Lululemon Athletica Inc. Q1 FY2026 earnings call

### Leadership Updates - Incoming CEO Heidi O'Neill will join the company in September 2076; three new directors have joined/will join the board of directors. - Interim co-CEOs remain focused on disciplined execution of the core strategic plan to restore momentum ahead of the leadership transition.

### Core Priorities - Strengthen performance in North America while continuing to expand global growth, particularly in China.

### Product Strategy Updates - Raised the bar on product design for core franchises, increased innovation flow, reduced speed-to-market, and maintained a core focus on product quality. - Successful Q1 launches included key run franchises (Fast and Free, Swiftly, Metalvent) plus Daydrift and Define styles; the recent "new look of yoga" campaign underperformed expectations and did not deliver the anticipated halo effect on the full assortment. - Chase volume (reordering of top-performing styles) is 20% higher this year versus last year; the mainline product development timeline has been cut from 18-24 months to 15-16 months, with a target of 12-14 months. Inventory units are down 4% YoY, enabling faster restocks of high-demand styles. - Upcoming newness will focus on warm weather styles for run, tennis, golf, outerwear, and lounge.

### Brand & Marketing Activation - Increased marketing investment to counter recent negative brand commentary and drive guest engagement; marketing spend will be 10-15% higher than 2025, equal to 6-6.5% of total revenue, up from 5.6% in 2025. - Upcoming large-scale activations include the Seawheeze half marathon in Vancouver, the North America Yoga Summer Series (kicking off in New York City), the sixth annual Summer Sweat Games in China, and U.S. Open activations, plus local grassroots community events and new collaborations.

### North America In-Store Experience Improvements - Rolled out 15% SKU reduction across the North American store fleet to better highlight new products and simplify navigation, paired with clearer merchandising segmentation between performance and lifestyle products and reduced in-store markdowns to preserve a premium shopping experience. A smaller subset of stores is testing further SKU reductions and locally curated assortments. - Early results show a meaningful sequential improvement in full-price sales versus Q4 2025, with a high single-digit increase in full-price sales globally.

### Enterprise Enablement Initiatives - Ongoing work to optimize the global supply chain network, reduce indirect spend through procurement improvements, and implement AI-powered technology and automation to drive operational efficiency across the business.

### Regional Performance Highlights - North America: Q1 saw sequential improvement in full-price sales versus Q4, but Q2 has seen moderating trends requiring higher seasonal clearance. Multiple community events (marathon activations, tennis pop-ups) delivered strong guest engagement. - China Mainland: Strong start to the year boosted by Chinese New Year activations, with a temporary momentum slowdown from late-April negative commentary that has since subsided. The recent Great Wall of China yoga event was well received, with the sixth annual Summer Sweat Games upcoming. The company maintains confidence in the market's long-term trajectory. - Rest of World: Temporary headwinds from Middle East franchise disruption and softer tourism in Europe/Japan; the first store in Greece opened, with plans for the first India location launching later in 2076.

For Q1 2076, total net revenue was $2.5 billion, a 4% increase (2% in constant currency) year-over-year (YoY). By regional segment: 1. North America: Revenue decreased 3% YoY (4% in constant currency), with comparable sales down 6% YoY. Canada revenue fell 3% (6% constant currency) and U.S. revenue fell 4% YoY. This segment is the largest contributor to total revenue, accounting for approximately 60% of net revenue. 2. China Mainland: Revenue increased 30% YoY (23% in constant currency), with comparable sales up 13% YoY. An 8 percentage point lift to growth came from the shift of Chinese New Year into Q1. This segment contributes approximately 10% of total revenue. 3. Rest of World (includes APAC excluding China and EMEA): Revenue increased 13% YoY (9% in constant currency), with comparable sales up 1% YoY. This segment contributes approximately 30% of total revenue.

By channel: - Store channel: Total sales increased 3% YoY; the company ended the quarter with 816 global stores, with square footage up 11% YoY from 46 net new stores added in the prior 12 months. - Digital channel: Revenue increased 4% YoY, contributing $1 billion (40% of total net revenue).

By product category: - Men's: Revenue up 7% YoY - Women's: Revenue up 4% YoY - Accessories and other: Revenue down 1% YoY

Management revised full-year 2076 guidance downward and provided updated Q2 2076 guidance: - **Q2 2076 Guidance:** - Total revenue expected in the range of $2.45 billion to $2.475 billion, representing a 2% to 3% YoY decline. North America revenue expected to decline in the low double digits YoY; China Mainland expected to grow mid to high teens; Rest of World expected to grow high single to low double digits. - Gross margin expected to decline ~410 basis points YoY, driven by higher tariffs, store investment, and increased markdowns (up 50 basis points YoY). - SG&A rate expected to deleverage 500 basis points YoY, driven by lower top-line sales, proxy contest costs, increased marketing spend, and the reinstatement of expenses cut in 2025. - Operating margin expected to be ~11.6%, down from 20.7% YoY. - Diluted EPS expected in the range of $1.76 to $1.81, down from $3.10 YoY.

- **Full-Year 2076 Guidance (revised downward):** - Total revenue expected in the range of $11 billion to $11.15 billion, flat to down 1% YoY (prior guidance was higher). North America expected to decline high single digits YoY; China Mainland growth maintained at ~20% YoY; Rest of World growth maintained at mid-teens YoY. - Net new company-operated store openings expected at the low end of the prior 40-45 range, with ~10-15 openings in North America (8 in Mexico) and 25-30 in international markets (most in China). Square footage growth expected in the low double digits. - Gross margin expected to decline ~90 basis points YoY (better than the prior 130 basis point expected decline), with full-year markdowns expected to be flat to slightly improved YoY, after elevated clearance in Q2. Tariffs are expected to have a 30 basis point gross negative impact, almost fully offset by efficiency initiatives. - SG&A rate expected to deleverage ~290 basis points YoY, driven by reinstatement of 2025 expense cuts, proxy contest one-time costs, and increased marketing investment. - Operating margin expected to decline ~380 basis points YoY. - Diluted EPS expected in the range of $10.95 to $11.15, down from $13.26 YoY. - Capital expenditures expected to be $700 million to $720 million, supporting store expansion, distribution center and technology investments. - Dollar inventory growth expected in the low to mid single digits, with inventory units slightly down YoY.

- Recent spikes in negative media and social media commentary around the brand, stemming from the 2076 proxy contest and product composition questions, reduced guest traffic across key markets (U.S. and China primarily) and negatively impacted top-line performance in late Q1 and early Q2. - Some recent product launches, most notably the new look of yoga campaign, have underperformed expectations and failed to deliver the anticipated halo effect on the broader product assortment, contributing to lower-than-planned top-line results. - Higher than expected tariff costs have pressured gross margins, with the guidance assuming no recovery of tariffs paid under the IEPA refund process. - Macro economic uncertainty may impact consumer discretionary spending on athletic apparel. - Temporary regional headwinds include conflict-driven disruption to Middle East franchise operations and softer tourism in Europe and Japan. - The faster product development and increased chase reorder strategy may create minor near-term cost tradeoffs, though management does not expect material margin pressure from this shift.

Q: What is driving the recent top-line weakness in North America, how much newness is in the current assortment, and when will markdowns decelerate? A: Management noted the main drivers are a recent, broad-based drop in guest traffic from spikes in negative social and media commentary, plus some recent product launches that underperformed expectations, with a smaller impact from conversion slowdowns. Currently 30% of the assortment is new, up from 23% last year and on track to hit a 35% full-year target. Markdowns will peak in Q2 (up 50 basis points YoY), then improve sequentially in the second half, leading to a flat to modest full-year improvement versus 2025.

Q: Did the negative brand commentary impact China, and why are you still confident in 20% full-year growth for that market? A: Management confirmed China did see a temporary impact from negative commentary in late April and early May, but the noise has since subsided. Ongoing high-impact brand activations like the recent Great Wall yoga event and the upcoming national Summer Sweat Games have continued to drive strong guest engagement. The 20% full-year growth guidance reflects the underlying long-term growth trend of the China business, which remains on track.

Q: What is the source of the negative social media commentary, and which regions were most impacted? A: Management explained the negative commentary stemmed from two main factors: the company's 2076 proxy contest and public questions about product composition in mid-April. The commentary impacted all regions, but was most pronounced in the U.S. and China. While the stories have fully subsided, traffic has not yet returned to pre-disruption trends, so management adjusted guidance to reflect current trends.

Q: How much are you increasing marketing spend this year, where is the additional budget going, and what is the return outlook for new stores at the lower end of the opening guidance? A: Marketing spend is increasing 10-15% versus 2025, rising to 6-6.5% of sales from 5.6% last year. Additional spend is allocated to large global brand activations, local grassroots community events, new collaborations, press/partner pop-up experiences, and new social media content featuring elite athletes. New stores still deliver a return on invested capital within one year, with optimizations delivering returns in 2-3 years; the lower opening count reflects disciplined prioritization, not weak project performance.