Lululemon Athletica Inc. (LULU) Q4 2025 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's Fourth Quarter Earnings Conference Call. Joining me today are Meghan Frank, interim Co-CEO and CFO; and Andre Maestrini, interim Co-CEO, President and Chief Commercial Officer. 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 annual report on Form 10-K are available under the Investors section of our website at www.lululemon.com. On today's call, Meghan will share an update on the action plan we laid out for you on our last earnings call. Andre will discuss our regional performance. Meghan will return to review our financials and guidance outlook, and then the team will be happy to take your questions. Before I turn the call over to Meghan, I'd like to remind 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. Also, please note that the purpose of today's call is to discuss lululemon's 2025 financial results and 2026 outlook, and we ask that you keep your questions focused on our performance.

Thanks, Howard. I'm glad to be here today to discuss our Q4 results, our outlook for 2026, and how we are executing our action plan to strengthen our brand, reaccelerate growth and create value for shareholders. Andre and I are working side-by-side with the senior leaders across our organization to drive our strategies forward to improve the U.S. business while also maintaining our international momentum and are making progress to deliver the performance we know is possible in all our regions. We have a healthy and loyal customer base that remains engaged and looking to us for great product and experiences. We have strong teams who are motivated and excited to bring our new innovations and product assortments to our guests. And we are working across the company to refine and advance our initiatives across product creation, product activation and enterprise enablement, which Andre and I will speak more about during our call today. We recognize there is more work to be done, and we have been course-correcting on a number of fronts, but we are encouraged by the guest response to our recent new product drops and activations. I'm grateful to our teams across the entire organization who remain committed to delivering products and experiences our guests love. Together, we are taking the right steps that will allow us to realize the full potential of lululemon. Before I speak to our action plan, I would like to call attention to today's announcement welcoming Chip Bergh to our Board of Directors. As you likely know, Chip Bergh is the former longtime President and CEO of the iconic brand, Levi Strauss. He's a seasoned public company executive who brings deep retail and brand expertise, and he has extensive experience guiding successful transformations and driving value creation at global category-defining companies. His appointment as a director comes after a comprehensive search by the Board and is part of the Board's thoughtful ongoing refreshment process that has brought 5 new directors to the Board over the last 5 years. I'd also like to acknowledge David Mussafer, one of our long-time directors, who has informed the Board that he won't be standing for reelection. We are grateful for David's many contributions to lululemon over the years. And with respect to the CEO search, I can share that our Board is running a robust search process and they've been meeting with highly qualified candidates. The process is moving forward, and we will provide an update on this topic at the appropriate time. I'll now dive into 3 components of our action plan: product creation, product activation, and enterprise enablement. During the fourth quarter, Andre and I dove deeper into each pillar of our plan and have been working with the teams across the organization to ensure we entered 2026 moving with focus and speed. We've been course-correcting where needed to restore and protect our brand health over time. A top priority for the management team as we enter the year is returning to full-price sales growth in North America. Through a series of steps that include the inflection of product newness and reducing the level of markdowns, SKU reduction and the rebalancing of inventory levels. This approach will reinforce our premium positioning that has long set lululemon apart from others while also protecting operating margin. So let's click down into product creation. Our priorities here are raising the bar on product design, delivering a consistent pulse of innovation, improving our speed to market and ensuring a relentless focus on product quality. Hopefully, you've been in our stores and visited our e-commerce sites and have seen some of our new innovations. I will take a moment to highlight a few of these for you including Unrestricted Power, our newest iteration of ShowZero and ThermoZen. Unrestricted Power is a new training collection for women and men. It is constructed from PowerLu, our newest technical fabric innovation, which uses our highest filament yarn count (sic) [ filament-count yarn ] and offers a remarkably soft feel while also providing incredible stretch and support. Guests have responded positively since the launch, and we look forward to an exciting future for this new franchise. Next, we recently announced an updated version of our ShowZero, no-show-sweat technology meant for high-sweat activities. This newest iteration of ShowZero was developed in collaboration with professional tennis player and lululemon ambassador, Frances Tiafoe and debuted at the BNP Paribas Open at Indian Wells earlier this month. The latest technology conceals sweat while also remaining incredibly lightweight and breathable. We plan to introduce new ShowZero products to guests later this year as we continue to scale the platform across activities and categories. And I also want to mention ThermoZen, our newest collection of insulated jackets and vests. These products offer warmth, water and wind resistance and superior softness, and are a great example of how we are leveraging our considerable expertise in developing technical apparel across our lifestyle and casual offerings. These are just some of the innovations that our team has been developing and we are encouraged by the response from guests to these offerings. When looking at our overall product assortment, you'll see it continue to evolve based on the strategic vision of our creative team. A few specific examples of what you can expect going forward include updates on some of our key lounge and lifestyle franchises, fewer logos, a more focused and coordinated color palette and a more edited assortment of our smaller accessories. This enables us to present a more refined, uniquely lululemon product assortment. As we introduce new and evolved product, we also recognize the importance of taking steps to further enhance and protect our product quality. I've been spending time with our supply chain team to ensure that as we shorten our go-to-market time line, we do not sacrifice on quality, maintaining the highest possible quality standards remains paramount for me and all of us at lululemon. Shifting to product activation. It is incredibly important that we ramp up our efforts to further engage existing guests, bring new guests into the brand and ensure all guests are made aware of our latest styles and innovation. Let me highlight 2 of our most recent activations for you, which occurred in the first quarter. The first is Studio Yet. This was a 3-week pop-up, high-performance training space in Los Angeles where we offered a variety of fitness classes taught by world-renowned trainers and coaches. The studio was a physical manifestation of our global Yet campaign, which focused on the relationship between going after big goals and the daily work needed to achieve them. Guest response to Studio Yet was fantastic with all classes selling out, significant media pickup across mainstream and social channels and it, along with the community events we hosted in conjunction with the L.A. Marathon, provided a halo effect and sales lift to our stores in the Los Angeles area. And I'll also highlight the success over the past few weeks of our sponsorship of the BNP Paribas Open Tennis Tournament in Southern California, one of the most popular tournaments for players and fans. This is the first year of our 3-year sponsorship and the long lines in response to our pop-up store, where approximately 2/3s of the visitors were new to lululemon, shows the significant potential for lululemon within the tennis community. These events demonstrate that when we engage with our guests through our unique activations, we see a tangible response, and this continues to reinforce the opportunity for lululemon going forward. When looking at our approach to integrated marketing, our plans continue to include more product-focused campaigns across social channels, which will leverage lululemon ambassadors and other influencers to help ensure our guests are aware of new styles, innovations and updates we're bringing into our assortments. Next, I'll turn to enterprise enablement, which includes our efforts to create efficiencies and manage costs across the company. While we have always been prudent with regard to expenses, we have been particularly vigilant over the last 2 years as sales trends in the U.S. have faced headwinds and tariff policy has added pressure. We are continuing with this vigilance into 2026, and we are targeting meaningful savings as we simplify our operations and focus on scaling more effectively while continuing to invest in key growth initiatives. Key work streams are increasing efficiencies across inventory management, supply chain and nonmerchandise procurement and reducing complexity while capitalizing on automation and AI opportunities. We know we must improve our performance in North America while continuing our momentum internationally. We have already taken decisive actions to position the business for sustainable growth. Looking forward, we have clear priorities and are moving with focus, speed and determination as we implement the strategies across our action plan. You can really feel the energy across the organization about the path forward and the team is excited about the opportunity ahead of us. I'll now turn the call over to Andre.

Thank you, Meghan. Like Meghan, I'm pleased to be here with you all. In my role overseeing our selling channels across all regions, I have the opportunity to spend considerable time in our stores, meeting with our leaders and educators and hearing from our guests. So I'm excited to share the highlights from our markets across the globe. Touching first on North America. We are actively making the changes needed to increase newness, enhance the guest experience in stores and online and improve our performance. We are building from a position of strength as we remain the #1 brand for women's activewear in the U.S. New guest acquisition, retention, engagement and key brand relevance metrics all remained solid in 2025. So let me speak to 3 of the strategies we are implementing to unlock growth in the region. First, as Meghan mentioned, we are focused on the growth of our full-price business. Looking at 2026, a primary goal in the North America is returning the business to healthier levels of full-price sales after seeing a higher markdown penetration in 2025. We are already seeing better full-price sell-through in Q1 relative to Q4, and we are targeting further improvement as we move through the year, driven by increased product newness, innovation and operating discipline. Second, we're enhancing the guest experience, both in-store and online. We recognize the importance of our store and e-commerce sites as guest touch points, and we are evolving the experience to better reflect the premium positioning of lululemon brand. In stores, our localization and curation enhancements continue. Our new design playbook features an elevated presentation with less density of product to better showcase our new styles and innovations, and to make the stores easier for guests to navigate and shop. We are also sharpening our focus on activity-based merchandising by offering clear destination for our core activities, including run, train and yoga, pilates within the store. These destinations allow for better storytelling and improve the shopping experience for guests. Our new store in SoHo reflects these enhancements, and we have been very happy with the guest response to these changes there and at other key locations. We will be rolling out these updates to additional doors in North America throughout 2026. And online, building on the new redesign of the site, we will continue to improve the guest journey with enhancements coming to our product display pages, checkout and overall storytelling. And third, we are increasing new style penetration across our assortment. Meghan already spoke to our product creation pillar. So I'll just add that in North America, with our new spring merchandise that is already hitting our stores and website, we have increased our new style penetration to approximately 35%. We know that our guests are looking for new styles and product from us. And when we deliver them effectively, we see strong response. In addition to what Meghan mentioned, other examples of successful new styles include EasyFive and the Groove Wide-Leg. Let me shift to our international business, where momentum remained strong. In China Mainland, our guests responding well to our product assortment in Q4 with outerwear and lounge being standout categories. The strength in outerwear was driven by Wunder Puff, which we feature in a localized brand campaign. More recently, we celebrated Chinese New Year with a campaign featuring world-renowned cellist Yo-Yo Ma, and offer guests the capsule collection comprised of some of our most iconic styles. This is an excellent example of how we continue to capitalize on locally relevant events to engage with guests in unique ways. In our Rest of the World segment now, let me highlight South Korea, one of our fastest-growing markets. Our localized approach to guest engagement, including targeted celebrity endorsement continues to resonate well, particularly among our younger guests. I would also highlight the strong response to our new store in Gangnam. This location showcases the newest expression of our brand similar to what we introduced in SoHo. It includes new design elements and detailing and acts as a hub for guests within the local community. In Milan, we saw the lululemon brand on the global stage at the Olympics as our partnership with the Canadian Olympic and Paralympic Committees continue. These games were our third as the official outfitter of Team Canada, a natural fit for our brand and help us acquire new guests by working with and outfitting elite athletes who perform at the highest level in their respective sports. To complete my around-the-world summary, I'll mention that with our franchise partner, the 100th lululemon store opened in EMEA in Warsaw, Poland earlier this month. This is an exciting milestone for the EMEA team and continues to demonstrate the long runway for growth within this region. The majority of stores in our international markets are company operated, but we strategically leverage our franchise model where it makes sense. Poland is a franchise market for us. And in 2026, our plans call for new franchise markets in Greece, Austria, Hungary, Romania as well as India. Before I turn the call back to Meghan, I want to express my confidence in the opportunity for lululemon in every market around the world, and I want to thank our team across our stores, distribution centers and corporate offices for your ongoing engagement with our guests and the tremendous enthusiasm you have for our brand. Meghan, back to you.

Thanks, Andre. I'll now turn to our Q4 financial review and guidance outlook. For Q4, total net revenue rose 1% to $3.6 billion. Excluding the 53rd week in Q4 of 2024, net revenue rose 6% or 4% on a constant currency basis and comparable sales increased 2%. Within our regions and channels, excluding the 53rd week and in constant currency, results were as follows: North America revenue was flat with comparable sales down 2%. By country, revenue increased 3% in Canada and was down 1% in the U.S. In China Mainland, revenue increased 28% with comparable sales increasing 26%. Results were stronger than anticipated despite 2 discrete calendar shifts, which negatively impacted Q4, including earlier 11/11 events on our third-party e-commerce platform and the shift of Chinese New Year into Q1. Guests responded well to our product assortment with particular strength in outerwear and lounge. And in the Rest of World, revenue grew by 12% and comparable sales increased by 5%. In our store channel, sales were down 1%. We ended the quarter with a total of 811 stores globally. Square footage increased 11% versus last year driven by the addition of 44 net new lululemon stores since Q4 of 2024. During the quarter, we opened 15 net new stores and completed 7 optimizations. In our digital channel, revenues increased 9% and contributed $1.9 billion of top line. And by category, men's revenue increased 3% versus last year, women's increased 7%, and accessories and others grew 4%. Gross profit for the fourth quarter was $2 billion or 54.9% of net revenue compared to 60.4% in Q4 2024. Our gross margin decreased 550 basis points relative to last year and was driven primarily by the following: a 560 basis point decline in overall product margin, driven predominantly by tariff impact and higher markdowns. Tariffs had a gross negative impact of 520 basis points in the quarter, offset by 110 basis points related to our enterprise efficiency initiatives, while markdowns increased by 130 basis points. Deleverage on fixed cost was 30 basis points and foreign exchange had 40 basis points of favorable impact. Relative to our guidance for gross margin decline of approximately 580 basis points, the upside was driven primarily by a lower tariff impact and regional mix. 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 $1.2 billion or 32.5% of net revenue compared to 31.5% of net revenue for the same period last year. The SG&A increase of 100 basis points was in line with our guidance and relates primarily to the negative impact of foreign exchange, fixed cost deleverage and ongoing investments to build brand awareness. These were partially offset by our ongoing initiatives to prudently manage costs across the enterprise. Operating income for the quarter was approximately $812 million, or 22.3% of net revenue compared to 28.9% of net revenue in Q4 2024. Tax expense for the quarter was $226 million or 27.8% of pretax earnings compared to an effective tax rate of 29.2% a year ago. The decrease in the effective tax rate relates primarily to a discrete tax benefit realized in the quarter and foreign exchange. The lower tax rate relative to our guidance contributed $0.15 to EPS. Net income for the quarter was $587 million or $5.01 per diluted share compared to earnings per diluted share of $6.14 for the fourth quarter of 2024. Capital expenditures were approximately $183 million for the quarter compared to approximately $235 million in the fourth quarter last year. Q4 spend relates primarily to investments to support business growth, including our investments in distribution centers, store capital for new locations, relocations and renovations, and technology investments. Turning to our balance sheet highlights. We ended the quarter with $1.8 billion in cash and cash equivalents and nearly $600 million of available capacity under our revolving credit facility. Inventory at the end of Q4 was $1.7 billion, an increase of 18% on a dollar basis. On a unit basis, inventory increased approximately 6%, below our guidance for an increase in the high single digits. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff rates relative to last year and foreign exchange. We are pleased with the composition of our inventory as we entered the spring season, as it is more reflective of our go-forward vision for the brand. During the quarter, we repurchased approximately 1.4 million shares at an average price of $188. For the full year, we repurchased $1.2 billion of stock. Let me now shift to our guidance outlook for 2026. As I mentioned, we are executing against our action plan, with particular emphasis on driving healthier full-price sales in North America. We're already seeing green shoots related to our new product launches and our recent brand activations. But I want to also acknowledge that an improvement in overall trends in North America will likely progress over the course of the year and into 2027 as we return to a healthier baseline of full-price sales. Let me also mention tariffs. For reference, in 2025, gross tariff costs were $275 million. We were able to offset approximately $62 million of this expense through our mitigation strategies, which was better than our initial expectations. Looking to 2026, we anticipate gross tariff impact of approximately $380 million with offsets from our enterprise efficiency initiatives of approximately $160 million within gross margin. Turning to our full year 2026 guidance outlook. We expect revenue to be in the range of $11.35 billion to $11.5 billion, representing growth of 2% to 4% relative to 2025. By region, we expect revenue in North America to be down 1% to 3%, with the U.S. down 1% to 3%. Baked into our total revenue guidance for North America is an improvement in full-price sales. We are already seeing better full-price selling relative to Q4, and we'd expect positive year-over-year growth in full price to begin in Q2 and continue into the second half, driven by the rollout of new styles, innovations and core updates over the course of the year. We expect revenue in China Mainland to be up approximately 20%, which takes into account our outperformance in 2025. Trends remained strong in Q1, and we're expecting a revenue increase of 25% to 30%, which includes a modest lift from the shift of Chinese New Year into the quarter. And in Rest of World, we expect revenue to increase in the mid-teens. Globally, we expect to open approximately 40 to 45 net new company-operated stores in 2026 and complete approximately 35 optimizations. This will contribute to overall square footage growth in the low double digits. Our new store openings in 2026 will include approximately 15 stores in North America including 8 in Mexico and 25 to 30 in our international markets, with the majority of these planned for China. While we are taking a disciplined approach to capital spending, we continue to see good returns from new store openings and store expansions as these strategies contribute to an improved shopping experience for existing guests, new guest acquisition, building brand awareness and community engagement. For the full year, we expect gross margin to decrease approximately 120 basis points relative to last year, driven predominantly by deleverage on fixed costs and ongoing investment in new store openings, optimizations and our distribution center network. We expect markdowns for the full year to improve modestly and tariffs to have a gross impact of 90 basis points, of which we expect to be able to offset almost all of it. Turning now to SG&A for the full year. While we intend to realize significant savings related to the enterprise enablement pillar of our action plan, we expect deleverage of approximately 130 basis points versus 2025 as we continue to strategically invest in our business to support future growth. These investments include market expansion, improving the guest experience by enhancing our omni capabilities and growing brand awareness. We are absorbing additional costs relative to last year as we layer back in certain expenses, including incentive comp, store labor hours, and we have onetime costs associated with the expected proxy contest this year. When looking at operating margins for the full year 2026, we expect it to decrease by approximately 250 basis points versus last year. For the full year 2026, we expect our effective tax rate to be approximately 30%, an increase from the 2025 effective tax rate of 29.5%. For the fiscal year 2026, we expect diluted earnings per share in the range of $12.10 to $12.30 versus EPS of $13.26 in 2025. Our EPS guidance excludes the impact of any future share repurchases. When looking at inventory, we expect dollar growth to be in the mid- to high single-digit range through 2026 with units flat to down slightly. With leaner inventories and improved chase capabilities, we are in a better position to read and react to guest demand and fuel momentum in stronger performing styles. We continue to have $1.2 billion remaining on our share repurchase program, which we will continue to utilize. Share repurchases remain our preferred method of returning cash to shareholders, and our repurchase levels in 2026 will likely be similar to those in 2025. Finally, for the full year, we expect capital expenditures to be approximately $725 million to $745 million. The spend reflects investments to support business growth, including capital for new locations, relocations and renovations, DC and technology investments. Our range of $725 million to $745 million is approximately 6% of revenue. Shifting now to Q1, we expect revenue in the range of $2.4 billion to $2.43 billion, representing 1-year growth of 1% to 3%. We expect to open approximately 6 net new company-operated stores and complete 6 optimizations. By region, we expect North America to decline in the mid-single digits with the U.S. also in that range and Canada is tracking slightly lower. We expect China Mainland to increase 25% to 30% and Rest of World to increase in the mid-teens. When looking at North America, as I mentioned, we are seeing good response to our new product launches and activations and are experiencing better full-price selling, but expect the inflection in total revenue to actualize over the course of the year. We expect gross margin in Q1 to decrease by approximately 380 basis points relative to Q1 of 2025. This decrease will be driven predominantly by higher tariff costs, ongoing investments in store openings and optimizations and our distribution network. We expect increased tariffs to have a gross negative impact of approximately 290 basis points with offsets of approximately 110 basis points. We expect markdowns to be up approximately 30 basis points versus last year. While full-price selling has improved meaningfully relative to Q4, we expect markdowns to begin to decrease versus prior year beginning in the second half. In Q1, we expect our SG&A rate to deleverage by 330 basis points relative to Q1 2025. This increase will be driven in part by timing related to brand activations, including the BNP Paribas Open, the Milan Olympics and Studio Yet as we have more events planned in the first half of the year versus the second half. In addition, there are discrete costs related to our proxy contest and expenses that we reduced last year that are layering back into this year related to store labor hours and incentive compensation. And we will continue to invest strategically in our growth initiatives and IT infrastructure. When looking at operating margin for Q1, we expect it to be 710 basis points lower than 2025 for the reasons I just mentioned. Turning to EPS. We expect earnings per share in the first quarter to be in the range of $1.63 to $1.68 versus EPS of $2.60 a year ago. We expect our effective tax rate in Q1 to be approximately 31.5%. I want to close today by saying that since Andre and I have stepped into our interim Co-CEO roles, we focused on engaging with our leaders and employees about the opportunities in front of us as we have worked to refine and implement initiatives that are part of our action plan. First and foremost, we are restoring the full-price health of our brand, and we are already seeing improvement in Q1. Other actions include testing a new design playbook in stores, rolling out enhancements to our e-commerce sites and working with the product teams to ensure that our design and merchandising choices emphasize athletic and technical apparel with lifestyle playing an important but supporting role. There is a renewed energy and enthusiasm across the business, in particular, where employees are seeing the product that is being introduced to guests that is in our pipeline. In fact, we've seen an increase in employee purchases as we introduce new innovations and product, which is an optimistic indicator that we're on the right path. Andre and I are encouraged by the progress we're seeing across the business, and we're inspired by the passion and commitment of our leaders and teams across the world. All of this reinforces our confidence in what's ahead for us. We recognize that it will take some time to see the benefits of these actions, but we are confident that these are the right moves to powerfully drive our brand forward in the near, mid and long term. We will now take your questions.

[Operator Instructions] The first question comes from Brooke Roach with Goldman Sachs.

When do you think the product assortment will be appropriate to deliver a return to inflection in North America growth? And how are you thinking about the headwind from the removal of markdowns throughout the year and the introduction of that new full-price selling product throughout the year?

Thanks, Brooke. So as we mentioned, we are focused on reaccelerating the full-price health of our business. So in Q1, we will see a meaningful inflection relative to Q4. We expect in Q2 that we believe it would be approximately flat in full-price trend in North America and then flipping positive in the second half of the year. So that's how the year progresses. In terms of markdowns, we are lowering that penetration. So as we mentioned, we were up 130 basis points in Q4 and up 60 in the year in 2025. For 2026, we're expecting a modest improvement in markdowns for the full year, predominantly driven through the second half, and we are expecting just a modest increase in Q1.

And just to clarify, are you seeing any improvement in your base business as you've put these new products into the assortment 1Q to date? Or is the improvement largely driven by the new product launches?

We're definitely seeing improvement to date. So we've seen a meaningful inflection in terms of full price coming out of Q4 and into Q1. And it will take us some time to inflect and we think it will be sequential throughout the year, flipping positive as I mentioned in the second half, but seeing some really great green shoots. I mentioned some of these in terms of the new innovations. We launched Unrestricted Power, ThermoZen and ShowZero, which will be commercialized later this year. We also had an exciting run capsule that launched earlier this month. So we're building on that strength as we move throughout the quarter. It's still early, but definitely seeing some positive indicators. Also would point to, we did see employee sales pick up as well over the last few weeks as we introduced new product.

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

As you work to inflect the North America sales trajectory to positive, are you doing any reassessing of your marketing, either dollars spent or types of marketing outreach to try to really bring in a new customer and reignite your existing? Or is it more status quo with the activation in grassroots styles?

Thanks, Lorraine. I'd share -- I do think we're looking at our marketing strategy. So really focusing on engaging the guests, ensuring they're -- that newness is front and center and visible. I think you'll see us shift more into utilizing brand-appropriate influencers and ambassadors as we move throughout the year. We are really focused on our activations and engaging with our guests through those means. So I would say you saw some evidence of that in Q1 in terms of us being very active in, I would say, our activity activations. So with the BNP Paribas Open in Indian Wells with tennis, Milan Olympics. So really excited about the assortment that we showcased there and then also Studio Yet in L.A. We also had a Chinese New Year activation this year -- this quarter.

The next question comes from Adrienne Yih with Barclays.

Great. A couple of questions. Andre, on the 35% newness, can you talk about kind of whether that is obviously styles, which you mentioned or color choice and SKUs? And what products are you sunsetting to make room for the newness? And then along those same lines, how does the reporting structure of who makes final decisions for quantity, make, what to chase, et cetera, within the merchandising organization? I know Elizabeth Binder reports into you, but just trying to figure out how this -- the system is working in terms of that. And then my final question is, how much of the CapEx is AI tech-driven, like the tech stack to support AI? And how do you plan to use that and incorporate that into the business?

Thanks, Adrienne. So we are moving our newness penetration from 23% in 2025 to 35% in '26. That is, I would say, new product never seen by the guest is how I'd frame that. So it's not just new colorways on existing products. It's truly a new product. So I would say in terms of sunsetting, we do have some SKU reduction as part of just being more pointed in our assortment and making that newness also more visible in our store and e-commerce expression. So that is a process we're going through as we assort the line. Jonathan Cheung, who's our Creative Director; as well as Liz Binder, our Chief Merchant, both report into me, and we've been leaning in together as we make these shifts. And then in terms of CapEx, we do have some investments in the AI space, shoring up our data and baseline so that we can move off of that. Really, I would say, our AI initiatives are focused on guest-facing, also enhancing our go-to-market calendar and supporting that speed aspect that we've discussed. So I would say it's an exciting and important part of how we're going after that enterprise enablement strategy.

The next question comes from Laurent Vasilescu with BNP Paribas.

Meghan, it was very helpful in terms of understanding the newness of 35%. But for the audience, the North American full-price realization, can you maybe just unpack a little bit better in terms of -- like I think you mentioned 1Q is better than 4Q. But in terms of percentages, where is it now versus a couple of years ago? And where do you want that to go back for 2026?

Yes. Thanks, Laurent. Yes. So if we look at 2025, we did have a higher markdown penetration than we would have liked. So it's illustrated by a 130 basis point increase in markdowns in Q4 and then 60 basis points for the year. We haven't broken out the penetrations in '26, but I would share, we expect to see a meaningful improvement in Q1. We're already starting to see that. But we are shifting from the lowest waterline in Q4. So we did have 130 basis points higher markdowns. So that points to having the most pressure on full price. So the sequential improvement is meaningful, but it will still underindex relative to our total top line. We do anticipate it will flip flat -- around flat in the second quarter and then the second half of the year would flip positive. We're really helping to enable this both through the newness curation as well as SKU reduction, and then the way we've positioned inventory for the year. So we have positioned units flat to slightly down. So really looking to read the trends on newness and chase where that's possible. As we've mentioned before, we have developed some capabilities -- enhanced capabilities in terms of our product team's ability to chase into what's working. So we believe this sets us up well for returning to healthy full-price sales penetration for the year and building off of that for the long term and in '26 as the opportunity presents itself.

Very helpful. And then I think you mentioned that square footage should grow low double digits. Just curious, whenever we find out about the new CEO. And if that individual wants to take a fresh look at that commitment. Can you maybe just unpack that a little bit more for the audience? How much of that is committed to for 2026? And then just a quick question here on marketing. I think in your 10-K, it's 5.7% of sales. Where should that go for 2026?

Yes. On your question, Laurent, about stores, we are taking a disciplined approach to capital spending and looking at our real estate project on a case-by-case basis. We continue to see good returns from new store openings and store expansions as these strategies contribute really to improve the shopping experience. So for 2025 to give you a number, NSOs are returning at above 100% ROI across both North America and the international markets. So representing a payback period of less than a year. So we feel confident with that. And also the strategy of optimization of existing doors in key influential cities to bigger format with proven quality traffic is solid. The productivity of our top larger stores is higher than the average of our fleet that is one of the best in the industry with sales per square foot over $1,400. So globally, to be precise, in '26, our plan calls for approximately 40 to 45 net new openings, which yields square footage growth to the low double digits. So with NAM, approximately 15 openings and international in between 25 to 30 openings with the majority in Mainland China. And for the marketing spending?

Yes. And I'd just add, Laurent, from a store perspective, it's really a store-by-store look that the team is doing, being really mindful of where we're opening, making sure it's relevant for the guest and we've got the right positioning in each market. As Andre just mentioned, it's 15 stores in North America, the majority of which would be in Mexico. So we have just a small handful of new store openings and we are watching them closely. We would be largely committed through '26 to our square footage expansion plans, but the team feels really confident in them. I'd say from a marketing perspective, we are -- our guidance assumes we're relatively flat from a rate of sales perspective in terms of marketing spend. I think what you'll see is we're shifting the composition of that spend a bit more towards these impactful guest activations we discussed as well as utilizing brand-appropriate influencers and ambassadors as we move throughout this year. So I would say a little bit of a shift in strategy on the spend, same waterline, and we'll continue to monitor to the extent that it's working for us, and we'll continue to push into it. Thanks.

The next question comes from Matthew Boss with JPMorgan.

So Meghan, could you maybe speak to the bridge from 4% underlying revenue growth in the fourth quarter to the 1% to 3% in the first quarter and 2% to 4% for the year? Meaning maybe just if you could elaborate on the balance between the improvement in full-price selling that you're citing relative to what's offsetting or constraining revenue growth as we think about the course of the year.

Yes, absolutely. So Q4, we're up 6%, excluding the 53rd week. And we did guide to 1% to 3% for Q1 and then 2% to 4% for the full year. I would say it's really the ramp of full price. So we had, I would say, the lowest waterline, as I mentioned in Q4, with markdown overpenetrating. We had 130 basis points of pressure in the markdown line in Q4. So we are improving that in Q1, but it will be still negative in Q1, flipping flat in Q2 and then accelerating in the second half of the year as we continue to build into it and then lap, I would say, the markdown performance that we had in the second half of '26.

Great. And then, Meghan, just on the more than 200 basis points of operating margin contraction this year, how much of the decline do you see tied to more transitory items? And what do you see as the revenue growth necessary to see operating margins return to expansion multiyear?

Yes. So we guided to 250 basis points decline. I would say the majority of that, when you step back from it, is add-backs of incentive comp and labor that we reduced in '25 and then also the proxy contest expenses. That's the majority of it as you step back. Obviously, we've got some headwinds and tariffs, but we're largely offsetting the year-over-year within the year. I do see this as the low waterline that we'll continue to build upon as we transition into '27. So really looking at getting back to that healthy full-price baseline. We're obviously having a little pressure on the fixed components of our P&L based on that revenue waterline of 2% to 4%. We haven't put a fine point on the leverage aspect. I think it will depend on the trajectory of the business, and then there are some decisions that we can make in terms of investment levels. So we'll definitely share more on that, but definitely expect it to improve from here.

The next question comes from Paul Lejuez with Citi Research.

Lots of focus on the North America full-price improvement, but I'm just curious if we should read that as you guys being happy with full-price selling in the Rest of World and China. Maybe you can talk about how those regions compare from a full-price penetration perspective to the Americas. And then also maybe match that with what sort of level of newness do you see in those regions? Have the percentages also gone down? And are they also supposed to go back up in '26? Or has it been more constant there?

Thanks, Paul. I would say we have not seen the headwind we've seen in North America in international regions in terms of full price. So still happy with the levels we're seeing there. That said, we do believe that the steps we're taking in our action plan in terms of product creation and activation will benefit all regions. But I would say we're still pleased with the trends there. I'll pass it to Andre just to add some more color on what we're seeing in the regions.

Yes, absolutely. I think that the model that has been developed to grow and expand in international is working because it generates full attention on the full price. And let me call out the different layers, which is, first, a brand-first approach, we are building the premium position of lululemon in activewear market in those key regions. Second, a diversified portfolio of product across the different activities where we want to lead in. Then this obsession of full price and minimal discounting and markdown. And also an elevated presentation in our stores and the guest experience across not only the key doors but also our online experience. And we are staying true to our community grassroot approach. We also keep standout events that generate organic traffic like the Summer Sweat Games, for example, in China. And that's why we are importing as a playbook to do Studio Yet that Meghan, you mentioned or our participation in the open of Indian Wells on new categories that we want to expand. So yes, as said, everything we are working on developing new styles and newness at the global level will also benefit all our markets to keep driving the focus and engaging the guest on full-price realization.

The next question comes from Michael Binetti with Evercore.

Could you speak a little bit to the Canada slower sales outlook in first quarter? Is that something you're seeing today, Meghan? Maybe just a few thoughts there. That market has been trending better than the U.S. for a little bit. I'm just curious what you're seeing in that market. And then maybe you could just help us -- you're shortening the time line on design from go-to-market. I think you diagnosed that as a pretty long time frame, 18 months plus. It's been a big focus for you. Could you just give us an update on what you're seeing there and some of the early progress or opportunities to shorten the lead times and what you think maybe that could go to as you look to kind of speed up the go-to-market process here?

Yes. Thanks, Michael. So in terms of Canada, we're expecting -- we are inflecting full price across the North America region. The Canadian consumer has been a little bit more sensitive to markdowns. So we're seeing a little bit more of a pronounced impact there, I'd say. So that's what's driving that differential, but expect still the same opportunities in terms of assortment shift and focus on guests with our activations and think we'll reset to a better waterline. And then in terms of the go-to-market calendar, so we are going from about 18 to 24 months, we're expecting we could go to closer to 12 to 14 months over time. Really focused on tools, process and systems and leaning into automation, including in the AI space to lean into that calendar. We did mention that we have a new Head of Technology who's got an AI focus. We're excited about him joining the team and the things that we can unlock in that space. And there's -- I would say, a lot of energy in the business around this reduction and simplification of our process.

Okay. And maybe if I can ask one follow-up. I think as I look back at last year, if I look at the first quarter, you mentioned that traffic was a little weaker than you'd liked in the quarter and the high-value guest was weak as well. You kind of gave us that breakout. Is that -- are you seeing better traction with the high-value guests as you start to flow the newness in and you start to get some confidence in the full-price selling as you at least start to improve sequentially from the fourth quarter here?

Yes. I'd say it's early in the quarter. I'd like a little more time just to understand what's going on with the high-value guests. But I would say we're seeing, as I mentioned, great green shoots on some of the new product launches. And I would expect that extends to that guest as well. So we'll share more on what we're seeing as it progresses.

The next question comes from Dana Telsey with Telsey Group.

Nice to see the progress. As you think about the performance apparel market, and just the activewear market, did you grow share this quarter? Did it stay the same? What do you see in the growth of premium athletic and in performance apparel? And then with the early results, positive results to the new assortments coming in, is it bottoms? Is it tops? And what are you learning from that as you develop new products, but for the next time line for the balance of the year?

Thanks, Dana. In terms of market share, so we maintained share in the total apparel market, and we lost about less than 1 point in activewear. So that's where we stand on that. As Andre mentioned, we maintained our position as the #1 women's activewear brand in the U.S. In terms of what's trending for category, tops and bottoms, we're seeing, I would say, some nice performance across both. The Unrestricted Power innovation, I mentioned we did in women's tights and men's shorts as well as a top, seeing some nice performance there. ThermoZen also was an outerwear innovation that we're excited about as well. We did also see some great performance out of a couple of bottoms that Andre mentioned, so EasyFive and then Groove Wide-Leg. And then we had a run capsule, which I would say encompass both tops and bottoms. So I would say it's both. And that had a lot of, I would say, energy around it in terms of fun and excitement in that run capsule. I think the team is really energized on building on the learnings in terms of what's working continuing to chase into as well as looking at how it informs our creative direction for upcoming seasons.

The last question comes from Ike Boruchow with Wells Fargo.

Meghan, can you just comment on the inventory ending in 4Q? How comfortable are you with that? I know the markdown is still expected to be up a little bit, but maybe just some more anecdotes there. And then what's your expectation for inventory as you move into 2Q and kind of the rest of the year?

Great. Yes, I would say we're pleased with both the level and composition headed out of Q4. We guided to unit increase in the high single digits, and we came in up 6%, so cleaner than we expected. We did focus on cleaning out seasonal inventory and feel we're headed into '26 with an assortment that's more reflective of our go-forward strategy. In terms of how we're managing inventory in '26, I would say, throughout the year, we'd expect to see units approximately flat to slightly down. That would hold true for the end of Q1 as well. So that is part of how we're supporting driving that full-price inflection in our business and the return to a healthier baseline in terms of penetration.

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