Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica first 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. Analysts who wish to ask a question may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead, sir.
Thank you. Good afternoon. Welcome to Lululemon's first quarter earnings conference call. Joining me to talk about our results are Glenn Murphy, Executive Chairman, who's joining us via telephone, and Stuart Haselden, COO. We're also joined today by PJ Guido, our new 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 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 or implied by these forward-looking statements due to the 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. 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 investor section of our website at www.lululemon.com.
Before we begin the call, I'd like to remind our investors to visit our investor site, where you'll find a summary of our key financial operating statistics for the first quarter, as well as our quarterly infographic. 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. Now I'd like to turn the call over to Glenn.
Thank you, Howard, and good afternoon, everybody. I was thinking today as I was preparing for this call, I went on to our website where you can find an infographic of our Q1 results. The comment I made on the last conference call about laminating Q4's performance was clearly premature. If you read that on our website, you'll see that our revenue is up 25%. I mean, that really speaks to the deepening engagement with existing guests. Equally important, as we invest in digital marketing, how much we've grown our customer acquisition, whether that's on our email file or bringing people in through our app or through the website organically. I mean, our gross margin expansion was greater than 250 basis points. We're a premium brand, but that is still a phenomenal performance, and that's all about product.
That's the design team, the merchant team, and the supply chain working together in a coordinated fashion to produce that kind of result on the gross margin line. We were able to achieve SG&A leverage of 130 basis points. The business and the leadership team understands we have a growth business here, 25% in the first quarter, growth that is. We know we have to make investments to drive growth and improve our business. At the same time, they're committed to looking for efficiencies, and that's where that performance comes through on the SG&A line. When you put that all together, first quarter performance on earnings per share was an improvement of greater than 70% versus last year.
Our management team is keenly aware that last year's first quarter results were below the standard we set for ourselves and what this brand can actually deliver quarter in, quarter out. If you combine it together and look at it, whether it's a two year way or whether you look at a stack, but when you put the two quarters together, I mean, all key indicators were very positive, whether that's categories, channels, or geographies. We've been looking at this year in general, look at the first quarter and our performance to date, which Stuart will talk about in the second quarter. We know we're operating inside of a good global consumer economy, and the athletic sector continues to benefit from really strong macro trends.
This is not the athleisure trend, which is a trend inside of the larger macro trend, which is benefiting our performance and really the entire sector, which is health and wellness. Even that aside, when you look with that as a backdrop, I mean, the last three quarters have been a stepped up performance for Lululemon when it comes to market share gains, and that's market share gains in our stores and in e-commerce. For me, as I spend time with the team as an interim appointment as executive chairman, the board wants to make sure that the management team just continues to push the business forward. If you look at Q1, if you look at Q4, clearly the data points are that this is indeed happening.
The three leaders we have and the people who work alongside of them are definitely pushing the company and challenging everybody inside the business to move forward. The other part that's important noting for our investors and shareholders and analysts on the phone today, I just came back from a week in Vancouver. I was sort of looking for signs of possible complacency or overconfidence. I can tell you, nobody in Vancouver or in our stores, our distribution centers, or our offices around the world, nobody's doing a victory lap. This is a senior management team who are heads down executing on the 2018 strategic initiatives to take our business to a whole other level. I thought I'd just pause for a second and give you an update on the CEO search. It's progressing well.
We've met with a number of candidates who are both qualified and interested. The whole board is together next week, and at that time, we will be discussing the candidates who have come forward and really getting agreement on how do we take this to the next level and to an whole other phase of the search, which is more getting closer to completion than trying to find who are the right candidates. I think we can now take this search to the next step. Let me close off by saying, on behalf of the board of directors, I really want to thank Celeste, Stuart, and Sun for their stellar leadership over the past four months.
Me personally, I've thoroughly enjoyed working with them and mostly watching them lead our over 13,000 employees and educators who each in their own way have contributed to this latest surge in guest engagement and to the company's overall performance. With that said, let me pass the call over to Stuart, who will take you through more detail on our Q1 2018 performance. Stuart?
Thanks, Glenn. Let me reiterate how pleased we are with the performance in Q1. We are successfully executing on our strategies and seeing consistent results across several key parts of the business that are now extending into Q2 and further setting the stage for us to achieve our 2020 goals. While much work remains to be done, we are finding success in driving traffic and conversion increases in both stores and online across diverse geographies. Importantly, the supply chain and technology infrastructure investments we've made over the last few years offer us a stable platform to grow and scale the business globally. What I'd like our investors to hear is that the success we are seeing now is not merely the lapping of weak prior year comparisons. What we are seeing is important momentum across the core areas of our business in channel, product, and guest engagement.
This momentum reflects the structural long-term investments that we've made and continue to make to drive the comp and non-comp revenue increases that are enabling us to deliver on our multi-year plans. We would further offer that our current results are a validation of these strategies. We now have even more opportunity to accelerate these investments in the areas that hold the greatest potential. Let me offer a few highlights from Q1 that illustrate what I'm talking about. First, in channel, we saw investments in our website and mobile capabilities deliver e-commerce conversion increases of 20%. This was further amplified by traffic increases of 30% that were driven by our improved product assortments and digital marketing efforts. Within our stores, this was the second quarter in a row of positive store traffic, which increased in the mid-single digit range and drove the overall comp results.
We continue to expand our international footprint with store openings in key markets, including Berlin and Seoul. Next, within product, we posted double-digit positive comp increases in our core businesses for both men and women. Bras and accessories achieved double-digit comp growth as well, while also accelerating meaningfully versus Q4. Finally, in guest engagement, we saw continued success in our community and digital strategies, which contributed to a 28% increase in guest acquisition in the quarter, fueling traffic gains across both stores and e-commerce. These efforts combined to deliver a strong financial result for the first quarter, with total revenue growing 25% to $650 million. Our combined constant dollar comp increasing 19%, with stores rising 6% and e-commerce up 60%. Gross margin increasing 270 basis points versus adjusted gross margin last year, as we saw both product margin expansion and leverage on our occupancy costs.
We were able to leverage SG&A by 130 basis points. These results contributed to a 16% operating margin and EPS of $0.55, a 72% growth versus the same period last year. Given this continued progress, we are confident in our plans for Q2 and the remainder of the year, which is reflected in our updated guidance. Looking to the future, we remain firmly on track to achieve our ambition of $4 billion in revenue in 2020. As previously mentioned, the path we're taking to achieve this goal includes product innovation across categories with significant opportunity remaining in men's in particular, expanding the Lululemon footprint in both North America and our international markets, continuing to accelerate our digital business. Let me now offer some color on our progress within each of these growth pillars in Q1 and looking forward.
We're excited about our product pipeline as we continue to drive category-defining innovation and solve problems for athletes. Some examples include our recently developed Out of Mind short liner in men's, made from a lightweight, breathable mesh. This improved liner construction is now offered in our three core short styles, Surge, Pace Breaker, and the T.H.E. Short, which are all performing extremely well now into Q2. We launched our City Sweat franchise for men, which includes a collection of hoodies and joggers made from our technical French Terry fabric. Guests responded well to this collection in Q1. This paves the way for further opportunities in our office travel commute category for men. For women, building on the success of Enlite, we see a compelling opportunity in the bra category. We're developing new styles with varying levels of support to broaden our overall assortment.
In Q1, we launched the Speed Up Bra, featuring a new molded technology, and we have additional styles ready to introduce later this year. We're also excited about our upcoming Embrace Movement collection. This will be a technically driven line of bottoms for women and men offering Zone Compression, fully leveraging our ongoing work as part of the Science of Feel. Expect to hear more about this in the fall when we launch the line. Shifting now to our North American stores. We posted another strong quarter with comps up 6%, driven by an accelerating traffic trend versus Q4. We're happy to see these trends continuing now into Q2, reflecting our momentum in guest acquisition and in-store conversions.
Our stores remain among the most productive in apparel retail, which is the direct result of the passion of our educators, our innovative product assortments, agile store formats, and connection to our communities. In a moment, I'll discuss our digital business in more detail. First, I want to say that a big part of our recent success has been our omni-channel focus on serving our guests and our ability to leverage this across channels. We continue to expand in this regard with ship from store now available in nearly 300 locations. We remain on track to begin the rollout of buy online, pickup in store during the second half of the year. Switching now to our business outside of North America, where we are still in the early innings of one of our most important growth strategies.
Asia continues to lead the way for us. In Q1, we saw combined comps over 50%, with results in China particularly strong. We successfully opened our third and fourth stores in Seoul, Korea, with the most recent opening in the iconic Lotte World Mall. We continue to expect to open 15-20 stores in Asia in 2018 and also plan to launch a local e-commerce site in Korea later this year. In Europe, we saw strong growth as well, with double-digit comps exceeding our plans. In addition to the recent store openings in Berlin and Frankfurt, we added to our presence in the U.K. with a new store in Guildford outside of London. Finally, I'd like to speak to the exciting progress we're seeing in our digital and e-commerce business.
We posted e-commerce comps of 60% on a constant dollar basis in Q1, driven by strong increases in traffic and conversion. While our comparisons get more difficult in each subsequent quarter in 2018, we are pleased to see strong momentum extending into Q2. Looking at traffic, our digital teams are driving high-quality web and mobile traffic, leveraging our email file growth, improving our targeting capabilities, and seeing more return guests. A few stats I'd like to highlight here. Our email file nearly doubled in the quarter. Direct marketing-related traffic to our site increased by more than 60%. We saw an increase of over 50% in transactions made by existing guests. As we are finding success in driving higher traffic levels, we're also delivering a better online experience for our guests. We've elevated the overall guest experience with better landing pages, enhanced content, and improved navigation and merchandising.
We see additional opportunities in this area in the near term. For example, we began streamlining the checkout process in Q1, with further progress planned into Q2 and Q3. As I said on the last call, we are starting to bring data-driven insights into our core decision-making across the business, but particularly within the digital channel. We're currently developing and rolling out more sophisticated and automated tools, which will allow us to take mobile, search, browse, email, and the post-purchase experience to new levels. Overall, we're pleased with our e-commerce results and see progress building towards our strategic goals for this part of the business. A key enabler of our growth and continued guest engagement are the brand activations and events we host in our markets around the world.
Building on our strong brand momentum, in Q1, we celebrated International Women's Day through events in key cities around the globe, including Washington, D.C., Melbourne, and London. In Q2, to further engage with our run-focused guests, we are sponsoring 10K races in Toronto and Edmonton, which sold out in less than 24 hours after registration opened. Earlier this month, I'm excited to announce that we launched our 360-degree run-focused campaign, Let Your Mind Run Free. As you know, one of the hallmarks of our company is our investment in people. We have a long-standing commitment to leadership development, and we continue to roll out programs and experiences for all employees that bring to life the unique aspects of the lululemon culture. Last year, we made a commitment to achieve pay equity for women and men across our organization by the end of 2018.
Nearly 80% of our workforce is comprised of women, and we knew this was simply the right thing to do. I'm proud to report that last month, nine months ahead of schedule, we delivered on this commitment, and we'll maintain this standard moving forward. This puts us in a leadership position among companies across industries. Before I share the specific details of our financial performance, it's my pleasure to introduce our new Chief Financial Officer, PJ Guido. Some of you may be familiar with PJ given his 15 years of prior experience leading various finance functions at Fortune 500 retail organizations. I'll ask him to say a few words now. PJ, welcome.
Thanks, Stuart, a warm hello to all those on the call today. I cannot express how energized I am to be joining such a powerful brand and talented team here at lululemon. I look forward to engaging with our investors and many of you on the phone as well in the coming months. So far, I've spent the last few weeks immersed in the business and getting to know the teams across the company. I have even pulled several store shifts, and I can tell you they are absolutely pulsing with energy and excitement. I look forward to working with Stuart, the entire leadership team, with those of you in the analyst and investor community. Now I will turn it back to Stuart.
Thanks, PJ. Before I speak to our financials, I would also like to thank Glenn for his guidance and strategic counsel, and in particular, Celeste and Sun for their partnership during this important time at the company. Speaking for the four of us, we want to thank our educators around the world for everything they do to bring lululemon to their guests every day. I will now offer some highlights on Q1, but please see the financial supplement posted on our investor site for additional details. As I mentioned earlier, total net revenue rose 25% to $650 million, with the increase in revenue resulting from strong performance across all parts of the business. Our store channel delivered a 6% comp store sales increase on top of a 1% decline in Q1 last year. In e-commerce, we posted a 60% comp increase.
lululemon branded store square footage increased 14% versus last year, driven by the addition of 48 net new lululemon stores since Q1 of 2017. The impact of foreign exchange increased revenues by $9 million in the quarter. Gross profit for the first quarter was $344.7 million, or 53.1% of net revenue, compared to an adjusted 50.4% of net revenue in Q1 2017. The gross profit rate in Q1 increased 270 basis points versus adjusted gross margin last year. This exceeded our expectations for the quarter, with the primary driver being a 120 basis point increase in overall product margin, resulting from favorability in product mix, lower product costs, and lower markdowns versus last year. I am particularly pleased that this increase comes on top of a 380 basis point improvement in product margin last year.
We continue to see opportunities to gain cost efficiencies within our supply chain, enabled by several ongoing strategies across sourcing and distribution. In addition, we realized 120 basis points of leverage on occupancy and depreciation and product and supply chain SG&A as a result of the strong top-line results. We also saw 30 basis points favorable impact related to foreign exchange in the quarter. SG&A expenses were just over $240 million, or 37% of net revenue, compared to 38.3% of net revenue for the same period last year. We are pleased that we were able to deliver leverage above the high end of our expectations. More efficient spend in both our SSC and store channel, coupled with leverage from higher-than-planned sales, generated approximately 290 basis points of leverage.
This was partially offset by 160 basis points related to foreign exchange, with the majority of deleverage due to the lapping of FX gains in the prior period last year. Operating income for the quarter was approximately $104 million, or 16.1% of net revenue, compared to an adjusted 12.1% of net revenue in Q1 2017. Tax expense for the quarter was approximately $32 million, or 29.9% of our pre-tax earnings, compared to an effective tax rate of 32.6% a year ago. Our tax rate came in 90 basis points higher than we initially expected due to refinements in our estimates under the recent U.S. tax reforms. Normalized for charges related to last year's ivivva restructuring, the adjusted effective tax rate for Q1 2017 was 30.8%.
Net income for the quarter was approximately $75.2 million, or $0.55 per diluted share, compared to earnings per diluted share of $0.23 for the first quarter of 2017. Excluding charges related to the ivivva restructuring, adjusted EPS in Q1 2017 was $0.32. Capital expenditures were approximately $34 million for the quarter compared to approximately $20 million in the first quarter last year. The increase relates primarily to new store renovations and relocation capital. Turning to our balance sheet highlights, we ended the quarter with $967 million in cash and cash equivalents. Inventory at the end of the first quarter was $373 million, or 23% higher than at the end of Q1 2017. Turning to our updated outlook for FY 2018 and our outlook for the second quarter. As a reminder, 2018 is a 53-week year for us.
For FY 2018, we now expect revenue to be in the range of $3.04 billion-$3.075 billion. This is based on a comparable sales percentage increase in the high single-digit range on a constant dollar basis. We continue to expect to open 40-50 company-operated lululemon stores in 2018. This includes 20-30 stores in our international markets and represents a square footage increase in the low double digits. For the year, we continue to expect gross margin to expand modestly, primarily driven by product margin improvement and leverage on occupancy and other fixed costs. We continue to expect SG&A for the full year to leverage modestly as we realize efficiencies within our cost structure. As you think about SG&A for the full year, please recall my comments from the Q4 call regarding our expectation for SG&A pressure in Q3.
We plan to make certain discrete investments that will create some SG&A headwind in the quarter. We now expect our FY 2018 diluted earnings per share to be in the range of $3.10-$3.18. Our EPS guidance is based on 136.3 million diluted weighted average shares outstanding. We also expect our effective tax rate to be approximately 30% in 2018. This is slightly higher than our previous guidance of 29% and is a result of the previously mentioned refinements under the U.S. tax reforms. We are continuing to analyze the impact of the changes to the U.S. tax code, including how this affects our overall strategies for capital deployment. We have assumed the Canadian dollar at $0.765 to the U.S. dollar for 2018 as well as Q2. We continue to expect capital expenditures to be approximately $240 million-$250 million for FY 2018.
The increase relative to 2017 reflects a ramp-up of our renovation and relocation program, increased store openings in international markets, technology investments, and other general corporate infrastructure projects. For Q2, we expect revenues to be in the range of $660 million-$665 million. This is based on a comparable sales percentage increase in the high single-digit range on a constant dollar basis compared to the second quarter of 2017. This also assumes three new store openings in the quarter. We anticipate gross margin to increase by approximately 50 basis points versus Q2 of last year. Despite the strong increases in product margin last year that we're now anniversarying, we continue to see AUC opportunities driven by our ongoing supply chain initiatives. We expect to leverage SG&A in Q2 by approximately 50 basis points as we continue to gain efficiencies in our cost structure.
Assuming a tax rate of 30% and 136.3 million diluted weighted average shares outstanding, we expect diluted earnings per share in the second quarter to be in the range of $0.46-$0.48 versus adjusted EPS of $0.39 a year ago. With that, let's open the call for 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 will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question is from Matthew McClintock with Barclays. Please go ahead.
Hi, yes, everyone, welcome, PJ. Doing a bang-up job so far.
Thanks, Matt.
I guess, Stuart, my first question, just high level, trying to understand the doubling in the email file. That seems to be a pretty monumental accomplishment this quarter, given that your email file is pretty large to begin with. Can you give us a sense for how much of that was international versus how much of that is North America?
Yeah, Matt. The email file trajectory has really been exciting and important. The mix of that is largely weighted towards North America. The reason we've seen an inflection in it is we implemented new applications within our POS system in the third quarter of last year with new training for our store educators to be able to be armed in a better way with technology and training to capture guest emails at point of sale. That has been a big part of the inflection in how we have increased the email capture rate. That has then been complemented by the improvements in the website that were a part of the relaunch at the end of the third quarter last year.
The combination of the improvements in the website and the improvements in the point-of-sale execution in store has really been what's been driving that inflection and acceleration in the email capture rate. We'll lap some of those changes really as we get into the fourth quarter of this year. We have initiatives beyond that to continue to fuel increases in how we're capturing emails with our guests.
Perfect. Thank you. If I could, just a follow-up question. You talked about new markets, Berlin, or new stores, Berlin and Seoul. If I recall, you probably have a couple stores in the comp base in South Korea and also in Germany by now, and you talk about Asia comping up 50%. Can you kind of give us a sense of how stores perform as they roll over in those two specific markets? I assume the up 50% comp in Asia is primarily China.
The performance across Asia has been really strong. We have some really strong store locations in other markets, including Hong Kong, Singapore, Tokyo. We have the greatest number of stores now in China with the greatest amount of new store openings happening in China. We're seeing strong comp performance across all those regions in Asia. The store locations in Seoul that we opened, we're very excited to reach additional guests in that particular market. We think it's an important market across Asia and important for us to show up strong in Seoul. Similarly, as we look at Europe, Berlin is an important city in Germany. As we think about the countries where we're focused in Europe, Germany, France, and the U.K. are top of the list.
It's important for us to have a good foot forward and have some locations there that represent the brand and help build brand awareness. Pleased with how all those stores have opened and the trajectory that they're on. As we've mentioned, the Asia stores have been off to a faster start in general, but we're pleased with the progress we're making in Europe.
Perfect. Thanks a lot, Stuart, and everyone else. Best of luck.
Thanks, Matt.
The next question is from Matthew Boss with JPMorgan. Please go ahead.
Thanks, congrats on a great quarter. Not even sure that gives it full justice.
Thanks for that.
As we think about Lulu as a dual-gender global brand, I guess versus the $4 billion 2020 revenue target, maybe Stuart, is there any way to just speak to where you're tracking maybe versus plan on some of the key pieces, online, men's, international? That'd be helpful.
Absolutely. We are very excited at the progress we're making against those 2020 goals that we had laid out. I would say that overall, we're on track, if not a little bit ahead, versus those plans. You might recall, we set those goals over two years ago, and as you might expect, we're farther ahead in certain areas than others. Right now, what I would say is within our men's business and within e-commerce, we are running ahead of schedule. I think that's reflected in the most recent performance that we just announced. International, I would say, is taking a little longer than planned. Asia specifically is accelerating ahead of plan and ahead of schedule, but Europe is taking a little bit longer.
We are assuming a very deliberate approach in Europe, but we're pleased with the double-digit comps, that exceeded our budget in the first quarter for Europe. We're pleased with the trajectory overall, and that we were confident that we're going to achieve that $4 billion number as we had set it out. The pieces and parts of how we get there might be a little different than we had originally envisioned.
Great. Just a follow-up. On the storefront, clearly material runway on the international side. I guess, could you touch on remaining opportunity that you see in North America, maybe both in terms of sales productivity catalysts as well as store saturation versus some of the legacy management targets that you've laid out? I think it's been a couple of years now.
Yeah, we see a lot of opportunity in North America. In 2018, we'll actually execute more real estate projects than in any other prior year. We mentioned in the prepared remarks, we're going to see a 14% increase in global square footage. We're going to see a healthy number of new store projects in North America. What's more exciting is some of the innovation that we've seen from our North American store team. Specifically, the co-located strategy has been a very important success, not only for extending the square footage runway that we have in North America, but also creating an important expansion of the retail guest experience that makes space for us to grow our men's business, to add new categories, potentially such as shoes. Those new categories, we couldn't fit into a 3,000 square foot box.
That co-located strategy becomes really important, more than just growing square footage, but creating that opportunity to expand the vision of what product categories we're able to execute in a physical environment. Beyond that, the seasonal store strategy has been a very strong success story for us. We did 24 of those in 2017. Nine of those locations we've kept into this year and are pursuing as permanent locations, and we're seeing really strong performance out of those locations. We continue to find ways to innovate our store model in North America. You really can't think of the business in that regard as just a static store count number off of a uniform store layout. It's very dynamic, and we're exploring even now and into next year, new experiential strategies as part of that physical experience for our guests.
We're really excited at what the team has been able to bring to the table. In many ways, we feel like we're just getting started.
Great. Congrats again.
Thanks, Matt.
Our next question is from Brian Tunick with RBC Capital Markets. Please go ahead.
Super. Thanks. I'll add my congrats to the team as well.
Thanks, Brian.
I guess, you mentioned footwear before, but it's obviously a much bigger idea for your athletic peers versus Lululemon. Curious how footwear is doing, and could footwear be one of the pillars for the company beyond 2020? The second question, in the shorter term, maybe Stuart, talk about the second half gross margin outlook. What are some of the puts and takes that we should be thinking about in your guidance? Thank you very much.
Sure. On the footwear, Brian, I think it's premature to call that as the major growth opportunity for us. We've been pleased with the tests that we've done with APL. I think we've learned a lot from it. We've learned that our guest is interested in buying shoes from us. That's one of the things we've learned. We've also been able to develop an understanding of how to sell shoes in our stores, and in particular, where we don't carry inventory, how to execute the showrooming model. We feel like that's a learning we can take into other categories That'll open the door for us to accomplish different things from an inventory management standpoint across a number of categories. We've learned a lot from footwear. We're pleased with how it's performing. We're looking for opportunities to expand it, even with our relationship with APL.
It's an open strategy for us to explore as we step into the future. Then, on your second question with regard to the gross margin outlook for the second half. We're really pleased with the results that we've seen. The beat that we saw in the first quarter really came from the outperformance in mix and lower markdowns. We feel confident with the gross margin and product margin outlook that we offered. To the extent that mix and markdowns come in more favorably, there is an opportunity for us to do better. We believe that the guidance that we provided is appropriate based on what we know at this point. More broadly, really pleased with just the journey we've seen with product margins. Much of the low-hanging fruit that we had talked about back in 2015 has been captured.
We're now focused on driving our segmented supply chain strategy, which will continue to help us capture AUC improvements. We're now also shifting our attention from a supply chain standpoint to speed and to how we can reduce lead times and create new strategic flexibility in our business from a supply chain standpoint. We're also exploring new, exciting efforts to capture cost efficiencies in our distribution network, specifically how we fulfill e-com orders in North America. We're really looking at our supply chain end to end and finding opportunities. The combination of all this really connects to a multi-year roadmap for gross margin improvement that we see extending at least until 2020 and is contemplated in our long-range guidance that we had shared previously.
Super. Thanks very much.
Thanks, Brian.
Our next question is from Adrienne Yih with Wolfe Research. Please go ahead.
Oh, thank you. Let me add my congratulations as well.
Thank you.
Stuart, my first question is, when you're doing sort of market research on international pieces of the business, what do you do in terms of marketing, laying the groundwork, and then do you do any changes to the product? Glenn, for you, it's been a year since you joined and the business is completely different today. I was wondering if you can just look back on the past year, the biggest opportunity, the biggest change that you think has been made to the business, and then go forward in the next two years to that 2020 target, what the next biggest leg of opportunity still remains. Thank you very much.
Adrienne, it's Stuart. Why don't I address the first two questions that you directed my way.
Sure.
We can have Glenn join us for the next part of it. The international market entry, we certainly do research for each trade area, for each market. The showroom model that we execute follows that market research. One of the key indicators that we look at is the e-commerce penetration that we see that gives us an indication of the overall brand awareness and latent demand within each market. That's an important data point for us. Certainly, there are other factors that we consider, not only in international markets, but any market we enter. The showrooming model gives us an opportunity to seed demand, to build awareness, to develop those communities in a proven way that has in fact proven very resilient and a good indicator of where we are ready to open a store. That model we continue to execute.
From a product standpoint, tailoring products for the international markets, for the most part, it is a global assortment. Our regional merchants help tailor just the shape of the buy, if you will, for regional tastes. We are exploring a limited number of Asia-only fits. That's a very small initial step. As I said, for the most part, it's a global assortment. Let me pause there and see if Glenn would like to respond to your second question.
Thank you.
Thanks, Stuart. My view is that, not to give you a history lesson because you all know the business well, but a year ago, the management team was just finishing some of the blocking and tackling work that they needed to get done as the new team and new talent got injected into the business and complemented the talent we had already inside the company. You know all the work that was done, whether it's on the inventory side or the supply chain side. I think that was work that needed to be done because trying to build something off a weak foundation is just not smart. I give the management team and the board credit for trying to sequence in properly. In the last 12 months, as that work's been. It's never completed.
There's always, as Stuart was saying earlier, there's always more we can do on some of those line items that the management team was focused on for about 24 months. Here come new category initiatives, which have been helpful, focus on digital and part of new categories, the expansion of men's, which has been a big win for the business. Starting to open up our thought process on what could this brand become internationally. We can't just take our North American business and think we can transplant it into Asia and to Europe. You certainly take the culture and what the company stands for and the heartbeat of Lululemon, that is non-negotiable. That has to go around the world. How we show up in parts of Asia, as you heard Stuart reference some countries earlier, what are we going to do in Europe? Opening up international.
Those three fronts are part of the 2020 plan. I really give the management team and the board credit for how it was sequenced. Looking forward, not to get too ambitious, I think we're now committed to the 2020 plan. I think what Stuart opened up a little bit in some of his commentary, what I really like about the management team, especially the three leaders I've been working with, is we do spend some time in Vancouver beyond looking at this quarter, 2018, and the 2020 plan. There has been some time invested. Well, where to from here? What else can the brand become? That's not for today, Adrienne, that'll be for another day.
Yep.
That won't be me, but it'll be somebody else who articulate it to shareholders and investors once we figure out what that is. We do know we've got a special brand that can do a lot more than just its current gross margin success of the products in which we sell and the guest engagement that we develop. We know there's something more the business can do. Again, that's not for today. We've had some preliminary conversations about what that next step and act could be for Lululemon, and I'm sure the management team will fill in the people on the phone at the appropriate time once we have that figured out.
Fantastic. Best of luck.
Thanks, Adrienne.
Our next question is from Oliver Chen with Cowen and Company. Please go ahead.
Hi. Congratulations. The lower markdowns were also impressive. What are your thoughts on how that can be sustained, and also the related topic is your thoughts on the state of inventory and supply chain and planning and allocation, as there could be some opportunities to make sure that the assortments are right in the right stores. The other follow-up I had was just about product innovation and what we should think about for the back half in your pants business. The Zone Compression sounds like a big idea, too. How would you prioritize the innovation factors around product? Thank you.
Hey, Oliver. Thank you. The lower markdown part of the story in Q1 was really great to see. The level of full price markdowns I think reflects the health of the business, and the success that we're having executing not only on the product side, but just in our channel execution as well. That is putting us in a great place where we can continue to drive a very healthy full price business. We see that continuing into Q2, into the balance of the year, and that's reflected in the guidance that we offered. From an inventory standpoint, very comfortable with the inventory position, the composition of it. It's very current.
As we had mentioned on the Q4 call, we do expect to see some higher inventory balances in the first half of the year, at the end of Q1 and Q2, before seeing it moderate into the second half of the year. Even with that, we're very comfortable with the inventory balances that we currently are seeing. From a product innovation standpoint and the product innovation pipeline, that is a critical part of our broader strategy. That is something that we remain focused on as an organization, our white space team, our design team, bringing newness and innovation to market that matters to our guests. You've seen some of that innovation from several key programs last year that we have yet to lap into this year with the ABC pants, new style introductions in Q3, with the Everlux fabric introductions in the second half of last year.
The Enlite bra success that we've seen, we continue to ramp that opportunity into 2018 and complement it with additional styles. The bra category in particular is one where we see a lot of opportunity. You're going to see new styles into the second half of the year, as well as new in-store execution. We view bras as a strategic part of our women's business and how we'll grow the penetration of our women's tops business. That's certainly a focus for us. The other things that we mentioned in the prepared remarks, in terms of the Zone Compression, is another product area that we see a lot of potential, and we're excited to introduce that later in the fall.
Very encouraging. Best regards. Thank you.
Thanks, Oliver.
Our next question is from Paul Lejuez with Citi. Please go ahead.
Hey, guys. A couple questions on men's. Can you maybe talk about the men's business and the growth that you're seeing by region? Also penetration by region, I'd be curious about. Also, what % of the new customers that you talked about are men versus women? Thanks.
Yep. We're really happy with how the men's business is performing, Paul, I think that's reflected in a number of the stats that we quoted. We're seeing on a regional basis, the men's and women's business are accelerating proportionally in the same manner. We're not seeing regional differences by gender or within genders.
What I would say is, we saw really strong performance in Q1 in the Southeast in particular. That's probably related to weather. That was a standout region across North America. Otherwise, there weren't noteworthy regional differences. We still have seen somewhat of a headwind in Alberta, in Canada versus B.C. and Ontario. That's a continuation of a prior trend. In terms of the percentage of new guests, we did see, of the new guests that we have acquired in the first quarter, about 30% of them were men. That was higher than the overall level of increase, a little bit higher than the number of women that we're attracting. Again, really pleased with our men's trajectory. As I mentioned earlier, we feel like we're probably a little ahead of schedule with men's in terms of our 2020 goals.
Stuart, how about penetration in Europe and Asia in the men's business?
We're a little higher in Asia and a little lower in Europe. There's nothing that we would feel is alarming about that. I wouldn't necessarily draw any big conclusions from that strategically. That's how the business is trending now, we still see both areas as having deep opportunities for our men's business as we are able to gain success in driving awareness for it.
Great. Thank you. Good luck.
Thanks, Paul.
The next question is from Omar Saad with Evercore ISI. Please go ahead.
Thanks for taking my question. Great quarter.
Thanks, Omar.
Glenn, I actually wanted to ask you to follow up to your conversation about the CEO search. With everything clearly hitting on all cylinders, the management team working so well together, has the urgency level at the Board level changed around the CEO search? Do you feel like you have more time, and maybe even not necessarily wanting to disrupt the current equilibrium?
The short answer is no. With that said, look, the performance of the business and the leadership of Celeste, Stuart, and Sun, and this is a number of the understatements you've heard on the call today, is of great comfort to Board of Directors. We don't have to feel the word I've seen other companies go through a full-fledged panic when situations like this arise. I think that the fact that the business is performing even better than our expectations and that the leadership and the steady hand of the three people we've asked to step up to take on more responsibility has been incredible.
I've witnessed it in Vancouver, that certainly gives us comfort and allows us, as I said, I think the first call where this came up, I said, "Look, we're not in a hurry, but we have a sense of urgency." We do know that internally and mostly internally at the end of the day, I know there's a lot of people on the call who represent our external audiences. If you think of our internal audience first, getting clarity about the new leadership going forward is super important. It's nice to be in this place. I think we'd all rather have somebody in place when the time is right, I think it's really nice to be able to be in this place where the business is performing and we have great leadership at the top.
Got it. If I could ask just a quick follow-up. I think it was Paul's question around the huge number of new guests, 28%, I think you said. Is that a big inflection from previous quarters? If it is, what's the catalyst for this sudden inflection of new customers discovering the brand?
Omar, it's Stuart. There's a couple things we would point to. The first is the success we're finding with our digital marketing strategies. We have just a more robust approach across a number of different elements of that digital strategy, which includes the success we're finding with email. I described some of the factors that are giving rise to the acceleration in the email capture, which is a part of the broader guest acquisition strategy. I think it's a combination of success in digital marketing, and the success broadly of the business. As we're presenting more compelling product assortments, we're attracting more guests to the brand, and we're being more efficient in how we're engaging with them once we have attracted them either to our stores or to our website.
That's a function of some of the improvements that we've made, both on the website through the relaunch, as well as what I described in terms of the POS improvements in capturing email. It's the combination of a few things. I don't think it's just one thing in particular. It just reflects the broad momentum that we're seeing across the business.
That's great. Thank you.
Operator, we'll take one more question.
Sure. Our last question is from Sharon Zackfia with William Blair. Please go ahead.
Hi, good afternoon. Just under the bell. A follow-up to that question on the 28% increase. Is there any difference in the demographics you're seeing of the new customers? Is it skewing more male than female or any difference there? Then secondarily, on the office travel collection that you've done so well with in men's, it seems like there's more of that now occurring in the women's line. Can you talk about what the opportunity is there?
Sure, Sharon. As I mentioned the mix by gender, it's about 30% of the new guests are men, are male. That's a little more than what is in the base business. We're pleased to see a little higher percentage of guys being attracted to the brand. Otherwise, there's not a remarkable distinction versus our existing customer base or guest base, I should say, in terms of their demographic profile. Then to your other question regarding the office travel commute products that we've been exploring. The first thing I'd say there is we remain focused on solving problems for athletes. We are a performance-oriented apparel business. The opportunities that we have identified to leverage the technical functionality, fabrics, and construction that we see in our performance products into more multi-use products. There's a few good examples.
The ABC pant in men's is probably one of the best. It's clear that our guests have an appetite for this. We're being pulled into these categories versus pushing our way into them, if you will. It's not really new. This has been a part of our assortments both in men's and women's for quite some time. We are identifying places where we can expand this. Again, it's where we're being pulled into, where our guests are asking for these types of products. It's been, I think, an interesting or a good part of how we're evolving our product assortments. Suffice it to say, we remain focused on extending our position as a performance apparel business. The multi-use products that we're exploring are a nice extension of those core technical capabilities that we have.
This concludes the question and answer session. I will turn the conference back over to the presenters for any closing remarks.
Thanks for joining us, everyone. We appreciate your time, and we look forward to speaking to you in about three months when we report our second quarter results. Thanks.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.