Lululemon Athletica Inc (LULU) 2009 Q1 法說會逐字稿

Good day, everyone and welcome to today's Lululemon Athletica first quarter 2009 results earnings call.

Today's call is being recorded.

At this time, 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 first quarter fiscal 2009 results.

A copy of today's press release is available on the Investor Relations section of the Company's website at www.lululemon.com or alternatively as furnished on Form 8-K with the SEC 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 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 and good morning everyone.

Thank you for joining us to discuss our first quarter results.

With me today are John Currie, our CFO, Sheree Waterson, EVP General Merchandise Manager.

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

We continue to manage for long-term brand expansion while delivering against our short-term commitments.

Given the troubled outlook for the economy at the time we entered 2009, we are pleased to state that we achieved $0.09 of earnings per share for the quarter.

We were also pleased with our current pace of our business and with our ability to continue to bring our customers through the doors to make full price purchases.

For the quarter, our constant dollar comps declined 8% remaining at the same level as the fourth quarter of 2008, and slightly ahead of our forecast.

We successfully launched other eCommerce site ahead of schedule with our mock launch on April 1st, April fool's day and a live launch on April 14th.

We achieved an operating margin of 12.1% despite the comp store sales decline through effective cost controls and increased efficiencies.

We also saw revenue stabilize and even begin to improve over the quarter and are continuing on that trend.

Given our high level of productivity and the strong double-digit same store sales we produced a year ago, we see our Q1 sales trend as a small victory and believe it reflects the resiliency of our brand and validates our position in the marketplace.

While encouraged by these results, this will not change the way we operate the business this year or cause us to remove a cautionary lens through which we are viewing 2009.

Looking at real estate, we continue to seek attractive real estate opportunities in North America.

During the past six months we have also worked hard on a real estate strategy and three key initiatives.

Reducing our initial store investment and occupancy costs, reducing our store operating expense and refining our inventory set and flow.

Our newest store Walnut Creek, California, opened in late May, reflecting the success of these initiatives and we are confident that we can grow profitably with our new stores.

Looking at our business, in retail, sales trend continue to improve and overall consumer response to our brand remains strong with new product in our running category and bright colors driving sales.

In the US, we are on track to open five stores this fiscal year and we are working on one to two additional stores that could fall into this fiscal year if the leases are signed and we receive construction permits on time.

We have closed a temporary Sawgrass Outlet in April and we'll open a Woodberry Commons outlet in late summer.

We will open one new market this year with Phoenix opening in August.

In Canada, we have had strong support from our landlords in our renewal process and are on track to complete the renewals on favorable terms.

We will open one additional store in Canada in fiscal year 2009.

As I mentioned, we launched eCommerce in April which was about six months ahead of schedule.

As with our previous April Fool's Day stunts, this year we launched a mock site on April 1st complete with retro 1980s web design techniques that delighted our guests and the tech community.

We have gathered a tremendous number of names and e-mail addresses from the viral marketing of the April 1st site.

Sales in the US have been particularly strong and we've had a small but steady international customer base.

We have also reached into our past and reinvented an online version of our shop nude campaign to preregister guests from our stores for the site.

We are proud of our execution launching the site and extremely pleased with the initial response, even though we opened with a limited assortment to ensure a smooth launch.

Our site gives us an enormous opportunity to extend our reach to a much broader market.

We now have 80% of our SKUs on the site and we will have 90% by early July.

For 2009, we continue to expect the site to have minimal impact on earnings.

Strategically we have focused on strengthening our execution, both in the stores and through our system implementations, while also making investments in innovation and responding to the consumers' concerns.

We see the current market conditions as an opportunity to increase our points of differentiation, solidify a strong manufacturing base, and grow our market share.

With this in mind, we have made some key decisions to take some actions which will compress our gross margin the in the short term but provide long-term growth opportunities.

Let me give you a few examples.

First, rather than simply pursue cost decreases, we have focused on securing space in the best factories to produce high quality goods at competitive pricing with priority service to support our quick turn flow of goods.

While we may pay more up front on some items this will reduce our inventory on hand, while allowing us to respond quickly to market demand.

Next, we are also expanding our organic cotton and natural fabric lines.

Our initial purchases were not large enough to achieve our historically strong margins.

We decided to price align initially to offer the consumer more choices at the right price point.

Choosing not to price based on short-term costing models.

We are confident that our sourcing strategies will yield strong margins for these items in 2010.

Another example where we decided to price for market share is in our yoga mat as well as our other yoga accessories.

We lowered the price of our best selling yoga mat to $28 from $54 in order to solidify our positioning as the leading yoga retail and lifestyle destination.

We believe it is working as planned as our sales and accessories are up over 40%.

And finally in keeping with our strategy of producing beautiful, functional garments that lasts a long time, we have increased the quality of the sundries such as zippers and pulls on several key items without passing through the added costs.

This will result in better quality and longer life of the garment as well as decreases in defective returns, all of which should continue to enhance our brand.

We are confident that no competitor can offer a garment of similar quality, function or design at our price points.

As I said, these are strategic decisions we are willing to make for the long-term good of the business.

For 2010, we are planning to see leverage in our sourcing and will also have time to refine some of the fabric and trim we are using in order to work back towards our historical initial merchandise margins.

In summary, we feel very good about the continued enhancements we are making to our brand, product, infrastructure and execution of our retail expansion.

Also in today's marketplace we see two consumer ideals emerging.

The first is that quality functionality and beauty are the new luxury.

And the second is that health, community, friends and family are the new wealth.

We believe our you business model is perfectly positioned to excel in meeting these emerging needs.

And with that I'll turn it over to John.

Thanks, Christine.

I'll begin by reviewing the details of our first quarter 2009 results and then I'll provide our outlook for the second quarter.

As a reminder, comparable 2008 figures have been restated to reflect the reclassification of our Japan operations to Discontinued Operations, which happened in Q2 of last year.

So for the first quarter of fiscal 2009, total net revenue was $81.7 million, up from revenue of $77 million in the first quarter of 2008.

We opened one store in our Australia joint venture in April, but no new corporate owned stores were opened during the quarter.

The increase in revenue from new stores opened over the past year more than offset the comparable store sales decline of 8% on a constant dollar basis, and a weaker Canadian dollar, which had the impact of reducing reported revenue by $11.3 million or 12.1%.

At the end of Q1, there were 67 stores in our comp store base, 37 of those in Canada and 30 in the United States.

Our corporate owned stores represented 89% of total sales or $72.9 million, versus 90% of total sales in the first quarter last year, or $69.4 million.

Franchise and other revenues, which includes wholesale, phone sales, showrooms, outlets, warehouse sales and now eCommerce sales totaled $8.8 million or the remaining 11% of total revenue for the first quarter.

We ended the quarter with 114 total stores versus 85 a year ago.

103, which are corporate owned and 11, which are franchises including the six operating in Australia.

Gross profit for the first quarter was $34.9 million, or 42.8% of net revenue.

As compared to $41.1 million or 53.4% of net revenue for the same period last year.

As we anticipated heading into this quarter, the majority of the decline was due to the negative impact on product costs associated with the weakening of the Canadian dollar, versus the first quarter of 2008, combined with the deleveraging on occupancy and depreciation expense due to lower productivity on new stores and lower comparable store sales.

These two factors were outlined in our guidance and together accounted for approximately 760 basis points of the decline.

The remainder of the decline resulted from a combination of factors including with the additions since last February of factory outlets in the US store base, we're realizing a steadier pace of discounting earlier in the year compared to last year, a true-up of our shrink reserve to adjust for the results of inventory counts during the quarter.

And as mentioned by Christine, the pressure on margins from strategic pricing decisions.

SG&A expenses were $25.1 million, or 30.7% of net revenue.

Compared to $29.2 million or 37.9% of net revenue for the same period last year.

As a reminder, for the first quarter of 2008 we recorded $1.9 million in certain one-time charges related to management changes including severance expenses, executive search fees, as well as the accelerated investing of performance based options.

Even excluding these charges, SG&A improved by 470 basis points.

We attribute the remaining improvement in SG&A to efficiencies in labor management, both in stores and at our store support center, together with reduced discretionary expenses through the continued execution of the Company's overall cost reduction plans implemented in Q4 of 2008, improved distribution and logistics efficiency, and finally, the weaker Canadian dollar also reduced reported Canadian SG&A costs, reducing SG&A by approximately $2.7 million.

Operating income for the quarter, first quarter was $9.9 million or 12.1% of net revenue, compared to $11.9 million or 15.5% of net revenue a year ago.

Tax expense was $3.4 million for the first quarter, or a rate of 34.4% versus 30.7% last year.

Net income from Continuing Operations was $6.5 million, or $0.09 per diluted share.

This compares to net income of $8.5 million or $0.12 per diluted share for the first quarter of 2008.

Our weighted average diluted shares outstanding for the quarter were $70.3 million, versus $71.7 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 first quarter with cash and cash equivalents totaling $59.3 million.

Inventory at the end of the first quarter was $44.6 million, down $7.4 million or 14.2% from the end of our fiscal 2008.

And down $10.4 million or 18.9% from the end of Q1 of 2008.

We were conservative with the timing of our deliveries and were therefore under inventory at the end of the quarter due to better than expected first quarter sales.

As a result, we're air freighting some product shipments in Q2 in order to catch up.

Capital expenditures were $2.3 million in the first quarter, resulting from existing store renovations and IT capital expenditures.

So now I want to turn to our outlook for the second quarter of 2009.

This guidance assumes a Canadian dollar at $0.85 US reflecting the recent strengthening over the $0.80 US experienced in Q1.

So for the second quarter of 2009, we expect comparable store sales will run in the negative single -- mid single digits range on a constant dollar basis.

We currently remain committed to open six stores in the year with one in the second quarter.

This being the Walnut Street store, Walnut Creek store opened in late May.

We anticipate reported revenue in Q2 to be in the range of $85 million to $90 million.

Overall we expect a similar gross margin profile in Q2 to that of Q1, with some minor differences.

Gross margin will again be impacted by deleverage on occupancy and depreciation, foreign exchange, and strategic pricing initiatives discussed by Christine.

Deleverage from occupancy and depreciation should be slightly less than in Q1, due to the more modest sales decline expected.

However, in order to meet these higher sales, we've incurred additional costs to air freight products from our suppliers.

Even though the Canadian dollar has strengthened since the beginning of the quarter, the favorable impact on gross margin will lag on average one or even two quarters until product purchased at the more favorable exchange rates runs through cost of goods sold.

For the second quarter of 2009, we expect SG&A to continue to benefit from our more efficient cost structure and labor management as well as foreign currency translation.

As I mentioned, even though there's a timing lag in the gross margin benefit from the recent strengthening of the Canadian dollar, the impact on SG&A is immediate and therefore, the recent move up from $0.80 US results in less of a reduction in reported SG&A in Q2 than we saw in Q1.

Overall, operating margin will likely be slightly lower than in Q1.

As Christine mentioned, we you view the product margin decline as a strategic decision to forego margin this year in order to build market share and loyalty in the current economy.

With better than expected same store sales, we're confident the strategy is working even though it exacerbates the margin pressure.

As we source goods for 2010, we're building in higher margins on the same goods that are dragging down our margins this year, primarily through volume discounts and negotiated pricing and in isolated cases adjusted retail pricing.

Overall we expect earnings per share in the range of $0.08 to $0.09 per share for the quarter.

This assumes a tax rate of 34%, and 70.5 million diluted weighted average shares outstanding.

Based on our current expectations of six new stores, with one or two possible additions, we expect capital expenditures in the mid-teen millions 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.

Thank you, John.

I just want to point out a couple of other things going forward in promotional activity.

Last year you remember at the end of June, we added a cycle of promotional discount sales to clear the summer goods.

Because we had the outlet centers and clearing, seen that timing pull forward, we will not be executing that level of sale at the end of this quarter due to stronger inventory management and the fact that our clearance strategy is working.

And then the Sawgrass closure we cleared the merchandise out of that store at a discount rather than move or hold the inventory which put a little pressure on the quarter, but with the timing of the Woodberry opening in late summer we feel that we've actually addressed in a very healthy way the gross margin and discounting to clear goods during the period.

So, as I said, we will continue to follow through with our plans for 2009, which will include planning the business with an emphasis on strengthening our competitive differentiation, improving cost efficiencies and prudently allocating capital to provide us with the strongest possible financial position, while executing a multichannel growth strategy now that our E-commerce site has been successfully launched.

So, Operator, we'll now take questions.

(Operator Instructions).

And we will take our first question from Michelle Tan with Goldman Sachs.

Great.

Thanks.

I was wondering if you could give us a little more color on the magnitude of impact to gross margin from the pricing initiatives and versus the outlet clearance strategy.

And then just to clarify, the fact that you're seeing more of the discounting evenly throughout the year, should that mean something better for gross margin when we get towards the fourth quarter?

To answer the second part of your question first, yes, because what's happening now is that we are selling more full priced merchandise at our stores, sweeping them to the outlet and having less -- we have two end of kind of the quarter clearance periods, one in July, one in January.

And we're not seeing the need to do the July one this year because of the way that we've been managing the goods through the outlet strategy.

On your first question about strategic pricing, in the gross margin compression, other than foreign currency, occupancy and depreciation, we're looking at about 300 basis points of impact and the pricing decisions were a half or maybe a little over half of that.

And then also, John, on the gross margin lag from currency, it seemed as we looked last year like the currency impact to gross margin flowed through relatively quickly with the fourth quarter hit that you took from currency.

So is there something that's changing there in terms of how long it takes the product to flow through, how long you're ordering it before you sell it, or is it just something that I'm misreading and what happened in fourth quarter of last year?

I guess the best way to answer it is, number one, the currency has moved quickly and it really -- the impact is very hard to measure because it's -- the flow of product coming in compared to the timing of the currency shift, so it's very, very difficult to get clarity on exactly the impact.

For example, in this quarter, in the month of May the Canadian dollar rose something like 12%, so very difficult to measure the impact on this quarter and next quarter, depends how much core that we already had that we're selling through.

So again, nothing has changed.

What I'm describing is intuitive because the favorable impact sits in cost of sales until we sell those goods.

But it would be difficult to give you more precise clarity on what I'm indicating going forward versus exactly what happened at the end of last year.

Okay.

Great.

And then my last one is just the improvement in sales trend, is that -- was it disproportionate at all between Canada and the US?

No, I think that's the thing we feel the best about is that we've seen it in both countries and we've particularly seen it in the new stores that we've opened last year in the non-comp as well so we feel really pleased with how the consumer is responding to our product right now.

Great.

Thanks for the color.

And our next question comes from Lorraine Hutchinson with Banc of America.

Thank you.

Good morning.

Just wanted to take a little bit of a longer view and talk about what you think the ideal store opening pace will be once we start to see the real estate market loosen up and the consumer get better?

I think where we would like to be is at a pace probably around 15 and then maybe up to 25 and that's strategically what we're planning right now.

We see a lot of opportunity with seeding the market early with the showrooms and stimulating demand for eCommerce and we've seen that really working for us right now, even in today's environment as a much surer way.

I think where we want to be strategically is in a demand model for our stores where we're really confident when we put the store in, we've stimulated the demand and I think with eCommerce, the showroom, that we actually have blunted a lot of the competitive situation that we would have otherwise worried about, allowing us to grow each store and place it in the right way and to grow each store and place it in the right way and we prefer to really work off of our real estate strategy, rather than just be opportunistic and very confident in the work that we've done, identifying the 300 stores and that's actually put us in a really great position to negotiate with the landlords.

We've had a very successful ICSE, the May convention, which John, Angie and I attended a few weeks ago.

Feel very confident in now our growth strategy, the relationship we have with landlords and our ability to take the market at our pace.

We certainly don't in the short-term see real estate prices going up.

Thank you.

And then when you think -- when you got the initial results from the first couple months of the website, were there any surprises about the composition of your customer base, geographically, internationally?

I mean, what are your early learnings there?

I think the early news for us was that such strong sales out of the US and I think that's been probably the big surprise.

We had initially anticipated we would have a stronger demand in Canada but I think in some part that was due to the fact that we had more basics on the site and this last few weeks where we've had more new product, and now at 80% of our SKUs on the website, we've seen a surging Canadian demand, but it's still not kept pace with where we're seeing the US and the US is our biggest growth market.

We really think that that is a great measure of the success and reach of of where the brand is.

So we feel that that's been a very positive result.

In terms of items that are selling, not as many accessories and men's has been a little bit lighter so we think that those are just opportunities, awareness, but really great sell-through on any of the technical product and the core basics which of course are our strongest items.

So we feel very good about the initial sales trend and the response that we have and think that we have huge opportunity.

We'll have 90% of the SKUs on by the end of this month going into July and so we expect sales to continue to grow.

Thank you.

And we'll take our next question from Liz Dunn with Thomas Weisel Partners.

Hi, good morning.

I guess some questions regarding the eCommerce business.

First, can you refresh my memory as to what the costs were for sort of pushing the launch up and then as it relates to the sales trends that you're seeing within the US for e com, is -- are you seeing anything geographically within the country that could be interesting for us in lending credence or telling you where your store opportunities may be going forward?

I'll answer the second part of that first.

What we're really seeing, and we were pleased about and gave us the confidence to go forward with the Phoenix market opening is we've had a showroom in Phoenix and for the last year and-a-half stimulating the market which has done very well and then what we saw when we launched eCommerce was really strong demand in that market.

Showed up as a real hot spot early on so as you remember, maybe recall, the showrooms have a much more limited inventory assortment so that then gave us the confidence to go ahead with opening the Phoenix market even though from an economic point of view, one of our concerns, it was a little bit more hard-hit so we weren't sure if it was the right time to put a store in so this actually gave us the confidence to go ahead and open that market.

And I'm sorry, your first part of the question again was, Liz?

Just the cost for pushing up the eCommerce initiative.

There really was not much.

We had a little bit of timing, some of our people with headcount and then we did make the decision to do the DC costs our ourselves.

We actually had invested most of the money in the end of last year so that's why you also saw our SG&A not really spike or increase.

So really, we feel that we're at -- we're not at optimal margin yet, probably because we've got a lot more sales leverage but we feel it's been a very smooth launch.

Costs are in line with what we expected.

And may I ask one question on the pricing strategy?

So I just want to understand, you're lowering prices on some of the accessories and then on the apparel it's not really about lowering prices but maybe adding quality and maintaining prices.

Is that the correct way to think about this?

And is this sort of the first quarter and then it will just be sort of a four quarter impact or how should we think about the timing of this change in pricing?

We'll give you some examples with that.

But what we saw was we've been able to make, as we've been designing the garments we've been able to make some real improvements in the garments but some of the initial buys were then a little bit compressed as we changed some of the sundries.

I'm going to have Sheree give a little bit more explanation.

But we really chose to price at what our future run rate of cost will be in order to maintain pricing, rather than take price up, wait until we reduce costs, take price back down.

So really, that's kind of what you're seeing.

We didn't feel today's environment was a place that we should be taking prices up and with that I'm going to turn it over to Sheri for a few minutes and talk about some of the details and things that we've been changing.

Thanks, Christine.

I think you got it basically right.

The accessories markdown is associated with our yoga market and that's basically a one-time hit.

The great thing about this strategy is, we're offering an opening price point in our best selling mat and accessories to lower the barrier to entry and to basically get more people into yoga, which is our core marketplace.

I'm happy to report that it's been very effective and that our sales have spiked three and-a-half times.

As Christine has said, our yoga accessories business is up about 40%, which is great news.

So that's that piece.

When the market gets tough, the tough get going and one thing we know is that product is king.

So as Christine has also said, we are actually investing in our product.

Let me give you an example of that.

We have our best selling scuba lulu hoody, which is one of our flagship pieces of apparel.

We chose to actually upgrade our zippers from a generic zipper to YKK which costs us about $0.80 to do.

And we thought that that was a terrific investment because over time obviously that adds to the quality of our garment.

Also as we're looking at some of the trends in the apparel market, heavier yarns, et cetera, are extremely important so investing in heavier yarns costs us more to do but we're happy to do it because it increases demand.

There's an increase in demand and there's also an uptick in our quality and I think both are great long-term strategies for our brand power.

Okay.

Great.

Good luck.

Thank you.

And our next question comes from Laura Champine with Cowen.

Hi, guys, I've just got a follow-up question on the pricing strategy because obviously when you start trying to capture market share with price, that can be a very long road.

Can you talk about whether or not you think you were just over-earning with gross margins at 50% or better or if you think you can get back there?

And also talk about your willingness to potentially compete on price on some of your categories that you do have more share in or more important to you.

For example, the $100 basic yoga pant, is that a defense-able price structure?

Absolutely.

And I think we need to be careful here.

We chose not to price up based on initial buys that we know that we can through our sourcing strategies reduce the cost back in line within a fairly short period of time.

So we're not choosing to lower our prices and compress our margins.

We're choosing strategically to leave our pricing at the similar price points while adding quality and accepting a short-term until we get the supply chain, in some cases for instance we're changing manufacturers.

We placed a quick buy with the great goods that we wanted, factories with one buyer for instance on organics, but we realized that the best of class manufacturer is in another place and we want to place the long-term buy there, short-term margin to get it to market but longer term we know we'll recover it by the fall.

So there's decisions like that that are affecting that we wouldn't take pricing up because it's really a backside supply chain transition and we just felt that that's not something in today's market you pass on to the consumer on some of those key items that we're selling.

So I want to be very careful.

Other than the mats and there's a bigger mat strategy even behind the decision that we just did so we wanted to make sure in today's market where we see the consumer, giving up gym memberships, looking for more cost effective ways to exercise, that we basically made a very available price point, which for us what we're seeing, the savings we're giving them translate into other products that they buy whether it's a tank or another accessory.

So it's actually even working in the short-term.

But the more yoga customers you create, the better off that we are, certainly, as a business platform.

So we feel that's strategic.

That said, there's also an overarching mat strategy that we have with a new accessory line that we'll launch in the fall and there we'll have two very best of class mats, one that will be co-branded, one that's our own and those will actually be manufactured at the price points that we're now talking about.

So from the long-term, our margins will return, but we wanted to offer the yoga mats in today's economy sooner.

There's nothing that we're doing that actually lowers our price points long-term and creates any compression on the margin.

It's tough to get a sense on your long-term gross margin prospects because you've been growing in some areas that I think do have just higher occupancy costs but is that 50% level, is that a good bogey to think about returning to?

We were running at 50% or higher, the other significant factors being the Canadian dollar was at par.

So again, compared to last year, the lower Canadian dollar at $0.80 took about 300 or so basis points out of that margin.

So ignoring that variable, there's no reason we shouldn't be able to get back to the kind of gross margins we were seeing last year.

And in fact, and I think when you think about it, there's the two parts of gross margin, one is the occupancy and depreciation.

Any strategy that drives revenue while maintaining the product margin, which is our strategy, then increasing the sales and the increase in the individual stores, ultimately helps gross margin and that's really how we look at managing that business strategically.

Got it.

Thank you.

(Operator Instructions).

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

Can you comment on performance of some the newer product lines like running and swim and how they're performing versus your expectations?

I'm going to let Sheree talk about our number one running short.

(LAUGHTER).

Thanks for asking the question.

It's a great entree to talk about one of our favorite categories, which is running.

We are performing extremely well in the running category and in fact, right now we're seeing our bottoms business driven by shorter length shorts being one of the key categories.

Within our short category, our two running shorts are our two top items and I'm happy to say that we added a longer running short this season and it seems that we have really -- we've really taken that market by storm.

So the reason that we're excited about the running category is because we feel that it is a key part of our future.

It keeps us technical in terms of fabrics.

It keeps us technical in terms of construction and there's a lot of growth here in both the top and the bottoms category.

So we're also seeing some great trending with some of our technical tops, our tops and our seamless which go along with the bottoms success that we've had, so very, very healthy here.

And I think that that's two of the items that we've had to increase our orders and our quick turn in, as well as you just recently saw a drop in the stores neon tanks, which was also a quick turn item, following a quick turn strategy to add pop and color to the demand and those we see people buying in threes and fours.

So really another popular item that we're seeing.

As we talked about earlier our strategy on adding more mid-price points and tops, that has also really worked to stimulate extra sales demand so we really feel with both our overall inventory position, driving it down, and the increased sales, we've done a really good job on managing the inventory turns and really stimulating the guest to buy.

So we feel very good about where we're heading for the balance of the year.

That's great.

Thanks.

Maybe just one other question on square footage growth.

Have you thought about just next year, more specifically?

Do you think we'll see more new stores open in 2010 versus your plan for 2009?

Right now, the number that we would plan for is 15.

Okay.

Maybe I'll just add one more in here.

In terms of the promotional plans for June, July, you said you would be less promotional in stores many I stores.

I think you did a warehouse sale end of July last year.

Is that planned to go on or there's no need to do that one this year?

We have not made a decision.

We do have a franchisee in Saskatoon that does one in that time period which we don't control or make that decision, so I can't speak for what he will be, so don't confuse that one with what one we would do, so we have not made that decision.

Based on our low inventory, we don't see the need to clear other than a very nominal level on a site by site basis if they have some track by the end of summer.

At this point in time we don't have a lot of pressure so I think we'll make that decision in the moment, closer to when we see where inventory levels are.

Right now we're in more of a chasing inventory position so we feel we don't have to plan for it but if we feel that there's older items or something that we see stragglers on, we might do a smaller one this year.

That is great.

Thanks very much.

And we'll take our next question from Paul Lejuez with Credit Suisse.

Hi, this is Julie for Paul.

I was wondering if you could talk about how the new classes of stores are performing and if you're seeing any differences in mall versus off-mall given the extent of the promotional environment in the malls and more competition kind of in general?

I wouldn't say we've actually seen any difference between the malls and our street locations.

I think historically in the US, the street have been slightly stronger and that trend continues but nothing that has changed.

I think in the malls we actually hold up very well and we did not, as many of you probably saw by walking in our stores, discount our spring line or have sales items, so -- or have a sale so I think we feel very proud of the fact that we did not have to result to promotional strategies to drive sales in the stores.

So overall, we're not seeing a shift.

We're seeing all categories of stores grow and particularly the non-comp class of store's been -- growth has been very encouraging for us.

Okay.

Great.

Thanks.

And for our next question we'll go to Richard Jaffe with Stifel Nicolaus.

Good morning.

We say Stifel.

Stifel Nicolaus.

Two questions.

One, just a follow-on on the real estate.

With 15 stores, could you give us a sense either regionally you how they'll break out or kind of real estate, street locations or regional malls?

And then a follow-on.

On the Internet initiative and some thoughts of how that's playing out, how you're handling the inventory and assortments on the Internet versus stores and the pricing?

Pricing on the Internet is the same as you would find in each individual market because we have a pricing toggle based on how you view where you're buying so there's a US pricing and Canadian pricing online, so it would be similar to whatever we have in the marketplace.

So there's no difference in the pricing strategy.

And our goal is to have about 90% the same SKUs and that could be either 90% of the existing assortment or in a shoulder season, for instance in jackets or outerwear which we would sell out of in the stores by November, plus or minus on the eCommerce website but on the whole it will be very similar to our strategy within the stores.

In terms of the profile for the stores that we're seeing we continue to lean more to street and lifestyle centers where we can control our own hours of operation, do our community work, et cetera.

That said, there have been some very key targeted malls that we go to which really we choose very carefully in any regional area and so there will be a small portion of those in the portfolio going forward.

But they're strategic and not the dominant model that we use.

Got it.

Thank you.

Roosevelt has come up to your expectations, it sounds like you were a little early on opening some of the Manhattan or metropolitan mall stores and it sounds like they're now moving to a level where you're much more comfortable.

Is that accurate?

Yes.

I mean, I think that we went in just a little too early.

I would have preferred to have had a year with several sites opened in New York City before we had gone out to the regional mall at Roosevelt.

That said, we are seeing the demand and the consumer responding in the Long Island market on the whole.

So I think that as brand awareness has grown, I think eCommerce has even helped that, as well as our social media strategy that we do with a lot of Twitter, blogs, community events.

We have seen all of the non-comp stores growing which has been very encouraging.

Got it.

Thank you very much.

And that concludes today's question-and-answer session.

So I'd like to turn it back over to our presenters for any additional or closing remarks.

I think that we've probably said enough about the sales that we feel very encouraged by the signs we see in the consumer, response to our product, very confident in our product and I think that the business that you've seen, we've been able to really control our expenses and our flow-through which is driving the business as well.

So we're very proud of the management team and the work that we've done for the quarter and feel very well positioned for the balance of the year.

So thank you everyone for joining us today.

This concludes today's conference.

We thank you for your participation.