Lululemon (Minutes): Expected growth of 5%-7% for the full year of 2025

Lululemon (Minutes): Expected growth of 5%-7% for the full year 2025

$Lululemon(LULU.US) Below are the minutes from Lululemon's FY24 Q4 earnings call. For the earnings interpretation, please refer to Lululemon: "The Little Black Pants" are not working, has the Hermes of Yoga been double-killed? - ****

I. Core Information Review from the Earnings Report

1. Full Year 2025 Guidance

① Revenue: Expected to be $11.15-11.3 billion (growth of 5%-7%), excluding last year's 53 weeks growth of 7%-8%. Moderate positive growth is expected in the U.S. revenue, with a negative impact from foreign exchange of 1%.

② Store Planning: Opening 40-45 net new stores (10-15 in the Americas, most international markets in China), completing approximately 40 optimizations, with an area increase of about 10%.

③ Profit: Gross margin expected to decrease by about 60 basis points (due to fixed cost deleveraging, foreign exchange, and tariffs); SG&A deleveraging of about 40-50 basis points (due to investment roadmap and foreign exchange); operating margin expected to decrease by about 100 basis points; effective tax rate around 30%; earnings per share expected to be $14.95-15.15 (foreign exchange drag of $0.3-0.35).

2. Q1 2025 Guidance

① Revenue: Expected to be $2.34-2.36 billion (growth of 6%-7%, with a negative impact from foreign exchange of 1%).

② Stores: Opening 3 net new stores.

③ Profit: Gross margin expected to be flat with Q1 2024 (slight increase in product margin offset by fixed cost deleveraging); pricing unchanged from last year; SG&A deleveraging of about 120 basis points (mainly due to foundational investments, depreciation, and strategic investments); operating margin deleveraging of about 120 basis points; earnings per share expected to be $2.53-2.58 (foreign exchange negative impact of $0.06); effective tax rate around 30%.

II. Detailed Content from the Earnings Call

2.1 Key Information from Executive Statements

1. Q4 Performance Highlights: Total revenue, excluding the 53rd week, grew by 8%, with a growth of 9% at fixed exchange rates. Operating margin performed well, increasing by 40 basis points to 28.9%. Earnings per share grew by 16%, with $332 million in stock repurchases, bringing the total repurchase amount for 2024 to $1.6 billion 2. FY24 Performance Highlights: Total annual revenue reached $10.6 billion, excluding the 53rd week, with a growth of 8% - 9% at constant exchange rates. Adjusted operating margin increased by 50 basis points to 23.7%, and adjusted earnings per share grew by 15%.

3. Product Innovation and Reserve Advantages:

① All product categories performed well, with outdoor and second-layer clothing and bags being popular, and new holiday season products gaining customer recognition.

② New product planning:

- Launching women's new products Glow Up (Ultralu fabric), Daydrift (Luxtreme fabric, expected to become a new core series), Be Calm (yoga series, soft and comfortable)

- For men's shorts, launching Mile Maker and updating License to Train;

- For women's shorts, the Fast and Free series welcomes seasonal new styles and colors, bringing innovation to the Swiftly series (incorporating new running shorts and other innovative elements), and launching a new fabric Lulu Linen.

3. Brand Strategy: There is significant room for improvement in brand awareness in global operating markets. Currently, brand awareness in France, Germany, and Japan remains in the single digits, while in mainland China it is in the 15% - 20% range, around 20% in the UK and Australia, and relatively better in the US at around 30%, indicating a large number of potential customers worldwide yet to be tapped. Specific strategies:

① In February, collaborating with the Las Vegas Rock 'n' Roll Half Marathon, opening a Glow Up studio in New York's Soho district, partnering with designers during London Fashion Week, celebrating the opening of the Regent Street store, and hosting a member carnival, all aimed at enhancing customer loyalty and attracting new customers through events.

② Introducing new ambassadors at the beginning of the year, such as golfers, tennis players, and F1 champions, supporting athletes through events to enhance brand credibility and awareness.

③ Launching a new brand platform Live Like You Are Alive.

2.2 Q&A

Q: You expect moderate growth in US revenue this year. How do you define "moderate"? Is the growth pace consistent throughout the year, or does it vary by quarter? And how do you determine that this growth level is the right choice at present?

A: The fourth quarter is similar to the annual situation, with positive customer feedback on new products, leading to a strengthening of the business quarter by quarter. By the first quarter, the number of new products has returned to previous levels, with great new products like "Glow Up" and "Daydrift" and subsequent reserves receiving enthusiastic customer responses, along with the tenth anniversary series products, such as new items based on the popular "naked feel wide-leg pants" and seamless leggings, which can attract both new and old customers. The current macro environment is volatile, and consumers are becoming cautious, impacting industry foot traffic, which also affects us. However, customers entering the store have a strong recognition of new products and innovations, and the average transaction value and order size are optimistic. At the beginning of the year, we kicked off a good rhythm with distinctive community activities, the team is motivated, the business is vibrant, and customers favor our products North America's annual revenue is expected to grow in the low single digits to mid-single digits range, with the U.S. close to the lower limit and Canada somewhat higher. There is no quarterly breakdown for now; the trend in the first quarter is similar to that in the fourth quarter, with a decline in foot traffic affected by macro factors, but the performance of new products is impressive, and subsequent improvements in traffic can seize opportunities. The decline in the second quarter of last year in the U.S. was more pronounced, thus the growth pressure in the first quarter this year compared to the same period in 2024 is greater.

Q: Talk about the subsequent marketing strategies. How effective are activities like "Membership Madness Week" for attracting new customers? What impact do they have on attracting and retaining consumers in the U.S. market?

A: We started this year with great momentum, focusing on and implementing several large community events, with exciting results. These activities are mainly aimed at attracting new customers, enhancing loyalty among existing customers, retaining high-value customers, and deepening their love for the brand. Some highlighted activities mentioned earlier include support for ambassadors participating in events in Melbourne, Phoenix, and Indian Wells, and integrated marketing around new products at the New York "Glow Up" studio. Customer participation has been enthusiastic, with thousands signing up. "Membership Madness Week" was even more successful, with over 15,000 customers signing up for community fitness activities in North America (mainly in the U.S.), and some community events had waitlists exceeding 1,000 people, showing extremely high participation and attracting a large number of new customers.

This is the unique advantage of the brand; we can initiate activities and promote them through community and ambassador integration. We understand its immense value and plan to hold more events this year than last. Just look at the pace of activities in the first 8 weeks to get a sense of it. Customer participation is high, and we have gained significant attention on social media, winning media coverage, and the halo effect of the events has helped enhance unaided brand awareness. This unique approach, with participation from stores and ambassadors, has a significant effect on attracting and retaining customers. I believe the energy and rhythm this year surpass previous years, allowing us to gain a competitive edge in the market, and customers have responded well to new products.

Q: If the scope of tariffs expands, what mitigation strategies are currently in place? Based on the current situation, how quantifiable is the impact of tariffs?

A: Regarding tariffs, we have estimated an adverse impact of about 20 basis points in our performance guidance, reflecting the current measures taken against imported goods from China and Mexico. We will closely monitor changes in the situation and continuously review our cost structure, and we will consider price adjustments if necessary.

Q: From a global marketing effectiveness perspective, new stores have opened in Tokyo and London. What are the plans for internationalization?

A: The activities conducted in the U.S. are part of a globally applicable market strategy, which will be adjusted according to market maturity. In emerging communities in the U.S., we enhance our influence through large-scale events, leveraging store resources to create momentum. Essentially, it is about utilizing local communities, stores, coaches, and ambassadors, such as the Hot Sweat events in mainland China, actions around World Mental Health Day, and event linkages with ambassadors participating in competitions, like the F1 event held in collaboration with Lewis Hamilton in Shanghai and Australia. We will see more of these types of activities in the future.

This strategy is unique and effective, with a prominent role for stores. Although the optimization strategy has just begun, results are already visible, such as the outstanding performance of the 11,000-square-foot store in Melbourne after optimization The planning for the Tokyo store is promising, as Japan is a potential market; the new stores in South Korea and Regent Street in London also present abundant opportunities. We are expanding and operating the market using these methods, continuously optimizing to attract local customers while also drawing global tourists. The positive momentum in the international and North American markets is indeed encouraging.

Q: What is the profit margin trend for 2025, and what factors should we pay attention to? Also, does the current quarter's sales growth align with the guidance?

A: The operating profit margin is expected to decrease by 100 basis points this year, with over 50% of the decline coming from foreign exchange and tariff headwinds; additionally, we have made some investments in the business, restoring some of the expenses cut in 2024.

Looking at it quarterly, the first quarter is under significant pressure, mainly because Q1 is the highest quarter for revenue growth in 2024. The operating profit margin for that quarter decreased by 120 basis points, with SG&A also decreasing by 120 basis points, resulting in an annual decrease of 40 - 50 basis points.

As for the trend from the first quarter to now, we are not disclosing details yet. The current quarter is already halfway through, and based on the current business and environment, we are guiding for a growth of 6% - 7% this quarter, including a 1 percentage point adverse foreign exchange factor.

Q: In the full-year guidance, have you accounted for the potential improvement after the fluctuations in North American traffic in the first quarter? Moving forward this year, can you be more aggressive in marketing activities to drive traffic?

A: Currently, the outlook for the second half is similar to the trend in the first quarter. We have been exploring ways to increase marketing investment within the guidance range. Customer feedback has been positive, and upcoming activities are promising, such as the "Align" 10th anniversary, which is a large global event with a rich variety of new products and formats that can attract new customers and allow high-value customers to refresh their "naked feel" series apparel. We have been striving to maintain our investment and efforts. This year's start has been aggressive, with impressive global results, and we will continue to support products, new lines, and customers.

Q: Talk about the sales metrics after the new launches in the U.S. Although the macro environment is weak, the sales trend from the first quarter to now is on par with the fourth quarter. How confident are you in this year's product line?

A: In the U.S., at the beginning of this quarter, industry traffic has declined, and we have also been affected, with conversion rates similar to the fourth quarter. However, new products have driven AOV, especially UPT improvements, and once traffic rebounds, this will allow us to seize opportunities, so the sales trend in the first quarter is not much different from that in the fourth quarter.

Q: Are you comfortable with the current inventory levels and composition? How much price reduction space is reserved in the gross margin guidance?

A: I am quite satisfied with the inventory situation, which has seen a high growth of over ten percent, related to this year's inventory rhythm. Core categories are well-stocked, and new products can be replenished promptly. Currently, we expect the price reduction in the first quarter and for the year to be stable.

Q: This year's SG&A guidance aims for a deleveraging of 40 - 50 basis points. If sales improve, will it still be within this range? Will there be additional investments? If sales are poor, what areas can be flexibly adjusted?

A: This year, there are foreign exchange headwinds affecting SG&A by about 20 basis points. At the same time, we are still investing in the "Three x2" roadmap to support international and global store expansion, and marketing brand strategies, enhance brand awareness without prompts, and invest in foundational technologies for data and analysis. How SG&A adjusts to sales fluctuations will depend on the business environment and dynamics In all aspects of the business, we have contingency plans in place to respond to both upward and downward trends, and decisions will be made based on business momentum and the current environment.

Q: Regarding growth in the Americas and internationally, you mentioned that growth in the Americas is in the low to mid-single digits, which means international growth is significantly lower than in 2024. Where is the slowdown internationally? Are there specific markets? What is the basis for this? Additionally, regarding the fundamentals, strategy, and marketing investments, how flexible is cost reduction in a challenging macro environment, and what is the trend for profit margins?

A: Okay, let’s talk about revenue by region. The Americas are expected to see low to mid-single-digit growth this year, China is projected at 25% - 30%, and other regions of the world are around 20%. When planning, we refer to current business trends and future environmental outlooks. Although this is slightly below our five-year compound annual growth rate target, we are ahead of schedule and remain committed to our long-term goals.

Q: Earlier this year, you expected gross margins to remain flat, but they increased by 65 basis points, and growth in the U.S. market was slower than expected. You have discussed the fourth quarter; looking back at the entire year, what differed from your initial expectations? Looking ahead to 2025, are your previous conservative estimates still valid? Which areas of this year's guidance on gross margins, sales, and SG&A still contain conservative elements?

A: Regarding differences, in terms of revenue, the year-end performance slightly exceeded expectations, leading to favorable gross margins. This is mainly due to a different product mix, which benefited from initial price increases, and the reduction in freight costs in 2024 also boosted gross margins. I believe the guidance for 2025 is feasible; there may be changes in the business mix and revenue outlook that could affect the profit breakeven point, but our current views on both are already reflected in the guidance.

Q: This year, marketing expenses as a percentage of sales rose to about 5%, but this is still lower than that of major competitors and has increased by about 50 basis points year-on-year. How do you view marketing investments for fiscal year 2025 and the long-term? Regarding those promotions, should you increase investment to drive sales growth in the Americas?

A: Last year, we faced challenges in promoting new products. We reviewed all investments and maintained marketing spending, with the percentage of sales rising to around 5%. We expect this to remain unchanged in 2025. This is a key focus area; this year has seen many new products and active marketing campaigns, and we will adjust investments flexibly as needed based on business trends.

Q: Regarding the decline in foot traffic, you mentioned the situation in the U.S.; how are other regions like Canada and China doing? Are there any anomalies in different regions of the U.S.? Did the poor weather in the first quarter have any impact?

A: In terms of foot traffic, significant changes are observed in the U.S., while there are no substantial differences in Canada and international markets. The timing of the Lunar New Year has caused minor disruptions to business in China and internationally in the first quarter. There are no noticeable differences across various regions in the U.S.

Q: For the U.S. market, are the changes you see widespread? Is there a more noticeable difference between women's and men's clothing?

A: In terms of the differences between men's and women's clothing businesses, we have not seen any major significant changes compared to the fourth quarter. Previously, we mentioned that women's clothing grew by 6% and men's clothing by 12%. The major missed opportunity in last year's new product promotions was primarily in the women's clothing business.

Now we are back on track, and as I mentioned, from metrics like average quantity per transaction and average order value, female consumers have provided positive feedback. So I believe this is a positive for us, as the women's product line has returned to a traditional model of blending new products with innovation Q: You mentioned that innovations and new products will be launched successively, but it sounds like there won't be much improvement in the North American trend from now on. Considering product flow, shouldn't the U.S. market improve as it progresses?

A: We expect a growth of 6% - 7% in the first quarter and 7% - 8% for the whole year. The growth in the Americas is projected to be 3% in 2024, with this year's expectation being in the low to mid-single digits. This range has taken into account the potential increase in growth in the Americas, but there is uncertainty this year, so we are very cautious in our business planning.

Q: Could you please explain the growth situation of the store area? How much do you plan to increase your store area in the U.S. this year? Additionally, what is the planned increase in-store area in China?

A: We do not disclose details of store area growth separately. This year, we plan to add a net of 40 - 45 stores, with a 10% increase in area, aligning with the "Three x2" low double-digit target. We will open 10 - 15 stores in North America, with the rest internationally, mostly in China.

Q: For the new stores in the U.S., will you expand the area of the stores this year?

A: Yes. We will continue to implement our optimization strategy. Therefore, in 2024, we have carried out a total of 39 store optimizations globally, and we currently plan to conduct 40 optimizations globally in 2025.

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