Lululemon Athletica Inc

NASDAQ:LULU

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Fourth Quarter and Year End 2021 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 fourth 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’d like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management’s current forecast of certain aspects of Lululemon’s future. These statements are based on current information, which we have assessed, but by which its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in our annual report on Form 10-K and in today’s earnings press release. In addition, comparable sales metrics given on today’s call are on a constant dollar basis. The press release and accompanying annual report on Form 10-K are available under our 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 operating statistics for the fourth 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 would like to turn the call over to Calvin.

[Calvin McDonald, Chief Executive Officer]

Thank you, Howard. It’s my pleasure to welcome everyone to our earnings conference call. The fourth quarter was a strong finish to a strong year. Once again, we delivered revenue growth in excess of our Power of Three targets and we grew adjusted earnings per share of 31% compared to last year and 22% on a 2-year CAGR basis. Looking at our full year results, I am particularly proud that we crossed the $6 billion in annual revenue milestone and we accomplished this despite the ongoing challenges in the macro environment. And we have seen our momentum continue and accelerate as we enter the first quarter. Our guidance calls for 24% to 26% top line growth and 19% to 23% adjusted EPS growth in quarter one. For 2022 overall, we are also guiding to another strong year for the company and I am optimistic about our performance and opportunities going forward as we continue to build upon our unique strengths and bring technical innovation to our guests. I am pleased to walk you through the key highlights of our fourth quarter and annual performance on today’s call. And I look forward to speaking with you again in a few weeks when we host our Analyst Day, where we will share our vision and outlook for the next 5 years. But before I begin, I want to take a moment to acknowledge the horrific situation in Ukraine and the humanitarian crisis that is unfolding. While we do not operate in Ukraine, we have made a donation to the relief efforts and are also supporting our employees who have family and friends in the region. In addition, as we look around the world, we continue to closely monitor our markets that are experiencing the surging impacts of COVID-19. As we have done throughout the pandemic, we will prioritize the health and safety of our people and the communities we serve and the decisions that we make. Now, turning to our results. The fourth quarter capped off another impressive year of growth for us, demonstrating the sustained momentum in the business. I want to thank our teams across the entire organization who navigated the Omicron variant, successfully executed against our Power of Three growth plan and continue to deliver for our guests and all of our stakeholders. In the fourth quarter, revenue grew 23% versus last year and 23% on a 2-year CAGR basis. And for the full year, revenue grew 42% versus 2020 and 25% on a 2-year CAGR basis, an impressive performance by any benchmark with strength across our products, channels and geographies. Before discussing our results in more detail, I will touch on several topics, including the macro trends that continue to provide a tailwind for our business, the ongoing issues within the global supply chain and their impact on our inventory levels and pricing. Lululemon continues to benefit from several consumer trends that uniquely position us in the marketplace. First, category strength as athletic apparel continues to outpace growth in overall apparel; second, the growing significance of versatility both while guests are engaging in their fitness routines and in their everyday lives; third, the importance of both physical retail and the convenience of digital engagement, these speak particularly well to our operating model; and finally, the increasing focus on physical, mental and social well-being given everything that people are navigating across the globe. These trends have accelerated during the COVID-19 period and we are well positioned to continue to grow our business in 2022 and beyond. Shifting to the supply chain, we continue to experience delays across our global network, particularly related to transporting our products via ocean freight. As a result, we continue to lean more heavily into air freight. However, I am pleased with how our teams have become increasingly adept at navigating these challenges. We have implemented several strategies to ensure we have the proper levels of inventory to fuel our top line growth. And as I have stated on prior calls, our core seasonless product makes up a meaningful percentage of our inventory, approximately 45%, which carries minimal markdown risk and positions us well to fulfill ongoing and future guest demand. Meghan will discuss our inventory levels in more detail shortly. When looking at pricing, we continue to be strategic. We plan to take some selective price increases over the course of the year on a small portion of our styles. Our pricing also factors in the value of our innovation and we will continue to monitor the competitive environment to ensure we maintain our price position relative to our key peers. Let me share further highlights from quarter four and our overall results for 2021, starting with the fourth quarter. First, we generated total revenue of $2.1 billion. Despite the onset of the Omicron variant during the peak weeks of the holiday season, we delivered growth in excess of our Power of Three plan. Second, our e-commerce business remains strong, with comps up 16% on top of a strong 92% last year. This translates on a 2-year CAGR basis to an increase in e-commerce of 50%. Third, our adjusted earnings per share were $3.37, which is better than the guidance we provided in January. And as I mentioned, we are pleased with how our momentum accelerated into the first quarter, as indicated by our strong guidance range. For the full year 2021, we delivered on our financial commitments and also made notable headway on our impact agenda goals. Some key milestones include generating total revenue of $6.26 billion, delivering adjusted earnings per share of $7.79 and achieving our Power of Three targets early including exceeding our total revenue target, doubling our e-commerce business, doubling our men’s business and we are on track to quadruple our international business by the end of 2022. I am pleased in our ability to deliver every 2023 goal ahead of schedule, which is particularly noteworthy given the effects of the global pandemic. This level of performance is only possible because of the agility and nimbleness of our teams who successfully navigated the macro environment, supported each other and found new ways to engage with our guests. I am also proud of how we advanced our impact agenda in 2021 to drive meaningful positive change in the world. A few examples include launching our first re-commerce program, Lululemon Like New in two test markets and introducing our limited edition Earth Dye collection; partnering with and investing in Genomatica to create the first ever plant-based alternative to nylon, which will help us achieve our goals to make 100% of our products with sustainable materials and have end-of-life solutions by 2030; and establishing our Lululemon Center for Social Impact to help break the barriers to well-being in local and global communities with a commitment to contribute $75 million by 2025. These are important milestones and represent only the beginning of what we will accomplish related to sustainability and well-being. Next, I will provide some additional details on our quarter four results and the foundational strengths that drive our business, fuel our success, and give us a distinct competitive advantage. I will begin with product innovation. Our momentum remained on the upswing across all major categories, with women’s revenue increasing 20%, men’s growing 28% and accessories up 33%, all on a 2-year CAGR basis. In quarter four, we continued to leverage the Science of Feel to fuel product newness and innovation, our guests responded well to our holiday merchandise assortment, and we saw positive response to outerwear, second layers and technical shorts for both women and men. Looking forward, our product pipeline remains robust and I am excited for the innovations we are bringing to market in 2022. Some highlights include our multiyear partnership with the Canadian Olympic Committee and Canadian Paralympic Committee. I am excited by the reaction to our product in the buzz this partnership created for our brand, notably both inside and outside of Canada. Partnering with Team Canada is a unique opportunity for us to build awareness for Lululemon on the global stage and to support some of the world’s most elite athletes. We are off to a great start. And I am thrilled that this month, we launched our footwear collection and we have received a very broad-based positive reaction to our unique women’s first positioning. In development for more than 4 years and leveraging our 20 plus years of designing and creating performance gear for women, we revealed our first three styles of technical athletic shoes and one performance slide to the market. The first of our four styles, Blissfeel, began selling on March 22 in North America and Mainland China and the UK will launch shortly. The initial guest response to Blissfeel has dramatically exceeded our expectations, not to mention incredible reviews from a number of publications and guests and we will have more to share about our footwear at Analyst Day. Before moving on to our omni guest experience pillar, I want to highlight several additional innovations we have teed up in 2022. First, we will continue to lean into our franchise strategy and you will see us introduce new silhouettes into our popular scuba and defined collections. Next, as guests begin to return to the office into more normalcy in their lives, we will continue to expand our on-the-move collection with new styles of tops and bottoms for men and women planned throughout the year. And finally, I’m very excited that we are advancing our play strategy as well with the launch of our first ever design for tennis collection available in stores and online beginning this week and our first ever design for golf collection, which will rollout next week. As you can see, we have ample opportunity to bring new technical solutions to our guests and I am pleased with how our product pipeline looks going forward. Switching now to our store channel, total revenue in quarter four increased 47% versus last year and 3% on a 2-year CAGR basis. Traffic increased 50% and operating profit expanded significantly versus last year. We were pleased to get off to a promising start during the recent holiday season and then like others, we experienced several consequences of the Omicron variant such as capacity constraints, limits on staff availability and reduced operating hours in some locations. Towards the middle of January, we began to see store traffic improve and this trend has continued into the first quarter. This acceleration underpins our guidance, which is detailed in our press release and Meghan will discuss shortly. I am excited by the energy I am seeing in our stores. In fact, I was able to spend some time with our teams in New York earlier this month and it was incredible to see our guests once again looking to connect with Lululemon in real life and the excitement among our educators to welcome them back into our stores. Turning to our e-commerce business, we continue to successfully leverage our investments in our sites and apps over the last 2 years, which enhanced the user experience and allowed us to serve even more guests where, when and how they want to shop. Looking forward, we will fuel ongoing growth in both traffic and conversion by continuing to make foundational investments across our digital platform. These will include enhancing our storytelling by adding more content and product comparisons, improving inventory accuracy and continuing to make the guest checkout experience more seamless. Our omni operating model has served us well through the COVID-19 environment. We were an omni business long before the pandemic hit. And this enables us to continue raising our capabilities across channels to engage with our guests on their terms in new and compelling ways. Turning now to MIRROR, in quarter four, MIRROR performed in line with our revised expectations and for the year both revenue and dilution were consistent with the guidance we provided. We remain enthusiastic about MIRROR, the opportunities within hybrid fitness and our plans for the platform in 2022 and beyond. We will hold further discussion about MIRROR for our Analyst Day in a few weeks and I am excited to share more with you about the evolution of our business and how it will further help build loyalty and community at Lululemon. Before handing it over to Meghan, I’d like to spend a few minutes on our international business. While we saw similar impacts from COVID-19 across many of our international markets, our performance remained strong in quarter four. It’s also important to note that we remain in early days of our growth trajectory outside of North America. For the full year 2021, international revenue grew by more than 50% and still represents just 15% of the business and our EMEA business turned profitable for the first time. We continue to see how well the Lululemon brand translates across borders and our plans in the coming year call for approximately 40 new stores opening across our international markets. In quarter four, we saw strong performance from every major region with each generating robust double-digit sales growth on a 2-year CAGR basis. In Mainland China, revenue increased more than 60% on a 2-year CAGR basis. After experiencing a slowdown in stores in December related to the COVID-19 variants, we saw an acceleration in January fueled by our Lunar New Year activation. The Olympics also generated considerable excitement in the region and we saw a significant lift in traffic that coincided with the games. And one other data point among many, in Australia, we have begun a store optimization program modeled after our successful approach in North America. Initial guest response to our remodeled stores has been strong and the program is also helping drive new guest acquisition in our most mature international market. This shows the growth potential for Lululemon in both our more mature and relatively new international markets. And with that, I will turn it over to Meghan.

[Meghan Frank, Chief Financial Officer]

Thanks, Calvin. We delivered solid performance in Q4 while navigating supply chain challenges and the impacts of COVID-19. And I am encouraged that we have seen trends accelerate in Q1. We are positioned well for spring despite the challenges that continue to exist in the macro environment, and I am excited about what’s in store for Lululemon in 2022. I am also thrilled that I will get the chance to see many of you in person at our Analyst Day next month. We have a new 5-year plan and I am looking forward to sharing our updated long-term financial targets with you at that time. Let me now share with you the details of our Q4 performance. I will also discuss specifics on our balance sheet, including our inventory and cash position. Please note that the adjusted financial metrics I will share include the operating results of MIRROR that exclude approximately $1.5 million of acquisition-related costs and their associated tax effects in Q4 2021 and $7.8 million of acquisition-related costs and their associated tax effects in Q4 2020. You can refer to our earnings release for more information and reconciliations to our GAAP metrics. For Q4, total net revenue increased 23% to $2.1 billion, in line with our guidance. Comparable sales increased 22% with a 32% increase in stores and a 16% increase in digital. On a 2-year CAGR basis, total revenue increased 23%. In our store channel, sales increased 47% on a 1-year basis and 3% on a 2-year CAGR basis. Productivity was slightly below 2019 levels due to impacts from the Omicron variant, including increased capacity constraints, more limited staff availability and reduced operating hours in certain locations. On average, we had 99% of our stores opened throughout Q4. We currently have 97% open with current closures related to the impact of COVID-19 in China. Square footage increased 14% versus last year driven by the addition of 53 net new stores since Q4 of 2020. During the quarter, we opened 22 net new stores. In our digital channel, revenues increased 50% on a 2-year CAGR basis and contributed $1 billion of top line or 49% of total revenue. Within North America, revenue increased 21% and within international, we saw 41% increase both on a 2-year CAGR basis. Gross profit for the fourth quarter was $1.2 billion or 58.1% of net revenue compared to 58.6% of net revenue in Q4 2020 and 58% of net revenue in Q4 2019. The deleverage relative to 2020 was driven by increased air freight expense. Our gross margin increase of 10 basis points relative to 2019 was driven by 120 basis points of leverage on occupancy, depreciation, product team and DC costs and 20 basis points of favorability in foreign exchange, which was partially offset by a 130 basis point decrease in product margin. Q4 product margin included an increase of approximately 530 basis points in air freight related to macro supply chain challenges, without which product margin would have increased versus 2019. I would also note that markdowns declined 110 basis points 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 $642 million or 30.2% of net revenue compared to 31.5% of net revenue in Q4 2020 and 28.2% of net revenue in Q4 2019. The leverage in the quarter versus Q4 2020 resulted from leverage in our store channel, somewhat offset by increased investments in corporate SG&A. The deleverage relative to Q4 2019 is primarily related to the consolidation of MIRROR’s results this year but not in 2019. Adjusted operating income for the quarter was $592 million or 27.8% of net revenue compared to 26.9% of net revenue in Q4 2020 and 29.8% of net revenue in Q4 2019. Excluding MIRROR, Lululemon-only operating margin increased modestly versus 2019, inclusive of the 530 basis point increase in air freight. Tax expense for the quarter was $156 million or 26.4% of pretax earnings compared to an adjusted effective tax rate of 27.4% a year ago. The reduction relative to last year is primarily due to increased deductions for stock-based compensation and a reduction in adjustments upon the filing of certain tax returns. Adjusted net income for the quarter was $436 million or $3.37 per diluted share compared to adjusted earnings per diluted share of $2.58 in Q4 of 2020 and $2.28 in Q4 of 2019. Capital expenditures were $128 million for the quarter compared to $58 million in the fourth quarter last year. Q4 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 nearly $1.3 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory grew 49% versus last year and was $966 million at the end of Q4. Our product teams continue to strategically use air freight to help mitigate industry-wide supply chain issues, with these higher costs having an impact on inventory when looked at on a dollar basis. We also believe that 2019 is the most relevant comparison point given supply chain challenges since the beginning of the pandemic. On a 2-year CAGR basis, unit inventory increased 29% relative to 2019 at the end of Q4 and is well positioned relative to our Q1 2022 top line guidance of a 25% to 26% increase on a 3-year CAGR basis. Again, comparing to 2019 due to the supply chain issues that existed throughout 2021, we were in an under-inventory position for most of the year and likely could not fulfill all guest demand, which our product teams have taken into account as they have planned merchandise receipts for 2022. In addition, we continue to leverage our core assortment, which makes up approximately 45% of our total inventory. Looking forward and grounded in my prior comments, we expect inventory dollars to grow in excess of the 49% 1-year growth rate we experienced at the end of Q4 2021 until the end of the year when the growth rate will begin to moderate. However, when looking at units, we’d expect growth in line with the 29% CAGR at the end of Q4 versus our 3-year CAGR revenue guidance of 23% to 24%. In Q4, we repurchased approximately 844,000 shares at an average price of approximately $381. For the full year, we repurchased 2.2 million shares, returning $813 million to shareholders. By mid-March, we have completed our current authorization, and I’m pleased that our Board has authorized a new $1 billion program. This program is our largest individual authorization ever and speaks to the optimistic view of our future shared by our management team and our Board of Directors. Before discussing our guidance, I’d like to provide an update on MIRROR. As Calvin said, MIRROR performed in line with our expectations in Q4. For the year, revenue and dilution were also in line with our expectations. Looking at 2022, we expect MIRROR will generate revenue in excess of 2021 and dilution will improve. Beyond that, we will have more to say regarding MIRROR at our Analyst Day, when we’re excited to share with you our updated vision for the business. Let me shift now to our outlook for Q1 and the full year 2022. For Q1, we expect revenue in the range of $1.525 billion to $1.55 billion, representing a 1-year growth rate of 24% to 26% and a 3-year CAGR of 25% to 26%. We expect to open five to 10 net new company-operated stores in Q1. I’d also note that store productivity has trended modestly above 2019 levels to date in Q1. We expect gross margin in Q1 to be down 200 to 250 basis points relative to Q1 of 2021. Our Q1 guidance includes an impact of approximately 300 basis points of pressure from air freight costs due to port congestion and capacity constraints. In Q1, we expect SG&A leverage of approximately 200 to 250 basis points relative to 2021. Drivers of the leverage include reduced digital marketing costs at MIRROR and cost efficiencies in both our store and e-commerce channels. Turning to EPS, we expect adjusted earnings per share in the first quarter to be in the range of $1.38 to $1.43 versus adjusted EPS of $1.16 a year ago. For the full year 2022, we expect revenue to be in the range of $7.49 billion to $7.615 billion. This range assumes our e-commerce business grows in the mid-teens relative to 2021. When looking at total revenue, our guidance implies a 3-year CAGR of 23% to 24%, which continues to be higher than our 3-year revenue CAGR of 19%, leading up to 2020. We expect to open approximately 70 net new company-operated stores in 2022. This is an increase relative to our recent annual opening cadence and reflects both the benefits and learnings from our pop-up strategy, which enables us to test and identify new markets where strong demand exists for our brand and informs our permanent store opening strategy and guests and insights derived from our digital business. Our new store openings in 2022 will include approximately 40 stores in our international markets and represents a square footage increase in the low 20% range. For the full year, we are forecasting gross margin to decrease between 50 to 100 basis points versus 2021. The reduction relative to last year is driven by increased investment in our DC network and a strategic increase in product development cost for MIRROR. The increased MIRROR cost and gross margin will be offset by a reduction in digital marketing, which flows through SG&A. Turning to SG&A for the full year, we are forecasting leverage of 50 to 100 basis points versus 2021 driven by the increased sales and the shift in MIRROR investments I just mentioned. And when looking at operating margin for the full year 2022, we continue to expect modest expansion. I also wanted to provide some additional color for the quarters beyond Q1. When looking at revenue, we expect growth in the low 20s on a 3-year CAGR basis in quarters two through four. In terms of gross margin, we are taking into account the dynamic nature of the global supply chain environment, our current thinking regarding air freight usage and the ramp in air freight usage we experienced last year. We currently expect gross margin to decline approximately 200 to 250 basis points versus last year in Q2, declined approximately 100 to 150 basis points versus last year in Q3 and then expand versus last year in Q4. In terms of SG&A, we would expect it to be relatively flat with 2021 in quarters two and three and then leverage in Q4. For the full year 2022, we expect our effective tax rate to be approximately 29%. We expect our tax rate for 2022 to be higher than 2021 as we benefited from some higher tax deductions related to stock-based compensation in 2021. And in 2022, we are expecting to begin accruing for Canadian withholding taxes on earnings, which we aren’t able to repatriate on a tax-free basis. For Q1, we expect our effective tax rate to be approximately 27.5%. For the fiscal year 2022, we expect diluted earnings per share in the range of $9.15 to $9.35 versus adjusted EPS of $7.79 in 2021. Our EPS guidance excludes the impact of any future share repurchases. We expect capital expenditures to be approximately $600 million to $625 million for 2022. The increase versus 2021 reflects increased investment in our supply chain, digital capabilities, new store openings and renovation as well as other technology and general corporate infrastructure projects. Notably, we are beginning a new multiyear project to increase our distribution capabilities to support our future volume and growth. And we are also ramping up our square footage growth relative to last year. A range of $600 million to $625 million is approximately 8% of revenue, in line with our current Power of Three target of 68%. Thank you. And with that, I’ll turn it back over to Calvin for some closing remarks.

[Calvin McDonald, Chief Executive Officer]

Thank you, Meghan. As you can see from these results in the early start to 2022, this is an exciting time for Lululemon as we build upon the momentum in the business and the across-the-board performance of our products, channels and markets. We look forward to sharing more with you during our Analyst Day, which will be held in person in New York and available through a live stream. We will go into more details on the strength of the brand and speak to our next 5-year growth plan. And the fact that we have achieved our current growth targets ahead of schedule bodes well for the opportunities ahead. In closing, I want to thank everyone across Lululemon for continuing to consistently deliver at such a high level. I’m honored to work alongside each of you as we continue to deliver for our guests, shareholders and one another. And with that, we are happy to take your questions. Operator?

[Operator]

Thank you. [Operator Instructions] Our first question comes from Ike Boruchow of Wells Fargo. Please go ahead.

[Ike Boruchow, Wells Fargo]

Hi, everyone. Congrats on the performance. I guess, Calvin, I was just wondering if you could elaborate a little bit more on the pricing initiatives that you mentioned. Could you just kind of talk us through timing, how you’re kind of surgically looking there? And then how do you think about pricing into the footwear collection as well, that would be great. Thank you.

[Calvin McDonald, Chief Executive Officer]

Right. Thanks, Ike. I mean we continue to be strategic with our pricing strategy as we have been in the past. We are taking modest selective price increases over the course of the year. Some will go in place in Q2. And as we look forward, into additional quarters. As I mentioned, it’s a very small portion of our styles that are impacted about 10%. And this will help offset some of the pressure we’re seeing on AUC. But we are constantly looking at multiple factors, such as the value of innovation, our range within our own product categories as well as in the marketplace and making sure that the performance of our apparel is always at a higher index than our pricing is relative to competitive options in the marketplace. So we are taking selective, but it’s not a drastic move. And then from a pricing on footwear, we definitely as you saw with the introduction of Blissfeel opened in a competitive position. We will apply the same approach to our footwear as we have our entire lineup, meaning very little discounting. We priced it effectively based on the innovation. Immediate response has been incredible. So we feel well priced. I don’t plan to take any additional actions on footwear this year, and we will manage the category as we look forward with additional innovation as well as evolution of the category over the years ahead.

[Ike Boruchow, Wells Fargo]

Great. Thanks.

[Operator]

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

[Brooke Roach, Goldman Sachs]

Good afternoon and thank you so much for taking our question. Calvin, I’d love to hear a little bit more about how you’re contemplating the different levers of growth throughout the brand this year. How are you thinking about the contribution from the core product line relative to growth in new products, such as footwear, tennis, golf and OTM?

[Calvin McDonald, Chief Executive Officer]

Sure. Thanks, Brooke. Majority of our growth will continue to come from core. As you’ve heard me say before, we’re early innings of growth across all of our growth levers. That starts with product and that’s core within men’s. That’s core within women’s that includes, obviously, the strength in our bottoms business and our core activities that we’ve identified, Run, Yoga, Train and OTM, where we still have opportunity to keep innovating and developing and bringing new innovation to the guests. Then you factor in the growth potential across our channels, be it digital stores and then our regions. These are the drivers of the business, and it is rooted in core in the key categories and activities that we’re known for. We’re excited about not just the pipeline behind those and how we will continue to expand, but our ability to reach and extend into new categories as we’re pulled into them with our guests and what their sweat needs are. Very excited with the introduction of footwear, and we’re taking a very disciplined long-term approach to building that category. And as you’ve heard me reference before, we have a number of play activities, which we know are the secondary sweat activities of our core loyal guests. Tennis, golf, hike are some of those. And we’re excited to be able to bring, again, some innovation that delivers on unmet needs. Now in these activities, the versatility of our product is where we really play to our strength. There are a lot of golfers out there in ABC pants and ABC shorts, metal event shirts. And we see a select opportunity to bring some very distinct innovation to that activity, in particular, builds credibility and it will lift both the activity, our credibility and activity as well as the core versatile product that we have. So that’s been the strategy, and we’re just further down the development of it in this year and excited about the newness that we’re going. But the majority of the growth is still coming from core where we have a significant opportunity to continue to bring innovation behind those key activities.

[Brooke Roach, Goldman Sachs]

Thank you so much.

[Operator]

Our next question comes from Adrienne Yih of Barclays. Please go ahead.

[Adrienne Yih, Barclays]

Good afternoon. It’s great to hear the momentum accelerating into the first quarter. So congrats. Calvin, I believe this is probably for you, just wanted to get some more color on kind of the potential in the North American market? This is the most stores that you’ve opened in quite some years, 70, with 40 internationally. Just wondering, is there a new target for North America or maybe you’ll give that to us in April? And should we expect this to be sort of the new steady state? And then Meghan, any metrics around those four-wall margins or in the size, I’m assuming is considerably larger than the average that you have in the opening. Thank you very much.

[Calvin McDonald, Chief Executive Officer]

Great. Thanks, Adrienne. There is no change in our store expansion strategy, and that includes both the addition of new stores, testing new markets and new opportunities through our seasonal store initiative as well as expanding existing stores where we go in. We validate the market through seasonal. We move to a permanent location. And as we grow the business, we look to expand it, all within a moderate range relative to others, but very much within the square footage that we know can continue to prove, deliver on the productivity numbers, the economics that we’re looking for as well as show up and represent the brand in the way we want between men’s, women’s, in particular, and we’re seeing great success in doing that. So we still see for that strategy, significant opportunity in North America. Predominantly driven by the U.S. with some select opportunity in Canada, but reinvesting in our fleet for the expansion, as I mentioned as well, is very much the balanced approach. And then on Analyst Day, we will be able to share more over the next 5 years how we see. But we still have a lot of opportunity for growth in all markets, including North America, across stores as well as digital.

[Meghan Frank, Chief Financial Officer]

And Adrienne, I would add, we have very healthy four-wall margins north of 20% for our store fleet and feel really confident in these openings as well as strong productivity. And we are at healthy levels with the store productivity reaching back to 2019 levels quarter-to-date. So, feel optimistic about store performance as we move forward, an important part of our strategy.

[Adrienne Yih, Barclays]

Great. Thank you very much. Best of luck.

[Operator]

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

[Lorraine Hutchinson, Bank of America]

Thank you. I was just hoping for an update on the international business, both Europe and Asia, where you stand profitability-wise and how you expect that to unfold in the coming years?

[Meghan Frank, Chief Financial Officer]

Yes. Hi Lorraine, it’s Meghan. We reached, as Calvin mentioned, profitability in Europe, which would put us profitable overall for international region. Still see opportunity with scale as we expand that business, and we will share more on our international strategy in a few weeks on Analyst Day.

[Operator]

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

[John Kernan, Cowen]

Congrats on a phenomenal year and a great start to take that in ‘22, looking forward to the Analyst Day. Meghan, did you give guidance for DTC in terms of the full year revenue guidance? I think I heard mid-teens, and if that’s the case – that does seem to imply that store productivity is now ramping above 2019 levels even as you open a lot of new stores internationally, and we are still not even fully out of a pandemic. So, maybe if you could talk to DTC growth within guidance and store productivity within full year guidance and then what you are seeing from some of the newer stores that are coming online in terms of productivity?

[Meghan Frank, Chief Financial Officer]

Yes. Thanks John. So, we did share overall revenue growth of 20% to 22% on a 1-year basis and within that, e-commerce growing in the mid-teens on an annual basis. And that would contemplate store productivity above 2019 levels, which we are seeing currently in Q1. I would say we continue to plan our business from an omni perspective and multiple channel scenarios to be able to meet the demand and where it comes to us and also navigating COVID-19 impacts were relevant. But that’s our current outlook in terms of mid-teens growth for e-com and then stores above 2019 productivity.

[John Kernan, Cowen]

Got it. And then maybe one quick follow-up. The CapEx is stepping up a bit this year and obviously, stores growth is accelerating. But can you talk to other investments that might be going in the CapEx?

[Meghan Frank, Chief Financial Officer]

Yes. It’s really two key pieces. So, the step-up in stores is one of them. And then we are also beginning a multiyear DC expansion strategy to support the long-term growth of our business. That capital range that we provided is 8% of sales, so in line with the 6% to 8% target that we provided on our last Analyst Day.

[John Kernan, Cowen]

Got it. Thank you.

[Meghan Frank, Chief Financial Officer]

Yes.

[Operator]

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

[Matthew Boss, JPMorgan]

Great. Thanks and congrats on the continued momentum. So, Calvin, maybe could you just speak to drivers of the recent top line acceleration that you cited in the business? Maybe touch on categories. What are you most excited about as we think about the core innovation pipeline and how that potentially sets up for the potential halo as room to additional categories across the store?

[Calvin McDonald, Chief Executive Officer]

Great. Thanks Matthew and that’s – I will try to share some of my excitement and make sure that I hold enough for us celebrating in a few weeks when we come together on Analyst Day. But clearly, we know that product fuels our business and our momentum, and it has and it will continue to. And we are early innings on that product development opportunity. And there has been no fundamental change in the strategy of the key categories of run, train, yoga and OTM and some of the key play activities, as I have mentioned. What has driven our momentum in the business is really the continual introduction of those activities, gaining credibility behind those activities as well as color and flow. We have continued to work through the logistical challenges, saw a greater disruption in the fourth quarter, although still very pleased with our results. And the team continues to get better. So, flow is better, core is solid and the new innovation in either franchise supporting activities or in the new innovation that I alluded to. Both men’s and women’s saw very strong-double digit growth. Every category within men’s and women’s, very strong outerwear second layer and technical shorts were some of the standout in fourth quarter. Obviously, COC, the Canadian Olympic Committee gear performed very well, introduction of footwear is off to a great start. These are small in relative terms, but we know our position to create brand awareness, consideration, drive loyalty with our existing guests and attract new guests and very encouraged with how well they are performing in those metrics as well. And then as I look forward into ‘22, we have some exciting additions to existing powerful franchises, scuba, our define OTM, as our guests go back to work. The team has been working and building that out. We see men’s is – we are more developed than OTM for him and the team has been working on building out the assortment for her in terms of the versatility functionality of our gear. It really is a completely open space and opportunity for us. And then some of the play categories that are fun. But more importantly, and I alluded to them before, is they build credibility in these activities and 80% of the assortment of these activities is our core product. So, this is all geared and designed around remaining narrow and focused on assortment, driving consideration awareness and the key activities that we focused on and using both core and newness to drive that credibility and ultimately, the sales back to core. The formula is working and continues to build momentum, and we are excited, and we will share a lot more on Analyst Day, but that gives you a little bit of flavor for the start of this year, at least until we get into the longer play.

[Matthew Boss, JPMorgan]

Great. Looking forward to the celebration in a few weeks.

[Calvin McDonald, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Dana Telsey of Telsey Advisory Group. Please go ahead.

[Dana Telsey, Telsey Advisory Group]

Good afternoon everyone and congratulations on the nice results. As you think about new customer acquisition and new customer expansion. What are you seeing there? What did you see in digital versus stores? And any updates to your enhancements of how you are thinking to reintroduce the loyalty program and progress on re-commerce and what that can do to sales and margins? Thank you.

[Meghan Frank, Chief Financial Officer]

Dana, we saw growth across both new and existing guests in Q4. We have also experienced, as we have mentioned previously, more cross-shopping throughout the pandemic period, and we see higher value from our guests who come to us both on e-commerce and stores. So, we continue to see that as an opportunity long-term, and then I will let Calvin take the loyalty question.

[Calvin McDonald, Chief Executive Officer]

Yes. I will quickly touch on both loyalty and re-commerce. Again, we will probably sound, I apologize to the group, a bit of a broken record, but there are a lot of exciting initiatives that we have been testing and piloting and learning from and they play into our 5-year vision. And I do want to save for our time together in New York. But on loyalty, clearly, this brand has very strong loyalty with our guests. And uniquely and interestingly, it’s been built the way we would want it to through relationships, incredible product. We tested a loyalty program that extended that relationship into sweat and strengthened our position of community in our stores. And that led to our confidence around the MIRROR acquisition, which is really an opportunity for us to position it in that membership base as a means to drive loyalty and retention with the Lululemon guests. And that’s what we will be sharing is the opportunity of further driving that through synergy and integration and we see a very unique and exciting proposition there. So, more on loyalty to come. And then on re-commerce, we are excited with the test that we did this year. We were in two states California and Texas. We had 80 stores participating. Basic program is gently used, guests can bring in product. They get a gift card on a predetermined dollar rate for the items they bring in. Those go to a third-party. Those items, they get washed, they get posted. And we are very encouraged with what we are seeing in terms of not just existing guests bringing in sort of an incentive to clean out the closet and get some of those still very good and quality product into someone else’s hands and see them redeem the gift cards, renew their wardrobe and then new guests being acquired through the pricing of the re-commerce product on our website. So, we will share more of our thinking moving forward. But the program is performing very well. It’s meeting and exceeding in terms of its goal, which is getting at current guests to spend more, acquisition of new guests with a more approachable entry price point and supporting our planetary initiatives and offering end-of-life solutions for our guests and being leaders in those goals. So, very encouraged, more to share in a few weeks.

[Dana Telsey, Telsey Advisory Group]

Thank you.

[Operator]

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

[Michael Binetti, Credit Suisse]

Hey guys. Thanks for taking all the questions here and congrats on a great quarter. I guess just for coming up on the Analyst Day, I know the SG&A plan for 2023 was about $2 billion. In that, you are on about $6 billion to $6.3 billion of revenues. You did the revenue number this year you pointed out, which is nice to see. But the SG&A was about $2.2 billion, so a little higher than you thought on similar revenues. I know, Calvin, we have talked about this on a few other conference calls. But some of the big investment buckets in there and especially e-commerce, you had to pull forward to service all the demand you had in 2020. But did you – I mean are some of the investments that you were thinking about beyond ‘23 in the original framework? Have you already started those investments? And then I guess on international margins, you said – oh sorry, international margins, I think at Analyst Day, last time you said international would quadruple. And then I think you said international margins had just broken even in 2018 and that international will be 10% to 15% of earnings by 2023. So, a lot of margin expansion was baked in at that time. Maybe some of the comments today made it sound like you hit a lot of your domestic targets early, but maybe there is some room left as an opportunity on international. Maybe you could orient us on where the margins are in international where you see the opportunity?

[Meghan Frank, Chief Financial Officer]

Hi Michael, it’s Meghan. So, in terms of SG&A for 2022, so we are really pleased that we are guiding to operating margin that’s just modestly under 2019, including the consolidation of MIRROR and then also inclusive of a 280 basis point impact from air freight pressure. We are really focused on optimizing that op margin expansion. And we have made some shifts in our investment profile, so investing more behind digital as we navigated the pandemic, which those expenses hit predominantly in SG&A. And then we pulled back to some degree on new store openings and renovations and saw that benefit within our gross margin. So, confident in our investment profile and that sets us up for long-term sustainable growth, and we will continue to take that approach going forward. And then in terms of international, we did guide to revenue quadrupling by 2023. So, we –as Calvin mentioned, we will reach that goal in 2022. And then our earnings are on track to what we expected. And overall, I would say our business has performed, over-performed in North America as well. So, in terms of overall dollars have reached that goal and penetration may differ slightly.

[Michael Binetti, Credit Suisse]

Thanks for all the color. Congrats again guys.

[Meghan Frank, Chief Financial Officer]

Thank you.

[Operator]

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

[Mark Altschwager, Baird]

Hi. Thanks for taking my question and congrats on the strong year. So, the initial revenue guidance this year is quite a bit ahead of the power of three growth targets. And I know we will need to wait a few weeks here to hear the details on the new 5-year plan. But I am wondering if we should read from the 2022 guidance that you are confident the business is in a place to sustain this higher level of growth that you have been delivering over the last few years and that you are planning for 2022? Thanks.

[Meghan Frank, Chief Financial Officer]

Thanks Mark. So, at this point in time, until we update in a few weeks, we are maintaining that commitment to the low-teens growth rate. We are expecting higher growth this year. We have been talking about – we thought we had some missed demand in 2021 as we navigated through some supply chain challenges. So, feel comfortable with our guide, which is above expectations of 23% to 24% on a 3-year CAGR basis and really broad-based over-performance category, region and channel, and we will share more work with you in a couple of weeks.

[Mark Altschwager, Baird]

Great. Thank you.

[Howard Tubin, Vice President, Investor Relations]

Operator, we will take one more question.

[Operator]

Certainly, our next question comes from Paul Lejuez of Citi. Please go ahead.

[Paul Lejuez, Citi]

Hi. Thanks guys. Two quick ones. One, just curious if you can share how big you expect the footwear business to be in ‘22 and second, can you talk about real estate projects that you are planning for ‘22 beyond just the store openings that you mentioned? How many expansions, relocations, remodels and any data you can provide on the remodels that you have done? Thanks.

[Meghan Frank, Chief Financial Officer]

Hi Paul, it’s Meghan. So, in terms of footwear, we are not putting a number on 2022 and we will share more on how we are thinking about that business. It’s a small portion and again, just a test-and-learn category for us. In addition to the 70 new store openings, we are also planning on 35 co-located remodels, which is up from 22 in 2021. So, that continues to be a strong strategy for us and allows us to expand our footprints and maximize our revenue opportunity where we have high sales per square foot and help to showcase a broader assortment of our women’s and also men’s product.

[Paul Lejuez, Citi]

And then can you talk about the lift that you see when you do those remodels, both in aggregate, total volume and sales per square foot?

[Meghan Frank, Chief Financial Officer]

Yes. We haven’t broken out that specifically, but we do see – we do target those optimizations in areas where the sales per square foot is above our average and do expect to see a meaningful lift from a revenue perspective, adding on a more meaningful portion of our men’s revenue.

[Paul Lejuez, Citi]

Thank you. Good luck.

[Meghan Frank, Chief Financial Officer]

Thank you.

[Operator]

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