Earnings Call: Q2 2017

Sep 1, 2016

you for standing by. This is the conference operator. Welcome to the Lululemon Second Quarter 2016 Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Chris Tam, Senior Vice President, Finance for Lululemon. Please go ahead. Thank you and good afternoon. Welcome to Lululemon's Q2 2016 earnings conference call. Joining me today to talk about our results are Laurent Potevin, CEO and Stuart Hazeland, 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 the company's future. These statements are based on current information, which we have assessed, but which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with 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 today's earnings press release. The press release and accompanying quarterly report on Form 10 Q are available under the Investors section of our website 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 questions addressed. And now, I would like to turn the call over to Laurent. Thank you, Chris, and good afternoon, everyone. Q2 was a strong quarter with revenue of $515,000,000 earnings of $0.38 per share and most importantly, the return to earnings growth we have predicted. The level of execution across our 4 key strategies, product innovation, building a digital ecosystem, North American growth and international expansion combined with our focus on operational excellence drove our continued performance. What pleases me most with regards to our performance is the quality of our results, which were driven by the ongoing top line momentum as our investments in innovation continue to drive the business. Our SG and A came in a bit higher in part due to accelerating some investments, which Stuart will speak to later. Gross margin improvement accelerated substantially and the inflection in product margins we've been building towards exceeded expectations, as we posted a 260 basis point increase over last year. This is the result of the initiatives that started a couple of years ago to build a scalable supply chain and create a world class sourcing structure to support our global expansion plan. I could not be more proud of the team's accomplishment in delivering this return to earnings growth. We are planning for this growth to accelerate into the second half of this year and beyond. Reflecting on our global opportunity, we are leading and supporting one of the most significant movements taking place, a continued trend towards a more active and mindful lifestyle. At the same time, retail is evolving at an increasingly rapid pace. We are observing a shift in the way consumers engage with brands, how they connect with each other, and how they value purpose driven brands. Each choice is increasingly built around experiences rather than transactions. This evolution creates a tremendous opportunity for Lululemon. Our highly productive physical footprint, augmented by our digital capabilities, combined with a deep understanding of the communities we're active in, gives us the unique advantage and flexibility to adapt quickly to consumer behavior. Despite a challenging microenvironment, our educator, our product and our focus on operational excellence have driven another healthy mid single digit comp in the Q2. We saw continued performance in our stores as well as an e commerce comp of 16% after normalizing for the online warehouse sales that occurred last year. Looking more broadly at results across all categories in Q2, we saw our design vision powerfully come to life and resonate with our guests. Within the women's category, guests embrace unique design details such as mesh, braiding, bonding and engineered prints. Our minimalist collection designed for studio and our Gold Crochet collection designed for high sweat and run incorporated some of these details and are favorite with our guests. Our tops assortment continues to evolve and we saw sequential improvement in our bra and tank categories, up 13% and 3% respectively year over year, driven by a powerful color assortment and growth in shelf less tanks. The combination of function and fashion is beautifully expressed through print, patterns and textures with the Dotty Drive print that launched in July being a perfect illustration of this combination. Other Q2 product highlights included continued strength in men with mid teens comp, driven by new products and continued strong performance in iconic styles such as the ABC pants and metal pants seamless tops. Finally, our focus on operational excellence is the main driver of gross margin and earnings improvement. Benefits from sourcing, logistics and more disciplined supply chain processes drove these results. Next, let me detail the progress we've made across the 4 strategies that are driving our long term goals. 1st, with product innovation. I'm truly inspired by the continued evolution of the product assortment as it comes to life. Our return to being a design led organization is coming through clearly with an overarching vision translating across categories and genders. Nowhere was that better exemplified than with the 2016 Olympics and our partnerships with the Canadian women's and men's beach volleyball team. Hanging up with the athletes in July at our Cumberland store in Toronto was such a thrill, second only to watching them wear our product in radio last month. This collaboration demonstrates the unique athlete relationships that are at the core of what we do and how we work. Within our women's tops category, our design focus has been in new raw materials, fit, layering and outfitting. Within tanks specifically, you can expect to see more natural feel fabrics, lightweight layering option and the expansion of silhouettes to complement our outfitting with more fitted bottoms. In the back half of this year, we will also introduce a new fleece aesthetic collection for men's and women. Fabric innovation is front and center with the introduction of a new fabric within our bottoms assortment in September. Providing gentle compression and crafted to minimize distractions, NuLuvs has it all. It offers quick drying, sweat wicking and lightweight coverage. NuLuX will make its debut with the like nothing pants and will also be available in core styles including the Wander Under and High Time. This is Lululemon's 1st Naked Sensation Cardio pants specifically developed for sweaty indoor workouts such as spin. As we continue to raise the bar on craftsmanship, we're also dialing up the visual impact of print, utilizing highly technical processes that allow us to achieve a richer level of color and detail without sacrificing function. You can expect to see this new digitally engineered print on the New Look fabric we're launching and in a variety of different styles including the new Speed Tite. Later in the year, we will also introduce a gorgeous Black Friday collaboration with Jena Milero, also known as feather girl, a textile designer from Paris who works regularly with Couture houses. We combined the artistry of her feather designs with technical silhouettes and fabrics to create digitally engineered prints. Our next area of focus is reaching our full potential in North America, where we continue to expand our footprint strategically while also exploring new formats. In May, we reopened our Mall of America store as a co located men's and women's space totaling 5,080 Square Feet. A dedicated and larger men's space provides for an unparalleled guest experience. And since the reopening, men's sales have increased 80% over last year to roughly 26% of total sales, while total sales are up 35%. We recently renovated our Somerset Collection store in Detroit, one of the highest volume stores in the country. The main business there is also one of the strongest across our portfolio. It's tremendously satisfying to see our momentum in this market, which is home to 4 professional sports teams. In a rapidly evolving landscape, we don't take a one size fits all approach to store format. This year, you'll see us open the doors to new smaller format stores that we're calling local. This innovative hyper local community stores allow us to come to life in front of influencer communities that we wouldn't otherwise reach, offering events and programming that are relevant to the local community. These locals will be anywhere between 1,000 to 2,000 square feet with similar productivity per square foot as our standard stores. The Fort Collins, Colorado local, which opened on August 20 is the first and the response has been overwhelmingly positive. More locals will follow in select markets across the U. S. And Canada. With smaller retail footprint, we are more innovative about the way we connect with and service our guests and we are able to reach the full potential of the smaller store format with air cover from our digital environment. Digital is our next key strategic priority and since the launch of our new site, we've been focused on continually enhancing the guest experience with teams and technologies that are agile and nimble. This improvement extends to payment security. At the most recent Apple's Worldwide Developers Conference in June, we were excited to be among the 1st retailers to implement Apple Pay across web, mobile and stores. This will ensure secure payment authentication across our digital access points. Our investment in CRM is already informing and enhancing the way we communicate with our guests, both in store and online. With a robust database that now includes over half of our guests, we are developing a unified multi channel view that allows us to analyze and understand guest behavior and create greater engagement. As an example, I'm excited about the ship from store pilot. Online orders can currently be fulfilled from available inventory in 11 locations. This is yet another capability that further improves our ability to service our guests, optimize our inventory sell through at full retail. Early results have been positive and we are extending this to 65 stores for the upcoming holiday season. Last but not least, we are expanding our collective globally. As I have shared, building new and vibrant communities in key Asian and European cities is essential to our 5 year plan. On our last call, I mentioned several developments which have since come to life. In August, we opened our first ever Lululemon shop in shop concept at Harrods, one of the world's most iconic retailers. This venture brings Lululemon within the world of 1 of London's most famous destination. Our team on the ground is excited to introduce the Sweatlife to the 14,000,000 guests that visit the store each year. This past July in London, we held a 1 day Sweatlife Festival and Dance Party for 1500 old and new friends. Our guests joined local and global yoga ambassadors including Chris Chavez and Gloria Lathem and sweated with the best studios in London, finishing the day off in typical L'Eurement fashion with a dance party led by Grandmaster Flash. On August 19, we opened our 1st Maven store in Europe within the historic Spitalfields market, one of London's oldest and most iconic shopping district. And in Q4, we will open an 8,200 Square Foot store on Regent Street with 7,500,000 annual visitors to this area. It is one of the best shopping spits in the world. This store will be a key part of our capital city strategy and building the brand in Europe. To celebrate the store opening, we are partnering with Central Saint Martin's fashion students to create a limited edition collection that will be sold exclusively at the Regent Street store. Turning to Asia, our existing stores continue to perform well and we are seeding key cities in new markets. In July, we celebrated the opening of our 1st showroom in Osaka, our 2nd in Japan following Tokyo. Located in popular Shinsaibashi area, the showroom is a great space that houses its own studio where the community team can host daily activities and classes. We continue to build momentum in Asia last month with Unroll China, a signature online to offline community program in partnership with Alibaba. Registration for a series of iconic experiential events sold out overnight with guests attending the 1st ever yoga party in the Forbidden City with some of the world's most celebrated yoga teacher. UN World China was a significant moment in building brand awareness for Lululemon in Asia. Finally, we also have 2 additional store openings planned later this year. Following the successful opening of our 1st store in Seoul, Korea, we just opened our 2nd store in Seoul, located at Thanos Mall, the largest underground mall in Asia. And finally, we plan to open our 1st store in Beijing later this year, located in San Le Tung, a key shopping and entertainment destination. We've been seeding China with 3 high performing showrooms, community events such as Unroll China and our presence on Tmall, which collectively are building awareness for the brand. We're only getting started here and this will be a significant part of the global growth story going forward. In summary, our accomplishments and successful results in Q2 are being driven by our relentless focus on function, innovation and design, our authentic connections with our growing collective which includes our educators, guests and ambassadors, the amazing guest experience that we deliver at every touch point in store and digitally, always adapting to where the market is going. And lastly, our high performance culture and focus on operational excellence which drove our return to earnings growth. We're very well positioned to deliver on our plan to double revenue and more than double earnings by 2020 and I could not be more proud of the way our entire team is working together to deliver these results. I want to close by thanking our educators who interact with our guests every day are the face of Lululemon around the world and remain in so many ways the key to our success. With that, I will now turn the call over to Stuart who will review our financial results for the Q2 and provide guidance on the full fiscal year. Stuart? Thank you, Laurent. As you mentioned, I will offer additional details on the results of our Q2. I'll then discuss our current outlook for the Q3 as well as the full year 2016. Q2 marks not only the achievement of critical performance milestones, but also represents an important turning point for Lululemon. The product margin inflection in the quarter reflects the culmination of our ongoing efforts over the last 2 years and sets the stage for successive quarterly improvements as we restore the company's profitability. The rebalancing of our inventories removes the prior overhang on our assortments and positions us to optimize our product offerings. And finally, the double digit earnings growth in Q2 reflects our improving flow through on a continued strong top line. And this is just the beginning. As our SG and A investments are now moderating into Q3 and beyond, we expect to see accelerating earnings growth and expanding operating margins. Turning now to the details of Q2, total net revenue rose 13.6 percent to $514,500,000 or 14.7 percent on a constant currency basis. The increase in revenue was driven by several factors. First, a total constant dollar comparable sales growth of 5% comprised of a bricks and mortar comp store sales increase of 4% and an e commerce comp of 7%. Keep in mind, we held an online warehouse sale last year in Q2 that accounted for $6,600,000 in volume. Normalized for this event, our e commerce comp would have been 10 comp points higher this quarter and consistent with our Q1 trend and our overall comp would have been approximately 2 comp points higher. Secondly, an increase in square footage of 14% versus last year driven by the addition of 43 net new company operated stores since Q2 of 2015, 17 net new stores in the United States, 1 store in Canada, 1 in Australia, 4 in Europe, 3 in Asia, and 17 AVEVA stores. And finally, these factors were offset by the foreign currency exchange impact of a stronger U. S. Dollar, which had the effect of decreasing reported revenues by $5,300,000 or 1%. During the Q2, we opened 6 net new company operated stores, 1 in Canada, 1 in Asia, 1 in Europe and 3 in Veeva. We ended the quarter with 3 79 total stores versus 336 a year ago. There are now 309 stores in our comp base, 42 of those in Canada, 201 in the United States, 28 in Australia and New Zealand, 3 in Europe, 3 in Asia and 32 Aviva. At the end of Q2, we also had a total of 68 showrooms in operation, 25 Lululemon showrooms in North America, 20 internationally along with 23 Aviva showrooms. Revenues from company operated stores totaled $381,400,000 or 74.1 percent of total revenue compared to $339,800,000 in the Q2 of 2015 or 75 percent of total revenue. Revenues from our digital channel totaled 87 point $4,000,000 or 17 percent of total revenue compared to 18.2 percent of total revenue in the Q2 of last year. Our e commerce penetration increased by 10 basis points when normalized for the prior year online warehouse sale. Other revenue, which includes outlets, showrooms, strategic sales, franchises, pop up stores and warehouse sales, totaled $45,700,000 versus $31,000,000 in the Q2 of last year. This increase in other revenue relates primarily to new outlets and growth in existing outlets since the Q2 of 2015. We expect the growth rates in our other channel to normalize in the back half of this year as we anniversary these openings. Gross profit for the Q2 was $254,200,000 or 49.4 percent of net revenue compared to $212,000,000 or 46.8 percent of net revenue in Q2 of 2015, an increase of 2 60 basis points. This marks the Q1 of year over year gross margin improvement since Q1 of 2014. The factors that contributed to this outcome include 360 basis points of increased product margin. This was driven principally by lower overall product costs that increased merchandise margins and reductions in raw material liability expenses along with lower markdowns compared to Q2 2015. These improvements resulted from our coordinated efforts across the supply chain. Offsetting this improvement in product margin were 20 basis points of decline due to the foreign exchange impact of a stronger U. S. Dollar, 40 basis points of deleverage from occupancy and depreciation and 40 basis points from investments in our design, merchandising and supply chain functions that are included in our cost of goods sold. SG and A expenses were $180,200,000 or 35 percent of net revenue compared to $145,400,000 or 32.1 percent of net revenue for the same period last year. The 290 basis point increase in SG and A rate was driven by increases in store and support center employee costs, including annual incentive and stock based compensation expenses, investments in our store support center overhead, which include our digital, IT, brand and retail operations functions investments to drive top line such as digital marketing, product campaigns and related brand marketing costs and a slight decrease in net foreign exchange gains compared to Q2 2015. The deleverage in the quarter was higher than initially expected primarily due to the acceleration of key investments in our merchandising operations, CRM capabilities and brand strategy. Specifically, these investments will enable us to sustain and extend the margin recovery that's now building and also accelerate efforts in customer analytics and brand marketing. As a result, operating income for the quarter was $74,000,000 or 14.4 percent of net revenue compared with $66,600,000 or 14.7 percent of net revenue in Q2 2015. Tax expense for the quarter was $20,900,000 or 28.1 percent of pre tax earnings compared to 29.3 percent a year ago. The decrease in the tax rate is primarily due to a $1,900,000 reduction in tax expense, which we recognized in Q2 2016. Similar to last quarter, this is connected to the company's transfer pricing arrangements and estimated taxes related to the associated plan to repatriate foreign earnings. The effective tax rate for the 2nd quarter excluding the above tax adjustments and associated interest costs was 30.5%. Net income for the quarter was $53,600,000 or $0.39 per diluted share. This is compared to net income of $47,700,000 or $0.34 per diluted share for the Q2 of 2015. Excluding the tax and related interest adjustments, diluted earnings per share would have been $0.38 There was a normal impact to earnings from foreign currency this quarter versus the prior year. Our weighted average diluted shares outstanding for the quarter were 137,200,000 versus 141,600,000 a year ago, which takes into account the weighted impact of 201,000 shares repurchased during the quarter at an average price of $63.65 per share. By the end of the quarter, we had completed a total of $450,000,000 in total share repurchases with the total authorization now having been completed. Capital expenditures were $44,600,000 for the quarter compared to $37,200,000 in the Q2 of last year. This includes the purchase of a land parcel in Vancouver for corporate purposes for $19,700,000 Turning to our balance sheet highlights. We ended the quarter with $535,300,000 in cash and cash equivalents. Inventory at the end of the 2nd quarter was $277,300,000 or 1.2% lower than at the end of the Q2 of 2015, reflecting a 15% decrease in inventory per square foot. Our inventory levels and composition remained healthy, particularly when looking at the 2 year comparison. We are well positioned from an inventory standpoint to achieve our back half sales expectations. We expect our inventory growth at the end of the third quarter to continue to sit beneath our forward sales trend as we anniversary our elevated inventory levels from last year. Turning now to the details of our Q3 and fiscal year 2016 updated outlook. We expect revenues in Q3 to be in the range of $535,000,000 to $545,000,000 This is based on a comparable sales percentage increase in the mid single digits on a constant dollar basis compared to the Q3 of 2015 and assumes a Canadian dollar at $0.77 to the U. S. Dollar. This also assumes 9 net new store openings in the quarter. We are pleased to see the gross margin inflection that began in Q2 now extending into the initial weeks of Q3 and we expect this recovery to continue taking shape through the second half of this year and beyond. For the Q3 specifically, we anticipate gross margin to increase in the range of 200 to 2 50 basis points over Q3 of last year. This increase is attributable to the following: higher product margins through lower overall product costs, which is the most significant component duty, trade and logistics efficiencies and continued reductions in raw materials liability costs through our improved buying and sourcing processes. These will be offset by slight occupancy and depreciation deleverage and modest deleverage in product and supply chain SG and A. And based on the underlying foreign exchange rates, we expect foreign exchange to have a minimal impact to gross margin in Q3. We expect SG and A in the second half to delever but to a much lesser degree than the first half. For Q3 and Q4 combined, we anticipate approximately 100 basis points of deleverage with Q3 slightly higher and Q4 slightly lower. This SG and A outlook reflects incremental spend associated with merchandising and brand strategic investments as well as digital and IT costs associated with our omni channel strategies. Assuming a tax rate of 30.5 percent and 137,500,000 diluted weighted average shares outstanding, we expect diluted earnings per share in the 3rd quarter to be in the range of $0.42 to $0.44 per share versus normalized diluted earnings per share of $0.35 a year ago. For the full year 2016, we expect revenue to be in the range of $2,325,000,000 to $2,350,000,000 This is based on a comparable sales percentage increase in the mid single digits on a constant dollar basis. We expect to open up to 42 company operated stores, which include the local that Laurent talked about earlier, 11 new stores internationally and 12 Aviva stores and represents a square footage increase of approximately 12%. We expect gross margin for the year to increase from 2015 driven by the improvements delivered in Q2 and carrying forward for the remainder of the year. We expect deleverage in full year SG and A versus 2015 driven by the strategic investments that were mentioned earlier, principally in supply chain, brand, digital and IT systems along with the net FX revaluation losses incurred so far this year. We expect our fiscal year 2016 diluted earnings per share to be in the range of $2.11 to $2.19 or $2.07 to $2.15 normalized for the tax and related interest adjustments incurred this year. This is based off of 137,500,000 diluted weighted average shares outstanding and also assumes an effective tax rate of 28.7% or 30.5% on a normalized basis. We expect capital expenditures to range between $165,000,000 to $170,000,000 for the fiscal year 2016 reflecting new store openings, renovations, relocation capital and also strategic IT and supply chain capital investments. In closing, we are heading into the second half of the year in a position of strength, continued top line momentum fueled by product innovation and the underlying strength of our brand and guest experience. This together with a much improved operational foundation that has now begun to deliver on the anticipated gross margin recovery well positions us for the accelerating earnings and the inflection in operating margin that we now see materializing. With that, I will open up the call for questions. Operator? Thank you. We will now begin the question and answer session. The first question comes from Brian Tuncay of Royal Bank of Canada. Please go ahead. Yes. Hi. This is Kate Fitzsimmons on for Brian. Thank you for taking my question. I guess first is on the gross margin. Stuart, can you just speak to your expectation for markdowns into the back half now that inventory is so lean? And then secondly, I guess just product costs in particular appear to be coming in much faster than we anticipated. You had previously spoken to that 300 basis point merch margin opportunity. I guess just how is what you're seeing from a product cost perspective making you maybe reevaluate that opportunity more bullish? Just how should we think about that there? Thank you. Sure, Kate. On your questions on gross margin, let me just cast some or offer some clarity rather on the results in the Q2 and how we were able to exceed our expectations and our prior guidance. So there were really three factors that enabled us to exceed expectations in the Q2. First, it was a favorable selling mix. We sold a higher proportion of our products from the higher margin categories. The second factor was less markdowns. More to your point, we saw a higher full price sell through result in the quarter. We had less markdowns that were needed in order to stay on top of our inventory movement. And the third factor was a favorable duty cost outcome. We saw better than expected savings from our 1st sale programs. Specifically on markdowns, as I mentioned, the results that we saw in the Q2 were better than expected. I would looking forward into the second half of the year, I wouldn't necessarily expect that that same outcome would continue just given the healthy position that we have in our inventory now. So I would expect markdowns to normalize to some degree into the second half of the year and perhaps not be quite as favorable as we saw in the Q2. In terms of the product cost benefits that we're achieving, we are in fact on track to achieve the order of magnitude of the 300 basis point improvement as we look back to 2014 levels over the next few quarters. And so that program to recover that level of profitability is materializing. We're pleased with the progress we're making. And by the I would say by 2017, certainly the middle of 2017 we will have achieved the majority of that cost or that product cost improvement. Great. Best of luck. Thank you. The next question comes from Matthew Boss of JPMorgan. Please go ahead. Hey, congrats on the nice quarter. Thanks. So on the SG and A front, can you just expand a little bit on the commentary regarding the moderating investment spend? Specifically, how should we think about the comp needed to leverage SG and A as we get into next year in 2018? Yes, I would say the SG and A takeaway from the guidance and the results we just announced is that we expect SG and A to moderate into the second half of the year and into 2017 as well. Over the long term, I would expect us to be able to leverage SG and A at a high single digit comp level. So but in the near term, we've just completed a number of critical strategic investments in relation to the infrastructure of our supply chain and merchandising. The bulk of those activities are wrapping up in the Q2 and that is what's giving rise to the moderation in SG and A into the second half and then further into 2017. Great. And then just a follow-up. Can you speak to the cadence of comp you saw this quarter as we kind of move from the start to the finish? And then just what did you see in tops versus bottoms? And was performance in August versus your mid single digit guide pretty consistent or anything to think about as we think about the progression from here? So I'll speak to the comp progression and just the underlying drivers of the comp and then maybe LaVon will speak to the product category performance. We did see traffic continue to be a headwind for us in the Q2. We were able to offset that with improvements in AUR and UPTs that enabled us to deliver the positive comp that we reported. The traffic headwinds have extended into the Q3, but similarly we're seeing upside in AUR and UPTs that are offsetting it. The trend has been choppy and I think we're not immune to what's happening from a macro standpoint. We're not going to be able to break down the specific periods within the quarter, but the trends we didn't see a huge divergence sort of beginning to end of the quarter, safe to say. I think that when you look at the product category, I mean, we continue to see a lot of strength in the bottoms, women's bottoms. I mean, it's double digit comping and every time we've introduced new silhouettes, new functionalities, some of the details that came in the past couple of months and new fabrics, I mean, we see a fantastic response from our guests. So, I really do feel like as we continue to we had the launch of the last year and that was a moment in time where we introduced a couple of fabrics and a few silhouettes and since then we've been continuing to introduce silhouettes. You think about the align pants or the align crop and every time we've done that, we've actually seen great response and actually where we've actually delivered more value to the guests and taken price increases, we have seen no price resistance. So really pleased with that and the work that we're doing in tops is really starting to paying off especially with tanks and bras. Great. Best of luck. Thank you. Next question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead. Great. Thank you so much. Laurent, I'm wondering if you can look into the back half of the year and talk to us about the product initiatives. I'm not sure if the tank wall full relaunch has yet been executed in the stores. And then how do you think about the opportunities and challenges as you begin to anniversary that women's pant wall relaunch from early September last year? Thanks so much. I think, I don't think we should think about necessarily anniversarying the parent world. I mean, the parent world was a new way of presenting the product assortment with fabrics and silhouette, but it was really sort of a matter of starting to educate on sensation. And so, I would really think about for every product category, but specifically with scent as a continued flow of innovation. So, you're going to see we're going to introduce new looks, this new fabric in September. And so you're going to see the way we educate on sensation, you're going to see that continue. But within that education, you're going to see new fabric, new silhouette. So I feel like we've got the right pipeline of innovation both from a fabric, a silhouette and as well from a print and texture standpoint, we've got the right pipeline of innovation to continue to perform in the category. So I feel really good about that. When I think about the back half of the year, what I'm really excited about is if you think about the first half what we've done from a digital standpoint, we really put a great foundation in place. So we launched the website for the 1st 3 weeks of the launch. I mean, we actually did better than we expected as user get a new user experience, but we invested less in digital marketing as user got familiar with the environment. And in the second half, I mean, now we've got CRM fully implemented. We've got capabilities to do AB testing on everything we do. And we're going to see continual improvement with if you think about the whole experience, we're really relentlessly focused on reducing all the frictions with our guests. So from the way you're browsing to the way you're looking at the product pages to the checkout, you're going to see a lot of improvements. So the foundation was put in place in Q1. We were able to achieve some great performance and now we can really accelerate with the tools that we're putting on top of that foundation. So I'm really excited about not only the impact that it will have online, but I mean we benefit greatly from that work in stores as well. And so when you think about ship from store program or the continued success of our BBR app that access online inventory in the stores and that's all of that coming together. I'm really, really excited about that. Thank you. The next question comes from Oliver Chen with Cowen and Company. Please go ahead. Hi, great quarter. On the topic of the online business and what's happening there, what would you isolate as the biggest year over year changes we should look to as we look to the back half? I'm just curious about thinking about inventory management across both online and offline and what opportunities you have there. And as you did elaborate on CRM, is that going to help traffic both online and in stores? Like what's the linkage between CRM and the big opportunity to drive revenues? Thanks. Well, I wish we had more time to answer that question. There is so much going on in the back half, but I mean if you look at simply look at what happened with the mobile app, like since we relaunched the website, I mean we went from a 2.53 star rating in the app store to a 4.6 star rating which really speaks to the new user experience. So you had a couple of questions. I mean, if you think about CRM and analytics, I mean, one, the ability to test everything we're doing is something that we didn't have and something that's paying off instantly. So we can put different product pages up and know within hours what works, what doesn't work or what works better. From a men's standpoint, I mean lately we've been able to send like a men's personalized homepage to the guests that we know and that had over a couple of weeks an improvement of 7.5% in conversion for that segment, which was fantastic. I mean, if you think about in store reengagement, we're sharing all of that CRM data so that the stores can actually create events that are catered to very qualified guests. And we can actually switch from a weekly email that was really product based to opportunities that are more event based. So maybe you a lapsed guest and we're getting you back or maybe it's your first time guest and we can really talk to you in a more personalized way and all of that coming to life in the back half of the year. So to your question, you're going to see continually and it's very agile and nimble, the environment that we build with the teams that we have. So you're going to see continual change through the entire experience and it will benefit the stores as well. And we're linking inventory. So when you think about ship from store, I mean, it's really going to allow us to use potential like broken cycle to move them much faster at full retail. So, avoiding those onesies and twosies markdown in the store, now we'll have access to those items much faster. So, there's a lot going on in the back end of the year that will bring the entire ecosystem together. And Laurent, the shop in shop at Harrods sounds awesome. And I know there's so much demand for both the brand and really wholesalers just kind of replicating a lot of what you do. What's your long term vision for how wholesale should play a role as you think about your global strategy and as you grow your business and think about speed and awareness versus direct to consumer from Lulu because there are potentially a lot of great brand partners out there, but there's pros and cons to using the wholesale channel? Yes, I mean, I think it's well, first of all, when you mention wholesale, I mean, I think it's really important for people to know that at Harrods, I mean, it is our employees and our inventory. So what we're known for is the experience. I mean, we actually create and control that experience, which is really, really important. I mean, I've said before, I mean, the structure that we have being vertical really allows us to not only create amazing experience, but also gives us the margin structure to work with the best fabrics and the best textured on and what you're going to see in the second half, some incredible trends. So I think you're right, there are opportunities around the world to evolve the model. Harrods is one of them. What we're doing in China with Tmall is growing incredibly fast in China and it's putting a lot of eyeballs on the brand. So we've got opportunities strategically to work with partners. And I certainly wouldn't say that it's going to a wholesale model. I mean, we're very happy with the structure that we have and the extent that it allows us to create for our guests. Thank you. Best regards. Thank you. The next question is from Paul Lejuez of Citi. Please go ahead. Hey, thanks guys. I'm just curious, where is the top business right now relative to where you want it to be? And assuming that we're not all the way there, at what point can we expect to see the majority of that improvement complete? And then second, I just want to clarify something. Stuart, I thought on the last call, you had mentioned that May maybe started off a bit slow. So I just wanted to clarify if in fact the monthly performance was actually consistent across the quarter or if May was the weaker month and you finished stronger? Thanks. Hey, Paul, it's Stuart. I'll ask that. I'll answer that question on the comp first. So we did see the quarter start out slow from a traffic standpoint. We did not really see a meaningful improvement in the traffic trend throughout the quarter. So that remained a headwind for us for the Q2. As I mentioned, there are other KPIs, specifically AUR and UPTs that we're able to help offset that as we drill closer into AUR. It's a combination of favorable mix as well as price. So that trend has largely extended into the 1st few weeks of Q3 in terms of those store KPIs. And then on tops? And as far as the tops business, I mean, I think you're going to continue to see improvement. I mean, I think you're seeing a lot more looser silhouette. I spoke to the tanks, the shelf less tanks that are performing really well. We've got double digit comp there. We still have some work to do on the jacket, but we've got a great fleece program coming in the fall both for men's and women's. So I don't know, I mean your question was how far we along I think you're going to continue to see there's a lot of fabric innovation, there's a lot of silhouette innovation. So I mean it's I don't think it's ever a finished project. It's a little bit like the pad wall. We're going to continue to innovate and you're seeing a lot of it on the floor coming in the second half. But there is I mean, when I think about the new fabrics and the silhouettes and the textures and the print coming in spring of 'seventeen, I mean, I think we've got a lot of room to continue to grow. I mean, if you think about the ratio to pants, I mean, we're starting to grow that ratio again and fully reaching the ratio of top 2 pants, I mean, really creates a lot of room for growth. And Rob, can you just remind us what that ratio is? Right now, it's about 1.2 or 1.3. Yes. And we could easily see that expanding to over 1.5. Yes. Great. Thanks guys. Good luck. Thank you. The next question comes from Adrian Yih of Wolfe Research. Please go ahead. Hey, good afternoon. It's actually Cody Ross on for Adrian this afternoon. Just a quick question. There recently was a large bankruptcy of a shipper. Do you guys think that this will have a big impact on your business in the rest of the year? And has your guidance contemplated this at all? Thank you. Hey, Cody, it's Stuart. So we don't have any concerns about our supply chain or our suppliers or the shipping partners that we use. So we have close relationships with Blue Chip Partners and really no concerns at all there and have seen no disruptions in our shipping partners or supply chain broadly. And our guidance reflects our confidence in our supply chain structure. The next question comes from Jessica Schmidt of KeyBanc Capital Markets. I guess, can you just elaborate a little bit on what the response has been from some of the new products that started coming out under Lee? I think it started coming out over the past few weeks and how that's sort of resonating with the customers so far? Yes, I mean, I think you see that actually in we talked about the traffic headwinds and when you see the UPT and the AUR and the level of conversion, I mean, I think that really speaks for the product. I mean, in August, actually, we ended up being really lean with some of our summer products. And it's I actually think it's a great position to be in. I mean, it speaks for how quickly the product grew up the shelf. And we probably left some business on the table in some of this new product that flow through the store and through online. So really, really pleased with not only the assortment, but how the assortment merchandizes together. So, I mentioned that on our last call, but we used to have really sort of different vision and design and print and colors for studio and cardio and all of that now being an overarching vision that actually extends to the men's category, it really allows our guests to put outfits together more easily and in a more powerful way. So, very pleased with what we're seeing so far. Great. Thank you. Thank you. The next question comes from Matt McClintock of Barclays. Please go ahead. Yes. Good afternoon, everyone. Laurent, it was really interesting what you said about locals. I really would like to talk a little bit more about that. Can you give us any more information? Where would it be appropriate to open these small stores? Are we talking places like Aspen, Colorado? Are we talking about an opportunity to really reach out and get meaningful distribution physically with this format? Thanks. Well, I mean, think about I mean, I think Aspen is a I think Aspen is a great example. You can think about mountain resorts. You can think about beach communities. You can think about influencing communities where we don't have the need for a full store. And when you think about our international expansion and what we're doing globally, I mean, we have a local in Tokyo. So in Harajuku, we've got a 900 square foot location that's absolutely gorgeous and that's getting a lot of traffic and it's really and I can see them I could see having a lot of locals in Tokyo where you have one that's dedicated to men, one to be dedicated to run. So, I think it's influencing communities, it's resource, it's smaller market, but especially with everything we're building from a digital standpoint, I mean we can really support having the availability of the product assortment in a more nimble way and with a lighter footprint. And Stuart, if I could just real fast, could you remind us how many remodels that you've done overall for the fleet in the last year and how many we should expect on a normal basis? Yes, I think we did 10 last year and we had 12 planned for 2016. Perfect. Thank you very much. Yes. And similar I would say a similar amount that I would expect going forward annually. Thanks a lot, Stuart. Operator, we have time for one last question. Thanks. The next question will come from Betty Chan of Mizuho Securities. Please go ahead. Thank you. Good afternoon and congrats on the progress. I was wondering if you can talk a little bit more about the traction you're seeing in Asia, especially in China. Are you seeing that customer purchase pattern any differently in terms of the mix or price points or tops to bottom? And then also any change in terms of how quickly we could see the store rollout plan? I know you mentioned what we should expect in the back half, but how about 2017 or beyond? Thanks. Really, when you think about Asia, I mean, actually when we look at the product mix, I mean, we don't really see any significant difference in the assortment between the rest of the world and Asia, which is I mean, we really talk about building a globally inspired line, so it resonates with guests around the world. No significant deviation from what you're seeing in the rest of the world. I mean, what I'll say that on Tmall, we see a very, very strong accessory business and people are probably engaging with the brand for the first time and so we're very pleased with that. As far as stores, I mean, the showrooms have been performing really, really well in China, especially when you think about Beijing and Shanghai and so that's where we're being most focused. And the ambassador strategy is really working well. I mean, we had this amazing event a couple of days ago in the Forbidden City. We had 3,000 people doing yoga and the event was done in partnership with Alibaba and sold overnight. So, I mean, I really think that we've got momentum. We're focused on the right cities. And as far as the assortment, I mean, it's resonating it's the same assortment that's resonating with the guests that we've seen in the rest of the world. How about stored in terms of the 4 wall or ROI, how should we think about those stores performing? They're smaller, but is the rent typically a little bit higher, but with the higher productivity, is the 4 wall similar to North America? Yes, we're pleased with the 4 wall economics. It is more expensive to do business in Asia and much of the world and that translates into higher labor costs and higher rent. But we're still pleased that the 4 wall profit that we're seeing, it's probably 300 to 500 basis points lower than the North American, the average for North America, but still we're very happy with the level of profitability we're seeing. The one thing that we see with consumer behavior and you know that is that they're obviously a lot more engaged from a mobile standpoint. So all the work that we're doing from a digital standpoint will allow us to sort of get to those new guests a lot faster and more efficiently and profitably. Okay. That's great. Thank you so much. Best of luck. Thank you. Thanks again everyone for joining us today. Look forward to talking again next quarter. Goodbye. Goodbye. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.