Earnings Call: Q2 2020

Sep 5, 2019

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Second Quarter 2019 Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon. Please go ahead, sir. Thank you, and good afternoon. Welcome to Lululemon's Q2 earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO Celeste Burgoyne, EVP, Americas and Global Guest Innovation and PJ Guido, CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward looking statements reflecting management's current forecast of certain aspects of Lululemon's future. These statements are based on current information which we have assessed, but by which its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10 ks and our quarterly reports on Form 10 Q. Any forward looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our quarterly report on Form 10 Q and in today's earnings press release. The press release and accompanying quarterly report on Form 10Q are available under the Investors section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the Q2, as well as our quarterly infographic. Today's call is scheduled for 1 hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. Now, I'd like to turn the call over to Calvin. Thanks, Howard. I'd like to welcome everyone to our 2nd quarter earnings call. I'm pleased to take you through our results which reflect continued strength across all areas of the business. Lululemon had another quarter as our teams across the world continue to build upon momentum in our business and execute on our Power of 3 vision for growth. On today's call, I'll provide an overview of our quarter two results, including further details on some key initiatives within product innovation and our international business. Next, Celeste Burgoyne, our EVP of the Americas and Global Guest Innovation will join us to discuss the success within the North American region, early learnings from our Lincoln Park experiential store and the progress of our membership pilot. Then PJ will provide a detailed financial review as well as our guidance outlook. To wrap up our call, I'll provide a few closing comments and then we'll be happy to take your questions. Looking at our Q2 results, momentum in the business remains strong across product categories, channels and regions. We're now 2 quarters into our 5 year vision and I'm pleased with the strong execution and passion across the business to continue to deliver on our growth priorities. In quarter 2, total revenue grew 22%. Constant dollar comps increased 17% on top of a 19% increase last year and earnings per share increased 35%. I'm also proud to share how we are living into our vision to be the experience brand that ignites a community of people living the Sweat life through Sweat, Grow and Connect. In July, we opened our first experiential store in Chicago's Lincoln Park neighborhood and just a few weeks ago, we hosted our 8th annual Seawees Half Marathon and Sunset Festival in Vancouver. These are both fantastic examples of how we are bringing innovation to guest engagement and connecting with our community both inside and outside the four walls of our store. You'll hear more specific details from Celeste shortly on these exciting initiatives. I will now update you on our power of 3 growth pillars product innovation, omni guest experience and market expansion. I'll speak to product and international and then Celeste will take you through the North America and omni guest experience. As you'll recall, our 5 year vision details our path to grow our core business in the low double digits annually, while doubling our men's, doubling our digital and quadrupling our international businesses between now and the end of 2023. Within our product innovation pillar, guest response to our merchandise offering was particularly strong across the board as we continue to leverage our key core franchises while always delivering new innovation through the science of feel. In women's, comps grew 13% as bottoms remained strong driven by both pants and shorts. Within the men's business, comps grew 27% with ongoing strength in both tops and bottoms. Like women's, the men's side also saw strength in shorts. Across both men's and women's, we continue to innovate to serve our guests across key activities yoga, run, OTC and train. Within train this quarter, we launched our latest collaboration Stronger as 1 with Barry's. This dual gender collection was designed specifically for the type of workouts that are popular in Berries bootcamp sweat classes with fabrics that offer abrasion resistance, breathability and moisture wicking. The strong response to the collection provides a compelling proof point of the opportunities as we push further into the train category in future seasons. Now I'll provide a quick update on self care. We're thrilled with the initial guest response as performance has exceeded our expectations. Look for several new additions to the line between now and of fiscal year. We're in the early phases of this pilot and see many opportunities to create product with our unique positioning of solving sweaty problems for athletes. Looking ahead across all categories, I'm happy with our near term product pipeline and the many innovations that our teams have in longer term development. Through our unique approach to innovation, the science of feel, we've recently relaunched our metal vent collection. This builds upon our successful franchise by offering improved performance attributes, and we're supporting the launch with compelling storytelling to attract new and existing guests to this product line. Our outerwear continues to represent a meaningful opportunity for us and we're excited to launch waterproof wool in the fall. This fabric innovation will offer guests the warmth and texture they expect from wool while keeping them dry as they spend time outdoors. We'll also be expanding our lab product to 45 stores and online for fall. As we showcased for you at our Analyst Day, our lab product reflects our pinnacle aesthetic and appeals to a younger more urban gas relative to our core. Turning now to international, let me share an update on the progress and success we're seeing in Europe. I spent several days with the team in London a few weeks ago and we're continuing to see strong trends in this market now that we are more established in the region. In quarter 2, total revenue in Europe grew 35 percent. We're also pleased with the continued success of our global event strategy and in June, we hosted our annual Sweatlife Festival in London. This amazing event brings together guests, educators, ambassadors and other members of the local community for a weekend of sweat classes, yoga, personal development, and meditation. In August, we hosted Sweatlife Berlin for the 2nd time I'm excited that we are bringing this event to Paris for the first time in early October. We're also pleased with the recent opening of our first mainline store in the Saint Germain area of Paris and with the rollout of our local market e commerce sites in France and Germany. Both sites went live during quarter happy with their performance to date. In our APAC region, the momentum continues to be driven by strength in both our store and online channels. Total revenue in APAC grew 33% in quarter 2 with particular strength in China where we saw market growth of 68%. We opened 2 new locations in China and our 4th store in Singapore with our Marina Bay location. We're in the early stages of our growth potential and remain on track to open approximately 15 stores in China this year, almost doubling our store count when compared to the end of 2018. And we continue to see strength in our e commerce business as guests engage with our brand across channels. In China, our e commerce comps were over 70% and our new local market sites in Korea and Japan are exceeding initial expectations. I will now turn it over to Celeste to share an update on North America and omni guest experience. Celeste? Thanks, Calvin. I'm thrilled to speak with you about the growth we're seeing across our stores and online channels, which the strong connection we have with our guests. In Q2, revenue in North America increased 21% as our guests continue to respond well to our merchandise assortment, engaging store environments and unique brand activations. Traffic remains a key driver in North America as our strategies and investments continue to drive guests into stores and to our e commerce site. During the quarter, we opened 1 new store in the U. S. And will remain on track to open 15 to 20 stores this year in North America. In addition, we remain particularly excited with the results we're seeing from our co located remodel strategy and we completed 8 projects in Q2. Within our digital business, guest engagement continues to be strong and we are focused on pushing forward with improvements to our sites and mobile apps. We are currently in the process of rolling out new search and browse functionality, which will further enhance and personalize the experience for guests visiting our e commerce site. We are also enhancing our product detail page across our digital ecosystem, which will improve product storytelling and product education and further support conversion. And finally, we now have buy online, pick up in store capabilities in nearly all of our stores across North America, up from 150 stores at the end of Q1. So far, the favorable response from guests shows how much they appreciate the flexibility and efficiency of this service. As Calvin mentioned, we are living into our vision and engaging with guests in compelling new ways both inside and outside of the store. Our Lincoln Park store is truly the physical manifestation of the heart and soul of Lululemon, which is reflected in being active, cultivating mindfulness and developing meaningful connections. At Lululemon, we refer to these three tenants as the Sweatlife. We're really excited with Lincoln Park's performance since its opening in July as it provides our guests, educators and ambassadors a space to sweat, grow and connect together. All under one roof, the store offers dedicated studio space for sweat classes and meditation, locker rooms with showers, healthy food at our fuel bar, a community space created simply to foster connection and of course an elevated shopping experience. 45 of our local ambassadors call the store home and they lead the 6 to 10 classes we offer every day. Currently, the store is a one of a kind for us as we learn from the initial results. Looking forward, we're excited to share that we have 2 key store openings planned for November, 1 in Minneapolis and 1 in New York City. In Minneapolis, we'll be opening our 2nd full experiential store in the Mall of America. This location will offer several of the features found in Lincoln Park and we are excited about what this store can teach us as a high volume mall based location. In New York City, we will complete the relocation of our large format Fifth Avenue store near Rockefeller Center. While this store is only moving across the street, the new 23,000 square foot location will offer an enhanced shopping experience for our guests with a better representation of the product assortment for both men and women. These two openings illustrate the agility of our store format as we meet the wants and needs of guests in each community where we open. Let me shift gears now and update you on membership. Our program remains very much a test. However, we are happy with the engagement we're seeing from our members in the first three cities of Edmonton, Denver and Austin. As we expected, our loyal guests up the majority of members so far, but we have a number of members who signing up for the program with their first purchase with our brand. In addition, we are seeing men connect with us via the program with over 20% of our members being male in Austin. While we continue to test and learn, we won't get into the specific economics of the program yet, but we recently launched in our 4th test market of Chicago. With the opening of Lincoln Park, we're excited to see the potential synergies that our membership program and experiential store can create together. Looking at our community activations in Q2, I'd like to highlight several for you that help us further engage with our guests who choose running as their preferred way to sweat. We hosted our 10 ks runs in Toronto and Edmonton with positive response from the local community and had 10,000 and 7,000 participants respectively. In addition, we announced our 1st large scale run event in the U. S, a 10 ks in San Diego that will happen in November and sold out in 3 days. Our brand momentum continued into the Q3 with our SiWee's half marathon. In addition to the race, which had 10,000 participants, including 3 of our global run ambassadors, We also had 6,500 guests join us for yoga. We offered Vision and Gold sessions and we held a celebration in the evening with world class musical acts. SiWee's is a powerful example of how we create lasting ways to sweat, grow and connect with our community beyond what happens within our stores. Before turning it over to PJ, I'd like to express my sincere gratitude to our educators and store teams as they continue to bring the Lululemon brand to life every day for our guests. I'd also like to specifically thank the cross functional teams that work to open Lincoln Park. This was a considerable undertaking and I really don't have the words Before I provide highlights on Q2 and our guidance outlook, I will refer you to the financial supplement posted on our investor site for additional details. For Q2, total net revenue rose 22 percent to $883,000,000 driven by continued strong execution across all parts of the business. In our store channel, we delivered an 11% constant dollar comp store sales increase on top of a 10% increase in Q2 of last year. Square footage increased 17% versus last year driven by the addition of 45 net new Lululemon stores since Q2 of 2018. During the quarter, we opened 5 new stores and completed 8 optimizations, including the opening of our experiential store in Lincoln Park. In our digital channel, we posted a 31% constant dollar comp increase on top of a very strong 47% increase last year. For the quarter, e comm contributed approximately $218,000,000 of top line or nearly 25% of total revenue. Increased traffic in Q2 continues to drive comps both in store and online with increases in the high single digits and over 30% respectively. And I'd add that the impact of foreign exchange decreased revenues by $8,400,000 in the quarter. Gross profit for the 2nd quarter was 485 $800,000 or 55 percent of net revenue compared to 54.8 percent of net revenue in Q2 2018. The gross profit rate in Q2 increased 20 basis points versus gross margin last year and was driven primarily by the following: a 90 basis point increase in overall product margin resulting from lower product costs, favorability in product mix, and lower markdowns. Comes despite the additional air freight expense we incurred as a hedge against potential port congestion related to China tariffs. We remain pleased with the product margin strength we continue to realize on top of the strong gains over the last several years. Product margin expansion was partially offset by a 30 basis point increase in product and supply team costs driven by ongoing investment in product development and supply chain, including our new Toronto DC, and an increase in occupancy and depreciation expense of 20 basis points. We also saw 20 basis points of unfavorable impact from foreign exchange. Moving down the P and L, SG and A expenses were approximately $318,000,000 or 36 0.2 percent of net revenue for the same period last year. We're happy to have achieved leverage in line with our guidance in Q2, while at the same time continuing to use the strength in the business to build brand awareness and invest in initiatives that fuel current and long term growth, including data and analytics, loyalty, self care and men's. These ongoing investments contributed to deleverage of 70 basis points, which is more than offset by 90 basis points of leverage in store costs and foreign exchange. Operating income for the quarter was approximately $168,000,000 or 19 percent of net revenue compared to 18.5 percent of net revenue in Q2 2018. Tax expense for the quarter was $45,000,000 or 26.4 percent of pre tax earnings compared to an effective tax rate of 29.5 percent a year ago. The decrease in our effective tax rate relative to our guidance reflects the release of new regulations which resulted in additional foreign tax credits for prior years. These deductions benefited EPS in Q2 by approximately 0 point 5%. Net income for the quarter was $125,000,000 or $0.96 per diluted share compared to earnings per diluted share $0.71 for the Q2 of 2018. Capital expenditures were approximately $67,000,000 for the quarter compared to approximately $50,000,000 in the Q2 of last year. The increase relates primarily to store capital for new locations, relocations and renovations and IT and supply chain investment. Turning to our balance sheet highlights, we ended the quarter with $624,000,000 in cash and cash equivalents. Inventory grew 26% and was $494,000,000 at the end of Q2. We repurchased approximately 9,600 shares this quarter at a cost of $1,600,000 Coming into 2019, our Board authorized the new $500,000,000 share repurchase plan, approximately $336,000,000 of authorization remained at the end of Q2. We believe that repurchasing our shares is an efficient and effective way to return cash to shareholders and we'll continue to be opportunistic with our share repurchase activity. Turning now to our outlook. For Q3, we expect revenues to be in the range of $880,000,000 to $890,000,000 This is based on a comparable sales percentage increase store openings in the quarter. We expect gross margin to be flat to up modestly versus Q3 of last year. Our guidance reflects the impact from new tariffs imposed on imports from China as well as additional air freight expense. For the full year, we continue to expect a $0.04 to $0.05 negative impact within gross margin related to the new tariffs and incremental air freight costs used as a hedge against possible port congestion. We incurred approximately $0.01 of this $0.04 to $0.05 in Q2 and expect the remaining $0.03 to $0.04 to impact Q3 and Q4 more evenly. We remain excited with the opportunities we see to drive further increases in product margin. As we laid out for you at our Analyst Day, we're continuing to execute on our strategies to further segment our supply chain and increase efficiencies within our distribution network. These initiatives coupled with ongoing scale benefits as we continue to grow give us confidence that our gross margin will continue to expand modestly on an annual basis through 2023. We expect SG and A rate in Q3 to leverage modestly as we balance investments for future growth with efficient management of our cost structure. We continue to expect modest leverage on the year. Assuming a tax rate of 28 percent and approximately 131,000,000 diluted weighted average shares outstanding, we expect diluted earnings per share in the 3rd quarter to be in the range of $0.90 to $0.92 versus EPS of $0.71 a year ago. For the full year 2019, we now expect revenue to be in the range of $3,800,000,000 to 3,840,000,000. This is based on a comparable sales percentage increase in the low teens on a constant dollar basis. We expect to open approximately 45 to 50 company operated stores in 2019. This includes approximately 30 stores in our international markets and represents a square footage percentage increase in the mid to high teens range. We expect gross margin for the year to expand modestly, primarily driven by continued product margin improvement. We expect SG and A for the full year to leverage modestly. We expect our fiscal year 2019 diluted earnings per share to be in the range of 4.63 on 131,000,000 diluted weighted average shares outstanding for the year. This range takes into account approximately $0.04 to $0.05 of additional costs within gross margin related to the tariffs and airfreight that I mentioned earlier. We expect our effective tax rate to be approximately 27.5% in 2019. We have assumed the Canadian dollar at $0.75 to the U. S. Dollar for 2019 as well as Q3. We now expect capital expenditures to be approximately $275,000,000 to $285,000,000 for the fiscal year 2019. The increase versus 2018 reflects a ramp up of our store renovation and relocation program, new store openings, technology investments and other general corporate infrastructure projects. In closing, we're excited with the continued strength we're seeing in the business and we remain optimistic about the fall season and beyond. And now back to Calvin for some closing remarks. I would like to thank PJ and Celeste for providing these insights in our business and performance. All of us within the company are proud of what we've achieved. As I travel around the world, I see guests responding to our product, our innovations and living the sweat life. Finally, I'd like to thank everyone at Lululemon for their commitment and dedication in achieving these results. And with that, we'll be happy to take your questions. Operator? Thank The first question comes from Paul Trussell, who is with Deutsche Bank. Please go ahead, sir. Good afternoon and congrats on another great quarter. Thanks, Paul. My first question is just related to the margin outlook for the Q3 and second half overall. Maybe just talk a little bit more about the puts and takes to the flat to up modest gross margin outlook as well as help us think a little bit more about why just modest leverage on low teen comps in the second half as you leverage some of those strategic investments that you started making last year? Yes, hey Paul, it's T. J. Thanks for the question. So similar to Q2, going forward in back half for gross margin, it's a similar story. We expect continued gains in product margin driven by lower product costs. We don't forecast into a mix benefit, but mix has been a benefit for the 1st part of the year given the strength in our women's pants business. But product cost remains the big opportunity and it comes through scale, segmenting our supply chain, better cost visibility and certainly greater efficiency across our distribution network. So we expect that to continue. The takes as you alluded to, we will see some occupancy and depreciation pressure as we continue to open stores internationally which carry higher rents as you know. But we also have some product development costs for newer categories such as bras, outerwear and accessories. So those are the puts and takes we see in the back half, but net net we still expect modest gross margin expansion for the year and going forward. And on SG and A? And on SG and A, so we committed to modest SG and A leverage. Last year, we delivered. We're committing to the same for this year and going forward. We continue to use strong performance to invest in current and long term growth. We are seeing the results from that. During Q2, we invested specifically, we expanded testing experience. We continue to expand our omni capabilities both in North America and globally and that will continue to roll forward in second half of the year. If we don't do these investments, we can see higher SG and A leverage for the quarter and beyond, but we continue to believe this is the right strategy for the business. And lastly from me is one of the more impressive parts of this quarter was the brick and mortar comp growth. Maybe just speak a little bit more about what is leading to the traffic increases and improvement in conversion that you're seeing in store? Thank you. Thanks, Paul. On the momentum that we're seeing in the business, I really break it down into 3 key categories. The first is the athletic space in general is very healthy relative to other sectors in both apparel and retail in general. 2nd, our business has fewer highs and lows relative to other apparel brands and we're less dependent on seasonal fluctuations and we have a very healthy core business that is driving our success. And then finally, and it to me is what the team is doing such a wonderful job at and that's engineering that growth. And that's coming from 1, compelling product 2, brand activations and 3, our continued improvement in our data analytics and digital success and momentum the team is doing in terms of engineering that growth. And we're seeing that across all international businesses and we're seeing it within not just in traffic, but as you alluded to very healthy conversion numbers which normally you don't see those 2 run together and that's the work that our store teams are doing on guest engagement, investing in the educator and I also think it's a reflection of the data analytics as I alluded to. Guests are coming in prepped with what their intent is and we have educators engaged and ready to assist them and all that work is paying off. Thanks for the color. The next question comes from Matthew Boss who is with JPMorgan. Please go ahead, sir. Great. Congrats on a nice quarter, guys. Thanks, Dan. So, Calvin, maybe on the gross margin, what do you see as the multi year opportunity here? Or maybe a different way to put it, any structural ceiling as we think about gross margin considering digital is outpacing store revenues and just the overall control that you have over distribution? I mean, I think I would in our 5 year guidance and our long term plan that we shared on Analyst Day is the best guidance that you should use to model and it's what we're building into. It's a combination of fine tuning opportunities to improve cost of goods as we grow in scale and as we build those relationships with our vendor base. 2nd, obviously we're mixing in new categories and making sure that we get that balance correctly. 3rd, we're mixing in new markets and P. J. Alluded to markets around the globe have a different cost structure, as well as we're expanding our North American business and building stores that are driving wonderful sales numbers and engaging in guests and offering them the full product. So that full balance across our 5 year plan we're committed to. We're seeing great success in it. A lot of that innovation is what's driving our top line. And I think the result is we are going to see leverage in gross margin, but it will be more in line with how we've provided guidance over the next coming years. Great. And then maybe just a follow-up on the expense front. So I guess really the question is best way to speak to the balance between in store cost leverage versus ongoing brand investments? I'm trying to figure out is 2Q a microcosm for the go forward modest SG and A algorithm? And then just one follow-up would be on the comps. Have you seen any moderation as you fair to say that the momentum has continued through strong? Fair to say that the momentum has continued through strong? Well, to your second question, we're pleased with the momentum, can't give too much color on comp, but we're pleased with where we are and we continue to see strong traffic. So good news there. On your question about SG and A, I would not say it's a microcosm of the future, but I would say given our store performance, we did leverage channel SG and A to a higher degree this quarter, But we also did have higher investment and again we use the upside of good performance to set us up for growth in the coming years. So I would also say we'll start to benefit and we already are seeing benefit from our prior investments that we've made in prior quarters. Digital marketing investment has driven guest acquisition. The enhancements to our website, search, browse, checkout are driving conversion and our investments in data and analytics are allowing for greater personalization and a closer relationship with our guests. So our prior investment is leveraging and again that is a model that's been working for us and we'll continue to deploy that. Perfect. Congrats again. Thanks. The next question comes from Mark Altschwager who's with Baird. Please go ahead, sir. Good afternoon and congrats on the continued momentum. It was nice to see the trend of lower markdowns continuing in the quarter. I was wondering if you could provide some color on the percent of your total sales that are coming from markdowns today. I think you most recently commented on some numbers for the holiday period. Just curious how that's trending year to date. I was also wondering if you could touch on what's been happening with some of the ship from store capabilities and how that's maybe affecting the merch margin trends on the markdown front? Thanks. Yes, we don't really give out the specific markdown number as you said. So our markdown activity was lower this quarter and it did contribute to gross margin expansion. Yes. Okay. And then maybe just as a quick follow-up, I was hoping you could comment on some of the trends you're seeing in the bra category, and a tremendous amount of innovation there and a bigger marketing focus. So curious what your key learnings are from the spring season? Hi, Mark. Yes. We remain very excited about the opportunity within the broad category. The product team continues to launch and develop product that will launch in the coming quarters and years as we see opportunity to innovate into white space within the category and add to our assortment. One of the new areas for this core that we activated was a bit of that brand activation and storytelling and we saw the guest respond well to it. In Q1, we really started to invest and set up the stores, how we merchandise. Q2, as we continue to roll out a couple of incremental SKUs, we got into some of the storytelling. Lincoln Park is a test but an expression of how we want to lean into the category and tell our unique innovative story behind Science and Field as well as present the athletic broad category to our guests in the different segments that we see as opportunities. So it is very early for us in bra. This will be a multi quarter, multi year investment. We are testing and learning and moving along, but the good news is that we're very happy with the results and we're equally excited about how we're learning as an organization and what's to come as we continue to make investments in this category. Great. Thank you. Best of luck. Thanks. The next question comes from Kate Fitzsimons who is with RBC Capital Markets. Please go ahead. Yes. Hi, guys. Congratulations on the strong results. You've seen amazing strength in the bottoms business in recent quarters. Did you say how much women's bottoms were up in the Q2? And I guess when you parse out that strength between more athletic offerings maybe versus more lifestyle offerings like office travel commute. How do you think about the strength there? Is it more broad based? We're just trying to get a sense as to what aspects of the customers' lifestyle you guys are really appealing to and just how to think about the trajectory of that business into the back half? Thank you. Thanks, Kate. On the bottoms business, as you know, it's a core category for us in both women's and men's. And in Q2, we saw both of those continue to perform very strong with the double digit comp performance. In fact, men's outperformed women's as we continued to see success in our men's initiative as one of the key Power of 3 growth initiatives. Strength in women's was really driven by both long styles and shorts. We're fueling the strength in shorts by leveraging our core line and fashion free franchises into a shorter inseam bike short, which is resonating very well with the guest. And in men's, the ABC franchise continued to see great success with existing guests and as a very strong new guest acquisition item and equally seeing success in shorts with the short and the pace breaker and surge. So a very good healthy balanced bottoms business across both pants, shorts, men's and women's and we continue to have innovative plans that we'll be launching to continue to drive that momentum forward. And as I alluded before, the team is doing lot of success in that and that's helping to drive success across many of the other categories and we anticipate to continue to see success in doing that. Great guys. Best of luck. Thank you. The next question comes from Paul Lejuez with Citigroup. Please go ahead. Thanks. Can you talk a little bit about your average ticket size in North America in store versus online? Curious to how different the average ticket is there? And how does that compare to what you're seeing in both Europe and Asia when you look at the stores versus online business? Thanks. Yes. Hey, Paul, it's PJ. So average ticket has remained relatively stable and is pretty consistent across channel. And there are subtle differences regionally, but by and large average ticket is fairly similar. Got you. And then can you maybe talk about the tops to bottoms ratio where you are in the men's business? Where are you in the women's business and where do you hope to be longer term in each of the genders? Thanks. Yes. So the men's business penetration has picked up given the higher growth rate. It's in the low it was in the low 20s approaching the mid-20s. So that trend will continue, but while the men's business is growing at a high rate, the women's business is growing pretty steadily as well. So I'm hard pressed to put specific penetration numbers on it given both businesses are growing together. So but men's has picked up. Hey, John, I was talking more about the tops to bottoms ratio within men's and the same within women's, if you can speak to where you are today versus where you're going? Yes. Sorry, Paul. We don't really share we don't share that. But bottoms is predominantly the ratio of bottoms to tops is obviously much higher. Thanks. Good luck. The next question comes from Kimberly Greenberger who is with Morgan Stanley. Please go ahead. Great. Thank you so much. I was hoping, Calvin, you could just talk about your business in Asia. It sounds like even with the slight deceleration in some of the economies over there, your numbers have been absolutely fantastic. Is that I heard you talk about the strength in digital, but sounds like the stores are equally good. So I'm just wondering if you can talk to us about, if you've seen any sort of change in trend there and perhaps you're just so early growth stage that you can sort of you're outgrowing what appears to be a very slight slowdown there. And then P. J, can you just remind us what your current exposure to China sourcing is and how we should think about the leverage or not to tariffs given the risk that we could see them move higher? Any quantification you can give us on that side would be helpful. Thanks. Thanks Kimberly. In terms of our APAC business in particular, I'll start off with our international business overall remained very, very strong in Q2 after a very strong quarter 1 and remains that leading into Q3. As you know, Steward was put into the role working with both the existing leadership of Ken and Garrett to really continue to put the focus on that business and early but we're seeing great success of the strength of that leadership team coming together, shared learnings and working with Celeste and her team to really bring key learnings across the globe and driving the business. Within APAC, it's a balance across both stores as well as e commerce, and that's what's so exciting. We opened up 8 stores in APAC in Q1, another one in Q2, and plan to continue a very aggressive back half. We opened the year with 15 in China and we plan to end the year 25 to 30 stores. So we're excited about the balance. Guests are responding to both the vision of the Sweatlife and the product. And yes, it's early for us in the in our growth journey, but I think it's the strength of the product and the community model that is resonating in that market that's also helping to fuel our business through these quarters. So it's exciting to see. And Kimberly, this is Rhej. To answer your question on China tariffs, so just as a reminder, our direct exposure to China is relatively small with approximately 6% of our finished goods in scope for U. S. Tariffs. That percentage is down considerably given how we have diversified our vendor base. We've never had more flexibility than we do today in our supply chain. So going forward, we do not expect it to be a big impact to the business. In terms of quantifying it, I'll just reiterate that we guided on the last call, we expected a $0.04 to $0.05 impact in the back half of the year weighted towards Q3. We did incur a penny of that in Q2. We do see an additional $0.04 in the back half but more equally weighted given the delay in the tariffs. But it's a situation we constantly monitor it. We have airfreight in as a hedge to ensure that we deliver for our guests. But again, this is an issue that we feel is highly manageable for us. Terrific. Thanks so much. The next question comes from Ike Boruchow, who is with Wells Fargo. Please go ahead. Hey, good afternoon everyone. Calvin, one for you on loyalty, so you expanding out to Chicago. I know you can't give us too much detail, but I guess my two quick questions would be, could you name maybe the most interesting or exciting thing that you've learned thus far in the small test? And then if things continue to progress in the right direction to you, when's a reasonable timeline that this could actually go go across the U. S. Or across North America? And then a quick one for P. J, just on the supply chain deleverage and on the gross margin, I know you have the new DC in Toronto, I think that recently opened. How should we think about deleverage on supply chain in the back half? And when does that headwind maybe start to flatten out? Thanks guys. Thanks, Ike. Two great questions. On the first, what's been quite honestly a lot of fun in the learnings from the test markets are there. There are a number of aspects of how the guest is interacting with the program that we're really excited to see. The 2 that come to mind that probably we didn't anticipate to be as strong in the test markets and that is 1, the percentage of new guests to Lululemon that we're first seeing through the membership program and the second is the penetration of men's in the program. So we kind of went in expecting in a pilot in these contained markets that it would definitely appeal to our high value guest, which it has, but to see it be another acquisition to acquire new as well as an acquisition for men's was not something we initially had anticipated and has been really encouraging among many other aspects. As you mentioned, we launched in Chicago. We're excited to be in that market. And we're going to continue to test and learn and roll out. We're going to expand more in 2020 and then really hit a stride probably in 2021. We'll share more as we confirm our umbrella plans, but it's early but very positive and we are continuing and will continue to expand to more markets and 'twenty will be bigger than 'nineteen as will 'twenty one. And I get to P. J. To answer your question about the supply chain and the gross margin impact. So yes, the startup in the Toronto DC has had an impact and has caused some modest deleverage. That's due to the fact that yes, it's ramping up and we're incurring some costs and some growing pains there. We expect again a modest impact associated with that as the facility scales, but it should we expect it to leverage thereafter. Thanks guys. The next question comes from John Kernan who is with Cowen. Please go ahead. Hey, good afternoon. Let me add my congratulations. Thanks, John. You provided some very helpful commentary and guidance on international profitability at the Investor Day. I'm just wondering given the top line strength, how international profitability has trended relative to expectations so far this year? And I just have one quick follow-up on Europe. So with regards to international profitability, again, we're pleased with the progress we're making in all of our regions. We are profitable from an international standpoint. So last year we did generate profit and our China business is profitable, our Asia business is profitable and our Europe business which is still generating a modest loss is quickly marching towards profitability. So we're on plan there and we do expect to continue to scale and achieve profitability improvement in line with how we guided at Analyst Day. Got it. And then just on Europe, I think up 35% in the quarter. You talked about some brand activations like the Sweatlife festivals. Just any more comments on how Europe is scaling? It seems like you're more it seems like you're a little bit more excited about the region right now and certainly some of the growth backs that up. Thanks, John. I was just with Gareth and team a few weeks ago and I would say across the management team we're quite excited about the success of our business in Europe and what the team is executing and how the guest is responding there. We've been longest in London and we're seeing a real healthy business driven out of that. But at the same point, the other countries we've expanded to are resonating. In Q2, we launched sites in Germany and France in local language. And the guests are responding well to that. Continue to open doors. We opened our first full line in Paris in August And as P. J. Indicated, we are very close to the profitability mark and the team is doing a wonderful job in recruiting guests and building that business and it's going to be a region that plays a big part in our international expansion and the commitment and the goal around the Power of 3 of how we're going to quadruple it and we're seeing some of that success today. That's excellent. Thank you. The next question comes from Michael Binetti who is with Credit Suisse. Please go ahead. Hey, guys. So let me add my congrats on a great quarter. Let me add just one, I guess, sort of fairly specific question on the margin. With the brick and mortar comp up 10%, obviously very strong by any compare. I guess I'm curious about the deleverage on the occupancy line. I know there's some lease accounting noise in there and then you mentioned the international mix and probably some double rent during relocations. But I'm curious if you could help us just look ahead a little bit on the underlying dynamics there. What is the underlying leverage point on that line as we think ahead to things like accounting rolling off next year? And then I have a follow-up. Yeah, I think what we pointed out in the past is that occupancy is going to be a headwind going forward as we open new stores, particularly internationally, but we've also incurred costs associated with building out our distribution network. So going forward, there is a headwind there, but we expect to scale and leverage that over time as stores ramp up, as DCs ramp up. The real story in the gross margin is that product margin remains strong and will continue to be the driving force behind gross margins. But we do see occupancy and depreciation in the gross margin line as the market heads. Okay, fair enough. And then I guess what's the comments on international and some of the color you gave around profitability by the different markets. I think the longer term plan along with quadrupling the revenues there was to go from I think pretty close to breakeven margins in total last year, slightly positive to I think 10% to 15% over 5 years. A big move obviously, but I guess would you help us think ahead a little bit on how you see the inflection in the overall margin for international, maybe where it's coming where you see the profitability contributing the most first? And then, is the overarching strategy there similar to the corporate strategy where, look, we're going to spend back any upside on the top line to smooth it out or is it back half weighted within the 5 year window front half weighted for any reason? Any kind of color you can help us think about as that seems like a big contributor here for the next few years? Yes. So the big driver will be the APAC region and specifically China. So as that business continues to ramp up, the the profitability. Europe will be also a contributor. So I do think we're on track to achieve that profitability that you talked about. And as far as the business model, given the fact that our international businesses are fast growing businesses that need fuel, we will continue to reinvest in those businesses as we have upside similar to what we've done in North America given we've seen the results with it here. So hopefully that answers your question. Okay. Thanks a lot and great job on the Lincoln Park store guys. Thank you. Operator, we'll take one more question. The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead. Good afternoon, everyone, and congratulations on the results. As you think about inventory and inventory growth for the balance of the year, how are you thinking about inventory and airfreight given those expenses that are wrapped in there and how do you expect airfreight expenses to be moving forward? And then, Calvin, given the loyalty program and given the events that you're having in the stores, are you seeing the translation of the events leading to loyalty members, new loyalty members and how is new guest conversion compared to what it had been? Thank you. Hey, David, it's PJ. So to answer your inventory question, so we feel really good about the inventory position given our momentum. We did expedite some fall merchandise using airfreight and we'll continue to use airfreight as a tool or a hedge if we start to see issues in the Southeast Asia region associated with the volatility around tariffs. But from a pure inventory standpoint, we are a low seasonal business and our aged inventory is really low. So we feel really good about how our inventory is positioned both at the end of the quarter and going forward. Hi Dana, and I'll just add a few points to your second question. We continue to see very healthy metrics with our loyal or high value guest in terms of retention and engagement in the brand. Equally, our new guest acquisition remains very strong quarter to quarter. And they're a big part of the conversion number that you're seeing and we're celebrating across both store and on e commerce. And one of the areas of success is in the migration of this new guest into becoming a high value where a healthy portion of our growth is coming from that migration. So we're seeing very good, very healthy new guest acquisition numbers. The teams are doing a wonderful job in migrating them up through the percentage of their spend. And then our retention of our high value guests is very high and very solid and remaining in a very strong, stable growing position. So in general, when I look at the metrics of our guests, they are healthy across all of those 3 very important levers. And we have many initiatives through both our digital and CRM to continue to improve and strengthen. And the notion of events and our vision of the Sweatlife just reinforces those. It's either how we acquire new guests as I shared through membership, events is how we equally share and acquire guests through our 10 ks events in London sorry, in Toronto and in Edmonton and in San Diego. These are great acquisitions and then they're migrating up. So very healthy across the board. This concludes time allocated for questions on today's call. I would now like to turn the conference back over to the presenters for any closing remarks. Thanks everyone for joining us. We appreciate the time and we look forward to speaking with you in a few months when we report our Q3 results. Thanks.