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Lululemon Athletica (LULU) Q4 2020 Earnings Call Transcript

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LULU earnings call for the period ending December 31, 2020.

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Lululemon Athletica (LULU 10.71%)
Q4 2020 Earnings Call
Mar 30, 2021, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica Inc. fourth-quarter and year-end 2020 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.

Howard Tubin -- Vice President, Investor Relations

Thank you, and good afternoon. Welcome to lululemon's fourth-quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; Sun Choe, chief product officer; Meghan Frank, CFO; and Alex Grieve, VP and controller. 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 in 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 the 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 and store productivity metrics given on today's call are on a constant dollar basis. The press release and accompanying annual report on Form 10-K are available under the Investors section of our website at 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 operating statistics for the fourth quarter, as well as our quarterly infographic.

[Operator instructions] And now I'd like to turn the call over to Calvin.

Calvin McDonald -- Chief Executive Officer

Thanks, Howard. I'm excited to be with you today. I'm proud of how lululemon navigated this past year and delivered for our employees, guests and shareholders. I believe 2020 has been a pinnacle moment for lululemon as we developed and delivered exciting new innovations that create even more opportunities for us into the future.

Our continued growth demonstrates our ability to win, both before, during and after COVID-19. Our business has many strengths and growth opportunities. We are just in the early innings of our potential. In fact, the pandemic has accelerated our progress and the opportunities we have within each of our Power of Three growth initiatives.

Over the course of today's call, we'll discuss our strong performance in the fourth quarter and the full year, and we'll also share our road map for 2021. I'm pleased to be joined on the call today by Sun Choe, our chief product officer, who will provide an update on our product innovations; Meghan Frank, our chief financial officer, who will speak to our fourth-quarter financials and offer our guidance outlook for quarter one and the fiscal year of 2021; and Alex Grieve, our controller, will also be available to answer any questions that you may have during the Q&A portion of the call. Let me start now by looking at 2020. Last year was another good reminder of the strength of our core product assortment.

Even as guest apparel needs evolve throughout the year, our positioning around technical athletic product remained extremely relevant. People will always want to sweat and stay active, and our focus on innovative performance fabrics will continue to deliver unique solutions. We continue to execute against our growth plans, culminating with several notable wins in the fourth quarter. Meghan will share the financial metrics with you, but I wanted to give you a couple of highlights.

Starting with our e-commerce performance, which grew 92% on top of 41% growth in the previous year. We grew our women's business by nearly 20%, fueled by strong performance across all categories. And our international revenues grew 47% with growth across all regions, indicating just how well our brand translates across cultures and geographies. When looking at the full year, a few accomplishments really stand out for me.

We grew total revenue by 11% in 2020 and with our second-half growth accelerating to 23%, in the full year, we more than doubled our e-commerce business. We continue to bring product innovation to our guests, including a relaunch of our Everlux fabric, our recent launch of DrySense, as well as further strengthening our assortment in our key activities of run, train and yoga. The guest response was very strong across all these product initiatives, and we'll continue to strengthen our pipeline of innovation in 2021 and beyond. We gained market share over the course of the fiscal year, as indicated by our nearly one-point gain in retailer market share of the adult activewear market in the U.S.

according to the NPD Group consumer tracking service. This was our largest annual share gain in recent history and was driven by gains in both men's and women's. We led powerfully through COVID-19, providing pay protection to our employees, creating our ambassador relief fund and honoring our financial commitments to both landlords and vendors. We successfully completed the MIRROR acquisition.

We accelerated our work related to inclusion, diversity and equity. We released our first Impact Agenda, which details our goals related to how we will create positive change to support people, create access to well-being and our sustainability initiatives. And we achieved all of this and strengthened our financial position, ending the year with $1.2 billion of cash. When looking back at 2020, the fundamental drivers of our performance have been the same for the past three years, and the pandemic has only accelerated their importance in the lives of our guests.

In addition, the trends that existed before the pandemic are even more important now and will only continue to grow post the pandemic. For example, people wanting to live an active and healthy lifestyle, combined with the growth in demand for technical athletic apparel that performs, and finally, the innate need to feel part of a community and to share a human connection with one another. Even with these growing trends, you might have expected our on-the-move and casual products to have had a compelling impact on our success in 2020. However, that was not the case.

In fact, our product design for performance represented approximately 67% of our total merchandise mix last year, which was a four-point increase in penetration from the previous year. We keep creating unique and differentiated product solutions for our guests and their evolving needs. This success in developing technical innovation is guided by our proprietary Science of Feel platform. Consumer and health trends are only increasing, and we are in the early innings of our growth potential across channels, across regions, across genders and across activities.

So let's look at the year ahead. The foundational strategies of our Power of Three growth plan remain unchanged and continue to drive the innovation across the business. I'll now touch on our plans for stores, e-commerce, product, international and MIRROR. Our stores and the physical connection they provide to our guests remain incredibly important to us and are an integral part of our omnivision.

In 2021, we'll be implementing a number of exciting initiatives, starting with the initiative to kick-start our stores. As operating constraints are removed, our teams are focused on accelerating our store productivity. We have a number of guests that only shop our stores, and we are focused on reengaging with them at the frequency they shopped with us before COVID-19. In addition, we have a significant number of new guests who engaged with us for the first time online last year.

We are focused on extending our omni-relationship with them so they can more fully experience the brand and community connection our stores offer. We will also be expanding our store base. We continue to be underpenetrated from a brick-and-mortar perspective across all our markets, including North America and around the world. We benefit considerably from the agile retail formats.

And in 2021, we will fully leverage this strength, opening 40 to 50 new mainline lululemon locations globally. And finally, we will continue to enhance our omni-capabilities. I'm excited to build upon the success of these new strategies we've rolled out toward the end of last year, including curbside pickup, virtual waitlist and the appointment shopping. These became guest favorites that elevated our in-store experience and demonstrated an area of opportunity going forward.

I look forward to sharing more with you next quarter as Celeste Burgoyne and her team demonstrate the power of our stores. 2020 was an outstanding year for our e-commerce business as guest behavior accelerated. As a result, we are now able to reevaluate how high is high for our digital growth, especially in our international markets. 2020 has reset our expectations for what is possible.

For example, our digital comps more than doubled for the full year and grew 92% in the fourth quarter, driven by a healthy combination of increases in traffic and conversion. These results were significantly ahead of our initial expectations and enabled us to achieve, three years early, our 2023 goal of doubling our e-commerce revenue from 2018 levels. We now have a very meaningful e-commerce business that is driving both new guest acquisition, as well as strengthening our omni-guest relationships. Our channel investments will continue to focus on elevating the guest experience and further strengthening our foundation while we also test and learn new capabilities.

The relationship we have with our guests in-store is unique and special for our brand. And our e-commerce vision is to create our online version of that relationship as well. Specifically, in 2021, our key e-commerce strategies are to elevate the guest experience by introducing more immersive category and franchise shops, investing in our product details page and enhancing our storytelling to bring the Science of Feel to life with new types of content and creative. We will continue to drive conversion by continuing to optimize the guest experience with further enhancements to search, browse, checkout, personalization and payment methods.

We will accelerate our investments into the strength of our international business as we expand our omni-capabilities and localize the guest experience through local payment and delivery options. And we will keep investing to scale our foundation and enhance the guest experience by evolving our BOPUS and curb pickup capabilities, piloting same-day delivery from our stores in nine key markets and refining and scaling our digital educator program. Turning now to product. I couldn't be more excited with the pipeline and innovation the teams have untapped for 2021 and beyond.

As I mentioned, we launched several new items last year: a combination of new fabrics, additional offerings in our key activities, as well as ongoing enhancements to our core assortments. What's exciting about our product launch strategies is that they are bigger than just any single item. These launches, whether new franchise opportunities or strengthening our position within our key activities, provide significant future growth opportunities that we will keep innovating on. Building upon this momentum, in 2021, we will continue to leverage the Science of Feel platform to bring new technical solves across our assortments for both men and women.

We are launching our Dual-Gender Run campaign this week. We're also introducing new tops within Train and On The Move. We are further expanding our core franchises, including Align and we are building toward the early 2022 launch of our technical footwear, which will allow us to provide guests with head-to-toe solutions. We expect another strong year of growth in 2021, with exciting launches planned across men's, women's, key categories and activities, all driven through innovation.

We will have more to share with you as the year proceeds, and Sun will speak to you further in just a moment. I would now like to shift to our business outside of North America. In 2020, our international revenues grew 31%, and we remain on track to quadruple the business from 2018 levels in 2023. At only 14% penetration, we are in the very early days of our journey outside of North America.

The growth is incredibly strong and we are showing how well our brand translates across cultures and geographies. Our key 2021 strategies include organizing into three regions, led by our new EVP of International, Andre Maestrini. The regions, EMEA, Asia Pacific and China, each have respected regional leaders with clear accountability and responsibility for driving distinct growth plans. In EMEA, this includes building upon the strong online growth in 2020, as well as leaning into key markets such as Germany and the United Kingdom.

In Asia Pacific, the opportunities include growing in critical markets such as Korea and Japan and in our long-established market of Australia and New Zealand. And in China, we will open our largest number of new stores this year, with the goal of adding 15 to 20 stores across both Tier 1 and Tier 2 cities in the mainland. The health and wellness trend is growing in this market, yet remains nascent. So there are considerable opportunities ahead for us.

And on a regional basis, similar to how we currently operate in North America, we'll have a singular view of inventory by the end of the year. Not only will this enable us to leverage inventory across channels, but it will pave the way for the implementation of transactional omni-capabilities, starting with ship-from-store in the U.K. and Australia by the end of the year. I look forward to having Andre join us on some upcoming calls.

I will now turn to the newest member of the family, MIRROR. We are very pleased with the performance of MIRROR in quarter four and over the course of the entire year as well. MIRROR generated approximately $170 million in revenue in 2020, including the period prior to our acquisition. I'm excited about the long-term outlook for the at-home sweat industry.

We started the process to purchase MIRROR before the global pandemic began because we believe in the opportunity to strengthen our community, further connect with our guests in their homes and provide new solutions for their workout needs. I don't expect the pandemic tailwinds to disappear once mass vaccinations have occurred. Guests were seeking more convenient at-home options before COVID-19, and they will continue to seek these options post the pandemic. And simply put, MIRROR is the most versatile at-home fitness platform available on the market today.

We offer more live classes across more workouts than any other product. And our guests are responding with more than two users per household and the average member taking over six different types of workouts each month. This versatility drives frequent engagement and truly positions MIRROR as having something for everyone within every household. This unique position will continue to translate into meaningful growth as we strengthen our member relations, further engage with our community and drive financial performance.

And we plan to continue to invest further into this advantage by adding even more live classes across more workout options while also investing in the overall guest experience in building this powerful community. I would like now to share some of our key 2021 MIRROR strategies, starting with studios. We are adding two more production studios so that by the end of the year, we will have three studios allowing us to triple the number of live classes compared to our current offering. We now have 15 instructors on MIRROR with plans to add up to seven more across multiple workout activities and all instructors are lululemon ambassadors.

We'll continue to launch community engagement initiatives. We recently added the Community Camera feature, allowing members and instructors to see each other during the workout. This month, we added the Face-off feature, which allows two members to compete head-to-head during the class. We are kicking off our international expansion plans, starting with Canada, launching in time for the holiday period this year.

And we will continue to leverage the lululemon ecosystem to raise awareness for MIRROR which remains one of our biggest opportunities. We will expand our shop-in-shop strategy to more than 200 locations in North America this year. We have many more exciting guest-facing innovations plan that we'll share throughout the year. Brin Putnam and her team at MIRROR continue to drive these exciting results and initiatives.

I'm very pleased with the performance of MIRROR, a business that launched only three years ago. We see the opportunity to strategically invest in the business further by continuing to innovate the guest experience, drive guest acquisition and leverage the lululemon ecosystem for further market expansions. Meghan will provide some additional financial detail in a few moments, but we're anticipating another year of strong growth for MIRROR, with revenue expected to increase 50% to 65% to $250 million to $275 million in 2021. Let me now turn it over to Sun.

But before I do, I want to acknowledge the incredible work this team continues to create. I'm proud of how Sun and the team adjusted plans this past year to ensure a strong flow of product newness in 2020. In March and April last year, our teams reevaluated and reflowed our merchandise buys for the second half of the year. We continue to bring in new innovation to our guests while we leaned into our core styles and reduced the more seasonal elements of the assortment.

Looking forward, we're using our learnings from last year to inform future buys. I'm excited with our product strategies that include an increased flow of newness and technical innovations relative to last year. Sun, over to you.

Sun Choe -- Chief Product Officer

Thanks, Calvin. I'm happy to be here to share details regarding our product innovation road map for the year ahead. 2020 was a great year for us from an innovation standpoint, but it wasn't perfect as we were forced to navigate the COVID-19 environment. We have significant opportunity in 2021 to increase our cadence of innovation.

Our product team will continue to bring to market merchandise that is technical, while also offering the versatility that our guests demand as they add new dimensions to the way they live the sweat life. We continue to leverage our Science of Feel innovation platform to solve guests' unmet needs and drive expansion in our four major product areas across Run, Train, Yoga and On The Move. Last year, while guests adapted to the new normal of working and sweating from home, their desire for technical athletic apparel that seamlessly transitions with them from activity to activity remains strong, and we delivered. Highlights include a relaunch of our proprietary Everlux fabric in new styles, expanding our Align franchise into tops with the launch of the Align Tank and for the first time, we offered some of our best-performing styles in a more inclusive size range.

In men's, we saw particular strength in shorts with our three core styles, the T.H.E., Surge and Pace Breaker, all performing well throughout the year. Also exciting is our recent launch of the License to Train shorts. This short expands our train offering for men, is made from abrasion-resistant fabric and is suitable for many types of sweaty pursuits, including weight training and trail running. Guest response has been strong, and the License To Train shorts is helping grow our big three core shorts for men into the big four.

In Q4, our guests responded well to our holiday merchandise offerings, which included special edition products across our highly coveted Wunder Under and Align franchises in women's and our City Sweat and In My franchises for men. We saw broad-based strength across all of our major merchandise categories with high teens revenue growth in women's, men's and accessories. Drilling down a bit, outerwear, shorts, bras, underwear and equipment were particularly strong classifications, all experiencing revenue growth in excess of the high teens. Our men's business continued to strengthen with Q4 being our strongest quarter of the year.

The resurgence we saw in our fixed waistband bottom toward the end of Q3 continued and as men generally prefer to shop our brick-and-mortar channel, we look for further strengthening as our stores remain open and capacity constraints subside. Let me shift gears and share some highlights on our product outlook for 2021. We firmly believe that the desire to live an active and healthy lifestyle has only strengthened over the last year. Our apparel, developed under the Science of Feel innovation lens, is designed to offer technical solve while also providing versatility and comfort.

This positions us extremely well as our guests continue to find new ways to sweat now and in the future. Looking forward, we have plenty of innovation on the way for 2021, and we have hit the ground running. In Q1, we made some major moves in men's tops with two very exciting franchises, the Fundamental T and DrySense. The Fundamental top, which comes in long sleeve, short sleeve and sleeveless, offers a perfect combination of technicality and comfort.

The fabric offers stretch, abrasion resistance, anti-stink and quick dry, all while having a cottony soft feel on the skin. While we made the short to expand our On The Move assortment, the versatility of the design also makes it perfect for hikes, runs, cross-training and other sweaty pursuits. Our DrySense franchise expands our train assortment and offers unique solutions for our guests through exceptional moisture wicking and additional technical features, including underarm gussets for increased mobility, a locker loop for easy hanging and the polyester component of the fabric is completely recycled. In women, we'll continue to bring technical solves across our major categories of Run, Train, Yoga and On The Move.

In Q1, we further leveraged our Align franchise and we now offer pockets in both long and short styles. Guests loved this added feature to our No. 1 pant franchise and response in the launch has been fantastic. I'm also excited with the recent launch of our Swift Speed running tight.

It's made from a proprietary Luxtreme fabric, which offers low friction, is breathable, wicks sweat and is cool to the touch. In addition, there are no inseams which provides for a distraction-free run. Later this year, we'll be launching our new high support bras, solving from movement management during runs and beyond. The air support bra is made with our proprietary Untralu fabric for a barely there feel and was developed with insights from your signature movement experience that measured guest's unique movement profiles.

We're also excited to reveal our special accessories capsule featuring Mylo, an infinitely renewable mycelium that highlights the role sustainable innovation can play in the future of fashion and retail. In closing, I'm thrilled that our Science of Feel innovation platform, which has fueled our momentum for the past several years, has only gotten stronger. Our brand is perfectly positioned to help our guests live into the sweat life any way they choose as our product not only offers technicality, but also comfort, versatility and beauty. Our pipeline of innovation for the coming year is robust, and we're already off to a strong start.

I'd like to thank our product teams across the globe for their unwavering dedication to finding new technical solves for our guests and their invaluable contribution to our strong financial results. And now over to Meghan to take you through our financials. Meghan?

Meghan Frank -- Chief Financial Officer

Thanks, Sun. We are proud of our 2020 results in a challenging environment and are entering 2021 in a strong financial position. We pivoted our investments in 2020 to ensure we were prepared for multiple operational scenarios over our peak holiday period. The fourth quarter was impacted by more COVID-19-related store closures and capacity constraints than we originally anticipated.

And we were pleased to deliver revenue growth of 24%, ahead of our expectations. In looking at 2021, we're excited about our momentum headed into the year and the opportunities in front of us. And we expect our top-line growth to exceed the annual targets as laid out in our Power of Three growth plan. Also, as Calvin mentioned, we're very pleased with the performance of MIRROR, which has exceeded our initial expectations and we have made the strategic decision to continue investing in innovation and building brand awareness to drive the long-term value of the MIRROR business.

This will have near-term implications for SG&A, but I will touch on it further in a moment. Let me share with you the details of our Q4 performance. I will also discuss specifics on our balance sheet, including our cash position, liquidity and inventories. Please note that the adjusted Q4 financial metrics I will share include the operating results of MIRROR but excludes $7.8 million of acquisition-related costs and our associated tax effect.

You can refer to our earnings release for more information and reconciliations to our GAAP metrics. For Q4, total net revenue increased 24% to $1.7 billion, above our expectations for a mid-to-high teens increase. This included a 21% increase in North America and a 47% increase in our international business. In our digital channel, we posted a 92% comp increase on top of a 41% increase last year.

e-com contributed approximately $900 million of top line or 52% of total revenue. We continue to see notable strength in traffic and conversion. Traffic was driven by channel shift, coupled with investments in digital marketing, and conversion continues to benefit from guest response to our product and the investments we've made in our global digital platform to improve guest experience. In our store channel, we had 88% of our stores open on average and saw productivity of 71% of last year's volume, in line with our expectations.

Square footage increased 11% versus last year, driven by the addition of 30 net new stores since Q4 of 2019. During the quarter, we opened six net new stores and completed nine planned optimizations. Gross profit for the fourth quarter was approximately $1 billion or 58.6% of net revenue, compared to 58% of net revenue in Q4 2019. Our gross margin increase of 60 basis points was driven by 190 basis points of leverage on occupancy, depreciation and product team costs and 20 basis points of favorability in foreign exchange.

This was partially offset by an 80-basis-point decrease in product margin, primarily due to higher airfreight costs related to COVID-19 and higher markdowns, and 70 basis points of deleverage on DC costs, predominantly related to COVID-19. Moving to SG&A. Our approach in the current environment has been to prudently manage our expenses while also ensuring we continue to invest in our long-term growth opportunities. SG&A expenses were $545 million or 31.5% of net revenue, compared to 28.2% of net revenue in Q4 2019.

The deleverage in the quarter resulted predominantly from marketing investment associated with MIRROR, coupled with the impact of store closures, capacity constraints and COVID-19-related costs, partially offset by leverage on corporate overhead due to our 2020 expense reduction initiatives and strength of our top line. Foreign exchange also had a negative impact on SG&A in the quarter. Adjusted operating income for the quarter was $466 million or 26.9% of net revenue, compared to 29.8% of net revenue in Q4 2019. Adjusted tax expense for the quarter was $127 million or 27.4% of pre-tax earnings, compared to an effective tax rate of 28.8% a year ago.

The reduction in tax rate relative to last year was primarily due to additional deductions obtained in select international jurisdictions. Adjusted net income for the quarter was $337 million or $2.58 per diluted share, compared to earnings per diluted share of $2.28 in Q4 of 2019. Capital expenditures were $58 million for the quarter, compared to $69 million in the fourth quarter last year. Q4 spend relates primarily to digital channel and analytics capabilities, supply chain investment, technology spend to support our business growth and store capital for new locations, relocations and renovations.

Turning to our balance sheet highlights. We ended the quarter with over $1.5 billion of total liquidity. We had approximately $1.2 billion in cash and cash equivalents and nearly $400 million of available capacity under our revolving credit facility. Inventory grew 25% versus last year and was $647 million at the end of Q4.

We expect levels at the end of Q1 to increase approximately 15% relative to Q1 2020. While we are seeing some delayed inventory receipts due to the issues at the ports, we are comfortable with the level and composition of our inventory and we are positioned well as we enter the spring season. I'll provide additional detail on this when I offer our gross margin guidance. We have $500 million of availability on our current share repurchase authorization.

We've repurchased nearly $1.4 billion of our stock over the last six years, and we continue to believe share repurchases are an effective method of returning cash to shareholders. Let me shift now to our outlook for Q1 and the full-year 2021. We're excited with our sales trend as we enter the new year. We have more stores opened now than we did in Q4, and our guests are responding well to our new innovations, as well as the core styles in our spring assortment.

We remain focused on continuing to leverage our omni model and digital strength. And we're planning for multiple operational scenarios as we navigate the continued uncertainties stemming from COVID-19. As we anniversary store closures, we are focused on two-year top-line CAGRs to normalize for the disruption of business trends last year. I will also offer some color on gross margin and SG&A relative to 2019 for Q1 given the significant impact from store closures we experienced during the first half of 2020.

For Q1, we expect revenue in the range of $1.1 billion to $1.13 billion, representing a two-year CAGR of 19% at the midpoint. In terms of stores, we currently have approximately 96% of our stores open across the globe, an improvement relative to Q4. However, we continue to experience the effects of COVID-19 in several markets. On a two-year CAGR basis, we expect stores to be flat to slightly negative, with e-com growing at approximately 50%.

We expect gross margin in Q1 to increase significantly from last year's COVID-impacted quarter and also be 50 to 100 basis points higher than Q1 of 2019. Relative to 2019, our gross margin is benefiting from a higher e-com penetration and leverage on occupancy and depreciation due to pulling back somewhat on new store openings in 2020, as well as a level of rent reductions. Our Q1 guidance reflects pressure from air freight costs due to port congestion and capacity constraints. We are strategically using airfreight to ensure we are able to meet guest demand, and we'll continue to closely monitor as we move throughout 2021.

In Q1, we expect SG&A leverage versus 2020, but deleverage of approximately 400 basis points relative to 2019. Drivers of the deleverage versus 2019 include: COVID-related costs, including labor and PPE; higher depreciation due to accelerated investments to support our e-com business in 2020 and 2021; consolidation of MIRROR's results this year but not in the prior year; and our strategic decision to increase investment in MIRROR in 2021. While the business is still in its early stages and represents less than 5% of our total revenue, MIRROR sales exceeded our initial expectations in 2020. Given the current momentum in the at-home fitness category, we now see an even greater opportunity than we did at the time of the acquisition.

The value in the MIRROR business model is the lifetime value of their guests, and we're going to invest into the current category strength to maximize the long-term value of this asset. Turning to EPS. We expect adjusted earnings per share in the first quarter to be in the range of $0.86 to $0.90 versus EPS of $0.22 a year ago. This includes operating results from MIRROR but excludes acquisition and integration-related costs.

As a reminder, we reported EPS of $0.74 in Q1 of 2019. For the full-year 2021, we expect revenue to be in the range of $5.55 billion to $5.65 billion. This range includes $250 million to $275 million from MIRROR and assumes our e-com business grows modestly relative to the outsized strength we experienced in 2020 as we expect the majority of stores to be opened in 2021. By quarter, we expect the most robust e-com growth in Q1, a decline in Q2 as we anniversary the height of COVID-related channel shift in our online warehouse sale and then modest growth in Q3 and Q4.

When looking at total revenue, our guidance range implies a two-year CAGR of 19% at the midpoint, which is in line with our three-year revenue CAGR of 19%, leading up to 2020 and is ahead of the low-teens CAGR contemplated in our Power of Three growth plan. We expect to open 40 to 50 net new company-operated stores in 2021. This includes approximately 30 to 35 stores in our international markets and represents a square footage percentage increase in the low double digits. We expect gross margin for the year to expand between 100 and 150 basis points compared to the modest increase we saw in 2020.

We expect gross margin increases relative to 2020 in each quarter of the year, with the largest increase expected in Q1. For the year, the anticipated margin expansion includes approximately 50 basis points of negative impact from additional freight costs, but is still in excess of our Power of Three growth plan, which assumes modest gross margin expansion annually. The outperformance is expected to be driven primarily by a shift relative to our initial plans and investment from new store openings and remodels toward digital capabilities, which impacts SG&A. When looking at SG&A for the year, we expect deleverage of 50 to 100 basis points versus 2020, which is in excess of what was contemplated within our Power of Three plan.

Drivers of the deleverage include consolidation of MIRROR for the full year and increased investment in MIRROR brand building. Relative to 2020, we expect predominantly all the deleverage to impact the second and third quarters. We expect our effective tax rate for the year to be similar to 2020, with the Q1 rate being lower than the other quarters. We expect our fiscal-year 2021 adjusted diluted earnings per share to be in the range of $6.30 to $6.45.

Our EPS guidance assumes modest dilution from MIRROR in the range of 3% to 5%, excluding acquisition and integration-related costs. We're excited with the momentum we're seeing in this business, particularly the growing community of people sweating with MIRROR, which contributes to increased brand awareness and strong long-term financial returns. But as I mentioned earlier, MIRROR remains early in its life cycle and we've made the strategic decision to invest more than initially anticipated to build long-term value in this business. Capital expenditures are expected to be approximately $335 million to $345 million for 2021.

The increase versus 2020 reflects increased investment in our supply chain, digital capabilities, new store openings and renovations, including MIRROR shop-in-shops, as well as other technology and general corporate infrastructure projects. I've already provided our guidance on Q1, but let me share some additional details to keep in mind as we model out the rest of the year. Taking into account my prior remarks on gross margin, SG&A and tax, you will see that we expect adjusted EPS growth in each quarter of the year relative to 2020, with the rate of growth likely below that currently implied by FactSet consensus in Q2 and Q3 and relatively in line with consensus in Q4. As I mentioned earlier, we're pleased with our momentum at the start of the year, and we are excited with the opportunities in front of us in 2021.

Before handing it back to Calvin, I want to thank our teams across the globe for their agility and commitment to our brand every day, which drives our financial strength. And now back to Calvin for some closing remarks.

Calvin McDonald -- Chief Executive Officer

Thanks, Meghan. In closing, I would like to reiterate how pleased we are with how lululemon performed over the quarter and the full year. We see many opportunities to build upon this year's performance by leaning into our strengths: innovative product, expanding our omni-capabilities and continuing to grow around the world. As I mentioned, when we look back at 2020, I believe we will see this as a pinnacle moment for lululemon when we were able to pull forward many future innovations that will create upside for the brand well into the future.

All of us on the leadership team are grateful for the continued support and loyalty of our employees, our ambassadors and our guests who continue to be there for one another and make these results possible. And with that, Sun, Meghan, Alex and I would be happy to take your questions. Operator?

Questions & Answers:


[Operator instructions] The first question comes from Lorraine Hutchinson with Bank of America. Please go ahead.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Well, thanks. Good afternoon. I want to just focus on the investments in MIRROR for a minute. The 3% to 5% dilution, you're obviously above what you had initially expected and I think what we were all expecting.

So in light of that, can you just maybe frame out your expectations for the long-term opportunities of the business that are getting you so excited about this -- the ability to invest now in the content?

Meghan Frank -- Chief Financial Officer

Yes. Hi, Lorraine. It's Meghan. So as we mentioned, MIRROR sales in 2020 exceeded our initial expectations at approximately $170 million.

And we did guide to $250 million to $275 million for 2021. They are still very early in their life cycle and the path to profitability there is very much within our control. That said, looking at the business, the value is really in the long term and the long-term value of the subscription revenue. So we've learned a lot since we purchased the business and COVID created an even greater opportunity than we saw at that time.

And we're going to invest behind the momentum we see in that business to really drive that long-term value. And you heard Calvin talk a little bit about some of the key investment areas that include adding production studios, adding an instructor -- instructors to the base, launching new features and then expansion into Canada, as well as importantly, over 200 shop-in-shops in our North America lululemon stores. In terms of the long-term opportunity for the business, I think we'll continue to learn a lot in 2021. We're not going to put a time point on it right now, but we'll continue to share more as we create our plans for 2022 and beyond.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you.


The next question comes from Mark Altschwager with Baird. Please go ahead.

Mark Altschwager -- Robert W. Baird -- Analyst

Good afternoon. Thanks for taking my question. So with respect to the 2021 guide, I think it implies kind of EBIT margins that are a couple hundred basis points below 2019. Maybe just break that down for us a little bit more.

I guess, how much of that compression is the MIRROR investments versus your outlook for the core? And then just bigger picture with respect to the Power of Three and the longer-term goals. Obviously, well ahead when it comes to digital, but just maybe give us a sense of what, if anything, has changed in terms of the longer-term ambitions and how that might flow through the P&L over the next couple of years? Thank you.

Meghan Frank -- Chief Financial Officer

Yup. Hi, Mark. It's Meghan. So if you take into consideration the color I offered on guidance, lululemon operating margin is slightly above 2019.

So on track, essentially for our Power of Three growth plans. And that dilution really is driven by the MIRROR investment that I just outlined and really geared toward investing into that business to drive the long-term value. In terms of Power of Three, you're right, we're further along, as Calvin mentioned, than we anticipated in terms of digital strength. We aren't revising our plan right now.

But as you can see, we're in good shape to meet that plan.

Mark Altschwager -- Robert W. Baird -- Analyst

A quick follow-up there. Can you talk about your progress toward scaling the business in China? And just from a -- maybe from a margin perspective, where that sits relative to the company average and how you're planning that progression?

Calvin McDonald -- Chief Executive Officer

Hey, Mark. It's Calvin. Just quickly on the Power of Three initiatives, doubling men's, doubling digital, quadrupling international, and then I'll quickly jump into certain markets. We're on pace on men's, on pace on international and arriving early ahead on our digital, as we said.

So as Meghan alluded to, we're in a very good position at this point in our commitments and excited about the momentum in the business and opportunities to keep investing in innovation, investing in growth. MIRROR is one of those areas that because the business is doing well, we're choosing to invest in a business that we know will add value through further guest relationships, building out that community and the value of the subscription model. So excited about those. And China is equal to those opportunities for us to invest in.

We are very happy with our business and growth. We've shared multiple times last year, the growth in both our store-based business and international. As well, I mentioned that heading into '21, our plan is to open more stores in the market than we've ever opened in the 15 to 20 range. That would put us well over 50 stores at this point in time.

And we're very pleased with both the top-line, bottom-line performance in that market, and we keep investing in that market local head office to empower the teams to drive relevancy. So I'm excited about our international business in all markets.

Mark Altschwager -- Robert W. Baird -- Analyst

That's great. Thanks for all the detail, and best of luck.


The next question comes from Erinn Murphy with Piper Sandler. Please go ahead.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thanks. Good afternoon. Calvin, for you, you talked about gaining a point of share in 2020.

I'm curious to how you think about your ability to continue to gain market share in 2021, particularly as several large global brands are doubling down on their women's business. And then maybe just a clarification on MIRROR. What have you seen in terms of the consumer appetite on some of the pricing that you've played around with? I think during the holiday season, if you were to buy it in store, there were different promotional opportunities to get it slightly cheaper. Are you pleased with the current price position of the MIRROR just before you scale it out to more doors this year? Thank you.

Calvin McDonald -- Chief Executive Officer

OK. Thanks, Erinn. First, on market share, very optimistic with the product that Sun indicated that we will continue to grow share across both men's and women's. We did so in 2020.

I believe we were the only of the major brands to do -- to achieve that goal. And we have a very strong business in women's. And I understand that others are identifying and seeing that as a growth potential. But we have a very strong commitment with our guests, very strong franchises, but equally, if not even more important, a very significant pipeline of newness that we're going to continue to build out and delight that guest with in terms of activities into yoga, further into train and run and introducing some new activities.

So I'm very confident in our ability through innovation and knowing what we're bringing, that we're going to see growth and success both with men and women and then the men, the opportunity, as we've shared in the past, is really driving that awareness. And we have some exciting initiatives that we'll share, further plan this year to continue to engage, drive awareness and consideration for our male guests as we continue to build out and drive that relationship and success with our women's. Yoga and our female guests, we know are critical parts. And as we look to grow into other areas and opportunity, just know that the team is 100% focused on maintaining and growing that relationship in those segments as well.

And in terms of MIRROR, we did do some interesting testing, and we continue to. The benefit of the business being new is that we're doing a lot with Brent and team on test and learn, on both how to acquire and drive the awareness, which remains a big opportunity and price, elasticity behind the product. And right now positioned at the retail price point with a free shipping offering resonates very well. The guest prefers that sort of combination.

And then we pulse in a variety of promotional opportunities when it's either competitively appropriate to do so or we see an opportunity. We've tried a number from a discount of $200 to $300 being the peak. So the net price being $1,200. And as well as bundling opportunities.

And feedback from the guest is very encouraging that a number of levers -- of registers with them. So it gives us the ability to not just sort of play one promotional lever in order to drive that opportunity to invest into the MIRROR. So we have a number of levers that we've tested and validated that we'll continue to do. We have a good price position in and around the $1,200 to $1,500 that they respond well to.

And we'll continue to operate with that, as well as we look to expansion in the Canadian market price accordingly.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thank you.


The next question comes from Paul Trussel with Deutsche Bank. Please go ahead.

Paul Trussell -- Deutsche Bank -- Analyst

Good afternoon. Thanks for taking our question. Just wanted to ask about what you're seeing today in terms of store traffic and productivity? And how are you thinking about the cadence of store productivity over the course of the year? And then second, you did mention that air freight, higher markdowns and distribution expenses were headwinds in this current period, offsetting some of the occupancy leverage and other savings. Just speak to the extent that when these headwinds may continue.

Meghan Frank -- Chief Financial Officer

Hi, Paul. It's Meghan. So in terms of productivity, we saw productivity in stores of 71% in Q4, which was in line with our expectations. We do now, in Q1, have more stores open at 96% and we are not in our peak traffic period.

So the constrained impact is lessening. We do expect that to improve as we move throughout the year, but we are planning as we did in 2021 -- or in 2020 for multiple scenarios so that we're able to meet our omni-guest demand. So we'll continue to iterate on that as we move throughout 2021. In terms of margin rates, we offered that we see expansion on a year of 100 to 150 basis points.

Included in that is 50 basis points of pressure related to airfreight. We don't see that as a barrier to revenue upside. We'll continue to strategically leverage airfreight to drive revenue and continue to closely monitor that throughout the year.


The next question comes from Matthew Boss with J.P. Morgan. Please go ahead.

Matthew Boss -- J.P. Morgan -- Analyst

Great. Thanks, and congrats again on the nice quarter. Calvin, maybe as we think about recovery post pandemic, so do you anticipate -- or maybe are you seeing signs of pent-up demand for technical innovation on the sweat side of the business as in-person or maybe people begin to think about in-person fitness again? And then I'm curious how you see lulu's lifestyle assortment positioned to take market share if casualization is, in fact, greater post pandemic?

Calvin McDonald -- Chief Executive Officer

Great. Thanks, Matthew. As I indicated, our technical performance of our product all through 2020 was the drivers of our growth predominantly. And I don't see that diminishing in any way.

I think people are finding ways to sweat, they've adopted new ways to sweat. And when the world opens up, and they'll be able to go back to their gyms and their studios, they'll just have a balance of ways in which they're engaging. And we have a lot more new guests or existing guests using a lot more of our technical product. That is going to just drive an appreciation for and loyalty to the uniqueness of how it performs.

So from a recovery standpoint, I feel all the momentum in the business behind driving even more adoption and success of our technical performance as we saw in 2020, and I think it's only going to be more pronounced moving forward. From an OTM perspective, we're early in our development of OTM in our women's category. The team has been building that for the last few years and adding assortment, and we test and launched a key product next year, we will add more to the assortment this year and in the years to come. So we're very early that we're well-positioned through our technical apparel to build that business as guests look to shift, but when they shift back to more other casual wear, they're going to be looking for something that I believe is unique and different in the technical apparel fashion, and some of the team are creating and building that.

And men's -- that's been one of our strengths in men's. Women's is going to catch up to our men's offering. And we have full confidence in our success and strength in men's in that OTM business and the work and the product that's following that is going to keep fueling the OTM. At the heart and the core, the technical performance gear did perform, is performing, and I think it's only going to perform more moving forward.

Matthew Boss -- J.P. Morgan -- Analyst

Great. And then maybe just a follow-up on SG&A. Meghan, so outside of MIRROR and the pull forward that you've cited of the DTC investments, I guess my question is on an underlying basis, is there any change to the annual plan, I think that you laid out at the Analyst Day, for modest SG&A leverage on low teens revenues this year? And then as you see it today, is there any reason the model doesn't return to that plan on a reported basis after this year?

Meghan Frank -- Chief Financial Officer

Yeah. Thanks, Matt. So as I mentioned, if you consider the color I provided, from an operating income perspective, lululemon is essentially in line with Analyst Day. And we have a bit more expansion in margin and a bit more pressure on SG&A, and that's because of the shift in investment profile between channels.

So pulling back somewhat on store openings and investing behind digital, the store expenses show up in gross margin and the digital expenses show up in SG&A. So I'd say a little bit of a near-term impact, and we continue to monitor that for the long term, and we're really focused on optimizing the bottom line of our business.

Matthew Boss -- J.P. Morgan -- Analyst

Thanks. Great color.

Howard Tubin -- Vice President, Investor Relations

Operator, we'll take one more question. Thanks.


Certainly. The next question comes from Ike Boruchow with Wells Fargo. Please go ahead.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Hey. Thanks so much for the question. So I just wanted to talk about men's versus women's. Men's seem to be underperforming through the year.

And just because your women's business was just so much stronger. I think you kind of leveled out in 4Q. I'm just trying to look at the filing now, but can you kind of explain what was going on between the two genders in your business? And is there anything that's changed as you come into 2021? And again, I don't know if that's just behavior or if that's just product or innovation. Just anything you could elaborate on, Calvin, would be great.

Calvin McDonald -- Chief Executive Officer

Yeah. No, for sure. Thanks, Ike. We've -- I would tell you, our assessment is 100% behavior.

Looking at his behavior at the beginning of the pandemic and shifts of where he was purchasing, how he was purchasing drove a lot of the declines in apparel that the industry saw in the men's categories. And that started to pick up throughout the year. Our impact was less in the industry at the beginning, and it picked up quicker at the tail end. In our fourth quarter, our men's business trailed our women's business, but it was the narrowest gap from the entire year that we saw.

And as Meghan indicated, the start of this year has been very, very strong for us, and the men's business continues that road to recovery. So it -- in my opinion, was 100% behavior and as stores come online and we're seeing that shift back into apparel, that it will come back to where we were in terms of performance and growth driving. Even with that, we are on pace to double our men's business per our commitment in our five-year and seeing very good results and strength back to the men's business already to start this year.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Got it. Thanks.


[Operator signoff]

Duration: 60 minutes

Call participants:

Howard Tubin -- Vice President, Investor Relations

Calvin McDonald -- Chief Executive Officer

Sun Choe -- Chief Product Officer

Meghan Frank -- Chief Financial Officer

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Mark Altschwager -- Robert W. Baird -- Analyst

Erinn Murphy -- Piper Sandler -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Matthew Boss -- J.P. Morgan -- Analyst

Ike Boruchow -- Wells Fargo Securities -- Analyst

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