Lululemon Athletica Inc (LULU) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lululemon Athletica fourth quarter 2010 results call.

At this time all participants are in a listen only mode.

Later we will conduct a question and answer session with instructions following at that time.

(Operator Instructions) And as a reminder, this conference call is being recorded.

And now I'll turn the call over to Melissa MacKay of ICR.

Please begin.

Thank you.

Good morning.

Thank you for joining Lululemon Athletica's conference call to discuss fourth quarter and full year 2010 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 furnished on Form 8-K with the SEC, available on the Commission's website at www.SEC.gov.

Today's call is being recorded and will be available for 30 days as a replay shortly after the call in the Investor Relations section of the Company's website.

Hosting today's call is Christine Day, the Company's 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.

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 these projected in such statements due to a number of risks and uncertainties, all which are described in the Company's filings with the SEC.

I'd now like to turn the call over to Christine Day, Lululemon Athletica's Chief Executive Officer.

Christine?

Thank you, Melissa.

Good morning, everyone.

The fourth quarter was a fitting finish to 2010, giving us four solid and consistent quarters of growth for the year.

Our fourth quarter revenues increased approximately 53% and for the year, sales were up 57%.

Looking back, we were able to increase our inventory position throughout the year which allowed us to continue our momentum against more challenging comparisons in the third and fourth quarters while also fueling our eCommerce business in the fourth quarter.

And even though we achieved a strong Q4 comp increase, we still believe there was unmet demand across all product lines in our stores and eCommerce channel.

In eCommerce, we achieved our goal of 10% of total sales in the fourth quarter.

And even though we will have a short-term disruption to this business as we relaunch our site at the end of the first quarter, we project staying at 10% in 2011, just our second full year in the eCommerce business, and we have set a new midterm target of 15% of sales.

Given we are still learning a lot about eCommerce and have been perpetually under inventoried on our site, we know that we are still at the early stages and see a tremendous opportunity to grow this channel.

Also adding to our total sales growth for the fourth quarter were 12 stores we opened in the US during 2010, which were performing close to the average of all our US stores.

We believe our expanded showroom strategy was a major driver of this improvement.

Looking at our profitability, we achieved a record gross margin of 55.5% for the year and 58.5% for the fourth quarter, both benefiting from strong sell-through and an unusually low level of markdowns.

This pushed our operating margin to 25.3% for the year and over 29% for the fourth quarter.

While it is unlikely that we will be able to improve on these margin levels in the near term due to rising sourcing costs, we continued and [contained] investments in our infrastructure and growth initiatives, we do believe we have a best of class business model that will enable us to continue to enjoy very strong profitability in 2011 and beyond.

So, to summarize 2010, the year was characterized by strong guest demand for our product, limited markdowns, multi-facetted top line growth and leveraging costs while still making important investments, all netting to record profitability.

We added capability to our senior management team with the addition of a very seasoned CIO with experience in the vertically integrated apparel business and a new VP of Human Resources.

Both are proving to be very valuable to the organization.

Another major investment was our new distribution center in the US which will provide us with cost savings in 2011 and beyond.

We believe that our overall strategy heading into 2011 is more dynamic than ever.

It includes driving organic revenue growth, increased supply chain capacity and capability, continued focus on our in store guest experience, continued innovation in yoga and run, grassroots community and a digital strategy to expand our online community presence, strategically placed showrooms converting to stores resulting in the opening of up to 30 new stores and the launching of our new eCommerce platform.

Moving into the first quarter of 2011, I want to highlight our inventory position and our eCommerce transition.

First, the exceptionally strong sell-through of our Q4 product left us under inventoried to service our Q1 demand.

In addition, as each new delivery arrives, it has been selling much faster than planned.

Our new product deliveries are now weighted towards April, beginning the replenishment of our inventory position.

Next, as previewed last year, we are transferring our eCommerce platform from our current third party vendor to our in house ATG platform.

This is a complex project that requires significant IT infrastructure changes and integration of multiple service vendors to a new site.

It also requires a physical move of inventory from the third party supplier to our own US DC.

The date of the official transfer is April 15.

To facilitate the cutover from our vendor systems to ours, the entire site will be down for a few hours, so we can test new site integration.

This will occur during the evening hours of April 14 to early morning of the 15th.

After launch, we will be introducing our new summer product line.

The plan is to slowly bring the spring inventory down in the outsource facility to minimize the amount that needs to be counted, packed and shipped and insures we will have a full inventory to support the new site.

We have a guest communication strategy in place.

So, the move is transparent and our guests are supporting during the --supported during the transition.

What we will see a temporary sales decline in the new eCommerce channel in Q1, we anticipate a full sales recovery in Q2 with the launch of the new site where we will achieve a higher margin.

I'm also very pleased to announce that we've hired [Chris Ladd] to head up our global eCommerce initiative.

Chris brings over 15 years of industry experience, most recently at Crocs and Titleist, with a great background in marketing, technology and eCommerce.

Chris is completing his immersion training program and will be ready to take the reins in April.

In the end, we are excited about bringing eCommerce in house.

The benefits longer term will be the ability to move inventory between channels to meet demand, a strong platform for growth and integration of our digital strategy, improved operating margin and operating efficiencies, ability to expand with country specific catalogs for international, improved guest experience with one page checkout and simplified product management.

The entire team here is very excited about our eCommerce relaunch and the year we just finished in 2010.

We are all together again in our new headquarters in Vancouver and are as excited and motivated as ever about capturing the many opportunities we see ahead for our business.

And now, over to John.

Thanks, Christine.

I'll begin by reviewing the details of our fourth quarter and full year 2010 results and then I'll update you on our outlook for the first quarter and full year fiscal 2011.

For the fourth quarter of fiscal 2010, total net revenue rose 52.8% to $245.4 million from $160.6 million in the fourth quarter of 2009.

The increase in revenue was driven by comparable store sales growth of 28% on a constant dollar basis, bringing our average store productivity up to a record $1,726 per square foot for fiscal 2010.

The addition of 12 net new corporate owned stores in North America since Q4 of 2009, the consolidation of Australian operations which now includes four showrooms and 11 stores, of which there have been two net new openings since Q4 of 2009, the addition of 35 net new showrooms opened in the US since Q4 of 2009, eCommerce sales which increased by $15 million and a stronger Canadian dollar, which had the effect of increasing reported revenues by $6 million, or 2.5%.

During the quarter, we opened four corporate owned Lululemon stores in the US and one in Australia.

We closed our Victoria Aviva location and in Brisbane, Australia, we closed our store for relocation due to a mall redevelopment project.

We ended the quarter with 137 total stores versus 124 a year ago, 133 which are corporate owned, including the 11 in Australia and four franchise stores, all in the US.

There are now 106 stores in our comp base, 41 of those in Canada and 65 in the United States.

Corporate owned stores represented 82.6% of total revenue, or $202.8 million versus 85.5%, or $137.4 million in the fourth quarter of last year.

Revenues from our direct-to-consumer channel which includes eCommerce and phone sales totaled $24.6 million, achieving a level of 10% of total revenue versus $9.8 million, or 6.1% of total revenues in the fourth quarter of last year.

Other revenue which includes franchise, wholesale, showrooms, warehouse sales and outlets totaled $18 million, or the remaining 7.4% of revenue for the fourth quarter.

Gross profit for the fourth quarter was $143.5 million, or 58.5% of net revenue compared to $86.6 million, or 53.9% of net revenue in Q4 2009.

The factors which contributed to this 460 basis point increase in gross margin were merchandise margin improvement of 90 basis points.

Although we did incur higher product costs due to inflationary pressures, this was more than offset by reduced markdowns, lower shrink, defective goods and obsolescence provisions and a shift towards our higher margin eCommerce channel.

Leverage on non-merchandise costs such as occupancy and depreciation and supply -- product and supply chain team costs which contributed 290 basis points of improvement and foreign exchange improvement of 80 basis points due to a stronger Canadian dollar.

SG&A expenses were $72.2 million, or 29.4% of net revenue compared to $45.1 million, or 28.1% of net revenue for the same period last year.

The 59.9% SG&A dollar increase is due to a natural increase in store compensation and operating expenses associated with new stores, showrooms, outlets and growth at existing location.

An increase in administrative costs and variable service provider fees associated with the higher sales volumes from our eCommerce channel.

SG&A and head office costs from our Australian operation, which we began accounting for on a consolidated basis commencing from the date of our ownership increase during Q2 2010.

An increase in head office employee costs, including management incentive based compensation and options expense and other head office costs as a result of the expansion of our business.

And finally, the higher Canadian dollar which increased SG&A by $1.4 million, or 2%.

As a percentage of revenue, our fourth quarter SG&A increased 130 basis points due to growth in our eCommerce, Australia, Aviva, and showroom channels which carry a higher SG&A component than our corporate stores.

As a result, operating income for the fourth quarter was $71.3 million, or 29.1% of net revenue compared to $41.4 million, or 25.8% of net revenue in 2009.

Tax expense for the quarter was $16.9 million after being reduced by an $8.9 million adjustment to reverse additional taxes accrued during the first three quarters of 2010.

As discussed on our earnings calls earlier this year, we increased our expected tax rate from 35% to 40% commencing in Q1 of this fiscal year to take into account the additional future taxes which would be incurred if and when excess funds are repatriated from our Canadian operating subsidiary to the parent Company by way of dividends.

As also discussed at that time, this was the conservative position as we continued to investigate planning opportunities and estimates of required uses for these excess funds within the subsidiary.

As a result of successful progress in these efforts, we are now comfortable that this additional future tax accrual is not required which has resulted in the $8.9 million adjustment as well as a return to a lower tax rate applied to Q4 and future taxable income.

Normalized for this adjustment, the tax rate for Q4 would have been 35.9%.

Net income for the quarter was $54.8 million, or $0.76 per diluted share.

Although earnings neutral for the full fiscal 2010, the tax adjustment had the impact of increasing Q4 earnings by $0.12 per diluted share.

Normalizing for this tax adjustment, net income for the quarter would have been $0.64 per diluted share.

I'll point out again that the $0.64 reflects the 35.9% tax rate versus the 40% tax rate anticipated when we gave guidance for the quarter.

This compares with net income of $28.5 million, or $0.40 per diluted share for the fourth quarter of 2009.

Our weighted average diluted shares outstanding for the quarter was $72.7 million versus $71.3 million a year ago.

Capital expenditures were $8.4 million in the fourth quarter resulting from new store buildouts, existing store renovations and IT capital expenditures.

Turning to highlights for our full fiscal year 2010 performance.

Net revenue rose 57.1% to $711.7 million from $452.9 million in fiscal 2009.

Gross profit was $394.9 million, or 55.5% of net revenue compared to $223.1 million, or 49.3% of net revenue in fiscal 2009.

Operating income was $180.4 million, or 25.3% of net revenue versus $86.5 million, or 19.1% of net revenue in fiscal 2009.

Net income for the year was $121.8 million, or $1.69 per diluted share, compared to $58.3 million, or $0.82 per diluted share for fiscal 2009.

This year's results were based on 71.9 million weighted average diluted shares outstanding and a tax rate of 33.3%.

Looking at our balance sheet highlights, we ended the year with cash and cash equivalents totaling $316.3 million, an increase of $156.7 million or almost double our cash position at the end of fiscal 2009.

Inventory at the end of the year was $57.5 million, or 30% higher than at the end of 2009.

Even though this point in time snapshot may seem reasonable compared to last year, in fact, we came into 2011 under inventoried to meet Q1 demand, which leads me to our outlook for the first quarter of 2011.

Before I talk about specifics, I'd like to expand on the very near term inventory challenges we're facing.

Our exceptional performance in the fourth quarter of 2010 was achieved in part by accelerating some deliveries planned for Q1.

And even with this additional product, we experienced higher than expected sell-through.

With light deliveries during the first part of Q1 and no opportunity to accelerate product deliveries until April, our sales in Q1 will be limited to a level of growth below the demand that we have seen and, when in stock, continue to see from our guests.

We therefore anticipate revenue in the range of $175 million to $180 million.

This is based on a comparable store sales percentage increase in the low double digits on a constant dollar basis compared to the first quarter of 2010.

We plan to open five Lululemon stores in the US, one Lululemon store in Australia and one Aviva store in Canada during the first quarter.

As Christine discussed, we are transitioning away from our third party model for eCommerce.

To facilitate a smooth transition, we're gradually reducing inventory allocated to the third party fulfillment provider so that inventory to be transferred is minimized at the mid April go live date.

We will then gradually increase assortment on our new platform as it is stabilized.

Therefore, although eCommerce has been running at approximately 10% of overall revenue, we expect for Q1 that it will be closer to 8% of revenue.

We expect slight gross margin expansion versus the first quarter of 2010 driven by leverage on fixed costs such as occupancy and depreciation, partially offset by higher product costs from sourcing pressures in both labor and raw materials.

We also expect deleverage on SG&A as a percentage of revenue versus the first quarter of 2010 due to growth in our eCommerce, Australia, Aviva and showroom channels which carry a higher SG&A component than our corporate stores.

These margin expectations also reflect some compression from pre-opening costs incurred in Q1 relating to the ten stores that we currently have under construction for opening late in Q1 or in Q2.

Assuming a tax rate of 36%, which is higher than the 2010 tax rate as our income mix shifts more towards the higher tax US operation and 72.4 million diluted average shares outstanding, we expect earnings per share in the first quarter to be in the range of $0.36 to $0.38 per share.

For the full fiscal year 2011, we anticipate we'll open a total of up to 30 corporate owned stores, including up to three Australia and two Aviva locations.

We expect net revenue to be in the range of $885 million to $900 million for the fiscal year, representing revenue growth of approximately 25% over 2010.

For the year, we expect gross margin to decline from 2010.

Sourcing pressures are expected to be higher in the second half compared to the first half of 2011, partially offset by leverage on occupancy and depreciation gains through higher store productivity and distribution efficiencies.

However, we do expect to leverage on overall SG&A as we gain cost efficiencies from the transition of our eCommerce platform to our in house model and leverage on our SSC cost in place, offset by higher store compensation designed to attract and retain the best staff and investments to continue to drive long term scalability and growth.

As a result, we expect our overall operating margin to be relatively flat with 2010.

We expect 2011 fiscal year earnings per share to be approximately $1.90 to $2 per share.

This is based on 72.6 million diluted weighted average shares outstanding, and it assumes an effective tax rate of 36% for the year.

We expect capital expenditures to be between $45 million and $50 million for fiscal 2011, reflecting new store buildouts, renovation capital for existing stores, IT and other head office capital and distribution center CapEx.

In addition, as recently announced on March 1, we purchased our store support center in the Kitsilano area of Vancouver near our original store for $65 million plus closing costs.

The purchase of the office is expected to be roughly earnings neutral for 2011.

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

Thanks, John, and we are very excited to be in our new office, so we apologize for being a bit late on the call today because you had executives trying to figure out how to turn on the lights in a new building, which wasn't easy for us.

I'd also like to thank everyone for joining us today and in closing, I want to state how devastated we are as a leadership team and a Company over the events that happened in our Bethesda store over the weekend.

And the senior team flew to the market and took care off our people, the families and made sure that we did everything that we could to insure that the police could cooperate with them to have effective investigation.

And I'm very proud of the way our Company responded to the events, the horrified (inaudible) we had to.

So, with that, we'll turn it over to Q & A.

Thank you.

(Operator Instructions)Our first question is from Michelle Tan of Goldman Sachs.

Your line is open.

Great.

Thanks.

Hey, guys.

I was wondering if you could touch a little bit more on the inventory constraints that you're experiencing.

Is there any way to quantify how much that's holding back sales?

And then also help us understand in the second half how you're adjusting your inventory plan, and is there an opportunity to take a much bigger position in safety stock for basic items?

Let me start and then maybe Sheree can kick in.

To put it into perspective, as I said, our inventory is up 30% year-over-year.

But if you go back two years, last year was actually down 15% from the prior year, so we're coming into this year only 15% higher in inventory than we were two years ago.

We have a cleaner inventory position, so our inventory turns are stronger, but we're still significantly under inventoried on a historical basis.

In terms of getting back in stock, our ability, as I said, there's some ability to accelerate deliveries into April.

To a large extent, that's taking from Q2, so we'll continue to be inventory constrained through the first half of the year.

We've placed deeper buys into Q3 ,and we still have an opportunity to place a deeper buy again into Q4, which we will.

Just before we turn to Sheree, just want to note that we sold through so strongly in Q4, it eroded a fair amount of the base of inventory we carry, and we had slightly lighter deliveries coming in April.

And with chase and even accelerating our orders with Chinese New Year being quite a longer period in there, it just takes a little while to build in Q1.

The other factor is the deliberate move to decrease the inventory available on our eCommerce site, which will then also push sales to the latter half of the quarter.

So Sheree, do you want to talk about the rebuild of inventory?

Sure, thanks, Christine.

We are taking measures and have been to increase our safety stock overseas and to create a cushion that's even more significant than we have in the past.

We're doing this by going deeper with our current manufacturing partners, as well as adding new ones with more flexible capacity that will allow us to sell different types of goods, knits, wovens and some very complex designs that we produce.

Great, thank you.

Sorry, go ahead.

Go ahead.

Oh, I was just going to say, any other color you can give us also on the comp composition, just traffic, ticket, conversion, that kind of stuff?

Yes, we do traffic counts in about a little under a third of the stores, so it's fairly representative.

About three quarters of the comp increase came from traffic, about 20% from conversion and the balance by slightly higher average dollar per transaction.

Great.

Thanks so much guys, good luck.

Thank you.

Our next question is from Lorraine Hutchinson of Bank of America.

Your line is open.

Hi, guys, it's Paul Alexander for Lorraine.

Could you give us a little bit more information on the sourcing pressure you're seeing?

It seems that you are experiencing pressure maybe a little bit earlier than some of the other retailers in the group.

Maybe if you could talk about how that's related to your exposure to Cotton versus Oil?

Thanks.

Okay, overall and going back to comments we've made on calls before, for the first half of the year, we see about 150 basis points of gross margin compression coming from inflationary costs on labor in China, et cetera and Cotton, as well as Nylon and other.

We expect that to be somewhat higher for the third quarter where we place the buy.

It's probably closer to 200 to 225 basis points of gross margin compression.

We're not quite there on Q4, but I'd expect something similar for Q4.

That's unmitigated.

Right.

Got you, and then maybe for Sheree, could you talk a little bit about your opportunities to raise prices to mitigate?

Obviously, we always look at our price architecture, but our bias is to actually hold on all of our core items and all of our key items.

We have -- when we design a line, there is so much newness created and with that, many times complexity and technical details and so on and so forth.

And we have always had a philosophy of pricing for the value of the garment, and we will continue to do so.

So, we can take pricing on things like our Special Edition hoodies, and so we have deployed a strategy of doing that while keeping the core basics in line.

And it's something that we'll always take a look at, but right now, we want to make sure we have the discipline as an organization of really being efficient and effective at what we do.

Great.

Thank you.

Thank you.

Our next question is from Janet Kloppenburg of JJK Research.

Your line is open.

Hi, everybody.

Congratulations.

Really nice job.

A couple of questions.

Last time I saw you, Christine, we talked a little bit about needing to build the infrastructure to support the growth, which has been, I think stronger than expected.

I'm wondering if you could talk about some of those investments and if any of those were made in the fourth quarter.

And Sheree, on the yoga and run investment for fiscal 2011, I wondered if you could embellish on that a bit.

Perhaps tell us about newness there or exactly how the investment will be characterized, whether that will be novelty it or basic, et cetera.

I'd like to learn more about that.

And John, on the new store openings, I was wondering if you could give us an idea of how they will look by quarter and what kind of pressure that would come -- would bring to pre-opening expense versus last year by quarter.

Thanks.

So, on the infrastructure, you did see some costs come through in the fourth quarter for the new eCommerce launch as we're getting to the final stages of that project.

We had people running around the office yesterday wearing the product they had received from all of the test shipping, so we are in the Soft Launch phase, we feel really good about where we are for that launch.

You also see -- saw us make some investments in our people in store labor, and mainly in pay rates for our Educators and Staff team so that we continue to attract the best, and we are heavily focused on our supply chain systems.

Now with Katherine Henry on board, everybody is here at the office eagerly awaiting her time to get their project up next, but our main focus is on the whole supply chain end-to-end and really allocations to the stores and really getting those systems to be best of class.

So, those are the primary areas that you'll continue to see us make our investments.

And then Sheree, newness and yoga?

Sure, we are going to continue to focus on diversifying yoga, so you will see our focus on Hot Yoga as well as other forms of flow and so forth.

We also have little capsule of Yoga Surf coming up, and we will continue to explore capsules to look at different technologies and different technical design features on garments.

In terms of our run line, we are introducing a new run short which we are really excited about, as well as again focusing on UV as we did last year, and those are our big ones.

Okay, well lots of luck, Sheree.

Thank you.

Oh, Janet did you want John to answer your question?

I do.

Okay.

As far as I said, in total, it's five Lululemon stores in North America plus, as I recall, one Aviva in Q1.

The number for Q2 will be similar, possibly one or two more, with the weighting of the openings primarily Q3.

There's obviously some shift between quarter to quarter, but that's our target for the first couple of quarters.

Okay, and just one last question on inventory.

When do you all think that inventory will be back to the level that you'll be able to fully exploit demand levels?

We're rebuilding starting Q2 as the really more significant deliveries come in and then we'll keep building.

Janet, I'm ready to sell my personal closet.

We can't get enough.

(laughter)

Don't do that.

Anyway, lots of luck you guys.

Great job.

Thank you.

Our next question is from Liz Dunn of FBR Capital Markets.

Your line is open.

Hi, good morning.

Congratulations on a great quarter.

I guess my first question is just a follow-up on the SG&A.

So, can you give us a sense of the magnitude of the leverage that we'll see in the back half?

And would we start to see leverage in Q2, or is it mostly Q3 and Q4?

And then on gross margin, in total for the year, are you anticipating that gross margin compression will be similar to what you said previously, which is about 150 basis points, or was that 150 basis points unmitigated and then it should be better than that in total?

And then I have a couple of questions on product.

Okay, starting with SG&A, I see the leverage coming more in the second half.

As I said, some of it comes from a shift in the model from eCommerce which happens the end of Q1.

That will really ramp up again in the second half.

And then more leverage as our volumes increase from new stores and comp sales increases in the second half.

Sorry, your question on gross margin I believe was 150 basis points that we're seeing right now, yes, that's the unmitigated.

For the full year, so it will be in total, inclusive of leverage on buying and occupancy, it will be better than that, or that's your current outlook?

Better than the 150 unmitigated for the year?

The pluses and minuses, 150 of sourcing pressure in the first half, as I said, maybe more like 2.25 in the second half.

Oh, I see, okay.

Occupancy and depreciation and some efficiency partially offsetting that.

Okay, great.

And then I was wondering if you had a goal for the year or for the next couple of years in terms of how much your eCommerce can be as a percentage of sales.

And then on product, I was wondering if there's an opportunity to take some of the technology in sort of running tees into tanks.

That's a very personal question.

(laughter)

(laughter) With that said, I think you will really like the line that we were just previewing yesterday.

So yes, you will see us actually introduce a lot more fabrics in the tanks that come from our other technology lines.

And there's a beautiful collection of yoga tanks that Sheree and her team have designed, which were based off of the running tanks.

So yes, we will be doing that, and --

eCommerce.

eCommerce percentage, as I mentioned in my script, we see a midterm target of 15% of being very achievable.

I will call out that we did purchase a significant amount more for the eCommerce channel starting in Q2, and we're trying to transition the product down in a very Lululemon way, so there's a very fun campaign around that.

And then we'll bring it back up a little bit slowly just to make sure we don't overwhelm the site, but we have purchased more significantly for that channel starting a little earlier in the year.

Okay, thank you.

Best of luck.

Thank you.

Our next question is from Edward Yruma of KeyBanc Capital Markets.

Your line is open.

Hi, thanks very much.

Congratulations on a great year.

You guys ended the year with over $1,700 in square foot of sales.

Can you talk a little bit about the performance of your older stores?

Are you starting to see some level of maturation and your most productive stores, how productive are they?

Okay, as you would expect, the older stores aren't comping at that average, but they are still comping in the teens or high teens.

And the newer stores, especially in some of the newer markets in the US are comping well above that average.

Sorry, what was the next part of your question?

But it was sales per square foot was -- yes.

You were answering comps.

Right.

Sorry, what was the balance of your question though, Ed?

I was just trying to understand for some of your best performing stores, can you provide some color as to how far above the chain average they are performing?

The half dozen most productive stores are well over $4,000 a foot.

Got you, thank you very much.

Thank you.

Our next question is from Claire Gallacher of CapStone Investments.

Your line is open

Thank you.

I was wondering if you could talk about your marketing and advertising strategy for 2011.

I believe you mentioned moving more digital going forward, so if you could discuss that, that would be great.

So, one of the strategies that we're working on as a Company with the new eCommerce launch, and that will be the first half of the year is really just getting the platform up, making sure it's stable, introducing International, some additional features on that and then working on some integration and some basically guest chasing pieces on the site.

And then in the back half of the year, you'll see us do a lot more with an integrated digital strategy, so it will be working on things like Mobile Apps and a lot more integrated guest experience.

And I don't want to say anymore than that because it's kind of fun at this time, and we want to have a little confidentiality about what we're doing.

But you'll see us take a lot more of our community strategy online, will be the basic premise of our Mobile and Digital strategy.

And let's see, what else are we doing?

The other thing that we are doing, we are starting to heat up our international ad placement strategy.

The only thing as you know we do is in the back of like Runner's World and Yoga Journal, you will see us expand that to a more global footprint to drive those eCommerce sales as well.

As a percent of sales, are you increasing the amount that you're spending, or is it just commencer at with your sales growth?

It's not an increase overall.

It probably doesn't even run total with sales growth.

But just naturally, as a percentage of sales you've got more money in that bucket, even though it's a lower probably overall percentage of the sales growth rate.

Okay, and then just last question.

From Aviva standpoint, is there any plans for eCommerce, or is it just too young in the cycle for Aviva?

No.

We feel very good about where the Aviva is.

As you know, the one store, just addressing that specifically, that we closed was one of the test stores we took over from Oqoqo in Victoria, and we built it there as we were closing out that store and using the remainder of the lease period.

We knew it was an ideal market for the concept, but we wanted a site close by so we could work with it.

And we're now relocating that store to Eastern Canada, and you'll see us open two this coming year.

And we're very pleased with the sales per square foot we're seeing out of that concept now.

We've really refined it into a Dance, Ice skating and Gymnastics line plus Active Wear for young women, and the response has just been incredible.

So, we do see in the back half of the year introducing eCommerce potentially for that site.

Our timing will really depend on the progress we make on our main Lululemon site, and we don't want to disrupt that.

And if we can't make it by the back-to-school on Aviva, we would push that to the next year.

Okay, great.

Thanks and good luck.

Thank you.

Our next question is from Howard Tubin of RBC Capital Markets.

Your line is open, sir.

Thanks, and let me also just say great quarter as usual, guys.

Can you just talk a little bit about the Mens business and kind of big picture as you view the Lululemon brand as a number one leading Athletic Apparel brand for women, where does Mens fit into the picture long term?

(laughter) Is that a personal question?

Partially.

This is Sheree.

Our mens business was introduced to Lululemon to create an amazing atmosphere for our guests and currently, Mens hovers around 12% to 15% of the business.

We are nurturing the Mens business and fine tuning the assortments and as we're doing that, we can see the demand increasing.

The feature of Mens is, since we always are thinking about the possibility there, there are things that we could do, but currently, Mens is just part of who we are at Lululemon.

I would say you'll really like the new short line for Mens shorts that we have that's coming out for summer.

We've got some really great new shorts.

And so I think it's just a continued used focus on the basics and getting the profiles of the basic right.

And we have seen a really strong response already to the Mens short line that we dropped for spring, and so with just continued focus on basics.

Got it.

Thanks.

Thank you, sir.

Next question is from Sharon Zackfia of William Blair.

Your line is open.

Hi, good morning.

I was curious, Christine, I think you mentioned or it was John that you didn't see the opportunity to really expand upon 2010's margins in the near term, but I guess that kind of begs the question, your margins are so good.

Where do you think longer term operating margin potential is?

Well remember when our goal was 20%?

I do, John.

We came in a little over 25% this year.

We like to, as I said, we're looking at staying relatively flat with that this year.

And I think with our business model, we should be able to continue to invest in growth and deliver an operating margin somewhere in that range.

It might be a little bit lumpy up and down, but that's a great new target I think.

But I guess longer term, as you grow eCommerce more quickly, is this potentially an operating margin where you could get up to 30% longer term, or are there headwinds to achieving that?

I think it's a pretty unsettled sourcing climate, so I think that's one thing that keeps us cautious from saying that.

But as we go back to what our growth strategy is, it's very high volume, fewer stores and then reach with eCommerce, both of which giving you high margin businesses.

I think competition is the other thing that could potentially disrupt that model if we go a little bit deeper maybe in stores to make sure that we protect our reach to guests.

And then as you expand into International, typically you have a little bit lower margin profile because of higher occupancy costs than labor costs.

So, I think over time, as we utilize the different growth strategies, you might see some different operating margin pressures from those, but we do believe that this could be a best of class operating margin business.

Okay, great.

Thank you.

Thank you.

Our next question is from Taposh Bari of Jefferies.

Your line is open.

Hey, guys.

Nice quarter.

John, I just wanted to clarify.

I don't know if I caught this in your prepared remarks.

Did you give comp guidance for the year?

No.

There's a lot of moving pieces in the revenue for the year, so I just gave revenue guidance.

Okay.

So, just looking at your 25% sales growth, it looks like kind of an in line low double digit type guidance based on what you're guiding for square footage.

So, I'm just trying, a follow-up on the operating margin question.

You guys are alluding to a flattish type margin for the year, so I'm just looking at the moving parts, obviously several there.

You're going to have a higher e-Com penetration, you're going to take on e-Com to your own model, presumably some fixed cost leverage, a favorable Canadian dollar.

Obviously, the sourcing cost environment remains kind of dynamic, to say the least.

Sourcing costs about 200 basis points for the year as a headwind unmitigated.

So, I'm just trying to understand why a down gross margin guide, if you can just provide some color there, and maybe I'm missing something there.

There again, there's lots of offsetting pluses and minuses and in addition, our crystal ball for the full year is still kind of foggy.

Part of it is additional air freight will be incurred this year to get back into stock, so our air freight expense will be higher than it was in 2010.

And again, the main driver offsetting those pressures is efficiency coming from our new DC and leverage on occupancy and depreciation.

I'd say we still have to place our Q4 buy, and we're still trying to make sure that we have the right target and amount to anniversary them from the comp we did in Q4 of this year.

So, the overall number is obviously affected by the base -- the strong base that we just occurred.

So, that's our planning work that we're doing right now to make sure that we make sure we have enough for Q4 of this year and enough going into Q1 of next year, so that's our really important short-term decision that we're making.

And so we'll be able to, I think next quarter, give a little more guidance on that.

Okay, that's helpful.

And then just a follow-up on, if you could talk about how your stores are performing in some of the new markets and states.

I notice that you opened a new store in states like Ohio, Tennessee and Georgia this year.

So, if you can just maybe give some color on how those stores are performing versus some of your stores that you typically open up along the coast which are presumably more productive?

We were actually looking at that yesterday, and we kind of had to laugh.

They were -- because they were so strong.

And the smaller markets like the Tennessee, (inaudible) they've opened up at some of the best levels that we saw.

We're really, really pleased with the 2010 store openings and the average sales that they opened, our showroom strategy is working without exception, and every store was just a stellar opening.

So, Delaney and her team just did a fantastic job.

All right.

Well, thanks a lot.

Best of luck.

Thank you.

Our next question is from Jennifer Black of Jennifer Black & Associates.

Your line is open.

Good morning, and let me add my congratulations to a phenomenal quarter.

I wondered as your web business grows, what are your learnings, especially with International?

Are you seeing a more diverse group of International buyers, and are there any new countries that you would call out?

And then I have a follow-up.

Thanks.

We definitely see our product beginning to penetrate.

We just recently had somebody from the team who was in Paris and was absolutely surprised at the amount of Lululemon they saw on the streets, so we know that our reach is expanding internationally and the demand is really growing, which is why it's one of our first priorities on the website, to convert to have the ease of shipping internationally including the duty tax, et cetera.

So, that will be the first priority that we do, as well as beginning local pages and strategically following the markets that we've planned out.

So right now, I can't remember the exact total off of eCommerce as a percentage of sales, but it is growing International shipments.

Great, and then I wondered also, can you quantify how much you need to increase your web inventory?

And I know you -- it sounds like you won't do this until you make the change over to meet the current demand while keeping the customer hungry.

And then my last question was as you gain information about your guests, are you doing anything to reward your special guests besides what you've already been doing?

Thanks.

Our strategy is much more -- is kind of an in the know strategy as opposed to anything that's discounting.

So, our really loyal guests, whether it's on the social media, that we will give them heads up.

For instance, we had a Special Edition hoodie online that we invited certain guests to know.

We thought that product would last, what, a couple weeks Sheree, and it lasted a day and a half.

So things are selling out very quickly online, and we know that that's our job to bring the product in.

We're a little bit short-term constrained because of the transition.

We made the decision not to ship them the summer product line and bring that down so that we had it ready to go here and with the new DC as opposed to trying to transition all of that product.

So, we learned a lot about what the guest wants online, and we've really fine tuned the product assortment.

You'll actually see us doing some broader and special online only categories, and we see it as a real tool in the future to bring back things like Classics that the guests have been asking for that we maybe don't have room in our store or something like the Deep V or the Athletic tank that we had.

We have a lot of demand for that, but we would bring something like that back online.

Great, and any quantification on inventory as far as how much you think you would need to increase it after you make the changeover online?

We have substantially bought.

I don't have the number off the tip of my fingers, but we're planning for significant growth in the eCommerce channel this year.

And as I said, our midterm target is to that 15%, and we believe it's only an inventory constraint together.

Okay, all right.

Well good luck, and thank you very much.

Thank you.

Our next question is from Paul Lejuez of Nomura Securities.

Your line is open

It's [Tracy Kogan] filling in for Paul.

I had a couple questions.

My first is I was wondering as you look at some of your newer stores and the sales increases there, do you have a sense if that's driven more by new customers or repeat customers or is it pretty equal ?

And then secondly, I think you said in your K that 12 to 15 of your openings this year will be in markets seated by show-rooms, and I was just wonder how you locate the other stores that aren't seated by show-rooms.

Are those just fill in stores in markets you're already in?

Thank

So, mainly the new stores, the base of new customers, particularly if it's a market that we've just had a showroom that you're really attracting.

Now, they might be familiar with the brand from shopping in either online or in other cities in close proximity when they travel.

So, that's mainly a new guest that we would be attracting in those locations.

And for the stores that we don't do a showroom, it's typically part of an expanded market strategy, so it could be the opening, the fourth or fifth store maybe in a city, so we wouldn't do a one for one with the show-rooms because those guests are already familiar.

And it's through the design meetings we do and our eCommerce sales with rather -- we have an integrated market strategy that we look at, that we then know that we have a lot of guest demand in a certain trade area, and so then we'll open a store as soon as we have the Management Team ready.

So, we have a very deep working list of locations for the build-out that we've stated of the over 300 stores, so we -- it's always just for us a proofing out that those are the right locations, and that's the process that we follow.

Got it, thanks.

Just a follow-up, though.

Do you have any sense of what the repeat customer is looking like at some of your newer stores?

Do you track that data?

We don't really track that data.

We only have overall transactions, but just anecdotally, we know that we have a very loyal guest following that stops into the store two or three days a week.

They know exactly when the product notification goes out, they know exactly when the case shipments of new products come in.

It's a very interactive guest.

And then we have another guest that shops in the stores but looks online and checks everything out.

So, we actually have put together a Facebook catalog where people can click in that will go as part of our digital strategy during the Launch transition to make it really easy for that guest to identify what she wants and get it at the location that she wants.

Great.

Thanks a lot.

Good luck.

Thank you.

Our next question is from Erica Maschmeyer of Robert Baird.

Your line is open.

Congratulations.

Just to follow-up on your inventory, I know you said it was constrained across all product lines.

Was it more constrained in some areas than others and also, did you see any regional differences in your comp?

No and no, so it was pretty much -- we see it across where we're actually we're fairly in stock in Grooves and Astro pants and the basics.

So it's more, did we order enough of the new, and that's a little more complicated to chase than the basics.

So, that's why it's taking us a little bit more time to get back in stock than it would if it was just the basics that we were chasing.

And then as far as regional performance, no.

We've seen some areas just really taking off, such as DC and Texas in particular, and really loyal guests building in those markets, so those would be outstanding.

But there wasn't any market that didn't benefit from guest demand.

That's great, and could you talk about your efforts to move productions out of China?

I think you were targeting around 62% at the end of 2010, where did that come in and where do you expect to be at by the year-end of this year?

Yes, we were closer to 60% and with the strategies that Sheree is putting in place right now, we did just hire a tremendous new individual to join our Sourcing Team that brings us a lot of experience from the Adidas organization.

And we also hired our General Merchandise Manager, our GMM candidate and Ruth Rosenthal, who comes to us with a lot of experience from Nike.

So, very pleased to have those two joining our team which will specifically target right product to right stores and increasing our manufacturing capacity.

Great.

Thanks so much.

Thank you.

Our next question is from Dana Telsey of Telsey Advisory Group.

Your line is open.

Good morning, congratulations.

Hi, Dana.

Hi.

Can you talk -- the merchandise margin was up around 90 basis points in the quarter.

That's an acceleration from the third quarter, I believe up around 60 basis points.

What's driving that?

Is it different categories?

Is it different materials you're using?

And then also on the warehouse show-rooms, how many do you foresee this year and how are the real estate negotiations going in terms of occupancy costs, given the acceleration in the number of new store openings?

Thank you.

Maybe I'll deal with the last one first.

Because we really look at our target lift, and our goal is to have a pipeline that's 150% of the target of stores that we actually want to open, that gives us a position to only do the sites that are on the terms that we want to be on.

And it's a very -- real estate costs are one of the core cost of your business model, so we take a great care.

If we're only going to have 300 or 400 stores, they have got to be the right place, the right deal, and the right terms for the long term, and we hold very firm with that.

And we believe that we're a very attractive tenant that brings in a lot of traffic to the centers that we're a part of, and the landlords recognize that.

So, we feel very good about the deals that we've been able to cut on very favorable terms that allow us to have a lot of security for the long term and the business model.

So on the margin, John will take that.

On the margin, a couple things.

Q4 is always a little bit lower because there's higher Outerwear component that carries a lower margin.

But in general, and as I said, even in Q4 we were starting to be impacted by the inflationary pressures on sourcing.

The things that offset that and put us into the positive are more some efficiencies and because of our strong sell-through.

So, mark downs for example, were very low.

We started the quarter in a better inventory position than compared to a year ago, so even air freight was lower in Q4.

And then because we sold through so strongly, being left with low inventory positions, reserves for things like Obsolescence just didn't need to be as high as they had been in the past.

So, those types of efficiencies in the supply chain that drove the higher margin.

So, I think there was some other follow on effects.

We had a very, very limited January holiday sale because there was no product to mark down, so that's another thing that kind of affects Q1 revenue numbers.

So, obviously then margins will be stronger.

We don't have enough product for our warehouse sale, so we won't be doing one of those in the near future.

And show-rooms are slightly different.

The run rate of those, Chris, is what for this year right now, 47, 48?

So -- and those are an ongoing concern.

We'll open a few, transition a few over the year, but pretty close to that run rate of about [50].

Thank you.

Thank you.

Our next question is from Stacey Pak of Barclays Capital.

Your line is open.

I don't know if I missed this.

I had to step away, but did you address what your experience has been in some of the lower tier, if you will, US markets?

What you're seeing from the customer and what you're seeing on a sales productivity level?

Could you comment if you're in line with the low double digit comp guidance now?

And then also, could you tell us where you expect to end inventories at the end of Q2?

Thanks.

We aren't really in any secondary or tertiary markets.

Our strategy is to only be in kind of the primary.

Yes, but let's say Ohio, Christine.

One of our best store openings of the year.

Really?

Yes.

So, we're very strong demand there, Tennessee, Cleveland.

And because we operate on a little bit of a scarcity model and we're going into the best real estate centers and real estate in those markets, there still really is a strong consumer demand at the tier of the market.

If we were penetrating into E&C locations with a high density, I think we would maybe potentially be affected.

But with our low store penetration, there's certainly enough guests in our income and demographic to support those stores.

So, are you saying that sales per square foot in those Tennessee's and Cleveland's are better than you've seen in the US?

They are coming in.

Those stores are opening at the US average in sales per square foot.

Okay, great.

And the other questions?

The other question on inventory, I think you meant at the end of Q1 going into Q2?

No.

I wanted to know where because you said you're still going to be low, right, in the first half, so I wanted to know at the end of Q2.

You can answer end of Q1 too, but.

I'm not sure I can answer either.

Yes, we've got a lot of Chase product and additional incremental that's coming in, so it's definitely building.

I don't have the exact number, so maybe we'll have to follow-up with that one with you.

Okay, and then just the comp now, do you comment on that?

I will because it's a tough one this year.

February we still saw -- we still had a reasonable short-term inventory position, so the demand continued until we were basically selling fumes.

And so March, we've really had the shortness in inventory, and then we're hoping that April gets back to the trend that we were seeing back in February.

So, it started strong, March has been weak understandably and we're expecting some rebound when inventory comes in.

Okay, great, thank you and good luck.

Thank you.

The next question is from John Zolitis of Buckingman Group, your line is open.

Hi, good morning.

Good morning.

Two quick questions.

One, can you quantify what you think the light inventory position is holding you back in terms of the comps?

So i.e., you gave guidance for low double digits, would it be 20% if you had all the inventory that you wish you had?

And then the second question is on the eCommerce profitability.

You mentioned that SG&A growing faster than sales had somewhat to do with the shift to revenues in the eCommerce category.

What's the op margin on eCommerce?

Is that higher or lower than the store op margin?

Thank you.

Boy, what would our comp be if we had inventory?

That's a dangerous question to try to answer.

But I think your suggestion of 20% would be in the -- would be realistic.

And again, I don't give monthly guidance, but that's what we were seeing in February.

Regarding eCommerce, under the present platform which is outsourced and therefore, there's a variable fee based on revenue, that entire fee goes through SG&A and there's no leverage on it.

So, as volumes increase, we get a big hit coming through SG&A.

That will change with the transition in the middle of April.

Overall, eCommerce is a stronger operating margin than the rest of the business by up to 10%.

Okay, thanks a lot and good luck.

Thank you.

Our next question is from Laura Champine from Cowen and Company.

Your line is open.

Hi guys, I'll keep it brief, just a follow on to the inventory availability question.

So I'm going through your K and seeing you still have one manufacturer making Luon, the top four makes 65% of the product.

Is the issue all in forecasting, or are your suppliers not able to keep up with demand and you need to develop new suppliers?

It's a little combination of both.

When you don't forecast a really huge demand, you can't book the factory space, so a little bit of that as we're kind of catching up and truing up on the forecasting.

The other critical part is forecasting your fabric.

On the Luon, we're fine and we actually now have brought on the second manufacturer of the Luon.

It's more of the specialty fabrics like the Silverescence, we now have, what is it Sheree, 47 key fabrics instead of the original seven.

So, making sure we have enough fabric to bring it in.

And then it's more, honestly, a short-term issue of the number of factories that shut down for what used to be a two week and now between the ramp down and the ramp back up, you're seeing it would almost be a four week impact, so it's a little bit of timing.

We had a lot of product on the water and not in the air for the Spring Launch post holiday.

So, even though we're air freighting some of the product in, it just takes a little bit longer to catch up.

So, we see it as a pretty short-term issue, not a longer term, and not a manufacturing capacity issue.

We've been on-boarding new factories, they are just starting to come into play and increasing there.

And certainly with the new person that we just hired is experience, she's already brought a tremendous number of new factories that we've already begun production with.

Great.

Thank you.

Thank you.

Our next question is from Christian Buss of Thinkequity.

Your line is open.

Congratulations on impressive execution again.

Wanted to ask about headcount and your ability to accelerate investments.

You guys have a pretty big cash cushion here, and can you talk a little bit more about how you think about deploying that capital at a faster rate?

We're in the fortunate position of not really being constrained by capital.

I think our constraint is just how many initiatives can a Management team and the rest of our Staff really handle effectively at any point in time.

I don't know how best to answer that other than that.

But I think you will see us put effort on opening an increased number of stores over time and especially if we see them performing, and there we always want to make sure we get it right with engagement in the local community and our people, and that's the first priority.

And when we have a really great Management team ready to go, you'll see us accelerating the stores.

And can you give us, as a follow-up, an update on some of the systems investments you have underway?

Obviously, the biggest one in a short-term is this eCommerce transition which the first phase of called Launch will happen on April 15.

And then there's a phase of stabilization, and then we'll be adding new capability and technology, including our digital strategy to that platform.

Our next biggest focus is the end-to-end supply chain.

We've been undergoing a business process project with KSA which is not only identified current state, but future state of our supply chain and the end-to-end systems that we need to really manage and be best-in-class in supply chain.

And so that will be a significant portion of our investment in time.

We've been working on a PLM which is Product Life Cycle Management system, and so that will be one of the first priorities that go in as well as the planning and forecasting and the allocation down to the stores systems are things that we're continually refining.

When the original systems were put in place almost three years ago now, the vision of the Company prior to my arrival was that it would be a North American only Retail Company.

We're obviously now multi channel, multi concept, multi geography, so there will be increased investment in just even our core and basic financial systems to go into multi currency.

So, that will be probably the next set as well as things like business intelligent data warehouse management, just the things that you need as you get to be a bigger Company.

Thank you very much and best of luck.

And I forgot, we have our new HRS system going live in April.

So, our new HR system which gives us complete online management.

Up to now, we've basically had a payroll system, and now we will have a complete people management system effective in April.

Thank you very much.

Thank you.

Our final question is from Rob Wilson of Tiburon Research.

Your line is open.

Yes, thank you.

Christine, you mentioned, I believe the ICR conference that you weren't going to try to increase prices, and we've all listened to a lot of conference calls over the last couple months where basically every company says they're increasing prices.

So I'm just curious philosophically how I reconcile that.

I think we're obviously going to be smart about the decisions that we make, and if Cotton continues to have poor crops and is a constant demand issue, we're obviously, in a longer term situation, going to have to address what we think that is.

Right now, what I want to be really careful of is that we don't build a culture of relying on pricing to solve issues.

And obviously, when you have tremendous raw materials and labor costs, we're going to have to do something at some point.

But right now, we still have a lot of room for efficiency, effectiveness, we have a lot of in small inefficiencies across the Company.

So, keeping a discipline of working on those issues first and then being smart and pricing, as Sheree said, to the value of the garment.

And we also -- we do look at what happens in our competitors and what are they pricing garments at, what's the quality that they are pricing at, and we have a lot of people trying to come into this space.

And the one thing that I'm very, very confident of is the quality of garment, and construction, design and value to the guests of the price we offer is exceptional.

And by just continuing to take price increases, we leave a lot of room for competition.

So, we do -- we look at it from a very holistic perspective, and we also can assort the line, as I said earlier, by doing Special Edition hoodies and as Sheree said, increasing the value and construction of some garments, we will higher price those but keep our basic quality goods at a price that's very attractive.

Fair enough and one last question.

John, did you mention that the direct to customer channel had a higher operating margin than the retail channel?

Yes, it does.

I hate to nit-picky, but I'm looking at your 10-K and it says quite the opposite.

Because that was last year's.

Well, no, even that, I'm not sure how it's broken out.

There's a very high gross margin, in part because obviously there's no occupancy in depreciation.

Then down in SG&A, as I said, we have the feed of the third party provider, but we avoid store based compensation, et cetera.

So, I think it's a matter of walking you through the details in the 10-K, and we can do that on a follow-up call.

Okay, well I appreciate that.

Thank you.

Thank you.

I'm showing no further questions at this time.

I'd like to turn the call over to Ms.

Christine Day for any closing remarks.

Again, just thank you everyone for joining us for the quarter, and we're looking forward to a great 2011.

So thank you, everyone.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now disconnect and have a wonderful day.