Lululemon Athletica Inc (LULU) 2008 Q4 法說會逐字稿

Good day, everyone.

Welcome to the Lululemon Athletica fourth quarter and fiscal 2008 earnings results conference call.

This call is being recorded.

Following formal remarks, we will conduct a question-and-answer session.

At this time, for opening remarks and introductions, I would like to turn the call over to Jean Fontana of ICR.

Please go ahead, Ms.

Fontana.

Thank you.

Good afternoon.

Thank you for joining Lululemon Athletica's conference call to discuss fourth quarter and fiscal 2008 results.

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'sWebsite.

Hosting today's call is 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 Christine Day, Lululemon Athletica's Chief Executive Officer.

Thank you, Jean.

Good afternoon, everyone.

Thank you for joining us to discuss our fourth quarter and full year results.

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

We are pleased to announce that we have met our earnings expectations, particularly in light of the current economic environment.

The weak consumer sentiment and overall macro picture continues to weigh heavily on retailers, and we are certainly not completely immune to its effects.

That said, we have been nimble and creative in responding to the slowdown in consumer demand, while protecting our brand integrity.

Our positioning as an entrepreneurial and innovative company allowed us to quickly respond to drive incremental revenue, while simultaneously driving down our operating expenses through strong execution across our business.

One example of this is the way we leveraged our showroom techniques to capitalize on market opportunities well outside the reach of our current store base, which enabled us to access more consumers and generate incremental full price sales, while building brand awareness and demand.

These temporary showrooms were up and running for approximately six weeks through mid-January.

As you will see on our other revenue line, the reaction was exceptional and it allowed us to sell through incremental inventory at full price.

So we are very proud of our great execution and the overall success of this initiative.

We also made excellent progress on our inventory control inflow.

Our strategy over the holiday period was to focus on guest loyalty events and -- at the local level, and wait until post-holiday to mark down inventory.

We did move aggressively on post-holiday, ensuring we maximize this window to produce a clean inventory position.

Due to our strong year-end post-holiday events, we were able to deliver new and fresh inventory in mid January, in a market where there is an abundance of markdowns and excess inventory.

Our strategy of buying in strategic modules also gave us flexibility during the holidays, which allowed us to move inventory to markets that needed it or hold it for the Spring launch post-holiday.

The module concept allows us to move inventory in quarterly windows to freshen up our store assortment or hold until later in the year.

We also had a successful second year in outerwear, but did feel we left opportunity on the table in accessories, sizing in men's, and the brighter color palette in the fourth quarter.

As reported in our prior earnings calls, we have been extremely focused on efficiency and have successfully reduced our operating costs as we improve our operations.

At the store level, we were able to reduce labor hours while maintaining the same level of service to our guests.

We conducted full labor and scheduling practice audits prior to holidays, and ensured we had the optimal staff level for each store and focused on peak selling periods.

We have further improved retention at the store level of both the manager and staff, which helps us to drive significant results and efficiencies.

In line with our strategic objective of a lean infrastructure, we have also completed a restructuring of our field organization, which streamlined our regional management structure.

We successfully reduced discretionary spending on things such as travel and supplies.

In addition, we are benefiting from efficiencies brought about by our IT implementation, including merchandising, warehouse management and POS systems, as well as from our logistics and sourcing initiatives, and we are seeing the results of strengthening our Senior Management Team in increased efficiency and effectiveness.

Turning to real estate, we made some strategic decisions related to both existing and new leases, which led to the $4.4 million impairment charge in the quarter.

John will discuss this in more detail.

Real estate selection remains a critical focus in a challenging environment.

We are paying close attention to turnover and closures on High Street, lifestyle centers and malls.

We have made the tough call not to proceed with sites that do not meet our negotiated co-tenancy or occupancy lease language.

We've also assessed our portfolio of stores, resulting in the closure or impairment of stores that we not feel meet our current real estate strategy.

We have already spoken about our plans to slow square footage growth in 2009, and we have six stores planned for the year.

We want to remain very flexible in order to position ourselves to capitalize on attractive lease opportunities, as landlords look to refill vacant spaces.

We are meeting with all of our top landlords to review growth, renewals and options with the goal of optimizing our portfolio.

We have a very healthy portfolio in the Canadian market.

11 stores, or about a third of our portfolio, are coming up for renewal, which gives us another tremendous opportunity to renegotiate our base portfolio.

We will also increase our flexible store showroom presence to seed markets, and leverage learning from our eCommerce sales to site new stores, and are expanding our specialty wholesale penetration in key markets, including Canada.

Even with the short-term deceleration in sales due to market conditions, our new stores continue to perform above industry norms on the 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, gives us strong opportunities for profitable growth in the future.

Our long-term strategy has not changed.

We plan to keep a balanced portfolio of regional malls, lifestyle centers and individual street locations.

We have mapped all of the top cities in North America and know exactly where we want to be.

We still see the potential for over 300 stores in North America.

We are excited to announce that we are ahead of schedule in our eCommerce strategy and now plan to launch the site in early April.

We believe that our eCommerce initiative will be a great tool through which we will leverage our brand equity.

In addition to helping to drive store traffic, it will enable consumers that don't have access to our stores to purchase Lululemon products.

We expect minimal impact to earnings in 2009, but based on our limited number of stores we certainly expect this business to become meaningful for us over the next few years.

Comparable business models demonstrate an opportunity of at least 10% of total revenues over time.

While we expect the environment to remain difficult, I believe that our ability to respond creatively and rapidly to changes in the market, as well as our unique and innovative product and community culture, will give us the resiliency we need to manage through this challenging period and position us for strong long-term growth.

Our key focuses are to quickly respond to changes in the macro environment, improve operating efficiencies, and to continue to build our cash reserve as we generate strong cash flow.

We remain very enthusiastic about our future prospects, and are looking forward to resuming our expansion.

Now John can give you some details about the fourth quarter and full year results and our outlook for the year.

Thanks, Christine.

I'll begin by reviewing the details of our fourth quarter and fiscal year 2008 results, and I'll then provide a brief update on our 2009 outlook.

Please note that in my comments' comparison to last year, the numbers reflect the reclassification of our Japan results into discontinued operations.

As you'll recall, we closed down our Japanese operations in Q2 of this year.

So for the fourth quarter of fiscal 2008, total net revenue was $103.9 million compared to revenue of $104 million in the fourth quarter of 2007.

We opened six stores in North America during the fourth quarter, and we closed one store -- the Shops at Highland in Texas.

We also opened one store in our Australian joint venture in December.

Increases in revenue from new stores were offset with a comparable store sales decline of 8% on a constant dollar basis and a weaker Canadian dollar, which reduced reported revenue by 18.9% or $15.1 million.

At the end of Q4, there were 66 stores in our comp base -- 37 of those in Canada and 29 in the United States.

Our corporate- owned stores represented 87% of total sales or $90.3 million, versus 88% of total sales last year or $91.7 million.

Franchise and other revenues, which include wholesale, phone sales, showrooms, outlets and warehouse sales, totaled $13.6 million or the remaining 13% of total revenue for the fourth quarter.

We ended the year with 113 total stores versus 81 a year ago -- 103, which are corporate owned, and 10 which are franchises, including the five operating in Australia.

Gross profit for the fourth quarter totaled $51.7 million or 49.7% of sales, as compared to $56.6 million or 54.4% of revenue for the same period last year.

Of this 470 basis point decline, approximately 280 basis points was attributable to the deterioration of the Canadian dollar versus Q4 of 2007, which negatively impacted gross margin as a majority of our product is purchased in US dollars.

In addition, we experienced deleverage of 390 basis points on occupancy and depreciation, resulting from lower productivity on new stores and lower comparable same-store sales.

This was offset by 200 basis points of leverage gained on corporate head office costs included in cost of sales, resulting from improved operating efficiencies at our distribution center, reduced compensation costs, and favorable exchange rate translation from the weaker Canadian dollar.

SG&A expenses were $31.2 million or 30% of total revenues, compared to $34.3 million or 33% of total revenues in the fourth quarter of last year.

Naturally, our overall store expenses increased from the fourth quarter of 2007 due to new stores open during the year, and our G&A increased year-over-year due to depreciation of our new IT systems and build-up of the management team earlier in the year.

Nonetheless, we were able to achieve a 300 basis point reduction in SG&A as a percentage of revenue, largely due to efficiency in labor management both in stores and at our store support center, together with reduced discretionary expenses, as we reacted early and effectively in reducing spending in response to changes in the economic environment; improved distribution and logistics efficiency; lower incentive-based compensation, given the overall financial performance of the Company.

And finally, the weaker Canadian dollar also reduced reported SG&A costs, reducing SG&A by approximately $4 million.

During the quarter, we undertook a thorough review of our existing portfolio of corporate-owned stores -- store locations to identify stores to be closed, signed leases for stores we will not open, and stores whose expected performance would not support carrying values of store improvement assets.

As a result of this review, we recorded a charge of $4.4 million or $0.04 per share after-tax to reflect impairment of store assets and lease exit costs.

These factors translated to operating income for the fourth quarter of $16 million or 15.4% of sales.

Excluding the impairment charge, operating income would have been $20.4 million or 19.7% of sales, compared to $22.3 million or 21.4% of sales a year ago.

Tax expense was $5.3 million for the quarter, or a rate of 32.7% versus 32.9% last year.

For the fiscal year, our tax rate was 29.4%.

Net income from continuing operations was $10.9 million or $0.16 per diluted share.

Excluding the impairment provision, net income would have been higher by $3 million to $13.9 million or $0.20 per diluted share.

This compares to net income of $14.6 million or $0.21 per diluted share for the fourth quarter of 2007.

Our weighted average diluted shares outstanding for the quarter were 68.5 million versus 70.6 million for the same period last year.

Turning to the key balance sheet highlights, we continue to operate with a healthy cash and working capital position and no debt.

We ended the fourth quarter with cash and cash equivalents of $56.8 million.

Inventory increased by $14.1 million to $52.1 million at the end of the fourth quarter, primarily due to $11 million of inventory in transit at year-end, which -- compared to last year, when it was very minimal.

So this increase is modest, considering the net increase of 34 stores over the prior year, and we're very pleased with the level and the make up of our inventory at the end of the fourth quarter.

Capital expenditures were $10.5 million in the fourth quarter, resulting from newly added stores in addition to IT capital expenditures.

So turning to highlights of our full fiscal year performance, for fiscal year 2008, total net revenue increased by 30.9% to $353.5 million from $269.9 million in fiscal 2007.

This increase was driven by a combination of adding 34 net new stores to our store base and a constant dollar comparable store sales increase of 3%, offset by a weaker Canadian dollar, which reduced reported revenue by approximately $9 million.

Operating income for the year was $56.6 million, and excluding our asset impairment charge, operating income would have been $61 million or 17.2% of revenue versus $51.6 million or 19.1% of sales in 2007.

We finished the year with a diluted earnings per share of $0.55.

Diluted EPS would be $0.59 when normalized for the asset impairment charge.

Now I want to turn to our outlook for fiscal 2009.

As you know, the global economy has created an unprecedented and challenging operating environment.

Until there is additional clarity on consumer spending -- hopefully in the second half of the year -- we're limiting our earnings guidance to the first quarter of 2009.

So for this first quarter of 2009, we expect same-store sales will run in the negative low double digits on a constant dollar basis.

We're currently committed to open six stores in the year; however, none in the first quarter.

We anticipate reported revenue in Q1 to be in the range of $70 million to $75 million.

We expect gross margin as a percentage of sales to be approximately 775 basis points lower than Q1 of 2008.

Roughly 300 basis points of this decrease is attributable to the deterioration in the Canadian dollar versus Q1 of last year -- again, as the majority of our product is purchased in U.S.

dollars.

The remainder of the reduction in margin is due to occupancy and depreciation deleverage from lower productivity on new stores and lower comparable store -- same-store sales.

For the first quarter of 2009, we expect SG&A as a percentage of sales to decrease by 330 basis points versus Q1 of 2008, largely due to favorable foreign currency translation on our Canadian dollar SG&A costs, and a more efficient cost structure.

Overall, we expect earnings per share in the range of $0.07 to $0.08 for the quarter.

This assumes a tax rate of 34% and 70.1 million diluted weighted average shares outstanding.

Based on our current expectation of six new stores, we expect capital expenditures of between $12 million and $13 million for the full year, including renovation capital for existing stores, IT, and other head office capital.

With that, I'll turn it back to Christine.

Okay, thank you, John.

In these difficult economic times, we are planning the business with an emphasis on improved cost efficiencies, inventory management, prudent allocation of capital, and maximizing cash flow to provide us with the strongest possible financial position to take advantage of growth opportunities as they arise.

So operator, we'll now take questions.

Thank you.

(Operator Instructions).

We'll take our first question from Paul Lejuez from Credit Suisse.

Hi.

Thanks, guys.

A couple questions.

One, Christine, did I hear you say that you're going to be expanding the wholesale business?

If so, if maybe you can provide a little bit of detail with where you're going from a wholesale perspective?

And John, maybe if you can walk through what's included in that charge in the fourth quarter, what stores and sites factored into that?

And also curious to know what your inventory plans are throughout 2009.

Thanks.

On wholesale, there's no change in overall strategy in terms of we're not going to any big boxes, but we have not done wholesale in Canada, and we recognize that part of our strategy to work more closely with the ambassadors and the local yoga and specialty gyms has been compromised by that decision that was made several years ago.

So we have made the decision to open up wholesale in Canada, more for the strategic fit.

But that also gives us good revenue opportunities in the marketplace as well.

When does that kick off?

We expect to begin in June.

So, Paul, in answer to your question on impairment, again, it was a total of $4.4 million.

As I mentioned, there was one store closed and that's included.

The other stores, I'm not in a position to give exact detail both because of confidentiality and in some cases we're still negotiating.

But they involve three leases signed on stores that we do not plan to open and another three stores where we're either impairing the assets or potentially closing the stores.

But at this point I can't give any more specifics.

And then inventory plans for the year, we, as I said earlier in the call, have been working to really streamline our procurement of goods.

We have a new replenishment strategy that keeps the flow of our core goods moving more efficiently throughout the year, and we see that benefiting us by being able to bring our core buys down, and then we've reduced the amount of time by at least 30 days, shortening our overall inventory cycle time through efficiencies.

And then we've shifted and have successfully implemented a 45-day turn for high-sale items through implementing a fabric strategy.

So our overall buys for inventory are down, and our ability to respond to the market has increased through the balance of the year.

I think for us, the big unknown is the rate of takeoff for the eCommerce, so we've really prepared ourselves to be able to quickly respond if we see a huge demand, which we certainly hope will happen for eCommerce.

If you exclude that eCommerce business, should we be expecting inventories to be down, or at least you managing store inventories to be down all year?

Store inventories should be down all year both at the store level and at the warehouse, through the efficiencies and improvements that we've made.

Great.

Thanks and good luck.

Thanks.

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

Great.

Thanks.

Sorry if I missed this on the prepared remarks, but did you talk about whether there was a currency impact on the inventory, and what it would have looked like on a constant currency basis?

I did not comment.

I'm just trying to think.

I believe it converts back toUS dollars regardless, and the balance sheet is inUS dollars, even the inventory carried in Canada.

Okay.

And then I guess just to clarify from Paul's question, is there a portion of the inventory at the end of the quarter that's allocated to the launch direct?

You know, what would the inventory have looked like this quarter without the direct piece?

We did not buy specifically for eCommerce.

And we made that decision recognizing we were slowing down the store growth and the buy had already been done for stores that would have opened in the year.

So we were able to reallocate the inventory from new stores that we had planned during the original buy to eCommerce.

Okay, great.

And then last question.

On the new stores you mentioned the productivity is still above many peers.

Can you give us a sense of roughly where the new store productivity is?

And then any additional color you can give on the reduced store investment that you've been able to achieve, how you're able to improve the new store profitability for some of the locations you're opening that may be coming in, still at a nice activity level but below where your Canadian stores are.

In terms of new store productivity, even in the fourth quarter, even with the tough environment, the stores that entered the comp base in Q4 were, on average, above our -- the minimum model we use of $750 a square foot.

And in many cases not up to our expectations because again the $750 is our minimum, but we do continue to open new stores above that minimum.

What was the next part of the question?

Just cost reductions, (multiple speakers) [for the] operating model.

Yes, so, we had been looking at around $250 a square foot and we now have the model down to $200.

And I think more significantly our ability to control the investment to a tighter window and take advantage of the TI dollars has significantly increased, and as well as we're seeing significant drops in rent.

I think what we also look at, though, is what's happening in the overall mall and street environment, and we are aware of a high degree of vacancies and fallout.

And we want to make sure when we plant new capital that we're really in the optimal places for us both long term and short term, and so we've just been waiting to see what kind of fallout there is in the market in the next three to six months, as vacancies increase and re-tenancies start to happen.

Okay, perfect.

And then John, I know you said you couldn't comment on this, but any color you can say on the potential future closings, whether they are all in theUS or not?

I wouldn't refer to them as closings.

Again, as I said, three of them were leases signed that we're just not going to open.

Two of them are stores that are undoubtedly going to stay open, but we've just taken a writedown on the improvements.

And then there's one potential closure, or it may end up being a negotiation of the rent.

And I can't comment on that.

Okay.

That's helpful.

Thank you.

We'll take our next question from Lorraine Maikis-Hutchison with Merrill Lynch.

Thank you.

Good afternoon.

Just wanted to touch on the merchandise margin for a minute, and get your thoughts on, were you happy with your strategy to move more clearance product into the store instead of having the large warehouse sales in 2008?

I think I was happy that we cleared in July, and that I was also happy that we waited until post-Christmas to do any real significant clearance activity at the store level.

I think in retrospect, we probably could have held off a little bit and maybe went a little aggressive, but not knowing what the next few months would bring and wanting to have a clean balance sheet, I think we made the best decision at the time.

So overall, in terms of net discounts for the year, I feel pretty confident and comfortable with the number that we ended up in compared to most people in our similar category.

So I feel that we were pretty effective in managing the merchandise markdowns, and what that allowed us to do most importantly was coming into this year.

We had a very clean and fresh palette, and a lot of brand new product in the stores, and we've been able to maintain full pricing without discounting our Spring line, which I think has also been a very helpful outcome of the strategy that we deployed.

And I know there will be a lot of movement with the Canadian dollar on your gross margin line.

But can you comment on any expectations for product cost reductions, particularly in the second half?

Yes.

We are at this point -- you know, we bought to some extent for the second half but not for winter, and we're already seeing some cost reductions as you probably are hearing industrywide, a lot of excess capacity in China in particular, and the strong brands that still have high volumes such as ourselves are benefiting from that.

I can't comment on quantum yet, but we are seeing a reversal of some of the inflationary pressure that we saw last year.

Thank you.

We'll go next to Liz Dunn from Thomas Weisel Partners.

Hi, good afternoon.

I apologize for the feedback.

I'm calling from a hotel, and the connection is not great.

I guess first just a follow-up on Michelle's question, which is I understand not all these stores are closing but are they all in theUS?

Yes.

Secondly, is there any opportunity to sort of align your product costs more with your revenue base?

I mean, is this Canadian dollar thing just going to continue to be a drag for the foreseeable future?

And what is your assumption about currency embedded in your first quarter guidance?

Yes, I should have clarified that.

We're assuming in our guidance that the Canadian dollar runs at approximately $0.80.

I think it's a little over $0.81 right now, but that's the assumption in that guidance.

We did give some consideration to shifting manufacturing to Canada to match costs with revenue.

It becomes more complicated than it sounds, because unless you're moving the mills close to where the factories are, you're not really accomplishing much.

So we don't have any plans to expand Canadian manufacturing right now, other than for short-term reasons as opposed to margin reasons.

Okay, and then last question, can you just give us an update on your outlet stores?

We've noticed recently that there's this Woodbury Commons Store.

That's still under negotiation.

We haven't finalized that lease with the landlord, so at this point in time we remain tied to the existing two.

The goal is that Sawgrass is a temporary one for us, and we would be closing that one down if we went to the Woodbury location.

Okay, great.

Good luck.

Thank you.

We'll go next to Robert Samuels from Oppenheimer.

Mr.

Samuels, you might check your mute button.

Your line is open.

Hi, sorry, can you hear me now?

Yes.

Oh, great.

Just with regard to the comp, can you break out transaction value versus number of transactions during the quarter?

So on the comp we saw very little change in sales mix and/or in average ticket.

It's primarily with all transactions.

Got it.

And then any comment on February, March trends?

It's really reflected in my guidance.

Okay.

I mean you haven't seen any pickup from what we saw in the fourth quarter?

(multiple speakers).

And are you able to determine what sort of repeat customer you're seeing?

I mean do you know how often particular women will shop in your stores?

We do know markets that we've been open longer, for instance, Boston, Chicago, San Francisco, we do have a very loyal customer base.

But in many of the other markets, particularly like New York City, where we recently opened so many new stores, it's a lot of brand new customers, so a little harder to get through the overall trends.

I mean I would just leave it as saying at this point we're pleased with where our business has performed so far to date, and we would be happy if the sales trends continued and got better.

All right, thanks.

We'll go next to Howard Tubin with RBC Capital Markets.

Hi.

Thanks, guys.

John, did you say what merchandise margin was in the fourth quarter relative to the fourth quarter of last year?

I didn't, and of course, there's various pieces, as I said.

Currency certainly impacted it by almost 300 basis points.

But real apples-to-apples product margin was actually pretty similar, reflecting slightly more discounting but not extensively versus last year, and also some efficiencies, both in distribution and product costing.

Got it, thanks.

And then just a question on the eCommerce site.

Is it going to be -- when it launches, is it going to be up and running in theUS and in Canada?

Or will it be two separate sites, one in Canadian dollars, one inUS dollars?

How is that going to work?

It will be one site, but we will trade in both foreign currency, so both Canadian andUS.

And you can actually toggle back and forth between the two on the site, so it's very flexible from that perspective.

We will be doing the distribution for Canada out of Canada, so the Canadian customers will not have to pay duty and taxes, andUS shipping will be out of US.

So very excited about the launch and the capability that we'll be demonstrating in our eCommerce site.

Great.

Thanks a lot.

Thanks.

We'll take our next question from Janet Kloppenburg with JJK Research.

Hi, everybody.

Hi, Janet.

Hi, nice job.

A couple of questions.

When you think about the fact that you moved your eCommerce launch up so -- by so many months, I was wondering if you had to give up anything in terms of the site style, friendliness, maneuverability, et cetera?

Or do you think it will be running at the level you expected it to for the later launch?

I think probably the only thing we didn't get in that I would have wanted in this initial launch was kind of the I-chat feature, even though we'll have live telephone assistance, so that people can pick up and talk to one of our people at the GEC if they have any product questions.

So that's probably the only thing that would have been of any significance.

And we will be adding capability over the course of the next year, even on the existing site.

But from a first launch, in terms of flexibility, filters for the guest experience, we're very pleased with where the final product has ended up.

Great.

Well, we can't wait to see it.

And I also wondered, on getting lower costs in the marketplace, if you thought that you would be passing on lower retail?

You may have answered that question, but I got on a little bit late.

I haven't noticed a decline in retail prices on some of the core basics.

But I was wondering if we could look forward to anything like that?

What we've done is we've added a lot more -- and it was strategically on our docket based on guest requests -- more layering pieces in the T-shirts and tanks, and so you'll see more price points in that $50 to $70 for layering pieces.

And we've already begun to deploy that, and we don't have quite enough stock yet and it disappears very rapidly.

We're not seeing it change our sales mix or average ticket.

People seem to be buying two of it, so -- or adding it as a complement to other pieces.

But it does give us more price points in the mid-$50 range and -- well, from $30 to $70, so we feel very good about that offering.

And that also brings guests in who maybe wouldn't be buying a new pair of pants or jacket, so offering something fresh.

And are you opening outlet stores around the country?

No, we still only have the Mount Vernon store, and we had opened the Sawgrass as a temporary location with the hopes of being able to get into Woodbury at a later date.

And those negotiations are ongoing but we don't have that secured at this time.

Would you think about it, I mean, and to source forward?

A lot of people make nice margin on those -- on that channel.

You know, I think at this point I'd like to see really where we end up with eCommerce and -- .

And how you can clear there?

And how we can clear there, what that looks like, because that's obviously a very, for us, low capital-intensive way of doing it.

And we're still very early in our growth phase, and I don't want to shift resources to manufacturing alignment that's below the quality that I think our brand is standing for this early.

So that's the other important consideration.

And we have other growth initiatives that I would probably rank higher than that.

Great.

Thanks.

I look forward to talking to you later.

Thanks so much.

Thanks, Janet.

Bye-bye.

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

Good afternoon, everyone.

Can you talk a little bit about the product extensions that you've done, and the feedback there, and what you've been seeing, any different regional trends to what you're introducing?

Also on the eCommerce business, will there be any exclusive product in that channel versus what's in the stores?

And how do you plan to build awareness for the eCommerce?

Thank you.

Okay, I'll start with maybe your last question.

If you go into any of our stores right now, there's a little business card that they are handing out, and we've been doing a lot of our own marketing campaigns where it invites guests to go to a Website and pre-register, And we've been collecting on average about 500 names a day from that process since we started it several months ago, in addition to the names that we had already been collecting through our product notification, email, Twitter, Facebook that we've been doing for the last seven, eight months.

So we feel very good about the pent-up demand that we've been generating for the Website and the viral marketing that we've done.

So -- and there's some more secret surprises to stay tuned for.

Then in exclusivity on theWebsite, we are tying several of our marketing strategies, so -- to both our goaltender site and to events in stores.

So for people who participate in those, they will get codes that will give them access to either products or free shipping, or if you achieve a goal, we might send somebody - like, if you ran the Boston Marathon, we'll send you a pair of running shorts.

So we have a lot of kind of cross-promotional pieces built in that would also have some exclusivity on the Web as part of our marketing strategy.

In terms of regional trends, we've seen improvement in the Texas business which we've been pleased with.

And overall, some of the financial scenarios like New York have probably been a little bit harder hit than the rest of the market, but we've continued to see strength in markets like the Northwest, Southern California for us.

Chicago is still doing very well.

So we do have what we consider quite bright spots on the marketplace.

And I think in Canada, we feel comfortable that we're probably outperforming most of our peer group in Canada.

Thank you.

(Operator Instructions).

We'll go next to Laura Champine with Cowen.

Good afternoon.

I've got a few small things, so I'll just hit them all upfront.

First, is there any -- can you describe what specifically drove the increase in in-transit inventories?

Is there a different way that you are flowing product this year?

If you could just give more color on that.

And then second, I know, John, you said that store-level inventories should be down, but does that mean that reported inventories will be down year on year?

And when does that trend start to develop?

And then lastly, we talked a lot about product cost.

But in your Q1 guidance for gross margin -- and I know there's a currency impact too -- does that assume down merch margins year over year?

Okay.

Going back to your first question, remember the year-end inventory balance is a snapshot point in time.

We take title to inventory as soon as it leaves the factory shipping dock.

And last year it just happened that there were large shipments that were made in February just after year-end.

This year there were, as I said, close to $11 million of product that was shipped to us just before year-end.

So it's really just a few days' timing difference.

So the better comparable is to exclude the in-transit compared to last year.

And in terms of your question on inventory level, sorry, can you give me that question again?

Sure, it was just when do you expect reported inventories to be down year on year?

I think that in response to another question you said that store-level inventories would be down.

I'm just wondering when balance sheet -- does that mean balance sheet inventory should be down year on year in the first quarter?

Yes, I would say at the end of the first quarter, you'll probably see inventory levels pretty similar to last year, pretty similar to where we were at year-end, and I think with some improvement versus square footage at least as you get later in the year.

And then your last question on margins, and again my memory is short, but I think you're asking about the product margin within there?

That's right.

Just, is your merch margin expected to be down year on year in the first quarter, and if so, what's driving that?

Again it's pretty consistent other than the impact of currency, which is about 300 basis points.

Got it.

Thank you.

We will take our final question from Richard Jaffe with Stifel Nicolaus.

Hi, thanks very much.

A question on the showrooms and the opportunity that the showrooms present, and if you could just talk through the additional showrooms you had in the fourth quarter and you're thinking for '09 about having those number of showrooms through '09 or just for the fourth quarter next year, or to have additional showrooms?

And give us a sense of sort of the magnitude as well, how many there are and what kind of volume they could do?

Well, what we deployed over the holiday period was really a series of temporary stores in what we considered kind of hot markets, particularly in Canada, that we had not penetrated, and so that was primarily where the -- most of those were, and that operated for anywhere from a six- to about a 10- or 11-week period overall.

And so we tried that as kind of a concept to see what happened by deploying showrooms into mature markets, and that gave us some confidence that we can operate, whether it's temporary stores in resorts or summer communities, et cetera.

So we will be continuing to seed new markets that way.

Right now, year over year, as we've entered some of the new markets that we had showrooms in, showrooms are down slightly in total count from last year.

But we're currently working on our showroom and what we're calling kind of temporary store strategy for this coming year.

But right now, our primary focus is on eCommerce, so we did not include in our guidance for the year any material upside for that.

I think we'll keep that as a kind of back-of-the-pocket strategy.

But right now our primary focus is still on launching eCommerce in theUS, and we don't want to be distracted in the short term from that.

Got it.

And then just to clarify, showroom is a wholesale business or it's also being used as a retail venue at full price?

It is a retail venue at full price.

And so the wholesale selling that you've commented on in Canada hasn't taken place but will take place from an alternative location?

Yes.

So where we sell wholesale to is yoga studios, specialty gyms, Pilates studios.

So we have not operated that business in Canada, and we will be opening it up to our Canadian partners.

Right, but that won't be out of your showroom.

It will be a traveling salesman or a mail order kind of business or --?

No.

So, for instance, a local specialty gym that we're working with in -- that has national presence out of the Vancouver area would have our product in their showroom at the gym.

Right, but how would they select which product they want to put in their gym?

We have a catalog that they pre-order from and own the inventory from the time they place the order.

Right, so you're buying based on the degree of their interest and there's no sort of -- I mean, Calvin Klein has a showroom, you go and pick out what you like, he buys it.

But there's none of that?

It's kind of a wholesale situation, it's just an -- order form [features]?

Yes.

It's order from the quarterly catalog that we put out, and so then the buy is created off of what the guests order.

But the product will be identical to stuff that will be in stores?

Absolutely.

Got it.

And it's only -- but it's a very limited selection, so if we had a Spring collection of 50 new SKUs, they would maybe have access to 12.

And then is there sort of a basics component to that as well?

Correct.

I mean really the whole point of that for us is an introduction to new guests.

Right.

And obviously these gyms probably don't have the capacity to have a full selection, anyway, so it works for both parties?

Absolutely.

Exactly.

Great.

Okay, thanks very much.

We'll take a question from Quinton Maynard from Morehead Capital.

Hi there.

Most of my questions have been answered.

Just a quick question on your eCommerce site.

Can you give us a little bit of a feel for who you're partnering with to do that?

Are they handling fulfillment, call center, et cetera?

We're using an organization called One Stop out of California, and we will do -- we do, I should say, theWebsite; they do all of this back of the house servicing.

They will do theUS fulfillment, we will do the Canadian fulfillment out of RDC.

Great.

All right.

Well, thanks so much and good luck.

Thank you.

That concludes the question-and-answer session for today.

At this time, I'd like to turn the call back over to Christine Day with any additional or closing remarks.

I would just like to thank all of you for joining our call today and for your continued interest in our business that we feel very confident in.

As a management team, our energy in the last quarter has really been to make sure that we've had a focus on preserving the business and preparing for the downturn and surviving.

Going forward, we're now very confident in our position to be able to redeploy our resources towards growth strategies, and that's what the management team is focused on.

So we just want to reiterate that we have tremendous confidence in our business, and we believe that the guests are seeing that value as well.

So thank you for joining us today.

This concludes today's conference.

We thank you for your participation.

Have a great day.