Lululemon Athletica Inc (LULU) — Q4 2019 Earnings Call Transcript

Thank you, and good afternoon. Welcome to lululemon's fourth quarter earnings conference call. Joining me today to discuss our results are Calvin McDonald, CEO; and PJ Guido, CFO. Before we begin, I want to remind you that our remarks today will include forward-looking statements that reflect management's current expectations regarding certain aspects of lululemon's future. These statements are based on the information we have at this moment, which is subject to change. Actual results may differ significantly from those projected in these forward-looking statements due to the risks and uncertainties associated with our business, including those disclosed in our most recent SEC filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements made during this call are based on assumptions as of today, and we do not take on any obligation to update or revise these statements due to new information or future events. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures can be found in our annual report on Form 10-K and in today's earnings press release. Both the press release and the annual report on Form 10-K are available under the Investors section of our website at www.lululemon.com. Before we start, I encourage our investors to check out our investor site, where you can find a summary of our key financial operating statistics for the fourth quarter as well as our quarterly infographic. We aim to conclude today's call in under an hour. Now, I would like to turn the call over to Calvin.

Thank you, Howard, and it's good to speak with all of you for our fourth quarter earnings call. We are very pleased with the strong performance of lululemon, both in the fourth quarter and throughout 2019 as we delivered nearly $4 billion in revenue. We continue to grow our core businesses while we strategically expand around the world and acquire new guests. The underlying health of our business is strong, and we entered 2020 with strong momentum. As you know, circumstances have changed dramatically in quarter 1 given the spread of COVID-19. We're proud of the actions we've taken across our business to help protect our people and our guests as we navigate this situation. I'll begin my comments by discussing COVID-19 as it relates to our business and provide a brief overview of quarter 4 and 2019. PJ Guido, our Chief Financial Officer, will then take you through our financials and provide more details on our more recent performance. We'll then take your questions. We plan to keep the call shorter than normal and wrap up in under an hour. Our hearts go out to all of those impacted by COVID-19. The safety and well-being of our people and our guests in the affected regions remains our highest priority. The current situation is clearly dynamic. Broadly speaking, and similar to many of our peers, we are seeing virus-related impact on performance across our markets. In North America and Europe, our stores have been closed since March 16. Stores in New Zealand are closed at this time, while Australia is operating on reduced hours. In China, all of our stores, except our location in Wuhan, are open, with most operating on regular schedules. Our stores also remain open in other Asian markets, except for Malaysia, where our two locations are currently closed. In addition, we are closely monitoring our supply chain and staying in constant contact with our vendors as they, too, navigate the situation. Given the rapidly changing nature of current events, we have decided not to provide financial guidance at this time. That said, the underlying health of our business is strong, which provides us with many levers to successfully manage through this period. These include: first, our strong balance sheet. We ended the year with $1.1 billion in cash, no long-term debt, and a $400 million untapped revolver. Second, our investments in key technologies, including RFID, and strong partnerships with our vendors, will enable us to maximize inventory across our network while managing our overall levels. Third, the power of our product. Our assortment is less seasonal in nature, as many of our core styles are relevant year-round and can be held for future use. Fourth, the flexibility of our multichannel business. Our e-commerce sites, mobile apps, and omni-capabilities allow our guests to shop in multiple ways, which is complemented by our agile store formats. And fifth, the strength of the category in which we compete. At our core, we solve sweaty problems for athletes, and we do not believe the current situation will change the trend toward people wanting to live an active and healthy lifestyle. These are some of the reasons we're confident in our abilities to navigate the near term while working to realize the opportunities over the longer term. In addition, we have early learnings from China, which show us that our business will bounce back. We are not yet back to pre-closing volumes, but the business is getting stronger week by week. There is considerable work underway across the business to respond to the current situation, and I'd like to specifically update you on two of these workstreams. The first is the support phase, and the second is how we will enable the recovery phase. I'll start with our support phase initiatives and how we are currently assisting our teams, our ambassadors, and our guests. We will do our best to open our stores as soon as possible when the recovery begins and will approach this market-by-market based upon the latest information. I'm consistently inspired by the resilience of our people as they navigate the unknown and connect even more regularly than ever before. In terms of our guests, our e-commerce sites continue to operate around the world, so we can continue to fulfill their needs with our product. Similar to what we've done for our own people, we have been offering online sweat sessions for our guests with yoga, meditation, Pilates, dance, and training classes. Our teams in North America and Europe have followed the lead of our people in China, where we've gained thousands of new followers on WeChat. On Instagram, during our first week of store closures and thanks to our increased content offerings, we saw nearly 170,000 guests join us for our live classes. It’s inspiring to see the strength of our guests come together this way, and we'll continue to stay closely connected as we navigate what's ahead. And finally, our ambassadors remain top of mind as well. We are in constant contact, and they are continuing to help us engage with our local communities through these virtual sweat sessions. As many of our ambassadors are small business owners who have been forced to close their doors, we just launched the global Ambassador Relief Fund. This fund will assist our ambassadors who own studios in their local communities to sustain their businesses during these currently extraordinary times. Let me shift gears now and speak for a moment about how we are thinking about the recovery phase. We know the current situation will pass, and we remain focused on being ready to serve our guests and support our communities when the time is right. Our balance sheet allows us to look ahead and continue the plan for growth as we manage the business for day-to-day. In terms of inventory, we are managing our buys and looking at our assortment flow with a full-year view. Our teams are now in the work to balance supply with the current reduction in demand we're experiencing. We're in constant communication with our vendors, and we have flexibility regarding our receipts for the second half of the year. Our key e-commerce distribution centers continue to function. We are practicing social distancing, monitoring the health and well-being of our people closely, and taking precautions to maintain our operations. Over the last several years, we have made significant investments in our supply chain and distribution network, and I'm confident that we'll be able to further leverage these investments to help us navigate through the current situation. Shifting to expenditures, we are currently evaluating our expense structure, capital expenditures, and store opening and remodel programs. We are acting now to ensure we can reaccelerate our growth drivers when we are ready. PJ will say more in a few minutes. In terms of products, our product pipeline remains full, and our white space and design teams have not stopped their work. We continue to leverage our Science of Feel development platform to bring new technical innovations to our guests. While we have paused on our events, such as 10K runs, through July 31, we are continuing to connect with our communities. We collected our best online content from our ambassadors on our new Community Carries On hub on our global website, creating one central place for our community to connect and access online fitness and health resources. This gives you a sense of the scope and breadth of our global response during both the support and recovery phases of our planning. Now let me share some details about our fourth quarter and full year results. We are pleased with the momentum we saw during the fourth quarter and throughout 2019. Our results for the fourth quarter include: total revenue growth of 20%, a constant dollar comparable increase of 20% on top of a 17% increase last year, and an earnings per share increase of 23% compared to adjusted earnings per share last year. Our quarter 4 results demonstrate that our guests responded incredibly well to our product this holiday. Growth occurred across all categories, with comps in women's up 12%, men's comps up 39%, and accessory comps up 24%. Strong comps across channels with 9% in stores and 41% in digital. And within our regions, North America was up 19%, international was up 25%, and China was up 70%. For the full year 2019, we delivered total revenue growth of 21%, a constant dollar comparable increase of 18% on top of an 18% increase in 2018, an operating margin of 22.3%, and an earnings per share increase of 28%. As you'll recall, our 2023 vision is comprised of three pillars: product innovation, omni-guest experiences, and expanded markets. These are the right pillars for our business. We executed well against them in 2019, and we remain committed to our 2023 targets as laid out in our Power of Three growth plan. In summary, we're proud of how lululemon continued to deliver against our strategies and gain momentum in the quarter and full year of 2019. While this period in our lives is filled with uncertainty, at lululemon, we are certain about our future. We have the balance sheet, the connection to our community, the strength of our category, and the right growth initiatives to sustain us while we keep investing well into our future. Although we do not know exactly when the current situation will pass, what we do know is that our stores will reopen. We know that initially, the business will be lower than it was pre-COVID-19. But we believe that each day and each week, it will keep building. We are planning for multiple scenarios, but in any one of these, we know that our brand is strong and has unique pillars of strength that will keep driving our momentum forward. I'll now ask PJ to provide further details about our quarter 4 performance and an update on current business.

Thanks, Calvin. I will first provide details on our Q4 performance, and although we are not providing quantitative guidance, I will offer some qualitative insight into the health of our business relative to the challenging environment in which we are operating. For Q4, total net revenue rose 20% to $1.4 billion, driven by continued strong execution across all parts of the business. In our store channel, we delivered a 9% constant dollar comparable store sales increase on top of a 7% increase in Q4 of last year. Square footage increased 18% versus last year, driven by the addition of 51 net new lululemon stores since Q4 of 2018. During the quarter, we opened 12 net new stores and completed five optimizations. In our digital channel, we posted a 41% constant dollar comparable increase on top of a 39% increase last year. For the quarter, e-commerce contributed approximately $464 million at the top line or 33% of total revenue. Increased traffic in Q4 continued to drive comps, both in-store and online, with increases in the high single digits and over 30%, respectively. Gross profit for the fourth quarter was $811 million or 58% of net revenue compared to 57.3% of net revenue in Q4 2018. The gross profit rate in Q4 increased 70 basis points versus gross margin last year and was driven primarily by the following: an 80 basis point increase in overall product margin resulting from lower product costs and favorability in product mix. In the aggregate, occupancy, depreciation, product, and supply chain costs had minimal impact in the quarter. Moving down the P&L. SG&A expenses were approximately $394 million or 28.2% of net revenue compared to 28.9% of net revenue for the same period last year. Foreign exchange, both translation and revaluation, contributed 30 basis points of deleverage in the quarter. Operating income for the quarter was approximately $416 million or 29.8% of net revenue compared to 28.4% of net revenue in Q4 2018. Tax expense for the quarter was $121 million or 28.8% of pretax earnings compared to an adjusted effective tax rate of 26.9% a year ago. The increase in our effective tax rate compared to our adjusted effective tax rate last year relates primarily to a change in tax legislation in the fourth quarter of 2018, which reduced tax expense in that quarter. Net income for the quarter was $298 million or $2.28 per diluted share compared to adjusted earnings per diluted share of $1.85 for the fourth quarter of 2018. Capital expenditures were approximately $69 million for the quarter compared to approximately $69 million in the fourth quarter last year. Q4 spend relates primarily to store capital for new locations, relocations, and renovations, as well as IT and supply chain investment. Turning to our balance sheet highlights. We ended the quarter with $1.1 billion in cash and with $400 million of available capacity under our revolving credit facility. Inventory grew 28% with $518.5 million at the end of Q4. We repurchased approximately 1,600 shares this quarter at a cost of just over $307,000. At the end of Q4, we had $327 million remaining on our current $500 million repurchase plan. Let me shift now to current events. As Calvin stated, our sales trend changed dramatically during the second week of March when the impact of COVID-19 accelerated. Due to the dynamic nature of this event, we are not able to provide accurate 2020 guidance at this time. All of our stores in Europe and North America have been closed since March 16, and our current plans call for these stores to remain closed until April 5. Our distribution centers are up and running with the exception of our facility in Sumner, Washington, which has been closed in line with temporary local restrictions. This distribution center does not fulfill a significant number of e-commerce orders, and the closure has not had a material impact on our business. The vast majority of our stores in China and most of Asia are currently operating and showing improved performance each week since reopening. Through the second week of March, our North American store comps remained strong and in line with Q4 trend, driven by consistent traffic and great execution by our store teams. In addition, our digital business has remained strong throughout, driven by traffic and improving conversion that is a direct result of the investments we have made in our digital platform. The strength of our business early in Q1, both in-store and online, reinforces that our brand remains strong. That said, we did see a dramatic slowdown in our business in conjunction with our store closure, and we expect this to have a negative impact on Q1 comps, margins, and EPS. One of our key advantages in the current environment is our liquidity position, which is extremely strong. We currently hold over $1 billion of cash on the balance sheet and have no long-term debt. We also have a $400 million revolving credit facility, which has three years left in maturity. In addition, this facility has an option to upsize by $200 million. We are also currently actively managing our expense structure, capital investment, and store openings and renovations. We have modeled several different scenarios to gauge the COVID-related impact on our business and believe we have the flexibility and nimbleness to adapt and manage to each scenario accordingly. To mitigate the impact we are seeing, we are reducing nonessential operating expenses and reprioritizing our capital spend towards business-critical projects. Among several other expense reduction opportunities, we've curtailed business travel, slowed the pace of new hires, rationalized our marketing spend, and are working with our landlords to defer a select group of our upcoming new store openings and remodel projects. In terms of inventory management, our merchant and supply chain teams are evaluating all upcoming deliveries through the lens of current and anticipated demand. We have flexibility with regard to our fall and winter 2020 receipts and, where appropriate, can push out or reduce our buy orders. We believe we are in a strong position given our high cash balance, strong cash flow, no long-term debt, and access to additional sources of liquidity. In addition, we will further enhance our financial position by managing working capital, SG&A expense, and capital expenditures. The strength of our balance sheet and flexibility of our operating model puts us in a position to address an unprecedented situation within the global economy. In addition, it will allow us the optionality to still prudently invest for the future and live into our potential as a global brand. And now back to Calvin for some closing remarks.

Thank you, PJ. I want to express my confidence in the leadership team of lululemon and our brand's strong position, which will enable us to effectively navigate these unexpected times. Our hearts go out to everyone who is personally impacted by COVID-19. I'm continually impressed by how the teams of lululemon are leading through this time and who they are being for one another, for our guests, and for our community. In closing, I want to thank our team members for the results they delivered for lululemon in 2019 and for their perseverance and commitment to our brand that I continue to see from them each and every day. Operator, we can now open it up for questions.

I hope everyone's family is safe and healthy. Calvin, I guess, the first question for me would be, you made the statement, plan for growth while continuing to manage the day-to-day. And it's an interesting statement because it seems like a lot of companies right now are not planning for growth, and they're just trying to survive. So can you kind of give us some insight into your ability to plan for growth, continue to grow when we get on the back end of this, and maybe where your confidence comes from that you're going to return to that in a reasonable amount of time? Is that just your China experience? What you're seeing in China is what makes you feel that way? That's my first question.

Thanks, Matthew. I'll address the first part and share some insights from China. I believe we are in a strong position at lululemon. We had great momentum before the current situation, and I don't see anything that will fundamentally hinder our ability to regain that momentum. Once we reopen and guests return to some normalcy in their lives, we expect them to come back to our category and shop. Our balance sheet is healthy, which allows us to plan for the future. We continue to focus on our Power of Three strategy and the vision we are creating, which is reinforced by the opportunities arising in our community and our omnichannel strategy. We are taking short-term actions, as PJ mentioned, due to uncertainty. We've reassessed our strategic initiatives and delayed some but are still investing in technology and our omni-digital capabilities, as well as building a strong omni-social community. We have made adjustments, but we believe the vision and opportunity for lululemon remain robust. It's important to continue building for the future while recognizing the need to pause on some initiatives to prioritize others. Looking at China, I think it will provide insights into how North America and Europe will navigate their recovery. However, the scenarios differ slightly since China experienced a brief two-week closure, and we've now been trading for five weeks since reopening. The country remains under a Level 1 security alert, but business is gradually improving week by week. In North America and Europe, we're anticipating a longer closure, which may lead to a faster recovery once we reopen. We are closely monitoring the evolving economic factors and developing scenarios accordingly. I am confident in our ability to maintain that balance while investing in the future vision, and we are committed to doing just that.

I appreciate that color, Calvin. It's important. And then my second question is just given your background and PJ's too, where you both worked in that retail or wholesale business model before, can you maybe talk to us about how your vertically integrated business model of lululemon potentially allows you to manage the inventory to appropriate demand quicker or faster or in a more appropriate manner than what you've seen in your historical experience?

Great. Thanks again on that. And we are absolutely in our support phase of initiatives managing our inventory. I do believe being vertically integrated gives us a ton of benefits. And there are other benefits that we equally have that are outside of just being vertically integrated. The benefit of being vertically integrated is that we own the relationship with our vendors, and we own the relationship right through to our guests and how we sell and how we choose to present the product and the quantities in which we've been buying allows us to manage very differently, in my opinion. Equally, and as we've commented before, one of the benefits around our inventory and product is that we have bought through the first half of the year. We are able to influence our Q3 buy slightly, and we are in the work on our fall and winter buys now. But our product is less seasonal. There is a high percentage of our business that is core, which means we're able to hold and continue to sell for a much longer period of time. We're less dependent on the need to flush out inventory. Second, our technology. With the use of RFID, we can access product at any point across our network, not just distribution centers, but at our stores as well from ship from store. So it allows us to do just regular demand that we're seeing today. Online, our plan in the next week is to turn on ship from store from our stores, although they will not be open to the public; we will be opening up some locations from a ship from store perspective and have a small number of staff operating that. That's going to allow us to continue to manage that inventory that's already in the network very effectively. And so those, I think, combined with the relationships we have with our vendors and the fact that we own the end-to-end are a number of very unique levers that put us in a much better position to manage our inventory levels.

I wanted to ask about the product strategy and how you're thinking about that as we move through the crisis. Are you planning any changes to the flow of newness? Are there product launches that you're looking to delay until store operations have ramped back up?

Thanks, Mark. We're noticing some changes in demand, primarily in the accessories category, with items like yoga mats and blocks as more guests exercise at home. However, we don't plan to alter our launch schedule. Instead, we're focusing on the timing to ensure our plans remain relevant to the current environment, making sure our product presentation is sensitive to the ongoing situations. Generally, what works in our favor is that our launches are designed to address unmet guest needs and are not restricted by time, seasonality, or trends. Therefore, there are no changes to our launch plans for 2020 or into 2021 at this moment. We just introduced our Everlux in February, which was our first product launch of the year under the Science of Feel positioning, and the response from guests has been remarkably positive, surpassing our expectations and continuing to perform well online. Looking ahead for the rest of the year, we don't have immediate plans for changes. We have our online platform to utilize, and we still operate in other markets. As I mentioned, we will be opening soon, and we believe our innovations will enhance and attract guests back to the stores.

And if I could just follow up on digital real quickly. Is it your hypothesis that the digital business will capture some incremental demand given the store closures? I know you said things have slowed recently here. And I was hoping you could clarify, are you saying that the growth has slowed from the rates of growth you were seeing in the fourth quarter? Or have you seen digital demand actually turn negative in recent weeks?

Thanks, Mark. I want to clarify that we entered the store closures with strong momentum in both our retail and digital channels. As PJ mentioned, we had an excellent fourth quarter with total comparables of 20%, which was our strongest performance in 2019, a very strong year for us. It's encouraging to finish with that momentum, which has continued into the start of this year across both physical stores and online. Since the closures, our digital business has improved, but it has not fully compensated for the volume loss from the closed stores. However, we have seen significant growth in our online business. While it cannot meet the entire demand, it is responding well, and we have made adjustments to our digital marketing strategies to be more effective, balancing our expenditure strategically. We are seeing positive responses to these changes and to new products, but while some categories are gaining traction, they haven't completely offset the loss of in-store sales.

Could you provide more details about the situation in China? You mentioned some helpful insights on the build progress, which aids our understanding. Since the reopening 5 or 6 weeks ago, you've noted a gradual increase, but volumes are still not back to pre-COVID levels. Can you share more about the year-over-year comparisons? I assume the comparisons are still negative. How is that trending currently? Based on your observations, do you have a target or timeline for when you think comparisons might start to improve in China? I'm looking to gain a clearer understanding of this.

Great. Thanks, Ike. As I sort of teed up, what's interesting with China, and I think an important element to remember, is that we closed for two weeks. We've been open for five. We're in our sixth week. The country was still on a Level 1 emergency alert. They are just moving to a Level 2 this weekend in Shanghai and Beijing. In one of our other regions, that region moved to a Level 2 earlier in the week. And we did see an immediate uptick in the performance of the stores. Yesterday, our total business in China from a collective of stores and online had a very strong day. So it really is day-to-day, and we're learning as we go. I believe that the five-week period was impacted by the Level 1 emergency alert. And as that changes, we will see more and more business come back at a quicker rate than what we have over the five weeks, and we're seeing that, although it is early. And we have been in negative comps but improving. And I think it's too early to assess when will we tip over negative comps into positive comps in our stores. Our online business has been trending very well, positive comps. But similar to North America, it just cannot offset the entire volume loss in our physical stores. But with what I'm seeing in the last few days and as these emergency alerts drop, I have reason to believe that we will see a quicker pace than we've seen in the last five weeks to that important sort of inflection point of getting back to positive.

Congratulations on the holiday and the momentum coming into the year. PJ, my question for you is on CapEx. It was about $280 million for fiscal '19, and the spread was about, what, $170 million for stores and about $100 million corporate. So as we're looking into 2020, I was wondering how should we think about store investment and continuing to grow. That piece of it seems like it's the growth aspect of it. And when we're thinking about CapEx reduction, is it $100 million off of this number? We were hearing people cut their CapEx up 50% to 60%. So just wondering if you can give us some color there.

Yes, our capital expenditures were approximately $300 million for 2019. We're not providing guidance for 2020 as we are actively managing it. To address your question, about one-third of our capital expenditures are for maintenance, while the remainder is for growth. This growth comes in the form of new stores and investments in growth platforms, such as our supply chain and IT. We are currently reviewing the capital expenditure budget, and we will scale back on areas that do not significantly impact the business. However, we will continue to invest in what is necessary for long-term growth. While we will reduce capital expenditures, it's difficult to specify a precise number at this moment.

Fair enough. Calvin, could you clarify whether all the stores are open or if it's 80%? For the stores that are open, if you categorize them into quintiles, is the top quintile performing within 10% of comparable sales, or is there a consistent spread across the different groups? Are certain markets significantly outperforming others?

Right. Just to confirm, you’re referencing 80% open, is that specific to China?

Specific to China, yes.

All our stores in China are now open, except for one in Wuhan, which we just received notification will be opening next week. This means all our locations in China will be operational next week, which is encouraging and aligns with the positive trends in that market regarding COVID-19. Store performance varies by market and is influenced by changes in emergency alerts. While the performance difference between the top and bottom quartiles is not very large, some stores are performing better than others. Overall, trends have been improving week-by-week, with each market and store showing progress. Some stores were closer to achieving positive comparisons and have maintained that momentum. As cities adjust their emergency statuses, that’s when we see significant improvements in overall performance.

Great. Calvin, you talked about some of the efforts that the lululemon community has done to just bring some of the virtual workout and meditations online as you connect with your consumer. I guess can you talk a little bit more about what you've seen specifically with new customer acquisition during this period, maybe looking at China first and then here in North America and Europe? And then second question really for PJ regarding just the flexibility to manage expenses during this period of time since we don't kind of have adequate history going back to former recessionary periods in your model.

In China, where we first innovated and continued sort of our relationship and partnership we had with an app there called Keep, which is a wonderful platform to activate sort of online sweat and then introduced some of the innovations around WeChat. I shared some numbers with you. And we are seeing a number of new guests. Whenever we do these types of activations in that market, be it some of our Tmall initiatives around Brand Day or on these types of platforms and partnerships, they're proving to be wonderful new guest acquisitions. So we're doing more of them as a result of not having physical sweat or events as an option, and we're seeing an increase in the acquisition of new guests. In North America, it's early, but I would anticipate that we would equally see some new guests acquired this way. But it is really absolutely satisfying and providing a service to our loyal guests that actively participate in our events that aren't available to them at this point in time or our ambassador studio community that are closed at this point in time. So I think we will see some but not quite to the degree of the China market, but it's a combination of. And I think it's just reinforcing the power of one of our goals as it relates to our vision, which is building this omni-social community where we launch and host both physical events and physical activations to come together, be it through membership or stores or local events, as well as our digital. And this has just pushed our innovation into the digital space. And it's inspiring to see the guests respond to it and think how the physical and digital will come together as we lean into that as one of the opportunities for our vision.

And then, Erinn, on your question about managing expenses. So we do have significant flexibility built into our SG&A. And the way we think about it is in a few buckets. There's the variable component, which will come down naturally as sales have come down. But there are also things we can do to drill into that a little bit further. There's the discretionary spend. Marketing is a good example. We can redeploy marketing dollars. For example, we're not doing store events now, but we can redeploy into digital marketing to drive e-commerce performance. So we can do things there. And then there's the overhead piece, which we are actively managing. And I talked about it a little in the prepared remarks, but there are several levers we can pull to control expense, whether it's slowing head count growth, curtailing travel. There's a number of buckets across the organization where we can find savings depending on what scenario we are in. So I feel pretty good about the flex we have in the P&L.

Yes, I would like to ask about the occupancy situation. We've seen headlines regarding rent renegotiations with landlords, and I believe you mentioned possibly deferring some rent on newer projects. Could you provide an update on the current discussions you are having with landlords? Additionally, regarding inventory, I understand that a portion can be repurposed for later seasons, but for the items that cannot be reused, what is your strategy for managing the excess? Should we expect warehouse sales or write-downs? Any clarification on this would be appreciated.

Yes. Thanks, Kate. It's PJ. So on the occupancy piece, it's obviously a very fluid real-time situation. So it's hard to comment on any rent relief we might see. What I will say is we have great relationships with our landlords. We are in active conversations with them. So we're hoping for some flexibility and anticipate some. So there's more to come on that, but nothing solidified at this point.

We are currently activating our forward buy strategy to manage our inventory position. We're also collaborating with our vendors on previously placed orders, allowing us to make adjustments based on our current inventory levels, a significant portion of which consists of core items. While some future orders could be cut back as they were meant to replenish core items, there's no immediate action needed for our basic colors, and we will not be making any short-term decisions that could negatively impact our brand or long-term price positioning. Our clearance strategies remain unchanged; we will continue using in-store and online markdowns, outlets, and we may revisit our online warehouse sales as needed. Historically, we've utilized these sales, and combined with our other strategies, we believe there's no need for additional actions that could jeopardize our price positioning or brand strength.

Great. And really, congratulations on the momentum in 2019. It was pretty spectacular.

Thank you.

Thank you.