.01 a year ago. We expect our effective tax rate in Q2 to be approximately 30%.

When looking at inventory, we expect units to increase in the low double digits in Q2, with dollar inventories up in the low 20s, due in large part to the impact of higher tariff rates and foreign exchange. We expect a similar dynamic in inventory growth for the remainder of the year. In Q2, the low double-digit unit growth reflects our investments in newness and innovation. In addition, we are comping a 6% decline in units in the prior year. We are pleased with both the level and composition of our inventory, which positions us well. And with that, I will turn it back over to Calvin.

Calvin McDonald: Thank you, Meghan. I feel we are well positioned to navigate the current period. We intend to leverage our strong financial position and competitive advantages to play offense while making deliberate decisions and continuing to invest in our growth opportunities. In closing, I want to thank our talented leaders and teams who make these results possible and demonstrate their agility and passion each day. We'll now take your questions. Operator?

Operator: Thank you. We'll now begin the question and answer session. Our first question is from Dana Telsey with Telsey Group. Please go ahead.

Dana Telsey: Hi, good afternoon everyone. As you think about the guidance for the balance of the year and the pressure on Q2, before you have some mitigation efforts in the back half of the year, can you expand on those mitigation efforts and what you're thinking about, whether it's price increases, diversifying sourcing, how should we think about it? And then when you think about just the U.S. business, any category strength that you saw with the newness that you offered and any early indications on the no-line Align, which frankly I've heard good sell-throughs? Thank you.

Meghan Frank: Thanks, Dana. I think given the dynamic of the year in terms of Q2 relative to the full year, it's important to anchor in the full year where we guided to a decline of 160 basis points versus our prior guide of 100, which is really related to the net impact of tariffs as well as the slight increase in markdowns. When we think about the tariff impact to mitigation actions, I'd highlight, one would be pricing. We are planning to take strategic price increases, looking item by item across our assortment as we typically do, and it will be price increases on a small portion of our assortment, and they will be modest in nature.

And then on the sourcing side, we are also pursuing some efficiency actions there, some of which will impact the second half of this year, and then we are also focused on that into 2026 as well. And I'll pass it over to Calvin on the product side.

Calvin McDonald: Yes. Thanks, Dana. In terms of category trends on newness, what's very encouraging is that it's balanced. It's balanced across our activity in lifestyle, new item introductions, as well as new and updates to our current. So just walk through a few of these. On the lifestyle side of our business, as you've seen and introduced at the beginning of Q1 and sold out pretty much in all doors, was our Daydrift trouser, which used performance fabrics with unique updated style, and she responded incredibly well to that. And we will be back in stock fully with some expanded silhouettes for September. So we're very encouraged and believe we have a future core success on our hands.

Be Calm, another new core, future core, and she responded very well to both, had great rating reviews. On the activity side of our business, we balanced between new as well as updates. On the new side, Glow Up was well received, good reviews, continues to gain momentum. And again, introduced with a limited set of colors, and we continue to build and expand into that. And again, feel we have a very unique legging creating a unique sensation and unmet need for Train and seeing good success. And then on updates to our existing core, Align No Line is a great example of that. And early results but very encouraging as you alluded to.

And we only had it distributed to 80 doors. So again, we are chasing and we'll be in full store distribution by September. You'll see it get stronger and distributed more throughout the quarter. But this is one in which across all of these and when I referenced the response to newness is encouraging and these being some of the strong hits both from a newness and innovation standpoint, definitely we saw a sellout and are chasing excited about what that means for the back half. But balanced across activity lifestyle, new as well as updates. So we know the newness is resonating and working well.

And the team is busy chasing into these what appear to be future hits for us. Thank you.

Operator: The next question is from Janine Stichter with Jefferies. Please go ahead.

Janine Stichter: Hi, thanks for taking my question. I was hoping you could dig in a little bit more to the comp drivers, the top line drivers. Think last quarter you had talked about traffic falling off, but seeing some improvements in transaction size and solid performance in conversion. Wondering if still seeing the same thing then maybe any update on the progression of the quarter, what you saw in April into May? Thank you.

Meghan Frank: Hi, Janine. So in terms of comp drivers, as we talked about on the last call, we did see a decline in store traffic, particularly in the U.S. As we moved from Q4 into Q1. We did see that moderate somewhat, but we did still for the first quarter see a lower traffic trend in stores relative to Q4. Conversion trends remained relatively consistent, a little bit of a decline year over year. And then also we did see an uptick in terms of average dollars per transaction in the first quarter. And then in terms of how it's progressing April into May, we don't share specifics on Q2, but I would say nothing materially different.

Janine Stichter: Great. Thanks so much.

Operator: Thank you. The next question is from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel: Hi, good afternoon. A couple of questions. I'm going to merge them together, both tied around kind of tariffs and your strategy for tariffs. I guess the first question, if I'm hearing you, I mean, as you're looking at these tariffs, it sounds like you're going to take the biggest hits on margin. So the question I have is, why not at least initially or do more with price? And then secondly, as we look at the guidance now, sort of say the bigger disconnect between top and bottom line, is that all, is that mostly tariffs or I think you did mention some other investment spending in there? Thanks.

Meghan Frank: Thanks, Brian. So in terms of top line versus bottom line, so for the full year, we maintained our revenue guide, so $11.15 billion to $11.3 billion. We did lower our op margin for the full year from 100 basis points decline year over year to 160. That's all driven by the net impact of tariffs. So the tariff impact then with some offsets, as I mentioned, in pricing and supply chain. And then a slight increase also in markdowns. They're not any meaningful changes in terms of our expense posture. We're maintaining our focus on the long term.

And as I mentioned, we do have some mitigation actions on tariffs that will also come into play as we get into 2026. In terms of price, as mentioned, we're really looking at this as operating from a position of strength, being strategic in our pricing, looking at our LS and where we have opportunity, and we'll continue to take a look at that as the year progresses. But feeling comfortable with our positioning at the state.

Brian Nagel: Okay. Thank you.

Operator: The next question is from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss: Great. Thanks. So Calvin, maybe could you elaborate on the progression of comps that you saw over the course of the first quarter? And on the start to the second quarter that you cited, I guess if we think about it relative to first quarter performance in The Americas, and in China? Does the 7% to 8% revenue guidance for the quarter, does that embed a moderation in June and July trends relative to what you've seen in May, just given the uncertainty and the dynamic backdrop?

Meghan Frank: Hey, Matt. So in terms of how the quarter progressed, no material changes in terms of trend month to month in Q1. As we look to Q2, we don't guide to specifics in Q2, but what I can share is, I would say similar trends in the U.S. relative to Q1. As you know, China was impacted by the timing of Chinese New Year in Q1, which was about a four-point delta. So I would say our expectation and current trends would be in line with our annual color we offered on China performance, which should be in the 25% to 30% range.

Matthew Boss: Great. And then maybe Meghan just a follow-up as it relates to second quarter guidance and the full year. I guess could you elaborate on the slight increase in markdowns now contemplated in the full year outlook? And maybe just how you see the progression in the second quarter versus back half?

Meghan Frank: Yes. In terms of markdowns, so we did actually see a decline in markdowns in the first quarter. So we haven't seen an uptick in markdowns in our results to date. We were down 10 basis points in Q1. But given consumer confidence and macroeconomic as we move into the second half of the year, we feel it's prudent to tick up our forecast slightly on the markdown line. We would be in the range of 10 to 20 basis points above last year, so not meaningfully higher than our last year water line, which was relatively, I would say, in line with history.

Matthew Boss: But you're saying first quarter and so far into the second quarter? That you haven't seen the need to take the markdowns. It's just an assumption that you've baked in given the backdrop.

Meghan Frank: Yes. I would say on our actuals, in Q1, we saw a downward trend of 10 basis points, and our markdown positioning in Q2 would be embedded in our guidance.

Matthew Boss: Okay. That's great color. Thank you.

Operator: The next question is from Brooke Roach with Goldman Sachs. Please go ahead.

Brooke Roach: Good afternoon and thank you for taking our question. Calvin, given some of the success of some of the new launches that you've seen year to date, can you elaborate on your latest thoughts about returning the U.S. business to sustainable comp growth and whether or not that differs at all in your Canada versus U.S. as you contemplate North America reported comps?

Calvin McDonald: Thanks, Brooke. When I look at what we control, in terms of our mix of newness, and how that's performing, especially the new intended core and the way the guest is responding to that, definitely positive and feel good about those reactions to it. And the team knows and is working on what they can continue to add and innovate to that. When I look at our performance versus the market, our performance, we gained market share in the premium activewear. We had strong performance gains against our peers in this segment of the market where we compete. And the macro consumer is different. We continue to see a more cautious, discerning consumer.

We're definitely not happy where the growth is in the U.S., but relative to the market and our performance versus others, pleased that we're putting on share, pleased with the reaction to the newness and with the mix of newness that's coming. As we continue to get back into stock on the new core that she's reacting to and making those adjustments and the newness that we have planned. And I think a bit of the delta between the Canadian and the U.S. market consumer we see is we're not seeing the same discerning consumer in Canada as we are seeing in the U.S.

In terms of traffic as well as some other metrics that we monitor, we continue to monitor that, but the newness in both markets is responding very well. And the team is very focused on what the guest is reacting to. And bringing that to the consumer into the market in the back half.

Brooke Roach: Great. Thanks so much. I'll pass it on.

Operator: The next question is from Ike Boruchow with Wells Fargo. Please go ahead.

Ike Boruchow: Hey, thanks for taking my question. Two questions. I think first for Calvin. So appreciate on the product side, the commentary on what's working both in lifestyle and performance. But at the end of the day, the comps are up 1%. So clearly, there's got to be some things that are not working. Could you just maybe help us what exactly are the parts that are lagging that you're hoping to improve? And then Meghan, maybe just back to Matt's question, part of the guidance revision down is markdown, but it sounds like you're saying that you're not seeing any markdown yet, but you're planning it. So I guess maybe I'm just a little confused.

Is it because of the inventory build that you're expecting markdown to accelerate? I guess I'm just confused why you're taking a more cautious approach on that. Like what's the leading indicator that's making you think that if you're not seeing it yet?

Calvin McDonald: Thanks, Ike. In terms of the balance of the mix, I would say the overall traffic numbers are having an impact on the general mix of the assortment in the U.S. From a new guest perspective, we grew our new guests from, and I think, Meghan mentioned this from an AOV, UPT, both positive from a market share across all categories. We saw growth in our premium segment. I think where there continues to be opportunity is with our core and seasonal colors. We're seeing the guests shift to the truly new styles as I mentioned, the Glow Up, the Align No Line, the Daydrift, the Be Calm, and have opportunities.

But overall, it really is the macro discerning consumer that we're seeing through traffic in the store, the behavior, how they're shopping and reacting I think is definitely showing good indication. And as I alluded to the growth in market share is indicating we are gaining and winning to the marketplace and how the consumer is spending.

Meghan Frank: And I would add, Ike, similar on the markdown front. So the traffic trends, I would say, would be the leading indicator on why we've taken that positioning in terms of consumer confidence and macro uncertainty in the second half as well.

Ike Boruchow: Okay. Thank you.

Operator: The next question is from Paul Lejuez with Citi. Please go ahead.

Paul Lejuez: You maybe give a little bit more detail about inventory by geography? And if there are any specific regions that you're seeing potentially more margin pressure, markdown pressure, where is that coming from? Is that just the U.S. or is it more global? I mean is there anything in the competitive landscape front you see across your different global markets that make you think that things might heat up from a promotional perspective? Thanks.

Meghan Frank: Thanks, Paul. So in terms of inventory, I'd say again, we haven't seen markdown pressure to date, down 10 basis points year over year in Q1. But when we think about traffic trends and headwinds, they would be predominantly in the U.S. So I'd say that's where I'd probably place a little bit more of the as we move into the second half of the year in terms of what we've layered in terms of markdowns.

Calvin McDonald: And, from a competitive perspective, there's nothing we're seeing globally on a price promotional play other than in the U.S. Where I would say we continue to monitor that closely because we do see ongoing promotional activity across the market, across the competitors as we've seen certain consumer, the more cautious we know that to lever others pull and we continue to monitor it and quite frankly, anticipating a bit of a spike in the back half, if the macro headwinds continue. But we are a full-price business and we'll lead with innovation and our core assortment continue to play that. But we are seeing and do anticipate probably a dynamic competitive market in the U.S.

Paul Lejuez: Got it. Right. I just followed, have you adjusted purchases at all? You're just considering where your inventories are and the tariff situation maybe taking price up a little bit. Have you also taken your purchases and purchase assumptions down for the back half?

Meghan Frank: I would say we're always adjusting purchases and reflecting the current environment. We do benefit from about 40% of our purchases in core product. So that's an area we flex as we move forward. So I would say we always are doing that. We've done that to some degree. We'll continue to keep a close eye on inventory levels and sales trends.

Paul Lejuez: Thank you. Good luck.

Operator: The next question is from Alex Stratton with Morgan Stanley. Please go ahead.

Alex Stratton: Great. Thanks so much. Maybe for either of you, do newness levels stand in total? Like, are they back where you want them to be? And then if that's not inflecting Americas comp to positive, are you exploring maybe other potential drivers for what to do to get it there? And maybe related for Meghan on that one, is a positive comp for Americas possible this year? Or with your view on the macro, is that something that is more kicked out?

Calvin McDonald: Thanks, Alex. In terms of the composition of our merchandise mix, we are back at our newness percentages, historical newness percentages of the sum. I think the way the guest is reacting and responding within that newness, she is reacting very positively to the new core or intended core silhouette styles that she has not seen before, alluded to sort of Glow Up, the Align No Line, the Daydrift, Be Calm to name just a few, and there is a number of those. Those as a percentage of our newness mix, we are increasing in the back half so that we're reacting to what the guest is responding to.

And as a result, we are shifting some of the seasonal colors, patterns, and graphics in the remaining core to maintain that sort of ratio that we're seeing. But as I look to the back half, the percentage of newness remains strong above historical as we lean into a little bit of these areas where the guest has really responded well. And we weren't at full store distribution. We sold out of many of these styles and silhouettes and have very strong rating reviews on them. So I'm pleased with the newness mix and the work the team has done.

And what we have seen is the consumer respond very well to the completely new styles that she hasn't seen before, and that's sort of the mix that you will see us continue to do heading into the back half of this year.

Meghan Frank: And Alex, I'd add, we're not guiding specifically to comps for the year. But our view on the full year revenue for The Americas hasn't changed. So low single digit to mid-single digit and feel we're well positioned to capitalize if the consumer environment improves as well. That's what we're offering today.

Alex Stratton: Thanks a lot. Good luck.

Operator: The next question is from Jay Sole with UBS. Please go ahead.

Jay Sole: Great. Thank you so much. My question is about China. Given the comp in China, you've opened a lot of stores. How much more store growth opportunity do you see in China before you start worrying about cannibalizing your existing store base given the level of comp right here? Like can you tell us how many stores you have now, what you expect by the end of the year? And then maybe kind of what you're thinking about as a store growth rate going forward? Thank you.

Meghan Frank: Yes. So in terms of China, I would say still feel we're early in our journey there. So we've got 154 stores today. We had a goal of approximately 200 in our current Power of Three times Two plan and saw growth beyond that. I'm really pleased with the performance on new stores. And I'd also mention we are early in terms of our co-located strategy, so where we have stores with high traffic, high sales per square foot, and see an opportunity to expand the size of stores to have a more holistic assortment across men's, women's, accessories, capitalize on that traffic.

We're underway in that strategy in North America to a larger degree, and it's largely still in front of us in terms of China.

Jay Sole: Got it. And can you talk about what the traffic trends were in China? Maybe you talked about what the trends were in the U.S.?

Meghan Frank: We don't break out specifically on traffic trends, but I would say still seeing strong double-digit growth in terms of the China market and nothing notable there.

Jay Sole: Got it. Thank you so much.

Operator: The next question is from Adrian Yin with Barclays. Please go ahead.

Adrian Yin: Thank you very much. My question is on the inventory. The inventory does have some tariff impact and FX. Of the delta from units to dollars at about 7%, how much of that is tariff and how much of that would be the FX? And then secondarily, I guess it's a follow-on. You expecting that tariff inventory to sort of hit the P&L sort of late June and July? And is that when we should expect the commensurate price impact? Thank you.

Meghan Frank: Hey, Adrian. So in terms of the impact on dollar inventory, so it is predominantly driven by higher AUCs related to tariffs and then FX, I would say, we haven't broken out the details, but not too far off from each other in terms of relativity. And then in terms of the impact on tariffs, we do have, as I mentioned, a more pronounced impact in Q2 in terms of the P&L. So 60 basis points in Q2 because the mitigation actions come in the second half. The second half of the year or sorry, for the full year, the FX, sorry, the tariff headwind is 40 basis points.

With the mitigation actions coming into play towards the second half of the year. I would say in terms of pricing, those actions will start rolling out towards the second half of this quarter and into Q3.

Adrian Yin: Okay, great. And then my other question is on the lower product costs, what is driving that? Was it freight or cost engineering? And do you assume that will neutralize as we go into the back half of the year? Thanks.

Meghan Frank: Yes. So in terms of product cost, it would be predominantly driven by mix of business relative to expectations. So I would say right now what's reflected in our guide reflects our forecast in terms of mix of business in the second half of the year, and I wouldn't call out product costs as a variance driver for the full year at this point in time.

Adrian Yin: Okay, great. Thanks so much. Best of luck.

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

Lorraine Hutchinson: Thank you. Good afternoon. I wanted to focus on SG&A for a minute. It looks quite high in the second quarter. Is there anything changing in your view of the investment needed to drive growth? Or is this just timing versus planned investments in the second half?

Meghan Frank: Thanks, Lorraine. Yeah. So in terms of Q2, so there are a few factors that are impacting Q2. So I think important to zoom out to the full year. So for the full year, we did guide revenue in line with last time, so $11.15 billion to $11.3 billion. And the operating margin relative to last time is about up 60 basis points driven by just tariffs and markdown changes. So when you look at Q2 specifically, first I'd note that we did expand our operating margin last year by 110 basis points. It was higher than our full year expansion, which was 50. So therefore, we had assumed some pressure in our operating margin as we planned the year.

Then if you look specifically at the year-over-year SG&A, that would be driven by increased foundational investments and depreciation, strategic investments. And then those add backs that we discussed last quarter in terms of expenses, for example, store labor. That we added back from a normalized perspective. Relative to the full year, 170 to 190 basis points deleverage in Q2. And 50 basis points for the full year.

Lorraine Hutchinson: Thank you.

Operator: The next question is from Aneesha Sherman with Bernstein. Please go ahead.

Aneesha Sherman: Thank you. I want to go back to China. Meghan, you talked about your store growth there, but wondering if you can share some color around the comp growth. There's been a pretty sizable deceleration year over year. Can you share some color around what's that's being driven by? Is it a macro slowdown or something else? And I know there were some tough compares last Q1 as those compares ease in China as well as in the rest of the world. Do you expect to see an acceleration in the comp in the next couple of quarters?

Meghan Frank: Yes. So in terms of China, we did see a slowdown both in trend and comp. We did have a four-point impact from the timing of Chinese New Year. We did also have an outsized performance, I would say, in terms of non-comp new store openings as well as the smaller portion that we do have co-located strategy there. We had an outperformance in terms of revenue growth last year. Even if looking at Q4 to Q1, we were at 39% growth in Q4, so well above expectations. So I would say still pleased with China trends, still strong double-digit growth, and do still have the same expectation for the full year of 25% to 30% growth rate for China.

Aneesha Sherman: And if I can just follow-up, is China still your best full-price market globally?

Meghan Frank: It's still our lowest markdown, yes, so highest full price.

Aneesha Sherman: Thank you.

Operator: The next question is from John Kernan. Oh, pardon me.

Howard Tubin: All right. We'll just take one more question. Thanks.

Operator: Thank you. The final question is from John Kernan with TD Cowen. Please go ahead.

John Kernan: All right. Thanks for squeezing me in, Howard. Just to stay on China and rest of world, obviously, you just talked about it in relation to Aneesha's question, but there was a sizable deceleration in the two-year stack if that's the best way to look at it. But do you think you're becoming more susceptible to a macro environment in China now that you're pushing the end of the year, be pushing $1.7 billion in revenue? And what are you seeing in Rest of World? There was a deceleration there as well. Thank you.

Calvin McDonald: Thanks, John. In terms of our view of our opportunities, nothing has changed. When I look at our performance in the quarter, and our guide for the year, across Mainland China, our Rest of World, and we look at our EMEA, and APAC markets, they continue to perform incredibly strong, double-digit momentum. We're early relative to market share, early relative to unaided brand awareness, continue to see very healthy new guest acquisition and matriculation with our existing guests. And the way the guest is responding to both our newness as well as our long lineup of core items. So nothing has changed from our vantage point.

I think as Meghan indicated, in some of the markets we had outsized growth last year, but very, very healthy strong numbers and relative to peer sets and with our market share gains, very excited and see a long runway of growth and opportunity. As I've alluded before, ended last year at 25% of our business being international and have opportunity we think for a fifty-fifty ratio into the future. So definitely Lululemon is a global brand underdeveloped in these markets and seeing great momentum, a very strong growth and anticipate that to continue.

John Kernan: Megan, did you give the markdown impact embedded in the gross margin guidance on a basis point level?

Meghan Frank: It did. For the full year, to 20 basis points up to last year.

John Kernan: Got it. Thank you.

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

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