The Home Depot, Inc. (HD) CEO Craig Menear Presents at Goldman Sachs 27th Annual Global Retailing Virtual Conference Call Transcript


The Home Depot, Inc. (NYSE:HD) Goldman Sachs 27th Annual Global Retailing Virtual Conference September 10, 2020 11:40 AM ET

Corporate Participants

Craig Menear – Chief Executive Officer

Ted Decker – EVP Merchandising

Conference Call Participants

Kate McShane – Goldman Sachs

Kate McShane

Everyone thank you for joining us for our Virtual Lunch Presentation. My name is Kate McShane, I’m the hardline, broadline analyst here at Goldman Sachs. It’s my pleasure today to introduce the members of the management team from the Home Depot.

Home Depot reported second quarter results recently with comps up over 23% with broad based strength throughout the quarter, all month for over 20% in every region comps double-digit and strong demand was carried through to the first two weeks of August with comps still at similar levels, 13 of 14 merchandise departments posted double-digit comps with DIY still outperforming but Pro accelerating meaningfully versus Q1.

We’re very happy to introduce Craig Menear, CEO of the Home Depot, and Ted Decker, EVP of Merchandising. We’re also joined by Isabel Janci, VP and Treasurer, as well as Tim Walsh and Lyndsey Burton from the Investor Relations team.

Craig and Ted, thank you so much for joining us today.

Craig Menear

Glad to be here and thank you.

Kate McShane

If we could maybe just level set and talk about the navigation of the current environments. As I mentioned in the opening comments, Home Depot sales grew over $7 billion in one quarter or 23%. And just keeping pace with that level of demand seems very, very tough and unprecedented. So I was hoping you could talk a little bit about how the company has navigated through some of the uncertainty over the last six months, I pivoted to meet this demand and what are some of the bigger challenges you’ve overcome?

Craig Menear

Sure. So, Kate, thank you again for having us.

To the point to grow $7 billion in the quarter was an interesting feat when you hit $9 billion for the year and we started our thought process around 2020. We thought for the year we grow somewhere in the 4 billion-ish range. So it is certainly presented its challenges. And then you layer COVID on top of that, and no doubt it put pressure in places.

So when you think about the important elements is, the complexity that it put into the supply chain pushing that kind of incremental volume through the supply chain. Taking that all the way back into the vendor community by the way, so there were raw material planning, efforts that needed to happen. Certainly that has presented challenges. We’d like to be in a better in-stock position than we are today. We’re down year-over-year. But we’re gaining ground on that and improving as we sit here today.

I think, when you think about the tremendous growth in the digital space, having the flexibility to be able to adjust to handle that kind of volume, particularly the volume we’re seeing not only through the stores with [indiscernible] but direct to customer having the flexibility to adjust and deal with that volume was pretty important as well. We did that by shifting a fulfillment center that we had opened in the Chicago area that was going to be a market delivery center in a matter of couple weeks we converted that temporarily to a direct fulfillment center, shipping product direct to customers from our dot com business so that we could support the triple-digit growth.

Kate McShane

Okay. Thank you for that. And I guess within the last six months, we saw a real change in dynamic with regards to the DIY customer for a long time we thought about the Pro customer as the bigger driver of growth for the home improvement industry. But this year, DIY is kind of leading the charge. And while some of this DIY might be driven primarily by people being home more, it does raise the question about whether we’re going to see a new level of engagement with that customer. And whether taking on a project here and there during this time is sticky, and that will be behavior that you see for a longer period of time. So how are you thinking about the activity longer term from the DIY shopper? And is there any category maybe you were under invested that you can lean into a little bit more to take advantage of a longer term trends?

Craig Menear

Sure. I think I’d start with the Pro customers always an important customer at the Home Depot. But we never lose sight of the fact that we have $60 billion-ish DIY business that has been pretty important to the company for its 41 year existence. And so we’re excited about seeing the engagement of the DIY customer in our space. And over the years, I’ve been asked a lot about what does this look like and the mix look like long-term at the Home Depot with all this focused on the Pro customer? And my answer to that always is that today we have kind of a 55, 45 DIY mix. And at the end of the day, if we end up with an 80:20 Pro, we haven’t really done our job because we want to grow the DIY business at the same time, we’re growing the Pro business and that’s been our focus all along.

So we’re super excited to see the engagement from the DIY customer. I think that customers spend a lot of time around their home, they see a lot of things that they want to do. And at the same time, there’s more wear and tear in the home. Our customers tell us from surveys that home is never more important than it is today. And so, we’re super excited about the opportunity that we see today. Ted, I don’t know, if you want to comment on some of the categories.

Ted Decker

Yes. So that the DIY business is clearly led over these past several months with COVID and really all categories across the store have seen tremendous growth as we reported. In Q2, we had double-digit growth and 13 of our 14 departments as you said in bath is just shy of double digits. So the installation business has been — are slower performing we’re starting to see that comeback as customers get more comfortable having people in their home in our pros and permitting and the like to do larger installed businesses.

But you talked about the engagement that we’ve seen with the DIY customer and that is clearly a focus of ours to track that engagement and maintain that engagement into the future. There’s so many good things going on in our segment with the DIY customer engaging. You’ve heard us talk a lot about Pro over the years and the things we’re doing with Pro but as Craig just said, DIY is a hallmark of the company and still the majority of sales and we need to keep that business growing and the engagement we’re seeing with DIY customers and with the engagement and interconnected in digital, it’s allowing us to know that customer better than we have in the past, we’ve always known our Pro customer with much fewer number of customers driving that 45-odd percent of our Pro business we have field sales, we have a Pro loyalty program and lots of ways with that Pro customer. But the DIY customer had traditionally been sort of a mass anonymous. But with the advent of interconnected and digital, we have a lot more signals now that we can start to know the customer to a much greater extent.

So we’ve been working a lot on personalization in audiences so if we might not know you to the end individual certainly know you as a segment in an engagement model, if you’re engaging garden department more or you’re painting or you’re more of an interior project and decor [indiscernible] customer. Then we can get our whole marketing message in our whole product in a way going. New product as you enter our sites and engage with the Home Depot. There’s just vast opportunity with COVID increase that engagement.

So as we build out abilities to track engagement, we’d like to see new customers, we’d like to see customers talk about in a shopping one aisle over, they shop in two aisles over. For the engagement projects, how many items for basket per transaction are they purchasing at Home Depot? We’d like to and our now increasingly capable of tracking their use of the capabilities we’re building out.

One of the big strategic reasons behind our change and our marketing tagline to how do doers get more done. Home Depot has always been known for product authority and know-how. So we helped a generation of — at the time baby boomers engaged in DIY and gained that confidence of that first project, the second project, increasing the scope of what type of project they were working on. But now as we build out more capabilities digitally, we wanted to signal that with how doers get more done. So we have our app. And we have planning tools, and we have project tools and calculators and way finding, so you can pinpoint exactly where in the store your product is located or buy online pick up in-store, buy online deliver from store, buy online have the product put in a locker for pickup. So all these capabilities that we are building, we are also able to attract the engagement levels.

And as you can imagine, as people start to engage with more capabilities as they start to shop one and two aisles over as they start to gain the same confidence of the newer DIY-er, that is the millennials launched on their journey. We’re starting to see that same behavior as the baby boomer back 30 and 40 years ago, and as they engage their spend and share wallet, goes up with a Home Depot. So huge opportunity, as you said with this new — great number of customers and their increased engagement with the Home Depot.

Kate McShane

Helpful. Thank you. I wanted to ask, just in the same context of category drivers before the pandemic, you had cited quite often the amount of innovation that was coming through your different merchandising categories. And just with such a wide assortment of SKUs that you carry, it’s a little tough for us to totally, fully appreciate, I think how much innovation really is taking place. So I wondered if you could maybe talk a little bit more recently about some of the innovation that you’re seeing from your vendors? What new trends do you think can emerge post the last six months in terms of what you’ve seen demand for innovation? And I assume innovation means people are trading up, so if you can comment on that as well.

Craig Menear

Let me make one comment around innovation in general and then I’ll give it to Ted to give you the specifics. So when you think about innovation, what the merchants are focused at Home Depot, it is how do you bring product to market that makes it easier for the consumer to be able to do a project and/or how do you bring product to market that allows the Pro to be more efficient. It gives them confidence and no callbacks. And that innovation is hugely important in the business.

Ted Decker

So in product authority is what we stand for in merchandising at Home Depot and innovation is the hallmark of that. So we’re working with our supplier partners, customer back deep into their product development of what should we be focused on in innovation, and it really goes across the whole store. You’ve heard us talk a lot lately about cordless battery technology in power tools that is now exploding in outdoor power equipment. So categories that were exclusively gas for decades and decades are quickly shifting to cordless technology, the lineup of products that we have coming in our outdoor, we have great product now but the lineup of product that we have coming in the spring of 2021, what you are going to be able to do in terms of size of job and run time and power of cordless technology and outdoor power equipment is incredible.

But this type of innovation is really across the store. I mean, it goes on through building materials into core categories, certainly appliances, we just I mean something you might not get that excited about. But we do at Home Depot, we just reset our entire grout bay. And we have an exclusive relationship with custom building products, which is by far the largest share in the category and they’ve just come up with an incredible array of floor levelers large format tile, quick adhesion, grouts that are NC approved for dust emissions which is required for nursing homes and hospitals. Pre-mixed grout for either a quick job for a DIY-er or making a job easier for a pro. We have color consistency, all at great value. So we just finished resetting our entire grout in tile set material bay over the last several weeks, the performance is incredible.

So again, something you wouldn’t think a lot about innovation in tile set material but it really is remarkable for all the new products that came in that reset.

Kate McShane

Thank you. One question that we got a little bit before the pandemic but certainly has become more prevalent is the changing in migration or population, and you’re seeing big cities like New York City and San Francisco being impacted by people moving to the suburbs or just moving away. But I was wondering what you were seeing in your business currently, I know there was some dynamic in the first quarter, it seems even out in the second quarter, but longer term, how do you think about some of these population trends and how your stores are positioned in urban versus suburban markets?

Craig Menear

So I’d say first comment would be we’re actually thrilled with our overall footprint that we have throughout the country. It’s interesting, because there’s a lot of talk and a lot of dynamics. Now, it takes me back to 2015 and earlier, when there is a lot of conversation around the fact that gosh, the whole millennial generation, everybody is going to move to inner cities and the millennials, we’re never going to own anything, they are only going to rent, they would never have a car, they would never have a tool. That’s what we heard through all of this. And our research that we did — deep research in 2015 indicated that that none of that was actually — actual based on the research that we had with the millennial generation, and that they would, in fact, act the same way other generations had. It was just a delayed cycle. And we’re actually seeing that play out, by the way.

So as the millennial generation got married. kids come along, you need more space, they moved from the city centers to a more suburban environment and they need more space, it’s more affordable. We’re actually really pleased with the overall footprint and we think that that plays out pretty much the same going forward. Will there be movement from the city centers? Of course, that’s what our research said was going to happen in 2015. And so, when you think about what we’re doing right now, we’ve actually been able to finally after sometimes a decade long effort to secure new sites in urban centers to take pressure off a really high volume stores, we’ve been able to open a few of those and we’ll continue to look for those kind of opportunities. But migration is something that we’ve always deal with and that we always will, footprints accordingly in given markets, when you see migration happening, whether that’s interesting, that’s just part of what you have to do as a retailer.

Kate McShane

Craig. I think, we lost your sound.

Craig Menear

Can you hear me?

Kate McShane

I can hear you now.

Craig Menear

Okay. Kate, the last comment I was making was migration and making sure that you’re covering footprints with stores where it needs to be is something that you always deal with as a retailer.

Right, again, opening stores to try to take pressure off a high volume and big urban markets or doing in-fills in a suburban market that might be growing more rapidly today than what it was 10 years ago. Those are things that you just naturally do as retailers.

Kate McShane

Okay. Thank you for that. Really if I could pivot to the competitive landscape, just given the fragmentation of the home improvement market, it is difficult to have a sense of exactly what’s happening with independence and smaller players. We wondered if you can give us a sense on how the pandemic maybe has affected some of the smaller players? Is it something in which you maybe saw an opportunity for more consolidation and now you’ve had almost a second breath of life because demand has been so strong for home improvement and how do you think about that longer term?

Craig Menear

Two comments there. We’ve shared in the past that when you aggregate up independence, in pretty much any category that we play in, they own the lion’s share of the market. And so that’s always an opportunity and part of what we’re investing and to create this interconnected experience, hopefully will give us an edge to be able to gain share and grow faster than the market.

Second comment that I have is, look when you look at independence and independence that came through 2008, 2009, 2010. Right? Those are really good business operators, people that survived that environment, people that will survive this COVID environment are really good operators that you have to gain a lot of respect for. And so there’s always going to be independence and competition. But we’re investing to position the Home Depot to grow faster than the market, in any environment that we get thrown into, whether it’s good or whether it’s bad, and that’s really what we’re trying to get done.

Kate McShane

And then if I could ask about pricing and promotions. I’m sorry, Craig, if I’m talking over you, there’s just a little bit of a delay. I’m sorry.

Craig Menear

No, you’re fine.

Kate McShane

Okay. If I could ask you about pricing and promotions, if demand remains very strong, is there a possibility that you could see a further pullback on promotions in the back half of the year?

Craig Menear

Well, that’s something that, we have tried to approach the business from an everyday low price approach. Events have always been part of how you drive excitement and I’ll let Ted address that. Yes, there’s definitely changes.

Ted Decker

Yes. So again, we always strive to be everyday low price. We do have events to create excitement, it’s as much to them as whether it’s our spring sets and patio set. That’s — is our decorative holiday or our gifts center and a lot of our tool categories. So it’s as much to bring the excitement of the product in new product innovation to life, but certainly we have special buys where we work with our supplier partners to bring in product. Specific to that event and specifically sharper prices, we try as much as possible not to simply have a lot of percent offs to signal under our categories such as appliances that is hard to get away from a percent off game. But we are always looking to move our events more product centric and excitement and seasonal relevance centric than percent off. And what this environment has really forced us to do are a number of things, because we’re trying to put safety first and foremost and encourage social distancing in our store, we’ve tried to limit the amount of product we’re putting down in the walkways of the store.

So we work with our supplier partners to really focus on key items larger and deeper, buys that get you even better values on key products, leveraging our end caps in our swing areas more than the race track of our store and by winnowing down the number of SKUs that’s allowed us to do that to promote social distancing and safety.

The other thing we’re doing is, we’re expanding the timeframe. So you think of a Black Friday, well, we are not as big traditionally, as a Black Friday player. As some other retailers we’ve built up quite amount of business and foot traffic and excitement around Black Friday. We’ll try to limit that single day focus and you’ll see us having that product and those values over a much longer period of time. There’ll be a few things that we do on Black Friday but things like have to come to the store this specific period of time, very short quantities. We just think today that might not be as responsible from a safety perspective as it could be. So we’ll still have events, we’ll still have great innovative product, we will still have great values, they’ll just be shown over a longer period of time and an opportunity to really leverage their interconnected experience. So all these are available online as well for ship to home or buy online and pick up in store. So we’ll have events just slightly different going forward.

Kate McShane

And when it does come to holiday and positioning around holiday, as we kind of emerged from the March and April timeframe, was that enough time to pivot or to chase some inventory for categories in which you think will be more important for holiday as it became more clear that people wouldn’t be travelling, maybe staying home, maybe focused more on home decor?

Craig Menear

One of the learnings we’ve had over the years from storm situations, in the earlier days, we used to think about — if a storm hit in a particular area that we would go in and extract like holiday decor from those markets. Thinking that the customer that’s not where their mindset was going to be and what we learned over the years is, actually it’s exactly where their head is, they want some form of normalcy in their life. And so they actually fully focus in that area. So we didn’t really pull back our thought process around the events in Q4 as it relates to holiday because we suspected that the customer would react in the same way that they do in a storm situation and that they want that kind of normalcy overall. So we’re prepared for the fourth quarter holiday events.

Kate McShane

Okay. Thank you. And I’m just going to pivot my questions to cost, you’re still in the midst of a multiyear investment plan. And we’re just wondering if this year’s surge in activity led to any big changes in the timing of what you’ll be rolling out with regards to your supply chain investments or your store remodel investments, et cetera?

Craig Menear

So the first comment, I have Kate is that, when you step back and you think about what transpired this year, and the work that we’re doing, there’s nothing that happened this year that would cause us to say we need to invest more than we had originally planned to invest. So there’s no change from that standpoint. What did happen is, as we pivoted and stopped some things that were happening in-store, because of all of that was happening, with our associates, we didn’t want to drive more people into the stores to do resets, transform front ends and so on.

We are looking at what portions of that we can begin again in the back half of the year. And so we’ll try to get some of that work done in the back half of the year, but some of that may actually end up rolling into 2021. We’ll see how much we can get done here this year, but kind of worst case scenario, it’s possible that 21 because of what we might have to push might look similar to 2020 from our capital investment standpoint, but it won’t be a dramatic shift.

Kate McShane

Thank you. And when it comes to the COVID related costs, if we think about the costs that you’ll be having in the first half of ’21. It seems like aside from cleaning costs, maybe a lot of what’s associated with the higher cost has been wages and bonuses. So even if demand throw next year as it was this year, it seems like you can grow EBIT, just given the amount of cost that likely will fall off. Is that a fair way to think about 21 without going, getting into the nitty-gritty of what you think demand would be, but just with regards to cost, it does seem like there might be some flexibility there.

Craig Menear

I think when you think about the incremental cost that we’ve incurred this year, I think there’s a couple ways to think about it. Right now, we’re continuing at this point, with our weekly bonuses for our associates, we feel that’s appropriate given everything they’re going through right now. There are the market dynamics, obviously, will determine where we’re at. We will remain competitive on a market-by-market basis. That’s how we’ve always approached our business in terms of our wages with associates. So we’ll continue to do that even after this whole COVID situation hopefully resolves itself.

As it relates to the other operational cost, we had an incremental costs that took place in Q2 because we made a decision in the quarter that we were going to require mass for all of our associates and all of our customers. Clearly, we will bring down that cost as we’ve gotten more efficient at purchasing mass and how we distribute mass. And so that will come down. The incremental costs that we saw in the second quarter also as a result of significant increase in U.S. volume at 25% comps, $7 billion worth of growth that flows, that cost will flow based on the volume that we do, because we have to have associates appropriate to the volume that we’re incurring.

So you can you can think about some of the operational costs coming down. Ultimately, I can’t imagine, the U.S. population run around with mass all the time, when we get a vaccine or we get this virus under control, totally, that costs will ultimately go away. And then what portion of the associate cost stays will be driven by the competitive market dynamics that we play against, and we do that all the time anyways.

Kate McShane

Okay. Thank you. I haven’t specifically asked about the Pro, which I should have asked a little bit earlier. So I want to make sure I get a question in on that you’ve been investing in the Pro experience for a very long time, as you mentioned earlier, enhanced delivery, credit, rentals, exclusives and then of course, all the investments that you’re making in the supply chain. We’re wondering if you can update us on a few of the enhancements that have recently gone live this year, what you’re most excited about heading into next year for the Pro?

Craig Menear

Sure. Obviously, the Pro is an important customer and we are to your point, investing in an ecosystem that encompasses a wide variety of capabilities, whether that’s product, brand, credit, delivery, all rental — tool rental, all of that as an important element of driving the Pro business. We’re really excited about the capabilities that we’re building out around delivery for our Pro customer and particularly in the flatbed network that will allow us to deliver big and bulky type products for our Pro customers. That will also take pressure off of our stores, the intent there is to relieve pressure from our stores. If you walked our stores, any at morning at six o’clock, you’d see lots of deliveries lined up in the aisles of the store, which is a great for the Pro’s are actually stopping in those aisles during that morning so that the flatbed delivery network that we’re building out, will give us the capability to remove that pressure from the stores to be much more efficient and to be able to open up capacity for delivery and begin to narrow down on windows to get to specific time slots for our Pro’s. That’s the work that we’re doing over time.

So we’re super excited about that. We’ve got a couple of these facilities up and running. There will be more coming towards the latter part of this year and then you’ll see an expansion in the next year. We’re kind of — Kate, we’re following the same pattern that we did when we build out the RDC network, kind of go slow at first, make sure that you have all the elements of it put in place that are operating efficiently. And then you increase the expansion of that on a more rapid basis as you move through the years. And that’s really what we’re doing, so really excited about that.

We’re excited about, the capabilities in connecting the Pro to the digital world as well. We’re seeing increased adoption there we on-boarded, the million or so Pro’s that we told you we were going to do into the digital capabilities. The engagement that we’re seeing there with Pro’s that as they get more familiar with the capabilities, that where you continue to enhance, we love the growth that we’re seeing with those Pro customers and their engagement in the digital world.

So, really we’re excited about the opportunities we have with a Pro customer. And the ability that we have to grow with the Pro and the more plan purchase element of their business, an area that we hadn’t really penetrated all that strongly. Because, it was largely done from a store base footprint, and the new supply chain capabilities give us a much greater opportunity to be able to play in that more plan, purchase element of the larger purposes. So super excited about that opportunity.

Kate McShane

Thank you. We are asking all the companies that are presenting at the conference for questions, and some are a little forward-looking, so you might not be able to expressly the answer them but your view would be helpful. Nice.

Question-and-Answer Session

Q – Kate McShane

The first question we’re asking is, if taxes were to go up next year, would you pull back on any of your investments?

Craig Menear

No. We will continue to do what’s necessary. Our approach to how we use our capital doesn’t change. We’re going to start with investing what we need to invest in position, the Home Depot to win in the marketplace on an ongoing basis. That’s just what we do. And we even talked about the fact that during the downturn of 7, 8, 9, we invested through that downturn, and that played to our advantage, right way. We’re investing through COVID. That’s going to play to our advantage. So now we would not pull back on investment that’s necessary to position the business.

Kate McShane

Okay. The next question, and again, we talked about this a little bit, but when it comes to margins, Calendar 21 do you expect them to be higher or lower than 2019?

Craig Menear

I think the answer there is to go back to what we shared with everybody at the investor conference in December, right? Through the investments that we’re making in the business, we want to position the Home Depot to be able to gain share faster in the market to be able to outgrow the market, no matter what the environment is. And if we can accomplish that, we then deliver incremental profit dollar growth. And that’s really what we’re focused on.

You don’t take rate to the bank, you take dollars to the bank. So if we can grow incremental profit dollars, that really is we know, we can then flow that through to the bottom-line for our shareholders. And that’s really what we’re focused on. If you think about areas that we’ve invested in the business and appliances comes to mind, right? We’ve put a lot of investment in the business in appliances over the past 10 years, we have grown incremental share in a huge way in that space, and now have a multi billion dollar business in appliances. That, obviously is a category that puts rate pressure on us from a margin standpoint, but the incremental gross margin dollars and then operating profit dollars that we gain way offsets the pressure that we see from a mix standpoint, on rate. And that I think is exactly the kind of investments that you want us doing as an investor in Home Depot so that we can deliver great returns and great return on invested capital as well. And so that’s really what our focus is overall rate will fall or rate falls. Our job is to deliver incremental off margin dollars so that we can deliver for our shareholders on the bottom-line.

Kate McShane

Thank you. The third question, which is not really applicable to Home Depot, but I’ll just ask it, do you expect to have more or fewer stores in ’21 versus 2019? Or is it the same?

Craig Menear

We expect to have a few more modest, right? Our store expansion has been very, very modest over the past, I don’t know 10 years plus, we open a handful of stores or two, three stores a year, maybe as many as five depending on the given year. Most of those have been in Mexico. But in recent years, the last couple of years, we’ve been able to actually open some stores in the U.S. where we’ve been working on filling opportunities it goes to one of your earlier questions about how are you — you think about migrations and that’s something that we’re always working on.

And, we’ve opened a handful of U.S. stores to fill-in market opportunities that we’ve seen come up and we’ll continue to do that we continue to evaluate that on an ongoing basis. So, handful of stores, probably the incremental over the next couple years.

Kate McShane

Okay, thank you. And the last and fourth question is, with regards to pricing power, do you expect pricing power to be stronger or weaker going forward?

Craig Menear

I’d say Home Depot uses its size and scale to leverage its pricing power. So that’s something that we do on a consistent basis.

Kate McShane

Okay, great. I’m going to check in with the audience to see if they have any questions. For those who are listening on the webcast, there is a ask a question box where you can type in your question and I’ll be able to read it to Craig and Ted. The first question I see here is, do you have any thoughts on catering to Home Builders?

Craig Menear

No. I mean, we’re really not set up for new construction. That’s not — we have Home Builders that shop at the Home Depot. But that is not what we are really set up to do. We really don’t cater to new construction. We couldn’t put together a lumber package to save our life. That’s just not our forte. We don’t have the space in our stores to be able to do that. That’s just not who we are.

Kate McShane

Okay. The next question touches upon something we talked about with regards to inventory. The question is, are there any areas that are more affected by inventory or lower levels of inventory now than others? And just how do you — how did the inventory challenges that are being created by the new normal volumes of high speed delivery? How are you addressing them?

Craig Menear

Sure. Yes. When you push an incremental 7 billion through in a quarter there’s definitely create some challenges. There’s no doubt about it. And Ted, if you want to share some of the categories.

Ted Decker

Yes. I would say every category was impacted, some worse than others. I think our two ends of the building were probably the most impacted with lumber and pressure treated with a huge spike in demand there and then in our garden, consumer and the cleaning products. Those were probably the two most impacted. But really every category participated in that 25% growth in Q2. In our year-over-year in-stock rates are down in virtually every category.

I can say them now with deep collaboration with our internal Home Depot supply chain team and with our supplier partners; we’re seeing improvement across the board. And we’re seeing accelerating improvement across the board. So lumber prices up about 150 plus percent is helping in the loss of supply and demand on lumber, but things like paper products and cleaning which you didn’t see at any retailer for weeks on end, you’re seeing paper products start to show up. And so across the board, we’re seeing pretty meaningful improvement and the worst of that imbalance is supply and demand as fortunately past us.

Kate McShane

Thank you. Another question that was just asked, is there a way to quantify the impact from the recent hurricanes and the fires that — can you quantify the impact of recent hurricanes and fires have had on the business?

Craig Menear

Yes. No, I actually don’t have numbers on that. Fortunately, where the hurricane actually came in was a much less dense population than what it could have been. And that doesn’t help the folks in Lake Charles, who are — pretty much took a direct hit. But it really was fortunate that it wasn’t in a very dense populated area. If it could have gone into Houston or gone into even New Orleans, it would have been much more significant. Probably the way the teams reacted, responding to continue to react and respond to the community needs, but it’s not a huge adjustment at this point.

And then in fires, right now in a scenario where they’re still going strong, there’s really not a ton of activity that happens in this stage of the game. And they’re just really — it’s a scary environment because when you’re in an environment like that where fires happen, it’s fueled by the Santa Ana winds, they spread so quickly, there’s multiple fires going. It’s just a really scary situation for the folks that are in those communities for our associates. Unfortunately, we’ve had associates who have lost their homes. And our Home Refund is stepping in to try to help those associates, which we will do but why it’s a tough, scary environment, but not at this stage of the game there’s really not a big impact financially on the business.

Kate McShane

Okay. Thank you. And the last question we’ll take from the audience is just how do you see the competitive landscape changing? We talked about independence before, but one of your larger competitors has been working to improve its operations. And so when it comes to the Pro’s, specifically, how are you continuing to execute and outpace your closest competitor?

Craig Menear

The thing for us that’s really, really important is clearly we have to be aware of what’s happening in the market around us, but the most important element for us is to stay focused on our customer and our customer needs. And to be in tune with the customer understand what their needs are and make sure that we’re addressing those. And if we do those things, we will continue to grow faster than the market the same way we did in the second quarter. And that’s really our focus overall, understand the customer, understand their needs, how do we help them run a better business when it comes to our Pro customers, make them more efficient and more effective in what they do every single day and then for our DIY customers to be there for their needs. And to help them get proper projects done whether that’s through know-how with our associates, through know-how that we have on homedepot.com or whether it’s a great innovative product that we bring to market that makes it simpler for them to do the projects. That’s really what our focus is overall.

Kate McShane

Okay. And with that, I want to thank you for joining us today and for all your time.

Craig Menear

Thank you, Kate. I appreciate it very much. Thank you for having us.

Kate McShane

Nice to see you.

Craig Menear

Good to see you as well. Take care. Thank you.

Ted Decker

Thank you.





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Midatech Pharma plc (MTP) CEO Craig Cook on Q2 2020 Results – Earnings Call Transcript


Midatech Pharma plc (NASDAQ:MTP) Q2 2020 Earnings Conference Call September 10, 2020 9:00 AM ET

Company Participants

Tim Sparey – Chief Business Officer

Stephen Stamp – COO & CFO

Conference Call Participants

Tim Sparey

Good afternoon from Cardiff and welcome to the Midatech Pharma 2020 Interim Results Presentation.

With me is Stephen Stamp; COO and CFO of the company who will run through the presentation. At the end of the presentation there will be a question-and-answer session. We’ve already received some questions, but if you would like to submit a question, please do click on the bottom link at the bottom of your screen at any time and those questions will be fed through to us. We’ll endeavor to get through as many as we can, but apologies in advance if we do run out of time.

And with that, I’ll now hand over to Stephen, who will take you through the presentation. Stephen?

Stephen Stamp

Thank you, Tim and good afternoon, everybody in the UK and good morning to those joining from the US. I am Stephen Stamp, CEO and CFO of Midatech and if you want to put a face to a name, I am in the middle of slide two surrounded by the brains of the organization.

I have a dozen or so of slide today up which as Tim said would be happy any questions you may have submitted. Moving on to slide three, I should like to take this slide as read if I may, but I would encourage you to refer to our public findings both on the London Stock Exchange RNS in the UK and on SECs Edgar in the United States.

So starting the presentation really on slide four, I would say that the first half of this year and year-to-date has been quite busy for the company and if I had to probably describe it as transitional a somewhat overused word, but I think actually appropriate for this company at this time. We’ve achieved some critical milestones which I’ll review when we get on to the R&D [ph] slides, but most noticeable in the first half was the initiation by the board of a strategic review. That strategic review was triggered by a couple of things; one being the collapse in the capital markets in mid-February and alongside of that, the withdrawal of a perspective licensee that we had lined up for our project MTD201.

Those two things as I said over the strategic review and that review immediately resulted in a couple of things. First of all the termination of further in-house of MTD201, there was no way we could see ourselves raising the $30 million or so in where we needed to complete that program. Alongside of that we closed our operations in Bilbao. That actually was pretty must dedicate to the manufacture of MTD201 and we made 47 of our 66 employees redundant. That’s over two thirds of the company.

The cost of that program was a onetime £1.8 million in cash, but it did result in a monthly reduction in cash outflow of about £0.5 million. So a payback in less than four months.

At the same time since strategic review, we appointed a boutique investment bank called Noble, to look at all the company’s options including possibly a sale of assets, the sale of technologies and even a sale of the whole company and we tested that with something called a formal sale process under the takeover code to see if there was anybody out there who was willing to pay a quick premium for the company and return value to shareholders.

As it turned out and I think possibly because of COVID and the inability to due diligence and the like, we didn’t receive any credible offers for the company and in fact, the formal sale process ended up becoming quite some hindrance to the company because we couldn’t sell assets and we couldn’t raise money because under the takeover code, those were deemed to be frustrating actions.

So in the absence of any formal office, we terminated the formal sale process in July, although we are still considering expressions of interest in certain individual assets of the company. However, while all that process was going on, we managed to pretty much half the burn rate and we realigned our strategy and we landed two industry collaborations and as a result of that, we were able to raise £5.75 million in a UK placing in July and from my perspective, that was the first fund raised of some time on which the company’s been able to raise money and what I’d call normal terms, that being a sensible discount with zero warrants and bringing in institutional investors. So overall I think it was a good outcome of that whole process.

Moving on to slide five and let’s talk a little bit here about our realigned strategy. The core of the realigned strategy is focused on Q-Sphera. Q-Sphera is our PLGA-based technology, which prints using print heads, normal print heads, encapsulated drugs in a biocompatible and biodegradable micro state here and the ejection of a Q-Sphera product then forms a depot inside the body, which releases drug with predictable kinetics over an extended period and we can tune that product to perhaps really store up to six months.

So the strategy of the Q-Sphera comprises two complementary elements with a common goal and that common goal is to license Q-Sphera products to Pharma in return for multimillion dollar milestones and royalties in due course that being after proof of concept. So how are we going about it, well we’re developing a balanced portfolio of internal programs and formulation development collaborations with Pharma. So why are we doing it in a balanced way?

Well for internal programs, we’re in charge of the timelines but we need to find potential licensees and create an option to generate some milestones and royalties we’re looking for. With external programs, clearly we’re working on the customer’s API, so we had already made licensee, it’s clearly obviously bought into the program. However, he’s in charge of the timelines rather than us and to trying to keep a balance risk and reward.

So how are we going about this? We take our internal candidates to formation developments and something called in vitro solutions and these are laboratory tests to estimate the rate at which the drug releases — would release in the body and then having established that and optimize the candidness, we’ll then take the product through something called IND enabling animal toxic studies. So these are just to demonstrate that the products are safe enough to be tested in humans.

And we’ve been doing [ph] before we could seek a licensee so that we have pretty much full proof of concept for the licensee then to take the product on into human clinical trials. And since the beginning of April, which is the start of the strategic review and mid-July when we signed our second collaboration, we signed two collaborations in that period in only 3.5 months and I have to tell you I was astounded and pleased by that. That is lightning speed for a biotech company.

So the first of our collaborations is with a very large Indian company called Dr. Reddy’s and the second is with an EU affiliate of a global pharma company who name we can’t release just yet. In both cases, we’re being paid to develop Q-Sphera formulations of their proprietary compounds. The partners will then undertake the pre-IND enabling studies and will have an option to enter into licenses to access our Q-Sphera IP.

A key component and frankly change to the strategy is that Midatech itself will no longer undertake human clinical studies, unless they are paid for in full either by the collaborator or by [indiscernible]. Together with the collaborations covering the direct costs and contributing to overhead, it means our realigned strategy requires less cash and is less resource intensive for Midatech and in my view more appropriate to company of our size and reach. It also means we can work on many more things at the same time more shots on goal, something I’ll come back to.

Moving on now if I may to slide six and the result of that realigned strategy is that we have a much different looking R&D looking portfolio and one of my favorite expressions with multiple shots on goal as illustrated here. Six months ago, I must tell you the company was pretty much exclusively working on MTD201. Now we have nine molecules covering 11 indications in the pipeline, much more diversification and in my opinion a better risk allocation.

So moving on to Slide 7, looking at the Q-Sphera pipeline in some detail, there are seven programs in all. Notice that one of the collaborate has already exercised his option on a second molecule. So the three of the seven are now partnered. One of the molecules we’re working on is MTD215, which is a monoclonal antibody. We are describing this as investigational and I just want to issue a word of caution around this monoclonal antibody.

Monoclonal antibodies are very large molecule proteins and many of the latest generation medicines all of those with a generic name ending in MAB, are monoclonal antibodies and as far as we know, there have been no approved long-acting formulations of monoclonal antibodies or large molecule proteins and the reason for that is because these molecules are extremely delicate and they’re easily denatured in manufacture.

Our process, the printing process is relatively benign process in terms of shear forces, heat consultants and we have some of the track record, particularly with MTD201, which is a peptide of developing Q-Sphera formulation of peptide and small proteins. We’re now taking it for the next level with large proteins and investigating the feasibility of encapsulating a monoclonal antibody.

If we are successful and emphasize if, this would be a world’s first, but I must caution you there are significant challenges ahead. The goal is to make Q-Sphera small molecules into a self-sustaining business through collaboration and licensing. Proteins would be upside or be it a lot of upside.

So lastly a word on MTD201 on to slide eight if I may. This program remains available for licensing, although we are not investing in it anymore. In January of this year, we announced the results of our second Phase I study of MTD201 and we were able to demonstrate similar blood plasma levels of intramuscular, which is the blue line on this chart compared with subcutaneous, the green line on this chart, administration of the product and why is that important?

Well subcutaneous administration means that at least in theory the product could be self-administered by a patient at home rather than having to visit outpatients or the doctor’s century and that takes cost out of the system and taking cost out of the system is very important to payers as you can imagine. So these get our product improved, not only have other clinical benefit, but you also have to be shown to be taking cost out of the system.

Across several in vitro studies and two Phase I studies of which this is the second, MTD201 has demonstrated that Q-Sphera products offer advantages as listed on the right here for patients, physicians and payers including as I list simpler reconstitution, improved injectability, minimal burst release, predictable kinetics, lower cost of goods and now with this latest study, subcutaneous administration.

So let’s move on to our second clinical program and that is MTX110 on slide nine please. MTX110 is a combination of a proven chemotherapeutic called Panobinostat and our solubilizing technology called MidaSolve. Now soluble Panobinostat, is delivered direct to tumor via a series of microcatheters as illustrated on the right here under slight pressure using a so-called convection enhanced delivery system or CED system.

So there is a port on the side of the child’s head. The drug is injected and is delivered to the tumor by the catheter. We’re developing MTX110 initially for DIPG, Diffuse Intrinsic Pontine Glioma, which is an intractable pediatric cancer with about nine months average survival and no effective product treatments.

We’re expecting the ongoing Phase I safety and tolerability study at UCSF to reported few weeks. And for that study to confirm those for Phase II. Our plans for Phase II at Kinderspital, Zurich are well advanced and the expected endpoints of that study will be the survival of 12 of 19 patients at 12 months because this is an orphan indication and because there are no other current treatments, we will approach the regulators assuming we get a successful signal at the end of the Phase II study to discuss potential early approval of this product.

But we’ll see, but as with Q-Sphera MTX110 also offers multiple shots on goal. So while DIPG is an often indication offers the fastest route to $100 million market, we’re also examining medulloblastoma which is another form of pediatric brain cancer with a similar sized market and we have some preclinical work going on in glioblastoma multiforme or GBM, which is an adult form of brain cancer, and a much larger $3 billion to $5 billion market.

Now, having said all of that, I must tell you, we are proceeding here with caution. You might recall that Secura Bio, the owner of panobinostat, the active ingredient here has in our view wrongly terminated our license to that product. So we would either need to resolve the situation with Secura Bio or delay the launch until the relevant patents have expired and that could be potentially two to three years.

More of that when we have some resolution to the Secura Bio. So moving now to Slide 10 in the financials, there was no material revenues booked from latest Q-Sphera collaborations in the first half of 2020. And the first half results were heavily impacted by the strategic review including a non-cash impairment charge you see here of £11.59 million as a result of the state of cessation of MTD201. So pulling out those sort of one-off numbers on Slide 11, please.

The first half included a number of one-time costs and charges including in R&D, redundancy costs, resulting from the closure of Spain and a few heads in the U.K. of £0.88 million. The write down of the Spanish assets, some of which returned to the U.K. but others will be sold in auction of £0.55 million offset by a credit because stock options were lapsed of £0.35 million and in R&D excuse me in administrative costs, we had one-time items of £350,000 associated with the repayments of Spanish government loans, including penalties, some U.K. redundancy costs of £70,000, and legal and professional costs of £510,000 some of which were due to the restructuring and some which were due to an aborted financing in February of this year as a result of this market crash, which in turn triggered the strategic view.

So stripping those one-time items out, actually the operating loss was not too dissimilar from the first half of last year, and in the second half will be lower again because of the closure of Spain.

So moving on one more Slide to 12 and looking a little bit at liquidity. At the half year, we had net cash of £3.59 million. We hadn’t at that point paid back all of the Spanish loans. So having done that, and there’s some Spain in cash, there will be a net outflow in cash of £0.6 million in the second half.

We have the proceeds from the July placing, which were net £5.28 million coming in. And then we have some warrant exercises of $1.25 million — and $1.02 million, £0.83 million in August, so we had a pro forma net cash position of £9.7 million the half year because we’ve burned a little bit of that two months of that since then. But our projection is that that cash runway takes us well into the fourth quarter of 2021.

So we are as well financed as we have been for quite some time now. So we have pretty good reasons given the traction we’re beginning to see with our Q-Sphera realigned strategy and a decent runway to look forward to the future with confidence.

So with that point, I’ll hand back to Tim for questions please.

Question-and-Answer Session

Q – Unidentified Analyst

Thank you very much, Stephen. We have received a number of questions from people who are participating in addition to the ones that I mentioned, we received ahead of the event. But if anybody does have any further questions, please do feel free to use the Submit question button. And those will be fed through to us. I will do my best to work through these. They’re obviously by definition, not in any particular order.

But we will look to try and answer everything that that has been submitted. There are a couple of common themes Stephen coming through. One of them is regard to timetables and do you have any expected or aspirational timelines to see either the existing collaborations come up, convert to formal development partnerships, and any idea that you can give listeners as to when they might be concluded their initial evaluation stages and moving on further?

Stephen Stamp

Right, thank you, Tim. So, as I don’t repeat myself, but one of the downsides maybe the only downside actually of a collaborative deal as opposed to the internal program is that the partner is more or less in charge of the timetable. It is the partner that will be doing the pre-IND enabling studies. And really, until you’ve done those and know that you have a product that is going to perform in the body as you would hope you will, according to target product profile, and there are no toxicology issues, which you wouldn’t expect but you have to prove it.

You haven’t really achieved proof of concept. And until you achieve proof of concept, you’re unlikely to get a multimillion dollar license fee out of a partner. So having said all of that, our target is to land our first licence fee in the first quarter of next year.

Unidentified Analyst

Okay, thank you. You’ve mentioned obviously the relationship and the situation with Secura Bio. Obviously, there’s very limited that we can say at this stage. But we have had a couple of questions. Is there any further update that you can give? Is there a formal process in train with them? Or is it just a wait and see?

Stephen Stamp

So one of the options available to the company is to go to court and seek a declaratory judgment and have the license reinstated, if we win. We’re advised that will take two possibly three years and cost $2 million, possibly $4 million. It seems like a heavy price to win something that already belongs to you. So we’re not persuaded that is the best use of the company’s funds. So we will prefer a negotiated settlement if possible. We have invited Secura Bio to reconsider, they have chosen not to do that. So our options are becoming more limited to be honest.

Having said all of that, the license agreement attaching to MTX110 by the panobinostat license is not particularly favorable to the company. And we could make an argument that actually the product is economically more valuable without the license, but it would mean delaying launch until the patents that expired. So, those are the sort of options that we’re weighing up now. In the meantime, we’re able to proceed with the program because we were using panobinostat for research purposes.

Unidentified Analyst

Thank you. Another theme that’s come through in a number of questions is regarding the future of MTD201. Really, you’ve mentioned that partnerships are very much something that’s being looked at. But is it an asset that the company will consider selling if the right offer was available?

Stephen Stamp

Absolutely. So, MTD201 whilst we felt to get a licensee for it, as of yet anyway, it hasn’t been a complete failure, because it has served a very useful purpose for demonstrating the characteristics and opportunities the Q-Sphera technology offers in humans, and that frankly is invaluable and without those data, I don’t believe we’d have a cat and hills chance of getting a licensee for any of these other molecules that are working on because it very much is a proof-of-concept, proof-of-principle.

So the short answer is yes, we would be very interested if somebody came forward with MTD201. But at this time, I don’t think it’s good use of the company’s energy and resources to focus on that, we’re better focusing on the newer opportunities, particularly the API’s that have come to us asking us to work on their programs.

Unidentified Analyst

Thank you. We’ve also had a couple of questions on strategy and what you’ve outlined in the presentation earlier. One, viewers made the comment that might take history of changing direction. Can you now confirm that this is the long-term strategy for the company? And if that is the case, why didn’t pursue this sort of collaboration early partnering type strategy before now?

Stephen Stamp

Yes, so I personally, I wasn’t part of some of those earlier forays that the company made. So I can’t talk exactly what the thinking behind that was, I think but potentially the company was looking to products that were closest to market which is an understandable aspiration and put all its efforts and energies and resources behind those products. The problem is that the closer you are to market in terms of Phase II, Phase III, the bigger the costs, and while these programs were going through the clinic, so the value of the company was declining and it became more and more difficult to raise the quantum of funds that you would need to get the product over the line.

And then the pulling out of the licensee of MTD201, frankly was the final straw. So in my view, given this current size of the company and the access to resources that it has, this is probably the only feasible strategy. By that I mean, not doing clinical trials and partnering early that the company could pursue at this time. Having said that, if we’re successful enough, when we get enough of these things over the line, and we get enough licenses and we get enough milestones, we could afford to start reaching further down the clinical path again and capturing more of the value. But as of today, this is the strategy and this is for the long-term, yes.

Unidentified Analyst

Thank you. And a related question obviously, with the closure of Bilbao, how does the company plan to manufacture Q-Sphera products going forward?

Stephen Stamp

That’s an extremely good question. So the listeners will understand that Q-Sphera is a unique manufacturing process, which is what makes it so valuable and so differentiated from the traditional methods of PLGA manufacturing. So you can’t go along to a CMO and say, print these tablet or make these tablets for me, all the technology, the knowhow is inside Midatech.

So we’re in the process of lining-up some partnership agreements with well, that’d be one in the end but we’re talking to several CMOs, whereby we can take the smallest scale equipment that we salvage from Bilbao, we need to add one or two pieces to it and install that inside a CMO which will have GMP capability such that we can manufacture at least clinical trial scale and then it will be the partner that will take on the scale up to commercial manufacturing.

Unidentified Analyst

Okay, thank you. One about the listings. Does the company intend to keep both the AIM and Nasdaq listings?

Stephen Stamp

Yes, we do.

Unidentified Analyst

Okay, thank you. It’s very clear. And we’ve had a few other questions coming that are not really don’t fall under the previous sort of headings, but I’ll just read them out in order. Emergex appears to be well funded and they’re making progress with the T-cell vaccine development program. What are the implications for the MidaCore platform of this?

Stephen Stamp

So Emergex is a private company, and as a private company, they don’t have to disclose exactly what they’re up to and what they’re doing. I understand that they’re making good progress and they have a license to some of our gold-nanoparticle patents. There are very smart people in Emergex, some of whom were inventors in that whole gold-nanoparticle technology. So in some senses, they are the best people to take that technology forward.

The license agreement that we have with them is a sort of traditional structure involves development milestones at certain stages and then back end royalties. So we’re hopeful that they will be successful in what they do.

Unidentified Analyst

Absolutely. Thank you. And one thing that has been mentioned in recent announcements is the situation with the EU regarding SME status, is there any update you can provide on that?

Stephen Stamp

So the last submission we made to the EU was on the 1 of July, and we haven’t heard back for them despite a number of prompts on our side. It is I have to tell you it’s quite frustrating Tim that Midatech isn’t an SME by European definition. So I think the SME rules were put in place to prevent giant companies say Pfizer setting up a company subsidiary calling itself an SME and getting a grant.

And that’s understandable. On a particular date in 2019, CMS as a result of a license agreement that was put in place in February 2019 owned more than 50%, 51% in fact of Midatech and because of that, the European Union by the way, they’re now down to 17%. But because of that the EU is choosing to regard CMS as a linked enterprise and therefore Midatech is part of the ex-CMS group. And therefore they’re looking at the whole of CMS, which has got 2,000 employees and billions of dollars of revenue as part of the Midatech Group which is frankly ridiculous.

And that that’s our frustration. So we’re trying to persuade them to look through the black and whites of the rules and see the substance over the form here, but we’re still waiting.

Unidentified Analyst

Thank you. One listeners has commented that Midatech is a complex vehicle to analyze. Maybe just wondering if any of the company’s advisors or any independent third-party had put together an assessment of the value of the group post the strategic review. And if not, are you anticipating anything maybe published in the coming months?

Stephen Stamp

Yes, I’m not sure I would agree with the complex, well so we’re certainly simpler than we were. As it happens, there have been two brokers today, one from each of our joint brokers, one of them pope has put together actually quite interesting valuation model. And they valued the company in three parts. One part is the Q-Sphera platform where they’ve sort of taken a shot at what a pro forma Q-Sphera product, and its revenues might look like. And then they’ve assumed I think there are going to be five of those over five years. And they’ve applied percentages of success to those various programs.

And then they’ve separately valued MTX110. And then they’ve also knocked-off the sort of present value of the overhead and SG&A costs and come out with a valuation of about £65 million. So I would commend your readers to take a look at that because that sort of breaks the company up into nice manageable chunks and is pretty transparent some of the valuation.

Unidentified Analyst

Thank you, very helpful. Well that concludes the questions that I’ve received to-date. If anybody does have a final question, you’ve got a few more seconds to submit it. And thank you very much, Stephen for that very insightful looking to the current situation of Midatech.

Stephen Stamp

Thanks, Tim and thanks everybody for joining.





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IAG’s Cash Call Falls Flat, Saga Sags By Investing.com


© Reuters.

By Geoffrey Smith 

Investing.com — Another day, another sign of the travel industry struggling to escape the clutches of Covid-19.

International Airlines Group (LON:), the parent of British Airways, Iberia, Aer Lingus and Vueling, has had to price its 2.7 billion euro capital raise at a 36% discount to the reference price, a stark illustration of how hard it’s getting to persuade private investors to put capital into an industry which can struggle to make sustainable profits in the best of times.

IAG became the latest big airline group on Thursday to revise down its outlook for the fourth quarter of this year saying it now expects Available Seat Kilometers, a key metric of capacity, to be down 60% from year-earlier levels, rather than the previously expected 46% drop. For 2021, it revised its forecasts for ASKs to 27% below 2019 levels, from a previous estimated drop of 24%.

“Since July, IAG has experienced an overall levelling off of bookings,” the group said in a statement. “Short-haul bookings have fallen slightly following the re-implementation of quarantine requirements by the U.K. and other European governments for travellers returning from specific countries including Spain.”

The most optimistic thing it could say was that its more lucrative long-haul business has registered a “modest increase” since August, and that “where travel markets have reopened without border restrictions and quarantine requirements, IAG has been encouraged by the level of pent-up demand that exists for air travel.”

IAG shares fell 3.8% to a three-week low in response, underperforming both the and the . They weren’t helped by some unfortunate-sounding lobbying from the International Air Travel Association, which warned that the U.K. aviation industry, the backbone of IAG’s business, is in existential crisis.

“Without a rescue plan, 820,000 jobs will be vaporized by quarantine and they may never come back,” IATA said in a statement that called for a new airport testing regime, a suspension of Air Passenger Duty and the extension of the government’s furlough scheme “until border restrictions are lifted and the industry has a chance to recover.”

IAG does at least expect to break even on an operating cash flow level even under its new assumptions. However, it warned that it still expects that passenger demand will return to 2019 levels no earlier than 2023.

IAG wasn’t the only travel group scrambling to raise money on Thursday. UK-based Saga (LON:), which specializes in selling holidays and insurance to the over-50s, said it will try to raise 150 million pounds to plug the holes in its balance sheet made by the pandemic.  The company swung to a pretax loss of 55 million pounds in the six months through July, sending net debt (excluding its cruise business) to 3.6 times EBITDA.

Saga shares had already lost nearly 70% year-to-date before the announcement and fell another 5.4% in the wake of it.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Yatra Online, Inc. (YTRA) CEO Dhruv Shringi on Q1 2021 Results – Earnings Call Transcript


Yatra Online, Inc. (NASDAQ:YTRA) Q1 2021 Earnings Conference Call September 9, 2020 8:30 AM ET

Corporate Participants

Manish Hemrajani – Head, Investor Relations

Dhruv Shringi – Co-Founder and Chief Executive Officer

Conference Call Participants

Operator

Good day, and welcome to the Yatra First Quarter 2021 Earnings Conference Call. Today’s conference is being recorded. As a reminder, we will not be taking any questions from the press today.

At this time, I would like to turn the conference over to Mr. Manish Hemrajani, please go ahead sir.

Manish Hemrajani

Thank you, Holly. Good morning, everyone. Welcome to Yatra’s fiscal first quarter 2021 financial results for the period ended June 30, 2020. I am pleased to be joined on the call today by Yatra’s CEO and Co-Founder, Dhruv Shringi.

The following discussion, including responses to your questions, reflects management’s views as of today, September 9, 2020. We do not undertake any obligation to update or revise the information.

Before we begin our formal remarks, allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking statements which are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that maybe beyond the company’s control. These include expectations and assumptions related to the impact of the COVID-19 pandemic, for a description of these risks please refer to our filings with the SEC and our press release.

Copies of this and other filings are available from the SEC and on the Investor Relations section of our Web site.

With that, let me turn the call over to Dhruv. Dhruv?

Dhruv Shringi

Thank you, Manish. Good morning everyone and thank you for joining us. I hope you and your families are all safe and in good health. This is the first earnings call that we are doing in a little over a year in that we were involved with the Ebix merger. In the meantime, the global COVID-19 pandemic situation requiring the cessation of all non-essential air travel in India, while the situation is not what we had expected, it is the situation that we face. During this time of extraordinary changes and challenges, I’m proud of the way our teams have responded to these and that included against factors which are not directly within our control.

This is also not the first time that we are facing a challenging situation of the company. From the financial crisis back in 2008, to the bankruptcy of Kingfisher Airlines and the subsequent collapse of domestic aviation in India in 2012, we’ve been through difficult periods before and each time we’ve come out stronger. And I feel confident that the same will be the case this time as well. We are starting to see a gradual recovery in travel after the reopening of domestic aviation towards the end of May post India’s nationwide lockdown in the month of March, April, earlier this year.

We believe the worst is behind us now. We’ve made all these essential changes to the operations to cut costs to the bare minimum, and after capital rise in June earlier this year, we believe we have the balance sheet to see us back to profitability. We now look forward to resuming the same growth and profitability trajectory we were on before all this unfolded.

We are excited about a multi-pronged approach to increase shareholder value. As you will recall, we are one of the leading OTAs in India and the largest corporate travel management business in the country as well.

First, with regards to the return of travel in India after the lockdown, on the consumer side, we started to see some early signs of recovery in travel in India since late May, when air travel was allowed to start back. Domestic flyers have now returned to about 25% of people with levels and that number continues to grow and we expect this to reach 40% plus by the end of the calendar year.

On the international air front, airlines are beginning to operate under the bubble agreement between countries. So far, we’ve seen approximately 10% capacity come back online. And this number continues to increase, literally on a weekly basis as new and new bubble agreements are entered into.

Domestic hotels were earlier taking bookings on a very limited basis. But since September 1, a number of states have allowed hotels to start operations without any quarantined restrictions. We expect to see gradual recovery here as well in the next quarter as people begin to undertake short haul and drive-in holidays.

On the corporate travel front, we are the leading corporate travel service provider in India, our easily scalable, fast technology platform enables us to serve customers of any size and industry. Currently, the online penetration in the corporate travel market in India we believe is just about 10%, a large percent of the market almost 60% is served by smaller offline players. As a result of the pandemic, we believe and they are already beginning to actually see signs of this, that there will be an accelerated shift towards online players, especially as the big contracts come up for renewal at the end of their life and go through the bidding process. We remain confident in our platforms credibility to serve any scale and types of customers.

Our other strategic growth driver is the expansion of our corporate digital platform as we essentially need to add non-travel related digital offerings to this corporate customer bases.

As the largest corporate travel service provider in the country, we have strong relationships with all of our corporate customers, which constitute very large and well-known enterprises in India. We continue to make inroads into these organizations with our non-travel options of expense management, EdTech and others. Our EdTech offering we have been in partnership with upGrad and has been well received by corporates even those it’s early days yet.

In a tough economic climate, we’re seeing corporates realize the importance of developing and rescaling the workforce to work on pressing challenges. Our platform allows our clients to offer these opportunities to their employees, especially as it remained underutilized during the pandemic. Corporates also view EdTech as an employee retention tool.

On our hotel networks front, we recently announced a partnership with Amazon India to provide our hospitality partners with a wide range of products catering to their various needs that’s the reason hospitality partners can leverage the Amazon business marketplace as a one-stop destination to access a wide range of products across categories to cater to their needs and to sell products in a safe and efficient manner.

Now a quick update on the litigation against Ebix as well. So while I’m not at liberty to give any details of the litigation, I would just like to point out here that a large part of our legal costs of this litigation is linked to the outcome of the case. And it’s not a direct cash outflow for us at the moment. Additionally, neither are we dependent, nor have we based our operations planning on a favorable outcome from the litigation.

Coming to our fiscal first quarter results, this quarter reflected the bulk of the impact of the nationwide COVID lockdown in India as travel was largely shut in the month of April and May and only gradually began to open up in June.

In the June quarter, our adjusted revenue decreased by 86% to INR 236.2 million or USD 3.1 million. Our adjusted EBITDA loss increased to INR 309.4 million, which is approximately $4.1 million in the three months ended 30 June from adjusted EBITDA loss of 205.8 million, or about $2.7 million in the three months ended June last year.

There was also an adverse impact of INR 168.4 million or USD 2.2 million on our operating performance in the current quarter due to legal and professional fees related to the merger transaction with Ebix. So these are one-time in nature and will be non-recurring. Excluding this, our adjusted EBITDA loss would have been INR 141 million or USD 1.9 million for the quarter versus an adjusted loss of INR 205.8 million or USD 2.7 million for the same quarter last year. So despite COVID, we’ve been able to on an ongoing basis drive improvement through cost control in our EBITDA loss.

Talking a bit more on the cost side, during the quarter we focused our efforts on restructuring our costs and significantly brought down our fixed costs run rate from approximately 2.7 million a month in the month of March 2020 to approximately 1.2 million a month for the month of May 2020, through a combination of companywide salary cuts ranging from 25% to 75% and renegotiation of contracts with our various service providers.

We believe our current liquidity position and optimized cost structure provides us with enough capital to withstand a prolonged slowdown if it were to transpiring the travel industry.

As of June 30, 2020, the balance of cash and cash equivalents and term deposits on our balance sheet was INR 3.675 billion, or approximately USD 48.7 million. Since then, however, we have settled our [Ebix] [ph] litigation and [indiscernible] same as part of that a final payment was made for the earn out of the acquisition of approximately 11 million. And our current cash balances as of 31 August 2020, is approximately $34 million. Given our reduced burn rate, we believe we have adequate liquidity on our balance sheet to return to profitability.

With our optimized cost structure and newly launched high margin initiatives, we believe we can now again breakeven at approximately 50% of our case over December 2019, quarter run rate of 22.2 million. We’re excited about our partnership with Zaggle on the expense management solutions; we view expense management as an integral part of our digital offering, as we continue to diversify beyond our core portfolio of travel to become an end-to-end business solution platform for our clients. Joining hands with Zaggle helps us guide efficiency for our clients by automating the expense management process. Our technology platforms complement each other and we look forward to going with Zaggle to drive lasting business impact for our clients.

A third-party report by MRFR put the Indian expense management software market as the fastest growing market globally at USD 593.3 million by the end of 2025, growing at a CAGR 14.1%.

Lastly, I would like to remind everyone that India’s travel market and topic travel market in particular, was the fastest growing travel market globally pre-pandemic growing at 12% CAGR and expected to reach 32 billion by 2020. A large part of the corporate travel market was offline pre-pandemic and we expect the shift from offline to online to accelerate as a result of the pandemic, benefiting online players like the Yatra in the longer term. This concludes our prepared remarks.

Let me now open the call for Q&A. Manish over to you.

Manish Hemrajani

Thanks, Dhruv. Holly, can you please open up the call for Q&A?

Question-and-Answer Session

Operator

Q – Unidentified Analyst

A – Unidentified Company Speaker

Operator

It appears there are currently no telephone questions. So I’d like to hand the call back to our host for any additional or closing remarks.

Manish Hemrajani

Thanks, Holly. Thank you, everyone for joining us today. We look forward to speak to you in the near future. Dhruv any closing remarks?

Dhruv Shringi

Just like to thank everyone again for taking out the time. I know it’s been a while since we’ve last been heard. And now going forward, we will end up probably interacting on a quarterly basis. And if there are any follow-up questions that any of you have, please feel free to reach out to Manish. Thank you so much and stay safe.

Operator

Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect.





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Lululemon Athletica Inc. (LULU) CEO Calvin McDonald on Q2 2020 Results – Earnings Call Transcript


Lululemon Athletica Inc. (NASDAQ:LULU) Q2 2020 Earnings Conference Call September 8, 2020 4:30 PM ET

Company Participants

Howard Tubin – Vice President, Investor Relations

Calvin McDonald – Chief Executive Officer

Meghan Frank – Senior Vice President, Financial Planning and Analysis

Alex Grieve – Vice President and Controller

Conference Call Participants

Lorraine Hutchinson – Bank of America

Mark Altschwager – Baird

Matt McClintock – Raymond James

Adrienne Yih – Barclays

Ike Boruchow – Wells Fargo

Alexandra Walvis – Goldman Sachs

Omar Saad – Evercore

Matthew Boss – JPMorgan

Operator

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Second Quarter 2020 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Howard Tubin

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 would like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management’s current forecast of certain aspects of Lululemon’s future. These statements are based on current information, which we have assessed which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained 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 reports 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 would like to remind investors to visit our investor site where you will find a summary of our key financial and operating statistics for the second quarter as well as our quarterly infrograph. Today’s call is scheduled for 1 hour. So please limit yourself to one question at a time to give others the opportunity to have their questions addressed.

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

Calvin McDonald

Thank you, Howard. I am 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 are seeing in the business as we look forward to the back half of the year. The results we are 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 products 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 am joined by Meghan Frank, our SVP of Financial Planning and Analysis, who continues to be a supportive partner as she works with me in 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 be available to answer your questions during the Q&A portion.

Before I detail our results, I would like to speak for a moment about the importance of diversity 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 everyday. 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 one, we are not reporting same-store sales due to the significant number of stores that remain closed during the beginning of the quarter. Our e-commerce business continued to accelerate with comps in quarter two 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 setup an opportunity for us to continue to innovate and gain market share. We are learning how our guests are changing their behaviors and we are adapting 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 have been making across the business.

One of our key strengths is our omni operating model. For the last several years, we have 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 are learning now during the COVID-19 environment is that omni means much more to our guests and 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 four of last year to 157% comp in the current quarter. Similar to quarter one, we have 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 four and ensure our guests continue to receive the highest level of service we have 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 roadmap for the next 2 years and given our ecommerce business has currently accelerated beyond our expectations we prioritize and pull forward these investments.

We are also continuing to grow our brand and engage with our guests across our international markets. In China, we are experiencing a strong rebound in store with same-store sales up over 30%, coupled with strengthen in e-commerce, which grew over 130% in quarter two 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 two, 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 are 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 to 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 have reopened to remain consistent with the current levels for the remainder of the year, we still expect to grow our top line in quarter three and quarter four.

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 pickup in store capabilities and our 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 two, 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 in 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, pickup in store functionality to buy online pickup by curbside. Second, we have enabled virtual waitlist 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 guest 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 sweat life 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 am also excited that in August, we were able to convert our Annual SeaWheeze Half Marathon into an extremely successful virtual event, which over 23,000 people for more than 100 countries participated, including myself. We have partnered with the running app, Strava and offered a 10-K 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 signs of feel. I am 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 in 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 utility TAC fabric. Initial response to these new styles has been strong. In particular, the City Sleek has exceeded expectations by a factor of two as the number one performing style in the company during the initial days of the launch and we are 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 am also pleased with our move toward more inclusive sizing. This is an important step forward for Lululemon and I am 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 sequential improvement relative to quarter one, 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 line 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 signs 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 are seeing in the marketplace towards apparel that provides versatility, comfort and technical innovation.

Before shifting to our outlook, let me update you on two of our omni guest initiatives, MIRROR and Membership. MIRROR is a further example of how we are 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 standalone 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 are on track to begin offering the MIRROR in 10 to 15 Lululemon stores in the United States by early quarter four when we will also begin leveraging our digital channels to help build the 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 are 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 am excited to announce we are continuing to test a program in Edmonton, Chicago and Denver and starting this week we will 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 offering such as special product, dedicated online sweat classes and inspiring guest speakers to extend the Lululemon experience. With COVID-19 in mind, I am 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 sweat life.

Let me now share our thoughts on how we are 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 four. 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.

Meghan Frank

Thanks, Calvin. I will start by providing details on our Q2 performance and although we are not providing specific guidance, I will offer some color on 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 pre-tax 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 high single-digits decline. In our digital channel, we posted a 157% constant dollar comp increase on top of the 31% increase last year. Given the significant number of temporary store closures in Q2, we do not know 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 and 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 two planned optimizations. In terms of our digital channel, e-com contributed approximately $554 million of top line or 61% of total revenue. A constant dollar e-com comps exceeded our expectations increasing 157%. Excluding the impact of our online warehouse sale, e-com 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 and full price sales as reflected on our flat product margin results year-over-year.

In terms of e-com drivers, we continue to see strength and 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 guests response to our product, and the investments we have made in our global digital platforms to improve guest experience. Those profits 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 de-leverage on DC related costs, which was offset by 40 basis points of product team costs leverage and 30 basis points of occupancy and depreciation leverage. Product margin was flat year-over-year inclusive of the online warehouse sale, as lower product costs and product mix offset higher markdowns. They 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 for 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 revenues due to COVID-19 related store closures and our commitment to continue to pay our employees through this period of disruption. We also associated with COVID-related supplies and PPE, de-leverage and depreciation and de-leveraged from here. These are partially offset by expense reductions relative to our original budget coupled with a 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 and 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 spent to support our business growth, digital channel and analytics capabilities and supply chain investments.

Turning to our balance sheet highlights, we ended the quarter of $1.2 billion of total liquidity. We have had $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 with $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 a 20% to 30% range. Our repurchase program remains on pause as part of our COVID-19 cash management strategy. They have approximately $264 million remaining on our current $500 million purchase plan.

Let me shift now to current trends and share with you some color on how we are looking at the remainder of the year. Due to the dynamic nature of the macro environment, we are not returning to our historical cadence to 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 and let us continue 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 have continued to see guests shift between channels, which has driven outsized growth on our e-commerce sites. As Calvin mentioned, we have 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 service is approximately 75% of last year’s volume.

As we continue to prioritize our people in 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 open 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 operate at 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 revenues 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 are currently experiencing in reopened stores. In our digital channels, 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. As 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 spending 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 with a gross margin relative to our original budget.

In terms of SG&A for the full year, we expect de-leverage 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 would be modest for the year overall, the bulk of this will be realized within SG&A contributing to de-leverage 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 would 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 have seen recently and we experienced ongoing strength in our e-commerce business. Longer term, we remain committed to our power free growth plan and we are excited with the opportunities to remain in front of us.

And now back to Calvin for some closing remarks.

Calvin McDonald

Thank you, Meghan. And I want to take this moment to also thank all of the Lululemon employees around the world to continue to be agile, nimble and creative as we meet and exceed the expectations of our guests during this time. I am 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 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 are now pleased to take your questions. Operator, we can now open it up for Q&A.

Question-and-Answer Session

Operator

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

Lorraine Hutchinson

Thanks. Good afternoon, I wanted to ask about how you are thinking about managing any holiday volume challenges, whether store capacity constraints or higher shipping costs. It sounds like we will 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?

Calvin McDonald

Yes, hello, it’s Calvin. Absolutely we I break it into a couple of key strategic buckets that we have 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 are anticipating. We have run a variety of scenarios if you think obviously fourth quarter volume is the highest volume within a year. And we are 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 a readiness on the site and the infrastructure in order to support and then we have 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 two of the big important factors and that is anticipating our online volume in a 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 have 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 variety of innovations have gone into that from the virtual line lineup that I share, shared as well as how we just check guests out and service them outside of the store. And then the seasonal stores is a 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 are planning on 70. And in some locations, we may even be doubling up in a 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 will be ready for the volume where we need to be in maximizing the potential physical space with some of the innovation that I shared with you.

Lorraine Hutchinson

Thank you.

Operator

The next question comes from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss, your line is live. The next question comes from Mark Altschwager with Baird. Please go ahead.

Mark Altschwager

Hey good afternoon. Thanks for taking my question. 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 am wondering how much of an impact the warehouse sale had in the quarter and whether the plus 180 we saw in the first quarter might be a better indicator of the underlying run-rate in the business.

Meghan Frank

Yes, thanks, Mark. It’s Meghan. So, we were really pleased with the strength we saw in product margin in the quarter. As you heard, we did do an online warehouse sale, which compressed really with our stores closed, markdowns selling into one period. But when we look across the quarter, we saw some really nice strength out of full-priced selling. We are 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 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.

Mark Altschwager

That’s very helpful. Thank you. And then just a follow-up, thanks for all the detail on the productivity trends and digital, does it – any further help on what you are seeing quarter-to-date in each of the channels relative to what you saw in second quarter?

Meghan Frank

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

Mark Altschwager

Thank you very much. Best of luck.

Operator

The next question comes from Matt McClintock with Raymond James. Please go ahead.

Matt McClintock

Thank you everyone. And 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 are making in terms of fulfillment volume, your ability to handle more volume versus customer service your ability to deal with customer service with these higher levels of volume, where does that position you longer term? I understand you are getting ready for the fourth quarter, but I want to think 2 years out, 3 years out that you are already building the ability to handle volume of 5 years from now, 6 years from now or is this because you are going so fast, you are still trying to just kind of keep up with that and still add some safety room? Thanks.

Calvin McDonald

Thanks, Matt. We are definitely well ahead of the volume that we had anticipated and 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 are 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, e-commerce orders, ensuring we have the right safety measures in place to maintain continuity of operating the DCs, which I am very proud of the work that the team did today to operate through while maintaining and putting the health and safety of our warehouse distribution, employees front and center on the website, improving this ongoing stability, the ability to take the traffic and convert and we saw traffic in quarter two increase by 91%, conversion increase by 46%. So, these combined with the volume are ahead of where we anticipated and there is just general infrastructure investments you need to make to be able to scale the business like that. Fortunately, we are 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 are experiencing it in all markets and we are investing there in the infrastructure support that volume. We are 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 will continue to invest in as we look forward to the 23 plan and then obviously our planning beyond that prioritizing the investments. I mean, what’s centered at our strategy is an omni ecosystem and approach and digital plays a big part of that. And we are going to keep investing to ensure that we support the growth of the business and take a long-term view on it.

Matt McClintock

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

Calvin McDonald

Great, thanks. I would say, as we have alluded, it is very early. And we, we have 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 line integration, we are going to be selling in 10 to 15 stores this year, selling it on lululemon.com as it 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 a light integration, we are anticipating, solid improvement in their forecasts shared earlier, revenues in 150 million. And as we continue to integrate as we continue to, tap into the ambassadors in the community, and expand selling into more of our stores. We are excited about that growth opportunity center of how we are viewing our strategy moving forward, and where we feel it’s very unique versus some other players is the Omni ecosystem that is 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 two 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, to drive that business forward.

Matt McClintock

Thanks for those very exciting times.

Operator

The next question comes from Adrienne Yih with Barclays. Please go ahead.

Adrienne Yih

Calvin, I was wondering if you can talk about product category expansion, and the introduction of ongoing innovation 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 have moved through inventory through the, I think there were three channels that you mentioned, or strategies last time, and how we should think about that at the end of both 3Q and 4Q? Thank you very much.

Calvin McDonald

Great, thanks. In terms of our product expansion, we have shared the four key sweat activities that we are focused on as a business, run train and yoga with on the move, being, you know, one of the key categories and we are sort of taking unique point of view is our most recent campaign, sort of picked up on which is 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, and we are working to do that we are innovating into that. And we are excited about bringing a little, continual newness as well as continuity to the 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 have 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 teams doing in and around product through signs of feel and really believe we are early in what we offer in North America and then even more so internationally, so see a long runway of growth with product.

Meghan Frank

Great. In terms of inventory, we are pleased with the level of composition coming out of Q2. Our inventory was up 36% year-over-year, which was under our Q1 year-over-year balance. We have 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 we are pleased with those results. But again, I just point back to we are 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 I just as again, a reminder, we do benefit from core being approximately 40% of our assortment.

Adrienne Yih

Great, thanks so much. Nice job in a tough environment.

Meghan Frank

Thank you.

Calvin McDonald

Thank you.

Operator

The next question comes from Ike Boruchow with Wells Fargo. Please go ahead.

Ike Boruchow

Hi, just two quick questions. Just back on the inventory, we understand this is the highpoint has been past and it’s going to moderate in the back half, the 20% to 30% is still pretty well above your sales trend, I am just kind of trying to understand your comfort with inventory you are 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 breakout the MIRROR revenue contributions that you are planning in Q3-Q4? Thanks.

Meghan Frank

Yes, thanks. It’s Meghan. So I think in terms of inventory, what I would 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 about sales growth, but we feel comfortable with the level based on reflowing 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 are not going to breakdown on the second half estimate, about $150 million, in excess of $150 million for the full fiscal 2020.

Ike Boruchow

Okay, thanks.

Operator

The next question comes from Alexandra Walvis with Goldman Sachs. Please go ahead.

Alexandra Walvis

Good afternoon. Thanks so much for taking the question. 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.

Meghan Frank

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

Alexandra Walvis

Great. Very clear. And then one more question from me, you are expanding this loyalty test to another city in Vancouver, any incremental color you can share on what you have learned from the loyalty pilots so far or anything that you are tweaking as you move into the subsequent pilot in Vancouver?

Calvin McDonald

Yes, absolutely. Thanks, Alexandra. First just to clarify the added cities Toronto that we are adding, so we are 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 in the adjustments we have 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, the sweats 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 have 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 one year, and we go on making it available this week, and we are excited to see the results. And in every test city we have done, we have seen very positive response from the guests, a high loyal team engagement and intend 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 is 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 and the membership program, but I am very excited about how the guest has continued to engage in it, if anything has 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.

Alexandra Walvis

Great. Thank you so much for all the color and all the best.

Operator

The next question comes from Omar Saad with Evercore. Please go ahead.

Omar Saad

Hi, thanks. Good afternoon. 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 may be a contrast to compare the patterns you are seeing in those markets online and stores? Did you see experienced pent up demand there? Maybe some of the differences you would call out for the kind of consumer behavior patterns, you are seeing the guest behavior patterns you are seeing in North America and Europe as well it will be great to get that feedback? Thanks.

Calvin McDonald

Great. Thanks, Omar. I will start by just sort of keying up the North American business as we have sort of shared from Q1 to Q2, we are 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 we are incredibly productive. And we just had challenges being able to match the same productivity numbers as the previous year. Any commerce obviously picked up a large share of that additional demand and overall the mix of the business we are very pleased with and it was a significant improvement from the Q1 performance internationally. I will 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 are seeing incredible growth in both our e-commerce number which was up 136% in China in stores, which are up, significant, growth, as we saw through the quarter and heading into this quarter. They are benefiting from a lot of the domestic travel that is occurring. But from a brand perspective, we have opened up a number of additional doors, and they have all performed well ahead of plan. In tier two cities. We continue to see great growth and reaction to the brand and we are 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 in the growth that it’s driving, which is by far the strongest of any market that we are in to-date in this quarter. And when Europe and rest of Asia-Pacific very positive growth lead in e-commerce, e-commerce numbers similar to that in North America, which is really exciting for us, because it’s acquiring new guests and it’s resetting how high it’s 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 am 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 are in.

Omar Saad

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? Thanks.

Calvin McDonald

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 are going to test and learn between the balance of making it available and increasing awareness through dotcom, making it available through stores, we are 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 have been able to play catch up and we are sitting in a good position, but we see this as an exciting position long-term and there is good momentum already in that and we are going to add to it, but it is really test and learn with the focus on ‘21.

Omar Saad

Thanks. Best wishes.

Calvin McDonald

Thank you.

Howard Tubin

Operator, we will take one more question. Thanks.

Operator

Certainly. Our next question comes from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss

Great, thanks. We will try this again. Calvin, on the inflection that you cited for retail and for Lulu from here, can you first elaborate on investments from market share that you have accelerated during the crisis? And then also in digital, how – what’s the best way to think about the sustainability of digital channel operating margins relative to the 40% plus that you have achieved the last several years?

Calvin McDonald

Yes, I will touch on the inflection as well as how we are leaning in and how we are planning to continue to lean in. Clearly, health, wellness and functional apparel and trends in apparel have changed dramatically and I don’t perceive 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 have 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 benefits, our brand and our positioning in a number of ways, predominantly linked to our Power of Three growth strategy around product omni guest in creating that ecosystem as well as market expansion. So, I am excited about the potential of growth. And what we do know is and we have 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 our – 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 have traditionally done in the past and it responded very well. So, the teams are going to continue to learn. We are continuing to sort of play with our rollouts and what we want and expect from the investments in how we get our brand known and have that awareness metric improve in the coming months, in 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 awareness around offering it is still a big opportunity for us and we are 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 has provided and it’s also inclusive – there is 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.

Matthew Boss

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 have cited relative to the second quarter or maybe just any commentary to think about as we have tried to think through the magnitude at all as we think about the current momentum that you guys carry so far into the third quarter?

Meghan Frank

Yes, I wouldn’t say there is 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 a 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.

Matthew Boss

Great. Best of luck.

Meghan Frank

Great. Thank you.

Operator

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





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