Lululemon Athletica Inc

NASDAQ:LULU

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica First 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 first quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO and Meghan Frank, CFO.

Before we get started, I would 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 and store productivity metrics given on today’s call are in 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 will find a summary of our key financial and operating statistics for the first quarter as well as our quarterly infographic. Today’s call is scheduled for 1 hour. So, please limit yourself to one question at a time to give others the opportunity to have their questions addressed.

And now I’d like to turn the call over to Calvin.

[Calvin McDonald, Chief Executive Officer]

Thank you, Howard and hi, everyone. I am excited to speak with you about our first quarter results and the momentum we are seeing across the business. As the press release describes, we’re off to a particularly strong start to 2021, with revenue growth of 88% over the same period last year. And when you look at our 2-year CAGR, our performance truly stands out and shows the sustained momentum in the business.

Our first quarter results reflected our strength across all drivers of growth, fueled by the continued expansion in our e-commerce business, our performance across categories and geographies, and a rebound in the number of guests shopping in our brick-and-mortar stores. I want to take a moment to recognize the resiliency and agility of our teams across the globe. Their commitment and dedication enables this impressive performance, and it would not be possible without them. On today’s call, I will speak to our first quarter results, our Power of Three growth pillars and the progress toward delivering against our impact initiatives. You’ll also hear from Meghan Frank, our CFO, with further details about our Q1 financial performance and our guidance outlook. We’ll then be happy to take your questions.

Looking at the quarter, our results were driven by strength across channels, regions and product categories. Here are a few key operating metrics. Firstly, our total revenue of $1.2 billion reflects an increase of 25% on a 2-year CAGR basis. This growth rate represents an acceleration relative to our 3-year CAGR of 19%, leading up to the pandemic, and reinforces that we remain early in our life cycle and have a unique business model that allows us to thrive in an ever-changing environment. In addition, our revenue increased across each of our regions, up 23% in North America and up 41% in our international markets, both on a 2-year CAGR basis. Secondly, growth within our e-commerce business remains strong, with comps up 50%, which is on top of the 70% increase in the same quarter last year. And thirdly, adjusted earnings per share were $1.16 versus $0.74 in 2019, significantly ahead of our expectations.

And we are also pleased to see our momentum extending into the second quarter. We delivered at this high level while we also strategically managed a number of ongoing macro operating challenges, such as continued store closures, capacity constraints, supply chain challenges at the ports and reduced air freight capacity. While challenges of all types will no doubt remain going forward, I am confident we will continue to manage them effectively and deliver outstanding results. In summary, lululemon continues to become stronger quarter after quarter. We are very early in our growth story, and we are well positioned for the post-pandemic world. And the opportunities ahead of us are significant and continue to expand.

I will now provide a bit more color on the first quarter results. We are firmly on track to deliver on our commitments contained in our Power of Three growth plan, through our three pillars of product innovation, omni-guest experience and market expansion. Within product innovation, we continue to leverage our Science of Feel platform to deliver technical athletic apparel to our guests. Our sweet spot is creating versatile and stylish products that include technical innovation, comfort and flexibility. In the first quarter, we saw strength across our assortment with women’s revenue increasing 23% and men’s growing 27% on a 2-year CAGR basis.

I will now share a few more thoughts related to our product. We saw strength in women’s across the assortment as guests are responding well to both tops and bottoms. Our performance in tops was driven by core styles and franchise extensions, such as the Align tank. Our male guests returned to our stores as we emerged from the pandemic. Men’s growth outpaced women’s growth on both a 1 and 2-year basis and we are seeing very positive momentum in our On The Move assortment. Across both the women’s and men’s businesses, our sales success reflects our ability to consistently introduce new innovation to our guests as we expand core and newer categories and leverage our spectrum of raw materials. We’re in the early days of our product journey with ample opportunity to expand across our four key product areas of Yoga, Run, Train and On The Move.

And speaking of Run, this quarter, we launched a global run campaign that highlights how we are making running more accessible and inclusive. And we took a broad-based approach that included messaging that featured male and female athletes in a broad range of products. A platform that highlighted existing ambassadors along with new ambassadors, such as Ultra Marathon Runner, Mirna Valerio; Brooklyn-based filmmaker and founder of Running to Protest, Coffey; Canadian 10,000 meter record holder, Natasha Wodak; and Olympian leader and mentor, Colleen Quigley. I am pleased with the results of our Run campaign, and it’s an example of the leadership Nikki Neuberger, our Chief Brand Officer, is bringing to the company. And I look forward to her joining us on a future call.

Let me now turn to our omni-guest pillar and the strength we saw across channels in Q1, with the upside in revenue driven by both our stores and e-commerce businesses. Here are a few highlights I’d like to share. The healthy comps in our e-commerce channel were driven by a mix of new and existing guests. We are also happy to see the investments in our digital business paying off, and we’re continuing to improve product education, offer better outfitting solutions and tell stories in a more compelling way. When looking at our store channel, I remain very enthusiastic about our performance. We are committed to stores, and we are building more stores this year and seeing more and more great real estate opportunities become available in great areas in key cities around the globe. We will continue to be opportunistic in grabbing these locations as they become available.

We are also fortunate to have our store teams in a good position as well. The pay protection initiative we implemented last year for employees has allowed us to retain and engage them throughout this period. This meant we could reopen stores quickly and this agile and dedicated team has allowed us to continue to support the increased traffic momentum in the stores that we are experiencing now. This helped us deliver against our plans to kick-start our stores and reengage our store-only guests. Here are some details on our performance. Firstly, store productivity improved to 88% of our levels in 2019. This exceeded our expectation and moves us towards our goal to return to productivity levels consistent with 2019. Secondly, even as traffic to our stores increased significantly in the quarter, conversion remains strong and continues to increase in the double digits. And as a reminder, these capacity constraints are just starting to lift in many markets in this quarter.

Touching on MIRROR, we continue to be pleased with the performance of MIRROR and the opportunities within the at-home fitness space. MIRROR had a strong mother’s day and remains on track to deliver $250 million to $275 million in revenue in 2021. We continue to leverage the lululemon ecosystem, and by the middle of this month, MIRROR will be featured in nearly 90 lululemon locations in the United States. We are well on our way to 200 shop-in-shops in time for the holidays later this year. In addition, we now have dedicated MIRROR specialists among our educators in each of these stores, and the early sales results are encouraging. We will have more to share about MIRROR later in the year as we gear up for new features, add more live classes and expand into Canada, the first international market of several we will see in the future for MIRROR.

Switching now to our international growth. We continue to be very pleased with our results and our growth potential across our three regions of China, Asia Pacific and EMEA. Andre Maestrini has hit the ground running as he leads our international team and sets ambitious growth goals, and I look forward to having Andre join us in the future for a call. From our new stores in China to continued growth in Asia Pacific to our online performance in EMEA, the results continue to reinforce that we are early in the growth trajectory. And as I have said before, I can see a time in the near future where our international business grows in size to be equal to our North America business.

In closing, I am proud to share a few details about our latest impact initiatives, which helps us to achieve our multiyear goals, including our goal to make 100% of our products with sustainable materials and end-of-use solutions. We launched lululemon Like New last month, our first re-commerce program. This is a trade-in and resale program for our guests, and all of the profits are reinvested in our sustainability initiatives. We have launched in California and Texas, and the response is encouraging. This kind of program reduces carbon water and waste and also enables us to attract new guests, particularly younger guests who are fans of thrifting. In the quarter, we also introduced our Earth Dye collection, which is made completely from materials upcycled from plants and uses less water, and is an example of the type of collections we’re expanding in the future.

In closing, these results and our continued focus on innovation demonstrate our confidence in the future and how we can continue to pull the many levers of growth we have available to us. Let me now hand it over to Meghan for a review of our first quarter financials and our guidance outlook. Meghan?

[Meghan Frank, Chief Financial Officer]

Thanks, Calvin. Our Q1 results were strong relative to last year’s COVID-impacted quarter, but more importantly, relative to Q1 of 2019 as well. On a 2-year CAGR basis, we saw double-digit top line growth across all major regions, with the standout being Mainland China, with an approximately 90% 2-year revenue CAGR. We also saw broad-based strength across merchandise categories, with women’s, men’s and accessories, all growing in excess of 20% on a 2-year basis. We are proud of these results despite the ongoing impact of COVID-19, and we have strong momentum moving into Q2 as reflected in our updated guidance I will share in a moment.

Let me now share with you the details of our Q1 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 $8 million of acquisition-related costs and their associated tax effects in Q1 2021, and $2 million of acquisition-related costs and their associated tax effects in Q1 2020. You can refer to our earnings release for more information and reconciliations to our GAAP metrics.

For Q1, total net revenue increased 88% to $1.2 billion, above our expectations of $1.1 billion to $1.13 billion. This included an 82% increase in North America and a 125% increase in our international business. On a 2-year CAGR basis, total revenue increased 25%. In our digital channel, revenues increased 61% on a 2-year CAGR basis, above our expectations of approximately 50% growth. E-com contributed $545 million of top line or 44% of total revenue. We continue to see strength in traffic and conversion. Traffic was driven by both new and existing guests, and conversion continues to benefit from positive guest response to the enhancements we’ve been making to our e-com sites and mobile app.

In our store channel, sales increased 3% on a 2-year CAGR basis, above our expectations of flat to slightly negative. Looking at store productivity relative to 2019, Q1 improved to 88% versus 71% in Q4 of 2020. At the end of the first quarter, we had 93% of our stores open. Square footage increased 10% versus last year, driven by the addition of 34 net new stores since Q1 of 2020. During the quarter, we opened 2 net new stores. Gross profit for the first quarter was $700 million or 57.1% of net revenue, compared to 51.3% of net revenue in Q1 2020 and 53.9% of net revenue in Q1 2019. Our gross margin increase of 320 basis points relative to 2019 was driven by 220 basis points of leverage on occupancy, depreciation and product team costs; an 80 basis point increase in product margin, with the decline in markdowns versus 2019 and despite higher airfreight expense related to COVID-19. In addition, we had 20 basis points of favorability in foreign exchange.

Moving to SG&A, our approach continues to be granted in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were $497 million or 40.5% of net revenue compared to 46% of net revenue in Q1 2020 and 37.4% of net revenue in Q1 2019. Leverage in the quarter relative to Q1 2020 resulted from the sales increase relative to the COVID-impacted quarter last year. The deleverage relative to Q1 2019 is the result of consolidation of MIRROR’s results this year, but not in 2019, coupled with higher depreciation due to accelerated investments to support our e-com business and COVID-related operating channel costs. Adjusted operating income for the quarter was $202 million, or 16.4% of net revenue compared to 5.3% of net revenue in Q1 2020 and 16.5% of net revenue in Q1 2019.

Adjusted tax expense for the quarter was $49.5 million or 24.5% of pretax earnings compared to an adjusted effective tax rate of 14.7% a year ago. In both Q1 2021 and Q1 2020, our tax rate benefited from certain discrete tax deductions related to stock-based compensation. However, since our Q1 2020 profit before tax was significantly lower due to the impact of COVID, this meant that these additional discrete tax deductions had a bigger impact on our tax rate last year.

Adjusted net income for the quarter was $152 million or $1.16 per diluted share, compared to adjusted earnings per diluted share of $0.23 in Q1 of 2020 and $0.74 in Q1 of 2019. Capital expenditures were $64 million for the quarter compared to $52 million in the first quarter last year. Q1 spend relates primarily to digital channel and analytics capabilities, supply chain investment, technology spend to support our business growth and store capital for new locations, relocations and renovations.

Turning to our balance sheet highlights, we ended the quarter with over $1.6 billion of total liquidity. We had approximately $1.2 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory grew 17% versus last year and was $733 million at the end of Q1. On a 2-year CAGR basis, inventory in Q1 increased 29%. While we continue to see some delayed inventory receipts due to issues at the ports, our team is strategically using air freight, and we are comfortable with the level and composition of our inventory as we move into Q2. At the end of Q2, we expect levels to increase approximately 25% to 30% relative to Q2 2020. In Q1, we repurchased 270,000 shares at an average price of $311. At the end of the quarter, we had $416 million of availability remaining on our current share repurchase authorization.

Let me shift now to our outlook for Q2 and the full year 2021. Our guests continue to respond well to our merchandise offering, including both tactical and On The Move apparel and MIRROR. As we are welcoming guests back to our stores, we also remain focused on our digital business and omni capabilities to ensure we are there for our guests no matter how they want to engage with us. We also continue to plan for multiple operational scenarios as we navigate the ongoing COVID-19 environment.

For Q2, we expect revenue in the range of $1.3 billion to $1.33 billion, representing a 2-year CAGR of 21% to 23%. In terms of stores, we currently have approximately 93% of our stores open. On a 2-year CAGR basis, we expect stores to be approximately flat, with e-com growing at approximately 55%. We expect gross margin in Q2 to increase from last year’s COVID-impacted quarter and also be 30 to 50 basis points higher than Q2 of 2019. Relative to 2019, our gross margin was benefiting from a higher e-com penetration. And leverage on occupancy and depreciation due to pulling back somewhat on new store openings in 2020 as well as the level of rent reductions.

Our Q2 guidance reflects continued pressure from air freight costs due to poor congestion and capacity constraints. In Q2, we expect SG&A deleverage of approximately 400 basis points relative to 2019. Drivers of the deleverage versus 2019 include higher depreciation due to accelerated investments to support our e-commerce business in 2020 and 2021; consolidation of MIRROR’s results this year, but not in 2019; and COVID-related costs, including labor for stores that remain closed.

Turning to EPS, we expect adjusted earnings per share in the second quarter to be in the range of $1.10 to $1.15 versus EPS of $0.74 a year ago. This includes operating results from MIRROR but excludes acquisition and integration-related costs. As a reminder, we reported EPS of $0.96 in Q2 of 2019. For the full year 2021, we now expect revenue to be in the range of $5.83 billion to $5.91 billion. This range continues to include $250 million to $275 million for MIRROR and now assumes our e-commerce business grows in the high single digits relative to the outsized strength we experienced in 2020. For e-comm, we expect a modest decline in Q2 as we anniversary the height of COVID-related channel shifts and our online warehouse sale. And we continue to expect modest growth in Q3 and Q4.

When looking at total revenue, our guidance range implies a 2-year CAGR of 21% to 22%, which is higher than our 3-year revenue CAGR of 19%, leading up to 2020 and is well ahead of the low teens CAGR contemplated in our Power of Three growth plan. We now expect to open 45 to 55 net new company-operated stores in 2021, up from our prior guidance of 40 to 50. This includes approximately 35 to 40 stores in our international markets and represents the square footage percentage increase in the low teens.

We now expect gross margin for the year to expand between 150 to 200 basis points compared to the modest increase we saw in 2020. For the year, the anticipated margin expansion continues to include approximately 50 basis points of negative impact from additional freight costs, but it’s still in excess of our Power of Three plan, which assumes modest gross margin expansion annually. The outperformance is expected to be driven primarily by a shift relative to our initial plans and investments from new store openings and remodels towards digital, which impacts SG&A.

When looking at SG&A for the full year, we now expect deleverage of 30 to 50 basis points versus 2020. Drivers of the deleverage continued to include consolidation of MIRROR for the full year and investment in MIRROR brand building. We expect our effective tax rate for the year to be similar to 2020. We now expect our fiscal year 2021 adjusted diluted earnings per share to be in the range of $6.73 to $6.86. Our EPS guidance continues to assume modest dilution from MIRROR in the 3% to 5% range. Excluding acquisition and integration-related costs, it also excludes the impact of any future share repurchases. We now expect capital expenditures to be approximately $365 million to $375 million for 2021. The increase versus 2020 reflects increased investment in our supply chain, digital capabilities, new store openings and renovations, including MIRROR shop and shops, as well as other technology and general corporate infrastructure projects.

Before handing it back to Calvin, I want to thank our teams across the globe for their agility, enthusiasm and dedication to lululemon that allows us to deliver these consistently strong financial results.

And now back to Calvin for some closing remarks.

[Calvin McDonald, Chief Executive Officer]

Thank you, Meghan. Before we take your questions, I just want to say on behalf of the entire management team that we are grateful to our teams who helped us deliver these results, you who are helping us raise our expectation about what’s possible for lululemon this year and well into the future.

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

[Operator]

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

[Adrienne Yih, Barclays]

Good afternoon and congratulations on the great start to the year and the momentum continuing. Calvin, my first question is for you. It’s about, as you become a global brand and now you have MIRROR and you are investing in that for marketing, are there any change in how you philosophically think about the marketing, the advertising expense line, demand creation so to speak? And when we are thinking about MIRROR, how should we think about the slight dilution coming in the form of increased ad spend? And when might we in the future think about sort of a breakeven notion? I guess another way of asking sort of that, probably more simply, is when you are building the brand for MIRROR, do you think about investing for top line growth first and maybe not necessarily prioritizing profits given that there is so much opportunity there?

[Calvin McDonald, Chief Executive Officer]

Thanks, Adrienne. I will try to compartmentalize that question because there is a lot of exciting topics embedded in that. Overall, from a brand perspective, I would tell you, as I highlighted with our Run campaign in this quarter, it’s one of many ways we’re looking at increasing both awareness and consideration for lululemon moving forward. And that applies to all markets we are in, both U.S., Canada and internationally. And Nikki and the team are in a variety of different initiatives this year where we are testing and learning ways to do more at top of funnel. That’s all included in the guidance that Meghan shared. But we are excited about the different initiatives we have planned because we see a huge opportunity around driving awareness and consideration, both for men’s as well as women and in every market we are in and we are going to lean in and do more of that. And the Run campaign is an example of us marketing ourselves more as a dual gender, showcasing both men and women, as well as leveraging our ambassadors, our community and the influencers and those key relationships. So there is a lot of work underway and we absolutely see the ability to drive awareness consideration for lululemon. Similarly, in MIRROR, there’s a lot of opportunity around awareness and consideration. That’s where we see leveraging synergies within lululemon in the stores and leveraging the 10 million guests that the brand has to help drive that. And we know we are investing as an acquisition vehicle to get guests in and purchase MIRROR and that’s in the guidance as well, but we will continue to do that. Fast forward, these brands are going to continue to be able to leverage one another and we see synergies in the community. We see synergies in refer a friend. We see synergies across the ambassadors and the content that we are producing. So we are early in how we bring awareness across both brands to each other brand and excited about what we’re seeing in the plans we have moving forward. And I will let Meghan just pick up a little bit on your question around the investments.

[Meghan Frank, Chief Financial Officer]

Hi, Adrienne. So in terms of the investments and the path to breakeven, so we were really pleased by what we saw with MIRROR performance in 2020 and it exceeded our expectations for sales at $170 million. And then we’re reiterating our guidance for – or our guidance color for MIRROR for 2021, revenue range of $2.50 to $2.75, and EPS dilution of 3% to 5%. And we have a number of exciting initiatives teed up for this year, including expanding instructors, expanding studios, moving into Canada and then going into over 200 lululemon stores. It’s still early in the year for us, just given the seasonality of that business, the ramp in store openings as well as just that growth curve we’re experiencing in the MIRROR business. We did have a strong Mother’s Day, pleased with our performance. And in terms of breakeven, we aren’t putting a fine point on it right now, but excited about the future there, definitely see it as a profitable business for us over the longer term and very much within our control.

[Adrienne Yih, Barclays]

Great. Thank you so much. Super helpful and best of luck.

[Meghan Frank, Chief Financial Officer]

Thank you.

[Operator]

The next question comes from Ike Boruchow with Wells Fargo.

[Unidentified Analyst]

Yes. Hi, this is Kate on for Ike. Thanks very much for taking our question. Calvin, I guess, just at a higher level, you spoke to in the quarter, the business accelerating with a 25% CAGR, I believe on a 2-year basis versus what you were running pre-pandemic. I am just curious now that we are that much further along in the recovery, how you are evaluating perhaps a widening TAM opportunity on the other side of COVID? That would be helpful. Thank you.

[Calvin McDonald, Chief Executive Officer]

Great. Thanks, Kate. I definitely – and as I have stated before, we were performing well before the pandemic. I think we led the peer group during the pandemic, and we’re excited about the performance and confidence in our ability to continue to perform post pandemic. And that’s driven by the sustainable acceleration in consumer trends of living a healthier life, versatile apparel, at-home sweat and the connection of community and community sweat, all play into our strengths. And we are early innings of growth. This quarter is a great example of that. Growth across channels, stores and .com, stores – growth across categories, across gender, men and women in our geographies, so very much early innings on that. And as that impacts and relates to TAMs, MIRROR, by addition, creates a sizable TAM for us that we’re excited about. We’re investing in because we see a meaningful business. They are a profitable business, a stand-alone P&L that equally will impact the lululemon brand through strengthening the community and helping to influence and drive apparel sales. So that clearly is one addition to our TAM that we’re excited about and we’ve added to. And then I think with sweat, in general, we’re seeing ongoing trends. Our positioning around Run, Yoga, and Train continue to resonate and be the key activities. We have versatility and see some excitement in hike as well as OTM. And OTM for her, we’re just getting started. We know it’s a good business for our men’s business as we’re building and adding. But we really have a limited OTM assortment for her, and we are leaning into that. We have dropped some with a real plan to continue to grow that out. So I would say OTM for women’s, MIRROR and then you know we’re bringing footwear next year are three sizable TAM opportunities that we’re adding to the ongoing mix of what the trend in the guest is happening and adding to the overall growth in activewear.

[Unidentified Analyst]

Great. Thanks very much.

[Operator]

The next question comes from Mark Altschwager with Baird. Please go ahead.

[Mark Altschwager, Baird]

Good afternoon. Thanks for taking my question and congrats on the strong start here. Maybe just to start-up, to follow-up on, Calvin, the comments you were just making on the OTM. I guess maybe just from a marketing standpoint, I mean, there is been a lot of innovation with the On The Move assortment, and that would seem to be particularly relevant I guess today, as guests are returning to travel and in-person activities. Just can you speak a little bit more about how you plan to amplify that message, both with existing guests as well as for new guest acquisition?

[Calvin McDonald, Chief Executive Officer]

Yes. No, for sure, Mark. And I’ll break it down from product and then into women’s – sorry, men’s and then as to women. So with our men, we continue to innovate into our raw material as well as some of our key franchises. So building out on our ABC and commuter, we’ve added the Bowline, which we continue to see respond very well and see growth in that. As we do more top of market – top-of-funnel activity through marketing and drive that awareness and consideration, we know OTM is one of our big hooks that gets him into the brand, and then we migrate them into the sweat and into other categories. So I think that flywheel is working, is gaining momentum. And as we continue to invest top of funnel, we will only pick up steam. On the women’s side of OTM, it really starts with product for us. And we have limited assortment. And when we drop it, she responds incredibly well to it. We’re excited about our ongoing expansion of our bottoms more into the OTM casual off the body fit. We’re excited about our sweater initiatives in the back half and we’re excited about ‘22 and beyond as we really look to create versatile solutions for those slots in her wardrobe. And that, I think we absolutely have an opportunity to tap into our existing guest and sell those incremental opportunities to her. So with women, it’s really about assortment, and we’re early with plans to expand. And with him, we’re going to keep adding and innovating, but we have a good base to start and top-of-funnel activity will help fuel that even further.

[Mark Altschwager, Baird]

Thank you. And then for Meghan, as we think about the path to recovery, is it your expectation that the store productivity can return to pre-pandemic levels or even grow from pre-pandemic levels or is some of this channel shift permanent and a lot of different regional trends that are embedded in the productivity metric you shared, just maybe any insight you can share on some of the trends in regions that have perhaps had restrictions relaxed for the longest? Thank you.

[Meghan Frank, Chief Financial Officer]

Sure. Thanks Mark. So we were really pleased with the improvement we saw in store productivity in Q1, at 88% versus 71% in Q4. We did see improvement as capacity restrictions moderated throughout the quarter. And we do fully expect to achieve 2019 levels of store productivity. At this point in time, we’re not going to put a time frame on it, just given ongoing uncertainties related to COVID and we still have a level of store closures in play at this point in time. But we’re really encouraged by trends we’re seeing in our store base.

[Mark Altschwager, Baird]

Thanks a lot and best of luck.

[Meghan Frank, Chief Financial Officer]

Thank you.

[Operator]

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

[Matthew Boss, JPMorgan]

Great, thanks and congrats again on the momentum. So, maybe first is on the margin front, so on gross margin, first quarter, more than 300 basis points above 2019. I guess, maybe could you just help bridge drivers in the second quarter forecast that you’re embedding relative to 2019? And just any back half assumptions for us to consider as we think about the gross margin line through the cadence of the year?

[Meghan Frank, Chief Financial Officer]

Sure, Matt. So in terms of Q1, and this is relative to 2019, we had 320 basis points of expansion versus our initial expectation of 50 to 100. That 320 basis points was driven by 220 basis points of occupancy and depreciation and product team, leverage really on that higher sales achievement and then 80 basis points increase in product margin. We did see some good trends relative to 2019 in markdown rates. And we also did experience some pressure as we’ve discussed on higher air freight expense. And then we had 20 basis points of favorability in FX. When we look to Q2, again, relative to 2019, we are looking for 30 to 50 basis points of expansion, relative to 2019 and really we are expecting continued headwinds in air freight. And then we have some level of rent concessions that we’re anniversarying from last year. And then our Q2 revenue growth rate is slightly lower than Q1, leading to that delta. In terms of the full year, we’ve given some color relative to 2020. So we’re expecting, for the full year, 150 to 200 basis points expansion versus last year, and that is up from our prior expectation of 100 to 150 basis points.

[Matthew Boss, JPMorgan]

Great. And then maybe just a follow-up for Calvin, on the outsized growth that you are seeing in e-commerce, relative to the sequential improvement that you’re also seeing at brick-and-mortar, I guess, any changes in consumer preferences that you saw take place over the first quarter? Or maybe into May, as we think by category, maybe tied more to recovery, the return of sport and some physical activity relative to the lifestyle side as maybe people are thinking about or actually leaving their houses and returning to some normal activity?

[Calvin McDonald, Chief Executive Officer]

Yes. Great. Thanks, Matt. As we shared, our active – what we define as our active wear was still the predominant driver of our business last year. It’s the core of our assortment, and it was the core of our drivers in Q1. It was good to see our men’s business come back as strong as it did. We saw it continue to accelerate through 2020 and into 2021 in the quarter and then get back to its position of driving the overall growth ahead of – slightly ahead of women’s. And that was really all through the sweat activity. Shorts performed incredibly well. And we did see an uptick in OTM and very encouraged with that momentum continuing. And then with her, again, active wear was the driver, very balanced across all of our categories. Shorts and tops, did see a very nice acceleration in growth. The team has been doing a lot of work in our top business, building out our franchises, which is a big part of our franchise strategies that I’ve shared with everybody that we are early in taking the franchise of our bottoms and extending that feel state through Science of Feel, head to toe. Align Tank being an example of one, but we have not done that consistently across the others, and we’re starting to and when we do see, responds incredibly well. So our tops business really performed nicely as well as shorts, but it was very much balanced across all categories, men’s and women’s and geography.

[Matthew Boss, JPMorgan]

It’s great to hear. Best of luck.

[Calvin McDonald, Chief Executive Officer]

Thank you.

[Operator]

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

[Lorraine Hutchinson, Bank of America]

Thanks, good afternoon. I wanted to follow-up on Mark’s question. He was talking about store productivity returning to 2019 levels. And I wanted to ask about the store profitability. You made some further progress there in the first quarter. Is there any reason why the store margins wouldn’t get back to 2019 and perhaps surpass them as you move back toward 100% productivity?

[Meghan Frank, Chief Financial Officer]

Hi Lorraine, it’s Meghan. Yes, I think we are still dealing with a degree of COVID-related expense in our store channel as well as the pressure from productivity, so store COVID-related labor as well as PPE. And I don’t expect there is any barriers to reaching 2019 store profitability levels once the productivity is normalized.

[Lorraine Hutchinson, Bank of America]

Thank you.

[Operator]

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

[Dana Telsey, Telsey Advisory Group]

Good afternoon everyone and congratulations on the nice progress. Calvin, part of the Power of Three and what you’ve talked about is international, and it sounds as if the international opportunity could be even a little bit – occur a little bit faster than expected, with the sizing that you talked about and also now with category expansion. How do you size up international and any learnings from what you’ve seen in any of the regions you’re currently in, even though small, that could be impactful for growth going forward? And lastly, as you talked about COVID costs – you mentioned COVID costs, how do you see those adjusting or winding down moving forward? Thank you.

[Calvin McDonald, Chief Executive Officer]

Great. Thanks, Dana. I’ll take international and then hand off to Meghan on the COVID expenses. Obviously, I think the numbers indicate the potential that we have internationally. And I think for the last few calls, I’ve shared the long-term opportunity of this brand, this business being 50-50 North America, international. And I don’t see anything that’s going to prevent us from achieving those results. We’re seeing good growth in every market. In EMEA, we continue to see growth even with the pressure on stores because our .com business continued to drive growth. And in every market, we’re in Australia, New Zealand or rest of APAC, very solid momentum in China being one of our biggest potentials and continue to see momentum in there. We were up 200% in the quarter, strong growth in stores, strong growth in .com and excited about that. So our commitment was to quadruple the business. We are definitely achieving those results and excited to share the next future of growth as we continue to see the maturity of these markets and invest in them. We’re in the right markets. And we’re early in terms of our share potential in these. So we’re really leaning in and focused on maintaining and growing the momentum in these markets. And then with Andre, we will be able to come back on a later call and share the future plans for continuing to drive growth. And then, Meghan?

[Meghan Frank, Chief Financial Officer]

Great. Hi, Dana. So in terms of COVID costs, we are beginning to see those wind down. It will really be dependent on the environment. We remain committed to our Power of Three growth plan, operating profit growth in excess of sales growth and really focused on managing our business to that. We did see operating margins for Q1 at 16.4%, which compared to 16.5% in Q1 of 2019. This year’s Q1 included MIRROR. So we saw, underlying that, some really nice expansion in the lululemon – in the lululemon side of the business and really on track to that Power of Three growth plan.

[Dana Telsey, Telsey Advisory Group]

Thank you.

[Operator]

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

[Paul Lejuez, Citi]

Hi, thanks guys. Curious about input costs, what you’re seeing and how we should think about AUC over the next several quarters and into next year? And also just how you’re thinking about pricing in a potentially inflationary environment? Thanks.

[Meghan Frank, Chief Financial Officer]

Hey Paul, it’s Meghan. So in terms of input costs, we’re not seeing any material impact on 2021. And anything we are experiencing is reflected in our guidance. We definitely have a close eye on the market. And are managing and mitigating any pressures as we move into 2021 – sorry, 2022, and we will certainly come back and share more when we provide 2022 color.

[Calvin McDonald, Chief Executive Officer]

And then just adding on to that, Paul, as it relates to pricing, because we’re not seeing any direct pressure this year, we’re comfortable with our pricing strategy through to the end of ‘21 and the merchants are working with the supply team on any potential changes that we may need to implement moving into ‘22. But we’re constantly evaluating our range, looking at the new innovation coming and pricing accordingly to drive the best value for our guests.

[Paul Lejuez, Citi]

Got it. And can you just talk about your ability to chase product, just given some supply chain constraints that were mentioned? I’m just curious how quickly you can get back into product.

[Meghan Frank, Chief Financial Officer]

Yes, definitely. So inventory was certainly one area where we postured to drive for growth, both throughout 2020 as we navigated the pandemic and then into 2021. The team has been really proactive in strategically leveraging air freight to meet guest demand. And we do have the ability to chase categories and keeping a close eye on what’s going on with the supply chain, but we feel really well positioned to navigate through this year and meet guest demand.

[Paul Lejuez, Citi]

Got it. Thanks a lot guys. Good luck.

[Meghan Frank, Chief Financial Officer]

Thank you.

[Operator]

The next question comes from Kimberly Greenberger with Morgan Stanley. Please go ahead.

[Kimberly Greenberger, Morgan Stanley]

Thank you so much. I wanted to just ask the question Matt asked, but a slightly different way. As consumers are starting to emerge and go out, are you seeing a shift in the kinds of products they are buying, let’s say, particularly in the April, May time frame? And then a question for Meghan on SG&A. Obviously, this year, you’ve given some guidance color, which is super helpful, and you’re looking for some deleverage relative to 2019 for MIRROR and the other factors that you cited. I’m just wondering if we should think about you starting to leverage SG&A beginning in 2022, if that’s a realistic expectation. And I am just trying to sort through the COVID cost, here this year to understand how much of the COVID costs will not recur in 2022? And I think you’re putting some store payroll that will be recurring into your COVID costs. So if you could maybe separate that out for us that would be helpful?

[Calvin McDonald, Chief Executive Officer]

Hi, Kimberly, I’ll go first and just pick up on the first question. We have not seen a meaningful shift in our active wear categories through the first quarter. As you know, a big piece of our business and sales are in core. It’s in athletic active wear. And I think with that, it has an embedded strength to not be purely trend-driven or fashion-driven. He and she are responding well to color. The team’s done a wonderful job in introducing color into these core franchises in silhouettes. But our active wear sweats, shorts and tops have really been the uptick in momentum. But overall, the growth is across almost every category equally and very balanced across geographies.

[Meghan Frank, Chief Financial Officer]

Hi, Kimberly. I will take the second part of that question. So in terms of SG&A, we’re expecting for the full year 30 to 50 basis points of deleverage, which is better than our prior expectation of 50 to 100 basis points. And that deleverage is really driven by consolidation of MIRROR for the full year as well as investment behind that business. And then a rebalancing of investments we did in 2020 into 2021, with the acceleration of our e-commerce business, which the expenses are attributed to SG&A and some pullback on the store side of which occupancy sits up in gross margin. We’re really focused on managing the business from a bottom-line perspective and managing operating profit in excess of sales growth. We are not going to break out the COVID cost specifically, but really remain committed to managing to that operating profit in excess of sales growth over the longer term.

[Kimberly Greenberger, Morgan Stanley]

Thank you.

[Operator]

The next question comes from Omar Saad with Evercore. Please go ahead.

[Omar Saad, Evercore]

Thanks for taking my question. I wanted to ask a follow-up on the real estate, the decision to accelerate some of those new store openings. What’s giving you the confidence there? Is it real estate opportunities, market opportunities? Are you going to use the newer kind of bigger store format that has more room for men? Is the primary format you’re using? And then I have a follow-up on MIRROR. Thanks.

[Calvin McDonald, Chief Executive Officer]

Great. Okay, Omar, let me address the first. I think it’s a combination of all the above. We’ve stated and remain very confident in our store business, in its performance, in its contribution and the role it plays of connecting the brand, guest acquisition and driving productivity numbers. And we’ve seen nothing through the pandemic and emerging coming out that would get us off of that position. We equally are very early in every market in our store fleet rollout. So we do have opportunity for growth in every market, including Canada and the U.S. as well as internationally. So we apply a conservative number on an annual basis, and we are being opportunistic as a result with the opportunities in around the globe where we’re getting key locations, with the right size in key cities and markets as a result of opportunities that are coming our way. And we’re capturing them because we believe in them. And in that, it is our newer models that allow for more of a men and expression, but it’s not significantly above sort of our sweet spot of stores, and it does vary by market, in the 3,000 to 4,000 range or the 5,000 to 6,000 range in North America, but it depends on the city and the location, but very – still confident in our store business.

[Omar Saad, Evercore]

Got it. Thank you, that’s helpful color. And then on MIRROR, I just want to do a quick follow-up on MIRROR. Who is buying MIRROR? Is it – are you seeing a consistent use case? Is it people who already have a home gym and they are mack daddying it out with adding MIRROR to it or is it people who are trying to squeeze in with their existing space and it’s such an efficient kind of interactive home workout solution? I’d love some color there. Thanks.

[Calvin McDonald, Chief Executive Officer]

Yes. No, for sure. And I’d say it’s – again, it’s all the above. We’re seeing individuals that have a number of at-home fitness solutions, and they add MIRROR as a versatile workout solution to round that out. And it definitely caters well to individuals that don’t have a distinct gym, who may not have a stud to attach a device to and want something that can function both in a space that is versatile and sweat. And we’re equally seeing a nice overlap with lululemon guests, but interestingly, a large number of non-lululemon guests owning MIRROR. So that’s where we get excited as we as we build out the synergies of having a lululemon guest buy into a MIRROR and have the MIRROR guest buy into lululemon as their sweat solutions. But there is really a versatility in who’s buying it and how they are using it. And the fundamental opportunity is unlocking these synergies, which we’re just getting started as we’re able to tap into the stores now that we’re emerging out of the pandemic and drive the awareness for the product.

[Omar Saad, Evercore]

Thanks.

[Operator]

The next question comes from John Kernan with Cowen. Please go ahead. John Kernan, your line is open.

[John Kernan, Cowen]

So hey, sorry about that. Congrats – thanks for taking my question and congrats on the big guidance increase in the top and bottom line. I guess, Meghan, if you look at where the business is operating from a P&L perspective, if I were to take out the high end of MIRROR revenue guidance and maybe the midpoint of the dilution, you’d be somewhere around a 23% operating margin, which for the core business, which is above – comfortably above where it was in 2019. Can you just talk to the long-term upside to the margin potential for the core business, particularly as the store level margins, which you talked about earlier, recovered to previous levels?

[Meghan Frank, Chief Financial Officer]

Yes. Thanks, John. So as you mentioned, we are headed towards a very healthy operating margin for lululemon only for the full year, which is in line really with our Analyst Day expectations of operating profit and growth in excess of sales growth. We’re really focused on managing that for the long-term and as we look towards the future, investing behind growth opportunities in order to maximize our top and bottom line. So we’re maintaining that commitment, and we are firmly on track to those Analyst Day targets, which were really grounded in growth rates. So we will continue on that trajectory. And we will update our beyond 2023 plans at the appropriate time.

[John Kernan, Cowen]

Got it. Thank you.

[Operator]

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