Lululemon Athletica Inc. (NASDAQ:LULU) Q2 2019 Earnings Conference Call - Final Transcript
Sep 05, 2019 • 04:30 pm ET
[Operator Instructions] The first question comes from Paul Trussell with Deutsche Bank. Please go ahead, sir.
Good afternoon and congrats on another great quarter.
My first question is just related to the margin outlook for the third quarter and second half overall. Maybe just talk a little bit more about the puts and takes to the flat to up modest gross margin outlook, as well as help us think a little bit more about why just modest leverage when low-teen comps in the second half as you leverage some of those strategic investments that you started making last year?
Patrick (PJ) Guido
Yeah. Hey, Paul, it's PJ. Thanks for the question. So similar to Q2 going forward in back half for gross margin, it's a similar story. We expect continued gains in product margin driven by lower product costs. We don't forecast into a mix benefit but mix has been a benefit for the first part of the year given the strength in our women's pants business. But product cost remains the big opportunity and it comes through scale, through segmenting our supply chain, a better cost visibility and certainly greater efficiency across our distribution network, so we expect that to continue.
The takes, as you alluded to, we will see some occupancy and depreciation pressure as we continue to open stores internationally, which carry higher rents as you know, but we also have some product development costs for newer categories such as bras, outerwear and accessories, so those are -- those are the puts and takes we see in the back half, but net-net we still expect modest gross margin expansion for the year and going forward.
And on SG&A?
Patrick (PJ) Guido
And on SG&A -- so we are committed to modest SG&A leverage. Last year we delivered. We're committing to the same for this year and going forward. We continue to use strong performance to invest in current and long-term growth. We are seeing the results from that. During Q2, we invested specifically we've expanded testing in new growth vehicles, loyalty, we continued our investment in our North American online guest experience, we continue to expand our omni capabilities both in North America and globally and that will continue to roll forward in the second half of the year. If we don't do these investments we can see higher SG&A leverage for the quarter and beyond, but we continue to believe this is the right strategy for the business.
And lastly from me is, one of the more impressive parts of this quarter was the brick-and-mortar comp growth. Maybe just speak a little bit more about what is leading to the traffic increases and improvement in conversion that you're seeing in store? Thank you.
Thanks, Paul. On the momentum that we're seeing in the business. I really break it down into three key categories. The first is the athletic space in general is very healthy relative to other sectors in both apparel in retail in general. Second, our business has fewer highs