Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Second Quarter 2020 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's second quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; Meghan Frank, SVP, Financial Planning and Analysis; and Alex Grieve, VP, Controller. 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, 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 reports 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 investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the second quarter as well as our quarterly infographic. [Operator Instructions] And now I'd like to turn the call over to Calvin.

Thank you, Howard. I'm excited to be here with you today to provide an update on our performance for the second quarter, share our learnings as we continue to adapt to and navigate the uncertain COVID-19 environment and highlight trends we're seeing in the business as we look forward to the back half of the year. The results we're sharing today demonstrate the strength of the lululemon brand as we face these unexpected times and see the future of retail accelerate through an expansion of e-commerce and digital sweat offerings. Our product, built with technical innovation and performance fabrics, is ideal for enabling the work-from-home and versatile lifestyle that has grown exponentially in the COVID-19 world. Building upon these components, our acquisition of at-home fitness innovator, MIRROR, and our continued expansion globally demonstrates our ability to navigate the near term while planning for the long-term growth. Today, I'm joined by Meghan Frank, our SVP of Financial Planning and Analysis, who continues to be a supportive partner as she works with me and the team on strategic and operational finance while our CFO search is ongoing. Alex Grieve, our VP and Controller, is also on the call today and will be available to answer your questions during the Q&A portion. Before I detail our results, I'd like to speak for a moment about the importance of diversity and inclusion at lululemon. As I mentioned on our last call, we are committed to increasing our investment in education, behavior change and diverse representation within our organization. The Black Lives Matter movement has ignited lululemon and our collective, serving as a powerful catalyst to critically examine our culture and practices. Back in June, we created IDEA, a commitment to create real and lasting change through inclusion, diversity, equity and action. As a company, we are focused on meaningful transformation, shifting our mindsets and behaviors and living into our core value of inclusion every day. I look forward to sharing our progress on this going forward as the diversity of our workforce truly begins to reflect the global communities in which we operate. Let me turn now to our business performance in the second quarter, which exceeded our expectations. Total revenue increased 2%. Consistent with quarter 1, we are not reporting same-store sales due to the significant number of stores that remained closed during the beginning of the quarter. Our e-commerce business continued to accelerate, with comps in quarter 2 increasing 157%. Gross margin declined 80 basis points, and our product margin was flat with last year. Adjusted earnings per share were $0.74 versus $0.96 last year, and our financial position remains strong as we ended the quarter with $1.2 billion in total liquidity. As we continue to operate and move through the COVID-19 environment, we are seeing a shift in behavior in terms of working from home, sweating from home and the increased importance of living an active and healthy lifestyle. These trends play to our strengths and set up an opportunity for us to continue to innovate and gain market share. We are learning how our guests are changing their behaviors, and we're adapting and engaging with them in new ways. We remain committed to our Power of Three growth plan, including the doubling of men's, doubling of e-commerce and quadrupling international by 2023. But we also recognize that 2020 is likely an inflection point for retail and for lululemon, with certain changes in guest behaviors likely to endure in the post-COVID-19 world. We believe lululemon is uniquely positioned to engage with our guests when, where and how they want based on the strength of our brand, the strength of our operating model and the investments we've been making across the business. One of our key strengths is our omni operating model. For the last several years, we've been investing in our ecosystem to ensure we have the capabilities to enable a seamless and enjoyable experience whether guests want to engage with us virtually, in stores or in the community. What we're learning now during the COVID-19 environment is that omni means much more to our guests than simply enabling purchase transactions across our channels. While our recent investments in transactional omni capabilities are clearly paying off as evidenced by our recent results, we have begun to view other areas of our business, including sweat and events through an omni lens. Let me now share some of the details. As our stores continue to recover, our e-commerce business has accelerated from a 41% comp in quarter 4 of last year to 157% comp in the current quarter. Similar to quarter 1, we've seen a healthy mix of new guests, existing e-commerce guests and historically retail-only guests now shopping with us online. In order to support growth in the business, capture a potential further increase in demand in quarter 4 and ensure our guests continue to receive the highest level of service, we've accelerated investments this year within our e-commerce channel. These investments include developing site enhancements, building our transactional omni functionality and increasing fulfillment capabilities. These further enhancements were on our road map for the next 2 years. And given our e-commerce business has currently accelerated beyond our expectations, we prioritized and pulled forward these investments. We're also continuing to grow our brand and engage with our guests across our international markets. In China, we're experiencing a strong rebound in-store with same-store sales up over 30%, coupled with strength in e-commerce which grew over 130% in quarter 2. And in Europe, a greater than 160% lift in e-commerce is driving our business as guests are engaging with us more online than ever. When looking at store growth in our regions in quarter 2, we opened 9 new locations across Asia and Europe, including our 100th location in APAC, an exciting milestone for our brand in this key growth market. Let me shift now to speak about the recovery of our store business. While this period continues to be unpredictable, we currently have approximately 97% of our stores open across the globe to serve our guests. On average, our reopened stores are performing at 75% of last year's volume. As you know, our stores are small and designed to be an efficient use of space with high levels of traffic, which results in high productivity. While these are appealing attributes, the current capacity constraints understandably limit the number of guests who can be in the store at one time. While we're seeing traffic declines relative to last year and expect these constraints to endure at least through the end of the year, the underlying health of our brand remains strong. Guests are patiently lining up to get into our stores, both physically and through our virtual tools. Our product continues to resonate well as evidenced by the strength of our e-commerce channel. And while we expect productivity for stores that we've reopened to remain consistent with the current levels for the remainder of the year, we still expect to grow our top line in quarter 3 and quarter 4. We continue to believe physical stores are and always will be an extremely important part of our ecosystem. From a sales standpoint, our stores are highly productive, and they enable so much more than simply the purchase of apparel by our guests. Our stores are our local hub and communities across the globe, gathering spots for our ambassadors and our connection to local studios, facilitate e-commerce transactions via our ship-from-store and buy online, pick up in-store capabilities and are a portal to bring new guests into our brand, particularly men. This year, we plan to open 30 to 35 net new stores while also accelerating our seasonal store strategy. In quarter 2, we operated just over 50 seasonal stores, and we plan to increase to approximately 70 in the second half of the year. Our strategy this holiday will include seasonal stores in key centers and markets where we have existing stores to help us mitigate the current capacity constraints. That being said, we are building new and leveraging our current transactional omni capabilities to ensure a quick and seamless shopping experience for both our store and e-commerce guests. Some of our actions include: first, we have evolved our buy online, pick up in-store functionality to buy online, pick up at curbside. Second, we have enabled virtual waitlists so guests no longer have to wait in line and instead can be notified via text when it is their turn to enter the store. This functionality has been particularly well received. In the month of August alone, we had nearly 400,000 individual guests utilizing our virtual waitlist across nearly 280 locations where we implemented the technology. Third, we have continued to expand the number of our omni educators who receive special training, enabling them to help guests in-store and virtually through our guest education center. And fourth, we continue to offer our digital educator and virtual concierge programs, and both initiatives continue to be well received by guests. This innovation demonstrates our consistent ability to be agile and anticipate the evolving needs of our guests. We have also enabled omni sweatlife capabilities to help our guests stay active, both physically and digitally. Many of our ambassadors have been offering live streams on our social channels, and we now offer digital content as part of our membership program in the cities where our tests are underway. I'm also excited that in August, we were able to convert our annual SeaWheeze Half Marathon into an extremely successful virtual event in which over 23,000 people from more than 100 countries participated, including myself. We partnered with the running app, Strava, and offered a 10K distance in addition to our half marathon. We also curated virtual training programs for both races to help runners prepare and compete at the height of their ability. Shifting now to product innovation. Our guests are now working and sweating from home more than ever, and we continue to be there for them with merchandise that offers versatility and flexibility powered by the technical innovation of Science of Feel. I'm excited to share the ways in which we are making our assortment relevant to more of our guests. Last month, we expanded our On The Move collection with the introduction of new pant styles for both women and men supported by our Everyday is a Workout campaign. These styles leverage our expertise in technical construction and developing technical fabrics, but they were explicitly designed for out-of-studio use. For women, we launched the City Sleek 5 Pocket powered by our Warpstreme fabric. And for men, we rolled out the Bowline pant in our new Utilitech fabric. Initial response to these new styles has been strong. In particular, the City Sleek has exceeded our expectations by a factor of 2, was the #1 performing style in the company during the initial days of the launch, and we're chasing into additional inventory to help keep up with demand. While we will always lead with performance-based apparel and technical innovations, we see continued opportunity to grow the On The Move portion of the business for both women and men. I'm also pleased with our move toward more inclusive sizing. This is an important step forward for lululemon, and I'm excited that later this month we will start to offer some of our core styles in sizes 0 to 20, and this is just the beginning. By the end of 2021, the majority of our women's assortment will be available in our more inclusive size range. When looking at the men's business overall, we saw a sequential improvement relative to quarter 1, although it lagged behind the growth in the women's business. As the work-from-home and sweat-from-home environment continues, we have seen our male guests respond more enthusiastically to shorts, sweats and hoodies. Our merchant teams are chasing into these categories so we can maximize these businesses based on the current shift in demand. And our brand teams are focused on continuing to raise awareness among men and our dual-gender lines such as On The Move provide an opportunity to grow in both the men's and women's business. Our opportunity within product remains in the early innings. We have only just begun to leverage our work within the Science of Feel innovation platform, and we have ample ways to expand our key categories: run, train, yoga and on the move. In addition, the lululemon brand is positioned well to take advantage of the shifts we're seeing in the marketplace towards apparel that provides versatility, comfort and technical innovation. Before shifting to our outlook, let me update you on 2 of our omni guest initiatives, MIRROR and membership. MIRROR is a further example of how we're considering and evolving new aspects of our business through an omni lens. As you know, we closed on the MIRROR transaction in early July, and I couldn't be more excited with the potential MIRROR brings to lululemon and the opportunities lululemon brings to MIRROR. As I stated when we announced the acquisition, MIRROR is a stand-alone revenue generating company, and their management team will continue to operate the business from their offices in New York. There is no need for heavy integration work and we have begun the process of bringing them into the lululemon family so that we benefit from our collective strengths. We're on track to begin offering the MIRROR in 10 to 15 lululemon stores in the United States by early quarter 4, when we'll also begin leveraging our digital channels to help build their brand awareness. From a financial standpoint, we continue to believe that MIRROR will be modestly dilutive to earnings this year. We plan to ramp up marketing and advertising spend in the second half of the year to fuel MIRROR's momentum during the holiday season and into 2021. The initial work we're doing with MIRROR during the upcoming fall season will set the stage for next year when we expect to be more aggressively leveraging the power of the lululemon ecosystem to grow the MIRROR business. Meghan will provide you with more details in a moment. Shifting to membership, I'm excited to announce we are continuing to test our program in Edmonton, Chicago and Denver. And starting this week, we'll also bring the program to our guests in Toronto for the first time. The membership program continues to celebrate community connection and provides a range of offerings, such as special products, dedicated online sweat classes and inspiring guest speakers to extend the lululemon experience. With COVID-19 in mind, I'm proud of how our teams have evolved to a virtual event format with plans to return to studio classes and physical gatherings once safe to do so. As we continue to test and learn through membership and integrate MIRROR into the lululemon family, we are gaining valuable insights on guest behavior that can help us further improve our offering and enhance the ability of our guests to fully experience the sweatlife. Let me now share our thoughts on how we're approaching the second half of the year. Meghan will share some specifics regarding our financial outlook, but I wanted to provide you with our planning framework for the fall season. Our starting point is that the environment remains uncertain. COVID is not yet contained in many of the markets where we operate. And while we expect the recovery to advance, we continue to plan for multiple scenarios this fall and particularly for the holiday season. We have pulled forward several IT investments related to our e-commerce business, increased our DC and fulfillment capabilities and are continuing to grow the ranks of our omni educators to ensure our guests receive the service and experience they are accustomed to should our e-commerce business spike even more in quarter 4. We continue to work with our vendors to ensure the proper timing of upcoming merchandise flows and can pull forward deliveries of select styles should unanticipated demand develop. And we continue to protect our downside by tightly managing expenses and the outlay of capital. Let me now turn it over to Meghan.

Thanks, Calvin. I'll start by providing details on our Q2 performance. And although we are not providing specific guidance, I will offer some color on our outlook for the remainder of the year. I will also discuss specifics on our balance sheet, including our cash position, liquidity and inventories. Please note that the adjusted Q2 financial metrics I will share include the operating results of MIRROR beginning on July 7, the date the transaction closed, but exclude $11.5 million of pretax acquisition-related costs. You can refer to our earnings release and Form 10-Q for more information and reconciliations to our GAAP metrics. For Q2, total net revenue increased 2% to $903 million. And while we are still in the COVID-19 recovery phase, this was above our expectations of a high single digit decline. In our digital channel, we posted a 157% constant dollar comp increase on top of a 31% increase last year. Given the significant number of temporary store closures in Q2, we do not feel store comp is a meaningful metric to evaluate performance. As we evaluate our top line performance, we will continue to be focused on total revenue, our digital business trends and open store recovery trends, which I will offer some additional color on as we move into our outlook. Square footage increased 15% versus last year driven by the addition of 46 net new stores since Q2 of 2019. During the quarter, we opened 17 new stores: 8 in North America, 4 in Mainland China, 3 in other markets across Asia and 2 in Europe. We also completed 2 planned optimizations. In terms of our digital channel, e-comm contributed approximately $554 million of top line or 61% of total revenue. Our constant dollar e-comm comps exceeded our expectations, increasing 157%. Excluding the impact of our online warehouse sale, e-comm comps grew 137%. While we were pleased with our online warehouse sale results, I did want to highlight that overall for the quarter, we saw strength in full price sales as reflected in our flat product margin results year-over-year. In terms of e-comm drivers, we continue to see strength in traffic and conversion, which increased over 90% and 45%, respectively. Traffic was driven by channel shift, coupled with investments in digital marketing. And conversion continues to benefit from guest response to our product and the investments we've made in our global digital platforms to improve guest experience. Gross profit for the second quarter was $489.5 million or 54.2% of net revenue compared to 55% of net revenue in Q2 2019. The gross margin decline of 80 basis points was driven by 130 basis points of deleverage on DC-related costs, which was offset by 40 basis points of product and cost leverage and 30 basis points of occupancy and depreciation leverage. Product margin was flat year-over-year, inclusive of our online warehouse sale, as lower product costs and product mix offset higher markdowns. We also experienced a 20 basis point negative impact from foreign exchange. Moving to SG&A. Our approach in the current environment has been to protect against downside while also ensuring we continue to invest in our long-term growth opportunities. SG&A expenses were approximately $353 million or 39.1% of net revenue compared to 36% of net revenue in Q2 2019. The deleverage in the quarter resulted predominantly from lower revenue due to COVID-19-related store closures and our commitment to continue to pay our employees through this period of disruption, costs associated with COVID-related supplies and PPE, deleverage on depreciation and deleverage from MIRROR. These were partially offset by expense reductions relative to our original budget, coupled with the recognition of some government wage subsidies in the quarter. Adjusted operating income for the quarter was approximately $136 million or 15% of net revenue compared to 19% of net revenue in Q2 2019. Adjusted tax expense for the quarter was $39.2 million or 28.9% of pretax earnings compared to an effective tax rate of 26.4% a year ago. The increase in our adjusted effective tax rate compared to last year relates primarily to changes in guidance associated with certain U.S. tax reform measures, which reduced the effective tax rate in the second quarter of fiscal 2019. Adjusted net income for the quarter was $96.3 million or $0.74 per diluted share compared to earnings per diluted share of $0.96 in Q2 of 2019. Capital expenditures were approximately $53 million for the quarter compared to approximately $67 million in the second quarter last year. Q2 spend relates primarily to store capital for new locations, relocations and renovations, technology spend to support our business growth, digital channel and analytics capabilities and supply chain investments. Turning to our balance sheet highlights. We ended the quarter with $1.2 billion of total liquidity. We have $523 million in cash and cash equivalents and approximately $700 million of available capacity under our committed revolving credit facilities. Inventory grew 36% versus last year and was $673 million at the end of Q2. We now believe Q1 was the high point for year-over-year inventory increases for 2020. We expect levels in the second half to moderate further and increase in the 20% to 30% range. Our repurchase program remains on pause as part of our COVID-19 cash management strategy. We have approximately $264 million remaining on our current $500 million repurchase plan. Let me shift now to current trends and share with you some color on how we're looking at the remainder of the year. Due to the dynamic nature of the macro environment, we are not yet returning to our historical cadence of providing specific guidance for the current quarter and fiscal year. We continue to plan for a number of scenarios in order to ensure we have the appropriate flexibility to manage the business through a range of second half outcomes. These include scenarios around store trend recovery in light of continued COVID-19 impacts across the globe. We are focused on and benefiting from leveraging our omni model and digital strength as we navigate this uncertainty. We've continued to see guests shift between channels, which has driven outsized growth on our e-commerce sites. As Calvin mentioned, we pulled forward investments in our digital channel to ensure our guests continue to receive an elevated experience when shopping our sites and to maximize second half and holiday business. In terms of stores, we currently have approximately 97% of our stores open across the globe, with only a handful of closures in North America and Australia. All of our distribution centers are up and running. The average productivity of our reopened store is approximately 75% of last year's volume. As we continue to prioritize our people and our guests, we are still limiting capacity and operating on reduced hours in many locations. We believe these restrictions, coupled with our relatively small store size and high productivity comparisons, continue to impact guest traffic. When looking at new store openings for 2020, we expect to open 30 to 35 net new stores with 15 net new stores opened through the end of Q2. These openings will contribute to a low double-digit increase in square footage for the year. In addition, we are maintaining our seasonal store strategy. We operated just over 50 seasonal stores in Q2 and plan to operate approximately 70 in the second half of the year. Looking forward, for the business overall, we continue to anticipate the trend in total revenue growth to improve sequentially throughout the remainder of the year. Inclusive of MIRROR in Q3, we expect total revenue to increase in the mid to high single digit range, with Q4 increasing in the high single to low double-digit range. It's important to note that our view on total revenue growth in the back half assumes no improvement to the 75% productivity levels we're currently experiencing in reopened stores. In our digital channel, we expect revenue to remain strong and well above our pre-COVID growth rates of 30% to 40%, but moderate in the second half relative to Q2 with the majority of stores open. And finally, we are now assuming that MIRROR will generate in excess of $150 million in revenue for the full year 2020, up from our initial expectation, which was revenue in excess of $100 million. We made the strategic decision to increase marketing spend for MIRROR in the second half to take advantage of current trends towards sweating from home and capitalize on the opportunity to drive business during the holiday season and into next year. The increased marketing spend, which will help acquire new guests in the near term and should also produce a return over the longer term through increased product and brand awareness, will contribute to modest earnings dilution reflected in our outlook. For gross margin, we continue to expect the second half of the year to be better than the first half with the decline relative to last year in Q3, followed by flat to modestly up gross margin in Q4. We remain on track to deliver savings of $40 million in non-merchandise expenses included within gross margin relative to our original budget. In terms of SG&A for the full year, we expect deleverage to continue in the back half as we prudently invest in select growth initiatives, particularly digital and store traffic likely remains below last year's levels. In addition, while MIRROR'S dilution on our P&L will be modest for the year overall, the bulk of this will be realized within SG&A, contributing to deleverage in Q3 and Q4. We remain on track to realize $130 million in gross SG&A savings by the end of the year relative to our original budget. With regard to earnings per share compared to a year ago, if we look at just the lululemon business, we expect an adjusted EPS decline in the 10% to 15% range in Q3 and adjusted EPS to grow modestly in Q4. When looking at our combined results for lululemon and MIRROR, we expect an adjusted EPS decline in the 15% to 20% range in Q3 and a modest decline in Q4. For the full year 2020, excluding acquisition costs, we continue to expect MIRROR to be modestly dilutive at less than 5%. In terms of capital spending, we expect CapEx for 2020 to be below our original budget and generally in line with last year. We are prioritizing spending on digital and omni initiatives and fulfillment capabilities while pulling back somewhat on new store openings and remodels. Before handing it back to Calvin, I'd like to reiterate that we are cautiously optimistic with regard to the holiday season, and we continue to plan the business based on multiple performance scenarios. Our guidance assumes store productivity remains consistent with the levels we've seen recently and we experience ongoing strength in our e-commerce business. Longer term, we remain committed to our Power of Three growth plan, and we're excited with the opportunities that remain in front of us. And now back to Calvin for some closing remarks.

Thank you, Meghan, and I want to take this moment to also thank all of the lululemon employees around the world who continue to be agile, nimble and creative as we meet and exceed the expectations of our guests during this time. I'm proud of the resiliency and flexibility of the business that allows us to deliver results like these that demonstrates both our near-term and long-term strength. And I continue to be impressed by how our leadership team is showing up, both as they lead their teams and strategically co-create our future. We all feel that lululemon is becoming stronger quarter-by-quarter and it's a testament to our people, our ability to innovate and our enduring connection with our guests we love to serve. We're now pleased to take your questions. Operator, we can now open it up for Q&A.

[Operator Instructions] The first question comes from Lorraine Hutchinson with Bank of America.

I wanted to ask about how you're thinking about managing any holiday volume challenges, whether store capacity constraints or higher shipping costs? It sounds like you'll be opening some seasonal stores to help with that. Are there any other plans in place to try to ensure that you can successfully manage through this tough 4Q environment?

Lorraine, it's Calvin. Absolutely. I'd break it into a couple of key strategic buckets that we've been working on. Early on, the first was pulling forward our investments to ensure that the infrastructure, both our supply chain as well as our websites around the world, were ready for the type of volume that we're anticipating. We've run a variety of scenarios. If you think, obviously, fourth quarter volume is the highest volume within a year, and we're seeing exponential growth on e-commerce. So we sort of applied that modeling to the back half as sort of the benchmark of what we needed to prepare for. And we pulled those investments forward to ensure readiness on the sites and the infrastructure in order to support. And then we've been investing into the guest experience, call center being one of the key areas, looking at how we can mobilize our educators to not just be able to work in the physical, but as well as being able to service our guests online, both through a concierge service as well as a call center. So leaning in and ensuring that we have the infrastructure to support and the guest education center to support are 2 of the big important factors, and that's anticipating our online volume. In the physical space, there is a variety of initiatives that we keep innovating to take away the operating constraints. That's the reality of operating through COVID. We've all seen the lines at our stores. We know that guests are willing and are waiting to queue up. And our challenge is, how do we get more into the store and transact at a quicker rate. So a variety of innovations have gone into that from the virtual lineups that I shared as well as how we just check guests out and service them outside of the store. And then the seasonal stores is a big shift as well, tapping into our nimble fleet, where last year, in fourth quarter, we had 51 seasonal stores. This year, we're planning on 70. And in some locations, we may even be doubling up in a mall or a location where we have an existing store so we can pick up some of that overflow. So those things combined, we feel good that we'll be ready for the volume where we need to be and maximizing the potential of physical space with some of the innovation that I shared with you.

The next question comes from Mark Altschwager with Baird.

On the product margin, can you walk through some of the drivers there relative to the strength that you saw in Q1? I guess, specifically, I'm wondering how much of an impact the warehouse sale had on the quarter and whether the plus 180 you saw in the first quarter might be a better indicator of the underlying run rate of the business.

Yes. Thanks, Mark. It's Meghan. So we were really pleased with the strength we saw in product margin in the quarter. You heard we did do an online warehouse sale, which compressed really with our stores closed, markdown selling into one period. But when we look across the quarter, we saw some really nice strength out of full price selling. We're not going to offer color on product margin specifically as we move into the second half, but we are expecting gross margins in the second half of the year to be better than the first half and expect a decline in Q3, returning to gross margin expansion year-over-year in Q4.

That's very helpful. And then just a follow-up. Thanks for all the detail on the productivity trends and digital. Just any further help on what you're seeing quarter-to-date in each of the channels relative to what you saw in the second quarter?

Yes. So we are tracking relatively in line with the top line color we provided, which is total revenue growth in the mid to high single digit range for the quarter.

The next question comes from Matt McClintock with Raymond James.

It's McClintock but good job trying. Honestly, I wanted to start with just fulfillment capacity. And it's kind of a follow-up to Lorraine's question, but I want to understand the investments that you're making in terms of fulfillment volume, your ability to handle more volume on the customer service, your ability to deal with customer service with these higher, higher levels of volume. Where does that position you longer term? I understand you're getting ready for the fourth quarter, but I want to think 2 years out, 3 years out. Are you building the ability to handle volume 5 years from now, 6 years from now? Or is this because you're growing so fast, you're still trying to just kind of keep up with that and still have some safety room.

Great. Thanks, Matt. We're definitely well ahead of the volume that we had anticipated, modeled in our 5-year growth plan that we shared last spring. And under the Power of Three and when we looked at doubling our digital business, we are definitely trending ahead of that run rate. So these investments that we're making this year, I would break into a number of factors. One is our distribution capability of both fulfilling stores as well as e-commerce orders, ensuring we have the right safety measures in place to maintain continuity of operating the DCs, which I'm very proud of the work that the team did to date to operate through while maintaining and putting the health and safety of our warehouse distribution employees front and center. On the website, improving ongoing stability, the ability to take the traffic and convert. And we saw traffic in quarter 2 increase by 91%. Conversion increased by 46%. So these, combined with the volume, are ahead of where we anticipated. And there's just general infrastructure investments you need to make to be able to scale a business like that. Fortunately, we're predominantly cloud-based now, which allows us to more easily expand both in North America and internationally. Internationally, our total business was up 37%. That's including stores. In the quarter, every region in Europe and APAC and China grew, and we saw significant growth in e-commerce. So we're experiencing it in all markets, and we're investing there in the infrastructure to support that volume. We're definitely going to come out of the year ahead of where we thought we would be in the 5-year plan on a dollar perspective, and we'll continue to invest in as we look forward to the '23 plan and then obviously, our planning beyond that, prioritizing the investments. I mean, the center of our strategy is an omni ecosystem and approach and digital plays a big part of that. We're going to keep investing to ensure that we support the growth of the business and take a long-term view on it.

And then just as a follow-up, we started noticing a lot more lululemon instructors on MIRROR. And I was just -- because you talked about starting to integrate the 2 companies a little bit. I wanted to get your thoughts on bringing your ecosystem on MIRROR and how that's impacting local communities? Are you seeing engagement, greater engagement levels in local communities where you have maybe local instructors teaching on MIRROR now?

Great. Thanks. I would say, as we've alluded, it's very early. And we started a partnership with MIRROR over a year ago, last spring. And in fact, through that partnership, we had some of our lululemon ambassadors on the MIRROR platform last fall. And that gave us a lot of test-and-learn opportunities to see how the MIRROR guest was interacting with both that ambassador as well as the interaction of at-home sweat. And that, among with many other metrics, gave us the confidence and led to the excitement about making the acquisition. So we look forward. We are moving forward with the notion of a light integration. We're only going to be selling in 10 to 15 stores this year, selling it on lululemon.com as a means to building awareness. And it really is set up as a test and learn and focus on '21. And as Meghan shared, even with the light integration, we're anticipating a solid improvement in their forecast shared earlier, revenues in the $150 million. And as we continue to integrate, as we continue to tap into the ambassadors and the community and expand selling into more of our stores, we're excited about that growth opportunity. Center of how we're viewing our strategy moving forward and where we feel it's very unique versus some other players is the omni ecosystem that's going to include both physical and digital sweat. So the lululemon membership is rooted in physical sweat, MIRROR is rooted predominantly in digital sweat, and we see a relationship between the 2 and at the community level. So we will continue to innovate and expand into that with more to share, but that is really the unique point of our strategy and vision. And MIRROR fits into it well and will be a part of the community, both digitally as well as within the physical representation of our ambassadors, our stores and others as we look to drive that business forward.

The next question comes from Adrienne Yih with Barclays. Adrienne Yih-Tennant: Calvin, I was wondering if you can talk about product category expansion and the introduction of ongoing innovation and newness for both the back half of this year and then into 2021. And then Meghan, if you can just talk to us about how you've moved through inventory through the -- I think there were 3 channels that you mentioned or strategies last time and how we should think about that at the end of both 3Q and 4Q?

Great. Thanks. In terms of our product expansion, we've shared the 4 key sweat activities that we're focused on as a business: run, train and yoga, with on the move being one of the key categories, and we're sort of taking a unique point of view as our most recent campaign sort of picked up on, which is the notion, life is a sport. And we see a lot of growth just in how we provide head-to-toe options and solutions for the guests in those activities. Equally, we have a number of sweat activities that our loyal guests choose as either their secondary or tertiary sweat options that we equally see opportunity to expand our current assortment. And we're working to do that. We're innovating into that, and we're excited about bringing a little continual newness as well as continuity to these sweat activities for both our men's business as well as our women's business and accessories. So there is a lot of new innovation in the pipeline. We shared the launch of our pant business this quarter with the City Sleek initiative with much more OTM planned for the back half and into next year and into these new sweat categories. So I continue to be incredibly energized about the product pipeline, both the newness as well as the opportunity we have and what we've already declared and then the expansion of new categories that would be completely incremental for us, building business, footwear in the coming years. So I think it's exciting to see the work that Sun and the team is doing in and around product through Science of Feel. And really believe we're early in what we offer in North America and then even more so internationally, so see a long runway of growth with product.

Great. In terms of inventory, we are pleased with the level of competition coming out of Q2. Our inventory was up 36% year-over-year, which was under our Q1 year-over-year balance. We previously thought end of Q2 would be our high point, and now we expect that will be Q1. So as you know, we did do an online warehouse sale during the quarter, pleased with those results. But again, I'd just point back to, we're also very pleased with our full price sales results. We do expect inventory to moderate in the second half of the year, up 20% to 30% as we move into the third and fourth quarter. And just as, again, a reminder, we do benefit from core being approximately 40% of our assortment. Adrienne Yih-Tennant: Great. Nice job in a tough environment.

Thank you.

The next question comes from Ike Boruchow with Wells Fargo.

Just 2 quick questions just back on the inventory. I understand the high point has been passed and it's going to moderate in the back half, but 20% to 30% is still pretty well above your sales growth. I'm just trying to understand your comfort with the inventory you're carrying, if we should be on the lookout for more potential events to clear inventory in the third or fourth quarter? And then any chance you guys could explicitly break out the MIRROR revenue contribution that you're planning in Q3 and Q4?

Yes. Thanks. It's Meghan. So I think in terms of inventory, what I'd say is, again, just 40% of our assortment is -- approximately 40% is core. And we expect inventory levels to moderate through the second half of the year, as we mentioned, 20% to 30%. As you know, that is above sales growth, but we feel comfortable with the level based on redeploying the inventory and taking into consideration that core portion. We do expect gross margin in the second half of the year to improve relative to the first half. And we expect, again, a decline in Q3 and returning to growth in Q4. And then in terms of MIRROR, we're not going to break down the second half estimate, that $150 million, in excess of $150 million is for the full fiscal 2020.

The next question comes from Alexandra Walvis with Goldman Sachs.

I had a question on the e-commerce growth. I was wondering if you could share any more color on the cadence of that growth through the quarter and indeed quarter-to-date. And also whether you might be able to share the composition of e-commerce revenue between existing customers and new to lululemon customers? That would be really helpful.

Great. So in terms of the e-commerce cadence, we had mentioned that we saw 125% when we were reporting Q1 at the start of the quarter. So we did see a pickup as we moved throughout Q2. And we saw 157% for the quarter. And it was 137% excluding the online warehouse sale. We have seen, as I mentioned, in line with our expectation of that year-over-year growth rate moderating as stores open for the full period of Q3 and into the second half. We do expect e-comm to be above the 30% to 40% growth rate that we experienced prior to COVID.

Great. Very clear. And then one more question from me. You're expanding the loyalty test to another city, in Vancouver. Any incremental color you can share on what you've learned from the loyalty pilot so far and anything that you're tweaking as you move into the subsequent pilot in Vancouver?

Yes. No, absolutely. Thanks, Alexandra. First, just to clarify, the added city is Toronto that we're adding. So we're repeating in 3 of the 4 cities, repeating at Edmonton, Chicago and Denver. And we tested in Austin with great results. But we elected to bring in a larger city with Toronto to test and learn. So Toronto is going to be the new market. And what we continue to see and the adjustments we've made, obviously, the essence of the program is rooted in connection and community, with physical being a big part. The team has done a wonderful job shifting to virtual events, be it sweat or speaker series or other tutorials that guests have engaged incredibly well in that really set up a lot of interesting learning as we think forward around the program. And we will moderate as we see studios open and guests being able to physically sweat. But where we've landed is a good balance of physical sweat, combined with access to product and then rooted at the notion of community and connection, $168 for the 1 year, and we go on making it available this week, and we're excited to see the results. And in every test city we've done, we've seen very positive response from the guests, high loyalty and engagement and intent to repeat and it does have a positive impact on their overall purchases of lululemon as well as recruitment of new guests. So from a guest metric standpoint, it's very encouraging. And it's early, and we are taking it through a test-and-learn phased approach. Toronto is going to be a great new addition. COVID has been an interesting balance based on the positioning of the membership program, but I'm very excited about how the guest has continued to engage in it. If anything, it's given us more confidence than not about the potential. And we will test and learn through these markets with plans to continue to look at adding additional markets in the coming year.

The next question comes from Omar Saad with Evercore.

Congratulations on another great quarter. I wanted to ask a little bit more about your international results, kind of compare and contrast versus your core North America market. The China number was pretty impressive. Is that a good -- maybe contrast and compare the patterns you're seeing in those markets online and in stores? Did you see, experience pent-up demand there? Maybe some of the differences you would call out for the kind of consumer behavior patterns you're seeing, the guest behavior patterns you're seeing in North America and Europe as well. It would be great to get that feedback.

Great. Thanks, Omar. I'll start by just sort of teeing up the North American business. As we've sort of shared, from Q1 to Q2, we're really pleased with the progression we saw in both Canada and the U.S. Stores performed similar in both markets. Predominantly, that's linked to the operating constraints that we had to operate under with small stores that were incredibly productive and we just had challenges being able to match the same productivity numbers as the previous year. And e-commerce, obviously, picked up a large share of that additional demand. And overall, the mix of the business, we're very pleased with, and it was a significant improvement from a Q1 performance. Internationally, I'll start with China because it continues to just build steam and momentum from Q1 when we had the early closings to when the stores reopened. And we're seeing incredible growth in both our e-commerce number, which was up 136% in China and stores, which are up significant growth as we saw through the quarter and heading into this quarter. They're benefiting from a lot of the domestic travel that's occurring. But from a brand perspective, we've opened up a number of additional doors and they have all performed well ahead of plan. In Tier 2 cities, we continue to see great growth and reaction to the brand. And we're acquiring new guests, and both channels are performing very strong. So very excited about what we continue to see as an inflection in our business in China and the momentum behind it and the growth that it's driving, which is by far the strongest of any market that we're in to date in this quarter. And though in Europe and rest of Asia Pacific, very positive growth, led in e-commerce. E-commerce number similar to that in North America, which is really exciting for us because it's acquiring a new guest and it's resetting how high is high with our online business and potential as we think about assortment, think about our physical real estate strategy and entering into new markets. So I'm excited overall with the performance of our business internationally and continue to see guest acquisition increase the expansion of the brand, led by China, but very strong in all markets that we're in.

Great. And then a quick follow-up on MIRROR. Why only 10 to 15 stores for the fourth quarter? Are there capacity constraints or you just want to build it slowly?

Yes. It's definitely build it slowly and test and learn and be able to go a little bit more aggressive in '21. And we're going to test and learn between the balance of making it available and increasing awareness through dot-com, making it available through stores. They're in a good supply chain perspective now. Their average delivery is 7 to 10 days in terms of inventory flow. Obviously, during early COVID, that number was expanded. They've been able to play catch up, and we're sitting in a good position. But we see this as an exciting position long term. And there's good momentum already in that, and we're going to add to it, but it is really test and learn with a focus on '21.

Our next question comes from Matthew Boss with JPMorgan.

We'll try this again. Calvin, on the inflection that you cited for retail and for lulu from here, can you first elaborate on investments for market share that you've accelerated during the crisis? And then also on digital, what's the best way to think about the sustainability of digital channel operating margins relative to the 40%-plus that you've achieved the last several years?

Yes. I'll touch on the inflection as well as how we're leaning in and how we're planning to continue to lean in. Clearly, health, wellness and functional apparel and trends in apparel have changed dramatically. And I don't foresee them defaulting back to pre-COVID sort of awareness with the guests. I think health and wellness trends are here to stay. I think that some of the trends we've seen in fashion and what guests are going to expect in apparel and in how they dress and how they want their apparel to perform are here to stay. And both of those benefit our brand and our positioning in a number of ways, predominantly linked to our Power of Three growth strategy around product, omni guest and creating that ecosystem as well as market expansion. So I'm excited about the potential of growth. And what we do know is, and we've shared this before, is even with the success of our business to date, we have awareness opportunities. We have significant awareness opportunities with men in North America. And in our international markets, awareness and consideration is and remains one of our big exciting opportunities. So we definitely leaned in, in Q3 with digital marketing. Plan to do more of that in the back half and into next year. Part of the success we saw internationally was turning on digital marketing and CRM in a more aggressive way than we've traditionally done in the past and it responded very well. So the teams are going to continue to learn. We're continuing to sort of play with our rollout and what we want and expect from the investments and how we get our brand known and have that awareness metric improve in the coming months and the coming years. So I just think the world is looking for more of what we have to offer and our opportunity, we know, is that our awareness around offering it is still a big opportunity for us, and we're going to lean in and invest in the back half of this year and into next year to do that. And that's all part of the guidance and margin that Meghan provided. And it's also inclusive. There's no change to our Power of Three 5-year view of the financial model that we shared as well last spring. So it's all incorporated in that, how we chase and lean. But it's an exciting opportunity for us to drive awareness, and we see the opportunity and we are shifting investment to go after it.

Great. And then just one follow-up. Just on the digital trend in August and early September, is there any driver of the moderation that you cited relative to the second quarter or maybe just any commentary to think about as we try to think through the magnitude at all as we think about the current momentum that you guys carry so far into the third quarter.

Yes. I wouldn't say there's a driver to the moderation. It's really looking at the omni trend overall, which, again, we see in the mid to high single digit range. And just with the lion's share of the stores open, just not seeing as much of a channel shift trend with our guests being able to access our store fleet.

That's all the time we have for questions today. Thank you for joining the call and have a nice day.