Earnings Call: Q2 2019

Aug 30, 2018

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. 2nd Quarter 2018 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. I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica Inc. Please go ahead. Thank you and good afternoon. Welcome to Lululemon's 2nd quarter earnings conference call. Joining me today to talk about our results are Glenn Murphy, Chairman of the Board Calvin McDonald, our new CEO Stuart Haselon, COO PJ Guido, CFO Celeste Burgone, EVP of Americas is also with us and will be available during the Q and A portion of the call. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward looking statements reflecting management's current forecast of certain aspects of Lululemon's future. These statements are based on current information, which we have assessed, but which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10 ks 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 release. The press release and accompanying quarterly report on Form 10 Q are available under the Investors section of our website, www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our Investors site, where you'll find a summary of our key financial operating statistics for the Q2 as well as our quarterly infographic. Today's call is scheduled for 1 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 Glenn. Thank you, Howard, and good afternoon, everybody. We had a very strong Q2 and because of that, I thought I'd just make a couple of brief remarks at the beginning and then pass the call on to a number of speakers you're going to hear from today, including our new CEO, Calvin McDonald. Obviously, I want to acknowledge the performance. The Q2 of this fiscal year was very strong, and it was very strong across all facets of the business, whether that's across different product categories, our channels of contact with our guests and across all our markets. It was just a very impressive second quarter result for Lululemon. And because of that, I want to thank people who made the contribution and made this happen. That's our management team, that's our educators and that's all other employees, whether distribution center, call centers, in our offices, who work together to produce these results. In particular, I do want to single out Celeste, Stuart and Sun, who stepped in and basically stepped up 6 months ago. And their leadership to the people I've identified earlier across our entire company, their leadership, their focus really played an incredible role in the results that you're going to hear about later on. So I want to thank them on behalf of the Board of Directors. And now I want to welcome Calvin McDonald. This is Calvin's first call with investors and analysts, first of many. He's really in inevitable position because the business is performing well and he will agree and so will everybody else here from today. There's always more we can do. There's always more opportunities for our business. But because we're in a strong position today, Calvin can take his time. He can do a lot of listening. He can meet with people. He can understand our strategy and our processes and our operations and what makes the company tick. So that's a nice position to be in. And he has full confidence of the Board. We did a very exhaustive search and we really believe he clearly is the right CEO for the future for the company and will take us from strength to strength. So with that said, I want to welcome to the 2nd quarter analyst call and investor call, Calvin McDonald, the new CEO of Lululemon. Calvin? Thank you, Glenn, for the introduction and for the support you have provided me as I jumped into my new role. I'm very excited to speak with you from Vancouver as a member of the Lululemon team. As this is only my 2nd week on the job, I'll keep my comments brief. 1st and foremost, I'd like to congratulate the team on the tremendous results we've just posted for quarter 2 and the strong momentum we're now seeing into quarter 3. I'm very excited to now be part of helping to create the next chapter of growth at Lululemon as we continue to build on this success. Stuart and PJ will take you through the details of our quarter 2 results and forward guidance. But first, let me offer some color on what attracted me to Lululemon and my initial impressions after 10 days on the job. Being the CEO of Lululemon is my dream job. I've chosen to focus my career on retail and brand building because I love to work with people, create product and innovate. I'm also an athlete. The opportunity to combine my professional passions with my personal ambitions is what makes this opportunity so exciting. Firstly, the people of Lululemon are an especially inspirational group, which has been very clear to me over the past 2 weeks. The unique culture with its focus on leadership, personal development and driving results is at the root of our success. It's both humbling and energizing to join such a talented group and I look forward to working with the leadership team to help take us to the next level. Secondly, the product at Lululemon is exceptional. I've been an avid guest for years and a fan of the product. I believe the quality, fabric, fit and technical innovation stand far above our competitors. It's very exciting to keep building on these unique attributes and help develop into new areas. And finally, the innovation at Lululemon is a core component of the DNA. The brand is iconic and our guests have given us permission to think about how we expand our offering to them in both product and services. When combined with the talent on this team, the future opportunities are very exciting. I look forward to how we continue to develop our guest ecosystem connected via digital across all of our channels and geographies and extending our capabilities in loyalty where we have an opportunity to create something that is first unique and will further differentiate our brand. The combination of these elements, people, product and innovation are really my passion and I'm thrilled to see where we can take them here at Lululemon. Before I pass it over to Stuart, I'll conclude by telling you how I plan to spend my initial time at the company. I feel it's important to meet as many people in the organization as possible. In my initial weeks months, I'll spend time in every part of the organization, in stores, our store support centers, our distribution centers and our guest education centers. My approach is to listen and to learn as much as possible about the organization and our guests from the teams across the company and to become grounded in all things Lululemon. This is an exciting time indeed to be joining Lululemon. It's good to speak with you all today and I look forward to getting to know you over the coming weeks months. And with that, I'll now hand it over to Stuart. Thanks, Calvin. Let me also welcome you to Lululemon. We're really excited to have you join the team and look forward to working with you on our next phase of growth. Our 2nd quarter results mark another important step in the journey toward our 2020 goals as well as the continuation of the top line inflection that began last year and we now see extending into Q3, which is reflected in our sales outlook for the quarter. In fact, we're now tracking to meet or even exceed a $4,000,000,000 revenue goal with men's and e commerce effectively ahead of schedule. Our product assortments and supply chain work continue to exceed expectations, contributing to our gross margin that is now firmly reaching the mid-50s range. This result combined with our solid SG and A management has produced a trailing 12 month EBIT margin of nearly 21%, delivering on our goal of a low-20s operating profit. It's important for our investors to understand that we still see opportunity for margin expansion as we further invest in these already successful initiatives, including expanding our e commerce business, segmenting our supply chain, reducing lead times and expanding our distribution network, we believe our margins can continue to expand into the future. Turning to the headlines for Q2. We saw a broad based acceleration in our business across an array of categories, channels and geographies. We had said on the Q1 call that our great results in that period were not simply a case of lapping weak prior year comparisons. And our Q2 results continue the story, reflecting the success of our ongoing structural investments. Combined comps for the quarter increased 19% on top of a 7% increase last year. This top line growth, along with significant improvements in gross margin and SG and A, delivered an 82% increase in EPS for the quarter. By channel, we saw store comps increase 10% and digital was up 47% versus a strong prior year comparison. This continued strength in our comps reflects the success we are seeing in our guest acquisition that increased 30% in the quarter and is fueling traffic increases across all channels. Specifically in stores, we saw a high single digit lift in traffic, while traffic to our e commerce site grew over 20%. Improved product assortments and better brand and community building efforts, including several successful activations, also contributed to these strong traffic trends. We're also particularly pleased with the ongoing strength in e commerce, which posted double digit conversion and AOV increases in Q2 as our digital business continues to benefit from last year's site relaunch in Q3. Our guest is responding well to the improved experience and we still see opportunities to remove friction and increase efficiency on the site as we continue to improve the search and checkout functions as well as expand further into personalization. Our product assortments also performed well across practically every category in Q2 with double digit increases across women's, men's and accessories. Women's pants, which is our highest margin category, along with men's pants, both posted comps over 30%. And women's tops generated another healthy double digit increase as we gain traction in this category. It is also exciting to see accessories delivering its strongest quarterly comps in the last 5 years at over 20%. And Q2 saw several successful brand activations. An important moment for all of us here at Lululemon was how we celebrated International Day of Yoga. Stores in more than 50 cities around the world hosted accessible yoga classes on June 21, and we donated over $1,000,000 through our HeretoBe social impact program. We're incredibly proud of HeretoBe, which benefits non profit groups that increase access to yoga and meditation for communities that face barriers to well-being. We continue to invest in this program to effect positive change in the communities around the globe where we work and live. Turning now to our growth pillars. I'd like to offer some details on our strategic priorities, which continue to be extending our success in our digital channels, ramping our international expansion with a near term focus on Asia, innovating our product assortments with a focus on accelerated growth in men's and continuing to roll out stores in North America that build on our important store format innovations. Our teams continue to deliver great results across these areas, which is setting the stage for our next chapters of growth. I'll share some highlights on our progress within each of these pillars now. In digital, it's exciting to see our momentum continuing to build. Excluding the warehouse sale from last year's results, the constant dollar comp was 65% for Q2. And as I mentioned, traffic and conversion continue to be strong as both new and existing guests are responding well to our enhanced online experience. Over the last 12 months, we've doubled the number of guests with whom we can communicate. And in Q2, we saw 80% growth in our email file. And we continue to see significant opportunities to enhance our digital guest experience. You've heard us talk about improvements we're making this year in checkout, search and personalization. Let me offer a couple of updates here. In checkout, in Q2, we saw a significant increase in the percentage of guests completing the checkout process, reflecting ongoing tactical improvements to the site. And in personalization, we now have our initial data scientist teams embedded within our brand teams who help deliver insights used to inform and drive our successful Father's Day campaign. We are making steady progress here and expect to see ongoing improvements over the next several quarters. Turning to our international business. Our combined comps in Asia increased 50% this quarter as we continue to build momentum in the region. And importantly, in China, our e commerce business continues to lead the way with a comp increase of over 200%. We launched our WeChat store in China in Q2 and remain on track to launch e commerce sites in Korea and Japan later this year. In Europe, comps were again better than planned and increased in the strong double digits. While we still have much work to do in this region, we're excited to see that our brand is resonating. We opened our 1st store in Sweden in a key destination city in Stockholm. And in London this quarter, we hosted another successful Sweatlife Festival, in which we partnered with 13 studios to offer over 250 classes and attracted over 4,500 guests. Within product, we lead with innovation and continue to find success in our core classifications as we leverage our key franchises, including Align for women and ABC for men. Guests are also responding well to our newer office travel commute styles, including the On the Fly collection, which offers versatile and away from the body silhouettes. Our men's business continues to accelerate, reaching a total penetration of 22% in the quarter, with great new styles planned for the second half. And looking forward to fall, we're really excited for the expansion of our outerwear business. Despite the heat in August, we're already getting great initial reads on our early jacket and outerwear offerings. And our North American stores continue to post impressive results with store traffic accelerating sequentially for the past 5 quarters now extending into the early part of Q3. We opened 4 net new stores and completed 7 co located remodels in Q2. We expect to open approximately 40 new locations in total by year end. In addition, we're seeing great success with our seasonal store strategy with 23 open at the end of Q2 and plans to more than double that number into Q4. We also remain on track with our buy online, pick up in store initiative, which will begin to roll out later this year. Combined with the ship from store and our BVR or endless aisle store app, these omni channel capabilities allow us to better serve our guests while also leveraging inventory across both our store and e commerce channels. I also want to highlight our integrated brand building efforts. We are now better able to combine the power of our community model with the improving power of our digital capabilities to better deliver a message to our new and existing guests. In Q2, building on last year's success, we sponsored 10 ks runs in Toronto and Edmonton. Across both races, we saw over 13,000 runners participate, including 4 Olympians and garnered 9,000,000 impressions on social media. Looking forward to Q3, we will continue our global outreach via a collaboration with Francesca Hayward of the Royal Ballet in London, and we're thrilled about our plans to celebrate our 20th birthday, which started this month and continues through September. Without giving too much away, we plan a truly integrated celebration, which includes digital in store events and a special capsule collection, a fitting way for us to recognize and celebrate our brand over the last 20 years while looking ahead to the next chapter. Before P. J. Provides the details on our financial results, I wanted to offer a few final comments. While we're pleased with our current performance, we're laser focused on leveraging this momentum to enable a strong 2019 and beyond. Specifically, we are making a number of investments in the second half of the year, which PJ will speak to, that will help us test strategies to potentially scale into next year. These tests consider multiple parts of our business, including experiential retail, digital guest engagement and conversion drivers across all channels. More to follow on this, but we're excited to build on our current success with these investments to help shape our future. And finally, I'd like to thank Glenn for his support during our transition period, and I especially want to thank Celeste and Son for their invaluable leadership in driving these incredible results. We're now excited to have Calvin on board and look forward to supporting his transition. And importantly, we'd all like to express much gratitude to our teams and our educators in particular around the world. It is only through their hard work that any of this is possible. I will now turn it over to P. J. Thanks, Stuart. Our brand building efforts, guest engagement and innovative product offering continue to translate into very strong financial performance. Before I offer some highlights of that performance, I will refer you to the financial supplement posted on our investor site for additional details. For Q2, total net revenue rose 25% to $724,000,000 driven by great execution across all parts of the business. In our store channel, we delivered a 10% comp store increase on top of a 2% increase in Q2 of last year. Lululemon branded store square footage increased 13% versus last year, driven by the addition 42 net new Lululemon stores since Q2 of 2017. During the quarter, we opened 4 net new Lululemon stores. In our digital channel, we saw strong traffic and higher conversion that resulted in a 47% comp increase. For the quarter, e com contributed $167,000,000 of top line or 23% of total revenue. I will note that the impact of foreign exchange increased revenues by $2,800,000 for the quarter. Gross profit for the 2nd quarter was $396,000,000 or 54.8 percent of net revenue compared to an adjusted 51.6 percent of net revenue in Q2 2017. The gross profit rate in Q2 increased 3 20 basis points versus adjusted gross margin last year. This exceeded our expectations for the quarter and was driven primarily by the following: a 260 basis point increase in overall product margin resulting from lower product costs, favorability and product mix and lower markdowns versus last year. We are particularly pleased that this increase comes on top of a 260 basis point improvement in product margin last year. In addition, we realized 70 basis points of leverage on occupancy and depreciation, a result of the strong top line results. We also saw a 20 basis point favorable impact related to foreign exchange in the quarter. This was partially offset by a 30 basis point increase in product and supply chain administrative expense. Moving down the P and L, SG and A expense was $262,000,000 or 36.2 percent of net revenue compared to 38.8 percent of net revenue for the same period last year. We are pleased that we were able to deliver leverage significantly higher than our expectations. More efficient spend in both our SSE and store channel coupled with leverage from higher than planned sales generated approximately 280 basis points of leverage. This was partially offset by 20 basis points related to foreign exchange. Operating income for the quarter was approximately $134,000,000 or 18.5 percent of net revenue compared to an adjusted 12.8% of net revenue in Q2 2017. This represents a marked improvement in overall operating profitability of 5 70 basis points. Tax expense for the quarter was $40,000,000 or 29.5 percent of pre tax earnings compared to an effective tax rate of 29.9 percent a year ago. Normalized for charges related to last year's Aviva restructuring, the adjusted effective tax rate for Q2 2017 was 29.6%. Net income for the quarter was approximately $96,000,000 or $0.71 per diluted share compared to earnings per diluted share of $0.36 for the Q2 of 2017. Excluding charges related to the Veeva restructuring, adjusted EPS in Q2 2017 was $0.39 Capital expenditures were approximately $50,000,000 for the quarter compared to approximately $30,000,000 in the Q2 last year. The increase relates primarily to IT investment in supply chain, data and analytics and further enhancements to our e commerce platform in addition to new store bills and store renovations. Turning to our balance sheet highlights, we ended the quarter with $778,000,000 in cash and cash equivalents. Inventory grew 24% in line with sales and was $393,000,000 at the end of Q2. Pursuant to a $600,000,000 share repurchase authorization put in place in June, we repurchased a total of 3,400,000 shares at a total cost of $406,000,000 during the quarter. This included our participation in the block trade executed by one of our largest shareholders, Advent International. As part of Advent's total sale of 10,000,000 shares, we were able to repurchase 3,300,000 shares at a total cost of approximately $400,000,000 Due to the opportunistic timing of the trade, we used a combination of available cash and short term borrowings to fund the repurchase. As a result, we ended the quarter with $100,000,000 of debt under our revolving credit facility, which has since been fully repaid. We expect to end the year with a debt free balance sheet and continue to evaluate further share repurchases through a broader capital allocation lens that balances working capital investments and shareholder return considerations. We had $193,000,000 of remaining authorization under the current share repurchase program at the end of Q2. Turning now to our outlook. Given our momentum and the recognition of what is currently working to drive our business, we are taking up our guidance for the year. And as a reminder, 2018 is a 53 week year for us. For Q3, we expect revenues to be in the range of $720,000,000 to $730,000,000 This is based on a comparable sales percentage increase in the low teens on a constant dollar basis compared to the Q3 of 2017. This also assumes 10 new store openings in the quarter. We anticipate gross margin to increase by approximately 100 basis points versus Q3 of last year. Although we are anniversarying strong increases in product margin, we are still very focused on further gross margin expansion through incremental reduction in average unit cost driven by ongoing supply chain initiatives and scale efficiencies. We expect to deleverage SG and A in Q3 by approximately 100 basis points. As you think about SG and A, please recall our comments from prior earnings calls regarding our expectation for SG and A pressure in Q3 related to strategic investments, including technology enhancements, data analytics, channel innovation and guest acquisition, the impact of which is heavier in Q3. Additionally, the strong momentum we're seeing in our business offers us an opportunity to further fuel growth in initiatives that are working for us as well as testing initiatives across guest and channel that have the potential to become additional revenue drivers going forward. Assuming a tax rate of 30% and 133,000,000 diluted weighted average shares outstanding, we expect diluted earnings per share in the Q3 to be in the range of $0.65 to $0.67 versus adjusted EPS of $0.56 a year ago. For the full year 2018, we now expect revenue to be in the range of $3,185,000,000 to $3,235,000,000 This is also based on a comparable sales percentage increase in the low teens on a constant dollar basis. We expect to open approximately 40 company operated Lululemon stores in 2018. This includes 20 to 25 stores in our international markets and represent a square footage increase in the low double digits. We now expect gross margin for the year to expand 100 to 150 basis points in 2018, primarily driven by the continued product margin improvement and leverage on occupancy and other fixed costs. Despite the investments we are making in Q3 to fuel future growth, we are still expecting SG and A for the full year to leverage modestly as we continue to realize efficiencies within our cost structure, while leveraging investments in technology, brand building and people. We now expect our fiscal year 2018 diluted earnings per share to be in the range of $3.45 to $3.53 Our EPS guidance is based on 134,000,000 diluted weighted average shares outstanding for the year. We also expect our effective tax rate to be approximately 30% in 2018. We continue to analyze the impact of U. S. Tax reform and its overall implications for capital deployment. We have assumed the Canadian dollar at $0.765 to the U. S. Dollar for 2018 as well as Q3. We continue to expect capital expenditures to be approximately $240,000,000 to $250,000,000 for the fiscal year 2018. Increase relative to 2017 reflects a ramp up of our store renovation and relocation program, increased store openings in international markets, technology investments and other general corporate infrastructure projects. In closing, I would like to call out our store, digital and product teams who are all working in unison to elevate Lululemon globally. I too would like to thank Glenn for his leadership during this pivotal period and also welcome Calvin to the team. There's a great deal to be excited about around here and it is not very hard to acknowledge that the best days for this company have yet to come. And with that, let's open the call for questions. Operator? Thank you. We will now begin the question and answer session. The first question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead. Great. Thank you so much for taking the question. You've all delivered a really stunning level of acceleration in your comp performance. And it's not like 2017 or 2016 comps were terrible by any measure. But the acceleration is just so striking this year. And I'm wondering if you can sort of unpack it a little bit for us and help us understand what has really changed in the business that has driven this really accelerated level of growth? Anything that you could sort of any color you could add, I think, would be helpful. Thanks. Hey, Kimberly, it's Stuart. So let me speak to your question. So it really is a story around traffic in our stores. And with our e commerce business, it's a story of traffic and conversion. And the underlying drivers of those traffic results are important to note. We mentioned on the call that we've seen 5 quarters of accelerating traffic trends in our stores, and that's not slowing down as we now enter the Q3. And we've spoken about this to a degree on prior calls. We did launch or implement new guest engagement strategies really last year. In particular, in Q3 of last year, we implemented new technology at POS that enabled our store teams to more effectively engage with our guests and capture email and capture information, making them a part of our guest file and enabling us then to enroll them in digital communications, digital marketing that we just didn't have before. At the same time, we have raised our game, grown more sophisticated with how we are in fact engaging in digital marketing. We're leveraging new CRM capabilities. We're taking the initial steps in data analytics to be able to leverage personalization strategies into how we're engaging with our guests. That is driving traffic both to our stores and to our website. And then on the e commerce side, I'm sure you'll recall the recovery efforts that we went that we followed we pursued rather last year, which culminated in the relaunch of our website at the end of the third quarter. The improvements to the website has been really the drivers of the improvements in conversion that we've seen. That story extends into 2018 and it will likely extend into 2019. So we focused on checkout, search, personalization on the website as the areas where we can continue to drive those conversion gains. And as you look at the 2nd quarter, if you exclude the online warehouse sales from last year, the comp on e commerce was really driven equally by traffic and conversion. So those are the strategies that we have developed and implemented in the recent periods that has delivered this acceleration in our traffic trends. And so we're excited to see a number of ways to extend those to make them bigger, to amplify them, to take them forward, and we feel like we're really just getting started. Terrific. Thanks and well done. The next question comes from Sharon Zackfia of William Blair. Please go ahead, Sharon. Hi, good afternoon. I wanted to talk a little bit about the supply side of the equation. So I think, Stuart, at our conference, you had talked about the new distribution center, which I think is going to be in Toronto as well as the Haiti manufacturing facility from a third party. So can you kind of help us understand or frame how much faster to market you could be with some of these new resources? And particularly as you get into Christmas where you're so high volume, if that will have any impact by that timeframe? For sure. There are really 2 separate issues, Sharon. And the first one with regard to the DC, the new DC that we're opening outside of Toronto will really help us improve the service commitments and the service experience of our guests in Eastern Canada. It will create additional strategic flexibility for us to evaluate more broadly across North America how we leverage our distribution footprint, and that's something that we continue to explore and we can speak with more specificity in future calls. So we're excited about that, and that will yield a benefit in our gross margin. And we'll likely be able to, again, speak with more specificity there into the future. As we look at the sourcing strategy and how we're leveraging nearshore capabilities, and you mentioned Haiti, and that's among a number of elements of that strategy that we're pursuing. We're very excited to be able to begin exploring and implementing a meaningful portion of our supplier base in geographies that will help us shrink and shorten our supply shipment times. So that's a result that we're just now beginning to see some of the benefits of. I would see that as a multiyear strategy that we haven't yet quantified exactly how much in terms of the time advantage it will create for us. But suffice it to say, we're very excited about it. At this point, in the Western Hemisphere, meaning the Americas and Caribbean, we source about 9% of our total production. And so we're excited to see that grow into the future. Thank you. The next question comes from Matthew Boss of JPMorgan. Please go ahead. Great. Thanks and congrats on another blowout, Fritz here. I guess, Stuart, your trailing 12 month gross margin is now in the mid-50s, which would be the higher end of the initial 2020 plan. The 21% EBIT margin would be at the lower end of the low to mid-20s that you originally laid out. I guess help us to think about the operating margin opportunity as we think about the next 2 years, maybe just split between what you see on the gross margin front versus SG and A leverage opportunity? Sure, Matt. We're really thrilled with the results that we've been able to generate in gross margin. It's exceeded our expectations. And we do see it as the new margin architecture that we'll take forward. We see additional benefits as we've said on the call in a number of areas within our sourcing strategies, our distribution strategies and then just leveraging the fixed cost elements of our gross margin from sales increases. So what I would say is the there's modest improvements that we see being able to capture in both gross margin and SG and A over the next couple of years, which would accrue to modest improvements in the run rate of our EBIT margin. And I think we're excited about our strategies and the potential of the business beyond 2020. And that's something that we're looking forward to speaking with our investors in more detail at year end as we will be able to share an updated view of our long term plans. But at this point, comfortable with modest improvements continuing for the next couple of years. Great. And then just a follow-up on the e commerce. So e commerce accelerated pretty materially on a stacked basis. I guess as we think about that $4,000,000,000 2020 plan and beyond, I guess any change in the size or mix of e commerce? Just the best way to think about the size and mix of e commerce in that $20,000,000,000 $24,000,000,000 maybe versus how it was originally laid? And just the other piece would be the profitability delta among channels. How best to think about that? I think from an e com standpoint, right now, we see continued acceleration or a continued outpacing of our store business with our e commerce business, if you will. We continue to expect to see e commerce grow faster than our store business. The composition of that will be largely the same across both channels in terms of the mix of product categories. And we also expect to see benefits from the mix on the EBIT margin line as the e commerce business continues to grow to go bigger. It is a more profitable business we'll have a mixed benefit there. And again, I think we'll be able to reset our view of the long term at year end when we give that update on the long term vision. Great. Looking forward to it. The next question comes from Brian Tuncay of RBC Capital Markets. Please go ahead. Thanks. And I'll add my congrats as well to the team. Curious, I guess, about the implied 4th quarter gross margins, I think only up, I don't know, 20 basis points. Is that a function of either tougher supply chain compares or a mix of business maybe away from the bottoms to more outerwear? Maybe just talk a little about as we look ahead to what's implied in the Q4 gross margins. And then just curious on the international side, as you mix in more digital versus bricks and mortar, how you're thinking about the time it would take for the international business to be less dilutive? Is there a revenue target or sales or number of stores? Anything to help us think about when that could be more similar to the domestic profitability? Thank you very much. Yes. Hey, Brian, it's T. J. So on your question about Q4 gross margin, yes, I think what we've been seeing is higher IMU given our women's pants business has really been on fire. We are not planning for it to be as robust as it has been. If it does continue, we have the inventory to meet demand and we have the flex in the business. But that's one thing. And then the other thing you mentioned, it is a tougher compare to last year, the gross margin. And yes, we I think the combination of those two things, hopefully, that helps you kind of plug your model. On the I'll ask Stuart to answer the question about international. Yes, Brian. We remain really excited about international. We're seeing strong growth in Asia in particular. We expect as that business grows, it will improve or it is improving from a bottom line profitability standpoint. You'll recall that we had mentioned that Asia will be soundly profitable, generating strong profits this year. So that in combination with the profits from Australia, the international business overall inclusive of Europe is profitable this year. And so that will only continue to accelerate as we capture scale economies in Asia. We're also very encouraged by the Europe business and the double digit comps that we're seeing there and maybe I'll invite Celeste to offer some comments. Yes. I mean in Asia to start with, we ended the quarter with a 50% combined comp, really seeing strong momentum in both stores and digital, which is good to see and makes us feel good about the momentum we also have going into Q3. In China, we launched our WeChat store, which we're really happy with the initial results, and we have an aggressive plan for how digital will lead us into the future in China specifically. A really big highlight from a community perspective, we have Unrolled China, which happens beginning this Saturday and going through the month of September. For Unruh China, we'll take yoga across China, which stops in 13 key cities, including Shanghai, Nanjing and other key Tier 1 and Tier 2 cities. So again, really excited about the momentum we saw in Q2 and really continuing to double down in both stores and digital to shift into the momentum that we know is possible for us in Asia in particular. And in Europe, again, a strong Q2. A couple of highlights, I mean, that business really also supported through a very strong core London business, which has been our focus. In the quarter, we had Flat Life Festival happening, which brought together 4,000 people for a day of development sweat and community. So really happy with those results. And Regent Street, just for an example, actually finished the quarter with a comp of over 50%. So really excited about, yes, what we're seeing in terms of momentum in both markets, and we have a lot of plans in terms of really doubling down and continuing that growth. The next question comes from Mark Altschwager of Baird. Please go ahead, Mark. Good afternoon. Thank you. I wanted to ask a question of Calvin, if possible. Sephora really has been a leader in personalization and merging the physical and digital shopping experience. So I was hoping you could speak to your view of Lulu's opportunity on those fronts and really what the vision your vision for what Lulu could look like in 2 to 3 years' time and whether you think an acceleration in digital investments is needed to get there. And along those lines, I think it was mentioned that some strategies that are being invested in right now to test, I guess, some things for next year, if you can maybe speak to the top couple that we could look forward to? Thank you. Great. Thanks, Mark. Well, why don't I start off I'll hand the last part of the question over to Stuart. But I'll start off with sharing some of the similarities that I think exist between Lululemon and the Sephora business. And the first one is the culture and values of both organizations. Lululemon is made up of an incredible strong talented group of individuals that are highly engaged and that's across the entire organization. And retail is a people business and when you have that level of engagement from stores to store support center, our ability to bring this brand to life and continue to build and develop it as a love mark is very unique in retail and it's something that both organizations share. There's this notion or spirit of a disruptive innovator and I mentioned it that's core to the DNA and at Lululemon it is really throughout the entire organization. If you go back 20 years from how we came to be in that disruption and what was innovated to today, it lives throughout the organization and it is something that is within how we do things and it allows us to just approach problems differently and to think differently and it's a very strong similarity. 3rd, I'd say both organizations put the guest at the center of all decisions of how we think about solving problems, how we think about growing and developing and innovating. And I think that's key to the success of the business today that barriers and silos don't truly exist in the organizations. It's all about what's right for the guest regardless of the point of view or the areas of the business that that leader may be leading, how they come forward is critical. And finally, and it builds to, I think, the point you're making, which is both have the ability to be exceptional and are exceptional experiential retailers. The product logically extends itself to creating something truly unique in this space where it's that connection between both heart and mind and how we activate that product through experiences only enhances what it is we sell and we can do it through unique experiences that are truly differentiated and take full advantage of the relationship we have with our guests and the model that we have. So for me, there are kind of similarities and you alluded to some of the successes that we had over the 5 years that I worked at Sephora and I believe many of those the notion of creating this experiential ecosystem that connects across all of our channels and how we think of digital to do that exists at Lululemon and it has more importantly the core foundation to not only celebrate where we are today, but to think about how we continue to extend and build that forward. So I'm super excited about those core foundational strengths. There are a ton of similarities, both in how the organizations are wired, but how the guests interact with the brand and the permission that the brand has. And that's what I am really excited to learn, to listen and then work with this leadership team to author our next chapter of growth beyond the 2020 plan, which is equally exciting. And I'll let Stuart sort of comment on progress to that. Thanks, Calvin. Yes, and you guys heard P. J. Mentioned in the prepared remarks, we're making we had planned a number of investments that we're executing in important areas of the business, data analytics, product, guest engagements, that account for about half of the deleverage, that we described. I'd say there's about another quarter of the deleverage that's related to more opportunistic tests that we have pursued in light of the strong business momentum that we have and that's in areas that includes additional digital marketing investments, new elements of our seasonal store strategy, new store conversion tests and an interesting holiday delivery test. So all those are things that we're excited to have the opportunity to pursue. And the balance of the deleverage is really related to FX gains that we're now lapping. What I would say is if you exclude those elements, we would certainly be offering leverage on the low teens guidance that we offered. And so it's really an opportunistic place that we're in to be able to pursue these investments given the strength of our profitability gains. Thanks for all the detail. The next question comes from Dana Telsey of Telsey Advisory Group. Please go ahead. Good afternoon, everyone, and congratulations to the whole team on such tremendous results. Quick question, Calvin, the accomplishments that you've had in previous positions, and I've studied and watched some of the things you've done, whether it's loyalty programs, how do you think of what you've had from previous positions to help Sephora to help Lululemon? Whether it's the loyalty programs, what do you see out there as some of the opportunities? And then Stuart, as you talk about some of the new experiential influences that the business could have, how do you see that in terms of the real estate landscape? Thank you. Thanks, Dana. I've had a lot of conversations already with the leadership team and the teams across the organization. I would tell you there is a ton of work that has been taken place and a lot of enthusiasm around many of the areas that you've identified as opportunities of strength and opportunities to do even more than we're doing today. And for me, what I've enjoyed and it's been 2 weeks, and I'm intending to take the opportunity over the next 100 days to continue to be curious and continue to work and ask the questions and to listen. But what I've really gotten excited about is the those similarities again between the businesses. And as I share my experiences, my general view is experiences at this point are to be shared and opinions are to be formed. And I'm really sharing the experiences and having incredible conversations with energetic, talented teams that see a lot of the same similarities to continue to build that guest experience through the work happening around experiential, to think about how to further enhance the love that our guests have for our brands through loyalty. And loyalty is just the affection they have for the brand and there's a variety of ways in which we can do that. And digitally, how to continue the great work that the team has done and how we look and think about augmenting and adding to the relationship we have with them and strengthen it even further. So what I would tell you is there is a lot of work that has been happening and people are working towards. And I'm excited about how a lot of the experiences and the work that I did at Sephora is very relevant here and excited to work with this team over the coming period to continue those conversations form sort of the next plan of growth, of which we'll share at a later point in time. Dana, it's Stuart. I'm going to actually pass your question to Celeste on our experiential retail strategies. Hi, Dana. So we've begun to see some exciting potential for expanding our offerings to our guests. We've really started with focusing on Queen Street and Flatiron, and we're seeing exciting potential through these locations. It does show us opportunity for us to expand these ideas more broadly across our business in the future. And to Stuart's point, we have some tests happening in Q3 and Q4, which will definitely allow us to learn more about what's possible for us as we look into the future. And then outside of Queen Street and Flatiron, we're really pleased with what we're seeing in the co located expansions from last year as well as the new ones we've opened this year. In Q2, we opened up 7 co located stores and they are averaging over 40% growth and close to 70% growth in men's in particular since open. This gives us confidence as we look to open an additional 18 this year and more into next as well. And it really allows us to engage with our guests in a bigger and more powerful and more engaging way. So again, kind of one example of how we're testing into experiential and we're really focused on leveraging the different store community work our stores do and the connection to the local ambassadors really allows us to see a great future of going deeper into the experiential world. And again, excited to learn more and share more as we go through that journey. Thank you. Thanks. The next question comes from Paul Lejuez of Citigroup. Please go ahead, Paul. Hey, guys. Thanks. Stuart, can you talk about the pipeline for store openings in 2019? What's already locked and loaded in terms of the mix between U. S. Versus Europe versus Asia? And then Calvin, I'm curious, I'm sure you come into the organization with some ideas of what the next level looks like. I'm curious where you think Lulu might actually be punching below its weight as you think about the next level? Thanks. So Paul, it's Stuart. So 20 or store openings rather for 2019, what I'd say is you should think about our real estate expansion from a square footage growth standpoint. And the reason I say that is for the reasons that Celeste just highlighted with the importance of our co located strategy this year and into next year. You're going to see low double digit increases in square footage for us. You're going to continue to see a healthy number of new store openings in North America, although those are diminishing versus prior years, you're going to see an increasing number of new store openings in Asia in particular and international broadly. So you'll see the balance of new store openings shift from North America to international, and you'll see a healthy mix of co located projects and new store projects. So and with that, I'll turn it to Calvin for your second question. Yes, I mean, I will I'll share just a couple of observations that I would have had as a guest. So my experience within Sephora and what that business had built as we doubled it over the time that I was there and scaled it to my experience as a guest. And then I'll end with my first 10 days inside the organization because the views are very different. I think there is and clearly the results support this. There is a lot of good that's happening in this business and the guests are responding in a very positive way, which is driving the results. We all would agree, and when I was looking outside in that, we have a real big opportunity internationally, in particular in Asia, and it's one that the team feels is a growth potential, disproportionate growth for this business and brand. Experiential, how our stores are more experiential than they are today, loyalty ecosystem, how the guest loves the brand today, but how can we build upon that in an even more innovative way and community, which is something that quite frankly, Lululemon created 20 years ago and is such a powerful strength to the organization. And how do we do more? What I would tell you is my 2 weeks in joining in the conversations, these aren't insights I bring that were ahas this organization. They were well aware of their strengths and the opportunities. And this leadership team has been working towards developing and innovating behind these pillars. What I'm excited about is how my experiences in the 5 years at Sephora and the journey that we went through as we doubled the business, as we invested and doubled down and led in some of these areas that I can work with them and the great work that they've already started and begun to offer that next chapter. So I think everybody on the management team is super excited about the results and the plans and where the brand and the business can continue to innovate and go equally I am and these are areas that my experience at Sephora will allow sort of thought partnership with this team as we continue to create moving forward. And that I'm super excited about. Operator, we'll take one more time. The next question comes from Matthew McClintock of Barclays. Please go ahead. Hi, yes. Good afternoon, everyone, and welcome, Calvin. I've heard a lot of good things. I want to talk about women's pants because a 30% comp is truly outstanding and that's on top of several years of really strong results in that business. And you're prudently not expecting that growth or that strength to continue, but you probably didn't expect the strength that you've seen over the last 3 years. So I was wondering how your thoughts on the TAM of your women's business has evolved from this kind of strength? And 2, how you think about share of closet with this kind of strength occurring? Thanks. Hey, Matt, it's Stuart. So you're right. The performance in women's pants has exceeded our expectations. And it's pretty remarkable that the fabric, the Nuvo fabric for our number one style, the line pant, that we just introduced 3 years ago has eclipsed Luan and the Wonder Under that the company was really built on in many ways. So what it speaks to and what the insight that we take from that, the profound insight we take from that is that innovation matters and that where we innovate in fabric and function and technical performance, it opens avenues for growth that in many ways are boundless. So we don't really know how big that market is and would be somewhat shortsighted for us to try to put a limit on it at this point given we've been wrong with our plans certainly this year and the overall success of that fabric and that pant. And you know what, we think we can make it better. And we're already in that work and there are new versions of that fabric that we will be introducing next year into the sequential years. So that is that's one of the things that gets us excited about not only our women's business, but our business overall. So I'm not sure that exactly answers your question. But and I would say, broadly speaking, you heard us mention the on the fly franchise that we're introducing, which is helping us take that technical functionality into our office travel commute offerings. And so much the same way that the ABC pant for our guys has given them a great versatile multi use product that they can take on the plane, they can take from the gym and from the studio. We believe that on the fly will offer the same thing for our female guests. And so super excited with the innovation. I would be remiss if I didn't also offer one additional comment to Kimberly's original question around what's been driving the overall growth trajectory of the business. Our product assortment has gotten remarkably better. So Sun and the work that the design team and the merchant teams have been leading is absolutely a part of the equation in addition to the other things that I mentioned. So we're thrilled at the improvements in color, the texture and print that Sun and the team have been delivering. There's so many exciting new product introductions we're going to see in the second half of the year. Outerwear begins to land in stores and online now. We're really thrilled with how much checking, and there's a number of others that we're really excited for. That's very helpful. Thank you very much, Stuart. This concludes time allocated for questions on today's call. I will now turn the call back over to Howard Tubin for any closing remarks. Thanks everyone for joining us. We appreciate your time and we look forward to speaking with you in about 3 months when we report our Q3 results. Thanks. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.