lululemon athletica inc. (LULU) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Fourth Quarter and Full Year 2024 Financial Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Thank you, and good afternoon. Welcome to Lululemon's fourth quarter earnings call. Joining me to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of Lululemon's future. These statements are based on current information, which we have assessed, but 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. A 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, the comparable sales metrics given on today's call are on a constant dollar basis. press release and accompanying annual report on Form 10-K are available under the Investors section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the fourth quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour, so please limit yourself to 1 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.

Thank you, Howard. I'd like to welcome everyone to our fourth quarter call. I'm pleased to be here to discuss our results, which contributed to another year of growth at lululemon and also speak to our outlook for 2025. On today's call, I'll start with our performance in quarter 4, which exceeded the revised guidance we provided in January, and I'll also share some key highlights on our annual performance. Next, I'll provide insights into our product innovation and the strength of our pipeline, I'll then detail our strategies to raise our brand awareness, which remains a significant opportunity for us globally. Meghan will then review our financials and provide our guidance for the first quarter and full year of 2025 and then we'll take your questions. So let's get started. In quarter 4, total revenue, excluding the 53rd week, increased 8% or 9% on a constant currency basis. Operating margin increased 40 basis points to 28.9% and earnings per share increased 16%. In addition, in quarter 4, we repurchased $332 million of stock which brings our total repurchases in 2024 to $1.6 billion, which demonstrates our confidence in the long-term prospects for lululemon. Shifting now to our full year 2024 results Total revenue was $10.6 billion, and excluding week 53, increased by 8% or 9% in constant currency. Adjusted operating margin increased 50 basis points to 23.7% and adjusted earnings per share increased 15%. Since 2021, which is the base year of our current Power of Three x2 5-year plan, we have grown revenue at a 19% CAGR and increased adjusted operating margin by 170 basis points and grew adjusted EPS at a CAGR of 23%. This puts us ahead of our targets for all these key metrics as we enter the fourth year of our plan. I want to thank our teams across the enterprise for their ongoing dedication and commitment to our company but wasn't for this global collective, we would not be able to deliver these results. I'd now like to spend a few minutes discussing our product and sharing some highlights from our pipeline of innovation. In quarter 4, we were happy with our performance across merchandise categories. Outerwear and second layers performed well for both women and men. And within accessories, bags continued to be well received. Overall, we were pleased with the guest response to the newness we brought into our core franchises for the holiday season. Looking at quarter 1, we have increased our level of newness on par with the past. We believe this increase, along with a robust pipeline of innovation will enable us to meet the expectations of our guests and I'm excited about what the product teams are bringing to market this spring and throughout the year. We started the year strong with the launch of several new innovations. Glow Up is our newest technical franchise for women. Made from a new version of our proprietary Ultralu fabric, the Glow Up type offers a smooth and sculpted fit designed to be used for a variety of training workouts. We also introduced a tank top and intend to expand the line in future seasons. Daydrift is our newest lifestyle trouser for women, made from our Luxtreme fabric, this casual pant offers technical features that provide interior comfort and versatility. Initial response has been very strong, and we've been selling out across several sizes and colors. The teams are chasing into it now, and we have several additions planned for later this year. Based on this response and performance, we believe Daydrift will become a new core franchise. And finally, there is Be Calm. The latest addition to our Yoga assortment and offers incredible softness of relaxed fit and extreme comfort weather on or off the map. These are just some of the recent product launches, which have been well received by our guests and demonstrate how we continue to innovate and bring newness into our core activities while also expanding our casual offerings. We're pleased with the positive feedback from guests, which is in line with our expectations and consistent with past successful product launches. And we're excited about our product pipeline, and I'd like to share a few examples. Within shorts, for men, we recently launched a new run franchise called Mile Maker and we'll soon update License to Train to further lean into this franchise opportunity. For women, we'll update fast and free with new seasonal styles and colors later this year and will bring innovation into our Swiftly franchise including a new Run Short. We'll introduce a new fabric called Lulu Linen, which has the look and field of linen and also includes some technical performance attributes we are known for. And we're excited about the plans we have in place to celebrate the 10th anniversary of our iconic aligned franchise. We recently introduced the Align Palazzo Pant and will expand further with other new bottoms, including a legging with no front seam. Our guests have been asking for this innovation, and we believe this style, along with all the other newness and innovation we are bringing to market will help drive new guest acquisition and increase purchase from existing guests as well. As you can see, our teams have been hard at work, solving for the needs of our guests, and we feel good about our product pipeline for 2025. Our unique approach to innovation is grounded in creating technical apparel with wide-ranging and adaptable use cases. The strength of our pipeline, along with seasonal updates to our core styles, brings newness into our assortment on a regular basis and helps drive guest loyalty, repeat purchase and long-term value. I'm pleased with the styles we've launched so far this spring, and I'm looking forward to the innovations lined up for the remainder of the year. Shifting now to brand awareness. Our teams have been delivering on our strategy to activate the lululemon brand across several of our markets around the world, particularly in the U.S. We continue to focus on increasing our brand awareness, which remains low in nearly every market in which we operate. For example, our unaided brand awareness in France, Germany and Japan is in single digits. In China Mainland, it's in mid- to high teens. In the U.K. and Australia, it's in the 20s. And in the U.S., unaided brand awareness is in the 30s. Increasing awareness and consideration is a meaningful opportunity. So I want to share some of the strategies we have in place to help us achieve this goal, including: first, the way we show up in our local communities through brand activations, local events and with our membership program; second, how we leverage relationships with our ambassadors; and finally, our global brand campaigns. Let's begin with our local community-based activations. These events allow us to engage directly with our guests in unique and exciting ways beyond a simple purchase transaction. Our activations are aimed at building loyalty with existing guests and attracting new guests into the brand. We've hit the ground running in 2025. Our teams have been busy bringing the lululemon brand to license several of our markets around the world, particularly in the U.S. where our opportunity to grow awareness remains significant. In February, we partnered with the Rock and Roll Half Marathon in Las Vegas. We showed up in a big way along the strip with pre-race yoga, cheer stations on the course, co-branded product and a takeover of the sphere. Next, to launch our newest franchise, we opened a Glow Up studio in SoHo, New York for 2 weeks across February and March. In addition to a launch party, we hosted a variety of sweat classes for guests taught by several of our ambassadors sought after trainers and local fitness instructors. In London, we celebrated our new collaboration with British Fashion Designer Saul Nash, with a launch party during London Fashion Week. We also celebrated the opening of our newly optimized Regent Street store with a lululemon takeover of the giant video screens and new stands in Piccadilly Circus. And beginning in mid-March and finishing this week, we ran Membership Madness. This event included member-only access to in-store events, free classes at studio partners and the opportunity to win entry to unique experiences will host throughout the year. This shows how we are innovating and testing premium ways to connect with our 28 million members and provide them with access to compelling and exclusive experiences. In addition to our activations, we continue to explore and strengthen our relationships with our global ambassadors as we start the year. I'm very excited about the new ambassadors we have introduced to start 2025, including PGA golfer Max Homa, professional tennis player, Frances Tiafoe and Formula One champion, Lewis Hamilton. This elevated roster of ambassadors helps us connect with more guests, both existing and new end markets across the globe. In quarter 1, we showed how we can leverage these relationships in many ways, including activations and expressions of fan support at the Phoenix Open Golf tournament Indian Wells Tennis Tournament and Formula One races in both Melbourne and Shanghai. These are great examples of how we support our athletes as they compete, grow lululemon's credibility and awareness across our growth activities and allow our local teams to create fun and unique activations for our guests. In addition, these events, along with the high level of activations in this period contributed to very strong reach and guest engagement in our own social channels to start quarter 1. While our grassroots brand-building strategies remain very important to us, we use global campaigns to reinforce our brand positioning and bring new guests into lululemon. We recently launched our new brand platform, Live Like You Are Alive, with a campaign featuring 78-year-old fitness influencer Joan McDonald. We'll use Live Like You Are Alive as a foundation for our messaging and will bring new creative into the narrative throughout the year. Upcoming chapters include the celebration of Align's 10-year anniversary in quarter 2 and a run focused campaign later in the year. Let me now spend a few moments on our U.S. business and share my perspective as we head into 2025. As I have shared before, the missed opportunity from last year was the level of newness across our merchandise mix. The teams worked with our vendors chased into what was possible and improve the penetration of newness in the second half of 2024. These efforts contributed to a stabilization in the U.S. business as the guests responded well to many of the updates we brought into the assortment. I would also note that, importantly, our new guest acquisition and retention metrics remain strong, and our opportunity is to drive increased revenue per guest as we continue to bring newness and innovation into the mix. As you have seen, we started this year with several compelling new product launches, but we also believe the dynamic macro environment has contributed to a more cautious consumer. In fact, based on the survey we conducted earlier this month in conjunction with Ipsos, consumers are spending less due to increased concerns about inflation and the economy. This is manifesting itself into slower traffic across the industry in the U.S. in quarter 1, which we are experiencing in our business as well. However, we see guests who visit us responding to the newness and innovations we've brought into our assortment. We believe this is a positive indication as we continue to flow new product engage with our guests through unique and compelling activations and launch brand campaigns. We are controlling what we can control, and we expect to see modest growth in U.S. revenue for the full year of 2025. Before handing it over to Meghan, I'd like to highlight our square footage growth plans for 2025. Stores remain an important part of our growth story. Not only are they highly productive but there are also hubs in our local communities and allow us to engage directly with our guests, which provides us with another important competitive advantage. In 2025, we plan to grow square footage by approximately 10% and which will be driven by new store openings and our ongoing optimization program. We will continue to open stores in existing markets and enter several new countries this year, including Italy, as a new company-operated market, and Denmark, Belgium, Turkey and the Czech Republic under a franchise model. In terms of our optimization strategy, our recent and compelling example can be seen in London, with the relocation and expansion of our Regent Street store. This door, which now spans 14,000 square feet offers the largest pant wall and men's assortment in Europe as a destination for both residents and tourists. Our new store offers a pinnacle expression of our brand, and we expect it will continue to help us attract new guests into lululemon from the U.K. and across Europe. We have much to be excited about in 2025. However, as you are aware, the external environment remains dynamic, and there continues to be considerable uncertainty driven by macro and geopolitical circumstances. That being said, we remain focused on what we can control. We've had a busy start to this year with product launches and event activations, and I feel confident with our plans for the remainder of the year. Meghan, over to you.

Thanks, Calvin. We delivered Q4 results that exceeded our January guidance update as we saw strength across the key components of the P&L, including sales, gross margin and SG&A. These results contributed to another year of solid performance while acknowledging product opportunities we have discussed in our U.S. business. Key highlights in 2024 include revenue growth of 9%, excluding the 53rd week and in constant dollars, adjusted operating margin expansion of 50 basis points and adjusted earnings per share growth of 15%. I'm proud we were able to deliver these strong results while continuing to invest in our strategic initiatives, including building brand awareness through our activations and brand campaigns, growing square footage 14% and returning $1.6 billion to shareholders through share repurchases. Looking at 2025, we are pleased with both the level and composition of our inventory as we entered the spring season, and we are seeing good guest response to newness and innovation we brought into our assortment. However, we also acknowledge the uncertainty in the retail environment as the consumer is navigating a dynamic macro environment. While we expect both top and bottom line growth for the year, we continue to be thoughtful in our planning. I'll take you through our guidance in a moment, but let me now share the financial details of Q4. For Q4, total net revenue rose 13% or 14% in constant currency to $3.6 billion. Excluding the 53rd week, net revenue increased 8% or 9% in constant currency and constant dollar comparable sales increased 4%. Within our regions, excluding the 53rd week, results were as follows: Americas revenue increased 2% or 3% in constant currency, with comparable sales flat. By country, revenue increased 11% in constant currency in Canada and increased 1% in the U.S. China Mainland revenue increased 38% or 39% in constant currency with comparable sales increasing 27%. And in the Rest of World, revenue grew by 22% or 26% in constant currency with comparable sales increasing by 17%. In our store channel, total sales increased 13% on a constant dollar basis, excluding the 53rd week, and we ended the quarter with 767 stores globally. Square footage increased 14% versus last year, driven by the addition of 56 net new lululemon stores since Q4 of 2023. During the quarter, we opened 18 net new stores and completed 16 optimizations. In our digital channel, revenue increased 8% and 4% excluding the 53rd week and contributed $1.8 billion of top line or 50% of total revenue. And by category, excluding the 53rd week, men's revenue increased 12% versus last year, while women's increased 6% and accessories and other grew 9%. Gross profit for the fourth quarter was $2.2 billion or 60.4% of net revenue compared to gross margin of 59.4% in Q4 2023. The gross profit rate in Q4 increased 100 basis points ahead of our guidance and was driven primarily by the following: a 160 basis point increase in product margin, driven predominantly by lower product costs, lower markdowns and improved shrink, offset somewhat by higher air freight, 30 basis points negative impact from foreign exchange and 30 basis points of net deleverage on fixed costs. Relative to our guidance, which was for a gross margin increase of approximately 30 basis points, the upside was driven predominantly by leverage associated with higher top line, prudent management of fixed expenses within gross margin and foreign exchange. Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were approximately $1.1 billion or 31.5% of net revenue compared to 30.9% of net revenue for the same period last year. SG&A was better than our guidance of 80 to 90 basis points of leverage due to higher top line and foreign exchange. Operating income for the quarter was approximately $1 billion or 28.9% of net revenue compared to operating margin of 28.5% in Q4 2023. Tax expense for the quarter was $309 million or 29.2% of pretax earnings compared to an effective tax rate of 28.1% a year ago. The increase in tax rate relative to last year is due to a decrease in tax benefits related to stock-based compensation, an increase in nondeductible expenses and an increase in profits outside of the U.S. Net income for the quarter was $748 million or $6.14 per diluted share compared to EPS of $5.29 for the fourth quarter of 2023. Capital expenditures were $235 million for the quarter compared to $207 million for the fourth quarter last year. Q4 spend relates primarily to investments to support business growth, including our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments. Turning to our balance sheet highlights. We ended the quarter with approximately $2 billion in cash and cash equivalents. Inventory increased 9%, slightly lower than our guidance for an increase in the low double digits. We repurchased 938,000 shares in Q4 at an average price of $354. For the full year, we repurchased approximately $1.6 billion of stock. Share repurchases remain our preferred method to return cash to shareholders, and we currently have approximately $1.3 billion remaining on our repurchase program. Let me now share our detailed guidance outlook for full year 2025. We expect revenue to be in the range of $11.15 billion to $11.3 billion. This range represents growth of 5% to 7% relative to 2024. Excluding the 53rd week that we had in the fourth quarter of last year, we expect revenue to grow 7% to 8%. And as Calvin said, we expect revenue growth in the U.S. to be modestly positive for the year. I'd also note that we expect foreign exchange to have a negative 1 percentage point impact on our revenue growth rate for the year. We expect to open 40 to 45 net new company-operated stores in 2025 and complete approximately 40 optimizations. We expect overall square footage growth of approximately 10%. Our new store openings in 2025 will include approximately 10 to 15 stores in the Americas, with the rest of our openings planned in our international markets, the majority of which will be in China. For the full year, we expect gross margin to decrease approximately 60 basis points versus 2024. We expect the decrease will be driven by deleverage on fixed costs, FX headwinds and the impact of increased tariffs related to China and Mexico. For the full year, we expect markdowns to be relatively in line with 2024. Turning to SG&A for the full year. We expect deleverage of approximately 40 to 50 basis points versus 2024 driven by ongoing investments into our Power of Three x2 road map and FX headwinds. For the full year, we are planning investments in marketing and brand building aimed at increasing our awareness and acquiring new guests, investments to support our international growth and market expansion and continued investment in technology and data analytics capabilities. When looking at operating margin for the full year 2025, we expect a decrease of approximately 100 basis points versus 2024. While we remain thoughtful as we plan expenses, we also continue to invest in our strategic road map to enable future growth. As I mentioned, we are seeing headwinds from foreign exchange and tariffs while also absorbing some additional costs relative to last year as we layer back in certain expenses, including store labor hours, travel and incentive comp. I would note that between 2021 and 2024, our operating margin increased 170 basis points, which is greater than our Power of Three x2 target of modest operating margin expansion annually. For the full year 2025, we expect our effective tax rate to be approximately 30%. For the fiscal year 2025, we expect diluted earnings per share in the range of $14.95 to $15.15 versus EPS of $14.64 in 2024. Our EPS guidance excludes the impact of any future share repurchases, but does include the impact of our repurchases year-to-date. I would also note that FX pressure relative to last year is a $0.30 to $0.35 drag on EPS in 2025. When looking at inventory, we expect dollar inventory to increase in the high teens in Q1 as we anniversary last year's declines. We expect capital expenditures to be approximately $740 million to $760 million in 2025. This spend relates to investments to support business growth, including a continuation of our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments. Shifting now to Q1. We expect revenue in the range of $2.335 billion to $2.355 billion, representing growth of 6% to 7%. The growth rate in Q1 is being negatively impacted by 1 percentage point related to foreign exchange. We expect to open 3 net new company-operated stores in Q1. We expect gross margin in Q1 to be approximately flat with Q1 2024. We expect a modest improvement in product margin, offset primarily by deleverage on fixed costs. Markdowns are planned to be relatively flat with last year. In Q1, we expect our SG&A rate to deleverage by approximately 120 basis points relative to Q1 2024. This will be driven predominantly by increased foundational investments and related depreciation and also strategic investments, including those to build brand awareness to support future growth. When looking at operating margin for Q1, we expect deleverage of approximately 120 basis points. Turning to EPS. We expect earnings per share in the first quarter to be in the range of $2.53 to $2.58 versus EPS of $2.54 a year ago. Our EPS guidance for the quarter includes approximately $0.06 of incremental negative impact from foreign exchange. We expect our effective tax rate in Q1 to be approximately 30%. And with that, I will turn it back over to Calvin.

Thank you for your time today. I am pleased with how we closed out 2024, delivering results that demonstrate our leadership, agility and potential for growth. And I am proud of how we have started the year with new product innovations, collaborations and a steady drumbeat of brand and community activations around the world. This energy will propel us forward as we navigate the current economic and political uncertainty, especially in the U.S. We will control what we can control, and we will focus on continuing to deliver the high level of newness and product innovations our guests expects from lululemon. I continue to feel confident in our Power of Three x2 strategy and our people who will continue to excite and engage with our guests and drive us forward in 2025 and beyond. We'll now take your questions. Operator?

[Operator Instructions] Our first question is from Alex Straton with Morgan Stanley.

Perfect. Congrats on a great quarter. I just wanted to focus, Calvin, on the modest U.S. revenue growth you're expecting for the year. Can you just elaborate a little bit around how you define modest? And should that be consistent throughout the year? Or any difference in cadence by quarter? And then just how you really arrive at that as the right level from here?

Thanks, Alex. I'll take the first, and then I'll pass it over to Meghan to go specifically into breaking down the growth number for you. But as I sort of shared, in Q4, consistent with what we saw throughout the year, our guests responded well to the newness that we offered through our assortment, and our business continued to sequentially get stronger on the back of that newness. And as we transitioned into Q1, our newness is back to being on par where it's been in the past, as we indicated we would be in the guests has responded very well to a number of new product launches that I'm excited about continue to build into future franchises from Glow Up, Daydrift, Be Calm, Shake It Out as well as what lies ahead in our pipeline, which is very strong. And I shared just a few of those with you with the 10th year anniversary for a line coming up, building on the Palazzo Pant that she's responded incredibly well too as well as offering a no front seam legging, which we know our guests have been asking and to offer that within the aligned franchise as an opportunity to celebrate the 10th anniversary. We're excited about that as a means for our high-value guests as well as new guests to acquire and bring in. That being said, we are operating within a dynamic macro environment that's really contributed to a cautious consumer, where we've seen material impact to traffic across the industry. While we've experienced some of these traffic trends, the guest who is visiting have responded very well to our newness and innovation. When we look at UPT average order size, both of these are positive. So the guests coming in are responding to the newness, they're buying more, and it's having an impact. So those are very good indicators. And as we continue to flow the positive newness that we see throughout the year, as well as the activations, I want to touch on North America, in particular U.S. We've started the year with a fantastic rhythm and cadence of very unique community-based activations. So overall, there's a very good energy across the teams and the business and the guests are responding very well to product. And we're controlling and focused on what we can control. And I think we're well positioned as these macro challenges softened moving forward. But I'll allow Meghan to just sort of put a little bit of color to the numbers as well.

Great. Alex, so in terms of the U.S., we are offering color on North America growing in the low single-digit to mid-single-digit range for the full year, the U.S. on the lower end of that and Canada higher. We're not breaking down the quarters, but what I would share is in terms of Q1, it's not trending materially differently than Q4. As Calvin mentioned, we did come into the quarter and saw a decline in traffic, macro traffic that's impacting us as well. And we're also seeing some really positive performance in terms of newness, which we believe positions us well as that traffic environment improves. I would also note that the decline was more pronounced last year in the U.S. in Q2. So we're up against our largest growth rate in '24 in Q1.

The next question is from Brooke Roach with Goldman Sachs.

Calvin, I was hoping you could elaborate on your marketing strategy from here. Are you seeing the response that you're hoping to get as you build into some of these additional customer acquisition vehicles such as Membership Madness Week? And then can you speak to what that's driving in terms of consumer acquisition and retention, specifically in the U.S.?

Thanks, Brooke. Overall, how we've started this year in the energy and really focusing in on and activating larger activations, community-based events, I'm very encouraged with the results that we're seeing. A lot of those are geared to both acquire new guests as well as drive loyalty and help in our retention and love for the brand with our high-value guests. Across all of the ones that we've started, and I shared a few of those, the fun activations, celebrating our ambassadors, be it where they compete around the world in Melbourne, in the Waste Management Golf, Indian Wells as a means to activate and then some of the other activations we've done ourselves into the integrated marketing on the back of Glow Up in the Glow Up Studio in New York. We had thousands of guests register. For Membership Madness, we have over 15,000 guests that have signed up for community-based sweat activations with our partners around North America, heavily in the U.S. We have waiting list of over 1,000 for some of these activations in our communities. These are incredibly strong, rich engagement numbers. And we see through those equally a number of new guests. And that, to me, is one of the very unique aspects of our brand when I talk about our moat and what makes us unique. The ability to activate a campaign, integrate it across our community, our ambassadors and bring to life is something we definitely see great value in, plan to do even more of this year than last year. And I think you're just getting a flavor for what that looks like if you think of the first 8 weeks of this year to start and the pace of those activations. And the -- as I said, the engagement has been very strong. And then obviously, socially as well, the both earned media as well as the halo we get from those, and that bleeds to getting into that unaided brand awareness. So you're going to see more of that. We think it's a unique approach, and we do it very strongly across our communities and allows for our stores, our ambassadors to be involved. It's unique, and it's having an impact on both retention and acquisition. So I'm very pleased with how we've started this year. I think the energy and the cadence is very strong, stronger than we've done in, I think, a number of years and really feels that we're on the offense in this market and guests are responding well and the newness they're responding well to. And as Meghan said, we're focused on what we control and set up well for the rest of the year as the macro challenges soften and if they do.

Great. And then for Meghan, can you elaborate on the plans that you have embedded in your guidance for tariffs this year? If tariffs were to widen to a broader set of geographies, what are your mitigation strategies right now? And what is the quantification of the current tariff impact under what you're seeing today?

Yes, absolutely. So in terms of tariffs, we've got approximately 20 basis points of a headwind embedded in our guidance, which is reflective of current actions on China and Mexico imports closely monitoring the environment. We'll continue to look across our cost structure as well as to pricing should the environment change. So definitely keeping a close eye on that.

Our next question is from Dana Telsey with the Telsey Group.

Calvin, as you think about the effectiveness of the marketing and what you're seeing globally, I saw the new store in Tokyo, obviously, London also. How are you planning for international go forward? And how do you think of the activations there? And then, Meghan, on the margins, the cadence of margins as we go through 2025, are there any puts and takes of what we should be mindful of? And just lastly, for the first quarter sales growth guidance, are you currently within those rates now?

Thanks, Dana. I'll take the first part. the activations that I've referred to in the U.S. is absolutely our go-to strategy -- go-to-market strategy around the globe. And we customize it based on the maturity of the market. Obviously, the U.S., we have an opportunity to amplify deeper with bigger activations in communities in newer markets. We leverage and tap into the store base more and then build the momentum and the size and activate. But the general formula of leveraging local market community stores, educators, ambassadors, and there are a number, as you know, around the globe from Sweat Games in Mainland China to what we did with World Mental Health Day in many markets that were shared, how we're activating around these global competitive events that our ambassadors compete in. We just did a few Formula One races in both Shanghai and Australia with Lewis Hamilton being one of our latest ambassadors, plan to do that across a lot of our activities. So that is absolutely one of our unique go-to-market strategies that I think we do better than most. And stores play a big part of that and how we activate those. And we're early in our optimization strategies and plans. If you look back over the last year, but even just the last few quarters, we've optimized a store in Melbourne, 11,000 square feet, and it's performing incredibly well. You mentioned the store in Tokyo. We have exciting plans planned for Tokyo see Japan as a big growth market for us. We have an exciting plan and opportunity in South Korea and Regent Street that just opened that's performing very well with an incredible activation, both on the back of Saul Nash and Fashion Week as well as the activations the store teams did. So that is a big part of how we go and activate, and you're going to see more of that as well as these optimizations that continue to perform well and both acquire a local guests as well as welcome a global tourist guest into the brand that we acquire as well as they travel, wanting to come in and see the brand and the product. So excited about the momentum in both internationally as well as in North America.

Great. And I'll take the margin piece. So in terms of op margin, we are guiding to 100 basis point decline for the year. At the highest level, I'd just call out FX and tariff headwinds are a little bit over 50% of that decline in op margin. Then we've got some investments in the business to add back some of the expense areas we pulled out in '24. So I would view those 3 buckets as incremental headwinds unique to this year. And then we also are continuing to invest into our Power of Three x2 road map with our confidence on the long term. And in terms of quarters, we've got a little bit more pressure as we called out in terms of Q1. It's also related to Q1 being our highest revenue growth rate in '24. So we've got 120 basis points decline in op margin there. pretty similar story in terms of SG&A. So 120 basis points deleverage in Q1 and then 40 to 50 for the year. So I think that's the color I'd offer there. And then you also had a question, Dana, on quarter-to-date trend. We're not breaking out specifics on quarter-to-date trend, but I would share we're about 50% through the quarter and looking at current trend of business and mindful of the environment, we did guide to 6% to 7% growth for the quarter with 1 point also of an FX headwind embedded in that.

[Operator Instructions] The next question is from Lorraine Hutchinson with Bank of America.

Have you included any improvement from the choppy first quarter traffic performance in North America in the full year guidance? And are there ways to be more aggressive on some of these marketing activations to drive stronger traffic as we move through the year?

Lorraine, I would say our balance of year outlook reflects similar trends to Q1 at this point in time. And I'll let Calvin chime in on marketing.

Yes. And I think the -- we're always testing and learning and looking for ways to continue to invest within the parameters of our guidance to add to marketing. And I think I'm very pleased with the current response from our guests, excited about the campaigns coming. As I mentioned, the Align 10th year anniversary will be a large activation around the globe. supported with a lot of product, new product and ways that I think will engage both with new guests as well as our high-value guests and reasons to update their align wardrobe. So we always look for ways to keep leaning in and investing. And as I mentioned, the cadence in Rhythm to start this year has been definitely on the offense, and I'm pleased with the results and those results around the globe. And we're going to continue to be on offense and support the product and the pipeline of newness that's coming and with our guests.

The next question is from Matthew Boss with JPMorgan.

So Calvin, could you elaborate on sales metrics in the U.S. as you've introduced recent newness? Just your confidence in this year's product pipeline with first quarter-to-date sales trends unchanged relative to the fourth quarter despite the softening macro that I know you cited. And then Meghan, just your comfort with content and composition of inventory today? And what have you embedded for markdowns in the gross margin guide?

Matt, so in terms of sales in the U.S., so we did come into the quarter and saw a negative traffic trend industry-wide, which is impacting us. Similar conversion, I'd say, to what we experienced in Q4, and then we've seen an improvement in AOV and specifically UPTs really a reaction to the newness in our assortment. And again, feel that positions us well for when traffic rebounds. So Q1 trends for the U.S. not materially different than Q4. And then in terms of inventory, I'm pleased with the level and composition of the inventory. We offered some color on high teens growth, and it's really related to just the cadence of our inventory as we move through this year, being in a good in-stock position in core, bringing in newness. And we also are expecting flat markdowns for both Q1 and the full year at this point in time.

And next question is from Janine Stichter with BTIG.

A question for Meghan. I was hoping you could just elaborate a bit on your SG&A philosophy. With the guidance you gave for deleverage of 40 to 50 basis points this year, if we see better sales, would we expect it to still be in that range? Or would you put more into SG&A? Or on the flip side, if we have sales come in weaker, maybe just elaborate on some of the areas where you might have some flex.

Yes. Thank you. So as I mentioned, we do have a headwind in FX for the year. And in terms of how that impacts SG&A, it's about half of the 40 basis point FX headwind, so 20 basis points impacting SG&A. And then also, as I mentioned, we are still investing behind our Power of Three x2 road map. So continuing to support our international strategy, our store expansion strategy across the globe, marketing and brand, as Calvin mentioned, and going after that unaided brand awareness piece. And then another one I'd mention was just tech in terms of foundational investments in data and analytics. I think it will depend on the environment and the business dynamics in terms of where SG&A moves with either increasing or decreasing sales. We always have contingencies across the business, both on the upside and downside, and will depend on the momentum we're seeing in the business and the current environment in terms of how we approach that.

The next question is from Aneesha Sherman with Bernstein.

So Meghan, talking about the Americas versus international growth, you talked about a kind of low to mid-single-digit outlook for the Americas. That would put international growth quite a bit lower than what you did in 2024. Can you give some color around where you may be seeing a slowdown internationally? Are there particular markets? And what gives you -- what your assumption is coming from? And then a quick follow-up on your levels of investments. You talked about foundational investments, strategic investments, marketing. Can you talk about how flexible the cost base is to the downside in the event of a tougher macro scenario, what would margin progression look like?

Yes. So in terms of revenue by geography. As I said, we're offering color on Americas, low single digit to mid-single digit for the year and China, 25% to 30%, Rest of World, approximately 20%. So we're being thoughtful in our planning, looking at current trends of the business and the forward outlook in terms of the environment. So a little bit below what's embedded in our 5-year CAGR, but we remain ahead of schedule and really pleased and committed to that long-term target there. And then in terms of flex across the P&L, as I just mentioned, we do have a number of contingency levers dependent on business outlook. At this point in time, I would say we remain really focused on the long term and driving into our long-term opportunity while navigating some near-term headwinds, particularly with FX and tariffs.

The next question is from Michael Binetti with Evercore.

So Meghan, you started the year guiding gross margin flat and finished up 65 basis points and the U.S. slowed from where you thought it was going to be in the year. Can you just help -- I know you offered some comments on 4Q, but when you look at the year in total, what went different than you thought earlier in the year? And I'm curious where -- as you look at 2025, do those oc conservatism still exist? Or where do you see conservatism in the guidance for the year, both in gross margin again as well as in sales and SG&A?

Yes. Thanks, Michael. So I would say in terms of what played out differently, top line, I think we saw a little bit of an outperformance as we moved to close out the year, which would provide a little bit of leverage in terms of gross margin. We also mixed a little bit differently by category and saw an IMU benefit from that as well as some reduced freight rates impacting our gross margin in '24. So I believe we're well positioned in our guidance in terms of '25. The mix of business could come out different there as well as the top line outlook could impact our leverage point. But I would say at this point in time, our current view on mix of business and revenue outlook is embedded in our guidance color.

The next question is from John Kernan with TD Cowen.

Meghan, it looks like marketing went up to about 5% of sales this year. It's still below some of your bigger peers. I think it's up about 50 basis points year-over-year. How do you think about marketing within fiscal '25 and also long term? Is this something given all the activations that Calvin talked to earlier, that you could flex up to drive faster sales in the Americas?

Yes. So marketing was an area where when we navigated last year and some of the challenges we had with newness and looked across our P&L investments, we maintained our investment in marketing, and we did see our penetration of sales tick up a little bit to that 5% range. That's what we're expecting as we move into '25. It is definitely an area we're closely monitoring. We've got a lot of excitement in terms of product newness and active marketing activations as we move throughout this year. So dependent on business trend, it's an area we would look to flex if that's appropriate.

The next question is from Paul Lejuez with Citi.

On the traffic slowdown, I think you specifically mentioned the U.S., but can you talk about what you saw in the other regions, including Canada, including China, international or rest of world? And anything within the U.S. that you could call out regionally? Obviously, there's been some unfavorable weather in the first quarter. Curious if you're seeing any impact from that.

Yes. So in terms of traffic, I would say the notable trend we saw was that shift in the U.S., nothing materially different in terms of either Canada or the international markets. I would call out just the difference in Lunar New Year timing, the shift in the timing this year does have a little bit of a headwind on Q1 in terms of our China trend and overall international. And then in terms of U.S. regional, we aren't seeing any meaningful differences regionally. And in terms of weather, I would say, really focused on what we can control.

The next question is from Ike Boruchow with Wells Fargo.

Just to keep going with the U.S. And is this -- is what you're seeing more broad-based? Is it more on the women's side, more on the men's side? Just kind of curious what you see there. And then given, Calvin, your talk of the innovation and newness flowing through as the year progresses, it sounds like you're baking in like essentially no improvement in North America trend from here. Shouldn't we be expecting North America -- sorry, I mean U.S. specifically to improve as the year progresses given the merchandise flow that you're speaking to?

Thanks, Ike. In terms of difference between the men's and women's business, we haven't seen any material notable change from the fourth quarter, which we talked about with women's up 6%, men's up 12%. The big opportunity in missed newness last year was really in our women's business. And we've gone back to at par on that, and she has responded, as I mentioned, across some of those metrics I shared, UPT average order size. So I think that is definitely a positive for us and being back in traditional mix of newness and innovation across the assortment for her. We are seeing good results to that. And I'll let Meghan reference the second part.

Yes. So we are guiding 6% to 7% in Q1 and then 7% to 8% for the full year. The Americas came in at 3% growth for '24, and we offered color low single digit to mid-single digit. So I would say that range captures a potential uptick there, but being thoughtful in terms of how we're planning the business given some of the uncertainty this year.

The next question is from Jay Sole with UBS.

Would it be possible to clarify on the square footage growth, how much square footage growth you're planning for the U.S. this year? And also how much square footage growth you're planning for China?

We're not breaking out the specifics on square footage growth, but what I can offer is we've got 40 to 45 net new openings for the year, square footage growth of 10%, which is in line with our Power of Three x2 target of low double digits. North America is about 10 to 15 openings within that, the balance is international. The majority of those would sit in China, and we'll continue to keep you updated as we move throughout the year.

And then on some of the adds -- the store adds happen in the U.S., are you upsizing stores in the U.S. this year?

Yes. We continue to pursue our optimization strategy. So we had a total of globally 39 optimizations in 2024, and we're currently planning 40 for 2025 globally.

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