Q1 2020 Lululemon Athletica Inc Earnings Call

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Thank you for standing by this is the conference operator, welcome to the Lululemons Athletic <unk> Inc. first quarter 2020 conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, they will be an opportunity to ask questions.

Analysts who wish to join the question Q May Press Star then one on their telephone keypad.

Should you need assistance during the conference call you may signal, an operator by pressing star and zero.

I would now like to turn the conference over to Howard Tubin, Vice President Investor Relations for Lululemons Athletica. Please go ahead.

Thank you good afternoon.

Welcome to Google in its first quarter earnings conference call.

Joining me today to talk about our results our Talbot Mcdonald CEO.

Okay, Chief product officer.

Yes, right SVP financial planning and analysis.

Screens VP and controller.

Before we get started I'd like to take this opportunity to remind you that I remarks. Today will include forward looking statements, reflecting management's current forecast certain aspects when these future.

These statements are based on current information, which we have assessed which by its nature is dynamic and subject to rapid and even abrupt changes.

Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business.

Turning those we have disclosed in our most recent filings with the FCC, 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 disclaims any obligation or under teaching to update or revise any of these statements as a result at new information or future events.

During this call will present, both GAAP and non-GAAP financial measures reconciliation of GAAP to non-GAAP measures is included in our quarterly reports on form 10-Q and in today's earnings press release.

A press release and accompanying quarterly report on form 10-Q are available under the Investor section of our website at www Dot and Lemon Dot com.

Before we begin the call I'd like to remind our investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the corner today's call is scheduled for one hour. So please limit yourself to one question at a time to give others the opportunity to have their questions. The dry and now I went back to turn the call over to kill.

Thank you Howard it's good to speak with all of you again to provide an update on our first quarter Oh, we're adopting to in navigating the unique challenges presented by cope with 19 and the trends. We're currently seeing in the business.

I'm pleased to be joined today by sign shape, our chief product officer, who will share some product highlights you'll also hear from Megan frame, our SVP of financial planning and analysis.

Again, it's one of our season about trends within the finance organization, who has stepped into an expanded and leadership role while our CFO search is underway.

Excited to be working closely with magazine and appreciate the support she is providing to the organization.

Also joining us for the Q and a portion of the call is Alex greed, our VP and controller.

Given recent events I'd like to begin by sharing some thoughts on the tragic gaps of George Floyd.

On a Taylor Amod armory, and far too many others and the global outrage over a long standing issues of ratio injustice and systemic discrimination.

Black lives matter.

The new London unequivocally announces the unacceptable racial violence and impression that directly impacts the black community.

We are listening and learning and taking action.

As a company we're committed to increasing our investment in education behavior change in diverse representation within our organization and calling on our global community to drive positive change into the future.

It's hard to sharing more details and our progress on these commitments going forward.

Let me turn now to our overall business performance in quarter one.

Total revenue decreased 17%.

Due to the significant number of stores closed during the quarter, we're not reporting same store sales.

Our E Commerce business was particularly strong in quarter, one accelerating as the quarter proceed.

E Commerce comps increased 70%, which is on top of 35% increase last year.

This represented a meaningful acceleration relative to our quarter for E commerce comps a 41%.

Gross margin declined 260 basis points as de leverage on occupancy and other non product costs offsetting an increase in product margin.

Earnings per share were 22 cents versus 74 cents last year.

And 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 I 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 Cobiz 19, our Q1 results unfolded in three phases with each one exhibiting unique performance characteristics. We also have key learnings across the quarter.

Let me now speak to our business performance within each phase.

During this phase one the pre Corbett time period, we were very pleased with the momentum of 11 carried into the quarter building off of our strong quarter for performance our business accelerated through early March with total comps increasing over 20%.

We saw strength and all of our regions, except Asia, which was already experiencing the effects of the virus by this time.

In mid March we entered phase two as Covance 19 began to spread across the globe.

We moved quickly to protect our people and gas by closing the majority of our stores.

While gas in North America in Europe are just beginning to deal with Cobot 19 guests in China were beginning to move into their recovery phase.

Our total comps in China were positive in March with strengthen our E commerce business offsetting continued declines in our stores.

During this period as our star 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 gas we're 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 guest 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 two.

All 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.

I believe this context is valuable given we're not providing detailed financial guidance in a moment Megan 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 to being globally coordinated and regionally in powered.

We stood up a global covert 19 response team comprised of cross functional leaders to ensure our actions were informed inappropriate based on conditions on the ground in each market.

The 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 little 11 community and our stakeholder relationships.

Our collective, including our employees ambassadors guest 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 fun to assist our employees who are directly impacted by Kobin 19.

Launching our ambassador really fun and continuing to pay our rents and pay for committed merchandise orders.

We believe that by supporting our collective and helping them navigate the day to day realities that this period, we will build even stronger relationships and increase the already strong loyalty and trusted lululemons.

These decisions are right for our people and for our Brad ball. There is a near term impact on RPL. These investments will serve us well over the long term.

I'd also like to highlight the strength and resiliency up our supply chain and distribution network.

As our ecommerce business spike throughout the quarter, we were able to harness the power of our agile distribution networks 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 grow E commerce orders through our distribution network in the most efficient way.

The benefits include increased delivery speed to gas 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.

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 ensuring we had inventory to fulfill gas demand as our ecommerce business continued to accelerate.

No capacity to ensure gas 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 and ability to react to multiple demand scenarios.

When looking more closely at our ecommerce business.

We continue to respond to the newness, we introduced into our Assortments, we leveraged our science it 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 in 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 up our sites and I'm thrilled to see how while 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, one and a 125% in April.

I'm excited that we were able to create more online growth globally. Despite the challenges of Colgate 19.

While our stores were closed in Europe, and Asia Pac the work in investments we have made in our regional sites took center stage and brought to the forefront considerable potential for our brand across each market and the role E. Commerce can play to grow our business Europe delivered a stellar hundred 70% E Commerce call.

In quarter, one and in Australia, ecommerce 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 guess perspective, a healthy combination of existing guess new guests and store only gas 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 co bid 19 phases and entered the recovery phase we have not taken our eye off the future we've accelerated our innovation in key areas and have prioritized investments in our key growth initiatives.

In the early days at a pandemic, we launched our community carries on portal on our E. Commerce sites globally. This hobble allows our gas both existing and new to lift the sweat life through a number of virtual channels more recently, we launched our digital educators service. This program allows guests to chat with educators.

The video to help and discover new products answer their questions on fit or help and find a gift.

This program speaks to the power of our omni educators and engagement they can have with our gas whether in store or online.

We've clearly seen our guest interact with us in new ways to be our digital offerings. We expect these behaviors in routines will continue as we move forward.

We also believe that at home virtual workouts will be additive component of sweat regimens well into the future even as studios reopened in return to normal operations and we intend to continue to be therefore, our gas 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.

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 reopen stores and the acceleration we've seen in our ecommerce business. We recognize that many unknowns continue to exist in the external environment, we're moving forward with new store openings and strategic locations, such as greater China and continuing to invest in our future.

Sure, but we are also being financially prudent as we move forward.

We operate under the principle that we will not taken 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 as gionee spend for the year and have identified additional opportunities should the ramp. We're currently anticipating revenue failed to materialize.

I'd now like to turn it over to son, who will share some product highlights.

Thanks, Calvin first I'd like to voice my support of Calvin's opening comment on the global movement to eradicate racial injustice and discrimination.

I am a person of color and an immigrant through hard work and Lucky breaks had been able to overcome racial barriers that tragically still exists today.

I am proud to be part of live 11 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 product without.

We continue to leverage our science, a feel product platform desal guest unmet needs and feel our future growth.

We brought new innovations into our assortment in Q1 I'm excited with what we have untapped for the coming months in quarters.

Despite covered related store closures, we saw strong demand across key areas of the business driven by the falling.

One continued innovation with new launches in the chain category.

To the new normal of working in flooding from home and three our ongoing ability to leverage our core franchises.

Let me share a few highlights on age.

From an innovation standpoint early in Q1, we relaunched our proprietary ever like fabric into new styles Wonder train and integrate.

These styles are designed for train and our guest response a strong tbas.

In fact, we saw virtually no cannibalization within our keep hand style and our womens pants business. That's one of my best performing categories in the quarter.

Midway through the quarter as our guests began adjusting to working in sweating from home, we saw a significant increase in demand for our yoga products, including our align bottom yoga mat and block.

We're also seeing I guess gravitate to I train products.

And women, we saw strong demand for wonder train and integrate buttons as I previously mentioned.

For men, we saw strengthen our search pan and jogger as well as our license to train patent jogger.

Even prior to kind of it we identified significant opportunity to grow I trained 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 are aligning swiftly collections in Q1 in aligned we expanded into tops with the align tank. This is particularly exciting because it is the first time, we've expanded an existing bottoms franchise into top and the style has been a huge success for us so far.

We see this tapping a key growth driver in our top business and see further runway for us to leverage some of our other pants and sizes and similar ways.

We also relaunched our swiftly franchise the swiftly to point out.

Its response to our enhanced versions of our swiftly franchise has been strong and we're 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 Wanna get too much away, but later this summer we'll be launching three new pants styles men for out of studio you.

Which leverage our expertise in fed technical fabric and construction that we are famous for an outperformance lagging.

It it's clear to me that the desire to where technical apparel, which also offers comfort is here to stay we do not believe that gas will be willing to fargo either one of these attributes even as they returned to their normalize over the coming month.

We will limit our extremely well positioned here based on the expertise we have developed over many years driven by the science a feel.

The entire body of work underpinning this platform relates to have guests want to feel while wearing close and we've always use this as our foundational principle supporting our innovation.

Continue to leverage this expertise to drive our growth going forward.

With that I'd like to thank our entire product organization for the ingenuity and dedication during this virtual and uncertain time.

We remain confident in our innovation pipeline and I am buoyed by the teams steadfast passion for beautifully solving our guests unmet needs and how they're creatively responding to the ever changing climate.

And now over 10, Meg and to take you through our financial Megan.

Thanks, Simon I'll start by providing details on our Q1 performance and although we're not providing specific guidance I will offer some color on our outlook for Q2, and the remainder of the year <unk>.

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.

Our business was impacted by the spread of Coca 19, and related store closures and our digital channel, we posted a 70% constant dollar comp increase on top of a 35% increase last year.

Our store comp definition remove stores never close 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 referring total comps our store comps as we evaluate our top line performance. We're 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.

[noise] square footage increased 15% versus last year, driven by the addition of 34 net new stores since Q1 of 2019.

During the quarter reopened for new stores two in mainland China, one in South Korea, and one in Hong Kong and we're pleased with initial performance. Excluding the temporary closure is related to cope with 19, we closed six stores in the quarter.

These were predominantly their veeva branded store closures, which we had planned.

None of our permanent store closures were related to cobot 19.

Also completed three plant optimization.

In terms of our digital channel. He can I'm contributed approximately 352 million of top line or 54% of total revenue our constant dollar econ comps were consistent with our Q4 trend through the end of March and as Kevin mentioned, we saw this accelerate to approximately 125% in April.

Parents accelerated strengthened traffic and conversion, which increased over 40% and 25% respectively.

Traffic was driven by channel chefs, coupled with investments in digital marketing and conversion driven by guest response to our product and the investments we've made in our global digital platforms to improved 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 is funny 19.

The gross margin decline of 260 basis points, including 180 basis point increase in overall product margin, resulting from lower product costs and favorability and product mix, we did not take any significant inventory write downs in the corner.

This was offset by 330 basis points of de leverage on occupancy and depreciation 100 basis points of de leverage on products and supply team costs, and 20 basis points of negative impact from foreign exchange.

Moving to SGN, our approach has been to protect against downside. While also ensuring we continue to invest in our long term growth opportunities as she and expenses for approximately 302 million or 46.3% of net revenue compared to 37.4% of net revenue in Q1 2019.

The de leverage in the quarter resulted predominantly from lower revenue due to cope with 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 weve subsidies.

Foreign exchange translation of revaluation contributed 40 basis points of leverage in the corner.

Operating income for the quarter with 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 pre tax earnings compared to an effective tax rate of 26.4% 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 22 cents per diluted share compared to earnings per diluted share of 74 cents a coupon of 2019.

Capital expenditures were approximately 52 million for the quarter compared to approximately 68 million in the first quarter last year.

Do you want to 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 investment.

Turning to our balance sheet highlights we ended the quarter of 1.2 billion in total liquidity, we had 823 million in cash and cash equivalents at 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.

You are vendors as partners and we have not used order cancellations as an inventory or cash management strategy.

Our product teams have worked hard to re flooring deliveries for the second half of the year, it's kind of inventories on hand, and our buys view of demand and we have honored commitments to our partners in Q1 in 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.

Levels began to moderate in the second half of the year.

I'd also reiterate our clearance strategies have not changed you have historically relied on for vehicle to clear merchandise instrument downs online markdowns are outlets and occasional warehouse sales.

Only have no plans to veer from these methods and addition, approximately 40% over inventory is comprised of course styles, which are generally season, unless the nature and carry minimal markdown risk.

We repurchased approximately 64 million in stock in Q1 for temporarily popping our share repurchase program as part of October 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 maybe some color on how we're looking at the remainder of the year.

Due to the dynamic nature of the macro environment, we're not you're returning to our historical cadence of providing specific guidance for the current quarter in fiscal year.

Looking at a number of scenarios in order to ensure we have the program flexibility to manage the business through a range of outcomes important in this has been closely monitoring recovery trends and open markets as well by digital business to inform both our forecasting an investment decision making.

After closing all of our stores in Europe, and North America and mid March we began the process to welcome guest Act mid May.

We currently have approximately 300 stores opened in the following regions approximately 190 in North America 13 in Europe, 53 in Asia, and 39, and Australia, New Zealand and all of our distribution centers are up and running.

We're very pleased with the response, we're seeing from I guess scenarios, where stores are open in China were stores have been up and running along as we've seen store comps increased approximately 20% and most recently.

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 fulfillment experience to ensure we serve our guests and capture demand.

Q2, we expect Thompson, our digital business to be relatively consistent with our April trends 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.

Expect revenue in our digital channel to remain strong in Q2 moderate in second half as the serve business continues to recover.

With regard to earnings per share, we anticipate S. Three declines relative to last year in Q2 in Q3, but the returns easy escrow. Thank you for 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 facts that consensus estimates.

In terms of S. DNA for the full year, we have identified 130 million enough see any savings relative to our original budget.

However, we expect to de leverage for the year as we continue to pair people prudently investments like growth initiatives on a lower than originally anticipated sales base.

We have identified contingency plans for further s. DNA reductions beyond the 130 million should the recovery period be more prolonged and what we are currently anticipated.

In terms of capital spending we expect Capex for 2020 to be below our original budget and generally inline with last year.

We are prioritizing spending on digital an omni initiatives and fulfillment capabilities 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 uncertainty is that the current macro environment are protecting our people and prudently investing in the future.

And now back to Calvin for some closing remarks.

Thanks for the uptake Megan.

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.

Cobot 19 is impacting our performance in 2020, but we remain focused on our three key growth pillars, and our goals to double mens double digital and quadruple international by year end 2023.

Within our quarter one results, we have much to celebrate including.

Seeing retail only gas beginning to transact with us online and transition towards becoming an even more loyal omni guest.

The overall strength, an 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're seeing in reopen stores with ongoing strength and our E Commerce business.

Finally, I'd like to thank our teams around the globe for their resilience agility and passion. During this period enthusiasm for our guests in our community shared by everyone across Lululemons demonstrates these during strength of our brand.

Operator, we can now open it up for questions.

Thank you.

We will now begin the question and answer session.

Analysts who wish to join the question Q May Press Star then one on their telephone keypad, you will hear a tone acknowledging your request.

If you are using a speakerphone please pick up your handset before pressing any keys.

To withdraw your question. Please press Star then too we will pause for a moment as colors join the queue.

Our first question comes from Matt Mcclintock of Raymond James. Please go ahead.

Hi, yes.

We won a in May I say, congrats good job to the entire bulimic organization, Calvin and probably fun too I wanted to start with consumer behavior changes because prior to co. Good there seem to be a shift towards comfort it within the apparel industry and it seems to be something that wasn't your wheelhouse.

And now that Qubits happened it seems like this this shift.

Towards product it feels good et cetera has accelerated and I want to know is that a onetime acceleration or is that something that you think the trend will actually not remain that heightened levels of growth and then when you brought up market share today I was wondering if you could talk about our your market share gains the function of that maybe you're just more trend aligned.

With this or is that maybe because some of your your your competitors have wholesale businesses that rely on more challenged distribution points. That's my first question. Thank you.

Great, Thanks, Matt and Ah and I'll start off and I'll tackle I'll tackle the two parts to the question.

Starting with the the the last part which is around market share.

And the market share that we look at is the athletic apparel categories within I quoted a north American U.S. number.

And it definitely is a category that has.

Performed better than other apparel categories over the last a number of quarters.

For a variety of reasons I think it is comfort I think it is lifestyle I think it is a shift to a less formal wear and we've always performed well and beaten the growth in that category in particular, a for this quarter our performance I think does.

Joe a shift a greater shift of the guest to both our brand as well as to the category as you mentioned, which I think serve as well as we look forward.

To where our opportunities continue to be.

Heading into this there is guest behavior and wants and certain things won't change as a result of covert 19 and definitely some things will change and I think the things that won't change play to our strength and that's living an active a healthy life style and the things that will change equally play to our strength now.

It is more work from home looking for comfort or the role that digital and omni play in that behavior and once that the guest house so the shift.

Or is it my opinion very positive for our brand and the role that we play in it. It has been something we've been building and innovating towards it's what's driven the success of our products through the work that Sun and the team has done.

Sun mentioned on the move for for women's which is something we've been working on and we'll be launching a in quarter, two which we're very excited about again I think timely, but something that has been worked on for for quite some time to deliver a very unique exciting product.

So I'm excited about the shifts that are happening and how it plays within our category and our role within not and what we experienced in quarter, one and will quite honestly for a little bit through 2020 are some short term operational challenges, but the demand for the brand in the demand for the category ice.

Feel has only strengthened through this and.

And those short term operational challenges will mitigate they will go away and I feel very good about a long term position and our strategy and focus on the power of three behind that.

Thanks for that Calvin and then then my follow up is just bump you said that you can react to multiple can that demand scenarios in the back half of this year and this is an industry where manufacturing can often be a barrier to entry constraint and I was just wondering if you could maybe comment a little bit on how you treat it your manufacture.

Tours and your ability to maybe get that that capacity at a time, where it's possible there could be a lot of I was the out of stocks, but a lot of people trying to run and trying to take on that same time. Thank you.

Note for sure and I'll take it.

From just a very high level strategic position in.

Really is interesting when I reflect and look back on the corridor or the different moves that we shifted to where early on with cobot 19.

When you know it was predominantly in China.

And we were closing our stores, we were very much focused on ensuring our raw material sourcing a was well secured working with many of our partners on a 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 in close stores that started to ship too.

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 three quarter for and what our current buys were and how we wanted to make adjustments to those and where we stand coming out of quarter. One is.

Obviously, a higher inventory number than some of our peers, but that's because we haven't action through Mark Downs, we have an action by pushing back and not honoring commitments. We made a 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 is a high demand for that product in the stores open up that demand will only increase and as we look forward to the ended the year, we plan to manage through having more inventory now a into managing into more of a a traditional inventory level, while able to work with our vendor base on pivoting.

And reacting quicker on styles and or colors. If we if we deem necessary. So there is a lot of flexibility built in and I think that 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. Thank you. Thanks.

Our next question comes from Matthew Boss of JP Morgan. Please go ahead.

Great.

Calvin.

The interplay that you're seeing between E commerce up over 100% on brick and mortar productivity as stores. We opened on North America, specifically, what kind of store comps are you seeing today in North America and are you seeing E commerce moderate.

Turns were scores of reopened so far.

Thanks Matthew.

I think it's too early to really assess where.

We're going to sort of find the new norm in mix, what we are seeing a and I was put this into context with our own team.

We have one of the most productive retail models in the industry smaller stores highly productive per square foot, which means we are moving through a lot of volume in small space and the reality is as we open up these stores they are operational constraints through social.

Distancing that we are honoring in respecting and supporting to protect our teams that are going to restrict does hitting those levels as quickly as we might like or a quite frankly as quickly as the demand of our guest is a as a result, I think that we're going to see our store.

Our productivity improve as we move through the through the year. It is currently in and around 75 or some stores are at a 100%. It really does balance between market and time in stores are doing a wonderful job and how to service the gas and address the needs outside of the stores. So.

We can get those at what a shop inside the store.

That's how widen viewing the store productivity number heading into quarter two with E. Commerce, we mentioned growth coming out of April the 125% we've seen that accelerate.

Coming in to into May and.

In June.

I think throughout the quarter, we're going to probably see that settled back in and around 125% range, but as of right. Now we have about 50% of our fleet in North America Open we're happy with the productivity numbers, we know it's going to be a little bit longer for us to hit our industry, leading numbers, but he call.

On the has currently accelerated and we'll see where that mixes back, but I think both or just an indication of a strong demand for the product short term operational challenges that we're working through but very positive in terms of the demand for the product and and what we're seeing from the guest.

That's great color here 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 a year relative to the hundred 80 basis points of expansion that you saw in the first quarter.

Thanks, Matt and again I'm, we're not going to provide specific guidance on product margin I'm 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 itself cover I'd also note that we are I'm expecting $40 million, an overhead cost savings within.

Our margins buckets similar to the buckets, we called out.

In the $130 million and I've seen a savings picks back for the full year.

That's helpful Best of luck.

Okay.

Our next question comes from Lorraine Hutchinson of Bank of America. Please go ahead.

Thanks, Good afternoon.

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.

Hi, Lorraine thinks its meghan and yeah. So in terms of the inventory person that is core 40, approximately 40% of our assortment and 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 its core and that 40%.

Thank you.

Our next question comes from Paul Trussell of Deutsche Bank. Please go ahead.

Good afternoon.

And first let me just say that your comments and statements on black lives matters is noticed and appreciated. So so thank you for them.

In terms of the P. now.

Just as we think about the channel mix with such strong and robust online growth.

Could you just remind us 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. Thank you.

Thanks, Paul so.

Our E Com channel is more profitable than our store channel. However.

We do look at the business as an omni channel business over the longer term as assistant situation normalizes, we expect to remain committed to our long term growth strategy of sales in the mid teens modest gross margin expansion more modest SGN, a leverage and EPS growth in excess of.

Hello.

Thank you best alone.

Our next question comes from John Kermen of Cowen. Please go ahead.

Hey, good afternoon. Thanks for taking my question Congrats on all the momentum.

Thank you just diving a little bit more in terms of in store trends you're seeing currently I think you said you have about 50% of the fleet.

In North America open just given that the digital guidance, you're giving us a 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, Jonathan I guess, we have approximately 60% over stores opened at this point globally, 100% in Australia, New Zealand, 95%, an Isa 60% in Europe, and 50% in North America, We do expect that will open almost 100% of our.

Or by the end of June if we think about the productivity, we're seeing with it within the Dorothy Calvin mentioned in niche in the initial weeks they seem some variability it's still very early I, but we're seeing that in the range of 75% to 100 over 100% of last year as productivity and at the same time, we've seen our ecommerce business accelerate.

An early weeks the corridor as I shared we expect total revenue to approve in Q2, two a high single digit decline and we expect E com for the quarter to grow at approximately 125% some moderating throughout the quarter at stores ramp Henry.

That's helpful. Thank you I guess my follow up is <unk>.

The west was on the call a couple of quarters ago talking about <unk>.

The larger.

Experian until stores that you wanted to invest in it I think would become 10% of the overall store base at some point Calgary 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 I listen it's hard.

My.

My first response would be no I think this is very difficult times to evaluate our the value of our retail fleet and to make any dramatic shifts and changes from a strategy that you know eight weeks ago was relevant guests were shopping.

Plus 20 was our combined comp and our stores across our very flexible fleet, we're performing incredibly well Ah theres no doubt coming out that our online business I believe we'll find a new norm that's higher than where we began that we definitely know we're gonna have more omni.

Yes, which is incredibly exciting because an omni gas shops, more often and spends more with us and is more loyal to the brand, but there's still an omni gas, meaning they shop, both physical and our online business and I think it's too early to determine if theres going to be any dramatic shifts or we have.

Very powerful stores they are core to our connection with the community and how we build the brand and the loyalty recruiting gas. It's our number one vehicle still to recruit guests and we were already shifting to a very flexible scenario of smaller sees no into the.

Experiential stores. So we will come out we will continue to manage and see guest behavior My.

Anticipation is that those larger stores, the experiential and what they were delivering in the community in the role that they were going to play well always design through an omni lens and these are just going to be stronger more powerful locations for us and we were never you know looking at this is being the dominant.

Number of stores in our fleet, we're being very selective.

And I think Theres in fact, a lot of exciting opportunities of the role they can play within the omni lens being rooted in the community and how guests are interacting with us both online virtually as well as in store, so nothing and shouldn't anticipate a.

Significant shift will learn but I'm still very committed to the growth in our store fleet. Because we know we have a you know relative to others, a moderate number of stores and still opportunity to grow in markets.

Excellent. Thank you.

<unk>.

Our next question comes from Erinn Murphy of Piper Sandler. Please go ahead.

Great. Thanks. Good afternoon, I guess my first question is just on China, I think you said that brick and mortar comps were up 20% for those that or it's an open can you just break down what you've seen in terms of traffic versus ticket and then Holly digital been performing in China.

Yeah, no absolutely and I'll walk through.

You know sort of coming in and the progression through sort of the three phases I laid out into in Q2, because I do think its a.

Ah we use it as a as an interesting and helpful benchmark of how stores will will build in saying that.

The rest of the markets as they come on.

Our accelerating this growth curve to getting back to sort of a productivity level quicker than what we saw our stores in China.

But heading into the you know coming out of quarter, four and obviously we were impacted much.

Quicker in Q1 in China. The E Commerce business did accelerate a relative to the incoming trend we don't share specific numbers, but it was a meaningful.

Acceleration as we close stores when stores reopened what we saw was you know it took a number of weeks to get back into a positive comp in March.

The total business was positive but that was driven through a very successful E commerce growth.

As a mix, where our store comp growth was still negative and then into April we saw a single digit growth as stores got closer to a sort of breaking up or a positive comp to to no longer declining in our E Commerce business continued to be.

Strong.

Most of that in stores was driven by conversion and ordering we have seen a slower returned to traffic numbers, but as stores or got to growth and as we've mentioned they've been in the last few weeks getting now into that 20 plus percent comp growth.

Number and we've been holding very strong E commerce growth. So our our China business has really returned to where it was pre Ur cobot 19 in that marketplace. Its driven on conversion in that highly engaged guest traffic is improving but it's definitely probably in retail the the trailing.

Metric in that sales equation.

Super helpful from a progression perspective, and then I guess my second question. It just on your loyalty program I recognize it's only a handful of stores or state or city I should say, but have you noticed anything meaningfully different on the digital trends from those cities, where the metro area versus the rest of North America.

How has that 19 shape, how you're thinking about rolling out your loyalty program or your membership program further.

No great question we've.

In particular, we launched a number of digital sweat a offerings to our to our guests. It was one of those areas where I'm. So proud of the way the team jumped on the opportunity to innovate and and we really tested in learned an accelerated a lot of initiatives.

Forward, so that we could really be present, an offer what they were looking for and that's that's across Instagram, Our Youtube channel Facebook, it's leveraging our ambassador community to really provide those we've launched a a move event on strother, which the results are.

Significant in terms of the number of Ah miles ran or bike or other activity and the number of gas that participated so really energized about the engagement that gas you're having with our brand with digital sweat and also one of the things that I think it's very exciting is it validated what.

We know which is.

The power this brand in the relationship with our guests in the ability to be in conversation with them and have them interact with us outside of just purely transactional needs. We are in daily conversations with a number of our gas they are interacting with our brand day to day week to week.

So when it came time to buy when it came time to think about the category just reinforces the role that our brand plays in their lives in the role that we can play a in their sweat. So excited about what we're seeing with digital as it relates to membership the program today is a balance between physical sweat.

As a driver product.

And we always had planned on providing digital solutions as well as a part of the membership package, we have pushed out a broader city launch or too early 21 at this point in time as a result to quite honestly, it's more about the uncertainty that it is about guest engagement and.

Demand for this this membership program in the city's we've had Austin, Denver, Chicago, and Edmonton incredible engagement, they've continued to be engaged in the program even during miss a they have engaged in our online activities. We have some unique offerings plan for them, we are going to repeat in those cities. This fall.

Going to add one new city to the program. So we can continue to learn but we pushed off the broader launch that we had planned for two early a 21.

More because of the uncertainty then really demand demand remains very strong we're excited about it we're going to able to add to the to the gas mix on not some more to come but there will be.

In those cities plus one more this year is the current quiet.

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Okay Super helpful off of that.

Okay.

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

Certainly our final question comes from Alex while this of Goldman Sachs. Please go ahead.

Good evening. Thanks, so much for the taking the question here. My question is on the demographic of new guests that are joining you online you seeing material.

Different demographic that you to the mid 11 brand during this period of disruption.

And then maybe a second question on the stores that have opened the is there any discrepancy by geography or store type or anything else you kept the call out on which stores are performing better out of the gates that versus those that are a little slower to ramp. Thank you.

Thanks, Alex I'll take the first part of the question in a lot Megan talk to the the store.

Performance and if there's any differences across the markets in terms of a gas 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 a noteworthy our stores in stores in general remain a significant acquirer of new guests for retail business and we've 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 a 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 gas has dipped below our trend I believe it is only short term it is a reflection of being online or in our physical stores being.

Closed or in the overall health number of new gas across both gender and a in other profiles youth and others is it's still very very encouraging and very strong. So I'm trying to share anything that would be a bit of a nuance in difference, but the overall numbers and metrics across all are still very healthy incur.

Urging as we think about that as a growth channel.

For us continuing moving forward and Meghan did you want to comment on stores, yeah, great. Thanks, Alex and so in terms of differences in what we're seeing and trends I'm, we're not seeing significant differences either by format or location I would share we're seeing a modestly better performance in non mall locations and we are benefited by approximately two thirds.

Our store locations being outside the mall.

I'm topic, thanks to a color know about.

So.

That's all the time, we have for questions today.

Thank you for joining the call and have a nice day.

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