Lululemon Athletica Inc. (LULU) CEO Calvin McDonald on Q1 2020 Results - Earnings Call Transcript

Lululemon Athletica Inc. (NASDAQ:LULU) Q1 2020 Earnings Conference Call June 11, 2020 4:30 PM ET

Company Participants

Calvin McDonald - CEO

Sun Choe - Chief Product Officer

Meghan Frank - SVP, Financial Planning & Analysis

Alex Grieve - VP, Controller

Howard Tubin - VP, Investor Relations

Conference Call Participants

Matthew McClintock - Raymond James

Matthew Boss - JPMorgan

Lorraine Hutchinson - Bank of America

Paul Trussell - Deutsche Bank

John Kernan - Cowen

Erinn Murphy - Piper Sandler

Alex Walvis - Goldman Sachs

Operator

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. First Quarter 2020 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. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Howard Tubin

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; Sun Choe, Chief Product Officer; Meghan Frank, SVP Financial Planning and Analysis; and Alex Grieve, VP and Controller.

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 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 the Investors section of our website at www.lululemon.com.

Before we begin the call, I would like to remind our investors to visit our investor site where you will find a summary of our key financial and operating statistics for the quarter. 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 like to turn the call over to Calvin.

Calvin McDonald

Thank you, Howard. It’s good to speak with all of you again to provide an update on our first quarter, how we’re adapting to and navigating the unique challenges presented by COVID-19, and the trends we're currently seeing in the business.

I'm pleased to be joined today by Sun Choe, our Chief Product Officer who will share some product highlights. You'll also hear from Meghan Frank, our SVP of Financial Planning and Analysis. Meghan is one of our seasoned veterans within the finance organization, who has stepped into an expanded leadership role, while our CFO search is underway. I'm excited to be working closely with Meghan and appreciate the support she is providing to the organization. Also joining us for the Q&A portion of the call is Alex Grieve, our VP and Controller.

Given recent events, I'd like to begin by sharing some thoughts on the tragic deaths of George Floyd, Breonna Taylor, Ahmaud Arbery and far too many others and the global outrage over longstanding issues of racial injustice and systemic discrimination. Black lives matter. Lululemon unequivocally denounces the unacceptable racial violence and oppression that directly impacts the black community. We’re listening and learning and taking action. As a company, we are committed to increasing our investment in education, behavior change, and diverse representation within our organization and calling on our global community to drive positive change into the future. I look forward to sharing more details and our progress on these commitments going forward.

Let me turn now to our overall business performance in quarter one. Total revenue decreased 17%. Due to the significant number of stores closed during the quarter, we’re not reporting same-store sales. Our e-commerce business was particularly strong in quarter one, accelerating as the quarter proceeded. E-commerce comp increased 70%, which is on top of 35% increase last year. This represented a meaningful acceleration relative to our quarter four e-commerce comps of 41%.

Gross margin declined 260 basis points as deleverage on occupancy and other non-product costs offset an increase in product margin, and earnings per share were $0.22 versus $0.74 last year. And our financial position remains strong as we ended the quarter with $1.2 billion in total liquidity. I'd also like to provide some insights into our market share gains. While we typically do not share market share data under these circumstances, the data helps calibrate our performance and reinforces the strength of our brand. In the Athletic Apparel space, a category that is performing better than other apparel categories, we saw one of our largest quarterly gains in market share in recent years according to NPD data.

Given the challenges presented by COVID-19, our Q1 results unfolded in three phases, with each one exhibiting unique performance characteristics. We also had key learnings across the quarter. Let me now speak to our business performance within each phase. During phase one, the pre-COVID time period, we were very pleased with the momentum Lululemon carried into the quarter. Building off of our strong quarter four performance, our business accelerated through early March with total comps increasing over 20%. We saw strength in all of our regions except Asia, which was already experiencing the effects of the virus by this time.

In mid-March, we entered phase two as COVID-19 began to spread across the globe. We moved quickly to protect our people and guests by closing the majority of our stores. While guests in North America and Europe were just beginning to deal with COVID-19, guests in China were beginning to move into the recovery phase. Our total comps in China were positive in March with strength in our e-commerce business offsetting continued declines in our stores. During this period, as our stores started closing globally, our e-commerce growth began to accelerate.

In late March and April, we moved into the early recovery phase, a new normal emerged and we were encouraged to see how quickly our guests were embracing both working and sweating from home. We saw a significant acceleration in sales trends that resulted in 125% e-commerce comp for the month of April with this momentum continuing into the second quarter. During this phase, our overall business in China accelerated further as guests began to feel more comfortable returning to the stores. Our total comps in China increased in the low-teens in April and have further improved into quarter two.

While this period of time remains uncharted territory, I'd like to share some of our key learnings that are guiding our view of our business both in the near and long-term. We believe this context is valuable given we're not providing detailed financial guidance. In a moment, Meghan will share some directional color for you on Q2 and the full year. Let me start by highlighting the strength of our management team. Our full leadership team came together. Our efforts demonstrated our strengths of being globally coordinated and regionally empowered.

We stood up a Global COVID-19 response team comprised of cross functional leaders to ensure our actions were informed and appropriate based on conditions on the ground in each market. As a leadership team, we have never been more aligned globally. The current environment has advanced cooperation across our regions, and we're using the learnings from China to guide our actions in other regions that are now in the recovery phase. Let me shift gears now and speak to the broader Lululemon community and our stakeholder relationships.

Our collective, including our employees, ambassadors, guests, vendors, and landlords has always come first. We acted swiftly during the quarter to support our collective in this crisis by closing the majority of our stores, committing to pay protection for all our employees, launching our We Stand Together Fund to assist our employees who were directly impacted by COVID-19, launching our Ambassador Relief Fund, and continuing to pay our rent, and pay for committed merchandise orders.

We believe that by supporting our collective and helping them navigate the day-to-day realities of this period, we will build even stronger relationships and increase the already strong loyalty and trust in Lululemon. These decisions are right for our people and for our brand. While there is a near-term impact on our P&L, these investments will serve us well over the long-term. I'd also like to highlight the strength and resiliency of our supply chain and distribution network.

As our e-commerce business spiked throughout the quarter, we were able to harness the power of our agile distribution network to ensure guests continue to receive a high level of service. We recently implemented intelligent sourcing capabilities that use machine learning and artificial intelligence to route e-commerce orders through our distribution network in the most efficient way. The benefits include increased delivery speed to guests, minimizing costs, and efficiently utilizing inventory pools to help reduce markdowns.

In terms of inventory management, we acted quickly so that we align future deliveries with our new view of demand. We benefit from an inventory with a relatively high percentage of core product, about 40% overall, that has a shelf life beyond the current season and with limited markdown risk. And while we did see some of our factories in affected regions temporarily shut down, our diversified vendor base has served us well in navigating the day-to-day.

Overall, these actions resulted in ensuring we had inventory to fulfill guest demand as our e-commerce business continued to accelerate, built capacity to ensure guests continue to receive the strong service levels as volume increased. And we’re positioned well from an inventory standpoint for the second half of the year and maintain an ability to react to multiple demand scenarios. When looking more closely at our e-commerce business, guests continued to respond to the newness we introduced into our assortments.

We leveraged our science to field innovation platform to bring innovation to the market, and Sun will share additional details with you in a moment. We have been investing in our sites in our mobile app for the last several quarters to enhance the guest experience. These investments have improved functionality including checkout, navigation, search browse, and the speed of our sites. And I'm thrilled to see how well these strategic investments are paying off. In recent weeks, we've seen order volumes equivalent to what we experienced during the Holiday season in December. As I stated earlier, our e-commerce comps increased 70% in quarter one and 125% in April.

I'm excited that we were able to create more online growth globally despite the challenges of COVID-19. While our stores were closed in Europe and APAC, the work and investments we have made in our regional sites took center stage and brought to the forefront the considerable potential for our brand across each market and the role e-commerce can play to grow our business. Europe delivered a stellar 170% e-commerce comp in quarter one and in Australia, e-commerce comps increased nearly 150%.

Our brand is clearly resonating in our international markets and we continue to believe we can quadruple this business from 2018 levels by 2023. For the e-commerce business overall, our strength was broad based driven by both core product and new innovations. From a guest perspective, a healthy combination of existing guests, new guests, and store only guests beginning to transact with us online drove performance. These trends are very encouraging and should drive our growth into the future as we continue to manage these relationships moving forward.

As we have managed the business through the COVID-19 phases and entered the recovery phase, we have not taken our eye-off the future. We have accelerated our innovation in key areas and have prioritized investments in our key growth initiatives. In the early days of the pandemic, we launched our community Community Carries On portal on our e-commerce sites globally. This hub allows our guests both existing and new to live the Sweatlife through a number of virtual channels. More recently, we launched our digital educator service. This program allows guests to chat with educators via video to help them discover new products, answer their questions on fit, or help them find a gift. This program speaks to the power of our omni-educators and the engagement they can have with our guests whether in-store or online. We've clearly seen our guests interact with us in new ways via our digital offerings.

We expect these behaviors and routines will continue as we move forward. We also believe that at home, virtual workouts will be an additive component of sweat regimens well into the future, even as studios reopen and return to normal operations, and we intend to continue to be there for our guests for all their sweaty pursuits, both inside or outside their homes. Let me update you now on where we stand with the store openings and our outlook on the future. As of today, we have reopened approximately 300 store locations across North America, Europe, Asia, New Zealand and Australia.

We will reopen the remainder of our stores when it is safe to do so in each community. While we're excited with the early results in our reopened stores, and the acceleration we've seen in our e-commerce business, we recognize that many unknowns continue to exist in the external environment, we’re moving forward with new store openings in strategic locations, such as Greater China and continuing to invest in our future.

But we’re also being financially prudent as we move forward. We operate under the principle that we will not take an action in the near-term that will hurt our business or our brand in the long-term. We have removed $130 million from our originally budgeted SG&A spend for the year and have identified additional opportunities should the ramp we're currently anticipating revenue failed to materialize. I'd now like to turn it over to Sun who will share some product highlights. Sun?

Sun Choe

Thanks, Calvin. First, I'd like to voice my support of Calvin's opening comments on the global movement to eradicate racial injustice and discrimination. I'm a person of color and an immigrant who through hard work and lucky breaks have been able to overcome racial barriers that tragically still exist today. I'm proud to be part of Lululemon and to be part of the team committed to driving meaningful and enduring change. Thank you. And with that, I'm happy to be here to share our product results.

We continue to leverage our science to field product platform to solve guests unmet needs and fuel our future growth. We brought new innovations into our assortment in Q1. And I'm excited with what we have untapped for the coming months and quarters.

Despite COVID related store closures, we saw strong demand across key areas of the business driven by the following, one continued innovation with new launches in the train category, two the new normal of working and sweating from home and three, our ongoing ability to leverage our core franchises. Let me share a few highlights on each. From an innovation standpoint, early in Q1 we relaunched a proprietary Everlux fabric in two new styles, Wunder Train and Invigorates. These styles are designed for train and our guests response was strong to both.

In fact, we saw virtually no cannibalization within our key pants styles, and our women's pant business was one of our best performing categories in the quarter. Midway through the quarter as our guests began adjusting to working and sweating from home, we saw a significant increase in demand for our Yoga products, including our align bottoms, Yoga mats and blocks. We’re also seeing our guests gravitate to our train products, in women we saw strong demand for Wunder Train and Invigorate bottoms as I previously mentioned and for men, we saw strength in our search, pant and jogger as well as our license to train patent jogger.

Even prior to COVID, we identified significant opportunity to grow our train business for men, much like we have for women by introducing additional styles of performance pants. We’ll continue to leverage this opportunity going forward.

Finally, when looking at our core franchises, we expanded both our Align and Swiftly collections in Q1. In Align, we expanded into tops with the align tank. This is particularly exciting because it is the first time we've expanded an existing bottoms franchise into tops, and the style has been a huge success for us so far. We see this tank being a key growth driver in our tops business and see further runway for us to leverage some of our other pant franchises in similar ways. We also re-launched our Swiftly franchise with Swiftly 2.0, the technology behind the Swiftly makes it ideal for use in running and training and our recent updates include shorter length, enhance fit characteristics and improved shape retention.

Guest response to our enhanced versions of our Swiftly franchise has been strong and we’re excited to build upon the success in our tops business. Looking forward, I'm thrilled with what we have on the horizon to expand our share of closet with our on the move category for women. I don't want to give too much away but later this summer we'll be launching three new pant styles meant for out-of-studio use, but which leverage our expertise in fit, technical fabric and construction that we’re famous for in our performance leggings.

It is clear to me that the desire to wear technical apparel, which also offers comfort is here to stay. We do not believe that guests will be willing to forego either one of these attributes even as they return to their normal lives over the coming months. We at Lululemon are extremely well positioned here based on the expertise we've developed over many years driven by the science to field. The entire body of work underpinning this platform relates to have guests want to feel while wearing clothes. And we've always used this as our foundational principle supporting our innovation.

We’ll continue to leverage this expertise to drive our growth going forward. With that, I'd like to thank our entire product organization for their ingenuity and dedication during this virtual and uncertain time. We remain confident in our innovation pipeline. And I’m buoyed by the team’s steadfast passion for beautifully solving our guests unmet needs, and how they’re creatively responding to the ever changing climate. And now over to Meghan to take you through our financials. Meghan?

Meghan Frank

Thanks, Sun. I'll start by providing details on our Q1 performance and although we’re not providing specific guidance, I will offer some color on our outlook for Q2 and the remainder of the year. I will also discuss specifics on our balance sheet including our cash position, liquidity and inventories. For Q1, total net revenue decreased 17% to $652 million, as our business was impacted by the spread of COVID-19 and related store closures. In our digital channel, we posted a 70% constant dollar comp increase on top of a 35% increase last year.

Our store comp definition removed stores that were closed for greater than 30 days. Given the significant number of temporary store closures in Q1, we do not feel store comp is a meaningful metric to evaluate performance. Therefore, we’re not reporting total comps or store comps. As we evaluate our top line performance, we’re focused on total revenue, our digital business trends and open store recovery trends, which I will offer some additional color on as we move into our outlook.

Square footage increased 15% versus last year driven by the addition of 34 net new stores since Q1 of 2019. During the quarter, we opened four new stores, two in Mainland China, one in South Korea and one in Hong Kong and we’re pleased with initial performance. Excluding the temporary closures related to COVID-19, we closed six stores in the quarter. These were predominantly the Aviva branded store closures which we had planned. None of our permanent store closures were related to COVID-19. We also completed three planned optimizations.

In terms of our digital channel, e-com contributed approximately $352 million of top line or 54% of total revenue. Our constant dollar e-com comps were consistent with our Q4 trend through the end of March. And as Calvin mentioned, we saw this accelerate to approximately 125% in April. We experienced accelerated strength in traffic and conversion, which increased over 40% and 25% respectively. Traffic was driven by channel shift coupled with investments in digital marketing, and conversion driven by guest response to our products and the investments we've made in our global digital platforms to improve guest experience.

Gross profit for the first quarter was $334 million or 51.3% of net revenue, compared to 53.9% of net revenue in Q1 2019. The gross margin decline of 260 basis points include a 180 basis point increase in overall product margins, resulting from lower product costs and favorability of product mix. We did not take any significant inventory write-downs in the quarter. This was offset by 330 basis points of deleverage on occupancy and depreciation, 100 basis points of deleverage on products and supply team costs and 20 basis points of negative impact from foreign exchange.

Moving to SG&A. Our approach has been to protect against downside while also ensuring we continue to invest in our long-term growth opportunities. SG&A expenses were approximately $302 million or 46.3% of net revenue compared to 37.4% of net revenue in Q1 2019. The de-leverage in the quarter resulted predominantly from lower revenue due to COVID-19 related store closures and our commitment to continue to pay our employees through this period of disruption, which was partially offset by the recognition of some government wage subsidies. Foreign exchange, both translation and revaluation contributed 40 basis points of leverage in the quarter. Operating income for the quarter was approximately $33 million or 5% of net revenue compared to 16.5% of net revenue in Q1 2019.

Tax expense for the quarter was $5.3 million or 15.6% of pre-tax earnings, compared to an effective tax rate of 26.4% a year-ago. This decrease in our effective tax rate compared to last year relates primarily to additional tax deductions for stock-based compensation during the quarter. Net income for the quarter was $28.6 million or $0.22 per diluted share, compared to earnings per diluted share of $0.74 in Q1 of 2019.

Capital expenditures were approximately $52 million for the quarter compared to approximately $68 million in the first quarter last year. Q1 spend relates primarily to store capital for new locations, relocations and renovations, technology spend to support our business growth, digital channel and analytics capabilities and supply chain investment.

Turning to our balance sheet highlights, we ended the quarter with $1.2 billion in total liquidity. We have $823 million in cash and cash equivalents and $400 million of available capacity under our committed revolving credit facility.

Inventory grew 41% versus last year and with $626 million at the end of Q1, we view our vendors as partners and we have not used order cancellations as an inventory or cash management strategy. Our product teams have worked hard to reflow our deliveries for the second half of the year on inventories on hand and a revised view of demand.

And we have honored our commitments to our partners in Q1 and Q2. These commitments coupled with our store closures resulted in the Q1 inventory increase and will likely result in a higher increase at the end of Q2 before levels begin to moderate in the second half of the year. I'd also reiterate our clearance strategies have not changed. We have historically relied on four vehicles to clear merchandise, in-store markdowns, online markdowns, our outlets and occasional warehouse sales. We currently have no plans to veer from these methods. In addition, approximately 40% of our inventory is comprised of core styles, which are generally seasonless in nature and carry minimal markdown risks.

We repurchased approximately $64 million in stock in Q1 for temporarily processing our share repurchase program as part of our COVID-19 cash management strategy. We have approximately $264 million remaining on our current $500 million repurchase plan. Let me shift now to current trends and share with you some color on how we're looking at the remainder of the year. Due to the dynamic nature of the macro environment, we’re not yet returning to our historical cadence of providing specific guidance for the current quarter and fiscal year.

We've been looking at a number of scenarios in order to ensure we have the appropriate flexibility to manage the business through a range of outcomes. Important in this has been closely monitoring recovery trends in open markets, as well as our digital business to inform both our forecasting and investment decision making. After closing all of our stores in Europe and North America in mid-March, we began the process to welcome guests back mid-May. We currently have approximately 300 stores opened in the following regions, approximately 190 in North America, 13 in Europe, 53 in Asia, and 39 in Australia, and New Zealand, and all of our distribution centers are up and running.

We’re very pleased with the response we're seeing from our guests in areas where our stores are open. In China, where our stores have been up and running the longest, we've seen store comps increase approximately 20% in most recent weeks. We're also pleased with the early response we're seeing in North America, which is exceeding our expectations. In addition, our digital business has remained strong throughout and we've continued to invest in our online and fulfillment experience to ensure we serve our guests and capture demand.

For Q2, we expect comps in our digital business to be relatively consistent with our April trends of approximately 125%. Looking forward for the business overall, we anticipate the trend in total revenue growth to improve sequentially throughout the remainder of the year. Total revenue in Q2 could decline in the high single-digits improving to a high single-digit increase in Q4. We expect revenue in our digital channel to remain strong in Q2 but moderate in the second half as the store business continues to recover.

With regard to earnings per share, we anticipate EPS rate declines relative to last year in Q2 and Q3 with the return to EPS growth in Q4, the Q2 decline will likely be better than the decline in Q1. Although I would note likely worse than what is implied by current Q2 Factset consensus estimates.

In terms of SG&A for the full-year, we have identified $130 million in SG&A savings relative to our original budget. However, we expect to de-leverage for the year as we continue to pay our people and prudently invest in select growth initiatives on a lower than originally anticipated sales base. We have identified contingency plans for further SG&A reductions beyond the $130 million should the recovery period be more prolonged than what we’re currently anticipating.

In terms of capital spending, we expect CapEx for 2020 to be below our original budget and generally in line with last year, we're prioritizing spending on digital and omni-initiatives and fulfillment capabilities or pulling back somewhat a new store openings and remodels. Before handing it back to Calvin, I'd like to reiterate that our financial position remains strong. Our balance sheet strength and flexibility in our business model is enabling us to effectively manage through the uncertainties of the current macro environment, are protecting our people and prudently investing in the future. And now back to Calvin for some closing remarks.

Calvin McDonald

Thanks for the update, Meghan. I'd like to close by letting you know that we remain fully committed to our Power of Three growth plan, which we laid out for you last year. COVID-19 is impacting our performance in 2020 but we've remained focused on our three key growth pillars and our goals to double men's, double digital and quadruple international by year-end 2023.

Within our quarter one results, we have much to celebrate, including seeing retail only guests beginning to transact with us online and transition towards becoming an even more loyal omni-guest. The overall strength and acceleration of our e-commerce business globally with breakout results in Europe and Australia. Strong performance from our core franchises, new innovations in the strength of our product pipeline, and the early recovery we’re seeing in reopened stores with ongoing strength in our e-commerce business.

Finally, I'd like to thank our teams around the globe for their resilience, agility and passion during this period, enthusiasm for our guests in our community shared by everyone across Lululemon demonstrates the enduring strength of our brand. Operator, we can now open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt McClintock of Raymond James. Please go ahead.

Matthew McClintock

Hi everyone, and may I say congrats. Good job to the entire Lululemon organization. Calvin and probably Sun too, I wanted to start with consumer behavior changes because prior to COVID, there seemed to be a shift towards comfort within the apparel industry, and it seemed to be something that was in your wheelhouse, and now that COVID’s happened, it seems like this shift towards product feels good, et cetera it has accelerated. And I want to know, is that a one-time acceleration or is that something that you think the trend will actually now remain at heightened levels of growth? And then when you brought up market share today, I was wondering if you could talk about, are your market share gains the function of that maybe you're just more trend aligned with this or is that maybe because some of your competitors have wholesale businesses that rely on more challenged distribution points? That's my first question. Thank you.

Calvin McDonald

Okay, thanks Matt. And I'll start off and I'll tackle the two parts of the question. Starting with the last part, which is around market share and the market share that we look at is the athletic apparel categories within -- I quoted a North American U.S. number. And it definitely is a category that has performed better than other apparel categories over the last number of quarters.

For a variety of reasons, I think it is comfort, I think it is lifestyle, I think it is a shift to less formal wear, and we've always performed well and beaten the growth in that category. In particular, for this quarter, our performance I think does show a shift, a greater shift of the guest to both our brand as well as to the category as you mentioned, which I think serves well as we look forward to where our opportunities continue to be.

Heading into this, there is guest behavior and want and certain things won't change as a result of COVID-19 and definitely some things will change. And I think the things that won't change play to our strength and that's living an active, healthy lifestyle, and the things that will change equally play to our strengths and that is more work from home, looking for comfort, the role that digital and omni-play in that behavior and wants that the guest has.

So the shift is, in my opinion very positive for our brand and the role that we play in it. It has been something we've been building and innovating towards what's driven the success of our products through the work that Sun and the team has done. Sun mentioned on the move for women's, which is something we've been working on and we'll be launching in quarter two, which we're very excited about, again, I think timely, but something that has been worked on for quite some time to deliver a very unique, exciting product.

So, I’m excited about the shifts that are happening and how it plays within our category and our role within that, and what we experienced in quarter one and will quite honestly for a little bit through 2020 are some short-term operational challenges, but the demand for the brand and the demand for the category, I feel has only strengthened through this. And those short-term operational challenges will mitigate, they will go away, and I feel very good about the long-term position and our strategy and focus on the Power of Three behind that.

Matthew McClintock

Thanks for that, Calvin. And then my follow-up is just, you said that you can react to multiple demand scenarios in the back half of this year, and this is an industry where manufacturing can often be a barrier to entry, a constraint. And I was just wondering if you could maybe comment a little bit on how you've treated your manufacturers and your ability to maybe get that capacity at its high where it's possible there could be a lot of, I won’t say out of stocks, but a lot of people trying to run and trying to chase at the same time. Thank you.

Calvin McDonald

No, for sure. And I'll take it from just a very high level strategic position, and it really is interesting when I reflect and look back on the quarter, the different moves that we shifted to were early on with COVID-19 when it was predominantly in China and we were closing our stores. We were very much focused on ensuring our raw material sourcing was well secured, working with many of our partners on building out sort of quantity of raw materials, so we could get to production of finished goods.

And then as it continued to expand, we started to shift and close stores and started to shift to demand and total quantity that we would need, making decisions in the short-term to support our vendor partners, as I mentioned equally looking forward to quarter three, quarter four, and what our current buys were and how we wanted to make adjustments to those and where we stand coming out of quarter one is, obviously a higher inventory number than some of our peers, but that's because we haven't actioned through markdowns. We haven’t action by pushing back and not honoring commitments we made.

And we have a large portion of our inventory that's not seasonal, that is core, that are colors that sell year long, and there's a high demand for that product. And as stores open up, that demand will only increase. And as we look forward to the end of the year, we plan to manage through having more inventory now and to managing into more of a traditional inventory level, while able to work with our vendor base on pivoting and reacting quicker on styles and/or colors if we deem necessary.

So there's a lot of flexibility built in, and I think the commitments we've made and where we stand right now allows us to play in a very effective way heading in to the back half of this year.

Matthew McClintock

I really appreciate it. I wish you all the best of luck. Thank you.

Calvin McDonald

Thanks Matt.

Operator

Our next question comes from Matthew Boss of JPMorgan. Please go ahead.

Matthew Boss

Great guys. Calvin, maybe can you speak to the interplay that you're seeing today between e-commerce up over 100% and brick-and-mortar productivity as stores reopened in North America, maybe specifically, what kind of store comps you're seeing today in North America? And are you seeing e-commerce moderate in any regions where stores have reopened so far?

Calvin McDonald

Thanks, Matthew. I think it's too early to really assess where we're going to sort of find the new norm in mix, what we are seeing and I would put this in the context with our own team, we have one of the most productive retail models in the industry, smaller stores, highly productive per square foot which means we’re moving through a lot of volume in small space. And the reality is as we open up these stores, there are operational constraints through social distancing, that we’re honoring and respecting and supporting to protect our teams that are going to restrict us hitting those levels as quickly as we might like or quite frankly as quickly as the demand of our guest is.

As a result, I think that we're going to see our store productivity improve as we move through the year. It is currently in and around 75 some stores are at 100%, it really does balance between market and time-in, stores are doing a wonderful job and how to service the guests and address the needs outside of the stores, so we can get those at what a shop inside the store but that's how I'm viewing the store productivity number. Heading into quarter two with e-commerce we mentioned growth coming out of April of 125%. We've seen that accelerate coming into May and June. I think throughout the quarter, we're going to probably see that settle back in and around 125% range.

But as of right now, we have about 50% of our fleet in North America open. We're happy with the productivity numbers, we know it's going to be a little bit longer for us to hit our industry leading numbers, but e-com has currently accelerated and we'll see where that mix is back. But I think both are just an indication of a strong demand for the product, short-term operational challenges that we're working through, but very positive in terms of the demand for the product and what we're seeing from the guests.

Matthew Boss

That's great to hear. And then just a follow-up on gross margin. What's the best way to think about mix versus markdowns as we think about product margins, maybe in the second quarter or back half of the year relative to the 180 basis points of expansion that you saw in the first quarter?

Meghan Frank

Thanks Matt, it’s Meghan. We're not going to provide specific guidance on product margin as we move throughout the year. But what we are providing is that we expect gross margin pressure to be slightly more in Q2 versus what we saw in Q1. And then we also expect gross margin performance in the second half of the year to be better than the first half as sales cover. I'd also note that we are expecting $40 million in overhead cost savings within our margin bucket similar to the buckets we called out in the $130 million in SG&A savings we expect for the full-year.

Matthew Boss

That's helpful. Best of luck.

Meghan Frank

Thanks.

Operator

Our next question comes from Lorraine Hutchinson of Bank of America. Please go ahead.

Lorraine Hutchinson

Thanks, good afternoon. I wanted to follow-up on the inventory number. Can you talk to what proportion of that inventory is core? And then also how much of your buys have you committed to for the back half at this point?

Meghan Frank

Hi, Lorraine. Thanks, it’s Meghan. Yes, so in terms of the inventory portion that is core, it's approximately 40% of our assortment. We have at this point committed to our second half purchases through winter. We do have some flexibility within that as large part of our assortment is core in that 40%.

Lorraine Hutchinson

Thank you.

Operator

Our next question comes from Paul Trussell of Deutsche Bank. Please go ahead.

Paul Trussell

Good afternoon. And first, let me just say that your comments and statements on Black Lives Matters is noticed and appreciated. So thank you for that. In terms of the P&L, just as we think about the channel mix with such strong and robust online growth, could you just remind us how we should think about the profitability and margins in that channel? And how they may differ if at all from your sales? I mean, your store sales. Thank you.

Meghan Frank

Thanks, Paul. So our e-com channel is more profitable than our store channel. However, we do look at the business as an omnichannel business over the longer-term. As the situation normalizes, we expect to remain committed to our long-term growth strategy of sales in the mid-teens, modest gross margin expansion, modest SG&A leverage and EPS growth in excess of sales.

Paul Trussell

Thank you. That’s all I have.

Operator

Our next question comes from John Kernan of Cowen. Please go ahead.

John Kernan

Hey, good afternoon. Thanks for taking my question. Congrats on all the momentum. Could you just dive in a little bit more in terms of the in-store trends you're seeing currently, I think you said you have about 50% of the fleet in North America opened, just given the digital guidance you're giving us. I'm curious in terms of how you want us to frame our models for the in-store sales and what you're seeing versus what you're seeing right now?

Meghan Frank

Great. Thanks, John. It’s Meghan. We have approximately 60% of our stores open at this point globally, 100% in Australia, New Zealand, 95% in Asia, 60% in Europe and 50% in North America, we do expect that we’ll open almost 100% of our stores by the end of June. If we think about the productivity we're seeing within those stores, as Calvin mentioned, in the initial weeks, we've seen some variability, it's still very early.

But we're seeing that in the range of 75% to over 100% of last year's productivity. And at the same time, we've seen our e-commerce business accelerate in early weeks of the quarter. As I shared we expect total revenue to improve in Q2 to a high single-digit decline and we expect e-com for the quarter to grow at approximately 125%, so moderating throughout the quarter as stores ramp and reopen.

John Kernan

That’s helpful. Thank you. I guess my follow-up is, I think was on the call a couple of quarters ago talking about the larger experiential stores that you wanting to invest in and I think would become 10% of the overall store base at some point. Calvin, are you still committed to that? Have you seen anything in terms of consumer behavior that would make you want to back away from that commitment?

Calvin McDonald

Thanks, John. Listen, it's hard. My first response would be no. I think this is very difficult times to evaluate the value of our retail fleet and to make any dramatic shifts and changes from a strategy that eight weeks ago was relevant. Guests were shopping at plus 20 was our combined comp and our stores across our very flexible fleet were performing incredibly well. There's no doubt coming out that our online business I believe will find a new norm that's higher than where we began that we definitely know we’re going to have more omni-guests, which is incredibly exciting, because an omni-guest shops more often and spends more with us and is more loyal to the brand.

But they're still an omni-guest meaning they shop both physical and our online business. And I think it's too early to determine if there's going to be any dramatic shifts. We have very powerful stores. They are core to our connection with the community and how we build the brand, and the loyalty. Recruiting guests, it's our number one vehicle still to recruit guests. And we were already shifting to a very flexible scenario of smaller seasonal into the experiential store.

So we will come out, we will continue to manage and see guest behavior. My anticipation is that those larger stores, the experiential and what they were delivering in the community and the role that they were going to play were always designed through an omni-lens. And these are just going to be stronger, more powerful locations for us. And we were never looking at this as being the dominant number of stores in our fleet. We're being very selective. And I think there's in fact a lot of exciting opportunities of the role they can play within the omni-lens being rooted in the community, and how guests are interacting with us both online virtually as well as in store. So not saying and shouldn't anticipate a significant shift, we'll learn but still very committed to the growth in our store fleet because we know we have relative to others, a moderate number of stores and still opportunity to grow in markets.

John Kernan

Excellent, thank you.

Operator

Our next question comes from Erinn Murphy of Piper Sandler. Please go ahead.

Erinn Murphy

Great, thanks. Good afternoon. I guess my first question is just on China. I think you said that brick-and-mortar comps were up 20% for those -- the doors have been opened. Can you just break down what you've seen in terms of traffic versus ticket? And then how is digital been performing in China?

Calvin McDonald

Yes, absolutely. And I'll walk through sort of coming in and the progression through sort of the three phases I laid out in Q2 because I do think it's, we use it as an interesting and helpful benchmark of how stores will build and saying that the rest of the markets as they come on are accelerating this growth curve to getting back to sort of a productivity level quicker than what we saw our stores in China.

But heading into the -- coming out of quarter four, and obviously we were impacted much quicker in Q1 in China. The e-commerce business did accelerate relative to the incoming trend. We don't share specific numbers, but it was a meaningful acceleration as we close stores. When stores reopened, what we saw was it took a number of weeks to get back into a positive comp in March, the total business was positive, but that was driven through a very successful e-commerce growth as a mix where our store comp growth was still negative.

And then into April, we saw single-digit growth as stores got closer to sort of breaking or positive comp to no longer declining in our e-commerce business continued to be strong. Most of that in-stores was driven by conversion and ordering, we have seen a slower return to traffic numbers. But as stores got to growth, and as we've mentioned, they've been in the last few weeks getting now into that 20 plus percent comp, growth number.

And we've been holding very strong e-commerce growth. So our China business has really returned to where it was pre-COVID-19 in that marketplace. It's driven on conversion, and that highly engaged guest traffic is improving, but it's definitely probably in retail, the trailing metric in that sales equation.

Erinn Murphy

Super helpful from a progression perspective. And then I guess my second question is just on your loyalty program, I recognize it's only in a handful of stores or states or cities, I should say, but have you noticed anything meaningfully different on the digital trends from those cities, or those metro areas versus the rest of North America and then how has COVID-19 shaped, how you're thinking about rolling out your loyalty program or your membership program further? Thanks.

Calvin McDonald

Great, question. We've, in particular, we launched a number of digital sweat offerings to our guests, it was one of those areas where I'm so proud of the way the team jumped on the opportunity to innovate and we really tested and learned and accelerated a lot of initiatives forward, so that we could really be present and offer what they were looking for. And that's across Instagram, our YouTube channel, Facebook, it's leveraging our ambassador community to really provide those, we've launched a Move event on Strava, which the results are significant in terms of the number of miles ran or bike or other activity and the number of guests that participated.

So really energized about the engagement that guests are having with our brand, with digital sweat and also one of the things that I think is very exciting is it validated what we know which is the power of this brand and the relationship with our guests and the ability to be in conversation with them and have them interact with us outside of just purely transactional needs.

We're in daily conversations with a number of our guests, they were interacting with our brand day-to-day, week-to-week. So when it came time to buy, when it came time to think about the category just reinforces the role that our brand plays in their lives and the role that we can play in their sweat. So excited about what we're seeing with digital. As it relates to membership, the program today is a balance between physical sweat as a driver product, and we always had planned on providing digital solutions as well as part of the membership package.

We have pushed out a broader city launch to early 2021 at this point in time, as a result of quite honestly, it's more about the uncertainty than it is about guests engagement and demand for this membership program. In the cities we've had Austin, Denver, Chicago and Edmonton incredible engagement, they've continued to be engaged in the program even during this, they've engaged in our online activities. We have some unique offerings planned for them. We’re going to repeat in those cities this fall, we're going to add one new city to the program, so we can continue to learn. But we pushed-off the broader launch that we had planned for in early 2021 more because of the uncertainty then really demand. Demand remains very strong. We're excited about it. We're going to be able to add to the guest mix on that. So more to come but there will be in those cities plus one more this year is the current plan.

Erinn Murphy

Great, super helpful, all the best.

Calvin McDonald

Thank you.

Meghan Frank

Operator, we will take one more question.

Operator

Certainly, our final question comes from Alex Walvis of Goldman Sachs. Please go ahead.

Alex Walvis

Good evening. Thanks so much for taking the question here. My question is on the demographic of new guests that are joining you online. Are you seeing materially different demographic that's new to the Lululemon brand during this period of disruption? And then maybe a second question on the stores that have opened, is there any discrepancy by geography or store type, or anything else you care to call out on which stores are performing better out of the gates versus those that are little slower to ramp? Thank you.

Calvin McDonald

Thanks, Alex. I'll take the first part of the question and let Meghan talk to the store performance and if there's any differences across the markets. In terms of a guest perspective, we had a wonderful balance across a lot of demographics in new guest acquisition prior. And I would say they haven't really fundamentally changed, if there was one that's noteworthy, our stores and stores in general remain a significant acquirer of new guests for retail business.

And we have definitely seen online pickup a portion of that as a result of stores not being open. But our stores in particular equally were a significant acquirer of men, new guests. And I would just indicate that, if there's been any shift in the last few weeks, we've seen an acceleration of more women new guests. As a result, the ratio of men new guests has dipped below our trend.

I believe it is only short-term, it is a reflection of being online and our physical stores being closed. In the overall health number of new guests across both gender and other profiles, youth and others is still very, very encouraging and very strong. So I'm trying to share anything that would be a bit of a nuance in difference, but the overall numbers and metrics across all are still very healthy encouraging as we think about that as a growth channel for us continuing moving forward. And Meghan, did you want to comment on stores?

Meghan Frank

Yes, great. Thanks, Alex. So in terms of differences in what we're seeing in trends, we're not seeing significant differences either by format or location. I would share we're seeing modestly better performance in non-mall locations and we’re benefited by approximately two-thirds of our store locations being outside of mall.

Alex Walvis

Fantastic, thank you for all the color and all the best.

Calvin McDonald

Thanks Alex.

Operator

That’s all the time we have for questions today. Thank you for joining the call and have a nice day.