Jun 2, 2017
Executives
Laurent Potdevin - CEO Stuart Haselden - CFO Sun Choe - SVP, Global Merchandising Howard Tubin - VP, IR
Analysts
Kate Fitzsimons - RBC Capital Markets Adrienne Yih - Wolfe Research Matthew Boss - JPMorgan Matthew McClintock - Barclays Oliver Chen - Cowen and Company Mark Altschwager - Robert W. Baird Dana Telsey - Telsey Advisory Group Paul Lejuez - Citigroup Omar Saad - Evercore ISI Kimberly Greenberger - Morgan Stanley
Operator
Thank you for standing by. This is the conference operator.
Welcome to the lululemon athletica First Quarter 2017 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 of 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 Laurent Potdevin, CEO; Stuart Haselden, COO. Sun Choe, SVP of Global Merchandizing will also be available during the Q&A portion of the call.
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 forecasts of certain aspects of the company’s future. These statements are based on current information, which we have assessed, but which it’s by nature 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 the company’s business. Factors that could cause these results to differ materially are set forth in the company’s 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 undertake no obligation to update 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. The press release and accompanying annual report on Form 10-K are available under the Investors section of our Web site at www.lululemon.com.
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’d like to turn the call over to Laurent.
Laurent Potdevin
Thank you, Howard, and good afternoon, everyone. On our year-end call, we reviewed our longer-term vision and 2020 plan to double our revenue to 4 billion and more than double earnings.
Today, I will focus specifically on our first quarter business trends, which were positively impacted by the actions we took to build momentum early in the quarter. I will then touch on Q2 milestones that inspired our guests from our first global brand amplification to our most innovative and integrated product launch to-date.
Stuart will review our financials and provide Q2 and full year guidance. We’ll then take your questions.
Let me kickoff the call by sharing our first ever global brand campaign, This is Yoga. Through recontextualizing how the world sees yoga culture, we articulate the core of our brand and what defines and differentiates lululemon.
The internal launch created an unprecedented energy and excitement across our employees, our educators, and our ambassadors. And on May 15, we took yoga off the mat and into real life sharing the power of practice with the world, reconnecting loyal guest with who we are and authentically reaching millions of new guests.
We are proud of how powerfully this campaign has resonated with influential audiences around the world creating 240 million global impressions, another 26 million views of the anthem video in its first two weeks. The launch of This is Yoga is just the beginning of our global brand amplification as we connect with millions of new guests in key markets around the globe.
Before sharing our first quarter highlights, I’ll update you on our decision to evolve ivivva to an eCommerce-focused strategy. This new streamline model with eight stores in key ivivva communities across North America will enable us to continue serving our young ivivva guests who have come to know and love the brand so much.
This decision would also be accretive to productivity, comps, and earnings. By August 20 of this year, we will close all but eight of our ivivva locations and Stuart will walk you through the financial impact for the year.
While I know this is the best path forward for the future of our business, it’s a very difficult decision due to its impact on our people who we are deeply committed to supporting with integrity and compassion throughout this transition. I am so grateful for the passion and dedication of our people, the brand has created and the impact ivivva will continue to have on so many communities of active girls.
I’ll now shift to our Q1 results. We delivered revenue of 520 million, a normalized gross margin increase of 210 basis points and an adjusted EPS of $0.32.
Our adjusted EPS was better than our guidance and increased 7% over last year. Comps declined 1% in total with stores down 1% and eCommerce flat.
Our normalized EPS exceeded our expectations driven predominately by stronger revenue and product margins, as we continue to benefit from the evolution of our supply chain. Our inventory remains well controlled at 6% at the end of Q1 and in line with our sales growth.
The actions we’ve taken to build momentum have had an immediate impact on our performance. This positive trend has continued and accelerated as we enter Q2.
And as we look to the second quarter, we’re seeing robust performance across all channels and categories with combined costs up in the low-to-mid single digits and digital back to a double-digit comp trend. Turning now to some specific first quarter highlights.
Let me share how the strategies we outlined on our last call have powerfully and positively driven our performance. Starting with women’s, our stronger assortment combined with newness and functional innovation delivered a significant comp improvement.
Towards the end of the first quarter, the cadence of new product launches and fabric innovation created excitement with guests and deepened our connection with the runners in our collective. Created in our new top-performing Nulux fabric, Fast & Free brought our Naked Sensation across an expanded range including a tight, a crop, and a bra.
Guest response to Nulux overall continues to surpass our expectations and contributes significantly to our overall women’s bottoms comp in Q1. And I am thrilled to share that together with new elite ambassador Kerri Walsh Jennings, the three-time Olympic Gold beach volleyball player and a truly inspirational role model both on and off the court, we launched our Mind Over Miles capsule.
Featured in white, this collection was designed for guests who prefer a hugged in [ph] sensation and was one of the top five selling style colors this quarter. This collection is catered to our guests growing demand for our Engineered Sensation across all product categories.
Shifting to digital, since April 1, we’ve doubled down on our digital strategies and our teams have been laser focused on delivering a significantly enhanced digital experience. As I’m sure you’ve all noticed, the infusion of energy, movement, and fun in how we brought product to life has exceptionally enhanced our guest experience and delivered an increased engagement and performance.
Having just passed 2 million subscribers, the new creative approach has created our highest ever engagement across men’s and women’s and delivered increased conversion. The clear and decisive actions we’ve made to inquire our guests and drive our digital performance is a compelling validation of the global runway ahead of us.
Looking at men’s, we delivered a high-single digit comp this quarter against an exceptional 21% comparison last year. Bottoms often our male guest’s entry to the brand remain a pillar of this business comping up 20% in Q1.
Our customers in men’s tops accelerated as the quarter progressed driven by the successful launch of the Somatic series training tops in our Intersec Fabric. This acceleration has contributed to an overall improvement in the men’s comp trending in the low-double digits.
In Q2, key innovation launches including light Metal Vent Tech sales and Pack and Dash run tops will expand two of our top performing franchises as we continue to solve for guests functional demand. Quarter-after-quarter, our performance gets us closer to realizing the full scale of our $1 billion plus opportunity in men’s.
While men’s accounts for 20% of our total business, they’re just under 30% of all new guests. This will only increase as we strategically focus on guest acquisition through co-located store, curated eCommerce experiences, and by leveraging This is Yoga where ambassadors like Jian Pablico and his practice of nonviolence, and London grime artist P Money and his practice of breath authentically connect with the broader millennial male audience.
Now turning to international, another exciting growth strategy and $1 billion opportunity. In response to market demand, we are accelerating our expansion with 50 new store openings this year.
Near term, Asia holds the most significant growth potential. Building on the energy of our Harajuku location, we’ve seen exceptional performance at our new store within the stunning new Ginza Six complex in Tokyo.
The guest response to our exclusive Tokyo white-on-white reflective capsule reflects the strongest affinity of the brand in one of the most influential markets in the world. Building on the brand’s performance and resonance in China, we’re accelerating our densification strategy in Tier 1 cities with the newest opening in Xintiandi, Shanghai, a vibrant iconic neighborhood destination for locals and visitors alike.
In the first few months of opening, our China stores are outperforming all store metrics currently tracking towards 1,600 doors in annual sales per square foot. Chinese millennials are some of the most digitally engaged consumers in the world of behavior we are experiencing online with our TMall business having doubled over the last three quarters.
The collective impact of our physical stores and digital presence is driving our impressive performance in these key markets. In its second year and more than doubling in size, our on-road China event sold out within hours.
It kicked off May 6 at the Shanghai Concert Hall with over 1,200 yogis experiencing the power of practice. Enhanced by live streaming, it’s travelling across six cities with over 10,000 participants.
On-road China is a fantastic platform as we continue to build brand awareness across China. And our expansion this year continues across key cities such as Chengdu and Guangzhou as well as additional locations in Shanghai and Beijing.
Turning to Europe. London remains our key focus delivering 50% sales growth on a constant currency basis year-over-year.
Outside of London, we opened our second shop in Dublin, Brown Thomas department store. Fueled by strong guest demand, the opening and performance has been exceptional tracking at 1,600 doors per square foot.
In North America, we continued to invest to realize the solid growth opportunities ahead of us, maximizing our potential through tailored and agile performance and leveraging our omni-channel tools that have greatly exceeded expectations with guests. We are driving double-digit square footage growth and on track to open 30 stores in key destination cities; including New York where we’re opening in an iconic space at 597 Fifth Avenue across from the Rockefeller Center as well as Las Vegas, Los Angeles and Boston.
While early into the second quarter, we’re off to a great start with many exciting moments to come that will continue to drive our performance. With a clear mandate to accelerate momentum and drive growth, a highly collaborative and creative team is delivering quantifiable impact and is demonstrating what can quickly be achieved when we unite behind a shared vision.
And the results speak for themselves. In a short period of time, the team has delivered two new releases of our Web site, an enriched experience for iconic product launches such as our category disrupting Enlite bra, bold and curative product experiences to align with This is Yoga campaign and highly targeted and timely guest engagement such as our summer seasonal focus on women’s shorts which drove a 39% comp in the U.S.
Collectively, this work is meaningfully and sustainably impacting our performance. The scale of our potential in digital is crystal clear and I’ve never felt more energized by our ability to realize $1 billion plus opportunity in front of us.
Last but not least, I want to focus on innovation starting with our newest white space launch, our category defining bra Enlite. Over two years in its creation, our industry disrupting research and development team created an innovative technology enabling women to experience comfort, performance and esthetics when collecting a run bra.
Managing harmonious movement across the whole body, Enlite provides a free sensation, superior comfort and zero distractions. Made from our proprietary Ultralu fabric in our signature barely there feeling, it provides optimal thresh, recovery and breathability.
We are now as powerfully positioned in the bra category as we are in women’s bottoms, delivering the most innovative and demanded product in the two categories that define the women’s athletic market. Initial performance and reaction from our guests and educators has been exceptional with Enlite receiving over 190 million media impressions exceeding plan by 300% and instantly becoming our number one selling bra.
In just a few weeks, Enlite has created a significant halo across the category and by balancing the overall assortment with a high support, molded fit option, our initial findings suggest that a significant number of guests choosing Enlite have not brought a bra from us before treating the opportunity for the Enlite platform to improve our conversion by reaching a broader range of guests. In Q3, we will bring to market our newest fabric innovation, building on our unique leadership position in yarn development and raw material designs.
I know this newest addition to our Engineered Sensation range will create an even deeper connection with new and existing guests released for high sweat and high intensity workout. Our white space team will continue to innovate the science of Engineered Sensation and the future of how people want to feel as they lead a life they love.
Before passing over to Stuart, I’d like to take a moment to share some great updates to our Board of Directors and executive team. First, a warm welcome to our new Co-Chairman, Glenn Murphy.
I look forward to working with Glenn and know that his deep knowledge and experience will have a substantial impact on the future of the business. Next, I’m delighted to recognize Stuart Haselden who is taking on the newly created role of Chief Operating Officer.
Since joining, he has led with clarity and confidence and thanks to his work, we have the foundation and operational excellence in place to strive as we realize the significant growth opportunities ahead of us. I’m also pleased to share that Sun Choe, our SVP in Merchandizing, is now reporting directly to me.
This ensures that our Creative Director, Lee Holman, and his team have the space to focus on designs while our merchants can effectively drive the designing to profitable growth. We’re happy to have Sun on the call with us today, so do feel free to direct questions her way also.
As I look to our second quarter and the rest of 2017, I continue to see the unprecedented opportunity for lululemon. From our unique culture, our cadence of product innovation, designing the future of guests experiences, combined with This is Yoga amplifying who we are globally, we are more powerfully positioned than ever to deliver long-term profitable growth as the leading global brand for an active mindful lifestyle.
Now, over to Stuart.
Stuart Haselden
Thank you, Laurent. After a slow start to Q1, we saw business accelerate in the latter part of the quarter and we’re pleased to see this trend now extending into Q1 with an even more pronounced improvement in the eCommerce trend that I’ll discuss shortly.
We also saw strong product margin performance in Q1 that exceeded prior estimates and enabled an earnings outcome well above our guidance. This reflects the ongoing benefits of our supply chain investments.
Before reviewing the details of the first quarter, I’d like to offer some commentary on the impact of our decision to close our ivivva stores. I’ll then review the details of our first quarter results and provide our updated outlook for the full year 2017 and also the second quarter.
As Laurent mentioned, we plan to reposition ivivva as a primarily eCommerce-focused business with a select number of stores continuing to operate in key communities across North America. We plan to close approximately 40 of our 55 ivivva branded stores and expect to convert about half of the remaining locations to lululemon stores.
We’ll also close our 16 ivivva branded showrooms and other temporary locations and we’ll streamline its dedicated support infrastructure. The store closures and restructuring will be substantially complete by the end of the third quarter of fiscal 2017.
In connection with this restructuring plan, we expect to recognize pre-tax costs of between $50 million and $60 million in fiscal 2017 of which $17.7 million was recognized in Q1. The costs are composed primarily of asset impairments, accelerated depreciation, lease termination costs and a smaller portion for inventory provisions and severance.
Now turning to the details of Q1. Total net revenue rose 5% to $520.3 million with the increase in revenue resulting from the following.
An increase in square footage growth of 10% versus last year driven by the addition of 38 net new company operated stores since Q1 of 2017; 22 net new stores in the U.S., three stores in Canada, five in Europe and eight in Asia. This was offset by a total constant dollar comparable sales decline of 1% comprised of a bricks and mortar comp store sales decline of 1% and an eCommerce comp that was flat.
The impact of foreign exchange decreased revenues by $1.5 million or 0.3%. During the first quarter, we opened five net new company operated stores; two in the U.S., two in Asia and one in Europe.
We ended the quarter with 411 total stores versus 373 a year ago; and 352 stores in our comp base, 57 of those in Canada, 258 in the U.S., 26 in Australia, New Zealand, seven in Europe and four in Asia. At the end of Q1, we also had a total of 48 showrooms in operation; 30 in North America and 18 internationally.
Revenues from company operated stores totaled $379.1 million or 72.9% of total revenue compared to 358.7 million in the first quarter of 2016 or 72.4% of total revenue. Revenues from our digital channel totaled $97.2 million or 18.7% of total revenue compared to 19.7% of total revenue in the first quarter of last year.
Other revenue, which includes outlets, showrooms, strategic sales, pop-up stores and warehouse sales, totaled $44 million versus $39.2 million in the first quarter of last year. Gross profit for the first quarter was $256.9 million or 49.4% of net revenue compared to 239.1 million or 48.3% of net revenue in Q1 2016.
The gross profit rate in Q1 was adversely impacted by 100 basis points related to ivivva inventory provisions. Excluding these items, adjusted gross margin increased 210 basis points versus last year which exceeded our expectations for the quarter with the increase comprised of the following.
380 basis points of overall product margin improvement primarily driven by lower F&B costs, higher average unit retails and a modest benefit in air freight and extension of our strategic supply chain efforts that we’ve seen driving margin improvement over the last several quarters. Foreign exchange contributed to a 30 basis point year-over-year improvement in gross margin.
Offsetting these factors was 200 basis points of deleverage half attributable to occupancy and depreciation and the other half to fixed costs related to our product and supply chain team. SG&A expenses were $199.1 million or 38.3% of net revenue compared to $181.5 million or 36.6% of net revenue for the same period last year.
The deleverage in SG&A was generally in line with our expectations and due to increases in store operating costs, digital marketing, investments in brand and community and IT partially offset by a benefit in foreign exchange relative to last year. Separately, as a result of our plan for the ivivva business, we incurred $12.3 million in asset impairment and restructuring costs associated with the write-off of capital assets and severance.
Operating income for the quarter was $45.4 million or 8.7% of net revenue compared with $57.6 million or 11.6% of net revenue in Q1 2016. Excluding the pre-tax charges of $17.7 million related to the planned closures of the ivivva stores, adjusted operating income for the quarter increased to 63.2 million reflecting 50 basis points of operating margin expansion versus last year to 12.1% of sales.
Tax expense for the quarter was $15.1 million or 32.6% of pre-tax earnings compared to an effective tax rate of 20.6% a year ago. Keep in mind the prior year tax rate includes certain adjustments for the company’s transfer pricing arrangement and associated repatriation of foreign earnings.
The adjusted tax rate for the quarter was 30.8% compared to the 29.8% in the first quarter of 2016. Net income for the quarter was $31.2 million or $0.23 per diluted share compared to earnings per diluted share of $0.33 for the first quarter of 2016.
Net income in Q1 2017 includes $13.1 million or $0.09 per share in ivivva related charges. Excluding these charges, adjusted net income in the quarter was $44.3 million or $0.32 per share or an increase of 7% to an adjusted EPS of $0.30 last year.
Our weighted average diluted shares outstanding for the quarter were 137.2 million versus 137.5 million a year ago which takes into account a weighted impact of 234,000 shares repurchased during the quarter at an average price of $54.60 per share. By the end of the quarter, we had completed a total of $12.8 million and total share repurchases under the current $100 million authorization, which was the maximum available for repurchase under our existing 10b5-1 program.
Capital expenditures were $19.9 million for the quarter compared to $26.6 million in the first quarter of last year. The reduction relates primarily to fewer store openings as our store opening cadence this year is weighted more heavily to the back half.
Turning to our balance sheet highlights. We ended the quarter with $698.3 million in cash and cash equivalents.
Inventory at the end of the first quarter was $304 million or 6% higher than at the end of the first quarter of 2016 reflecting a 3% decrease in inventory per square foot. We expect our inventory growth at the end of Q2 and for the balance of the year to generally grow in line with our forward sales trend.
Turning now to our updated outlook for the second year and fiscal year 2017. We are pleased with the results we are now seeing from our efforts to recover the sales trend in our eCommerce business.
Quarter-to-date trends online are now comping in the positive low double digits and we see additional opportunity ahead. To deliver this important inflection in our digital business, we have taken aggressive steps to reorganize our digital teams and have leveraged certain external resources not previously contemplated in our financial plans.
As a result, we will have certain one-time investments related to this recovery effort which we will break out momentarily as part of our SG&A guidance. We’re also pleased with the performance of our store teams in a difficult macro environment and we continue to see solid ongoing results.
Please note that the guidance we are sharing excludes additional costs related to the ivivva restructuring. For Q2, we expect revenues to be in the range of $565 million to $570 million.
This is based on a comparable sales percentage increase in the low to mid single digits on a constant dollar basis compared to the second quarter of 2016 and reflects a low to mid teens eCommerce comp estimate. This also assumes the Canadian dollar at $0.76 to the U.S.
dollar and eight new store openings in the quarter. We anticipate gross margin normalized for ivivva to increase approximately 100 basis points over Q2 of last year.
This reflects strong product margin improvements partially offset by occupancy and depreciation trends similar to Q1. We expect SG&A in the second quarter to delever from Q2 2016 by approximately 350 basis points.
This deleverage is greater than our original plans contemplated with approximately half related to critical one-time expenditures to support our eCommerce business as we just discussed. These aggressive actions encompassing site optimization, visual merchandizing, improved social engagement and digital marketing in a short period of time have already made a significant impact improving our digital comps from flat to low double digits and I am excited by the momentum this gives us for the balance of Q2 and the second half of the year.
The remainder of the SG&A deleverage is related to brand and community investments associated with our new global brand campaign that we’ve launched in May along with IT spend related to key technology projects. We expect foreign exchange to have a nominal impact to SG&A in Q2 based on actions taken to mitigate our exposures.
Assuming a normalized tax rate of 31% and 137.2 million diluted weighted average shares outstanding, we expect normalized diluted earnings per share in the second quarter to be in the range of $0.33 to $0.35 versus $0.38 a year ago. It’s important to note this includes approximately $0.04 to $0.05 of earnings impact from expense related to our digital acceleration work that I just mentioned.
For the full year 2017, we expect revenue to be in the range of $2.53 billion to $2.58 billion. This is based on a comparable sales percentage increase in the low single digits on a comp to dollar basis.
The guidance range takes into account the planned closures of our ivivva stores and the associated reduction in revenues, offset partially by the accelerating trends we are seeing take shape in the business and in particular digital. We continue to expect to open up to 50 company operated stores in 2017.
This includes 15 or more internationally and represents a square footage increase in the low double digits. We expect normalized gross margin for the year to increase 50 to 100 basis points from 2016, reflecting the benefits of product margin improvements primarily in Q1 and Q2 and moderating into the second half.
We continue to expect deleverage in product and supply chain SG&A as well as occupancy and depreciation primarily due to more store openings planned versus last year, including those higher occupancy international locations. We now expect SG&A for the full year to deleverage by approximately 50 to 100 basis points versus 2016.
This includes the one-time digital related investments which I had mentioned earlier and accounts for approximately 50 basis points of the increase. In addition, we will continue to invest in brand and community activities, IT and our international business notably to support our expansion efforts in Asia.
As we complete our work in digital, we expect the SG&A rate to moderate in the second half of the year and provide leverage in Q4. We now expect our normalized fiscal year 2017 diluted earnings per share to be in the range of $2.28 to $2.38.
This increase to our full year guidance reflects our confidence that the positive trends we’re now seeing will extend for the full year. Our EPS guidance is based on 137.2 million diluted weighted average shares outstanding and also assumes a normalized effective tax rate of 31%.
We expect capital expenditures to range between $175 million and $180 million for the fiscal year 2017 reflecting new store openings, renovations, relocation capital and also strategic IT investments. This is an increase versus our prior guidance of $170 million to $175 million due to increased investments to accelerate our digital business plus additional capital related to new and remodeled stores.
Before we take your questions, I wanted to emphasize the importance of the strategic measures we have taken to reorganize and strengthen our digital and technology capabilities. We have leveraged both internal and external resources in this effort to generate results quickly.
These actions have carried costs that are impacting SG&A in the near term but we expect to realize meaningful SG&A leverage in Q4 as we clear these one-time investments. We are confident that these are the correct investments to make now to build our business for the long-term.
We’ve also balanced these decisive near-term moves with thoughtful structural changes including the recent announcements within our leadership team. I’m excited for my new role and the opportunity to work more closely with our technology teams and I am thrilled to have Julie Averill joining us as our new CTO leading all of our global IT functions.
Julie has nearly 20 years of broad-based IT experience and was most recently Chief Information Officer at REI. I look forward to working with her to further build our technology infrastructure to achieve our growth plans.
With that, we’d like to open the call for questions. Operator?
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions]. Your first question is from Brian Tunick with Royal Bank of Canada.
Please go ahead.
Kate Fitzsimons
Hi. This is Kate on for Brian.
Thank you for taking our questions and congrats on the quarter-to-date improvement. I guess as we’re thinking about what actions specifically you took in Q1 that you think most directly impacted the comp trend just from a merchandize perspective.
And then I guess with Sun in the room, I guess when you’re thinking about what changes you’re making here in 2Q from a product perspective and to the back half, what do you see as the most meaningful opportunity in order to help continue the improved comp momentum? Thank you.
Laurent Potdevin
Thanks for your questions. So the two most important actions we took was one is getting back with that in the assortment that we had lacked early on in the quarter, and two was really as we had articulated on the last call really focusing on our digital experience.
And I’m sure you’ve seen it, I’m sure you’ve experienced it. But what we’ve been able to create in a very short period of time has actually brought to life, or the brand to life where that is, that is really, really powerful and we’ve seen the highest engagement from our guests ever actually whether it was a strap happy or the launch of the Enlite bra or other campaigns that we launched at that time.
So I’ll let Sun speak more specifically to the assortment. But from an assortment and from a digital standpoint, we are incredibly focused.
We articulated what we needed to do. We did it.
And actually the results exceeded our expectations.
Sun Choe
From a merchandizing standpoint, I think two key things. First, it really helped turn some of the trend around.
The first thing was we were quickly able to get back into color and print, so we do see that balance improving. And I think given that we are a performance and functional brand, the fact that we had really strong launches in our Nulux fabric franchise as well as the launch in our Enlite bra, that really helped buoy the trend and we know that we have a lot more of those innovation platforms and franchises in the pipeline for the future, so we remain optimistic.
Kate Fitzsimons
Great. And then I guess just to follow up on the Enlite bra.
Can you just speak to any pricing or branding learnings that came as you implemented that launch? It sounds like it’s really bringing in some new customers to the brand.
Sun Choe
We’re really excited. It’s our most expensive bra in our portfolio.
We have seen zero price resistance. But what we’re finding is that if we have a technical solve and we’re differentiated in the market, she’s willing to pay the price.
Kate Fitzsimons
Great. Best of luck.
Laurent Potdevin
Thank you.
Operator
The next question is from Adrienne Yih with Wolfe Research. Please go ahead.
Adrienne Yih
Good afternoon. My question is on the digital growth, first on the gross margin.
How should we think about the gross margin in that channel and the op margin relative to brick and mortar? And then Stuart, can you also talk about the inventory marked on the 5.4 million, was it all ivivva?
Was there any go-forward products? And is there any residual markdown in Q2 that we should expect?
Stuart Haselden
Hi, Adrienne, certainly. So on the profit profile of our digital business, and there’s certainly disclosure that we provide in our Q.
We enjoy a stronger operating margin with our eCommerce business, I mean specifically we did not have the rent and the payroll costs that we incur as part of our bricks and mortar business. And the product margins are slightly higher as well as we have a more efficient way to manage our inventory pool online, so that is a benefit to the eCommerce business as we continued to have goals to drive a higher proportion of our business through our eCommerce channel.
That should have an accretive impact on our overall company operating margins. In terms of the inventory costs that you called out and there’s a wreck [ph] in the press release that addresses specifically the cost of the inventory provision we took related to the ivivva restructuring decision, that is entirely related to ivivva and at this point we do not expect further inventory provisions in the second quarter.
We believe that should all fall within the first quarter disclosure.
Adrienne Yih
Great. Thank you very much and congratulations.
Laurent Potdevin
Thank you.
Operator
The next question is from Matthew Boss with JPMorgan. Please go ahead.
Matthew Boss
Thanks. So just to breakdown that low-to-mid single digit comps that you’re seeing here in May or that you saw in May, I guess how would you rank the sequential improvement by category if we were to bridge the 400 basis point comp improvement versus the negative one in the first quarter?
Stuart Haselden
Hi, Matt. It’s Stuart.
I think that we’re seeing strength out of the latter part of the first quarter into the second quarter certainly in both channels. Versus our original expectations for Q1, we saw a really strong trend in stores in particular in the latter part of Q1.
We see that continuing into the first quarter. That’s definitely part of the guidance that we gave, but importantly and probably strategically, the work that we are in, in the digital acceleration effort has produced an important inflection in the trend of that business from the first quarter into the second quarter which the quarter-to-date trends that we commented on in the prepared remarks reflect the impact of that effort of having where we are very confident that those trends will continue.
And as we mentioned, we see opportunity above the quarter-to-date trends, so that business being about 20% of the total, you can sort of back into how the relative impact on that comp guidance is shaking out, but we’re really seeing strength across both channels.
Matthew Boss
Got it. And then just a follow up on SG&A, Stuart.
Excluding the one-time items you’ve laid out near term, is it still fair to think about low single digit comps as the multiyear SG&A hurdle rate? And then I guess if you could just touch on the strategic expense assessment.
What you found in phase 1 and then just potential opportunities as we think about phase 2, which I think would be more next year opportunity?
Stuart Haselden
Certainly. I think we’ve been pretty consistent that we expect to be able to leverage our cost structure at a low to mid teens total revenue growth outcome.
So the combination of the comp and the square footage growth are the factors that will help us achieve that. That’s unchanged.
We see that as the underlying fundamentals of how we have constructed the financial plan for this year and into next year. What’s different is we mentioned is the one-time cost that we’ll incur to recover our digital business.
So those fundamentals are not different. In terms of – I think your second question was regarding the SG&A work that we had begun in the later part of last year and that work we’re benefitting from this year.
We’ll see – as we had mentioned on the prior call, we’ll see that – the full benefit of that work in the second half of this year particularly in the fourth quarter where we expect we’ll be in a position to begin leveraging the top line estimates that we’ve offered.
Matthew Boss
That’s great. Best of luck.
Stuart Haselden
Thank you.
Laurent Potdevin
Thank you.
Operator
The next question is from Matt McClintock with Barclays. Please go ahead.
Matthew McClintock
Hi. Good afternoon, everyone.
Great quarter. I actually wanted to focus a little bit on two questions.
The first one is just – not to continue to talk about digital but the digital change, there’s been a lot of changes going on there and I just want a high level strategically what specifically are you doing now that’s having such a meaningful immediate impact that you really didn’t do before? And how to think about that in terms of one-time costs, Stuart?
It would seem like maybe the one-time costs are consulting fees or something like that. How much of that is one-time?
How much should we think about that as an ongoing cost just to grow the business?
Laurent Potdevin
Matt, if you go back a couple of years, there was really no digital culture, no digital mindset at lululemon. So we’ve built this center of excellence with digital that really allowed us to put the tools, the platform, the foundation in place to really be able to build the global scalable business that we knew we needed, including CRM which didn’t exist.
We’ve done that over the past two years. We’ve got this outstanding foundation.
And the last piece of the puzzle was really to bring the brand to life digitally in a way that’s as powerful as in the stores. And when you think about our performance in the store, it’s all about human connection and we refer constantly about educators being the most important role in the company.
And so translating that online is difficult. But the focus over the past few months now have the foundation in place has really been to bring the brand to life in a powerful way.
And I think you can see that in the way the product is being shot, in the way we’re talking about in technology, in the way we’re bringing video to life and maybe most importantly in how we’re linking social PR operators on mobile as well as on desktop. So that has had a very significant impact on the business and it’s really – if you think about center of excellence, we’ve built it, we’ve built the foundation and the transition that we’ve been driven lately really brings all of the technology under Julie Averill, our new CTO who will be reporting to Stuart all the digital marketing, guest acquisition, driving traffic in our brand and community which the timing is perfect with the launch of This is Yoga.
And then all visual merchandizing with Sun and finally the operating part of driving the channel under our leaders in the various regions with Celeste, Ken and Garrett [ph] so that they can truly have a guest-centric vision to servicing our guests that is channel agnostic.
Stuart Haselden
Matt, just to follow on that and offer some details on the costs, a lot of the costs that we’re incurring are related to getting results quickly. So there’s a few buckets I would group them into.
First is the technical digital work related to our Web site. We identified a number of opportunities through the work that we started in the first quarter and are now continuing into the second quarter that were hardcore coding issues that we needed to tackle.
And in order to do that quickly, we needed to bring in external resources so that we could have the critical mass in terms of the expertise to do that in a quick manner. So that’s a big part of this cost.
Otherwise, you’ve heard us speak about the creative content on the Web site, photography. We’ve engaged agencies to help us not only with the development of that creative content but also in the photography itself.
So the agency cost related to photography and creative content and really the other pieces of the cost that we’re incurring. The one-time in nature aspects and the way we’ve characterize it in that manner is that again we’ve asked these external resources to join this task force we’ve organized to help us drive change rapidly.
And so in order to do this under those timetables, that is what’s giving rise to the additional costs that we’re incurring outside of our normal business model. As we complete this work over the course of the summer and early part of Q3, we’ll be able to transition and build on this work and take it forward as a new part of how we do business from a digital standpoint and be able to better leverage a more normalized cost profile.
Laurent Potdevin
As to Stuart’s point, we’ve been very confident about doubling down on the investment because week after week, almost day after day we see the riddles in the business [indiscernible]. So there is this real time feedback look about the quality and the impact of the work that we’re doing.
Matthew McClintock
Thanks a lot for that. I’ll actually table my second question so someone else can get a chance.
Thank you.
Operator
The next question is from Oliver Chen with Cowen and Company. Please go ahead.
Oliver Chen
Hi. We have a question related to capabilities with a digital and inventory management.
What are your thoughts around how you feel about the bricks and clicks in terms of the inventory in store versus online? And Stuart, on the strategic supply chain efforts, could you just update us on what’s ahead in terms of opportunities there as you continue to make progress in both quality and speed?
Those were our main questions. Thank you.
Laurent Potdevin
Oliver, this is Laurent. Quickly on the omni-channel, I think I mentioned that in the prepared remarks.
We’re actually really, really proud about the results of our omni-channel strategy. From the implementation of RFID to the ability to really maximize the use of inventory and obviously the margins that we deliver, like our mid-channel strategy are working incredibly well in both from a financial standpoint but also in servicing our guests and we’ve got more of those coming online in the latter part of the year.
And I’m spacing [ph] on the second part of your question.
Stuart Haselden
Right, on the supply chain and some of the strategic I guess goals that we have there now that we’ve been happy with the results that we’ve seen in recovering our gross margins, we believe we’ve established a more stable and reliable sourcing and supply chain organization. I think our next priorities turn to continuing to support our design teams from an innovation standpoint so that we can enable the work they’re doing from a sourcing standpoint to bring to life meaningful innovation and designs that will matter to our guests and help us solve problems for athletes.
In addition to that I think importantly we’re continuing to look at ways for us to build flexibility into our supply chain so that we can position raw materials in a way that we can respond to guest trends more rapidly. We saw some of the first examples of this late in the first quarter but we were able to actually chase into certain styles where we saw gaps in color and even introduce certain graphic styles that we hadn’t done in a while with remarkable sell-throughs.
So we’re really pleased to see those initial limbs and those are – that flexibility is something we’re looking to expand.
Stuart Haselden
And from an organization standpoint – with Sun reporting to me from an organizational standpoint, we’re going to create some healthy tension between merchandizing and design which will really allow us to sort of drive the design vision into profitable growth.
Oliver Chen
Okay. And the last thing is on the product side.
You really have made really great progress with Enlite and Nulux. How would you prioritize one of the bigger product opportunities or how would you prioritize for the back half between tops and bottoms and outerwear and accessories can be an opportunity too?
Just curious about how we should think about the catalyst relative to each other? Thank you.
Laurent Potdevin
Oliver, you’ll see it when it comes to life. So we’re not going to tell you too much too early.
But one thing that I can tell you is that we’re obviously always focused on function first. And when we do that, it pays off tremendously whether it’s Nulux or Enlite.
We’ve got two incredible data points right there. So you’re going to see a focus on function and that’s really what makes us who we are.
Operator
The next question is from Mark Altschwager with Robert W. Baird.
Please go ahead.
Mark Altschwager
Great. Good afternoon.
Thanks for taking the question. Just a follow up on the SG&A leverage discussion and I’m sorry to harp on it.
The guidance for the year I guess really doesn’t get you to that low to mid teens revenue growth rate in the back half, yet Stuart I think you mentioned expecting meaningful SG&A leverage by Q4. So I’m just trying to make sure I understand it.
As you get to Q4, would you expect to be at a point where you can leverage SG&A consistently on a go-forward basis or is the Q4 leverage and call it a low double digit revenue growth more of an exception versus the rule? Thanks.
Stuart Haselden
Mark, it’s a good question. I would say the way we’ve built the model over the next five years and should enable us to deliver SG&A leverage in that top line growth range we mentioned that low to mid teens.
I think in the fourth quarter there’s an opportunity to do better than that based on the work that we’ve done to improve our cost structure coming out of the project that we had mentioned in the second half of last year and will take those benefits forward. And the fourth quarter is our largest quarter from a sales standpoint and a little bit more flexibility from a quarterly standpoint to have leverage on the cost structure.
Mark Altschwager
That’s helpful. Best of luck.
Stuart Haselden
Thank you.
Laurent Potdevin
Thank you.
Operator
The next question is from Dana Telsey with Telsey Advisory Group. Please go ahead.
Dana Telsey
Good afternoon, everyone, and nice to see the improvements. As you think about the ivivva business and the existing of that business, what long-term margin and return improvements do you think can be expected?
And then on another note, the improvement in color, is it where you want it to be yet or how should we see the product enhancements whether it’s on the color or whether it’s the online conversion that changed in Q1, is there more runway to go? Thank you.
Stuart Haselden
So, Dana, it’s Stuart. I’ll first respond to your question on ivivva and then I’ll let Sun respond to your question on the color and the product strategy.
In regards to ivivva, it was a very difficult decision in terms of the restructuring plan that we have announced that came after much deliberation. As we look at the run rate of this business go forward under the new structure that we have established, we expect the revenues to be a little less than half of what we saw last year and it should be positioned to generate positive comps that will be accretive to the overall company comps.
And it should also be positioned to generate a modest operating profit where in all prior years we’ve operated ivivva, it’s had a small operating loss. And as we mentioned, the restructuring and the store action should be largely completed by Q3.
Sun Choe
And then going into color, I’d say we are happy with the improvement of the balance. We feel good that we have a lot of white in stores which is seasonally really appropriate in emphasizing light neutrals and some pops of color.
And I’d say that as we get into the back half of June and going into fall will be even in more ideal state. And as Stuart mentioned, we’ve just done a much better job partnering with the supply chain and making sure that we do have flexibility in our sourcing model, so always able to shape back into colors that sell out.
And then again, we feel very well positioned from a portfolio standpoint because we have a lot of key innovations in the pipeline for the back half of the year that’s really focused on fabric function and fit.
Dana Telsey
Thank you.
Operator
The next question is from Paul Lejuez with Citigroup. Please go ahead.
Paul Lejuez
Thanks. Stuart, can you talk about the promotional cadence in the business during the quarter, how that trended?
How it’s been in May, today? And also curious about store traffic, just what you saw?
How did that progress during the last several months? Thanks.
Stuart Haselden
Thanks, Paul. The promotional cadence has been healthy.
We executed the physical warehouse sale in Dallas earlier this month to a great success. It was a record for us that – or approached I should say the record we had achieved previously with our Edmonton warehouse sale.
The sales in AUR results from that event exceeded our plans and I think it really speaks to not only the resilience of our clearance model but also our full price business given the level of interest in demand we saw in that warehouse sale. So otherwise markdowns in stores and online are well managed.
And I think our inventory position reflects that as well. So the markdown picture is very healthy and has been for much of Q1 and certainly now into Q2.
Store traffics an interesting story. It still remains a headwind for us and that was a big part of the weakness that we saw early in Q1 that we spoke about on the last call.
We have seen improvements in store traffic. And what’s been interesting is as we have executed on white launch, the Nulux Fast & Free launch and importantly This is Yoga program or campaign rather, we have seen that these events have been able to move the needle in our store traffic as well as our online traffic.
So what we’ve taken away from that is it’s actually possible for us to affect store traffic positively when we have compelling product and brand stories and events. So we’re taking these learnings forward.
We believe it creates interesting opportunity for us as we look forward. And as we think about KPIs generally, that improvement, sequential improvement in store traffic still negative, still a headwind but sequentially better in the latter part of Q1 into the early part of Q2 is also being supported by improvements in conversion and UPTs in our stores that is supplementing or complementing the continued strength in AURs.
Ultimately, we need to see a balanced picture across all of our store KPIs to have a sustainable comp picture. So we’ve relied heavily on AUR up to this point.
We still see strong AUR performance but it’s really important to see conversion, UPT in a better place and also traffic improving. So thanks for your question on store traffic.
Paul Lejuez
Thanks, Stuart. Good luck guys.
Laurent Potdevin
Thank you.
Operator
The next question is from Omar Saad with Evercore ISI. Please go ahead.
Omar Saad
Thanks, guys. Thanks for taking my question.
I wanted to actually focus on the decision to accelerate international openings Asia versus Europe and is it kind of more a fill in of the existing trade areas, or you’re expanding it to new trade areas and markets? And what are you seeing in those markets that’s giving you the confidence to pull that lever and press on the gas at this point?
It is online demand that you’re seeing or store level demand or is it the showrooms, what you’re learning from those? I think this is probably a pretty important part of the equation for you guys over the next few years?
Thanks.
Laurent Potdevin
Thanks, Omar. I think it’s all of the above.
We’re obviously seeing the opportunity and the scale of the opportunity in Asia and we’re seeing great momentum there. So whether it’s our TMall business doubling in less than three quarters or whether it’s store opening in a couple of months that 1,600 door square foot, all the activity that we see on social or with the events that we’re rolling out; that obviously give us great confidence in our ability to accelerate our store openings in Asia, mostly in China.
But it’s also – honestly the ability to secure outstanding locations. So if you think about the store that we have also opened in Tokyo with Ginza Six, all the locations that we’ve been able to open in Xintiandi in Shanghai and in Beijing, that obviously – the pace of the openings is in no way jeopardizing the quality of the locations that we’re picking.
So we see tremendous momentum in Asia, in Japan, in Hong Kong, in mainland China as well as Singapore and Korea. And in Europe, we’ve grown 50% year-over-year and it actually goes outside of London.
You see the performance of Brown Thomas in Dublin which really gives us – which really validates the work that we’re doing in Europe. And the fact that the halo aspect that it’s got that it has beyond London.
Omar Saad
Got it. Thanks for the color.
Laurent Potdevin
Thank you.
Howard Tubin
Operator, we’ll take one more question.
Operator
Thank you. The next question is from Kimberly Greenberger with Morgan Stanley.
Please go ahead.
Kimberly Greenberger
Great. Thanks so much for taking my question.
Stuart, my question’s on digital marketing investments and can you just give us a little more color on the second quarter investments? And why you would characterize them as one-time?
Maybe if we understand a little bit better what those expenses are, we could get our heads around the one-time characterization. And then secondarily, I would imagine that ivivva operated at lower gross margins.
So is there a permanent improvement in gross margin you expect to see over the next one to two years from the elimination of most of the ivivva business? Thanks so much.
Stuart Haselden
Okay, Kimberly. On the first question, the digital marketing investments, I would not include that as part of the one-time costs that we were referring to.
What I am referring to are the technical design and development costs for the improvement to our Web site. That’s one bucket.
The second bucket is photography costs of outsourcing photography to a photography agency. And the third bucket is the brand creative content support that we have from an agency who was also selected to help us with that.
And what I would say is that what’s creating much of the one-time nature of this is the speed at which we’re trying to accomplish these improvements and changes that we’ve identified we need to the Web site. There will be elements likely of the second and third buckets that we’ll take forward but not to the same order of magnitude that we’re seeing right now given just again the timeframe in which we’re trying to accomplish these improvements.
So hopefully that clarifies it. The second question you had on ivivva gross margin, gross margins in ivivva have not been as high as in lululemon.
I think that’s safe to say. By reducing the mix of the ivivva overall, yes, that creates some benefit to the overall weighted average, if you will, gross margin that we’ll have.
The ivivva business will be a viable business that we still believe in, albeit on a smaller scale and we also have specific strategies and plans in place to improve the product margin of the ivivva business as we’ll take it forward as primarily an eCommerce business.
Kimberly Greenberger
Great. Thank you, Stuart.
Stuart Haselden
Great. Thank you.
Operator
This concludes the question-and-answer session. I will now turn the conference back over to the presenters for any closing remarks.
Howard Tubin
All right, thanks everybody.
Operator
This concludes today’s conference call. You may disconnect your lines.
Thank you for participating and have a pleasant day.