Lululemon Athletica Inc. (LULU) Q1 2024 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. First Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [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 first 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 GAAP and both non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the first quarter as well as our quarterly infographic. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Calvin.

Thank you, Howard. I'm happy to be here to discuss our quarter one results. As you've seen from our press release, our revenue growth was modestly ahead of our expectations, while EPS came in even stronger. On today's call, I'll share some highlights regarding our performance in quarter one, including my perspective on our U.S. business and what our teams have been working on. Next, I'll speak to the recent departure of our Chief Product Officer and the opportunities our new structure unlocks for us. Then I'll provide some details on our product innovations and brand activation. In addition, Meghan will review our financials, and we will close out our time today by taking your questions. So let's get started. In the first quarter, total revenue increased 10%, or 11% in constant currency. By region, we saw continued strong momentum in our international business with revenue in China Mainland up 52% and rest of the world up 30%, both in constant currency. In the Americas, revenue increased 4% in constant currency with Canada up 12% and the U.S. up 2%. By merchandise category, women's increased 10%, men's increased 15%, and accessories remains positive and up 2%, which is impressive given the exceptionally strong performance last year. Earnings per share were $2.54 versus EPS of $2.28 in quarter one last year. In addition, we repurchased nearly $300 million of stock in quarter one, an additional $230 million in the second quarter thus far, and our board recently increased our authorization by $1 billion, bringing our capacity to repurchase shares up to approximately $1.7 billion. As you can see, our business remains strong and our brand continues to resonate with guests around the world. We are engaging with them through our unique and compelling activations and brand campaigns, and we continue to drive the business with new product innovations. Let me now share some additional quarter one details by region. As I mentioned, our business remains strong in every international market in which we operate as our brand is resonating with guests across regions and geographies. Our approach to growth follows the model we've implemented so successfully in North America and includes omnichannel distribution via highly productive stores and e-commerce sites, a product assortment which offers technical and versatile styles and is frequently updated with new innovations to enable our guests to sweat in any way they choose and a unique and compelling approach to building brand awareness, which includes local activations as well as larger-scale brand campaigns. Our international business remains under-penetrated and continues to represent a significant growth opportunity. For the full year 2023, international was only 21% of our business, and over the long run, I see the potential for it to grow to 50% as we continue to expand our presence outside of North America. Shifting now to the U.S. As we mentioned on our last call, we've seen a slower start to the year due to several internal factors, including missed opportunity in women's and bags, which we are actively addressing, and some ongoing choppiness in the consumer environment. Our men's business has maintained its momentum, driven by strong guest response to our innovations across performance, lounge, and our ABC franchise. Our market share gains were strong in men's in quarter one, and with unaided brand awareness of less than 20% in the U.S., our opportunity to continue to grow this business remains significant. When looking at women's, we did not maximize the business in the U.S., which was the result of several missed opportunities, including a color palette and our core assortment, particularly in leggings, that was too narrow. Where we had color, guests responded well, we just needed more as they are looking for additional choices. And we are also out of stock in some of our smaller sizes. And in addition, we saw a fantastic guest response to our newer styles of bags such as the two-tone tote, but did not buy these styles with enough depth to fully capture the demand. Meghan will share our guidance with you later in the call, but as you've seen, we are maintaining our revenue guidance for the year. In quarter two, we expect revenue growth of 9% to 10%, roughly in line with our quarter one growth rate. Our guidance for the full year continues to call for revenue growth of 10% to 11%, excluding the 53rd week, and includes a modest step-up in the second-half. In summary, we are moving in the right direction and understand the root cause of the issues. And with the lead times, we expect to be in a more optimal inventory position in the second-half of 2024. In addition, our upcoming product launches and innovation flows, which I'll speak to shortly, are skewed toward the back half of the year, which is another reason for our optimism. Looking out further, our growth opportunities in the U.S. remain compelling. Our unaided brand awareness is only in the low-30s. Using our unique approach, which combines local engagement, community activations, and larger scale brand campaigns, we continue to have a significant runway to introduce new guests to lululemon and drive them to our stores and e-commerce sites. We are just beginning to leverage the power of our membership program, which now has approximately 20 million members in North America. By offering benefits like early access to product and invitations to exclusive events, we are increasing our member base and powerfully engaging with them, which will ultimately drive both spend and long-term value. Our stores remain highly productive with new locations performing well, and we continue to be pleased with our store optimization program. As a reminder, in 2024, our plan calls for five to 10 new store openings and 15 to 20 optimizations. Looking beyond 2024, our real estate opportunities in the U.S. remain significant, and our plans include continuing both of our new store opening program and our optimization strategy. And we continue to gain market share with outsized strength in men's where we outpaced the overall market in quarter one. Now let me speak about product innovation and some of the current shifts we recently announced within our organizational structure. As you know, our Chief Product Officer, Sun Choe, recently decided to leave lululemon to take a job elsewhere in the industry. Sun and I had been in regular conversations, so I understood her personal and career goals. We regularly update our succession plans, which allowed us to seamlessly step into our new plan leadership structure. I'm excited about how the new structure will bring new perspectives, curiosity, and leadership across our product teams. This approach will drive several meaningful benefits in the near and long term, including increasing our speed of innovation, stimulating creativity, and enhancing team accountability around product flows and assortment. We have a strong and dynamic product team led by Jonathan Cheung, our Global Creative Director, who now reports to me, and Liz Binder, our Chief Merchandising Officer, who now reports to Nikki Neuburger, as she steps into her expanded role as Chief Brand and Product Activation Officer. Jonathan, Liz, and the entire product team will continue to drive innovation, design technical product that looks great, and solve for the unmet needs of our guests. And under Nikki's proven leadership, the merchant and the brand teams will be more fully integrated, which will streamline decision-making and ensure we show up powerfully and consistently for our guests across all markets. All of this is intended to speed the ideation process with regard to product storytelling and further improve our speed-to-market. And these shifts will help maintain and enhance our pipeline of innovation. I want to now share several recent and upcoming product launches that continue to show our team's ability to create compelling product. In quarter one, in women's, our guests continued to respond very well to our key second-layer franchises, including Define, Scuba, and Softstreme. In addition, we continued to see strength in bottoms led by bike shorts and our away from body styles. Looking forward, we're on track to bring significant innovation into our assortment beginning the end of quarter two and into the second-half of the year. Within women's, we have some exciting new launches planned within our leggings assortment. These include a new innovation designed for hot, low-impact workouts, and made from a new performance fabric, one of our quickest drawing and lightest weight to date. And later in the year, we'll launch another new type, our most versatile swimsuit line, providing a completely different feel state, which will bring newness and innovation into our train assortment. The upcoming newness in leggings is a perfect example of how we continue to bring innovation into our core categories where we already have significant strength. Our teams continue to expand our product offerings with new technical solutions, and I'm excited for you to see these new styles. Let's now take a look at men's. In quarter one, we continued to see strong response to our lounge offering, including steady state and soft jersey. In addition, we recently launched a Smooth Spacer hoodie, which provides a cooling sensation and is a great recovery piece to wear home after a workout. We are pleased with the variety of and performance of our lounge offerings. We plan to fuel this strength by building our inventory levels and expanding the silhouettes offered in all three of these collections for fall. On the technical side of men's, we continued to see great response to our Pace Breaker and Zeroed In franchises, both of which we will expand later this year. Zeroed In is following in the footsteps of our other key technical styles for men and is quickly becoming a top performer in train. I also want to mention our new Show Zero technology, which we just launched in men's polo shirts. This fabric uses innovative construction to hide the appearance of sweat on the outside of the shirt. These polos are highly versatile and can be worn on the golf course to the office or many other occasions. And in footwear, our new cityverse style has done extremely well, particularly in men's where demand has exceeded our expectations. These are just the latest examples of the disruptive innovations we are known for and will continue to create. Shifting now to brand awareness. As you know, our unaided brand awareness remains low in every country where we operate, except our home market of Canada. We will continue to activate across our grassroots and global platforms to increase awareness and bring new guests into the lululemon brand. Let me share just a few examples. In quarter one, we held several successful earned media activations, including launching our new cityverse and Beyondfeel footwear styles in New York, hosting our further women's Ultramarathon event near Palm Springs, California, and unveiling our kit for the Canadian Olympic and Paralympic Athletes in Toronto. In quarter two, we will again host our successful Summer Sweat Games in China while also bringing a version of this event to our Essentials members in North America with our Membership Summer Series. And in quarter three, we'll strategically test TV again with another men's campaign. Building on the success of last year's campaign, this year's spot will focus on men and feature some high-profile personalities. Before I hand it over to Meghan to discuss our financials and guidance outlook, I'd like to share some additional thoughts about the rest of the year. Our pipeline of innovation and our launch cadence for the second-half of 2024 is particularly strong. In the U.S., our teams have been making the appropriate adjustments in closing the inventory gaps in terms of color and sizing. Our brand awareness remains low but is growing and our store productivity remains among the best in the industry. We continue to engage with our guests in unique and compelling ways and inspire them with our differentiated product innovations. I'm optimistic with regards to our performance in the second-half of the year and beyond as we continue to execute well against our Power of Three times 2 goal of doubling our revenue in five years. Meghan, over to you.

Thanks, Calvin. Our Q1 results exceeded our expectations, driven by above-plan performance across the key areas of our P&L. Our business remained strong in our international regions in Canada, and in the U.S., we've seen a slower start to the year in line with our expectations. As you've seen in our press release, we're maintaining our revenue guidance for the year, while increasing our EPS guidance. This reflects our optimism in our plans and strategies for 2024, many of which you just heard Calvin speak about. In addition, we continue to plan for multiple scenarios and manage our business to protect against downside. Before sharing the details of our Q1 performance and our guidance outlook, let me provide a quick update on our Mexico operations. In May, we signed an agreement with our franchise partners to acquire their lululemon Mexico operations in the 15 retail locations they currently operate. Our partner has built an incredible foundation for our brand in Mexico, and our acquisition will allow us to more efficiently continue to expand, grow our community, and enhance the guest experience. We are acquiring the business for approximately $160 million in cash, and the deal is expected to close in the next several weeks subject to customary closing conditions. From a P&L standpoint, we expect the transaction to have an immaterial impact on our financial results for the fiscal year 2024. Let me now share the details of our Q1 performance. For Q1, total net revenue rose 10% to $2.2 billion and comparable sales increased 7%. Within our regions, the results were as follows. Americas revenue increased 3% on a reported basis, or 4% in constant currency, with comparable sales flat. China Mainland revenue increased 45% on a reported basis, or 52% in constant currency, with comparable sales increasing 33%. And in our Rest of World segment, revenue grew by 27% on a reported basis or 30% in constant currency, with comparable sales increasing by 26%. In our store channel, total sales increased 12%. We ended the quarter with 711 stores across the globe. Square footage increased 14% versus last year, driven by the addition of 49 net-new lululemon stores since Q1 of 2023. During the quarter, we completed three optimizations. In our digital channel, revenue increased 8% and contributed $906 million of top-line, or 41% of total revenue. By category, women's revenue increased by 10% versus last year, men's increased by 15%, and accessories grew 2% on top of a strong 67% last year. Gross profit for the first quarter was $1.28 billion, or 57.7% of net revenue, compared to 57.5% of net revenue in Q1 2023. Our gross margin increased 20 basis points relative to last year and was driven primarily by the following. A 120-basis point increase in overall product margin, driven primarily by lower product costs, lower air freight costs, and lower inventory provisions, offset somewhat by a 50 basis-point increase in markdowns. The 120-basis point increase in-product margin was partially offset by 70 basis points of deleverage on fixed costs and 30 basis points of deleverage on foreign exchange. 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 $842 million, or 38.1% of net revenue, compared to 37.4% of net revenue for the same period last year. The 70 basis points of SG&A deleverage was better than our guidance of 130 basis points to 140 basis points and was driven by timing, slightly better top-line, and prudent management of expenses. Foreign exchange was flat in the quarter. Operating income for the quarter was $433 million, or 19.6% of net revenue, compared to operating margin of 20.1% in Q1 2023. Tax expense for the quarter was $134.5 million, or 29.5% of pretax earnings compared to an effective tax rate of 29.1% a year ago. The increase relative to last year is due primarily to a decrease in tax benefits associated with stock-based compensation and an increase in non-deductible expenses in international jurisdictions. Net income for the quarter was $321 million, or $2.54 per diluted share, compared to earnings per diluted share of $2.28 for the first quarter of 2023. Capital expenditures were approximately $131 million for the quarter versus $137 million in Q1 last year. Q1 spend relates primarily to investments that support business growth, including our multi-year distribution center project, store capital for new locations, relocations and renovations, and technology investments. Turning to our balance sheet highlights. We ended the quarter with $1.9 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory at the end of Q1 was $1.3 billion. We are pleased with our inventory levels, which declined 15% versus last year. Relative to our expectations, higher revenue and foreign exchange contributed to the decrease. During the quarter, we repurchased approximately 751,000 shares at an average price of $395. Year-to-date, we've repurchased approximately $530 million of stock. Share repurchases remain our preferred method to return cash to shareholders, and I'm happy that our board has recently increased our authorization by $1 billion. With this new authorization, we now have approximately $1.7 billion of capacity to continue to buy back our shares. Let me speak now to our guidance outlook. We remain excited with our pipeline of innovation, brand activations and marketing plans for 2024. As it remains early in the year and the consumer environment in the U.S. is dynamic, we continue to be prudent in our planning while also continuing to invest in our strategic roadmap, which will set us up well for both the medium and long term. For the full year 2024, we continue to 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 continue to 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 five to 10 stores in the Americas with the rest in our international markets, primarily in China Mainland. For the full year, we continue to forecast gross margin to be approximately flat with adjusted gross margin in 2023. Within gross margin, we expect both markdowns in air freight to be relatively flat with last year. Turning now to SG&A for the full year. We continue to forecast leverage of approximately 10 basis points versus 2023. We are prudently managing our expenses while continuing to strategically advance our Power of Three times two road map, with investments in marketing and brand-building aimed at increasing our awareness in acquiring new guests, international growth and market expansion, and technology infrastructure and data analytics capabilities. When looking at operating margin for full year 2024, we continue to expect an increase of approximately 10 basis points versus adjusted operating margin in 2023, which expanded 110 basis points versus 2022. For the full year 2024, we expect our effective tax rate to be approximately 30%, an increase over the 2023 adjusted effective 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 the fiscal year 2024, we now expect diluted earnings per share in the range of $14.27 to $14.47 versus adjusted EPS of $12.77 in 2023. Our EPS guidance excludes the impact of any future share repurchases. It does include the impact of our share repurchases year-to-date and also higher forecasted interest income. When looking at inventory, we expect dollar inventory to decline in the mid-teens in Q2 and then increase in the second-half of the year as we anniversary last year's decline. We continue to expect the 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 multi-year distribution center project, store capital for new locations, relocations and renovations and technology investments. Shifting now to Q2. We expect revenue in the range of $2.4 billion to $2.42 billion, representing growth of 9% to 10%. We expect to open 14 net-new company-operated stores in Q2. We expect gross margin in Q2 to decrease 100 basis points to 110 basis points relative to Q2 2023. The decrease will be driven predominantly by deleverage on fixed costs and our ongoing investment in our multi-year distribution center project. We expect product margin to be relatively flat with last year, inclusive of an increase in markdowns, but a smaller increase than we saw in Q1 of this year. In Q2, we expect our SG&A rate to leverage by 40 basis points to 60 basis points relative to Q2 2023. This will be driven predominantly by favorable regional penetration, a shift in timing of spend related to certain brand campaigns from Q2 last year to Q1 this year, and leverage on top-line and ongoing prudent expense management. And looking at operating margin for Q2, we expect a decrease of approximately 50 basis points to 60 basis points relative to last year. However, we continue to expect 10 basis points of operating margin expansion for the full year. Turning to EPS. We expect earnings per share in the second quarter to be in the range of $2.92 to $2.97 versus EPS of $2.68 a year ago. We expect our effective tax rate in Q2 to be approximately 30%. And with that, I will turn it back over to Calvin.

Thanks, Meghan. In closing, I want to say I am energized by the opportunities in front of us and excited for what the future holds for lululemon. I was in China last week, and when I'm traveling in markets around the world, I see how powerfully our brand resonates across cultures and geographies. While we make some strategic adjustments in the U.S., our leadership team continues to challenge ourselves and our teams by asking how high is high. It's that mentality and passion for our brand that will enable us to navigate the near term as we build towards the long-term opportunities for lululemon that we know exist. In closing, I want to thank the senior leaders of lululemon as well as our teams in every market around the world for your unyielding focus on creating amazing products and experiences for our guests. I look forward to taking your questions now. Operator?

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Brooke Roach with Goldman Sachs. Please go ahead.

Good afternoon, and thank you for taking our question. Calvin, you spoke about making some strategic adjustments in the U.S. Can you speak to your confidence in the Lululemon brand and the growth trajectory that you see in the U.S. going forward as well as the timing and magnitude of some of those strategic adjustments that you're making? And then perhaps contextualize the traffic and conversion trends that you saw in your U.S. business as you move throughout the quarter? Thank you very much.

Great. Thanks, Brooke. In terms of our excitement and optimism for growth in every market, including the U.S., it remains as strong today as it was at the beginning of this year and obviously coming off of 2023, which was a very strong year for us. In the U.S., in particular, there are a number of areas of growth that we still see that have not changed. Continuing to acquire guests. We have very low unaided brand awareness, as you know, opportunities in categories across the wear occasions as we've tested and moved deeper into performance as well as into lounge and social, our accessories business and our men's. And our store fleet, which is still early in terms of opportunity, not just in expanding as well as optimizing and creating an even better environment for our product and our guests to shop. So in terms of the U.S., nothing has changed from the last few years into 2023 into the first quarter of this year. The opportunity for us when I look at the business is men's has a number of new innovative launches that are resonating and he's responding very well to. In performance with the Zeroed In and continuing the success of the changes from last year on the Pace Breaker into some of the key categories we identified, run, golf, and train, as well into some of the new franchises in the lounge category that we launched, he is responding incredibly well to that. And we saw that in our performance around the globe as well in the U.S. and we saw that in our share performance in the U.S., where we saw outsized gains in men's. In our women's business, we had some missed opportunity, really in our color palette, in particular, in some of the key categories such as our legging business where we didn't have enough color newness. The one color and newness we did have, she responded incredibly well to, but she was looking for more, and our palette that we chose was just more limited than what she was looking for, as well as because of the success in Q4, we came into the year with some missed opportunity across our size profile, particularly our smaller sizes. All of this is within our control, all of this the teams have been chasing, and we expect much of that to be addressed in the second-half of this year, as well as a lot of the newness and innovation we did have planned for this year in our women's business was scheduled more for mid to back half of the year. We have some exciting new innovation coming in our leggings, in particular in the next few weeks. In early July, we'll be launching a new innovation in leggings with a Hudson Yards called Breeze Through. So there were some missed opportunities in women's, but in terms of the health of the brand, the strength and the potential of the growth, nothing has changed. Traffic was positive in the quarter in the U.S. We did see the opportunity in conversion and we attribute that to, as I mentioned, the known missed opportunities as it relates to some missed opportunity in color in our women's business.

Thanks so much. I'll pass it on.

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

Perfect. Thanks for taking the question. I've got one for Calvin and maybe one for Meghan. Maybe, Calvin, just bigger-picture, I feel like we rarely hear of assortment missteps in lulu's history. So kind of what changed, or maybe what do you think provokes that this year? And then bigger-picture maybe for Meghan, China, obviously a key growth area for you all. Can you talk about how the competitive landscape is different or similar? And then how you think about the revenue potential for lulu in that market over time? Thanks a lot.

Thanks, Alex. On -- in terms of the track record of the team, I agree, we have a very talented a team across the product organization in both design and merchandising. And this was just a quarter where the chosen color palette was more narrow than I think the consumer coming into this year was looking for. We know that the consumer environment remains dynamic with inflation, higher interest rates. So it's weighing on the mind of the consumer and we also know they will spend, but they're being selective. And I think with our color palette, it -- we had opportunity because where we had it, she responded incredibly well. Combined with the success we've seen in growing our guest base and broadening cross sizes, the teams have been chasing into that to determine the go-forward size profile across the sizes and the different styles in both performance, lounge, and social. So I'm confident that those opportunities have been identified. I'm confident when I look to the innovation and the pipeline as well as just how we bring newness to core in the back half of this year and forward that a lot of that learning has been addressed, and we were able to address it and control it.

Yes. And thanks, Alex. From a China standpoint, we're very pleased with our business in that market. Continue to see very strong trends in Q1, so plus 52% constant currency China Mainland. And I would say from a competitive landscape, we continue to see strong business on our side. Definitely closely monitoring the environment, but we're really still early in our growth journey there, and no concerns at this point in time.

Thanks a lot. Good luck.

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

Great. Thanks. So maybe, Calvin, just higher level, or larger picture as we think about the U.S. business. I mean, do you believe anything has structurally changed if we're thinking about on a longer-term horizon? And then on the progression from here, just how best to think about progress to date that you've already made maybe within stock level, sizing and color? And then just the cadence with each of those as well as the product pipeline in the back half of the year? Just anything that you're really excited about that would support the sequential improvement as the year progresses.

Great. Thanks, Matt. I'll start with absolutely nothing has changed in terms of the growth potential of this brand, not just internationally across all markets, but in the U.S. As you know, 2023 was a very strong market for us. Quarter four was a very strong quarter for us in the U.S. and have identified some missed opportunities in Q1. We saw success in our men's business where we did bring newness, innovation, color, and we had less of an impact on the size, status, and very pleased with that growth as well as that growth relative to the market and the outsized gains we saw in share. In the accessories business, we know that we're cycling over the success of the Everywhere Belt Bag, which is incredible. It really validates and shows what's possible for our brand in accessories in particular in bags. And although that bag continues to perform well, not quite to the levels of last year, but the team has introduced a number of new styles of bags that the guests responded incredibly well to. We just didn't have the depth of inventory to satisfy the demand that could have offset the -- some of the headwind of the Everywhere Belt Bag success last year. That is something we can control. We know the newness is resonating and the guest is moving beyond just an Everywhere Belt Bag. And we have opportunity and the teams have been chasing into that and expect to be in a better in-stock position in the back half. The Two-Tone bag is a good example of that, sold out almost immediately. We were able to chase, bring some in, offer it as an Essentials member early access. It again sold and did incredibly well and we continue to chase into that. So we have a number of exciting, very successful bags in our accessory business that we are chasing inventory in and excited to see how that will contribute -- continue to contribute to our growth. And then in the women's business, traffic, as I mentioned, was positive, engagement in the brand was positive where we had newness. She engaged incredibly well in some of the new innovation we brought. She continued to perform very well in some of the new activities that we've continued to lean in on, tennis, golf, as well as our position in yoga and train and run have seen strength. We can really attribute the missed opportunity to a handful of categories, leggings in particular, as I've mentioned, and really linked to color and less color than last year, which was a choice in the palette, more narrow and based on where the consumer is this year a missed opportunity for us. But nothing from a brand, from an opportunity to grow unaided awareness, and engagement in the brand has fundamentally shifted and changed. And I remain as optimistic and excited about our growth potential in the U.S. as I am in all of our international markets. And we see that in the performance of this quarter with fantastic growth in Mainland China, strong growth in the rest of the world, how the brand is continuing to grow, continuing to acquire guests and resonate and the uniqueness of our product. And I don't see anybody with product comparable from a from a positioning perspective. So I do believe the differentiation of the brand is the same, and we know what the opportunities are and what we can control. And that's what the teams are focused on, and definitely we'll get stronger as we as we trade through this year.

That's great color, Calvin. Meghan, just maybe could you speak to health of current inventory? And then just drivers of markdowns in the first quarter, how best to think about markdowns in the second quarter and the back half of the year?

Yes, sure. So inventory, we were down 15% at the end of the quarter. So that was on the lower end of the range that we provided of high-single-digit to low-double-digit decline. And we do expect the second-half inventory will grow year-over-year relatively in line with sales. I would say at this point in time, we're very pleased with the currency and composition of our inventory outside of some of the opportunity areas that Calvin mentioned. So well-positioned there from an overall perspective. In terms of markdowns, we were up 50 basis points year-over-year in Q1. We believe Q2 will be slightly above last year as well, though less than Q1, and we are still expecting essentially flat markdowns for the year. And with that, some of the opportunity areas that Calvin described in terms of color and sizing. And we are continuing to chase into as well as some other items that are working for us for the second-half of the year and we've got some innovation teed up and believe that will drive the gas towards the full-price component of our assortment and a lot markdowns for the year.

Great. Best of luck.

Thank you.

The next question is from Michael Binetti with Evercore. Please go ahead.

Hey, thanks. Congrats on a nice quarter, guys. So maybe I can just continue that last question, Meghan. Could you speak a little bit to your confidence in the sustainability of the product margins in the U.S.? And then I guess, I'd be curious what you think are some of the differences driving the gap in results between Canada and the U.S., a little bit of notable difference there. And then maybe just a little help understanding the U.S. consumer dynamics. Calvin, bigger-picture, how has purchase frequency, UPT, AUR changed, if at all? Looking -- as you look across the cohorts that you acquired pre-COVID, during COVID, after COVID, are there any change in key customer behaviors or KPIs to point out?

Thanks, Michael. So in terms of U.S. product margin, I don't see that changing over the long term. We run a highly full-price business. We have no plans to change our strategy there. So I would view some of the current challenges with assortment and slightly higher markdowns as temporary. And then from a Canada to U.S. perspective, the opportunity areas that Calvin outlined in terms of color, sizing were more prominent drivers last year in the U.S. as well as the Everywhere Belt Bag was a more popular item in the U.S. as well. And so that's driving the difference in terms of trend.

And with the consumer, I sort of mentioned that obviously, we're monitoring the environment and it remains dynamic. But we do know that the guest is being more selective, but will spend where they choose. So we believe our product is differentiated in the marketplace, stands out in terms of quality as well as the versatility, which I think is a key element of the product of how it can be worn multiple wear occasions and use cases across either performance activities and/or through social and lounge, which these are unique positions. And the missed opportunity is really what that we did not provide her in terms of the assortment she was looking for in certain areas. Obviously, where we did, she responded incredibly well and he continued to. When I look at the overall mix, nothing really to call out. UPT and AUR, no change, no fundamental shifts and changes there. Really, traffic was positive, as I mentioned. In the quarter, it was conversion that we just saw an opportunity on with guests coming in and either not acquiring as much and/or as they didn't necessarily see the color in that product. But we believe the loyalty and the engagement with our guests over multiple years, which we've continued. And coming off of Q4, this is a very short transition as we course-correct and adjust some of these product opportunities and the teams have been in that work. So nothing that I'm concerned about long term in terms of our ability. We have a very sticky guest. We have a brand that there's a lot of love for and differentiated product. And we know where the opportunity is, and the teams have been chasing that for the back half of this year. So I'm not -- have not seen anything and I'm not concerned with any fundamental shifts in the guest or the guest loyalty or attention with this brand.

Thank you very much, guys.

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

Hey, everyone. A quick question, let's circle back to Matt's question about the markdown. So I just want to make sure I understand, Meghan. So the markdown you guided in three months ago for Q1 was, I believe, flat, and it came in down 50 bps. So I'm kind of curious, number one, what exactly transpired in the quarter kind of drive that? Obviously, you may beat the gross margin line, but that line item, what exactly happened? And then you're maintaining the full year at flat, but you're coming off the Q1 was down and then you're saying Q2 will be down again. So it just feels like now there's a back half like needed ramp-up in markdown versus before there wasn't. So I guess, I'm just trying to understand like the progress of the full-year for the gross margin line as well.

Yes. Hi, Ike. So in terms of markdowns for the first quarter. So I would say the challenges we saw with assortment and color and sizing, and in addition to that, the environment, we did see gaps gravitate more towards the markdown proportion of our assortment. So we saw 50 basis points increase. We believe Q2 will be still up to last year, but lower than -- a lower increase than Q1. Q1 is a relatively small portion of our markdowns for the year. So when we think about the full year, we are maintaining that essentially flat markdown rate for the full year, but we would see some opportunity in the second-half just given some of the actions we're taking to correct those pieces of the assortment in terms of the color sizing, and then also some exciting innovation that Calvin spoke to as well as other portions of the assortment that we're chasing into that are working for us today. So feel well-positioned headed into the second-half of the year.

Okay. So it's mainly a function of Q1. This isn't that impactful for the year on the markdown rate?

Yes.

Okay. Got it. Okay. Thanks a lot. Appreciate it.

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

Hey, thanks, guys. You reiterated your sales guidance for the year, but curious if you've changed your outlook in any of the regions versus how you were thinking at the beginning of the year? And you also talked about there not being any structural differences in the U.S. market, but curious how you'd characterize the competitive landscape near term in 1Q relative to what you saw in the second-half of '23? Any changes in promotional cadence amongst competitors out there that you're paying more attention to? Thanks.

Thanks, Paul. I would say from a regional and country level. A little bit of feedback. [Technical Difficulty] Sorry about that. So from a regional and country-specific perspective, we have not changed our outlook materially for the balance of the year. I would say the slight Q1 overperformance would have come from international region and primarily China.

Yes, Paul. In terms of the competitive landscape, the second part I'll address first, have not seen anything dramatically different from a promotional intensity perspective. There remains competitors in this space that use promo as a means to drive demand for their product. We've seen that increase over the last few years, but I wouldn't say in this quarter, it's either gone deeper or pulled back. It's sort of the same, which I would say is a heightened level from a few years ago, but nothing dramatic in the quarter. And competition in our space has always been there and been intense, and we've always been able to continue to perform and compete. And nothing has shifted from quarter four and 2023, where we saw our performance in the U.S. be very strong into Q1. And I really therefore point to the missed opportunities that we had versus it being a competitive impact on our business. Our men's business, and there are competitors in the men's space performed very well where we saw the outsized share gains because of the product, the innovation, the newness and the color palette was there. It resonated and very pleased with the success momentum that has continued in that business. I shared the accessories, and the excitement behind the newness, but lack of depth to satisfy the demand. And the mis opportunity in women's, which is really, we control that. It's within our control and we've been chasing it. So competition has always been there. I haven't seen anything dramatically shift and change in the quarter and definitely not from Q4 to Q1 where we had a very strong quarter. And therefore, I really do point to missed opportunities that we that we have.

The next question is from Sharon Zackfia with William Blair. Please go ahead.

Hi, good afternoon. I guess I'm curious if you've seen U.S. trends kind of stabilize and become more predictable? And within the women's business, it wasn't clear to me whether you think you lost share within the quarter in the U.S. or whether maybe the whole market was a bit softer for the segment.

Thanks, Sharon. I would say in terms of U.S. performance, it did come in as we expected in Q1. And so I would say to that from that standpoint, it was in line with our expectations.

And in terms of share, in Q1, we did gain market share in both the U.S. adult apparel industry as well as the U.S. adult active wear industry. We saw outsized gains in men's where we significantly outperformed the overall market. In women's, we were flattish based on the missed opportunities that I identified.

The next question is from Dana Telsey with Telsey Advisory Group. Please go ahead.

Hi, good afternoon, everyone. Calvin and Meghan, as you think about store productivity and levels of new stores in North America, is that changing at all from how you thought about it before? And how are new stores opening? And then lastly, as you think about the men's business, which seems to be growing very strongly, any difference in terms of what you're seeing overseas versus in North America for the men's business? Thank you.

Thanks, Dana. I would say in terms of new store openings, we continue to see opportunity and runway across all of our geographies. In the U.S. specifically, we see sales -- very productive sales per square foot above our average, which is around $1,600 per square foot. We tend to look at new stores as ramping into their full mature volume over a two- to four-year period. I would say we're continuing to see that, and we see ample runway in both the U.S. as well as importantly, our international region.

Hi, Dana. I'll chat with Matt. Just I'll just add in terms of the optimization of our doors around the world, including in the U.S., very excited with the results we see, the percentage of the portfolio that we still have available to be optimized, and obviously the product innovative pipeline that is creating opportunities for these additional categories within that space. And that's markets from APAC to Australia into the U.S. So very excited about how we will continue to invest, optimize, and showcase our product innovation in an even a stronger fashion. In terms of men's, men's globally is performing very strong. Interestingly, it took us a number of years to get to our penetration of the men's business in North America, and we're seeing the international markets get there a lot quicker. So it really earlier on, lululemon is a dual-gender brand in these markets and men are responding to the newness in the product and the innovation globally. In similar fashion, when we see the strength of the ABC, we see the strength of our performance franchises. Interestingly, when we see the success of the new launches, the Zeroed In franchise or the expansion of Pace Breaker are resonating around the globe in all of our markets. So excited to see the growth in men's globally as well as in the U.S.

Thank you.

Operator, we'll take one more question.

And that question is from John Kernan with TD Cowen. Please go ahead.

Excellent. Thanks for squeezing me in. Congrats on a nice quarter. Calvin, I think I heard you say international potential to reach 50% of sales. How does the complexion of that look on an omnichannel basis and geography basis?

I think from a geography perspective, we haven't broken it out. Obviously, Mainland China, which continues to perform well for us. And we're still early in terms of the potential when we look at the number of doors we have, the potential of store locations, the success of our business online, unaided awareness internationally being as low as it is in every market we're in. So really the growth possibility is on stores. Digital, where we have a different degree of penetration of our digital channel, but I think all markets can be hitting 40%-plus on our digital channel in the years to come as a support and driver of that as we build out our store network and opportunity. The addition of new markets, but we're in the bulk of the right markets that are going to drive fundamentally the majority of that growth across EMEA, APAC, and Mainland China. And we are just so early in that growth that when I look at the performance and the adoption and the reception of the brand, where we are in unaided awareness, where we are in store penetration and growth and that potential, and then look at some competitive other brands and where their ratio is, that's where our aspiration is and see that opportunity. Obviously, not in the current Power of Three times two where, our goal is to quadruple our business again on top of quadrupling it. But there is nothing systemic that's preventing the brand from achieving a 50% international, 50% North America penetration in the future.

That's outstanding. I guess, how should we think about the omnichannel business in the Americas? You've made some big investments in co-located stores, you're still growing square footage in Canada and United States. I guess, how should we think about -- there's a DTC platform with tremendous scale, e-commerce with tremendous scale. How do we think about the balance of stores and e-commerce going forward in North America?

Yes. So we haven't put a fine point on stores versus e-comm. What we shared in our current five-year plan is we expected e-comm to grow slightly ahead of our 15% CAGR and stores slightly below. And but we are remaining agile and going to where the guest wants to shop with us. As you mentioned, we've invested in omnichannel capabilities and really look at it as a seamless experience across both. And so see slightly more opportunity in e-commerce over the longer term. And -- but we'll remain agile in how we approach the business.

That's great. Thank you.

Thank you.

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