lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. First 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. Analysts who wish to join the question queue may press star, then one, on the telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Howard Toovan, Vice President Invest Relations for Lululemon Athletica Inc. Please go ahead, sir.

Thank you and good afternoon. Welcome to Lululemon's First Quarter Earnings Conference Call. Joining me today to talk about our results are Calvin McDonald, CEO, Stuart Hazelden, COO and EVP International, 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 which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, 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 10-Q are available under our website at .lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site where you'll find a summary of our key financial operating statistics for the first quarter as well as our quarterly infographic. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I would turn the call over to Calvin.

Thank you, Howard, and welcome everyone to our first quarter earnings call. As we begin, I would first like to say how much I enjoyed hosting our recent Analyst Day meeting in New York. We are incredibly excited about the growth opportunities we have in front of us, and we look forward to delivering on our five-year growth plan. Lululemon had another successful quarter driven by many strengths in our business across product, channel, and geography. Our innovative merchandise assortments and our engagement with guests around the world enables the financial results we're proud to report to you today. On today's call, I'll start by sharing some of our key highlights from quarter one, including how we're living into our product innovation and omni-guest experience growth pillars. Going forward, I will periodically ask a member of our senior leadership to join the call and provide an update on key strategic areas of the business. Today, Stuart Hazelton will join the business. Today, Stuart Hazelton will join us to provide an update on on our opportunities in China and other key international markets. As you know, earlier this year, Stuart's responsibilities were expanded to include serving as our EVP of international in addition to his role as Chief Operating Officer. Following the global update, PJ Guida will provide a detailed financial review as well as our guidance outlook. I'll then wrap up a few closing comments and we'll be happy to take your questions. Let's have a look at our first quarter results. We are very pleased to see continued strong momentum in the business. The Power of Three growth plan, which we detailed at Analyst Day, is serving as a driving force to move us forward to achieve our five-year growth plans. Across the company, teams are executing at extremely high levels. In Q1, our total revenue grew by 20%. Constant dollar comps increased 16% on top of a 19% increase last year. And earnings per share increased 35%. Our guests responded well to both our men's and women's assortments. They engaged with us across channels as our store and digital businesses were both strong. And our brand continues to resonate well in our core North American market, as well as in Europe and APAC. Supporting our growth, we are leveraging the strategic infrastructure investments we're making across the business. Our focus over the last several years to create efficiencies and to further segment our supply chain as paying off and tangibly contributing to our success. As an example, our newest distribution center in Toronto opened on schedule in May and enables us to deliver product more effectively and efficiently in Eastern Canada. As you know, the growth plans we discussed during Analyst Day are long-term in nature and the financial targets we provided are annual. I'm pleased 2019 is off to such a strong start and we're beginning to live into our five-year vision. I'd now like to speak specifically about the power of three growth pillars, product innovation, omnigest experience and market expansion. As you recall, our five-year vision details our path to double our men's business, double our digital business and quadruple our international business during this time. Let me now provide some highlights from quarter one for these drivers. When looking at our product innovation pillar, over the next five years, we expect annual growth in our core women's business to be in the low double digits while men's is planned to grow at 20% per year. In quarter one, we continue to see robust performance in our women's business with particular strength and bottoms. This category remains one of our strongest with comps up over 19% driven by both leggings and jogger styles. Within the men's business, comps grew 26% with ongoing strength in both tops and bottoms. The business was led by our ABC franchise and three core short styles, the short, pace breaker and surge. Guests are responding well to our new boxers designed to address all three elements of the science of feel, touch, temperature and movement. Looking forward, I'm excited with the innovation we intend to bring into our assortments for both men and women. Just to preview some of the upcoming highlights for men, we plan to launch a new and improved metal vent tech collection. And for women, we plan to further expand our technical bra offering with two high support styles in the coming months. The final component of our product innovation plan is to test into new categories. The main driver continues to be our core categories across both men's and women's. However, we've identified several areas of white space where we can test the waters and bring innovation to our guests. One example of this is self care, which we will roll out to 50 stores and online next week. Shifting now to Omni-guest experience, we had strong results across our channels with our store comps increasing 8% on top of 6% increase last year. Our digital business grew 35%, which represents a more than doubling of the business over the last two years. Increased traffic in quarter one is driving our comps, both in store and online, with increases of 8% and 41%, respectively. We're excited about our vision to be the experiential brand that ignites the community of people living the sweat life. Next month, you'll see our first truly experiential store when we open Lincoln Park in Chicago. This 20,000 square foot store captures who we are as a brand as it will embody the sweat life through multiple studios, a meditation space, a healthy juice and food offering, and areas for community gatherings. This distinct environment will provide us additional opportunities to explore and learn as we connect with our guests in a range of new and exciting ways. We also continue to test our members in a range of new and exciting ways. We also continue to test our membership program. And in May, we expanded to our third pilot city in Austin, Texas. We are very encouraged by the results and each city in our test has brought new learnings and innovations as we look to scale the program. Looking now at our digital business, we further expanded our online only size and color offerings for both men and women. We expanded our buy online, pick up and store capability from 35 stores to 150 in quarter one, with 80% of the orders ready for guest pickup in one hour. We remain on track for a full rollout by the end of quarter three. We also significantly improved our mobile point of sale capabilities so educators can complete our guest purchases from anywhere in the store. Our strength and unique position is to activate great product across our Omni guest experiences, leveraging our stores, community and events. Run is a key strategy for us and a great representation of how we will activate across our entire business to deliver an exceptional guest experience. In addition to our strong and light bra franchise, we rolled out the fast and free run oriented collection for men. We highlighted the strength of our technical apparel with our global run campaign, featuring our first global run ambassador, Charlie Dark. Our run focused activations during the quarter included a presence at the Boston, Los Angeles and London marathons. And just last week, we celebrated global running day by rallying our community to participate with their local run clubs or to join our 5K challenge on Strava. In the coming weeks, you'll see us sponsor our 10K runs in Toronto and Edmonton, as we've done in the last several years. And we plan to add more events going forward. Run is an important category for us with significant potential. And we see opportunities to expand our share of wallet with current and future guests. Shifting gears now to our markets, let me share some highlights regarding performance in our core region of North America and then turn it over to Stuart to discuss growth in our international markets. First, our opportunities in North America, our largest region remains significant. Our innovative merchandise assortment, agile store formats, inspiring brand activations and unique event offerings provide ample ways to engage with existing and new guests. In quarter one, revenue in North America grew 18% as the momentum in this region remains strong. We opened six stores in the US and Canada and remain on track to open 15 to 20 in 2019. Our guest stats remain robust with continued growth and new guest acquisition and increased spending across existing guests. Traffic to our stores in North America was strong and grew in the high single digit range. Last month, Stuart and I had the opportunity to visit our team in China and to see the incredible growth opportunities firsthand. I'll let him share our insights and some of the results this quarter internationally. Stuart.

Thanks Calvin. In May, I was able to spend nearly two weeks with our team in China. And while we are seeing exciting momentum across all of our international markets, China in particular is on track to post impressive growth this year. In Q1, our China team delivered nearly 70% market growth and entered three new cities with strong store openings in Chongqing, Xian and Xiamen. And we remain on track to open 10 to 15 stores in China this year. We also continue to invest in our digital capabilities here with the relaunch of our .cn site in Q1 to compliment our presence on Tmall and WeChat. And these investments are paying off as we saw our China e-comm revenues increase over 100% in Q1. These results also include the great success of our Super Brand Day event with Tmall in April. As part of this event, we invited 400 guests to join us at the Intercontinental Shanghai Wonderland for sweat sessions, meditation classes, and also a function show. The event garnered significant attention from the media and on social channels and was a great way for us to connect with both new and existing guests. All of this contributed to a strong performance for our Asia Pacific region overall in Q1 with revenues for the region increasing approximately 40%. Other highlights include the launch of our .jp and .kr websites, both of which are seeing strong starts. Turning now to Europe, we posted strong double digit comps across all channels driven by ongoing robust traffic increases. These results helped us deliver over 40% market growth in Q1 across Europe. We're pleased to see our business gaining momentum as our community and brand building efforts accelerate. We also opened a great new store in Amsterdam. At the grand opening, which I was able to attend in March, it was exciting to see firsthand the energy that our team in Europe is creating, which is reflected in the strong results we are now experiencing. Europe is creating, which is reflected in the strong results we are now experiencing. And we remain on track to open five to 10 new stores this year across Europe. Overall, our international growth remains strong and accounts for an increasing portion of our total company growth. And finally, I'd like to offer my gratitude to our teams around the world. It's only with their great work that any of this is possible. And now I'll pass it to PJ.

Thanks, Stuart. Before I provide highlights on Q1 and our guidance outlook, I will refer you to the financial supplement posted on our investor site for additional details. For Q1, total net revenue rose 20% to 782 million driven by strong execution across all parts of the business. In our store channel, we delivered an 8% constant dollar comp store sales increase on top of a 6% increase in Q1 of last year. Square footage increased 15% versus last year driven by the addition of 44 net new Lululemon stores since Q1 of 2018. During the quarter, we opened 15 new stores. In our digital channel, we posted a 35% constant dollar comp increase on top of a very strong 60% increase last year. For the quarter, E-Com contributed approximately 210 million of top line, reaching nearly 27% of total revenue. And I'd add that the impact of foreign exchange decreased revenue by 12 and a half million dollars in the quarter. Gross profit for the first quarter was 421.7 million or .9% of net revenue compared to .1% of net revenue in Q1 2018. The gross profit rate in Q1 increased 80 basis points versus gross margin last year and was driven primarily by the following. A 190 basis point increase in overall product margin resulting from lower product costs, favorability in product mix and lower markdowns. We are pleased with the product margin strength we continue to realize on top of the strong gains over the last several years. This increase was partially offset by a 60 basis point increase in product and supply team costs driven by ongoing investment in product development and supply chain and an increase in occupancy and depreciation expense of 20 basis points. We also saw 30 basis points of unfavorable impact from foreign exchange. Moving down the P&L, SG&A expenses were 293 million or .4% of net revenue compared to 37% of net revenue for the same period last year. In Q1, we continue to use the strength in the business to invest in strategic priorities, brand awareness and initiatives that fuel current and long-term growth. This includes digital loyalty and self-care. Foreign exchange both revaluation and translation leveraged by 30 basis points in Q1. Operating income for the quarter was approximately 129 million or .5% of net revenue compared to .1% of net revenue in Q1 2018. Tax expense for the quarter was 34.6 million or .4% of pre-tax earnings compared to an effective tax rate of .9% a year ago. The decrease in our effective tax rate relative to our guidance reflects the impact of higher tax deductions related to stock-based compensation. These deductions benefited EPS in Q1 by approximately two cents. We still expect our tax rate for 2019 to be approximately 28%. Net income for the quarter was 96.6 million or 74 cents per diluted share compared to earnings per diluted share of 55 cents for the first quarter of 2018. Capital expenditures were approximately 68 million for the quarter compared to approximately 34 million in the first quarter 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 576 million in cash and cash equivalents. Inventory grew 19% and was 443 million at the end of Q1. I'd also note that pursuant to the new lease accounting standard, ASC 842, we added a lease-related asset of 627 million and lease-related liabilities totalling 665 million to our balance sheet. This new accounting standard has no impact on our income statement or cash loss. We repurchased 1 million shares during the quarter at a cost of 163.5 million. Coming into 2019, our board authorized a new $500 million share repurchase plan of which approximately 337 million of authorization remains. We believe that repurchasing our shares is an efficient and effective way to return, repurchasing our shares is an efficient and effective way to return excess cash to shareholders and will continue to be opportunistic with our repurchase activity. Turning now to our outlook. For Q2, we expect revenues to be in the range of 825 to 835 million. This is based on a comparable sales percentage increase in the low double digits on a constant dollar basis compared to the second quarter of 2018. This also assumes five new store openings in the quarter. We expect gross margin to be flat to up modestly versus Q2 of last year. Our guidance reflects a modest impact from potential new tariffs and also additional costs to air freight product in order to avoid anticipated port congestion in the Asia region due to the pending tariff increases. The negative impact of these costs will be approximately 20 to 25 basis points within gross margin and approximately four to five cents on EPS for the full year 2019. Most of the impact would come in the back half of the year with the majority in Q3. I should note that roughly two to three cents of this impact would be incurred regardless of whether new tariffs are imposed. We are committing to higher air freight usage as a hedge against disruption in ocean shipping lanes as we approach the key dates related to tariff increases. This will ensure delivery of new product for our guests on time. We expect the SDNA rate in Q2 to be flat as we continue to invest in growth drivers for our business that fuel top line momentum. We see larger opportunity to leverage SDNA in the back half of the year and we continue to expect modest leverage on the year. Assuming a tax rate of 28% and approximately 131 million diluted weighted average shares outstanding, we expect diluted earnings per share in the second quarter to be in the range of 86 to 88 cents versus EPS of 71 cents a year ago. For the full year 2019, we now expect revenue to be in the range of 3.73 to 3.77 billion. This is based on a comparable sales percentage increase in the low double digits on a constant dollar basis. We continue to expect to open approximately 40 to 50 company operated stores in 2019. This includes 25 to 30 stores in our international markets and represents a square footage percentage increase in the mid teens range. We expect gross margin for the year to expand modestly, primarily driven by continued product margin improvement. We expect SDNA for the full year to leverage modestly. We expect our fiscal year 2019 diluted earnings per share to be in the range of $4.51 to $4.58. Our EPS guidance is based on 131 million diluted weighted average shares outstanding for the year. This range takes into account approximately four to five cents of additional costs within gross margin related to the tariffs and air freight that I mentioned earlier. We expect our adjusted effective tax rate to be approximately 28% in 2019. We have assumed the Canadian dollar at 75 cents to the US dollar for 2019, as well as Q2. We continue to expect capital expenditures to be approximately 265 to 275 million for the fiscal year 2019. This increase versus 2018 reflects a ramp up of our store renovation and relocation program, new store openings, technology investments and other corporate infrastructure projects. In closing, we remain excited with the momentum we're seeing in the business as our teams are executing our new power of three strategic plan. And now back to Calvin for some closing remarks. Thanks PJ. While it's been reported there is some recent softening in the apparel space, there's no doubt that 2019 is off to a great start for us. We're building upon the momentum of the past year and instilling confidence in our long-term growth plans. With each new market and innovation, we are inspired by the way in which our guests, both existing and new to the brand, are responding to Lululemon. Our vision to ignite a community of people to live the sweat life is resonating strongly with guests and provides many growth opportunities for us ahead. We remain laser focused on leveraging our strengths and creating opportunities to ensure Lululemon continues to rise above the near term challenges being faced by others. I'd like to thank our teams around the world for the passion and spirit they bring with them to work every day. Their dedication to our guests and energy for our brand makes this level of sustained performance possible. And with that, we'll be happy to take your questions. Operator?

Thank you. We will now begin the question and answer session. Analysts who wish to join the question now begin the question and answer session. Analysts who wish to join the question queue may press star then one on their telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your questions, please press star then two. We'll pause for a moment as callers join the queue. The first question comes from Matthew Boss of JPMorgan. Please go ahead, sir.

Thanks, and congrats on another great quarter, guys. I guess maybe first, could you elaborate on the current momentum that you're seeing in the business, if you've seen any impact from the recent lateral apparel softness that you mentioned, and just how you'd rank back half opportunities, maybe by category?

Yeah, sure, Matt. In terms of Q2, we remain very happy with the momentum we're seeing in the business, which is reflected in our comp guidance of the plus low double digit, which is on top of a 19% last year. So the business has continued to see very, very strong trading into the quarter. And that growth is coming across all levers of the power of three. In product, our men's business, as we shared, up 33%, continues to be very strong across all categories, tops, boxers, and the bottom business. And our women's business equally is showing very solid and very strong growth, and particular bottoms driven by leggings and joggers. And with what we're gonna be launching in terms of newness, that momentum, we believe, will continue as we continue to feed the core with more innovation and test and learn into new categories and build out the key categories we wanna win being yoga, train, and run. So we feel very good about the product launches that are dropping and the momentum and the way the guest is reacting to the product as they see it.

That's great, congrats on the continued momentum.

Thanks,

Matt. The next question comes from Ike Borochow of Wells Fargo, please go ahead, sir.

Hey, let me add my congrats. I guess I'm gonna throw this question to Stuart. It's very compelling stuff you've got on China with the .CN rollout. I guess just over time, Stuart, can you maybe talk about how you see the mix of your digital business in China, the .CN site versus Tmall, and it may be relative profitability between the two, if there's any nuances we should keep in mind, thanks.

Sure, Ike. So the business vision that we have for China is certainly more heavily considered from a digital standpoint than North America. As we've said in some of our prior conversations, we can see the business in China being 50% online. And the structure of the industry in China is also important in creating that. Environments make that possible. And when I say that structure, I think part of that is the marketplace structure that we're all aware of with WeChat and Tmall and the dominance that they have in the Chinese market. So we participate in that, but we're very cognizant of how our brand is being introduced and developed. And we take important steps to ensure that we have a very premium positioning for the brand. We see Tmall continuing to be an important part of the overall digital business mix for us, but we see our own .CN site and our WeChat site emerging and taking a large proportion of our digital business in time. We're making investments now to make that possible. And we'll share those details with you as they develop. But the launch of the .CN site, or the relaunch, I should say, of the .CN site that we mentioned in the first quarter is an important part of that. And generally, just the expansion of the store footprint will drive brand awareness. We're seeing great traction broadly across China. And a lot of signals that are suggesting that our brand is gaining traction. So that will support and fuel traffic in our business across all channels. So I think those are things I'd point to in terms of just how we're thinking about the digital part of our business there.

Could you just elaborate on the margin structure of the .CN versus Tmall over time opportunity?

Yeah, for sure. Overall, there is an advantage from a digital versus stores that is directionally consistent with what we see in North America in terms of the bottom line contribution margin for the digital business versus stores. That said, there is incremental cost that we incur to operate on the Tmall platform. But it's still an attractive contribution margin that is still higher than what we see in our store business.

Got it, very helpful, congrats.

The next question comes from Kate Fitzsimmons of RBC Capital Markets. Please go ahead.

Yes, hi guys. Congratulations on the strong results. I guess my question would be the 2019 outlook on gross margin. Just how should we factor in some of these non-merchandise items? PJ, you did mention the 2030 basis points had went from flying in goods ahead of the port congestion. But if we think about some of these other merchandise items such as rent, occupancy, and the product and supply chain costs as well. Thank you.

Yeah, hey Kate, this is PJ. So what's driving gross margin going forward? So the biggest driver does remain lower product cost. We did have a pick up and mark down and mix. Would you see remaining opportunities in scale segmenting the supply chain greater efficiency across the distribution network? That said, so there are some pressures and those pressures are related to DC investments. So we opened Toronto, there was some startup costs there. Our co-located and our international stores carry higher rent. So we'll see a little bit of pressure on occupancy and depreciation. But that for the quarter was relatively minimal. And then going forward, we're gonna continue to develop product, right? So new categories, bras, outerwear. So we are spending money to continue to build out our product assortment. So again, net net, we'll see modest expansion as we've guided to, but there will be a little bit of pressure from those items I just mentioned.

Great guys, best of luck.

The next question comes from Adrienne Yee of Wolf Research, please go ahead.

Good afternoon, congratulations, great quarter. Calvin, I was wondering if you can give us an update on the Robert Geller and a lab collections and any learnings thus far for your go forward strategy. And then PJ, just to clarify the comments you made on the tariffs, were those the increase from 10 to 25% on list three, or is this predicated on the list four? And can you give us the amount of sourcing directly out of China at this point? Thank you.

Great, I'll kick off and just comment on both Robert Geller and lab. On Robert Geller, we're very pleased with the results of the collaboration and similar to many of the collaborations we've done, our guests are responding very favorably in general to this newness and an opportunity to either buy into a new category or a unique aesthetic. With Robert Geller in particular, some of the key learnings was, this one showed up very strong from an international perspective, in particular in our Asia Pacific markets, which is really exciting when we think of the opportunity for these collabs going forward. The marketing buzz through social was significant behind this collaboration, which is exciting as we look for ways to continue to leverage our marketing and create an impact and acquire new guests and raise the awareness of the brand, which then leads to the final learning which is it responded very well with recruiting new guests into the brand, but equally our current guests were heavily engaged in the product, which is a great opportunity for us as we look for ways to continue to broaden and increase the share of wallet with our highly loyal and high spenders. So overall, the collaboration performed very well with a lot of key learnings. In the lab, those ideas will feed into our lab of which we shared earlier, we're planning some shopping shops in the fall and we'll continue to expand and roll out from there. Great. And then on the second question about tariffs, I'll point out just a few things. So first, I think it's important to mention that our direct exposure to China is relatively small with 6% of our total finished goods exported for China to the US and sold for tariffs. To answer your question, so currently under the Tronch 3 tariffs, only 1% of our finished goods are subject to that. The balance, the additional 5% would be subject, that would be part of the Tronch 4 tariff. So that's the direct impact. The better part of the expense is really coming from this indirect exposure we have. We're anticipating port congestion right around the timeframe, starting in that mid to late July timeframe. And we think it's prudent and important to deliver new product for our guests and protect the sales associated with those goods. So really the larger air freight that I mentioned.

Extremely helpful. Thank you very much. Best of luck.

The next question comes from Paul Lejuez, who's with Citigroup. Please go ahead, Paul.

Hey, thanks guys. I'm curious, as you open stores in some of your less mature markets, if you're seeing a lift to your e-com business in that market, and if there's any way for you to quantify that. And then second, what percent of your product sales come from new SKUs? And what was that number in one, two, if you do try to quantify it that way. And I'm curious about what is your philosophy about what that percentage should be over time coming from new SKUs versus existing winners? Thanks.

Hey, Paul, it's Stuart. I'll speak to your first question on our less developed markets. What we see in our international regions is consistent with our experience in North America. And as we open new stores, we see our web business, our e-com business, accelerate in and around the trade area where we open those stores. But we also use our digital business, our e-com business as a guide to understand where we might look to open new stores, where our demand and brand awareness is gaining traction. That is an indicator that factors into how we rate markets and trade areas as potential candidates for new stores. So that experience has proven consistent in our international markets. And we really see a positive synergistic effect of the footprint, the growing footprint of the store, the fleet and driving awareness and traffic across both channels.

And Paul, relative to the second part of your question, the majority of our sales growth is coming from our core products, our core franchises that we either continue to innovate on or introduce new color palettes, which the guests are responding very favorably to. We do introduce a number of drops on a weekly basis. The guest responds very well to those. We monitor but don't share sort of the makeup as a percentage of sales. But overall, core is driving our business. Take franchises and innovate behind them. And I think we shared Metal Vent that's coming in Q3, tail-ended Q2, which is a wonderful innovation on a very powerful, strong franchise. That will continue to drive. And as we test and learn into new categories, as we expand into yoga, train and run, and OTC, which are the areas that we mentioned are focus areas for the merchants and our product team to design into, the growth is coming from core.

Thanks guys, thanks a lot.

The next question comes from Omar Saad, who's with Evercore ISI. Please go ahead.

Hey, thanks for taking my question. I wanted to ask about the most recent round of the loyalty launch. What you're learning from that. Now I think it's in the third iteration. When do you expect to roll it out more broadly? What kind of data are you accruing from the program at the local market level? It's pretty incredible to me the results you're putting up without even really having that data, customer level data behind some of the decision-making. So I'm intrigued to hear more and how big of a lever that can be. Thanks.

Great, thanks. Thanks Omar. We did roll out. So we're now testing in Edmonton, in Denver, in Austin. And each market, we tweak the program slightly from the product that we make available to the guest to the price point that we make available to the guest to the price point. As you know, we raised the price point in our later test to see how the guest would respond. We're playing with the events, which are the primary benefit from joining into the membership. And in each market, the results have been well above our expectations going in, very favorable from the guest. And we continue to tweak and learn and do plan to roll into more markets. And we'll have more to announce at a later point in time. But 2020 is year in which we see expanding into more markets. And we are very excited about the potential of this membership in the platform to drive new guest acquisition, which is what we're seeing with the program, which is super exciting, driving guest loyalty and engagement into the brand, which is what we expected, but also on the back of having it be a revenue stream for the business in a way in which we can achieve and drive that engagement through that system.

Thanks, well done.

The next question comes from John Kernan, who's with CalEN. Please go ahead, sir.

Good afternoon, thanks for taking my question. We wanted to go back to the buy online pickup in store. I think it's scaling from 35 to 150 stores. And it's a full rollout, I think you said, by the end of the third quarter. What are your learnings from this and how much of an incremental driver of demand you think this can be?

I think, so you're right. We rolled up to 150 stores. And our plan is to have all stores up and running by end of Q3, which will put us in great standing for the holiday. And I think we'll learn a lot when that happens. As we're rolling out, we're happy with the results. Equally internally, operationally, 80% of the orders that are placed are ready for pickup within one hour, which I think is an important internal metric for us because it just sort of talks to the operational readiness and engagement so that as the demand from the guests accelerates, we're ready to be there to service them. As we roll out to more stores, we're able to position it differently within the website experience and the checkout, making it a lot more known and really start to market it. So early indication is encouraging. We think it's a necessity in leveraging our Omni strategy, which is one of our pillars of growth. So we know we need to do it. And I think this fourth quarter, when we're in full rollout and we're marketing it aggressively on our website and in the checkout, that guests really know it's an option across the full fleet will really learn. But I'm encouraged by it. And I think it will be a wonderful way to continue to drive our traffic into the store, drive that incremental pickup and contribute to the top line.

Got it. And then just on that topic, obviously the Lincoln Park store opening in Chicago, is this a test or is this like larger scale experiential type store, something you think is, that you're considering scaling even greater?

Well, it's definitely a test. We, as you know, our vision is is to be an experiential brand. And we know we can deliver those experiences both within the store and outside of the store. And we do that very effectively across the fleet today. What Lincoln Park will allow us to do is to bring a lot of those experiences inside the four walls into the community on a consistent basis. So it is a test and we will learn from that and then figure out how within, our flexible fleet that we have today from seasonal stores to small up to our large format. This we believe could become just another mix within our portfolio of how we go into a market and deliver our experience to our guests. But it's a test we're gonna learn and we'll go from there. Got

it. Thank you and congrats on all the momentum.

Thank you. The next question comes from Camille Lyon who's with County Corps Genuity. Please go ahead.

Thank you. Good afternoon everyone. Really great job here. Calvin, I think in your comments about the strength of the women's business, you talked about the bottoms category continuing to be a leading category for you. But what was interesting to us was the mention and call out of joggers. Can you talk about how your female consumer is expanding their aperture with respect, female consumer is expanding their aperture with respect to your offering such that you're getting a larger share of closet. It seems like that is starting to manifest in a way that could serve you well from the perspective of creating a bigger motor around the customer that you've invested in all these years. Yeah, no,

for sure. What I would tell you in terms of the extent of our business, both across men's and women's, but I'll speak specifically to women's is the number of new guests we're seeing as well as our reactivated guests in addition to a current active guest. So bottoms continues to be the number one driver of new guest acquisition and both leggings and joggers are performing incredibly well at achieving that. As well as we dial up our digital marketing initiatives and our email campaigns, we're proving that many of those tactics are proving very effective to reactivate guests into the brand. And then as you've mentioned to grow that share of wallet, which is equally something that we're focused on and exciting. So bottoms really is a very balanced growth across those three pillars. When we look to building out our core and filling in the assortment opportunities we have around yoga, train and run, as well as OTC, we expect that much of that will drive the share of wallet with our existing guests. Because what we're doing is truly bringing incremental assortment in choice to her and him, but in this case to her in the categories in which she sweats today, where we don't have product offering, but we know we have an opportunity to deliver it through our unique lens of science of feel. So moving forward, we expect to continue to grow that share of wallet. And as you mentioned, depth of wardrobe and see a lot of opportunity to do that by just expanding into the sweat categories we already have a relationship for or with her today.

Great, thank you. My follow-up question relates to the differences between your existing guests purchasing behavior and the new guests that you're bringing into the store and into the brand. So is there any clarity to provide in terms of the average spend between those two cohorts? I think that would be helpful in determining what the opportunity is of taking that new guest up that spend curve and have that person or that guest look like a more mature, higher spending consumer over X amount of time or months or what have you.

Yeah, we don't share sort of the average spend across our different guests. What I can tell you is directionally that our email file growth continues to be very strong as well as our new guest acquisition. And as we're building our CRM capability, our ability to then migrate or trade up those guests into new categories or deeper into the categories they're in is proving to be a very effective way in which we're keeping the guests very engaged and active as well as increasing their share of wallet, but equally focused on our high value guests, which we have incredible loyalty retention numbers within retail. So they're highly engaged. The retention numbers are very high and getting them to continue to engage in the category and drive growth is proving very, that's a big area of focus for us. And something that we're really excited about as we look to yoga train run in OTC as categories where we can expand the assortment with that engagement and retention to be able to increase the share of wallet. That whole CRM initiative is a big area and we're seeing some really good success from it.

Thanks so much. All the best in the next quarter.

The next question comes from Kimberly Greenberger who's with Morgan Stanley. Please go ahead.

Great, thank you so much. PJ, I wanted to just follow up on the potential port congestion. I'm wondering what you're hearing from your production department around the risks of port congestion. Is it that ocean cargo capacity is tight right now or are there other signals that your production department is seeing that suggests we could see this port congestion either late second quarter or late third quarter? And with regards to the use of the port, your early third quarter and with regard to your deliveries in particular, it sounds like you've protected all of your deliveries from these potential delays, but I just wanna confirm that you don't have any inventory on order that would be at risk of late delivery. And then I wasn't sure if I missed it, but did you offer any color guidance on the second quarter as GNA? Thanks so much.

Yeah, thanks Kimberly. So I'll take those one at a time. So with regards to the air freight, you're exactly right. We are protecting our fall deliveries and that's why we're doing it, it's a hedge. So we're eliminating the risk. I mean, there's always some risks, but we're eliminating most of it by utilizing air freight and not getting caught up in the congestion, which is we've seen this before due to tariffs, companies trying to get out ahead of it, but there is also a broader issue with carriers consolidating cargo. They refer to it as trans shipments, but that's a separate issue that's related more to carriers, but that is an issue we're dealing with as well. So hopefully that answers your question on port congestion. On SGNA, so we are committed to modest SGNA leverage for the year, we remain focused on that. As we mentioned before, we're using strong performance to invest in current and long-term growth and we're seeing a result from that. During this quarter, we leaned into digital marketing, focused on building brand awareness, driving new guest acquisition. As Calvin talked about, we're expanding our testing of new growth vehicles, loyalty, self-care, BOFUS, and then we continue to invest in our North American online guest experience and data and analytics to drive conversion. So the last few quarters have seen, we've ramped up our investment. We'll start to see the benefit of those in the back half and for Q2, we're calling for flat on SGNA and we see the bigger opportunities in our biggest quarters, Q3 and Q4, to add leverage to SGNA. But for now, we're still making investments and we still feel like that's the right strategy for the business.

That's great, thank you so much.

The next question comes from Brian Miguel, who's with Alpenheimer. Please go ahead,

Brian. Sure, with no regrets, I'm very, very next quarter. I want to, you look at the gross margin trajectory, here in Q1, clearly still very solidly positive year on year, but the rate of year on year increase has moderated a bit over the past few quarters or so. So my question there is, if we can understand better, what's occurred to facilitate that more modest rate or more modest pace of gross margin experience and how should we think about that line going forward?

So, hey, Brian, it's Stuart. Let me speak to that in terms of the drivers within our supply chain that had delivered the improvement over the last few years and then, I think more specifically to your question more recently. So we were able to build the programs that delivered the larger, more step function improvement in 16 and 17, and we've been able to take that forward into 18 and 19, and it's a part of our long-term guidance that PJ outlined at our analyst day to deliver modest gross margin improvement over the next few years. There's really four things that are driving that. Scale, price breaks from volume increases. Second thing is segmentation of our supply chain as we are able to drive more of our assortment into the lower cost segments of our sourcing strategy. The third thing is transparency as we're able to drive greater degree of specific production standards and costing negotiations across a broader part of our assortment. And the fourth thing is the distribution efficiencies that PJ also mentioned. So those four things are the drivers of our gross margin improvement. We're lapping some very significant improvements. They will naturally moderate into the future, but we still see significant opportunities over the next several years reflected in our guidance.

That's very helpful, I appreciate it. If I could slip in maybe a quick follow-up, again, just with regard to sales, and Calvin, I think you mentioned your prepared comments. Follow-up, again, just with regard to sales, and Calvin, I think you mentioned your prepared comments and you made reference to some of the soft lines or apparel type weakness out there. And clearly that did not occur in the rule of results as we're looking at results today. But the question I have is, as you look closer to your business, whether it be geographically across the country or even month to month, week to week, did you see any signs at all behind these very, very strong numbers of some stress on that consumer within the category?

I think when we look at Q1, and as we've shared, the balance across our product categories, both men's and women's, both bottoms and tops, our brand activations, be it some of the tests with membership or the event activity that we were doing, being able to leverage our improved data analytics and digital marketing, I mean, our guest was responding. And as we shared, store traffic of plus 8% and over 40% in e-commerce is a good healthy metric of a highly engaged guest. And we did not, as we don't typically see in our business, significant swings week to week or season to season or holiday to holiday. So I would, through Q1, we were very pleased with the momentum, consistent with traffic driving, a big piece of that business in both new guests, as well as existing guests and balanced across our product range.

Very helpful, thank you very much. 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 a terrific result. As you look at the comp, beyond the traffic, how are the other components of comp and how did they compare to last quarter? What are you seeing? And is there any more color on the merchandise margin and the progress there? Thank you.

So, hey Dana, it's PJ. So with regard to comp drivers, it is predominantly a traffic story. Again, you know, trafficking stores up 8% online, over 40%. North American conversion online has shown significant improvement due to our ongoing investment there, so we're seeing a result there. As far as AUR, UPP, they have effectively, we have a relatively stable average order value or basket size, so it's predominantly a traffic story.

So, thank you.

This concludes time allocated for questions on today's call. I'll now turn the conference back over to Howard Toobin for any closing remarks.

Thanks for joining us, everyone. We appreciate the time, and we look forward to speaking with you in about three months when we report our second quarter results. Thanks.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.