Lululemon Athletica Inc (LULU) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your lululemon athletica quarter one 2011 results conference call.

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

Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, this call is being recorded.

I would now like to introduce Mr.

Joe Teklits, with ICR.

You may begin.

Thank you.

Good morning, everyone.

Thanks for joining us to discuss lululemon's conference call for first-quarter 2011 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.

Also available in the investor relations section of the Company's website will be a recording of today's call which will be available for 30 days as a replay shortly after the call ends.

Hosting the call today is Christine Day, the Company's CEO, and John Currie, the Company's CFO.

First we would like to remind everyone that 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 results might differ materially from those projected in such statements due to a number of risks and uncertainties all which are described in the Company's filings with the SEC.

Now I would like to turn the call over to Christine Day.

Thank you, Joe.

Good morning, everyone, and thank you for joining us to discuss our first-quarter results.

With me today are John Currie, our CFO; Sheree Waterson, our EVP General Merchandise Management and Sourcing Executive; Delaney Schweitzer, our EVP Retail Operations; and Chris Ladd, our Head of Global e-Commerce.

Following my opening remarks, I will turn the call over to Chris and then John will go through the financial details for the quarter.

We are again very pleased with our start to fiscal year 2011.

Given our inventory constraints combined with our focus on transitioning our e-commerce platform, we approached the plan for the first quarter conservatively.

However thanks to our strong partnerships with our manufacturers, we were able to source additional inventory for April and maximize the productivity of the inventory we had to work with both in sales and gross profit dollars.

And although we had a few bumps in the road given the complexity of the e-commerce project, for the most part we saw a relatively smooth transition to our platform, thanks in a big way to our new CIO, Kathryn Henry, and our e-commerce team.

It took a little longer than expected to merchandise our online catalog by about two weeks, but we are now to a point where our online store is matching our retail stores about as much as we want it to.

Our online store inventory will be in a good position to support a strong back half of the year, so while we planned e-commerce down as a percentage of revenue through the transition, we already see it climbing back towards a 10% run rate and expect to be close to a 10% of total revenue for the full year.

Looking at the performance of our retail stores, they also performed as expected for the quarter.

February was strong, but inventory constraints held back sales in March and then April rebounded as we were able to chase inventory.

Our same-store sales comparison of 16% drove our trailing 12 month's average sales per square foot in comp stores to new highs, just over 1800, up from 1428 a year ago.

We believe there is room for continued productivity increases as we build our inventory position, invest in our stores and our people, and execute our strategy.

Our second-quarter product mix is still somewhat transitional as chasing product for April had some impact on the optimal mix of product in stores today.

But we are in a better position overall in Q2 than we were in Q1.

Looking ahead, our richest opportunity is maximizing the size curves and seasonal allocation of product to our stores.

We also continue to innovate our yoga and run lines, which are the major drivers of our sales growth.

We are in the fortunate position of being able to manage the rate of innovation and keep a strong pipeline ready for execution.

New fabrics, construction, and styling are how we continue to evolve our core lines.

Our exploration into various new categories such as our small cycling collection this summer have received a strong response and is an example of a growth opportunity we can pursue in the future.

What we really strive for is healthy growth.

We believe the best strategy to deliver shareholder value is a balanced growth strategy that focus on driving organic topline revenue through technical and innovative product, excellent execution of our community strategy to build brand loyalty, a culture of personal accountability and development, and delivering strong sales flow through to drive profitability.

We believe our strong execution of this balanced growth strategy creates a competitive advantage, maximizes shareholder value, and creates a space for our people to excel.

While we remain cautious about the macro environment, we are confident that our business momentum will remain on trend for fiscal year 2011 and are confident in our ability to navigate the cost pressures to sustain our healthy business model.

I also want to highlight that one of our top initiatives in the first quarter was bringing our entire e-commerce platform in-house.

A major accomplishment and a project we are happy to have behind us.

What I want to do now is turn the call over to Chris Ladd to give you some additional details on the transition and what it will mean for our business going forward.

Chris?

Thanks, Christine.

Good morning, everyone.

Christine, I really want to take you and the rest of the team for inviting me to join lululemon.

This is a very exciting time in the Company's growth and I want to acknowledge you for asking me to lead the e-commerce business into this exciting next phase.

As Christine mentioned on the Q4 call, I joined the Company in February and spent the first 60 days traveling around the US, working in our stores and learning the business from the ground up.

This was a great way to learn about our brand, meet some of our amazing store teams around the country, have inspiring conversations with our guests, and of course, gain perspective on the incredible opportunity for growth in our online business.

I am going to talk to you today about some of our recent accomplishments for the channel and start to lay out some of our key areas of emphasis to take this business to the next level.

Q1 saw the migration from a fully outsourced business to an in-house model with the transition of our core e-commerce platform to ATG and the migration of our e-commerce distribution operations in the US into our international facility in Sumner.

The transition by all accounts was an incredibly successful one and I personally want to thank Kathryn Henry, our CIO, and all the teams across the Company for making such a complex project a great success.

We successfully mitigated the business risk and managed the guest experience in line with our expectations while adding some key functionality like one-page check out, merchandising and search capabilities, rich imagery enhancements, and core business process stabilization.

Most importantly, we are now standing on a solid core foundation that will enable our teams to expand and innovate our e-commerce business.

The next few months will be focused on working with the internal teams to lay out the key projects and initiatives for scale and growth.

Some of the areas you will see us focus on predominately will be in the social, global, and international areas, as well as shoring up our day-to-day store operations, delivering a world-class online guest experience, impeccable customer service, and without a doubt, connecting with our guests all around the world in new and innovative ways.

We have very passionate and loyal friends out there and I look forward to learning from them what they want from us and of course elevating the world from mediocrity to greatness one click at a time.

With that, I would like to turn the call over to John.

Thanks, Chris.

I will begin by reviewing the details of our first quarter of 2011.

Then I will update you on our outlook for the second quarter and the full year of fiscal 2011.

As announced yesterday, our shareholders approved our proposed 2-for-1 stock split at our annual meeting on Wednesday.

The split is expected to take effect in early July, but please keep in mind that all comments with regards to share count and per share amounts in our results and outlook are on a pre-stock split basis.

So for the first quarter, our net revenue rose 35.1% to $186.8 million from $138.3 million in the first quarter of 2010.

The increase in revenue was driven by comparable store sales growth of 16% on a constant dollar basis; the addition of net new -- sorry, 12 net new corporate-owned stores in North America since Q1 of 2010; the consolidation of Australian operations, which now includes five showrooms and 12 stores, of which there have been three net openings since Q1 of 2010; the addition of 17 net new showrooms opened in the US since Q1 of 2010; direct to consumer sales which increased by $4.6 million; and a stronger Canadian dollar, which had the effect of increasing reported revenues by $4.3 million or 3.1%.

During the quarter, we opened three corporate-owned lululemon stores in the US and one in Australia.

We also opened one corporate owned ivivva store in Canada.

We ended the quarter with 142 total stores versus 128 a year ago, 138 of which are corporate-owned including the 12 in Australia and four franchise stores all in the US.

There are now 108 stores in our comp base, 42 of those in Canada and 66 in the United States.

Corporate-owned stores represented 83.8% of total revenue or $156.5 million versus 83.6% or $115.6 million in the first quarter of last year.

Other revenue, which includes franchise, wholesale, showrooms, warehouse sales, and outlets totaled $16.5 million or 8.8% of revenue for the first quarter versus $13.6 million or 9.8% of revenue in the first quarter of last year.

Revenues from our direct to consumer channel totaled $13.8 million or 7.4% of total revenue versus $9.1 million or 6.6% of total revenue in the first quarter of last year.

As I had mentioned on our earnings call last quarter, we planned down our e-commerce sales due to the transition to an in-house e-commerce platform.

To facilitate a smooth cutover, we gradually reduced inventory allocated to the third-party fulfillment provider so that inventory to be transferred was minimized at the mid April go-live date.

We then gradually increased the assortment on our new platform and recently returned to a more complete assortment level.

Gross profit for the first quarter was $109.7 million or 58.7% of net revenue compared to $74.4 million or 53.8% of net revenue in Q1 of 2010.

The factors which contributed to this 490 basis point increase in gross margin were as follows -- a decrease in product costs related to an adjustment to recognized previously unrecorded benefit of certain input tax credits from previous periods, which contributed 140 basis points of the improvement.

This is a one-time adjustment and ignoring its impact, our normalized gross margin would have been 57.3%.

Product margin improvement of 90 basis points, higher product costs due to inflationary pressures from raw materials and labor along with higher airfreight to accelerate product deliveries were more than offset by reduced markdowns and lower shrink, obsolescence, and damaged inventory provisions.

Leverage on non-merchandise costs such as occupancy, depreciation, and product and supply chain team costs including the efficiencies from our new distribution center in the US, contributed 190 basis points of improvement.

And foreign exchange improvement of 70 basis points due to a stronger Canadian dollar.

SG&A expenses were $8 million or 31% of net revenue compared to $41.9 million or 30.3% of net revenue for the same period last year.

The 38.5% SG&A dollar increase is due to an increase in store compensation and operating expenses associated with new stores, showrooms, outlets, and growth at existing locations; an increase in administrative costs and variable service provider fees associated with the higher sales volume from our e-commerce channel; SG&A and head office costs from our Australian operations which we began accounting for on a consolidated basis commencing from the date of our ownership increase in Q2 of 2010; an increase in head office employee costs including management incentive-based compensation, stock-based compensation, other head office costs, as a result of the investment in infrastructure and resources needed to sustain our long-term growth trajectory.

Finally, the higher Canadian dollar, which increased SG&A by $1.2 million or 2.1%.

As a percentage of revenue, our first-quarter SG&A increased 70 basis points due to growth in our e-commerce and Australia channels, which carry a higher SG&A component than our corporate stores.

The SG&A deleverage also reflects the compression for preopening costs incurred in Q1 related to Q1 store openings and early Q2 openings.

As a result, operating income for the first quarter was $51.7 million or 27.7% of net revenue compared with $32.5 million or 23.5% of net revenue in 2010.

Ignoring the impact of the one-time input tax credit adjustment, operating income would have increased 51% to $49 million and operating margin would have expanded by 280 basis points to 26.3%.

Tax expense for the quarter was $19.1 million or a tax rate of 36.3% compared to $13 million or a tax rate of 40% in the first quarter of 2010.

Net income for the quarter was $33.4 million or $0.46 per diluted share, of which $1.7 million net income or $0.02 per diluted share resulted from the one-time input tax credit adjustment.

This compares with net income of $19.6 million or $0.27 per diluted share for the first quarter of 2010.

Our weighted average diluted shares outstanding for the quarter were 72.5 million versus 71.6 million a year ago.

Capital expenditures were $74.8 million in the first quarter resulting mainly from the purchase of our store support center in the Kitsilano area of Vancouver for $65.1 million plus acquisition-related costs.

Also costs associated with new store buildouts, existing store renovations, and IT capital expenditures.

We ended the quarter with $260.9 million in cash and cash equivalents.

With respect to inventory, we started the quarter under inventory to meet first-quarter demand but were able to accelerate product deliveries in April, which helped to alleviate some of our inventory constraints.

Inventory at the end of the first quarter was $64.4 million or 27% higher than at the end of the first quarter of 2010.

Although this is still somewhat lower than the increase we anticipated in our revenue in the second quarter, as the quarter progresses, we will continue to accelerate product deliveries to improve our product flow and in stock position and by the end of the second quarter and into the fall, we expect to be in a healthy inventory position to meet demand.

Which leads me to our outlook for the second quarter of 2011.

This outlook assumes a Canadian dollar at par with the US dollar compared to an average exchange rate of [$0.96] in Q2 of 2010.

We anticipate revenue in the range of $200 million to $205 million.

This is based on a comparable store sales percentage increase in the mid to upper teens on a constant dollar basis compared to the second quarter of 2010.

We plan to open six lululemon stores in the US and one in Australia during the second quarter.

We expect some gross margin expansion versus the second 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.

Sequentially from Q1 2011, we expect gross margin to decline due to the nonrecurring benefit we realized in Q1 related to input tax credits, a slightly higher proportion of airfreight to accelerate product deliveries, and more normalized markdowns as we have and will continue to build to sufficient inventory levels.

During the second quarter, we expect to gain cost efficiencies as a result of the transition of our e-commerce platform to an in-house model.

Although some of this will be reinvested back into e-commerce to build the infrastructure and teams required for the rapid growth we expect from this channel.

We will also be investing in higher store level compensation designed to attract and retain the best staff, incurring preopening costs related to the seven stores planned to open in Q2 and additional stores planned to open in early Q3, and adding additional resources at our head office to continue to drive long-term scalability and growth.

As a result, we expect to deleverage on SG&A as a percentage of revenues versus the second quarter of 2010.

Assuming a tax rate of 36% and 72.6 million diluted average shares outstanding, we expect earnings per share in the second quarter to be in the range of $0.42 to $0.44 per share.

For the full fiscal 2011, we anticipate we will open up to 30 corporate-owned stores including ivivva in Australia.

We expect net revenue to be in the range of $915 million to $930 million for the fiscal year, representing revenue growth of approximately 30% over 2010.

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

As we have discussed on previous earnings calls, sourcing pressures are expected to be greater in the second half compared to the first half of 2011 and we now expect will account for approximately 225 to 250 basis points of gross margin compression relative to the back half of 2010.

We also expect to see more normalized markdowns as we bring inventory levels back to appropriate level.

This will be offset by leverage on fixed costs such as occupancy and depreciation, which will vary depending on the seasonality of sales volumes between Q3 and Q4.

Keep in mind also when we transition into fall and winter, there's a seasonal mix shift in our product assortment that will result in lower merchandise margins compared to the first half of 2011.

Adding all this up, we expect our second-half gross margin to be in line with our historical targets, which is in the low to mid 50s range.

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

As a result, overall we expect our operating margin to leverage slightly over 2010.

We expect 2011 fiscal year earnings per share to be approximately $2.10 to $2.16.

This is based on 72.8 million diluted weighted average shares outstanding and it assumes an effective tax rate of 36%.

We expect capital expenditures to be between $110 million and $115 million for fiscal 2011 reflecting the purchase of our store support center in the first quarter as well as new store build outs, renovation capital for existing stores, IT, and other head office capital expenditures.

With that, I will turn it back to Christine.

Thanks, John.

As always, I would just like to thank and point out that these business results are the results of a hard work effort and commitment passion of all the people in the Company and I'm really proud of the results they produced for the quarter.

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

(Operator Instructions).

Michelle Tan, Goldman Sachs.

Great.

Thanks so much.

I was wondering if you could maybe give us some perspective on just the update on what you are seeing in some of the newer markets?

And then also I know there has been some questions raised around quality.

I know you guys are historically pretty maniacal about it.

I remember the zipper write-off in first quarter of '09.

But I was wondering if you are hearing anything that concerns you at all on that front and how you are monitoring the quality situation as you chase capacity?

Great.

Maybe I'll start with that one, Michelle, and then come back to the second one on your markets.

Overall what we can tell you is that our statistics for damage, returns, negative guest comments are down across the board and at the lowest levels thanks I think to a lot of the quality things that we have put in place.

I think some of the noise that we have heard a little bit is around luon.

So I do want to point out that there is some variation in the fabric family of luon that I think causes a little bit of confusion.

Our luon has been the same for over seven years and we are maniacal about protecting that standard.

But we also have innovation in luon such as the luon white, the brushed luon.

Last year we did a test with Silverescent and we also did tests with the higher wicking luon that had a softer hand feel in the garment.

And we do monitor the quality and feedback on those items in particular because we are always looking to push luon to the next level.

So it's important we have that rate of innovation out there.

But we haven't seen any increase in negative comments and the cost of that quality protection and the cost of the innovation are already in our model.

And then let's talk about markets.

We are so excited.

In the new markets across the board and the new store openings, Delaney and her team have done a fantastic job.

We really see the new stores opening at the highest rates we have ever been able to achieve across the board.

And particularly key markets in the Mid-West have really responded well to the lululemon openings in markets like Ohio.

Delaney, where else would you like to point out?

Ohio was actually one of our most proud of openings for Q1 for sure.

But we have new markets that we are opening this year, 10 new markets.

We're balancing it with our existing markets.

So we have showrooms in all of these markets that we are making friends wherever we go and tracking it through e-comm and able to see what happening to each of these markets and we are really excited about what's happening across the US.

Thanks.

Actually can I sneak one more in?

Christine, on the cycling line that you mentioned, I know spin is kind of a category that seems to be gaining a lot of popularity among people who I would think are potential lulu customers.

I guess I'm curious, in the past you've talked about it as a relatively small opportunity.

Are you thinking about it any differently and how do you think about it relative to things like run that you have done in the past?

We think it is one of those as we are seeing it kind of shape up going forward, we definitely see an opportunity in not only like road bike, which you see is big, just general cycling and people using the bicycle more for commuting and practice and the need to have cycling clothes that work into the same way that our yoga works into from studio to home to work and mix and match in wardrobe.

We see cycling as being another opportunity that is like that and you will see us innovate on a broad thing from indoor spin to outdoors and test a bunch of things as we kind of hone that.

But always what is most important for us is getting the technical features right first.

So we believe in testing a product in to get that anchor product that we know people love and then we grow the line from there.

So we're not in a hurry to do it.

It's testing it, getting the technical aspect of it right, and then growing it, which is how you saw us grow the run line.

Thanks so much, guys.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you.

Good morning, everyone.

I was just hoping for an update on your showroom strategy.

How many are open right now?

And then how many do you plan to add over this year?

And then also on the new store target of 30 for this year, do you view that as your maximum opening potential or do you think that you could accelerate that in 2012 and 2013?

This is Delaney again.

In terms of our showroom, we currently have 54 showrooms in operation.

For this year, we are looking at potentially opening another nine since we've opened I believe four already but those numbers can change throughout the year as we see what's happening.

So those aren't fully confirmed.

In terms of the showroom strategy moving forward, we continue to innovate and look at what we want, what each market needs us to do, whether it be a showroom or go right into a store.

But we continue to just innovate through our showroom strategy and make sure that we are finding great people that a, want to be our guest, and b, want to work for lululemon.

And what was the other question?

What was your second question?

How many stores do you think you could open in a given year?

Could you see that 30 accelerate in 2012 and 2013?

Yes, 30 is our target for this year and that includes 25 lululemon stores.

That could change one or two either direction.

You know, going forward because of the showroom strategy, because of all the other things we are putting in place, we're setting ourselves up to be capable of more aggressive store expansion, but we don't have a number target for 2012 yet.

The number will be whatever the number of markets that are ready for us.

And I think the focus on Delaney and our head of store development, [Win], have worked on is a strong pipeline and what does it take not only to identify all the right locations, but what does it take to get ready to open in a strong way?

And I think that strong partnership that we have produces the results that you see and is a key part of our strategy.

So overlooking that, we also looked at strategic sales, we looked at online sales for the market readiness.

We have a lot of metrics and we will open the right number that we see the consumer demand.

Where we don't want to be is opening before that demand has been created, before we have a manager we can really believe in, or before we have built a relationship with the guests.

So we are always after the high-quality growth because that is what allows our business model to deliver the results.

Thank you.

Janet Kloppenburg, JJK research.

Good morning, everyone.

Congratulations.

A couple of questions.

First, if you could talk a little bit more about the cycling category, how early are we in the stage of SKU rollout?

Is it in all stores?

Is there a lot of opportunity for this category?

Could it rival that of yoga and run?

Also I was wondering if you could talk a little bit about your outlook for pricing pressure next year.

We are hearing from a lot of folks that fiscal '12 input pricing is coming down a bit.

And I also was wondering if you could talk a little bit about ivivva.

It sounds like you are starting to open more stores there and I'm wondering about the viability of that concept for America and also how big you envision that category could be?

Thank you.

Okay, I will start with cycling and I think what -- right now we believe that run and yoga are still such big whitespace, and as I talked about earlier, we want to keep some innovation back for it to drive that future growth and we also don't want to be distracted from what we believe are the two biggest growth categories.

So we view kind of testing our way into it but we also do see it's a great whitespace opportunity just like really Yoko was to do a lot around.

So we will continue to develop that, but in terms of being in a hurry to develop something or needing to develop it to drive sales, we are not in a hurry from that perspective and getting it right, getting the technical product and exploring is really what we're doing there and will continue to do for some time and so that when we are ready to go, we are ready to go there.

Pricing pressure, I don't think we've really seen a lot there.

We have seen some cotton coming down.

For 2012 of course, we haven't placed the buys yet, so it's really too early to give much clarity, but there are indications that there is some relief in some of the inflationary pressure that we've seen through 2011.

And for ivivva, we are really excited about the results that we are seeing in the ivivva model.

We are already producing square foot -- sales per square foot numbers that are above the industry average in that concept.

The work that we have done on the product line has strengthened the gross margin to a strong gross margin and as we increase our buys, we will continue to get leverage on that.

So it's a healthy business model and it's growing and I think what we have learned about the guest is there's really -- there is some whitespace around that, so I think if we size that price compared to traditional children's wear or traditional sportswear, you would probably get a smaller number based on those analytics than what we believe the opportunity for that concept is because it's a combination and we really feel like we've hit a great spot there with that dance, gymnastics, and then the fitness line and skate being the big hitters.

So we are really happy with what we have seen there.

What you'll see us do is take it to online in Canada first and then time permitting, we hope to get it online for the US for the holiday season, but that still will be dependent on our resources to make that happen.

If not, then we will launch it in spring of next year in the US.

So we do anticipate we will get a lot of demand because we have already gotten a lot of calls about asking us when we're going to get that concept in.

This year you will see up open a couple of new stores.

We've had some pop-up stores similar to the lululemon but in it's own unique way.

We've done some test stores for that concept, so -- and those have been very well received particularly in the Toronto market.

Great, just one more.

Is on the e-commerce business, could you just refresh me as to which markets you now are operating, which markets have access to your e-commerce, the lululemon e-commerce site?

Thank you.

Our predominantly -- our predominant business is based in Canada and the US and then we do pretty much ship all over the world from our DC and Sumner, Washington.

So we see quite a bit of business coming from Europe, Asia, Australia.

It's less than 3% of the total really sort of outside of North America today but we certainly see it as an opportunity for growth going forward.

So you don't have country-specific sites except for North America.

Is that right, Chris?

That's correct, yes.

Okay, and do you have plans for launching company-specific sites in the near term?

Yes, we sort of look at it as the same strategy as our store rollout.

If the demand is there, if the guest is looking for us and feel like we need a presence there, then that's the strategy that we will take.

We do see some indication in a couple of places in the world now where we could certainly support it and we're looking at that as we go forward.

And I think one of our -- the only thing, Janet, is the first site you will see us concentrate on is Australia, so we can support the local store market there.

Great, and what could that be this year, Christine?

We are looking at early 2012.

We really just got the platform in house and I think it's too premature for us to be rolling out any additional markets.

We've got some work to do to shore up the North American business before we expand outside of that.

Okay.

Good luck.

Thanks so much.

Claire Gallacher, CapStone Investments.

Great, thank you.

Just wanted to circle back on ivivva following up on Janet's question.

Did you mention if you are going to have the e-commerce launch ahead of back to school ready for this year?

Or will that be pushed into 2012?

So for Canada, our goal is to have it late summer.

It's a little touch and go just to make sure that we make it like what I would like to have would be early August.

It might be sometime in August, so that's what we are shooting for.

Worst-case early September, which would be a little later than I would like, but we have to let the team do it well and that is always our priority is to have something that we can be proud of out there and not rush a date.

But we will certainly at a minimum capture the holiday season.

Okay, great.

Then if you could just give us an update on your men's business, I realize it's a small part of your business, but just what's going on there?

How did men's perform in the first quarter?

We were definitely inventory-light in the men's category.

It's held its percentage of sales even through the growth.

I think with men's, I still feel like we're going through a little bit of a transition.

I think the product quality, the color set, and the focus has been right.

But I think we are still looking.

We feel like we've got a really strong line of shorts and bottoms and I think our signature tank -- our tech tops.

And I think what we're really finding in men's is what is our sweet spot so that we can really grow that without it being an also-ran to somebody else or a distraction to us -- so for our women's and what is the right amount of space in the store for that?

So I really feel like we still have a lot of room to grow in that category.

The guests have loved the product and once they try it, they are very loyal to the product.

So I think that still an evolving concept for us.

In my mind we still haven't gotten that 100% right.

In the new stores that you're opening, is the men's business doing better than the older stores or is it kind of performing at the corporate average?

I think you see a natural evolution in the US because the brand was introduced as a male/female brand.

You see it stronger there.

In Canada, we are starting to see that shift as more men are getting into the product and testing it, trying it, so we're actually seeing healthy growth in Canada but the percentage is still less than you'd see in the US.

Except for the underwear, we can never keep that in stock for the men's.

Okay, great.

Thanks.

Good luck.

Sharon Zackfia, William Blair.

A couple of quick questions.

It looked like new store productivity was very, very healthy in the quarter.

Could you comment on how the class of 2010 is performing versus historical averages?

The new stores in 2010, and this was I think I mentioned this on the last conference call and it continues to be true that the stores we opened last year are very close.

They are all in the US market and they are very close to the overall US average, which is obviously very strong for first-year performance.

They are at the level where we use to expect them to hit in the third year.

Okay.

And then separately, I was hoping you could remind us the shift to bring in e-commerce and do an in-house platform.

Could you remind us on what kind of the cost savings potential is for this year from that shift and maybe ultimately what the goal would be for e-commerce for the next five years in terms of percent of sales?

I think the answer for this year is a little bit different than what it is going to be going forward once we are really up to speed and normalized.

The shift to get away from a variable fee model should easily produce an additional 10 points of margin.

You won't see that this year because, number one, the transition is partway through the year, but we are still in build mode, so you will see a little bit of leverage this year but not to the same extent that we expect to see going forward.

Then ultimately the e-commerce target, Christine, was it 15% over time or higher?

We said that's our midpoint, which we view as achievable in a couple of years and then after that with Chris and Sheree designing what the product line for that is, we do see a large opportunity to do things like extended outerwear season that we can't do in our stores that we can carry product lines a little bit longer.

We can bring back the classics.

Then there's so many things that we can do, yes, and line extensions that we don't have the opportunity to do because of our size in our stores that also produce a healthy margin.

And we're doing the work now prioritizing those opportunities along with all the other projects we are giving Chris.

We are going to set a much higher internal target to just to keep Chris on his toes.

Make his bonus dependent on it.

I was just going to say, every time he goes into John's office, John is taking the target up.

So Chris is avoiding John's office now.

One last question.

I think I saw Chip on Facebook kind of dancing around in his Blue Sky division.

So I guess I have to ask what is Chip up to in the Blue Sky division?

If you kind of could explain what that's incubating.

Way too much that we could ever execute.

He's having a great time really looking at what's happening in the world of retail, what are things that we could look at, everything from fabrics to new concepts.

And he scares me every time he comes by my office with pictures of things he wants to do.

He's got a great little team that works with him that dimensionalizes these opportunities, so he's really working on that three- to five- to 10-year innovation pipeline and he's in his great space, which is what's possible in that.

So we don't have to worry about innovation around here.

All right, great.

Thanks.

Paul Lejuez, Nomura.

I was just wondering what was behind the macro comments you made today, which you hadn't talked about as of last quarter.

Was it related more to the US, Canada, or both or just kind of were you throwing it out there?

And I guess also specifically if you can talk at all about the performance of US versus Canadian stores, would be curious to hear any color you can provide.

Thanks.

Really don't read too much into the comment.

We are all looking at the world economy and Greece, etc., and I just think it's prudent for us in any of our planning to be aware that the ground can be shifting.

It's nothing about what's going on in our business or Canada or otherwise.

Sorry, what was the other part of the question?

I just think that the reality is for us we feel very in control of our business and the variables that we can manage, so we see the risk and the things that we can't and I think where the potential is in the macro environment is what we will lean into, but also what we create contingency plans around.

So -- and we see the US business is really caught up to two years gap that it had I think in that '08, '09, and we see the ramp accelerating at that catch-up pace, so we feel very good about where we are at and I think it's the unknown that we are left worrying about.

Got you, and then just US versus Canadian stores during the quarter?

Just in terms of comp, as we've been saying the last few quarters, the rate of increase and the productivity of the US stores in general is dramatically higher than what we are seeing in Canada, which is what you would expect.

We have a mature business in Canada that is -- still continues to comp positively and we have momentum in the US that, as Christine says, is seeing the US catching up quickly to Canada.

And just to be specific, we have heard other retailers comment on Canada [softener].

We didn't see that, but I think it was probably masked a little bit by our inventory position, so we were performing where we expected.

But since we have been back in inventory we've seen the ramp.

So I think that's not something we are seeing today but that's part of what keeps us cautious is that out there.

Are we just playing catch-up for lack of inventory?

I think that will play out over the second quarter.

Got you.

Thanks, guys.

Good luck.

Taposh Bari, Jefferies.

Congrats, nice quarter.

I wanted to ask you guys about the PC business and how you plan on kind of increasing I guess the marketing around that now that you have that under your own model?

I guess specifically if you can just talk about that and also specifically, would you ever consider complementing your e-commerce business with possibly a catalog or some direct marketing initiatives?

I'm sorry, you said first --?

The first line you said, was that the e-commerce business?

Yes, I just wanted to get some more clarity around how you plan on kind of increasing the marketing around that not that you have it owned?

And also would you ever consider complementing your e-comm with a catalog down the road?

We haven't considered a catalog.

I think there is -- we put some things out there like you saw us do in the transition where we actually put little catalog, mini catalog out on facebook so people could do a product look.

And so you might see us do some things that are online and kind of reinventing what a catalog looks like, but not a traditional mailed paper catalog.

So I don't know that there's any reason for us to do that because we are so active in social media to reach those guests.

I think you do see us drive a little bit of more online advertising in Runner's World and the Yoga Journal, but it's more print around our product and not brand, traditional brand advertising in terms of a commercial aspect.

We really strongly believe in that guest experience, sharing and growing lululemon because it creates the strongest brand loyalty and emotional attachment.

So you continue to see us stay away from traditional drive transaction advertising at least in the short term at this stage in growth for our brand.

I do think now that we have the platform in house we have some unique ways to bolster our community online and I think if you see us adding any demand generation type activities, it will be focused on how we further strengthen the community.

And using things like mobile apps is a great opportunity to do that.

Yes, it's a very interesting statistic and even though we don't have -- we don't actually have a mobile app right now, we have -- Chris, how many of our customers actually use their iPad or phone to buy off the e-commerce side?

Yes, right now our mobile sales are 7% of the total and we don't have a mobile-optimized website.

So you can probably imagine what would happen with that percentage if we actually created an experience where people could use the phone in a friendly way to navigate the site.

So that's one of the initiatives where we are quickly getting underway today.

Got it, that's very helpful.

I guess the second question that I had was I don't know if Sheree is on the line but maybe if she could talk about just kind of where you saw relative strength in either women's assortment?

If you could talk about tops versus bottoms, I think you mentioned a couple quarters ago that you were seeing really good momentum in the core business.

Any kind of color there would be very helpful, thank you.

Sure, we are seeing the seasonal categories perform really well right now, so we see continued momentum with tanks and we see unbelievable momentum with tops.

So all of our Silverescent running tops and so on and so forth have been outperforming plan as well as our crop and short categories.

So really healthy seasonal business along with complementing our core business is what we are seeing.

Does that help?

Yes, that does.

Thanks a lot and good luck.

John Zolidis, Buckingham Research.

Good morning, two questions.

One, I was wondering if you could attempt to quantify how much the lower inventory levels held back the comp in the first quarter?

Do you have any way of quantifying that?

And then second is a little bit of a broader question.

When you talk to your customers and you discuss with them where else they might be shopping for similar product, where do you think you are taking share?

And to the extent that you can see what some of your competitors are doing, do you think more competitors are trying to copy or come out with similar product to what you have in your stores?

Thanks.

Maybe I will take the first question, just trying to guesstimate what the potential could have been had we been in a better inventory position.

I think the best way to think about it is just looking at how the sales trended through the quarter.

We came into the quarter February was strong and as the month progressed and towards the end of February, we sort of hit our low point in inventory.

So as expected, March the comp was very low, low double digits, and then into April, I guess first or second week of April as our inventory position improved again, we saw the comp rebound.

I don't give monthly comps but I think it is important to give the detail.

April was around a 20 comp.

So I think it's easy enough to say that had there not been the inventory dip in the middle, 20% could have been achieved for the quarter.

Great, and the question --

Sorry, I was just going to go answer that.

Your question really about where do we see other guests shop.

Historically if they are a runner, they have probably been in the Nike run product and then they try our product and they still probably have a family of products that they use from Nike.

Our goal is just to continue to win that guest over with our technical product.

We've made great strides I believe in the run short in particular and if you just look at -- if you go to any race now, you will see a well represented fraction of lululemon.

And I think particularly in the men's shirt, you see us gaining a lot of share in that category for men as well as our run response short.

So we are continuing to refine that technical product and really go after more of that marathon runner.

I would say that we have really gotten the light runner and the half marathon runner, so continue to refine into that more technical space what's needed.

In other categories such as yoga, probably the one thing that we don't have enough of in the lineup for some guests is a more light organic or cotton product.

We really find that it's at our quality standard and lengths that we want to have the garment last for the guest that we are not going to be doing the filmy tops and a lot of the other things that the guests get that our only going to last a season or shorter.

That's not our space, so we kind of don't look at growing market share there because of our technical product focus and our desire not to be seen as active wear but true athletic wear.

So there are some categories we opt out to, which leaves some whitespace for competitors and that's really where we see a lot of the softline substitution is into those spaces.

Thanks and good luck.

Liz Dunn, FBR.

Let me add my congratulations on a strong quarter.

I have some questions regarding the inventory position.

Are you having any trouble finding factories that meet your standards because other athletic and technical apparel manufacturers seem to have inventory up more than the rate of sales?

But some are mentioning capacity constraints, so that's one question.

And related to that, I recently found groove pants from like four different countries in one store, so I am just -- I found that curious and was just kind of wondering what your strategy is there?

Also, John, your comments regarding gross margin for the back half are more specific but sound about consistent with your prior view.

Is that right and are you bought through the balance of the year?

Thanks.

Let me start with our manufacturing base.

So our fabrics are really manufactured in just a very small handful of factories so that we can really control the quality of the fabric.

Then the fabric is shipped to several manufacturers.

But we have a very small base of manufacturers that we expand with so that we can control the quality.

We are not usually their beta when they open a new factory.

We wait until the sewing capacity is at the level that we can go into, which is why we're a little slower in building our factory base and our capacities than other people to protect that quality.

But while maybe the one factory isn't -- or one factory owner could own a factory in four countries which is what you see but it's run by the same general organization that we partner with and that we do a multiyear capacity planning exercise with those factory partners to grow to that future demand in partnership together.

That allows us to ensure that we not only meet the quality but that we have a commitment to helping them grow in a way that is healthy, that meets all of the environmental standards, that meets all of the labor standards, the health and safety standards, clean water standards that matter to us as we grow that factory base.

So the cut and sew portion could be in different countries, which is what you were seeing on the groove pant.

Okay.

Then John, regarding the gross margins?

As you say, the guidance on the gross margin in the back half is consistent with what I've said in the past.

We have placed the buy for the seasonal component of the back half of the year.

Of course there's some additional ongoing flow throughout the year.

But yes, it's consistent pretty much with what we said before.

Okay, in terms of Canada, it looks like there was a bigger deceleration in Canada in the quarter than the US.

Was there some reason that the inventory was -- affected Canada more than the US?

Yes, as we looked at the inventory assortment and going into Q1, there was less because we buy separately and ship into two different DCs.

The buy for Canada was a little lighter in the first quarter, so they suffered a little bit more from our inventory shortage than the US market did.

Okay, and then just finally, a big drop in payables.

Was there anything behind that?

No, a lot of it was in accrued income tax, the end of the year.

It's just normal payroll -- or payables cycle.

Great, thanks.

Thank you.

This is Jane in for Ed.

Congratulations on a great quarter.

I just had two questions.

Your inventory turnover in the quarter, was it -- did it increase in store or is the higher comp needed to drive your new store growth?

Sorry, can you repeat that question?

Your inventory turnover in the quarter, did it increase in store or was a higher comp needed to drive new store growth?

Sorry, I'm really struggling to understand the question.

(multiple speakers) Inventory turnover in store did increase, of course, yes.

More than what is needed to drive let's say costs for new store growth?

I don't think I understand that question either.

So costs for new store growth -- so do you mean the preopening expense for new stores and --

That compared to -- because you were talking about higher in-store compensation?

So higher compensation for our store managers?

Yes.

So what does it take to leverage that increased investment?

Yes.

Okay, we're with you now.

At our rate of growth, and our high sales per square footage, it's the amount that we have given in a pay increase does increase our payroll, but the rate of growth of sales in those stores more than offset that investment that we made in paying back our people which we really believe they are the ones that drive the revenue and should share in the success of the Company.

Just to clarify, the revisions to our in-store compensation were rolled out in April.

So they had some impact in Q1, but they are more of an impact Q2 and forward.

Okay, and then I was wondering if you -- as it relates to e-commerce, if you ever plan to fulfill the e-commerce store from in-store stock?

At this point in time, it's not a priority for us to be able to do that.

We've got some other things that are ahead of that and I think in order to do that, you also have to be very accurate with your inventory if we try to -- and we don't have any desire to ship from store.

Do we see an opportunity to have some kind of handheld or terminal that we could satisfy the demand and ship from home in the stores in the future?

That's definitely something that we are considering and there's a lot to work out from that in terms of compensating store managers and keeping all of that in-line that we have to solve.

It's not just a technical issue because we want to make sure we get it in a robust solution that satisfies all the concerns with doing something like that.

And just my last question as it relates to the running products, can you tell us what you are most excited about for Q2 and then for the second half?

For running products what we are excited about?

Yes, for running.

Well, every month we drop new running products, so one thing that our design team does a phenomenal job of is continuing to inspire and delight, including me.

If you looked at my closet, you would know how much I love our running products.

But every season we come out with amazing new shorts, new running skirts, our technical tops, and so on and so forth.

And that continues.

Going forward beyond that, there's other technical pieces of the line that we are adding.

Christine had mentioned that commuting is one of those and coming into third quarter we are actually looking at dropping a new (inaudible) line.

So we have always got something new up our sleeve that we are excited about.

I think in the first quarter, it was definitely the white run shorts which people felt that was a great crossover and the skirt was a great crossover piece for a lot of things.

That flew out the door, so we're also finding if we do things in color and print right now, that's also a really big driver of the product.

Okay, great.

Thank you very much.

Howard Tubin, RBC Capital Markets.

A quick question on international growth maybe outside of North America and Australia.

Any updated plans there?

We are definitely doing all the behind-the-scenes work on the business model, evaluating the markets, looking at future or structure capability that we need.

But in the near term, we find every resource that we have really has the opportunity to be deployed to North America and because the opportunity is just so big to continue to drive that business.

So we are not in a hurry to get there because there's so much demand in front of us right here, but doing the prudent planning to be able to turn that on in the right way, which for us is always with a healthy profit objective and not with a loss that you have to clean up later or not doing it well.

We are attracting talent that has global experience in a lot of key positions to build our bench to be able to manage that business well.

So you will see us do a lot of behind-the-scenes things but -- and we will continue to do some wholesale in those markets.

You'll start to see the e-commerce in those markets and eventually we will do some showrooms to test markets.

But we are already beginning to develop the tracking capability, develop a pricing strategy, so those are the things that we are looking at right now.

Stacy Pak, Barclays Capital.

Hey, guys, congratulations.

I guess I still have several questions, believe it or not.

But one is, if you are back to the 20 comp in April, why not guide to that sort of a level for Q2 given the inventory feels like it's in a better position?

Two, is I was hoping you could comment on, Christine, you just mentioned print and brights.

I think at least that's what you said.

Comments on that in terms of the inventory.

Do you think you have enough of that as well as the size, the smaller sizes, the 2s and the 4s and also the accessories?

If not, when those kinds of things get back in stock?

Can you also comment on the pricing that you took?

And do you want me to keep going or come back to you on the other questions?

Maybe let John take the comp one and then Sheree is giving me some notes on the prints and colors, so we will do that one.

As you say, we saw 20 comp in April.

April, we got a real surge of new inventory in.

Our inventory in Q4 or in Q2 as we have said, isn't going to be perfect either in terms of quantity or our mix, so I don't want to assume that we will match that surge that we had with a lot of new product in April.

And so we are guiding for higher than what we saw in Q1, but I don't want to get carried away because the inventory flow is still less than optimal.

And I think we also know that there was some pent-up demand in April that probably peaked April, and I think that's what we're looking at is what is going to be that normalized rate?

We're still seeing as new product comes in, that kind of starved guest effect.

But once we get full into stock, I expect that to normalize a little bit.

Then we do from July forward start to anniversary some pretty steep comps going into the third quarter.

And in fact last year in July for example, we had some markdowns that drove volume, so we are also lapping against that.

So for prints and colors, I think we haven't had enough of those proportionately in the line in the first quarter and beginning of the second quarter.

That increases pretty dramatically in the end of back half of second quarter and the third quarter, fourth quarter.

So we feel really good about where we are with that.

I think we were a little light I think on prints and bright colors for the first quarter and that will something be that we address next year.

And accessories, we had a little bit more of a focus line that sold really well but we've seen the guests missing some breadth.

We've got a great team in accessories now and I think you can look forward to us increasing that.

On the size curve, we have improved.

We don't have as big an out of stock situation, but on the colored lines and the prints, we still see the 2, 4, 6s go faster and so we are constantly adjusting the amount of mix we have in that.

That said, part of our strategy has always been that not to ever have enough of some of those to keep the scarcity, to also have the guests be able to walk into a class and not be dressed in the same as someone else, which we believe fairly strongly in.

So within the boundaries of that, we do expect those to turn at a faster rate and -- but we should have something new behind it and that is what we are working on is to increase that.

And then the pricing that you took in Q1 and sort of how you are viewing your opportunity to price up in the second half?

And then I don't think you said or if you did I missed -- the stores that opened in Q1, how did they open on sales per square foot versus the US average?

In terms of pricing, we didn't actually take any pricing, so what you'll see us do is some special edition hoodies or groove pants or a jacket that might be priced higher than the norm, but we have been pretty selective about maintaining our price points.

So we haven't actually taken like an official pricing.

It's been on the item by item basis some adjustments especially with special editions.

And then -- (multiple speakers) then you had your first question, which was on the new stores, which --

Yes, and of course we don't have annualized numbers for the stores that just opened so we just have a few weeks of average weekly sales.

Similar to the store openings last year, they are opening anywhere from 80% to 100% of the average for the US so continued very strong openings of these new stores.

Again, very early days for some of these because they have only been open a few weeks.

Right, right, okay.

Thank you so much.

Jennifer Black, Jennifer Black & Associates.

Good morning and let me add my congratulations.

I have a few questions.

I wondered -- it seems like you are offering more product that can be worn for multiple purposes and you have an offering of dresses.

I wondered how big of an opportunity you feel this is?

We always -- and you'll see us in the spring as kind of a cover-up piece and kind of from that to and fro yoga collection, it is part of like our fun element that we always have in there in the spring.

So you see us do that then, but we don't see us driving what's more we call kind of a culture or a casual wear piece as a main category for us.

But having elements of fun and surprise and delight, that's why we do things like that.

But not as what we see a major growth driver.

Okay, great.

And then as for as your product categories, what do you see as being the largest opportunity for fall?

Can you speak a little bit to outerwear as well?

I'd say the largest opportunity is actually being in stock and what the guests want, so if you look at -- good idea, right?

If you look at our tops category, that's one that just sticks out in my mind.

Our technical tops is something that our guests cannot get enough of and we have significantly increased our penetration there.

In terms of outerwear, we have I think what you'll see is some new styling and we are really pushing the boundaries more there and we're really excited about that.

So I think you will see more variety in that category.

And I think that we didn't do spring outerwear this year.

Normally we will do a light jacket, etc., but you will see that drop in August for back to school.

So there will be not only the traditional that we do for October, the winter, you will also see a bit of a fall jacket assortment.

Great.

And then lastly, I wondered what percent of your business is accessories?

Do you have a goal, a longer-term goal in mind?

Are you happy with where it is?

Our penetration varies between 12% and 15% and I really feel that that is probably the right penetration.

There is definitely opportunities to be in business in certain categories with an uninterrupted flow and so on and so forth.

But the overall penetration, I don't know that we would want to see it too much higher.

No, I think keeping it growing at pace is the right strategy.

Great.

All right.

Good luck.

Dana Telsey, Telsey Advisory Group.

Good afternoon and good morning and congratulations, everyone.

Can you give us any more color just on the comp store sales number whether its transactions, traffic, what the complexion was?

I thought what was really outstanding was the gross margin.

The mix of the gross margin and how you see those components going forward through the balance of the year.

Thank you.

Okay, well, the first one, the comp, again this is similar to what we have been seeing, about three-quarters of the comp came from increased traffic and most of the balance came from increased conversion.

Very little came from the basket that the guest was buying.

In terms of your question on gross margin, I'm not quite sure how much I can say other than what I said on the call.

Gross margin in Q1 was extremely high of course.

A lot of what was driving that was very, very few markdowns.

That is not even a healthy markdown level as we are back to normal inventory levels.

You will just naturally see some more normalized markdowns and that will bring gross margin down.

The balance of the year we will continue to incur airfreight because we are still working hard to stay in an inventory position.

That's higher than what you'd see in a -- if you can call anything a normal year.

The main thing offsetting those -- and of course, in addition, I talked about inflationary pressure on sourcing, labor, and materials.

And then offsetting that primarily is leverage on higher volumes, on occupancy, depreciation, and other fixed costs.

And then, Christine, can you just comment on as you see the product assortment go and as you move international opening that first warehouse showroom in London, any adjustments to the categories, the penetration, or the mix as you move forward?

Sorry, what did you say about London?

I missed that part.

As you open your first warehouse showroom in London, as you grow in other regions, does the mix at all need to be adjusted?

Yes, we haven't officially planned to open the London showroom yet.

We have kind of held back on that so we are really penetrating more with strategic sales and some trunk shows, etc.

in that market, which we found is the right strategy for where we are at right now -- so rather than a physical store.

But I think we always start with technical products, which is our highest margin product, because that is what we want to seed with the guest first.

So in terms of margin impact, it would be a healthier margin because it's in our core technical products.

Thank you.

Thank you.

I would now like to turn it back to the speakers for any additional remarks that they might have.

I apologize that we have run out of time and I know there were more people with questions in the queue, so we will try to handle those off-line in call backs.

So thank you, everybody, for joining us today.

We look forward to seeing you out there and we look forward to Q2.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

You may now disconnect and have a wonderful day.