Q2 2020 Lululemon Athletica Inc Earnings Call
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Thank you for standing by this is the conference operator welcome to the live I'm in a flatter coach Inc. second quarter 2020 earnings Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
And always who wish to dry in the question Q May Press Star then one on their telephone keypad.
Should you need assistance during the conference call you may signal in the operator by pressing star and zero.
I would now like to turn the conference over to Howard Tubin, Vice President Investor Relations for Lululemons Athletic. Please go ahead.
Thank you good afternoon.
Welcome to lending second quarter earnings conference call.
Joining me today to talk about our results, our Calvin Mcdonald's CEO mainframe SVP of financial planning and analysis and Alec screen VP controller.
Well, we get started I'd like to take an opportunity to remind you that our remarks. Today will include forward looking statements, reflecting management's current forecast certain aspects when needed and 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 our implied by these forward looking steep due to risks and uncertainties associated with our business, including base. 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 and based on assumptions as of today, and we expressly disclaim any obligation or undertaking update or revise any of these days as a result of new information for future events.
During this call we 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.
The press release and accompanying well then important and form 10-Q or available under the Investor section of our website at www dot lending dot com.
Before we begin the call I'd like to remind investors to visit our investor site, you'll find a summary of our chief financial and operating statistics for the second quarter as well as our quarterly in program.
Today's call is scheduled for one hour.
Please limit yourself to one question and it's hard to give others the opportunity to have their questions dress and now I'd like to turn the call over to count.
Thank you Howard I'm excited to be here with you today to provide an update on our performance for the second quarter share our learnings as we continue to adopt to navigate the uncertain called <unk> 19 environment and highlight trends, we're seeing in the business as we look forward to the back half the year.
Our results were sharing today demonstrate the strength of the little Lemon brand as we face these unexpected times and see the future of retail accelerate through an expansion of ecommerce and digital sweat offerings.
Our product built with technical innovation and performance fabrics is ideal for enabling the work from home and percentile lifestyle that has grown exponentially and the cobot 19 world.
Building upon these components our acquisition of at home fitness innovator mirror and our continued expansion globally demonstrates our ability to navigate the near term while planning for the long term growth.
Today I'm joined by Meghan, Frank our SVP of financial planning and analysis, who continues to be a supportive partner as she works with me and the team on strategic and operational finance, while our CFO search is ongoing.
Alex grief, our VP and controller is also on the call today would be available to answer your question during the Q and a portion.
Before I do tell our results I'd like to speak for a moment about the importance of diversity inclusion not lose in London.
As I mentioned on our last call, we're committed to increasing our investment in education behavior change and diverse representation within our organization. The black lives matter movement has ignited little development in our collective serving as a powerful catalyst to critically examine our culture and practices back in June we created idea.
A commitment to create real and lasting change through inclusion diversity equity inaction.
As a company we're focused on meaningful transformation shifting our mindset, some behaviors and living into our core value of inclusion every day I look forward to sharing our progress on this going forward as of the diversity of our workforce truly begins to reflect the global communities in which we operate.
Let me turn now to our business performance in the second quarter, which exceeded our expectations.
Total revenue increased 2%.
Consistent with quarter, one we're not reporting same store sales due to the significant number of stores that remain closed during the beginning of the corridor.
Our ecommerce business continued to accelerate with comps in quarter, two increasing 157%.
Gross margin declined 80 basis points and our product margin was flat with last year.
Adjusted earnings per share were 74 cents versus 96 cents last year and our financial position remains strong as we ended the quarter with 1.2 billion in total liquidity.
As we continue to operate a move through the cobot 19 environment, we're seeing a shift in behavior in terms of working from home sweating from home and the increased importance of living an active in healthy lifestyle.
These trends play to our strengths and set up an opportunity for us to continue to innovate and gain market share.
We are learning how our guests are changing their behaviors and we're adopting engaging with them in new ways. We remain committed to our power of three growth plan, including the doubling up mens doubling of E Commerce and quadrupling international by 2023.
But we also recognize that 2020 is likely an inflection point for retail and for Lululemons with certain changes in guest behavior is likely to do or in the post cobot 19 World. We believe lululemons is uniquely positioned to engage with our gas when where and how they want based on the strength of our brand the strength.
Our operating model and the investments we've been making across the business.
One of our key strengths is our omni operating model for the last several years, we've been investing in our ecosystem to ensure we have the capabilities to enable a seamless and enjoyable experience whether guests want to engage with us virtually in stores or in the community.
What we're learning now during the covert 19 environment is that omni means much more to our guests and simply enabling purchase transactions across our channels.
While our recent investments in transactional omni capabilities are clearly paying off as evidenced by our recent results. We've begun to view other areas of our business, including sweat and events through an omni lines. Let me now share some of the details.
As our stores continue to recover our ecommerce business has accelerated from a 41% comp in quarter four of last year to 157% comp in the current quarter similar to quarter. One we've seen a healthy mix of new guests existing ecommerce guests and historically retail only gas now shopping with.
Online.
In order to support growth in the business capture a potential further increase in demand in quarter, four and ensure our gas continued to receive the highest level of service. We've accelerated investments this year within our E. Commerce channel. These investments include developing site enhancements building, our transactional omni functionality and incur.
Are you seeing fulfillment capabilities. These further enhancements were on our roadmap for the next two years and given our E. Commerce business has currently accelerated beyond our expectations, we prioritize and pull forward these investments.
We're also continuing to grow our brand and engage with our guests across our international markets in China were experiencing a strong rebound in store was same store sales up over 30% coupled with strength in E Commerce, which grew over 130% in quarter, two and in Europe, a greater than hundred six.
The percent lift in E. Commerce is driving our business as guests are engaging with us more online than ever.
When looking at store growth in our regions in quarter. Two we opened nine new locations across Asia, and Europe, including our hundred location in APAC and exciting milestone for our brand in this key growth market.
Let me shift now to speak about the recovery of our store business. While this period continues to be unpredictable. We currently have approximately 97% of our stores open across the globe to serve our guests on average our reopen stores are performing at 75% of last year's volume.
As you know our stores are small and designed to be an efficient use of space with high levels of traffic, which results in high productivity. While these are appealing attributes the current capacity constraints understandably limit the number of gas who can be in the store at one time.
While we're seeing traffic declines relative to last year and expect these constraints to endure at least through the ended the year the underlying health of our brand remains strong.
That's our patiently lining up to get into our stores, both physically and through our virtual tools, our product continues to resonate well as evidenced by the strength of our E Commerce channel and while we expect productivity for stores that we reopened to remain consistent with the current levels for the remainder of the year, we still expect to grow our.
Topline in quarter three in quarter four.
We continue to believe physical stores are and always will be an extremely important part of our ecosystem.
From a sales standpoint, our stores are highly productive and they enable so much more than simply the purchase of apparel by our guests our stores or our local hub in communities across the globe gathering spots for ambassadors and our connection to local studios facilitate ecommerce transactions via our ship from store and bio.
Online pick up in store capabilities, and our portal to bring new guests into our brand, particularly Matt.
This year, we plan to open 30 to 35 net new stores, while also accelerating our seasonal store strategy.
In quarter, two we operate at just over 50 seasonal stores and we plan to increase to approximately 70 in the second half of the year.
Our strategy. This holiday will include seasonal stores in key centers in markets, where we have existing stores to help us mitigate the current capacity constraints.
That being said, we're building new and leveraging our current transactional omni capabilities to ensure a quick and seamless shopping experience for both our store in E commerce guests.
Some of our actions include.
First we have evolved our buy online pick up in store functionality to buy online pick up that curbside.
Second we have enabled virtual wait list, so guess no longer have to wait in line in instead can be notified via tax when it is there turned to enter the store. This functionality has been particularly well received in the month of August alone. We had nearly 400000 individual gas utilizing our virtual waitlist across nearly 280 local.
Patients, where we implemented the technology.
Third we have continued to expand the number of our omni educators, who receive special training, enabling them to help gas in store and virtually through our guest education Center and fourth we continue to offer our digital educator and virtual concierge programs and both initiatives continued to be well received by guess this into.
Evasion demonstrates our consistent ability to be agile and anticipate the evolving needs of our guests.
We've also enabled omni sweat life capabilities to help our guests stay active both physically and digitally.
Many of our ambassadors have been offering live streams on our social channels and we now offer digital content as part of our membership program in the cities, where our tests are underway.
I'm also excited that in August we were able to convert our annual Seawheeze half marathon into an extremely successful virtual event, which over 23000 people for more than 100 countries participated including myself.
We partnered with the running abstract and offered a 10-K distance. In addition to our half marathon. We also curated virtual training programs for both races to help runners prepare and compete at the height of their ability.
Shifting now to product innovation, our guests are now working and sweating from home more than ever and we continued to be there for them with merchandise that offers versatility and flexibility powered by the technical innovation of Sciences feel I.
I'm excited to share the ways in which we are making our assortment relevant to more of our guess.
Last month, we expanded our on the move collection with the introduction of new pads styles for both women and men supported by our everyday is a workout campaign you styles leverage our expertise and technical construction in developing technical fabrics, but they were explicitly designed for out of studio use.
For women, we launched the city sleek five pocket powered by our war upstream fabric and for men, we rolled out the Bull line Pan in our new utility Tac fabric.
Initial response to these new styles has been strong in particular the city sleek has exceeded our expectations by a factor of two was the number one performing style in the company. During the initial days of the launch and we're chasing into additional inventory to help keep up with demand why we will always leave with performance based upon.
Oral and technical innovations, we see continued opportunity to grow the on the move portion of the business for both women and men.
I'm also pleased with our move toward more inclusive size. This is an important step forward for lose a lemon and I'm excited that later this month, we will start to offer some of our core styles and sizes zero to 20 and this is just the beginning by the end of 2021, the majority of our women's assortment will be available and are more.
Inclusive size range.
When looking at the men's business overall, we saw sequential improvement relative to quarter, one although at lake behind the growth in the women's business.
As the work from home and sweat from home environment continues we have seen our male guests respond more enthusiastically to short sweats in hoodies. Our merchant teams are chasing into these categories. So we can maximize these businesses based on the current shift in demand.
And our brand teams are focused on continuing to raise awareness among men and our dual gender lines such as on the move provide an opportunity to grow in both the men's and women's business.
Our opportunity within product remains in the early innings, we've only just begun to leverage our work within the sciences feel innovation platform and we have ample ways to expand our key categories run train yoga and on the move. In addition, the lumen brand is positioned well to take advantage of the ships were seeing in the marketplace towards.
Apparel that provides versatility comfort and technical innovation.
Before shifting to our outlook, let me update you on two of our omni guess initiatives mirror and membership.
Mirror is a further example of how we're considering an evolving new aspects of our business through an omni lens as you know we closed on the mirror transaction in early July and I couldn't be more excited with the potential mirror brings to Lou lemon and the opportunities Lululemons brings to mirror.
As I stated when we announced the acquisition mirror as a standalone revenue generating company and their management team will continue to operate the business from their offices in New York Theres No need for heavy integration work and we have begun the process of bringing them into the lululemons families. So that we benefit from our collective strikes.
We're on track to begin offering the mirror in 10 to 15, Lou Lemon stores in the United States by early quarter for when will also begin leveraging our digital channels to help build their brand awareness.
From a financial standpoint, we continue to believe that Mary will be modestly dilutive to earnings. This year, we plan to ramp up marketing and advertising spend in the second half of the year to fuel mirrors momentum during the holiday season and into 2021.
The initial work we're doing with mirror during the upcoming fall season will set the stage for next year, when we expect to be more aggressively leveraging the power the Lou I mean ecosystem to grow the mirror business Megan will provide you with more details in a moment.
Shifting to membership I'm excited to announce we are continuing to test our program and Edmonton Chicago in Denver and starting this week will also bring the program to our gas in Toronto for the first time.
The membership program continues to celebrate community connection and provides a range of offering such as special product dedicated online sweat classes and inspiring guest speakers to extend the Lou Lemon experience with Covance 19 in mine I'm proud of how our teams have evolved to a virtual event format with plans to return to studio classes in physical.
Gatherings once they have to do so.
As we continued to test and learn through membership and integrate Marin to the Lou and then family. We are gaining valuable insights on guest behavior that can help us further improve our offering and enhance the ability of our guests the full experienced this website.
Let me now share our thoughts on how we're approaching the second half of the year Megan will share some specifics regarding our financial outlook, but I wanted to provide you with our planning framework for the fall season.
Our starting point is that the environment remains uncertain.
David is not yet contained in many of the markets, where we operate and while we expect the recovery to advance we continued to plan for multiple scenarios this fall and particularly for the holiday season.
We have pulled forward several IP investments related to our ecommerce business increased our DC and fulfillment capabilities and are continuing to grow the ranks of our omni educators to ensure our guest received the service an experienced their accustom to should our ecommerce business spike even more in quarter four.
We continue to work with our vendors to ensure the proper timing of upcoming merchandise flows and can pull forward deliveries of select style should unanticipated demand developed and we continued to protect our downside by tightly managing expenses and the outlay of capital.
Let me now turn it over to Mega.
Thanks, Calvin I'll start providing details on our Q2 performance and although we're not providing specific guidance I will offer some color on our outlook for the remainder of here I'll also discuss specifics on our balance sheet, including our cash position liquidity and inventories. Please note that the adjusted Q2 financial metrics I will share include the operating results of mirror.
Beginning on July seven day, the transaction closed, but exclude 11 and a half million a pretax acquisition related costs you can refer to our earnings release and form 10-Q for more information and reconciliations to our GAAP metrics for Q2 total net revenue increased 2% to 903 million and while we're still on the cover 19 or car.
Three phase this was above our expectations of a high single digit decline.
And our digital channel, we posted a 157% constant dollar comping creates on top of a 31% increase last year given the significant number of temporary store closures in Q2, we do not feel store comp as a meaningful metric to evaluate performance as we evaluate our topline performance. We will continue to be focused on total revenue our digital.
Business trends and open start recovery trends, which I will offer some additional color on as we move into our outlook.
Square footage increased 15% versus last year and driven by the addition of 46 net new stores since Q2 of 2019 during the quarter. We opened 17, new stores eight in North America foreign mainland China three in other markets across Asia and two in Europe. We also completed two planned optimizations.
In terms of our digital channel E. Com contributed approximately 554 million of topline or 61% of total revenue our constant dollar E com comps exceeded our expectations, increasing a 157%.
Excluding the impact of our online warehouse sale E com comps grew 137%.
We're pleased with our online warehouse sell resolved I did want to highlight the overall for the quarter, we saw strength and full price sales as reflected on our flat product margin results year over year.
In terms of E. Com drivers, we continued to see strikes and traffic and conversion, which increased over 90% and 45% respectively.
Traffic was driven by channel shaft, coupled with investments in digital marketing and conversion continues to benefit from guest response to our product and the investments we've made in our global digital platforms to improved guest experience.
Gross profit for the second quarter, with 489.5 million or 54.2% of net revenue compared to 55% of net revenue in Q2 2019.
Gross margin declined 80 basis points was driven by 130 basis points of de leverage on DC related costs, which was offset by 40 basis points of product team cost leverage and 30 basis points of occupancy and depreciation leverage product margin was flat year over year inclusive of our online warehouse sale as lower product costs and product mix offset.
Higher markdowns, we also experienced 20 basis point negative impact from foreign exchange.
Thank you asked Shannay our approach in the current environment has been to protect against downside. While also ensuring we continue to invest in our long term growth opportunities.
SGN expenses were approximately 353 million or 39.1% of net revenue compared to 36% of net revenue in Q2 2019.
The de leverage on the quarter result at predominantly from lower revenues due to covert 19 related store closures.
And our commitment to continue to pair employees through this period of disruption costs associated with covert related to five NPP de leverage on depreciation and deleverage from mirror. These were partially offset by expats reductions relative to our original budget coupled with the recognition of some government wage subsidies in the quarter.
Adjusted operating income for the quarter with approximately 136 million of 15% of not revenue compared to 19% of net revenue in Q2 2019.
Adjusted tax expense for the quarter was 39.2 million or 28.9% of pre tax earnings compared to an effective tax rate of 26.4% a year ago.
The increase in our adjusted effective tax rate compared to last year relates primarily to changes in guidance associated with certain U.S. tax reform measures, which reduced the effective tax rate in the second quarter fiscal 2019.
Adjusted net income for the quarter with 96.3 million or 74 cents per diluted share compared to earnings per diluted share of 96 cents in Q2 2019.
Capital expenditures were approximately 53 million for the quarter compared to approximately 67 million in second quarter last year Q2 spend relates primarily to store capital for new locations relocations and renovations technology spend to support our business growth digital channel and analytics capability and supply chain about turning.
Onto our balance sheet highlights we ended the quarter is 1.2 billion of total liquidity.
523 million in cash and cash equivalents at approximately 700 million of available capacity under our committed revolving credit facilities.
Eventbrite grew 36% versus last year, almost 673 million at the end of Q2.
We now believe Q1 with a high point for year over year inventory increases for tiny tiny we expect levels in the second half to moderate further an increase of 20% to 30% range. Our repurchase program remains on pause as part of our Coca 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 that 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.
We continue to plan for a number of scenarios in order to ensure we have the appropriate flexibility to manage the business to a range second half outcomes.
These include scenarios around store trend recovery in light of continue Kogan 19 impacts across the globe, they're focused on and benefiting from leveraging our omni model and digital strength as we navigate this uncertainty.
We've continued to see guests shift between channels, which has driven outsized growth on our ecommerce site.
As Kevin mentioned, we pulled forward investments in our digital channel to ensure our guests continue to receive an elevated experience when shopping our sites and to maximize second half in holiday business.
In terms of stores. We currently have approximately 97% of our stores open across the globe with only a handful closures in North America, and Australia, all of our distribution centers are up and running.
The average productivity or hurry up and service, it's approximately 75% of last year's volume as we continue prioritize our people in our guests we are still women and capacity and operating on reduced hours in many locations.
These restrictions coupled with our relatively small store size and high productivity comparisons continue to impact guest traffic.
When looking at new store openings for 2020, we expect to open 30 to 35 net new stores with 15 net new stores opened through the end of Q2.
These openings will contribute to a low double digit increase on square footage for the year.
In addition, we're maintaining our seasonal store strategy, we operate in just over 50 seasonal stores in Q2 and plan to operate approximately 70 in the second half the year.
Looking forward for the business overall, we continue to anticipate the trend in total revenue growth to improve sequentially throughout the remainder of the here.
Inclusive of mirror in Q3, we expect total revenue to increase in the mid to high single digit range, but Q4, increasing in the high single to low double digit ranch. It's important to note that our view on total revenue growth in the back half assumes no improvement to the 75% productivity levels were currently experiencing and reopen stores and our digital channel we expect.
Revenue to remain strong and well above our pre cobot growth rates for 30% to 40%.
Moderate in the second half relative to Q2 with the majority of stores open and finally, we are now assuming that marable generate an excess of 150 million in revenue for the full year 2020.
From our initial expectation, which was revenue in excess of 100 million you made the strategic decision to increase marketing spend from mirror and the second half to take advantage of current trends towards funding from home and capitalize on the opportunity to drive business during the holiday season and into next year.
Increased marketing spend which will help acquire new gas in the near term and should also produced a return over the longer term through increased product and brand awareness will contribute to modest earnings dilution reflected in our outlook.
For gross margin, we continue to expect the second half of the year to be better than the first half, but the decline relative to last year in Q3.
All by flat to modestly up gross margin in Q4, we remain on track to deliver savings of 40 million and non merchandise expenses included within gross margin relative to our original budget.
In terms of S. cheniere for the full year, we expect deleverage to continue in the back half as we prudently invest in select growth initiatives, particularly digital and store traffic likely remains below last years levels. In addition, while myris dilution on our piano would be modest for the year overall the bulk of this will be realized within SGN AG contributing to de leveraging Q3.
In Q4, we remain on track to realise 130 million at gross SGN I savings by the end of year relative to our original budget.
With regard to earnings per share compared to a year ago. If we look at just the Lululemons business. We expect on adjusted EPS decline in the 10% to 15% range in Q3, and adjusted EPS to grow modestly in Q4, when looking at our combined results for Lululemons Mirror, we expect an adjusted EPS decline in the 15% to 20% range in Q3.
And a modest decline in Q4 for the full year 2020, excluding acquisition costs, we continue to expect merited be modestly dilutive at less than 5%.
In terms of capital spending we expect Capex for 2020 to be below our original budget and generally in line with last year, we're prioritizing spending on digital and omni initiatives and fulfillment capabilities for pulling back somewhat on new store openings and remodels before handing it back to Calvin I'd like to reiterate that we're cautiously optimistic with regard to the holiday season.
And we continue to play on the business based on multiple performance scenarios, our guidance assumes store productivity remains consistent with the levels. We've seen recently and we experienced ongoing strengthen our ecommerce business longer term, we remain committed to our power free growth plan and we're excited with the opportunities that remain in front of us and now back to Calvin for some closing.
Remark.
Thank you Meghan and I want to take this moment to also thank all of the Lululemons employees around the world, who continued to be agile and nimble in creative as we meet and exceed the expectations of our gas during this time.
I'm proud of the resiliency and flexibility of the business that allows us to deliver results like these that demonstrates both our near term and long term strength and I continue to be impressed by how our leadership team is showing up both as they leave their teams and strategically co create our future.
We all feel that lululemons is becoming stronger quarter by quarter, and it's a testament to our people our ability to innovate and our enduring connection with our gas we love to serve we're now pleased to take your questions. Operator, we can now open it up for QNX.
Certainly well 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 share a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before press.
Seeing any key.
To withdraw your question. Please press Star then too.
We will pause for a moment as colors join the queue.
The first question comes from Lorianne Hutchinson with Bank of America. Please go ahead.
Thanks, Good afternoon, I want to ask about how you're thinking about managing any holiday volume challenges whether store capacity constraints are higher shipping costs. It sounds like you will be opening some seasonal stores to help with that are there any other plans in place to try to ensure that you can.
Successfully manage through this this tough for Q environment.
Yes, Hello, Ryan, it's Kelvin absolutely, we I'd break it into a couple of.
Key strategic buckets that we've been working on early on the first was.
Pulling forward our investments to ensure that the infrastructure, both our supply chain as well as our web sites around the world.
We're ready for that type of volume that we are anticipating.
We've run a variety of scenarios. If you think obviously fourth quarter volume is highest volume within a year and we're seeing exponential growth on E. Commerce should we sort of applied that modeling to the back half as sort of the the benchmark of what we needed to prepare for and we pulled those investments forward two inch.
Sure a readiness.
On the sites in the infrastructure in order to support.
And then we've been investing into the rest guest experience call center being one of the key areas.
Looking at how we can mobilize our educators to not just be able to work in the physical but as well as being able to service our guests online.
Both through a concierge service as well as a call centers, so leaning in and ensuring that we had the infrastructure to support and the guest education center to support our two of the big important factors.
And not anticipating our online volume in the physical space. There is a variety of initiatives that we keep innovating to take away. The operating constraints. That's the reality of of operating through co that we've all seen the lines at our stores. We know that guests are willing and are waiting to queue up and our challenges.
How do we get more into the store and and transact at a at a quicker rate. So a variety of innovations have gone into that from the virtual line mine upset I share shared as well as how we just a check guess out in service them outside the store and then the seasonal stores is is a big shift as.
Well tapping into our nimble fleet, where last year in fourth quarter, we had 51 seasonal stores. This year, we're planning on 70.
And then some locations we may even be doubling up in a in a mall or.
Location, where we have an existing stores should we can pick up some not overflow so those things combined.
We feel good that we'll be ready for the volume, where we need to be and maximizing the potential no physical space.
With some of the innovation that I shared with you.
Thank you.
The next question comes from Matthew Boss with JP Morgan. Please go ahead.
Matthew Boss your line is lives.
The next question comes from Mark Altschwager with Baird. Please go ahead.
Great. Good afternoon, Thanks for taking my question.
On the product margin can you walk through some of the drivers there relative to the strength that you saw in Q1, I guess, specifically I'm wondering how much can impact the warehouse sale had on the quarter and whether the plus 180, you saw in the first quarter might be a better indicator of the underlying run rate in the business.
Yeah, Thanks markets Meghan and so we were really pleased with the strike refined product margin in the quarter our.
You heard we didn't do an online warehouse, Sal, which compressed really with our stores closed markdown falling into one period, but when we look across a corridor. We saw some really nice strength kind of full price selling we're not going to offer on color on product margin, specifically as we move into the second half.
We are expecting gross margins in the second half a year or to be better than the first half unexpected decline in Q3, returning to growth margin expansion year over year in Q4.
[noise] that's very helpful. Thank you and then just a follow up thanks for all the detail in the productivity trends and digital due to any further help on what you're seeing quarter to date in each of the channels relative to what you saw in second quarter.
And so we are attracting relatively in line with the topline color, we provided which in total revenue growth in the mid to high single digit French for the quarter.
Thank you very much that's the books.
[noise]. The next question comes from Matt claim.
Clint can talk a lot with Raymond James Please go ahead.
Hi, Thank you everyone as mcclintock with good job trying.
The.
Honestly I wanted to start it's just fulfillment capacity and it's kind of default the learnings question, but I want to understand the investments that you're making and in terms of fulfillment volume your ability to handle more volume versus only customer service your ability to deal with customer service will be higher higher levels of volume where did that position you longer term I understand.
You are getting ready for the fourth quarter, but I wouldn't say two years all three years out do you already building the ability to handle volume of five years from now six years from now or is this because you're growing. So fast you are still trying to just kind of keep would that it's still add some safety safety real thanks.
Great. Thanks, Matt.
We're definitely well ahead of the volume.
That we had anticipated modeled in our five year growth plan that we shared last spring.
And under the power of three and when we looked at a doubling our digital business.
We are definitely trending ahead of that.
Run rate.
So these investments that we're making this year.
I would break into a a number of factors one is our distribution capability, a both fulfilling stores as well as economists E Commerce orders.
Ensuring we have the right safety measures in place to maintain continuity of operating the Dcs, which I'm very proud of the work that the team did today to operate through while maintaining and putting the health and safety of our warehouse distribution to employees front and center.
On the website.
Proving a this ongoing stability or the ability to take the traffic and convert and we saw traffic in quarter two increased by 91% conversion increased by 46%. So these combined with the volume are ahead of where we anticipated and Theres just general.
Structure investments you need to make to be able to scale the business like that Fortunately, we're predominantly cloud base now which allows us to more easily expand both in North America and internationally internationally. Our total business was up 37%, that's including stores in the quarter.
Every region in Europe, and Asia Pac.
And China grew and we saw significant growth in E. Commerce. So we're experiencing it in all markets and we're investing there in the infrastructure support that volume, we're definitely going you could come out of the year ahead of where we thought we wouldn't be in the five year plan on a dollar perspective.
And we'll continue to invest in as we look forward to the 23 plan and then obviously our planning beyond that.
Prioritizing the investments I mean, what center at our strategy is an omni ecosystem in approach in digital plays a big part of that and we're going to keep investing to ensure that we support the growth of the business and take a long term view on.
Thanks, Thanks for that color and then just as a follow up we started noticing a lot more lumen structures on newer and I was just because you talked about starting to integrate the two companies a little bit I wanted to get your thoughts on bringing your ecosystem on your all in it looked after looking at these are you.
Agent greater engagement levels and local communities, where you have maybe local instructors teaching on your now thanks.
Great. Thanks, I would say you know as we've alluded it's very early.
And we we started a partnership with mirror over a year ago last spring and in fact few that partnership we had some of our Lululemons ambassadors on the mirror platform last fall.
And that gave us a lot of test and learn opportunities to see how the mirror guest was interacting with both that.
Ambassador as well as the interaction of at home sweat and that among with many other metrics.
No gave us the confidence and led to the excitement about making the acquisition. So we look forward.
We are moving forward with a you know the notion of a light integration, we're only going to be selling and 10 to 15 stores. This year selling it on a lululemons dot com as a means to building awareness and it really is set up as a test and learn and focus on 21 and as Megan shared even with a.
Light integration we're anticipating.
Oh.
Solid improvement in their forecast shared earlier revenues into 150 million and as we continue to integrate as we continue to.
Tap into the ambassadors in the community and and expand selling into more of our stores were excited about that growth opportunity center of how we're reviewing our strategy moving forward and where we feel it's very unique versus some other players is the omni ecosystem.
Thats going to include both physical and digital sweat. So the Lululemons membership is rooted in physical sweat a mirror is rooted predominantly in digital sweat and we see a relationship between the two.
And at the community level. So we will continue to innovate and expand into that with more to share but that is really unique point of our.
Strategy envision and mirror fits into it well and will be a part of the community both digitally as well as within the physical representation of our ambassadors our stores and others as as we look to.
You know to drive that business forward.
Thanks for that very exciting times.
The next question comes from Adrian you with Barclays. Please go ahead.
And Calvin I was wondering if you can talk about product category expansion and the introduction of ongoing innovation and newness for both the back half of this year and then into 2021 and then begun.
You can just talk to us about how you've moved to inventory through the I think there were three channels that you'd mentioned our strategies last time and how we should think about that at the end of those threeq and Fourq you. Thank you very much.
Great. Thanks on in terms of our product expansion.
We've shared.
The the four key sweat activities that were focused on as a business run train and yoga with on the move as being one.
We have a number of sweat activities that are loyal guests choose as either their secondary or tertiary.
Sweat options that we equally see opportunity to expand our current assortment.
And and we're working to do that we're innovating into that and we're excited about bringing a little.
Continual newness as well as continuity.
To the sweat activities for both.
Our men's business as well as our women's business and accessories. So there's a lot of.
New innovation in the pipeline, we shared the launch of.
Our pant business this quarter with the city sleek.
Initiative with much more OTM plan for the back half and into next year.
And into these new sweat category, So I am I I continue to be incredibly energized about the product pipeline.
Both the newness as well as the opportunity we have and what we've already declared.
And then the expansion of new categories that would be completely incremental for us.
Building business footwear.
In the coming years, so I think it's exciting to see the work that signed in the team's doing in and around product through science of steel and really believe were early and what we offer in North America, and then even more so internationally, so see a long runway of growth with product.
Great.
In terms of inventory, we're pleased with a level of competition coming out of Q2, our inventory was up 36% year over year, which was under our Q1 year over your balance we've previously thoughts on Q and if you read the our high point and now.
We expect that will be Q1.
So as you know we did do an online warehouse sale during the quarter plans with those results, but again I just point back to we're also very pleased with our full price sales results and we do you expect inventory to moderate and the second half of the year up 20% to 30%.
And as we move into the third and fourth quarter and just as it again a reminder, we do benefit from core being approximately 40% of our assortment.
Great. Thanks, so much nice job in a tough environment.
Thank you.
The next question comes from Ike Boruchow with Wells Fargo. Please go ahead.
Hi.
Just two quick questions just back on the of the inventory I understand this is the high point has been passed them.
At a moderate in the back half with 20% to 30% of still pretty well above your sales trends going on I'm trying to understand your comfort with inventory you're carrying if we should be on the look out for more potential.
Vince to clear inventory in the third or fourth quarter, and then any chance you guys could explicitly breakout the mirror revenue contribution that you're planning in Q3 Q4. Thanks.
Yes, thanks, it's not going on so I think in terms of inventory I'm, what I'd say as again to 40% of our assortment is approximately 40% as core and we expect inventory levels to moderate through the second half year as we mentioned, 20% to 30% as as you note that is about sales growth, but we feel comfortable with a lap all based.
Unrefined inventory and taking into consideration that core portion.
We do you expect gross margin in the second half of the year to improve relative to the first half and we expect again a decline in Q3 and returning to growth in Q4.
And then in terms of mirror, we're not going to break down on the second half on estimate that $150 million in excess of $150 million is for the full fiscal 2020.
Good thanks.
The next question comes from Alexandra Wall vis with Goldman Sachs. Please go ahead.
Good afternoon. Thanks, so much for taking the question how am I had a question on the E. Commerce growth I was wondering if you could share anymore color on the cadence of that growth through the quarter on indeed closer to date.
And also whether you might be able to share the composition of E commerce revenue between existing customers and new to Lululemons customers.
That would be really helpful.
Great. So in terms of the ecommerce cadence we had mentioned that we saw a 125%.
When we were reporting Q1 at the start of the quarter. So we did see a pickup as we move throughout Q2.
And we saw 157 for the quarter and it was 137, excluding online warehouse sale, we have seen as I mentioned.
Inline with our expectation of that year over year.
Both rate moderating as stores opened our first for the full period.
Q3 and into the second half, we do expect E com to be above the 30% to 40% growth rate and that we experienced prior to cope ad.
Great very clear and then one more question for me I am you're expanding the loyalty.
Test to another city in Vancouver any.
Incremental color you can share on what you feel on from the loyalty pilots so far anything that will tweaking as you move into.
The the subsequent pilot in Vancouver.
Yes, absolutely thanks stocks under our first to just too.
Clarify the added cities Toronto that we're adding so we're repeating in three of the four cities repeating in Edmonton Chicago in Denver.
And we tested in Austin.
With great results, but we elected to bring in a larger city with Toronto to test and learn so Toronto is going to be the new market.
And what we continue to see in the adjustments me. We've made obviously the essence of the program is rooted in connection and community.
With physical being a big part the team has done a wonderful job shifting to virtual events.
Be it sweats or speaker series or other tutorials that guests have engaged incredibly well in.
Really set up a lot of interesting learning as we think forward around the program and we will moderate as we see studios open.
In gas being able to physically sweat, but where we've landed is a good balance of physical sweat combined with access to product and then rooted.
At the notion of community in connection.
Hundred $68 for the one year.
And we go.
On.
Making it available this week and we're excited to see the results and in every test city we've done.
We've seen very positive response from the guests.
Hi, loyalty and engagement and intend to repeat.
And it does have a positive impact on their overall purchases of Lou lemon as well as recruitment of new guests. So.
From a guess metrics standpoint, it's very encouraging.
And it's early and we are taking it.
You know through a test and learn phased approach Toronto is going to be a great. New addition, covitz been an interesting.
Balance based on the positioning in the membership program, but I'm very excited about how the guess has continued to engage in it if anything it's given us more confidence the not about the potential and we will test and learn through these markets with plans to.
Continue to look at adding additional markets in the coming year.
Great. Thank you so much for all the color on all of us.
Yes.
The next question comes from Omar Saad with Evercore. Please go ahead.
Hi, Thanks, good afternoon, congratulations on another great quarter.
I wanted to ask a little bit more about your international results kind of compare and contrast versus your core North America market, the China number was pretty impressive.
Is that a good.
Maybe contrast to compare the patterns you're seeing in those markets online in stores did you see experienced pent up demand there.
Maybe some of the differences you would call out for the kind of consumer behavior patterns are saying the guest behavior patterns are seeing in North America on Europe, as well be great great to get that feedback. Thanks.
Thanks Omar.
I'll start by just sort of teeing up.
The the North American business as we sort of shared.
Yes.
From Q1 to Q2, we're really pleased with the progression we saw in both Canada and the us.
Stores perform similar.
In both markets.
Predominantly that's linked to the operating constraints that we had to operate under with small stores that were incredibly productive.
And we just had challenges being able to meet match the same productivity numbers as the previous year.
Any ecommerce obviously picked up a large share of that additional demand.
And overall the mix of the business, we're very pleased with.
And and it was a significant improvement from Q1 performance internationally.
I'll start with China, because it continues to just build steam and momentum from.
Q1, when we had the early closings to win the stores reopened.
And we're seeing incredible growth in both our E commerce.
Number which was up 136% in China in stores, which are up.
No significant.
Growth.
As we saw through the quarter and heading into this quarter, they're benefiting from a lot of the domestic travel that's occurring but from a brand perspective, we've opened up a number of additional doors.
And they have all performed well ahead of plan in tier two cities, we continue to see great growth.
And reaction to the brand.
And we're acquiring new guests and both channels are performing very strong. So very excited about what we continue to see is an inflection in our business in China and the momentum behind it in the growth.
That it's driving which is by far.
The the strongest of any market that we're in.
To date in this quarter and though in Europe, and rest of Asia Pacific very positive growth led in E Commerce E Commerce numbers similar.
To that in in North America.
Which is really exciting for us.
Because its acquiring a new guests.
And it's resetting how high is high with with our online business potential as we think about assortment think about our physical real estate strategy and entering into new markets. So excited overall with the performance of our business internationally.
And continue to see guest acquisition increase the expansion of the brand led by China, but very strong in all markets that we're in.
Great and then a quick follow up on mirror, why only 10 to 15 stores for the fourth quarter or their capacity constraints or you just want to build it slowly. Thanks.
Yes, it's definitely build it slowly.
And.
Test and learn and be able to go a little bit more aggressive in 21.
And we're going to test and learn between the balance of making it available and increasing awareness through dot com, making it available through.
Stores, there and a good supply chain perspective now their average delivery is seven to 10 days in terms of inventory flow.
Obviously during early covert that number was expanded they've been able to play catch up and we're sitting in a good position.
But we see this is as an exciting physician long term and theres good momentum already in that and we're going to add to it but it is really test and learn with a focus on 21.
Thanks Best wishes.
Okay.
Operator, we'll take one more question. Thanks.
Certainly our next question comes from Matthew Boss with Jpmorgan. Please go ahead.
Great. Thanks, we'll try this again.
Calvin on on the inflection that you cited for for retail headed from an for Lu from here can you first elaborate on investments from market share that you've accelerated during the crisis and then also on digital how what's the best way to think about the sustainability of digital channel operating margins relative.
The 40% plus that you've achieved the last several years.
Yes, all charts.
On the inflection as well as how we're leaning in and how we're planning to continue to lean in.
You know clearly.
Health wellness and functional apparel and trends in apparel have changed dramatically and I don't foresee them defaulting back to pre Cove it.
Sort of awareness with the gas I think.
No health and wellness trends are here to stay I think that some of the trends we've seen in fashion.
And what gas are going to expect in apparel and how they.
How they dress and how they want their apparel to perform are here to stay in both of those benefit.
Our brand in our positioning.
In a number of ways predominantly linked to our power three growth strategy around product.
Omni guest in creating that ecosystem as well as market expansion. So im excited about.
The potential of growth and what we do know is and we've shared this before is even with the success of.
Our business to date, we have awareness.
Opportunities, we have significant awareness opportunities with men in North America and in our international markets awareness and consideration is.
It remains our.
One of our big exciting opportunities. So we definitely leaned in in Q3 with digital marketing plan to do more of that in the back half and into next year.
Part of the success, we saw internationally was turning on digital marketing and CRM.
In in a more aggressive way than weve traditionally done in the past.
And in that and it responded very well so the teams are going to continue to learn.
We're continuing to sort of play with our ROE asking what we what we wanted to expect from the investments in how we.
Get our brand known and and have that.
Awareness metric improve in the coming months in the coming years. So I just think the world is looking for more of what we have to offer and our opportunity. We know is that our awareness around offering it is still a big opportunity for us in and we're going to lean and invest in the back half of this year and into next year.
Sure to do that and Thats, all part of the guidance in margin that.
Megan's provided.
And it's also inclusive there's no change to our power of three.
Five your view of the of the financial model that we shared as well last spring. So it's all incorporated in that how we chase in lean, but as an exciting opportunity for us to drive awareness and we see the opportunity and we are.
Shifting investment to to to go after it.
Great and then just one follow up just on the on the digital trend in August in early September is there any driver of the moderation that you cited relative to the second quarter or maybe just any commentary to think about as we try to think through the magnitude at all as we think about the current momentum that you guys Kerry so far.
Our into the third quarter.
I wouldn't say there is a driver to the moderation, it's really looking at the omni trend overall, which again, we see in the mid to high single digit Ranjan, just with the Lions share of the stores open I'm, just not seeing as much about channel shift trend and with our guests being able to accept our store fleet.
Great Best of luck.
Great. Thank you.
That's all the time, we have for questions today. Thank you for joining the call and have a nice day.
Yeah.
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