lululemon athletica inc. 2027 Q2 Earnings Call

Welcome to Lululemon's second quarter earnings conference call. Joining me today are Meghan Frank, interim co-CEO and CFO, and André 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 quarterly report on Form 10-Q and in our 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 investor section of our website at www.lululemon.com. On today's call, Meghan and André will begin by discussing recent business developments across our regions and the plans and strategies we're implementing to drive improved performance.

Meghan will then discuss our detailed Q2 financials, the impact recent trends are anticipated to have on our performance for the remainder of the year, and our revised guidance outlook. 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 second quarter, as well as our quarterly infographic. Meghan, over to you. Thanks, Howard.

Welcome, everyone, and thank you for joining us. I want to start the call by taking you through our Q2 results, what we are seeing in the business today, and how this is informing our decision to lower our guidance for the full year. André and I will spend most of our time discussing North America and China mainland, what has happened since our last earnings call, and the actions we are taking across these markets to improve the trajectory of the business. As you recall, we began the year with an action plan focused on three pillars: product creation, product activation, and enterprise enablement. A key objective of our plan is to strengthen our full price sales trajectory and position the company for long-term growth.

In Q1, we saw some encouraging signs indicating we were moving in the right direction to strengthen performance in North America while continuing to expand our global growth engine. As we moved into Q2, we faced negative commentary in the media and social channels, which impacted traffic and softer than planned response to some new product launches, which contributed to a moderating sales trend. As you have seen from our press release, Q2 revenue came in below our expectations, with the shortfall driven predominantly by China mainland, where revenue grew 4%. North America finished down 8% for Q2, slightly ahead of our guidance. As we moved into Q3, while we are seeing good guest reaction to our activations and some of our newer styles, the overall response to our product launches remains inconsistent. We have continued to see pressure on the brand in both of our largest markets.

Based on our assessment of these current trends, we have updated our guidance for the remainder of the year. At the enterprise level, we have several key actions underway to improve our performance. André and I will get into the regional detail in a moment. Our product teams are chasing into strong performers, including our Groove and Define styles, more aggressively than in the past, and working with vendors to strategically manage future inventory flows. On brand, we are moving forward with our increased marketing investments in the back half of the year. We are seeing strong community engagement with our recent campaigns and activations. While we have not yet seen an impact on the top-line trajectory, we are encouraged by the response. On expenses, we have been continuing to drive efficiency across the organization.

Given current trends, we have heightened that focus in the back half of the year while protecting investments in product and brand. We are excited our incoming CEO, Heidi O'Neill, joins us next week. We expect she will take a deep dive into the business, evaluating our strategy and current action plan. We look forward to the fresh perspective she will bring to define the path forward for Lululemon's next chapter. In the near term, our teams remain focused on execution. As we look to the future, we remain confident in the underlying strength of Lululemon's brand, the connection we have to our highly engaged community of guests and ambassadors, and the equity we have built. We believe our greatest opportunity is to build on this foundation through continued investment in product innovation, reinforcing our premium positioning, and the long-term brand health.

At the same time, our strong financial position allows us to invest in near-term actions that support full price sales and top-line improvement while remaining focused on the significant growth opportunities ahead. I will now share an update on our action plan and then hand it over to André to discuss regional performance. The markets we operate in are competitive, which makes it imperative for us to focus on unique and innovative ways to inspire our guests. As you know, we have been working on this through our action plan with a focus on product and brand. We anticipated our plan would take some time to gain traction as we bring in new innovations, elevate our store and digital experience, and increase and redirect our marketing spend. But we expected a better response than we are seeing as we enter the second half of the year.

Let me share some details, starting with product. As we have stated on prior calls, a top priority for the management team is returning to full price sales growth as we focus on restoring and protecting our brand health for the long term. Despite the headwinds we are experiencing, we are moving forward with our actions in this area, which will include bringing updates to our core franchises, introducing new styles, overall SKU reductions, and tightly managing inventory levels. In addition, we are leaning into our chase capabilities. As we discussed on prior calls, faster chase times allow us to read and react to guest demand and get back into certain strong-performing styles more quickly. We are chasing approximately 20% more volume this year relative to last year.

In Q2, while we are seeing green shoots in product, particularly within some of our newer away-from-body bottoms for women, we are also seeing an inconsistent performance in our assortment overall. This included a greater than expected slowdown in some of our core categories, particularly leggings. In women's tops, guests are responding well to Scuba and Steady State, now offered in our SuperLoft fabric, and our Define franchise continues to perform well. In men's, we are seeing strength in Metal Vent Tech tees and our golf tops, supported by the storytelling campaigns we developed around some of our elite ambassadors, including Lewis Hamilton and Min Woo Lee. We are also pleased with the halo effect our design for golf tops are having on our ABC bottoms, as they pair well together and provide guests with a versatile and technical solution on the golf course.

Let me now spend a moment on our women's bottoms business, where performance has been mixed. Leggings trends so far this year have been below our expectations, with sales declining approximately 20% in Q2. While we have been planning into lower legging sales and we are seeing good traction in several of our away-from-body styles, we are not yet able to fully offset these declines. Leggings remain an important category for us, where we remain the market leader. The wellness trend is strong. We continue to be a leader in technical fabric development, and guests continue to purchase our leggings for their exercise and training needs, particularly yoga and Pilates. We remain committed to the category, but there are shifts occurring with guests looking for away-from-body silhouettes.

We're happy with the performance of several new away-from-body styles we've recently introduced, including the Groove Wide-Leg, the Align Foldover Jogger, the Breezily, and our updated Dance Studio Pant. All are trending well, and we expect momentum to build in the back half of the year and into 2027. As we look at the second half of the year, in addition to away-from-body bottoms, we'll continue to focus on new and updated styles across our activities. You'll see updates across run with new cold weather innovations, and outerwear featuring Wunder Puff and our Featherweight Down franchise, and a new version of our popular Big Cozy to highlight just a few. I also wanted to mention accessories, where we experienced a 13% decline in Q2. While backpacks are strong, we are seeing overall softness in bags.

In addition, we are strategically editing the overall accessories assortment to better align with our go-forward vision for the brand. Moving now to product activations and marketing. We are working to strengthen brand relevance, desirability, and demand by engaging more directly with guests through social channels and differentiated community experiences while using those platforms to tell richer stories about our brand, products, and innovation. We held several successful events in Q2 and into Q3, and engagement levels are encouraging. Let me highlight two. In June, we celebrated our foundation in yoga with the launch of our summer series. We partnered with leading yoga, Pilates, and sculpt instructors to bring free classes to tens of thousands of guests across 70 cities in the U.S. and Canada. More recently, in August, we brought back our SeaWheeze Half Marathon and Festival for the first time since 2019.