lululemon athletica inc.

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. 4th Quarter and End Year 2019 Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts who wish to join the question queue may press star then one on their telephone keypad. Should you need any assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to hand the conference over to Howard Toobin, Vice President, Investor Relations for Lululem Athletica Inc. Please go ahead.

Thank you and good afternoon. Welcome to Lululemon's fourth quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO, 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, which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained 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 annual report on Form 10-K and in today's earnings press release. Press release and accompanying annual report on Form 10-K are available under the investor 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 operating statistics for the fourth quarter, as well as our quarterly infographic. We're planning to end today's call in under an 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.

Thank you, Howard, and it's good to speak with all of you for our fourth quarter earnings call. We are very pleased with the strong performance of Lululemon both in the fourth quarter and throughout 2019 as we delivered nearly $4 billion in revenue. We continue to grow our core businesses while we strategically expand around the world and acquire new guests. The underlining health of our business is strong, and we entered 2020 with strong momentum. As you know, circumstances have changed dramatically in quarter one, given the spread of COVID-19. We're proud of the actions we've taken across our business to help protect our people and our guests as we navigate this situation. I'll begin my comments by discussing COVID-19 as it relates to our business and provide a brief overview of Quarter 4 and 2019. PJ Guido, our Chief Financial Officer, will then take you through our financials and provide more details on our more recent performance. We'll then take your questions. We plan to keep the call shorter than normal and wrap up in under an hour. Our hearts go out to all of those impacted by COVID-19. The safety and well-being of our people and our guests in the affected regions remains our highest priority. The current situation is clearly dynamic. Broadly speaking, and similar to many of our peers, we are seeing virus-related impact on performance across our markets, In North America and Europe, our stores have been closed since March 16th. Stores in New Zealand are closed at this time, while Australia is operating on reduced hours. In China, all of our stores except our location in Wuhan are open, with most operating on regular schedules. Our stores also remain open in other Asian markets except for Malaysia, where our two locations are currently closed. In addition, we are closely monitoring our supply chain and staying in constant contact with our vendors as they too navigate the situation. Given the rapidly changing nature of current events, we have decided not to provide financial guidance at this time. That said, the underlying health of our business is strong, which provides us with many levers to successfully manage through this period. These include, first, our strong balance sheet. We ended the year with $1.1 billion in cash, no long-term debt, and a $400 million untapped revolver. Second, our investments in key technologies, including RFID and strong partnerships with our vendors, will enable us to maximize inventory across our network while managing our overall levels. Third, the power of our products. Our assortment is less seasonal in nature, as many of our core styles are relevant year-round and can be held for future use. Fourth, the flexibility of our multi-channel business. Our e-commerce sites, mobile apps, and Omni capabilities allows our guests to shop in multiple ways, which is complemented by our agile store formats. And fifth, the strength of the category in which we compete. At our core, we solve sweaty problems for athletes, and we do not believe the current situation will change the trend toward people wanting to live an active and healthy lifestyle. These are some of the reasons we're confident in our abilities to navigate the near term while working to realize the opportunities over the longer term. In addition, we have early learnings from China which show us that our business will bounce back. We are not yet back to pre-closing volumes, but the business is getting stronger week by week. There is considerable work underway across the business to respond to the current situation, and I'd like to specifically update you on two of these work streams. The first is the support phase, and the second is how we will enable the recovery phase. I'll start with our support phase initiatives and how we are currently assisting our teams, our ambassadors, and our guests. We will do our best to open our stores as soon as possible when the recovery begins, and we'll approach this market by market based upon the latest information. I'm consistently inspired by the resilience of our people as they navigate the unknown and connect even more regularly than ever before. In terms of our guests, our e-commerce sites continue to operate around the world so we can continue to fulfill their needs with our product. Similar to what we've done for our own people, we have been offering online sweat sessions for our guests with yoga, meditation, Pilates, dance, and train classes. Our teams in North America and Europe have followed the lead of our people in China, where we've gained thousands of new followers on WeChat. On Instagram, during our first week of store closures, and thanks to our increased content offerings, we saw nearly 170,000 guests join us for our live classes. It's inspiring to see the strength of our guests come together this way, and we'll continue to stay closely connected as we navigate what's ahead. And finally, our ambassadors remain top of mind as well. We are in constant contact, and they are continuing to help us engage with our local communities through these virtual sweat sessions. As many of our ambassadors are small business owners who have been forced to close their doors, we just launched a global ambassador relief fund

This fund will assist our ambassadors who own studios in their local... ...about the recovery phase.

We know the current situation will pass, and we remain focused on being ready to serve our guests and support our communities when the time is right. Our balance sheet allows us to look ahead and continue the plan for growth as we manage the business for day to day. In terms of inventory, we are managing our buys and looking at our assortment flow with a full year view. Our teams are now in the work to balance supply with the current reduction in demand we're experiencing. We're in constant communication with our vendors and we have flexibility regarding our receipts for the second half of the year. Our key e-commerce DCs continue to function. We are practicing social distancing, monitoring the health and well-being of our people closely, and taking precautions to maintain our operations. Over the last several years, we have made significant investments in our supply chain and distribution network, and I'm confident that we'll be able to further leverage these investments to help us navigate through the current situation. Shifting to expenditures, we are currently evaluating our expense structure, capital expenditures, and store opening and remodel programs. We are acting now to ensure we can reaccelerate our growth drivers when we are ready. PJ will say more in a few minutes. In terms of product, our product pipeline remains full and our white space and design teams have not stopped their work. We continue to leverage our science of field development platform to bring new technical innovations to our guests. While we have paused on our events, such as 10K runs through July 31st, we are continuing to connect with our communities. We've collected our best online content from our ambassadors on our new Community Carries On Hub on our global website, creating one central place for our community to connect and access online fitness and health resources. This gives you a sense of the scope and breadth of our global response during both the support and recovery phases of our planning. Now, let me share some details about our fourth quarter and full year results. We are pleased with the momentum we saw during the fourth quarter and throughout 2019. Our results for the fourth quarter include total revenue growth of 20%, a constant dollar comp increase of 20% on top of a 17% increase last year, and an earnings per share increase of 23% compared to adjusted earnings per share last year. Our quarter four results demonstrate that our guests responded incredibly well to our product this holiday. Growth across all categories, with comps in women's up 12%, men's comps up 39%, and accessory comps up 24%. Strong comps across channels, with 9% in stores and 41% in digital. And within our regions, North America was up 19%, International was up 25%, and China was up 70%. For the full year of 2019, we delivered total revenue growth of 21%, a constant dollar comp increase of 18%, on top of an 18% increase in 2018, an operating margin of 22.3%, and an earnings per share increase of 28%. As you'll recall, Our 2023 vision is comprised of three pillars, product innovation, omnibus experiences, and expand markets. These are the right pillars for our business. We executed well against them in 2019, and we remain committed to our 2023 targets as laid out in our Power of Three growth plan. In summary, we're proud of how Lululemon continued to deliver against our strategies and gain momentum in the quarter of and full year of 2019. While this period in our lives is filled with uncertainty, at Lululemon, we are certain about our future. We have the balance sheet, the connection to our community, the strength of our category, and the right growth initiatives to sustain us while we keep investing well into our future. Although we do not know exactly when the current situation will pass, what we do know is that our stores will reopen. We know that initially the business will be lower than it was pre-COVID-19, but we believe that each day and each week it will keep building. We are planning for multiple scenarios, but in any one of these, we know that our brand is strong and has unique pillars of strength that will keep driving our momentum forward. I'll now ask PJ to provide further details about our quarter four performance and an update on current business.

Thanks, Calvin. I will first provide details on our Q4 performance and, although we are not providing quantitative guidance, I will offer some qualitative insight into the health of our business relative to the challenging environment in which we are operating. I will also discuss specifics on the strength of our balance sheet and our overall financial position. For Q4, total net revenue rose 20% to $1.4 billion, driven by continued strong execution across all parts of the business. In our store channel, we delivered a 9% constant dollar comp store sales increase on top of a 7% increase in Q4 of last year. Square footage increased 18% versus last year, driven by the addition of 51 net new Lululemon stores since Q4 of 2018. During the quarter, we opened 12 net new stores and completed five optimizations. In our digital channel, we posted a 41% constant dollar comp increase on top of a 39% increase last year. For the quarter, e-com contributed approximately $464 million of top line, or 33% of total revenue. Increased traffic in Q4 continued to drive comps, both in-store and online, with increases in the high single digits and over 30% respectively. Gross profit for the fourth quarter was $811 million, or 58% of net revenue compared to 57.3% of net revenue in Q4 2018. The gross profit rate in Q4 increased 70 basis points versus gross margin last year and was driven primarily by the following, an 80 basis point increase in overall product margin resulting from lower product costs and favorability in product mix. In the aggregate, occupancy, depreciation, product, and supply team costs had minimal impact in the quarter. Moving down the P&L, SG&A expenses were approximately $394 million, or 28.2% of net revenue compared to 28.9% of net revenue for the same period last year. Foreign exchange, both translation and revaluation, contributed 30 basis points of deleverage in the quarter. Operating income for the quarter was approximately $416 million, or 29.8% of net revenue compared to 28.4% of net revenue in Q4 2018. Tax expense for the quarter was 121 million, or 28.8% of pre-tax earnings compared to an adjusted effective tax rate of 26.9% a year ago. The increase in our effective tax rate compared to our adjusted effective tax rate last year relates primarily to a change in tax legislation in the fourth quarter of 2018, which reduced tax expense in that quarter. Net income for the quarter was 298 million, or $2.28 per diluted share, compared to adjusted earnings per diluted share of $1.85 for the fourth quarter of 2018. Capital expenditures were approximately $69 million for the quarter, compared to approximately $69 million in the fourth quarter last year. Q4 spend 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 $1.1 billion in cash and with $400 million of available capacity under our revolving credit facility. Inventory grew 28% and was $518.5 million at the end of Q4. We repurchased approximately 1,600 shares this quarter at a cost of just over $307,000. At the end of Q4, we had $327 million remaining on our current $500 million repurchase plan. Let me shift now to current events. As Calvin stated, our sales trend changed dramatically during the second week of March when the impact of COVID-19 accelerated. Due to the dynamic nature of this event, we are not able to provide accurate 2020 guidance at this time. All of our stores in Europe and North America have been closed since March 16th, and our current plans call for these stores to remain closed until April 5th. Our DCs are up and running with the exception of our facility in Sumner, Washington, which has been closed in line with temporary local restrictions. This DC does not fulfill a significant number of e-commerce orders and the closure has not had a material impact on our business. The vast majority of our stores in China and most of Asia are currently operating and showing improved performance each week since reopening. Through the second week of March, our North American store comps remain strong and in line with Q4 trend, driven by consistent traffic and great execution by our store teams. In addition, our digital business has remained strong throughout, driven by traffic and improving conversion that is a direct result of the investments we have made in our digital platform. The strength of our business early in Q1, both in-store and online, reinforces that our brand remains strong. That said, we did see a dramatic slowdown in our business in conjunction with our store closure, and we expect this to have a negative impact on Q1 comps, margins, and EPS. One of our key advantages in the current environment is our liquidity position, which is extremely strong. We currently hold over a billion dollars of cash on the balance sheet and have no long-term debt. We also have a $400 million revolving credit facility, which has three years left in maturity. In addition, this facility has an option to upsize by 200 million. We are also currently actively managing our expense structure, capital investment, and store openings and renovations. We have modeled several different scenarios to gauge the COVID-related impact on our business and believe we have the flexibility and nimbleness to adapt and manage to each scenario accordingly. To mitigate the impact we are seeing, we are reducing nonessential operating expenses and reprioritizing our capital spend towards business-critical projects. Among several other expense reduction opportunities, we've curtailed business travel, slowed the pace of new hires, rationalized our marketing spend, and are working with our landlords to defer a select group of our upcoming new store openings and remodel projects. In terms of inventory management, our merchant and supply chain teams are evaluating all upcoming deliveries through the lens of current and anticipated demand. We have flexibility with regard to our fall and winter 2020 receipts, and where appropriate, can push out or reduce our buy orders. We believe we are in a strong position given our high cash balance, strong cash flow, no long-term debt, and access to additional sources of liquidity. In addition, we will further enhance our financial position by managing working capital, SG&A expense, and capital expenditures. The strength of our balance sheet and flexibility of our operating model puts us in a position to address an unprecedented situation within the global economy. In addition, it will allow us the optionality to still prudently invest for the future and live into our potential as a global brand. And now back to Calvin for some closing remarks.

Thank you, PJ. I want to express my confidence in the leadership team of Lululemon and our brand-strong position, which will enable us to effectively navigate these unexpected times. Our hearts go out to everyone who is personally impacted by COVID-19. I'm continually impressed by how the teams of Lululemon are leading through this time and who they are being for one another, for our guests, and for our community. In closing, I want to thank our team members for the results they delivered for Lululemon in 2019 and for their perseverance and commitment to our brand that I continue to see from them each and every day. Operator, we can now open it up for questions.

Thank you. We will 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 are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press Start then 2. We will pause for a moment to allow callers to join the queue. Your first question today comes from Matthew McClintock with Raymond James. Please go ahead.

Yes, everyone. I hope everyone's family is safe and healthy. Calvin, I guess the first question for me would be, you made the statement, plan for growth while continuing to manage the day-to-day. And it's an interesting statement because it seems like a lot of companies right now are not planning for growth and they're just trying to survive. So can you kind of give us some insight into your ability to plan for growth, continue to grow when we get on the back end of this? And maybe where your confidence comes from that you're going to return to that in a reasonable amount of time is that it's just that your China experience, what you're seeing in China is what makes you feel that way. That's my first question. Thanks.

Okay. Thanks, Matthew. I mean, I'll tackle the first part and then I think share a little bit of the learnings from China. I believe... The balance that we are striking is recognizing that, you know, Lululemon is in a very healthy position. We had fantastic momentum coming in to the current situation, and there's nothing that I believe will fundamentally change our ability to regain that momentum once we reopen, once the gasp you know, get some degree of normalness back into their life, how they will come back into our category and shop. We know and we've stated the balance sheet is healthy. That allows us to, you know, trade and think into the future. And we equally know that with the power of three and the vision that we're building towards, you know, is if nothing else, even reinforced with the current opportunities or situation that we're facing around our community, around our omni-channel strategy, how we're thinking about leveraging the brand and with our guests. We are taking short-term actions, as PJ alluded to, that are appropriate because there is a degree of uncertainty, and we have looked at our strategic initiatives, and we have delayed some of those, but there are some we're investing in technology, investing in our omni-digital capability. and investing into that vision of an omni-social community that we continue to make. So we have reshuffled, we've rebalanced, but we believe even more so that the vision and the opportunity for Lululemon is strong, and now is the time to not stop building for the future while recognizing we need to sort of pause on some in order to maintain others. In part, when we do look at China, I do think it will help inform how North America and Europe will come back trading, but I do think the scenarios are slightly different in that China had a quick two-week closing period when the stores were then reopened. We've traded five weeks since reopening. We are in our sixth week, but the country was still under a level one security situation. So I think its pace of rebuilding back business is getting better every day, every week, but is building back. In North America and Europe, we're planning on a longer close period, which I think once we reopen could accelerate the pace in which we see guests coming back into the stores. And obviously from now to then, you know, there are other factors in the economy that have equally changed or evolving. So we're continuing to monitor, run scenarios against both, but I do believe in our ability to strike that balance and continue to invest in the future, in the vision, and we're doing that.

I appreciate that color, Calvin. It's important. And then my second question is just, given your background in PJs, too, where you both worked in that retail wholesale business model before, Can you maybe talk to us about how your vertically integrated business model of Lululemon potentially allows you to manage the inventory to appropriate demand quicker or faster or in a more appropriate manner than what you've seen in your historical experience? Thanks.

Great. Thanks again on that. And, you know, we are absolutely in our support phase of initiatives managing our inventory. I do believe being vertically integrated gives us a ton of benefits, and there are other benefits that we equally have that are outside of just being vertically integrated. The benefit of being vertically integrated is that we own the relationship with our vendors, and we own the relationship right through to our guests. in how we sell and how we choose to present the product and the quantities in which we've been buying allows us to manage very differently, in my opinion. Equally, and as we've commented before, one of the benefits around our inventory and product, we have bought through the first half of the year. We are able to influence our Q3 buys slightly, and we are in the work on our fall and winter buys now, but our product is less seasonal. There is a high percentage of our business that is core, which means we're able to hold and continue to sell for a much longer period of time. We're less dependent on the need to flush out inventory. Second, our technology, with the use of RFID technology, We can access product at any point across our network, not just DCs, but at our stores as well from ship from store. So it allows us through just regular demand that we're seeing today online. Our plan in the next week is to turn on ship from store from our stores, although they will not be open to the public. We will be opening up some locations from a ship-from-store perspective and have a small number of staff operating that. That's going to allow us to continue to manage that inventory that's already in the network very effectively. And so those, I think, combined with the relationships we have with our vendors and the fact that we own the end-to-end, are a number of very unique levers that put us in a much better position to manage our inventory levels.

Thank you very much for the call there. Best of luck.

Thank you. The next question comes from Mark Auschwager with Baird & Co. Please go ahead.

Good afternoon and thanks for taking my question. I wanted to ask about the product strategy and how you're thinking about that as we move through the crisis. Are you planning any changes to the flow of newness? Are there product launches that you're looking to delay until store operations have ramped back up? Thanks, Mark. We're seeing some shifts in demand currently, as you can imagine. Much of that is more in the accessories categories with – yoga mats and some of our yoga blocks and items that are fulfilling that need as more and more of our guests sweat at home. But we're not planning to change any of our launch cadence. Rather, we're looking at timing to ensure that our plans are still relevant with the environment that we're in to make sure that how we present the product to the guest is in an appropriate way, that it's not tone deaf to the situations that are happening around us. But in general, I think the benefit we have is that and what's in our favor is that our launches are rooted in solving guests' unmet needs. And it really isn't bound to time or seasonality or fashion. So there are real no changes to 2020 launch plans or as we look into 21 at this point in time. You know, we had just launched our Everlux in February. which is our first product launch for this year under Sciences Field positioning. And the guest resonated incredibly strong to it. It was far exceeded our expectations and continues to sell well online. And as I look forward to the rest of the year, we don't have any immediate plans at this place. We have our online network to sell. We still have other markets we're operating in. And we know, as I said, we will be open soon, and we believe the innovation and what we have will only enhance and entice the guests to come back into the stores. Thank you. And if I could just follow up on digital real quickly. Is it your hypothesis that the digital business will capture some incremental demand given the store closures? I know you said things have slowed recently here, and I was hoping you could clarify. Are you saying that the growth has slowed from the rates of growth you were seeing in the fourth quarter, or have you seen digital demand actually turn negative in recent weeks? Thanks. Great. Thanks, Mark, and definitely want to clarify that. We saw coming into the store closures very strong momentum in both our retail and digital channels. As BJ alluded to, we had an incredible fourth quarter, total comps of 20%, which was the strongest in all of 2019, which was a very strong year for us. So it's great to end with that type of momentum. We saw that momentum continue into the start of this year across both physical stores and digital. Since closing, our digital business has picked up. But it's obviously not recovering all the volume loss from our store networks being closed. But we have seen our store or our online business accelerate in terms of growth. but obviously it cannot pick up the entire demand. So it is responding well, and we've adjusted our digital marketing initiatives. We leaned in a bit there, again, back to the notion of balancing costs, expenditures, but doing it strategic. We've leaned in a bit. We're seeing good response to that, good response to new products still. Some other categories are picking up, but it's not completely covering the loss of store volume, but is responding in a positive manner. Very helpful. Thanks again and best of luck. Thank you.

Thank you. Your next question comes from Ike Boruchow with Wells Fargo Security. Please go ahead.

Thank you. Good afternoon, everyone. So I guess maybe for Calvin on China, you gave some helpful details on the progression and the build, which is really helpful for us to understand what's going on over there. Could you give maybe a little bit more color? I think you've said that ever since kind of reopening five or six weeks ago, you've seen gradual build, but your volumes aren't at pre-COVID levels. Can you talk about it maybe from a comp perspective? I assume comps are still negative year over year. Where exactly is that trending now? Based on what you see, is there a target in mind or a date in mind when you think comps can start to grow again in China? I'm just trying to understand that a little bit better.

Great. Thanks, Ike. As I sort of teed up, what's interesting with China, and I think an important element to remember, is that we closed for two weeks. We've been open for five. We're in our sixth week. The country was still on a level one emergency alert. They are just moving to a level two this weekend in Shanghai, Beijing. In one of our other regions, that region moved to a level two earlier in the week, and we did see an immediate uptick in the performance of the stores. Yesterday, our total business in China from a collective of stores and online had a very strong day. So it really is day-to-day, and we're learning as we go. I believe that the five-week period was impacted by the Level 1 emergency alert, and as that changes, we will see more and more business come back at a quicker rate than what we have over the five weeks, and we're seeing that, although it is early. And we have been in negative comp but improving. And, you know, I think it's too early to assess when will we, you know, tip over negative comp into positive comp in our stores. Our online business has been trending very well, positive comp, but similar to North America, it just cannot offset the entire volume loss in our physical stores. But with what I'm seeing in the last few days and as these emergency alerts drop, you know, I have reason to believe that. we will see a quicker pace than we've seen in the last five weeks to that important sort of inflection point of getting back to positive.

Thanks. Super helpful. Good luck.

Thank you. The next question comes from Adrienne with Barclays.

Please go ahead. Good afternoon. Congratulations on the holiday and the momentum coming into the year. PJ, my question for you is on CapEx. It was about $280 million for fiscal 19, and the spread was about, what, $170 for stores and about $100 million for corporate. So as we're looking into 2020, I was wondering, how should we think about store investment and continuing to grow? That piece of it seems like it's the growth aspect of it. And when we're thinking about CapEx reduction, how should we think about it? Is it 100 million off of this number? We're hearing people cut their CapEx up, you know, 50 to 60%. So just wondering if you can give us some color there. Thank you very much.

Yeah, sure, Adrienne. So first off, yeah, our CapEx was closer to 300 for 2019. You know, and we're not giving guidance for 2020 because we are managing it actively. To answer your question, you know, I would say roughly a third of our CapEx is maintenance CapEx with the balance being growth. And as you said, it comes in the form of stores, but it also comes in, you know, in the form of, you know, investing in growth platforms, our supply chain, our IT. So we are going to, we are actively, you know, reviewing the CapEx budget and You know, where we can throttle back on things that we don't see having, you know, a huge impact on the business, we'll do that. But we'll still absolutely do the things that we need for long-term growth. So, you know, we will pull back on CapEx. Hard to give you, you know, a specific number right now.

Fair enough. And Calvin, a really quick one for you. Did you say all the stores are open or 80% of them are open? And of the ones that are open, if you quintile them, is the top quintile, you know, within 10% of comping or is it pretty tight spread across the different buckets of them? Or are certain markets doing materially better than others? Thank you.

Right. Thanks. Just to confirm, are you referencing 80% open? Is that specific to China? No.

Specific to China, yes.

Okay. All our stores are now open in China except for one in Wuhan, which actually we just received notification that it will be opening next week. So we'll have all doors open next week in China, which I think is positive and continues sort of the positive trend that's happening in that marketplace with the COVID-19 situation. And there are differences in terms of how stores are performing, and it is both by market as well as when we've seen some of these level emergency alerts change. They aren't broadly distributed, so the difference between the top quartile to the bottom left quartile isn't a massive scatter, but we are seeing some stores that are closer to the positive comp than others. but they are all trending and moving sort of week by week into a similar trend, which is every market, every store is getting better. Some started closer to the positive comp and have continued the momentum to that. And then as these markets take or cities take a position to change their emergency status, that's where we really see the inflection point on overall performance improvements.

Great. Thank you very much. Best of luck.

Thank you.

Thank you. Your next question comes from Erin Murphy with Parker Sandlot. Please go ahead.

Great. Thank you and good afternoon. Calvin, you talked about some of the efforts that the LULU community has done to just bring some of the virtual workouts and meditations online as you connect with your consumer community. I guess, can you talk a little bit more about what you've seen specifically with new customer acquisition during this period, maybe looking at China first and then here in North America and Europe? And then second question really for PJ regarding just the flexibility to manage expenses during this period of time since we don't kind of have adequate history going back to former recessionary periods in your model. Thank you so much.

Sure. In China, where we first innovated and continued sort of our relationship and partnership, we had with an app there called Keep Up. which is a wonderful platform to activate sort of online sweat and then introduce some of the innovation around WeChat. I shared some numbers with you, and we are seeing a number of new guests. Whenever we do these type of activations in that market, be it some of our Tmall initiatives around Brand Day, or on these type of platforms and partnerships, they're proving to be wonderful new guest acquisitions. So we're doing more of them as a result of not having physical sweat or events as an option, and we're seeing an increase in the acquisition of new guests. In North America, it's early, but I would anticipate that we would equally see some new guests acquired this way, but it is really absolutely satisfying in providing a service to our loyal guests that actively participate in our events that aren't available to them at this point in time, or our ambassador studio community that are closed at this point in time. So I think we will see some, but not quite to the degree of the China market, but it's a combination of. And I think it's just reinforcing the power of You know, one of our goals as it relates to our vision, which is building this omni-social community where we launch and host both physical events and physical activations to come together, be it through membership or stores or our local events, as well as our digital events. and this has just pushed our innovation into the digital space, and it's inspiring to see the guests respond to it and think how the physical and digital will come together as we lean into that as one of the opportunities for our vision.

And then, Aaron, on your question about managing expenses, so we do have significant flexibility built into our SG&A, and the way we think about it is, in a few buckets. There's the variable component, which will come down naturally as sales have come down. But there's also things we can do to drill into that a little bit further. There's the discretionary spend. Marketing is a good example. We can redeploy marketing dollars, for example, We're not doing store events now, but we can redeploy into digital marketing to drive e-com performance. So we can do things there. And then there's the overhead piece, which we are actively managing. And I talked about it a little in the prepared remarks, but there are several levers we can pull to control expense. whether it's slowing headcount growth, curtailing travel. There's a number of buckets across the organization where we can find savings depending on what scenario we're in. So feel pretty good about the flex we have in the P&L.

Thank you all. Thank you. The next question comes from Kate Fitzsimmons with RBC Capital Markets. Please go ahead.

Yes, hi. Thank you for taking my question. I guess first I just want to ask, you know, on the occupancy front, you know, we've heard, seen headlines just about, you know, rent renegotiations going on with landlords. I believe you guys had alluded to maybe deferring some of the rent on the newer projects, but you know, just maybe give us an update on, you know, some of the active conversations you are having with landlords. And then secondly, just on the inventory, you know, certainly understand, you know, there's a decent portion that is, you know, can be, you know, repurposed for later seasons, you know, less fashion associated with it. But I guess when we're thinking about, you know, the aspects of the assortments that, you know, can't be, you know, reused in future seasons, You know, just how are you thinking about getting rid of the excess? You know, should we think about warehouse sales? Just, you know, write downs. Just, you know, help us kind of contextualize it there. That would be helpful. Thank you.

Yeah, thanks, Kate. It's PJ. So on the occupancy piece, it's obviously a very fluid real-time situation. So it's hard to comment on, you know, any rent relief we might see. WHAT I WILL SAY IS WE HAVE GREAT RELATIONSHIPS WITH OUR LANDLORDS. WE ARE IN ACTIVE CONVERSATIONS WITH THEM. SO WE'RE HOPING FOR SOME FLEXIBILITY AND ANTICIPATE SOME. SO THERE'S MORE TO COME ON THAT. BUT NOTHING SOLIDIFIED AT THIS POINT.

AND ON THE DIFFERENT OPTIONS RELATIVE TO OUR INVENTORY POSITION. One, obviously, that we're activating because you want to get ahead of it is our forward buy, and that's the work we're in right now, as well as work with our vendors on orders that had been placed and if we want to adjust those accordingly based on the inventory we have on hand, knowing that a large percentage of it is core, but some of those future orders would have been replacing core, and we can reduce and pull those down. And on that core inventory, when it's your basic colors, there is no need for us to take a short-term immediate action, and we won't. There will be a portion of inventory that we will want to look to our traditional levers in order to help us clear through. I think the important thing is we don't need to, nor are there any plans on making any short-term decisions that's going to hurt our brand, our positioning, our price positioning in the long term. We have had clearance strategies, and right now we don't see any need to change from them. We're going to continue to use in-store as markdowns, online as markdowns. We have outlets. And up to 2019, we've had online warehouse sales. And last year, we didn't need to run that, so we did not. But we have typically run warehouse sales, and that is one initiative that is at our disposal, and we may use it. But we have always traditionally used it, and combined with the other levers that I see no need to activate anything further, and everyone should know that we are managing all those decisions through the lens that we won't take anything that puts our price positioning, the power of our price and our brand at risk, nor do we see the need to.

Great. Thanks very much. And really, congratulations on the momentum in 2019. It was pretty spectacular.

Thank you. Thank you.

Thank you. That's all the time we have for Q&A today. Thank you for participating. You may now disconnect your lines.