Lululemon Athletica Inc. (LULU) Q4 2023 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Fourth Quarter 2023 Conference Call. [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; and Meghan Frank, CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of lululemon's future. These statements are based on current information, which we have assessed, but by which 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 that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our annual report on Form 10-K 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 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 and operating statistics for the fourth 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 be here today to discuss our Q4 and full year 2023 results, which represent another solid finish to another strong year for lululemon. We will also discuss our business in Q1 and our outlook for 2024. As you've heard from others in our industry, there has been a shift in the U.S. consumer behavior of late, and we're navigating what has been a slower start to the year in this market. We view this as an opportunity to keep playing offense as we lean into investments that will continue our growth trajectory. Outside the U.S., our business remains strong in all our international markets in Canada. Meghan will take you through our guidance shortly, and I will share with you some of the initiatives that we have planned specifically for the U.S. as well as our overall plans for product and marketing. What you'll hear from me is a message that remains consistent. We have an impressive pipeline of innovation. Our opportunity to increase our brand awareness remains significant. And we will continue to grow and optimize our store base within the Americas and around the world. And we remain ahead of our Power of Three x2 goals. So let's begin. As you read in our press release, our Q4 results, both top and bottom line, exceeded the updated guidance we provided in January. Our growth remained balanced across channels, regions and product categories. And we continue to see strong increase in traffic at our stores and e-commerce sites. In the fourth quarter, total revenue increased 16%. By region, the Americas increased 9%, China Mainland increased 78%, and the rest of the world increased 36%. By merchandise category, women's increased 13%, men's grew 15% and accessories increased 40%. And earnings per share were $5.29 versus adjusted EPS of $4.40 in Q4 last year. When looking at our product performance in Q4, the trends we have seen in the business over the last several quarters continued. We saw strength in key franchises, including, for women: Scuba, Define, Softstreme and Wunder Puff. For men: Steady State, Soft Jersey and ABC as well as License to Train and Pace Breaker. And in accessories, our overall bag assortment continues to perform well. And we continue to build our Essentials membership program in North America, which has now grown to more than 17 million members in the first year. This quarter, we offered them exclusive benefits, including early access to our Black Friday styles, member-only shop nights and invitations to participate in experiences such as our Move for You activation with Peloton at the Mall of America. We remain excited with our membership program as it offers us new ways to engage with our guests and increase both spend and LTV. I'm pleased that we're seeing positive results so far on all of these objectives. Now turning to our full year 2023 results. Revenue increased 19% versus last year to $9.6 billion, with the Americas, up 12%; China Mainland, up 67%; and Rest of World growing 43% versus last year. Adjusted operating margin increased 110 basis points while adjusted earnings per share increased 27% versus 2022. As you know, 2023 was the second full year of our Power of Three x2 growth plan. When looking at these 2 years collectively, I'm pleased that we have grown revenue at a 24% CAGR, fueled by a 44% CAGR in our international regions, expanded our adjusted operating margin by 120 basis points, grown adjusted EPS at a 28% CAGR and continued to gain market share. These results speak to the strength of the lululemon brand in all markets where we operate and illustrate the significant opportunities we have in front of us as we remain in the early innings of our growth story. Let me now speak to quarter 1 of 2024 and what we're seeing in the business. We are pleased that our sales remain strong in most regions across the globe. Consistent with what we've seen from others in the market, the consumer environment in the United States has been somewhat challenging. However, despite the market dynamics, we remain optimistic about our opportunities to grow our business in the U.S. in 2024 and to continue to gain market share. We have robust plans in place to further strengthen our position. We will continue to open and optimize our stores with plans for 5 to 10 new store openings and 15 to 20 optimizations. With U.S. sales per square foot above our overall average of $1,600, our stores remain among the most productive in the industry. In addition, our stores facilitate a direct connection with our guests, help us attract new guests into the brand and act as hubs in our local communities. We will continue to invest into the market to increase our brand awareness as we continue to activate both community-based events and larger brand campaigns. We see other areas within the business to further strengthen our positioning. We are successfully growing our business across all age demographics, including our younger guests. As we have attracted more younger guests into the brand, we have seen strong sell-through of our smaller sizes and our offering of color. We don't yet know how high is high with this demographic, and our teams are chasing into these areas of the assortment so we can better maximize the business. And our product pipeline is compelling, both within the U.S. and across the globe. In fact, 2024 will be another year of significant product innovation. We started the year strong with the launch of our expanded footwear collection in early February. Building on the initial success of our women's line, we hosted a media event in New York City to unveil new styles of both technical and casual footwear, including our first shoes designed for men. Our new styles available for both men and women include the cityverse, designed for all-day comfort and bringing the best of technical performance to a casual sneaker; beyondfeel, a new running shoe that offers superior cushioning, ventilation and support; and beyondfeel trail, our newest road to trail running shoe. We are very pleased with the initial reaction to our new styles. We were seeing a particularly strong response to cityverse from our male guests in North America and in China, and the guest response is exceeding our expectations. Our teams are chasing into this initial strength, and we'll build upon this momentum with additional footwear innovations planned throughout the year. Our strategy with footwear is the same as apparel. We lead with technical innovations that solve for the unmet needs of our guests. We can then leverage our expertise in raw material innovation and technical construction to offer versatile styles designed for everyday use. In addition, within our 2024 product pipeline, we will continue to be a leader in fabric innovation with new fabrics planned within both our yoga and train categories. Also for women, we will continue to maximize our largest franchise, Align, as we explore new silhouettes across both tops and bottoms. And we will continue to expand our popular train franchise, License to Train. On the men's side, this year, we are launching the most innovation I've seen in the last number of years across categories and activities. A few highlights include new fabric innovations within our golf category and continuing to build upon the success of soft jersey with additional styles. Also, we have recently leveraged our iconic Pace Breaker into a complete collection with the launch of a Pace Breaker jacket and pad to bring new solves into the men's run category. Our product and our ability to bring new technical solutions into our assortment on a consistent basis is one of our biggest competitive advantages. I'm excited with the innovations we have on top for 2024, which will continue to enable our guests to sweat in any way they choose. Let me now shift to our brand and marketing strategies. As you know, our brand awareness remains low across most markets, which represents a significant opportunity for us to attract new guests. Starting with our FURTHER event, which began just before International Women's Day and concluded last week. FURTHER was a first-of-its-kind women's ultramarathon in which 10 athletes from our ambassador collective set out to run the furthest distances of their careers. The activation was a huge success as world records were set by athletes wearing our apparel and footwear and is a great example of what makes lululemon unique. For example, how we create authentic community activations like no other brand, which result in increased brand awareness through significant earned and social media attention and also how we continue to innovate with athletes and for athletes and introduce new technical solutions into our assortment. As part of FURTHER, we designed 36 products through a female-first lens, many of which we will introduce into our mainline assortment over the coming seasons. Looking forward, next month in advance of the Paris Olympics and Paralympic Games, we'll be revealing our kit for Team Canada. As you know, in 2021, we announced a multiyear partnership with the Canadian Olympic Committee and the Canadian Paralympic Committee. After our inaugural 2022 Winter Games, we're now set to launch our first Team Canada summer collection, outfitting the athletes and coaches with our product. I've seen what we've created, and it's amazing for both our Olympians and Paralympians. In addition to supporting Canadian athletes, this partnership is another example of lululemon's deep relationships with elite athletes. It showcases our brand on the global stage and is a compelling strategy to grow awareness and bring new guests into the brand. I'd like to spend a moment on the success and growth within our international business. We experienced strength across all of our international markets in Q4, and we expect business to remain robust in 2024. International, which includes our China Mainland and Rest of World segments, continues to be underpenetrated and represents only 21% of our business. We operate a total of 273 stores in all of our international markets combined, which clearly speaks to the opportunity we have ahead of us. In 2024, we'll open approximately 30 stores outside of North America, and we will continue with our strategies to increase our brand awareness. And while not part of the Power of Three x2 growth plan, over the long term, we expect international to represent approximately half of our overall revenue. As you can see, we have many reasons to be optimistic about the future. We entered 2024 from a position of strength. We exceeded our Power of Three x2 revenue target in 2023. And based upon our guidance, we will remain ahead of schedule in 2024. We are excited that our strategies to build brand awareness are working. Over the past year through our strategic investments in brand campaigns and community activations, we have successfully grown our unaided awareness in key markets. The U.S. went from 25% to 31%, and China went from 9% to 14%. We will continue these strategies in 2024. And we will continue to strategically invest across all markets, including the U.S., which will set us up well for this year and beyond. Given we are in the early innings of our growth with low unaided awareness and significant market share potential, all of us on the lululemon leadership team are tremendously excited for what lies ahead for our brand. We are investing for growth with a pipeline of innovation that is full. We are playing offense while many others in our sector are not. And these advantages will further enhance our standing in the marketplace in the U.S. and around the globe. With that, I'll turn it over to Meghan for a review of our financials and our 2024 guidance.

Thanks, Calvin. We closed out 2023 on a strong note, with our Q4 results exceeding the updated guidance we provided in mid-January. As Calvin mentioned, we've seen a slower start to Q1 in the U.S. while we continue to see strength in all other regions. While we navigate the consumer environment in the U.S., we see several opportunities to maximize our performance. Our teams are focused on executing against our strategies and delivering for our guests throughout 2024. As we have always done, we continue to plan for multiple scenarios. We are positioning ourselves to both maximize our performance in the short and long term and manage our business to protect against downside. Before sharing the details of our Q4 performance and our guidance outlook, let me provide an update on our segment reporting. With the evolution of our business, the meaningful opportunity we have in our international regions and our omnichannel operating model, we've changed our reporting segments from channel to geography. In our 2023 10-K, you will see our new segments, which are Americas, China Mainland and Rest of World. In the earnings release and on today's call, we will still provide comparable sales metrics by channel so you'll have the data to close out your models for 2023. However, going forward, we'll be reporting revenue metrics and profit on a regional basis. Let me now share the details of our Q4 performance. For Q4, total net revenue rose 16% to $3.2 billion, and comparable sales increased 12%. Within our regions, results were as follows: Americas revenue increased 9%, with comparable sales increasing 7%. China Mainland revenue increased 78%, with comparable sales increasing 60%. And in our Rest of World segment, revenue grew by 36%, with comparable sales increasing by 31%. In our store channel, total sales increased 15%, with comparable store sales increasing 6%. We ended the quarter with a total of 711 stores across the globe. Square footage increased 15% versus last year, driven by the addition of 56 net new lululemon stores since Q4 of 2022. During the quarter, we opened 25 net new stores and completed 15 optimizations. In our digital channel, revenues increased 17% and contributed $1.7 billion of top line or 52% of total revenue. By category, women's revenue increased by 13% versus last year, men's increased by 15%, and accessories grew 40%. We also experienced ongoing strength in traffic across channels, with stores and e-commerce both increasing by approximately 20%. This speaks to the strength of our omni operating model as we engage with our guests in ways most convenient to them. Gross profit for the fourth quarter was $1.9 billion or 59.4% of net revenue compared to the adjusted rate of 57.4% of net revenue in Q4 2022. Our adjusted gross margin increased 200 basis points relative to last year and was driven primarily by the following: a 210 basis point increase in overall product margin, driven primarily by lower air and ocean freight costs as well as lower airfreight usage, offset slightly by 10 basis points of deleverage on foreign exchange. Markdowns in Q4 were relatively flat with last year. Gross margin was favorable to our updated guidance of 120 to 130 basis points, driven predominantly by 40 basis points of leverage on fixed costs, 20 basis points of favorability in product margin driven mostly by lower freight costs and 10 basis points of favorability in FX. Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were approximately $990 million or 30.9% of net revenue compared to 29% of net revenue for the same period last year. The deleverage in SG&A was driven by our continued strategic investments in brand building, technology and foundational infrastructure, in addition to increased depreciation and amortization related to investments made in 2022 and 2023. This was partially offset by savings related to the evolution of our lululemon Studio business model. Foreign exchange contributed 40 basis points to the deleverage in the quarter. Operating income for the quarter was $914 million or 28.5% of net revenue compared to an adjusted operating margin of 28.3% in Q4 2022. Tax expense for the quarter was $262 million or 28.1% of pretax earnings compared to an adjusted effective tax rate of 28.7% a year ago. The decrease relative to last year is due primarily to an increase in tax benefits related to stock-based compensation and some favorable adjustments upon the filing of income tax returns. This was partially offset by an increase in accrued withholding tax on earnings in Canada. Net income for the quarter was $669 million or $5.29 per diluted share compared to adjusted earnings per diluted share of $4.40 for the fourth quarter of 2022. Capital expenditures were approximately $207 million for the quarter, flat with Q4 last year. Q4 spend relates primarily to investments that support business growth, including our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments. Turning to our balance sheet highlights. We ended the quarter with $2.24 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory at the end of Q4 was $1.3 billion. We are pleased with our inventory levels, which declined 9% versus last year. Relative to our expectations, higher revenue and foreign exchange contributed to the decrease. On a unit basis, inventory increased approximately 1%. During the quarter, we repurchased approximately 120,000 shares at an average price of $450. In the full year 2023, we repurchased approximately $550 million of stock at an average price of approximately $375. At the end of Q4, we had approximately $1.2 billion of capacity remaining on our share repurchase authorization. Let me now shift to our guidance outlook. As I said at the start of my remarks, we're being disciplined and agile with our planning for 2024. Our teams are focused on maximizing our performance in the current environment and delivering for our guests this year and beyond. We remain committed to our Power of Three x2 growth plan. Beginning with the full year 2024, we expect revenue to be in the range of $10.7 billion to $10.8 billion. This range represents growth of 11% to 12% relative to 2023. Excluding the 53rd week that we have in the fourth quarter of 2024, we expect revenue to grow 10% to 11%. We expect to open 35 to 40 net new company-operated stores in 2024 and complete approximately 40 co-located optimizations. This will contribute to overall square footage growth in the low double digits. Our new store openings in 2024 will include 5 to 10 stores in the Americas, with the rest in our international markets, primarily in China Mainland. For the full year, we forecast gross margin to be approximately flat with adjusted gross margin in 2023. Within gross margin, we expect both markdowns and airfreight to be relatively flat with last year. Turning now to SG&A for the full year. We forecast leverage of approximately 10 basis points versus 2023. We are prudently managing our expenses while continuing to invest strategically into our Power of Three x2 road map, 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 infrastructure and data analytics capabilities. When looking at operating margin for the full year of 2024, we expect it to increase by approximately 10 basis points versus adjusted operating margin in 2023, which expanded 110 basis points versus 2022. To date, in our Power of Three x2 plan, we are tracking above our operating margin target of modest expansion annually. For the full year 2024, we expect our effective tax rate to be approximately 30%, an increase over the 2023 adjusted effective tax rate of 28.7%. The increase relative to last year relates primarily to lower stock-based compensation deductions and the favorable adjustments we realized when filing our tax returns in 2023. For Q1, we expect our effective tax rate to be 29% to 29.5%. For the fiscal year 2024, we expect diluted earnings per share in the range of $14 to $14.20 versus adjusted EPS of $12.77 in 2023. Our EPS guidance excludes the impact of any future share repurchases. When looking at inventory, we expect dollar inventory to decline in the high single to low double-digit percent in the first half of the year and then increase in the second half of the year as we anniversary last year's declines. We expect capital expenditures to be approximately $670 million to $690 million for 2024. This spend relates to investments to support business growth, including a continuation of our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments. Shifting now to Q1. We expect revenue in the range of $2.175 billion to $2.2 billion, representing growth of 9% to 10%. We expect to open one net new company-operated store in Q1. We expect gross margin in Q1 to be approximately flat with Q1 2023, with markdowns relatively flat with last year. In Q1, we expect our SG&A rate to deleverage by 130 to 140 basis points relative to Q1 2023. This will be driven predominantly by increased investments to grow brand awareness and acquire new guests and higher depreciation resulting from technology investments made in 2022 and 2023. Let me share some additional details on our investments to grow brand awareness. Within Q1, we will be activating 3 relatively large brand events: our footwear launch and Further ultra marathon, which already took place and our Team Canada kit launch later in the quarter. These events, plus some other strategic investments in brand building, are contributing to the deleverage. Looking at quarters 2 through 4, we do not anticipate SG&A deleverage. And as I previously stated, we expect 10 basis points of SG&A leverage for the full year. When looking at operating margin for Q1, we expect it to decline 130 to 140 basis points year-over-year, driven by our SG&A investments. I'd also note that operating margin in Q1 2023 expanded by 400 basis points, driven predominantly by airfreight savings. In addition, we did not start accelerating our investments into our strategic road map until the second quarter of last year. And as I stated previously, we expect operating margin to expand modestly for the full year on top of the 110 basis points of operating margin expansion in 2023. Turning to EPS. We expect earnings per share in the first quarter to be in the range of $2.35 to $2.40 versus EPS of $2.28 a year ago. And with that, I will turn it back over to Calvin.

Thank you, Meghan. In summary, I'm proud of how we closed out 2023 and the way in which we have continued to expand around the world, deliver against our Power of Three x2 strategies and create momentum in the business. I'm optimistic that the investments we're making in the business will contribute to another year of growth in 2024. In closing, I want to thank the members of our global collective, particularly our employees in our stores, distribution and guest education centers as well as our store support centers, who engage with our guests every day and bring our brand to life. They are responsible for driving these results, and they will be the engine that will fuel all we will accomplish going forward. We will now take your questions.

[Operator Instructions] The first question comes from Alex Straton with Morgan Stanley.

Great. I just wanted to hone in on the comments on the challenging consumer behavior. Just wondering, are you seeing that in some pockets of the business more than others? Or is it broad-based? Is it a traffic or a conversion problem? Or how do you see that? And then does that mean that the business is currently running at the 1Q guide, like that 9% to 10%, I believe? Or how should we think about that comment in relation to the first quarter guidance?

Thanks, Alex. In terms of what we're seeing, as I mentioned, all international markets, including Canada, are continuing their strong momentum into Q1. And in the U.S. is where we're really navigating the dynamic retail environment with the consumer. That is a little soft coming into the year. I think we have an opportunity. I know we have an opportunity in this market, in particular, some in and around our product. As I mentioned, our sizing, in particular, in 0 to 4 is something we're chasing into. Color, where we had color, it performed well. And honestly, we just did not have enough. And both of these attributes overindexed in the U.S., which is where I see the opportunity, and we're going to continue to play offense in the market. The innovation product pipeline remains very strong for this year, and we have some exciting brand initiatives in addition. Where that's showing up, we're seeing a slowdown in traffic in the U.S., but it's still positive, and conversion is down slightly. And I'd link that to some of the product opportunities we have in the sizing and color, which, as I said, we will -- we are chasing into and get stronger through the quarters.

Great. And Alex, I'd just add, on the Q1 guide relative to current trends, we don't speak to inter-quarter trends. But as Calvin shared, we were off to a soft start in the U.S., with all other regions performing strongly, and did guide to the 9% to 10% growth, which we feel is appropriate given what we're seeing in terms of trends.

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

I was hoping you could provide a state of the union on the men's business. Growth stabilized after decelerating a bit last year. Where do you see the largest opportunity is to defend and grow share in the men's business?

Great. Thanks, Lorraine. As I mentioned, I'm very excited about the product pipeline for men's this year. Last year, our men's business did increase, as you indicated, in the Q4, which was great to see that momentum back into our men's business. Total year was 15% growth. And 2 years into our Power of Three x2 plan, we've grown our men's revenue at a 21% CAGR, so ahead of that goal. We continue to put on share through all of last year. We did see the male guest in general pull back a little bit in the category of apparel and athletic. And I think Q4, we are seeing him being drawn back in on innovation, which I will highlight a few that, for this year, I'm very encouraged by. One is, as you know, in our ABC franchise, both the trouser and 5 pocket, it was only a few years ago that we had one fabric offering, and that was Warpstreme. Since then, we've added Utilitech, we've added WovenAir, and we are launching a VersaTwill product this year, which is -- feels more -- it's a proprietary performance base. So it feels more of a hand feel of a cotton. So it's fantastic for the lighter, warmer months. And it really is a completely incremental offering for us in a silhouette and a brand and a franchise that he loves. Our Lounge product in men's is just getting stronger. We launched Soft Jersey last fall. We've been chasing since then. In the next few weeks, we'll really be fully in an in-stock position to represent. We've added Steady State and Smooth Spacer. So our Lounge offering for him is the strongest it's been. And we've equally launched some performance product that's performing incredibly well: Zeroed In, which is a new train franchise; and the Pace Breaker, which is our most versatile hero short item, bringing that into a track bottom and top to round out the needs for him. So all those are checking very positively. We're seeing very encouraging demand on the newness. And I'm very confident in our product pipeline and what we're going to see.

The next question comes from Brooke Roach with Goldman Sachs.

I was hoping you could elaborate on what you're seeing in the China market today and your outlook for growth there this year. Additionally, could you provide updated thoughts on opportunity for further profitability improvement in the region this year?

Thanks, Brooke. I'll take the first half. We remain excited about the potential for lululemon in China. In Q4, our revenue increased 78% in Mainland China. Part of that was driven by the COVID-related store closures we experienced in quarter '22. But in the full year, our business grew 67%. So while we're keeping a close eye on the macro environment in the region, our business remains very strong, and we believe several factors benefit us in China. One, we are building from a smaller base. We have 127 stores on Mainland at the end of the quarter, and we see opportunity to continue to add. We have and take a localized approach to our brand, leveraging relationships locally in the community through ambassadors, instructors and influencers that has really resonated locally. And some of our most exciting activations come from that market and an ongoing strategy to keep opening new stores. So our unaided brand awareness, we did see good improvements last year. We started the year at 9%. We ended at 14%. But 14% in a market of that size, we have a lot of opportunity to continue to grow, see great momentum in the brand and excited about how that team is activating and growing and optimistic with our potential in that market.

And then, Brooke, I'd add, though we don't break out regional outlooks, in terms of China, we believe that growth rate will be significantly above our guide of 10% to 11% for the full year, excluding the 53rd week. So coming off of a 78% growth in Q4 and feel well positioned as we move into '24. And then in terms of improving profitability in that region, our near-term priority is really to grow top line and capture, as Calvin mentioned, the unaided brand awareness opportunity we see there and go after new guest acquisition this year. So we've looked to continue those investments as we look into '24, but certainly see opportunity over the longer term to continue to grow that operating margin product.

The next question comes from Mark Altschwager with Baird.

I wanted to ask you about inventory. I guess this is the first time in a while, I think, I've heard you speak to stock-outs in certain sizes and styles perhaps weighing on sales growth. So how do you feel about the level and the mix of your current inventory? What are your plans for inventory growth this year? And given that things seem to be fairly lean, why wouldn't there be an opportunity to perhaps drive lower markdowns in 2024? Maybe walk us through some of the puts and takes you're thinking about there.

Yes. Thanks, Mark. So inventory, we came in negative 9% on a dollar basis and plus 1 on a unit basis. We feel pleased with the level and currency composition of our inventory overall. Calvin did talk about a few pockets in the U.S. where we feel like we've got an opportunity to accelerate what's working in terms of inventory, but we still feel well positioned from an overall perspective. I would say, from a markdown perspective, we run a very low markdown rate. Generally speaking, 2023 was flat to '22 and 2019, which is a healthy water line for us. That's our expectation for 2024. So at this point in time, given we're very early in the year, we're not changing our thinking on markdowns, but we'll continue to keep updated there.

The next question comes from Matthew Boss with JPMorgan.

Could you speak to multiyear drivers of positive comp growth in the Americas maybe relative to the high single digits last year or just areas that you see could take continued market share regardless of the macro?

Matt, I think the beginning of your question cut off. Do you mind just repeating it?

Yes, sure. Yes, I think the operator held it on. So what I was asking is on the early innings growth story that I know, Calvin, that you speak to, just how the Americas fits into that? And as we think about same-store sales growth in the Americas relative to the high singles this year, just how best to think about multiyear drivers or areas to take continued market share regardless of what the Americas macro may look like?

Yes. Thanks, Matt. Definitely still view across all markets being early innings in our growth story. When we look at Americas, as I mentioned, Canada is continuing its strong momentum into quarter 1. And within the U.S., we're navigating what we see as a dynamic retail environment and a consumer that's a little bit softer. But there are a lot of areas that we are focused on and we know can continue to drive our business, that being product innovation and the unaided awareness, which, in the U.S., is still very low. I think, combined, it's less than 50%, in the 40% range, with a lot of exciting initiatives. Plan to continue to make progress on that awareness metric. So when we look across the metric, when we look across our categories, which I've always talked to before in terms of the balanced approach across men's and women's and accessories in the pipeline and the ability to grow and where we are from an awareness perspective, no change in U.S., no change in our strategy. And with this guidance, not only did we complete '23 ahead of our Power of Three x2 goals, but with the guidance, 2024, we will still be ahead of our Power of Three x2 goals, and we don't see a change in that.

And Matt, I'd just add, we shared a long-term target of low double-digit CAGR for North America. We're tracking ahead of that to date in our plan. I feel comfortable with that long-term target. And then from a sales per square foot perspective, the U.S. is the highest in terms of sales per square foot by store. So -- and was -- continue to grow when we went through 2023. So we still feel like stores are an important part of that strategy.

That's great. Meghan, just one follow-up. Could you elaborate, this year, on SG&A, just efficiencies or flexibility in this year's P&L to leverage on the low double-digit revenues? I think, historically, it's mid-teens to see SG&A and operating margin leverage.

Yes. So we guided for the year to 10 basis points operating margin expansion. We were up against a 110 basis point expansion in 2023. So really pleased with the leverage we saw in 2023. When we looked at our 2024 plans, we've made some reductions to discretionary spend while continuing to invest behind market expansion as well as going after unaided guest awareness and new guest acquisition. So we're really looking at driving into the long-term opportunity there as we also move through 2024.

The next question comes from Dana Telsey with Telsey Group.

Can you talk a little bit about the marketing investment and how you're thinking about this year compared to last year? And then the membership program, any update on the rollout of the membership program, the profile of the guests that you're seeing and getting?

Dana, from a marketing campaign perspective, as we've signaled, we continue to lean in to a variety of activations as a means to get at that unaided brand awareness. Building on the successes that we saw last year, we continue to test and learn. We did an Align campaign beginning of last year, very pleased with the results, followed up with an ABC campaign for him in the fall. Very pleased with that activation. We had a number of activations in Mainland China. All of those are contributing to the growth that we've seen in unaided awareness. So we know that we are acquiring guests, and these top-of-funnel activations are performing. And heading into this year, we have a number that we will continue to innovate and create and bring. So we've kicked off this year already with our cityverse activation, which we were able to leverage quite a bit of earned media behind. That's off to a strong start, as I mentioned, in particular, overindexing with our male guests. FURTHER, which another earned media opportunity supported. Interestingly, with FURTHER is we showcased up to 36 unique innovative items that will, over the next coming months, appear in our lineup for run, with the first being an incredible bra innovation that we'll be launching in Q3. The COC or the Canadian Olympic Committee, which really, we know, from the Beijing Games had a great impact on the brand from a global scale. So there are a lot of exciting activations that we will continue to really gear towards that more top-of-funnel unaided awareness. And as I shared with you, we're seeing success on that. I know we have a long way to go, early innings on what the potential of the brand is in driving unaided into that consideration. Membership program, I mentioned we now have 17 million active members, and that's from really the program was just 1 year -- launched 1 year earlier. So a significant number of our guests, and the program is geared to drive LTV and to drive spend. And we do that through a variety of activations as well as benefits. It can be early access to product. It can be access to some of our events, leveraging our partners, be it physically in local communities or, as we did in January with Peloton, having a back-to-sweat activation. And that is driving engagement, and it's having an impact on the LTV and spend metrics. So we're going to continue in that work. But it's only been less than 1.5 years since we launched it and very encouraged with the results so far and excited to continue building that program.

And Dana, I'd just add, in terms of marketing investment, our marketing as a percent of sales for 2023 was 4.5. And we're expecting to be in the range of 4.5 to 5 in 2024 and looking forward at this point in time.

The next question comes from John Kernan with Cowen.

So Calvin, we've seen new entrants in the space. They didn't slow your momentum over the holiday in Q4. But can you talk to the durable competitive advantage that lululemon maintains in terms of materials innovation, scale, the depth of the offering for both men and women?

Yes. Thanks, John. I'll break that down into how I view it, which is really 2 components. One is what's fueling the momentum in the business? And obviously, what are the unique strengths or the moat of the brand and how unique are we when we look and compare ourselves to others? So from a momentum perspective, we know that our unique approach to innovating, putting unmet needs of the guests first and delivering the solutions through science of feel, beginning with fabrics, but into fit and overall into performance and then into that product, which then drives the engagement and -- with our community and guest relationships, which then unlocks further unmet needs, is really the momentum driver of this business. And when I look at where we sit in terms of the innovation, the product and the activation with our guests and how they're engaging in any and all activations we do and the relationships with our stores, with our educators, NPS scores, very, very positive, good momentum across all markets when I look at those attributes. And then when I look at what makes lululemon unique, I really stack it and build it across both our model and our brand. And I think the uniqueness is all of these elements combined. Other competitors or brands may have elements of these. But when I look at our model and our product and the consistency of true innovation at the performance level, not at a fashion level, but at a performance level, into our community and the way in which we activate across our partner platform and then through our stores and our ambassadors, the scale in which we're able to do that compared to others. And then combined with our D2C model, where not only do we own the relationship with our guests, but there are inherent benefits of margin structure that allows us to invest other ways in our business to further differentiate. And then into brand, being a dual-gender brand that has permission across wear occasions, from Pinnacle, Podium, Sweat all the way through of Lounge and Social, we believe, is incredibly unique. And we bring that performance perspective to all those needs of the guests and then into the agelessness of the brand, where, if you look -- and I've said before, you go to stores, mom, daughter and grandma can be shopping in the brand and are actually advocates of the brand to the others. And I think that's rooted in the notion of the solutions that we offer and provide for. That stack, when I go through the competitor list, I don't see anyone that compares to that. And we think that is really the strength of this brand and where we look to disrupt ourselves, where we look to invest and definitely fuel and plugs into our momentum. But that's how we compare and look at ourselves and see a lot of strengths in that and the ability to keep driving our business.

That's very helpful. Meghan, just a follow-up, maybe shifting more towards the model. The decision to go towards a geographic-level disclosure versus the channel disclosure before, how should we think about omnichannel comps going forward? You've obviously made some big investments across stores and digital. I think a lot -- you focus more on co-located stores recently and larger stores. How should we think about the balance between corporate store sales and DTC now?

Yes. So we had shared, when we set out this Power of Three x2 plan, that we expected e-comm to grow slightly ahead of our CAGR of 15% sales CAGR, and store is slightly below. I would say, over the long-term time period, that view hasn't changed. We've seen, I would say, strength in both channels coming off of '23: e-comm total growth, 17%, stores 21%; e-comm comped at 17%, and stores at 9%. So continue to see opportunity across both channels and leveraging that on the ecosystem.

The next question comes from Paul Lejuez with Citi.

This is Kelly on for Paul. Just wanted to follow up on the slowdown that you're seeing in the U.S. currently. Is one category or gender driving the slowdown? Or is it more broad-based? And then secondly, just curious if you're assuming some pickup in traffic in the U.S. as a result of some of these marketing investments you're making in 1Q as we move throughout the year.

Kelly, I would say, the slowdown we're experiencing in the U.S. is fairly broad-based. As Calvin mentioned, we have identified some opportunities that we can go after and product specifically on color and on women sizing, so on the 0 to 4 size range. And then in terms of traffic, we do have -- you'll see in our guidance, Q2 through Q4 is the growth rate is slightly ahead of what we're guiding to in Q1, given Q1 guide at 9 to 10, and then the full year at 10 to 11, excluding the 53rd week.

And just to clarify, is that being driven by what you would expect to be an improvement in the U.S. relative to what you're seeing in 1Q?

Yes. We'd expect some marginal improvement.

The next question comes from Abbie Zvejnieks with Piper Sandler.

Just a follow-up to that one. I mean what exactly is driving those 2Q through 4Q improvements in the U.S.? Is it product? Was there something that we're lapping in 1Q that we should think about? Any color you have there?

Yes. I would say it's a modest acceleration Q2 through Q4 and really points to some of the investments we're making on the marketing side in terms of new guest acquisition as well as some of the product opportunities that Calvin pointed to would be drivers of that.

Yes. I'll just add some of the products. As we obviously mentioned that we're chasing color and size. And we expect that, that will continue to improve starting in Q2 through. In fact, we're seeing -- and as color hits now, the guests respond incredibly well to it. Q2, our business shifts from leggings, still an important part, but shorts and skirts plays a much greater role. And we're seeing good results in that assortment in response to the guests now, and then the innovation that I alluded to. We have a hydrogen yarn legging coming out in summer for yoga. We have the support code bra, which is one of our further proprietary technology innovations coming out later in Q3. And then we have another innovation in leggings for the back half in the train category. So there's quite a bit of product innovation. I mentioned men's, just highlighted women's that we see playing a positive through the back half of this year.

The last question comes from Ike Boruchow with Wells Fargo.

I guess, maybe for Meghan or Calvin, is there any way you're able to let us know what comp you're specifically modeling for Q1 and for the full year, specifically based on your guidance? And then just a follow-up to that, maybe this one's for Meghan. Gross margin is flat for Q1 and the year, but clearly, lots of outperformance overseas. We know that's a higher-margin channel. I'm assuming that means the Americas gross margins are going the other way. I guess just could you comment on that if that's correct? Is there something that's driving that? Is it markdown? Is it just deleverage? Just kind of curious how you would think about that.

Thanks, Ike. So we aren't providing forward-looking comps, but we would share that we see North America below the guided growth range and then international significantly above. In terms of margins, as I mentioned, relatively flat markdowns year-over-year. And as you mentioned, we do have an overpenetration in our international regions. We are still investing behind our DC, distribution center network. That's a multiyear investment. So that would be embedded in our gross margin guide that we've provided.

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