lululemon athletica inc. ($LULU)

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 first quarter earnings conference call. Joining me today are Meghan Frank, Interim Co-CEO and CFO; and Andre Maestrini, Interim Co-CEO, President and Chief Commercial Officer. 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 quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com. On today's call, Meghan will begin with some remarks addressing current business trends and our updated guidance. Then she and Andre will speak to the plans and strategies we are implementing to drive improved performance and also share some Q1 highlights. Meghan will then discuss our detailed financials and guidance outlook, and then the team will be happy to take your questions. Before I turn the call over to Meghan, I'd like to remind investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the first quarter as well as our quarterly infographic. Meghan, over to you.

Thanks, Howard, and welcome everyone to our Q1 call. Before we dive into our results and current business trends, I want to say how excited we are to welcome incoming CEO, Heidi O'Neill, to the company in September. Andre and I both spent time with Heidi. It's clear to me she has a true passion for the lululemon brand, a deep understanding of product excellence, extensive experience driving growth and transformation at scale and will be a strong leader for our organization. I'm looking forward to working with her to help lululemon achieve the opportunities in front of us. I also want to give a warm welcome on behalf of the leadership team to our newest Director, Esi Eggleston Bracey, who joined the Board in April as well as to Laura Gentile and Marc Maurer, who will join the Board following our annual meeting later this month. We appreciate the support of the full Board, including these new directors, as we continue to advance our plans and strategies. Turning to the business. Andre and I remain deeply engaged with our teams with a clear focus on discipline, execution and brand vision. Our priorities are straightforward. Strengthen performance in North America while continuing to expand our global growth engine. We saw encouraging signs in Q1 that reinforce we're moving in the right direction. But as we closed Q1 and entered Q2, we faced a few headwinds and a moderating sales trend. Based on our early analysis, there are 2 key factors impacting our trend. First, we experienced spikes of negative commentary in the media and on social channels with regard to our brand, which had an impact on traffic and overall top line performance. And second, not all of our product launches have met our expectations. While we've had several successful launches so far this year, we've seen others, as we start Q2, not generate the anticipated guest response. Taken together, these factors impacted performance and are reflected in our updated guidance. I want to emphasize that we are not sitting still, and we are moving with urgency to make the necessary adjustments to reaccelerate momentum, particularly in North America. With that, let's turn to the work already in motion to strengthen our top line trajectory and position ourselves for long-term sustainable growth. Let's begin with our product creation pillar. As a reminder, our intent with this workstream is to raise the bar on product design, including bringing a new creative energy into our key franchises, deliver a consistent flow of innovation, increase our speed to market and ensure a relentless focus on product quality. Across the assortment in Q1, we saw good guest response to the updates we brought into some of our key run franchises, including Fast & Free, Swiftly and Metal Vent. Other standouts I'd mention include Daydrift and Define, where we offered expanded silhouettes and new and elevated colors. However, more recently, our new look of yoga campaign didn't drive top line results in line with our expectations. As part of that campaign, we featured away-from-body styles across our Align and Groove franchises. These styles were met with good guest response, but so far, the campaign hasn't had the expected halo effect on other areas of our assortment. We're pleased with our overall product pipeline, and in Q2, you will see more warm weather styles across some of our key activities, including run, tennis, golf and our lifestyle offerings. Over the course of the year, we'll continue to bring newness, excitement and new fabrics into the assortment with focus areas including outerwear and lounge. To help improve the sales trend, we are leaning into our chase capabilities now and over the balance of the year. As we discussed on prior calls, our faster chase times improve our ability to read and react to guest demand trends and get back into certain strong performing styles more quickly. We are chasing 20% more volume this year relative to last year, and we see this as an important capability going forward. And with inventory units down approximately 4%, when we see strong guest reaction to new styles, we can get back into them more quickly, which we expect can help accelerate our momentum. We have also reduced our mainline product development process from 18 to 24 months to 15 to 16 months, and we are working to further reduce it down to 12 to 14 months. Our product teams are focused on bringing new innovations to our guests, updating our iconic franchises and leveraging our increased speed-to-market capabilities to better anticipate, meet and fuel demand. I also want to reiterate that product quality is foundational to our brand, and we will continue to lean into this principle and enduring strength of lululemon. Turning now to our product activation pillar. Andre will share the details of our regional activations in a moment, but I want to speak at a high level to some of our brand and marketing initiatives. To shift the narrative in this competitive market, we are moving with speed to invest more in marketing, community experiences and product stories to connect with and deepen engagement with our guests. You will see us be bolder in the second half of the year with more brand activations, similar to last week's yoga experience on the Great Wall of China. And in August, we are excited to see the return of SeaWheeze, our iconic half marathon event in Vancouver, which was a near-instant sellout. You will see additional product expressions like new collaborations to drive energy and excitement for guests in key cities around the world. You will also see grassroots community activations, a particular strength of our brand, as well as new and exclusive experiences for press and partners. All of this will be underpinned by an innovative media and advertising strategy, store and brand experience elevation, additional partnerships and a creative direction for lululemon that will inspire our guests around the world to sweat, grow and connect. Next, I wanted to share an update on our enterprise enablement pillar. This is a broad initiative across the enterprise to ensure we are operating as efficiently and effectively as possible as we look at process, technology and our operating model. To drill down a bit, projects we are continuing to advance include analyzing our current global supply chain network to ensure the structure is fully optimized, reducing indirect spend through our procurement process, including price and terms optimization, volume consolidation and rationalization and implementing new technology, including AI-powered systems and automation to drive efficiencies across the enterprise. We're pleased with how our teams are implementing the initiatives in these areas, and we expect to see benefits over time. In summary, we expect our actions to help rebuild momentum, expand share and reassert our leadership position. I'll now hand it over to Andre, who will share some more details with you regarding our guest engagement strategies and our regional highlights. Andre?

Thank you, Meghan, and good afternoon, everyone. It's good to be here with you again. I'll start by noting that I'm also excited to welcome Heidi as our new CEO, and I'm looking forward to working with her as our entire team continues our effort to realize lululemon's full potential. Let's get to a regional review of Q1 performance and start with North America. In Q1, I'm encouraged that we have experienced a sequential improvement in our full price sales relative to Q4. In Q2, based on recent sales trends, our guidance assumes higher levels of seasonal clearance, but looking forward, driving full price sales remain a primary focus. Let me now share some of the highlights and progress we're making across our product activation pillar in North America and speak to some of the unique experiences we have lined up to engage our guests and help drive improved brand momentum. In addition to the successful Studio Yet and our Indian Wells Tennis activations, we further engaged with guests during the quarter through our run activations during the Los Angeles and Boston marathons. We designed and launched limited edition race kits for several of these events and featured additional innovation across our Swiftly, Milemaker and Go Further product collections. We are pleased with the high level of guest engagement and demand for these events and special products, reinforcing the power of our community efforts. Looking ahead, we have several exciting events planned across North America, including our yoga summer series. We'll kick it off with an exclusive New York City event and follow up with free yoga classes throughout the summer, which will serve tens of thousands of guests around the region. And in August, I'm excited that we are bringing back our popular SeaWheeze Half Marathon and Festival. We saw unprecedented demand to participate as we gather in our hometown for a weekend of sweat and connection. These events are a few examples of the powerful yet unique way we inspire and engage with new and existing guests. Let me also update you on the progress we've made to enhance the guest experience across our selling channels, starting with the in-store strategies aimed at elevating the shopping experience for our guests. When looking at our store fleet in North America, you can already see several enhancements. These include: first, a less dense presentation of products featuring 15% fewer SKUs, which allows us to better highlight new styles and innovation. Second, a sharper focus on merchandising by performance and lifestyle products, which allow for improved storytelling, better visual merchandising and make the store easier to navigate and shop. And third, a significant reduction in markdowns, which allows the guest to focus more on our new and full price offerings and contribute to our premium shopping experience. In addition to these strategic shifts across all stores in the market, we have a smaller subset of doors where we are testing additional enhancements. These include further SKU reductions, more curated assortment based on local taste and preferences, new fixture packages and updated imagery and mannequins. With regard to e-commerce, we are continuing our work to elevate the guest experience on our digital channels. The teams are working to increase conversion with sharper visual merchandising, better storytelling and by offering a more premium shopping experience. This shows how our North America teams have been working to ensure our guests have the shopping experience they expect from lululemon. While we are pleased with the initial response, we expect that these initiatives to gain more traction over time. Let me now shift to our international business, beginning with China Mainland. In China, we had a strong start of the year, supported by successful product and brand activations during Chinese New Year run and tennis campaigns, but experienced a slowing of momentum towards the end of Q1 as we saw spikes of negative commentary, which has now subsided. The team is focused on building brand awareness and distinction through our mindful performance position and community activation. In yoga, one of the most powerful examples of this took place just a few days ago in Beijing on the Great Wall of China, where more than 2,000 guests and 70 ambassadors practiced yoga at the flagship event that launched a series of global activations. And beginning in late June through August, we will host our sixth annual Summer Sweat Games. This is another pinnacle run and train activation our China team has designed to engage our community across the country, culminating in a national championship in Hangzhou. Clearly, there continues to be a lot of energy in this market, and the teams are bringing unique experiences to our guests that only lululemon can offer. For Q2, we expect sales to increase in the mid- to high teens, and we continue to expect approximately 20% growth for the year, demonstrating the ongoing momentum in the business in China Mainland. Let me finish my recap with our Rest of the World segment. We remain pleased with our business in APAC and EMEA. In Q1, revenue increased 13% or 9% in constant currency. We have seen some disruption in our Middle East franchise business due to the conflict in Iran, and we've also seen some softer tourism in Europe and Japan. We view these as temporary, and we remain excited for our brand's potential in both APAC and EMEA. With the help of our franchise partner, we recently opened the first location in Greece and plans are well underway to open in India later this year. Before I hand it back to Meghan, I'd like to reiterate that we are focused across the regions on building brand relevance and momentum, delivering product excellence and actively engaging with our community. And we are grateful to our employees who stayed focused on these top priorities and on delivering for our guests. Recently, we gathered our leaders from around the world in Vancouver and the passion, clarity and determination from this group of people is what gives us confidence in the near, mid and long term for lululemon. Meghan, now back to you.

Thanks, Andre. Let me now get into the Q1 financial review and our updated guidance outlook. For Q1, total net revenue rose 4% or 2% in constant currency to $2.5 billion and comparable sales decreased 2%. Within our regions and channels, results were as follows: North America revenue decreased 3% or 4% in constant currency. Comparable sales were down 6%. By country, revenue decreased 3% or 6% in constant currency in Canada and decreased 4% in the U.S. China Mainland revenue increased 30% or 23% in constant currency, with comparable sales increasing 13%. The shift of Chinese New Year into Q1 added 8 percentage points to the growth rate in the quarter. And in our Rest of World segment, revenue increased by 13% or 9% in constant currency, with comparable sales increasing 1%. In our store channel, total sales increased 3%, and we ended the quarter with 816 stores globally. Square footage increased 11% versus last year, driven by the addition of 46 net new lululemon stores since Q1 of 2025. During the quarter, we opened 5 net new stores and completed 6 optimizations. In our digital channel, revenues increased 4% and contributed $1 billion of top line or 40% of total revenue. And by category, men's revenue increased 7% versus last year and women's increased 4%, while accessories and other declined by 1%. Gross profit for the first quarter was $1.34 billion or 54.2% of net revenue compared to 58.3% in Q1 2025. Our gross margin decreased 410 basis points compared to last year and was driven primarily by the following: a 330 basis point decline in overall product margin driven predominantly by tariff impact and markdowns. Tariffs had a gross negative impact of 280 basis points in the quarter, offset by 100 basis points related to our enterprise efficiency initiatives. Markdowns increased 40 basis points. Deleverage on fixed costs was 140 basis points, driven by ongoing investments in our store fleet and regional mix, and foreign exchange had 60 basis points of favorable impact. Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also strategically investing in our plans and strategies to improve sales trend in North America, while also strengthening our foundation and positioning lululemon for long-term growth. SG&A expenses were approximately $1.06 billion or 42.9% of net revenue compared to 39.8% of net revenue for the same period last year. The increase of 310 basis points relates to expenses that we've reduced last year, but layered back this year, including store labor hours and incentive comp, timing of certain brand activations and costs related to the proxy contest. These were partially offset by our ongoing initiatives to prudently manage costs across the enterprise. Operating income for the quarter was $277 million or 11.2% of net revenue compared to 18.5% of net revenue in Q1 2025. Tax expense for the quarter was $91 million or 31.8% of pretax earnings compared to an effective tax rate of 30.2% a year ago. The increase relates to lower stock-based compensation deductions compared to last year. Net income for the quarter was $195 million or $1.69 per diluted share compared to $2.60 for the first quarter of 2025. Capital expenditures were approximately $127 million for the quarter compared to approximately $152 million in the first quarter last year. Q1 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 $1.5 billion in cash and cash equivalents and nearly $600 million of available capacity under our revolving credit facility. Inventory at the end of Q1 is $1.7 billion, an increase of 2% on a dollar basis. On a unit basis, inventory decreased approximately 4%. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff rates relative to last year and foreign exchange. We repurchased approximately 2.2 million shares at an average price of $165. Let me shift now to our guidance for Q2, which takes into account the business trends I spoke to earlier. We expect revenue in the range of $2.45 billion to $2.475 billion, representing a decline of 2% to 3%. We expect to open approximately 13 net new company-operated stores and complete 13 optimizations. By region, we expect North America to decline in the low double digits with the U.S. also in that range. We expect China Mainland to increase in the mid- to high teens and Rest of World to increase in the high single to low double digits. We expect gross margin in Q2 to decrease approximately 410 basis points compared to Q2 of 2025. This decrease will be driven predominantly by higher tariff costs, ongoing investments in store openings and optimizations and our distribution network. We expect increased tariffs to have a gross negative impact of approximately 150 basis points, with offsets of approximately 100 basis points. We expect markdowns to be up approximately 50 basis points versus last year. While we continue to expect markdowns to improve modestly year-over-year in the second half, the slower-than-expected top line trends in Q2 will necessitate additional seasonal clearance. In Q2, we expect our SG&A rate to deleverage by 500 basis points relative to Q2 2025. This increase will be driven in part by deleverage associated with lower sales than initially expected, discrete costs related to our proxy contest, increased marketing and expenses that we've reduced last year, but are layering back this year, including store labor hours. And we will continue to invest strategically in our growth initiatives and IT infrastructure. When looking at operating margin for Q2, we expect it to be approximately 11.6% versus 20.7% in Q2 2025 for the reasons I just mentioned. Turning to EPS. We expect earnings per share in the second quarter to be in the range of $1.76 to $1.81 versus EPS of $3.10 a year ago. We expect our effective tax rate in Q2 to be approximately 30%. Turning to our full year 2026 guidance outlook. We now expect revenue to be in the range of $11 billion to $11.15 billion, flat to down 1% relative to 2025. By region, we now expect revenue in North America to be down in the high single digits, with the U.S. slightly lower and Canada better. We continue to expect revenue in China Mainland to be up approximately 20%. And in Rest of World, we continue to expect revenue to increase in the mid-teens. Globally, we now expect to be closer to the low end of the 40 to 45 range for net new company-operated stores in 2026 and continue to expect to complete approximately 35 optimizations. This will contribute to overall square footage growth in the low double digits. Our new store openings in 2026 will include approximately 10 to 15 stores in North America, including 8 in Mexico and 25 to 30 in our international markets, with the majority of these planned for China. While we are taking a disciplined approach to capital spending and looking at all real estate deals on a case-by-case basis, we continue to see good returns from new store openings and store expansions as these strategies contribute to an improved shopping experience for existing guests, new guest acquisition, building brand awareness and community engagement. For the full year, we now expect gross margin to decrease approximately 90 basis points relative to last year, driven predominantly by deleverage on fixed costs and ongoing investment in new store openings, optimizations and our distribution center network. We expect markdowns for the full year to be flat to slightly improved and tariffs to have a gross impact of 30 basis points, of which we expect to be able to offset almost all of it. When looking at tariffs for the full year, our guidance now assumes an incremental rate of 10% for Q2. This is down from our prior assumption of approximately 20%. For the back half of 2026, we continue to assume a 20% incremental rate. In addition, while we are participating in the refund process, our guidance assumes no recovery of tariffs paid under IEEPA. Turning now to SG&A for the full year. While we intend to realize significant savings related to the enterprise enablement pillar of our action plan, we now expect deleverage of approximately 290 basis points versus 2025, including incentive comp, store labor hours and continued strategic investments in our business to support future growth. These investments include market expansion, improving the guest experience by enhancing our omni capabilities and growing brand awareness. As mentioned, we are absorbing additional costs relative to last year as we layered back on certain expenses and have onetime costs associated with the proxy contest. In addition, based on recent trends, we are increasing our marketing spend to drive brand heat. When looking at operating margin for the full year 2026, we now expect it to decrease by approximately 380 basis points versus last year. For the full year 2026, we expect our effective tax rate to be approximately 30% versus our 2025 effective tax rate of 29.5%. For the fiscal year 2026, we now expect diluted earnings per share in the range of $10.95 to $11.15 versus EPS of $13.26 in 2025. Our EPS guidance excludes the impact of any future share repurchases. When looking at inventory, we now expect dollar growth to be in the low to mid-single-digit range through 2026, with units slightly down. We have approximately $1 billion remaining on our share repurchase program, which we will continue to utilize. Share repurchases remain our preferred method of returning cash to shareholders, and we continue to expect our repurchase levels in 2026 to be in line with 2025. Finally, for the full year, we now expect capital expenditures to be approximately $700 million to $720 million. The spend reflects investments to support business growth, including capital for new locations, relocations and renovations, DC and technology investments. Before we open it up for Q&A, as we look at the second quarter and the back half, we will continue to be agile as we take actions that will drive our performance and engage with our guests. We are pleased that some of the recent distractions have been removed, and we remain sharply focused on returning the business to a position of strength in North America by chasing into strong performing styles, investing more in brand moments to engage with and excite our guests and continuing to execute on our action plan. There is significant potential ahead for lululemon, and we are taking the steps necessary to realize it. Operator?

[Operator Instructions] The first question comes from Dana Telsey with Telsey Group.

As you think about the product assortment, the brand, how much of the weakness in the top line is coming from maybe the shift to more fashion versus what lulu is doing? And how do you think of the new items that you've introduced? What percentage of the assortment out there is it? And how do you see adjustments given the learnings you have from the initial entries that you've had? And just lastly on the margins, the go-forward look of what margins should stabilize at, is clearance accelerating in the back half? Or are you looking for it to decelerate?

Dana, thank you. I would say, overall, in terms of our performance relative to market, which I think was your first question, we're seeing relative stability in the trend of the athletic space. And what we really experienced was a drop-off in -- primarily in traffic and, to a lesser degree, conversion over the last 6 to 7 weeks. And as I mentioned, our analysis indicated it came from 2 key areas. So the first being spikes in negative commentary around the brand, from a number of factors, really at the end of Q1 and entering Q2. I mentioned that's now subsided, but we do believe it impacted our traffic and top line to a degree. And then in addition, while we've seen some of our product launches perform to expectations, we did see some recent product launches which performed under expectations. So we're really focused on what we can do to action that. In terms of go-forward margins and how much is driven by clearance, we are expecting gross margin 90 basis points under last year. Our prior expectation was 130. Within that, we're expecting a modest -- flat to modest improvement in markdowns for the full year. So we're having a bigger impact in spring/summer clearance in Q2 with an expectation of markdowns up 50 basis points, and then some recovery as we move into the second half. Can you remind me, you had a question on percent of assortment?

How much of the percent of assortment is new versus how much is core styles? And is the weakness in performance more related to core or the new? Is there a way to assess it?

Yes. Yes. As we set out this year, our aim was to increase our penetration of newness to -- from 23% last year to 35% over the course of this year. Right now, we sit at about 30%. It will fluctuate as we move throughout '26. I would say, I mentioned we've seen some of that newness perform to expectation and some be a little short. And I would say our recent performance is impacting all areas of our business from a product perspective.

The next question comes from Rick Patel with Raymond James.

Question on new products not meeting expectations. Can you share if you see this as a risk for international markets? Curious if overseas customers are more drawn to core franchises and they are less sensitive to newness or if this is something that you would expect headwinds from a little further down the road. So just some color on how new products are resonating with international consumers would be great.

Yes. Thank you, Rick, for the question. Andre here. We see that the portfolio that we have in international markets with more recent is more diversified in the composition of the sales. And yes, you're right, by bringing the core franchise to life with different colors, different iterations, is still a growth driver in international that plays stronger in those markets than our original North American market. So both, we play on the strength of our well-known global franchises, and we have this diversified newness portfolio in those markets operating to a bigger extent.

Great. And then just to follow-up on the question on markdowns. Can you help us understand the assumptions for the back half, which imply an improvement in markdown? Is that just a function of easier comparisons? Or are you assuming demand improves in the back half?

Yes. In terms of the second half, I would say Q3 will be a sequential improvement to Q2, and then we expect markdowns in Q4 to be under last year, given that was our high water level from a markdown perspective. So I'd say sequentially better as we improve throughout the year. And again, for the full year, flat to modest improvement. So Q2 will be our high-water mark this year.

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

I was hoping to dig into the China business a little bit more. Can you talk about what happened there, if it was different than the experience in the U.S., and also the factors that give you confidence that it will improve as the year goes on?

Lorraine, thanks. I would say, when we look back at the last 6- to 7-week period, which is really where we've seen the shift in the trend, we did experience an impact in China from some of the negative commentary that was out in the market, most pronounced at the end of April and early May. We have seen that business improve to a degree. We are still holding our guide for the year at 20%. And I would say that's fairly reflective of what we see as the underlying trend of the business and in line with the expectation we have for the second half. And then I'll have Andre add some color on what we're experiencing in terms of performance.

Yes. As you were saying, Meghan, as the brand noise has begun to dissipate, we continue to engage with guests in new and unique ways, including our yoga festival on the Great Wall just last week. And looking forward, we'll be hosting our sixth annual Summer Sweat Games this summer, highlighting our latest run and train products. So we are confident that with our strong premium positioning in the market, the guests are going to really engage with the brand, and we'll be back to our underlying trend of business in line with this annual guidance that remains a growth of approximately the 20%.

The next question comes from Matthew Boss with JPMorgan.

So Meghan, could you speak to the progression of revenues in the Americas through the first quarter and elaborate on demand trends that you've seen in May, maybe relative to the outlook for low double-digit decline in the second quarter and just opportunities you see for sequential improvement in the back half?

Yes. Thanks, Matt. So in the Americas, we did see a negative 4% trend in Q1 overall, which was ahead of our expectations for low mid-single digit. I would say February and March were our strongest months. And as I mentioned, the shift we've seen in trend has really been over the last 6- to 7-week period. So we saw trends softened at the end of April and then into May. I would say our expectation for North America in Q2, a decline of low double digits, and then generally in line in the second half of the year at this point. We obviously described a number of actions we're taking in the business in terms of investment into brand to shift the narrative there and drive brand heat as well as some of the product activations we're pursuing, including chasing an incremental 20% relative to last year, still managing inventory well in line with our trend. So I would say we're not assuming any meaningful impact from those initiatives at this point. So to the extent that they perform the way we would expect them to, we could potentially see upside to our range.

Great. And then maybe just a follow-up, Meghan. So with newness, I think you said restored to 30%, and obviously relative to your comments on some of the below-plan reception to recent product launches. Maybe just to circle back on the magnitude of decline that you're seeing in the Americas. Is it product design, category demand, macro, a little bit of all? What -- maybe if there was a way to bridge or try to bifurcate the buckets as to the magnitude of the decline that you're seeing in the Americas, that would be helpful.

Yes. I would say -- and this is based on our early analysis of this trend that's been about 6 to 7 weeks. But we have been evaluating and looking at the macro. Obviously, there's some macro noise. But we are, as I mentioned earlier, seeing some stability in our category right now, and we're seeing ourselves drop below where we were performing, in early Q1. Really seeing that predominantly through traffic, and then to a lesser degree, conversion and really pointing to those 2 aspects that I noted in terms of negative commentary around the brand and really a spike there towards the end of April. And then also from a product perspective, saw really favorable, I would say, results and tracking well relative to our expectations in February and March. And then saw that spike in, I would say, late April, and then weren't as thrilled with our product performance with our recent launch. Good response, I would say, to the away-from-body yoga styles, but didn't have the halo to the balance of the assortment that we expected.

The next question comes from Michael Binetti with Evercore.

Can I just ask a little bit different way on the second half? Could you maybe just help us understand what's contemplated in there relative to 90 days ago so we understand? I know you're really clear on how you're adjusting 2Q. I'm just curious the update a little bit in the second half. And then maybe just on the SKU reductions, the SKU reductions in North America that you were talking about doing some testing, if you're seeing anything in terms of better conversion or sales productivity in the areas where you have started to look at that work? And where do you feel like you're most over-SKUed?

Thanks, Michael. I would say in terms of second half trends, so they're fairly consistent, I would say, with the underlying trend of our business right now. So it's a slight improvement relative to Q2 guide, but that's really reflective in some aspects of the impacts we saw in late Q1, early Q2 subsiding to a small degree, and that trend carrying forward. We have not included, as I mentioned, any meaningful impact from any of the initiatives that we have underway. So again, just to the extent that they perform to what we would expect, we could see some upside to the range. Is that helpful?

Yes, that's helpful.

Great. And then Andre was going to comment on the SKU reduction.

Yes. On the stores, you're pointing it right. We decided to have a less dense presentation of our products featuring these 15% fewer SKUs. And that, as a matter of fact, allows us to better highlight the new styles and innovation. Also, it brings a sharper focus on merchandising by performance on one side and style -- lifestyle on the other for, again, a better, easier-to-navigate store layout. And we drastically reduce any markdown activity in the stores to contribute to a more and definitely premium shopping experience for the guests. So we are really encouraged, and we think that over time, it's going to build up and gain more traction.

I would just add to that -- sorry, in the first quarter, we saw a high single-digit increase in reg price globally. And we did see a meaningful sequential improvement in the U.S., I think, which points to some of the success of our strategy, particularly from SKU reduction also and removing some of the markdowns from store. And sorry, Michael, did you have something else?

No, you got it.

The next question comes from Brooke Roach with Goldman Sachs.

Meghan, Andre, I'd love your thoughts on the product design language and the learnings that you've realized from some of the new style launches that haven't resonated to your expectations. What changes should we be expecting in the way that you inform the way that you design and the new products that are coming to market on a go-forward basis? And then just an additional question on traffic. Does the shift in traffic that you've seen in recent weeks over-index to any specific consumer demographic cohort or guest type?

Thanks, Brooke. I would say, certainly some learnings, in terms of both design and then also importantly, how we activate product and what resonates in terms of guest messaging. I would say, as I mentioned, we saw good guest response from some of the products that we launched around the new look of yoga away from body, but didn't see the halo that we had hoped for and had in our plans. I do think color is an aspect of that. I do think some of these things also will take a little bit more time in terms of continuing to get them in front of guests, making sure they're seeing the newness and building into them over time. And then I'd say in terms of how we activate just front and center in stores and online, that continues to be a focus for us as well. And then can you remind me the second part of your question?

Is the change in traffic over-indexed to any specific consumer demographic cohort or guest type?

No. We really did see a broad-based traffic reduction, which was really all demographics.

The next question comes from Jay Sole with UBS.

I'm just wondering if you can elaborate on the social media issues that you talked about. What did they stem from? How long did they last? Why did they end? Is there any lingering impact? If you could help us with that, that'd be great.

Yes. Thanks, Jay. So I would say there were a number of factors impacting the negative commentary around the brand, both, I would say, media and social. A couple to mention would be, obviously, we had the proxy contest during that period as well as we had some questions around the composition of some of our products in mid-April. As I mentioned, these stories have died down and subsided, but we have not yet seen a return to our pre-disruption, I'd say, trends. So we're closely monitoring and feel it's prudent, I think, to update our range in terms of what we're seeing today and the trend of the business.

Was it mostly in the U.S., in China, both or other regions?

I would say it was across regions. And predominantly, I would say China was impacted as well as the U.S.

The next question comes from Brian Nagel with Oppenheimer.

So my first question, you talked a lot about the recent products that may have not performed as well as you expected them to. So as you look at these products, do you have abilities -- are there levers to pull to maybe course-correct on these products? And then given the performance of some of these products lately, has that encouraged you or caused you to change any type of launches you expected for the balance of the year?

Thanks, Brian. Yes, I mean, certainly taking our learnings forward. I would say in terms of what works, I mentioned a few of these, but our run assortment was strong in Q1. Daydrift has been a great style for us. Define, including new silhouettes. And then I mentioned in terms of new look of yoga didn't respond in halo as we had expected. In terms of what's coming, we're still really excited about our product pipeline. We do have new lounge fabrics in the second half of the year. We'll have a hot weather assortment launching across run, tennis and golf. And then we are reordering, as I mentioned, 20% more on an annual basis relative to last year. So that's pretty significant, I would say, in terms of the penetration of our business that we're chasing into and certainly prioritizing the styles that are working well. So a couple examples there. The Groove pant has been a style that's been a great seller and reordering there. And then Define continues to have a lot of energy around it, including the new silhouettes. So I would say, again, as I mentioned, we aren't embedding anything meaningful from these strategies into our guide for the second half. So to the extent that they perform to how we would typically expect them to, we could see some upside.

That's helpful. And then my second question, so Meghan, you mentioned, I think in your prepared comments, that you've met with Heidi. Heidi clearly has not yet joined the company, but she will join here in the not-too-distant future. I guess the question I ask you, from an organizational standpoint, now having the leader named, although not at the company, does that change what you're doing at the company now? Is now at least knowing who the CEO is going to be?

I would say we stay -- remain focused on our action plan. We're looking to have the same goals around restoring the full price health of the business. And obviously, we're pivoting based on current trends, but really trying to set the business up so that Heidi steps in, hits the ground running and builds on top of the actions that are already underway.

The next question comes from Janine Stichter with BTIG.

First on marketing, I think you said you're planning for an increase versus your previous plan this year. Maybe quantify that and help us understand where that spend is going, how you're thinking about marketing in general? And then on the unit growth, moving to the lower end of the guide, any thoughts on how you think about the return on new stores? And what might cause you to go below that number at any point in the future?

Great. Thanks, Janine. So yes, we've increased our marketing investment. We are now taking it to approximately 10% to 15% above last year. So it's in the range of 6% to 6.5% of sales versus last year at 5.6%. I would say in terms of where the dollars are going, we're certainly going after activations, building on some exciting recent events, including the Great Wall yoga experience. We've got SeaWheeze coming up, which is our Vancouver half marathon. We'll have a pinnacle yoga event in New York City to kick off our summer series. And then also another example would be the U.S. Open activation. We'll have some collaborations coming up, continue to build on grassroots community activations, including run and yoga events locally. And then we're going to have some new experiences for press and partners, notably a pop-up in New York City showcasing new product. And then you can look for also a new content series on our social channels with some elite athletes, and those are just a few examples of what's to come. And then the second question you had in terms of unit growth. We did have a few stores push into '27. We continue to perform well, I would say, on our new store openings. Just a reminder, we've got 10 to 15 openings in North America. Eight of those are Mexico, so it's just a small handful of stores in the North American market. We still see return on capital of 1 year for our new stores and then 2 to 3 years for our optimizations. Continue to keep a really close eye on that, and we'll continue to refine our plans for '27, but still looking to make sure we've got the right experience for our guests in each market.

The next question comes from Mark Altschwager with Baird.

On China, you talked about Chinese New Year shift adding to the Q1 growth rate. You also noted momentum slowed late in the quarter on the negative commentary before it subsided. So what's the clean underlying comp trend in China today? And as you hold the roughly 20% growth for the year with the majority of the international store openings going there, how much of that growth is comp versus new units? And then on the margin side, it looks like China is nicely accretive to the margin now. Just any updates there on how you're thinking about it.

Yes. So in terms of China, so we were tracking, I would say, above our guide for Q1, prior to the disruption. So we did come in at 30%, 23% on a constant currency basis and did have 8 points within that 30% related to the new year shift. We're guiding Q2 in the mid- to high teens. I would say what we're viewing as the underlying trend of the business is generally in line with our full year guide at 20%, which is where we really have the second half positioned as well. From a comp perspective, we haven't broken out the full year comp, but we did have a 13% comp in Q2 (sic) [ Q1 ] relative to the 30% total top line. And yes, I would say, in terms of operating margin, still some healthy, I would say, expansion in the China market and continue to invest behind that business to drive the long-term trajectory.

Great. And then a follow-up on the product development time line. What's the gating factor to get to the 12 to 14 months that you talked about? And when does the faster speed to market translate to better comps? And then any gross margin trade-off to think about as you compress the calendar? Does that reduce sourcing flexibility, just higher costs as you move the product? Anything to think about there?

Thanks. I would say in terms of go-to-market, we're making good progress. There are certainly some technology unlocks that we can have over time. And obviously, those take time to implement as well as rollout. So I would say that's what we're focused on in terms of moving as quickly as we can to that faster time frame, and we're really excited about that. In terms of faster speed to market, those again will build over time. We continue to make progress, I would say, with every delivery or every new season in terms of our speed to market. And then in terms of costs, I think there's always trade-offs in terms of speed with airfreight, but I wouldn't equate any higher product costs with our overall go-to-market time line.

The last question comes from Aneesha Sherman with Bernstein.

So you talked a lot about markdowns. I want to ask about full price sales. Andre, you said that was the primary focus. Can you update us on the timing of when you expect full price sales to turn positive given some of the challenges on new launches? And then a quick clarification, Meghan. I think you said in response to one of the other questions, high single-digit increase in reg price Q1. Does that -- is that average selling price for the non-markdown full price sales in Q1?

So I was talking about reg price, which is the same in my mind as full price, in Q1. So that full price increase is high single digits for the full quarter globally. The U.S. was slightly negative but was a meaningful sequential improvement from what we saw in Q4. In Q2, we're expecting full price sales overall to decrease in the mid-single digits, given the top line trend and some of the seasonal clearance activities that we'll pursue to make sure we stay on top of inventory. When we look at the full year, our expectation is flat to slightly better in terms of full price, and I would expect that it will progress throughout the year.

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