Lululemon Athletica Inc

NASDAQ:LULU

Earnings Call Transcript 2019-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Fourth Quarter and End Year 2019 Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [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.

[Howard Tubin, Vice President, Investor Relations]

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-Q 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 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 operating statistics for the fourth quarter as well as our quarterly infographic. We are planning to end today’s call in under an hour. So please limit yourself to one question at a time to give others the opportunity to have their questions addressed.

And now, I would like to turn the call over to Calvin.

[Calvin McDonald, Chief Executive Officer]

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 one given the spread of COVID-19. We are proud of the actions we have taken across our business to help protect our people and our guests as we navigate this situation.

I will begin my comments by discussing COVID-19 as it relates to our business and provide a brief overview of quarter four 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 will 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 remained open in other Asian markets, except for Malaysia, where our two locations are currently closed. In addition, we are closely monitoring our supply chain and staying in constant contact with our vendors as they too navigate this situation.

Given the rapidly changing nature of current events, we have decided not to provide financial guidance at this time. That said the underlying health of our business is strong which provides us with many levers to successfully manage through this period. These include first, our strong balance sheet. We ended the year with $1.1 billion in cash, no long-term debt and a $400 million untapped revolver. Second, our investments in key technologies, including RFID and strong partnerships with our vendors will enable us to maximize inventory across our network while managing our overall levels. Third, the power of our product, our assortment is less seasonal in nature as many of our core styles are relevant year round and can be held for future use.

Fourth, the flexibility of our multi-channel business, our e-commerce sites, mobile apps and omni capabilities allows our guests to shop in multiple ways, which is complemented by our agile store formats. And fifth, the strength of the category in which we compete.

At our core, we solved sweaty problems for athletes and we do not believe the current situation will change the trend toward people wanting to live in active and healthy lifestyle. These are some of the reasons we are confident in our abilities to navigate the near-term while working to realize the opportunities over the longer term. In addition, we have early learnings from China which show us that our business will bounce back. We are not yet back to pre-closing volumes, but the business is getting stronger week by week.

There is considerable work underway across the business to respond to the current situation and I would like to specifically update you on two of these work streams. The first is the support phase and second is how we will enable the recovery phase. I will start with our support phase initiatives and how we are currently assisting our teams, our ambassadors and our guests. We will do our best to open our stores as soon as possible when the recovery begins and will approach this market by market based upon the latest information. I am consistently inspired by the resilience of our people as they navigate the unknown and connect even more regularly than ever before.

In terms of our guests, our e-commerce sites continue to operate around the world, so we can continue to fulfill their needs with our product. Similar to what we have done for our own people, we have been offering online sweat sessions for our guests with yoga, meditation, pilates, dance and train classes. Our teams in North America and Europe have followed the lead of our people in China where we have gained thousands of new followers on WeChat. On Instagram, during our first week of store closures and thanks to our increased content offerings, we saw nearly 170,000 guests join us for our live classes. It’s inspiring to see the strength of our guests come together this way and will continue to stay closely connected as we navigate what’s ahead. And finally, our ambassadors remain top of mind as well. We are in constant contact and they are continuing to help us engage with our local communities through these virtual sweat sessions. As many of our ambassadors are small business owners who have been forced to close their doors, we just launched the Global Ambassador Relief Fund. This fund will assist our ambassadors who own studios in their local communities to sustain their businesses during these extraordinary times.

Let me shift gears now and speak for a moment about how we are thinking about the recovery phase. We know the current situation will pass and we remain focused on being ready to serve our guests and support our communities when the time is right. Our balance sheet allows us to look ahead if you continue to plan for growth as we manage the business for day-to-day. In terms of inventory, we are managing our buys and looking at our assortment flow with the full year view. Our teams are now in the work to balance supply with the current reduction in demand we are experiencing. We are in constant communication with our vendors and we have flexibility regarding our receipts for the second half of the year. Our key e-commerce DCs continue to function, we are practicing social distancing, monitoring the health and well-being of our people closely and taking precautions to maintain our operations.

Over the last several years, we have made significant investments in our supply chain and distribution network and I am confident that we will be able to further leverage these investments to help us navigate through the current situation. Shifting to expenditures, we are currently evaluating our expense structure, capital expenditures in store opening and remodel programs. We are acting now to ensure we can reaccelerate our growth drivers when we are ready. PJ will say more in a few minutes.

In terms of products, our product pipeline remains full and our white space and design teams have not stopped their work. We continue to leverage our science to field development platforms to bring new technical innovations to our guests. While we have paused on our events such as 10-K runs through July 31, we are continuing to connect with our communities. We have collected our best online content from our ambassadors on our new Community Carries on Hub on our global website creating one central place for our community to connect and access online fitness and health resources. This gives you a sense of the scope and breadth of our global response during both the support and recovery phases of our planning.

Now, let me share some details about our fourth quarter and full year results. We are pleased with the momentum we saw during the fourth quarter and throughout 2019. Our results for the fourth quarter include total revenue growth of 20%, a constant dollar comp increase of 20% on top of the 17% increase last year and an earnings per share increase of 23% compared to adjusted earnings per share last year. Our quarter four results demonstrate that our guests responded incredibly well to our product this holiday. Growth across all categories with comps in women’s up 12%, men’s comps up 39% and accessory comps up 24%. Strong comps across channels with 9% in stores and 41% in digital and within our regions North America was up 19%, international was up 25% and China was up 70%.

For the full year 2019, we delivered total revenue growth of 21%, a constant dollar comp increase of 18% on top of an 18% increase in 2018, an operating margin of 22.3% and an earnings per share increase of 28%. As you recall, our 2023 vision is comprised of three pillars: product innovation, omni-guest experiences and expand markets. These are the right pillars for our business. We executed well against them in 2019 and we remain committed to our 2023 targets as laid out in our Power of Three growth plan.

In summary, we are proud of how Lululemon continued to deliver against our strategies and gain momentum in the quarter and full year of 2019. While this period in our lives is filled with uncertainty, at Lululemon, we are certain about our future. We have the balance sheet, the connection to our community, the strength of our category and the right growth initiatives to sustain us while we keep investing well into our future. Although we do not know exactly when the current situation will pass, what we do know is that our stores will reopen. We know that initially the business will be lower than it was pre-COVID-19, but we believe that each day and each week, it will keep building. We are planning for multiple scenarios, but in any one of these we know that our brand is strong and has unique pillars of strength that will keep driving our momentum forward.

I will now ask PJ to provide further details about our quarter four performance and an update on current business.

[PJ Guido, Chief Financial Officer]

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 the 7% increase in Q4 of last year. Square footage increased 18% versus last year driven by the addition of 51 net new Lululemon stores since Q4 of 2018. During the quarter, we opened 12 net new stores and completed five optimizations. In our digital channel, we posted a 41% constant dollar comp increase on top of the 39% increase last year. For the quarter, e-comm contributed approximately $464 million to 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. which driven primarily by the following, an 80 basis point increase in overall product margin resulting from lower product cost 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 same period last year. Foreign exchange, both translation and revaluation, contributed 30 basis points of de-leverage in the quarter. Operating income for the quarter was approximately $416 million or 29.8% of net revenue compared to 28.4% of net revenue in Q4 2018. Tax expense for the quarter was $121 million or 28.8% of pre-tax earnings compared to an adjusted effective tax rate of 26.9% a year ago. The increase in our effective tax rate compared to our adjusted effective tax rate last year relates primarily to a change in tax legislation in the fourth quarter of 2018 which reduced tax expense in that quarter.

Net income for the quarter was $298 million or $2.28 per diluted share compared to adjusted earnings per diluted share of $1.85 for the fourth quarter of 2018. Capital expenditures were approximately $69 million for the quarter compared to approximately $69 million in the fourth quarter last year. Q4 spend relates primarily to store capital for new locations, relocations and renovations, and IT and supply chain investments.

Turning to our balance sheet highlights, we ended the quarter with $1.1 billion in cash and with $400 million of available capacity under our revolving credit facility. Inventory grew 28% and was $518.5 million at the end of Q4. We repurchased approximately 1,600 shares a quarter at cost of just over $307,000. At the end of Q4, we have $327 million remaining on our current $500 million repurchase plan.

Let me shift now to current events. As Calvin stated, our sales trend changed dramatically during the second week of March when the impact of COVID-19 accelerated. Due to the dynamic nature of this event, we are not able to provide accurate 2020 guidance at this time. All of our stores in Europe and North America have been closed since March 16 and our current plans call for these stores to remain closed until April 5. Our DCs are up and running with exception of our facility in Sumner, Washington, which has been close in line with temporary local restrictions. This DC does not fulfill the significant number of e-commerce orders and the closure has not had a material impact on our business. The vast majority of our stores in China and most of Asia are currently operating and showing improved performance each week since reopening. Through the second week of March, our North American store comps remained strong and in line with Q4 trend driven by consistent traffic and great execution by our store teams.

In addition, our digital business has remained strong throughout driven by traffic and improving conversion that is a direct result of the investments we have made in our digital platform. The strength of our business early in Q1 both in-store and online reinforces that our brand remains strong. That said we did see a dramatic slowdown in our business in conjunction with our store closure and we expect this to have a negative impact on Q1 comps margins and EPS.

One of our key advantages in the current environment is our liquidity position, which is extremely strong. We currently hold over $1 billion of cash on the balance sheet and have no long-term debt. We also have a $400 million revolving credit facility which has 3 years left in maturity. In addition, this facility has an option to upsize by $200 million. We are also currently actively managing our expense structure, capital investment and store openings and renovations. We have modeled several different scenarios to gauge the COVID related impact on our business and believe we have the flexibility and nimbleness to adapt and manage to each scenario accordingly. To mitigate the impact we are seeing we are reducing non-essential operating expenses and reprioritizing our capital spend towards business critical projects. Among several other expense reduction opportunities, we have curtailed business travel, slowed the pace of new hires, rationalized our marketing spend and are working with our landlords to defer select group of our upcoming new store openings and remodel projects.

In terms of the inventory management, our merchant and supply chain teams are evaluating all upcoming deliveries through the lens of current and anticipated demand. We have flexibility with regard to our fall and winter 2020 receipts and where appropriate can push out or reduce our buy orders. We believe we are in a strong position given our high cash balance, strong cash flow, no long-term debt and access to additional sources of liquidity. In addition, we will further enhance our financial position by managing working capital, SG&A expense and capital expenditures. The strength of our balance sheet and flexibility of our operating model puts us in a position to address an unprecedented situation within the global economy. In addition, it will allow us the optionality to still prudently invest for the future and live into our potential as a global brand.

And now, back to Calvin for some closing remarks.

[Calvin McDonald, Chief Executive Officer]

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 and I am 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 everyday. Operator, we can now open it up for questions.

[Operator]

Thank you. [Operator Instructions] Your first question today comes from Matthew McClintock with Raymond James. Please go ahead.

[Matthew McClintock, Raymond James]

Hi, yes everyone. I hope everyone’s family is safe and healthy. Calvin, I guess the first question for me would be you made the statement, the plans for growth while continuing to manage the day to day, but it’s an interesting statement because it seems like a lot of companies right now are not planning for growth and they are 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 are going to return to that in a reasonable amount of time is that just your China experience, what you are seeing in China is what makes you feel that way? That’s my first question. Thanks.

[Calvin McDonald, Chief Executive Officer]

Okay. Thanks, Matthew. I mean, I will 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 is nothing that I believe will fundamentally change our ability to regain that momentum once we reopened, once the guests get some degree of normalness back into their life, how they will come back into our category and shop. We know and we have 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 are building towards is, if nothing else, even reinforced with the current opportunities or situation that we are facing around our community, around our omni-channel strategy, how we are thinking about leveraging the brand and with our guests. So we are taking short-term actions as PJ alluded to that our 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 are 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 rebalanced what 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 and form how North America and Europe will come back trading, but I do think the scenario there is slightly different and that China had a quick 2-week closing period when the stores were then reopened. We traded 5 weeks since reopening we are on our sixth week but the country was still under a Level 1 security alert. So I think it’s pace of rebuilding back business is getting better everyday every week, but it is building back in North America and Europe. We are planning on a longer close period which I think once we reopen would accelerate the pace in which we see guest 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 are continuing to monitor own scenarios against both, but I do believe in our abilities to strike that balance and continue to invest in the future in the vision and we are doing that.

[Matthew McClintock, Raymond James]

I appreciate that color. Calvin, it is 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 vertical integrated business model of Lululemon potentially allows you to manage the inventory to appropriate demand quicker or faster or in more appropriate manner than what you have seen in your historical experience? Thanks.

[Calvin McDonald, Chief Executive Officer]

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 are on the relationship with our vendors and we own the relationship right through to our guest in how we sell how we choose to present the product in the quantities in which we have been buying allows us to manage very differently in my opinion equally. And as we commented before one of the benefits around our inventory in product we have brought through the first half of the year. We are able to influence our Q3 by 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 business that is core which means we are able to hold and continue to sell for a much longer period of time. We are 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 just regulate demand that we are seeing today online. Our plan in the next week is to turn on ship from store from our stores. So 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 is 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.

[Matthew McClintock, Raymond James]

Thank you very much for the color. Best of luck.

[Operator]

Thank you. Your next question comes from Mark Altschwager with Baird & Co. Please go ahead.

[Mark Altschwager, Baird & Co.]

Good afternoon and thanks for taking my question. I wanted to ask you about the product strategy and how you are thinking about that as you move through the crisis, are you planning any changes, the flow of newness, are there product launches that you are looking to delay until store operations have ran back up?

[Calvin McDonald, Chief Executive Officer]

Thanks Mark. We are 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 are not planning to change any of our launch cadence rather we are looking at timing to ensure that our plans are still relevant with the environment that we are in to make sure that how we present the product to the guest is in an appropriate way that is 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 have just launched our Everlux in February, which is our first product launch for this year under science of field positioning and the guest resonated incredibly strong to it. It was far exceeded our expectations and continues to sell well online. And as I look forward to the rest of the year, we don’t have any immediate plans at this place. We have our online network to sell. We still have other markets where we are operating in. And we know as I said we will be open soon and we believe the innovation of what we have will only enhance and entice the guests to come back into the stores.

[Mark Altschwager, Baird & Co.]

Thank you. And if I could just follow-up on digital real quickly, is it your hypothesis that the digital business will capture some incremental demand given the store closures, I know you said things have slowed recently here and I was hoping you could clarify are you saying that growth has slowed from the rates of growth you were seeing in the fourth quarter or have you seen digital demand actually turn to negative in recent weeks? Thanks.

[Calvin McDonald, Chief Executive Officer]

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 type of momentum. We saw that momentum continue into the start of this year across both physical stores and digital. Since closing, our digital business has picked up but it’s obviously not recovering all the volume loss from our store networks being closed, but we have seen our store or our online business accelerate in terms of growth, but obviously it cannot pickup the entire demand. So it is responding well and we have 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 leaned in a bit. We are 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.

[Mark Altschwager, Baird & Co.]

Very helpful. Thanks again and best of luck.

[Calvin McDonald, Chief Executive Officer]

Thank you.

[Operator]

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

[Ike Boruchow, Wells Fargo Securities]

Hi, thank you. Good afternoon, everyone. 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 have said that ever since kind of reopening 5 or 6 weeks ago, you have seen gradual build, but your bigger 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. Just trying to understand that a little bit better?

[Calvin McDonald, Chief Executive Officer]

Great. Thanks, Ike. As I sort of teed up, what’s interesting with China and I think an important element to remember is that we closed for two weeks, we have been open for 5, we are in our sixth week, the country was still on the 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 are 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 are 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 am 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 have seen in the last 5 weeks to that important sort of inflection point of getting back to positive.

[Ike Boruchow, Wells Fargo Securities]

Okay, thanks. Super helpful. Good luck.

[Operator]

Thank you. Your next question comes from Adrienne Yih with Barclays. Please go ahead.

[Adrienne Yih, Barclays]

Good afternoon. Congratulations on the holiday and the momentum coming into the year. PJ, my question for you is on topics, it was the $280 million for fiscal ‘19 and the spread was about $170 million for stores and about $100 million for corporate. So as we are 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 are thinking about CapEx reduction, is it $100 million off of this number and we are hearing people cut their CapEx up 50% to 60%. So just wondering if you can give us some color there? Thank you very much.

[PJ Guido, Chief Financial Officer]

Yes. Sure, Adrienne. So first off, our CapEx was closer to $300 million for 2019 and in fact we are not giving guidance for 2020 because we are managing it actively. To answer your question, I would say, roughly a third of our CapEx is maintenance CapEx with the balance being growth. And as you said it comes in the form of stores and it also comes in the form of investing in growth platforms, our supply chain, our IP. 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 will do that, but we will still absolutely do the things that we need for long-term growth. So we will pullback on CapEx, hard to give you a specific number right now.

[Adrienne Yih, Barclays]

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

[Calvin McDonald, Chief Executive Officer]

Alright, thanks. Just to confirm, are you referencing 80% hoping is that specific to China?

[Adrienne Yih, Barclays]

Specific to China, yes.

[Calvin McDonald, Chief Executive Officer]

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 will have all doors open next week in China which I think is positive and continue sort of the positive trend that’s is happening in that market place 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 have 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 in a sort of week by week in to a similar trend which is every market every store is getting better some started closer to the positive comp and continue the momentum to that and then as these markets take or cities take a position to change their emergency status that is where we really see the inflection point on overall performance improvement.

[Adrienne Yih, Barclays]

Great, thank you very much. Best of luck.

[Calvin McDonald, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Your next question comes from Erinn Murphy with Piper Sandler. Please go ahead.

[Erinn Murphy, Piper Sandler]

Great, thank you and good afternoon. Calvin, you talked about some of the efforts that the Lulu community has done to just bring some of the virtual workouts and meditations online as you connect to the consumer I guess can you talk a little bit more about what you seen specifically with new customer acquisition during this period may be 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 we don’t kind of have adequate history going back to former recessionary period in your model? Thank you so much

[Calvin McDonald, Chief Executive Officer]

In China where we first innovated and continued sort of our relationship in partnership we had with an app there called Keep which is a wonderful platform to activate sort of online sweat and then introduce some of the innovation around WeChat. I shared some numbers with you. And we are seeing a number of new guests whenever we do these type of activations in that market, be it some of our Tmall initiatives around brand day or on these type of platforms and partnerships they are proving to be wonderful new guest acquisitions. So we are doing more than those results not having physical sweat or events as an option and we are seeing an increase in the acquisition of new guests in North America Its early but I would anticipate that we would equally see some new guests acquire this way but it is really absolutely satisfying and providing a service to our loyal guests that actively participate in our events that are unavailable to them at this point of time or our ambassadors 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 is a combination of and I think it is just reinforcing the power of one of our goals as it relates to our vision which is building this on the 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.

[PJ Guido, Chief Financial Officer]

And then Erinn on your question about managing expenses so we do have significant flexibility built into our SG&A again though the way we think about it is in a few buckets. There is a variable component which will come down naturally as sales have come down but there is also things we can do to drill into that a little bit further. There is discretionary spend. Marketing is a good example.

We can redeploy marketing dollars. For example, we are not doing store events now, but we can redeploy into digital marketing to drive e-com performance. So we can do things there and then there is the overhead piece which we are actively managing and I talked about it a little in the prepared remarks, but there are several levers we can pull to control expense whether it’s slowing headcount growth, curtailing travel, there is a number of buckets across the organization where we can find savings depending on what scenario we are in. So, we feel pretty good about the flex we have in the P&L.

[Erinn Murphy, Piper Sandler]

Thank you.

[Operator]

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

[Kate Fitzsimons, RBC Capital Markets]

Yes, hi. Thank you for taking my questions. I guess first I just want to ask on the occupancy front, we have heard – seen headlines just about rent renegotiations going on with landlord. I believe you guys have alluded to maybe deferring some of the rents 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 is a decent portion of that is – can be repurposed for later seasons, less fashion associated with it. But I guess when we are 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, write-downs just help us kind of contextualize it there? That would be helpful. Thank you.

[PJ Guido, Chief Financial Officer]

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 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 are hoping for some flexibility and anticipate some. So there is more to come on that, but nothing solidified at this point.

[Calvin McDonald, Chief Executive Officer]

And on the different options relative to our inventory position, one, obviously that we are activating because you want to get ahead of it is our forward buy and that’s the work we are 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 do 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 are going to continue to use in-store as markdowns, online as markdowns. We have outlets. And up to 2019, we have 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 show know that we are managing all those decisions to the ones that we won’t take anything that puts our price positioning, the power of our price in our brand at risk nor do we see the need to.

[Kate Fitzsimons, RBC Capital Markets]

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

[Calvin McDonald, Chief Executive Officer]

Thank you.

[PJ Guido, Chief Financial Officer]

Thank you.

[Operator]

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