Lululemon Athletica Inc (LULU) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the lululemon athletica third quarter earnings results conference call.

This call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Ms.

Jean Fontana of ICR.

Please go ahead, ma'am.

Thank you.

Good morning.

Thank you for joining lululemon athletica's conference call to discuss third 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 8-K 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 Chip Wilson, Founder and Chief Product Officer; Christine Day, the Company's President and Chief Executive Officer; and John Currie, the Company's Chief Financial Officer.

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 be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC.

Now I would like to turn the call over to Chip Wilson, lululemon athletica's Founder and Chief Product Officer.

Good morning.

I'll just in general review the details of the third quarter results, but I just wanted to say a few things about the current environment.

We are definitely operating under conditions that we haven't seen before, but we have - I really believe in the resiliency of our people, the entrepreneur spirit, and really our training program that allows us to continue to recreate ourselves every day.

We have a great team in place, and we're definitely executing on all our initiatives in our strategic plan, and I think we are going to come out the other end of this as the market leader in our industry.

On that, I would like to pass it on to our wonderful Christine Day, CEO.

Good morning, thank you, Chip.

Good morning everyone.

Thank you for joining us to discuss our third quarter.

Following my opening remarks I will turn the call over to John, who will go through the financial details of the quarter.

Our third quarter earnings met our plans that we laid out for you on our last conference call, and our results included a positive same-store sales comparison in constant currency within each month of the quarter, without material changes to our promotional strategy to drive sales.

We were able to effectively manage costs and grow earnings from continuing operations by 12% versus a year ago.

Before I discuss our view of the go-forward macroenvironment, I want to also quickly point out we have basically completed our infrastructure upgrades for the year.

We have filled key roles such as the Head of Allocations, opened two temporary outlets, refined our real estate strategy, set e-commerce in motion, implemented system upgrades, and rolled out [TADA's] advanced allocation system.

So in total, we are on track with the efficiency initiatives that we talked about earlier this year.

Like most retailers, we have experienced decelerating trends beginning in October that continued through November, and are expected to persist.

Our comps turned negative in November, proving we are not immune to the squeeze on consumer spending and the heavy promotional environment today.

So how are we positioned, and how do we respond in order to limit the downside risk for our shareholders while also protecting our brand for the long-term?

First, I'm happy to say our inventory was in good shape at the end of the third quarter, down 1% in total from the third quarter last year.

Looking ahead, while we did not buy the fourth quarter and spring 2009 inventory in line with our new sales trend, we did begin buying some of our inventory strategically in what we call modules.

The goods in these modules can be rolled into our stores at any point over the next six months, as demand warrants.

One of our strategic advantages is that we provide functional and technical product that is seasonless in nature, which helps us to mitigate the inventory issues and fashion risks inherent in most other apparel businesses.

We also delayed purchasing goods for our e-commerce launch, which will give us additional flexibility with our open to buy post-Christmas.

Finally, though we may layer in some higher priced goods like outerwear, over 90% of the items in our store are at price points below $100.

This value is hard to find elsewhere, given the quality of innovation in our everyday product, which is made to be worn through multiple seasons and to transition easily from gym to street.

With all of that said, we realize that guests have more options with the heavy promotional environment elsewhere.

We plan to react, but in our own unique and entrepreneurial way that is consistent with the values and exclusivity of lululemon.

We plan to surprise and delight our guests through our community events.

Our goal will be to our keep stores vibrant with new product, our educators busy and our guests satisfied, and our top line strong enough to keep from deleveraging too significantly.

Second, we have been diligently managing costs.

Several months ago, we started to prepare for a downturn by challenging our people to take a look at their businesses and focus on the essentials.

At the stores we are focused on optimizing labor hours, but we are cognizant that cost savings are not borne by our stores alone.

Here at the support center we are focused on controllable expenses, such as staffing, travel and supplies, as well as gaining efficiencies in our IT implementation, logistics and sourcing.

Entrepreneurial management is embodied by acting with purpose.

Our employees, from managers to educators, continue to excel in this area.

Next, looking ahead, we are becoming more prudent and vigilant with our store growth plans in this new retail environment.

At this point we have five leases signed for stores in fiscal 2009, and we will grow opportunistically only when we see landlords start to reflect the reality of a new world in their leases.

This does not preclude us from resuming a more aggressive store opening pace in the future; it simply means that we will not trade quality for quantity.

We will maintain the process of targeting and building an attractive real estate pipeline, so we will be ready when the selling environment becomes more certain and the market corrects.

Our focus for next year will be on store executions, system efficiencies, supply chain leverage and operating efficiencies at the store level.

We will also focus on our community marketing, and building deeper competitive barriers.

And finally, we will continue to build our e-commerce business, and look forward to enjoying the ability to leverage our strong brand through this channel next year.

Big picture, we feel we are well positioned in this challenging macro landscape.

We are debt free and have a strong working capital position, along with good cash flow in every quarter of the year, driven by our higher productivity and margin levels.

We continue to build upon our strong brand, and attract loyal guests who are passionate about our products and our community outreach efforts, made evident by the higher number of guests participating in our complimentary classes.

We should also continue to benefit from the health and wellness trend, that will be less affected by a recession.

Business will be challenging for at least the next six to 12 months, as we respond to a deeply discounted market in the US, and lower gross margin due to occupancy costs.

However, as Chip said earlier, we believe that our business model will prove resilient throughout this challenging time, and we will emerge from these conditions with strong growth potential for our brand.

Longer-term, we fully expect to increase market share through our resumed growth strategies in a market that is likely to see contraction, as well as have opportunities to benefit from improved lease terms to attract and maintain talent, and to restore our superior operating margins.

Even with a short-term deceleration in sales due to market conditions, our new stores continue to perform above industry norms on a sales per square foot basis.

Our new store business model also has the flexibility to adjust in the new economic environment, and our recent efforts have reduced store investment.

This initiative, coupled with lower occupancy rates and supply chain efficiencies, give us tremendous opportunities for profitable growth in the future.

Now John can give you some details on the third quarter results, and our outlook for the rest of the year.

Thanks, Christine.

I'll begin by reviewing the details of our third quarter 2008 results.

I'll then update our guidance for the fourth quarter, which reflects the impact of the new macroeconomic landscape, and the impact of foreign currency fluctuations, and I will close with a brief comment on fiscal 2009.

Third quarter total net revenue increased 34% to $87 million, as compared to $64.9 million in the third quarter of 2007.

This increase was driven by a combination of 37 net new corporate stores opened since the third quarter of 2007, including 16 new stores during this third quarter of 2008, coupled with a comparable store sales increase of 4% on a constant dollar basis.

The weaker Canadian dollar compared to Q3 of '07 offset this increase by reducing reported revenue from comparable stores by 6%.

As of the end of Q3 there were 55 stores in our comp store base, 35 of those in Canada and 20 in the united states.

Our corporate-owned store sales represented 89% of total sales or $77.6 million, versus 91% last year.

Franchise and other revenues, which include wholesale, phone sales, showrooms and outlets totaled $9.5 million, and represented the other 11% of total revenue in the third quarter.

During the quarter we bought back three additional franchise stores and closed our final corporate-owned location in Japan.

We therefore ended the quarter with 107 total stores versus 70 a year ago, 98 of which we own and nine franchise stores, including the four operating in Australia.

Gross profit for the third quarter increased $6.4 million or 18% to $41.9 million.

Gross margin decreased as a percent of revenue by 660 basis points to 48.1%.

Higher occupancy and depreciation expenses contributed 320 basis points of this decrease.

As anticipated, we opened a greater number of stores during the third quarter versus last year.

Most of these openings took place in October, which caused us to incur nearly a full quarter of occupancy costs with less than a month of sales from those stores, and therefore contributed approximately 130 basis points of the 320 basis point decrease.

The balance was from lower productivity from new stores, coupled with a general deceleration of sales late in the quarter.

The other substantial impact on gross margin was a 290 basis point decrease in product margin.

This was largely relating to in-store markdowns, two temporary outlet stores opening, and warehouse sales during the quarter.

SG&A expense increased 23.9% to $28.8 million for the quarter or 33.1% of total revenue, compared to $23.3 million or 35.8% of total revenue in the third quarter of last year.

This 270 basis point reduction in SG&A as a percent of sales was due to leverage, good cost control at our store support center, and cost savings at our corporate-owned stores; partially offset by higher depreciation expense related to our new IT systems implemented this year.

These factors overall led to a 6.6% increase in operating income to $13.1 million, as compared to $12.2 million last year.

Operating margin was 15% this year versus 18.9% in the third quarter of 2007.

Our tax rate for the quarter was 33.1%, versus 37.6% in the same quarter a year ago.

As discussed on our previous calls, last year our tax rate was inflated by our intra-company transfer pricing structure, which we amended at the end of 2007.

Net income from continuing operations rose $8.8 million - sorry, rose to $8.8 million, versus $7.9 million a year ago, or $0.13 per diluted share versus $0.12 per share a year ago.

The weaker Canadian dollar negatively impacted earnings per share by approximately $0.01 in Q3.

Our weighted average diluted shares outstanding for the quarter were 70.6 million, versus 71.7 million for the same period last year.

Turning to the key balance sheet highlights, we ended the third quarter in a healthy cash and working capital position, and we continue to operate without requiring access to our operating line or other debt.

Inventory at the end of the quarter was $49 million, which is down 1.3% from the end of the third quarter last year.

Capital expenditures were $11.3 million in the third quarter, and primarily related to our new store buildout costs and IT capital expenditures.

We continue to expect capital expenditures to be approximately $36 million for the full year.

Before commenting on our fourth quarter 2008 guidance, I would like to remind you of the impact of foreign currency fluctuations, how it impacts our income statement.

First, our earnings are impacted by translating the results of Canadian operations into US dollars.

Therefore, when the US dollar appreciates in comparison to the Canadian dollar, our reported earnings are unfavorably impacted.

Secondly, we purchase the vast majority of our product in US dollars.

Therefore, a stronger US dollar results in a lower gross margin.

Lastly, virtually all of our corporate G&A is in Canadian dollars, which actually provides some positive leverage on our operating margin when the US dollar is stronger.

While currency fluctuations impact our comparable stores -- our comparable earnings growth over the near-term, I want to stress that this is not really a reflection of the strength of our core business operations.

Also, over time as the balance of our operations shift more towards the US, the impact of currency fluctuations will be reduced.

We have incorporated the recent devaluation of the Canadian dollar and the weaker macroeconomic environment into our fourth quarter guidance.

As a result, we now anticipate reported revenue to be in the range of $90 million to $95 million.

This is based on a comp store sales decline in the low double digits on a constant dollar basis, and six store openings during the quarter, bringing our total new store openings for the year to 35.

We now expect diluted earnings per share in the range of $0.15 to $0.17 in Q4, incorporating a tax rate of 34% and 70.7 million diluted shares outstanding.

Our Q4 guidance is based on an $0.80 Canadian dollar.

For example, if the Canadian dollar was at par through Q4, consistent with the level in Q4 of '07, our revenue guidance would have been higher by approximately $16 million, and earnings per share would have been higher by approximately $0.04 per share.

Our anticipated Q4 results bring our full fiscal 2008 net revenue to a range of $340 million to $345 million, and diluted earnings per share to $0.55 to $0.57, based on anticipated shares outstanding of approximately 71 million for the year.

This fiscal 2008 earnings guidance includes the $0.02 per share loss recorded in the second quarter, resulting from the company's closure of its four stores that operated in Japan.

We closed our final store during Q3, but the closure of this business was fully reserved in Q2.

There is no further earnings impact anticipated.

While we will not be providing 2009 earnings guidance on this call beyond what Christine has already mentioned about revised store growth, I will close with a few comments on the coming year.

We are planning our business conservatively, as we expect the current challenges to persist, and are doing everything within our control to maintain strong sales volumes, keep inventories lean, and manage expenses prudently.

If, however, the Canadian dollar remains at its current level, and the macro headwinds remain in place through 2009, we expect to see deleveraging of our operating margin in 2009.

However, we continue to believe that over the longer-term, in a non-recessionary economy, our business model remains capable of delivering our goals of 25% revenue growth, 20% operating margins, and diluted earnings per share growth in excess of 25%.

With that, we are ready to turn the call back to the Operator for questions.

(OPERATOR INSTRUCTIONS)

We'll have our first question from Lorraine Maikis with Merrill Lynch.

Thank you, good morning.

Just wanted to get a little bit more information on the inventory balance, how you were planning that going into the fourth quarter, and if you could tell us a little bit more about this module structure and how you expect that to play out in the stores?

I think we talked about this last quarter, and we have - we started anticipating both for upside and for downside to buy some of our inventory in flexible modules that we could move throughout the year to reduce our inventory risk.

So that's what we did going into the fourth quarter, and that's really about as much as I would like to say about it from a competitive point of view.

But we do believe that the strategies we have in place for an inventory level will help us get through this period that's coming up.

Then just to clarify the comment on the e-commerce business, are you expecting to use that to clear product or do you just think hat you will be able to put some of the excess product on line?

We believe we'll be able to grow our business with e-commerce, and that is our first strategy, and we don't really believe at this point we have an inventory problem, so I think sales growth is actually our larger focus at this point in time.

So we are comfortable with our inventory levels, and really just optimistic about the growth that we will get from e-commerce.

Great, thank you.

We'll go next to Richard Jaffe with Stifel Nicolaus.

Thanks very much.

A quick question regarding CapEx of $36 million, and what seems to be a much more cautious outlook for new stores.

Should new store growth come in below the original plan of roughly 35 stores, shouldn't we anticipate a similar contraction in CapEx, or are you not willing to sort of anticipate that yet?

Well certainly - even in 2008 the bulk of our CapEx related to new store growth, of course the elements are refurbishing existing stores and -

I'm sorry, I was referring to 2009.

Yes, I'm just starting with 2008.

So there was a high IT capital spend in 2008, and that would be lower next year anyway.

But my point is yes, with lower store growth you would expect capital spend on new stores to be down proportionately.

Just a quick follow-on question.

The store in Atlanta, the Highland store, was closed on black Friday, surprisingly.

Help me understand the thinking behind that.

Is that simply a showroom, and I misunderstood it as a full retail store?

Yes, that's simply a showroom in the Highland, and that usually only operates three days a week, though we did open it a little bit more during the Holiday season.

Yes, there were - obviously I was disappointed for my own reasons, but customers were surprised as well.

We did react to that, and we have extended the opening hours at that location through the rest of the Holiday season.

It's kind of a - more of a retail positioning.

You mentioned store leadership and having the autonomy to adjust to this -- this environment; could you give us some more detail on how store managers or store executives can react, what kind of autonomy they have to manage their businesses?

We have always had a more entrepreneurial store manager, particularly in the side of community, and we really do let the store manager work to set community events.

What you won't see us do in a promotional strategy is put, you know, 60% off sale tags in our window.

You know, that's really what we've tried to stay away from, from the beginning of the conception of the brand, even through these challenging times, and now our strategy is much more localized community events driven by the store manager.

We feel that that has done well for us even in the current environment, and we will continue to pursue that strategy along with our other traditional methods.

In terms of cost savings, that really comes from the home office, both pricing on product and head count in stores, that sort of thing?

Head count in stores, we've trained all of our managers, and we recently held sessions with each one of them reviewing all of their schedules, making sure that they put their staff against the peak sales opportunities, because it's really it's a two-tiered strategy.

One is, be affective with your tasks and your hours and your head count, but the other is really also make sure that you're staffing against your business.

So we make sure that we emphasize both when working with our teams.

And so we have just completed a review in the last 60 days, and continue to monitor that.

We've seen the business respond, both on the cost side and the upside, positively from that.

I see.

Just one last question, I've been to a couple of the fairly new stores in the northeast, Roosevelt Field and Garden State, and wondering what kind of feedback you're getting from the customers and from your store people regarding the store design.

Both are fairly unusual, different from the [native] mall and different from the other stores in the mall, and wondering what your thoughts are - obviously they're still early in their development, but what your thoughts are about those locations?

I mentioned it's different for every [person] that looks at it.

I think the number one thing that we want to do is we are trying not to look like a chain store, and be more relevant to the local markets or - you know, and surprise and delight our customers.

So that's our goal.

Hopefully, we came through on that.

Are you commenting about the Buddha at Garden State?

Well, the Buddha in Garden State, the glass front in Natick, the closed feel to the front of both Roosevelt Field and Garden State.

I'm wondering what are you learning from these sort of different motifs?

I mean, does a Buddha sell more Yoga wear, or is it a hindrance, you're better off with a glass front and people watching other people do Yoga.

I don't know, I'm really just asking what you guys are seeing.

The store designs are obviously very different, and I'm wondering based on what you learned, what should we look for going forward?

I think you will continue to see unique designs with each store front, particularly in mall environments, where we like to differentiate ourselves, and we've actually had very positive response to the one particularly at Garden State, because it's very unusual and interesting.

Natick is a little bit more traditional, which we actually honestly struggle with a little bit more, differentiating ourselves in that mall.

Roosevelt Field, we - the store will be fine as brand awareness on Long Island grows.

I think brand awareness is more the challenge than anything with the store front in that particular store.

It's still very early for us to have entered Long Island, especially when our original plan was to have at least three stores in New York City, but due to some delays we didn't have that at time we opened.

But now that we have more stores in the city, we are seeing Roosevelt Field grow.

Got it.

Thank you.

Our next question comes from Paul Lejuez with Credit Suisse.

Did you mention how many stores you had signed already for '09?

We have five deals signed for '09.

We have basically put everything else on hold temporarily, and are actively renegotiating with landlords until we get to a level that we feel comfortable with, that can be sustained in a difficult environment for the first - we anticipate at least the first six to 12 months of next year, and maybe into the next year, will be difficult.

So we view this as an opportunity to really deleverage the rent infrastructure, and we're going to continue to focus on that.

What's your hope, though, for 09?

What's an ideal number for you, just given the infrastructure that you have, the overhead, the real estate teams; what's the ideal number for you to have open in '09?

Paul, as we've said, we are planning conservatively.

Our cost structure at the [SSC] is scaled to level that we are comfortable if it's five stores, and beyond that we will look opportunistically.

But it wouldn't be realistic to pick a number at this point.

And just on that point, I would like to point out we made the move right after I joined last year to outsource everything from construction, design, except for some of the base layouts that we do internally here ourselves.

So we actually have a highly flexible real estate and store development system.

Got you.

And inventory in units, can you share that number with us?

We don't break it out by units.

Just in terms of percentage change year-over-year?

Percentage change year-over-year - I mean, our pricing hasn't changed much in our - I mean inventories compared to a year ago are, as you say - as you've seen, slightly down.

So that's reflecting the cleansing of our older inventory that we did earlier in the year.

But, I mean, generally our inventory has been in pretty good shape at Q3.

Can you just reiterate what you said about your inventory plans?

I think you said that you didn't buy through the current sales trend for the fourth quarter or first quarter?

Am I correct, did I hear that right?

What are you planning inventories down, as you think about how you want to exit the first half of '09?

As you would expect, we do buy inventories several months in advance, and therefore for Q3 and Q1 our buy was based on a more positive sales outlook than what we are seeing and we've guided to for Q1 - or, sorry, for Q4.

Therefore, you would expect some inventory build.

Fortunately, we're heading into Q4 on a very healthy inventory position, so the inventory level will come up, and we will focus on strategies to clear that, whether it's releasing to the stores in modules or the other strategies we are using.

But even with that buy versus sales trend, I expect inventory at the end of this year to be no higher on a per square foot basis than you saw last year.

Thanks.

Good luck, guys.

We'll go next to Dana Telsey with Telsey Advisory Group.

Good morning, everyone.

Can you please talk a little bit about - as you think about next year and your planning, the focus it seems like is certainly on execution.

As you think about your growth initiatives and your products, whether it's price points, is that being adjusted?

What are you seeing regionally?

And lastly, you mentioned store execution system efficiencies and supply chain leverage; where do you see the biggest amount of change next year, in terms of the focus on execution and bringing it in line with the current top line environment?

Thank you.

I think the one area that regionally breaks out for us, and I think it is a combination of the macroenvironment and the number of new stores that we have opened, has been New York.

We went from one store to nine stores in a general area in a very short period of time, which affected disproportionately comp sales at our Lincoln Center store, but obviously a very positive growth story overall.

So we definitely feel like we did the right thing in the marketplace, but that did affect our comps.

So that would be from a regional perspective the strongest story and some of the reasons that we think happened there.

In terms of going forward in to next year and our execution strategy, and I think a breather in some ways from growth is always a healthy thing, particularly for the stores, allowing them to focus, and we are shifting less resources into opening more new stores, so we can focus on growing the business within each store.

So we'll always take an opportunity to do that and focus on execution when we can.

So we actually view that as a positive outcome in this market.

As we've implemented a lot of new systems, the opportunity to continue to focus on those internally, so that we can get the efficiency from our merchandise systems.

In terms of big opportunities for next year, we already have begun negotiations with our supply base, and have seen fairly positive responses from the factories that we work with, who have obviously suffered a tremendous loss of business.

So we have very strong partnerships there, and we're working closely with each one of those suppliers.

We are seeing some of the other ancillary costs and logistics dropping.

So we are actively renegotiating almost every contract that we have.

The other opportunities that we're looking at is we do have a lot of renewals in our Canadian market, so we are actively renegotiating those so that we can drop our lease costs in our most significant market.

So as we look across the levers of next year, we have already done tremendous work on reducing our new store costs, so we feel actually pretty well poised from an infrastructure point of view going into next year with our ability to reduce costs.

And then we are being very opportunistic on the top line for next year, and we have done some things already which I think you in New York would see.

We did have one store that we didn't discuss in the Flatirons area, which is a temporary store.

Our landlord had difficulty getting his certificate of occupancy for the Union Square location.

So we were able to actually build a store in two weeks in a temporary location in the Flatiron area, and clear through any inventory that we would have had to carry until the Union Square store will open in early January.

So I think that's just one example of the kind of flexible creativity that you can expect to see from us in growing our top line next year.

Thank you.

Our next question comes from Sharon Zackfia with William Blair.

Good morning.

John, I was pretty impressed by your ability to leverage SG&A on the comps you put up in the third quarter, particularly I think in the past you had told us you kind of needed high single-digit comps to leverage SG&A, so clearly there is a lot of work being done internally, which I think is good work as we go in to '09.

I guess I'm wondering as you slow growth and as these initiatives play out, I mean what's a good ballpark for a break-even comp on SG&A next year?

In this environment, when I'm guiding to negative comps in Q4, that's a tough question, Sharon.

So I really don't have a new answer beyond what I've said in the past, other than top line outlook is lower than it's been.

And as I also said, if that -- if the economic condition continues, we are likely to see overall deleverage.

Having said that, as you commented about Q3, our cost structure we are working on all the time, it's in line and we'll continue to do that.

But I wish I could give you clarity into '09, but that's tough at this point.

Okay.

Maybe secondarily, I appreciate your commentary on sales trends in October and November, and I don't think think they are terribly out of keeping with what a lot of folks are seeing, but you do have more exposure to Canada than most of the retailers we follow; is there divergence happening in Canada versus the US in terms of sales trends?

I think it's fair to say that, again, Canada didn't have the extreme housing bubble situation, so I would say the Canadian economy has been more resilient, was slower to feel the effects but is feeling the effects.

So our guidance reflects that Canada is now in recession, as well as the US.

Are Canada and the US comping about the same?

They were not during Q2, as I said Canada was more resilient, but now it's getting closer to - the Canadian comp is still a bit stronger than the US, but we are anticipating they will both be similar going forward.

Okay, and then maybe lastly just I will put in a plea for the investment community.

Last year you reported your fourth quarter pretty late.

I'm guess I'm wondering if there will be any opportunity for you to at least give us a sales number earlier than what we got last year after you get through the Holidays, if there is thought of that from the Board level?

I do remember that very, very long period where we weren't able to really talk much, and I share your desire to be able to talk about our results sooner than - I think it was late March.

So I hear you, and we'll hopefully deliver something on that.

Okay, well best of luck.

Thank you.

Our next question comes from Michelle Tan with Goldman Sachs.

Great.

I was wondering if you could help us - give us some more qualification maybe of the new store productivity, if you took out the franchise stores that you bought back and the timing issue you had in the third quarter.

Roughly where are you tracking with the new stores?

The new stores that entered the comp base in Q3, I think I commented similarly in Q2, and the stores that entered the comp base in Q2 came in - finished their first year significantly above the benchmark that we use on the $7.50 a foot.

In Q3, that was a bit weaker but still somewhere close to that $7.50 a foot on average.

It's hard to comment on stores that are not open a year, and just entering their first Holiday season.

But as you would expect they are tracking below expectations, as are our comp base stores.

Great, that's helpful.

Also any update on your thoughts towards hedging?

Have you thought about hedging product costs go forward from here, or any new update on that?

As I commented, there are three elements of foreign exchange that impact our income statement.

I think it's important to realize that the biggest impact that you saw in Q3, and more so in Q4, comes from translation, which is simply - it's not margin, it's just taking the Canadian results and translating to US dollars.

As I've said before, I would not consider hedging our Canadian entity's profit.

So as we say, hedging the US dollar purchases for the Canadian Company is something we constantly look at.

There is offset in the margins because our G&A is almost fully Canadian dollars, even though a growing amount of our revenue is US dollars.

So there's - we're not looking at hedging the Canadian dollar at $0.80, because there is a thought that it's oversold relative to the US dollar.

Having said that, It's something we look at all the time.

Just one last one.

Any thought on giving us a sense of profitability in the US versus Canada?

I know you haven't before, but if there is any kind of order of magnitude that you could offer, that would be great?

Again, we don't break out Canada and the US, really.

Okay, well thank you very much, and good luck for the Holiday.

Thanks.

We will go next to Suzanne Price with ThinkEquity.

Hi, guys.

A couple of questions.

First, on the five stores that you do have signed for next year, should we assume those are opening in the first quarter?

I think there is a couple - or one of them, two of them are new construction, so the timing is going to be a little later in the year.

So there are three that we anticipate.

There are more stores under negotiation, but the farther that we delay that negotiation to sign those deals, then it just obviously from the construction cycle, et cetera, gets a little harder to open them in the third quarter, which is when we would ideally like to do it.

So honestly, that would be the biggest barrier for us getting as many stores open in the year as we would like to have open.

But we believe that it is absolutely the right thing to do, to be really tough in the real estate market right now, to deleverage those real estate costs.

Yes, it seems like a lot of stores are closing.

You should get a lot of great opportunities.

The other question is on gross margins, thanks for giving some clarity on that.

Could we maybe talk a little more in detail about what the different things were that affected it, and maybe what part of those you see as ongoing and what part should stay stable or not get worse, if things stay the same?

In my comments I broke up the two large areas, being product margin and occupancy.

Occupancy in Q3 was significantly impacted by the new store timing, which I commented on, so you will see less of that in Q4, and with a lower store growth model in the near-term, that will be less of a factor.

So that would be expected to cause less deleverage.

Product margin, again, it's pretty tough to be precise.

But as we commented on, we do have some excess inventory, so we will have some strategies to clear that, which could involve short-term additional markdowns of one sort or another.

Would you say product margins, the issue was mostly on markdowns and outlets and not on actually manufacturing costs or currency?

We've actually managed our production costs very well, so I think there is a little bit of shift.

We have kept the -- we have the temporary outlets and kept them open.

It's actually worked really well to keep the product fresh in the US, keep our costs low.

While you see it maybe in margins, because we have such low costs in the outlet stores, we make up a little bit of that in operating margin, so it's actually been a very sound strategy for us to pursue to continue to clear goods.

Between that and the markdowns, we anticipate being able to keep pace.

And as well as we're more focused on loyalty promotional events, you know, so we don't see even in the current environment us having to do anything that says 60%, 80% off, to keep inventory moving, our sales a at healthy volume.

So we are optimistic, given the environment, that we are actually pretty poised with the strong gross margin to do better than most in the current environment.

The final piece that I do want to comment on is currency.

In Q3, the Canadian dollar was running around $0.95 for the first part of the quarter, and then dropped down late in the quarter, primarily October.

So the currency impact on margin was fairly minor in Q3.

With the dollar running at about $0.80 now versus at par a year ago, you will see more of an impact on gross margin in Q4 than you saw in Q3.

Okay, that's helpful, thank you.

We will go next to Howard Tubin with RBC Capital Markets.

Thanks, guys.

Have you re-thought the number of stores you think you can potentially have in the US just based on what is going on in the current environment?

Are you still thinking that you will slow square footage down next year, but you could still have 300 some-odd stores in the US?

Yes, we still have a very active list of about - you know, even in this environment we've identified at least 165 on our target list that we are working towards.

We really spent a lot of time resequencing all of the markets, so it's not only the list of when - of what stores we want to be in, it's also when and what sequence in each market.

So we feel very good about the real estate strategy, and now our job is really to be opportunistic and to negotiate those costs down so that we have a very healthy portfolio, regardless of what economic conditions we see.

Just one follow-up on the stores and promotions going forward.

Just maybe a general sense of - we walk into stores over the next couple of months, December and January, what should we expect to see?

Should we expect to see one sales rack per store or two sales racks per store, or will it vary, and any - other than price-related promotions, anything more specific you can tell us there?

I think you - it really depends, honestly.

Again, as I want to stress, we don't really believe at this point in time we have an inventory issue.

What we are going to be sensitive to is keeping our stores vibrant and busy, and the sales flowing through an appropriate level, and I think that our strategy and execution will really end up more with where we see the consumer over the next six months.

I think the Holiday season, the next six weeks will be quite telling.

And then, honestly, when you get into January, we are very cognizant we will be competing in a very discount environment for quite a period of time.

So we don't want to be one end saying we will never discount, but we know we need to do it in a way that's consistent with the brand.

We believe that we can have a healthy balance.

More of our focus will be on - if you are a loyal customer, which I know you are, Howard, will be on loyalty-based programs with our guests, helping our partnership with the yoga studios.

And so there will be opportunities for co-promotions with Yoga studios, where guests might get value with their purchase.

So we have a lot of activities that will look more like that than pure discounting.

Great.

Thanks.

And yes, super, super loyal customer here.

Thanks again.

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

Hi, good morning.

The negative low double-digit constant currency comp for -expectation for the fourth quarter, first of all what are you expecting inclusive of the currency impact?

Then second, is that what you are currently running?

That's my first question.

Yes, that's what we are currently running.

That's the basis of the guidance.

And as I said, we are forecasting on the assumption that the Canadian dollar is at $0.80, whereas it was at par in Q4 last year.

So our Canadian sales, that's a 20% additional decline.

But again, it's not a reflection of the strength of the business, it's just the translation impact.

Yes, absolutely.

What percent of the sales are currently Canadian?

Roughly two-thirds.

Okay.

Then in terms of the comp, can you give us some sense of transaction value versus the number of transactions?

Trying to get a sense of, has traffic fallen off or are people just buying less when they visit the stores?

We have not seen any impact yet on ticket, which, as I talked about, even though we are premium product we have tremendous value, and we do have price points that are in the $40 range for the tank to the $60s, so we do still have something for everyone.

But even with that, we really are seeing a constant in the average transaction.

It's definitely been traffic down, particularly in the mall environment stores, and historically our growth has been all transaction growth, so it's really been in transactions overall.

Our conversion rates are still quite good.

I think - I just want to clarify.

I'm not talking about the average unit, I'm talking about, you know, I come in the store and buy three units last year, and this year I just decide to buy two because I'm on a tighter budget; have you seen that happen?

No.

Units per transaction are pretty similar.

Pretty constant.

So that [implies] that our conversion rate, which shows both the average sales ticket and the bundle, is still very similar.

It's just overall traffic being down.

Okay.

Then just one more, if I may.

Any thoughts on different categories, Outerwear, Running, versus Yoga?

And I've noticed Dance has been pulled out of some stores; can you just talk through that?

We are integrating Yoga and Dance a little bit more together, so you will just see a shift in the new line that comes out.

We are just really staying focused on the opportunities that we see.

Our Running line has been so well received, can't keep it in stock, and so that's really going to be a big focus for us next year.

We're very excited, we just saw some of the line for the fall and for next year, and we have great Running line coming up

Thanks, good luck.

We will go next to Janet Kloppenburg, JJK Research.

Hi, everybody.

A couple of questions.

Did you guys indicate what your comp inventory levels are right now on a comp store basis, Christine?

No, we didn't give that.

Overall inventory levels are down both at the store and through the system.

So sales helped comps, and we would have even reported a stronger inventory story or reduction in our ability to flow the goods.

Is it fair to say they are in line with the comp sales decline?

We did [buy] to - in the quarter coming up, to a stronger comp, but we also planned for contingency planning purposes to be able to move some of that inventory to other times of the year, should we need to.

So we actually - as I said earlier, we feel very good about where our inventory position is for both Q4 and the beginning of the year.

So you haven't had to - you were able, then, to push back receipts with your vendors?

We did a bit of that into next year and a little bit of smoothing, but like I said earlier we have so much more flexibility with our inventory and our buys that - compared to a fashion retailer, because we don't have Christmas sweaters, we don't have highly seasonal goods.

And the category that is a little bit more seasonal is Outerwear, and we are through that by the end of Q4, anyway.

Okay.

I'm then I'm wondering on the cost side, we are hearing from a lot of other retailers that they have been able to significantly reduce store payroll, and I know that's an area that is sort of your signature, that you have great and well-trained help on the floors.

I'm wondering what your positioning is there for the fourth quarter and going forward?

Thanks.

As I said earlier, what we made sure we did was with every single store the senior team reviewed their scheduling all the way through the Holiday, and we do review that on a weekly basis to make sure that we are optimizing where we are putting the hours against sales growth, and all of the tasks that you have to do to run a business.

We have actually been able to manage our hours down in response to the situation, but still keeping a very healthy sales staff targeted for the guest experience.

So we feel very good about where we are with that, and have been able to gain leverage on that line.

Christine, you mentioned warehouse sales as one of the detriments to gross margin; were these incremental to last year?

I had thought you only did them in January?

Maybe I was wrong on that.

And is this something you will be doing more of as we go through these tough economic periods?

One that we did which was targeted for July but ended up being like that first week of August, so it just was a timing issue, it shifted into Q3, which we talked about in the last conference call.

So there was nothing additional beyond that one.

We have one - we have two actually planned in January, which we [traditionally] do, and we might even just take that to one.

So that's all that we have planned, other than the two temporary outlets, one in Sawgrass and one in Mount Vernon, which is how we really clear the goods in the US, and that's pretty much all we are doing on that regard.

When should we expect to hit - when should we expect the e-commerce business to launch?

We are still are right now committed obviously to our original date, but we are working hard to see if we can pull that forward.

And the original date was?

It was basically fall or Q3 of next year.

Okay.

Lots of luck to you both - to all of you.

Thank you.

That concludes the question and answer portion of conference today.

I will turn the conference back over to Ms.

Christine Day for additional or closing remarks.

Thank you all for joining our call today.

Just to summarize, in this new environment we will stay true to the lululemon brand and focus on doing the right things for the long-term health of the business, while also capturing as much business as we can.

I'm confident that our Company's entrepreneur spirit, our ability to act swiftly, and our efforts to keep our stores vibrant through our relentless focus on community, will help us through the difficult times.

We want to thank everyone for their interest in lululemon, and wish you a Happy Holiday.

Thank you.

That concludes today's conference.

You may disconnect at this time.

We do appreciate your participation.