Thank you for standing by, this is the conference operator. Welcome to the lululemon athletica Inc. Fourth Quarter and Year-end 2020 Conference Call. [Operator Instructions] And 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 Fourth Quarter Earnings Conference Call. Joining me today to talk about our results are Calvin McDonald, CEO; Sun Choe, Chief Product Officer; Meghan Frank, CFO; and Alex Grieve, VP and 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 by which in 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 that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During the call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our annual report on Form 10-K 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 annual report on Form 10-K 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 operating statistics for the fourth quarter as well as our quarterly infographic. [Operator Instructions] And now I'd like to turn the call over to Calvin.

Thanks, Howard. I'm excited to be with you today. I'm proud of how lululemon navigated this past year and delivered for our employees, guests and shareholders. I believe 2020 has been a pinnacle moment for lululemon as we developed and delivered exciting new innovations that create even more opportunities for us into the future. Our continued growth demonstrates our ability to win, both before, during and after COVID-19. Our business has many strengths and growth opportunities. We are just in the early innings of our potential. In fact, the pandemic has accelerated our progress and the opportunities we have within each of our Power of Three growth initiatives. Over the course of today's call, we'll discuss our strong performance in the fourth quarter and the full year, and we'll also share our road map for 2021. I'm pleased to be joined on the call today by Sun Choe, our Chief Product Officer, who will provide an update on our product innovations; Meghan Frank, our Chief Financial Officer, who will speak to our fourth quarter financials and offer our guidance outlook for quarter 1 and the fiscal year of 2021; and Alex Grieve, our Controller, will also be available to answer any questions that you may have during the Q&A portion of the call. Let me start now by looking at 2020. Last year was another good reminder of the strength of our core product assortment. Even as guest apparel needs evolve throughout the year, our positioning around technical athletic product remained extremely relevant. People will always want to sweat and stay active, and our focus on innovative performance fabrics will continue to deliver unique solutions. We continue to execute against our growth plans, culminating with several notable wins in the fourth quarter. Meghan will share the financial metrics with you,…

Thanks, Calvin. I'm happy to be here to share details regarding our product innovation road map for the year ahead. 2020 was a great year for us from an innovation standpoint, but it wasn't perfect as we were forced to navigate the COVID-19 environment. We have significant opportunity in 2021 to increase our cadence of innovation. Our product team will continue to bring to market merchandise that is technical, while also offering the versatility that our guests demand as they add new dimensions to the way they live the sweat life. We continue to leverage our Science of Feel innovation platform to solve guests' unmet needs and drive expansion in our 4 major product areas across Run, Train, Yoga and On The Move. Last year, while guests adapted to the new normal of working and sweating from home, their desire for technical athletic apparel that seamlessly transitions with them from activity to activity remains strong, and we delivered. Highlights include a relaunch of our proprietary Everlux fabric in new styles, expanding our Align franchise into tops with the launch of the Align Tank and for the first time, we offered some of our best-performing styles in a more inclusive size range. In men's, we saw particular strength in shorts with our 3 core styles, the T.H.E., Surge and Pace Breaker, all performing well throughout the year. Also exciting is our recent launch of the License to Train shorts. This short expands our train offering for men, is made from abrasion-resistant fabric and is suitable for many types of sweaty pursuits, including weight training and trail running. Guest response has been strong, and the License To Train shorts is helping grow our big 3 core shorts for men into the big 4. In Q4, our guests responded well to our holiday…

Thanks, Sun. We are proud of our 2020 results in a challenging environment and are entering 2021 in a strong financial position. We pivoted our investments in 2020 to ensure we were prepared for multiple operational scenarios over our peak holiday period. The fourth quarter was impacted by more COVID-19-related store closures and capacity constraints than we originally anticipated. And we were pleased to deliver revenue growth of 24%, ahead of our expectations. In looking at 2021, we're excited about our momentum headed into the year and the opportunities in front of us. And we expect our top line growth to exceed the annual targets as laid out in our Power of Three growth plan. Also, as Calvin mentioned, we're very pleased with the performance of MIRROR, which has exceeded our initial expectations and we have made the strategic decision to continue investing in innovation and building brand awareness to drive the long-term value of the MIRROR business. This will have near-term implications for SG&A, but I will touch on it further in a moment. Let me share with you the details of our Q4 performance. I will also discuss specifics on our balance sheet, including our cash position, liquidity and inventories. Please note that the adjusted Q4 financial metrics I will share include the operating results of MIRROR but excludes $7.8 million of acquisition-related costs and our associated tax effect. You can refer to our earnings release for more information and reconciliations to our GAAP metrics. For Q4, total net revenue increased 24% to $1.7 billion, above our expectations for a mid-to-high teens increase. This included a 21% increase in North America and a 47% increase in our international business. In our digital channel, we posted a 92% comp increase on top of a 41% increase last year. e-com…

Thanks, Meghan. In closing, I would like to reiterate how pleased we are with how lululemon performed over the quarter and the full year. We see many opportunities to build upon this year's performance by leaning into our strengths: innovative product, expanding our omni-capabilities and continuing to grow around the world. As I mentioned, when we look back at 2020, I believe we will see this as a pinnacle moment for lululemon when we were able to pull forward many future innovations that will create upside for the brand well into the future. All of us on the leadership team are grateful for the continued support and loyalty of our employees, our ambassadors and our guests who continue to be there for one another and make these results possible. And with that, Sun, Meghan, Alex and I would be happy to take your questions. Operator?

[Operator Instructions] The first question comes from Lorraine Hutchinson with Bank of America.

I want to just focus on the investments in MIRROR for a minute. The 3% to 5% dilution, you're obviously above what you had initially expected and I think what we were all expecting. So in light of that, can you just maybe frame out your expectations for the long-term opportunities of the business that are getting you so excited about this -- the ability to invest now in the content?

Yes. Lorraine, it's Meghan. So as we mentioned, MIRROR sales in 2020 exceeded our initial expectations at approximately $170 million. And we did guide to $250 million to $275 million for 2021. They are still very early in their life cycle and the path to profitability there is very much within our control. That said, looking at the business, the value is really in the long term and the long-term value of the subscription revenue. So we've learned a lot since we purchased the business and COVID created an even greater opportunity than we saw at that time. And we're going to invest behind the momentum we see in that business to really drive that long-term value. And you heard Calvin talk a little bit about some of the key investment areas that include adding production studios, adding an instructor -- instructors to the base, launching new features and then expansion into Canada as well as importantly, over 200 shop-in-shops in our North America lululemon stores. In terms of the long-term opportunity for the business, I think we'll continue to learn a lot in 2021. We're not going to put a time point on it right now, but we'll continue to share more as we create our plans for 2022 and beyond.

The next question comes from Mark Altschwager with Baird.

So with respect to the 2021 guide, I think it implies kind of EBIT margins that are a couple hundred basis points below 2019. Maybe just break that down for us a little bit more. I guess, how much of that compression is the MIRROR investments versus your outlook for the core? And then just bigger picture with respect to the Power of Three and the longer-term goals. Obviously, well ahead when it comes to digital, but just maybe give us a sense of what, if anything, has changed in terms of the longer-term ambitions and how that might flow through the P&L over the next couple of years?

Mark, it's Meghan. So if you take into consideration the color I offered on guidance, lululemon operating margin is slightly above 2019. So on track, essentially for our Power of Three growth plans. And that dilution really is driven by the MIRROR investment that I just outlined and really geared towards investing into that business to drive the long-term value. In terms of Power of Three, you're right, we're further along, as Calvin mentioned, than we anticipated in terms of digital strength. We aren't revising our plan right now. But as you can see, we're in good shape to meet that plan.

A quick follow-up there. Can you talk about your progress towards scaling the business in China? And just from a -- maybe from a margin perspective, where that sits relative to the company average and how you're planning that progression?

Mark, it's Calvin. Just quickly on the Power of Three initiatives, doubling men's, doubling digital, quadrupling international, and then I'll quickly jump into certain markets. We're on pace on men's, on pace on international and arriving early ahead on our digital, as we said. So as Meghan alluded to, we're in a very good position at this point in our commitments and excited about the momentum in the business and opportunities to keep investing in innovation, investing in growth. MIRROR is one of those areas that because the business is doing well, we're choosing to invest in a business that we know will add value through further guest relationships, building out that community and the value of the subscription model. So excited about those. And China is equal to those opportunities for us to invest in. We are very happy with our business and growth. We've shared multiple times last year, the growth in both our store-based business and international. As well, I mentioned that heading into '21, our plan is to open more stores in the market than we've ever opened in the 15 to 20 range. That would put us well over 50 stores at this point in time. And we're very pleased with both the top line, bottom line performance in that market, and we keep investing in that market local head office to empower the teams to drive relevancy. So I'm excited about our international business in all markets.

The next question comes from Erinn Murphy with Piper Sandler.

Calvin, for you, you talked about gaining a point of share in 2020. I'm curious to how you think about your ability to continue to gain market share in 2021, particularly as several large global brands are doubling down on their women's business. And then maybe just a clarification on MIRROR. What have you seen in terms of the consumer appetite on some of the pricing that you've played around with? I think during the holiday season, if you were to buy it in store, there were different promotional opportunities to get it slightly cheaper. Are you pleased with the current price position of the MIRROR just before you scale it out to more doors this year?

Okay. Thanks, Erinn. First, on market share, very optimistic with the product that Sun indicated that we will continue to grow share across both men's and women's. We did so in 2020. I believe we were the only of the major brands to do -- to achieve that goal. And we have a very strong business in women's. And I understand that others are identifying and seeing that as a growth potential. But we have a very strong commitment with our guests, very strong franchises, but equally, if not even more important, a very significant pipeline of newness that we're going to continue to build out and delight that guest with in terms of activities into yoga, further into train and run and introducing some new activities. So I'm very confident in our ability through innovation and knowing what we're bringing, that we're going to see growth and success both with men and women and then the men, the opportunity, as we've shared in the past, is really driving that awareness. And we have some exciting initiatives that we'll share, further plan this year to continue to engage, drive awareness and consideration for our male guests as we continue to build out and drive that relationship and success with our women's. Yoga and our female guests, we know are critical parts. And as we look to grow into other areas and opportunity, just know that the team is 100% focused on maintaining and growing that relationship in those segments as well. And in terms of MIRROR, we did do some interesting testing, and we continue to. The benefit of the business being new is that we're doing a lot with Brent and team on test and learn, on both how to acquire and drive the awareness, which remains a big opportunity and price, elasticity behind the product. And right now positioned at the retail price point with a free shipping offering resonates very well. The guest prefers that sort of combination. And then we pulse in a variety of promotional opportunities when it's either competitively appropriate to do so or we see an opportunity. We've tried a number from a discount of $200 to $300 being the peak. So the net price being $1,200. And as well as bundling opportunities. And feedback from the guest is very encouraging that a number of levers -- of registers with them. So it gives us the ability to not just sort of play 1 promotional lever in order to drive that opportunity to invest into the MIRROR. So we have a number of levers that we've tested and validated that we'll continue to do. We have a good price position in and around the $1,200 to $1,500 that they respond well to. And we'll continue to operate with that as well as we look to expansion in the Canadian market price accordingly.

The next question comes from Paul Trussel with Deutsche Bank.

Just wanted to ask about what you're seeing today in terms of store traffic and productivity? And how are you thinking about the cadence of store productivity over the course of the year? And then second, you did mention that air freight, higher markdowns and distribution expenses were headwinds in this current period, offsetting some of the occupancy leverage and other savings. Just speak to the extent that when these headwinds may continue.

Paul, it's Meghan. So in terms of productivity, we saw productivity in stores of 71% in Q4, which was in line with our expectations. We do now, in Q1, have more stores open at 96% and we are not in our peak traffic period. So the constrained impact is lessening. We do expect that to improve as we move throughout the year, but we are planning as we did in 2021 -- or in 2020 for multiple scenarios so that we're able to meet our omni-guest demand. So we'll continue to iterate on that as we move throughout 2021. In terms of margin rates, we offered that we see expansion on a year of 100 to 150 basis points. Included in that is 50 basis points of pressure related to airfreight. We don't see that as a barrier to revenue upside. We'll continue to strategically leverage airfreight to drive revenue and continue to closely monitor that throughout the year.

The next question comes from Matthew Boss with JPMorgan.

Great. And congrats again on the nice quarter. Calvin, maybe as we think about recovery post pandemic, so do you anticipate -- or maybe are you seeing signs of pent-up demand for technical innovation on the sweat side of the business as in-person or maybe people begin to think about in-person fitness again? And then I'm curious how you see lulu's lifestyle assortment positioned to take market share if casualization is, in fact, greater post pandemic?

Great. Thanks, Matthew. As I indicated, our technical performance of our product all through 2020 was the drivers of our growth predominantly. And I don't see that diminishing in any way. I think people are finding ways to sweat, they've adopted new ways to sweat. And when the world opens up, and they'll be able to go back to their gyms and their studios, they'll just have a balance of ways in which they're engaging. And we have a lot more new guests or existing guests using a lot more of our technical product. That is going to just drive an appreciation for and loyalty to the uniqueness of how it performs. So from a recovery standpoint, I feel all the momentum in the business behind driving even more adoption and success of our technical performance as we saw in 2020, and I think it's only going to be more pronounced moving forward. From an OTM perspective, we're early in our development of OTM in our women's category. The team has been building that for the last few years and adding assortment, and we test and launched a key product next year, we will add more to the assortment this year and in the years to come. So we're very early that we're well positioned through our technical apparel to build that business as guests look to shift, but when they shift back to more other casual wear, they're going to be looking for something that I believe is unique and different in the technical apparel fashion, and some of the team are creating and building that. And men's -- that's been 1 of our strengths in men's. Women's is going to catch up to our men's offering. And we have full confidence in our success and strength in men's in that OTM business and the work and the product that's following that is going to keep fueling the OTM. At the heart and the core, the technical performance gear did perform, is performing, and I think it's only going to perform more moving forward.

Great. And then maybe just a follow-up on SG&A. Meghan, so outside of MIRROR and the pull forward that you've cited of the DTC investments, I guess my question is on an underlying basis, is there any change to the annual plan, I think that you laid out at the Analyst Day, for modest SG&A leverage on low teens revenues this year? And then as you see it today, is there any reason the model doesn't return to that plan on a reported basis after this year?

Yes. Thanks, Matt. So as I mentioned, if you consider the color I provided, from an operating income perspective, lululemon is essentially in line with Analyst Day. And we have a bit more expansion in margin and a bit more pressure on SG&A, and that's because of the shift in investment profile between channels. So pulling back somewhat on store openings and investing behind digital, the store expenses show up in gross margin and the digital expenses show up in SG&A. So I'd say a little bit of a near-term impact, and we continue to monitor that for the long term, and we're really focused on optimizing the bottom line of our business.

Operator, we'll take one more question.

Certainly. The next question comes from Ike Boruchow with Wells Fargo.

So I just wanted to talk about men's versus women's. Men's seem to be underperforming through the year. And just because your women's business was just so much stronger. I think you kind of leveled out in 4Q. I'm just trying to look at the filing now, but can you kind of explain what was going on between the 2 genders in your business? And is there anything that's changed as you come into 2021? And again, I don't know if that's just behavior or if that's just product or innovation. Just anything you could elaborate on, Calvin, would be great.

Yes. No, for sure. Thanks, Ike. We've -- I would tell you, our assessment is 100% behavior. Looking at his behavior at the beginning of the pandemic and shifts of where he was purchasing, how he was purchasing drove a lot of the declines in apparel that the industry saw in the men's categories. And that started to pick up throughout the year. Our impact was less in the industry at the beginning, and it picked up quicker at the tail end. In our fourth quarter, our men's business trailed our women's business, but it was the narrowest gap from the entire year that we saw. And as Meghan indicated, the start of this year has been very, very strong for us, and the men's business continues that road to recovery. So it -- in my opinion, was 100% behavior and as stores come online and we're seeing that shift back into apparel, that it will come back to where we were in terms of performance and growth driving. Even with that, we are on pace to double our men's business per our commitment in our 5-year and seeing very good results and strength back to the men's business already to start this year.

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