Lululemon Athletica Inc (LULU) 2009 Q3 法說會逐字稿

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

This call is being recorded.

Following today's presentation, we will have a question-and-answer session.

Instructions will be given at that time.

Now, for opening remarks and introductions, I would like to turn the conference over to your host, Jean Fontana with ICR.

Please go ahead.

Thank you.

Good afternoon.

Thank you for joining lululemon athletica's conference call to discuss third 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, is furnished on Form 8-K with 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.

Good afternoon, everyone.

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

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

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

Our third quarter performance demonstrates wins in three significant areas.

The first is positive comps of 10% for the quarter, highlighting our growing sales momentum in both the Canadian and the US stores, a return to healthy gross margin levels of almost 50%, driven by our supply chain and product initiatives, and the successful second quarter of our new eCommerce business, which delivered $4.2 million in revenue for the quarter.

Looking at what is driving revenue, it is important to state that we achieved our sales results without increasing our promotional cadence.

The guest is truly responding to our unique product assortment and guest experience.

Our focus on new colors and styles delivered weekly creates a scarcity model that provides an immediate guest purchase.

This focus, combined with an upbeat staff and store environment have proven over and over to be a winning formula.

Our yoga line remains a core revenue driver.

Wins include introduction of increased choices of technical fabric in our tank line and a new hot yoga line.

We also continue to have an incredible reaction to our running line, with an expanded line of shorts, crops and outerwear and our running skirt was a run away hit.

Our men's business continues to grow with product introductions such as our ripped compression line, more color and technical tops.

Our natural fabric line also continues to perform nicely.

E-Commerce now carries our full-line of product and we introduced free shipping in October.

This drove increased traffic and conversion rates across North America.

We continue to enhance the look, feel and performance of our site, and to build our online community.

To give you a sense of our online presence, lululemon is mentioned every 17 seconds online.

While John will speak to gross margin in detail, as a reminder, we took some unique steps over the past year to position our business for the recession, without turning to traditional promotion.

Basically, we added more value to our products such as technical functionality and other key features, as well as new fabrics, all without increasing prices.

This resulted in helping our sales in the first half of the year, but pressuring our gross margin.

We also focused our merchandising efforts on pieces that were at certain strong selling price points, such as within our running line and reduced price of some key accessories to drive traffic.

Our focus on sourcing and supply chain initiatives, as well as adding value for the guests have paid off with increased sales providing leverage on depreciation and occupancy, while supply chain initiatives improved our initial product margin.

As our store managers increase their tenure with the company, it has increased our capacity to drive results in sales and profit, but it has also enabled us to become more connected to the communities we serve, both our guest of complimentary classes at events and ambassadors in the fitness community.

We continue to see a focus on healthy living, particularly in the US where the healthcare debate keeps the costs of healthcare top-of-mind for consumers.

Now looking at the quarter, our 10% same-store sales comparisons in the third quarter was our first positive result since the third quarter of last year.

It was driven by positive results in both Canada and the US, with the US being very strong, especially in the new stores that opened Q3 of last year, as they opened during the worst period of the recession.

We continued to leverage our control of the supply chain provided by our new systems and business process reinvention to pull inventory forward in order to meet our growing demand.

Our inventory's in very good shape for the fourth quarter.

We finished Q3 with total inventory up 6%, placing us in great inventory position heading into the holiday season.

While we are utilizing air freight as needed, overall improvements in the gross margin due to sourcing initiatives and supply chain initiatives offset much of the impact to gross margin, which we have historically felt we when utilized air freight.

Also, we will be bringing in March and April inventory early this year due to the Chinese New Year, which falls three weeks later in February, affecting shipments for the first quarter.

This also allows us to meet additional demand in the fourth quarter without running the risk of having excess fall winter goods.

Looking ahead to 2010, we are looking to open up the [15] new stores and again will be filling in our existing markets, primarily in our markets in the US.

We have now opened our first three initial ivivva athletica stores.

As a reminder, this new concept will focus on active young women ages 6 to 12 years old.

Initial results tell us we have a winning concept, and we will continue to develop and refine the model over the next few quarters.

In addition, we have made the strategic decision to intensify our use of showroom as not only a brand awareness builder and bellwether for new markets, but as a source for incremental revenue growth mostly via our eCommerce site.

The success of this strategy has demonstrated to us clear wins in year one store sales, increased return on investments, and reduction of mistakes or underproducing stores, especially important in this uncertain economic environment.

Show rooms also allow us to increase our human capital, which is our biggest growth constraint.

We currently have 13 show rooms open and we are now planning to open an additional 25 by the end of the first quarter and possibly more show rooms later in the year.

We remain confident in our long-term potential to have 300 stores and feel the right strategy is to focus on the right location, strong execution, and strong results, outweighing the focus on store counts.

We want to ensure that new stores are well thought out and in locations where we have seeded the brand and tested demand.

We expect the show rooms to pay for themselves with limited hours of operation, while also using them for local community outreach with the added potential to drive business to our eCommerce site.

Our strategy is to have enough show rooms to feed the markets for up to two years in advance and to harvest the strongest market producers against our target store list.

Finally, while we have strongly controlled our SG&A spend over the past year, we want to note that due to the rapid increase in store sales, our labor investment has lagged, resulting in some unnatural leverage.

In order to maintain the exceptional store experience that our guests are accustomed to, we will be making additional investments in labor in the fourth quarter to catch up.

However, Q4 is also a quarter with high sales, so the investment will be more apparent in Q1 of the next year.

So with great pleasure, I now turn the call over to John to go through the details of our financial results.

Thanks, Christine.

I'll begin by reviewing the details of our third quarter 2009 results, and then I'll provide our outlook on the fourth quarter.

So for the third quarter of fiscal 2009, total net revenue was $112.9 million, up 29.7% from revenue of $87 million in the third quarter of 2008.

The increase in revenue was driven by comparable store sales increase of 10% on a constant dollar basis.

The addition of eight new corporate-owned stores opened since Q3 of 2008, a stronger Canadian dollar, which had the effect of increasing reported revenues by $800,000, or 0.7%, and the addition of eCommerce operation, which contributed revenues of $4.2 million in Q3.

During the quarter, we opened four corporate-owned stores and two stores in our Australian joint venture.

We also closed the two ococo branded locations, which have since been reopened as the ivivva stores in Q4 2009.

We ended the quarter with 119 total stores versus 107 a year ago.

106, which are corporate-owned, and 13 which are franchises, including the eight now operating in Australia.

Our corporate-owned stores represented 87% of total revenue, or $98.1 million versus 89%, or $77.6 million in the third quarter of last year.

Franchise and other revenues which includes wholesale, showrooms, outlets, warehouse sales, and now eCommerce sales totaled $14.8 million, for the remaining 13% of revenue for the third quarter.

Gross profit for the third quarter was $56.3 million, or 49.9% of net revenue compared to 41.9 million, or 48.1% of net revenue in Q3 2008.

The primary factors contributing to this 180-basis point increase in gross margin were merchandise margin improvement of 110 basis points, which was driven by improved sourcing on our fall merchandise, and reduced markdowns.

These cost reductions were partially offset by air freight costs incurred throughout the quarter to keep pace with stronger than expected sales demand.

Leverage on non-merchandise costs such as occupancy, depreciation, design, and production costs, coupled with the efficiencies in distribution expenses contributed 180 basis points of improvement.

These improvements were partially offset by a 120-basis point negative impact from a lower Canadian dollar.

Remember, there's a time lag of one to two quarters, as the impact of currency fluctuations works its way through cost of sales over inventory churn.

Therefore, the impact seen in this Q3 actually reflects a weaker Canadian dollar during the first half of 2009.

This may seem ironic, as in fact the Canadian dollar has continued to strengthen and at $0.93 in Q3, was stronger than the $0.91 average in Q3 of 2008.

Overall, we're pleased with the sequential quarter-to-quarter improvement in the three main buckets, which contributed to our gross margin decline earlier this year, namely merchandise margin, occupancy and depreciation, and foreign exchange.

We're very pleased to have achieved a return to our healthy historical gross margins in the 50% range.

SG&A expenses were $35.4 million, or 31.4% of net revenue compared to $28.8 million, or 33.2% of net revenue for the same period last year.

The increase in SG&A dollars was due to the following.

An increase in store payroll and administrative fees and costs associated with new stores and our eCommerce business.

Higher professional and legal fees, primarily associated with ongoing litigation, including legal settlement costs.

Higher depreciation associated with IT projects placed into service during the quarter.

Higher management incentive-based compensation.

And the higher Canadian dollar also increased SG&A by $400,000.

As a result, operating income for the third quarter was $20.9 million, or 18.5% of net revenue compared to $13.1 million, or 15% of net revenue a year ago.

Tax expense was $6.9 million for the third quarter, for a rate of 32.8% versus 33.1% last year.

Based on statutory tax rates, our expected tax rate for Q3 was 35%.

The lower tax rate realized this quarter is due primarily to the recognition of deferred tax assets related to a one-time true-up to our 2008 tax returns.

Net income was $14.1 million, or $0.20 per diluted share.

This compares to net income of $8.8 million, or $0.13 per diluted share for the third quarter of 2008.

Our weighted average diluted shares outstanding for the quarter were 71.1 million versus 70.6 million a year ago.

Turning to the key balance sheet highlights, again this quarter we generated strong positive cash flow and ended the third quarter with cash and cash equivalents totaling $101.8 million.

We continue to have a healthy working capital position and no debt.

Inventory at the end of the third quarter was $52.2 million, or $6.2 higher than at the end of the third quarter 2008.

Inventory per square foot at the end of Q3 is now down just 5% from a year ago, after executing some tactical steps towards building up inventory from conservative levels.

We feel very good about having been able to readjust our inflows and source the inventory necessary to meet demand in the fourth quarter.

While we're on the topic of inventory levels as a heads-up, due to the planned opening of numerous show rooms early in 2010, coupled with the desire to avoid disruptions in product delivering due to the timing of Chinese New Year, we're planning an increase in year end inventory of 20 to 25% over year end fiscal 2008.

Capital expenditures were $3.7 million in the third quarter, resulting from new store buildouts, existing store renovations, and IT capital expenditures.

For the year, we expect capital expenditures to be approximately 13 to $14 million.

I'll now turn to our outlook for the fourth quarter of 2009.

This outlook assumes the Canadian dollar of $0.93 to $0.95 US compared to an average exchange rate of $0.81 in Q4 of 2008.

For the fourth quarter 2009, we expect comparable store sales will increase in mid teens on a constant dollar basis, compared to the fourth quarter of last year.

In the fourth quarter, we've already opened a store on Rush Street in Chicago and three ivivva branded stores in Canada, which has finalized our store openings for fiscal 2009.

We expect revenues for Q4 to be in the range of $140 million to $145 million.

Overall, we expect gross margin improvement in Q4 based on additional leverage on occupancy and depreciation, but we expect this to be partially offset with air freight incurred to pull forward product to meet higher demand.

For the fourth quarter of 2009, we expect SG&A as a percentage of sales to be below Q4 2008, due largely to increased leverage gains from positive comps and annualizing on new store openings.

However, as mentioned by Christine, the rapid sales increase in the third quarter created some artificial leverage on store labor costs, which we have addressed in Q4, SG&A in Q4 2009 will also be adversely impacted by the higher Canadian dollar versus Q4 of 2008.

So assuming a tax rate of 35% and 71.3 million diluted weighted average shares outstanding, we expect earnings per share in the range of $0.26 to $0.28 per share for the quarter.

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

Thanks, John.

These results would not be possible without the contribution of many people.

We deeply appreciate the contribution of our merchant, design and production and logistic teams, along with our incredible store managers and educators.

We also appreciate our shareholders loyalty in the turbulent retail market and really appreciate your continued interest and support for lululemon.

Before I turn it over to Q&A, I would just like to invite Sheree Waterson to make a few comments about products.

Thanks, Christine.

I would like to give a big shout-out to the product and supply chain team here in Vancouver that designed, merchandising and planning, production, logistics and distribution.

A tremendous amount of cross-functional hard work and dedication have gone into chasing and pulling forward the over 1 million units that have allowed us to meet our guest demand.

As we said before, there's no speed without planning.

There are no things that are accomplished without a seamless cross-functional teamwork.

And there is nothing that is done without the excellent factory relationships that lululemon and the production team have established.

All of these have contributed to our excellent results, and I would like to thank you all.

Thank you, Sheree.

With that, operator, we'll turn it over for questions.

Thank you.

(Operator Instructions).

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

Great, thank you.

I was wondering if you could give us any color on the progression of comp sales that you saw throughout the quarter.

And then also, we had heard about a Hong Kong showroom.

I was wondering when that opened, what you're seeing there and, Christine, given your prior experience in Asia, can you tell us how you're thinking about that market.

Thank you.

Great, I'll start with that and then turn it over to John to do the cost cadence.

We actually have had a long-term relationship with Pure Yoga for several years and a couple years ago, prior to my arrival, we had opened what was to be the head of international office in Asia, which we closed when we closed the Japan market.

And then we subsequently opened our liaison office in Hong Kong.

Attached to that liaison office, which we opened summer of last year, we opened a showroom attached to that, as kind of product demo space.

And we do sell out of that space to the public.

But it's located on the seventh floor of an office tower.

That said, the sales are kind of incredible.

But we don't currently have any plans to further our international expansion beyond that additional space, beyond that showroom space that we have there.

Michelle, in terms of the, the comp trends during the quarter, definitely strengthened as the quarter progressed.

As you recall, in the Q2 call indicating flat comps, and that was somewhat consistent with what we saw at the start of the quarter.

And then the last week of October, updated guidance to something just a little below where we came in.

And again, that was reflecting continued strengthening of comps sequentially each month.

Great, thanks.

And then if I could just squeeze one more in.

On the ivivva, you mentioned you have confidence in it being a successful concept.

Any color you can give us on what gives you that comfort?

We opened three stores in the last few weeks and each one had a slightly different design of the store layout.

And then we have a product range that we've put in the stores, which is very similar.

And initial guest response to that has been extreme.

So we're very pleased with the results.

We feel that we have to continue to refine the prototype of the store, and refine the product mix and as we solidify those two, we'll get ready to look at it.

I think the important thing is making sure that we can sustain those sales results that we've seen initially post-holiday period, and post initial launch to give us the confidence to develop the final plans for rollout.

But initial response has been fantastic.

Very, a lot of very excited young girls.

Great, thanks so much, and good luck.

Thanks.

Our next question will come from Paul Lejuez with Credit Suisse.

Hey, guys.

Just a follow-up on Michelle's.

If we take a longer-term view, just wondering if you can maybe frame for us how you prioritize your initiatives between moving faster in the US, ivivva, international, and if wholesale distribution is a possibility at some point.

And let's say we take a five-year view.

How do each of those look over the next five years?

And then second, just was thinking back to the store impairments that you took.

Can you just remind us which stores those were, and if you have seen an improvement in those stores as you've seen in the rest of the business.

Thanks.

Answering your first question first, US is still very much number one for us, which is why you see us do the the push on the number of show rooms really priming the market, and we've just been, we've been very aggressive in what we're holding for real estate deals.

And we have really seen in the stores we've opened this year enormous success when we do the showroom model right with year one sales for the stores.

And we think it's really important to stay on that strategy.

Ecommerce would be what I would rate number two, as our other strategic opportunity and response we've seen in that platform particularly since we turned on the free shipping.

And I think international, wholesale is a smaller opportunity.

We don't see doing it big-box, but we do see tremendous room for strategic improvement in how we're executing and in team sales in particular.

And then -- but I think it will still be a minor portion of the business.

And then international and ivivva, I think the big strategic decision space in the company that we're really discussing, but for us it's not until we finish our focus on the US, whether we become multiconcept or we push international.

And Paul, regarding last year's impairment, there's a combination of things that are two stores included in that charge that we subsequently closed.

One was Chino Hills in California.

The other, Shops At Highlands in Dallas.

There are three stores, as I recall, that were actually lease assignments that we did not open.

And then there were two stores where we broke down the tenant improvement assets on our books.

Those two stores I would rather not disclose.

I don't want to taint them.

But they weren't in any one geographic region.

One was in the east.

One was in the west.

Have you seen improvement in those stores?

Yes, we are, we are seeing improvement as the economy recovers.

Okay, thanks, and good luck.

Our next question will come from Edward Yruma with KeyBanc.

Thanks very much for taking my questions.

You talked about two headwinds to SG&A for next year, one the incremental SG&A store investments, and two, the incremental showrooms that you're adding.

Can you provide more quantifications and how does that impact your comp line?

Thank you.

Okay.

In-store labor being the first one, as we both mentioned, what we saw in Q3 was accelerating sales levels and quite frankly, we just didn't have the ability to quickly add the labor hours to provide the proper guest experience to keep pace with those sales.

And so what we're saying is Q4 and then again next year, you shouldn't expect to see the same leverage on store labor because part of the key to our success is the guest experience.

I think that said, we're not predicting a deterioration.

There's just an unnatural lag that we didn't anybody to get too excited about building into models future leverage on that.

Great, thanks.

Store labor and what was the--

Your increase in your showroom.

Show rooms are our marketing, pre-branding, real estate due diligence and management pipeline generator.

So, they generate modest sales, but basically the costs, the SG&A takes them down to just above a break-even and so with us really ramping up and using the showroom strategy to push forward with the brand, it will deleverage our SG&A.

Great, thank you.

Our next question will come from Lorraine Hutchinson from Banc of America Merrill Lynch.

Thank you.

Good afternoon.

Earlier in the year you had added some quality to certain of your products and taken your price points down on the yoga mats.

Can you walk us through where you are in sourcing into those product improvements and if we should expect to see some gross margin lift in the first half of next year from the better sourcing.

Let me turn that over to Sheree to answer that.

Sure, thank you, Christine.

Our product improvements, our sourcing improvements, you will see with favorable margin results for the first half of next year.

We are looking at really leveraging our running line, which is our most technical line, and because we are extending that line significantly, we're going to triple the penetration next year.

You will see that we will have the commensurate savings because we are leveraging our piece good buying, et cetera, et cetera.

And then you asked the second question regarding yoga mats.

Yes, that we've basically worked through late fall, we've basically introduced the new yoga mat and we're through clearing the discount yoga mats that we had earlier in the year.

Those didn't affect the Q3 numbers, it will show in the Q4 numbers, so you will see improvement on those items as well.

And then we had also taken actions on the hoodies, and in the stores, you would have seen some special edition hoodies that came through that were premium hoodies, just fairly recently that they evaporated, we couldn't keep those in stock, so very nice reintroduction of the hoodies that we had been planning, which took those back to historical margins.

And offset some of the hit we had taken for increasing zippers, but not increasing price.

So through some strategic initiatives, we feel very comfortable that we'll have all of those back on track late Q4, into Q1.

Great.

And then it was noticed that you've brought in the SIGG branded water bottles and the Manduka yoga mats into the stores.

I was just curious if that was more of a couple of one-offs or if we should expect branded product to play a bigger role in the stores.

The initiative to have Manduka and to have SIGG in our stores is actually, lululemon is dedicated to providing the best in the world to our guests, and when the branded lines are best in the world, we will offer those to our guests until we can produce something better.

And is the margin structure similar to your own brands?

It is -- our own brand is slightly more profitable, but we are responding to the guest demand.

I think it's in accessories in general tends to be lower.

So these are in line with our accessories margin, they wouldn't be as high as our clothing margin.

Okay, thank you very much.

We'll take our next question from Liz Dunn with Thomas Weisel.

Hi, good afternoon.

I guess could you talk about how the online, your increased online presence is driving your store business?

I was also curious if you could provide insight into the comp metrics.

I know you said conversion and traffic were positive.

I don't think you have traffic counters, but maybe that's a comment on transactions, and maybe what happened with average unit retail in the quarter?

We definitely have seen eCommerce bring traffic to the doors both in US and Canada because we see the guests preshopping on the website and then going into the stores.

But then because we have a scarcity model, if they can't find it in the stores, they run back and get it online.

So we've seen it actually work both ways and we've created more availability of the full SKU line online.

That is definitely increased the number of visits that we have and we just recently begun extending the shoulder season of items that we maybe quickly through in the stores a little longer on the website at full price and that's also really driven the eCommerce business.

So, we feel very good about the cross-channel synergy that we've been able to create with eCommerce, that combined with what I spoke to briefly, our social media strategies online creating that community experience, has also really driven the business in both the stores and online as well.

Are there any -- I was just going to ask are there any specific examples one-off you could provide, like you sent some sort of e-mail and, and there was an increased commensurate in the stores?

Yes, I mean I think we have something pretty incredible.

We don't do any promotional e-mails.

We do product notification.

So we'll announce when we do a new drop of the product our click open rate on that is something incredible like 41%.

And we do know that the guests from Facebook spend longer on our average site, week over week, about 20%.

The number of Facebook fans we have, 17th fastest growing number of fans on Facebook, and we have over 130 of our stores and show rooms have Facebook pages.

And we connect with over 100,000 fans daily.

So, there's -- when we send out those product notifications, we see average increases in sales much like -- I'm looking through some numbers here.

So it can drive over $6000 in sales when we send one of those out.

So we have about since we've gone online, we have about 2000 interactions with guests on our Facebook page each week.

And so the number of guests directly corresponding with those looking at products.

So it's pretty phenomenal community reaction.

Liz, your question on transaction data, you're right, we don't have detailed traffic count information.

We don't have conversion data.

The transactions are up, but we don't have a good breakdown between traffic and conversion.

Also units per transaction are slightly higher, and very little of our comp store increase, if any, comes from pricing.

So as has been the case typically it's transactions.

Great, thank you.

Our next question will come from Janet Kloppenburg with JJK Research.

Hi, everybody.

Congratulations, nice quarter.

I had a couple of questions on the, on this flow issue, Christine and Sheree.

I know you increased your flows and I am wondering if that's putting any pressure on the distribution center or on any logistic issues there or on the workflow for the teams in the stores and if that's driving up SG&A.

And I also wanted to ask a little bit about the higher -- it seems to be a higher number of showroom openings and if that would be indicative of the plan perhaps to accelerate store openings in 2011.

I'll start with maybe the store one and turn over to -- yes.

I think what we want to be in the position to be able to do is act with complete certainty and confidence against stores that we determine our number for 2011 based on the results that we have with those -- in the first quarter.

Okay, and is that pressuring the SG&A line because you are opening more than we had thought you might, Christine?

Yes, on the show rooms, yes, because that's where that shows up, but I'm going to let Sheree talk about the flow, which that's actually a good story on that side.

Okay.

Thanks so much.

Great.

Actually flow would bring down SG&A, or any overhead because an even flow of goods allows distribution center to actually take the goods, process them, and direct them directly to the stores, rather than put them up and later on have to take them and pull them down.

The other thing that flow does is even out the work load for the stores and so the more predictable the flow, the more liable they are to be able to properly schedule their work hours.

So this flow has really worked to the advantage of not only our operations, but to the guest experience because she is continually seeing new things from us and we are also allowing to -- this also allows us to supply the correct sizes, current colors, et cetera, on a more even basis.

I think the other thing that happens, Janet, that I would just note is because of our ability now to forecast and to reach back farther into when the goods are shipping, we can actually schedule our warehouse and DC more effectively than we've been able to in the past because they didn't know what was coming in and with now putting in advanced allocations, drop the assortment mix for the warehouse to work on over time in a future base way.

So we've really been able to use the systems to create a tremendous amount more efficiency at the DC.

Okay, great.

And John, I was wondering how the inventory planning and flow was going in the eCommerce business.

I've noticed some outages and out-of-stocks and some products, some sizes, and I'm just wondering if -- it seems like that business is ramping faster than expected and if it will be in a good inventory situation for holiday.

Janet, I'll actually you take it.

It's Christine.

The reality is we've been -- we do buy for that separately, like a large store.

And it's significantly exceeded our expectations.

So, you know, we also had to be chasing goods for the eCommerce.

And the reality that we're in, all channels are up, so we are constantly shoving inventory on a needed basis to all of the channels.

And that is creating outages, occasionally in different items.

But there's also some that we do buy shallowly on the more seasonal merchandise or special edition jackets, et cetera, that those are out by design limited amount, but really keeping in stock on the basics is our, has been our focus.

Okay, great.

And just two more questions on the ivivva success.

Would you maybe test of that product in the United States, or, you know, some of your flagship locations in 2010, and would you consider launching the eCommerce business internationally?

Thanks.

We are basically planning on keeping ivivva a Canadian concept at this point in time and then we would probably -- put it on eCommerce and then see where the shipping is in the US and then make a determination what we think the demand is, but right now we want to stay focused on building out lululemon stores in the United States.

In that area, and so we are taking a look at what would it take to do that, but right now we also have some very basic functionality and improvements in site performance that we want to stay focused on before we add an additional complexity.

Okay.

I want to wish you all lots of luck for a great holiday season.

Thanks so much.

Thank you, Janet.

We'll take our next question from Howard Tubin with RBC Capital Markets.

Well, thanks.

Can you tell us approximately what percentage of the assortment is made up of -- where you want to take that over the course of 2010?

Sure.

Right now, we are planning for running to be about 25% of our total penetration, so it would be larger than it's been this year.

Our yoga businesses by far are our most important, as it still is our core.

Running is just an addition, and a natural extension of the technical wear that we do.

So we would go from about the low teens to that 25%, at our current rate today to where we plan on being by early next year.

Good, and thanks.

And John, the inventory position at the end of the year, you said up, down 20 or 25%, is that per foot or is that total?

That's, that's in total.

Again, I just want to give a heads-up.

It's planned to be that way.

It's not going to be a reflection of our sales pace.

And that's primarily due to in-transit because we've had to pull two months worth of product forward in order to have it in time because of the closure of the factories in February.

Okay, okay, thanks.

Our next question will come from Barbara gray with Odlum Brown.

Thank you.

Great results, guys.

Just two questions.

One on ivivva.

What's your strategy in terms of leveraging your existing infrastructure in terms of sourcing IT, employee base?

Second, on the winter Olympics, I know you're not the official sponsor, but how many of the elite ambassadors that you have will be competing in the Olympics and do you have a strategy to capitalize on this event?

Not that I could tell you out loud.

Okay.

But I think it's 18 athletes that are our lead ambassadors that would be competing in the winter Olympics.

Okay.

And for ivivva, they have a small operating team that runs the day-to-day operations of the business and the merchandise planning that's less than five people.

And then we leverage the remaining infrastructure from the other department, but all told, you know, the impact on the business is probably four or five people -- from the other--

Okay, great.

Thanks so much.

You're welcome.

Our next question will come from Jennifer Black with Jennifer Black & Associates.

Good afternoon, and let me add my congratulations.

You have really done a great job with the jackets -- seem like they are more democratic and flattering and I wonder what we expect to see winter jackets over the next several quarters as far as styling.

And then I have a follow-up.

Sure.

Shout-out to the design team for that.

Our -- we spend an inordinate amount of time actually fitting our garments.

We use best in the world fabrics, which is one of the reasons that they fit.

In terms of our silhouette, I think part of the magic of going forward of our mix is going to be that we provide long silhouettes for leggings so that you can outfit long over lean.

We also have shorter, more slimming jackets that look great with some of our groove pants.

And then we have something in between.

So I think it's about the mix because no woman wants to dress the same way all the time for her workouts, and we found that this is sort of a magic formula.

In addition, we provide all the layering pieces that are just the proper length so that they get the right outfit.

And so that's are the of, that's part of the magic.

Great.

Yes.

And then my follow-up question, thank you, is can you talk about your store associates.

Do you have different incentive programs?

Have you made any changes?

And do you plan to compensate your employees who order product from the internet or another store?

I just -- anything about that would be great.

We have enriched and created a little more upside in our store educator and store manager programs and really created certainty by increasing the base for our store managers in this uncertain economic time while at the same time giving them some upside stretch and that has worked very well for us.

For the eCommerce, we're not yet integrated to the store point of sale and as you probably know, that's also complicated the situation with landlords in terms of wanting percentage of sale, et cetera.

So we've chosen to take a portion of the eCommerce sales and increase our staff rewards so that they do participate in the benefit of doing eCommerce business.

Okay, great.

Thank you.

Good luck.

Thank you.

And we'll hear our next question from Laura Champine with the Cowen Group.

Hi, guys.

Just a quick housekeeping.

The ivivva stores, they are converted stores, so the net new store count is one store for Q4, is that right, John?

In Q2, it was minus 2 because we closed the two ococo stores and then we're opening -- sorry, Q3 we closed those two and we're opening those two and one more ivivva in Q4.

Got it, and then as we get into next year, I know there are a ton of moving parts, but can you tell us just generally what your thinking is on, will gross margins be up or down?

Will your SG&A rate be up or down next year versus this year?

Right, and you're not looking for 2010 guidance, right?

Very, very broadly, as you've seen the last couple of quarters, our merchandise margins are getting, getting back to their historical levels.

I think we see a little bit of potential improvement as we head into 2010.

Sheree talked about getting to a critical mass on the run line, other things like that.

I think the Canadian dollar, if it continues at its current level, there's a little bit of return leverage that we lost last year that has still not flowed through.

And so those are the high level comments on gross margin.

Of course if we're seeing a strong economy and strong sales, there's, of course, leverage on occupancy, depreciation, and other.

SG&A is maybe a tougher one.

We've indicated already that there is a need to invest more in store labor.

You're going to see that in Q4, and that will carry on next year.

And beyond that, it's too early to comment on SG&A increases or investments in growth that are going to come next year.

As we have addressed I think in a previous call, the showroom strategy will add to our SG&A as a percentage of revenue, but that's, that's just fine because it's laying the groundwork for future growth.

Got it.

Thank you.

That does conclude today's question and answer session.

Now for closing remarks, I would like to turn the conference back over to Christine Day.

Please go ahead.

We would like to thank you all for joining us here today and we're cautiously optimistic about Q4.

And look forward to our next call with all of you.

Thank you very much.

Once again, this does conclude today's conference call.

We thank you for your participation.