Lululemon Athletica Inc (LULU) 2016 Q1 法說會逐字稿

Welcome to the lululemon athletica first-quarter 2016 results conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Chris Tham, SVP Finance.

Please go ahead.

Thank you.

Good morning.

Welcome to lululemon's first-quarter 2016 earnings conference call.

Joining me today for the results are Laurent Potdevin, CEO, and Stuart Haselden, CFO, along with Celeste Burgoyne, our SVP of the Americas, who will be available during the Q&A portion of the call.

Before we get started today, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecasts of certain aspects of the Company's future.

These statements are based on current information which we have assessed but which, by its nature, is dynamic and subject to rapid and even abrupt changes.

Actual results may differ materially from those contained in, or implied by, these forward-looking statements, due to risks and uncertainties associated with the Company's business.

Factors that could cause these results to differ materially are set forth in the Company's filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q.

Any forward-looking statements that we make on this call are based on assumptions as of today.

We undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.

The press release and accompanying quarterly report on Form 10-Q are available under the Investor section of our website at www.lululemon.com.

Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed.

Now, I would like to turn the call over to Laurent.

Thank you, Chris.

Good morning, everyone.

I am pleased to share with you today the results of a successful first quarter.

I will start by offering a few highlights of the quarter.

I will then provide insights on our continued progress towards our five-year plan, including each of the four growth strategies that were outlined on our last call.

Stuart will then provide details on financials and our updated outlook for the balance of the year.

We experienced continued momentum in Q1 that was the result of comp sales increases and gross margin improvements that exceeded our projections.

Most relevant, we saw inventory levels get in line with our sales trend, while exceeding gross margin expectations.

We delivered Q1 revenues of $496 million, gross margin of 48% and adjusted EPS of $0.30, which included $0.06 of net FX pressure, primarily due to significant FX revaluation losses that we incurred as a result of the strengthening Canadian dollar in Q1, which Stuart will expand upon.

While we are pleased to see the gross margin recovery in Q1 exceed what we had planned for, the continued recovery we are experiencing into the early weeks of Q2 is a validation of our team's work across our entire supply chain from design to in-store delivery.

Our foundational work over the last year is paying off, and the earnings recovery we have planned for 2016 is taking shape.

Likewise, with inventories now back in line, we have removed the strain on the Business, and are positioned to bring our innovation platform and our design vision to life, powerfully, both in stores and online.

While store traffic comp wasn't as strong in Q1 as in Q4, we delivered a total revenue increase on a constant-currency basis of 19%, driven by an 8% combined comp, the result of continued positive comps in our stores and e-commerce growth in the high teens.

Given the retail macro environment, driving traffic has been a focus, and continues to be one.

The Align Crop product launch is a great example of the inherent success in combining innovation, storytelling, education and visual merchandising across channels.

This launch drove traffic while enhancing brand engagement and margin.

You will see more holistic product launches in the months to come as we deliver new styles and innovative fabrics across categories and genders.

Looking broadly across our Business, we saw solid performance in key product categories, as well as continued momentum across channels and geographies.

We posted a 21% increase in our men's category, the sixth consecutive quarter of growth above 15%.

We posted another double-digit comp in women's bottoms, as the success of our innovation continues to delight our guests around the world.

By channel, our stores delivered another strong positive comp, marking four consecutive quarters of positive comps.

In Canada, where we have the most brand awareness, our guest loyalty was a catalyst in delivering a particularly strong trend.

As a result, we posted a higher store comp than our US store, which clearly made our Canadian team incredibly proud.

Globally, online sales increased 18% in Q1, on top of a 31% increase in the first quarter of last year, a penetration of nearly 20% of the total Business.

These results put us on track to achieve our long-term vision.

Operational excellence and building a sustainable, high-performance culture have been a strategic focus for the past couple of years.

I couldn't be more thrilled with the results we're seeing across all functions at lululemon.

Specifically, and as it relates to supply chain, I am proud of the team's accomplishment in building a scalable foundation as we grow into a global iconic brand.

There is still work to do, and yet our accomplishments are reflected in the improved gross margin performance.

On our Q4 call, we outlined four key growth strategies for 2016 and the next five years that will deliver revenue growth that doubles our 2015 sales, and earnings growth that will more than double during the same period.

Q1 marks solid progress against these goals, which I will touch on specifically now.

As a reminder, these four strategies were: product innovation across current and new categories; reaching our full North American potential; building and leveraging a digital culture; and building our global footprint through international expansion.

First is product innovation.

We see tremendous guest response when we lead with innovation and articulate a unique functional point of view.

We deliver our best work by never compromising on solving problems for athletes and yogis, while being focused on craftsmanship and design.

Our ambassadors are our local heroes and a unique source of inspiration.

These individuals reflect our culture, share our core values, test our product to their limits, provide us with invaluable feedback, and inspire us to create the best products for athletes and yogis.

We recently hosted our annual ambassador summit in Whistler with 100 ambassadors from nine countries around the world.

Our collaboration with these athletes will continue to drive future innovation throughout 2016 and beyond.

I recently had a chance to review the first prototypes of the winter 2016 season, and I'm really looking forward to our guests experiencing the powerful combination of function and fashion that Lee Holman, Tom Waller and the team are about to deliver.

In July, we will cheer our athletes on their journey to Rio.

On July 20 in Toronto, we will officially unveil the 2016 Canadian beach volleyball team equipment that all beach volleyball players representing Canada will wear while competing at the 2016 Summer Olympic Games in Rio.

This summer will mark the first Olympic games where lululemon has partnered with Canada's beach volleyball team to create one-of-a-kind equipment designed specifically for them.

The custom gear was developed with real-time feedback from the athletes of the Canadian women's and men's beach volleyball teams.

Rigorous testing on court and in-house at lululemon's Whitespace resulted in the ultimate designs that will allow the athletes to perform at their best without distraction, while looking fantastic.

As it relates to Q1, we saw improvement in the women's tops category, which comps positively, and continues to gain momentum.

A standout in the quarter was our Swiftly franchise.

The performance of the Swiftly was bolstered by the introduction of true black, a fabric and yarn innovation that achieves a unique depth of color.

We also expanded our bra assortment, giving our guests more option both from a support and design standpoint.

Last, but not least, our Fast Turn team, which is set up to bring product to life on shorter lead times, continues to be an important part of our strategy.

A perfect example of the agility Fast Turn affords us is the success we saw in our Making Moves collection.

In men's, we continue to see strong performance in our core franchises, with new silhouettes in our Seamless program and continued strength in our pants category, driving strong comps.

We believe [new vision] across men's and women's, we are focused on driving the men's sweat category, and bringing new fabric innovation and styles to market throughout our assortments.

This month we're excited to introduce the ABC construction that was pioneered with the ABC pant into more men's styles to keep our male guest distraction free throughout the day.

Turning next to our second growth driver -- reaching our full North American potential.

In Q1, we opened two new lululemon stores, along with six new ivivva locations.

This supported our total square footage growth in Q1 of 18%, keeping pace towards our 12% annual goal.

We also saw strong performance from recent key store optimization projects, including our Prudential Center store in Boston, our Northbrook Court store just outside Chicago, and our Chinook expansion in Calgary.

These optimizations represent an essential element of our real estate strategy to best meet guest demand.

As our e-commerce business accelerates, we continue to see potential to expand our physical presence through different formats in North America.

Where we have opened new stores, we see a corresponding increase in e-commerce penetration, reflecting the importance of building guest-centric and channel-agnostic strategies.

As we have mentioned on previous calls, technology continues to be a very successful way for our educators to connect our guests to our entire inventory pool.

Our third growth strategy is building our digital ecosystem to deliver enhanced experiences anytime, anywhere and however our guests want to engage with lululemon.

If you haven't already, I encourage all of you to visit our new environment at lululemon.com, which launched last month.

The site now allows us to share richer community and product content with deeper storytelling that connects product design to our ambassadors and our local communities.

The site also features a streamlined checkout process to provide a better purchase experience.

Our shop app now provides a functionality to see store product availability, therefore, giving our guests the option to get instant gratification by picking up product at their local store.

Being able to turn on this incredible functionality is the result of leveraging our RFID technology, which gives us inventory accuracy at the store level above 98%.

In the second half of the year, we will fully roll out our CRM capabilities.

We are moving quickly to test, implement, and optimize our guest analytics engine, and connect it with our digital marketing strategies.

Finally, our fourth growth driver, our international expansion.

We continue to make progress as we build vibrant communities in key cities across Europe and Asia.

We opened our first street-front location in Asia and first store in Singapore, situated in an iconic and historic [shophouse] on Duxton Road.

This multi-level store includes a community space perfectly designed to host community classes and events.

We also opened our first Japanese showroom, which I visited a couple of weeks ago.

Located in Tokyo's Harajuku district and on the corner of Omotesando and Cat Street, at about 900 square feet, this showroom is already one of our strongest performing showrooms, validating our go-to-market strategy and the potential of the Japanese market.

At the beginning of May, we opened our first store in Seoul, Korea.

I had the opportunity to attend the store opening and was inspired by the energy of the community, as well as our entire team from our educators to our ambassadors.

And our IFC location in Hong Kong remains a highlight, producing over $5,000 in sales per square foot, while our Tmall presence is growing very rapidly, building brand awareness across China.

Our disciplined and thoughtful approach to market entry and brand awareness building remains a very powerful strategy to ensure we create authentic and long-lasting relationship with our communities as we continue to expand our global collective.

In Europe, we are pleased with the progress we made in the quarter, and have some exciting developments on the horizon.

We will open our first store in Zurich, Switzerland, in July after great success with our showroom there over the past year.

In the summer, we will be opening our first shop-in-shop in one of the world's premier shopping destinations in London.

This location will allow us to build brand awareness and give our educators the opportunity to build the collective in a different environment.

Other brand-building opportunities are under way in London that we look forward to sharing with you on subsequent calls.

This is still just the beginning of our journey in Europe, and we're focused on winning in London.

To support our growth strategies, our brand and community team continues to create brand resonance around the world.

Last week, we launched our summer of yoga tour in the US.

We'll cover 7,500 miles of open road in 45 days, stopping at a dozen locations across the US, as well as select Wanderlust Festivals.

Each stop will include a yoga and meditation experience led by one of our ambassadors, as well as a pop-up shop featuring this year's exclusive Wanderlust products.

Here in Vancouver, we're gearing up for the event of the year, the fifth annual SeaWheeze Half Marathon, happening Saturday, August 13.

SeaWheeze clearly isn't your average half marathon, heralded by SELF Magazine as one of the best running races to sign up for in 2016, and is 13.1 miles of breathtaking scenery, salty ocean air, and over 10,000 runners.

This year's race sold out in 30 minutes.

So, if you're not running, there's always the Sunset Festival, an evening of yoga, music, dancing, food and, of course, beer.

When it comes to the people at lululemon, what has always been exceptional is only getting better.

Our educator and store manager turnover is at its lowest level ever in the brand's history, which is a testament to the commitment and investments we make in our people's development.

Our leadership team is the strongest lululemon has ever assembled.

It is global, diverse, and a combination of people with tenure, combined with new additions to the team.

Together, they provide the organization with deep experience and knowledge in design and innovation, vertical retail, digital, as well as a real focus on culture, talent, and operational excellence.

Last, but not least, we have welcomed two great new additions to our Board this year.

Both are bringing talent, insight, and energy to our discussion.

Kathryn Henry joins us with over 20 years of strategic IT and retail experience, and is a long-time friend of lululemon, having previously served as Chief Information Officer.

Jon McNeill joined us in April, and is President of Global Sales, Delivery and Service for Tesla Motors.

He's one of the most respected leaders in America today, whose success as an entrepreneur has earned him a reputation as both an innovator and operational leader.

Today, we have the right people throughout lululemon to support the execution of our strategic five-year plan and invent the future beyond 2020.

In conclusion, Q1 was a solid quarter for us.

Our performance was driven by our unique business model encompassing product innovation, engaging guest experiences, and a passion for the communities we live in.

As we look to the rest of 2016 and beyond, I am inspired by the progress we're making, in particular the return to earnings growth driven by gross margin expansion that we see taking shape in Q2.

I am proud of our teams, who have been relentlessly building the capabilities and infrastructure that will drive and sustain our long-term growth and profitability.

Celeste Burgoyne, our SVP of the Americas, is joining us this morning, and is available to answer your questions later during the Q&A session.

With that, I will now turn the call over to Stuart, who will review our financial results for the first quarter and provide guidance on the full fiscal year.

Stuart?

Thank you, Laurent.

I'll begin today by reviewing the details of our first-quarter results.

I'll then review our current outlook for the full-year 2016 and also the second quarter.

But starting with Q1, we saw a period of continued top-line momentum within the context of a challenging retail environment.

We delivered accelerated progress in recovering our gross margins, and completed our work to rebalance our inventory levels in an orderly and disciplined manner.

When considering the impact of FX on our results in the quarter, we're pleased with the underlying recovery in earnings that Q1 represents, which we now see extending into Q2.

Looking more closely at the details of the first quarter, total net revenue rose 17% to $495.5 million, with the increase in revenue driven by several factors.

First, a total constant-dollar comparable sales growth of 8%, comprised of a bricks-and-mortar comp-store sales increase of 5% and e-commerce comp of 18%.

Secondly, an increase in square footage of 18% versus last year, driven by the addition of 57 net new Company-operated stores since Q1 of 2015: 26 net new stores in the United States, 1 store in Canada, 1 in Australia, 5 in Europe, 4 in Asia, and 20 ivivva stores.

Finally, these factors were offset by the foreign exchange impact of a stronger US dollar, which had the effect of decreasing reported revenues by $7.3 million or 1.5%.

During the first quarter, we opened 10 net new Company-operated stores: 2 in the US, 1 in Asia, 1 in Australia, and 6 ivivva.

We ended the quarter with 373 total stores versus 316 a year ago.

There are now 290 stores in our comp base: 41 of those in Canada, 191 in the United States, 29 in Australia and New Zealand, 2 in Europe, 1 in Asia, and 26 ivivva.

At the end of Q1, we also had a total of 71 showrooms in operation: 25 lululemon showrooms in North America, 20 internationally, along with 26 ivivva showrooms.

Revenues from Company-operated stores totaled $358.7 million or 72.4% of total revenue, compared to $314.1 million in the first quarter of 2015 or 74.2% of total revenue.

Revenues from our digital channel totaled $97.6 million or 19.7% of total revenue, compared to 19.7% of total revenue in the first quarter of last year.

Other revenue, which includes outlets, showrooms, strategic sales, pop-up stores and warehouse sales, totaled $39.2 million versus $25.8 million in the first quarter of last year.

This increase in other revenue relates primarily to the addition of seven outlet stores since Q1 2015, in order to ensure appropriate liquidation capacity for our growing full-price business.

It's also worth noting that our outlet store volumes are not included in the store comp calculation.

Gross profit for the first quarter was $239.1 million or 48.3% of net revenue, compared to $205.9 million or 48.6% of net revenue in Q1 2015.

We're pleased with this progress against our gross margin goals.

The factors that contributed to this outcome were: 40 basis points of overall product margin improvement, primarily driven by lower FOB costs, reductions in raw material liability expenses and lower air freight, offset with higher markdowns compared to Q1 2015 as part of our final steps to complete the rebalancing of our inventories.

Offsetting this improvement in product margin was 50 basis points of decline due to the foreign exchange impact of a stronger US dollar.

And lastly, 20 basis points of deleverage from occupancy and depreciation.

SG&A expenses were $181.5 million or 36.6% of net revenue, compared with $137.8 million or 32.5% of net revenue for the same period last year.

SG&A in the quarter was burdened by the impact of the significant strengthening in the Canadian dollar.

This impact was higher than our expectations when we gave guidance, due primarily to additional FX revaluation losses that we incurred in the second half of the quarter.

Keep in mind that the Canadian dollar appreciated from $0.75 versus the US dollar at the time of our last earnings call, to just under $0.80 by the end of Q1.

The resulting revaluation of the US dollar balances accumulated in our Canadian entity significantly increased the FX losses reported in SG&A.

Specifically, we incurred $13.5 million in revaluation losses in the quarter, which are reflected in total SG&A.

This represented a $9.1 million increase over Q1 last year.

Setting that aside, the remainder of the SG&A deleverage was due to consulting costs tied to our gross margin and supply chain initiatives, which are winding down now in Q2, as well as increased digital marketing efforts to drive traffic to our stores and the website, and higher corporate support center overhead, which included $1 million of severance incurred in the quarter.

As a result, operating income for the quarter was $57.6 million or 11.6% of net revenue compared with $68 million or 16.1% of net revenue in Q1 2015.

Tax expense for the quarter was $11.8 million or 20.6% of pre-tax earnings compared to 30.3% a year ago.

The decrease in the tax rate is primarily due to a $5.6 million tax recovery, which we recognized in Q1 2016.

This is connected to the Company's transfer pricing arrangements and estimated taxes related to the associated plan to repatriate foreign earnings.

Net income for the quarter was $45.3 million or $0.33 per diluted share, compared to net income of $47.8 million or $0.34 per diluted share for the first quarter of 2015.

Excluding the tax and related interest adjustments, diluted earnings per share would have been $0.30.

Importantly, the negative net impact to earnings from foreign currency this quarter was $0.06 per share versus the prior year, reflecting the significant strengthening in the Canadian dollar in the quarter.

Our weighted average diluted shares outstanding for the quarter were 137.5 million versus 142.3 million a year ago, which takes into account the weighted impact of 240,000 shares repurchased during the quarter at an average price of $65.01 per share.

By the end of the quarter, we had completed a total of $437.2 million in total share repurchases, with the remainder of our $450 million total authorization now having been completed in early Q2.

Capital expenditures were $26.6 million for the quarter, compared to $27.9 million in the first quarter of last year.

Turning to our balance sheet highlights, we ended the quarter with $550 million in cash and cash equivalents.

Inventory at the end of the first quarter was $286.2 million or 21% higher than at the end of the first quarter of 2015, reflecting a 3% decrease in inventory per square foot.

This result reflects the substantial work begun a year ago in response to the supply chain disruptions we experienced in the first half of last year.

We are pleased with how our teams across the Company, from sourcing and logistics to stores and digital, were able to unwind this excess inventory position while maintaining the integrity of our pricing and minimizing the impact on margins.

We were also pleased to see that our preliminary inventory position at the end of May indicated an increase in the high single-digit range versus last year.

We now expect our inventory growth at the end of Q2 and for the balance of the year to sit beneath our forward sales trend.

Turning now to the details of our Q2 and FY16 updated outlook, we expect revenues in Q2 to be in the range of $505 million to $515 million.

This is based on a comparable sales percentage increase in the mid-single digits on a constant-dollar basis, compared to the second quarter of 2015, and assumes a Canadian dollar at $0.77 to the US dollar.

This also assumes eight new store openings in the quarter.

Q2 marks a key gross margin inflection point for the Company, as we have discussed for some time now.

Our supply chain initiatives have made significant progress and our margin goals remain on track.

So, for the second quarter, we now anticipate gross margin to increase approximately 120 basis points over Q2 of last year.

Consistent with what we have previously outlined, the increase is attributable to the following: higher product margins through improvements in key areas including: reductions in FOB costs; lower air freight; and reductions in raw materials liability costs through better controls and process changes.

These will be offset by modest occupancy and depreciation deleverage.

Based on the prevailing rates, we expect foreign exchange to have a nominal impact to gross margin in Q2.

We expect SG&A in the second quarter to delever significantly from Q2 2015, with roughly one-third of the impact attributable to lapping FX gains incurred in Q2 of last year, and the balance associated with the costs of completing the supply chain and gross margin initiatives, incremental digital marketing, technology projects, and also brand and community investments.

Assuming a tax rate of 30.2% and 137.5 million diluted weighted average shares outstanding, we expect diluted earnings per share in the second quarter to be in the range of $0.36 to $0.38 per share versus $0.34 a year ago.

For the full-year 2016, we expect revenue to be in the range of $2.305 billion to $2.345 billion.

This is based on a comparable sales percentage increase in the mid-single digits on a constant-dollar basis.

We expect to open up to 40 Company-operated stores, slightly lower than our prior estimates, due to timing shifts in selected openings.

This includes 11 new stores internationally and 12 ivivva stores, and represents a square footage increase of approximately 12%.

We expect gross margin for the year to increase from 2015, beginning with the positive inflection starting in Q2 that we just outlined, and continuing as we head into the back half of the fiscal year, as we deliver the benefits from the cost improvements, duty and logistics opportunities, and more disciplined supply chain processes that we have been working on now for several quarters.

We expect deleverage in the full-year SG&A versus 2015, driven by strategic investments in our supply chain, digital capabilities, CRM infrastructure, guest experience, brand, and IT systems.

We expect the greatest deleverage in the first half of the year, driven notably by the FX losses we incurred in Q1, with some modest level of deleverage now expected in the third and fourth quarters.

We expect our FY16 diluted earnings per share to be in the range of $2.08 to $2.18, or $2.05 to $2.15 normalized for the tax and related interest adjustments in Q1.

This is based off of 137.5 million diluted weighted average shares outstanding, and also assumes an effective tax rate of 28.9%, or 30.2% on a normalized basis.

We expect capital expenditures to range between $160 million and $165 million for the FY16, reflecting new store openings, renovations, relocation capital, and also strategic IT and supply chain capital investments.

This is higher than our guidance when we last spoke with you in March due to the purchase of a land parcel in Vancouver for general corporate purposes.

In closing, Q1 marks several key milestones for us: sustained top-line momentum fueled by product innovation, margin recovery ahead of expectations that validates our supply chain efforts, and rebalancing of our inventories to position us for disciplined growth this year and beyond.

We're excited for the trends we're now seeing emerging in Q2, which keep us on track to deliver the margin recovery and earnings inflection we've been working towards now for some time.

Much work remains in front of us, but we are encouraged by our success in Q1 and progress so far in Q2.

With that, I will open up the call for questions.

Operator?

(Operator Instructions)

Paul Lejuez, Citigroup.

It's Tracy filling in for Paul.

I have two questions, first on gross margin.

So you beat your guidance for the last two quarters in a row.

I'm wondering if we should be thinking a little more optimistically about your gross margin goals for 2016 and 2017 relative to what you previously talked about.

Then secondly, on SG&A, what changed in your guidance that you're now expecting deleverage in the second half?

Maybe that's your latest FX; I'm not sure.

Thanks.

Hey, Tracy; it's Stuart.

Yes.

So on the gross margin for the year -- or just the gross margin in general, I think we were happy with the results that we saw in Q1.

Certainly, saw upside in things that we mentioned on the call, the FOB cost, the fabric viability, and air freight, all better than expected.

Those were offset by the markdowns that we mentioned.

We see that continuing into Q2.

We're pleased with the progress again that we're making against our plans.

At this point, we feel like the guidance that we've given properly reflects the order of magnitude of that recovery.

Certainly, there's always potential to do better, but we feel like the guidance where we have positioned it is appropriate, given the risks and opportunities that we see in the supply chain and our margin plans.

The other elements of gross margin, occupancy and depreciation -- occupancy and depreciation will remain a headwind as we mentioned.

Certainly, those costs are more fixed.

To the extent we exceed our revenue expectations, we'll deliver more leverage on those fixed cost elements of the gross margin.

Certainly, the FX is a wild card at this point for Q2.

As we mentioned, we see it as a relatively nominal effect as we look year-over-year versus last year.

But that can change as we saw in the first quarter as well.

Then on your second question with regard to SG&A deleverage in the second half, I think it's really a function of just as we refine our outlook for the second half of the year, we're seeing some modest level of deleverage.

I would say that translates to less than 100 basis points in the second half.

It's really just a function of where we see the current estimates on the FX impact, both translation and revaluation, as well as just the investments that we continue to make in our business.

So we feel like that connects to a healthy operating margin recovery in the second half of the year.

We expect to see earnings up in the second half double-digits.

We expect to see a healthy recovery in our operating margins as well, as we're able to flow through the improvements in our gross margin to a greater degree in the second half of the year.

So hope that answers your question.

Yes, it did.

Thanks a lot.

Good luck, guys.

Thank you.

Oliver Chen, Cowen.

Great results in an environment that hasn't been easy.

Stuart, the rebalancing of inventory is really impressive.

So for second quarter, what should we assume in terms of maybe second quarter and back half in terms of markdowns relative to last year, given that it sounds like the inventories are in really super shape?

Laurent, on that topic of women's tops, where are you in that -- within that innovation?

What needs to happen next in terms of what we should look for, whether it be pricing or styling?

Are there any changes ahead as you think to the back half in terms of how you're evolving the pant wall, whether it be products or visual merchandising?

Because I know there's a lot of innovation focus in that area of the store as well.

Thank you.

Great.

Thanks, Oliver.

I'll address your first question.

So we're very pleased with the inventory position that we're in and the work that the teams have completed, as I mentioned.

We expect to see markdowns moderate into Q2 and the balance of the year.

That's reflected in the margin guidance that we've given.

We noted on the call in the prepared remarks that, as of the end of May, our preliminary inventory results indicate that inventories are up in the high single-digit range in the end of May.

That just reflects the further moderation in that year-over-year inventory growth.

As we mentioned, we expect inventories to be up to a lesser degree versus our revenue increases.

So I think if you look at it on a two-year basis, the inventory position is still -- it's still full.

We have plenty of inventory to drive our revenue projections.

We're pleased to see the year-over-year trends come back in line -- or actually will be -- sit beneath our forward sales trend.

So inventories are healthy.

They're clean.

They position us in a manner that enables the optimization of our assortments.

We're not dealing with the prior inventory overhang.

It should translate into a better experience for our guests as well.

Oliver, from a tops standpoint, we're actually really pleased.

I would say that we're slightly ahead of where we thought we would be.

If you've been in our stores, you've seen the assortment shifting in the right direction.

Some of that is really the result of the power of our Fast Turn group, which really works on shorter lead times.

You can see different silhouettes.

The Making Moves collection with the pleated back is a great example of bringing something to market really quickly.

The Swiftly franchise has done really well.

But I would attribute the current success mostly to the new silhouette, the looser silhouette, the one that you can layer.

That combined with the success of our bras, the Making Moves bra or the Rack Pack bra, the Get Down bra has really put us in a strong position.

So I just looked at the spring 2017 product and last week at the winter 2016 product and I'm absolutely thrilled with the progress that we're making.

It very much -- you'll see function and fashion coming together in a way that you haven't seen in quite some time, if not ever.

It's really the result of the product reorg that we've done and a number of talents that we added to the team from a design standpoint.

So that combined with the progress that we've made in supply chain and being able to flow the product to bring the design in turn to life the way we want to, it feels really powerful.

It's actually showing up on the floor right now.

Thank you.

That's very helpful.

Thanks, Oliver.

Sharon Zackfia, William Blair.

I think this is the first quarter in a while where your e-com hasn't grown as a percent of sales.

I know it's chasing a moving target, but just curious as to what you think is going on in that channel?

If you expect it to outpace the bricks-and-mortar for the full year?

Any thoughts on that would be helpful.

Hey, Sharon, it's Stuart.

So yes, the e-com growth, still double-digits, high teens.

We're not going to feel bad about that.

It is a little lower than what we've seen last year.

We feel like the penetration has the potential to grow well above 20%, easily could reach 25% to 30%.

I think we've talked about that in our five-year goals.

I would expect as the digital team is able to ramp up the full impact of our new website, as we're able to bring online, particularly in the second half of the year, the full capabilities of our CRM efforts, we're going to see healthy trends in that e-com sales trend and would expect penetrations to increase over time.

So we're not seeing any red flags, per se, in the Q1 results.

Remember that we're really focused on building guest-centric and channel agnostic strategies.

So the launch of the new website is actually a great example and a great foundation for what's to come.

We had -- with every website launch we had anticipated a slight degradation in business as guests get used to the new user experience.

Actually what we've seen is better conversion, especially on mobile, and a very rapid adoption to the website.

So we feel very good that as we launch the full analytics capabilities of our CRM and we tie that to our digital marketing strategy, we've got -- we're actually going to leap frog from where we've been.

So I'm very excited for what's to come there.

Great.

Thank you.

Matthew Boss, JPMorgan.

Great quarter, guys.

On SG&A can you just talk about investments that are embedded this year versus 2017?

I guess the question being, does deleverage stabilize or potentially even turn to leverage next year if mid-single-digit comps were to persist?

Then, just secondly on international, just the best way to think about the time line for international profitability.

Sure, Matt.

It's Stuart.

On the SG&A question, yes, I think we're going to get past the major supply chain investments, really, in Q2.

As we get into the second half of the year, we'll begin to lap those investments in the prior-year period.

So it will be -- it will create some tailwind from an SG&A standpoint.

That's embedded in the guidance that we've given.

I think that, then, we have that in a more pronounced way as we get into 2017 and beyond, as the -- we don't have these lumpy supply chain project pressure in the SG&A.

So that element of it will certainly moderate, even in the second half of the year and certainly into 2017.

We're always going to have things we're investing in.

We're not in a place where we're squeezing SG&A to drive earnings.

This is still a growth story.

It's about revenue growth.

It's about margin expansion.

Those were the underpinnings of how we will recover a stronger earnings trajectory.

We're going to invest in SG&A where it makes sense.

But that said, we expect it will moderate even into the second half.

Then from an international standpoint, we continue to be really pleased with the strategy of entering key cities in key markets.

So when you look at our performance in Asia, we've got all of our stores, over $1,500 or $1,600 a square foot with IFC in Hong Kong topping the list at $5,700 a square foot.

So very happy with that.

The Tmall penetration that we're seeing there is really putting a lot more eyeballs on the brand where we don't have a physical presence.

Europe -- in Europe we're very focused on London.

The retail environment in London has been a little tricky lately until they go through the elections at the end of June.

What we've seen is in the market where we've got a great community, we're doing really well including King's Road, Covent Garden and Marylebone.

In a couple cities where we've probably gotten a little bit ahead of the vibrancy of the community, we're not seeing the same result and that would be Danbury and Richmond.

So it's actually a great sort of validation that focusing on the key markets and going where we have the community pays off.

I would actually love to add that in our remarks, we have hinted at the fact that we're going to find a couple different ways of going to market in London that will definitely drive brand awareness in a really powerful way.

We're very excited to share that with you probably in the next couple of weeks.

Wow.

If I could sneak one more in.

Given some of the larger picture shopping mall trends, what kind of traffic and comp trends have you seen so far in 2Q, just versus the first quarter and the mid- single-digit guide.

So Matt, I'll give a little color and might invite Celeste to comment as well.

The traffic was softer in the first quarter versus what we saw in Q4.

It was softer late in the quarter as well.

That persisted into the first couple of weeks of May in Q2.

We have seen the traffic trends improve in the last couple of weeks, so there's been a mixed trend in terms of traffic in the first part of Q2.

AUR and conversion have offset that to help us deliver the comps that we reported in Q1 and we guided to in Q2.

But maybe I'll ask Celeste to add some color.

Yes, Stuart.

I think you hit it.

Basically, we did see Q1 traffic not being as strong as we saw in Q4.

However, when we look at the highly negative macro trend we feel really good that we were favorable to that.

AUR conversion gives us really good indication that our new product drops are resonating with our guests, as well as our continued focus on a great guest experience both online and in stores, it's continuing to pay off.

So as we look into Q2, we continue to see the momentum in AUR and conversion maintain.

So it definitely gives us confidence as we shift into Q2.

That's great color.

Good luck.

Thank you.

Anna Andreeva, Oppenheimer.

Great.

Thanks so much.

Good morning, guys.

Let me add my congrats as well.

Thank you.

Thanks, Anna.

I was curious if you could talk about the monthly comp progression in 1Q.

Should we think April was the weakest month of the quarter given the traffic comments that you made?

Sorry if we missed this, what were comps by division in 1Q: Canada versus US and Australia?

Secondly, I guess to Laurent, just holistically thinking through the pricing architecture for lulu, I think we are starting to see some of the opening price points in tops specifically.

Is that an opportunity to extend the customer reach for the brand?

Any tweaks you guys need to make to pricing architecture in bottoms especially?

Thanks.

Hey, Anna.

So that was a mouthful.

So on the comp question in traffic, we're not going to break out the comps by month.

I think, as Celeste said, we saw -- we were very encouraged by the strength in AUR and conversion.

Traffic, as I mentioned, was weaker in the second half of Q1 and that persisted into the early weeks of May, before becoming stronger in the last few weeks.

So that's embedded, again, in the results that we reported in Q1 and then in the guidance.

By region, I think we mentioned in the prepared remarks that we saw strength in Canada in particular.

Canada actually posted a store comp that was slightly higher than the US, which, again, we look at that as a strong indicator of the -- just the strength of the brand and how in our most mature market, we're driving some of our strongest results.

Again, it speaks to our assortments and our in-store execution.

Then, on your question regarding pricing --

The thing about pricing, Anna, on the bottoms side, look, we're very happy with the pricing architecture.

As I was mentioning in looking at winter 2016, spring 2017, we're delivering a lot of innovation.

So we price with the value that we deliver to the guests.

We're very confident that we've got with the pricing architecture both across category but from a global standpoint as well.

With tops, we're where we need to be.

We see a lot of success.

We see the opportunity to actually bring innovation and continue to be sort of really owning the high end of the market the way we always have.

Okay.

Thanks.

Best of luck.

Thank you.

Operator, we have time for one more question.

Thank you.

Kimberly Greenberger, Morgan Stanley.

Great.

Thank you so much.

Thanks for squeezing me in.

A really nice quarter.

Stuart, I just wanted to ask, I think you said $0.06 in the quarter due to FX hits.

Can you just remind us how many pennies of FX headwind you had planned for in the quarter?

Then, Laurent, as we look into the back half of the year and reflect on the very successful pant launch that you guys had in the third quarter last year, can you talk about your product strategies and how you're thinking about driving your business to the next level as we proceed through the year?

Thanks so much.

Hey, Kimberly.

It's Stuart.

So the EPS impact from FX certainly exceeded our expectations.

We did expect deleverage in the quarter.

You might recall that we had mentioned that in our guidance back in March.

We'd, at that point, even seen the Canadian dollar strengthen significantly from around $0.70 at the end of Q4 to $0.75 at the time of the call.

Safe to say that the actual result exceeded our expectations in terms of the level of pressure that we saw from FX.

Canadian dollar, as we mentioned in the prepared remarks, strengthened $0.05 from $0.75 to $0.80 in the last four weeks of Q1.

We did not expect that.

So I think we had an estimate of around $0.03 in the prior outlook that we had.

So where it landed was almost double our expectations.

So it's something that is really part of the exposure that we have from the cash balances that we accumulate in Canada in US dollars.

It's not really the translation of the Canadian P&L, per se.

I would add that we've taken steps already to -- from an operational standpoint, to reduce our exposures in those cash balances.

At this point, our exposure is less than half of what it was in Q1.

So we feel like we're going to be able to mitigate this exposure to some degree as we go forward, but certainly it's something we'll continue to be focused on.

On your product question, Kimberly, I think the pant wall launch was successful and was really the very beginning of what we're about to do.

When you see summer land, you'll see a completely different assortment.

Having sort of collapsed the studio and the cardio part and making them one group, you're going to see a heart wall.

You're going to see the ability to put outfits together across the entire assortment.

It's going to be a lot more powerful.

You're going to see a lot more newness in fabrics, textures, and prints.

But also a very elevated attention to detail to trim, construction, raw materials in a way that probably hasn't come to life in the past couple of years.

So obviously -- and we?ll continue to focus on run, where we see a tremendous opportunity both for men's and women's.

You'll see most of the focus, if not all of the focus, on the sweat category, which we really own and want to continue to lead.

So as you see summer, you'll see an environment that is elevated, that speaks to function and that looks fantastic.

Terrific.

Thank you.

Thank you, everyone, for joining us today.

We'll talk again next quarter.

Thank you.

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

This does conclude the program.

You may all disconnect.

Everyone, have a great day.