Lululemon Athletica Inc (LULU) — Q1 2020 Earnings Call Transcript

Thank you, and good afternoon. Welcome to Lululemon's First Quarter Earnings Conference Call. Joining me today to discuss our results are Calvin McDonald, CEO; Sun Choe, Chief Product Officer; Meghan Frank, SVP, Financial Planning and Analysis; and Alex Grieve, VP and Controller. Before we begin, I want to remind you that our remarks will include forward-looking statements that reflect management's current expectations for certain aspects of Lululemon's future. These statements are based on current information that we have evaluated, but they are inherently dynamic and can change rapidly. Actual results may vary significantly from those implied by these forward-looking statements due to risks and uncertainties related to our business, including what we have disclosed in our most recent SEC filings, such as our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements made during this call are based on assumptions valid as of today, and we expressly disclaim any obligation to update or revise any statements based on 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 quarterly report on Form 10-Q and today's earnings press release, which are both available under the Investors section of our website at www.lululemon.com. I encourage our investors to visit our site for a summary of our key financial and operating statistics for the quarter. Today's call is scheduled to last for one hour. And now I would like to turn the call over to Calvin.

Thank you, Howard. It's good to speak with all of you again to provide an update on our first quarter, how we are adapting to and navigating the unique challenges presented by COVID-19 and the trends we're currently seeing in the business. I'm pleased to be joined today by Sun Choe, our Chief Product Officer, who will share some product highlights. You'll also hear from Meghan Frank, our SVP of Financial Planning and Analysis. Meghan is one of our seasoned veterans within the finance organization, who has stepped into an expanded leadership role while our CFO search is underway. I'm excited to be working closely with Meghan and appreciate the support she's providing to the organization. Also joining us for the Q&A portion of the call is Alex Grieve, our VP and Controller. Given recent events, I'd like to begin by sharing some thoughts on the tragic deaths of George Floyd, Breonna Taylor, Ahmaud Arbery, and far too many others and the global outrage over long-standing issues of racial injustice and systemic discrimination. Black lives matter. Lululemon unequivocally denounces the unacceptable racial violence and oppression that directly impacts the black community. We are listening and learning and taking action. As a company, we are committed to increasing our investment in education, behavior change, and diverse representation within our organization, and calling on our global community to drive positive change into the future. I look forward to sharing more details and our progress on these commitments going forward. Let me turn now to our overall business performance in quarter 1. Total revenue decreased 17%. Due to the significant number of stores closed during the quarter, we are not reporting same-store sales. Our e-commerce business was particularly strong in quarter 1, accelerating as the quarter proceeded. E-commerce comps increased 70%, which is on top of 35% increase last year. This represented a meaningful acceleration relative to our quarter 4 e-commerce comps of 41%. Gross margin declined 260 basis points as deleverage on occupancy and other nonproduct costs offset an increase in product margin, and earnings per share were $0.22 versus $0.74 last year. Our financial position remains strong as we ended the quarter with $1.2 billion in total liquidity. I'd also like to provide some insights into our market share gains. While we typically do not share market share data under these circumstances, the data helps calibrate our performance and reinforces the strength of our brand. In the athletic apparel space, a category that is performing better than other apparel categories, we saw one of our largest quarterly gains in market share in recent years, according to NPD data. Given the challenges presented by COVID-19, our Q1 results unfolded in 3 phases, with each phase exhibiting unique performance characteristics. We also had key learnings across the quarter. Let me now speak to our business performance within each phase. During Phase 1, the pre-COVID time period, we were very pleased with the momentum Lululemon carried into the quarter, building off of our strong quarter 4 performance, our business accelerated through early March with total comps increasing over 20%. We saw strength in all of our regions, except Asia, which was already experiencing the effects of the virus by this time. In mid-March, we entered Phase 2 as COVID-19 began to spread across the globe. We moved quickly to protect our people and guests by closing the majority of our stores. While guests in North America and Europe were just beginning to deal with COVID-19, guests in China were beginning to move into the recovery phase. Our total comps in China were positive in March, with strength in our e-commerce business offsetting continued declines in our stores. During this period, as our stores started closing globally, our e-commerce growth began to accelerate. In late March and April, we moved into the early recovery phase. A new normal emerged, and we were encouraged to see how quickly our guests were embracing both working and sweating from home. We saw a significant acceleration in sales trends that resulted in 125% e-commerce comp for the month of April, with this momentum continuing into the second quarter. During this phase, our overall business in China accelerated further as guests began to feel more comfortable returning to the stores. Our total comps in China increased in the low teens in April and have further improved into quarter 2. While this period of time remains uncharted territory, I'd like to share some of our key learnings that are guiding our view of our business, both in the near and long term. We believe this context is valuable given we are not providing detailed financial guidance. In a moment, Meghan will share some directional color for you on Q2 and the full year. Let me start by highlighting the strength of our management team. Our full leadership team came together. Our efforts demonstrated our strengths of being globally coordinated and regionally empowered. We stood up a global COVID-19 response team comprised of cross-functional leaders to ensure our actions were informed and appropriate, based on conditions on the ground in each market. As a leadership team, we have never been more aligned globally. The current environment has advanced cooperation across our regions, and we're using the learnings from China to guide our actions in other regions that are now in the recovery phase. Let me shift gears now and speak to the broader Lululemon community and our stakeholder relationships. Our collective, including our employees, ambassadors, guests, vendors, and landlords has always come first. We acted swiftly during the quarter to support our collective in this crisis by closing the majority of our stores, committing to pay protection for all our employees, launching our We Stand Together fund to assist our employees who were directly impacted by COVID-19, launching our ambassador relief fund, and continuing to pay our rent and pay for committed merchandise orders. We believe that by supporting our collective and helping them navigate the day-to-day realities of this period, we will build even stronger relationships and increase the already strong loyalty and trust in Lululemon. These decisions are right for our people and for our brand. While there is a near-term impact on our P&L, these investments will serve us well over the long term. I'd also like to highlight the strength and resiliency of our supply chain and distribution network. As our e-commerce business spiked throughout the quarter, we were able to harness the power of our agile distribution network to ensure guests continue to receive a high level of service. We recently implemented intelligent sourcing capabilities that use machine learning and artificial intelligence to route e-commerce orders through our distribution network in the most efficient way. The benefits include increased delivery speed to guests, minimizing costs, and efficiently utilizing inventory pools to help reduce markdowns. In terms of inventory management, we acted quickly so that we align future deliveries with our new view of demand. We benefit from an inventory with a relatively high percentage of core product, about 40% overall, that has a shelf life beyond the current season and with limited markdown risk. And while we did see some of our factories in affected regions temporarily shut down, our diversified vendor base has served us well in navigating the day-to-day. Overall, these actions resulted in ensuring we had inventory to fulfill guest demand as our e-commerce business continued to accelerate, built capacity to ensure guests continued to receive the strong service levels as volume increased, and we are positioned well from an inventory standpoint for the second half of the year and maintain an ability to react to multiple demand scenarios. When looking more closely at our e-commerce business, guests continue to respond to the newness we introduced into our assortments. We leveraged our Science of Feel innovation platform to bring innovation to the market, and Sun will share additional details with you in a moment. We have been investing in our sites and our mobile app for the last several quarters to enhance the guest experience. These investments have improved functionality, including checkout, navigation, search browse, and the speed of our sites. And I'm thrilled to see how well these strategic investments are paying off. In recent weeks, we've seen order volumes equivalent to what we experienced during the holiday season in December. As I stated earlier, our e-commerce comps increased 70% in quarter 1 and 125% in April. I'm excited that we were able to create more online growth globally despite the challenges of COVID-19. While our stores were closed in Europe and APAC, the work and investments we have made in our regional sites took center stage and brought to the forefront the considerable potential for our brand across each market and the role e-commerce can play to grow our business. Europe delivered a stellar 170% e-commerce comp in quarter 1. And in Australia, e-commerce comps increased nearly 150%. Our brand is clearly resonating in our international markets, and we continue to believe we can quadruple this business from 2018 levels by 2023. For the e-commerce business overall, our strength was broad-based, driven by both core product and new innovations. From a guest perspective, a healthy combination of existing guests, new guests, and store-only guests beginning to transact with us online drove performance. These trends are very encouraging and should drive our growth into the future as we continue to manage these relationships moving forward. As we have managed the business through the COVID-19 phases and entered the recovery phase, we have not taken our eye off the future. We have accelerated our innovation in key areas and have prioritized investments in our key growth initiatives. In the early days of the pandemic, we launched our Community Carries On portal on our e-commerce sites globally. This hub allows our guests, both existing and new, to live the Sweatlife through a number of virtual channels. More recently, we launched our digital educator service. This program allows guests to chat with educators via video to help them discover new products, answer their questions on fit, or help them find a gift. This program speaks to the power of our omni-educators and the engagement they can have with our guests, whether in-store or online. We have clearly seen our guests interact with us in new ways via our digital offerings. We expect these behaviors and routines will continue as we move forward. We also believe that at home, virtual workouts will be an additive component of sweat regimens well into the future even as studios reopen and return to normal operations, and we intend to continue to be there for our guests for all their sweaty pursuits, both inside or outside their homes. Let me update you now on where we stand with the store openings and our outlook on the future. As of today, we have reopened approximately 300 store locations across North America, Europe, Asia, New Zealand, and Australia. We will reopen the remainder of our stores when it is safe to do so in each community. While we're excited with the early results in our reopened stores and the acceleration we've seen in our e-commerce business, we recognize that many unknowns continue to exist in the external environment. We are moving forward with new store openings in strategic locations, such as Greater China and continuing to invest in our future, but we are also being financially prudent as we move forward. We operate under the principle that we will not take an action in the near term that will hurt our business or our brand in the long term. We have removed $130 million from our originally budgeted SG&A spend for the year and have identified additional opportunities should the ramp we're currently anticipating in revenue fail to materialize. I'd now like to turn it over to Sun, who will share some product highlights. Sun?

Thanks, Calvin. First, I'd like to voice my support of Calvin's opening comments on the global movement to eradicate racial injustice and discrimination. I am a person of color and an immigrant, who through hard work and lucky breaks, have been able to overcome racial barriers that tragically still exist today. I am proud to be part of Lululemon and to be part of the team committed to driving meaningful and enduring change. Thank you. And with that, I'm happy to be here to share our product results. We continue to leverage our Science of Feel product platform to solve guests' unmet needs and fuel our future growth. We brought new innovation to our assortment in Q1, and I'm excited with what we have untapped for the coming months and quarters. Despite COVID-related store closures, we saw strong demand across key areas of the business driven by the following: one, continued innovation with new launches in the train category; two, the new normal of working and sweating from home; and three, our ongoing ability to leverage our core franchises. Let me share a few highlights on each. From an innovation standpoint, early in Q1, we relaunched our proprietary Everlux fabric in 2 new styles, Wunder Train and Invigorate. These styles are designed for training and our guest response was strong to both. In fact, we saw virtually no cannibalization within our key pants styles, and our women's pants business was one of our best-performing categories in the quarter. Midway through the quarter, as our guests began adjusting to working and sweating from home, we saw a significant increase in demand for our Yoga products, including our Align bottoms, Yoga mats, and blocks. We are also seeing our guests gravitate to our train products. In women's, we saw strong demand for Wunder Train and Invigorate bottoms, as I previously mentioned; and for men, we saw strength in our search pant and jogger as well as our License to Train pant and jogger. Even prior to COVID, we identified significant opportunity to grow our train business for men, much like we have for women, by introducing additional styles of performance pants. We will continue to leverage this opportunity going forward. Finally, when looking at our core franchises, we expanded both our Align and Swiftly collections in Q1. In Align, we expanded into tops with the tank. This is particularly exciting because it is the first time we've expanded an existing bottoms franchise into tops, and the style has been a huge success for us so far. We see this tank being a key growth driver in our tops business and see further runway for us to leverage some of our other pant franchises in similar ways. We also relaunched our Swiftly franchise with Swiftly 2.0. The technology behind the Swiftly makes it ideal for use in running and training, and our recent updates include shorter lengths, enhanced fit characteristics, and improved shape retention. Guest response to our enhanced versions of our Swiftly franchise has been strong, and we are excited to build upon the success in our tops business. Looking forward, I'm thrilled with what we have on the horizon to expand our share of closet with our on-the-move category for women. I don't want to give too much away, but later this summer, we'll be launching 3 new pant styles meant for out-of-studio use, but which leverage our expertise in fit, technical fabric, and construction that we are famous for in our performance leggings. It is clear to me that the desire to wear technical apparel, which also offers comfort, is here to stay. We do not believe that guests will be willing to forgo either one of these attributes even as they return to their normal lives over the coming months. We at Lululemon are extremely well positioned here based on the expertise we've developed over many years, driven by the Science of Feel. The entire body of work underpinning this platform relates to how guests want to feel while wearing clothes, and we've always used this as our foundational principle supporting our innovation. We will continue to leverage this expertise to drive our growth going forward. With that, I'd like to thank our entire product organization for their ingenuity and dedication during this virtual and uncertain time. We remain confident in our innovation pipeline, and I am buoyed by the team's steadfast passion for beautifully solving our guests' unmet needs and how they are creatively responding to the ever-changing climate. And now, over to Meghan to take you through our financials. Meghan?

Thanks, Sun. I'll start by providing details on our Q1 performance. And although we are not providing specific guidance, I will offer some color on our outlook for Q2 and the remainder of the year. I will also discuss specifics on our balance sheet, including our cash position, liquidity, and inventories. For Q1, total net revenue decreased 17% to $652 million as our business was impacted by the spread of COVID-19 and related store closures. In our digital channel, we posted a 70% constant dollar comp increase on top of a 35% increase last year. Our store comp definition removed stores that were closed for greater than 30 days. Given the significant number of temporary store closures in Q1, we do not feel store comp is a meaningful metric to evaluate performance. Therefore, we are not reporting total comps or store comps. As we evaluate our top line performance, we are focused on total revenue, our digital business trends, and open store recovery trends, which I will offer some additional color on as we move into our outlook. Square footage increased 15% versus last year, driven by the addition of 34 net new stores since Q1 of 2019. During the quarter, we opened 4 new stores: 2 in Mainland China, 1 in South Korea, and 1 in Hong Kong, and we are pleased with initial performance. Excluding the temporary closures related to COVID-19, we closed 6 stores in the quarter. These were predominantly the ivivva-branded store closures, which we had planned. None of our permanent store closures were related to COVID-19. We also completed 3 planned optimizations. In terms of our digital channel, e-comm contributed approximately $352 million of top line or 54% of total revenue. Our constant dollar e-comm comps were consistent with our Q4 trend through the end of March. And as Calvin mentioned, we saw this accelerate to approximately 125% in April. We experienced accelerated strength in traffic and conversion, which increased over 40% and 25%, respectively. Traffic was driven by channel shift, coupled with investments in digital marketing; and conversion, driven by guest response to our products and the investments we have made in our global digital platforms to improve guest experience. Gross profit for the first quarter was $334 million or 51.3% of net revenue compared to 53.9% of net revenue in Q1 2019. The gross margin decline of 260 basis points includes a 180-basis-point increase in overall product margin resulting from lower product costs and favorability in product mix. We did not take any significant inventory write-downs in the quarter. This was offset by 330 basis points of deleverage on occupancy and depreciation, 100 basis points of deleverage on product and supply chain costs, and 20 basis points of negative impact from foreign exchange. Moving to SG&A. Our approach has been to protect against downside while also ensuring we continue to invest in our long-term growth opportunities. SG&A expenses were approximately $302 million or 46.3% of net revenue compared to 37.4% of net revenue in Q1 2019. The deleverage in the quarter resulted predominantly from lower revenue due to COVID-19-related store closures and our commitment to continue to pay our employees through this period of disruption, which was partially offset by the recognition of some government wage subsidies. Foreign exchange, both translation and revaluation contributed 40 basis points of leverage in the quarter. Operating income for the quarter was approximately $33 million or 5% of net revenue compared to 16.5% of net revenue in Q1 2019. Tax expense for the quarter was $5.3 million or 15.6% of pretax earnings compared to an effective tax rate of 26.4% a year ago. This decrease in our effective tax rate compared to last year relates primarily to additional tax deductions for stock-based compensation during the quarter. Net income for the quarter was $28.6 million or $0.22 per diluted share compared to earnings per diluted share of $0.74 in Q1 of 2019. Capital expenditures were approximately $52 million for the quarter compared to approximately $68 million in the first quarter last year. Q1 spend relates primarily to store capital for new locations, relocations and renovations, technology spend to support our business growth, digital channel and analytics capabilities, and supply chain investments. Turning to our balance sheet highlights. We ended the quarter with $1.2 billion in total liquidity. We have $823 million in cash and cash equivalents and $400 million of available capacity under our committed revolving credit facility. Inventory grew 41% versus last year and was $626 million at the end of Q1. We view our vendors as partners, and we have not used order cancellations as an inventory or cash management strategy. Our product teams have worked hard to reflow our deliveries for the second half of the year based on inventories on hand and our revised view of demand, and we have honored our commitments to our partners in Q1 and Q2. These commitments, coupled with our store closures, resulted in the Q1 inventory increase and will likely result in a higher increase at the end of Q2 before levels begin to moderate in the second half of the year. I'd also reiterate our clearance strategies have not changed. We have historically relied on 4 vehicles to clear merchandise: in-store markdowns, online markdowns, our outlets, and occasional warehouse sales. We currently have no plans to veer from these methods. In addition, approximately 40% of our inventory is comprised of core styles, which are generally seasonless in nature and carry minimal markdown risk. We repurchased approximately $64 million in stock in Q1 for temporarily pausing our share repurchase program as part of our COVID-19 cash management strategy. We have approximately $264 million remaining on our current $500 million repurchase plan. Let me shift now to current trends and share with you some color on how we're looking at the remainder of the year. Due to the dynamic nature of the macro environment, we are not yet returning to our historical cadence of providing specific guidance for the current quarter and fiscal year. We've been looking at a number of scenarios in order to ensure we have the appropriate flexibility to manage the business through a range of outcomes. Important in this has been closely monitoring recovery trends in open markets as well as our digital business to inform both our forecasting and investment decision-making. After closing all of our stores in Europe and North America in mid-March, we began the process to welcome guests back mid-May. We currently have approximately 300 stores open in the following regions: approximately 190 in North America, 13 in Europe, 53 in Asia, and 39 in Australia and New Zealand, and all of our distribution centers are up and running. We are very pleased with the response we're seeing from our guest scenarios where our stores are open. In China, where our stores have been up and running the longest, we've seen store comps increase approximately 20% in most recent weeks. We're also pleased with the early response we're seeing in North America, which is exceeding our expectations. In addition, our digital business has remained strong throughout, and we've continued to invest in our online and fulfillment experience to ensure we serve our guests and capture demand. For Q2, we expect comps in our digital business to be relatively consistent with our April trend of approximately 125%. Looking forward, for the business overall, we anticipate the trend in total revenue growth to improve sequentially throughout the remainder of the year. Total revenue in Q2 could decline in the high single digits, improving to a high single-digit increase in Q4. We expect revenue in our digital channel to remain strong in Q2, but moderate in the second half as the store business continues to recover. With regard to earnings per share, we anticipate EPS rate declines relative to last year in Q2 and Q3, with a return to EPS growth in Q4. The Q2 decline will likely be better than the decline in Q1, although I would note likely worse than what is implied by current Q2 consensus estimates. In terms of SG&A for the full year, we have identified $130 million in SG&A savings relative to our original budget. However, we expect to deleverage for the year as we continue to pay our people and prudently invest in select growth initiatives on a lower than originally anticipated sales base. We have identified contingency plans for further SG&A reductions beyond the $130 million should the recovery period be more prolonged than what we are currently anticipating. In terms of capital spending, we expect CapEx for 2020 to be below our original budget and generally in line with last year. We are prioritizing spending on digital and omni initiatives and fulfillment capabilities while pulling back somewhat on new store openings and remodels. Before handing it back to Calvin, I'd like to reiterate that our financial position remains strong. Our balance sheet strength and flexibility in our business model is enabling us to effectively manage through the uncertainties of the current macro environment while protecting our people and prudently investing in the future. And now back to Calvin for some closing remarks.

Thanks for the update, Meghan. I'd like to close by letting you know that we remain fully committed to our Power of Three growth plan, which we laid out for you last year. COVID-19 is impacting our performance in 2020 but we remain focused on our 3 key growth pillars and our goals to double men's, double digital, and quadruple international by year-end 2023. Within our quarter 1 results, we have much to celebrate, including seeing retail-only guests beginning to transact with us online and transition towards becoming an even more loyal omni-guest. The overall strength and acceleration of our e-commerce business globally with breakout results in Europe and Australia, strong performance from our core franchises, new innovations, and the strength of our product pipeline, and the early recovery we are seeing in reopened stores with ongoing strength in our e-commerce business. Finally, I'd like to thank our teams around the globe for their resilience, agility, and passion during this period. The enthusiasm for our guests and our community, shared by everyone across Lululemon, demonstrates the enduring strength of our brand.

Yes, everyone, and may I say congrats, good job to the entire Lululemon organization. Calvin, and probably Sun, too, I wanted to start with consumer behavior changes because prior to COVID, there seemed to be a shift towards comfort within the apparel industry, and it seemed to be something that was in your wheelhouse. And now that COVID happened, it seems like this shift towards product that feels good, etc. has accelerated. And I want to know, is that a one-time acceleration? Or is that something that you think the trend will actually now remain at heightened levels of growth? And then when you brought up market share today, I was wondering if you could talk about, are your market share gains a function of that, maybe you're just more trend-aligned with this? Or is that maybe because some of your competitors have wholesale businesses that rely on more challenged distribution points? That's my first question.

Great. Thanks, Matt. I'll begin by addressing the two parts of your question, starting with the latter, which concerns market share. The market share we focus on is within the athletic apparel categories, specifically referencing a North American U.S. figure. This category has indeed outperformed others in the apparel sector over recent quarters for various reasons. Key factors include comfort, lifestyle changes, and a shift away from formal wear. We've consistently excelled and outpaced growth in this area. For this quarter, our performance indicates a significant shift towards our brand and the overall category, which bodes well for our future opportunities. Currently, there are altered behaviors and preferences, with some changes likely persisting post-COVID-19, while others will evolve. The aspects that won't change highlight our advantages, such as promoting an active and healthy lifestyle. Meanwhile, the changes, including increased remote work and demand for comfort, align with our strengths in digital and omnichannel strategies. I view this shift as very beneficial for our brand and our involvement in the market. We've been preparing for this and innovating in our product offerings, evidenced by the work that Sun and the team have accomplished. Sun mentioned the launch of On The Move for women in quarter 2, which we've been developing for some time, and we’re thrilled about its release. This timely initiative is set to provide a unique and exciting product. I'm genuinely optimistic about the ongoing shifts in our category and the role we occupy within it. While we experienced some temporary operational challenges in quarter 1, I believe that the demand for our brand and the overall category has only strengthened during this period. I expect these short-term operational issues to resolve and feel confident in our long-term strategic positioning and the effectiveness of our focus on the power of 3.

My follow-up question is about your ability to respond to different demand scenarios in the latter half of this year. Manufacturing can often pose challenges in this industry, so I would like to know how you are managing your manufacturers and your capacity to meet demand, especially considering that many people might be rushing to stock up at the same time.

No, for sure. And I'll take it from just a very high-level strategic position. And it really is interesting when I reflect and look back on the quarter, the different moves that we shifted to where early on with COVID-19, when it was predominantly in China and we were closing our stores, we were very much focused on ensuring our raw material sourcing was well-secured, working with many of our partners on building out sort of quantity of raw materials, so we could get to production of finished goods. And then as it continued to expand, we started to shift and close stores. It started to shift to demand and total quantity that we would need, making decisions in the short term to support our vendor partners, as I mentioned, equally looking forward to quarter 3, quarter 4 and what our current buys were and how we wanted to make adjustments to those. And where we stand coming out of quarter 1 is, obviously, a higher inventory number than some of our peers, but that's because we haven't actioned through markdowns. We haven't actioned by pushing back and not honoring commitments we made. And we have a large portion of our inventory that's not seasonal, that is core, that are colors that sell year-long, and there's a high demand for that product. And as stores open up, that demand will only increase. And as we look forward to the end of the year, we plan to manage through having more inventory now into managing into more of a traditional inventory level while able to work with our vendor base on pivoting and reacting quicker on styles and/or colors if we deem necessary. So there is a lot of flexibility built in. And I think the commitments we've made and where we stand right now allows us to play in a very effective way heading into the back half of this year.

I really appreciate it. I wish you all the best of luck.

Thanks, Matt.

Great. Calvin, maybe can you speak to the interplay that you're seeing today between e-commerce up over 100% and brick-and-mortar productivity as stores reopen in North America? Maybe specifically, what kind of store comps are you seeing today in North America? And are you seeing e-commerce moderate in any regions where stores have reopened so far?

Thanks, Matthew. It's still early to determine where we'll land regarding the new normal and mix. What we're experiencing connects to our own team; we have one of the most efficient retail models in the industry. With smaller stores that are highly productive per square foot, we manage a significant volume in limited spaces. As we open more stores, we're adhering to operational constraints due to social distancing to protect our teams, which may hinder our ability to reach our desired levels as quickly as we would prefer, or as quickly as the demand from our guests allows. I anticipate that our store productivity will enhance as the year progresses. Currently, we're around 75% productivity, while some stores are operating at 100%. This varies based on location and timing. Our stores are performing admirably in serving guests and addressing needs outside of the physical space, facilitating those who might have shopped inside to still engage with us. That's how I perceive the store productivity metric. Heading into the second quarter, we noted that e-commerce grew 125% compared to April, and we've seen that growth accelerate into May and June. I expect that figure to stabilize around the 125% mark throughout the quarter. Right now, approximately 50% of our locations in North America are open, and we are pleased with the productivity levels. We recognize it will take a bit longer to reach our industry-best figures. E-commerce has notably accelerated, and we'll see how the mix balances out. However, both trends reflect robust demand for our products, alongside some short-term operational challenges we're navigating, which is very encouraging given the demand we observe from our guests.

That's great to hear. And then just a follow-up on gross margin. What's the best way to think about mix versus markdowns as we think about product margins, maybe in the second quarter or back half of the year relative to the 180 basis points of expansion that you saw in the first quarter?

Yes. Thanks, Matt. It's Meghan. We're not going to provide specific guidance on product margin as we move throughout the year, but what we are providing is that we expect gross margin pressure to be slightly more in Q2 versus what we saw in Q1. And then we also expect gross margin performance in the second half of the year to be better than the first half as sales recover. I'd also note that we are expecting $40 million in overhead cost savings within our margin bucket, similar to the buckets we called out in the $130 million in SG&A savings we expect for the full year.

I wanted to follow-up on the inventory number. Can you talk to what proportion of that inventory is core? And then also, how much of your buys have you committed to for the back half at this point?

Lorraine, thanks, it's Meghan. Yes. So in terms of the inventory proportion that is core, it's approximately 40% of our assortment. We have, at this point, committed to our second half purchases through winter. We do have some flexibility within that as a large part of our assortment is core in that 40%.

And first, let me just say that your comments and statements on Black Lives Matter are noticed and appreciated. So thank you for that. In terms of the P&L, just as we think about the channel mix, with such strong and robust online growth, could you just remind us of how we should think about the profitability and margins in that channel and how they may differ, if at all, from your sales? I mean, your store sales.

Thanks, Paul. So our e-comm channel is more profitable than our store channel. However, we do look at the business as an omnichannel business. Over the longer term, as the situation normalizes, we expect to remain committed to our long-term growth strategy of sales in the mid-teens, modest gross margin expansion, modest SG&A leverage, and EPS growth in excess of sales.

Congrats on all the momentum. Could you just dive in a little bit more in terms of the in-store trends you're seeing currently? I think you said you have about 50% of the fleet in North America open. Just given the digital guidance you're giving us, I'm curious in terms of how you want us to frame our models for the in-store sales and what you're seeing versus what you're seeing right now?

Great. Thanks, John. It's Meghan. We have approximately 60% of our stores open at this point globally. 100% in Australia and New Zealand, 95% in Asia, 60% in Europe, and 50% in North America. We do expect that we'll open almost 100% of our stores by the end of June. If we think about the productivity we're seeing within those stores, as Calvin mentioned, in the initial weeks, we've seen some variability. It's still very early, but we're seeing that in the range of 75% to over 100% of last year's productivity. And at the same time, we've seen our e-commerce business accelerate in early weeks of the quarter. As I shared, we expect total revenue to improve in Q2 to a high single-digit decline. And we expect e-comm for the quarter to grow at approximately 125%. So moderating throughout the quarter as stores ramp and reopen.

Helpful. I guess my follow-up is I think Celeste was on the call a couple of quarters ago talking about the larger experiential stores that you wanted to invest in, and I think would become 10% of the overall store base at some point. Calvin, are you still committed to that? Have you seen anything in terms of consumer behavior that would make you want to back away from that commitment?

Thanks, John. It's a challenging situation. My immediate response is no. It's difficult to assess the value of our retail fleet right now and to make any significant changes to a strategy that was effective just eight weeks ago. Guests were shopping, and we saw a 20% increase in our combined comparable sales, with our stores performing exceptionally well. I am confident that our online business will reach a new normal that is higher than where we started. We will certainly have more omni-guests, which is very encouraging because these guests shop more frequently, spend more with us, and show greater loyalty to the brand. However, it’s important to note that these omni-guests shop both in physical stores and online. I think it's premature to predict any significant changes. Our stores are very powerful; they are essential to our community connections and brand loyalty. They remain our top method for attracting guests. We were already transitioning to a more flexible approach, focusing on smaller seasonal and experiential stores. Moving forward, we will continue to monitor guest behavior. I expect that our larger experiential stores, which were designed with an omni-channel perspective, will become even more impactful in their communities. We never intended for them to be the majority of our stores; we are being selective. There are indeed many exciting opportunities for these stores to enhance our omni-channel strategy while being deeply rooted in the community and how guests engage with us both online and in-person. So, I don't foresee any major shifts. We will learn and adapt, but we remain committed to growing our store fleet because we have a relatively modest number of stores compared to others and see opportunities for expansion in several markets.

Great. My first question is about China. You mentioned that brick-and-mortar comparable sales increased by 20% since the stores reopened. Could you explain what you've observed regarding customer traffic versus average transaction value? Also, how is digital performing in China?

Yes. I will outline the progression through the three phases we discussed in Q2, as I believe it's an interesting benchmark for store development. The other markets are accelerating the growth curve, returning to productivity levels more quickly than our stores in China. Coming out of Q4, our e-commerce business accelerated significantly compared to the incoming trend, although we don't disclose specific figures. This acceleration was notable as we closed stores. After reopening, it took several weeks to achieve positive comparable sales in March, driven by strong e-commerce growth, while in-store comparisons remained negative. In April, we observed single-digit growth as stores approached breaking even, with e-commerce performing well. The in-store growth was largely attributed to improved conversion and ordering, though traffic numbers returned more slowly. Recently, we've seen stores achieving over 20% comparable sales growth, alongside robust e-commerce performance. Our business in China has essentially returned to pre-COVID-19 levels, driven by conversion among highly engaged customers. While traffic is improving, it is still lagging behind sales in the overall retail metrics.

Super helpful from a progression perspective. And then I guess my second question is just on your loyalty program. I recognize it's only in a handful of stores or state or city, if I should say. But have you noticed anything meaningfully different on the digital trends from those cities or those metro areas versus the rest of North America? And then how has COVID-19 shaped how you're thinking about rolling out your loyalty program or your membership program further?

No, that's a great question. We have launched several digital offerings for our guests, and I'm really proud of how our team seized the opportunity to innovate. We tested, learned, and advanced many initiatives to meet what our guests were looking for. This has involved platforms like Instagram, our YouTube channel, and Facebook, and we've utilized our ambassador community to provide these offerings. We also launched a move event on Strava, and the results were impressive in terms of the miles run, biked, or engaged in other activities, along with significant guest participation. I'm really energized by the engagement our guests show with our brand through digital sweat. Moreover, it has validated our understanding of the brand's power and our relationship with our guests, allowing us to interact with them beyond just transactional needs. We are having daily interactions with many of our guests, who engage with our brand regularly. This underscores the important role our brand plays in their lives and how we can contribute to their fitness journeys. We're excited about the digital progress. Regarding membership, the current program balances physical fitness as a key offering while also including digital solutions in the membership package. We have postponed a broader city launch until early 2021 due to uncertainty rather than a lack of guest engagement or demand. In cities like Austin, Denver, Chicago, and Edmonton, we've seen incredible engagement, and they have remained active in our program, participating in our online activities. We have unique offerings planned for them, and we will repeat in these cities this fall while adding another city to continue learning. However, the broader launch initially planned will be pushed to early 2021 due to uncertainty—not because of weak demand, which continues to be strong. We’re excited about expanding our guest base, and there's more to come. The current plan includes those cities plus one additional one this year.

Great. Super helpful. All the best.

Operator, we'll take one more question.

My question is on the demographic of new guests that are joining you online. Are you seeing a material different demographic that's new to the Lululemon brand during this period of disruption? And then maybe a second question on the stores that have opened. Is there any discrepancy by geography or store type or anything else you care to call out on which stores are performing better out of the gates versus those that are a little slower to ramp?

Thanks, Alex. I'll take the first part of the question and let Meghan talk to the store performance and if there's any differences across the markets. In terms of the guest perspective, we had a wonderful balance across a lot of demographics in new guest acquisition prior, and I would say they haven't really fundamentally changed. If there was one that's noteworthy, our stores and stores, in general, remain a significant acquirer of new guests for a retail business. And we have definitely seen online pick up a portion of that as a result of stores not being open. But our stores, in particular, equally were a significant acquirer of men new guests. And I would just indicate that if there's been any shift in the last few weeks, we've seen an acceleration of more women new guests. As a result, the ratio of men new guests has dipped below our trend. I believe it is only short term. It is a reflection of being online and our physical stores being closed. The overall health number of new guests across both gender and other profiles, youth and others, is still very, very encouraging and very strong. So I'm trying to share anything that would be a bit of a nuance and difference. But the overall numbers and metrics across all are still healthy and encouraging as we think about that as a growth channel for us continuing moving forward. And Meghan, did you want to comment on stores?

Yes. Great. Thanks, Alex. So in terms of differences in what we're seeing in trends, we're not seeing significant differences either by format or location. I would share we're seeing modestly better performance in non-mall locations, and we are benefited by approximately 2/3 of our store locations being outside of malls.