Earnings Call: Q1 2018

Jun 1, 2017

Thank you for standing by. This is the conference operator, and welcome to the Lululemon Athletica First Quarter 2017 Conference Call. As a reminder, all participants are in a 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. Please go ahead. Thank you, and good afternoon. Welcome to Lululemon's Q1 earnings conference call. Joining me today to talk about our results are Laurent Potvin, CEO Stuart Hazelin, COO Sun Cho, SVP of Global Merchandising will also 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 the company's future. These statements are based on current information, which we have assessed, which is, by nature, 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 the company's business. Factors that could cause these results to differ materially are set forth in the company's 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 undertake no obligation to update 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 annual report on Form 10 ks and in today's earnings press release. The press release and accompanying annual report on Form 10 ks are available under the Investors section of our website at www.lululemon.com. 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 addressed. And now, I'd like to turn the call over to Laurent. Thank you, Howard, and good afternoon, everyone. On our year end call, we reviewed our longer term vision and 2020 plans to double our revenue to $4,000,000,000 and more than double earnings. Today, I will focus specifically on our Q1 business trends, which were positively impacted by the actions we took to build momentum early in the quarter. I will then touch on Q2 milestones that inspired our guests from our 1st global brand amplification to our most innovative and integrated product launch to date. Stuart will review our financials and provide Q2 and full year guidance. We'll then take your questions. Let me kick off the call by sharing our 1st ever global brand campaign, This is Yoga. Through recontextualizing how the world sees yoga culture, we articulate the core of our brand and what defines and differentiates Lululemon. The internal launch created an unprecedented energy and excitement across our employees, our educators and our ambassadors. And on May 15, we took yoga off the mat and into real life, sharing the power of practice with the world, reconnecting loyal guests with who we are and authentically reaching millions of new guests. We are proud of how powerfully this campaign has resonated with influential audiences around the world, creating 240,000,000 global impressions and over 26,000,000 views of the Anthem video in its 1st 2 weeks. The launch of This Is Yoga is just the beginning of our global brand amplification as we connect with millions of new guests in key markets around the globe. Before sharing our Q1 highlights, I'll update you on our decision to evolve EVVAC to an e commerce focused strategy. This new streamlined model with 8 stores in key EVVA communities across North America will enable us to continue serving our young EVVA guests who have come to know and love the brand so long. This decision will also be accretive to productivity, comps and earnings. By August 20 this year, we will close all but 8 of our EVA locations and Stuart will walk you through the financial impact for the year. While I know this is the best path forward for the future of our business, it's a very difficult decision due to its impact on our people, who we are deeply committed to supporting with integrity and compassion throughout this transition. I am so grateful for the passion and dedication of our people, the brand they've created and the impact Eviva will continue to have on so many communities of active girls. I'll now shift to our Q1 results. We delivered revenue of 520,000,000 dollars a normalized gross margin increase of 2.10 basis points and an adjusted EPS of $0.32 Our adjusted EPS was better than our guidance and increased 7% over last year. Comps declined 1% in total with stores down 1% and e commerce flat. Our normalized EPS exceeded our expectation driven predominantly by stronger revenue and product margins as we continue to benefit from the evolution of our supply chain. Our inventory remains well controlled, up 6% at the end of Q1 and in line with our sales growth. The actions we've taken to build momentum have had an immediate impact on our performance. This positive trend has continued and accelerated as we entered Q2. And as we look to the Q2, we're seeing robust performance across all channels and categories with combined comps up in the lowtomidsingledigit and digital back to a double digit comp trend. Turning now to some specific Q1 highlights. Let me share how the strategies we outlined on our last call have powerfully and positively driven our performance. Starting with women's, our stronger assortment combined with newness and functional innovation delivered a significant comp improvement. Towards the end of the Q1, the cadence of new product launches and fabric innovations created excitement with Guess? And deepened our connection with the runners in our collective. Created in our new top performing New Look fabric, Fast and Free brought our naked sensation across an expanded range including a tights, a crop and a bra. Guess' response to New Look's overall continues to surpass our expectations and contribute significantly to our overall women's bottoms comp in Q1. And I'm thrilled to share that together with new elite ambassador, Kerry Walsh Jennings, the 3 time Olympic gold beach volleyball player and a truly inspirational role model both on and off the court, we launched our mind over mild capsule. Featured in white, this collection was designed for guests who prefer Hugged in sensation and was one of the top 5 selling style colors this quarter. This collection is cater to our guests growing demand for our Engineered Sensation across all product categories. Shifting to digital. Since April 1, we've doubled down on our digital strategies and our teams have been laser focused on delivering a significantly enhanced digital experience. As I'm sure you will notice, the infusion of energy, movement and fun in how we brought product to life has exceptionally enhanced our guest experience and delivered an increased engagement and performance. Having just passed 2,000,000 subscribers, the new creative approach has created our highest ever engagement across men's and women's and delivered increased conversion. The clear and decisive actions we've made to inspire our guests and drive our digital performance is a compelling validation of the global runway ahead of us. Looking at men's, we delivered a high single digit comp this quarter against an exceptional 21% comparison last year. Bottoms, often our male guest centric, the brand, remain a pillar of this business comping up 20% in Q1. Our performance in men's top accelerated as the quarter progressed, driven by the successful launch of the Somatic series training tops in our intersex fabric. This acceleration has contributed to an overall improvement in the men's comp, trending in the low double digit. In Q2, key innovation launches, including Light Metal Vent Tech Surge and Pack and Dash run tops, will expand 2 of our top performing franchises as we continue to solve forget functional demand. Quarter after quarter, our performance gets us closer to realizing the full scale of our $1,000,000,000 plus opportunity in men. While men account for 20% of our total business, they are just under 30% of all new guests. This will only increase as we strategically focus on guest acquisition through co located store, curated e commerce experiences and by leveraging This is Yoga, where ambassadors like Giant Publico and his practice of non violence and London grime artist, P Money and its practice of breath authentically connect with a broader millennial male audience. Now turning to international, another exciting growth strategy and a $1,000,000,000 opportunity. In response to market demand, we are accelerating our expansion with 15 new store openings this year. Near term, Asia holds the most significant growth potential. Building on the energy of our Harajuku location, we've seen exceptional performance at our new store within the stunning new Ginza 6 complex in Tokyo. The guest response to our exclusive Tokyo white on white reflective capsule reflects the strongest affinity for the brand in one of the most influential markets in the world. Building on the brand's performance and resonance in China, we're accelerating our densification strategy in Tier 1 cities with the newest opening in Shintandi, Shanghai, a vibrant iconic neighborhood destinations for locals and visitors alike. In their first few months of opening, our China stores are outperforming all store metrics, currently tracking to over $1600 in annual sales per square foot. Chinese millennials are some of the most digitally engaged consumers in the world, a behavior we are experiencing online with our Tmall business having doubled over the last three quarters. The collective impact of our physical stores and digital presence is driving our impressive performance in these key markets. In its 2nd year and more than doubling in size, our annual China event sold out within hours. It kicked off May 6 at the Shanghai Council Hall with over 1200 yogis experiencing the power of practice. And hence, by live streaming, it's traveling across 6 cities with over 10,000 participants. Unworld China is a fantastic platform as we continue to build brand awareness across China. Our expansion this year continues across key cities such as Chengdu and Guangzhou as well as additional location in Shanghai and Beijing. Turning to Europe. London remains our key focus, delivering 50% sales growth on a constant currency basis year over year. Outside of London, we opened our 2nd shop in shop in Dublin's Brown Thomas department store. Fueled by strong guest demand, the opening and performance has been exceptional, tracking at $1600 per square foot. In North America, we continue to invest to realize the solid growth opportunities ahead of us, maximizing our potential through tailored and agile store format and leveraging our omnichannel tools that have greatly exceeded expectations with guests. We are driving double digit square footage growth and on track to open 30 stores in key destination cities, including New York, we're opening in an iconic space at 597 Fifth Avenue across from the Rockefeller Center, as well as Las Vegas, Los Angeles and Boston. While early into the Q2, we're off to a great start with many exciting moments to come that will continue to drive our performance. With a clear mandate to accelerate momentum and drive growth, a highly collaborative and creative team is delivering quantifiable impact and is demonstrating what can quickly be achieved when we unite behind the share of vision. And the results speak for themselves. In a short period of time, the team has delivered 2 new releases of our website and enriched experience for iconic product launches such as our category disrupting and light bra bold and curated product experiences to align with This Is Yoga campaign and highly targeted and timely guest engagement such as our summer seasonal focus on women's shorts, which drove a 39% comp in the U. S. Collectively, this work is meaningfully and sustainably impacting our performance. The scale of our potential in digital is crystal clear, and I've never felt more energized by our ability to realize the $1,000,000,000 plus opportunity in front of us. Last but not least, I want to focus on innovation, starting with our newest whitespace launch, our category defining bra and light. Over 2 years in its creation, our industry disrupting research and development team created an innovative technology enabling women to experience comfort, performance and aesthetics when selecting a run bra. Managing harmonious movement across the whole body, N Life provides a freeing sensation, superior comfort and zero distractions. Made from our proprietary Ultra Lube fabric in our signature Barely There Feeling, it provides optimal stretch, recovery and breathability. We are now as powerfully positioned in the bra category as we are in women's bottoms, delivering the most innovative and demanded product in the 2 categories that define the women's athletic market. Initial performance and reaction from our guests and educators have been exceptional with N Life receiving over 190,000,000 media impressions, exceeding plan by 300% and instantly becoming our number one selling bra. In just a few weeks, nLIGHT has created a significant LO across the category. And by balancing the overall assortment with a high support molded fit option, our initial findings suggest that a significant number of guests choosing nLIGHT have not bought a bra from us before, creating the opportunity for the nLIGHT platform to improve our conversion by reaching a broader range of guests. In Q3, we will bring to market our newest fabric innovation, building on our unique leadership position in yarn, development and raw material design. I know this newest addition to our engineered sensation range will create an even deeper connection with new and existing guests who live for high sweat and high intensity workouts. Our whitespace team will continue to innovate the science of engineered sensation and the future of how people want to feel as they live a life they love. Before passing over to Stuart, I'd like to take a moment to share some great updates to our Board of Directors and Executive team. First, a warm welcome to our new Co Chairman, Glenn Murphy. I look forward to working with Glenn and know that his deep knowledge and experience will have a substantial impact on the future of the business. Next, I'm delighted to recognize Stuart Hasseldone, who is taking on the newly created role of Chief Operating Officer. Since joining, he's led with clarity and confidence. And thanks to his work, we have the foundation and operational excellence in place to strive as we realize the significant growth opportunities ahead of us. I'm also pleased to share that Sun Cho, our SVP merchandising is now reporting directly to me. This ensures that our credit director, Lee Holman and his team have the space to focus on design, while our merchants can effectively drive the design vision into profitable growth. We're happy to have Sun on the call with us today, so do feel free to direct questions away also. As I look to our Q2 and the rest of 2017, I continue to see the unprecedented opportunity for Lululemon. From our unique culture, our cadence of product innovation, designing the future of guest experiences, combined with This Is Yoga amplifying who we are globally, we are more powerfully positioned than ever to deliver long term profitable growth as the leading global brand for an active mindful lifestyle. Now over to Stuart. Thank you, Laurent. After a slow start to Q1, we saw business accelerate in the latter part of the quarter and we're pleased to see this trend now extending into Q2 with an even more pronounced improvement in the e commerce trend that I'll discuss shortly. We also saw strong product margin performance in Q1 that exceeded prior estimates and enabled an earnings outcome well above our guidance. This reflects the ongoing benefits of our supply chain investments. Before reviewing the details of the Q1, I'd like to offer some commentary on the impact of our decision to close our AVEVA stores. I'll then review the details of our Q1 results and provide our updated outlook for the full year 2017 and also the Q2. As Laurent mentioned, we plan to reposition Aveva as a primarily e commerce focused business, with a select number of stores continuing to operate in key communities across North America. We plan to close approximately 40 of our 55 Aviva branded stores and expect to convert about half of the remaining locations to Lululemon stores. We'll also close our 16 Aviva branded showrooms and other temporary locations and will streamline its dedicated support infrastructure. The store closures and restructuring will be substantially complete by the end of Q3 of fiscal 2017. In connection with this restructuring plan, we expect to recognize pretax cost of between $50,000,000 $60,000,000 in fiscal 2017, of which $17,700,000 was recognized in Q1. The costs are composed primarily of asset impairments, accelerated depreciation, lease termination costs and a smaller portion for inventory provisions and severance. Now turning to the details of Q1. Total net revenue rose 5% to $520,300,000 with the increase in revenue resulting from the following: an increase in square footage growth of 10% versus last year, driven by the addition of 38 net new company operated stores since Q1 of 2016, 22 net new stores in the U. S, 3 stores in Canada, 5 in Europe and 8 in Asia. This was offset by a total constant dollar comparable sales decline of 1%, comprised of a bricks and mortar comp store sales decline of 1% and an e commerce comp that was flat. The impact of foreign exchange decreased revenues by $1,500,000 or 0.3%. During the Q1, we opened 5 net new company operated stores, 2 in the U. S, 2 in Asia and 1 in Europe. We ended the quarter with 411 total stores versus 373 a year ago and 352 stores in our comp base, 57 of those in Canada, 258 in the U. S, 26 in Australia and New Zealand, 7 in Europe and 4 in Asia. At the end of Q1, we also had a total of 48 showrooms in operation, 30 in North America and 18 internationally. Revenues from company operated stores totaled $379,100,000 or 72.9 percent of total revenue compared to $358,700,000 in the Q1 of 2016 or 72.4 percent of total revenue. Revenues from our digital channel totaled $97,200,000 or 18.7 percent of total revenue, compared to 19.7 percent of total revenue in the Q1 of last year. Other revenue, which includes outlets, showrooms, strategic sales, pop up stores and warehouse sales totaled $44,000,000 versus $39,200,000 in the Q1 of last year. Gross profit for the Q1 was $256,900,000 or 49.4 percent of net revenue compared to $239,100,000 or 48.3 percent of net revenue in Q1 2016. The gross profit rate in Q1 was adversely impacted by 100 basis points related to AVEVA inventory provisions. Excluding these items, adjusted gross margin increased 210 basis points versus last year, which exceeded our expectations for the quarter with the increase comprised of the following: 3.80 basis points of overall product margin improvement, primarily driven by lower FOB costs, higher average unit retails and a modest benefit in air freight, an extension of our strategic supply chain efforts that we've seen driving margin improvement over the last several quarters. Foreign exchange contributed to a 30 basis point year over year improvement in gross margin. Offsetting these factors was 200 basis points of deleverage, half attributable to occupancy and depreciation and the other half to fixed costs related to our product and supply chain team. SG and A expenses were $199,100,000 or 38.3 percent of net revenue compared to $181,500,000 or 36.6 percent of net revenue for the same period last year. The deleverage in SG and A was generally in line with our expectations and due to increases in store operating costs, digital marketing, investments in brand and community and IT, partially offset by a benefit in foreign exchange relative to last year. Separately, as a result of our plans for the AVEVA business, we incurred $12,300,000 in asset impairment and restructuring costs associated with the write off of capital assets and severance. Operating income for the quarter was $45,400,000 or 8.7 percent of net revenue compared with $57,600,000 or 11.6 percent of net revenue in Q1 2016. Excluding the pretax charges of $17,700,000 related to the planned closures of the AVEVA stores, adjusted operating income for the quarter increased to $63,200,000 reflecting 50 basis points of operating margin expansion versus last year to 12.1 percent of sales. Tax expense for the quarter was $15,100,000 or 32.6 percent of pretax earnings compared to an effective tax rate of 20.6 percent a year ago. Keep in mind, the prior year tax rate includes certain adjustments for the company's transfer pricing arrangement and associated repatriation of foreign earnings. The adjusted tax rate for the quarter was 30.8% compared to the 29.8% in the Q1 of 2016. Net income for the quarter was $31,200,000 or $0.23 per diluted share compared to earnings per diluted share of $0.33 for the Q1 of 2016. Net income in Q1 2017 includes $13,100,000 or $0.09 per share in AVEVA related charges. Excluding these charges, adjusted net income in the quarter was $44,300,000 or $0.32 per share or an increase of 7% to an adjusted EPS of $0.30 last year. Our weighted average diluted shares outstanding for the quarter were 137,200,000 versus $137,500,000 a year ago, which takes into account the weighted impact of 234,000 shares repurchased during the quarter at an average price of $54.60 per share. By the end of the quarter, we had completed a total of $12,800,000 in total share repurchases under the current $100,000,000 authorization, which was the maximum available for repurchase under our existing 10b5-1 program. Capital expenditures were $19,900,000 for the quarter compared to $26,600,000 in the Q1 of last year. The reduction relates primarily to fewer store openings as our store opening cadence this year is weighted more heavily to the back half. Turning to our balance sheet highlights. We ended the quarter with $698,300,000 in cash and cash equivalents. Inventory at the end of the Q1 was $304,000,000 or 6% higher than at the end of the Q1 of 2016, reflecting a 3% decrease in inventory per square foot. We expect our inventory growth at the end of Q2 and for the balance of the year to generally grow in line with our forward sales trend. Turning now to our updated outlook for the Q2 and fiscal year 2017. We are pleased with the results we are now seeing from our efforts to recover the sales trend in our e commerce business. Quarter to date trends online are now comping in the positive low double digits and we see additional opportunity ahead. To deliver this important inflection in our digital business, we have taken aggressive steps to reorganize our digital teams and have leveraged certain external resources not previously contemplated in our financial plans. As a result, we will have certain one time investments related to this recovery effort, which we will break out momentarily as part of our SG and A guidance. We're also pleased with the performance of our store teams in a difficult macro environment, and we continue to see solid ongoing results. Please note that the guidance we are sharing excludes additional costs related to the AVEVA restructuring. For Q2, we expect revenues to be in the range of 5.65 $1,000,000 to $570,000,000 This is based on a comparable sales percentage increase in the lowtomidsingledigits on a constant dollar basis compared to the Q2 of 2016 and reflects a lowtomidteensecommercecomp estimate. This also assumes the Canadian dollar at $0.76 to the U. S. Dollar and 8 new store openings in the quarter. We anticipate gross margin normalized for AVEVA to increase approximately 100 basis points over Q2 of last year. This reflects strong product margin improvements partially offset by occupancy and depreciation trends similar to Q1. We expect SG and A in the Q2 to delever from Q2 2016 by approximately 3.50 basis points. This deleverage is greater than our original plans contemplated with approximately half related to critical one time expenditures to support our e commerce business as we just discussed. These aggressive actions encompassing site optimization, visual merchandising, improved social engagement and digital marketing in a short period of time have already made a significant impact improving our digital comps from flat to low double digits and I am excited by the momentum this gives us for the balance of Q2 and the second half of the year. The remainder of the SG and A deleverage is related to brand and community investments associated with our new global brand campaign that we launched in May along with IT spend related to key technology projects. We expect foreign exchange to have a nominal impact to SG and A in Q2 based on actions taken to mitigate our exposures. Assuming a normalized tax rate of 31 percent 137 200,000 diluted weighted average shares outstanding, we expect normalized diluted earnings per share in the 2nd quarter to be in the range of $0.33 to $0.35 versus $0.38 a year ago. It's important to note this includes approximately $0.04 to $0.05 of earnings impact from expense related to our digital acceleration work that I just mentioned. For the full year 2017, we expect revenue to be in the range of 2.5 $3,000,000,000 to $2,580,000,000 This is based on a comparable sales percentage increase in the low single digits on a constant dollar basis. The guidance range takes into account the planned closures of our Aviva stores and the associated reduction revenues, offset partially by the accelerating trends we are seeing take shape in the business and in particular digital. We continue to expect to open up to 50 company operated stores in 2017. This includes 15 or more internationally and represents a square footage increase in the low double digits. We expect normalized gross margin for the year to increase 50 to 100 basis points from 2016, reflecting the benefits of product margin improvements primarily in Q1 and Q2 and moderating into the second half. We continue to expect deleverage in product and supply chain SG and A as well as occupancy and depreciation, primarily due to more store openings planned versus last year, including those higher occupancy international locations. We now expect SG and A for the full year to deleverage by approximately 50 basis points to 100 basis points versus 2016. This includes the one time digital related investments, which I mentioned earlier and accounts for approximately 50 basis points of the increase. In addition, we will continue to invest in brand and community activities, IT and our international business notably to support our expansion efforts in Asia. As we complete our work in digital, we expect the SG and A rate to moderate in the second half of the year and provide leverage in Q4. We now expect our normalized fiscal year 2017 diluted earnings per share to be in the range of $2.28 to $2.38 This increase to our full year guidance reflects our confidence that the positive trends we're now seeing will extend for the full year. Our EPS guidance is based on 137,200,000 diluted weighted average shares outstanding and also assumes a normalized effective tax rate of 31%. We expect capital expenditures to range between $175,000,000 $180,000,000 for the fiscal year 2017, reflecting new store openings, renovations, relocation capital and also strategic IT investments. This is an increase versus our prior guidance of $170,000,000 to $175,000,000 due to increased investments to accelerate our digital business, plus additional capital related to new and remodeled stores. Before we take your questions, I wanted to emphasize the importance of the strategic measures we've taken to reorganize and strengthen our digital and technology capabilities. We have leveraged both internal and external resources in this effort to generate results quickly. These actions have carried costs that are impacting SG and A in the near term, but we expect to realize meaningful SG and A leverage in Q4 as we clear these one time investments. We are confident that these are the correct investments to make now to build our business for the long term. We've also balanced these decisive near term moves with thoughtful structural changes, including the recent announcements within our leadership team. I'm excited for my new role and the opportunity to work more closely with our technology teams. And I am thrilled to have Julie Averill joining us as our new CTO, leading all of our global IT functions. Julie has nearly 20 years of broad based IT experience and was most recently Chief Information Officer at REI. I look forward to working with her to further build our technology infrastructure to achieve our growth plans. And with that, we'd like to open the call for questions. Operator? Thank you. We will now begin the question and answer session. Your first question is from Brian Tuncay with Royal Bank of Canada. Please go ahead. Yes. Hi. This is Kate on for Brian. Thank you for taking our Congrats on the quarter to date improvement. I guess just when we're thinking about what actions specifically you took in Q1 that you think most directly impacted the comp trend just from a merchandise perspective? Then I guess with Sun in the room, I guess when you're thinking about what changes you're making here in 2Q from a product perspective and into the back half, what do you see as the most meaningful opportunity in order to help continue the improved comp momentum? Thank you. Thanks for your question. The 2 most important actions we took was, 1, is getting back with debt in the assortment that we had lacked early on in the quarter. And 2, it was really, as we had articulated on the last call, really focusing on our digital experience. And I'm sure you've seen it. I'm sure you've experienced it. But what we've been able to create in a very short period of time has actually brought to life brought the brand to life, whether that has been really, really powerful. And we've seen the highest engagement from our guests ever, actually, whether it was the TRAP Happy or the launch of the ENLIGHT bra or other campaign that we launched at that time. So I mean, I'll let San speak more specifically to the assortment. But from an assortment and from a digital standpoint, I mean, we were incredibly focused. We articulated what we needed to do. We did it. And actually, the results exceeded our expectations. Yes. And from the merchandising standpoint, I think 2 key things for us that really helped turn some of the trend around. The first thing was we were quickly able to get back into color and print. So we do see that balance improving. And I think given that we are a performance and functional brand, the fact that we had really strong launches in our Nu Luxe fabric franchise as well as the launch in our NYPA that really helped buoy the trend and we know that we have a lot more of those innovation platforms and franchises in the pipeline for the future. So we remain optimistic. Great. And then I guess just a follow-up on the Enlite Bra. Can you just speak to any pricing or branding learnings that came as you implemented that launch? It sounds like it's really bringing in some new customers to the brand? Yes, we're really excited. It's our most expensive bra in our portfolio. We have seen 0 price resistance. So what we're finding is that if we have a technical solve and we're differentiated in the market, she's willing to pay the price. Great. Best of luck. Thank you. The next question is from Adrienne Yih with Wolfe Research. Please go ahead. Good afternoon. My question is on the digital growth. First on the gross margin, how should we think about the gross margin in that channel and the op margin relative to brick and mortar? And then Stuart, can you also talk about the inventory marked in the $5,400,000 Was it all IVIVA? Was it any go forward product? And is there any residual markdown in Q2 that we should expect? Hey, Adrienne, certainly. So on the profit profile of our digital business, and there's certainly disclosure that we provide in our Q, we enjoy a stronger operating margin with our e commerce business. I mean, specifically, we did not have the rent and the payroll costs that we incur as part of our bricks and mortar business. And the product margins are slightly higher as well as we have a more efficient way to manage our inventory pool online. So that is a benefit to the e commerce business. And as we continue to have goals to drive a higher proportion of our business through our e commerce channel, that should have an accretive impact on our overall company operating margins. In terms of the inventory costs that we called out and there's a rec in the press release that addresses specifically the cost of the inventory provision we took related to the AVEVA restructuring decision. That is entirely related to AVEVA. And at this point, we do not expect further inventory provisions in the Q2. We believe that should all fall within the Q1 disclosure. Great. Thank you very much and congratulations. Thank you. The next question is from Matthew Boss with JPMorgan. Please go ahead. Thanks. So just to break down the low to mid single digit comps that you're seeing here in May or that you saw in May. I guess how would you rank the sequential improvement by category if we were to bridge the 400 basis point comp improvement versus the negative one in the Q1? Hey, Matt, it's Stuart. I think that we're seeing strength out of the latter part of the first quarter into the Q2, certainly in both channels. Versus our original expectations for Q1, we saw a really strong trend in stores, in particular, in the latter part of Q1. We see that continuing into the Q1. That's definitely part of the guidance that we gave. But importantly and probably strategically, the work that we are in, in the digital acceleration effort has produced an important inflection in the trend of that business from the Q1 into the Q2, which the quarter to date trend that we commented on in the prepared remarks reflect the impact that that effort is having. We are very confident that those trends will continue. And as we mentioned, we see opportunity above the quarter to date trends. So that business being about 20% of the total, you can sort of back into how the relative impact on that comp guidance is shaking out. But we're really seeing strength across both channels. Got it. And then just a follow-up on SG and A, Stuart, excluding the one time items you've laid out near term, is it still fair to think about low single digit comps as the multi year SG and A hurdle rate? And then I guess if you could just touch on the strategic expense assessment, what you found in Phase 1 and then just potential opportunities as we think about Phase 2, which I think would be more next year opportunity? So certainly, I think we've been pretty consistent that we expect to be able to leverage our cost structure at a lowtomidteens total revenue growth outcome. So the combination of the comp and the square footage growth are the factors that will help us achieve that. That's unchanged. We see that as the underlying fundamentals of how we have constructed the financial plan for this year and into next year. What's different, as we mentioned, is the one time cost that we'll incur to recover our digital business. So that those fundamentals are not different. In terms of the I think the second question was regarding the SG and A work that we had begun in the later part of last year and that work we're benefiting from this year. We'll see as we had mentioned on the prior call, we'll see that the full benefit of that work in the second half of this year, particularly in the Q4, where we expect we'll be in a position to begin leveraging the top line estimates that we've offered. The next question is from Matt McClendonck with Barclays. Please go ahead. Hi, yes. Good afternoon, everyone. Great quarter. I actually wanted to focus a little bit on two questions. The first one is just not to continue to talk about digital, but the digital change, there's been a lot of changes going on there. And I just want to high level strategically, what specifically are you doing now that's having such a meaningful immediate impact that you really didn't do before? And how to think about that in terms of one time cost, Stuart? It would seem like maybe the onetime costs are consulting fees or something like that. How much of that is onetime? How much should we think about that as an ongoing cost just to grow the business? Well, Matt, if you go back a couple of years, I mean, there was really no digital culture, no digital mindset at Lululemonet. So we built this center of excellence with digital that really allowed us to put the tools, the platform, the foundation in place to really be able to build the global scalable business that we knew we needed, including CRM, which is an increase. We've done that over the past 2 years. We've got this outstanding foundation. And the last piece of the puzzle was really to bring the brand to life digitally in a way that's as powerful as in the stores. And when you think about our performance in the stores, it's all about human connections. I mean, we refer constantly about the educators in the most important role in the company. And so translating that online is difficult. So the focus over the past few months now having the foundation in place has really been to bring the brand to life in a powerful way. And I think you can see that in the way the product is being shot, in the way we're talking about in technology, in the way we're bringing video to life and maybe most importantly in how we're linking social PR, our presence on mobile as well as on desktop. So that has had a very significant impact on the business. And it's really if you think about that center of excellence, we've built it, we've built the foundation And the transition that we've been driven lately really brings all of the technology until under Julie Averill, our new CTO, who will be reporting to Stuart, all the digital marketing, guest acquisition, driving traffic in our branding community, which the timing is perfect with the launch of This is Yoga and then all visual merchandising with Sun and finally, the operating part of running the channel under our leaders in the various regions with Celeste, Ken and Garrett, so that they can truly have a guest centric vision to servicing our guests that is channel agnostic. And Matt, just to follow on that and offer some details on the costs. A lot of the costs that we're incurring are related to getting results quickly. So there's a few buckets I would group them into. First is technical digital work related to our website. We identified a number of opportunities through the work that we started in the Q1 and are now continuing into the Q2 that were hardcore coding issues that we needed to tackle. And in order to do that quickly, we needed to bring in external resources so that we could have the critical mass in terms of the expertise to do that in a quick manner. So that's a big part of those costs. Otherwise, you heard us speak about the creative content on the website, photography. We've engaged agencies to help us not only with the development of that creative content, but also in the photography itself. So the agency costs related to photography and creative content are really the other pieces of the cost that we're incurring. The one time in nature aspects and the way we characterize it in that manner is that, again, we've asked these external resources to join us, join this task force we've organized to help us drive change rapidly. And so in order to do this under those timetables, that is what's giving rise to the additional cost that we're incurring outside of our normal business model. As we complete this work over the course of the summer and early part of Q3, we'll be able to transition and build on this work and take it forward as a new part of how we do business from a digital standpoint and be able to better leverage a more normalized cost profile. Thank you. Thank you. And to add to Stuart's point, I mean, we've been very confident about doubling down on the investment because week after week, almost day after day, I mean, we see the results in the business of the work that we're doing. So there is this real time feedback loop about the quality and the impact of the work that we're doing. Thanks a lot for that. I'll actually table my second question so someone else can get a chance. Thank you. The next question is from Oliver Chen with Cowen and Company. Please go ahead. Hi. We had a question related to capabilities with digital and inventory management. What are your thoughts around you feel about the bricks and clicks in terms of the inventory in store versus online? And Stuart, on the strategic supply chain efforts, could you just update us on what's ahead in terms of opportunities there as you continue to make progress in both quality and speed? Those were our main questions. Thank you. Yes, Oliver, this is Laurent. Quickly, on the omni channel, I mean, I think I mentioned that in the prepared remarks. We're actually really, really proud about the result of our omni channel strategy. I mean, from the implementation of RFID to the ability to really maximize the use of inventory and obviously the margins that we deliver. I mean, like our mid channel strategy are working incredibly well in both from a financial standpoint, but also in servicing our guests. And we've got more of those coming online in the latter part of the year. And I'm spacing on the second part of your question. Right. On the supply chain and some of the strategic, I guess, goals that we have there. Now that we've been happy with the results that we've seen in recovering our gross margins, we believe we've established a more stable and reliable sourcing and supply chain organization. I think our next priorities turn to continuing to support our design teams from an innovation standpoint so that we can enable the work they're doing from a sourcing standpoint to bring to life meaningful innovation and designs that will matter to our guests and help us solve problems for athletes. In addition to that, I think importantly, we're continuing to look at ways for us to build flexibility into our supply chain, so that we can position raw materials in a way that we can respond to guest trends more rapidly. We saw some of the first examples of this late in Q1, where we were able to actually chase into certain styles where we saw gaps in color and even introduce certain graphic styles that we hadn't done in a while, so and with remarkable sell throughs. So we're really pleased to see those initial wins and those are that flexibility is something we're looking to expand. And from an organizational standpoint, with Sun reporting to me from an organizational standpoint, I mean, we're going to create some healthy tension between merchandising and design, which will really allow us to sort of drive the design vision into profitable growth. Okay. And the last thing is on the product side. You've really made really great progress with in lite and new look. Just how would you prioritize what are the bigger product opportunities or how would you prioritize for the back half between tops and bottoms and outerwear and accessories could be an opportunity too. Just curious about how we should think about the catalysts relative to each other. Thank you. Well, Oliver, you'll see it when it comes to life. So we're not going to tell you too much, too early. But one thing that I can tell you is that we're obviously always focused on function first. And when we do that, it pays off tremendously, whether it's with Nelux or Allied. I mean, we've got 2 incredible data points right there. So you're going to see a focus on functional, what comes first, and that's really what makes us who we are. The next question is from Mark Altschwager with Robert W. Baird. Please go ahead. Just to follow-up on the SG and A leverage discussion and sorry to harp on it. The guidance for the year, I guess, really doesn't get you to that low to mid teens revenue growth rate in the back half. Yes, Stuart, I think you mentioned expecting meaningful SG and A leverage by Q4. So I'm just trying to make sure I understand. I mean, as you get to Q4, would you expect to be at a point where you can leverage SG and A consistently on a go forward basis? Or is the Q4 leverage on, call it, a low double digit revenue growth more of an exception versus the rule? Thanks. Yes, Mark, it's a good question. I would say the way we've built the model over the next 5 years should enable us to deliver SG and A leverage in that top line growth range we mentioned, that low to mid teens. I think in the Q4, there's an opportunity to do better than that based on the work that we've done to improve our cost structure coming out of the project that we had mentioned in the second half of last year, and we'll take those benefits forward. And the 4th quarter is our largest quarter from a sales standpoint and a little bit more flexibility to from a quarterly standpoint to do to have leverage on our cost structure. That's helpful. Best of luck. Thank you. Thank you. The next question is from Dana Telsey with Telsey Advisory Group. Please go ahead. Good afternoon, everyone, and nice to see the improvement. As you think about the Aviva business and the exiting of that business, what long term margin and return improvements do you think can be expected? And then on another note, the improvement in Color, is it where you want it to be yet? Or how should we see the product enhancements, whether it's on the color or whether it's the online conversion that changed in Q1? Is there more runway to go? Thank you. So Dana, it's Stuart. I'll first respond to your question on AVEVA and then I'll let Sona respond to your question on the color and the product strategy. In regards to AVEVA, it was a very difficult decision in terms of the restructuring plan that we have announced that came after much deliberation. As we look at the run rate of this business go forward under the new structure that we have established, We expect the revenues to be a little less than half of what we saw last year, and it should be positioned to generate positive comps that will be accretive to the overall company comps. And it should also be positioned to generate a modest operating profit, where in all prior years we've operated DaViva, it's had a small operating loss. And as we mentioned, the restructuring of the store actions should be largely completed by Q3. And then going into color, I'd say we are happy with the improvement of the balance. We feel good in that we have a lot of white in stores, which is seasonally really appropriate, emphasizing light neutrals and some pops of color. I'd say that as we get into the back half of June and going into fall, we'll be even in a more ideal state. And as Stuart mentioned, we've just done a much better job partnering with the supply chain and making sure that we do have speed and flexibility in our sourcing model. So always able to chase back into colors that sell out. And then again, we feel very well positioned from a portfolio standpoint because we have a lot of key innovations in the pipeline for the back half of the year that's really focused on fabric, function and fit. Thank you. The next question is from Paul Lejuez with Citigroup. Please go ahead. Hey, thanks. Hey, Stuart, can you talk about the promotional cadence in the business during the quarter? How that trended? How it's been in May to date? And also curious about store traffic, just what you saw, how did that progress during the last several months? Thanks. Thanks, Paul. The promotional cadence has been healthy. We executed the warehouse sale the physical warehouse sale in Dallas earlier this month to great success. It was a record for us that or approached, I should say, the record we had achieved previously with our Edmonton warehouse sale. The sales and AUR results from that event exceeded our plans. And I think it really speaks to not only the resilience of our clearance model, but also our full price business, given the level of interest and demand we saw in that warehouse sales. So otherwise, markdowns in stores and online are well managed. And I think our inventory position reflects that as well. So the markdown picture is very healthy and has been for much of Q1 and certainly now into Q2. Store traffic is an interesting story. It still remains a headwind for us. And that was a big part of the weakness that we saw early in Q1 that we spoke about on the last call. We have seen improvements in store traffic. And what's been interesting is, as we have executed on our Enlight launch, the new Luxe Fast and Free launch, and importantly, that This is Yoga program or campaign rather, we have seen that these events have been able to move the needle in our store traffic as well as our online traffic. So what we've taken away from that is that it's actually possible for us to affect store traffic positively when we have compelling product and brand stories and events. So we're taking those learnings forward. We believe it creates interesting opportunity for us as we look forward. And as we think about KPIs generally, that improvement sequential improvement in store traffic, still negative, still a headwind, but sequentially better in the latter part of Q1 into the early part of Q2 is also being supported by improvements in conversion and UPTs in our stores that is supplementing or complementing the continued strength in AURs. Ultimately, we need to see a balanced picture across all of our store KPIs to have a sustainable comp picture. So we've relied heavily on AUR up to this point. We still see strong AUR performance, but it's really important to see conversion UPT in a better place and also traffic improving. So thanks for your question on store traffic. Excellent. Good luck guys. Thank you. The next question is from Omar Saad with Evercore ISI. Please go ahead. Thanks guys. Thank you for my question. I wanted to actually focus on the decision to accelerate international openings, Asia versus Europe. And is it kind of more a fill in of the existing kind of trade areas? Are you expanding into new trade areas and markets? And what are you seeing in those markets that's giving you the confidence to do to pull that lever and press on that gas at this point? Is it online demand that you're seeing or store level demand? Or is it the showrooms? What you're learning from those? I think this is probably a pretty important part of the equation for you guys over the next few years. Thanks. Thanks, Omar. I think it's all of the above. I mean, we're obviously seeing the opportunity and the scale of the opportunity in Asia, and we're seeing great momentum there. So whether it's our Tmall business doubling in less than 3 quarters or whether it's store opening in the couple of 1st months at $1600 a square foot or the activity that we see on social or with the events that we're rolling out, I mean, that obviously give us great confidence in our ability to accelerate our store openings in Asia, mostly in China. But it's also, honestly, I mean, the ability to secure outstanding locations. So if you think about the store that we were able to open in Tokyo within Ginza 6 or the locations that we've been able to open in Shintani, in Shanghai and in Beijing. I mean, that obviously we're not the pace of the openings is in no way jeopardizing the quality of the locations that we're picking. So we see tremendous momentum in Asia in Japan, in Hong Kong, in Mainland China as well as Singapore and Korea. And in Europe, we've grown 50% year over year and it actually goes outside of London. I mean, you see the performance of Brown Thomas in Dublin, which really gives us which really validates the work that we're doing in Europe and the halo effect that it's got that it has beyond London. Got it. Thanks for the color. Thank you. Operator, we'll take one more question. Thank you. The next question is Kimberly Greenberger with Morgan Stanley. Please go ahead. Great. Thanks so much for taking my question. Stuart, my question is on digital marketing investments. And can you just give us a little more color on the 2nd quarter investments? And why you would characterize them as one time? Maybe if we understand a little bit better what those expenses are, we could get our heads around the one time characterization. And then secondarily, I would imagine that Viveba operates at a lower gross margin. So is there a permanent improvement in gross margin you expect to see over the next 1 to 2 years from the elimination of most of the AVEVA business? Thanks so much. Okay. Okay, Kimberly. On the first question, the digital marketing investments, I would not include that as part of the one time cost that we were referring to. What I am referring to are the technical design and development costs for the improvements to our website. That's one bucket. The second bucket is photography cost of outsourcing photography to a photography agency. And the 3rd bucket is the brand creative content support that we have from an agency we've also selected to help us with that. And what I would say is that what's creating the much of the one time nature of this is the speed at which we're trying to accomplish these improvements and changes that we've identified we need to the website. There will be elements likely of the second and third buckets that we'll take forward, but not to the same order of magnitude that we're seeing right now, given just again the timeframe in which we're trying to accomplish these improvements. So hopefully that clarifies it. The second question you had on AVEVA gross margin. Gross margins in AVEVA are have not been as high as in Lululemon. I think that's safe to say. By reducing the mix of the AVEVA overall, yes, that creates some benefit to the overall weighted average, if you will, gross margin that we'll have. The AVEVA business will be a viable business that we still believe in, albeit on a smaller scale, and we also have specific strategies and plans in place to improve the product margin of the AVEVA business as we'll take it forward as primarily an e commerce business. Great. Thank you, Stuart. Great. Thank you. This concludes the question and answer session. I will now turn the conference back over to the presenters for any closing remarks. All right. Thanks, everybody. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.