Good day, ladies and gentlemen, welcome to the Lululemon Athletica second quarter 2014 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If you should require any assistance during the call, please press star and zero on your touch-tone telephone. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Chris Tham, Senior Vice President of Finance. Sir, you may begin.
Morning, everybody, thank you for joining us on our second quarter 2014 conference call. A copy of today's press release is available on the Investors section of Lululemon's website at www.lululemon.com, or furnished on Form 8-K with the SEC and available on the Commission's website at sec.gov. Shortly after we end this morning, a recording of today's call will be available as a replay for 30 days on the Investors section of the website. Hosting our call today is Laurent Potdevin, the company's CEO, Stuart Haselden, the company's CFO, and Tara Poseley, our Chief Product Officer, will also be available during the Q&A portion of this. We would like to remind everybody that statements contained on this call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. For today's call, we have a limit of one hour, please limit yourself to one question at a time to give others the opportunity to have theirs answered. With that, I'll turn it over to Laurent.
Good morning, everyone. The results we're sharing with you today are beginning to reflect the ongoing work that is being done across our entire organization, our sales and bottom line for the quarter finished slightly ahead of plan. We are early in the process of getting back to consistently delivering amazing and innovative product to our guests, along with unmatched guest experiences. We obviously don't aspire for flat same-store sales and earnings that are down year-over-year, yet are confident that the work and investment we're making is building the foundation that will fully unlock Lululemon's long-term global potential. On our last call, I laid out four key priorities: product, brand, guest experience, and international expansion. Our second quarter results indicate consistent progress against those priorities. On the product front, product flows were ahead of forecast in our sales plan in the second quarter.
This was particularly evident in July as we tested additional prints and bottoms and leveraged our fast turn team to create mesh product with both newness and excitement in-store and online. Additionally, our transitional collection, which was a new strategy to bridge summer and fall, was incredibly well received by our guests and created the uptight sewing July by selling through faster than anticipated. While our assortments are not optimal this year, we have started to shift our mix with further improvement expected in 2015. We've also emphasized our commitment to building our foundation over the next 18 months in order to set ourselves up for global growth. One of these foundational areas to strengthen is our go-to-market process. Although it's still early, we're hitting each milestone in the implementation of the calendar that we set to achieve.
At this time, we've completed the cadence of the calendar, resulting in 4 additional weeks of creative space for our designers as they start to design of fall 2015. This past quarter, our White Space Workshop has started partnering with our ambassadors on 3 different fronts. First, co-creating innovative, technical, and beautiful products with a small group of elite ambassadors. Second, gaining a deep insight into asset product relationships. Third, testing and validating product development and upcoming launches. The information we derive from our workshop projects, combined with the world-class product engine, will drive the innovation that our guests love. Moving on to brand and guest experience. On our last call, I spoke about one of our most unique yet underleveraged assets, our 1,500-strong army of ambassadors. These athletes are leaders in their communities. They embody our lifestyle and reflect our amazing culture in everything that they do.
They are the authentic voices in our community, whose local stories and insights are shaping our global brand. We are committed to building and nurturing this group of inspirational assets. One of the ways we are harnessing the collective power of this group is through the online ambassador forum we recently launched. Through this forum, more than 1,000 of our ambassadors are connecting and sharing back with each other, the Lululemon stores, and the product and White Space team here in Vancouver. Our SeaWheeze Half Marathon in Vancouver, which brings together running, yoga, and community, was once again a tremendous and inspiring success, and we are thrilled to see our annual event become such a sought-after destination. We hosted more than 10,000 runners, 70% of whom were from outside of Vancouver and 50% from outside of Canada.
In fact, registration for 2015 took place yesterday and sold out in 36 minutes. This event fully embodies the spirit of Lululemon, and we're rolling out locally relevant experiences in San Francisco, Los Angeles, New York, and Toronto from October through December that will reflect that same spirit. This year, the SeaWheeze event took place on the heels of the opening of our flagship Robson store in Vancouver, a beautiful 4,500 sq ft space featuring in-store digital storytelling, dedicated space for men's and women's, and on-site product personalization. This new space serves as an example of the directions we're taking, with similar openings scheduled to take place in Miami and Santa Monica in the next quarter. The store opening was supported with community events that truly showcase the engagement that currently exists among our guests.
The store performance in its opening week performed at 141% to plans, which was the highest volume store globally, reaching an 18% penetration in men's sales, the highest in North America. To further elevate our guest experience and global brand awareness, we are relocating our Soho store in New York and opening both men's and women's standalone locations kitty-corner to each other on Prince and Wooster, with the men's location opening by late fall 2014. This will provide unique experiences for both men and women in spaces that are designed uniquely for their needs. I look forward to seeing how these two stores build a solid partnership while still making sure to one-up each other every now and then. Once again, the ivivva business performed very well with a positive comp of 36% in Q2.
We recently launched the Dreams and Goals program for all our stores and showrooms to connect with our young guests, and we're incredibly excited about the potential of this growing brand. We continue to invest in our infrastructure to support our goals. We made significant headway in improving our online guest experience by opening another distribution center to improve service level to our guests by delivering product faster. This distribution center is located in Columbus, Ohio. Our new guest order management system went live on July 11. It's a major pillar in our one guest omni-channel strategy, enabling efficient routing of orders among all distribution centers. This quarter, our Backroom app, which allows us to process sales in store from our online inventory, created incremental opportunities and enhanced experience for our guests by giving them access to a broader product selection. Moving on to our international expansion.
We are seeing continued demand and brand strength globally, with our London store continuing to perform strongly. We look forward to opening our second store in Chelsea by December of 2014. We are on track to build a network of showrooms in both Europe and Asia through 2014 and 2015, and by the end of 2017, to have 20 stores in both regions. We are very happy to announce that we've secured a fantastic location in Singapore in the ION Mall and are on track for a Q4 opening. We're also in the final stages of securing our first location in Hong Kong, scheduled to open early 2015.
On the heels of the successful opening in London in the spring and a continuation of strong demand and performance, we continue to look into opportunities to accelerate market entry in other regions, including being in discussions with potential partner in the Middle East to enter the region by Q4 of 2015. Before I turn the call over to John, I want to mention that we're all looking forward to having Advent back as a shareholder. Advent was an early investor in Lululemon, and David Mussafer and Steven Collins were both instrumental in helping to guide our growth in its early years. We look forward to having their guidance once again as we write the next Lululemon chapter. To summarize, we are on track in building the foundation for our next phase of growth, and we continue to focus on innovation and products, brands, guest experience, and international growth.
We are amplifying our brand storytelling, better leveraging our ambassador network, and seeing steady improvement on product innovation and assortments. The foundational work we're doing today is strengthening our leadership position in the market that we originated in. With that, I will turn the call over to John to review the financials.
Thank you, Laurent. I'll begin by reviewing the details of our second quarter of 2014, then I'll update you on our outlook for the third quarter and the full year of 2014. For Q2, total net revenue rose 13.4%, $390.7 million from $344.5 million in the second quarter of 2013. The increase in revenue was driven by total comparable store sales on a combined basis, including e-commerce of 0%, comprised of 30% growth online and a bricks-and-mortar store sales decline of 5%, all on a constant dollar basis. The addition of 44 net new corporate-owned stores since Q2 of 2013, 29 net new stores in the U.S., one store in Canada, one in Australia, three stores in New Zealand, one in the U.K., and nine ivivva stores.
Offset with a foreign exchange impact of a weaker Canadian and Australia dollar, which had the effect of decreasing reported revenues by $5.1 million or 1.3%. We were able to deliver above our Q2 expectations coming into the quarter due to strong performance of fall transition product that we were able to pull forward from Q3 and drive sales in July. During the quarter, we opened seven net new corporate-owned stores, five in the U.S., two ivivva, and one in Australia/New Zealand, offset with one closure in Australia. We ended the quarter with 270 total stores versus 266 a year ago. There are now 206 stores in our comp base, 39 of those in Canada, 136 in the U.S., 23 in Australia/New Zealand, and eight ivivva.
At the end of Q2, we also have a total of 93 showrooms in operation, 42 Lululemon in North America, 18 internationally, and 33 ivivva. Corporate-owned stores represented 75.3% of total revenue, or $294 million versus 79.5%, or $273.8 million in the second quarter of last year. Revenues from our direct-to-consumer channel totaled $63.5 million or 16.2% of total revenue, versus $49.4 million, or 14.3% of total revenue in the second quarter of last year. Other revenue, which includes strategic sales, showrooms, pop-ups, and outlets, totaled $33.2 million, or 8.5% of revenue for the second quarter, versus $21.4 million or $6.2 million of revenue in the second quarter of last year. Gross profit for the second quarter was $197.3 million or 50.5% of net revenue, compared to $186 million or 54% of net revenue in Q2 2013.
Factors which contributed to this 350 basis point decline in gross margin were product margin decline of 260 basis points, due primarily to a higher sales mix of lower marginal margin seasonal product, higher input costs, in particular with print and textured fabrics, 40 basis points of deleverage from occupancy and depreciation, 70 basis points of deleverage from continued investment in our design, merchandising, and product engine functions, and 50 basis points deleverage from foreign exchange impact on product costs due to the weakening of the Canadian and Australian dollar. These were offset with a decrease in markdowns and discounts of 70 basis points compared to the second quarter of 2013. SG&A expenses were $129.4 million, or 33.1% of net revenue, compared to $107 million or 31.1% of net revenue for the same period last year.
This 17.3% SG&A dollar increase was due to an increase in operating expenses associated with new stores, showrooms and outlets, including higher store wages to reflect merit and base pay market adjustments. Increased variable operating costs associated with the year-over-year growth in our e-commerce business, increases in expenses at our store support center, including salaries, administrative expenses, professional fees, and management incentive compensation. In addition, we recognized $1.3 million in foreign exchange losses, attributable primarily to the revaluation of U.S. dollar cash balances in our Canadian subsidiary, which increased overall SG&A. This is compared to a $4.4 million foreign exchange gain in Q2 2013. These were offset with a weaker Canadian and Australian dollar, which on translation decreased reported SG&A by $2.6 million or 2%. As a percent of revenue, our second quarter SG&A delevered 200 basis points.
As a result, operating income for the first quarter was $67.9 million or 17.4% of net revenue, compared with $79 million or 22.9% of net revenue in Q2 2013. Tax expense for the quarter was $21 million or at a rate of 30.1%, compared to $23.8 million at a tax rate of 29.7% in the second quarter of 2013. Net income for the quarter was $48.7 million, or $0.33 per diluted share, compared to net income of $56.5 million or $0.39 per diluted share for the second quarter of 2013. Our weighted average diluted shares outstanding for the quarter were 145.5 million, versus 145.9 million a year ago. This takes into account the weighted impact of 1.4 million shares repurchased during the quarter, at an average price of $39.24 per share.
The impact of the share buyback on diluted EPS for the quarter was nominal due to the timing of when the shares were repurchased. Capital expenditures were $26.7 million for the quarter, compared to $23 million in the second quarter last year. The increase associated with new stores, renovations, IT, and head office capital. Turning to our balance sheet highlights. We ended the quarter with $725.1 million in cash and cash equivalents. Inventory at the end of the second quarter was $176.5 million, or 8.3% higher than at the end of the second quarter of 2013, reflecting a sequential improved ratio of inventory to forward sales versus the first quarter of this year. This now leads me to our outlook for the third quarter and full fiscal year 2014. We anticipate Q3 revenue in the range of $420 million-$425 million. This is based on comparable store sales. Sorry.
Comparable sales percentage increase in the low single digits on a constant dollar basis compared to the second quarter of 2013, assumes a Canadian dollar at $0.91 to the U.S. dollar and 19 new store openings, one in Canada, 15 in the U.S., three ivivva. Consistent with Q2, we expect gross margin to be approximately 51%. This is down from a year ago, primarily due to product sales mix, deleverage against product and supply chain expenses within cost of goods sold. Store occupancy and depreciation. Lastly, the impact of foreign exchange due to a weaker Canadian and Australian dollar compared to last year. We expect SG&A deleverage as a percentage of revenue compared to the third quarter of 2013, driven primarily from the run rate of strategic investments made last year, an incremental spend in traffic and revenue-driving initiatives that we mentioned last quarter.
Majority of these costs associated with the driving traffic initiatives will be incurred in the back half of the year, as the timing of some costs slip from Q3 to Q2. Our SG&A outlook also reflects pre-opening costs related to the 19 stores planned to open in Q3 and additional stores planned to open in early Q4 of 2014. Assuming a tax rate of 30.2% and 144.7 million diluted average shares outstanding, we expect diluted earnings per share in the second quarter to be in the range of $0.36-$0.38 per share. For the full fiscal year 2014, we expect net revenue for the year to be in the range of $1.78 billion-$1.8 billion. We expect to open 47 corporate-owned stores, which, as Laurent mentioned earlier, now includes our first store in Asia, Singapore, and our first men's only store in SoHo, New York.
For the year, we expect gross margin of approximately 51%, down from last year due to the same factors impacting Q2 and Q3. We expect SG&A to deleverage as a percentage of revenue compared to 2013. This is primarily due to continued strategic investments in areas such as IT, international, traffic-driving initiatives, and lapping both $17 million in foreign exchange gains realized last year and reduced management incentive compensation. As a result, we expect our overall operating margin to deleverage from 2013, and our fiscal year diluted earnings per share to be approximately $1.51-$1.56, or $1.72-$1.77 normalized for the non-recurring tax adjustment we incurred in the first quarter. This is based on 145.2 million diluted weighted average shares outstanding.
Our guidance does not reflect any estimate of shares repurchased in future quarters. It assumes an overall effective tax rate of 38.5%, which includes the one-time tax adjustment, or 30.2%, excluding this tax adjustment. We expect capital expenditures to range between $110 million-$115 million for fiscal 2014, reflecting new store build-outs, renovation capital for existing stores, IT, and other head office capital, including expansion of our existing premises. With that, I'll turn the call over to the operator for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press the star, the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from Adrienne Tennant of Janney Capital Markets. You may begin.
Good morning. Can you hear me?
Yes.
Congratulations on the improvement in the product. Laurent, can you talk about what % of the July flows and go-forward are in the seasonal versus the core category? John, if you can talk about the inventory. You had to pull some of it forward because demand was good. Where does that put you in terms of inventory flows going into the early part of fall season? If you can talk a little bit about that. Then really quickly, the Canadian comps versus U.S., if you can talk to that. Thank you so much.
As far as the breakdown, we had this strategy of launching the transitional line that was a bridge between summer and fall that was received really well. The sell-through was higher than anticipated. We had a plan on selling about three weeks of those in July, as well as the first two weeks of August. We pretty much moved all of that product in July. That probably created a void in the first two weeks of August. What is the breakdown exactly?
I think the question also is about the balance of.
Yeah.
Versus core. As we had talked about in the last call in Q1, the balances as we move into the back half of the year is going to be about 40% in core, which is similar to what it trended in 2012. John, did you want to
Yeah. On your question on pulling inventory from Q3 into July. Moving the transition line up into July helped July sales relative to what we'd expected when we gave guidance. That did leave us a little bit lighter in that product for August, but still had some remaining that has helped us through August, but a little bit lighter than what we'd expected. When you look at our revenue guidance from last quarter for the full year, it's really just been a shift from Q3 into Q2. Your other question on comps. On a combined basis, U.S. was up slightly, low single digits, and Canada was down mid-single digits.
Okay, thanks so much, and best of luck.
Thanks.
Thank you.
Thank you. Our next question is from Ed Yruma of KeyBanc Capital Markets. You may begin.
Hi, this is Jessica Schmidt on for Ed. Thanks for taking my question. Laurent, you've been in the position for a while now, where do you think you still need to invest to get systems and processes to where you really want them to be? Do you think you have the necessary tools to manage the business?
I really do feel that we've got the necessary tool. As I mentioned on the call and actually on the prior call, we're on this journey of building the foundation, I'm really excited to see the team hitting all of the milestones so far. It's a really deep project that will see all of its results pay off by the first quarter of 2016. One of the first milestones being to free up a lot of our designers' time and giving them a lot more room to create has been achieved, we've rebalanced the whole calendar. That first milestone is incredibly critical in our process of really building the most technically innovative product. We have the investments. We're still building the team, we've made a lot of progress in getting a lot of amazing talent on board, I'm really excited.
It's by no means a finished project, there is still much work to be done. We're very much on track, both from a human capital standpoint, from a financial standpoint, and from a technology and process standpoint.
Thank you. Our next question is from Brian Tunick of JPMorgan. You may begin.
Thanks. Good morning, guys. I guess two questions. I'm sorry if we missed any comments you made about the second quarter comp drivers, whether it was traffic or conversion. We're curious, in terms of traffic, if there's any sense of loyalists versus new customers, what you're seeing there. On the SG&A, John, just some more color on this timing shift. Can you give us some idea of how much spending is shifting into the second half? It looked a little like you may have reduced your fourth quarter implied earnings guidance. We're just wondering, was it comp or anything else in Q4 that might be taking a more conservative view? Thanks very much.
Okay. On your first question, for the past couple of quarters, traffic has been down, and that's what's negatively impacted our comp. In Q2, actually traffic turned slightly positive, that's encouraging. The comp was adversely impacted by lower conversion and average basket, which is consistent with the fact that our product assortment wasn't ideal, but again, encouraging in terms of trend. In terms of the shift in SG&A, is really referring to some of the paid search and other traffic-driving initiatives that we'd planned for the three quarters when we gave guidance last quarter. With sales trending a little bit higher at the back half of Q2, we didn't spend as much of that as we'd originally anticipated. It's a shift of maybe $2 million-$3 million from Q2 forward.
Your last question regarding Q4, of course, I haven't broken out Q4 in the past, really the guidance I'm giving today doesn't indicate a drop in Q4. It's consistent with what was included in my guidance when I gave it last quarter.
Thank you. Our next question is from Oliver Chen of Citigroup. You may begin.
Hi. Congrats on the momentum here. I had a bigger picture question for Tara and Laurent. What are your longer-term ideas in terms of how we prioritize the factors that will keep you ahead of the competition with respect to product? A financial question is on the gross margin side. Is our expectation for merchandise margins to continue to show that positive traction and product mix to continue to be a headwind? Thank you.
Before I let Tara maybe get more into the product, really the bigger strategic moves are really in ramping up everything we do with our White Space Workshop and combining that with our ambassadors. As I've said since day one, our ambassadors are truly our most under-leveraged asset. They are the authentic voice of this brand, we've done a lot of work in having the White Space and the ambassadors collaborate in looking at new activities, looking at problems they want to solve during their activities, we have a lot in the pipeline, both from a performance standpoint, from a raw material standpoint, from a category standpoint, we'll be sharing that when we're ready.
Obviously not to forget all the work that we're doing to boost our international expansion. We're getting really strong demand internationally. We've started to really accelerate the pace of our rollout with the Singapore store opening, the finalization soon of the Hong Kong location, and the second location in London.
Yeah, thanks. Hi, Oliver. How are you? I think Laurent stated it well. I've been going through with the team over the last six months a rigorous process of building our three- to five-year product, raw material strategies, and innovation strategies. Obviously, as Laurent stated, we're not going to share those because those are proprietary. That work is in motion, and the teams are executing against it. Really tight project plans against all of those areas are in place. We look forward to sharing those as we go into the future.
Thank you. Our next question is from Camilo Lyon of Canaccord Genuity. You may begin.
Thanks. Good morning, guys. I was hoping you could give some color on the new DC opening, how that is expected, or if that's expected to help product flows this year, or is that a 2015 benefit? Then just if you could update us on the two new mills that you've added this year and their contribution to improving product flows.
The DC, the facility we just opened is in Columbus, Ohio. The biggest improvement right now is the service level to our guests. With the opening of that facility with no additional cost, we're reaching over 85% of our guests in two days. As we head into Q3 and Q4, we're really excited to see that level of service improve. Then starting in January, we will be delivering the stores from the facility.
Thank you.
What was the second part of the question?
You got one on.
Thank you. Our next question is from Lorraine Hutchinson of Bank of America. You may begin.
Thank you. Good morning. John, as we think about the gross margin trajectory going forward, is your expectation that you'll be able to get back into the mid-50s%, or is the focus on fashion and seasonal product going to keep the margin down in the low 50s% going forward?
As we've said, in the near term, you're likely to see gross margin in a similar range to what you've seen in Q2. The work underway that Tara's team and Jennifer's team are doing on the go-to-market calendar. Over the next couple of years, we see significant improvement in gross margin coming from those initiatives. I think as I've said in the past, maybe 300 or more basis points. In terms of pricing architecture, we're really not at a point of talking about whether there will be significant changes that would impact product margin. For the time being, I assume that that would not be a factor. Bottom line, just with the improvements on the process side, we see getting back closer to that mid-50s% level.
What's the timeframe on that?
Well, not until we get into 2016 and these initiatives have really taken hold and have impacted the seasons that we'll be delivering in 2016.
Great. Thank you.
Thank you. Our next question is from Kimberly Greenberger of Morgan Stanley. You may begin.
Great. Thank you. I just had a follow-up question on Lorraine's gross margin question. Obviously, understanding you don't want to reveal any trade secrets about the work you're doing on the supply chain, we're just trying to understand the move from the low 50s to the mid 50s in gross margin. Is that being driven by an ability to take price in the assortment? Are you looking at trying to save on average unit cost? Maybe if you can just help us understand what the levers are that could get you there. Thanks.
Yeah. It's really not based on taking pricing. That's always the last lever that we want to be pulling. It's primarily based on efficiencies. The obvious ones being reduction in air freight and some of the other costs, efficiencies coming from the new DC, but also just a much smoother and more efficient process from design all the way through to delivering to the stores.
Thank you. Our next question is from Omar Saad of ISI Group. You may begin.
Thanks. Good morning. Two questions. First one is on the success you're seeing in the transitional merchandising assortment. What's really going on there? What are you learning? What's so good about the assortment that's really driving that business, and how can you carry forward that momentum or even build upon it going forward? Any insights, especially around product and stylings that's driving that. The second question I have is on ivivva. You mentioned a really good comp number there. I know it's really small. Maybe you could talk about the long-term vision for that concept and brand, and how it's going to fit versus the Lululemon brand and complement it, and where you see that going long term. Thanks.
I'll answer the success of the transition line. I think it really underscores what I have been talking about over the last two quarters about our opportunity to be really consistent in bringing beauty and the technical back to our product. I think that line definitely illustrates that. I also think the work that the team did with print and also some of the print that we chased into in the quarter also, we saw great response there. Again, it's just that newness and beauty, but always underscored by great technical product. Laurent, did you want to talk about ivivva?
With ivivva, especially having a 12-year-old daughter, I'm very excited about the work that we're doing with ivivva. There's so much correlation with what we're doing at Lululemon. When you see the Dreams and Goals program that we rolled out for little girls, it's been incredibly well embraced by our young guests. With sales getting into close to $1,000 per square foot, we're very happy with the results, and we're creating the next generation of Lululemon guests. A very exciting prospect. In the meantime, we're doing great work in our communities with little girls. We see a bright future with ivivva.
Thank you. Our next question is from Bob Drbul of Nomura Securities. You may begin.
Hi, good morning. John, I was wondering if you could give us some commentary around new store productivity trends, U.S., Canada, men's productivity, ivivva productivity.
Just making sure I don't miss any part of the question. New store productivity, again, in Q2, new store productivity was coming in around 1,100 to 1,200 a square foot. That's similar to where we've been coming in for the last year or more. In terms of men's, we don't really break up productivity by men's. In terms of comp, men's comped up 5%. Again, I don't have the productivity broken out. As Laurent mentioned, ivivva, it's on track to end the year at somewhere a little over 1,000 per square foot productivity.
Got it. Okay. I'm not sure if I missed it, but did you just give a full year e-com sales estimate that's included in the guidance today?
We didn't break out full year e-commerce estimate. E-commerce is in Q2, it was running about 16%. Typically, goes up a little bit in the fourth quarter, we haven't specified an e-commerce number for the year.
Thank you. Our next question is from Betty Chen of Mizuho Securities. You may begin.
Thank you. Good morning. Congrats on the progress. I was wondering, John, if you can talk a little bit more to the SG&A deleverage. Should we expect the magnitude to be similar to what we saw in the first half, or given the shift in timing, should it be a little bit greater? Whether we should expect that growth rate to continue in 2015. My second question is related to earlier. What were the women's comps during the second quarter, and how did that measure against Q1 if we saw any sequential improvements? Thanks.
Okay. SG&A, the guidance I've given, say for Q3, I think you'll see a margin profile pretty similar to Q2. The thing to watch for as you look at our second half, I mentioned, Q2 was skewed a little bit by sort of non-recurring, sort of foreign exchange gains, last year versus losses this year. That simply comes from the balance sheet date revaluing the U.S. dollars held in the Canadian company. It's really not an indication of the health of the business. If you look at last year, the Canadian dollar dropped significantly. For the full year last year, as I said in my prepared remarks, the foreign exchange gain that was offsetting our SG&A was about $17 million, and most of that was in the back half. We wouldn't expect to have that benefit again this year.
Also last year, because we missed our budget and plans, our bonus accruals were reduced primarily in the back half, and that was sort of a high single-digit millions benefit to SG&A this year that we won't enjoy, sorry, last year that we won't enjoy this year. Seems strange to say enjoy a lack of a bonus, anyway. Women's comp. As I said, men's was +5%. I believe women's was just slightly negative.
Thank you. Our next question is from Lindsay Drucker Mann of Goldman Sachs. You may begin.
Thanks. Good morning, everyone. I wanted to ask another gross margin question. In the last couple of quarters, we've seen some pretty nice sequential improvement in the rate of decline in your product margins. You called out last quarter 110 basis points of discounts that hurt, and you didn't call it out this quarter. Also some of the negative mix impact got better. I was actually curious, how do we think about what's embedded in your gross margin guidance for the back half of the year? Could you actually get a bit of a tailwind from discounts that you put into place in the fourth quarter, or are we looking at the 2Q kind of run rate of product margin compression being pretty similar?
Yeah, looking at the back half, your question on discounts, I don't think I called that out, but markdowns and discounts were a little bit lighter in Q2 this year than last year. The back half, there might be a little bit of a tailwind because we had an online warehouse sale last year. We may not duplicate that this year. Other than that, the items in our gross margin guidance, there continues to be some tailwind from product mix. FX, again, the Canadian dollar continuing lower will impact us sort of 30-50 basis points. With lower year-over-year revenue, there's deleverage on our fixed costs, occupancy and depreciation and the cost of the product team. Those continue to be the main pieces of the gross margin guidance.
Thank you. Our next question is from Tom Salandro of Susquehanna International Group. You may begin.
Thanks for taking my question and nice execution. I have a question on the DTC channel. I was hoping you can give us a sense of what's driving the acceleration. Is it transactions, average dollar growth, anticipation of what we should see for the balance of the year? Can you also address what the contraction was in that channel? I think it was down 220 for the period. Then Laurent, just very quickly, I think you mentioned this earlier about the omni-channel initiative in-store driving some performance there. Can you expand on exactly what it is you guys doing in store to offer that customer the full assortment? Thank you very much.
Yeah. We've rolled out, it was a pilot earlier this year, maybe even at the end of last year, actually, and we rolled out to all stores now this Backroom app. It's an iPod device that's rolled out in all of our stores that give access to the entire online inventory, for our educators to see to service our guests. When you're in store, you not only obviously have access to the in-store inventory, but now you have access to the whole online inventory. We've seen great momentum in growing this business with last quarter to about 1% of our retail sales. Much better service for our guests, much better use of our online inventory. We've also rolled out a new guest order management system that allows us to flow the orders better through different VCs. That was the Backroom app.
Obviously, we've set up a full group in-house to really look at the guest experience. As we build further technology, we're obviously going to continue to play with technology and enhance the service that we're providing and maximizing the inventory between the channels.
On your question on DTC, as I said in the prepared remarks, e-commerce comped up 30%. That was driven pretty much entirely by increased traffic. Strong traffic growth continues, not much of a change in terms of conversion or average order value. Your other question, I think you said down 20 basis points. You might be looking at the DTC margin that's contained in the Q. If that's what you're getting at, it's really just a flow through of the lower gross margin. Most of the costs related to DTC are variable other than the product margin.
Thank you. Our next question is from Faye Landes of Cowen and Company. You may begin.
Hi. I'm just hoping that you can elaborate a little bit more on inventory. Pretty consistently, the products that sell really well sell out earlier than you've expected, which is in some ways a high-class problem, obviously, but you're also leaving money on the table. I don't remember the last quarter where that didn't happen. Can you talk about how you plan to adjust things so that you can fully capitalize on the opportunities that you have?
Okay, I'll take that one. Hi, Faye.
Hi.
Yeah. What we talked about in Q1, where we've seen the high sell-through in the seasonal goods, and we had overplanned our expectation in the core. What we did for Q3, obviously we weren't able to affect Q2. What we did for Q3 was really shift that core investment and open-to-buy into the seasonal product. We went back and looked at sell-throughs on all of our seasonal product in Q1, made sure we were planning our APS appropriately in Q3 and really did that diligence and making sure we were investing appropriately. We will. We also do really value the scarcity model. We've got very low markdown rate in the brand, which I love. It's always that fine balance, and then that's what we're working and perfecting towards.
As part of what we had talked about, I think we had mentioned this earlier, we're in the process of implementing a new planning and allocation tool, that will be fully live for the planning of winter 2015, and we're on time and on budget, with the execution and implementation of that tool.
Thank you. Our next question is from Howard Tubin of RBC Capital Markets. You may begin.
Oh, thanks, guys. Can you just update us on where you stand on senior level hires and what senior level open positions are still there?
Yeah. We've got four senior level position open. We're in the final stages of the HR and brand and community search, and we're probably about halfway through the process with the CFO search and the managing director for Europe search.
Okay. Thank you.
Thank you. Our next question is from Paul Lejuez of Wells Fargo. You may begin.
Thanks, guys. Sorry if I missed any comments about the showrooms, can you maybe talk about how your showrooms are performing, what % of them are you happy with, and which geographies do you feel most comfortable that the brand is resonating? Thanks.
Maybe I'll take that. We had probably the most showrooms we've ever had open during the quarter. I think it was 90, 93. 33 of those are ivivva, which is a real expansion of the showroom program for ivivva. The showrooms in North America for Lululemon continue to perform as they have. They are our barometer for when a market is ready for a store. I think more interestingly, the international showrooms. Speaking broadly, the ones in Asia are doing extremely well, much better than the counterparts that we had in the U.S. as we expanded into the U.S. Singapore, Hong Kong, Shanghai, those showrooms are very strong, which is an indication that there had already been brand awareness in Asia.
In Europe, with the London store opening well ahead of our expectations, the other showrooms in London are continuing to perform very well, again, because there's growing brand awareness in London. The other European showrooms are really doing quite similar to how the U.S. showrooms did when we really expanded that program back in 2009. They're on track. They're building brand awareness, and we're building showroom sales, which is one of the indications of when we are ready to open stores. I'd say overall, the European showrooms are on track.
Thank you. Our next question comes from Dorothy Lakner of Topeka Capital Markets. You may begin.
Thanks. Good morning, everyone, and congratulations on the progress. Just a question for, I guess, either Laurent or Tara. In terms of the milestones that we should be looking at into the back half of the year as to where you are in the calendar and getting to where you want to be from a product standpoint, what should we be looking for as that product comes into the stores in the second half of the year? You were obviously able to chase more in second quarter. What should we be looking for in the third and then into holiday?
For the back half, obviously, the go-to-market calendar and all the work that we're doing with that, we commenced that in Q1 of this year. Obviously that did not affect Q3 and Q4 of this year since that was already bought and commercialized at that time. Really for the back half of the year, it was rebalancing the core versus the seasonal, which I just talked about a few minutes ago, and just making sure we are investing appropriately in the seasonal. We've continued to really focus with the design team on making sure we're getting all of that beauty and technical, always technical, back into our product because we are very proud that we are the originators of that, and that's in this space, and a lot of focus there. That's the focus this year.
Just using our fast turn where we can to continue to chase into products. A good example of that is I used fast turn team to create a special little capsule product to arrive right before Black Friday for some wonderful price selling during that weekend.
Thank you. Our next question is from Janet Kloppenburg of JJK Research. You may begin.
Hi, everybody. Congratulations on the progress being made. Tara, just a question on the product mix. I think you've introduced a lot of new bottoms to try and reinvigorate that core category. I was wondering if you could talk about the performance there and your outlook as we go forward for that category. Laurent, I think you had defined $10 million in incremental SG&A spending on traffic-driving initiatives for the stores and/or for the entire business. I'm wondering if there was impact on the SG&A line from that in the second quarter, or if most of that will be incurred in the back half, or if we potentially could see more investment there. Thanks so much.
Yes, Janet, you're right. We had talked about that Q3 was going to be a focus on really reinvigorating our core products, starting with the bottom. Early signs are that there is some emerging core that is in store now that we're excited about. I'm not going to call out which silhouettes those are because that's proprietary information, but we are seeing some good signs there. As we move into Q4, the other area that we're really clear that we needed to continue to evolve and create newness in was in tops and the tanks, and we also will be testing some new emerging core in those areas as well. The fast turn team will continue to also be testing and learning, and getting that insight and information that we can chase in future quarters.
To the second part of your question, we had allocated $7 million to drive traffic through increased paid search, online campaigns, email segmentation, and redesigning our product notifications that are so relevant to our guests. Most of that spend will happen in the back half of the year. In Q2, I think we spent less than $1 million on it, and we looked at sales through and inventory and saved that investment for the second part of the year.
Thank you. Our next question is from Sam Poser of Sterne Agee CRT. You may begin.
Hi, it's Ben Shamsky for Sam. Thanks for taking my call. Wanted to dig in a little bit more on the brick-and-mortar side of the business. Can you provide us with the traffic in the brick-and-mortar stores? Then if you could, the comps by month in the brick-and-mortar.
Traffic in brick-and-mortar was up mid-single digits. I don't break out monthly comps. I will say, though, that July ended up a little stronger than our expectations because of, as we've talked about, the pull forward of the transition line.
Yeah, operator, I know there's many people still left in the queue. We have time for one more question.
Our next question is from Dana Telsey of Telsey Advisory Group. You may begin.
Good morning, everyone. Can you talk a little bit about where do you stand on some of the improvements from the third-party consultants, what you're learning as they look at the organization and the processes? Lastly, Tara, on the new line where you've seen the big improvement on the style, price, how are the learnings able to influence the other product flows in the short term? Is the margin on this product, do you see that developing early in the ability to have improved margin? Thank you.
The third-party consultant that we brought in to help us with re-engineering a go-to-market calendar. We've had really good insights. I think, on the whole, it's a lot around how we were sequencing events within the calendar. We're going through a process of re-sequencing how we bring product to market. Some things were happening too late in the process that needs to be moved forward. I'm not going to get into all that detail, but we've really, really honed in on what those pieces are and are going through the process of a redesign of every single quarter for each season. We are on track by Q1 of 2016 to have a fully operational go-to-market calendar. I think, Dana, what was your second question? It was about style and price and what we can do in the short term.
This is a very scrappy and entrepreneurial culture, which I deeply value. We literally are learning minute by minute about our assortments as we see things getting in using our fast turn team when we can to react quickly to get those learnings in, also infusing any of the learnings into the future seasons that are in process and being worked on.
Thank you. I would now like to turn the conference back over to Laurent Potdevin for closing remarks.
Well, we'd like to thank you all for joining us today, and we look forward to talking to you again in a quarter. Thank you so much.
Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.