Lululemon Athletica Inc. (LULU) Q3 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica Inc. Third Quarter 2020 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's third quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; Celeste Burgoyne, President of Americas and Global Guest Innovation; Meghan Frank, CFO; and Alex Grieve, VP, Controller. 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-K and our quarterly reports on Form 10-Q. Any forward-looking statements 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. 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 and store productivity 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, 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 third quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour. [Operator Instructions] And now, I'd like to turn the call over to Calvin.

Thank you, Howard. I am pleased to speak with you today about our performance in the third quarter, which exceeded our expectations. I'm incredibly proud of how our teams around the globe have continued to execute on the strategies that underpin our Power of Three growth plan as we navigate this unprecedented year. Joining me on the call today is Celeste Burgoyne, who was recently appointed to serve as our first President and will provide an update on our omni-guest experiences. In addition, Meghan Frank, who was recently promoted to Chief Financial Officer, will speak to our third quarter financials and provide some color on our outlook for the fourth quarter. And Alex Grieve, our VP Controller, will be available for Q&A. On today's call, I will provide an overview of our third quarter results and share some highlights with you from our Thanksgiving week. Then I'll give an update on our international business and product innovations, including MIRROR before turning the call over to Celeste and Meghan. Let me begin by providing an overview of our business performance in the third quarter. Total revenue increased 22% to $1.1 billion, driven by a combined comp increase of 18%. The revenue increased across our major regions with growth of 19% in North America and 45% in our international markets. In the store channel, productivity increased to 82% of last year's volume, better than our expectation of 75%. Our e-commerce business remained strong with comps of 93%. In addition, gross margin increased 100 basis points, and adjusted earnings per share increased 21% to $1.16 versus $0.96 last year, significantly ahead of our expectations. I'm also excited that in fiscal Q3, our share performance continued with our strongest quarterly market share gain in recent history. We grew our retailer market share of the U.S. adult active apparel market by 1.4 points over last year, according to the NPD Group's consumer tracking service. In summary, these results demonstrate that our brand is becoming stronger, and I'd like to touch on the 6 key drivers of our performance this quarter. First, many of our loyal female guests are shopping our entire collection, extending beyond bottoms as we continue to innovate our offering across categories, including bras and on-the-move. Second, we continue to deliver a steady pipeline of new products to our guests every month as we leverage our Science of Feel development platform. Third, our teams managed our inventory flows extremely well through the COVID store closures to ensure we had ample inventory to support the increased demand. Fourth, we provided pay protection to our educators to protect their well-being, which ensured we were ready to reopen stores and successfully launch new guest-facing services, such as our virtual waitlist appointment shopping and mobile POS. Fifth, we have been investing in our digital capabilities and enhancing the experience of our e-commerce sites for several years, which enabled us to quickly respond to the accelerated shift to omni this year. And finally, we successfully showed how well lululemon translates and connects with guests across cultures and geographies, with growth in both North America and around the world. These drivers will continue to carry us forward into 2021 and beyond as we work to fuel our momentum. Before providing broad comments by category and channel, I wanted to also touch on our performance over the recent holiday. For the week that included Thanksgiving and Black Friday, we delivered a record-breaking performance in our e-commerce channel, which offset declines in store traffic. Response to our full-price offering was extremely good with many of our classic franchise items such as the Align pant, the defined jacket and the ABC jogger as well as new franchises, including Wunder Train and Invigorate all performing well, and our markdown penetration was relatively in line with last year. There are several large volume weeks ahead for us in the fourth quarter, and we recognize that uncertainties remain due to COVID-19. As we have throughout the year, we continue to plan for multiple scenarios yet the unknowns make forecasting the business more difficult. That being said, we are focused on the levers we control such as pulling forward our holiday messaging and leveraging the key drivers I mentioned a few moments ago that led to our success in the third quarter. We are excited about how the holiday season has begun with continued demand for our product offerings, and we have confidence in our ability to execute during this period. Switching now to international. I'd like to start by mentioning that Andre Maestrini will join lululemon in January to serve as our new EVP International. He will have responsibility for leading and driving growth in our international markets, including China and the broader APAC and EMEA regions. I speak for myself as well as our leaders in the regions when I say I'm thrilled to have Andre as part of the team. He's joining us at an exciting time in our international business, and we remain committed to quadrupling revenues from 2018 levels by 2023. Looking at our international business in the third quarter, I'm especially pleased that total revenue increased 45%. In APAC, business was strong across all major markets and particularly in China, where total revenue increased by more than 100%. This was driven by the performance in both our store and e-commerce channels. Over the last 2 years, we have tripled the number of stores we operate in Mainland China, and I'm thrilled with how our brand is resonating across both Tier 1 and Tier 2 cities. In Europe, guests continue to actively engage with us online as our store traffic remains below last year's level. e-commerce comps increased by nearly 160%. And for the second quarter in a row, these results more than offset declines in our store channel to drive positive revenue growth in the region. Shifting now to product innovation. We continue to leverage our Science of Feel platform to bring new technical merchandise to our guests. Since the early days of the pandemic, our guests have been demanding technical product that offers comfort and versatility as they spend more time working and sweating from home. Within women's, business was particularly strong as we saw a return to pre-COVID growth rates. In total, women's grew 22% with strength in both tops and bottoms. Within men's, total revenue grew 14%, which represents further improvement from the trends in quarter 1 and quarter 2. I'm excited that we're seeing strength in the bottoms category with our male guests returning to our fixed waistband styles, including ABC and commission while our joggers also continue to perform well. And within accessories, we will continue to lean into our strong performance with opportunities to grow our equipment offerings with new products. As an example, in the coming months, we will launch a 3D yoga mat, one of the first in the world designed with a textured surface to better enable body alignment during your practice. Looking forward, I'm thrilled with our pipeline of innovation. For the holidays, we are offering special edition product in many of our key franchises. And over the course of 2021, you'll see us scaling the Science of Feel to bring more technical innovations across our major categories. As I've said before, we are in the early stages of growth within our product innovation pillar, and we have ample ways to expand our key categories of run, train, yoga and on the move. I'm also happy to share an update on MIRROR. Since the acquisition 5 months ago, we have made steady progress on the integration, and we are pleased with the brand's performance in Q3 and with how the holiday season has begun. We continue to expect MIRROR to generate in excess of $150 million in revenue in 2020. Over the course of the third quarter, we began to leverage the lululemon ecosystem to raise awareness for MIRROR. We launched the dedicated MIRROR U.S. e-comm site, including a hyperlink for guests to complete a purchase transaction, and we have included MIRROR in our e-mail marketing campaigns. Also in November, we created shop-in-shops in 18 of our U.S. locations to test and learn how to refine our in-store selling experience, and we plan to expand this to several hundred stores next year. One of our store managers in Santa Monica described it best. Our guests are blown away by the sleek design and functionality of MIRROR that is as innovative and unique as our own products. We are just at the beginning of our journey with MIRROR, and we are thrilled with the current momentum and excited with what this can mean for next year and beyond. Before turning the call over to Celeste, I want to highlight the launch of our impact agenda in October. This is our first long-term strategy focused on how lululemon will become a more sustainable and equitable business. minimize harm to the environment and accelerate positive change, both inside and outside of our company over time. To help us deliver on these commitments, Stacia Jones joined lululemon this quarter and will lead our work related to inclusion, diversity, equity and action, what we call IDEA. Stacia has extensive experience in this area including having served in the role of Chief Diversity and Inclusion Officer. I look forward to sharing with you our progress on the impact agenda and IDEA commitments going forward. Let me now turn it over to Celeste to speak to our omni guest experience pillar. Our approach toward guest engagement and our ability to deliver unique experiences across both physical and digital environments is a key competitive advantage for lululemon. Celeste?

Thank you, Calvin. I'm pleased to be on the call today to speak to our omni-guest experience pillar and to share some details on our third quarter performance, both in our store and our e-commerce channel. Over the past several years, we have shifted our organization to be focused on the omni-guest experience rather than focusing on specific channels. This served us very well in the COVID-19 environment. We know that guest behavior is dynamic, and our goal is to create opportunities in both the physical and the digital worlds that offer compelling experiences. We have leveraged our channels, put the guest at the center of all we do and have enhanced the ways we engage with our guests, whether via a transaction, a personal development session, community connection or on the MIRROR platform. Looking at our store channel, we are bullish on stores as physical retail remains an important part of the lululemon growth story. We continue to be focused on and invest in our in-store experience, our stores, our hubs and our local communities, creating a space for engagement among our guests, educators and ambassadors and allowing us to educate and story tell our product in a powerful way. In addition, we leverage our stores to facilitate our omni capabilities, including BOPIS and ship from store, and they continue to be an important vehicle for new guest acquisition. We remain on track to open 30 to 35 net new stores globally in 2020. In Q3, we had 97% of our stores open. Currently, we are still at approximately 97%, but we've seen a tightening of capacity constraints in several markets due to spikes in COVID-19 While these constraints can lead to lines outside stores during peak shopping times, I'm proud of how we have successfully implemented several strategies to improve the guest experience and reduce wait times. These include: first, the virtual waitlist, so guests no longer need to physically wait in line and can be notified by text when it's their turn to enter the store; second, mobile POS, which allows certain transactions such as returns, exchanges and purchasing gift cards to all occur just outside of the store; third, buy online, pick up in store at door or at curbside, offering flexibility and choice for our guests; fourth, appointment shopping that can be scheduled both before, during and after a store's normal operating hours; and fifth is our digital educator program, which is designed to assist guests who would rather continue engaging with us online. This allows a guest to have a quick online chat or schedule an appointment for a personal or group shopping experience. I'm also excited that we continue to successfully execute our ship-from-store capabilities to leverage our inventory across channels. In fact, we achieved our highest volume ever with ship-from-store orders over the Thanksgiving and Black Friday holiday week. I'm so proud of how our educators are embracing and executing these new initiatives and further enhancing the guest experience. Another strategic area for us has been leaning more aggressively into our pop-up store strategy with our largest number of seasonal stores this holiday. In Q3, nearly 70 were operating. And in Q4, we plan to increase that number to approximately 100. We have leveraged pop-up successfully for the last several years to bring our product and community to life in markets where we don't have a year-round physical presence. In addition, this year, we're using pop-ups to help alleviate capacity constraints at high-volume stores in key malls across North America, including centers such as Somerset Collection near Detroit and Shenu Center in Calgary. In total, we have opened 14 pop-ups within close proximity to existing stores, and we're also operating 9 gifting hubs and malls where we already have a mainline location. These temporary locations not only help support an improved guest experience, but they also attract new guests into the brand. Switching now to e-commerce. As Calvin mentioned, sales trends remain robust with total digital comps up 93% in Q3, driven by a healthy mix of new and existing guests. Even with stores being open for a majority of the quarter, we continue to see historically retail-only guests now shopping with us online. In the spring, as we recognize the dramatic behavior shift towards e-commerce, we layered on additional investments in IT infrastructure, fulfillment capabilities and our guest education center, all to ensure we are ready for a spike in traffic over the holiday season. And I'm thrilled that we are seeing these investments paying off. Throughout Q3, we continued to see both traffic and conversion remain strong even as the majority of our stores were open throughout the quarter. The enhancements we're delivering to our guests include increased and improved storytelling and product education, more predictive search and a more seamless checkout. In addition, we recently partnered with Afterpay in North America, which is now live on our site, and we have enabled direct checkout functionality on Instagram and Facebook. These features offer our guests new methods to engage and transact with us, which -- while also helping us acquire new guests. Before handing it over to Meghan to take you through our financials, let me give you a quick update on our membership program. In September, we launched in Toronto and began enrolling members for the second year of the program in Denver, Chicago and Edmonton. We are very pleased with the number of guests who have joined us across these 4 cities as they enjoy a higher level of engagement with lululemon and gain access to a more complete expression of our brands. We remain in test-and-learn mode with membership, and we continue to iterate the program such as the recent expansion of our digital offering. Benefits now include virtual workshops focused on emotional fitness, including a recent session hosted by our global ambassador, Gabby Bernstein, which was attended by over 500 members. We will continue to study the ways guests are engaging with us in our test cities, and we'll use these learnings as we evolve the program going forward. I'm also very excited about the opportunities MIRROR could bring to our membership program. We look forward to sharing more in the future about how we plan to leverage these 2 platforms to bring new experiences to our guests and MIRROR members. In closing, I'd like to thank the entire lululemon family. It truly takes a village -- from our product teams to our e-commerce teams to our technology teams and to so many across the company. We are so grateful for everyone's hard work and dedication. And I would like to especially thank our store, guest education center and distribution center teams, who are on the front lines, providing an amazing guest experience during a challenging year. And with that, I also want to congratulate my colleague, Meghan Frank, on being named to serve as our CFO. I will now turn it over to Meghan.

Thanks, Celeste. Let me first say how happy I am to be here as lululemon's newly appointed CFO. I'm excited to continue to partner with Calvin and our talented senior leadership team to execute on our Power of Three growth plans, and I look forward to keeping you up-to-date on our progress on future earnings calls. Let me now provide you with the details on our Q3 performance. And although we are not offering specific guidance, I will provide some color on our outlook for the remainder of the year. I will also discuss specifics on our balance sheet, including our cash position, liquidity and inventories. Please note that the adjusted Q3 financial metrics I will share include the operating results of MIRROR but exclude $8.5 million of acquisition-related costs and our associated tax effect. You can refer to our earnings release and Form 10-Q for more information and reconciliations to our GAAP metrics. For Q3, total net revenue increased 22% to $1.1 billion, above our expectations for a mid- to high single-digit increase. In our digital channel, we posted a 93% comp increase on top of a 30% increase last year. In our store channel, we had 97% of our stores open and saw productivity increase to 82% of last year's volume, better than our expectation of 75%. Square footage increased 13% versus last year, driven by the addition of 36 net new stores since Q3 of 2019. During the quarter, we opened 9 net new stores and completed -plan optimizations. In terms of our digital channel, e-comm contributed $478 million of top line or 43% of total revenue. We continue to see notable strength in traffic and conversion. Traffic was driven by channel shift, coupled with investments in digital marketing and conversion continues to benefit from gaps response to our product and the investments we have made in our global digital platforms to improve guest experience. Gross profit for the third quarter was $627 million or 56.1% of net revenue compared to 55.1% of net revenue in Q3 2019. The gross margin increase of 100 basis points was driven by 170 basis points of leverage on occupancy and depreciation and 10 basis points of favorability in foreign exchange. This was partially offset by 80 basis points of deleverage in product margin, primarily due to higher airfreight costs related to COVID-19 and higher markdowns. Moving to SG&A. Our approach in the current environment has been to protect against downside while also ensuring we continue to invest in our long-term growth opportunities. SG&A expenses were $412 million or 36.8% of net revenue compared to 35.9% of net revenue in Q3 2019. The deleverage in the quarter resulted predominantly from marketing investment associated with MIRROR, partially offset by leverage on higher-than-expected sales. Adjusted operating income for the quarter was $213 million or 19.1% of net revenue compared to 19.2% of net revenue in Q3 2019. Adjusted tax expense for the quarter was $62 million or 28.9% of pretax earnings compared to an effective tax rate of 29.1% a year ago. Adjusted net income for the quarter was $151 million or $1.16 per diluted share compared to earnings per diluted share of $0.96 in Q3 of 2019. Capital expenditures were $66 million for the quarter compared to $78 million in the third quarter last year. Q3 spend relates primarily to digital channel and analytics capabilities, supply chain investment, technology spend to support our business growth and store capital for new locations, relocations and renovations. Turning to our balance sheet highlights. We ended the quarter with nearly $1.2 billion of total liquidity. We have $482 million of cash and cash equivalents and $700 million of available capacity under our committed revolving credit facilities. However, subsequent to quarter end, and based on the strength of our financial position and our outlook for future cash flows, we've given notice to cancel the $300 million short-term credit facility we put in place at the time of the MIRROR acquisition. We continue to maintain our 5-year revolving credit facility of $400 million, which matures in 2023. Inventory grew 23% versus last year and was $771 million at the end of Q3. We continue to expect levels at the end of Q4 to increase in the 20% to 30% range. As we announced today, our Board of Directors has authorized an increase in our share repurchase program from $264 million to $500 million. We've repurchased nearly $1.4 billion of our stock for the last 6 years, and we continue to believe share repurchases are an effective method of returning cash to shareholders. Let me now shift to current trends and share with you some color on how we are looking at the fourth quarter. Due to the dynamic nature of the macro environment, we are not yet returning to our historical cadence of providing specific guidance for the current quarter and fiscal year. We remain focused on leveraging our omni model and digital strength as we navigate the uncertainties stemming from COVID-19. While the majority of our stores remain open, we have continued to see guest shift between channels, which has driven outsized growth on our e-commerce sites. As we've mentioned, we pulled forward investments in our digital channel to ensure our guests continue to receive an elevated experience when shopping our sites and to maximize holiday business. In terms of stores, we currently have approximately 97% of our stores open across the globe, in line with Q3. However, as we're seeing a resurgence of COVID-19 in several markets, We've experienced a higher number of government-mandated capacity restrictions in November and December relative to Q3. Given our historically high levels of productivity, particularly during the holiday season, these constraints clearly limit the number of guests who can enter our stores at any given time. Therefore, when looking at Q4, overall, we are expecting productivity to be approximately 70% of last year's levels, with trends in line with Q3 during nonpeak weeks. When looking at new store openings for 2020, we remain on track to open 30 to 35 net new stores, with 24 net new stores opened through the end of Q3. These openings will contribute to a low double-digit increase in square footage for the year. In addition, we continue to execute on our seasonal store strategy with nearly 70 seasonal stores operating in Q3 and and plans to operate approximately 100 in Q4. Looking at Q4 specifically, we expect total sales to increase in the mid- to high teens. This is above our prior expectation of a high single to low double-digit increase and assumes e-commerce growth remains strong but likely moderate modestly from levels we saw in Q3. This also assumes the majority of our stores remain open throughout the fourth quarter. When looking at MIRROR, we continue to expect revenue for the full year 2020 to be in excess of $150 million with strong results during Thanksgiving week. We're excited with the momentum we're seeing in this business. particularly the growing community of people sweating with MIRROR, which contributes to increased brand awareness and strong long-term financial returns. In terms of gross margin, we continue to believe it will be flat to up modestly versus last year in Q4. When looking at SG&A, we continue to expect deleverage in Q4 as store traffic remains below last year's levels, and we continue to invest in marketing for MIRROR to take advantage of current trends towards sweating from home to drive the long-term value of this business. Given the seasonality of this investment, we expect to deleverage in Q4 to exceed what we experienced in Q3. With regard to Q4 earnings per share, compared to a year ago, the growth rate in adjusted EPS is now expected to increase in the mid-single-digit range, up from our prior expectation for a modest decline. This includes operating results from MIRROR but excludes acquisition and integration-related costs. In terms of capital spending, we now expect CapEx for 2020 to come in somewhat below last year's level. Before handing it back to Calvin, I'd like to reiterate that we believe we are well positioned from an omni perspective for the high-volume weeks that remain ahead of us this holiday season. We're excited with the performance we saw over Thanksgiving week, but acknowledge the environment remains uncertain, particularly given COVID-19-related capacity constraints. We have planned for multiple scenarios and we'll continue to be agile as we serve our guests where and when they want to shop. I'd also like to thank our teams for their dedication and hard work and for enabling these results we reported today. And now back to Calvin for some closing remarks.

Thanks, Meghan. Before we take your questions, I also wanted to mention that this quarter, we were pleased to welcome Courtney Gibson to our Board of Directors. Courtney is President of Loop Capital Markets, one of the largest privately held investment banking, brokerage and advisory firms headquartered in the United States. She brings a wealth of consumer and market insights to lululemon, and I look forward to her counsel. Let me close by reiterating that we are positioned well for the big volume days during the holiday season. Since the early days of COVID-19, our management team has been preparing for multiple possible scenarios, and we are ready to serve our guests where and when they want to connect with us. In our store channel, we will leverage our seasonal stores, virtual waitlist, mobile point-of-sale and appointment shopping to ease capacity constraints and continue to protect the safety of our store teams. And in e-commerce, our investments are paying off as our sites have demonstrated the ability to more than handle the anticipated spike in volume. In closing, I want to once again thank our teams around the world for continuing to be there for our guests and for one another. Their resilience, tenacity and creativity throughout 2020 have been a continued source of inspiration for me and our entire leadership team. This sets us up well for the coming months and quarters ahead. And with that, we'll be happy to take your questions. Operator?

[Operator Instructions] The first question comes from Mark Altschwager with Baird.

Congrats on the strong results here. Really nice to see the digital momentum. I was hoping you could talk about e-commerce capacity in Q4 and really your ability to sustain the type of growth rates you've been seeing given the much higher sales base in the fourth quarter. And then separately, I just wanted to touch on men's. I think the growth rate there has lagged the overall company year-to-date. I was hoping you could dig into the drivers there a bit more. Is it a function of just the work-from-home and lower demand for some of the core products like ABC or just any other high-level learnings there and how you see the men's business potentially reaccelerating from here?

Great. Thanks, Mark. It's Meghan. I'll take the e-comm capacity and then hand it over to Calvin for men's. So as we mentioned, we have been planning for multiple scenarios for Q4, and we feel well positioned to capture e-comm opportunity, depending on where the guest wants to shop with us. And we do see it moderating slightly from what we experienced in Q3 just in line with our overall guidance of mid- to high-teens growth relative to our 22% increase in Q3.

Great. And on men's, Mark, we're really happy with the progression we've seen through Q1, Q2 through to Q3. Moving from Q2 to Q3, the men's business accelerated almost at the same rate as women's. So although it's slightly behind our women's growth, it has, in fact, accelerated faster from the Q1 impact from COVID. And it's predominantly driven by he just wasn't shopping to the same degree out of the gate as she was. And that's in the market. We continue to put on share with our men's business. We've seen him respond well to strengthen our shorts, our sweats and our hoodies. And we have seen in Q3, our fixed waistband business getting much stronger. So I'm very pleased with the acceleration of the men's business, his response to the product and see no concern. And we remain committed to our power of doubling our men's business by '23.

That's great. And maybe, Calvin, just a quick bigger picture one. Just thinking ahead to next year, vaccine is on the way, but probably some time before we return to normal buying patterns. Could you just speak to how you're planning the business in terms of inventory flows, maybe pace of product introductions, anything on the marketing front as we head into spring of 2021.

Yes. In terms of -- as we look through multiple scenarios into next year, we talked earlier about our inventory position coming out of Q1 and where we are coming out of Q3. And we continue to feel very good about our position, up 23%, down from 41% in Q1. We have the product to satisfy the demand, and our product is predominantly core, less seasonal. So we're well positioned, and we've continued to lean in to make sure that we have the product to satisfy the demand. Our newness and innovation pipelines remain healthy, very strong, and we haven't pulled back on any of those. And that will continue to hit and flow. So we feel very good, and we're excited about the opportunity with new guests entering this category. The new guests that we've acquired through 2020 continue to build upon that and look the ways to amplify the brand. So again, not knowing the next few months, we feel very good about our position, the flow of product, our guest engagement, our ability to continue to fuel the business and growth forward.

That's great. Best of luck, and congrats, Meghan, on the new role.

Thank you.

The next question comes from Erinn Murphy with Piper Sandler.

I guess, first, just a clarification for Meghan. On the productivity in the fourth quarter stepping down to 70% in store, what is all being taken account to here? Is it just what you're seeing currently or just your anticipation of further capacity constraints to come? And then Calvin, as we just think about the product road map into next year, any update on footwear and any other kind of key product innovation, things we should be mindful of?

Thanks, Erinn. I'll start on productivity. So we did see average productivity in our stores in Q3 at 82%, which was higher than our expectation of 75%. But given we are seeing a resurgence with COVID-19 in some markets and we are also seeing stricter capacity constraints, government-mandated capacity constraints in several markets as we head into these peak weeks, we are expecting productivity overall for the quarter to be at approximately 70%, but reaching trends in line with Q3 during non-peak weeks. And it's really driven by just the volume of store sales in Q4. In a typical year, we see a 40% to 50% lift from Q3 to Q4, which given capacity constraints and traffic impact clearly limits our opportunity to service that traffic in our stores. .

And on our product pipeline, I'll first touch on footwear. So we anticipate the back half of next year introducing the -- our introduction into the category with selling in early '22. So we're excited to share our unique point of view and innovation in that category. And as it relates to all others, the pipeline is full, and we will continue through what we've expressed before of OTM, the sizing expansion. But as we continue to invest in our activity base, be it run, train or yoga, across the categories, there's a number of innovations that we'll introduce throughout the year that will continue to fuel growth in the business.

The next question comes from Lorraine Hutchinson with Bank of America.

I'd like to follow up on your comments around the air freight pressure in 3Q. Do you expect this to persist? And then can you also comment on the availability of air freight capacity just to make sure that you can land enough inventory to meet holiday demand and then into the early spring?

Sure, Lorraine. It's Meghan. So we have seen higher air freight market rates, but generally sufficient availability. We do expect that we'll continue to have some air freight rate pressure in Q4, and that is reflected in the guidance that we provided of a modest increase in Q4.

Have you found enough capacity to meet demand?

I'm sorry. I think I missed the second part of that question. Can you repeat that?

Sure. Have you been able to find enough capacity to meet demand for the holiday and then into the early spring launches?

Yes. Yes. We don't have any capacity limitations at this point.

The next question comes from Matt McClintock with Raymond James.

Congrats both Celeste and Meghan and even Courtney. I guess there is some good news in 2020. The question I have, actually, Calvin, and it's a little bit different angle than what Mark went with. But you -- your women's business still seems to be growing pretty exceptionally And there's a lot of people out there that think that you're ultimately going to need men's to grow fast at some point. But your women's business has proven that it can consistently grow faster than anyone's ever thought for years. So you actually put up a nice slide back at that Investor Day a couple of years ago. I'm talking about TAM, total addressable market. So how have your thoughts on the total addressable market changed or evolved now that we're in a COVID world or a post-COVID world? That's my first question.

Great. Thanks, Matt. I mean it's definitely with the inflections that we've seen this year through COVID with guests living a more active, healthy life and looking for more versatility in their apparel clothing, I think that all bodes well for the addressable market that we shared at the time. And what we shared at the time was we are early innings of our share of that addressable market. So I do think there are 2 forces. We will continue to gain share the addressable market, as we did in this quarter, and we shared achieving among our largest gains in our recent history. So that said, even with guests coming in and looking for versatility, we are winning at a greater rate than others. And I do believe that addressable market will only get larger. So I think both will continue to add fuel for our business. And we're happy with our men's business and the acceleration and the growth moving forward. We know that's a big opportunity for us as a percent of share of sales as well as just awareness. And as you've indicated, our women's business is far from -- at its potential. And what we saw this quarter was new guests coming in and our existing guests broadening out from some of the core categories as we've introduced newness, as we also innovate behind those. We introduced the cloud bra. Bras has been a big opportunity for us that we see with our female guests, and they responded incredibly well -- responded and the total category lifted. And we saw a really strong share growth. So I'm excited about the continual growth in women's both through new guests as well as migrating them into new categories, fueled by our innovation, fueled by versatility of apparel, the growth of TAM and our market share potential.

But just as a follow-up question. On MIRROR specifically, you meaningfully increased your guidance for MIRROR last quarter. I think 50%, $100 million to $150 million plus this year, and yet you kept the earnings the same, the accretion dilution, the same in terms of guidance. And you said that was going to go into marketing. So I'm just actually curious, can you give us an update in terms of the returns that you're seeing on the marketing dollars that you're actually putting to work at MIRROR?

Absolutely. We're really pleased with the holiday that MIRROR is having. We guided and raised it in the last earnings call, and we've reinforced the - in excess to that number. We're off to a very good holiday with MIRROR through November. There's lots of content and experiential innovation that's rolling out that we're announcing, for example, sweat dates, which is very unique and differentiated on the platform. We've only started rolling it out within the lululemon network. We have 18 stores today that we're learning and is becoming a great beacon and brand building opportunity and rolling it into other lululemon channels, with plans next year of going to hundreds of stores, continuing to build upon the platform. And there are some big weeks ahead. So I like our position. I like where we are in the quarter, and there is very solid momentum behind it. And we bet with the team on inventory numbers that allow us to have units. So we're in a good stock position with 2-week SLAs. So I'm encouraged. And there are some big weeks ahead with some uncertainty. But all indication is very positive with guest response and the momentum that's fueling and building behind MIRROR.

I actually look forward to using -- wearing my lululemon shoes that Erinn Murphy talked about with MIRROR.

The next question comes from Paul Lejuez with Citi.

Curious, you mentioned stores operating at around down 18%. I just want to make sure I understand if that number is being hurt more by weaker traffic or not being able to handle the traffic that is showing up, just given the smaller store size. And I think maybe related to that, you've got these pop-up stores. I just want to make sure I understand the accounting of those sales. Are those -- is that going to be included in comps if they are near to an existing store? And just how does that tie in to the spread that we see between comps and total sales as we look to 4Q?

So I would say in terms of store traffic, there are lower industry trends. And I think generally speaking, more traffic is shifting to e-comm. I think that said, we do have capacity constraints, and that's impacting also our ability to put traffic to our stores. As you mentioned, we are opening approximately 100 seasonal locations that will have an operation through Q4. Those do not show up in our comp sales. They will show up on our other channels. And as you mentioned, some of those are within markets and centers where we have existing locations so that we can capitalize on that traffic flow through Q4. .

The next question comes from Paul Trussell with Deutsche Bank.

My congratulations as well on the quarter and the new roles by Celeste, Meghan, Stacia and Courtney. My question is on e-commerce. You continue to experience, obviously, really strong growth in that channel with over 40% of sales this period. While that likely changes when the environment normalizes, just how has your view on investing in and rolling out stores changed, if at all? And are there areas of capabilities online where you need to invest further? And just lastly on that, how does a higher e-commerce mix kind of impact the P&L over the long term?

Great. Thanks, Paul. I'll talk to the -- our current strategic thinking through the balance of the channels and then hand it off to Meghan to talk about mix. We are obviously incredibly excited about the omni guest that has joined lululemon this year. Equally, the stores will remain a very important strategy and presence within how we service our guests, how we recruit and acquire new guests. There's been no dramatic change to our forward view of that. We always open a conservative number of new stores on an annual basis. They are small, highly productive and have the role of more than just transacting. They are building in the community, connecting to our guests and our ambassador community and really being a marketing driver, while at the same point, servicing and selling at high productivity. And we are early in the size of our store network. So we're going to continue to be opportunistic. I think there's going to be exciting opportunities for us next year with the state of retail. And our balance of cities, our balance of mall to non-mall is healthy, and our fleet remains healthy, and we will continue to take that conservative opportunistic view. And then with digital, we did a lot of innovation this year that the team will just build upon. You can go to the site today, you can interact with one of our incredible store educators live on demand through video. You can schedule a concierge, not to mention that traditional omni connectivity of buying online, picking up in store. So we're going to continue to invest in that digital connection of the ecosystem, both on how the guest transacts but also bring to our digital the human connection that is so unique within our store environment. So we're excited about our innovation and continue to feel the success in both channels, both which play a key critical role in our omni strategy. And Meghan, if you want to talk about mix?

Yes. So in terms of e-comm penetration impact on operating margin, we do, as you noted, see a higher operating margin in that channel. However, stores, which have historically been approximately 70% of our mix have seen decline in traffic and revenue. So that's contributed to some deleverage and impacted the overall profitability in the near term. As we look into the future, we do aim to manage the business on an omni basis and remain committed to our Power of Three growth plan, which includes operating margin slightly above revenue growth over the long term. And as we mentioned, we've been planning into multiple scenarios, and that channel penetration dynamic is an important piece of that.

You mentioned the loyalty program earlier. Can you just provide any additional details on spend per shopper enrolled in the program versus others? Any further color on rollout plans to additional cities and just any tweaks or changes you've made to the program of late?

Yes. Thanks, Matt. It's Celeste. I'll take that question. So obviously, as I mentioned, we're operating currently in 4 cities across North America with our membership program. And we are really pleased with not only the number of guest but also the engagement of guests. So we are not going to talk about any specifics on spend or any of that stuff, but really happy overall with their engagement. We did have a really great event in October. We had Gabby Bernstein, one of our global ambassadors who led an hour-long wellness and mental well-being session. We had over 500 members from across those 4 cities joined. So just an example of how we're really leveraging this program, and our guests are really enjoying participating and connecting with us across our entire ecosystem and really through the entire Sweatlife. We're really using these markets in these cities to continue to test and iterate. Obviously, a pivot to digital during this current environment has been a huge area of pivot. But one of the things that we're really excited about is also the opportunities that MIRROR can bring to our membership program. So we'll have more to share on that in the future. But definitely, the teams are hard at work ensuring that we really create and continue to iterate this program.

The next question comes from Matthew Boss with JPMorgan.

Congrats on another nice quarter. So Calvin, could you elaborate on comp trends that you've seen since the close of the third quarter. Black Friday, I think you said record weeks sounds great. Have you seen overall comps accelerate relative to high-teens performance in the third quarter? And has store performance to date exceeded the embedded 70% full quarter forecast?

Matt, it's Meghan. I'll take that. So we were pleased with the performance we saw during Thanksgiving week, and we did intentionally pull forward some seasonal activity, just given the capacity constraints as we moved further into the quarter. And we remain comfortable with the level of guidance we gave for Q4. That said, there is some uncertainty ahead of us, both with the virus and impact on store closures as well as store trends and guest behavior. So that's why our outlook for the balance of the quarter is a little lower than what we've seen to date. .

Okay. Great. And then just maybe for SG&A. On the accelerated e-commerce investments that I believe are tied to the higher digital penetration that you're seeing. Is this spending -- or is this basically incremental dollars relative to the 5-year plan laid out at your Analyst Day? Or should we think about this as more of a pull forward of some of the multiyear expenses and investments that were already preplanned within that 5-year plan?

I would think about it as more of a pull forward. And as I mentioned, we'll look -- we look to manage the business from an omni perspective. And as e-comm has accelerated, we've also somewhat pulled back on store openings, and so we'll look to balance our portfolio over the longer term as well.

The next question comes from Michael Binetti with Credit Suisse.

Let me add my congrats on a nice quarter. Maybe I'll just dovetail off Matt's question. Could you talk about how the SG&A in the fourth quarter, maybe what the book ends at the different range of the scenarios you planned? Or what were some of the -- what are some of the big swing factors between the high end and the low end of the scenarios you're thinking about in the quarter? And then I guess, looking out to next year, Calvin, how would you stratify -- I guess, with what you've learned this year and how your customers changed, how would you stratify what you think are the incremental growth drivers to lean into? And I guess, referencing Matt's question, as you think about investing coming off this, given that the growth next year pivots back to stores, that's where you have the majority of your fixed cost and leverage, is there a scenario where the SG&A could grow faster than revenues next year to get back on track to that 5-year plan?

So I'll take the first part of your question. So in terms of SG&A, we're not providing specific guidance for Q4. But as I mentioned, we do expect Q4 to deleverage slightly more than what we experienced in Q3. And we do -- we do plan the business prudently and manage costs effectively as we move through the fourth quarter. That really is driven by 2 pieces that deleverage. So the first would be due to this pressure on store traffic remaining below last year's levels and the impact that has on the P&L. And the second piece would be our investment in MIRROR. So as we mentioned, we see MIRROR as being modestly dilutive to earnings in 2020. The majority of that dilution will impact Q3 and Q4 given the seasonality of the business and the investment that we've been discussing in terms of marketing to capture new guests with the benefit really coming over the long term in that business.

And I'll just add, in terms of the multiple scenarios, we've looked at, there are a number of growth drivers that we anticipate will continue and accelerate from '20 into '21. As I mentioned, we're excited about the growth in women's, the growth coming from not just a strong bottoms business, but an acceleration in the additional adjacent categories. And those categories are ones in which the team has been working on, newness and innovation for the past few years in bras, in tops for example, in OTM. And next year, the innovation and the addition into those categories continues as we also continue to launch newness into our bottoms business. So I see a continual growth in the women's business. Men's is showing the pace in which it's reaccelerating, and I anticipate next year that it will be back at its momentum coming into '20 as we resume to some degree of normalcy. The international business incredibly strong. We've learned so much this year about the power of e-commerce. And I think that will continue to allow us to drive our omni initiatives across many markets into next year. And I'll just end with guest. We've acquired a number of exciting guests through COVID this year. One that came to us through e-commerce and haven't shopped our physical store because of a variety of constraints and the ability to migrate them into the store and have them become an omni guest. And then the increase in our omni guest portfolio within our existing a store-only guests became omni and shopped with us online and how we leverage those opportunities and continue to drive the share of spend with us going into next year. So multiple scenarios but all very positive on the back of product and the innovation that we're launching heading into next year.

The next question comes from Adrienne Yih with Barclays.

Congratulations on the performance and everybody on their promotions. Well-earned. Calvin, I guess my first question for you is, traditionally, showrooms and brand strength itself has been the driving force of advertising. Wondering as you become a global brand with a huge little footprint, what's your philosophy on investing more in demand creation? And then Meghan, for you, what have you learned about attachment rate of product purchases in combination with MIRROR sales? And what portion of the MIRROR customer file overlaps with that of lulu?

I believe we have an exciting opportunity with our brand to drive awareness to, therefore, drive consideration and help fuel guest acquisition and add to the growth potential that lululemon has. We talk a lot about the unaided awareness within men's and the opportunity to recruit more men to drive the awareness behind the brand and recruit. But that also exists for women. And it exists even in our more mature markets like the U.S. and Canada, not to mention international. So as you know, Nicky Neuberger joined us in the new role of Chief Brand Officer earlier this year, and she has already made an impact in assembling the talent of that team. And I'm excited how we're positioned heading into next year to drive into some of those initiatives and opportunities. We see a huge opportunity around earned media, and doing more with that as well as just the current initiatives we deploy to drive awareness and recruit. So you'll definitely see in '21 an increased effort and tactics of how we go within North America, but also internationally to tackle some of the opportunities we have with the brand and driving awareness and consideration.

And in terms of MIRROR and overlap with lululemon, I'd say we're still very early in our integration with 18 stores open and learning a lot there. But what we did see in diligence was approximately a 50% overlap. So we do believe that the brands are very compatible, and we're excited about what we can create in the future.

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