Lululemon's FY25Q3 conference call: The target for next spring is to increase the penetration rate of new styles to 35%.

Recently, Lululemon (LULU.US) held the FY25Q3 conference call. In terms of overall market performance, the clothing sector continued to face pressure. Although the company maintained market share in the high-end sportswear sector, there was a slight loss in high-performance apparel due to downward trading behavior among customers. Regarding new product introductions, the company expressed satisfaction with its innovative pipeline. In this quarter, the company updated the SBA series and introduced high-performance new products such as Mile Maker and Shake It Out in the casual series. Looking ahead to spring, the company's goal is to increase the penetration rate of new styles to 35%. This will balance innovation in the high-performance activity category (which continued to grow in Q3) with new products and innovation in the lifestyle category. The company will start the new year with the Train series and then launch new products from core series such as Scuba, Swiftly, and ABC. Q&A session: Q: How is the demand trend in the third quarter? What is the trend so far in this quarter (QTD)? Can you provide detailed information, especially regarding the slowdown trend after Black Friday? Looking ahead to next year, what is a reasonable time frame for optimizing the product mix? A: The progress of demand in the US market in the third quarter was generally as expected, with August performing the best and October relatively weak (as planned). Looking ahead to this quarter, the company is satisfied with the strong performance during Thanksgiving, but there has been a decrease in traffic after Thanksgiving, which has already been reflected in the latest performance guidance. In terms of the timeline for product optimization, the company will focus on activating novelty in the product mix in the first quarter (Q1) and aim to maximize the benefits from increasing the penetration rate of new products. Additionally, the company will enhance product activation strategies to ensure maximum exposure and attention through omni-channel marketing. Q: With the adjustments to the product mix, what are the positive and negative factors to consider when calculating next year's operating profit margin? Considering the strategies mentioned such as "enhancing experience" and "activating new products," are there plans for reinvestment next year that we need to consider? A: Looking ahead to 2026, there are some pros and cons to the trend in operating profit margin, and the company will provide more detailed guidance after seeing the initial effects of the product mix adjustments in March next year. The main pressure points include the need to bear higher tariff costs for the entire year and the impact of the elimination of the de minimis rule, as well as the revaluation of certain costs reduced in 2025, such as incentive compensation. However, the company is actively taking steps to alleviate these tariff and cost pressures and is committed to overall cost savings and business efficiency. Despite facing negative factors, the team will continue to focus on efficiency improvements and plan to update progress in March next year. Q: How does Lululemon's performance in this quarter compare to the overall industry/market performance? Which product lines or categories will see the influx of new products first? A: The clothing sector continues to face pressure in terms of overall market performance. While we have maintained market share in the high-end sportswear sector, there has been a slight loss in high-performance apparel due to downward trading behavior among customers. In terms of new product introduction, we are satisfied with our innovative pipeline. This quarter, we updated the SBA series in the casual category and introduced high-performance new products such as Mile Maker and Shake It Out. Looking ahead to spring, our goal is to increase the penetration rate of new styles to 35%. This will balance innovation in the high-performance activity category (which continued to grow in Q3) with new products and innovation in the lifestyle category. We will start the new year with the Train series and then launch new products from core series such as Scuba, Swiftly, and ABC. Q: What traits and abilities does the company/board primarily focus on when looking for the next CEO? A: Traits with experience in transitioning CKH HOLDINGS. Q: To what extent are the new product lines and future strategies directly inspired and guided by first-hand research and customer feedback? A: We will continue to prioritize innovation in the five major activities of running, training, yoga, golf, and tennis. For example, the training series will introduce a new high-performance fabric designed specifically for weight training. Based on analysis of high-value customer data, the company will continue to update core series (Core Franchises). For example, the Swiftly series will undergo rapid iteration updates, the men's ABC pants will be updated, and opportunities for innovation will be sought in successful series such as Waffle and Scuba. The team comprehensively utilizes their own customer behavioral data and research feedback from brand ambassadors and the community to precisely identify innovation opportunities. Q: What price increase measures has the company taken so far this quarter? Are there additional price increase plans for next spring? You mentioned maintaining or supporting the current level of operating profit margin next year, what specifically does this include in terms of content and measures? A: Regarding pricing, the company has not taken any new price increases since last quarter. Previously, the company moderately raised prices on a few product lines and was satisfied with the price elasticity shown by these actions, which met revenue and profit margin expectations. The company will continue to monitor the competitive landscape, but currently has no further plans for price increases. For the operating profit margin in 2026, the management believes that negative factors will outweigh positive factors. The main pressure point is that next year will be the first full year that the company will bear higher tariff costs. Therefore, it is expected that next year's profit margin will face some pressure. Although the team is actively seeking measures to offset these costs and has made progress, improving profit margins and achieving efficiency will be a multi-year effort. Q: How are the major product lines performing? Do you believe these core businesses are large enough to warrant a "reset" in 2026 and beyond in order to make new product innovations and design language more prominent to consumers? What Proof Points of new design language do you currently see that give you confidence that the new styles to be introduced in 2026 can change the trends currently seen in the US? A: The company's strategy for core series is to maintain balance, continuously drive innovation in the five major high-performance activity categories of running, training, yoga, golf, and tennis, and meet athlete demands through businesses such as leggings and tops. The social leisure category performs well, but the lounge category, which is the most challenging core series, is being addressed by the company through material and silhouette updates of the Scuba series, which have received positive feedback internationally. Since many core series are saturating in North America while the international market still has growth potential, the company's strategy is to drive growth internationally while reshaping and innovating in North America. To ensure that new products and design language are prominently presented to consumers, the company is implementing key initiatives: offline, leveraging tests in Los Angeles and Miami to reduce store product density and optimize planning to highlight the visibility of new products; these tests have shown positive results and are planned to be expanded. Online, the new website design provides the team with more tools to position new products at the core of customer attention through storytelling and navigation. These measures have shown initial effectiveness in product adoption and visibility, providing confidence for the launch of new products in 2026. Q: Can you quantify the specific impact of the [NFL partnership] on company sales and profit margins? Has this partnership successfully attracted new customers, or has it re-engaged existing customers as expected? A: From an expectation standpoint, the company is satisfied with the performance of the NFL partnership. The strategic focus of this partnership is similar to our other strategic partnerships, mainly focusing on customer acquisition, aiming to increase both male and female customer bases. Although still in the early stages, we are pleased with the number of new customers attracted through this partnership. Financially, the NFL partnership currently accounts for a relatively small percentage of the company's business, but we are satisfied with the overall profitability of the project. However, as revenue sharing is involved, we have not disclosed specific financial breakdown data. Q: Do you have any additional thoughts on the "trade-down" trend observed in the third quarter? How does this trend of customers seeking lower prices affect your use of pricing as a means to offset future costs (such as tariffs)? A: This behavior has been evident throughout the fiscal year and reflects consumers' mindset in uncertain environments. Consumers are currently responding positively to promotional activities in the market, actively seeking value and ways to save expenses, which has continued into the third quarter. In terms of pricing, the company has always taken very strategic measures and is satisfied with the price elasticity demonstrated by the price increases that have been implemented, aligning with sales and profit margin expectations. The company will continue to maintain this item-by-item, cautious approach to future pricing decisions. Q: Regarding the Canadian distribution center (DC) that is planned to be operational next year, considering that its construction has been ongoing and the de minimis policy has now been canceled, does the company need to reposition the use of this DC? Are there any plans or considerations currently in place regarding this? A: The team is conducting a thorough evaluation of the entire distribution network. This does not mean that the company will be discontinuing its presence in Canada, but it does mean that the DC network will need to be adjusted to maximize operational efficiency. Management stated that more details about the DC network adjustments will be shared when the team's work progresses further in 2026. Q: Can you provide a detailed comparison of the performance of e-commerce business and physical store business in this quarter? How would you summarize the overall characteristics of the sportswear market in China? Are there significant market differences between different city levels in the Chinese market? A: The Chinese mainland market continues to show very strong growth momentum, and the overall performance is satisfactory. While part of the quarter's performance exceeded expectations due to factors such as the timing of platform activities, lululemon remains one of the brands with the least discounts in these activities. The company leverages these activities to activate products such as Scuba. Additionally, the company has a low proportion of outlet stores in this market, allowing for effective clearance of discounted products through these channels, which is very effective. The outerwear business has performed well in the Chinese market, with existing series like Wonder Puff and new designs such as Feather Weight receiving positive feedback from consumers. The company continues to gain share and momentum in the market. The team has strong execution and has achieved success at all city levels. As the business penetrates deeper into second and third-tier cities, the brand continues to resonate well and perform strongly, with no obvious negative differences seen. Q: Will the leadership changes affect or impact the timing or any aspect of the extensive product updates or releases scheduled to launch at the beginning of 2026? How is the customer acceptance of the new products that have been launched so far? Are there significant differences in customer response compared to the company's traditional products? A: The company is confident in the work the team has done in product innovation, so the leadership changes will not affect the schedule or plans of the new product releases at the beginning of 2026. The team is enthusiastic about achieving the goal of increasing the penetration rate of new products to 35%. Management stated that the current new products (considered as core products in the future) launched in the US market have achieved better-than-expected growth, showing very strong and positive reactions from both high-value and regular customers. The company is very satisfied and encouraged by the success rate of new products and will continue to increase the proportion of new products in the product mix to offset the challenges posed by the prolonged lifecycle of some core series. Q: Under your (Calvin) transition and Co-CEO structure, to whom does the design department and product department report? Who will ultimately decide on key product decisions such as product direction, production content, and which products enter the stores? A: Under the Co-CEO structure, Andre Maestrini will continue in the role of Chief Business Officer, providing leadership to global markets and general managers and leveraging his success in the global market to provide new perspectives and insights to the North American team. During the CEO search process, the design, product, and brand departments will report directly to Meghan (CFO). The team has operated collaboratively as peers, a dynamic that will continue to drive business development. Additionally, as many key decisions in design, product, and merchandise for the first half of next year (including the 2026 winter season procurement) have been completed before the search began, the team's current focus is on executing Meghan's outlined action plans and leveraging existing foundations to achieve business inflection points. Q: How do you view the changes in markdowns? What were the reasons for higher-than-expected markdowns in the third quarter? What are the reasons for further increases in markdowns in the fourth quarter? How confident are you in achieving the goal of increasing full-price penetration next year? Is this improvement more likely to occur in the second half of next year, or will it be visible in the first half? A: The sales performance this year fell short of expectations, leading to the company accumulating more seasonal inventory, thus resulting in higher-than-expected markdowns in the third quarter and an increase expected in markdowns in the fourth quarter, reflecting in the current markdown expectations. Looking ahead to next year, the company is adopting a more conservative inventory strategy. The plan is to keep inventory units managed below sales plans to mitigate markdown risks and to utilize the previously described chase capabilities to capture and chase upward trends. The company plans to implement this new inventory management dynamic starting from the first quarter (Q1). While the company has prepared various contingency plans for different market trends, overall, it will maintain a more cautious and conservative stance in inventory management to increase full-price penetration.