Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Fourth Quarter and End Year 2019 Conference Call. [Operator Instructions] I would now like to hand the conference over to Howard Tubin, Vice President, Investor Relations for lululemon 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 Investors section of our website at www.lulemon.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. [Operator Instructions] And 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 underlying health of our business is strong, and we entered 2020 with strong momentum. As you know, circumstances have changed dramatically in quarter 1 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 16. 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 2 locations are…

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 5 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-comm contributed approximately $464 million at 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 chain 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…

Thank you, PJ. I want to express my confidence in the leadership team of lululemon and our brand's 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.

[Operator Instructions] Your first question today comes from Matthew McClintock with Raymond James.

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 just your China experience, what you're seeing in China is what makes you feel that way? That's my first question.

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 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 guests get some degree of normal-ness 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 trade and think into the future. And we equally know that with the Power of Three and the vision that we're building towards is, if nothing else, even reinforced with the current opportunities or situation that we're facing around our community, around our omnichannel strategy, how we're thinking about leveraging the brand and with our guests. So 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 2-week closing period when the stores were then reopened. We've traded 5 weeks since reopening. We are in our sixth week. But the country was still under a level 1 security alert. 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, 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 and PJ's too, where you both worked in that retail or 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?

Great. Thanks again on that. And 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 and 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 buy 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, 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 to do 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.

The next question comes from Mark Altschwager with Baird & Co.

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 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. We had just launched our Everlux in February, which is our first product launch for this year under Science of Feel positioning, and the guests 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 where 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.

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 turned negative in recent weeks?

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 PJ 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 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 cost 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.

Your next question comes from Ike Boruchow with Wells Fargo Securities.

So I guess, maybe for Calvin, on China, you gave some helpful details on the progression in 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 5 or 6 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? Like I assume comps are still negative year-over-year. Where exactly is that trending now? Is there a -- 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 2 weeks. We've been open for 5. We're in our sixth week. The country was still on a Level 1 emergency alert. They are just moving to a Level 2 this weekend in Shanghai, Beijing. In one of our other regions, that region moved to a Level 2 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 5-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 5 weeks, and we're seeing that, although it is early. And we have been in negative comp but improving. And I think it's too early to assess when will we tip over negative comp into positive comp in our stores. Our online business has been trending very well, positive comps. 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, I have reason to believe that we will see a quicker pace than we've seen in the last 5 weeks to that important sort of inflection point of getting back to positive.

The next question comes from Adrienne Yih with Barclays.

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 million for stores and about $100 million 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, is it $100 million off of this number? We were hearing people cut their CapEx up 50% to 60%. So just wondering if you can give us some color there.

Yes. Sure, Adrienne. So first off, yes, our CapEx was closer to $300 million for 2019. And we're not giving guidance for 2020 because we are managing it actively. To answer your question, I would say roughly 1/3 of our CapEx is maintenance CapEx with the balance being growth. And as you said, it comes in the form of stores, and it also comes in the form of investing in growth platforms, our supply chain, our IT. So we are going to -- we are actively reviewing the CapEx budget and where we can throttle back on things that we don't see having 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 we will pull back on CapEx. Hard to give you 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 within 10% of comping or within -- or is it pretty tight spread across the different buckets of them? Or are certain markets doing materially better than others?

Right. Just to confirm, you referencing 80% open, is that specific to China?

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 continue sort of the positive trend that's happening in that marketplace with the COVID-19. And there are differences in terms of how stores are performing, and it is both by markets 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 improvement.

Your next question comes from Erinn Murphy with Piper Sandler.

Great. Calvin, you talked about some of the efforts that the lulu community has done to just bring some of the virtual workout and meditations online as you connect with your consumer. 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 period in your model.

In China, where we first innovated and continued sort of our relationship and partnership we had with an app there called Keep, which is a wonderful platform to activate sort of online sweat and then introduced 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 and 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 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 local events as well as our digital. 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, Erinn, 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-comm 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 head count growth, curtailing travel. There's a number of buckets across the organization where we can find savings depending on what scenario we are in. So I feel pretty good about the flex we have in the P&L.

The next question comes from Kate Fitzsimons with RBC Capital Markets.

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

Yes. 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 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, 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. 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.