Q2 2019 Earnings Call
Thank you for standing by this is the conference operator, welcome to Lululemons second quarter 2019 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 analysts who wish to ask a question may I ask a question by pressing 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 will now like to turn the conference over to Howard Tubin, Vice President Investor Relations for Lou Lemon. Please go ahead Sir.
Thank you and good afternoon, welcome to Lululemons second quarter earnings Conference call.
Joining me today to talk about our results our Calvin Mcdonald CEO , so less burgling, EVP Americas, and global guest innovation and PJ Guide our CFO .
Before we get started I'd like to take this opportunity to remind you that our remarks. Today will include forward looking statements, reflecting managements current forecast of certain aspects of Lululemons future. These statements are based on current information, which we have assessed but by which 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, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K , and our quarterly reports on Form 10-Q .
Any forward looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press.
The press release and accompanying quarterly report on Form 10-Q are available under the investors section of our website at Www Dot Lululemons dotcom.
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 second quarter as well as our quarterly info graphic.
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 addressed and now I'd like to turn the call over to Kelvin.
Thanks, Howard I'd like to welcome everyone to our second quarter earnings call I am pleased to take you through our results, which reflect continued strength across all areas of the business. There's 11 had another successful quarter as our teams across the world continued to build upon the momentum in our business and execute on our power of three vision for growth.
On today's call I'll provide an overview of our quarter two results, including further details on some key initiatives within product innovation and our international business next Celeste Burgoyne, our SVP of the Americas and global guest innovation will join us to discuss the success within the North American region early learnings from our Lincoln Park experiential store and the progress of our membership pilot then PJ will provide a detailed financial review as well as our guidance outlook to wrap up our call I'll provide a few closing comments and then we'll be happy to take your questions.
Looking at our second quarter results the momentum in the business remains strong across product categories channels and regions. We're now two quarters into our five year vision and I'm pleased with the strong execution and passion across the business to continue to deliver on our growth priorities.
In quarter to total revenue grew 22%.
Constant dollar comps increased 17% on top of a 19% increase last year and earnings per share increased 35%.
I'm also proud to share how we are living into our vision to be the experience will brand that ignites a community of people living the sweat life through sweat grow and connect.
In July we opened our first experiential store in Chicago's Lincoln Park neighborhood, and just a few weeks ago, we hosted our eighth annual Seawheeze half Marathon in Sunset Festival in Vancouver. These are both fantastic examples of how we are bringing innovation to guest engagement and connecting with our community both inside and outside the four walls of our store you'll hear more specific details from Celeste shortly on these exciting initiatives.
I will now update you on our power of three growth pillars product innovation omni guest experience and market expansion.
I'll speak to product in international events less will take you through the North America and omni guest experience.
As you'll recall, our five year vision details our path to grow our core business in the low double digits annually, while doubling our mens.
Doubling our digital and quadrupling, our international businesses between now and the end of 2023.
Within our product innovation pillar guest response to our merchandise offering was particularly a strong across the board as we continue to leverage our key core franchises, while always delivering new innovation through the science of field.
In women's comps grew 13% as bottoms remains strong driven by both pants and shorts.
Within the men's business comps grew 27% with ongoing strength in both tops and bottoms like women's the men's side also saw strength in shorts.
Across both men's and women's we continue to innovate to serve our guests across key activities Yoga run Otcs and train within train this quarter, we launched our latest collaborations stronger as one with berries. This dual gender collection was designed specifically for the type of work outs that are popular and Barry's bootcamp sweat classes with fabrics that offer abrasion resistance breathability and moisture wicking. The strong response to the collection provides a compelling proof point of the opportunities as we push further into the train category in future seasons.
Now I'll provide a quick update on self care, we're thrilled with the initial guest response. This performance has exceeded our expectations look for several new additions to the line between now and the ended the fiscal year. We're in the early phases of this pilot and see many opportunities to create product with our unique positioning of solving sweaty problems for athletes.
Looking ahead across all categories I'm happy with our near term product pipeline and the many innovations that our teams have in longer term development.
Through our unique approach to innovation the science of feel we've recently relaunched our metal vent collection. This builds upon our successful franchise by offering improved performance attributes and we're supporting the launch with compelling storytelling to attract new and existing guests to this product line.
Our outerwear continues to represent a meaningful opportunity for us and we're excited to launch waterproof pool in the fall. This fabric innovation will offer guests the warmth and texture. They expect from wall, while keeping them dry as they spend time outdoors.
We'll also be expanding our lab product to 45 stores and online for fall as we showcased for you at our analyst day, our lab product reflects our pinnacle aesthetic and appeals to a younger more urban gas relative to our core.
Turning now to international let me share an update on the progress and success, we're seeing in Europe I spent several days with the team in London, a few weeks ago, and we're continuing to see strong trends in this market now that we are more established in the region.
In quarter to total revenue in Europe grew 35%.
We're also pleased with the continued success of our global event strategy and in June we hosted our annual Sweat Life Festival in London.
This amazing event brings together guess educators ambassadors and other members of the local community for a weekend of sweat classes yoga personal development and meditation.
In August we hosted sweat life Berlin for the second time and I'm excited that we are bringing this event to Paris for the first time in early October . We're also pleased with the recent opening of our first mainline store in the Saint Germain area of Paris, and with the rollout of our local market E Commerce sites in France, and Germany. Both sites went live during quarter, two and were happy with their performance to date.
And our APAC region. The momentum continues to be driven by strength in both our store and online channels total revenue in APAC grew 33% in quarter, two with particular strength in China, where we saw market growth of 68%. We opened two new locations in China, and our fourth store in Singapore with our Marina Bay location, where in the early stages of our growth potential and remain on track to open approximately 15 stores in China. This year, almost doubling our store count when compared to the end of 2018.
And we continue to see strength in our ecommerce businesses guess engage with our brand across channels.
In China, our ecommerce comps were over 70% and our new local market sites in Korea, and Japan are exceeding initial expectations I will now turn it over to Celeste to share an update on North America and omni guest experience so less.
Thanks, Calvin I'm thrilled to speak with you about the growth, we're seeing across our stores and online channels, which reflects a strong connection we have with our GAAP.
In Q2 revenue in North America increased 21% as our guests continue to respond well to our merchandise assortment engaging store environment and unique brand activation.
Traffic remains a key driver in North America, as our strategies and investments continue to drive gas into stores and to our ecommerce site.
During the quarter, we opened one new store in the U.S. and will remain on track to open 15 to 20 stores. This year in North America.
In addition, we remain particularly excited with the results we're seeing from our co located remodel strategy and we completed eight projects in Q2.
Within our digital business guest engagement continues to be strong and we are focused on pushing forward with improvements to our sites and mobile apps.
We are currently in the process of rolling out new search and browse functionality, which will further enhance and personalized experience for gas visiting our ecommerce site.
We're also enhancing our product detail page across our digital ecosystem, which will improve product storytelling and product education and further support conversion and finally, we now have buy online pickup in store capabilities in nearly all of our stores across North America up from 150 stores at the end of Q1, so far the favorable response from gas shows how much. They appreciate the flexibility and efficiency of this service.
As Kelvin mentioned, we are living into our vision and engaging with gas and compelling new ways, both inside and outside of the store. Our Lincoln Park Star is truly the physical manifestation of the heart and soul of Leu, Lemon, which is reflected in being active cultivating line from that and developing meaningful connections at Lou Lemon we refer to these three tenants as the sweat life.
We're really excited with Lincoln parks performance since its opening in July as it provides our guests educators and ambassadors space to sweat grow and connect together all under one roof. The store offers dedicated studio space for sweat classes and meditation.
Locker rooms, the showers healthy food at our fuel bar a community space created simply to foster connection and of course and elevated shopping experience.
45 of our local ambassador is call the store home and they lead the six to 10 classes we offer everyday.
Currently the store is a one of a kind for us as we learn from the initial results looking forward. We're excited to share that we have two key store openings planned for November one in Minneapolis, and one in New York City in Minneapolis, we'll be opening our second full experiential store in the mall of America dislocation will offer several the features found in Lincoln Park and we are excited about what this store can teach outs as a high volume model based location.
In New York City will complete the relocation of our large format fifth Avenue store near Rockefeller Center. While this store is only moving across the street. The new 23000 square foot location will offer an enhanced shopping experience for our guests with a better representation of the product assortment for both men and women. These two openings illustrate the agility of our store formats as we meet the wants and needs of gap in each community, where we open.
Let me shift gears now and update you on membership our program remains very much a task. However, we are happy with the engagement, we're seeing from our members in the first three cities have Edmonton, Denver, and Austin as we expected our loyal guests make up the majority of members. So far but we have a number of members who are signing up for the program with our first purchase with our brands. In addition, we are seen men connect with that the other programs like though with over 20% of our members being male in Austin.
While we continue to test and learn we won't get into the specific economics of the program yet, but we recently launched in our fourth test market of Chicago with the opening of Lincoln Park were excited to see the potential synergies that our membership program and experience will store can create together.
Looking at our community Activations in Q2, and I'd like to highlight several for you that help us further engage with our guests who choose running as their preferred way to sweat.
We hosted our 10-K Ron's in Toronto in Edmonton with positive response from the local community and had 10007 thousand participants respectively.
In addition, we announced our first large scale run event in the U.S., a 10-K and San Diego that will happen in November and sold out in three days.
Our brand momentum continued into the third quarter with our Seawheeze half Marathon. In addition to the race, which had 10000 participants including three of our global run Ambassadors. We also had 6500 gas join us for Yoga, we offered vision and gold sessions and we held a celebration in the evening with World Class musical acts Seawheeze is a powerful example of how we create lasting ways to sweat growing connect with our community beyond what happens within our stores.
Before turning it over to PJ I'd like to express my sincere gratitude to our educators and store teams as they continue to bring the Lululemons brand to life every day for our guests.
I'd also like to specifically thank the cross functional teams that work to open Lincoln Park. This was a considerable undertaking and I really don't have the words to express my gratitude for everyone involved and now I'll pass it to PJ.
Thanks last before I provide highlights on Q2, and our guidance outlook I will refer you to the financial supplement posted on our Investor site for additional details for Q2 total revenue net revenue rose, 22% to $883 million driven by continued strong execution across all parts of the business in our store channel. We delivered an 11% constant dollar comp store sales increase on top of a 10% increase in Q2 of last year.
Square footage increased 17% versus last year, driven by the addition of 45 net new Lululemons stores since Q2 of 2018.
During the quarter, we opened five new stores and completed eight optimizations, including the opening of our experience will store in Lincoln Park.
In our digital channel, we posted a 31% constant dollar comp increase on top of a very strong 47% increase last year.
For the quarter E Com contributed approximately $218 million of top line or nearly 25% of total revenue.
Increased traffic in Q2 continues to drive comps both in store and online with increases in the high single digits and over 30% respectively.
And I'd add that the impact of foreign exchange decreased revenues by $8.4 million in the quarter.
Gross profit for the second quarter was $485.8 million or 55% of net revenue compared to 54.8% of net revenue in Q2 2018. The gross profit rate in Q2 increased 20 basis points versus gross margin last year and was driven primarily by the following.
A 90 basis point increase in overall product margin, resulting from lower product costs favorability in product mix and lower markdowns. This comes despite the additional air freight expense, we incurred as a hedge against potential port congestion related to China tariffs.
We remain pleased with the product margin strength, we continue to realize on top of the strong gains over the last several years product margin expansion was partially offset by a 30 basis point increase in product and supply chain costs, driven by ongoing investment in product development and supply chain, including our new Toronto DC.
And an increase in occupancy and depreciation expense of 20 basis points. We also saw a 20 basis points of unfavorable impact from foreign exchange.
Moving down the PML SGN expenses were approximately $318 million or 36% of net revenue compared to 36.2% of net revenue for the same period last year.
We're happy to have achieved leverage in our in line with our guidance in Q2, while at the same time continuing to use the strength in the business to build brand awareness and invest in initiatives that fuel current and long term growth.
Including data and analytics loyalty self care and mens.
These ongoing investments contributed to deleverage of 70 basis points, which which was more than offset by 90 basis points of leverage in store costs and foreign exchange.
Operating income for the quarter was approximately $168 million or 19% of net revenue compared to 18.5% of net revenue in Q2 2018.
Tax expense for the quarter was $45 million or 26.4% of pre tax earnings compared to an effective tax rate of 29.5% a year ago.
The decrease in our effective tax rate relative to our guidance reflects the release of new regulations, which resulted in additional foreign tax credits for prior years.
These deductions benefited EPS in Q2 by approximately two cents, we now expect our full year 2019 tax rate to be approximately 27.5%.
Net income for the quarter was $125 million or 96 cents per diluted share compared to earnings per diluted share 71 cents for the second quarter of 2018.
Capital expenditures were approximately $67 million for the quarter compared to approximately 50 million in the second quarter of last year. The increase relates primarily to store capital for new locations relocations, and renovations and IP and supply chain investments.
Turning to our balance sheet highlights we ended the quarter with $624 million in cash and cash equivalents.
Inventory grew 26% and was $494 million at the end of Q2.
We repurchased approximately 9600 shares this quarter at a cost of $1.6 million.
Coming into 2019, our board authorized a new $500 million share repurchase plan of which approximately $336 million authorization remained at the end of Q2.
We believe that repurchasing our shares is an efficient and effective way to return cash to shareholders and we'll continue to be opportunistic opportunistic with our share repurchase activity.
Turning now to our outlook.
For Q3, we expect revenues to be in the range of 880 $890 million. This is based on a comparable sales percentage increase in the low teens on a constant dollar basis compared to the third quarter of 2018. This also assumes 22 new store openings in the quarter.
We expect gross margin to be flat to up modestly versus Q3 of last year. Our guidance reflects the impact from new tariffs imposed on imports from China as well as additional air freight expense.
For the full year, we continue to expect a four to five cents negative impact within gross margin related to the new tariffs and incremental air freight costs used as a used as a hedge against possible port congestion, we incurred approximately one cents of this four to five cents in Q2 and expect the remaining three to four cents to impact Q3, and Q4 more evenly.
We remain excited with the opportunities we see to drive further increases in product margin as we laid out for you at our analyst day, we're continuing to execute on our strategies to further segment, our supply chain and increase efficiencies within our distribution network.
These initiatives coupled coupled with ongoing scale benefits as we continue to grow give us confidence that our gross margin will continue to expand modestly on an annual basis through 2023.
We expect SDMA rate in Q3 to leverage modestly as we balance investments for future growth with efficient management of our cost structure.
We continue to expect modest leverage on the year.
Assuming a tax rate of 28% and approximately 131 million diluted weighted average shares outstanding we expect diluted earnings per share in the third quarter to be in the range of 90 to 92 cents versus EPS of 71 cents a year ago.
For the full year 2019, we now expect revenue to be in the range of $3.8 billion to $3.84 billion. This is based on a comparable sales percentage increase in the low teens on a constant dollar basis.
We expect to open approximately 45 to 50 company operated stores in 2019.
This includes approximately 30 stores in our international markets and represents a square footage percentage increase in the mid to high teens range.
We expect gross margin for the year to expand modestly primarily driven by continued product margin improvement, we expect SGN a for the full year to leverage modestly.
We expect our fiscal year 2019 diluted earnings per share to be in the range of 463 to 470.
Our EPS guidance is based on a 131 million diluted weighted average shares outstanding for the year. This range takes into account approximately four to five cents of additional costs within gross margin related to the tariffs in air freight that I mentioned earlier.
We expect our effective tax rate to be approximately 27.5% in 2019.
Weve assume the Canadian dollar at 75 cents to the US dollar for 2019 as well as Q3.
We now expect capital expenditures to be approximately $275 million to $285 million for the fiscal year 2019.
The increase versus 2018 reflects a ramp up of our store renovations and relocation program new store openings technology investments and other general corporate infrastructure projects.
In closing we're excited with the continued strength, we're seeing in the business and we remain optimistic about the fall season and beyond.
And now back to Calvin for some closing remarks.
I would like to thank PJM Celeste for providing these insights in our business and performance all of US within the company are proud of what we've achieved.
As I travel around the world I see gas responding to our product our innovations and living the sweat life.
Finally, I'd like to thank everyone at Lululemons for their commitment and dedication in achieving these results and with that we'll be happy to take your questions operator.
Thank you.
We will now begin the question and answer session.
Analysts who wish to join the question queue May Press Star then one on their telephone keypad, you'll hear a tone acknowledging a request. If you are using a speakerphone. Please pick up your handset before pressing any keith.
To withdraw your question. Please press Star then two we'll pause for a moment as callers join the queue.
The first question comes from Paul Trussell Who's with Deutsche Bank. Please go ahead Sir.
Good afternoon, and congrats on another great quarter.
Thanks, Paul My first question is just related to the margin outlook for the third quarter and second half overall, maybe just talk a little bit more.
About the puts and takes to the flat to up modest gross margin outlook.
As well as help us think a little bit more.
About why just modest leverage.
When low teen comps in the second half as you leverage some of those strategic investments that you started making last year.
Yes, Hey, Paul PJ. Thanks for the question. So similar to Q2 going forward in back half for gross margin. It's a similar story. We expect continued gains in product margin driven by lower product costs are we you know we don't.
Forecast into a mix benefit but mix has been a benefit for the first part of the year given the strength in our womens pants business, but product product costs remain the big opportunity and if it comes through scale through segmenting, our supply chain up better cost visibility and certainly greater efficiency across our distribution network. So we expect that that to continue.
It takes as you alluded to.
We we will see some occupancy and depreciation pressure as we continue to open stores.
Internationally, which carry higher rents as you know.
But what we also have some product development costs for newer categories, such as broad outerwear and accessories.
So those are those are the puts and takes we see in the back half, but net net we still expect.
Yes, modest gross margin expansion and.
For the year and going forward.
And on this journey.
And on Ash DNA, so we committed to modest Sta leverage.
Last year, we delivered we're committing to this thing for this year and going forward.
We continue to use strong performance to invest in current and long term growth. We are seeing the results from that during Q2, we invested specifically we expanded testing in new growth vehicle loyalty. We continued our investment in our North American online guest experience, we continue to expand our omni capabilities, both in North America and globally.
And that will continue to roll forward in the second half of the year. If we don't do these investments we could see higher SGN a leverage.
For the quarter and beyond but we continue to believe this is the right strategy for the business.
And lastly for me is one of the more impressive part. So this quarter was the brick and mortar comp growth.
Maybe just speak a little bit more about what is leading to the traffic increases and improvement in conversion that you're seeing in store. Thank you.
Thanks, Paul on.
The momentum that we're seeing in the business I really break.
Break it down into three key categories. The first is.
The athletic space in general is very healthy.
Relative to other sectors in both apparel in retail in general second our business has fewer highs and lows relative to other apparel brands.
And we're less dependent on seasonal fluctuations and we have a very healthy core business that is driving our success and then finally in it to me is what the team is doing such a wonderful job that and Thats engineering not growth.
And that's coming from one compelling product to brand Activations and three our continued improvement in our data analytics and digital marketing, where we're testing and learning and developing those strengths within the business. So it's a combination of the health of the space and the success and momentum. The team is doing in terms of engineering that growth and we're seeing that across all international businesses and we're seeing it.
Within not just in traffic, but as you alluded to very healthy conversion numbers, which normally you don't see those to run together.
And that's the work that our store teams are doing on guest engagement.
Investing in the educator and I also think it's a reflection of the data analytics as I alluded to guests are coming in craft with what their intent is and we have educators engaged and ready to assist them.
And and all that work is is paying off.
Thanks for the color.
The next question comes from Matthew Boss with JP Morgan. Please go ahead Sir.
Great Congrats on a nice quarter guys.
Staff.
So kelvin maybe on the gross margin what do you see as the multiyear opportunity here or maybe a different way to put it any structural feeling as we think about gross margin considering digital Val pacing store revenues and just the overall control that you have over distribution.
I mean, I think I would you know in our five year guidance and our.
Long term plan that we shared on analyst day is the best guidance that.
That you should use to model and it's what we're building into its a combination of fine tuning.
Opportunities to improve cost to goods as we grow in scale and as we build those relationships with our.
Vendor base second obviously, we're mixing in new categories.
And making sure that we get that balance correctly third we're mixing in new markets.
And PJ alluded to different markets around the globe have a different cost structure.
As well as were expanding our north American business and building.
You know stores that are driving wonderful sales numbers and engaging in gas and offering them. The full product so that full balance across our five year plan. We are committed to we're seeing great success in it.
A lot of that innovation is whats driving our top line and I think the result is we are going to see leverage in gross margin, but it will be more in line with how we've.
We provided guidance.
Over the next coming years.
Great and then maybe just a follow up on the expense front.
So I guess really the question as a best way to speak to the balance between in store cost leverage versus ongoing brand investments I'm trying to figure out is to Q a microcosm for the go forward modest SGN a algorithm and then just one follow up would be on the comps have you seen any moderation as you as you speak to the momentum any moderation whatsoever. In August are fair to say that the momentum has continued through strong.
Well.
The 10 years second question, where we're pleased with the remote momentum can't give too much color on comp, but we're we're we're pleased with where we are and we continue to.
To see strong traffic. So so good news there on your question about as DNA I would not say, it's a microcosm of the the future, but I would say given our store performance, we did leverage channel less DNA.
To a higher degree this quarter, but we also did have higher investment and again we use.
We use the upside of good performance to set us up.
For growth in the coming years so.
I would also say, we'll start to see benefit and we are already are seeing benefit from our prior investments.
That we've made in prior quarters, specifically digital marketing investment has driven guest acquisition the enhancements to our website search browse checkout are driving conversion.
And our investments in data and analytics are allowing for greater personalization.
Closer relationship with our desk. So our prior investments is leveraging and again, that's a that is a model that.
That's been working for us and will continue to to deploy that.
Perfect Congrats again.
Thanks.
The next question comes from Mark Altschwager, whose with Baird. Please go ahead Sir.
Good afternoon, and congrats on the continued momentum.
It was nice to see the trend of lower markdowns continue in the quarter was wondering if you could provide some color on the percentage of your total sales that are coming from markdowns today I think you more most recently commented on some numbers for the holiday period, just curious how that's trending year to date.
It's also wondering if you could touch on what's been happening with some of the ship from store capabilities and how that may be affecting the merge margin trends on the marked out front. Thanks.
Yes, we don't really give out the specific.
Markdown number as you said so it it our markdown activity was lower.
And this quarter and it did contribute to gross margin expansion.
Yes.
Okay, and then maybe just as a quick follow up I was hoping you could comment on some of the trends you're seeing in the broad category been a tremendous amount of innovation there in a bigger marketing focus so curious what your key learnings are from the spring season.
Hi, Mark yes.
We remain very excited about the opportunity within the broader category.
The product team continues to launch and develop product that will launch in the coming quarters and years as we see opportunity to.
Innovate into white space within the category.
And add to our assortment one of the new areas for this quarter that we activate it was a bit of that brand activation and storytelling.
And we saw the guest responded well to it in Q1, we really started to invest in set up the stores, how we merchandise.
Q2, as we continue to roll out a couple of incremental skews, we we got into some of the storytelling Lincoln Park is a pass but an expression of how we want to lean into the category and tell our unique innovative story behind sciences field as well as present.
The athletic broad category to our guests in the different segments that we we see those opportunities. So it is very early for us in broth. This will be a multi quarter multi year.
Investments, we're testing and learning and moving.
Along but the good news is that we're very happy with the results.
And we're equally excited about how we're learning as an organization and whats to come as we continue to make investments.
In this category.
Great. Thank you best of luck.
Thanks.
The next question comes from Kate Fitzsimmons with RBC capital markets. Please go ahead.
Yes, hi, guys congratulations on the strong results.
You've seen amazing strength in the bottoms business in recent quarters I did you say how much women's bottoms were up in the second quarter and I guess, when you parse out that strength between more athletic offering maybe versus more lifestyle offerings like office travel can you.
How do you think about the strength there is it more broad based I, we're just trying to get a sense as to what aspects of the customer's lifestyle. You guys are really appealing to us just how to think about the trajectory of that business into the back half. Thank you.
Thanks, Kate on on the bottoms business.
As you know, it's a core category for us in both womens and mens ending Q2, we saw both of those continue to perform very strong with a double digit comp performance in fact men's outperform women's as we continued to see success in our men's initiative as one of the key power three growth initiatives strengthen women's was really driven by.
Both long styles in shorts were fueling the strength in short by leveraging our core line in fashion free franchises into a shorter in seem bike short.
Which is resonating very well with the guest in men's the APC franchise continued to see great success with existing guests and as a very strong new guest acquisition.
Item and equally seeing success in shorts with the short and the pace Breakered surge. So a very good healthy balanced bottoms business across both pants shorts men's and women's and we continue to have innovative plans that we will be launching to continue to drive that momentum forward and as I alluded before that the team is doing a wonderful job in leveraging the relationships and then broadening if you'd like to share a wardrobe outside of just the bottom business. We're seeing a lot of success in that and that's helping to drive success across.
Many of the other categories and we anticipate to continue to see success in doing that.
Great guys best of luck.
Thank you.
The next question comes from Paul Lechem away, whose with Citigroup. Please go ahead.
Hi, Thanks can you talk a little bit about your average ticket size in North America in store versus online curious to how different the average ticket and fair and how does that compare to what you're seeing in both Europe and Asia. When you look at the stores first online business. Thanks.
Yes, Paul TJ. So average ticket has remained relatively stable and is pretty consistent.
Across.
Channel.
And there are subtle differences regionally, but by and large average ticket is is fairly similar.
Gotcha, and then can you talk about the tops to bottoms ratio, where you are on the the men's business.
Where are you in the women's business and where do you hope to be longer term in each of the genders. Thanks.
Yes, so the men's business penetration has picked up given the higher growth rate. It's in the low it was in the low twentys approaching the mid Twentys.
So that trend will will continue but that while the men's business is growing at a at a high rate the women's business is growing pretty steadily as well so.
Hard pressed to put specific penetration numbers on on a given both businesses are growing.
Together, so, but but men's has has picked up.
Hey, guys I will talk more about the tops to bottoms ratio within men's and the same with Dan Women's if you can speak to where they are today versus where you count Yep, sorry, Paul We don't we don't really share we don't share that.
But but bottoms is predominantly.
But the ratio.
Bottoms tops is obviously much higher.
All right. Thanks, good luck.
The next question comes from Kimberly Greenberger with Morgan Stanley . Please go ahead.
[noise] great. Thank you so much I was hoping Kelvin you could just talk about your business in Asia. It sounds like even with the slight deceleration in some of the economies over there your numbers have been.
Absolutely fantastic.
Is that right.
I heard you talk about the strength in digital but it sounds like the stores are.
Really good so I'm just wondering if you can talk to us about if you've seen any sort of change in trend there and perhaps you're just so early growth stage that you can sort as you're outgrowing what appears to be a very slight slow down there and then PJ can you just remind us what your current exposure to China sourcing is.
And how we should think about the.
Leverage or not terrorists given the risk that we could see them move higher.
Any quantification you can give us on that side would be helpful. Thanks.
Thanks, Kimberly in in terms of our APAC business in particular I'll start off with our international business. Overall remained very very strong in Q2 after a very strong quarter one.
And remains that leading into a into Q3 as you know.
Steward was put in to the role working with both.
The existing leadership of Ken and Garrett to.
To really continue to put the focus on that business in early but we're seeing great success of the strength of that leadership team coming together shared learnings.
In working with Celeste and her team to really bring.
Key learnings across the globe and driving the business within a pack, it's a balance across both stores as well as ecommerce.
And that's what's so exciting we opened up eight stores in APAC in Q1 and another one in Q2.
And plan to continue a very aggressive back half we opened the year with 15 in China, We plan to end the year.
25 to 30 stores so.
We're excited about the balance guests are responding to both division of the sweat life and the product and yes. It's early for us in the in our growth journey, but I think it's the strength of the product and in the community model that is resonating in that market. That's also helping to fuel our business through through these quarters. So.
It's exciting to see.
And Kimberly this is ray J. to answer your question on China, Tara. So just as a reminder, our our direct exposure to China is relatively small with approximately 6% of our finished goods.
In scope for for US tariffs that percentage is down considerably given how we have diversified our vendor base, we've never had more flexibility than we do today in our supply chain. So going forward, we do not expect it to be a big impact to the business.
In terms of quantifying it I'll just reiterate that we guided on the last call. We expected a four to five cent impact in the back half year weighted towards Q3.
We did incur a penny of that in Q2, we.
We do see an additional four cents in the back half, but more equally weighted given the delay in the tariffs.
But it's a situation we constantly monitor it.
We have air freight and as it has in it.
A hedge to ensure that we deliver for our gas, but but again this is a.
An issue that we.
That we feel is highly manageable for us.
Terrific. Thanks, so much.
The next question comes from Ike Boruchow with Wells Fargo. Please go ahead.
Hey, good afternoon, everyone Calvin one for you on loyalty.
See you expanding at Chicago, I know you can't give us too much detail, but I guess my two quick questions would be could you may be the most interesting are exciting thing that you've learned thus far in the small town and then if things continue to progress in the right direction to you once a reasonable timeline that this could actually go.
You know across the U.S. or across North America, and then a quick one for PJ just on the supply chain de leverage on the gross margin I know you have the new.
DC in Toronto, and I think that recently opened how should we think about the leverage on supply chain in the back half and wind when does that headwind maybe start to flatten out thanks guys.
Thanks Ike.
Two great questions on the first.
What's been what's been quite honestly a lot of fun.
In now.
In the learnings from the test markets are there there are a number of aspects of how the guest is interacting with the program that we're really excited to see the two that are that come to mind that probably we didn't anticipate to be as strong in the test markets.
And that's not our that is one the percentage of new guests to move I mean that were seeing through the membership program in the second is the penetration of men's in the program.
So we kind of went in expecting in a pilot you know in these contain markets that it would definitely appealed to our high value guest.
Which it has but to see it be another acquisition to acquire new as well as an acquisition for mens.
Was not something we initially anticipated.
And has been really encouraging among many other aspects.
As you mentioned, we launched in Chicago, we're excited to be in that market and we're going to continue to test and learn and roll out we're going to expand more in 2020.
And then really hit its stride probably in 21, we'll share more as we as we confirm our rollout plans, but it's early but very positive and we are continuing and will continue to expand to more markets in 20 will be bigger than 19 as will a 21.
It's TJ to answer your question about the supply chain and the gross margin impact. So yes. The startup in the Toronto DC has had an impact and has caused some modest de leverage.
That ship, that's due to the fact that yes, it's ramping up and we're incurring some costs and some growing pains. There we expect again a modest.
Impact associated with that as the facility scales, but it should we expect it to leverage thereafter.
Thanks, guys.
The next question comes from John Kernan with Cowen. Please go ahead.
Hey, Good afternoon, let me add my congratulations.
Thanks, Sean.
You provided some very helpful.
Commentary and guidance on international profitability at the Investor Day answer just wondering given the topline strength.
How international profitability is trended relative to your expectations. So far this year and I just have one quick follow up on Europe .
So with regards to international profitability.
We're pleased with the progress we're making in all of our regions.
We are profitable from an international standpoint, so last year, we did generate profit and our our China business is profitable our Asia business is profitable and our Europe business, which is.
Still generating a modest loss is quickly marching towards profitability. So we're on plan there and we do expect to continue to scale and.
Achieve profitability improvement in line with how we we guided at analyst day.
Got it and then just on Europe , I think up 35% in the quarter.
You talked about some brand activations like the sweat life Festival assist any more comments on how Europe is scaling seems like you are more.
It seems like you're a little bit more excited about the region right now and some of it certainly some of the growth back that up thank you.
Thanks, John I was.
I was just with garrison team a few weeks ago, and I would say across the management team, we're quite excited about the success.
Of our business in Europe , and what the team is is executing and how the guest is responding there we've been longest in in London, and we're seeing a real healthy.
Business driven out of that but at the same point you know the other countries. We've expanded two are resonating in Q2, we launch sites in Germany and France.
In in local language and the guests are responding well to that continue to open doors. We opened our first full line in Paris in August .
And as as PJ indicated we're very close to the.
Profitability, Mark and the team is doing a wonderful job in recruiting guests in building that business and it's going to be a region that plays a big part in our international expansion and the commitment.
And the goal around the power of three of how we're going to quadruple it and we're seeing some of that success today.
That's excellent thank you.
The next question comes from Michael Binetti, whose with credit Suisse. Please go ahead.
Hey, guys.
My congrats on a great quarter.
Just wanted to I guess.
Sort of fairly specific question on the margin so the brick and mortar comp up 10%, obviously very strong any compare I guess I'm curious about the deleverage on the occupancy line I know theres some lease accounting noise in there and then you mentioned the international mix and probably some double rent during rig relocations, but I'm curious if you could help us just look ahead.
A little bit on the underlying dynamics there what is the you know the underlying leverage point on that line as we think ahead to things like accounting Rolling off next year, and then I have a follow up.
Yes, I think what we.
What we pointed out in the past is that yes.
Occupancy is going to be a headwind going forward as we are.
Opening new stores.
Particularly internationally.
But we've also.
Incurred cost associated with building out our our distribution network so going forward.
No there is.
A headwind there, but we expect to scale and leverage that over time as stores ramp up as Dcs ramp up.
The the real story in the gross margin is that product margin is remains strong and will continue to be the driving force behind gross margin but.
We do see occupancy.
And and depreciation in the gross margin line as a month.
Okay Fair enough and then.
I guess with the comments on on international on the some of the color you gave around profitability by the different markets.
I think the longer term plan along with quadrupling. The revenues there was to go from I think pretty close to breakeven margins in total last year slightly positive.
Two I think 10% to 15% over five years.
A big move obviously, but I'm I guess would you help us think ahead a little bit on how you see the inflection in the overall margin for international maybe where it's coming where do you see the profitability contributing the most first and then is the overarching strategy there similar to the corporate strategy, where look we're going to spend back any upside on the on the topline to smooth it out or is it back half weighted within the five year window front half weighted for any reason and any kind of color. You can help us think about as that seems like a big contributor here for the next few years.
Yeah. So.
The big driver will be.
APAC region, and specifically, China, So as that business continues to show it to ramp up that will drive a lot of the profitability Europe will be also a contributor.
So.
I do think we're on track to.
To achieve that profitability that.
You talked about.
And as far as.
The business model given the fact that our international business is our fast growing businesses that need fuel, we will continue to reinvest in those businesses as we as we have upside similar to what we've done in North America, given we've seen the results.
We've seen the results with it so.
So hopefully that that question.
Alright, Thanks, a lot and great job on the Lincoln Park store guys.
Thank you operator, we'll take we'll take one more question.
The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.
Good afternoon, everyone and congratulations on the results.
As you think about inventory and inventory growth for the balance of the year. How are you thinking about inventory and air Air freight given those expenses that are wrapped in there and how do you expect there airfreight expenses to be moving forward and then Calvin given the loyalty program and given the events that you're having in the stores are you seeing the translation of the events leading to loyalty members new loyalty members and how his new guest conversion compared to what it had been thank you.
Hey, David PJ, so to answer your inventory question.
So we feel really good about the inventory position given our momentum.
We did expedite some fall merchandise using airfreight and we'll continue to use air freight as a tool or a hedge if we start to see.
Issues in the South East Asia region associated with that the volatility.
Around tariffs, but from a pure inventory standpoint.
We are a low low seasonal business.
And our aged inventory is really low so we feel really good about how our inventory is physician.
Both at the end of the quarter and going forward.
I didn't I know I'll, just add a few points to your second question.
We continue to see very healthy.
Metrics with our loyal or high value guest in terms of retention and engagement.
In the brand.
Equally our new guest acquisition.
Remains very strong quarter to quarter.
And they're a big part of the conversion numbers that that you're seeing and we're celebrating across both store and on E Commerce.
And one of the areas of success is in the migration of this new guest into becoming a high value where.
[noise] healthy portion of our growth is coming from that migration. So we're seeing very good very healthy new guest acquisition numbers. The teams are doing a wonderful job in migrating them up.
Through the percentage of their spend and then our retention of our high value gas is very high.
And very solid and remaining and a very strong stable growing position. So in general when I look at the metrics of our guests.
They are they're healthy across all of those three very important believers and we have many initiatives through both our digital and CRM to continue to improve and strengthen and the notion of events and our vision of the sweat life.
Just reinforces that since either how we acquire new guests as I shared through membership.
Events is how we equally share.
And acquire gas through our 10-K events in London.
Sorry in Toronto.
And in Edmonton and in San Diego. These are great acquisitions and then.
They're they're migrating up so very healthy across the board.
Thank you.
This concludes time allocated for questions on today's call I would now like to turn the conference back over to the presenters for any closing remarks.
Thanks, everyone for joining us we appreciate the time and we look forward to speaking with you in a few months when we report our third quarter results. Thanks.
This concludes today's conference call you may disconnect. Your lines. Thank you participating have a pleasant day.