Lululemon Athletica Inc (LULU) 2011 Q3 法說會逐字稿

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

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

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host for today, Mr.

Joe Teklits.

Sir, you may begin.

Okay, thanks.

And good morning, everybody.

Thanks for joining us for the third quarter conference call.

A copy of today's press release is available in the Investor Relations section of lululemon's website at www.lululemon.com or furnished on Form 8-K with the SEC and 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 is available for 30 days as a replay, shortly after we end today.

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

We would like to remind everyone, of course, that statements contained on this 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 of which are described in the Company's filings with the SEC.

Also, today's call, we've got a limit of one hour, so when we get to the Q&A, please limit yourself to one question -- your one primary question.

And with that, I will turn it over to Christine Day.

Thank you, Joe.

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

Today, we are doing our call from New York City.

And with me is John Currie, our CFO, and Sheree Waterson, our Chief Product Officer.

Following my opening remarks, I will turn the call over to John Currie to review the financial details for the quarter, and our outlook for the fourth quarter.

In the third quarter, we achieved 31% revenue growth, with 50% year-over-year EPS growth, and we set a new record in comparable sales per square foot of $1880.

These strong revenue results were at the top end of our guidance.

And as anticipated, we also had of unmet sales demand throughout the quarter.

Our new stores continued their strong performance, and we also bought back our last remaining franchises in Colorado and Santa Barbara.

Our goal for Q4 was to break the inventory cycle we were in all year, and we have achieved it.

As you will remember in Q4 of 2010, we were well-positioned in inventory to meet demand, which drove the 28% comp.

This was a great result for 2010, but it left us under inventoried, and began the cycle of chase.

In Q4 2011, we have the right mix of new styles and color, and a healthy and clean inventory.

New product highlights for Q4 include new running Luon, polar fleece, featherweight down layering pieces, a dance capsule and bright colors.

To set Q4 and Q1 up for success, our Q3 in-transit inventory includes two modules.

We brought forward a portion of the spring deliveries, built around a back to studio marathon training, cycling, commuter theme, along with our black-and-white capsule.

This will create inventory flexibility, as it is appropriate for either quarter.

We expect inventory turns and markdowns to appropriately normalize due to our in-stock position.

Given our confidence in our inventory levels, we have increased our revenue guidance for Q4.

One of the highlights of the quarter was the launch of our ivivva Canada, and then subsequent November launch of ivivva in the US.

Even without a ivivva US store presence, our US sales are exceeding Canadian e-commerce sales, with strong demand coming from Chicago, LA and New York.

As we do with our lululemon site, ivivva e-commerce gives us insight into guest demand and potential future store locations.

We also completed the seamless migration of our e-commerce servers, from a shared to dedicated environment to meet growing demand.

In addition, we are excited to see our guest reaction to our new lululemon site redesign, which launched in early November with new features such as video education, and a new front page every day with feature campaigns.

We encourage you to check it out, if you have not already.

Activities to support international growth in the quarter included third-party logistics agreement to support international e-commerce for Europe and Asia, and expansion of our Australian DC to accommodate local e-commerce shipping.

In Q1 2012, we will launch our first localized website in Australia, with the UK, Hong Kong and potentially one other market to follow later in the year, supported by our planned openings of two new showrooms in both Hong Kong and London in early 2012.

We also launched a new business intelligence tool, upgrade our POS in-store network system to speed up our POS transactions and increase reliability.

We have selected our design and development system software known as PLM, and have commenced implementation.

We have made substantial investments in our IT, digital, e-commerce and product organization to increase our capacity and depth to prepare for the increased complexity and growth.

In December, we will begin our initial round of interviews for an SVP of branding community, and replacing Chris Ladd, our former head of e-commerce who left for personal reasons.

So as we finish 2011, we are positioned where we want to be.

We continue to perform at the top of our sector, and remain focused on our 4 core strategic growth priorities, driving comp store sales, e-commerce, new stores and preparing for international expansion.

As we have said before, growth alone is not a strategy.

Elevating the brand through innovative technical product and guest experience, excellence in execution, investing in our people and communities, and producing a strong return on our assets are equally important.

I will now turn the call over to John, to go through the financial results.

Thanks, Christine.

I'll begin by reviewing the details of our third quarter of 2011.

And then I will update you on our outlook for the fourth quarter, and therefore the full-year fiscal 2011.

Our shareholders approved a 2-for-1 stock split, which took effect in early July.

Please keep in mind that all comments with regards to share count and per share amounts in our results and outlook are now on a post-stock split basis.

For the third quarter, our total net revenue rose 31% to $230.2 million, from $175.8 million in the third quarter of 2010.

The increase in revenue was driven by comparable store sales growth of 16% on a constant dollar basis, the addition of 28 net new corporate-owned stores in North America, and 3 net new corporate-owned stores in Australia since Q3 of 2010, direct-to-consumer sales which increased by 71% or $9.9 million, and stronger Canadian and US dollars which had the effect of increasing reported revenues by $3.7 million or 1.6%.

During the quarter, we opened 13 corporate-owned Lululemon stores in the US, and 1 in Australia.

We also we re-acquired our 4 remaining franchise locations, which brings to an end our franchise program.

We ended the quarter with 165 total stores, versus 134 a year ago.

There are 118 stores in our comp base, 40 of those in Canada, 68 in the United States, and 10 in Australia.

During the quarter, we had 5 high-volume stores under renovation, operating in temporary premises.

Corporate-owned stores represented 82.6% of total revenue or $190 million, versus 81.5% or $143.2 million in the third quarter of last year.

Revenues from our direct-to-consumer channel totaled $23.9 million or 10.4% of total revenue, versus $14 million or 7.9% of total revenue in the third quarter last year.

Other revenue, which includes franchise, wholesale, showrooms and outlets totaled $16.3 million or 7% of revenue for the third quarter, versus $18.6 million or 10.6% of revenue in the third quarter of last year.

This decrease resulted from reduced markdown product available for sale at our outlets, and our warehouse sale held in Q3 of the prior year, fewer showrooms as several have transitioned to new stores, and the transition of our franchise stores to the corporate-owned store category.

Gross profit for the third quarter was $128.5 million or 55.8% of net revenue, compared to $96.8 million or 55.1% of net revenue in Q3 of 2010.

The factors which contributed to the 70 basis point increase in gross margin were, a product margin decline of 20 basis points, higher product cost due to inflationary pressures on raw materials and labor were partially offset by fewer markdowns and discounts associated with strong product sell-through, as well as improvements due to mix shift, lower duty rates, and other input cost efficiencies and improvements.

Leverage on occupancy and depreciation of 70 basis points was offset by increased product and supply chain team costs of 60 basis points, and a foreign exchange improvement of 80 basis points due to stronger Canadian and Australian dollars.

SG&A expenses were $68.8 million or 29.9% of net revenue, compared with $54.5 million or 31% of net revenues in the same period last year.

The 26.3% SG&A dollar increase is due to an increase in store compensation, and operating expenses associated with new stores as well as increases at existing locations, an increase in head office employee costs including management incentive-based compensation, stock-based compensation and other head office costs as a result of the investment of people and systems needed for long-term growth.

And finally, the higher Canadian and Australian dollars which increased SG&A by $1.2 million or 1.7%.

As a percentage of revenue, our third-quarter SG&A decreased by 110 basis points, due mainly to lower e-commerce operating costs following the transition of our e-commerce platform back to an in-house platform, as well as some smaller factors, partially offset by 80 basis points of deleverage from the increased head office costs.

As a result, operating income for the third quarter was $59.7 million or 25.9% of net revenue, compared with $42.4 million or 24.1% of net revenue in 2010.

Other income, including net interest expense totaled $0.6 million, compared to $0.1 million in the third quarter of 2010.

Tax expense for the quarter was $21.4 million, at a rate of 35.5%, compared to $16.5 million, at a rate of 38.9% in the third quarter of 2010.

So net income for the quarter was $38.8 million, or $0.27 per diluted share.

This compares with net income of $25.7 million or $0.18 per diluted share for the second quarter of 2010.

Our weighted average diluted shares outstanding for the quarter were $145.3 million, versus $143.7 million a year ago, which again has been adjusted for the 2-for-1 stock split.

Capital expenditures were $13.6 million in the third quarter, relating to new store build-outs, existing store renovations, IT capital expenditures, and net assets from re-acquired franchises.

We ended the quarter with $276.9 million, in cash and cash equivalents.

Inventory at the end of the third quarter was $129.2 million, or 77% higher than at the end of the third quarter of 2010.

Within this total, is a significant increase in in-transit inventory, a $33 million versus $11 million last year, which as Christine discussed, was largely as spring product pulled forward.

Excluding the in-transit inventory, our units of inventory on hand was up approximately 45%, which sets us up well to meet guest demand for Q4 and early 2012.

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

This outlook assumes a Canadian dollar at $0.95 to the US dollar, compared to an average exchange rate at par in Q4 of 2010.

We anticipate revenue in the range of $327 million to $332 million.

This is based on comparable store sales percentage increase in the low to mid-teens, on a constant dollar basis, compared with the fourth quarter of 2010.

We plan to open 2 lululemon stores in the US, 5 in Australia and 2 ivivva stores in Canada during the fourth quarter.

We again, expect our gross margin to be in the 55% range.

Similar to the third quarter, we expect higher product costs from both labor and raw materials that we have not passed on to the guests through higher pricing, combined with more normalized markdown levels, associated with more sufficient inventory level to compress our gross margin from a year ago.

We expect SG&A as a percentage of revenue to be roughly 300 basis points below the third quarter level, which is consistent with our normal, historical seasonality.

During the fourth quarter, we expect to continue to see cost efficiencies, as a result of the transition of our e-commerce platform to an in-house model, while at the same time, we'll be increasing our reinvestment back into the e-commerce business to develop the necessary foundation to achieve the potential growth trajectory in this channel.

Our SG&A will also reflect higher store level compensation designed to attract and retain the best of staff, pre-opening costs related to the 9 stores planned to open in Q4, and additional stores planned to open in early Q1 2012, as well as additional resources at our head office to continue to drive long-term scalability and growth.

Assuming a tax rate of 36% and 145.3 million diluted average shares outstanding, we expect earnings per share in the fourth quarter to be in the range of $0.40 to $0.42 per share.

This brings our full-year sales to a range of $956 million to $961 million.

For the full fiscal year 2011, we anticipate we will open a total of 37 corporate-owned stores, including Australia and ivivva locations.

Since our last update, this includes 1 additional US store, and 1 additional Australia store.

We also now expect 2011 fiscal year earnings per share to be approximately $1.16 to a $1.18.

This is based on 145.2 million diluted weighted average shares outstanding, and it assumes an effective tax rate of 36%.

We expect capital expenditures to be between $116 million and $108 million for fiscal 2011, reflecting the purchase of our store support center of $65.1 million, plus closing costs in the first quarter, as well as new store build-outs, renovation capital for existing stores, IT and other head office capital.

And with that, I'll turn it back to Christine.

Okay.

Thank you, John.

So, we'll go ahead and go to Q&A.

And please remember, that we only have time today for about an hour of questions, so we are asking that we limit it to one question.

Thank you.

(Operator Instructions).

And in the interest of time, we do ask that you limit yourself to one question.

Our first question come -- today comes from the line of Lorraine Hutchinson from Bank of America.

Your line is open.

Please go ahead.

Thank you, good morning.

I just wanted to talk about the fourth quarter gross margin guidance for a minute.

It seems like -- quite a bit more of a drop versus what you had in the third quarter.

And I guess, are you seeing product costs escalate further?

Or do you just expect the fully in-stock inventory position to lead to more markdowns?

It is more of the second.

The inflationary pressure, as we guided previously in Q3 was, give or take 250 basis points.

We expect the same in Q4.

It's really, we are reflecting and assuming, that with our inventory position as you would expect, a more normalized markdown level.

Thank you.

And maybe I will just add a little bit of color to that.

We did not clear, in Q3, we did not have a warehouse sale, which we had the year before.

So we didn't have enough product to do it, frankly.

And then we, because inventory receipts were a little later than we would've liked, we didn't do the rack markdowns until October.

So we've already cleared any product, that we would have wanted to clear, at the beginning of this quarter.

And then, looking at January, year-over-year, last year we didn't have any product to do the holiday sale, so we sold through full price merchandise.

This year we anticipate we will be in a more normal markdown, post-holiday mode.

So, year-over-year, I think it is important to recognize that both October and January, will be a little different for the fourth quarter.

Great, thank you.

Thank you.

Our next question comes from the line of Edward Yruma from KeyBanc Capital Markets.

Your line is now open.

Please go ahead.

Hi, thanks very much.

Could you give some color into the performance of the Canadian stores?

And have you seen the weakness that some other retailers have exhibited?

Thank you.

I guess, this is what the third quarter, we've had the same kind of discussion about the weakness in Canada, that we are reading about.

And, when I look at statistics on mall traffic, et cetera, it does say that Canada is weakening, although the Canadian economy to me seems pretty strong.

We're -- throughout the year, we've been give or take, 5% comping in Canada, rounding up to 6% or down to 4%, it's been pretty consistent.

Given our high level of productivity, and that comp really exceeds what other retailers in Canada are seeing.

I think we're not really concerned about the Canadian market.

I suppose, if there is weakness there, that means that we would normally be doing better than the comps that we are doing, but it -- that's a very healthy business, and continues to be.

And the other thing I'd add, is that we've seen really strong growth in our e-commerce business there, year-over-year as well.

So, that's in addition to what we're producing in that comp.

Great.

Thank you.

Thank you.

Our next question comes from the line of Michelle Tan from Goldman Sachs.

Your line is now open.

Please go ahead.

Great, thanks.

Hi.

I was wondering if you could give us any sense of what kind of trends you've seen so far in November?

And then, maybe talk a little bit about the timing of when out of stocks last year really started to materially impact your sales trend, if we look at Q4 and Q1?

And then, if I could sneak one extra one in, John, any color you could give us on the productivity of the Australian franchises that you bought in?

Thanks.

I think sales, obviously we did really well in all of Q4 last year, which we sold through everything that we brought in early.

And we really eroded our base going into Q1.

If I look at our -- Sheree and I were doing an analysis, and we looked at our year-over-year Q1 base of inventory, and it was down 40%.

So, and then we sold through strongly in that January, finishing off Q4.

So, going into Q1, starting in that February, we were 40% lower than we really should have been, to support the sales in the Chinese New Year.

That's really when you saw it -- and March, if you recall, was probably our worst out stock period.

So, and that definitely affected our sales ramp, and began that chase cycle.

And where we really want to be, is set up our strong Q1.

And most importantly for us, is the energy we spent on chase, I'd really rather be spending on innovation.

So, the cost is more than just sales, it's about creating the future.

So, our goal for 2012, is to set ourselves up, to have a strong inventory flow throughout the year.

And that's what we've been working on.

We feel we are in a great position to accomplish that.

So, just in summary, very little impact to really Q4 last year, most of the impact into Q1.

And this year, we'll be really carefully watching, and frankly, capping sales, so we don't impact Q1.

And Michelle, your question on Australia.

Again, the Australia brand recognition is maybe a year or two behind the US.

Productivity is strong, comping low 20s.

And the productivity is just over $1,000 a square foot and rising.

Great.

That's helpful.

Thanks, and any color on November?

Well, again we came into November in a great in-stock position, a strong Black Friday even without markdowns, and a Cyber Monday, that supports our guidance.

Thank you.

Our next question comes from the line of Omar Saad from ISI Group.

Your line is now open.

Please go ahead.

Thank you, good morning.

Christine, you mentioned something in your prepared remarks about elevating the brand, and work to elevate the brand.

And we have probably been hearing a lot of the luxury brands that we cover, are seeing price points move higher.

The consumer is looking for higher quality, more premium, more interesting, unique product.

Are you incorporating that theme into your strategy?

Are you seeing a mix shift, in terms of price points, that your consumer is being attracted to?

And how does the ivivva brand fit into that -- kind of -- if you think about the price points [scheme]?

We definitely are.

We see that there is not a lot of price push back.

And as we've been innovating in the garments, adding more detail -- and we haven't taken pricing on the basics, but we are pricing the premium above the basics.

So like the special edition hoodie, for instance, that is in the stores right now, is just getting snapped up.

So, we definitely see we have opportunity.

And that is part of the reason why strategically, I would rather be spending my time chasing that market, which we really consider differentiates ourselves.

So, Sheree and her team has done a great job.

I think when you see the spring product that hits, I think it's some of our best stuff that we've ever done.

So I am really excited about the work that we have done there.

Yes, just to add onto what Christine said, this is Sheree.

As we continue to innovate more and more for our technical product, both in our fabrics, our trends and in our make and functionality, the value equation is so much higher.

And the guest is, as Christine said, really snatching it up so.

And they really like it.

(Multiple speakers).

Yes.

For instance one of the pieces that is in the store right now is a new featherweight running piece, that has almost like a down vest built into it, but it is featherweight light.

And it's just incredible, and it's exactly that type of technical jacket that you will see a focus more on.

And then on the ivivva piece, like how does that fit in there?

Well, what we are seeing is there is a market for premium, girls athletic wear, and especially in that dance, gymnastic space, and then carrying over into casual wear.

So it works pretty much the same way, that lululemon does with active wear, casual wear, built off of those core sports.

And both in Canada, and as we said, when we opened the US e-commerce site there, was very, very little marketing.

The draw has been really incredible.

And we don't even actually start a lot of our marketing on that until after the holidays.

So we've done a few things, like we have put flyers in our -- in all the holiday shipping bags that go out.

So that the guest knows that we have the ivivva US website, but most of the on-ground work doesn't start until after the year.

So we are really encouraged by the reception for that brand in the US.

Thank you.

Our next question comes from the line of Howard Tubin from RBC Capital Markets.

Your line is now open.

Please go ahead.

Thanks.

Maybe just a question on inventory.

Where do you think it will be at the end of the fourth quarter, kind of an increase verse last year basis?

I guess, the way to look at it is, if you ignore the large increase in in-transit that we had at that point time at the end of Q3, and look at where we are in inventory versus forward sales, we would expect to be in a similar position at the end of Q4.

Of course, that depends how Q4 goes, et cetera.

But like I said, we're comfortable with the inventory level that we've achieved coming into this quarter, so hopefully we'll be similar.

I would love to be above last year, because what we know last year wasn't enough to support Q1, right?

So, our main goal was starting 2012 off in a really great position, so we can put our energies towards design.

And, take some pressure off our manufacturers and the supply chain, and just do healthy chase, which is a little bit more on demand-base rather than the catch-up.

And, for us, I think that the critical issue is, also when we are chasing, it depends on what fabrics are readily available, and what manufacturing space is available.

So then we are not in as such a planned mode.

And I think really in Q3, that's what we struggled with the most, as we were still living with what we could get, versus what we ideally wanted.

And then timing of that, and managing the flow of that, without bumping into our next season takes a lot of energy.

So that's the cycle we are committed to really ending.

And I'd rather be sitting here telling you, we're in a great inventory position that's up, than be sitting here, quarter after quarter, talking about being down.

Because (inaudible) the cost is big to our guests, and it is big to our brand, long-term.

So, we really are excited about where we are for inventory, because it's with relief, we can turn our energies to other things.

And we know what we have in mix for Q4 and into Q1, is what the guest wants.

Thanks.

Thank you.

Our next question comes from the line of Erika Maschmeyer from Robert W.

Baird.

Your line is now open.

Please go ahead.

Good morning.

Thanks so much.

Could you talk a little bit about your e-commerce penetration.

It's a strong number I know, helped by having some better inventory in the back part of the quarter in ivivva.

Could you talk a little bit about where you're penetration was running at the end of the quarter?

Or how it is trending in November?

I think the number one thing is the US is accelerating, for penetration in the US, and broadly across the US.

Because, I think in the initial build, as you would expect, primarily the big cities, and where we have the big stores, we are starting to see the brand penetrate more generally across the US.

And so we are excited that we are growing that customer base, which then also then helps us to grow our store base.

So I think that's really the big story.

And Canada, has healthy growth as well.

So, I think you are going to see a little less coming in store comps maybe in the future, because we are penetrating more through the convenience of e-commerce.

So, I think that's really the big story there.

And then, with ivivva, as we've said, the big penetration spots are really built around the dance studios where we've seen, and markets where there's a lot of children in dance, or young girls -- New York, Chicago, LA, have been the initial hotspots for ivivva.

And then internationally, we're seeing a lot of business coming in lululemon, continues to be from -- really the Germany, UK, France.

And then shifting over into Asia, it's really Hong Kong and Japan.

And then, I know you talked about a 15% sort of midpoint goal for e-commerce penetration.

I guess kind of where do you think you could be in Q4?

We were 10.4% in Q3.

We expect to be higher than that, but the 15% target is still a ways out there.

Yes, (inaudible) I don't think we will get there by year-end, though we had a very strong Black Friday and Cyber Monday online.

So we have some record days that we're very excited about.

Thank you.

Our next question comes from the line of Adrienne Tennant from Janney Capital Markets.

Your line is now open.

Please go ahead.

Good morning, and congratulations on the quarter.

My question is, John, can you talk a little bit about sort of the inventory shortage in the first half of the year?

And how we should think about a more normalized gross margin in the first half of 2012?

It still seems like expectations are for maybe a high 50% gross margin.

And after having guided to sort of the more normalized level of markdowns plus ongoing, but better cost inflation impact, should we be thinking about the first half as more normalized in that mid-50% range?

Thank you.

Okay.

So again, I mean inventory levels, as we've been talking about all year, in the first half, were constrained.

If you recall, I guess 3 earnings calls ago, we in the first quarter, especially in March, comps really dropped, because we were so out of stock, and similar shortages in the second quarter.

So, again, I am not giving guidance for next year.

But it is reasonable to assume that being in a better in-stock position should give us a tailwind in the first half of next year.

I'm not at a point where I want to be giving guidance on gross margin next year, but again, the same themes, the inflationary cost pressures are likely still to be there.

And we will be seeing a more normalized level markdowns.

And so, just those factors alone bring gross margin down from where it has been but still at a very healthy level.

And the other thing I'd add, is in addition to not doing any warehouse sales this year at all.

Then we also had very low outlet store sales, because we don't manufactured separately for our outlets.

And, we really starved those all year.

And so, just this last month, was the first time we were able to really give the outlet product, outlets stores any product at all.

And we had weeks, we were down like negative 50 in our outlet stores.

Which is --

Will you be doing a warehouse sale in the fourth quarter?

Or none at all in 2011, and then bringing them back in 2012 with a better in-stock position?

We will be doing one in 2012.

Yes --

Actually we are -- looking at January or February for one, so there may be one in Q4.

Thank you.

Our next question comes from the line of Janet Kloppenburg from JJK Research.

Your line is now open.

Please go ahead.

Hi, everybody.

Congratulations on a great quarter.

Thanks.

I wanted to just talk a little bit about the top line in the third quarter.

It seems like the differential, John, between your comps and your total sales has narrowed.

And I'm wondering if that has to do with, may be new store openings.

Some people are worried about productivity of per store.

And I'm also wondering if there was some -- if you could highlight the lost sales from the warehouse sales?

Or perhaps timing differences, either with the showroom closings or new store openings that may have affected that.

And, hello to Sheree, I was wondering if you could talk a little bit about what I am seeing in the stores, which is, I think, a higher focus on new fashion, not only in color, but in treatment and detail?

And I am wondering if that is a focus of the brand going forward?

Thanks so much.

Okay, yes.

The other category is, especially is coming down as I said in the script.

And also, there are a number of things going on in the revenue line that aren't -- aren't visible.

As you said, the warehouse sale that we had last year, we didn't happen in Q3 this year -- I can't remember exactly what the revenue was from that -- it might have been a couple million.

Okay.

I mentioned this in the script, because it isn't insignificant -- there were 5 of our -- pretty much all of our high productivity stores that were under renovation during a good portion of Q3.

And are they complete now, John?

They are now.

I think a couple just opened --

Three.

-- this past weekend.

So there is some lost revenue there?

Yes.

They were operating out of smaller, temporary locations, so there's -- I don't know the exact number, but it's probably around a $1million at least of lost revenue there.

And then the other -- I mean it's would be very difficult, if you are outside the Company, to model new store timing.

We opened a lot of stores in the quarter, a total of 14.

And they were really, very much weighted towards the end of the quarter.

Yes, only 3 opened earlier.

Yes, if you had assumed that they had opened on average in the middle of the quarter, you would have expected more store weeks, and therefore more revenue.

And then the other piece, that I'm more aware of than most, shortly after -- shortly after the last earnings call, the Canadian and Australian dollars took a dip.

And so the translation of Canadian and Australian revenue, at least for a period, was a little bit lower than it would have been expected.

That was another couple hundred.

Yes.

And then, the lower outlet store sales, as well.

Yes.

And then again, this is the last quarter where we have any franchises, so that was -- that revenue has moved into corporate stores.

And we did close a few storeroom --showrooms, as those then translated into new stores.

Yes.

Okay, and now on to the product.

So, very observant, Janet, thank you very much.

We -- the color that we are introducing for Q4 is phenomenal, and the guest is responding.

So for Q3, we had some more subtle color palettes, and we know that she really responds to some of the brighter colors.

And so, those are being very well-received right now.

And in terms of detailing, this is one place where we really know that counts for lululemon.

So, we've looked at fit, function and finishing.

And in terms of the fit, continuing to focus on body flattering styling.

As well as for running, as an example, fits that feel like nothing is on your body, which is exactly what a runner wants to feel like.

The functionality of the fabric, again, feeling light as air.

And in terms of running, or seamless, and so on and so forth.

And, in terms of yoga, just being extremely functional.

And then, our finishing is, I'd say, is one of the things we are best in the world at.

So whether or not, it's the perfect functioning pocket, or zipper or ventilation system, or it's a gorgeous ruffle or treatment, it's something that the design team now is really putting their attention to so.

I think in terms of maybe hidden in your question, are we shifting to more fashion, no.

It's always fit, function and technical product first, adding elements that come from the fashion world to that.

And, that's our magic formula.

So, we will always still be athletic, technical, functional wear.

Thank you.

Our next question comes from the line of Claire Gallacher with Auriga Investments.

Your line is now open.

Please go ahead.

Great, thank you.

So, I was curious about the trend for your traffic and sell-through rate throughout the quarter, if you saw any major fluctuations, maybe early in the quarter, versus what you saw late in the quarter?

No, not any discernible trends.

Again, as been the case, earlier in the year, the ups and downs tended to fall along the product drops, as opposed to any kind of trend based on general traffic or economy.

Okay, great.

Thank you.

Thank you.

Our next question comes from the line of John Morris from BMO Capital.

Your line is now open.

Please go ahead.

Thanks, good morning.

Good work on the quarter thus far.

I wanted to know, maybe Christine, a little bit more about the performance of the new dance category?

How that's going?

Is it very meaningful, and are you contemplating other, interesting new classifications that are in the works, that you talked about before?

And then, in addition to that, I'm also kind of separately, maybe John can address this.

I'm thinking that the inventory up as much as it is, and the better positioning you've got on the spring product, would you anticipate that maybe some of the offset from a cost perspective, would be the freight costs could come down?

And would that be helpful, as we move into next year?

Yes.

So, starting with the new dance category.

That -- we did for -- in the stores right now, you'll just see finishing, actually because it is almost all gone, a dance capsule that we did, which was kind of just a kick off to holiday, and kind of just some interesting and new for the guests, as we eased into our more traditional holiday set.

So it went very quickly, it was very well-received.

There was some really great, winning pieces in that.

And we use those capsules to kind of test our product edge, see what we can incorporate into the core line, what needs to be repeated for maybe a quarter, what's seasonal, and then how we build that into the longer line planned going forward.

But, we are also very conscious of the fact that we have, under 3,000 square feet in the majority of our stores.

So we use the capsules as a way of creating excitement, testing new lines, but at the same time really maximizing the space.

So, you will see an emphasis on that, as part of our comp driving strategy and a way of offering newness to the guests, but without cluttering our stores.

And it sounds like it's a bit of a keeper.

Are there other classifications that you are looking at?

I mean, it was such a new way to create excitement, anything else to anticipate in the coming months?

What you will see us -- and I discussed in there -- that we are doing a bike commuter line for spring.

So you will see us do that.

The real power, comes from not what we do in the stores, but then how we translate that into online.

And we can use that to extend shoulder seasons, we can use that to sell longer online, with a quick hit in the store.

So it's really an integrated strategy that we are looking at developing, which drives that overall business, which is really where we think the retail world is trending.

And, John, on your question, with inventory up at the end of the year, would that imply maybe lower freight costs?

Early next year, yes, that is valid.

The in-transit that you saw in the balance sheet at the end of October, a lot of it for spring, was on the water, as opposed to in the air.

So, I can't quantify it yet, but that will be possible benefit in Q1.

And our air freight really didn't start until late -- it was really in Q2.

Sorry, into Q1, Q2 of next year, because of where the Chinese New Year and what we could get products.

So the air freight catch-up happened after March, April.

So just for timing perspective.

Thank you.

Our next question comes from the line of Christian Buss from Credit Suisse.

Your line is now open.

Please go ahead.

Hello?

Please check that your line is not on mute --

Hello?

Can you hear me now?

Yes.

Okay.

I was wondering if you could provide some color on the margin rate decline in the corporate-owned stores, just kind of running through the numbers from the Q?

Are we talking gross margin or --?

The income from the corporate-owned stores lines?

I guess, my math suggests that margins there, were down there about 60 basis points.

Okay.

You've got more detail on that, than I have in front of me.

(Laughter).

Again, as we've talked about higher product cost due to inflation, and in raw materials and labor, it's about 250 basis points -- lower markdowns, year-over-year is 70, 75 basis points to the good.

And then just a variety of smaller items, that gave us about 160 basis points of improvement in product margin offsetting those amounts.

So that gives the net -- I'm just looking overall, as opposed to just corporate stores, but that's what came to the net 20 basis point decline in product margin.

So -- and then beyond that, it was the leverage and FX that I talked about.

(inaudible)

Okay.

And then as you're (inaudible) comping week, this week.

And I'm wondering how things are going, as the Favorite Things episode is being lapped?

I do understand that we are -- it does mention that.

Again, so we've got some notice, I think from Oprah on that so.

I don't think that there's -- it wasn't a really -- I think it was a great visibility, do --did it cause a run on fitness pants?

I mean, we didn't know enough, in time last year, to have ordered enough pants to have met the demand that was created.

And it is kind of a dangerous thing to buy a whole bunch of those again this year, because it really what the guests want.

So we always designed to know what she wants versus what historically has sold.

So, that we don't ever get into a place where we are buying a bunch of stuff that we have to mark down.

Thank you.

Our next question comes from the line of Stacy Pak from Barclays Capital.

Your line is now open.

Please go ahead.

Hi, a few follow-ups, and then a couple questions.

So, I guess first, did you, or would you repeat what you said about the comp and/or sales in Canada?

I missed that.

Second of all, when you add a pretty much everything that you said on the list of why total sales were light, does that get new store productivity sort of back to the 90%, 100% range?

Or was there still a decline, because I don't have every single number?

But should we look at for SG&A dollar growth in 2012, should it be similar to '11?

And I guess the other big question is, if inventories are so high, and you are guiding to more markdowns, right?

More normalized markdowns, shouldn't you also be driving a higher comp with those higher inventories?

And if not, why not?

Which question do you really want answered?

(Laughter).

That's a whole lot of one question, so I'll go quickly through them.

To repeat, comps or sales in Canada, again, the whole year in Q3 was similar, where -- mid-single-digit comps, which is better than the overall Canadian retail market seems to be performing.

Our productivity in Canada is huge, and we're comping at that level.

So we are not feeling weakness in Canada, if the Canadian economy is suffering, then I suppose we would be doing better.

Total sales productivity, I think your question was, when you do the puts and takes that I went through, on responding to Janet's question, what does that mean for new store productivity?

New store productivity is not down from what it's been at all.

New stores are still opening, at a projected annual rate in excess of $1100 a square foot.

That's been the case throughout the year, and it is not declining.

SG&A dollar growth 2012, I am not guiding to that yet.

So and with higher inventory, higher markdowns, why not a higher comp -- I mean last year, Q4, we were in a pretty good inventory position coming in.

And we did a 28 comp, lapping a 28 -- 29 comp the year before.

So we are just being really realistic, in terms of what's a good level of comp, in addition to --

The dollar value of a comp is huge.

I mean if you just do the math, and what it takes to drive a dollar comp in Canada, what it takes to drive a dollar comp now in the US, it's a huge number, right?

So it takes a lot more units to drive that comp.

So just realistically, if you do that math alone.

The other point which I said earlier which is, this year, we are going to cap, our overall growth so that we set ourselves up for next year.

And, I think it's really important that we do that, so we don't have another year of trying to chase the product.

So there's I think, an upper range that we're comfortable with.

And I think we provided -- we feel like if, the consumer isn't there, we're in great shape, we haven't taken on any more risk that we can manage that protects the overall business.

And that's always our objective, is to manage a well-run business, and set ourselves up for success next year.

So our resources go towards our strategic objectives versus catch-up.

Thank you.

Our next question comes from the line of John Zolidis from Buckingham research.

Your line is now open.

Please go ahead.

Hi, good morning.

Good morning.

Question on the SG&A.

I believe the guidance was for SG&A to slightly delever in the quarter.

And it came in with a 110 basis points of leverage.

And looking at the SG&A dollar growth rate, on a per square foot basis in Q3, it decelerated sharply from the first half of the year.

So can you just talk about what was different in SG&A in Q3, relative to the guidance?

Thank you.

I -- there are a lot of small things.

I would say the biggest one was, we anticipated a quicker ramp up in our spend on our owned e-commerce team and digital marketing around the e-commerce channel, having brought it in-house.

And, that spend did not happen as early as I anticipated in the guidance --

But it has happened now.

Yes we're now -- (Multiple Speakers).

So I mean I think this is one of the points, where I mean we have substantially hired.

And I said in my script, about in the product organization, in the IT organization to support a lot of the new systems and business process work we're doing for the increased complexity in the business.

And that capital projects we have slated for -- really that are in process this year, that will go in next year, and the digital strategy and the web team.

So it took us a little longer to do this sourcing, but those hires have been made.

There was a substantial increase in the back half of the year in our headcount and hiring, and that run rate will then continue, so it's more of a step change, than a small run rate increase.

Thank you.

Our next question comes from the line of Taposh Bari from Jefferies & Company.

Your line is now open.

Please go ahead.

Thank you.

I guess first of all, I wanted to congratulate you on the website.

I think it's amazing.

And then I guess the question that I had is, I just wanted to dive back into third-quarter performance, specifically around your comp.

So 16%, obviously at the high end of your range, a great number by any kind of standard.

But, I think the market has kind of come to expect you, for better or for worse, beat even the high end of your range.

So looking back at the third quarter, has anything changed?

Or is it all kind of inventory constrained related?

Or has it been any kind of US macro choppiness?

Or is it simply in inventory issue that you should be able to work through into 2012?

I think I want to answer that by saying we really don't intend to blow away our guidance.

We've had pleasant surprises in the past, where -- I like where we came in relative to guidance.

I'd say the only significant change was, as I said earlier, the Canadian and Australian dollars dropped after I gave guidance, and that might have knocked a little bit out.

But otherwise, it's where we expected and hoped to come in.

Yes.

And I think we do feel like we had unmet demand in Q3, but that was reflected in our guidance.

We knew we couldn't maybe step up, because we --our mix was still, in my mind, not optimal.

And where we don't want to be, is buying either poor quality product, because we are rushing it just to fill a number.

And we don't want to buy 10 more pink, when it's 10 more yellow that will sell, because that creates markdowns.

And it creates what the guest doesn't want, which hurts the brand.

So, as we are chasing, we have to be really careful to create the right balance, of what the product is the guest wants, and have the discipline not to just put anything in the store.

And, that's really what we are still managing through in Q3, which limits potential upside in that quarter.

And the flow of goods was probably a little more challenging in Q3.

We got some product later than we wanted.

So there was I think, some small execution pieces in there, that affected that.

But as John said, and in going into Q4, we really want to make sure we manage Q4, to not blow it away, so that we are set up for Q1 of next year.

And so that's -- without placing stupid bets that place the Company at risk.

So managing well, thought-out growth, and a well-executed business to deliver great bottom-line results consistently, is where we come from.

Thank you.

Our next question comes from the line of Dana Telsey.

Your line is now open.

Please go ahead.

Good morning, everyone.

As you are thinking about the growth for next year, Christine, how are you thinking about the team?

Is there any new people that you need to hire?

And as you think about online, how are online operating margins this quarter versus what you had?

And how does that normalize going forward?

So, kind of going back in hires -- as I mentioned we are bringing in -- it's time to bring in a new SVP of Brand and Marketing, that has that global experience.

So we are looking to add that to the team, we are back-filling Chris Ladd's position.

So at the executive level, (inaudible) we're still building out some of our supply-chain and sourcing leadership as well.

So we think that's really the next important area that we invest in.

So, not at the senior, senior level but some significant, executive hires there.

And so, I think that's really the area that we're building out.

We are starting to bring in people who have more international and global experience in every position, as part of that strategy.

So that we are building a team of people running a global operation, so that's one of the qualities we look for in every hire that we do.

So, I think we are getting ourselves ready for the things that are critical and important to us.

And then, and then the IT organization.

Kathryn Henry has done a fantastic job of attracting top, top, top talent.

So there's a new person that's brought in to run our store operating POS systems, which will help us integrate our online and store systems, which is one of our objectives for next year.

And she's brought on a great person who has supply-chain experience.

So, 2 critical hires in the areas that were very excited about, to drive those initiatives.

And so -- I am sorry, Dana, your second question?

The online operating margin.

Oh, yes.

And it is laid out in the Q.

It's in the high 30s, which is down a little bit from Q2, because we're starting to spend some of the dollars with the new sites launching, et cetera.

Q4, again there is additional SG&A spend, but it is a higher revenue quarter, so it will probably be similar or maybe slightly lower.

And we'll see, for next year, there's lots of room to leverage on the upside.

Thank you.

Our next question comes from the line of Andrew Burns from D.A.

Davidson.

Your line is now open.

Please go ahead.

Good morning.

With all the categories that are, and will be in stores, the expanded run line, cycling, small dance capsule, new spring lines, how do you think about the proper store size to adequately merchandise the depth of product that you now have?

And do you think a larger box could be in the future for new stores?

Or opportunity to expand stores in stronger markets here?

Thank you.

One of the strategies that we have been deploying, and that is why we have 5 of our top stores under renovation, was we do look at the older stores base, particularly in Canada, where we've added so many more product lines since they were first originated.

And a lot of those stores were in the low 2,000, 2,200, 2,300 square feet.

So at the point of renewal, which is your optimal kind of business model time to do it, we are taking additional square footage and renovating those stores.

If we could take it next to us, and if not, and some we relocated in the mall to a new location, to do that.

Or if it is more of the street front location, making sure that we renovate to add room for the capacity by deploying new fixtures.

So we have a whole strategy that around upgrading some of those older, smaller stores that's timed around their lease renewal rates.

And so, that strategy is being deployed.

And we have in -- we've looked at our stores.

And if it's a neighborhood store, we stay pretty close to the 2,800 square foot model that we've traditionally been doing.

But if it is a store that we believe will be that future, anchor store, we will take it up a little closer to the 3,000 square feet.

But we don't have any intention of building 5,000 square foot stores, or flagships.

Our strategy is much more around the flow of goods, and about integration with online.

Thanks, and good luck.

Thank you.

Our next question comes from the line of Paul Lejuez from Nomura.

Your line is now open.

Please go ahead.

Hi.

Thanks.

I wonder if you could just talk a little bit about third quarter performance, maybe East coast versus West coast in the US.

Then also on the comp breakdown, if you could talk traffic versus ticket, and what your AURs were?

Also just an update on men's, how did that do during the quarter?

Thanks.

Let's see, we love the Midwest.

I mean, that's -- really our business is just phenomenally blowing out there.

Strong performance across all markets.

We don't have any soft markets that we really seen.

So I think that is definitely the good news, the brand is going everywhere.

Mens, we wish we had more.

Men's has really done well.

We've been a little light on product on men's, as Chip and our new designer were revamping the line, we stuck pretty much with basics.

And you'll just really start to see the new men's stuff in, really summer of next year --?

Sheree, the kind of the big popping stuff.

So it will pretty much be a basic story, but high-quality, great colors, great lines, between now and then.

And -- and then in terms of traffic, it still primarily traffic, John.

The overall comp, a little over half just came from traffic, 25%, give or take from conversion.

There was a little bit that came from AUR, about 3% increase in our average transaction value.

And that just reflects a little bit of the mix shift, as opposed to any take in pricing.

More of a top --.

Got you.

Thanks.

And what percent does men's represent now?

I believe we're somewhere around 12%.

About 12.

Comp on men's, which is slightly ahead of the overall average.

And due to time constraints, our final question today will come from the line of Jennifer Black from Jennifer Black & Associates.

Your line is now open.

Please go ahead.

Congratulations on a great quarter.

I have a follow-up to men's.

I was curious to know if you were going to broaden the assortment, and do you -- are you still thinking that it could represent 15% to 20% of your business?

And then, I also wondered about limited, the limited edition collection?

Are you carrying more inventory in this category, corresponding with your inventory increase?

Yes, that's kind of seasonal.

Like right now, we have a limited edition hoodie that is in the store.

So that's -- and some pants, which we do every holiday season.

I think what you are seeing is, kind of the premium running jackets, and the premium yoga jackets.

And there are a few more in that premium category, but not yet what I would call special edition.

We did expand the special editions hoodie categories.

And we also have the special edition leggings.

And so, yes, you are seeing that.

And the guest is responding, which is fantastic.

And then in terms of mens, you asked if we were still bullish on expanding the men's business.

And the answer is absolutely, yes.

And with what I just saw, that is coming through for next year, just post -- just post the first half of 2012 looks really good.

So the -- I think there's a tremendous amount of potential there both in-store.

And of course, Christine has continued to mention leveraging our online stores as well.

And who knows what is next?

I really think the work that we have done in the last six months about finding our voice in men's, and what's our spot that we are going to go after.

That is what I'm most excited about is, because I really think we defined that.

And that's what you will start to see show up in the second half of 2012.

Thank you.

I would now like to turn your conference back over to Ms.

Christine Day for any closing remarks.

Thank you everyone for joining us today.

And as usual I would just love to thank everybody from our e-commerce team who worked so hard to get really 3 new websites up and running for us, between the 2 ivivva sites, and then the new [Luon] -- reskinned in a very short period of time.

And everybody out there in our stores, who delivers a great guest experience.

So, thank you, everyone.

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

This does conclude the program, and you may all disconnect.

Have a great rest of the day.