Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. First Quarter 2019 Conference Call. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica inc. Please go ahead, sir.

Thank you and good afternoon. Welcome to lululemon's first quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; Stuart Haselden, COO and EVP International; 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 forecasts of certain aspects of lululemon's future. These statements are based on current information, which we have assessed but which, by its nature, is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our Investors site, where you'll find a summary of our key financial operating statistics for the first quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour. [Operator Instructions] And now I will turn the call over to Calvin.

Thank you, Howard, and welcome, everyone, to our first quarter earnings call. As we begin, I would first like to say how much I enjoyed hosting our recent Analyst Day meeting in New York. We are incredibly excited about the growth opportunities we have in front of us, and we look forward to delivering on our 5-year growth plan. lululemon had another successful quarter, driven by many strengths in our business across product, channel and geography. Our innovative merchandise assortments and our engagement with guests around the world enables the financial results we're proud to report to you today. On today's call, I'll start by sharing some of our key highlights from quarter 1, including how we're [ leaning ] into our product innovation and omni guest experience growth pillars. Going forward, I will periodically ask a member of our senior leadership to join the call and provide an update on key strategic areas of the business. Today, Stuart Haselden will join us to provide an update on our opportunities in China and other key international markets. As you know, earlier this year, Stuart's responsibilities were expanded to include serving as our EVP of International in addition to his role as Chief Operating Officer. Following the global update, PJ Guido will provide a detailed financial review as well as our guidance outlook. I'll then wrap up a few closing comments, and we'll be happy to take your questions. Let's have a look at our first quarter results. We are very pleased to see continued strong momentum in the business. The Power of Three growth plan, which we detailed at Analyst Day, is serving as a driving force to move us forward to achieve our 5-year growth plans. Across the company, teams are executing at extremely high levels. In Q1, our total revenue grew by 20%, constant dollar comps increased 16% on top of a 19% increase last year and earnings per share increased 35%. Our guests responded well to both our men's and women's assortments. They engaged with us across channels as our store and digital businesses were both strong, and our brand continues to resonate well in our core North American market as well as in Europe and APAC. Supporting our growth, we are leveraging the strategic infrastructure investments we're making across the business. Our focus over the last several years to create efficiencies and to further segment our supply chain is paying off and tangibly contributing to our success. As an example, our newest distribution center in Toronto opened on schedule in May and enables us to deliver product more effectively and efficiently in Eastern Canada. As you know, the growth plans we discussed during Analyst Day are long term in nature, and the financial targets we provided are annual. I'm pleased 2019 is off to such a strong start, and we're beginning to live into our 5-year vision. I'd now like to speak specifically about the Power of Three growth pillars: product innovation, omni guest experience and market expansion. As you recall, our 5-year vision details our path to double our men's business, double our digital business and quadruple our international business during this time. Let me now provide some highlights from quarter 1 for these drivers. When looking at our product innovation pillar, over the next 5 years, we expect annual growth in our core women's business to be in the low double digits, while men's is planned to grow at 20% per year. In quarter 1, we continued to see robust performance in our women's business with particular strength in bottoms. This category remains one of our strongest with comps up over 19%, driven by both leggings and jogger styles. Within the men's business, comps grew 26% with ongoing strength in both tops and bottoms. The business was led by our ABC franchise and 3 core short styles: T.H.E. Short, Pace Breaker and Surge. Guests are responding well to our new boxers designed to address all 3 elements of the science of feel, touch, temperature and movement. Looking forward, I'm excited with the innovation we intend to bring into our assortments for both men and women. Just to preview some of the upcoming highlights for men, we plan to launch a new and improved Metal Vent Tech collection. And for women, we plan to further expand our technical bra offering with 2 high support styles in the coming months. The final component of our product innovation plan is to test into new categories. The main driver continues to be our core categories across both men's and women's. However, we've identified several areas of whitespace where we can test the waters and bring innovation to our guests. One example of this is Selfcare, which we will roll out to 50 stores and online next week. Shifting now to omni guest experience. We had strong results across our channels with our store comps increasing 8% on top of 6% increase last year. Our digital business grew 35%, which represents a more than doubling of the business over the last 2 years. Increased traffic in quarter 1 is driving our comps both in-store and online with increases of 8% and 41%, respectively. We're excited about our vision to be the experiential brand that ignites a community of people living the Sweatlife. Next month, you'll see our first truly experiential store when we open Lincoln Park in Chicago. This 20,000-square-foot store captures who we are as a brand as it will embody the Sweatlife through multiple studios, a meditation space, a healthy juice and food offering and areas for community gatherings. This distinct environment will provide us additional opportunities to explore and learn as we connect with our guests in a range of new and exciting ways. We also continue to test our membership program, and in May, we expanded to our third pilot city in Austin, Texas. We are very encouraged by the results, and each city in our test has brought new learnings and innovations as we look to scale the program. Looking now at our digital business. We further expanded our online-only size and color offerings for both men and women. We expanded our buy online, pick up in-store capability from 35 stores to 150 in quarter 1 with 80% of the orders ready for guest pickup in 1 hour. We remain on track for a full rollout by the end of quarter 3. We also significantly improved our mobile point-of-sale capabilities so educators can complete our guest purchases from anywhere in the store. Our strength and unique position is to activate great product across our omni guest experiences, leveraging our stores, community and events. Run is a key strategy for us and a great representation of how we will activate across our entire business to deliver an exceptional guest experience. In addition to our strong and light bra franchise, we rolled out the Fast & Free run-oriented collection for men. We highlighted the strength of our technical apparel with our global run campaign featuring our first global run ambassador, Charlie Dark. Our run-focused activations during the quarter included a presence at the Boston, Los Angeles and London marathons, and just last week, we celebrated Global Running Day by rallying our community to participate with their local run clubs or to join our 5K challenge on Strava. In the coming weeks, you'll see us sponsor our 10K runs in Toronto and Edmonton as we've done the last several years, and we plan to add more events going forward. Run is an important category for us with significant potential, and we see opportunities to expand our share of wallet with current and future guests. Shifting gears now to our markets. Let me share some highlights regarding performance in our core region of North America and then turn it over to Stuart to discuss growth in our international markets. First, our opportunities in North America, our largest region, remain significant. Our innovative merchandise assortment, agile store formats, inspiring brand activations and unique event offerings provide ample ways to engage with existing and new guests. In quarter 1, revenue in North America grew 18% as momentum in this region remains strong. We opened 6 stores in the U.S. and Canada and remain on track to open 15 to 20 in 2019. Our guest stats remain robust with continued growth in new guest acquisition and increased spending across existing guests. Traffic to our stores in North America was strong and grew in the high single-digit range. Last month, Stuart and I had the opportunity to visit our team in China and to see the incredible growth opportunities firsthand. I'll let him share our insights and some of the results this quarter internationally. Stuart?

Thanks, Calvin. In May, I was able to spend nearly 2 weeks with our team in China. And while we are seeing exciting momentum across all of our international markets, China in particular is on track to post impressive growth this year. In Q1, our China team delivered nearly 70% market growth and entered 3 new cities with strong store openings in Chongqing, Xi'an and Xiamen. And we remain on track to open 10 to 15 stores in China this year. We also continue to invest in our digital capabilities here with the relaunch of our .cn site in Q1 to complement our presence on Tmall and WeChat. And these investments are paying off as we saw our China e-com revenues increase over 100% in Q1. These results also include the great success of our super brand day event with Tmall in April. As part of this event, we invited 400 guests to join us at the InterContinental Shanghai Wonderland for sweat sessions, meditation classes and also a function show. The event garnered significant attention from the media and on social channels, and it was a great way for us to connect with both new and existing guests. All of this contributed to a strong performance for our Asia Pacific region overall in Q1 with revenues for the region increasing approximately 40%. Other highlights include the launch of our .jp and .kl websites, both of which are seeing strong starts. Turning now to Europe. We posted strong double-digit comps across all channels driven by ongoing robust traffic increases. These results helped us deliver over 40% market growth in Q1 across Europe. We're pleased to see our business gaining momentum as our community and brand-building efforts accelerate. We also opened a great new store in Amsterdam. At the grand opening, which I was able to attend in March, it was exciting to see firsthand the energy that our team in Europe is creating, which is reflected in the strong results we are now experiencing. And we remain on track to open 5 to 10 new stores this year across Europe. Overall, our international growth remains strong and accounts for an increasing portion of our total company growth. And finally, I'd like to offer my gratitude to our teams around the world. It's only with their great work that any of this is possible. And now I'll pass it to PJ.

Thanks, Stuart. Before I provide highlights on Q1 and our guidance outlook, I will refer you to the financial supplement posted on our Investors site for additional details. For Q1, total net revenue rose 20% to $782 million, driven by strong execution across all parts of the business. In our store channel, we delivered an 8% constant dollar comp store sales increase on top of a 6% increase in Q1 of last year. Square footage increased 15% versus last year, driven by the addition of 44 net new lululemon stores since Q1 of 2018. During the quarter, we opened 15 new stores. In our digital channel, we posted a 35% constant dollar comp increase on top of a very strong 60% increase last year. For the quarter, e-com contributed approximately $210 million of top line, reaching nearly 27% of total revenue. And I'd add that the impact of foreign exchange decreased revenue by $12.5 million in the quarter. Gross profit for the first quarter was $421.7 million or 53.9% of net revenue compared to 53.1% of net revenue in Q1 2018. The gross profit rate in Q1 increased 80 basis points versus gross margin last year and was driven primarily by the following: a 190 basis point increase in overall product margin resulting from lower product costs, favorability in product mix and lower markdowns. We are pleased with the product margin strength we continue to realize on top of the strong gains over the last several years. This increase was partially offset by a 60 basis point increase in product and supply team costs driven by ongoing investment in product development and supply chain and an increase in occupancy and depreciation expense of 20 basis points. We also saw 30 basis points of unfavorable impact from foreign exchange. Moving down the P&L. SG&A expenses were $293 million or 37.4% of net revenue compared to 37% of net revenue for the same period last year. In Q1, we continued to use the strength in the business to invest in strategic priorities, brand awareness and initiatives that fuel current and long-term growth. This includes digital, loyalty and Selfcare. Foreign exchange, both revaluation and translation, leveraged by 30 basis points in Q1. Operating income for the quarter was approximately $129 million or 16.5% of net revenue compared to 16.1% of net revenue in Q1 2018. Tax expense for the quarter was $34.6 million or 26.4% of pretax earnings compared to an effective tax rate of 29.9% a year ago. The decrease in our effective tax rate relative to our guidance reflects the impact of higher tax deductions related to stock-based compensation. These deductions benefited EPS in Q1 by approximately $0.02. We still expect our tax rate for 2019 to be approximately 28%. Net income for the quarter was $96.6 million or $0.74 per diluted share compared to earnings per diluted share of $0.55 for the first quarter of 2018. Capital expenditures were approximately $68 million for the quarter compared to approximately $34 million in the first quarter last year. The increase relates primarily to store capital for new locations, relocations and renovations and IT and supply chain investment. Turning to our balance sheet highlights. We ended the quarter with $576 million in cash and cash equivalents. Inventory grew 19% and was $443 million at the end of Q1. I'd also note that pursuant to the new lease accounting standard, ASC 842, we added a lease-related asset of $627 million and lease-related liabilities totaling $665 million to our balance sheet. This new accounting standard has no impact on our income statement or cash flows. We repurchased 1 million shares during the quarter at a cost of $163.5 million. Coming into 2019, our Board authorized a new $500 million share repurchase plan, of which approximately $337 million of authorization remains. We believe that repurchasing our shares is an efficient and effective way to return excess cash to shareholders, and we'll continue to be opportunistic with our repurchase activity. Turning now to our outlook. For Q2, we expect revenues to be in the range of $825 million to $835 million. This is based on a comparable sales percentage increase in the low double digits on a constant-dollar basis compared to the second quarter of 2018. This also assumes 5 new store openings in the quarter. We expect gross margin to be flat to up modestly versus Q2 of last year. Our guidance reflects a modest impact from potential new tariffs and also additional costs to airfreight product in order to avoid anticipated port congestion in the Asia region due to the pending tariff increases. The negative impact of these costs will be approximately 20 to 25 basis points within gross margin and approximately $0.04 to $0.05 on EPS for the full year 2019. Most of the impact would come in the back half of the year with the majority in Q3. I should note that roughly $0.02 to $0.03 of this impact would be incurred regardless of whether new tariffs are imposed. We are committing to higher airfreight usage as a hedge against disruption in ocean shipping lanes as we approach the key dates related to tariff increases. This will ensure delivery of new product for our guests on time. We expect the SG&A rate in Q2 to be flat as we continue to invest in growth drivers for our business that fuel top line momentum. We see larger opportunity to leverage SG&A in the back half of the year and we continue to expect modest leverage on the year. Assuming a tax rate of 28% and approximately 131 million diluted weighted average shares outstanding, we expect diluted earnings per share in the second quarter to be in the range of $0.86 to $0.88 versus EPS of $0.71 a year ago. For the full year 2019, we now expect revenue to be in the range of $3.73 billion to $3.77 billion. This is based on a comparable sales percentage increase in the low double digits on a constant-dollar basis. We continue to expect to open approximately 40 to 50 company-operated stores in 2019. This includes 25 to 30 stores in our international markets and represents a square footage percentage increase in the mid-teens range. We expect gross margin for the year to expand modestly primarily driven by continued product margin improvement. We expect SG&A for the full year to leverage modestly. We expect our fiscal year 2019 diluted earnings per share to be in the range of $4.51 to $4.58. Our EPS guidance is based on 131 million diluted weighted average shares outstanding for the year. This range takes into account approximately $0.04 to $0.05 of additional costs within gross margin related to the tariffs and airfreight that I mentioned earlier. We expect our adjusted effective tax rate to be approximately 28% in 2019. We assume the Canadian dollar at $0.75 to the U.S. dollar for 2019 as well as Q2. We continue to expect capital expenditures to be approximately $265 million to $275 million for the fiscal year 2019. This increase versus 2018 reflects a ramp-up of our store renovation and relocation program, new store openings, technology investments and other corporate infrastructure projects. In closing, we remain excited with the momentum we're seeing in the business as our teams are executing our Power of Three strategic plan. And now back to Calvin for some closing remarks.

Thanks, PJ. While it's been reported there is some recent softening in the apparel space, there is no doubt that 2019 is off to a great start for us. We are building upon momentum of the past year and instilling confidence in our long-term growth plans. With each new market and innovation, we are inspired by the way in which our guests, both existing and new to the brand, are responding to lululemon. Our vision to ignite a community of people to live the Sweatlife is resonating strongly with guests and provides many growth opportunities for us ahead. We remain laser focused on leveraging our strengths and creating opportunities to ensure lululemon continues to rise above the near-term challenges being faced by others. I'd like to thank our teams around the world for the passion and spirit they bring with them to work every day. Their dedication to our guests and energy for our brand makes this level of sustained performance possible. And with that, we'll be happy to take your questions. Operator?

[Operator Instructions] The first question comes from Matthew Boss of JPMorgan.

Congrats on another great quarter, guys. I guess maybe first, could you elaborate on the current momentum that you're seeing in the business, if you've seen any impact from the recent lateral apparel softness that you mentioned and just how you'd rank back half opportunities maybe by category?

Yes. Sure, Matt. In terms of Q2, we remain very happy with the momentum we're seeing in the business, which is reflected in our comp guidance of the plus low double digit, which is on top of a 19% last year. So the business has continued to see very strong trading into the quarter. And that growth is coming across all levers of the Power of Three. In product, our men's business, as we shared, up 33%, continues to be very strong across all categories: tops, boxers and the bottom business. And our women's business equally is showing very solid and very strong growth, in particular, bottoms, driven by leggings and joggers. And we -- with what we're going to be launching in terms of newness, that momentum, we believe, will continue as we continue to feed the core with more innovation and test and learn into new categories and build out the key categories we want to win, being yoga, train and run. So we feel very good about the product launches that are dropping and the momentum and the way the guest is reacting to the product as they see it.

The next question comes from Ike Boruchow of Wells Fargo.

Let me add my congrats. I guess I'm going to throw this question to Stuart. It's very compelling stuff you've got on China with the .cn rollout. I guess just over time, Stuart, can you maybe talk about how you see the mix of your digital business in China, the .cn site versus Tmall, and then maybe relative profitability between the 2, if there's any nuances we should keep in mind?

Sure, Ike. So the business vision that we have for China is certainly more heavily considered from a digital standpoint than North America. As we've said in some of our prior conversations, we can see the business in China being 50% online. And the structure of the industry in China is also important in creating that environment to make that possible. And when I say that structure, I think part of that is the marketplace structure that we're all aware of with WeChat and Tmall and the dominance that they have in the Chinese market. So we participate in that, but we're very cognizant of how our brand is being introduced and developed. And we take important steps to ensure that we have a very premium positioning for the brand. We see Tmall continuing to be an important part of the overall digital business mix for us. We see our own .cn site and our WeChat site emerging and taking a larger proportion of our digital business in time. We're making investments now to make that possible, and we'll share those details with you as they develop. But the launch of the .cn site or the relaunch, I should say, of the .cn site that we mentioned in the first quarter is an important part of that. And generally, just the expansion of the store footprint will drive brand awareness. We're seeing great traction broadly across China and a lot of signals that are suggesting that our brand is gaining traction. So that will support and fuel traffic in our business across all channels. So I think those are the things I'd point to in terms of just how we're thinking about the digital part of our business there.

Can you just elaborate on the margin structure of the .cn versus Tmall over time opportunity?

Yes. For sure. Overall, there is an advantage of -- from a digital versus stores that is directionally consistent with what we see in North America in terms of the bottom line contribution margin for the digital business versus stores. That said, there is incremental costs that we incur to operate on the Tmall platform, but it's still an attractive contribution margin that is still higher than what we see in our store business.

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

Yes. Congratulations on the strong results. I guess my question would be the 2019 outlook on gross margin. Just how should we factor in some of these nonmerchandise items? PJ, you did mention the 20, 30 basis points headwind from flying in goods ahead of the port congestion. But can we think about some of these other merchandise items are items such as rent, occupancy and the product and supply chain costs as well?

Yes. Kate, this is PJ. So what's driving gross margin going forward, so the biggest driver does remain lower product costs. We did have a pickup in markdown and mix. We do see remaining opportunities in scale segmenting the supply chain, greater efficiency across the distribution network. That said, so there are some pressures, and those pressures are related to DC investments. So we opened Toronto. There were some startup costs there. Our collocated and our international stores carry higher rent, so we'll see a little bit of pressure from -- on occupancy and depreciation. But that, for the quarter, was relatively minimal. And then going forward, we're going to continue to develop product, right, so new categories, bras, outerwear. So we are spending money to continue to build out our product assortment. So again, net-net, we'll see modest expansion, as we've guided to, but there will be a little bit of pressure from those items I just mentioned.

The next question comes from Adrienne Yih of Wolfe Research. Adrienne Yih-Tennant: Congratulations. Great quarter. Calvin, I was wondering if you can give us an update on the Robert Geller and lab collection. And any learnings thus far for your go-forward strategy? And then, PJ, just to clarify, the comments you made on the tariffs, were those the increase from 10% to 25% on List 3? Or is this predicated on the List 4? And can you give us the amount of sourcing directly out of China at this point?

Great. I'll kick off and just comment on both Robert Geller and lab. On Robert Geller, we're very pleased with the results of the collaboration. And similar to many of the collaborations we've done, our guests are responding very favorably in general to this newness and an opportunity to either buy into a new category or a unique aesthetic. With Robert Geller, in particular, some of the key learnings was this one showed up very strong from an international perspective, in particular, in our Asia Pacific markets, which is really exciting when we think of the opportunity for these collabs going forward. The marketing buzz through social was significant behind this collaboration, which is exciting as we look for ways to continue to leverage our marketing and create an impact and acquire new guests and raise the awareness of the brand, which then leads to the final learning, which is it responded very well with recruiting new guests into the brand, but equally, our current guests were heavily engaged in the product, which is a great opportunity for us as we look for ways to continue to broaden and increase the share of wallet with our highly loyal and high spenders. So overall, the collaboration performed very well with a lot of key learnings. In the lab, those ideas will feed into our lab, of which we shared earlier. We're planning some shop-in-shops in the fall, and we'll continue to expand rollout from there.

And then on the second question about tariffs, I'll point out just a few things. So first, I think it's important to mention that our direct exposure to China is relatively small with 6% of our total finished goods exported for China to the U.S. and [indiscernible] for tariffs. To answer your question, so currently, under the tranche 3 tariffs, only 1% of our finished goods are subject to that. The balance, the additional 5%, would be subject -- that would be part of the tranche 4 tariffs. So that's the direct impact. The better part of the expense is really coming from this indirect exposure we have. We're anticipating port congestion right around the timeframe, starting in that mid- to late July timeframe. And we think it's prudent and important to deliver new product for our guests and protect the sales associated with those goods. So really, the larger airfreight that I mentioned.

The next question comes from Paul Lejuez with Citigroup.

Curious, as you open stores in some of your less mature markets, if you're seeing a lift to your e-com business in that market? And if there's any way for you to quantify that. And then second, what percent of your product sales come from new SKUs? And what was that number in 1Q if you do try to quantify it that way? And I'm curious about what is your philosophy about what that percentage should be over time coming from new SKUs versus existing winners.

Paul, it's Stuart. I'll speak to your first question on our less developed markets. What we see in our international regions is consistent with our experience in North America in that as we open new stores, we see our web business, our e-com business, accelerate in and around the trade area where we open those stores. The -- and we -- but we also use our digital business, our e-com business, as a guide to understand where we might open, look to open new stores, where our demand and brand awareness is gaining traction. That is an indicator that factors into how we rate markets and trade areas as potential candidates for new stores. So that experience has proven consistent in our international markets. And we really see a positive, synergistic effect of the footprint, the growing footprint of the store, the store fleet in driving awareness in traffic across both channels.

And Paul, relative to the second part of your question, the majority of our sales growth is coming from our core products, our core franchises, that we either continue to innovate on or introduce new color pallets, which the guests are responding very favorably to. We do introduce a number of drops on a weekly basis. The guest responds very well to those. We monitor but don't share sort of the makeup as a percentage of sales. But overall, core is driving our business. We take franchises and innovate behind them, and I think we shared Metal Vent that's coming in Q3, tail end of Q2, which is a wonderful innovation on a very powerful, strong franchise. That will continue to drive. And as we test and learn into new categories, as we expand into yoga, train and run and OTC, which are the areas that we mentioned, our focus areas for the merchants and our product team to design into, the growth is coming from core.

The next question comes from Omar Saad who's with Evercore ISI.

I wanted to ask about the most recent round of the loyalty launch, what you're learning from that, and I think it's in the third iteration. When do you expect to roll it out more broadly? How are -- what kind of data are you accruing from the program at the local market level? And it's pretty incredible to me the results you're putting up without even really having that data -- customer-level data behind some of the decision making. So intrigued to hear more how big of a lever that can be.

Great. Thanks, Omar. We did roll out. So we're now testing in Edmonton, in Denver and Austin. And each market, we tweak the program slightly from the product that we make available to the guests to the price point. As you know, we raised the price point in our later tests to see how the guests would respond. We're playing with the events, which are the primary benefit from joining into the membership. And in each market, the results have been well above our expectations going in, very favorable from the guests. And we continue to tweak and learn and do plan to roll into more markets, and we'll have more to announce at a later point in time. But 2020 is a year in which we see expanding into more markets. And we are very excited about the potential of this membership and the platform to drive new guest acquisition, which is what we're seeing with the program, which is super exciting; driving guest loyalty and engagement into the brand, which is what we expected; but also, on the back of having to be a revenue stream for the business in a way in which we can achieve and drive that engagement through that system.

The next question comes from John Kernan who's with Cowen.

I wanted to go back to the buy online, pick up in-store. I think it's scaling from 35 to 150 stores. And it's a full rollout, I think, you said, by the end of the third quarter. What are your learnings from this? And how much of a incremental driver of demand do you think this can be?

I think -- so you're right. We rolled up to 150 stores, and our plan is to have all stores up and running by end of Q3, which will put us in great standing for the holiday. And I think we'll learn a lot when that happens. As we're rolling out, we're happy with the results. Equally, internally, operationally, 80% of the orders that are placed are ready for pickup within 1 hour, which I think is an important internal metric for us because it just sort of talks to the operational readiness and engagement so that as the demand from the guests accelerates, we're ready to be there to service them. As we roll out to more stores, we're able to position it differently within the website experience and the checkout, making it a lot more known and really start to market it. So early indication is encouraging. We think it's a necessity in leveraging our omni strategy, which is one of our pillars of growth. So we know we need to do it. And I think this fourth quarter, when we're in full rollout and we're marketing it aggressively on our website and in the checkout, that guests really know it's an option across the full fleet, we'll really learn. But I'm encouraged by it, and I think it'll be a wonderful way to continue to drive our traffic into the store, drive that incremental pickup and contribute to the top line.

Got it. And then just on that topic. Obviously, the Lincoln Park store opening in Chicago, is this a test? Or is this like larger-scale, experiential-type store, something you think that you're considering scaling even greater?

Well, it's definitely a test. We -- as you know, our vision is to be an experiential brand. And we know we can deliver those experiences both within the store and outside of the store, and we do that very effectively across the fleet today. What Lincoln Park will allow us to do is to bring a lot of those experiences inside the 4 walls into the community on a consistent basis. So it is a test, and we will learn from that and then figure out how, within our flexible fleet that we have today from seasonal stores to small up to our large format, this, we believe, could become just another mix within our portfolio of how we go into a market and deliver our experience to our guests. But it's a test. We're going to learn, and we'll go from there.

The next question comes from Camilo Lyon who's with Canaccord Genuity.

Really good job here. Calvin, I think in your comments about the strength of the women's business, you talked about the bottoms category continuing to be a leading category for you. But what was interesting to us was the mention and callout of joggers. Can you talk about how your female consumer is expanding their aperture with respect to your offering such that you're gaining a larger share of closet? It seems like that is starting to manifest in a way that could serve you well from the perspective of creating a bigger moat around the customer that you've invested in all these years.

Yes. No, for sure. What I would tell you in terms of the [Audio Gap] of our business, both across men's and women's, but I'll speak specifically to women's, is the number of new guests we're seeing as well as our reactivated guests in addition to a current active guest. So bottoms continues to be the #1 driver of new guest acquisition, and both leggings and joggers are performing incredibly well at achieving that, as well as we dial up our digital marketing initiatives and our e-mail campaigns. We're proving that many of those tactics are proving very effective to reactivate guests into the brand. And then as you've mentioned, to grow that share of wallet, which is equally something that we're focused on and exciting. So bottoms really is a very balanced growth across those 3 pillars. When we look to building out our core and filling in the assortment opportunities we have around yoga, train and run as well as OTC, we expect that much of that will drive the share of wallet with our existing guests because what we're doing is truly bringing incremental assortment and choice to her and him, but in this case, to her in the categories in which she sweats today where we don't have product offering, but we know we have an opportunity to deliver it through our unique lens of science of feel. So moving forward, we expect to continue to grow that share of wallet and, as you mentioned, depth of wardrobe and see a lot of opportunity to do that by just expanding into the sweat categories we already have a relationship for or with her today.

Great. And my follow-up question relates to the differences between your existing guests' purchasing behavior and the new guests that you're bringing into the store and into the brand. So is there any color you could provide in terms of this -- the average spend between those 2 cohorts? I think that would be helpful in determining what the opportunity is of taking that new guest up that spend curve and have that person or that guest look like a more mature, higher spending consumer over X amount of time or months or what have you.

Yes. We don't share sort of the average spend across our different guests. What I can tell you is, directionally, that our e-mail file growth continues to be very strong as well as our new guest acquisition. And as we're building our CRM capability, our ability to then migrate or trade up those guests into new categories or deeper into the categories they're in is proving to be a very effective way in which we're keeping the guests very engaged and active as well as increasing their share of wallet but equally focused on our high-value guests, which we have incredible loyalty retention numbers within retail. So they're highly engaged. The retention numbers are very high. And getting them to continue to engage in the category and drive growth is proving very [Audio Gap] was a big area of focus for us and something that we're really excited about as we look to yoga, train, run and OTC as categories where we can expand the assortment with that engagement and retention to be able to increase the share of wallet. That whole CRM initiative is a big area, and we're seeing some really good success from it.

The next question comes from Kimberly Greenberger who's with Morgan Stanley.

PJ, I wanted to just follow up on the potential port congestion. I'm wondering what you're hearing from your production department around the risk of port congestion. Is it that ocean cargo capacity is tight right now? Or are there other signals that your production department is seeing that suggests we could see this port congestion either late second quarter, early third quarter? And with regard to your deliveries in particular, it sounds like you've protected all of your deliveries from these potential delays, but I just want to confirm that you don't have any inventory on order that would be at risk of late delivery. And then I wasn't sure if I missed it, but did you offer any color or guidance on the second quarter SG&A?

Yes. Thanks, Kimberly. So I'll take those one at a time. So with regards to the airfreight, you're exactly right. We are protecting our fall deliveries, and that's why we're doing it. It's a hedge. So we're eliminating the risk. I mean there's always summers, but we're eliminating most of it by utilizing airfreight and not getting caught up in the congestion, which is we've seen this before due to tariffs, companies trying to get out ahead of it. But there is also a broader issue with carriers consolidating cargo. They refer to it as transshipments. But that's a separate issue that's related more to carriers. But that is an issue we're dealing with as well. So hopefully, that answers your question on port congestion. On SG&A, so we are committed to modest SG&A leverage for the year. We remain focused on that. As we mentioned before, we're using strong performance to invest in current and long-term growth, and we're seeing a result from that. During this quarter, we leaned into digital marketing focused on building brand awareness, driving new guest acquisition. As Calvin talked about, we're expanding our testing of new growth vehicles, loyalty, Selfcare focus. And then we continue to invest in our North American online guest experience and data and analytics to drive conversion. So the last few quarters have seen -- we've ramped up our investment. We'll start to see the benefit of those in the back half. And for Q2, we're calling for flat on SG&A. And we see the bigger opportunities in our biggest quarters, Q3, Q4, to add leverage to SG&A. But for now, we're still making investments, and we still feel like that's the right strategy for the business.

The next question comes from Brian Nagel who's with Oppenheimer.

[indiscernible] on another very nice quarter. I want to dive a little [indiscernible]. If you look at the gross margin trajectory here in Q1, clearly, still very solidly positive year-on-year. But the rate of year-on-year increase has moderated a bit over the past few quarters or so. So my question there is if we can understand better, what's occurred to sort of facilitate that more modest rate or more modest pace of gross margin expansion? How should we think about that line going forward?

So Brian, it's Stuart. Let me speak to that in terms of the drivers within our supply chain that have delivered the improvement over the last few years and then I think more specifically to your question more recently. So we were able to build the programs that delivered the larger, more step function improvement in '16 and '17. And we've been able to take that forward into '18 and '19. And it's a part of our long-term guidance that PJ outlined at our Analyst Day to deliver modest gross margin improvement over the next few years. There's really 4 things that are driving that: scale, price breaks from volume increases; second thing is segmentation of our supply chain as we are able to drive more of our assortment into the lower-cost segments of our sourcing strategy; the third thing is transparency as we're able to drive greater degree of specific production standards and costing negotiations across a broader part of our assortment; and the fourth thing is the distribution efficiencies that PJ also mentioned. So those 4 things are the drivers of our gross margin improvement. They -- we are lapping some very significant improvements. They will naturally moderate into the future, but we still see significant opportunities over the next several years reflected in our guidance.

That's very helpful. I appreciate it. If I could slip maybe a quick follow-up in. Just with regard to sales, I think -- Calvin, I think you mentioned in your prepared comments, you made reference to some of the soft lines or apparel-type weakness out there. Clearly, that did not occur in the [indiscernible]. But the question I have is as you look closer to your business, whether it be geographically across the country or even month-to-month, week-to-week, did you see any signs at all behind these very, very strong numbers of some stress in that consumer within the category?

I think when we look at Q1, and as we've shared, the balance across our product categories, both men's and women's, both bottoms and tops, our brand activations, be it some of the tests with membership or the event activity that we were doing, being able to leverage our improved data analytics and digital marketing, I mean, our guest was responding. And as we've shared, store traffic of plus 8% and over 40% in e-commerce is a good, healthy metric of a highly engaged guest. And we did not as we don't typically see in our business significant swings week-to-week or season-to-season or holiday-to-holiday. So I would -- through Q1, we were very pleased with the momentum consistent with traffic driving a big piece of that business in both new guests as well as existing guests and balanced across our product range.

The next question comes from Dana Telsey with Telsey Advisory Group.

Congratulations on a terrific result. As you look at the comps, beyond the traffic, how are the other components of comp? And how did they compare to last quarter? What are you seeing? And is there any more color on the merchandise margin and the progress there?

So Dana, it's PJ. So with regard to comp drivers, it is predominantly a traffic story. Again, traffic in store is up 8%; online, over 40%. North American conversion online had shown significant improvement due to our ongoing investment there, so we're seeing a result there. As far as AUR, UPT, they have effectively [Audio Gap] we had a relatively stable average order value or basket size. So it's predominantly a traffic story.

This concludes time allocated for questions on today's call. I'll now turn the conference back over to Howard Tubin for any closing remarks.

Thanks for joining us, everyone. We appreciate the time, and we look forward to speaking with you in about 3 months when we report our second quarter results. Thanks.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.