Lululemon Athletica Inc (LULU) 2008 Q1 法說會逐字稿

Good day, everyone and welcome to the Lululemon Athletica first quarter earnings results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Jean Fontana of ICR. Please go ahead, Ma'am.

Good afternoon thank you for joining Lululemon Athletica conference call to discuss first quarter results for fiscal 2008. A copy of today's press release is available in the Investor Relations section of the Company's website at www.lululemon.com or alternatively as furnished on Form 8K with the Securities and Exchange Commission and available on the Commission's website at www.SEC.gov. Today's call is being recorded and will be available for replay for 30 days, shortly after the call in the Investor Relations section of the Company's website.

Hosting today's call is Bob Meers, the Company's Chief Executive Officer; John Currie the Company's Chief Financial Officer; Christine Day the Company's President, COO and CEO designate. All participants on today's call are advised that the discussion my include forward looking statements reflecting management's current forecast of certain aspects of the Company's future. In many cases you can identify forward looking statements by terms such as will, expects, plans, believes, potential or the negative of these terms or other comparable terminology. These forward looking statements are based on management's current expectations but they involve a number of risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in the forward looking statements as a result of such risks and uncertainties, which include those described in our SEC filings.

You are urged to consider these factors carefully in evaluating the forward looking statements herein and are cautioned not to place undue reliance on such forward looking statements which are qualified in their entirety by the cautionary statement. Now I would like to turn the call over to Lululemon Athletica's Chief Executive Officer, Bob Meers.

Good afternoon. Thank you all for joining us to discuss our first quarter fiscal 2008 results. I'm joined today by Chip Wilson, Christine Day our President, Chief Operating Officer and CEO designate. John Currie our Chief Financial Officer as well as a group of other senior managers in the company. Following our my opening remarks, I will turn the call over to Chip and then Christine to review select strategic initiatives followed by John who will go over the financial details of the quarter. We will then open it up to questions I'm extremely please with the continued momentum of our business through the first quarter. Revenues increased 75% to $78.2 million and comparable-store sales were up 28% and operating income up 71% for the quarter. I'm pleased that our comparable-stores in both Canada and the United States continue to perform well and our new stores were very strong in the quarter.

As I have said in the past, this type of performance is a testimony to the strength of the Lululemon brand. The growing market for performance in active apparel among our entire demographic, our great guest experience and our technical product continues to evolve with the demands of our active minded health conscience guests. The double-digit comparable-store sales increased and strong gross margins are not easy to deliver in today's current economic environment. However, I do believe that the tied will continue to rise for our market niche and there where we are very well positioned to continue to gain market share as we expand our store base and eventually migrate into e-commerce.

We opened three new stores during the quarter in Canada and the United States and then four additional new stores opening have been completed since the beginning of May. These new stores including Troy, Michigan; Denver, Colorado; Chino Hills, California; and Halifax, Nova Scotia. I want to point out that the initial results in Troy, Michigan and Halifax stores were among the best in our Company's history. These are secondary markets and we belive the hunger for our product in these new markets is a great indication of the success we will have as we continue to roll out across North America. We expect to open 28 stores this year for a total of 35 stores in North America during fiscal 2008. That brings me to the next phase of our growth.

As you know, we plan to continue to open the 35 stores annually for the next three to five years. We also have opportunity in e-commerce and international expansion. As these opportunities grow nearer, and the organization grows larger, we need to be sure that we have the right tools to maximize our potential. I continue to emphasize that the key for us will be the people we have in place and the systems we have to manage our expansion. The first thing we have done is chosen Christine Day as our next Chief Executive Officer, who I believe is the best person to lead this Company through the next phase of our growth and beyond. She is already in the process of making some important hires and identifying other processes and ideas that will allow Lululemon to capitalize on the opportunities in front of us. Christine will provide you with the details of the plan that she has already put in motion and John will run through the details on how and why we are impacting our earnings slightly this year. But I want to point out that these incremental investments we have being made not only are they there to ensure our current growth plans are smooth and as well as executed, but also to position this Company to play in some additional arenas in the future and thus, add incremental positive returns for our business.

For me, it is gratifying to know that very strong foundation is in place at Lululemon and a talented new CEO will be leading this organization into the future. Christine will officially transition to the role of CEO in June and I will remain in an advisory capacity for the balance of the fiscal year. So with the Company in very good hands, I want to personally thank all of our employees, our shareholders for supporting me and the Company over the past few years and I wish Chip, Christine, John and the entire organization the best as they continue to grow into one of the premiere retailers and brands in North America and one day globally.

With that I would like to turn the call over to Chip.

Thanks, Bob, that was really well said and thank you for everything you have done. It is fantastic. We are a fast growing company, new times and I would like to introduce Christine Day, again as someone who I think not only has tremendous leadership but fantastic people skills. So on that, I will turn it over to Christine.

Thank you, Chip and good afternoon. I'm certainly thrilled to be working with the team and honored to be taking over the reins of CEO of Lululemon Athletica, in the midst of its exciting expansion. As I said at our analyst day a couple of month ago, our priority is growing the brands through opening stores while protecting the tremendous culture we have at Lululemon. This is an exciting time as we have so many opportunities in front of us. We are still very under penetrated in the United States. Our e-commerce business is just beginning to being formed and the international market is still virtually untapped.

As Bob mentioned, we are making some additional investment in our business to better position Lululemon for future growth. The idea behind these initiatives is to make sure we are maximizing our current potential as well as putting the right team in place to expand into tomorrow's new business successfully. Also while our new stores continue to open with very strong productivity, and current store productivity is at the top of our industry we still think we have opportunities to execute even better. We are set to open 35 stores this year and are already working on our 2009 leases.

One of my goals is to focus on in-filling our current market including New York, southern California, Texas, D.C., Chicago and Seattle. We will also continue to focus on making sure that when our guests enter our stores especially in new markets they can see our product advantages and have a great guest experience. We will continue to focus on our execution and ensuring we are getting the right product in the stores at the right time in order to maximize both the guest experience and our productivity potential. One of the key lessons I learned while at Starbucks was in it's high growth phase was that investing in people ahead of the curve is critical for longer term success. We got to have those leaders who understand what the future looks like but also stay with those core people who built the Company from ground up.

As announced in a separate press release today, I'm pleased to announce that we recently hired Sheree Waterson as Executive Vice President of General Merchandise Management and Sourcing. Sheree comes to Lululemon with over 25-years retail experience including positions such as President of Speedo's at Warnaco Inc., and Vice President, Woman's Merchandising at Levi Strauss & Company. She will over see a team at Lululemon that includes global production, community legacies, visual merchandising and merchandising management. Other key hires later this year, will include a head of logistics and replacing my former EBP of operations position, two very critical functions as our store base grows. But we are also making sure that internally our people continue to receive the development that they need. We have been working on development plans for all of our core people who have been working hard to create this culture and this opportunity. We are focusing on some simple changes in our stores. We are increasing the number of assistant managers in our stores and the amount of time they spend in market prior to new store openings.

We also have made some changes to our training programs to provide more training for our managers so we have more seasoned operators opening stores. We have made changes in making sure that we have showroom locations in new markets a year in advance of new store openings.

Another extremely important initiative for us this year is our e-commerce strategy. Currently in the strategic planning phase the process is on track for generating revenue in the second half of 2009. We are excited about this next phase of growth for Lululemon but are also cautious that we will not burden our current systems of people before they are ready. As we look at other initiatives, we continue to see major opportunities to strengthen our supply chain infrastructure. We have made and continue to make significant investments in our new IT systems which will increase our execution abilities enabling us to more efficiently get the right product to the right stores on time and ultimately further our long-term growth.

Our new merchandise and warehouse system which was implemented last quarter is live and performing well. This month we began the process of installing our new point-of -sale system, which will be rolled out to all U.S. stores by the end of August and to Canada in 2009. Also, we will be installing [Maple Lake] in July, a new merchandise planning system which will allow for improved product forecasting. This will be followed by a new JDA advanced allocation system in September.

I would like to finish by pointing out that our philosophy will continue to be focused on doing the right things for the long-term health of this business. At this point in our growth cycle, in order to support new management we are incorporating these additional expenses, equating to a couple of cents earnings per share into our guidance for the year. We want you to be assured that all of these initiatives are designed to pay dividends for many years ahead. We expect to get a return on these in a number of ways and belive this is right decision for the long-term good of the business.

As I transition to the role of CEO, I would like to thank Bob for all of his hard work over the past two years. He leaves the Company in excellent shape and I look forward to continuing to attract new guests to our brand and providing innovating new products and building on our distinctive community based approach to retail. Our sales momentum, our culture, the store experience and the lifestyle driven brand we offered keep us extremely encouraged about our long-term growth and future.

Now I will turn the call over to John.

Thanks, Christine. As Bob and Christine stated we are pleased with our first quarter results. We are continuing to run our business with a focus on capitalizing on our significant long-term potential. I will address our slight change to our 2008 guidance following my discussion of our first quarter results.

For the first quarter of fiscal 2008, total net revenue increased 74.5% to $78.2 million as compared to $44.8 million in the first quarter of 2007. Our corporate-owned store sales represented 90% of this total at 70.6 million an increase of 85.7% over the first quarter 2007. This increase was driven by a combination of 27 new corporate store openings since the first quarter of 2007, coupled with the reported comparable-store sales increase of 28%. The strengthening of the Canadian dollar against the U.S. dollar contributed 13% of this comp store sales growth, meaning that on a constant dollar basis our comp store sales increased 15%. We ended the quarter with 85 total stores versus 54 a year ago including 74 corporate-owned stores versus 47 a year ago.

Our new stores not yet in the comp phase also continued to perform at or above our expectations in the quarter. Franchise and other revenues which include wholesale, phone sales and showrooms totaled 7.6 million and represented the other 9.7% of total revenue in the first quarter. Gross profit for the first quarter increased 83.6% to 41.5 million with gross margin expanding by 260 basis points to 53.1%. The appreciation of the Canadian dollar against the U.S. dollar last year coupled with stronger merchandise margins contributed to the increase. These improvements were partially offset by higher occupancy and depreciation costs associated with the up coming new store openings. The majority of our new store openings have shifted to earlier in the year, the second and third quarters this year versus the fourth quarter last year. SG&A expenses were 29.8 million for the quarter or 38.1% of total revenues compared to 15.8 million or 35.2% of total revenues in the first quarter of last year.

Certain one-time charges relating to management changes including severance expenses, executive search fees, as well as the accelerated vesting of Bob Meers performance based options in total amounted to $1.9 million during the quarter and caused 240 basis points of the 290 basis SG&A increase. As anticipated with go-live of our new merchandise management system on February 4, depreciation expense of the system capital cost also contributed to the increase this quarter. Operating income increased 71.1% to 11.7 million or 15% of sales as compared to 6.8 million or 15.3% of sales a year ago. Our tax rate for the quarter was 30.8% versus 49.6% in the same quarter a year ago. As discussed in our previous calls, we worked with legal and accounting advisors to make adjustments to our inter company transfer pricing rates which historically inflated our tax provision. These adjusted rates are reflected in our first quarter tax rate. Net income rose to $8.5 million versus $3.5 million a year ago or $0.12 per diluted share versus $0.05 per share a year ago. Our weighted average diluted shares outstanding for the quarter were 71.1 million versus 70.6 million at year-end going to the vesting of Bob Meers performance options. Turning to the key balance sheet highlights, we ended the first quarter with cash and cash equivalents totaling approximately 34.1 million and we continued to have no debt. Inventory at the end of the quarter was 55 million or up 113% from the end of the first quarter last year. A major component of this reported increase is in transit inventory of $10 million this year versus 1.5 million in transit a year ago. So excluding the 8.5 million increased inventory in transit. Inventory was up approximately 60% which was in line with our sales growth especially considering the under stocked position we were in last year.

Historically, as many of you have noted our stores have had difficulty keeping up in demand with our product and we have been focused on our supply chain and sourcing in order to bring the right product to our stores on time this year. We believe our current inventory levels will improve our in stock position going forward as well as support our aggressive growth plans for the remainder of the year. Capital expenditures were 8.6 million in the first quarter and these expenditures related to our new store build out cost and IT capital expenditures.

I will now turn to the outlook for the balance of 2008. We continue to anticipate comparable-store sales growth of low teens or high single-digits on the constant dollar basis and 35 planned new store openings in North America. Due to strong sales at new stores not in the comp base, coupled with an earlier than anticipated new store opening calendar for this year, we are raising revenue guidance to between 380 and $385 million versus previous guidance of 370 to $375 million. However, this higher revenue will be offset by certain identifiable SG&A costs that were not in our original budget primarily resulting from new management hires and the other strategic initiatives that Christine outlined in her remarks. The Company expects an effective tax rate in the low 30s for the full year and finally, we expect to end the year with 71.7 million diluted shares outstanding.

Fiscal 2008 earnings guidance continues to include a charge of approximately $0.02 per share resulting from the Company's planned closure of its four stores currently operating in Japan which is expected to occur by the end of the second quarter of 2008. So overall, therefore based on the results in the first three months and our outlook for the balance of the fiscal year, the Company is now expecting diluted earnings per share for fiscal 2008 to be in the range of $0.68 to $0.71 per share, down slightly from our original guidance of $0.70 to $0.72. Our new fiscal 2008 guidance remains above the Company's previously stated long-term growth targets of net revenue growth of approximately 25% and diluted EPS growth in excess of 25%.

For the second quarter of 2008 we expect comparable-store sales growth in the low teens on a reported basis for high single-digits on a constant dollar basis, plus ten new store openings in North America during the quarter. We expect diluted earnings per share between $0.12 and $0.13 which compares to $0.07 in the second quarter of fiscal 2007. So with that, we are ready to turn the call back to the operator for questions.

(OPERATOR INSTRUCTIONS) . We will go first to Paul Lejuez with Credit Suisse.

Couple questions, anything that you can tell us on the monthly trend during the quarter and if you saw any sort of a deceleration in the month of May?

If you are asking what the comp trends starting high and trending lower, the answer is no, no, there was no real trends month to month in the quarter nor in the --

And you said nor in May, correct?

Yes. I'm staying away from monthly comp guidance. You should anticipate that the quarter is as guided for Q2.

And can you talk about any updates to your new store model in the U.S. now that you have a few years under your belt. What has been the average year one productivity and how have comps trended in years two and three if you can help us understand that a bit better.

Paul, it is a valid question but I think it would be over stating to be saying we have a few years of history and a good base for comparison. We continue to operate with our store model that you have seen which represents the minimum. We are experiencing on average sales higher than that and too early to really change our expectations of how the comp trends go. So I would say that we haven't changed our new store model.

I think that the performing above the minimum base is still prudent for us to be playing internally focusing on return on cash and capital investments and I also believe that we need to make sure that we keep the metrics in place so that we stay lean. Last, in terms of regional differences, anything that you are seeing across the U.S., particularly interested in California and Texas. I think Texas was the regions as you were a little slower as you opened stores in that state. Any color that you can provide there.

We are still very pleased with the overall results and openings of all of the stores and we are seeing some turn around in the Texas market based on some of the strategies we have implemented there. We are excited about the new stores that will be opening in the market. We think the real estate is stronger than some of the real estate we have opened to date and that will give us the real (inaudible).

And California continues to perform even though that is our highest built out area to date in total number of stores.

Thanks and good luck.

Thank you.

We will take our next question from Michelle Tan with Goldman Sachs.

I was just curious about why the change or why the new kind of viewpoint on the need to maybe build out strength at the management level, maybe give us a little more detail on what some of the big competencies that Sheree brings to the table, areas where you may have been deficient before?

Sheree's skill set in particular, she has e-commerce in her background which we didn't have anybody on the team which had the retail e-commerce expertise. She also has -- which I think is a compliment to Chip and Bob -- the supply chain experience in a deeper level than anyone we have grown internally on the team. Making sure we have that extra bench strength and she has also grown in -- been in rapidly growing business which many of our internal affairs have not so it is filling back Bob's skill set as he exits the business and she is also very skilled in the performance fabrics which we work with.

I think also we did not have the systems in place and so we would have frustrated professional talent in our inability to have the data they needed to do their job. The timing to bring in a senior management team to surround Christine where they will know the leader in place has many years in front of them and they can form their own high productive team. The timing of that is perfect for this as well as following on the heels of giving them the tools they need to run a professional business.

That's helpful. Thank you. Any update on the e-commerce roll out, how things are going so far in terms of building the infrastructure and any updates on timing?

Basically the initiative plan for really the back half of the year for the expenses which is why you don't see the leverage in SG&A because we planned for it to fall flew the back half. We have a presentation with our Board this week laying out the various strategic options and we will begin to execute the plan sometime towards the back half of the year still on target for a launch in ' 09.

Great. Thank you.

Next to Lorraine Maikis with Merrill Lynch.

Just wanted to ask about gross margins and where you think the potential is going forward? Will we continue to see such large gains on that line item and where do you expect those to come from?

And year over year analysis on gross margins may be complicated. If you remember back when we were ran the IPO road show and our gross margin was 51% we talked about seeing a couple hundred basis points of leverage from that point. We saw that in the latter half of 2007. We are in the 53 plus gross percent gross margin range in Q1. As I have said at various conferences we do see positive levers helping on the gross margin line but somewhat off set by other levers such as depreciation and occupancy costs on new stores that initially open up at lower productivity. Lots of pluses and minuses but overall we expect gross margins to be similar to what you have seen with some room for leverage but not dramatic.

And then Christine ran through a number of initiatives some of that we have heard about and some that may be incremental. Could you highlight specifically where the additional SG&A cost pressure is coming from for the rest of this year.

We have already mentioned e-commerce in the back half of the year. SG&A we have increased the number of show rooms and now have that on trend as well as our assistant managers in the back half of the year which poises us well for the opening of new stores. We have met on the real estate side with many of the developers through the ICSC and have refined our two-year multi-year strategy for stores with a lot of the developers. We have now secured sites on a lot further out time frame. We have been refining our store site strategy to make sure managers who have been in system six months to a year in advance of the store openings. So really the work we have been doing is fine tuning that strategy so we continue to open with strong stores which is what leads towards healthy business.

Thank you.

We will go next to Sharon Zackfia with William Blair & Company.

A couple of questions on the addition of assistant managers, I think you said, Christina at all stores and additional assistant manager, can you give us a breakdown at this point as to what the typical management system is at the store level?

We have a store manager and two assistants and key holders which basically fill in the hours that the store manager and assistant manager wouldn't be part of and the structure is the store manager and the general manager of the store and then we have them focused on -- assistant managers focused on community and product inside the stores to make sure that we are -- we have the right product in the stores and it is merchandised well and community because we are so community oriented as our marketing.

Is this a stair step increase where in the past month or two every store has had an additional store manager or is it something that is rolling.

It is still in the process of rolling completely but we are probably about midway through putting the second assistant manager in the stores and then the plan is that the assistant managers come out and manage the new stores so that's where the rotation would be rather than at the store manager level so we have consistency in the execution of that store.

Okay. Separately on the showrooms, I guess the increase in showroom times before a market opens, are the showrooms actually losing money initially? Is that why it is a hindrance to SG&A?

No, the showrooms consider them to break even. So you are going to see revenue on the revenue line with a low gross margin and SG&A. Overall that's our marketing spend that pays for itself.

Lastly, you increased the SG&A by, the SG&A spend 1 to 2 million, 1 to $0.02. Is that enough as you look at the business, Christine, and you are coming in, are we going to see some other infrastructure investments that have enter yet been identified and separately in '09/ 2010 should we expect to see SG&A leverage again?

We believe you will. This is the correct key positions we feel for building the management team. I think as we refine our e-commerce strategy, we feel that we have the expense side built in for that but I think we are still refining that a little bit. On the whole, we feel these are the remaining key positions for the senior management team.

Sharon, I continue to expect to see a 20% operating margin in ' 09. And ' 08 we will expect to be somewhere between where we were in 2007 and 2009 target.

Thank you.

We will go next to Liz Dunn with Thomas Weisel Partners.

I wanted to follow-up on Sharon's question a little bit heavier hand if I may. Does the management team and the board really understand the magnitude of the sort of change in perception that results from a guidance reduction at this point in the Company's history and we really just need to get a sense from you that this guidance is conservative enough. I think one of the things that many of us really appreciate about your model is that there are places that we can point to new store productivity, margin, et cetera, where we -- where we felt like the model was conservative. Can you give us any comfort that you won't be coming back to us three months from now with added expense categories because I do think it's going to be an over hang for some time unless we get that comfort.

To answer your first question, yes, we certainly understand the importance of earnings guidance and especially of revision and we do think that revising as we have has been prudent. We did a full reforecast and tried as best we could to anticipate any further spend. Are we being conservative enough? Yes, we definitely feel we are being conservative enough and form, we will be looking for -- furthermore we are looking for more opportunities to run efficiently and do better. We feel this is conservative and prudent guidance revision.

Can you give us a little bit of detail on the inventory flow resulting from your systems evolution as it occurred in the quarter. Are you pleased with the progress that you have made and how should we see systems implementations happening through the balance of the year? Are they still on track?

With the MMS and warehouse management system up and running -- we have talked about it before -- it is now in place where we are at the point of -- we are actually figuring out how to make best use of it. Have you seen improvements yet? No, but clearly the system, we can see where certainly by the end of the year we see a more efficient flow of inventory. The rest of the systems as Christine aligned in her remarks were on track. The point-of-sale system is being implemented in U.S. stores as we speak followed by advanced allocations and planning in the summer and in September. All of those systems are on track and will be in full use for the busy fall/winter season next year.

One more if I may sneak one in, any update on the competitive front? We have seen some more fashion retailers launching yoga product. Can you give us your perspective on those type of competitive offerings and the competitive environment overall?

Yes, I still think that the competition is growing the market and obviously they are seeing the growth in active wear and healthy living and athletic participation. To date the competition that we have been looking at both online, in catalog and at retail we think is healthy for us and we believe that the infrastructure we have in place and more importantly the location of our stores, the added costs that we put into our fabric and the community based marketing is much more critical than just having something that looks fashionable. I would say competition on the general athletic side, the general lodge wholesalers are putting an emphasis on technical fabrics that are coming off the competitive playing fields and I believe that is helping us in terms of getting a jump start on some long-term research and development that otherwise would be longer to get to market and particularly as we expand our categories, that the opportunity is not yoga, it is exercise, fitness and general, fitness activities and the success that we are seeing in our running line, our jackets and outerwear, our soon to be delivered swimwear line and our men's business really indicate that competition is still following as opposed to coming out with something truly innovative.

Thanks, good luck.

Next up we will go to Adam Clark with BMO Capital Markets.

Can you hear me?

Yes.

I was wondering if you can -- you mentioned regional differences in sales in the U.S., but if you can talk to your key market here still up in Canada, if there were much differences up here.

Some background noise. Canada is strong. Our comp store sales in Canada were consistent with the U.S., in fact, anything against the U.S. was slightly stronger. The Canadian store base in sales we are not seeing any issues.

Okay. But west versus east, is it fair to say that west would have been stronger than east?

No.

About the same, okay? And non-mall versus mall locations, is there much difference?

As always we are -- we don't see significant differences between malls and street locations and that hasn't changed given the economy we are in.

Okay and just finally, you mentioned how much currency has an impact on your top line. I was wondering if you could break out for us what it meant to the bottom line for the quarter.

I don't have that broken out. If you go back to our 10-K, certainly when you look at ' 07 there is an example it attempts to quantify what a change in currency would be and I think you can extrapolate that to '08.

Great. Thank you.

Next we will go to Howard Tubin with RBC Capital Markets / Dain Rauscher.

Can you give us a sense of where you think inventory is going to be at the end of the second quarter?

No, I'm not giving inventory guidance at this point. I have measured it in terms of forward weeks, et cetera. I expect second quarter will be similar to this quarter.

I think the key is to look at forward weeks and not inventory turn. When you take into consideration the number of new stores we have opening, the seasonal flip of the putting in warmer weather product into the stores and then the getting and maintaining size integrity on our core product, we are comfortable that we have a good handle on that inventory and its growing in the right shape.

I guess the other color on that in my remarks I did comment that most of our stores were opening in Q2 and Q3 this year and there is inventory build to fill those new stores.

Thanks and in terms of the comp would you say the bulk of your comp is being driven by increases in transactions.

Yes, it is traffic transactions.

Great, thanks.

(OPERATOR INSTRUCTIONS). We will go next to Vivian Ma Oppenheimer & Co.

Good afternoon. Wondering if all the exit costs related to Japan will go through in the second quarter of this year. Are there any in the first quarter or evolving into the third quarter at all?

Very small amount in the first quarter. The bulk will be in the second quarter and some spill over into the third quarter.

Can you -- is the amount in the first quarter, how big is that number?

It is in materially.

Secondly, just want to ask a question about the New York area new stores. I have noticed there is a slight delay which is typical to this market. Are you expecting any further delays to the upper east side store or the Hansen store at all?

We have been waiting for the landlords to finish some work there. I believe that the date that we now have is in a good date. It is on track and we have I think two other stores that are coming upright after that.

Thanks very much.

Next to Janet Kloppenburg with JJK Research.

Good afternoon, everyone and congratulations. I wanted to ask John first if he could talk a little bit about, he identified costs that came to $9.1 million in SG&A spend in the first quarter. Did you point them out, the executive search, the depreciation of the new stores, et cetera as one-time or are there parts of those expenses, John, that would be considered one-time in nature?

It is really for the most part one-time given the change over. As I said, there is severance costs. Search fees for the new positions that Christine referred to, the acceleration of the vesting of Bob's options.

Could you identify how much that was and if that will occur again in the second quarter?

No, that will not occur it will end up being publicly separated anyway about 8 to 900,000 to the total.

Close to a $0.01 a share in the earnings today?

Yes.

That would be considered one-time in nature?

Yes.

Are there any other components of that 9.1 million that would be considered one-time?

For example, we have out sourced certain functions in our real estate group and as a result that resulted in some terminations in severance pay. I view that as a one-time.

Right. But the executive search and the depreciation of the new stores is a an ongoing. Wouldn't you think so?

The executive searches wouldn't be.

Not at this level, the senior people.

And when you look at the change in guidance on the year which is a $0.01 to $0.02, is a lot of that coming out of the second quarter guidance or is that spread in Q2 through Q4?

Sorry, your question was, was it coming out of Q1 versus the others or --

No, Q2 as apposed to being spread across Q2 through Q4?

I would think it is quite balanced over the three remaining quarters.

Okay and then on the inventory, you said that we should expect it to be about the same coming out of Q2. Is that including the in-transit level as well? We should expect it to be up over 100%?

The in-transit is always a bit of a wild card. That's goods that's on a ship somewhere and we might not get to it for four weeks. We have to think about what we have on hand and the DCs and in the stores. That's really what I'm referring to.

You are referring to the inventory up about 60%?

Yes, again, I don't want to get too specific on guidance. Yeah, it would be consistent with where we are at the end of the Q1 and repeating the point I made before a lot of stores open in Q3. You will see inventory at the end of the Q2 that has to be in place to open those stores.

Your guidance on sales you took -- correct if I'm wrong -- you took the total sales number up. I'm not sure you took your comp guidance up. Am I correct on that?

That's right. The comp guidance we were bang on guidance for Q1 and we are not changing comp guidance for the balance of the year. The improvement is coming from better results at new stores that are not in the comp base as well as some additional store weeks because we are tracking towards earlier openings on some new stores.

Was your second -- first quarter benefited by a lower than expected tax rate or was that tax rate on expectation.

That was pretty much on expectations.

Right. Okay. There is nothing unusual in the first quarter numbers except for the one-times that you pointed out to us?

Yes, exactly.

And then I just wanted to Christine, maybe if you could tell us in your first 60 days, I don't know how long you have been there. Apologize for that. Maybe some observations where the characteristics of the business may have been somewhat different than what you expected and what that looks like, please.

I think actually the business continues to really surprise me in a very positive way. I think it is just a matter of refining the strategy to make sure we continue to perform and so in areas of my -- for my focus have been the real estate strategy for multi-year and making sure we get the quality deals and sites that we should be looking for, the e-commerce strategy so we take advantage of the market opportunity that we have there, the U.S. store people pipeline is another critical strategy for us and returns to continue to execute our community based model the way we want to and our supply chain, our number one opportunity is getting the product in the right size runs to the stores and the demand has out stripped our capability in some cases and execute some of the side runs and that's the real focus which is what we have been trying to address with the inventory.

You will be able to capitalize on those within the next 12 months or so.

Absolutely.

Lots of luck.

We will take our next question from Rob Wilson with Tiburon Research Group.

Thank you. What is your expectation for revenue in Q2? I don't believe you gave a number there.

I haven't given a specific revenue guidance for Q2.

Why would you not?

Comp store sales are a good indicator of the health of the business with the number of stores we are opening to give overall revenue guidance, there is too much variable based on when the stores actually open. I'm limiting my guidance to comps.

Well, I guess I'm looking at -- you are going to grow stores by 50% this year. You are expecting high single-digit same-store sales and the high end of your revenue guidance implies 41% revenue guidance. I'm trying to reconcile the 50% store growth and the very healthy same-store sales versus only 41% revenue growth.

Don't forget the stores -- the new stores are not open the full year. We are opening stores halfway through the year or later it is going to skew that calculation.

Also, Christine, in your -- in the press release you suggest that there were some incremental SG&A expenses. I'm assuming these were incremental relative to what you told us two months ago ; is that correct?

At that point we had not secured all the final candidates and offers that we had made. We had been looking at their (inaudible) -- expenses as a stock options for the new hires effective this year for their initial grants and so some of that is what we have been refining.

So this relates to stock option grants of new hires that you didn't know about two months ago?

Yes, that's right.

And that was really essentially the only incremental SG&A that you suggested today versus two months ago?

Some of it has been refining the strategies for e-commerce and that's a significant -- that is back loaded in the back half of the year and that's in the SG&A number as well.

The e-commerce is still a 0.05 million to 1 million; am I correct there?

Yes, depending on which way you look at the strategy yes.

Consider it a place holder. We have a refined budget on that. It is still our best estimate but having said that, it is an important initiative and with that, it could be a higher portion of what we have indicated today.

Thank you. At this time we have time for one final question and we will go to Liz Dunn with Thomas Weisel Partners.

I'm sorry to log back in. I guess my question relates to your inventory comments. Do you think that there is still -- I didn't realize I was still on speaker. Is there any way to quantify how much you walked last year by being out of stock? I'm sorry I have to follow-up on that last comment. Are you saying that the SG&A may come in higher once you refine the plan.

No, no, no.

I'm saying the SG&A guidance that we have given includes an estimate of e-commerce. That's all.

Okay. But are you committed to bringing the actual in line with that estimate? If you feel like you need to spend more, will you spend more?

Going back to your original question and I will reconfirm, we fully expect that our SG&A guidance is conservative.

And then how about how much you felt you walked in terms of sales last year by being under inventoried? Any guess?

I wouldn't know how to do that because it is all anecdotally and we did as you remember really increase the amount of inventory and got into the stores last year and did halfway throughout the holiday season both from the factory and from the warehouse into the store but even there we couldn't keep up with the sales. There is no way, Liz, for us to be able -- for us with the systems we had in place to be able to quantify that.

Right now because you are running lean and in chase mode you are not as focused on inventory turn, would it be safe to assume that you will implement that sort of discipline at some point when the inventory catches up with the sales trends?

Yes, I think you eventually shift your focus to inventory turn in a high growth business I think you can get internally focused too soon in your growth curve and then you become a self-fulfilling prophecy.

Thank you.

That is all the time we have for questions. I would like to turn the program back over to today's speakers for any additional or closing comments.

I would like to thank everybody for joining us today and we look forward to delivering another great quarter coming up.

Thank you.

Thank you

That does conclude today's conference. You may now disconnect your lines.