lululemon Q4 Earnings Conference Call: Full Transcript

Operator: Good day, ladies and gentlemen and welcome to the lululemon athletica Fourth Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. If anyone should require Operator assistance, please press star than zero on your touch tone telephone. As a reminder, this conference call is being recorded. I would now like to do turn the conference over to Chris Tham, VP of Finance. You may begin. Chris Tham: Senior Vice President, Finance: Thank you and good morning. Welcome to lululemon's fourth quarter 2015 earnings conference call. Joining me today to talk about our results are Laurent Potdevin, CEO; Stuart Haselden, CFO; and Lee Holman, EVP Creative Director will also be available during the Q&A portion of the call. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast 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 and 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 Annual Report on Form 10-K will be available under the Investors section of our website at 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. And now, I will like the call over to Laurent. Laurent Potdevin: Chief Executive Officer: Thank you, Chris and good morning, everyone. It is my pleasure today to share the results of a very solid fourth quarter. I will speak to some highlights of 2015 as well as our priorities into 2016 and beyond. Stuart will then walk you through our financials and guidance in more detail. 2015 was a transformative year for lululemon, one where we successfully reached key milestones that are positioning us for continued growth and improved profitability, over the next five years. The strengths that lululemon demonstrated in the fourth quarter exceeded our expectations as a result of continued top-line momentum, focus on gross margin and inventory levels. While we have room to improve, we are well-positioned to deliver solid earnings growth in 2016. From a top line perspective, the fourth quarter delivered 22% constant currency revenue growth, including exceptional full price sell through during the key holiday week. We delivered an 11% global combined comp, the result of accelerating performance across our channels and regions. Our e-commerce revenues continue to outpace our overall growth, posting a 33% increase in the quarter. While inventory levels are still elevated, they are significantly lower than our prior estimate. This reduction happened while delivering gross margins above the high end of our guidance. And looking more closely at the results in the quarter, we see exciting momentum by category, channel and geography. Our women's category continued its strong performance in Q4 with bottoms delivering double-digit comps, reflecting the continued strength of our product assortment. The successful launch of engineer sensation with new technical fabrics and innovative construction techniques drove the business led by new Align Pants, designed to minimize deflection and maximize comfort. We also saw sequential improvement in women's tops where comps were positive in the quarter, led by the success of our skinless program. And I am actually excited to see what will come next with the Align Pants as we launched a new Align Crops in the next couple of weeks. Our men's category continued to outpace our overall growth with another strong comp of 24%, driven by our sweat category. It's been exciting to see acceleration in men's as we build on the continued success of franchise items such our Metal Vent Ts, our Short programs and our ABC Pants. With a total penetration to sales of just 16% and a renewed focus on credit direction, we are only getting started in the men's category. Our North American stores posted accelerating comps versus the highest prior year comparison, supported by strong full price sell through in the peak holiday sales period. The quality of sales speaks to our unrivaled product performance and to our educators who deliver exceptional experiences that are unique in the retail landscape today. Canada saw a strong trend in Q4 that continues into the first quarter. We have so proud of our Canadian business and the performance in our home market. It speaks to the loyalty of our guests and the strength and scalability of our brands globally. Within our North American footprint, we increased our square footage by 15% in 2015 through new stores, store optimization and expansion. We opened our new West Edmonton Mall which is now double its original size and is the most productive store in the world. We opened our Flatiron Store in New York, introducing Hub 17, our community space. We have now also brought our Lab concept to the United States with our first location which opened yesterday on Bond Street in New York. Lululemon Labs are hub of creativity of functional and experimental design that talks you (ph) to the culture, trends and technology of the people and places it celebrates. We are excited about what our teams can do in these new locations, and we will continue to look for the right opportunity to grow our footprint strategically in key markets. As I turn to our digital culture, we are building an ecosystem that will create unique experiences for our guests. As I mentioned earlier, our e-commerce revenue in Q4 grew over 30% to just over 20% of total sales in the quarter. This will only continue to increase as we expand our digital business model with the introduction of innovative digital experiences, leveraging CRM capabilities and the expansion of more sophisticated digital marketing strategies. I am thrilled to see what Miguel and his team are doing as we continue to build our channel agnostics strategies for our guests to engage with lululemon whenever, however and wherever they want to. Internationally, we continued to make important progress in Q4 towards our expansion goals. In Europe, we remain focused on winning in London where we opened another great location in Q4 at Westfield Mall. And we are finalizing exciting new locations in capital cities around world including Seoul and Tokyo. Our success is based on discipline and commitment to go to market when our communities are vibrant and pulling us in. It is a nimble, powerful and unique strategy that further solidifies our footprints as we expand our global presence. 2015 was a pivotal year, in which comps accelerated, margins stabilized and critical infrastructure was established. Last month, we completed our management team with the arrival of Gina Warren, our Executive Vice President of Talent and Culture to lead, nurture, and evolve our most important asset: our people. lululemon now has a full management team in place, a diverse group of global citizens incredibly talented and deeply ingrained in our culture. This team is more aligned than ever with our goal of building a highly profitable global brand. Our deliberate focus on being design-led is fueling our growth and our focus on operational excellence is driving our earnings expansion. In addition to the highlights I have already mentioned, we also saw important progress in building key capabilities to support how we will scale the business in the coming years. First, we made foundational investment in our product design and innovation capabilities, reorganizing our Whitespace team as well as our design and merchandising team. We established a brand's first ever Creative Director role and appointed Lee Holman to drive our design-led approach. This drive to unify men's and women's is creating greater alignment and a strengthened brand vision. As a result, the role of Senior Vice President, Men's held by Felix Del Toro has been eliminated. I want to personally thank Felix for his important contribution over the past couple of years. Second, our supply chain was and continues to be a major focus for us this year. We have made important steps towards building a reliable and scalable supply chain to bring to life our design vision and I am delighted to announce the hiring of Ted Dagnese who has joined us in the role of Chief Supply Chain Officer. Ted is an industry veteran who will bring his leadership and experience to the tremendous amount of progress that was made with --. Looking forward to 2016 and the next five years, we're excited and ready to leverage the capabilities we filled in 2015 as we resume earnings expansion and scale our business as an originator of brand. By 2020, our plan is to double our revenue and more than double our earnings. We will achieve these through four of distinct growth strategies. First, product innovation. It is central to how we continue to create transformational experiences for our guests who live and breathe the sweat life. Our products are rooted in function and our design of -- proud of every single product they create. Specifically we will focus on two areas: building our women's sweat category to include expanding and improving our top business with the focus we've had on bottom. Our product assortment in the second half of 2016 will capture that substantial opportunity and growth potential. The other major product opportunity is the continued expansion of our men's category. With a focused steady vision, we will see continued disruptive innovation in product. Our focus will be on training, run, and yoga as we elevate and diversify our stable offering and build out our seamless program. The second growth driver is the continued store build-out in North America. Square footage growth in the US will continue to be a key component of our strategy to fully develop current communities and we are continuing to open new stores where we have underserved markets. And the third growth driver is the ramp up of our digital culture as we scale our uniquely lululemon guest experiences in ways at channel agnostic and global. Our vision is to design and nurture digital ecosystem that amplifies human experiences, relationships and connection. Digital is a critical platform for us to tap into the power of our collective, both online and offline, allowing us to continue engaging with our guests in an authentic and personalized ways. As our guests increasingly engage with us online, this channel will continue to grow rapidly and likely will account for more than one quarter of our business by 2020. We are laying the foundation for our long-term digital capabilities by building out our cross-function in areas such as analytics, digital product management and digital marketing, enhancing our guest experience with the mobile first mindset to connect digital and physical experiences, strengthening our e-commerce operations and igniting digital marketing based on a powerful news channel platform. This insight will give us the ability to interact with our guests in ways we haven't been able to before and will drive traffic and conversion across all of our channels. And lastly, the fourth growth driver as we look forward to 2020 is our international expansion. We are continuing to focus our expansion in key capital markets to build brand awareness, which will support future and border store expansion in those types of geographies. We expect to open 11 stores in 2016 and further accelerate in 2017 and beyond. Combined with our e-commerce business, we expect international to account for 20% to 25% of the business by 2020. In pursuing these growth drivers, we will remain true to pillars of our brand operating model that you have heard described us now for over year: our product, our guest experience and our brand and community. Under the leadership of Lee Holman, the product organization will deliver product growth by applying our unique perspective and insight into solving problems for athletes, designing with the lens of functional innovation and impeccable craftsmanship. Guest experience has and always will be a differentiator at lululemon. Within our physical location, we see further opportunities in expanding and enhancing our experiences as we evolve our footprint and as we build our digital culture. We expect our store portfolio to be a combination of our standard 3,000 square foot store, larger format in key high volume locations, and smaller format stores that are relevant to smaller markets or destination resort locations. And finally, brand and community is a diverse ecosystem activity that fosters storytelling and now it shows relationship with our guest in store and our digital platform and through experiences in our local communities. Our unique grassroots model continues to be incredibly powerful and relevant. When combined with our investment in public relation and in digital platform, it is getting amplified on a global scale. So as we look to the start of 2016, our outlook for the year is healthy with the recent solid earnings growth. This is a combination of the foundation and infrastructure we put in place over the past couple of years, while creating a high performance culture focused on delivering sustainable profitable growth, putting us well on our way to achieving our five-year goal of doubling our revenues and more than doubling our earnings. With I will now turn things over to Stewart to review our financial results and provide guidance for the upcoming quarter and for fiscal year. Stuart? Stuart Haselden: Chief Financial Officer: Thank you Laurent. I will begin today by reviewing the details of our fourth quarter of 2015 and highlights from the year. I will then provide details for our outlook for 2016 and the first quarter. I will also provide further details of our growth plans for the next five years as Laurent has described. The fourth quarter was an important period for us as we posted accelerating double-digit comps against our highest prior period comparisons of the year. We also made improvements in our product margins and solid progress in realigning our inventories, which help set the stage for the recovery and profitability in 2016 that we have been building towards this past year. Turning to the details, Q4 total net revenues rose 16.9% to $704.3 million with the increase in revenues driven by several factors that include: a total constant dollar comparable sales growth of 11% comprised of a bricks and mortar comp store sales increase of 5% and an e-commerce comp of 33%; and also an increase in square footage of 20% versus last year, driven by the addition of 61 net new company-operated stores since Q4 of 2014, 30 net new stores in the United States, two stores in Canada, five in Europe, three in Asia and 21 ivivva stores. And finally these factors were offset by the foreign exchange impact of a stronger US dollar which had the effect of decreasing reported revenues by $28.3 million or 4.7%. During the fourth quarter, we opened nine net new company-operated stores, six in the US, one in Europe and two ivivva. We ended the quarter with 363 total stores versus 302 a year ago. There are now 284 stores in our comp base, 41 of those in Canada, 188 in the United States, 31 in Australia and New Zealand, one in Europe, one in Asia, and 22 ivivva. At the end of Q4, we also had a total 84 showrooms in operation, 25 lululemon showrooms in North America, 21 internationally and 38 ivivva. Company operated stores represented 72.3% of total revenue. Revenues from our digital channel totaled $146.3 million or 20.8% of total revenue compared to 19% of total revenue in the fourth quarter of last year. Other revenue, which includes strategic sales, showrooms, pop-up stores, warehouse sales, and outlets totaled $48.9 million versus $31.9 million in the fourth quarter of last year. Gross profit for the fourth quarter was $354.5 million or 50.3% of net revenue compared to $310 million or 51.5% of net revenue in Q4 2014. The factors which contributed to this 120 basis point decline in gross margin were; 30 basis points of overall product margin increase primarily driven by stabilizing initial merchandising margins, lower airfreight costs, offset with higher markdowns compared to Q4 2014; 110 basis points of decline due to the foreign exchange impact of a stronger US dollar and 20 basis points of deleverage from occupancy and depreciation; and 20 basis points of deleverage in product and supply chain overhead costs. SG&A expenses were $188.2 million or 26.7% of net revenue compared with $152.9 million or 25.4% of net revenue for the same period last year. This 23% SG&A dollar increase is due to the following; an increase in operating expenses associated with new and existing stores, showrooms and outlets, increased variable operating costs associated with the growth in our e-commerce channel including digital marketing expenses; increased head office costs associated with strategic investments and supply chain consulting expenses associated with our gross margin improvement plan initiative. These items were offset with a stronger US dollar which on translation decreased reported SG&A by $13.7 million or 6.2% along with an increase in foreign exchange revaluation gains of $5 million compared to the fourth quarter of 2014. As a result, operating income for the fourth quarter was $166.3 million or 23.6% of net revenue compared with the $157.2 million or 26.1% of net revenue in Q4 2014. The tax rate was 29.8% compared to 30.3% a year ago. Net income for the quarter was $117.4 million or $0.85 per diluted share compared to net income of $110.9 million or $0.78 per diluted share for the fourth quarter of 2014. The negative net impact to earnings from foreign currency this quarter was $0.03 per share. Our weighted average diluted shares outstanding for the quarter were 138.2 million versus 142.4 million a year ago, which takes into account the weighted impact of 2.1 million shares repurchased during the quarter at an average price of $49.52 per share. We now have completed a total of $421.5 million in total share repurchases with approximately $28.5 million remaining on our original authorization. Capital expenditures were $35.4 million for the quarter compared to $30.4 million in the fourth quarter of last year. Turning to the highlights for our full fiscal year 2015 performance, net revenue was $2.061 billion, up 20% on a constant currency basis and reflecting a 10% comparable sales growth. e-commerce sales totaled $401.5 million or 19.5% of total sales. Gross profit was $997.2 million or 48.4% of net revenue compared to $914.2 million or 50.9% of net revenue in fiscal 2014. Net income for the year was $266 million or $1.89 per diluted share compared to $239 million or $1.66 per diluted share for fiscal 2014. This is based off of an effective tax rate of 27.8% in 2015 versus a 37.6% effective tax rate in 2014. Normalized for transfer pricing and repatriation tax adjustments, our adjusted EPS was $1.86 for fiscal year 2015 compared to $1.89 in 2014. Turning to our balance sheet highlights, we ended the quarter with $501.5 million in cash and cash equivalents. Inventory at the end of the fourth quarter was $284 million or 36% higher than at the end of the fourth quarter of 2014. This marks a sequential improvement to our inventory levels from the end of Q3 that was better than our prior estimates. This improvement was a result of three factors; first, the higher sales outcome enabled us to move through more inventory than previously estimated; secondly, we took incremental markdowns in the quarter to help address the overhang from prior periods; and lastly, we saw more favorable in-transit levels that were generally in line with the overall year-over-year increase for the quarter. The improvement to our prior estimates for in-transit inventory related primarily to refinements in the timing of shipments impacted by Chinese New Year. We are impacting inventory levels rebalance with sales now that we are deep in the Q1. So, we remain confident that our inventories will be well aligned with forward sales at the end of the quarter. Turning to our outlook for 2016, we now see our plans for recovery and profitability coming into sharper focus. At this point, most of our assortment plans for the year are set and we have visibility to the gross margin inflection that we will deliver beginning in Q2 and continuing through the second half of the year. This inflection combined with continued strong comp sales momentum will drive the recovery in earnings growth we have been working towards over the last year. Q1 will mark the last step in our transition to regaining earnings growth as we complete work to rebalance our inventory level and extend efforts to strengthen our supply chain capabilities. Turning now to the details of our Q1 and fiscal year 2016 outlook, we expect revenues in Q1 to be in the range $483 million to $488 million. This is based on a comparable sales percentage increase in the mid-single digits on a constant dollar basis compared to the first quarter of 2015 and assumes the Canadian dollar at $0.75 to the US dollar and eight new store openings. We anticipate gross margin to be approximately 47%. The factors driving this are continued improvement in product margins as we benefit from the lower airfreight usage and improved initial merchandise margins. This is partially offset with higher markdowns as we work through the inventory overhang from prior periods. The impact of FX from a weaker year-over-year Canadian and Australian dollar which is the largest headwind to gross margin, moderate occupancy and depreciation deleverage although improved versus last year, and finally, slight deleverage in product and supply chain expenses. We expect SG&A in the first quarter to delever significantly from Q1 2015 primarily due to currency revaluation losses that we anticipate in the quarter as a result of the significant strengthening of the Canadian dollar over the last two months. We anticipate that approximately half of this deleverage for the quarter will result from currency revaluation. Assuming a tax rate of 30.2% and 138 million diluted weighted 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 versus $0.34 a year ago. For the full year 2016, we expect revenue to be in the range of $2.285 billion to $2.335 billion. This is based on a comparable sales percentage increase in the mid-single digits. We expect to open up to 44 company-operated stores, which includes up to 11 new stores in Asia and Europe, and also 12 ivivva stores. This represents a square footage increase of approximately 12%. As we have mentioned, we expect gross margin for the year to increase from 2015 beginning with a positive inflection starting in Q2 and carrying forward each quarter for the rest of the fiscal year. We will deliver this gross margin improvement from several areas, including reduction in airfreight as we shift a higher portion of product flows to ocean freight, improved logistics costs as we optimize mode selection for the movement of our goods, improved duty costs as we pursue identified first sale opportunities, FOB cost improvements as we improve our demand planning, reduce cancellations and late stage change orders, and lastly, other efficiencies from a more disciplined go-to-market process such as lower fabric liability and improved development ratios. We expect modest deleverage in full year SG&A versus 2015 driven by strategic investments and supply chain digital guest experience, brand, and IT systems. We expect higher deleverage in the first half of the year due to the currency revaluation impact expected in Q1 with the second half planned roughly flat to last year. As a result, we expect operating margin to lever from 2015 to 2016 overall, with some improvements beginning in Q2 and accelerating in the second half of the year. We expect our fiscal year 2016 diluted earnings per share to be in the range of $2.05 to $2.15 per share. This is based off of 138 million diluted weighted average shares outstanding which does not reflect an estimate of share repurchased after Q4 2015 and also assumes an effective tax rate of 30.2%. This includes an estimate of an overall net negative impact to earnings from foreign exchange for the year of approximately $0.06 per share when compared to fiscal year 2015. We expect capital expenditures to range between $150 million and $155 million for the fiscal year 2016, reflecting new store openings, renovations, relocation capital and also strategic IT and supply chain capital investments. We are excited for 2016, a year when we will continue to top line momentum from 2015, rebalance our inventories, recover our product margins, resume double-digit earnings growth and extend our growth strategies as Laurent described. As we look beyond 2016, we see a compelling growth model emerging with economics that are well within the company's past performance levels. Laurent outlined four growth strategies that collectively will enable us to double our revenues to roughly $4 billion by 2020. Looking more closely at each of these, we see a convincing case for this level of growth. First, our continued investments in product innovation are building a pipeline of new technology, fabrics and designs that will be a foundation for the mid-single-digit comps we expect to deliver over the next five years. Our Pant Wall launch this year help to deliver a 19% increase in women's bottoms from September to January and we are eager to see what Tom and Lee will do with women's tops later this year. This game-changing level of innovation will be the catalyst to enable growth in our women's category to reach approximately $3 billion in total revenues by 2020. Our men's category might be even more exciting posting an average quarterly increase of 20% over the last 10 quarters. Given this growth trend, it is not a stretch to expect our men's category to reach $1 billion in revenues by 2020. Secondly, the continued build-out of our North American stores fleet offers the lowest data part of the growth story. With much runway remaining in the US, this region will deliver a major portion of the double-digit total square footage growth we expect in the coming years. This will include both new stores as well as expansions and relocations, the latter being an important evolution of our real estate strategy. We are also now incubating several new real estate formats that we will talk more about later in the year. The third growth strategy, our digital business continues to deliver strong momentum and the work Miguel and team are up to has everyone here excited. So much runway with the essentially no cap on the upside. This has been an important part of our comp story with annual e-commerce sales growth over 20% every year since the site launched in 2009, and we are only now reaching 20% penetration. We expect that this business will reach 25% to 30% or more as the total revenues for the company over the next five years. New website, new CRM and customer analytics, new digital marketing, and new leadership, very excited for what the team is building. And finally international, it's hard to overstate the potential for us in Asia and Europe over the next five year. As Laurent described, we expect international to reach 20% to 25% of our total revenues over the next five years. We also expect international to be accretive to earnings by the end of 2017. Looking beyond top line expansion, we continue see our operating profit recovering to the 20s led by the recovery in our gross margins. This recovery began in Q4 2015, continues in the current quarter and accelerates in Q2 and into the second half of the year. We see much of the margin recovery happening by 2018 with more modest improvements through 2020. And to be clear, this simply represents a reversion to the mean of where our gross margin has performed previously, certainly not extending our model into uncharted waters. And regarding SG&A, we expect modest leverage over the next five years, importantly our strong top line growth should enable a virtuous cycle of reinvestment to fuel our growth drivers going forward. We are obviously excited about our potential in 2016 and over the next five years and we look forward to keeping you updated on our progress. With that I open up the call for questions. Operator? Question & Answer Operator: Thank you. [Operator Instructions] Our first quarter comes in line of Oliver Chen of Cowen and Company. Your line is now open. Oliver Chen: Cowen and Company: Hi, congrats on a really awesome end to the great year. Regarding the unification of men's and women's, what do you think we should expect in terms of what may happen to men's just because the momentum has been so strong there? And also as we look forward, you did mention that your inventories are a little bit more than you would have liked. Which product is related to? And Laurent, if you could highlight anything we should expect with the women's tops momentum and innovation there that would be helpful for as we think about modeling the back half. Thank you. Laurent Potdevin: I think that was four questions in a row. So, I will pick up the men's question, I want to remind everybody that we've got Lee in the room with us. But really the unification of men's and women's under one creative vision is really to strengthen the brand. So when you think about telling global stories of functional raw materials of our construction, I mean, now we have a platform that really is much larger than it was before. And I always talk about Ocean and Duke, our muses being able to show working close and we are all one brand. So I am very-very excited about the power of the unification and truly being design-led, as Lee built his organization. So, Lee, I'll you let you chime in on that, but it's really the first time that as an organization we are design-led across men's and women's both from a functional and from a design standpoint. Lee Holman: Executive Vice President, Creative Director: Yeah, I am just really excited about 2016 and beyond and it really starts from movement from a house of brands to a branded house. And what I mean is just aligning under one creative vision, having a pipeline of innovation that tops into men's and women's. Think of the engineer sensation, how you can take that platform and build it from a men's to women's point of view. So I am just really excited about driving the men's and women's business forward and a constant stream of like innovative product that we can bring to our guests. Stuart Haselden: And our -- it's Stuart. So on your question regarding inventory and I think you're asking any specific categories we would call out in terms of the current inventory balance. First I'll say we're pleased with the improvement that we saw in the quarter. I would offer that the inventory balances are very current and we're not seeing any deterioration in aging, there is not a specific category I'd say were particularly heavy and I think we're -- as we look forward for the year, we expect to see inventories by Q1 come in line with our forward sales trend. Inventories over the course of the year may even begin to look lean. I think on a two-year basis versus our sales trend, it will look appropriate. But we're pleased with the progress that we made on the inventories balances as I said in those particular categories I call out. Laurent Potdevin: And Lee, do you want to touch real quick on question around tops? Lee Holman: Yeah, I think on the women's tops business, and we can look at men's as well, really having the real heightened focus and obsession around how do we bring a balanced assortment of newness and also how do we make it easier to outfit within the stores and on digital with our bottoms business. So we're really off setting around how color and print work together, how different textures, one of the biggest call out there from our ambassadors and athletes is 10 O'clock on the bottom and natural on top and we are really covering that with our new assortment. Oliver Chen: Thank you, great Flatiron store and best regards. Laurent Potdevin: Thank you. Lee Holman: Thank you. Stuart Haselden: Thanks Oliver. Operator: Thank you. Our next question comes from the line of Adrienne Yih of Wolfe Research. Your line is now open. Adrienne Yih: Wolfe Research: Good morning. Let me add my congratulations, the stores look great. Lee Holman: Thank you. Adrienne Yih: Lee, the question is for you. Can you talk about before you got there, there was this kind of push and pull in balancing between core basics and the seasonal products. And I am wondering how that strategic direction has changed under your vision. And then for Stuart, if you can talk about merch margin recovery over this long range plan that you've laid out for us, where can the merch margins return back to, say, overtime? Thank you very much. Lee Holman: Yeah, I think coming in a year ago in October, I think it's really around how do we heighten up those functional, seasonal stories with newness and new silhouettes that we are hearing from our ambassadors and our athletes, but also with the balance offensive classification excellence and we are proud of every product that we currently put out, of course currently evolving. And we always look at our fit, we look at how things are shifting really to more of high-rise rather than a low rise. I mean, something we are hearing from our guests and I think what is very unique about coming here to lululemon is just -- from our regional managers, our store managers and our ambassadors that we can really react to shift in trends and also what's really exciting is just about how people are working out very differently, shifting to more of these hybrid classes, combining high sweat activities and low sweat kind activities like the yoga is moving and we're moving with yoga which is really exciting. And then tapping into training and run that Laurent talked about earlier with new innovative products, just so excited about as we get through this year and beyond with the new innovated experiences that myself and Tom are bringing in. Adrienne Yih: Okay. Thank you, and Stuart? Stuart Haselden: Great, yeah, Adrienne, so, our merchandise margins, as you've suggested, looking forward in terms of the recovery, what I would say is we see in the second half of the year that anticipated recovery in product margins or merchandise margin taking shape consistent with our product expectations. We see this extending into the first half of next year as planned and beyond. And we think we can achieve the level of recovery that we had targeted previously, and communicated with investors. That said, I would like to shift the focus here to gross margin in our discussions, where we can provide more transparent guidance to the investors, and I think that's likely what you intended with your question anyway. We will certainly provide details on the components of gross margin as we go forward, but alternately that's the metric we have to improve in order to drive recovery in our operating profit, and so specifically on your question of where we think we can get back to, I think we still feel like the low 50s in aggregate for gross margin is where we can recover our gross margins. That will be the primary impetus for a recovery in our operating margins to below 20s. We don't see that changing. We think over the next five years, we should be able to get back to that level of performance, and we will continue to provide updates in as we go through the year. Adrienne Yih: Great, thank you, best of luck. Stuart Haselden: Thank you. Laurent Potdevin: Thank you. Operator: Thank you. Our next question comes from the line of Paul Lejeuz of Citi. Your line is now open. Paul Lejeuz: Citi: Hey, thanks guys. Can you talk about traffic versus ticket on that plus five store comp and what assumptions are built into your comp guidance for '16 at the store level versus e-comm and within that store assumptions again traffic versus ticket. And then just bigger picture, can you talk about pricing power you think you might have? Thanks. Stuart Haselden: Yes, hey Paul. So I think I hit this right. I will give you some color on what we saw in traffic Q4 and into Q1 and then just talking about how that connects to our comp outlook. So we have seen positive store traffic in the first quarter both in stores and online for sure, and that's really against backdrop of a pretty challenging retail environment. That said, the traffic has not been as strong in the first quarter as we had experienced in the fourth quarter. And then thinking about how that connects to our comp guidance, we plan comps for the year and for the first quarter at mid-single digit and that's how we're bought and certainly if it gets votes above this, we can do better. But at this point we feel like that guidance for our comps is appropriate and that's certainly reflective of the traffic trends that we are seeing in the first quarter. As we think about looking back at Q4 with the really strong traffic, the other factor that booed our comp results in the fourth quarter was just a very strong AUR outcome. So, and that connects I think to your ticket question. So, certainly traffic and AUR were the drivers of that comp performance in the fourth quarter. I would say that's largely extended into the first quarter although as I just mentioned, we're -- it's tempered by some moderation in the traffic trends in the first couple of months in the quarter. Paul Lejeuz: Great, thanks. Laurent Potdevin: And as far as your question, I mean on pricing power. I mean I think (inaudible) equity of the brand, where we think we have tremendous powers in innovation and when we deliver innovation and value for our guests, we actually do have pricing power and that was very clearly dominated, when we re-launched our pant wall and also with our men's business. So as long as we are focused on innovation and as long as we deliver innovation across categories and across gender, I mean we have tremendous pricing power. Paul Lejeuz: Thanks guys. Operator: Thank you. Our next question comes from the line of Ike Boruchow of Wells Fargo. Your line is now open. Ike Boruchow: Wells Fargo: Hi everyone, let me add my congrats. I guess Stuart, I want to focus on the international side. So 11 openings this year from I think 9 last year and then in the prepared remarks you mentioned by 2020 getting to about 20% to 25% of sales which is a pretty big jump from today. So, I guess my question is can you help us understand how you get there in terms of new door growth versus productivity and then can you talk about the ramp in profitability there from what I guess is losses today to breakeven next year to what kind of contribution you'd expect by 2020? Thanks Stuart Haselden: Yes thanks Ike. So to be clear that 20% to 25% does include our Australia business which we have about 30 stores today in Australia and in New Zealand, but certainly the bigger part of the story is with the acceleration of our growth in Asia and Europe. And so certainly we're building a pipeline of showrooms in each of those geographies that we believe will support an acceleration in the store openings in the coming years. So and then as we think about just those two geographies, particularly excited about the results that we're seeing in Asia. We've seen strong results or strong performance in the new stores both in Singapore and Hong Kong. We are targeting other capital cities in the region, Seoul, Tokyo, Shanghai, and Beijing in the near future for new stores that we are just -- we think we will be particularly successful both in terms of profit and the total volume that these stores will generate. We are also pleased with the traction that we are getting in London. We have some important openings in London, we've got 3 to 4 more teed up for this year, really focusing on building our brand awareness in this pretty critical capital city for that region to help drive the brand awareness and the strategy is such that we're balancing, executing our prudent showroom strategy that helps us de-risk these new store openings, seed brand awareness, seed demand in those markets with developing a stronger brand awareness regionally through opening these high profile stores in these capital cities. So certainly as you think about the profitability, we think we will reach a point by the end of next year where we will have a critical scale, particularly in Asia and in Europe, where we believe we can begin to leverage our overhead and that should accelerate beyond '17 as we achieve greater and greater scale. I wouldn't look at the number of openings that we've had in '15 and '16 as a straight line. We will expect that we will be able to increase the store opening cadence as we get deeper into the five-year plan that we've outlined. Laurent Potdevin: And remember that we've got a very focused strategies, like capital city to run brand awareness. So later this year we will be actually announcing a couple of different go-to-market strategies to really increase that, we have been very innovative and curious in how we can accelerate, how quickly we run brand awareness those capital cities. Ike Boruchow: Good luck guys. Operator: Thank you. Our next question comes from the line of Matthew Boss of JPMorgan. Your line is now open. Matthew Boss: JPMorgan: Hey, congrats on a great quarter. So as we think about same store sales by category, can you talk about comp performance of tops versus bottoms in the fourth quarter? Specific initiatives just to expect this year in tops, and really the best way think about bottoms in the back half just lapping in the pant wall. And then finally on the first quarter, what have you seen in February and March versus the mid-single-digit comp guide, I think any color would be really helpful. Stuart Haselden: Okay, Matt, it's Stuarts. Maybe I will speak to your latter question on the Q1 trends, which really is sort of along the same lines as what Paul asked a few minutes ago, then I will turn it over to Lee to kind of talk about the plans we have and the trends that we've seen in women's tops and bottoms. So in Q1, as we mentioned, we set the comp guidance at mid-single-digit and we have seen traffic while positive in the first quarter not quite as strong as it had been in Q4. So we feel like the mid-single-digit guidance is appropriate. That said, as I mentioned, if our guests vote above this, there is potential to do better than that. But at this point, we feel like this is -- that guidance is appropriate, and really as we think about the KTIs that underlay that comp guidance, it's really the same story from the fourth quarter where we're seeing improvements in AUR and modest positive traffic in the first quarter against that comp outlook. So hopefully that answers your questions regarding Q1. And Lee, can you speak to tops and bottoms? Lee Holman: Yes, I think on our tops business, we're really excited how we get into the back end to the quarter is around bringing newness into our tops business. It is from a natural point of view, from a fabrication and more technical soul. And already we are looking about how we layer in a system of dress, which is really around our harmony's in tops. So how's your first layer, your second layer work for your outerwear so that when you go into story telling in the stores or when the guest coming in, it's really easy to outfit. And then what I am really excited about the bottoms business, it's really extended to engineer sensation platforms that we did in Q4 and then adding new fabrications that really heighten out those sensations. So you're going to see a lot more new fabrications, a new execution on prudent techniques within our pant wall as well and more obsession around craftsmanship as well, really driving this notion around engineering rather than --. That's really engineering the fabric, really get impact to the design principles around fit, fabrication, silhouette, and really going back about how lululemon has really started with the fabrication around -- unique properties around that. And also made you look amazing, how do we get back into that and driving innovation for all the products that we're driving and I am really excited about how we're bringing these innovation products for the next year and beyond. Matthew Boss: Great. Best of luck. Lee Holman: Thank you. Laurent Potdevin: Thank you. Operator: Thank you. And our next question comes from the line of Brian Tunick of Royal Bank of Canada. Your line is now open. Brian Tunick: Royal Bank of Canada: Thanks, good morning guys. I guess one question, just maybe give us update -- Stuart Haselden: Brian, we can't clearly hear you. Brian Tunick: Oh, sorry, is it better? Stuart Haselden: Not really. Yeah, go ahead. Brian Tunick: Thanks. Just on the supply chain and new design calendar and lead times, just maybe give us an idea of what happened on the last year or two, how long does it take to your products in the store, what kind of testing are you doing, just an overall view point there. And then the second question is on omni-channel, your new DPC launch, can you maybe talk about timing where are you on some of the projects there? Thanks very much. Stuart C. Haselden: Hey Brian, it's Stuart. So on your first question in terms of the supply chain and the product calendar, fundamentally the timetable for how we bring products to market is unchanged, and we are really operating on essentially a nine-month seasonal calendar where we're making financial commitments probably four to five months out and the balance of that nine-months is related to design and development. So, I mean, that's largely unchanged. Certainly we're always looking for ways to improve that timing and create flexibility. Our fast turn strategy is really the most prominent way we try do that in terms of leveraging fabric that we own into trends that we see emerging in stores on a shorter lead time and that's I think a well understood strategy we have had. We are always looking to try to grow that where it make sense to again create a greater degree of flexibility to respond closer to market. So, hope that answered your question there. On the omni-channel and direct-to-consumer, as we mentioned in our prepared remarks, a lot going on. Miguel is rapidly building an impressive team, we are making a lot important technological investments. We had mentioned I think previously that we are building towards a new launch for our website that is definitely still the case. That website is now live internally and we're testing and looking at a launch externally to our guests in early Q2. So, plans there are on track as we had previously described. I mean, additionally from an omni-channel standpoint, it's important to mention the work we are doing at CRM, so we are building new customer analytic capabilities that the Company has never had, and that will enables us to better tailor, better craft our communication with guests in a sophisticated way that we just have never done. It will give us better understanding of our customer segments, how they're performing, how they're trending, what's working, what's not so that we can just become a stronger, more customer-centric business. So -- and then connecting that with the technological improvement in RFID, how we are connecting our pools of inventory across channels so that we can meet to our guests and as Laurent described in the channel agonistic manner so that we are able to connect those experiences between stores and online more seamlessly. So, that's a big part of the growth strategy over the next four years, it was one of the four that Laurent had mentioned and it's certainly something we are investing aggressively behind. Chris Tham: Operator, we have time for one more question, thank you. Operator: Thank you. Our next question comes from the line of Paul Alexander of BB&T. Your line is now open. Paul Alexander: BB&T: Great, thank you. Any earnings from the New York Flatiron stores so far, and then just broader question about flagships stores, sounds like the international strategy will rely heavily on capital cities. Will North America get any more kind of flagship stores? Thank you. Laurent Potdevin: I think we, this Laurent. I think we talked about that on the last call. I want to be really clear when we talk about flagship store. What we've got is that we've got a very proven powerful formula with our 3,000 square stores and we are experiencing with more formats. So whether it's a larger format or a smaller format in each mountain location, but it's not a flagship, we don't build flagship on a branding standpoint that are losing money. So we look for same profitability, we just build the larger format when we want show a broader assortment of the product where we've got much better, a much stronger traffic. So it's not so much about flagship, it's a question of really having the right assortment where we needed, and provide the global assortment with digital air cover. So you will see larger of format where it make sense. But you want to see us build flagship as a marketing or branding exercise. Paul Alexander: Great. Thank you. Chris Tham: Thank you everyone for joining us today. We will talk again soon. Laurent Potdevin: Thank you. Operator: Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You all disconnect, have a great day everyone.