lululemon Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good day, ladies and gentlemen, and welcome to the Lululemon Athletica LULU First Quarter 2016 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 follow at that time. If anyone should require operator assistance during the

conference please press star and then zero on your telephone keypad. As a reminder, this conference call maybe recorded.

I would now like to turn the conference over to Chris Tham, SVP of Finance. Please go ahead. 

Chris Tham:Senior Vice President, Finance:

Thank you, and good morning. Welcome to Lululemon's first quarter 2016 earnings conference call. Joining me today to talk about our 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, 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 quarterly report on Form 10-Q are available under the investors 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.

And now, I would turn the call over to Laurent.

Laurent Potdevin:Chief Executive Officer:

Thank you, Chris, and good morning, everyone. I'm pleased to share with you today the results of the sixth fiscal first quarter. I will start by the few highlights of the

quarter and I will then provide insight on our continued progress for Lululemon five year plan including each of the core growth strategies that we're 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 projection. 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 still -- expand upon. While we are pleased to see the gross margin recovery in Q1 exceeds what we have plan

for. 

The continued recovery we are experiencing into the early weeks of Q2 is the validation of our teams work across our entire supply chain from D9 to in-store

delivery. 

Our foundational work over the last year is paying off and the earnings recovery we have plan for 2016 is taking shape. Likewise, these inventory is now back in

line we have removed this chain of the business and are position to bring our innovation platform and our design visions device powerfully both in-stores and

online. While store choppy comp was strong in Q1 and 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 Pants product launch is a great example of the inherent

success in combining innovation, story telling, education and visual merchandising across channels. This launch drove traffic will enhancing brand engagements

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 gender. 

Looking broadly across our business, we saw solid temperament in key products 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 about 15% and we posted another double-digit -- as a success of our

innovation continues to delight our guests around the world. 

By channel, our stores delivered another strong positive comp marking four consecutive quarter as a positive comps. In Canada, where we have the most -- our

guest loyalty was the catalyst in delivering a particularly strong trend. As a result we posted a highest stock comp in our US store which clearly made our cadence

an incredibly proud. Globally online sales increased 18% in Q1 on top of the 31% increase in the first quarter of last year. 

A penetration of nearly 20% of the total business. This results put us on track to achieve 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 shrilled with the results we are seeing across all functions at

Lululemon. 

Specifically and as it relates to supply chain, I am proud of the teams accomplishment in building a scalable foundation as we go into a global iconic brand. There

is more work to do as yet our accomplishments are reflected in the improved gross margin performance. On our Q4 call we outlined four key growth strategies for

2016 in the next five years. That was deliver revenue growth that doubles our 2016 sales and earnings growth that will more than double during same period. 

Q1 mark solid progress against these goals which I will touch on specifically now. As a reminder, these growth strategies where product innovation across current

and new categories, reaching our full North American potential, building and leveraging a digital culture, and building our global footprint to international extension.

First on this 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 hero and a unique source of inspiration. It's entry towards reflect our culture, sale outcome values, sensed our product to their

limits, provide us with endurable feedback and inspire us to create the best product for athletes and yogis. We recently hosted our Annual Ambassador Summit in

Whistler with a 100 ambassadors from 9 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 facts of the winter 2016 season and looking forward to our guest experiencing the powerful combination of function and

fashion that Lee Holman, Tom Waller and the team are about to deliver. 

In July, we will -- Rio. On July, 28 in Toronto we will officially inbuilt the 2016 Canadian Beach Volleyball Team equipment. That all beach volleyball players

representing Canada -- while competing as the 2016 summer Olympics camps in Rio. This summer for month the first Olympic games where Lululemon's partner

is Canada's Beach Volleyball Team to create one of the kindly treatment design specifically for them. The custom gear was deadlock is real time feedback on the

athletes of the Canadian women's and men's beach volleyball team. 

Rigorous testing on core and in house at Lululemon's wide space resulted in the alternate design that will allow the athletes to -- that best we got this traction while

looking fantastic. I think -- to Q1 we saw improvements in the women's tops category which comes positively and continuous to gain momentum. A standard in the

quarter was our Swiftly franchise. The performance of the Swiftly was boosted by the introduction of true black, a fabric and lounge innovation that achieved the

unique depth of color. 

We also expanded our broad softness giving our guest more option based on the super and design standpoint. And last but not least, our fast turn team which is

set up to bring products to life on shorter lead time continues to be an important product of our strategy. A perfect example of -- fast turner projects is the success

we saw in our making moves collection. And then we continue to see strong performance in our core franchises. 

We knew -- our seamless program and continued strength in our pants category driving strong comp. And we believe in -- men's and women we are focused on

driving the men's sweat category and bringing new fabric innovation and styles to markets throughout our craftsman. This month we are excited to introduce the

ABC construction that was pioneered with the ABC pant into more men style to keep our destruction 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 location. This

reported 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 potential center store in Boston. 

Our - core store just outside Chicago and our generic expansion in Kalgoorlie. These optimizations represent an essential element of our realistic strategy to best

meet this demand. 

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

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

strategy. 

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 encourage all of you to get it our new environment at lululemon.com which launch last month. The site is now allows us to share

reach our community and product content with deeper storytelling that connects products design to our ambassadors and our local communities. The site also

features the streamline checkup process to provide a better purchase experience. And our shop app now provides a functionality to the store product availability

therefore giving our guest the option to get instant ratification by picking up products 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 solid about 98%. In the

second half of the year, we will fully rollout our CRM capability. We are moving quickly to test, implement and optimize our guest analytics engine and connected

throughout 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 fort location in Asia and first store in Singapore situated in an iconic and historic south house on Boston road. This multilevel store

includes a community space perfectly design to host community classes and evidence. 

We also opened our first Japanese showroom which I visited a couple of weeks ago. Located in Tokyo Harajuku district and on the corner of -- street at about 900

square feet this showroom is already one of our strongest performing showroom 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 we as our entire team from our educated to ambassador. And our IFC location in Hong Kong remains a highlights producing of a $5,000 in sales per

square foot. While our - presence is growing very rapidly building brand awareness across China. 

Our disciplined and thoughtful approach to market entry and brand awareness building remains the very powerful strategy to ensure we create authentic and long

lasting relationship with our community as we continue to expand our global collectives. 

In Europe, we are pleased with the progress we made in the quarter and have some exciting developments on the Verizon. We will opened our first store in Zurich,

Switzerland in July after great success with our showroom build last year. In December we will be opening our first shopping shop in -- will 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 defined environment. 

Other brand building opportunities are underway in London that we look forward to sharing New Zealand subsequent calls. This is just the beginning of our journey

in Europe and we are 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 send-off yoga

tour in the US. We will cover 7500 miles of up on road in 45 days stopping at a dozen locations across the US as well as -- one of last festivals. Each stop will

include a yoga and mediation experience led by one of our ambassadors as well as a pop-up shop featuring this year exclusive $1 product. 

And here in Vancouver, we are gearing up for the event of the year. The fifth annual SeaWheeze Half Marathon happening Saturday August, 13. SeaWheeze

clearly is average half-marathon held by -- magazine as one of the best lending overseas to standup in 2016 and is 31.1 miles of breathe taking scenery salty

ocean air and over a 10,000 runners. This year's race sold out in 30 minutes. 

So if you are not running there is always the sunset festival and evening of yoga, music, dancing, food and of course -- . When it comes to the people of Lululemon

what has always been exceptional is only getting better. Our educator installment as a -- is at its lowest level ever in the brands history, which is the testament the

commitment and investment we make in our people's development. 

Our leadership team is the strongest Lululemon as ever assembled. It is global, diverse and a combination of people who is tenure combined with new additions to

the team. Together they provide the organization with deep experience and knowledge in design and innovation, value for retail, digital as well as we are focused

on culture, talent and operational excellence. 

Last but not least, we have welcome two great new additions to our board this year and both are bringing talent, insight and energy to our discussion. Kathryn

Henry join us with over 20 years of strategic IT and retail experience and is a longtime friend of Lululemon having previously service Chief Information Officer. And

Jon McNeill joined us in April and he is President of Global Sales Delivery and Service for Tesla Motors. He is one of the most respected leaders in America today

with success as an entrepreneur as -- was in an innovative and operational leader. 

Today we have the right people throughout Lululemon to support the execution of our strategic five year plan and invent future beyond 2020. In conclusion Q1 was

the solid quarter for us. Our performance was driven by our unique business model and compressing 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 are 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 he is available to answer your questions later during the Q&A session. 

And 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?

Stuart Haselden:Chief Financial Officer:

Thank you, Laurent. I'll begin today by reviewing the details of our first quarter results I will then review our current outlook for the full year 2016 and also the

second quarter. 

Let's starting with Q1, we saw a period of continued top line momentum within the context of the challenging retail environment. We delivered accelerated progress

and recovering our gross margins and completed our work to rebalance our inventory levels in an orderly and disciplined manner. And when considering the

impact of FX on our results in the quarter, we are pleased with the underlying recovery and 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 on 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; one store in Canada; one in Australia; five in Europe; four in Asia; and 20 ivivva stores. And finally, these factors were offset by the

foreign exchange impact of the stronger US dollar which have 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; two in the US; one in Asia; one in Australia; and six ivivva. We ended of 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; two in Europe; one 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% 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 are 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, deductions 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 re-balancing of our inventories. Offsetting this improvement in product margin was 50 basis points of decline due to the foreign

exchange impact of the 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 burden 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 will 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 turn 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 increase the FX losses reported in SG&A. 

Specifically we incurred $13.5 million in a revaluation losses in the quarter which are reflected in total SG&A. This represented a $9.1 million increase over Q1 last

year. Setting us aside the remainder of the SG&A deleverage was due to consulting costs time for our gross margin and sequential initiatives we are winding down

now in Q2 as well as increased digital marketing efforts to drive traffic to our stores and in website and higher cooperate 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 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 for the significant strengthening and 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 have completed a total of $437.2 million in total share repurchases which remainder of our $450 million total authorization now

haven't 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

we've done a year ago in response to the supply chain disruptions we experienced in the first half of last year.

We are pleased with our teams across the company for the 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 down to the detail of our Q2 and fiscal year 2016 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 sometime now. 

Our supply chain initiatives have made significant progress and our margin goals remained 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 the key areas including reductions in FOB costs,

lower air freight and reductions in raw materials liability costs to better controls and process changes. These will be offset by modest occupancy and depreciation

de-leverage. And 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 deliver significantly from Q2 2015 with roughly one-third of the impact attributable to lapping FX gains incurred in Q2 last

year. 

And the balance associated with the cost of completing the supply chain and the gross margin initiatives, incremental digital marketing, technology projects and

also brands 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 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 had 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 for 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 fiscal year 2016 diluted earnings per share to be in the range of $2.8 to $2.18 or $2.05 to $2.15 normalized for the tax and related interest

adjustments in Q1 which is based up of $137.5 million diluted weighed average shares outstanding, and also assumes an effective tax rate 28.9% or 30.2% on a

normalized basis. We expect capital expenditures to range between $160 million and $165 million for the fiscal year 2016, reflecting new store openings,

renovations, relocation capital and also strategic IT and supply chain capital investments. This is higher than our guided when we last spoke with in March due to

the purchase of land parcel in Vancouver for general corporate purposes.

In closing, Q1 mark several key milestones for us, sustained top line momentum filled by product innovation, margin recovery ahead of expectations that validates

our supply chain efforts, the re-balancing of our inventories to position us for disciplined growth this year and beyond. We are excited for the trends we 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 sometime. 

Network remains in front of us, but we are encourage by our success in Q1, and progress so far in Q2. 

With that I will open up the call for questions. Operator?

Question & Answer

Operator:

Thank you. Ladies and gentlemen if you'd like to ask a question at this time please star and then one on your telephone keypad. If your question has been

answered or you would like to remove yourself from the queue please press the pound key. Our first question comes from Paul Lejuez with Citigroup. 

Your line is open. 

Tracy Kogan:Citigroup:

Thanks guys. It's Tracy coming in for Paul. I have two questions, first on gross margin are your future guidance for the last two quarter in a row. And I'm wondering

if we should be thinking a little more (inaudible) about your gross margin goal for 2016 and 2017 relative to what you previously talk about. 

And then secondly on SG&A, what change in your guidance that you are now expecting deleverage in the second half maybe that's related to FX I'm not sure?

Thanks. 

Stuart Haselden:

Hey, Tracy it's Stuart. Yes so, on the gross margin for the year our just a gross margin in general I think we were happy with the result that we saw in Q1 certainly

saw an upside and things that we mentioned on the call the FOB cost, the fabric liability and air freight all better than excepted and those were offset by the

markdowns that we mentioned. We see that continuing into Q2 and we are pleased with the progress again that we are making against our plans. At this point we

feel like the guidance that we given properly reflects that we are order of magnitude of that recovery. 

Certainly there is always potential to do better, but we feel like the guidance where we have positioned it is appropriate given the risks and opportunity that we see

in the supply chain and our margin plans. 

The other elements of gross margin occupancy and depreciation will remain a headwind as you mentioned. Certainly those costs are more fixed and to the extend

we exceed our revenue expectations will deliver more leverage on this fixed cost elements of the gross margin and 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. 

And then on your second question with regard to SG&A deleverage in the second half. I think the it's really a function of just as we define our outlook for the

second half of the year, we are seeing some modest level deleverage and I'd say that translates to less than 100 basis points in the second half and it's really just

a function of where we see the current estimates on the FX impact the translation and revaluation as well as just the investments that we continue 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 are able to flow through. 

The improvement in our gross margin to a greater degree in a second half of the year. So I hope that answer your question. 

Tracy Kogan:Citigroup:

Yes. I appreciate. Thanks a lot. Good luck guys. 

Stuart Haselden:

Thank you. 

Operator:

Thank you. Our next question comes from Oliver Chen with Cowen. Your line is open.

Oliver Chen:Cowen:

Hi, great results and in an environment there hasn't an easy Stuart the re-balancing inventories were impresses. So for the second quarter want should we

assume in terms of may be second quarter and back half in terms of markdowns relative to last year given that it look towns like the inventories are in a really

super shape. And Laurent on that topic of women's tops where are you in that within that innovation and what needs to happen next in terms of what we should

look for or whether be pricing and styling and are there any changes ahead as you think for the back half in terms of how you are evolving the talent well? Weather

it would be product or visual merchandising because I know there is a lot of innovation focused in that area of the store as well? Thank you. 

Stuart Haselden:

Great. Thanks, Oliver. I will address your first question. So we are very pleased with the inventory position that we are have and the work of the teams have

completed as I mentioned. 

We expect to see markdowns moderate into Q2 and the balance of the year and that's reflected in the margin guidance that we've given. And 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

and that just reflects the further moderation in that year-over- year inventory growth and as we mentioned we expect inventories to be up to a lesser degree versus

a revenue increases. So I think as if you look out on it on a two year basis, the inventory position is it's still full. We have plenty of inventory to drive our revenue

projections, we are pleased to see the year-over- year trend come back in line are actually will be are sit the needs our forward sales trend. 

So inventories are healthy, they are clean they positioned us in a manner that enables the optimization of our assortment. We are not dealing with the prior

inventory overhang and it should translate into a better experience for our gusts as well.

Laurent Potdevin:

And Oliver on a top standpoint I mean we are actually really pleased I mean I would say that growth slightly ahead of plan we thought we would be any -- in our

stores. You have seen the assortment shifting in the right direction I mean some of that is really the result of the power of our -- group which really works shorter

lead times and you can see different delays in I mean the making moves collection with the fleeted back is a great example of bringing something to market really

quickly. The Swiftly franchise is done really well. What I would say I would attribute the current success mostly to the new -- the one that you can layer. 

And that combined with the success of our broad make a move above the right back bra, they get down bra is really put us in a strong position. 

So I just looked at the spring '17 product and last week at the winter of '16 product and I am absolutely thrilled with the progress that we are making it very much.

You will see function and fashion coming together in a way that you haven't seen in quite sometime is not ever and it's really the result of the product re-org 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 throw the product to bring the designing intent to life the way we want to it feels really powerful and it's actually showing up on the floor right now.

Oliver Chen:

Thank you. That's very helpful. 

Operator:

Thank you. Our next question comes from Sharon Zackfia with William Blair. Your line is open.

Sharon Zackfia:William Blair:

Hi, good morning. I think this is first quarter in a while your e-com hasn't kind of grown as a percent of sales and I know it's chasing a moving target. But just

curious as to what you think is going on in that channel if you expected to tell pace the brick and mortar for the full year any thoughts on that would be helpful. 

Stuart Haselden:

Hey, Sharon it's Stuart. So, yes, the e-com growth still double-digits, high teens we are 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 go well above 20% easily it could reach 25% to 30% and I think we've talked about that in our five year

goals. 

I would expect as the digital team is able ramp up the full impact of our new website as we are able to bring online particularly in the second half of the year the full

capabilities of our CRM efforts we are going to see healthy trends in that e-com sales trends and we would expect penetrations to increase overtime. And so we

are not seeing any red flags for say in the Q1 results.

Laurent Potdevin:

And remember that we are really focused on building get centric and channel agnostic strategy. So the launch of the new website is actually a great example and

great foundation for what's to come and we had with every website launch we had anticipated at a slight degradation in business as get use to the new user

experience and actually what '15 is better conversion especially on mobile and a various update adoption to the website. So we feel very good as we launch the

full analytics capabilities of our CRM and retire that to our digital marketing strategy. We have got we are actually going to LeapFrog from where we have been. 

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

Sharon Zackfia:

Okay, great. Thank you. 

Operator:

Thank you. Our next question comes from Matthew Boss of JPMorgan. Your line is open.

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 as mid single-digit comps where to persists. And then just secondly on international, so it's a best way to think about

the timeline for international profitability. 

Stuart Haselden:

Sure, Matt it's Stuart. On the SG&A question, I think we are going to get past the major supply chain investments really in Q2. And as we get into the second half

of the year, we will begin to lap those investments in the prior year period. So 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 '17 and beyond is the we don't have

these lumpy supply chain project pressure in the SG&A. So that element that will certainly moderate even in the second half of the year and certainly into '17. We

are always going to have things we are investing in. 

We are going to we are not in the place where we are squeezing SG&A to drive earnings. This is still a growth story, it's about revenue growth, it's about margin

expansion and those are the underpinnings of how we will recover a stronger earnings trajectory. We are going to invest in SG&A with some expense, but that said

we expect it will moderate even into the second half. 

Laurent Potdevin:

And from an international standpoint I mean 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 I mean we've got all of our stores over a $1,500 or $1,600 of square foot IST in Hong Kong top in the list at $5,700 a square foot. So very

happy with that we see more penetration that we are seeing there is really putting a lot more eye balls on the brand where we don't have a physical presence. 

In Europe we are very focused on London. The recent environment in London we know articulately until they go through the election at the end of June. And what

we've seen is in the market where we've got a great community we are doing really well including Kings Road, Covent Garden and Mal Born and in a couple

including where we probably go than a little bit ahead of the vibrancy of the community. We are not seeing the same results than that would be agenda again

enrichment. 

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

And I would actually love to add, that in our remarks, we have hinted at the fact that we are going to find a couple of different ways of going to market in London,

that will definitely drive brand awareness in a really powerful way, and we are very excited to share that with you probably in the next couple of weeks.

Matthew Boss:

Wow! If I could just sneak one more in, given some of the larger picture choppy 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?

Stuart Haselden:

So Matt, I will 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, and it was softer

late in the quarter as well, and that persisted in the first couple of weeks of May, in Q2. We have seen the traffic trends improve in the last couple of weeks. So

there has been a mix 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 delivered in Q1 that

we guided to in Q2. 

But maybe I will ask Celeste to add some color.

Celeste Burgoyne:Senior Vice President, Americas:

Yes, Stuart. I think you hit it. I mean, 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 felt 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 stores is continuing to pay off. So as we look into Q2, we continue to see the momentum in AUR and conversion maintain, so it

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

Matthew Boss:

That's great color. Good luck.

Stuart Haselden:

Thank you.

Operator:

Thank you. Our next question comes from Anna Andreeva with Oppenheimer. Your line is open.

Anna Andreeva:Oppenheimer:

Great, thanks so much. Good morning, guys, and let me add my congrats as well. 

Stuart Haselden:

Thank you. 

Anna Andreeva:

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 and sorry if we missed this, what were comps by division in 1Q, Canada versus US and Australia. And secondly, I guess to Laurent, just holistically,

thinking through the pricing, architecture for lulu, I think we are starting to see some of their opening price points in tops, specifically. Is that an opportunity to

expand the customer reach for the brand, and any tweaks you guys need to make to pricing architecture, in bottoms especially? Thanks.

Stuart Haselden:

Hey Anna. So that was a mouthful. So on the comp question in traffic, we are not going to break out the comps by month. I think as Celeste said, we saw we are

very encouraged by the strength in AUR in conversion. 

Traffic, as I mentioned, was weaker than 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, and the results that we reported in Q1, and then the guidance. By region, I think we mentioned in the prepared remarks that, we saw

strength in Canada in particular, and 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 are driving some of our strongest results and again, it speaks to our assortments in our

in-store execution. So then on the on your question regarding pricing and on the bottom side I mean, we are very happy with the pricing architecture. 

I mean, as I was mentioning looking at winter 2016, spring 2017, we are daily bringing a lot of innovation. And so, we have priced to a value that we deliver to the

guests. I mean, we are very confident that we got with the pricing architecture, both across categories, from a global standpoint as well, and we thought, I mean,

we are like where we need to be. I mean, we see a lot of success and we see the opportunity to actually bring innovation and completely sort of really owning the

high end of the market that we really have.

Anna Andreeva:

Okay, thanks. Best of luck.

Chris Tham:

Operator, we have time for one more question. Thank you.

Operator:

Thank you. Our next question comes from Kimberly Greenberger with Morgan Stanley. Your line is open.

Kimberly Greenberger:Morgan Stanley:

Great. Thank you so much. Thanks for squeezing me in. 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 headwinds you had planned for in

the quarter? And then Laurent, as we look into the back half of the year, and reflect on the very successful camp launch that you guys had in the third quarter last

year, can you talk about your product strategies and how you are thinking about driving your business to the next level, as we proceed through the year? Thanks

so much.

Stuart Haselden:

Hey Kimberly, its 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, and we had, 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 dollars, 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 and 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, and so the its something that is really part of the exposure that we have from our cash balances that we

accumulate in Canada, in US dollars, it's not really the translation of the Canadian PML per se. and I would add that we have taken steps already to from an

operational standpoint to reduce our exposures in those cash balances, and at this point, our exposure is less than half of what it was in Q1. So we feel like we are

going to be able to mitigate this exposure to some degree as we go forward. But certainly, it's something we will continue to be focused on.

Laurent Potdevin:

On your product question, Kimberly, I think that -- launch was successful and was really the very beginning of what we are about to do. I mean, when you see

somewhere land, I mean you will see a completely different assortment. I mean, sort of having sort of collapse there just physio and the cardio pot, and making

them one group. I mean, you are going to see a hard wall, you are going to see the ability to put outfit together across the entire assortment that's going to be a lot

more powerful. 

You are going to see a lot more newness in fabrics, texture and print also are a very elevated attention to detail, to trim, construction, raw material, in a way that

probably hasn't come to life in the past couple of years. So obviously, and we are going to focus on run, where we see tremendous opportunity both for men's and

women's, and you will 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 teach

them, I mean, you will see an environment that is elevated, that speaks to function and that looks fantastic.

Kimberly Greenberger:

Terrific. Thank you. 

Chris Tham:

Thank you everyone for joining us today. We will talk again next quarter. Thank you.

Operator:

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.