Categories Earnings Call Transcripts, Retail

Lululemon Athletica Inc (LULU) Q3 2021 Earnings Call Transcript

LULU Earnings Call - Final Transcript

Lululemon Athletica Inc (NASDAQ:LULU) Q3 2021 Earnings Call dated Dec. 09, 2021.

Corporate Participants:

Howard Tubin — Vice President, Investor Relations

Calvin McDonald — Chief Executive Officer

Meghan Frank — Chief Financial Officer

Analysts:

Adrienne Yih — Barclays — Analyst

Matthew Boss — JP Morgan — Analyst

Ike Boruchow — Wells Fargo — Analyst

Mark Altschwager — Baird — Analyst

Erin Murphy — Piper Sandler — Analyst

Lorraine Hutchinson — Bank of America — Analyst

John Kernan — Cowen — Analyst

Paul Lejuez — Citi — Analyst

Michael Binetti — Credit Suisse — Analyst

Brooke Roach — Goldman Sachs — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Presentation:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Howard Tubin — Vice President, Investor Relations

Thank you, and good afternoon. Welcome to Lululemon’s third quarter earnings conference call. Joining me 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 which by 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 today’s earnings press release. In addition, the comparable sales metrics given on today’s call are on constant dollars.

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 third quarter as well as our quarterly info rack. 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.

Now, I’d like to turn the call over to Calvin.

Calvin McDonald — Chief Executive Officer

Thank you, Howard, and welcome everyone to our third quarter conference call. I’m excited to be here to discuss the results and share highlights of our performance at the start of the holiday season. Our momentum remains strong in the quarter reflecting the continued growth potential for Lululemon in both the near-term and the long-term. I am especially pleased with how our leaders and teams continue to successfully execute against our Power 3 growth plan, while we navigate the supply chain issues within the industry. Relative to last year, revenue grew 30% and on a two year CAGR basis, increased 26%.

Our strength continues to be broad based and balanced across every facet of our business, including channel, category, activity, gender and geography. Before discussing more details about quarter three, I would like to share some highlights on the three topics. Our performance over the recent Thanksgiving Holiday, inventory levels and the current labor market. Starting with Thanksgiving, we were pleased with our performance over the holiday weekend. For the five days spanning thanksgiving through Cyber Monday, both our digital and brick and mortar channels performed well. E-commerce delivered record breaking days in several key metrics, including sales, traffic and conversion and I’m excited to share that this year, Thanksgiving Day was our highest volume e-commerce day ever. The investments we have made over the last several years are enabling the acceleration we’re seeing in the digital business and contributing to the growth this year on top of last year’s outsized performance. While we still have several large volume weeks ahead of us, it was great to see our guests respond well to our merchandise offering as we kicked off the holiday season.

Shifting to our supply chain, we continue to face the same issue as much of the industry, including port slowdowns and increased costs associated with air freight. In Vietnam, I am pleased to share that all of our factories have reopened and continue to ramp up their capacity. While the summer closures cause some delays, our total inventory at the end of Q3 was up 22%, slightly ahead of our most recent expectations of 15% to 20%. As you are aware, approximately 40% of our inventory is comprised of core season listproduct, which helps us make our inventory management and flow decisions. This, coupled with the well-established partnerships we have with our vendors is allowing us to mitigate many of the current supply chain risks. I am extremely proud of our team have and continue to successfully navigate through this dynamic environment. While we’re comfortable with both the quality and quantity of our inventory, I continue to believe that demand for our brand is outpacing supply and our business could have been even stronger without the supply chain challenges.

Turning to the labor market, we are well positioned this holiday to meet guest demand. As you know the hiring environment has been very competitive this season, and I’m pleased that we have been able to hire more than 7,000 employees within our stores, DCs and guest education centers in the lead up to the holiday. Our strong employee offering, highlighted by our pay-protection program through COVID-19 and recent increases in minimum wage has enabled us to perform well in the current environment.

Let me now share some highlights from our Q3 results. First, our total revenue of $1.5 billion represents growth of 26% on a two year CAGR basis. Second, we continue to build on the strength in our store channel with productivity levels above what we achieved in 2019. Third, our e-commerce business comped up 21%, which on top of the 93% last year translates into a two year CAGR of 54%. And finally, our adjusted earnings per share were $1.62 versus $0.96 in 2019, which was above expectations. This level of performance continues to demonstrate how Lululemon is a brand positioned for consistent growth quarter-after-quarter.

Next, I will provide some additional details on our results starting with product innovation. Our momentum remains strong across all of our major categories with women’s revenue increasing 24%, men’s growing 29% and accessories up 40%, all on a two year CAGR basis. We continue to leverage the science of field to bring product newness and innovation to our guest. I’m particularly proud of our recently announced multi-year partnership with the Canadian Olympic Committee and Paralympic Committee. This is important to us in several ways. First, it allows us to showcase the Lemon brand and our technical expertise within apparel on the world stage. Next, it is a compelling platform that we can leverage to continue to grow our brand presence in Canada, our most mature market, and finally it offers a new and exciting test and learn opportunity to increase our brand awareness and consideration with men, both inside and outside of Canada.

Our product teams worked with athletes for 18 months and developed more than 30 styles to help each team member feel and perform their best during the games. As a Canadian and lifelong fan of the games, I want to share that all of us at Lululemon are honored to play a role in helping to inspire and unite people through sport.

Let me now move on to MIRROR. Our core Lululemon business continues to be strong, driving innovation and growth in our core remains our primary focus and our results demonstrate the ongoing effectiveness of our initiatives. This success allows us to invest in new opportunities to enable future growth and MIRROR is one of those examples. Our vision for MIRROR is to assist in building and extending our Lululemon community and helping us drive both retention and spend. It’s an evolution of our membership program to propel our core business at Lululemon for Lululemon. We have only just begun our journey with MIRROR and we will continue to roll out initiatives that deliver on this goal.

As you know, 2021 has been a challenging year for digital fitness and as I mentioned on our last earnings call, we have seen increasing pressures on Cack that are impacting the entire industry. One of the unique advantages we bring to the space is the many ways we can build brand awareness for MIRROR. As we unlock these synergies, we see a clear path to engage with the more than 10 million Lululemon guests who live the Sweatlife. We will not chase growth at any cost, we simply don’t need to, but we will invest to define our unique proposition and to bring MIRROR to market through our owned marketing channels. We demonstrated this with our recent launch in Canada and the introduction of our innovative connected weights, both of which are off to a great start. We can and will stand out in a crowded space and leverage all that’s unique about Lululemon.

With this context, we are lowering our revenue guidance for MIRROR for the year to $125 million to $130 million. Given the seasonality of their business, which skews heavily to quarter four, the timing of this revision is appropriate given the line of sight we have on its performance. Importantly, we are maintaining our dilution estimate of 3% to 5%. With this said, I’m pleased that we will have grown our subscribers by 40% year-over-year and will end 2021 with a meaningful subscription base to build upon. MIRROR represents less than 3% of our revenue this year. Although we do not require it to deliver our Power 3 goals, we see MIRROR as an opportunity to engage with our guest in new ways, that we will continue to evolve and refine over time. We are still early in creating our vision of a loyalty community that captures the best of Lululemon. This is not a sprint for us and we will maintain a steady pace forward that realizes our vision.

Switching now to our store channel, total revenue increased 38% versus last year and 10% on a two year CAGR basis. Traffic increased over 50% versus last year. We’re pleased with the start of the holiday season in stores and our educators are thrilled to be engaging with the guests in person. We continue to leverage and enhance our in-store and omni capabilities, including enhancing our mobile app to facilitate curbside pickup for guests, make our in-store hand held units more intuitive for our educators to help speed guests through transactions and continue to offer our online digital educator service at no cost, providing a personal shopping experience for guests who can’t make it into our stores.

Turning to our e-commerce business. Sales trends remain robust with total digital comps up 21% in Q3. This result comes on top of the 93% increase in the same quarter last year. We continue to enhance the experience for our guests on our websites and apps, which is the direct result of the investments we have made over the last 18 months and it is paying off for us. For example, when I was in stores over Thanksgiving weekend, each store was doing an impressive volume of orders through both BOPUS and BBR [Phonetic]. This is enabled by the visibility we have to our inventory across our network, which allows us to meet guest demand and exceed their expectations. It’s a great example of how we are realizing our omni, vision and potential.

Looking forward to the fourth quarter, we feel good about our ability to handle the increased volume of traffic based on the significant investments we’ve made over the last several years, in technology, IT infrastructure, our guest education center and DCs, all which continue to produce results.

Regarding our international business, we continue to be excited by the level of performance across each region, which shows how well our brand translates across borders and beyond North America. It’s clear that there is a vast opportunity for Lululemon as we expand further into EMEA, in China and in the Asia Pacific region. In Q3, we saw strength across every major region with each generating strong double digit sales growth on a two year CAGR basis. In China, our two year CAGR growth of more than 70% significantly outpaced the performance we saw overall in international, as we continue to see compelling guest response to our merchandise assortment online and in our stores. Our team also continues to maintain a steady pace of new store openings in the market. And in Europe our two year CAGR revenue growth of over 20% was driven by broad based strength across most of our key markets, coupled with an improving brick and mortar business in the United Kingdom, following very prolonged COVID-19 related closures. We are on track to open 40 to 45 stores in our international regions this year, and are excited by the significant runway for growth across our key markets outside of North America.

Before handing it over to Meghan, who will provide additional details on our Q3 financials and our guidance outlook, I want to bring our inaugural impact report to your attention. One year ago we published our impact agenda, which details our vision and strategy to help transform our industry and create a healthier world. It is structured into three interconnected pillars, be human, be well, and be planned, each with a set of specific goals and strategies. We will report annually on our progress towards these goals and I hope you will take the time to visit the sustainability section of our website to learn more. We recognize that it will take continuous learning and sustained dedication to achieve our goals. We are firmly committed to accountability, transparency and doing the necessary work to help build a safer and healthier world.

And with that, I’ll turn it over to Meghan.

Meghan Frank — Chief Financial Officer

Thanks, Calvin. Our business remained strong in Q3. The trend in stores continue to improve with productivity above 2019, while our e-commerce business continues to comp positively over the growth we experienced last year. I will share our guidance outlook with you in a few minutes. But I think it’s important for investors to know that we are raising our guidance for the year despite increase in air freight costs and a more conservative view on revenue from MIRROR. This is a testament to the underlying strength of our core business and to our teams around the globe who enable this impressive performance.

Let me now share with you the details on our Q3 performance. I will also discuss specifics on our balance sheet, including our cash position, liquidity and inventories. Please note that the adjusted financial metrics I will share, include the operating results of MIRROR, but exclude approximately $24 million of acquisition related costs and their associated tax effect in Q3, 2021, and $8.5 million of acquisition related costs and their associated tax effect in Q3, 2020. You can refer to our earnings release for more information and reconciliations to our GAAP metrics.

For Q3, total net revenue increased 30% to $1.45 billion, above our expectations of $1.4 billion to $1.43 billion. This included a 28% increase in North America and a 40% increase in our international business. On a two year CAGR basis total revenue increased 26%. This is better than our expectation of a 24% to 25% two year CAGR growth and continues to outpace our three year CAGR of 19% leading up to the pandemic. Within North America, revenue increased 23% and within international we saw 42% increase, both on a two year CAGR basis.

In our digital channel revenues increased 54% on two year CAGR basis and contributed $587 million of top line, 40% of total revenue. In our store channel, sales increased 10% in a two year CAGR basis. Productivity in stores exceeded 2019 levels and continues the trend of improving productivity we’ve seen throughout the year. On average, we had 96% of our stores open throughout Q3 and 99% opened at the end of the quarter.

Square footage increased 11% versus last year, driven by the addition of 37 net new stores since Q3 of 2020. During the quarter we opened 18 net new stores. Gross profit for the third quarter was $829 million or 57.2% of net revenue, compared to 56.1% of net revenue in Q3, 2020 and 55.1% of net revenue in Q3, 2019.

Our gross margin increase of 210 basis points relative to 2019 was driven by 230 basis points of leverage on occupancy, depreciation and product team costs, and 30 basis points of favorability in foreign exchange, which was partially offset by a 50 basis point decrease in product margin. Excluding a 230 basis point increase in airfreight related to industry supply chain challenges, product margin would have increased versus 2019. I would also note that markdowns declined relative to 2019.

Moving to SG&A. Our approach continues to be grounded and prudently managing our expenses, while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were $545 million or 37.6% of net revenue, compared to 36.8% of net revenue in Q3, 2020 and 35.9% of net revenue in Q3, 2019. The de-leverage in the quarter versus Q3, 2020 resulted from increased investments in people and brand building to support our growth initiatives, coupled with deleverage on foreign exchange. The deleverage relative to Q3, 2019 is primarily the result of consolidation of MIRROR’s results this year, but not in 2019, amount of fee leverage on depreciation, amortization and foreign exchange. Adjusted operating income for the quarter was $282 million or 19.4% of net revenues compared to 19.1% of net revenue in Q3, 2020 and 19.2% of net revenue in Q3, 2019.

Adjusted tax expense for the quarter was $71 million or 25.1% of pre-tax earnings compared to an adjusted effective tax rate of 28.9% a year ago. The reduction relative to last year is due primarily to a reduction in non-deductible expenses in international jurisdictions, an increase in tax deductions related to stock based compensation and a reduction in adjustments upon the filing of certain tax returns.

Adjusted net income for the quarter was $211 million or $1.62 per diluted share, compared to adjusted earnings per diluted share of $1.16 in Q3 of 2020 and $0.96 in Q3 of 2019. Capital expenditures were $122 million for the quarter compared to $66 million in the third quarter last year. Q3 spend relates primarily to store capital for new locations, relocations and renovations, supply chain investment and technology spend to support our business growth.

Turning to our balance sheet highlights. We ended the quarter with $1.4 billion of total liquidity. We had approximately $1 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory grew 22% versus last year and was $944 million at the end of Q3. This is slightly higher than our expectations for 15% or 20% increase, reflecting the efforts of our supply chain and product teams to mitigate industry wide supply chain risk by prioritizing production to ensure key styles are produced first and strategically increasing our use of air freight. At the end of Q4 we expect inventory levels to increase approximately 20% to 25% relative to Q4 of 2020.

In Q3 we repurchased approximately 582,000 shares at an average price of $406. At the end of the quarter we had approximately $509 million of availability remaining on our current share repurchase authorization, which includes the recent $500 million increase our Board of Directors approved in early October.

Let me shift now to our outlook for Q4 and the full year 2021. While we are pleased with our performance over Thanksgiving, it’s important to acknowledge that the macro environment remains uncertain and we have several large volume weeks ahead of us. I’d also note that as the industry wide supply chain issues have been well publicized, consumers may have started their holiday shopping early this year. To account for these variables as we have done throughout the COVID period, we continue to plan the business for multiple scenarios.

For Q4 we expect revenue in the range of $2.125 billion to $2.165 billion, representing a two year CAGR of 23% to 24%. We expect gross margin in Q4 to be flat with Q4 of 2019. Our Q4 guidance reflects an impact of approximately 450 basis points of pressure from air freight costs, due to port congestion and capacity constraints. This represents an increase in air freight expense relative to our prior guidance.

In Q4 we expect SG&A deleverage of approximately 200 to 250 basis points relative to 2019. Drivers of the deleverage versus 2019 include consolidation of MIRROR’s results this year, but not in 2019, and higher depreciation due to accelerated investments to support our e-commerce business in 2020 and 2021.

Turning to EPS, we expect adjusted earnings per share in the fourth quarter to be in the range of $3.25 to $3.32 versus adjusted EPS of $2.58 a year ago. This includes the operating results for MIRROR, but excludes acquisition and integration related costs. As a reminder, we reported EPS of $2.28 in Q4 of 2019.

For the full year 2021, we expect revenue to be in the range of $6.25 billion to $6.29 billion. This represents an increase from our prior guidance range of $6.19 billion to $6.26 billion and includes our more conservative view on MIRROR revenue for the year of approximately $125 million to $130 million. This range also assumes our e-commerce business grows in the mid-teens relative to the outside strength we experienced in 2020.

When looking at total revenue, our guidance range implies a two year CAGR of approximately 25% to 26%, which is higher than our three year revenue CAGR of 19% leading up to 2020, and is well ahead of the low-teens CAGR contemplated in our Power 3 Growth plan. We now expect to open 50 to 55 net new company operated stores in 2021. This includes approximately 40 to 45 stores in our international markets and represents a square footage percentage increase in the low-teens.

For the full year we are forecasting gross margin to expand between 100 to 150 basis points compared to the modest increase we saw in 2020. The reduction relative to our prior guidance of an increase of 150 to 200 basis points is driven by an increase in airfreight expense to 200 to 250 basis points for the year. Despite the increase in airfreight expense year-over-year, we continue to anticipate gross margin expansion in excess of our Power 3 Growth Plan, which assumes modest growth margin expansion annually.

When looking at SG&A for the full year, we are forecasting leverage of 50 to 100 basis points versus 2020. We now expect our adjusted effective tax rate for the year to be approximately 27%. For the fiscal year 2021, our revised range for adjusted diluted earnings per share is $7.69 to $7.76 versus our prior range of $7.38 to $7.48.

Our EPS guidance continues to assume modest dilution from MIRROR in the 3% to 5% range, excluding acquisition and integration related costs. Despite our more conservative view on MIRROR revenue, we are being prudent with our expenditures, particularly related to digital marketing, and this is enabling us to maintain the dilution percentage in the range we’ve been guiding to all year. Our updated EPS range also excludes the impact of any future share repurchases. We now expect capital expenditures to be approximately $375 million to $385 million for 2021. The increase versus 2020 reflects increased investment in our supply chain, digital capabilities, new store openings and renovations, including MIRROR shop-in-shops, as well as other technology and general corporate infrastructure projects.

Thank you. And with that, I’ll turn the call back over to Calvin for some closing remarks.

Calvin McDonald — Chief Executive Officer

Thank you, Meghan. I am very pleased with the high level performance of Lululemon across every major metric and category, which allows us to deliver such a strong quarter. We have begun the fourth quarter with the inventory, staffing and strategies in place to enable us to finish 2021 in a position of strength, as we expect to pass the $6 billion annual revenue level for the first time. The way we continue to grow and expand is a testament to the commitment and passion of the people of Lululemon. I am particularly proud of our agility throughout this year and over the course of the pandemic and how the leadership team continues to build upon the momentum in the business.

And with that, we’ll be happy to take your questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Adrienne Yih of Barclays. Please go ahead.

Adrienne Yih — Barclays — Analyst

Good afternoon, and great job in what’s a tremendously difficult environment. Calvin, I wanted to start by talking about average initial retail, what you think the pricing power there is and most of retail didn’t really touch their initial retails in 2021, but they are going to start touching the like for likes in 2022. So just wondering kind of how you’re thinking about that and Lululemon relative to that pricing. Meghan, given that 40% in core in the ongoing supply chain issues, is there an increase in weeks to supply scheduled for spring of 2022 as a safety sock? Thank you very much.

Calvin McDonald — Chief Executive Officer

Thanks Adrienne. On pricing we have no plans to change our pricing strategy at this time. As you know we lead with technical innovation and price our garments accordingly. We’re always studying the market place and make pricing adjustments as necessary based on the competitive dynamics and opportunities that exist, but we have no plans to make a change heading into 2022.

Meghan Frank — Chief Financial Officer

Adrienne in terms of inventory, we do have an advantage in the proportion of our inventory that sits in core product and while we aren’t showing details in our 2022 plans today, the team is actively looking at opportunities to capitalize on that core assortment and pull that forward where that makes sense for us.

Adrienne Yih — Barclays — Analyst

Great. Thank you very much. Best of luck for the Holidays.

Calvin McDonald — Chief Executive Officer

Thank you.

Meghan Frank — Chief Financial Officer

Thank you.

Operator

Our next question comes from Matthew Boss of JP Morgan. Please go ahead.

Matthew Boss — JP Morgan — Analyst

Great. Thanks, and congrats on another nice quarter. So Calvin, revenues year-to-date up 60% versus 2019 and you’ve mentioned demand exceeding supply now for the second straight quarter. Could you speak to new customer acquisition and drivers of the balance that you’re seeing between stores and digital, which points in your view to sustainable strength of the brand?

Calvin McDonald — Chief Executive Officer

Yes, thanks Matthew. There are a number of the overall driving metrics that point to that. The obvious one is the challenge we’ve seen in inventory and even though we’ve been able to achieve these results, product drops, some of the product innovation and the way in which the design teams intended our activities and our categories to be launched for the guest just haven’t materialized pretty much in the entire and we’ve been chasing into that. So we know there’s an upside to being able to represent and present the product the way in which it was designed and intended to. That said, when we look at our new guest acquisition, it remains very strong; has before the pandemic, during and post. We continue to see new guests come into the brand. We continue to have success migrating those new guests up through different categories and their spend journey and the retention of our high spending, loyal, Lululemon guests remained incredibly strong.

What we alluded to during the early pandemic when stores were closed was that we were seeing more of our store only shift into omni. We were seeing our omni guest spend more and because we have such a strong position with digital, that enabled them to engage in the brand and do purchasing, and we know there were some store-only guests that could not have access or chose not to. Now that the stores are up and operating, we’re very pleased with seeing them returned back to the brand as we continue to grow.

We reference stores being great acquirer of men’s. Now that they are up and you’ve seen our men’s business has come back incredibly strong and we see new guests through that and having our stores perform above our 2019 numbers while maintaining our digital is really a factor of all those inputs, predominantly new guests, migration of guests and retention of guests, all very healthy. And we know our product positioning is only going to get stronger and the team did a wonderful job chasing it, but it wasn’t our best. It was a good foot and it was — we had a bigger intention, even behind what we’re able to get out.

Matthew Boss — JP Morgan — Analyst

That’s great color and it’s a perfect lead into my second question on the product positioning. Could you elaborate on trends that you’ve seen so far in the fourth quarter, and given your inventory position, but then the proactive steps that you took to air freight and product, what is your ability to chase demand if moment exceeds plan, and to your point on product positioning, what do you wish you had more of or maybe changes that in an ideal world to meet that outsized demand.

Calvin McDonald — Chief Executive Officer

Yes, no, thank you. Overall on product there haven’t been any dramatic shifts to the trends that we saw coming in. We’ve seen great growth across men’s and women’s. Very balanced growth across categories top, second layer, bottoms, shorts, skirts and into the men’s sweat categories and across our activities. So again and as I mentioned before, our growth remains very balanced across men’s, women’s, across each category, across all the activities we’ve identified and are innovating into and across every region that we are doing business in and across our channels, be it stores and digital.

What would I have wanted more of? There are some products that we are light on. Outerwear is a category that has performed incredibly well for us this season and we didn’t have the depth there that we would have wanted. Some of our second layer categories, OTM leading into the holiday have been delayed, some of our early fall receipts. But overall, because of our balance in inventory core, we’ve been able to and we have leaned in. We’ve made sure through air freight to have those goods, and they are our fuel and drivers and they continue to be and we’re in a good position. But there are definitely certain items and areas where we’ve seen the delay as a result of the shutdown, but we have more than enough balance and key growth across our entire portfolio that is able to keep fueling the results that we achieved.

Meghan Frank — Chief Financial Officer

And I’ll put that on there. We did an inventory — with inventory up 22%, which was above our expectation of 15% to 20% growth and really reflective of the teams supply chain and product team’s leveraging air freight. We do make those decisions about six weeks out. Certainly don’t have as much flexibility as a normal environment just for supply chain constraints, but it is something we’re actively managing where we do have opportunity.

Matthew Boss — JP Morgan — Analyst

That’s great color. Congrats again.

Calvin McDonald — Chief Executive Officer

Thank you.

Operator

Our next question comes from Ike Boruchow of Wells Fargo. Please go ahead.

Ike Boruchow — Wells Fargo — Analyst

Hey. Good afternoon everyone. I guess Meghan, I just wanted to dig into the air freight dynamic a bit more. Is there any way you could possibly share with us based on spring orders, what kind of pressure you guys should expect or we should expect for you guys to see in the first half of next year and then I guess if you don’t want to get too specific, I guess for the full year you’re saying 200 to 250 basis points of pressure. How much of that based on what you know today is reasonable for us to expect for you guys to kind of recapture in 2022?

Meghan Frank — Chief Financial Officer

Thanks Ike. I think a little soon to put a fine point on 2022, but we do expect that the supply chain pressures will be with us as we move into the first half of the year. That said, we think there’ll be some puts and takes in our gross margin and we are right now maintaining our commitment to modest margin expansion next year. Certainly air freight presents an opportunity over the long term, but there will be some normalization of historically high full price sell-through and low mark downs, as well as other investments in our business to maintain that modest margin expansion goal, and we’ll share more in Spring ’22 on our next five year outlook.

Ike Boruchow — Wells Fargo — Analyst

Meghan, is it fair to say that this should be the peak of the air freight pressure in Q4?

Meghan Frank — Chief Financial Officer

I believe so.

Ike Boruchow — Wells Fargo — Analyst

Thanks.

Operator

Our next question comes from Mark Altschwager of Baird. Please go ahead.

Mark Altschwager — Baird — Analyst

Good afternoon. Thanks for taking my question. So to start out, I mean you sound very pleased with the start to the holiday season. Were there any changes to your approach to the Black Friday, Cyber Monday period this year versus prior years, especially in light of supply chain disruption? And then relatedly, you’ve talked about how you may have left some sales on the table and in the quarter given the inventory constraints, but you’re also mindful of some potential pull forward in sales that might be happening. So maybe just talk about your level of confidence and potentially building on the Q3 growth rates. Thank you.

Calvin McDonald — Chief Executive Officer

Thanks Mark. In terms of our thanksgiving shopping over Black Friday and Cyber Monday, there was really no change to our strategy and tactic. In that by I mean, we didn’t take further markdowns, we don’t play promotion as you know. The team’s definitely worked hard to get the stores and online in a good inventory position to satisfy demand. We made sure that we were ready.

We’ve been investing for months quite frankly, going back to the beginning of the pandemic to get our digital channel ready, to anticipate the sort of volume, and as I alluded to in my opening remarks, we had the largest volume day in the history of Lululemon on Thursday and the site performed incredibly well as RDCs and the full support. So there wasn’t anything unique, there wasn’t anything artificial to drive demand, just all good work and hard work to get ready for the demand and getting our core product out there with traditional markdown activity, and we saw that, the volume.

We are anticipating you know a pull forward. So we are continuing to monitor the weeks ahead as Meghan mentioned. There are some big weeks ahead. We’re pleased with our position; we’re pleased coming out of November. We knew that we needed to have a strong start to the quarter and we achieved that and we’re continuing to monitor and get ready for the coming weeks.

Meghan Frank — Chief Financial Officer

And Mark, I’d just add in terms of Q3 growth next year. I think the guest metrics in growth that Calvin was pointing to in both new and existing engagements give us confidence in our ability to continue to grow on top of the space line, as well as our International and North America on the expansion strategies. And again, we’ll share more in Spring ’22 on our next five year outlook.

Mark Altschwager — Baird — Analyst

Thank you. And just a quick follow-up on MIRROR if I could. Can you just give us some perspective on how you’re thinking about balancing the growth and profitability for the platform for 2022? I guess would you expect it to be net dilutive to EPS next year? Thank you.

Meghan Frank — Chief Financial Officer

Sure. So in terms of MIRROR in 2022, we’re not going to share specifics today, but I would offer that we — the path to profitability is very much within our control over mean prudent investment as we have been this year, and then we do expect dilution to begin to decrease next year.

Mark Altschwager — Baird — Analyst

Great. Happy holidays. Thank you.

Meghan Frank — Chief Financial Officer

Great. Thank you.

Calvin McDonald — Chief Executive Officer

Thanks Mark.

Operator

Our next question comes from Erin Murphy of Piper Sandler. Please go ahead.

Erin Murphy — Piper Sandler — Analyst

Great. Thanks, good afternoon. I was hoping you could talk a little bit more about what you’re seeing in the competitive landscape in China for the Lulu brands and just are you seeing any change in dynamic between global brands versus national brands there. And then relatedly, any early reads on 11/11 in that market?

Calvin McDonald — Chief Executive Officer

Yes, thanks Erin. We haven’t seen any notable change from our brand perspective in the China market as you heard in my opening remarks. In terms of the performance we continue to be very pleased with the results, two year CAGR of 70%. We continue to invest in China, opening stores, invest in our headquarters in Shanghai, in creating in-country roles and jobs to really help support that business, continue to connect with the community, which is our unique way of working with and we see a real opportunity to continue and to push for the Sweatlife and the healthy initiatives that exist within that market and feel we play a very unique role in doing that. So from our perspective we’re pleased and pleased with the investments we’re making in the connection with the community.

Meghan Frank — Chief Financial Officer

Yes, and I’d say in terms of 11/11 Erin, generally in line with our expectations from the consumer specifics, but as Calvin mentioned, strong performance in China with approximately 70% two year CAGR in Q3, so we completed it.

Erin Murphy — Piper Sandler — Analyst

Great. And then if I could just follow-up, on your footwear initiatives, is that still planned for next year and how material are you thinking about the investment behind building that platform out? Thanks so much.

Calvin McDonald — Chief Executive Officer

Thanks Erin. Yes, we’re still on track for our Spring ’22 launch and just as a reminder, inconsistent with how we’ve shared it, it’s a test and learn for us. We’re excited about it, excited about the opportunity and our unique position, but it’s not required in the power of three growth commitments that we’ve shared and therefore are taking a growth approach to this new initiative.

Erin Murphy — Piper Sandler — Analyst

Excellent. Thank you so much and happy holidays.

Calvin McDonald — Chief Executive Officer

You too.

Meghan Frank — Chief Financial Officer

You too.

Operator

Our next question comes from Lorraine Hutchinson of Bank of America. Please go ahead.

Lorraine Hutchinson — Bank of America — Analyst

Thanks, good afternoon. Just hopping on Erin’s question, can you give us an update on the margin performance of the international business and anything about the past to parity with North America margins given the investments you’re making there?

Meghan Frank — Chief Financial Officer

Hi Lorraine. Thanks. We are profitable in our international business overall. We are still on the path to profitability in Europe. We had pushed out that date to ’22, just given the impact of store closures that we experienced throughout 2020 and then continuing into the first half of ’21. And sorry, can you remind me of the second half of your question.

Lorraine Hutchinson — Bank of America — Analyst

Yes, just looking at the past to parity overall given all the investments you’re planning to make in Asia.

Meghan Frank — Chief Financial Officer

Yes, we certainly see opportunity in the international margin. That said, we also have the opportunity for expansion in our North American margin. So expected to tip below and there are some structural rent items that are a little bit more pressure, I would say in our international region relative to North America.

Lorraine Hutchinson — Bank of America — Analyst

Thank you.

Operator

Our next question comes from John Kernan of Cowen. Please go ahead.

John Kernan — Cowen — Analyst

Excellent. Thanks for taking my questions, and nice job on the quarter. So what enables you to outperform your expectations by this much given the reduction to MIRROR. I guess in the core business what outperformed your expectations from the last time you gave revenue guidance versus where we are now and what’s a pretty difficult core environment out there given the supply chain events.

Meghan Frank — Chief Financial Officer

Yes, I’d say John it’s really been broad basis. So our performance has come both from channels and e-com, as well as across women’s, men’s and accessories, and I think we’ve been particularly pleased I’d say with our store performance, so exceeding 2019 productivity in Q3, which was up from flat in Q2 and then 88% of 2019 in Q1, so we’ve seen some nice acceleration there. At the same time e-commerce businesses has continued to be very strong. So we’re up 22% year-over-year in Q3 and then 54% on a two year CAGR basis. So really pleased I’d say across the border.

John Kernan — Cowen — Analyst

Excellent. A quick follow-up. Just on SG&A dollars, it looks like the expectations implied for SG&A expense are little bit lower versus where they were last quarter. Can you talk to the drives of that? Are you dialing back some of the investments in MIRROR, some of the acquisition costs there? Any comments on SG&A as obviously the gross margin headwinds picked up a bit on airfreight.

Meghan Frank — Chief Financial Officer

Yes, so we did experience Cack for MIRROR in excess of our LTV to Cack ratio parameters, on the Q3 that continued into Q4. So we have made a strategic pull back there, and then there has been also some efficiencies identified on the Lululemon side that are contributing to that SG&A line as well.

John Kernan — Cowen — Analyst

Got it. Thank you.

Operator

Our next question comes from Paul Lejuez of Citi. Please go ahead.

Paul Lejuez — Citi — Analyst

Hey. Thanks guys. Curious, could you just give us an update on the number of MIRROR shop-in-shops you have currently? Anything you could share in terms of what that does to the stores that they’re in, connectivity to the customer and maybe just what your future plans are for shop-in-shops as you look out to next year? Thanks.

Calvin McDonald — Chief Executive Officer

Thanks Paul. We did achieve our goal of 200 stores, that’s both across the US and in Canada. I think the Canadian number is around 48 is the final number, so I’ll call it 152 and 48. We have been and we’re almost at the full MIRROR leads in each of those stores, which is a critical component to really activating the MIRROR and driving, guest engagement and demonstrations.

We saw — we are very pleased with the results in Canada when we launched, which has only been the last few weeks and we really wanted to test and learn and launch just through the Lululemon channels and synergies leveraging both online, already guest relationships that we had in the store channel, and very pleased with the start of the results of that initiative. And then I’d say across all very encouraging, and it’s early in this, but we know it is one of our huge advantages of how we unlock synergies and tackle what remains the number one opportunity, which is just general awareness behind this product in this category and the uniqueness of our proposition.

One example is in-store demonstrations have a 6% conversion test to sale, which is very encouraging. When you think of traditional retail conversion numbers of foot traffic in, our ability to convert 6% of those engaging in demonstrations with the MIRROR it’s a very encouraging number, which is why that MIRROR key lead is critical in higher volume doors, having two key MIRROR leads to support the store and seven days a week operation, and again we are early. We see our unique point of view and the impact it’s having on performances and we’re going to continue to invest where it makes sense and play our unique role and keep building this business forward.

Paul Lejuez — Citi — Analyst

Thanks. And how has your thinking involved just in terms of maybe using the existing customer base of MIRROR to actually sell Lulu product, if that’s something on the horizon that you’re going to be doing a little bit more.

Calvin McDonald — Chief Executive Officer

I think there’s definitely the aspirational, which is we want everybody sweating on a MIRROR to be in Lululemon and we want everybody sweating with Lululemon to be you know engaging and using a MIRROR and that’s an operational vision, but it’s to say there’s opportunity on both sides. As we continue to move forward, more and more of these guests are already or have shopped with Lululemon which is good, because a big part of the role MIRROR plays with us is as a membership community that drives loyalty retention and spend with our Lululemon guests. We know the more they sweat with us, the more they spend with us, and our core business is our priority and will always remain our priority and MIRROR is a way in which we drive that business forward. So we are seeing those dynamics play out. There is an opportunity. There are new guests we acquire and see come in to the family through MIRROR and will be able to convert them over, but the collective play is about retention, loyalty and increased spend and we are pleased with those dynamics so far.

Paul Lejuez — Citi — Analyst

Great. Thank you, good luck.

Calvin McDonald — Chief Executive Officer

Thank you.

Operator

Our next question comes from Michael Binetti of Credit Suisse. Please go ahead.

Michael Binetti — Credit Suisse — Analyst

Hey guys. Thanks for all the details there and thanks for taking our questions. Meghan, could you just give us some thoughts on what you think are some of the realistic scenarios for that store productivity number you referenced a few times as you look into 4Q. I know they get quite crowded as you get very close to the holiday, but maybe if there was a pull forward, maybe that actually would have helped if there was any capacity issues in a normal season. But how should we think about what — some of the scenarios you thought about as far as what the stores can do on a productivity basis in the fourth quarter.

And then, I guess Calvin if you help us just back up as we think to the 2023 plan with the SG&A, I think if we look at the financial model from the Analyst Day, the thought was 13%, 14% type revenue growth and some SG&A leverage every year, maybe 10 basis points about. And I think you delivered, obviously revenue growth has been much different than that, because its higher than that because of the pandemic. But I know a lot of moving parts in there, but you mentioned a lot of times, you pulled forward a lot of spend, particularly the fulfill on e-commerce. As we look out excluding the MIRROR business just at the core, you know is it — is the back end of that Analyst Day period a bigger SG&A leverage period, because you got to those investments earlier and they generated bigger revenue returns than you thought or did you start looking at ’24 and ’25 investments and pulling those in as you look at ’22 and ’23?

Meghan Frank — Chief Financial Officer

Hi Michael. Thanks. It’s Meghan. So in terms of store productivity for Q4, we are managing our business from an omni perspective and really looking at multiple scenarios. I would say store productivity, I would say flat to 2019 to up slightly is probably a good baseline scenario. Though again we are planning for multiple scenarios to flex where the demand comes to us and I’ll also take the long term question in terms of SG&A. So we did have modest SG&A expansion in our long term plan. At this point we remain on that commitment and what we’re really focused on is our operating income and growing our operating income in excess of sales growth. We have had some shift in the dynamic of our business, with more investment in e-com to support the accelerated growth there of which depreciation sits in SG&A and we’ve also had some lower occupancy and expenses, and so some more gross margin leverage come throughout. We’ll continue to balance our investments to grow our operating income, and we’ll share more on our next five year outlook again in spring of ’22.

Michael Binetti — Credit Suisse — Analyst

Thanks a lot Meghan.

Operator

Our next question comes from Brooke Roach of Goldman Sachs. Please go ahead.

Brooke Roach — Goldman Sachs — Analyst

Good afternoon, and thank you so much for taking our question. You spoke in your prepared remarks earlier to strongly guest acquisition and retention. As you think about the profile of the guest that you’re acquiring today, can you talk to how that incremental new guest might differ in terms of demographics or preferred activities versus the customer that you acquired in prior years. What is your outlook for new guest acquisition going forward?

Meghan Frank — Chief Financial Officer

Thanks Brook. From a general demographic perspective, we remain healthy across all the different demographic profiles from age, gender and I will touch on the activity blends. But a lot of the initiatives we continue to deploy are resonating with younger consumers, very pleased with the health of new younger guest acquisition into the brand and then as I mentioned, the migration and retention of the guests are very, very strong here at Lululemon.

So when we look at activity, two points: one, the versatility of our product is one of our greatest strengths and it allows for guests to find what they need for their Sweat Life across multiple categories, be it bottoms, tops, second layer shorts. And as you know we’ve defined very clear activity that we want to own and have significant share of mind, share of wallet, position and that is run, train and yoga, and then we’ve identified what we call play categories, be it golf, tennis and hike, and these are the businesses that equally we’re seeing our guests spend into and are helping to drive. But it’s the versatility of the product and a very defined activity strategy linked to or product innovation that’s helping to drive not just new guests but spend with existing guest and we are very early in those strategies.

As you know we just launched a brand new yoga franchise for our female guest at the beginning this quarter, the Instill Tight, which delivers a completely different feel sensation through our smooth cover material, and it’s just one example of our approach to building franchises that deliver on feel space through these key core activities that are driving both new guest acquisition and spend with our existing guests.

Brooke Roach — Goldman Sachs — Analyst

Thank you. I’ll pass it on.

Howard Tubin — Vice President, Investor Relations

Operator, we’ll take one more question, thanks.

Operator

Certainly. Our final question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, great. Thanks so much. Meghan, can I just start on a follow up on gross margin. I think you indicated that you had 230 basis points of air freight here in the third quarter and that really accounted for more than the 50 basis point decline in your product margin. If I back that inbound airfreight charger or costs out, am I right in doing so to get to let’s say a gross merchandise margin increase in a quarter of 180 basis points. Is that an okay way for me to think about it?

Meghan Frank — Chief Financial Officer

Hi Kimberly. I would think about also, if you’re looking for a baseline for future planning, just that we had historically high full price sell through and lower mark down rates. So when we look into the future, we will have some puts and takes within our gross margin rates and right now we’re committed to that modest margin expansion as we outlined in our Power 3 Growth Plan.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, got it. So you’ll hopefully get back a good chunk of that airfreight next year in the third quarter, but perhaps the 180 — there will be as well maybe a small bit of give back on the — on mark downs or the pure merchandise margin, okay understood. Did you quantify the potential airfreight cost for Q4 in basis points Meghan. I’m not sure if I heard that.

Meghan Frank — Chief Financial Officer

Yes, we did. So 450 basis points of pressure in Q4 relative to 2019 and then also for the full year 200 to 250 basis points relative to 2020.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, thanks so much. My last question for Calvin, I you know heard you on the pricing philosophy and that that makes a ton of sense Calvin, I think to price for the performance that you’re putting into the product year-after-year. What we are starting to hear from some of our colleagues in supply chains that some of the OEMs in Asia are experiencing higher cost for either labor, utilities, raw materials. Would Lululemon philosophically try to price for any actual increase in the cost of goods that your suppliers might be feeling? Would you think that that would be an appropriate way to also raise price to the end consumer.

Calvin McDonald — Chief Executive Officer

I mean, I think we really do price to market and there are obviously a variety of inputs and consideration, and you’ve alluded to some. But as business that is positioned as a premium brand that has much innovation built into the product. We look at a variety of factors to make our pricing decisions and it’s just not — we won’t just do it you know laterally because of those pressures. We’ll look at other ways to manage the overall mix and maintain our committed margins.

Kimberly Greenberger — Morgan Stanley — Analyst

Fantastic. Thanks for the color.

Calvin McDonald — Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

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