Lululemon Athletica Inc (LULU) 2007 Q3 法說會逐字稿

Good afternoon. My name is William and I will be your conference operator today. At this time, I would like to welcome everyone to the lululemon third-quarter and fiscal 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

And now it is my pleasure to turn the floor over to Mr. Joe Teklits. Please go ahead.

Thank you. Good afternoon. Before we get started, I would like to remind you of the Company's Safe Harbor language. The statements contained in this conference call which are not historical facts may constitute forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to the number of risks and uncertainties, all of which are described in the Company's filings with the SEC.

And now I would like to turn the call over to lululemon's Founder, Chairman and Chief Product Manager, Chip Wilson.

Good morning and thank you for coming. We've got a great quarter, and I think it is definitely our great team and a wonderful product. And we are very proud of what we have done. And with those results, I will just pass it on to Bob Meers. Bob?

Good morning. Thank you all for joining us to discuss our third-quarter results. In addition to Chip this morning, I am joined by John Currie, our CFO, and a group of other senior managers in the Company. Following my opening remarks, I will turn the call over to John to review our financial highlights. We will then open the call up to questions.

Before I address the progress in the third quarter, I would like to briefly reiterate my comments on a recent news article regarding the contents in our VitaSea product line. We believe that we have earned an excellent reputation and the brand loyalty of our guests by consistently providing high-quality, innovative merchandise. We believe that this is paramount to our Company's success. To ensure that we live up to these high standards that we have set and that our guests have come to expect, we extensively test our product for content using a leading independent testing facility.

Based on these standards and practices, we stand behind the integrity of our product and processes, including VitaSea. And I am pleased to report that we have experienced very few returns, and we do not believe the media coverage has negatively impacted our VitaSea sales or our business in general.

I want to briefly highlight the results of our third quarter. We're pleased to have once again delivered strong top- and bottom-line performance. Sales exceeded our expectation, with revenue rising 84% to $66.2 million on a 36% increasing comp store sales for the quarter. Operating income increased 152% to $11.8 million, driven obviously by strong sales, gross margin expansion, as well as SG&A leverage.

Along with our strong store comp sales increase in the quarter, we successfully opened 10 new stores, including eight in the United States, one in Canada and one in Japan. Since the end of the third quarter, we have opened an additional eight new stores, including six in the United States, one in Canada and one in Australia. And we expect to open three additional stores in the balance of the fourth quarter, bringing our year-end total to 81 stores worldwide. We expect to open 27 stores in North America this year, up from our original plan of 25.

We will now be growing our store base by 59% in '07, and I'm proud of the team's ability to exceed our expansion goals this year. We are also pleased with the productivity level of our newest stores, which have exceeded our internal hurdles, and we believe that the success of our recent stores' openings further demonstrates the portability of our brand retail concept into the United States.

We continue to expect to open between 30 and 35 new stores in North America in fiscal 2008, with new markets including Hawaii; Maryland; Georgia; North Carolina; Philadelphia; Washington, D.C.; Connecticut; New Jersey; and Eastern Canada. And we will also fill in existing markets in Northern and Southern California, Massachusetts, New York, Texas, Florida, Illinois, Denver and Ontario.

Looking ahead, we are beginning to establish a presence in new markets for future growth. We opened four new showrooms during the third quarter in Atlanta, Georgia; Austin, Texas; Charlotte, North Carolina; and Philadelphia, in addition to our existing showroom locations, which are open and already seeding the new markets for us. We're building brand recognition in these markets in preparation for retail store openings in 2008 and beyond. We are very pleased with our initial response to these marketing efforts and look forward to expanding our relationships with local yogis and fitness instructors in these communities.

Another focus for us on the operation front has been supply chain enhancement, which are allowing us to flow enough inventory to meet the demands of our expansion efforts and our strong comp store sales growth. Since the last quarter, we have been successful in repositioning our inventory stock to include more men's product as well as more core sizes and in our core styles in our women's business. We are in a good position for the third quarter and are currently in a very good position inventory-wise for our holiday season, with our inventory up over 80% over last year.

This just does not happen by chance. Over the past year, we have added senior-level executives, additional support in Asia via our own sourcing office in China, and two new larger, more efficient distribution centers, one in Canada and one in the United States. We're also implementing a new ERP program. All these efforts combine to solidify our sourcing efforts and to shorten the product development and supply chain cycle, ultimately speeding up the product flow to our stores.

On the product front, we are experiencing strong reception to our winter outerwear collection that we introduced this year, and we fully expect to have full sell-through of this collection within the next three to four weeks.

In summary, we are very pleased with our third-quarter performance. We are executing better than ever, thanks to all of the dedication and hard work of everyone in the entire organization, including our management team that continues to gel as a cohesive unit. I believe the strong results in the third quarter demonstrate that our distinctive community-based approach to retail and the innovation and product quality we offer create tremendous brand loyalty and continue to attract new customers to our brand.

We are very pleased that both our comp stores and new stores are exceeding our expectation, whether in some of our original markets such as Southern California and British Columbia, or our new markets like New York and Northern California in reaction to our product, our culture, store experience and lifestyle-driven brand keeps us extremely excited about our future.

I would like now to turn the call over to John Currie to discuss the financial details of the quarter.

Thanks, Bob. We are very pleased with our Q3 results, especially the continued strong sales momentum and our ability to source and execute effectively, providing product to meet this above-plan demand.

Beginning with revenue, our total net revenue was $66.2 million for the third quarter, an increase of 83.9% over the third quarter of 2006. Our corporate-owned store sales represented 90.6% of this total at $59.9 million, an increase of 105.6% over 2006. This increase was driven by a combination of a 68% increase in our corporate store base from the third quarter of '06, coupled with a reported comp store sales increase of 36%. The strengthening of the Canadian dollar against the U.S. dollar contributed 10% of this comp store sales growth, meaning that on a constant dollar basis our comp store sales increased 26%. Noncomping stores are also performing well above our expectations for the quarter.

Other revenues, which include franchise, wholesale, phone sales and showrooms, totaled $6.2 million and represented the other 9.4% of total revenue. A decline in other revenues of 8.9% from 2006 was a direct result of the buyback of our three Calgary franchise stores on April 1 of 2007.

Gross profit for the third quarter increased 91.5% to $35.5 million, and gross margin expanded by 210 basis points to 54.2%. Strong merchandise margins, coupled with leverage of our design, production and occupancy costs due to higher sales, have contributed to the increase.

SG&A expenses were $24.1 million for the quarter or 36.4% of total revenues versus 39.1% in the third quarter of last year. This 270 basis point improvement was primarily driven by leveraging administrative costs and depreciation. This is partially offset by increased store expenses related to higher concentration of new store openings during Q3. The result of our gross margin expansion and SG&A leverage was an operating margin expansion of 480 basis points to 17.9% or to $11.8 million for the quarter versus $4.7 million a year ago.

Tax expense was $4.8 million for the quarter or a rate of 38.9% versus 66.1% last year. During the third quarter, we worked with legal and accounting advisors to make adjustments to our inter-Company transfer pricing rates, which have historically inflated our tax provision. This adjustment is reflected in our Q3 tax provision and earnings year to date. The resulting net income available to common shareholders was $7.6 million or $0.11 per share. Our weighted average diluted shares outstanding for the quarter were 71.7 million.

Turning to the key balance sheet highlights, we ended the third quarter with cash and cash equivalents totaling approximately $36.3 million. Inventory at the end of the quarter was $49.7 million or up 80.4% from the end of the third quarter last year and in line with our sales growth expectations for the fourth quarter. We are very pleased with our current inventory position prior to this holiday season. We have the right amount of product to meet the inventory demands associated with our rapid store rollout and the strong comp store sales.

Capital expenditures for the third quarter were $8.8 million. The expenditures relate to our new store buildout costs and costs related to the implementation of our new ERP system, which will become operational in February of 2008.

Now I want to turn to our updated outlook for fiscal 2007. We now expect fiscal 2007 net revenue to be in the range of $255 million to $260 million, which incorporates a comp store sales growth in the high 20s for the full fiscal year or in the low 20s on a constant dollar basis. Our operating margin for the year is expected to be approximately 18.5%. Also for the year, we are projecting an effective tax rate of approximately 41%, leading to diluted earnings per share in the range of $0.40 to $0.42. We also anticipate diluted weighted average shares outstanding of approximately 70.3 million for fiscal 2007.

This updated outlook for 2007 incorporates a fourth-quarter comp store sales growth of approximately 30% on a reported basis or approximately 15% on a constant dollar basis, plus 10 new store openings in North America in Q4, bringing our total for new store openings to 27 for the year, or two ahead of previous guidance.

We anticipate that our Q4 tax rate will be approximately 36%, but in the third quarter the Company will experience costs relating to our new public company status that were not incurred in the prior year. The fourth quarter also incorporates our planned change of our fiscal year from the calendar reporting period to a 52/53-week fiscal year on a Monday-to-Sunday basis. As a result of the planned change, our fiscal 2007 year will end on February 3, 2008. The impact of this change is expected to be immaterial to our fiscal 2007 results.

We plan on giving fiscal 2008 guidance when we report our fourth-quarter and 2007 year-end results, but we want to reiterate, we continue to expect 30 to 35 new store openings in North America in 2008. We expect our leverage point on nonmerchandise costs of goods sold and SG&A to be at a constant dollar reported comp increase of approximately 10%. As well, due to planned amendments to our purchasing processes and transfer pricing policies, we expect our reported tax rate to be approximately 34% beginning next year, with some seasonal shift to the rate depending on the mix of Canadian and U.S. profits in each particular quarter. Again, we will offer more detail on our 2008 fiscal year and color on the seasonality of the business when we report Q4 results.

So with that, I will turn it back to Bob.

Thanks, John. Before we open the call to Q&A, I would like to reiterate how much this management team appreciates all the hard work and dedication of our lululemon team of employees. There has been a tremendous amount of hard work performed at this Company over the past few years to position it for maximum success as we identify and exploit the many growth opportunities that are out there. I am extremely proud of this organization's ability to grow our store base and drive significant comp store sales growth this year. And while we have executed these above-plan results, we also continue to build upon the infrastructure that is in place to provide similar success for the long term.

We see the health and fitness trends that are building momentum. We see customers gravitate to our brand, product, culture and service levels. And we see a tremendous amount of white space for our stores both domestically and internationally. And when we put all this together, we are excited about the future prospects for the Company.

With that, I will open the call up to questions.

(OPERATOR INSTRUCTIONS). Margaret Mager, Goldman Sachs.

Congrats on another excellent quarter. I have a couple of questions, Bob. First of all, on your new product category initiatives, you mentioned outerwear was a good performer in the quarter. Can you talk about any other areas that -- what is happening on the development front on the product categories, be it men's or accessories, etc.?

And then on the VitaSea product, a good job addressing that, I thought, head-on, but wondering, what is the consumers' reaction to that? Are you seeing a drop-off in the sales of that product, or just what has been the reaction by the consumer? Thanks.

Let me make sure I remember it. First of all, on the product front, our running business continues to grow very rapidly, and we will continue to introduce new fabrics and styles in the line as we enter into the Christmas and spring season. We continue to experience very strong growth in our men's business, both in terms of our core business as well as our Silverescent product, and VitaSea, by the way.

Our bra business, which had been lagging last year, has really started to catch up as we have introduced some new, innovative, strong bra program into our stores and the introduction of a broader fitting line of women's apparel continues to grow our core business.

On VitaSea, we have not seen a fall-off. But I want to remind everybody, it is about 1% of our sales. And we as a company will continue to push the innovation in fabric that our customers expect to see from us. And the reaction to the customers has been one of support and pleasure with the product that we have brought to market. And just like you said, and thank you for saying it, they appreciate us handling the issue head-on and being very diligent about reporting our research and our testing results.

Good luck going forward, and I wish you all the best, Bob and Chip and everyone. Take care.

Paula Kalandiak.

I have a couple questions. One is with regards to the outerwear. I think you said that you expected full sell-through in three to four weeks. Does that mean you are not going to have any winter outerwear left in three to four weeks?

Yes, it looks like we are going to be able to sell it all the way through. But as we said in the last conference call, because this was a new introduction for us, any excess winter outerwear we will move into our resort stores such as [West] Banff and Boulder, Colorado. But right now, it looks like the demand for our product is slightly ahead of our expectations.

Is that about when you would like to be out of outerwear or it's a little earlier than you would have liked to have been out of it?

No, it is exactly what we were looking for. We did not want to get into a markdown situation and chase the last sale. So this is right on our plan.

And then just out of curiosity, did anyone at all take you up on the offer to return the VitaSea product?

If they did, it didn't show -- the answer is, I am sure somebody did, but as we monitored it, candidly, it turned out to be a non-issue.

Thanks a lot and good luck with this holiday.

Paul Lejuez, Credit Suisse.

Can you talk about the percent that men's represents in the U.S. versus Canada?

Second, just want to understand the inventory plan going forward. How do you plan to end the year from an inventory perspective? And how should we think about it going into next year?

And then last, just wondering, how much did earnings benefit this quarter from the Canadian dollar?

Could you repeat the first question?

Men's, percentage of the business in U.S. versus Canada.

In the U.S., it runs just under 15%, and Canada just over 10%. And I think that's really a function of the exceptional performance of our women's business in the Canadian market, which would include our culture product, which is [To and From]. But our men's business is very strong in the United States and was held back by size limitations that no longer restricts it.

John, would you take the balance of the question?

Regarding inventory, as we've said and as you will recall from the last conference call at Q2, one of the concerns was our ability to keep up with demand. We are very happy with where we are in Q3 with the right inventory level to take us through the holiday season. I think your question was at year end and going forward. We are watching inventory, monitoring it to metrics such as inventory turns. And we will strike that right balance between being in stock and making sure we don't have excess inventory.

In terms of the Canadian dollar impact, as I said, it impacted our comp store sales. It contributed 10% of the comp store sales increase. So that shows you the impact on revenue. Of course, there's a significant element of our cost structure that is Canadian dollars. Now, I haven't reduced the calculation to exactly what the earnings impact is, but again, don't just look at the revenue line because the bulk of our G&A is in Canadian dollars. So overall, the impact is less than you might expect.

Just on the inventory side, I want to make sure that you understand. We felt as though we had tightened the inventory screws too tightly at the end of Q2 and pushed ourselves to be out of stock on core styles and sizes in the women's business and the men's business as well. And by putting less emphasis on inventory turn, we were able to create these Q3 results. Now, that does not mean that we will have inventory runaway. If anything, we watch it tightly. But our stores want to continue to perform above plan, and we don't want to hold them back by being too diligent on the inventory side.

Definitely makes sense. What are your goals in terms of the turn, if you can share that?

We typically look for turns of three or a bit higher.

Thanks and best of luck.

Lorraine Maikis, Merrill Lynch.

This is Jaime Sheinheit for Lorraine Maikis. I was wondering if you could talk a little bit more about how new door productivity has been trending and any regional differences you are seeing there. Thank you.

I am going to have to ask you to repeat the question. You broke up.

Sorry. I was just wondering if you could talk a little bit about new door productivity and any regional differences you are seeing there.

Well, we actually have not seen any regional differences in new door productivity. I would say that one of the things that keeps reaffirming to us on the operations side is when we can prebrand the market, open a showroom, get our community educators in there, make contact with yogis and fitness instructors and build a demand between six and 12 months before a store opens, the store opens -- they opened very, very fast and had a very nice rate.

And where we lag behind, we have to build. And so I would have to say that if I pointed to any area that we need to continue to work hard on, it would be in the Southwest, Texas and in the Washington, D.C., market. And that is not pointing out a problem. It is really pointing out that our business will continue to build there because of the showrooms.

Howard Tubin, RBC Capital Markets.

Great quarter. Can you just talk to us a little bit about the news store opening pipeline for next year and how many leases you have already signed and how many are close to being signed?

We have 26 leases either signed, in LOI form or in final negotiations. And we have all the others stores identified and working towards finalizing the priority of our programs. So we feel very good about '08.

And John, do you think the tax rate will be 34% next year starting in 1Q, and for the whole year will it kind of ramp itself down?

It will vary based on the seasonality of our business. So 34% overall for the quarter, but a higher productivity quarter, of course being Q4, is going to be lower than, say, Q1.

Lyn Walther, Wachovia.

Congratulations, guys. A couple questions here. If you could just talk about the merchandise margins during the quarter, what drove the improvement, and is this something we should be looking for to continue into Q4 of next year?

Our merchandise margin was strong, 70%, 71%, impacted, of course, by -- there's some benefit from the fact that a lot of our sales are in Canadian dollars with U.S. dollar pricing, and improved purchasing, because we have bolstered our sourcing and production team and we are starting to see the results there. And yes, we would expect to see similar margins going forward.

Just to reiterate, we had said early on that we were looking at potentially 200 to 300 basis points off of our starting 51-point margin, and I don't want to encourage you to think that we're going to have runaway leverage on the margin line.

Thanks for clarifying. And then you also mentioned the leverage point for '08 being a 10% comp. I think we were assuming close to a high single digit for next year. Can you just talk about the change there?

With our sales ahead of plan, we are really looking at building -- everything is really accelerating in the Company. So for example, we bolstered, as I said, our sourcing and production team. We have opened an office in China. So investments like that that are really building further out into the future that are being put in place now and will annualize in 2008 have maybe contributed to a little bit of an adjustment to that leverage point. But it is all building for the future.

And then finally, can you just talk about international -- what is the timeframe for rolling out Europe? Have you thought about that?

Probably not until '09. We have made some adjustments in our Japanese business, put a new General Manager in place, moved one of our senior executives to Hong Kong to oversee the development of Japan, the Hong Kong marketplace and Australia. And we are identifying joint venture partners.

But key to us is making sure we have the supply chain and pipeline for U.S. and North American growth. And we don't want to fragment our efforts by moving into Europe too rapidly and stretching our supply chain.

Thanks, guys. Good luck.

Barbara Gray, Blackmont Capital.

Fabulous results. A couple of questions. First, what are you running in terms of sales per square foot right now?

At the end of Q3, on a general basis, we are at $1526 per square foot for our comp stores.

And second, was there any difference in performance in your U.S. versus your Canadian stores?

Yes, John, take that one.

Of course, we don't break out Canada and the U.S. Measuring it based on comps, as has been our experience in the past, you would expect the stores in the newer markets, and a lot of those are in the U.S., to show the strong comps that we have been experiencing. And the more mature Canadian markets have pleasantly surprised us by showing similar comps. So basically, there's not a lot of difference regionally, Canada/U.S.

We still haven't found the top.

In terms of new store openings, initially you said 300 to 500, and now you are at 200. Given the huge acceptance of the product, are you considering increasing the number of new store openings?

You mean on a yearly basis?

No, in terms of your potential in the U.S. for new stores.

No, we have identified the 300 locations in the key markets and want to make sure we get those opened. There may be more upside. I think we have said that we will test opening some resort stores in 2008. And we will also look at filling the market in in 2010, but probably no more than another 50 to 100 stores in the central part of the U.S.

And one last question -- do you have any new product lines that are coming out, given the outerwear was such a success?

We are always pushing that. Chip and his team are constantly looking at new categories that fit our business. And although our focus is on yoga inspiration, the fitness and exercise market and healthy living is our key. So we are looking at cycling. We are looking at swimming. We are looking at more running gear end general exercise gear. Outerwear continues to be a strong focus for us in terms of going to and from the marketplace. And then in the accessory business, we are bringing in some key exercise products to continue to grow our accessory business, which is a rapid growth area for us and strong margins.

One last question -- in terms of the VitaSea controversy, you said you are going to be doing a review of your other products' therapeutic attributes. Do you have the conclusions from that review?

Yes, we are in good shape. We have completed analyzing all of our fabrics and making sure that our test results are up to speed, that our suppliers have complied with their reports and test results to us, and that our factories are compliant in making sure that the products are being made to our specifications. And that is done. And we are very satisfied that everything is on train.

Are you going to put out a separate press release, or not even bother?

No.

Brad Cragin, Goldman Sachs.

Can you just give us a little bit more insight into what you had to do operationally to get your inventories back in line? Can you talk about whether you had to do much in the way of airfreighting or whether that sourcing is coming from local markets in Canada?

Well, at the end of last quarter, our conference call, I think we had just completed our manufacturing summit that we ran in Vancouver. And we had brought in our key factory suppliers from China, Indonesia, Vietnam, Cambodia, Israel, Peru and Canada. We have since put on a quick-turn factory in Los Angeles. All of our factories give us not only the '07 manufacturing capacity that we wanted, but also bought into our '08 and '09 projections and made sure that we have the capacity both in terms of fabric availability and manufacturing capacity.

And yes, we have been able to get them to be very responsive to our replenishment and to make sure we stay in stock. We do use a substantial amount of airfreight, and that is built into our margins. So there is no negative impact in doing that, keeping ourselves in stock.

And as you have to react to the sell-throughs in your stores, is that excess capacity going to come out of that Los Angeles relationship now? Can you just talk about the cost implications, that presumably it is slightly incrementally more expensive there?

No, because -- because it is replenishment, actually, we have all of the machines set at one tension, so we are using only two fabrics. So there is no breakdown and there is no setup of the machines. And labor is relatively a low-cost piece of our U.S. and Canadian manufacturing. So there is not a big negative impact to domestic manufacturing as long as you keep it only for quick replenishment. And yes, we have use the L.A. facility to use excess manufacturing capacity. They had to get us back in stock in Q3 and in key core styles for Q4.

Sounds great. And then on the stores, the 27 new stores in North America, just so I am clear, does that include or exclude the three Calgary stores that were converted from franchise to owned?

No, that is not part of the 27.

And on the currency front, just given the movements that we have seen in the Canadian dollar versus the U.S. dollar, have you guys updated your thinking around potential hedging policies?

We have said this before, but even more so, we're analyzing it in depth. I'm glad to see the dollar has come back to a more normalized level, close to par. That of course has benefited us. And yes, we're looking hard at whether we should move ahead with hedging. I see exposure to the Canadian dollar being an '08, maybe as far as into '09 topic, because the further out you get and the more of our revenues are in U.S. dollars, I think our Canadian dollar revenue and our Canadian dollar expenditures will be more balanced. But stay tuned. It is something we're looking hard at.

And then finally on your IT systems and the February rollout, is that still on track, and can you just give us an update on testing of that system and what you are doing to ensure that that will be a smooth transition?

Because we've moved it from an October implementation to a February implementation, we are currently in the testing phases of many of the first phase systems we bring online. But it has also bought us some time to put some enhancements in. And as we have said before, we will double-track, parallel-track once we flip the switch in February. But right now, the testing is going very, very nicely. And this is on top of two warehouse moves that are behind us now and the warehouses are functioning beautifully to get daily deliveries into our stores. So I'm quite optimistic that we have got one major domino down and another one being in the testing phase.

Great. Well done. Thank you and good luck.

Sharon Zackfia, William Blair.

Wanted to follow up on the inventory question. I guess with much better in-stock position, wondering if there might not be an opportunity for constant dollar comps to actually accelerate this quarter rather then decelerate, and what your thoughts are surrounding that.

Well, I think in Q3 we are seeing, certainly towards the second half of the quarter, you saw a little bit more of what we can achieve when we are in stock. I guess my only conservatism on Q4 is because so many of our stores are so productive in the holiday season that to show aggressive comps on top of stores that are very, very busy just isn't quite logical. And that is why I've always expected slightly lower comps in Q4 than what you had seen in the last busy quarter.

And then secondarily, when you have the ERP system in place, I am just curious from a consumer proposition whether or not at the store level the employees or partners will be able to track down sizes at other stores in the region, or so on, so that if someone sees a style they like and the size isn't there, they can get it shipped to them? It is something I see constantly happen at the stores.

We will have that capability, yes.

Sharon Zackfia And then lastly, the store openings for next year, are they going to be back end weighted like this year?

Yes, they will be back end weighted, a similar profile to this year.

Liz Dunn, Thomas Weisel Partners.

Congratulations on a great quarter. First question relates to store openings. Last quarter, you talked about some lease negotiations and just issues with timing the store openings. Were your Q3 openings on plan with what you anticipated? And then of the 10 openings anticipated for the fourth quarter, are any of those open yet?

The answer is yes, we have readjusted our model to take into consideration lease negotiation with independent landlords. And so we will be able to better project in '08. Q3 stores did open on time. But as you remember at the Q2 release, that we said that we had pushed some into Q3. So we didn't have any negative impacts there. And yes, we have opened two new stores in Q4 already.

In terms of the events that you host in your stores, can you just give us some sort of thought process on how do those impact comps and what does the schedule look like for the fourth quarter versus last year in the fourth quarter? Are you hosting more events or about the same? And what type of impact do those events have on comp store sales results?

I don't know how to quantify it as it relates to comp store sales results. What I do know is our strategy is to become part of the community. And one of our key marketing initiatives is to highlight local fitness heroes, the people who are in and around our store. And we use our store as that center for a gathering place.

So the activities have always been pretty robust and will continue to be robust. We do know that it builds a loyal customer base. We certainly see at the end of all of the classes our sales bump up as people take product home. But we do not measure it as part of what it does to our comps.

And then final point relates to inventory, understanding that you are in a bit better position heading into the fourth quarter, but how do you feel about your size ranges in each individual store and the optimization of your inventory by market? I know that will get better over time with systems, but how do you feel about it right now?

I feel very good. I thought we caught up in Q3, as we said we would. And although nobody in the Company is modeling 36% comps, we do a very good job of getting back in stock. And we have with our new warehouses -- well, even our old warehouses, but our new warehouse is able to get daily deliveries into the stores all over North America. So with the increased sales, it is a challenge, but I feel very good about -- when I go visit the stores, all over North America, it looks pretty good to me.

Thanks. Congrats again.

We have time for one more call.

Michelle Tan, UBS.

Just a question on the tax rate. Looking at it, 34% starting in 2008 -- it has obviously normalized faster than we thought, given this strong U.S. profitability. 34% is a little lower than we would have expected as a long-term tax rate. Is that because you are using up NOLs in the U.S.? And what should we be thinking about in the out years for a truly normalized tax rate?

No, that doesn't reflect the utilization of our NOLs in the U.S. In fact, that is potential for a one-time further benefit. The 34% is a blend of Canadian and U.S. statutory tax rates. And recently, Canada announced reductions in the tax rates here. And so that has brought our forecast rate down.

Great. So we should expect 34% or potentially a little lower as a one-time going forward?

Yes.

And then also, to clarify one of the comments on the U.S. versus Canada stores, or sorry, the newer versus older stores, I think you said they were comping at a relatively similar rate, which is pretty impressive. Is that without the currency benefit to the Canadian stores?

Yes, on a local currency basis.

So the older stores are comping similar to the newer stores on a local currency basis? Great.

Yes.

Very good. Thank you very much and congratulations.

This is Chip Wilson here. I would just like to thank everyone for coming. And again, we would like to thank John and Bob for the great job they did and the support staff to get them here. So take care, everyone.

And that concludes our conference for today. Thank you for your attendance and have a good day.