Lululemon Athletica Inc (LULU) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Lululemon Athletica first-quarter 2014 results conference call.

(Operator Instructions)

As a reminder, today's call is being recorded.

I'd now like to turn the conference over to Therese Hayes.

Ma'am, you may begin.

Good morning everybody.

Thank you for joining us on our first-quarter 2014 conference call.

A copy of today's press releases are available on the Investor Relations section of our website at www.lululemon.com or furnished on Form 8-K with the SEC and available on the Commission's website.

Shortly after we end this morning a recording of today's call will be available as a replay for 30 days also available on the website.

Hosting our call today is Laurent Potdevin, the Company's CEO; and John Currie, the Company's CFO; our Chief Product Officer, Tara Poseley, will also be available during the Q&A.

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.

We have about an hour for today's call so when we get to the Q&A if you'd please limit yourself to one question at a time, that will give others the opportunity to also have their questions addressed.

And with that, I'll turn it over to Laurent.

Good morning.

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

There are obviously a number of things for us to discuss on this call and a couple of them I'm going to leave to John, namely the share buyback and his future plans.

Q1 result were in line with our expectations as sales came in slightly above our guidance, and we are pleased that overall gross margin and earnings were achieved with lower markdowns than last year.

We knew heading into 2014 that driving sales in the first half of the year would be impacted by a sub-optimal product assortment combined with soft traffic trends.

Q2 sales have started off behind plan and comps are more impacted than we had originally anticipated.

In response to this we have launched a number of initiatives to drive sales and increase long-term guest loyalty.

I would like to spend a majority of my time with you focusing on what I believe are the three key priorities that will continue to drive Lululemon as a market leader in the future.

One, we are continuing to build our product engine to relentlessly innovate and consistently fill new product and exciting product to our store for both mens and womens, including having our whitespace workshop and world-class sourcing organization that are fully integrated with the product development team.

Two, we are implementing a branding and communication strategy that will create long-term guest loyalty, bring guests back and attract new ones.

And three, we are pursuing international growth with an aggressive yet sustainable plan.

So first on product.

On our last call I spoke to preventing quality issues from getting to our guest.

We have made significant progress with the product engine and are seeing results with an increasingly higher pass rate at our factories, and a 12% improvement in the past 12 months.

As part of our longer-term strategy we are aggressively focused on redesigning our go-to-market calendar to support our global growth.

The first phase of this project relating to fact finding and initial assessment is complete.

[Shelf hole] process will be fully redesign and implemented over the next 18 months and we will see incremental improvement along the way to get back to our long-term gross margin goals of Mid 50%.

For Q4 and Q3 of this year we are focused on clarifying roles and responsibilities, freeing up a significant portion of our designers' time so they can focus on what they do best, being innovative and creating beautiful technical products.

We will implement process and system solutions throughout 2015 to significantly improve the flow of seasonal product to the right store at the right time and in the right amount.

We will start seeing a measurable impact of this work in Q2 of 2015 and will continue to gain momentum into the back half of the year.

This enhanced predictability will enable us to sell clear brand and product stories in season and across categories.

And by Q1 2016, we'll have a fully operational world-class product engine to support a global omnichannel, multi-brand business with localized assortment capability.

All of these efforts will not only result in amazing products, and therefore increase traffic and conversion, but will play a significant role in getting back to our margin goal.

We are very pleased with the momentum of our men's business which experienced a 9% comp in the quarter, on track with our expectations.

And as mentioned on our last call, we look forward to seeing men's dedicated spaces come to life in Vancouver, Santa Monica, and Miami in the next couple of months.

And our girl's brand, ivivva, continues to perform incredibly well and achieved its highest comp yet in Q1 2014 at 39%.

ivivva's store and showroom operatings are on track for 2014 with 10 and 20 locations respectively.

Next, and as it relates to brand, you're about to see actions that focus on driving traffic and sales.

Lululemon gets at a very digitally savvy guest and have great substantial investment to flex our digital muscle through a variety of activations that include the implementation of the social platform that allows us to leverage the power of our [invastada] community.

In-store technology has been rolled out to our entire network of stores to provide our guests the ability to shop our online inventory while in store, which is greatly enhancing the experience by broadening access to product and we're seeing great results already.

Additional pay search, affiliate programs, and on top of these digital projects we are operating 14 pop-up stores across Canada and the US on April through September.

These stores allow us to target new guests, drive additional sales, and showcase the brand in unexpected ways.

Last but not least our international expansion.

I'm really excited about the momentum that we continue to build in what we see as a significant opportunity and long-term growth driver.

The success of our first London store opening which is on track to do $7 million in its first year is a testament to the international demand for our brands.

In other parts of the world we continue to experience increasing traffic and volume in our show room.

In the past couple of months we've built a very clear four-year road map to increase our overall footprint in Europe, Asia, and other parts of the world.

This road will continue footprint growth as the North American business matures and as we reach our anticipated store count of about 350 in North America.

By the end of 2014, we will have a presence in 8 countries outside of North America through stores, strategic sales partners, and show rooms, and when adding eCommerce, the number of countries our product is reaching is 83.

We are on track to open our second store in London by year end, and we expect our first store in Hong Kong by Q1 of 2015.

Throughout 2014 and 2015 we are focused on growing our show room network with store rollout expected to really ramp up in 2016 and beyond.

By the end of 2017, we plan to be present in all major European and Asian regions, with more than 20 stores in both Europe and Asia.

2014 is very much a transitional year for Lululemon and we are on track with the improvements we have set to achieve.

We are focused on building a scalable foundation to further elevate our North American business, and thus see the brand's incredible international potential.

I am confident that the work we're doing today will only enhance our premium positioning as we continue to lead the market as a market innovator.

And now I will turn the call over to John.

Thanks, Laurent.

Before I review the details of our first quarter of 2014 and update you on our outlook for the year, I want to begin by talking about the share repurchase program that we announced this morning.

The Board has approved a program to buyback up to $450 million of our common shares, that's dollars of course, at prevailing market prices over the next two years.

To fund this plan, we will repatriate cash from our Canadian subsidiary to our US parent Company, which will trigger a one-time tax charge of $30.9 million, taken on earnings from prior years that were previously not subject to US tax.

This non-recurring tax expense is recorded in our first-quarter results and represents a $0.21 impact on our diluted earnings per share.

This now increases our available cash in the US, allowing us the flexibility to distribute capital back to our shareholders.

We believe in the long-term value of the Company and this program will serve to create shareholder value as we execute it over time.

Now on to our first-quarter results.

For Q1, total net revenue rose 11.2% to $384.6 million from $345.8 million in the first quarter of 2013.

The increase in revenue was driven by total comparable sales growth on a combined basis including eCommerce of 1% on a constant dollar basis, comprised of 25% growth online, and a bricks and mortar stores sales decline of 4%, all on a constant dollar basis.

The addition of 45 net new corporate-owned stores since Q1 of 2013, 30 net new stores in the US, 2 stores in Canada, 2 stores in Australia, 2 in New Zealand, 1 in the UK, and 8 ivivva stores, and offset with the foreign exchange impact of a lower Canadian and Australian dollar, which had the effect of decreasing reported revenues by $10.1 million or 2.6%.

During quarter we opened nine corporate owned stores, Three Lululemon stores in the US, one in Australia, and our first store in the UK, as well as four ivivva stores in the US.

We ended the quarter with 263 total stores, versus 218 a year ago.

There are now 202 stores in our comp base, 39 of those in Canada, 131 in the US, 24 in Australia and New Zealand, and 8 ivivva.

We also opened another two international show rooms during the quarter, one in the UK, and one in China, for a total of seven in Asia, and nine in Europe at the end of Q1.

We now operate a total of 76 showrooms which also includes 18 ivivva locations.

Corporate owned stores represented 74.9% of total revenue or $288.1 million, versus 77.9% or $269.4 million in the first quarter of last year.

Revenues from our direct-to-consumer channel totaled $66 million or 17.2% of total revenue, versus $54 million or 15.6% of total revenue in the first quarter of last year.

Other revenue, which includes wholesale, showrooms, warehouse sales, and outlets, totaled $30.5 million or 7.9% of revenue for the first quarter, versus $22.5 million or 6.5% of revenue in the first quarter of last year.

Gross profit for the first quarter was $195.7 million or 50.9% of net revenue, compared to $170.7 million or 49.4% of net revenue in Q1 2013.

The factors which contributed to this 150 basis point increase in gross margin were the 510 basis point improvement in gross margin due to anniversarying the Luon write-off provision from last year, a decrease in markdowns and discounts of 110 basis points compared to the first quarter of FY13; these were offset with product margin decline of 310 basis points due primarily to a higher sales mix of lower-margin seasonal items, and also in part attributable to higher raw material costs associated with prints and textured garments, as well as duty adjustments that were trued up this quarter.

50 basis points deleverage from the foreign exchange impact on product costs due to the weakening of the Canadian dollar, higher air freight costs of 40 basis points, and 70 basis points deleverage from continued investment in our product and supply chain functions.

SG&A expenses were $125.9 million or 32.7% of net revenue, compared with $104.8 million or 30.3% of net revenue in the same period last year.

The 20.1% SG&A dollar increase is due to an increase in operating expenses associated with new stores, show rooms, and outlets, as well as higher wages across our stores to reflect merit increases and base pay market adjustments, increased variable operating costs associated with our eCommerce business, consistent with the year over year revenue growth in this channel, increases in expenses at our store support center, including salaries, administrative expenses, professional fees, and Management incentive compensation associated with the growth in our business; and in addition we recognized $1.5 million in foreign exchange losses which added to overall SG&A.

These were offset with the weaker Canadian and Australia dollar, which decreased reported SG&A by $5.4 million or 4.3%.

As a percent of revenue our first-quarter SG&A deleveraged 240 basis points due primarily to the run rate of prior-year investments and new incremental operating spend needed to drive long-term growth.

As a result, operating income for the first quarter was $69.8 million or 18.2% of net revenue, compared with $65.9 million or 19.1% of net revenue in Q1 2013.

Tax expense for the quarter was $52.5 million.

This includes the one-time adjustment of $30.9 million related to the repatriation of foreign earnings to fund the share buyback program.

Excluding this tax adjustment, the tax rate would have been 30.1%, compared to 29.8% in the first quarter of 2013.

Net income for the quarter was $19 million or $0.13 per diluted share.

On a normalized basis, diluted earnings per share would have been $0.34, compared to net income of $47.3 million or $0.32 per diluted share for the first quarter of 2013.

Our weighted average diluted shares outstanding for the quarter were 145.9 million, versus 145.8 million a year ago.

Capital expenditures were $25.4 million for the quarter, compared to $21 million in the first quarter last year, with the increase associated with new stores, renovations, IT, and head office capital.

Turning to our balance sheet highlights we ended the quarter with $752 million in cash and cash equivalents.

Inventory at the end of the first quarter was $177.4 million, or 23.4% higher than at the end of the first quarter of 2013.

Similar to last quarter, this is higher than optimal due primarily to a higher composition of core inventory.

We expect to continue to rebalance our inventory levels as we head into the back half of the year, and have adjusted our assortment more in line with guest demands for fall and winter.

This now leads me to our outlook for the second quarter and full FY14.

May performance to date has been soft as our comps have declined from the first quarter.

As a result of our comp trends we have deployed revenue-driving initiatives for both our stores and eCommerce site, some of which Laurent addressed earlier.

In addition we've opened pop-up locations to capture demand in areas that otherwise would not have a store.

While these initiatives are good for the long term as they primarily encompass full-price selling, they do come with increased SG&A costs.

We expect these initiatives to mitigate some of the sales miss over the rest of 2014.

As a result we are adjusting our Q2 and full-year revenue and SG&A forecast for these changes.

We currently anticipate Q2 revenue in the range of $375 million to $380 million.

This is based on comparable sales percentage decrease in the low- to mid-single digits on a constant dollar basis compared to the second quarter of 2013.

This outlook assumes a Canadian dollar of $0.91 with the US dollar and 12 new store openings, 7 in the US, 2 in Australia and New Zealand, and 3 ivivva.

Consistent with Q1 we expect gross margin to be between 50% and 51%.

This is down from a year ago, primarily due to a higher mix of lower-margin seasonal product, deleverage against product and supply chain expenses within cost of goods sold, store occupancy, and depreciation.

And lastly, the impact of foreign exchange due to a weaker Canadian dollar compared to last year.

We expect SG&A to deleverage as a percent of revenue compared to the second quarter of 2013, which is driven primarily from the run rate of strategic investments made last year and incremental spend in traffic and revenue-driving initiatives.

While these investments drive the top line, the associated sales carry a reduced flow through percentage.

Finally, due to a slightly stronger Canadian dollar relative to the end of Q1, we will incur foreign exchange losses that will increase SG&A.

Our SG&A also reflects pre-opening costs related to the 12 stores planned to open in Q2 and additional stores planned to open in early Q3 of 2014.

Assuming a tax rate of 30.2% and 146 million diluted average shares outstanding, we expect diluted earnings per share in the first quarter to be in the range of $0.28 to $0.30 per share.

For the full FY14, we expect net revenue for the year to be in the low to mid of our previous guidance at $1.77 billion to $1.8 billion.

We expect to open 45 corporate owned stores, including our Australian stores and ivivva locations.

We're also on pace to operate up to 20 international show rooms by the end of this year.

For the year we expect gross margin of approximately 51%, down from last year due primarily to product mix, continued investment in our supply chain and product operations functions, and also foreign exchange impacts from a weaker Canadian dollar.

We are on track to open our second US distribution center in Columbus, Ohio in August, which will go live initially with eCommerce with retail fulfillment to begin in Q1 of 2015.

As I've mentioned before the start up costs and increased capacity will initially delever our gross margin by 30 to 40 basis points in 2014.

We expect SG&A deleverage as a percent of revenue compared to 2013.

This primarily includes investment in corporate SG&A in areas such as brand, IT, guest experience, and international that were included in our original guidance for the year.

The traffic and sales initiatives discussed earlier will result in an incremental investment in the $10 million range.

In addition, our SG&A forecast is also setting aside funds for additional strategies currently being developed and evaluated for approval.

As a result we expect our overall operating margin to delever from 2013 and our fiscal year diluted earnings per share to be approximately $1.50 to $1.55, or $1.71 to $1.76 normalized for the tax adjustment.

This is based on 146.3 million diluted weighted average shares outstanding as our guidance does not reflect any estimate of shares repurchased, and it assumes an overall effective tax rate of 38.6%, which includes the one-time tax adjustment, or 30.2% excluding this tax adjustment.

We expect capital expenditures to be between $110 million and $115 million for FY14, reflecting new store buildouts, renovation capital for existing stores, IT, and other head office capital including expansion of our existing premises.

Finally, before we open up the call to questions I want to take a minute to speak to the announcement today that I will retire at the end of the fiscal year once we transition to my successor.

As many of you know, we are a very goal-oriented Company and it has long been a part of my goal to expand my involvement serving on corporate and non-profit Boards.

And for those of you who know me really well, you know my longstanding goal has been to ski each season the number of days equal to my age.

Since I turn 60 next year and these goals are difficult to achieve as a day job, I've decided that this is the time to announce my retirement plans.

This will allow the Company to initiate a comprehensive search for my replacement and to allow for a smooth transition.

So this isn't the time to say goodbye, as I'll be around for a number of months and you'll have me to kick around on at least a couple more earnings calls.

And so with that, I'll turn it back to the operator for questions.

(Operator Instructions)

Our first question is from Bob Drbul of Nomura.

Good morning.

John, best of luck and congratulations on the retirement.

Laurent, I guess the first question that I have really is with John retiring, should we expect additional Management changes now that you've had some further time to sort of assimilate into the organization and create a little bit more of a view?

First off, we're all incredibly sad to see John deciding to go and start his professional skiing career, but we've got a number of months with him before that happens.

And with every transition, you do have changes, and we have a couple of other changes including one change in brand, in our brand and communications department.

Okay, great.

And then within the updated outlook, on the gross margin side and even on the sales side, can you just update us around like the expectations for the seasonal offerings and the fast-turn capsules related to both top line and the gross margin?

So I'll speak to fast turn, John if you want to deal with the gross margin question.

But I think we've talked a lot about 2014 being the year of building our foundation, and we've been doing a lot of work for the back half of the year to rebound to assortments between the seasonal core, really reflecting where the guest appetite is for seasonal core.

Also we used our fast turn group to chase into additional prints and bottoms for the third quarter.

And then as we move into fourth quarter we continue to use that team to chase into product, as well as we've worked really diligently to make sure more of the beauty and technical is that I've spoken to in prior calls and at the analyst day, that making sure we are more consistently showing up with that in our product.

Great, thank you very much.

On your gross margin question, I think our gross margin will be pretty consistent with where it was in Q1 through the first three quarters, and then of course in the fourth quarter due to higher volumes it will be a couple hundred basis points higher.

Great, thank you.

Our next question is from Brian Tunick of JPMorgan.

You may begin.

Thanks.

Good morning, everyone.

Was hoping maybe you could just parse out the quarter-to-date deceleration in the comp trend.

How much of that is a traffic issue and how much of that may be the product flow issue?

And then maybe just more commentary on the pop-up stores, maybe what's the duration of the leases and could those potentially become permanent stores as well?

Thanks very much.

Okay, it's hard to dissect the comp only a few weeks into the quarter but actually what we're seeing is traffic a little bit stronger which is very encouraging, but conversion down which makes sense with a non-ideal product assortment.

So I mean it's telling us that we're maintaining the guest coming in, and when the product is right that should deliver a rebound but in the back half.

And on the pop-up stores, I think your question would they'd be permanent.

They are typically leases of less than six months and unlikely that any of these would be permanent stores.

There might be some locations where we would seek out a permanent store but not in these existing locations.

Our next question is from Roxanne Meyer of UBS.

Great, good morning.

I was wondering if you could talk longer term about the gross margin and your targets to get back to the mid 50%s.

I guess just thinking about the perspective back when your margins were more healthily, steadily there, your comps were at a much more elevated level, and obviously, your mix was a bit different, more skewed to the higher-margin core product and obviously that's transitioning and weighing down on your margin now.

So what are the factors that you think longer term can get your gross margin back to the mid 50%s?

Thanks a lot.

Tara, maybe I'll take it and you can add whatever you'd like.

Because when I look at our longer-term gross margin where I see tremendous opportunity to get back to that mid 50%s range comes from all of the work that Tara and Jennifer Battersby and their teams are doing to change the go-to-market process to operate more efficiently, and just work with our factory partners in a more organized, disciplined way.

We see that potentially driving 300 to 500 basis points of improvement over time.

That will take a couple years to get there, but there's a pretty clear road map that we're seeing that should deliver that.

Tara, anything to add?

No, I think unless there's additional questions?

Great, that's helpful.

Thanks a lot.

Our next question is from Barbara Wyckoff of CLSA.

Hi, everybody.

Congrats to John.

I want to ask about gross margin too.

You mentioned lower margin on seasonal product.

Is that because you're intentionally taking a lower IMU because the costs are higher due to smaller quantities or are there higher markdowns, air-shipping?

And at what point do you think that IMU or that margin comes up?

I'd say generally, it is higher cost whether it's textures and prints or additional features that in our pricing architecture, we haven't taken full pricing, and so they do tend to have a lower margin.

I think Tara's commented in the past that potentially over time we look at that pricing architecture.

But for the near term that's really what's driving the lower margin on the seasonal items.

Okay, thank you.

Our next question is from Matt McClintock of Barclays.

Yes, good morning.

I was wondering if you could focus more on the revenue-driving initiatives.

I understand the pop-up stores but could you talk about what you're doing specifically for what would impact the comp base, like what type of revenue-driving initiatives would impact either your eCommerce business or the stores in the comp base?

Thank you.

Sure, Lululemon engages a very digitally savvy guest and we really haven't flexed our muscle there and we're doing a number of things.

I spoke on our earlier call on our call from a quarter ago about the incredible value of our ambassadors and the fact that we don't really leverage our stories that happen in our communities.

So we're building a social platform that is unique to ambassadors that will go live in September so that we can gather realtime all of the work that's happening in our communities and sort of be able to share that in a much more efficient way.

We're also, we released in-store technology so we can share inventories when our guests are in stores, they can actually shop the online inventory, therefore enhancing the access to product.

And then we've really ramped up [base served] media with leveraging standard channels through Google.

We're working on click-to-brick, and this is a geo-based strategy that we're doing in partnership with Google as well, and we're also accelerating our affiliate partners with ambassador studio, elite athletes who promote our content and drive traffic to our site.

To add to that we've been really successful with our product notifications and we're planning to double the base of guests that receive those product notifications, and we're also going to make them a lot better and a lot more efficient.

And finally, as we ramp up our CRM effort, we're starting to do some light segmentation of our emails to be much more targeted in how we reach our guests.

Our next question is from John Morris of BMO Capital Markets.

Thanks.

My congratulations to you too John and good luck on your retirement and skiing career.

Thank you.

Two part questions here.

First of all, I think in the prepared remarks, Laurent you talked about ramping up store openings.

I think it was in 2016 and beyond and wondering what does this long-term square footage growth look like if you look out three to five years, do you have a target for that?

And also, with respect to the long-term operating margin goals, what would those look like given what you've already been talking about with respect to the long-term gross margin goals?

Thanks.

So as we think about international expansion, we're staying very true to our show room strategy, which is to build awareness in the market and build momentum and getting pulled by the community, and we expect the show room to have a life span of 12 to 18 months before we are ready for store rollout.

So we're going to be in the next 18 to 24 months we're going to really accelerate the show room internationally, and then that's going to trigger a store rollout 12 to 18 months following that.

So the plan is really to be if you think by 2017 having over 20 stores in Europe, 20 stores in Asia, not including what I mentioned Asia, not including Australia and New Zealand.

The plan is further and beyond to be able to open about the same number of stores that we're currently opening today in North America, around 45, and that will sort of replace the square footage in the next couple of years in North America as that market matures.

So would that be kind of a mid-teen or maybe even a target towards 20% long-term square footage growth?

Just want to kind of get a feel for that.

Just have to do the arithmetic.

We tend to think in units.

These stores are -- (multiple speakers)

Probably just in the mid-teens right?

Yes.

Okay, good and John?

Operating margin?

Highly confident that the gross margin will get back to that mid 50%s range.

As I said in the past, getting back to mid 20%s operating margin I think we'll get there.

Of course as we are expanding into new countries, new markets, initial productivity will be lower so that will bring down operating margin temporarily as those stores ramp up.

But the core business and as international operations mature, my view hasn't changed on our ability to achieve that mid 20%s operating margin.

Okay, thanks.

Our next question comes from Sharon Zack of William Blair.

Hi, good morning.

I was hoping I think Laurent, you mentioned there might be some other changes in Management, so could you give us an update on where you're seeking talent, what holes are still out there, where we might see more turnover?

And then maybe a broader comment on just morale within the organization, given kind of the disruption both in Management but also more recently with the Board.

Sure.

So on the morale, I think we aren't commenting on the Board, but meeting with the Company yesterday, we sort of mentioned that our parents are fighting and it's awkward, but both Chief and Director of the Boards fully support the Management team and what we're doing, so we're staying focused and we're not going to let us be distracted, and so I think we're in very good shape.

When you think about our educators, they are the face of the brand and they deal with our guests every day.

So certainly we've made their life more difficult in the past year, but we're very focused on them being engaged, excited, and happy, so we haven't seen any increase turnover there.

And I don't remember the first part of your question.

I think in response to a previous question you had mentioned there might be more changes in Management, so could you give us any update on that?

I think you said maybe somebody in product or something like that.

And then if there are any key holes you're still looking to fill within the Management team.

When I came on board we had a hole in HR, and we're in the very final stages of that search so I'm really excited about that.

And also Laura Klauberg in brand marketing has decided to move on and we're in the process of interviewing candidates there, but we have a really, really strong team, both on the community brand digital, and creative side of the business and we've gotten very engaged with them.

And other than that, we're in great shape.

Thank you.

Thank you.

Our next question is from Adrienne Tennant of Jane Capital Markets.

Good morning.

And John, congratulations on the retirement.

Thank you.

My question actually is on the non-comp productivity.

It looks weak again.

For the fourth quarter at the analyst day you had delineated several factors that were contributing to fourth-quarter non-comp productivity.

Could you do the same for the first quarter?

And then secondarily, Laurent, have you done any brand awareness studies for the Canadian US market and then the new markets that you're entering?

Thank you.

Okay sorry, I can't remember how I delineated the new store products.

You gave us the top 10 things we were missing in our non-comp calculation.

Got you.

Yes, you're probably still making most of those mistakes.

(laughter) So bottom line again when we look at new store productivity in Q1 continued to be in that $1,100 to $1,200 per square foot range similar to what we've seen over the last 18 months.

So no meaningful change there?

No.

Okay.

And as far as looking at consumer sentiment, brand strength, we actually just launched, we implemented NIPS, net promoter score, and we got our first benchmarks yesterday.

So I haven't had a chance to fully dig into them, but I'm really looking forward to using that as a tool to sort of see where our brand initiatives are.

Changing the brand sentiment and improving conversion and traffic.

Does that study give you brand awareness at the end?

Yes, it does.

Okay, and will you share that with us on next call perhaps?

Sure.

Okay great, thank you.

Best of luck.

Thank you.

Our next question is from Janet Kloppenburg of JJK Research.

Good morning, everyone.

John, I want to thank you for all of the help you've provided and let you know that you'll be sorely missed, congratulations.

I have a couple of questions.

I wondered if Laurent or Tara might talk a little bit more specifically about the sales slowdown in May.

Has it been in all categories, men's and women's, and across all sub categories of bottoms and tops, and what it looks like by channel?

And if you could maybe help me understand it a little bit more, Tara, I thought that the fashion component was to become higher here in the second quarter and then that would help drive sales and traffic conversion in the stores.

It seems like things are going in reverse and I'm not sure I really understand why; has the build to the fashion assortment not been what you expected it to be here in the second quarter?

Thank you.

Hi, Janet, Tara here.

Hi.

So just I've been pretty consistently saying in [nine] when I came into the business and knowing our product life cycle, it's a nine month calendar, I've been pretty consistent I was getting that rebalance of core and seasonal corrected for the third quarter, not the second quarter.

And then also have been chasing into prints and really continuing to work on the reinvention of core, and we'll start seeing more of that in bottoms as we get into Q3.

And then Q4 my focus not only was the rebalance, but also making sure working closely with design to really try to affect the beauty technical piece that's so important to our brand, and really sets the foundation of who Lululemon is.

So for second quarter those assortments were done well over a year ago prior to me getting here, but we've used the fast turn team pretty aggressively to affect third and fourth quarter.

And to add to Tara's point, one, we have been incredibly impressed with how quickly the team is reacting on the fly and getting us the absolute best assortment they can in an environment where we don't have, we haven't planned for that a year ago.

But also if you look at the beginning of Q2 and going back to the point John made earlier we're actually seeing traffic getting stronger, which speaks to the brand sentiment getting better and conversion getting lower, so the initiatives that we started to do about brand are paying off.

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

Congratulations, John on your retirement.

Thank you.

I was wondering if you could talk about your efforts to acquire data about your core customer and his or her shopping preferences, are you able to track how many customers and transactions are tied to purchases?

And if not, what systems do you have in place that will be able to give you detailed information?

Or is this something that you're working on building, is this part of a bigger picture down the road building your CRM loyalty program?

Thank you.

Thank you.

We've actually never used a lot of data in the history of Lululemon.

We're shifting that as quickly as possible.

We've got a very loyal guest and we should know a lot more about him or her, and it is part of our CRM effort.

So we are investing heavily both from a talent standpoint and technology standpoint to really ramp that up, and (inaudible) we don't have a lot of data right now, the blessing being that we can build a system that will really take us in the future, and that's what we're building.

So it is part of the plan and we're in the process of building it.

Thank you.

Our next question is from Dana Telsey of Telsey Advisory.

Good morning, everyone.

As you work to drive traffic and improve the assortments, is anything changing on the pricing side both with core and with seasonal product?

And are you seeing same trends online as to what you're seeing in the stores?

And lastly, any further update on London, how that is doing?

Just one more quick thing, on the sourcing side, Jennifer and Tara, how are you doing in putting in place the processes that you want, where are you in getting to the end goal?

Thank you.

Bye.

Okay, I'll start.

And just on the process and sourcing side, one of the things as I have been here since November and really on the ground in Vancouver starting in February, one of the things that I have found in really digging into our go-to-market calendar with Jennifer is we have a go-to-market calendar that really supports a much smaller Company and doesn't necessarily reflect the complexity of where we are today and where we're going in the future.

So work that we have done and put under way we brought in outside consultants who I've actually worked within the past to do a deep dive on our go-to-market calendar.

And over the next 6, 12, and 18 months we are going to be implementing the findings that we found as we really looked and did a deep dive on the calendar.

So I think from a quality standpoint Laurent has talked about it all of the process procedure is in place for quality, and now our real focus is on the go-to-market calendar and creating a really efficient, strong calendar that supports an innovative product organization.

So as we move into Q3 and Q4 I've talked a great deal about on this year it's really about building our foundation, so we're going to be beginning to shift our process as we move into Q3 and Q4, which we'll really start seeing the results as we move into Q2 of 2016 and beyond.

And then the core versus the seasonal product and pricing structure, one of the things we've initiated is very strategic work around pricing where we sit in the marketplace and our pricing architecture.

And as I see opportunities, both in the core and in the seasonal to adjust pricing to that very methodical approach, we'll be doing so.

So then I'll just turn it over because I think there might have been another question about driving traffic?

Exactly.

The question was about driving traffic in London, right?

So I mentioned earlier, London is performing incredibly well.

I think we are in excess of 130% of plan, and we're sort of on track to be a $7 million store in year one, which we're very pleased with.

And in terms of driving traffic, I'll go back to what I said earlier about flexing our digital muscles and also working on some key initiatives at the store level that will be rolling out in the next couple of months.

John, best of luck and we look forward to staying in touch over the next few months, thank you.

Thank you.

Our next question is from Paul Lejuez of Wells Fargo.

Hi guys, it's Tracy filling in for Paul.

Question for John.

I was wondering of your $110 million to $115 million of CapEx this year, how much of that is going to IT and infrastructure versus new stores?

And then as you look out to future years, do you think the CapEx number continues to pick up or do you think it will flatten out at this level?

Thanks.

I think all of the various IT systems and initiatives are probably close to $40 million of that number.

There's $10 million, $15 million of various head office related capital and the balance is either new store buildout or we have a pretty significant renovation program every year.

I think you'll see CapEx in a similar range for a couple of years and maybe beyond, certainly on the store side.

And with systems, once you get them all implemented it's time to upgrade them, so probably that sort of level is a good number for several years.

And some of them focus on guest taking technology, either in-store technology that we're starting to play with or our CRM business of guest intelligence efforts.

Thank you, good luck.

Our next question is from Camilo Lyon of Canaccord Genuity.

You may begin.

Thanks and all the best to you, John in your future endeavors.

I wanted to just understand a little bit more, I know you talked about some of these revenue-driving initiatives, you talked favorably about what you're seeing on the traffic side.

But just help me understand exactly why you should see the level of reacceleration in comp growth in the second half given that there's still some imbalances between seasonal and core and the efficiencies on the supply chain side look more like longer-term sort of benefit and not something completely see in the back half, so if you could just help reconcile that, that would be great.

Yes, a couple things give us confidence that you're going to see stronger comps in the second half.

First of all as Tara said the product assortment won't be ideal in the second half but it will be improved over what we saw in Q1 and what we're dealing with in Q2.

And then secondly, the downturn in traffic and some of the issues started really Q3, Q4 last year.

So we're going to be lapping weaker performance in the second half of 2013 versus what we saw at the start of the year.

Great.

And then just on competition, how are you thinking about the competitive environment right now, whether it's from SKU overlap, pricing dynamics?

And then just lastly if you could just break out the Canadian to US comps.

Do you want to break down the comps?

Yes.

Sorry just got to find it.

US combined comps was 2% and Canada was minus 5%.

And as far as competition, obviously it's a crowded field but it's also a very much a growing field globally, and we know that we've got the right talent and when we design the product right as we've done lately, we win, so we're in this game to win it.

Thank you.

And maintain our premium positioning in the market that we've created.

Thank you.

Our next question is from Oliver Chen of Citi.

Thank you.

On your full year comp guidance, what's the implication for fourth quarter?

It seems like as you rebalance you'll potentially see an acceleration, so are you thinking mid to high by fourth quarter and third quarter; can we assume that that's going to inflect the positive comps?

Also if you could just comment on your inventory composition and how you feel about freshness now, it was running ahead and you tapered your guidance down, so I was curious about if there's merchandise margin pressure and if things are over-inventoried currently, thank you.

Yes, in the second half, we see Q3 turning to positive combined comps and you're right, sort of mid to maybe little bit above comps in Q4.

In terms of inventory composition, similar to last quarter we're, as I said in the prepared remarks, we're a little heavier than we like to be overall in inventory but the excess is primarily excess core.

And we deal with that just by reducing forward orders, which we have done and that excess of core is actually coming down, so we feel pretty good about the freshness of the balance of the inventory.

And in general, we're doing things like opening these pop-up stores.

So that even with weaker than we would like to see sales trends we're able to clear this inventory at full price.

Thanks for the details.

And a follow-up on the conversion rates where it seems like there's an opportunity for a better conversion rate, which classifications between the tops and bottoms do you feel that she may be looking at but not purchasing or has an opportunity for the most improvement?

Well I think that we have been talking about the core that we have the opportunity to evolve our core as we move forward, so I would say the first place that we'll start seeing results first would be in the bottoms, and then tops and jackets really following in subsequent quarters.

Does that answer your question Oliver?

I'm not sure.

Our next question is from Jim Duffy of Stifel Nicolaus.

Thank you.

John, I like the sound of your plan.

Congratulations to you.

A couple questions.

So bear with me on this.

The first one, have you implemented any of these initiatives to drive traffic yet, and if so have you seen a noticeable influence in the results?

And then I have a follow-up related to that.

Yes, we have.

We've just launched and it's early to tell what the results will be, but we've done the affiliates program that they serve, and the Google clicks to bricks.

And the one initiative that we can stick to is the in-store technology that gives our guests access to our online inventory while in stores, and we've seen tremendous results with that with the app already generating 1% of our retail sales and 8% of our eComm sales.

I'm sorry, 4% of our eCommerce sales, I was a little optimistic with that.

Does that get credited to the eCommerce business or to the retail stores?

It gets credited to the eCommerce business but the store Manager gets compensated for the sale.

Very good.

So my next question is the traffic is getting better you feel; you have these initiatives which you expect to drive more traffic, you expect better product in the stores for Q3, and it sounds like even better yet for Q4.

Can you be more specific about the things you are seeing that gives you reason to be more conservative on the revenue outlook for the full year?

I mean even though we're seeing -- more comfortable with traffic, we still are seeing a deceleration in comps coming into Q2 and it's reflected in my guidance.

And so as we extrapolate out, we are taking into account the positives in terms of product assortment, et cetera, but I think it's still prudent to be conservative and expect that the underlying trend continues for the time being.

Thank you.

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

Tara, maybe you could comment a little bit on the men's business.

I think you said it was up 9% in the quarter so what's driving the men's business?

So we're really pleased with the men's business.

Q1, our big focus was on really landing our men's fit which we are pleased to have done as well as really focus on the base of our sweat assortment, so been pleased with the results there.

So I think the men's team this is their first quarter of our newly formed men's team with Felix del Toro, and we're excited about the momentum that I'm continuing to see in the product that's going forward in Q2 and Q3 and moving into Q4.

I don't like giving specifics on exactly what is doing on assortment because that's just nice information that I would just be handing out to competition, but we're very pleased with the results and where we see that business going, as well as we talked about the ivivva business and I think the product there looks tremendous and very excited for the team, and also the momentum they are gaining in their business as well.

And if you look at on the digital side what we've done with the men's business, they just launched a very specific social platform, they've got a different shopping environment.

So we've done some really great work and you can really sort of experience that firsthand on our website.

Got it, thanks.

Could you just remind us what percentage of the overall business is men's?

13% in the quarter, little over 13%.

Got it, thanks.

Operator we have time for just one more question.

Our next question is from Kimberly Greenberger of Morgan Stanley.

Thank you so much.

John, I wanted to check the cash balance on the balance sheet $750 million, how much of that is in the US?

A little over $100 million; most of it's in Canada.

Okay.

This $31 million one-time tax adjustment, how much will that charge, how much of the cash that's outside of the United States will that charge allow you to repatriate?

$500 million.

$500 million, okay, fantastic.

And then my question for Tara is is there, and I apologize for asking such a basic question, but is there a simple way to help us understand what you think is wrong with the assortment currently?

I'm not, I've been listening through the Q&A and trying to understand this a little better but I'm not sure I get it.

No, that's okay.

So what we've been and we talked about it on the last call is we have a core product assortment that has not been evolved as quickly as it should have been and we're diligently working away at that.

We didn't have enough depth in our seasonal product in Q1.

Our balance is more heavily weighted towards core and less in the seasonal, so we're getting that rebalance back in line and it will be running more where it was running in 2012 by the time we get back into Q3 and Q4.

I think there's been a real lack of cohesive merchandising stories in our store really telling those product stories in a really clear and concise way so lots of opportunity there, especially as we move into 2016.

And again I talked about the go-to-market calendar.

We have a lot of opportunity to evolve that process to really express where we are as a more complex North American brand and moving forward as a global brand.

So a lot of work being done there that will bring a lot more consistency as we move into 2016 in our product storytelling, and our beautiful technical product landing in stores on time in the right place at the right time as we talked about.

Great, thank you.

That's helpful.

So thank you very much.

It was good speaking to you all and we look forward to speaking with you next quarter.

Ladies and gentlemen this concludes today's conference.

Thank you for your participation and have a wonderful day.