Lululemon Athletica Inc LULU
Q2 2010 Earnings Call Transcript
Transcript Call Date 09/10/2010

Operator: Good day, ladies and gentlemen and welcome to the lululemon athletica Q2 2010 Results. 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. (Operator Instructions).

As a reminder today's conference call is being recorded. I'd now like to turn the conference over to your host Ms. Melissa McKay from ICR. Please go ahead.

Melissa Mackay - ICR: Good morning. Thank you for joining lululemon athletica's conference call to discuss second quarter 2010 results. A copy of today's press release is available on the Investor Relations section of the Company's website at or furnished on Form 8-K with the SEC available on the commission's website at

Today's call is being recorded and will be available to replay for 30 days shortly after the call in the Investor Relations section of the Company's website.

Hosting today's call is Christine Day, the Company's President and Chief Executive Officer and John Currie, the Company's Chief Financial Officer.

Before we get started, I would like to remind you of the Company's Safe Harbor language. Statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from these projected and such statements due a number of risks and uncertainties all of which are described in the Company's filings with the SEC

Now, I'd like to turn the call over to Christine Day, lululemon athletica's Chief Executive Officer.

Christine Day - CEO: Thank you, Melissa. Good morning, everyone and thank you for joining us to discuss our second quarter results.

With me again this morning are John Currie, our CFO; Sheree Waterson, our EVP General Merchandise Management and Sourcing; Delaney Schweitzer, our EVP of Stores; and Deanne Schweitzer, our Head of Strategy and e-Commerce.

Following my opening remarks I'll turn the call over to John who will discuss the quarter's financial details as well as our outlook for the remainder of the year.

In our second quarter our strong first quarter growth momentum continued with a 31% stores sales increase and net income that more than doubled last year's second quarter results.

Second quarter earnings were also more than 85% higher than our previous second quarter earnings peak in 2008 catching up to our pre-recession trajectory.

The strong sales results were driven by consistent execution of our key strategies, grassroots community to drive traffic, our core lines of running, yoga and our focus on our in-store guest experience.

The comp improvement in the quarter was again driven by traffic and transactions, which we believe is simply a continued increase in brand recognition and proof that our community effort and overall strategy and market positioning are resonating with our guests.

We also improved our inventory position in core and key items, in particular, in sizes two, four and six allowing us to be in stock to drive sales.

Our sales per square foot are now over 1,530 which is above our IPO levels of 1,447. While all age classes are delivering positive comps. The strong increase is led by the accelerating growth of our newest age classes.

In addition to existing stores, we continue to focus intently on our growth initiatives such as e-commerce, new stores and showrooms, as well as complementary initiatives, like the purchase of our Australian licensee.

Looking at these growth avenues and starting with Australia, we made the acquisition of the Australian licensee, which now includes 10 stores and four showrooms. We have been extremely pleased with the smooth transition. We are committed to 12 new stores in North America this year along with two openings in Australia.

We are also very pleased with the performance of our new showrooms so far this year. We have opened 28 showrooms through two quarters and plan on opening 46 in total in North America and two in total in Australia by year end.

Finally, e-commerce remained between 6% and 7% of total revenue for the second quarter. Although this means our e-commerce business as a percentage of total revenue more than doubled the second quarter of last year, we were again constrained by inventory on our site. I'm happy to say that with fall inventory arriving, sales are now building consistent with increased inventory flows and we consider this business a significant growth opportunity going forward.

We are still on track to open 20 to 25 new stores in 2011 and will have the ability to leverage the knowledge we are gaining from all of our new 2010 showrooms. We also believe that we are just scratching the surface in e-commerce and will continue to add resources in order to push this channel to more than 10% of our sales in the near-term.

We will continue to focus on our grassroots community initiatives both online and in our local communities to build brand awareness.

A great example of our ability to take a store initiative from one store to a national event through social media was our Salutation Nation. Over 10,000 people participated in communities across North America, an idea which started in one of our stores.

Looking ahead, we will continue to focus our energies on the strategies that are working for us while being smart about investments, inventory, and spending. I know there are a lot of concerns out there about sourcing cost pressures and the macro environmental trend, despite these pressures we feel good about our position in the market, our ability to respond due to sound planning and the ability to deliver innovative and technical products that resonate in today's market. Even with the investments and pressure discussed, we will plan our business with the expectation that we will maintain our strong operating margin in 2011.

So it is now my pleasure to turn the call over to John to go through the details of our financial results and give you our outlook for Q3 and the balance of the year. John?

John E. Currie - CFO: Thanks, Christine. I'll begin by reviewing the details of our second quarter 2010 results, and then I'll update you on our outlook for the third quarter and fiscal 2010. Keep in mind as I discuss our results for the acquisition of the majority interest in our Australian licensee early in this second quarter now results in the full consolidation of Australia's financial results, which has contributed to variances in operating results and balance sheet amounts compared to the prior year. So for the second quarter of fiscal 2010, total net revenue rose 55.8% to $152.2 million from $97.7 million in the second quarter of 2009.

The increase in revenue was driven by comparable store sales growth of 31% on a constant dollar basis, with our 2008 age class of U.S. stores in particular performing well above the company average. The addition of 12 net new corporate-owned stores in North America, since Q2 of 2009, which includes the Saskatoon franchise we acquired late in the second quarter. A consolidation of our Australian operations which includes four showrooms and 10 stores, of which four have opened since Q2 of 2009, the addition of 32 net new showrooms opened in the U.S. since Q2 of 2009, e-commerce sales which increased by $6.6 million, and the stronger Canadian dollar which had the effect of increasing reported revenues by $6.9 million or 4.8%.

During the quarter, we opened one corporate-owned lululemon store in New Jersey, and one store in Sydney Australia. We ended the quarter with 130 total stores versus 115 a year ago, 126 which are corporate-owned, including the 10 in Australia and four U.S. franchises. There are now 98 stores in our comp base, 38 of those in Canada, and 60 in the United States.

Corporate-owned stores represented 85.1% of total revenue or $129.4 million versus 87.1% or $85.1 million in the second quarter of last year. Revenues from our direct-to-consumer channel which includes the e-commerce and phone sales totaled $9.6 million or 6.3% of total revenue versus $3 million or 3.1% of total revenues in the second quarter of last year. Other revenue which includes franchise, wholesale, showrooms, and outlets totaled $13.2 million or the remaining 8.6% of revenue for the quarter.

Gross profit for the second quarter was $80.3 million or 52.8% of net revenue compared to $45.2 million or 46.2% of net revenue in Q2 of 2009. The factors which contributed to the 660 basis point increase in gross margin were merchandise margin improvement of approximately 200 basis points which was driven by improved product costing on our summer merchandise with some offset due to return to a more normalized rate of markdowns. Leverage on non-merchandised costs such as occupancy, depreciation, and product and supply chain team costs contributed 240 basis points of improvement, and foreign exchange improvement of 220 basis points due to a stronger Canadian dollar.

SG&A expenses were $46.1 million or 30.3% of net revenue compared to $30.8 million or $31.6 million of net revenue for the same period last year. The 49% SG&A dollar increase was due to a natural increase in store labor and operating expenses associated with new stores, showrooms, outlets, and growth at existing locations; an increase in administrative cost and variable service provider fees associated with our e-commerce website; the consolidation of store SG&A and head office costs from our Australian operations; an increase in salary and wages, professional fees, and other corporate head office costs as we reinvest into our support functions in response to the increase in demand; higher management incentive-based compensation; and finally the higher Canadian dollar, which increased SG&A by $1.8 million or 4%.

Nonetheless, we were able to achieve a 130 basis-point reduction in SG&A as a percentage of revenue contrary to our expectation when giving guidance for the quarter that we would see SG&A deleverage as a percent of revenue against Q2 2009. This is largely due to leverage gains through improved store productivity, delay and timing of new showroom preopening costs, and later than expected new hires in support function at the store support center. Year-to-date our strong revenue growth has allowed us to fund investment in future growth, increasing SG&A by 57%, while still producing SG&A leverage as a percent of revenue.

As a result, operating income for the second quarter was $34.2 million or 22.5% of net revenue compared with $14.3 million or 14.7% of net revenue a year ago.

Other income totaled $2.1 million in the second quarter, which includes a $1.8 million gain recorded at the time of acquisition of our Australia licensee on the fair value remeasurement of our of our previously held equity investments.

Tax for the quarter was $14.6 million recorded at a rate of 40.3% versus 35.6% in 2009. Net income for the quarter was $21.8 million or $0.30 per diluted share. This compares with net income of $9.2 million or $0.13 per diluted share for the second quarter of 2009. Our weighted average diluted shares outstanding for the quarter were $71.8 million versus $70.4 million a year ago.

Turning to the key balance sheet highlights; we ended the quarter with cash and cash equivalents totaling a $178.2 million. During the quarter we generated strong positive operating cash flow, which funded our increased investment into our Australian licensee and the acquisition of our Saskatchewan franchise. We continue to have a healthy working capital position and no debt.

Inventory at the end of the second quarter was $66.5 million as compared to $46.5 million at the end of the second quarter in 2009. The increase is in line with our expected year-over-year increase in forward sales with better depth in key and core styles and in sizes two, four, and six to capture missed sales that we've seen in the past due to early stock outs. Capital expenditures were $5.7 million in the second quarter resulting from new store build outs, existing store renovations, and IT capital expenditures.

Now turning to our outlook for the third quarter. This outlook assumes the Canadian dollar at $0.95 to the U.S. dollar compared to an average exchange rate of $0.93 in Q3 of 2009. For the third quarter, we anticipate net revenue to be in the range of $155 million to $160 million. We expect comparable store sales percentage increase in the high teens on a constant dollar basis compared to the third quarter of 2009, and we expect to open three stores in North America and one store in Australia in this quarter. We expect gross margin as a percentage of sales to modestly improve over Q3 of 2009 as we continue to benefit from leverage of strong sales productivity and foreign exchange improvement.

Turning to SG&A; as a percentage of sales we expect some SG&A deleverage. Although we expect leverage from the strong comparable store sales growth, this will be offset by incremental showroom operating costs and preopening costs incurred in the four new stores and 13 new showrooms that we plan to open in the third quarter, administrative cost and variable service provider fees associated with our growing e-commerce channel, corporate headquarters relocation expenses and rent duplication associated with our plan to move in October, the inclusion of Australian head office costs and store operating costs, community and brand initiatives planned for Q3 and a change in timing on people development initiatives, and lastly we expect the stronger Canadian dollar to slightly increase with reported SG&A costs, both at Canadian stores and at our store support center in Vancouver. Assuming our adjusted tax rate of 40% and 72.5 million diluted average shares outstanding, we expect earnings per share in the third quarter to be in the range of $0.22 to $0.27 per share.

Now looking at our outlook for the full fiscal 2010, we currently have 12 new stores confirmed in North America and two new stores in Australia. Our outlook assumes that comps in the second half of the year will begin to moderate as we lap the stronger results we experienced as 2009 progressed, and for the year we expect our overall comp to increase in the high-teens. For the year, we now expect net revenue to be in the range of $645 million to $650 million.

For gross margin, we expect gross margin increase of roughly 300 basis points reflecting a slight decrease for the second half as we anniversaried a very strong margin in last year's fourth quarter and also absorbed some product cost increases.

Beginning in Q4, and continuing into 2011 inflationary pressures on fabrics, labor and transportation are expected to impact gross margin by approximately 150 basis points. This gross margin compression will be at least partially offset by leverage on fixed costs and higher productivity out of our new USDC as we operate for the full year out of our new facility in Sumner, Washington.

For SG&A we expect some deleveraging in the second half to offset the leverage we got in the first half of the year as we spend in the areas I previously discussed and also build our platform to support our long-term growth trajectory. We continue to expect capital expenditures to be between $27 million and $30 million for fiscal 2010 reflecting new store build-outs, renovation capital for existing stores, IT and other head office capital. Overall, we expect 2010 fiscal year earnings per share to be approximately $1.18 to $1.22 which assumes a 40% tax rate in each of the third and fourth quarters and 72.3 million diluted weighted average shares outstanding for the year

With that, I'll turn it back to Christine.

Christine Day - CEO: Thank you, John. As always, we appreciate the dedication and hard work of our educators and store managers as well as our team here at the support center. We're seeing focus on delivering technical products, inspiring community events and a great guest experiences in our stores in the second half of 2010.

We will now turn it over to the operator to open it up for questions-and-answers.

Transcript Call Date 09/10/2010

Operator: Michelle Tan, Goldman Sachs.

Michelle Tan - Goldman Sachs: I was wondering if you could talk Christine, a little bit about – a little more color on what you're seeing with some of the showrooms you opened in the first half. What gives you the confidence to step up the openings for next year, any markets in particular that you're excited about or any key learnings there?

Christine Day - CEO: We're very excited about the performance of our showrooms. They're performing actually ahead of our expectations across the board, which have lot of great learnings about market readiness. We just completed a – what we said, about a seven city and four day tour, looking at all of the showrooms and site, and approving sites for next year. So, we feel we're in a really great position with our stores and very excited about not only this level of community and engagement and readiness for customers in these new markets. So, I think we're being cautious in terms of not getting ahead of our SKUs and trying to get up to 35 stores for next year. So, we really want to keep it in that 20-25 and continue to open stores with excellence and based on grassroots community and really being connected. So, that's the work that takes a little bit of time, but everything we've seen we're very excited about. It's really across the board, I think our job is to really focus on the markets where we can build out three to five stores rather than one store, and that's probably what you'll see us doing a little bit more consistently as we go forward into next year.

Michelle Tan - Goldman Sachs: And then any update on running and how that's doing any kind of incremental categories you're thinking about going forward?

Christine Day - CEO: Running is so strong for us as well as our core yoga business that at this point in time, we're going to probably hold any major innovations or diverting our energies into additional categories. But we're very pleased with the running performance it's definitely driving sales. Sheree, do you want to give any more color?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: I'd say the great news about running is that we have key items emerging that are really driving revenues and allow us to get our arms around some consistent foundation for that business, as well as the fact that we are also introducing some line extensions quarterly so that we can see other new trends in the technical business.

Operator: Sharon Zackfia, William Blair.

Sharon Zackfia - William Blair: Christine, I think you were planning on re-launching the e-commerce website, and I don't know if there was a decision made on the timing of that before or after Christmas. So, if you can maybe give us an update on that on what the improved functionality will be?

Christine Day - CEO: We did make the decision to go post Christmas. We didn't want to do anything that did not allow us to capture all of the holiday sales. So, you will see it launch after the beginning of the year. Deanne, do you want to talk a little bit about some of the new…?

Deanne Schweitzer - Head of Strategy and e-Commerce: Actually, when we'd launch right after holiday there won't be any major changes to functionality. The work is being done right now on the new and improved kind of guest experience, and you will see that in the next 12 to 18 months. Small, little quick wins will be added in January, but in general, you won't see a substantial difference in our website post-holidays.

Sharon Zackfia - William Blair: Then separately, on the new distribution center, John, you may have said this, but did you quantify the savings from that in this quarter, I guess, if you could help us just segregate that with the normal savings you get from the strong sales and the leverage on distribution?

John E. Currie - CFO: Yes. I didn't comment on it. But I think in Q2, it was minimal because we did the transition in Q2, so you had some moving cost, some duplication. It really didn't come through in Q2. We are starting to see some efficiencies, and it will be hopefully fully realized Q3 and onwards.

Sharon Zackfia - William Blair: Then as we think out for next year from an SG&A perspective, I understand this year it's somewhat of a catch-up from kind of operating on a shoestring in 2009. I mean, what's the right pace of SG&A growth for your business considering it is a fairly early stage company, Christine, if you could kind of flesh that out for us?

Christine Day - CEO: Well, I think, one of the key hires that we've recently made is a very seasoned experience CIO, who has a lot of experience in the vertically integrated apparel business, international, et cetera. So really setting ourselves up for foundational growth in systems is really one of the major investments that you'll see us make, really scaling our business for a multi-channel, multi-geography business, and having an eye to that, not that I'm saying that we're going into international next year. But we've always wanted to have that focus on preparing our business with those sound fundamentals and investments in like the PLM. So definitely, you will see a little bit of increased spend in IT, the website, the online, what we are calling the digital guest experience, so really creating additional investments in that space to capture what's really been a successful platform for us with the guests. We're really focused on building our technical R&D capabilities, so we'll be making some investments in that area, both in headcounts and increasing some of the dollars that we spend on innovation. Then continuing to build out our supply chain production team, so we maintain the quality that we're known for, because I think that – (indiscernible) see any break in that. Continued investment in our people in the stores, maintaining our stores fresh, making sure that we're paying at the right rate in our stores, because that is where everything happens, it's very light and stands over and above the stores, and making sure, as part of our values in the way that we express our business that we keep our educator and store manager compensated at the right place for our business model are also investments that you'll see us make.

Operator: Janet Kloppenburg, JJK Research.

Janet Kloppenburg - JJK Research: Just a couple of follow-up questions. John, I think, you're talking about cost pressure affecting gross margin. Will we start to see higher retails in the store or how should we be thinking about that? I'm wondering about the performance or productivity of the Australian market. Christine, you may not want to be specific, but is that market performing at the levels of productivity that we understand the U.S. and Canada to be? Also with respect to the e-commerce business, do you have a certain goal of where you see that business growing to as a percentage of sales? If you could just comment about the profitability there, because we're hearing from most of our companies that the margin in that channel is higher than elsewhere, and the retail store – and retail businesses? Thanks.

Christine Day - CEO: I'll let, Sheree, answer the pricing.

Sheree Waterson - EVP, General Merchandise Management & Sourcing: Regarding cost pressures, because we're mitigating as much of this, vis-�-vis smart planning and our great vendor relationships we don't see this affecting our retails in the stores. We will however as we invent and invest in our new technologies, we will look at those retails as appropriate and if there is something that warrants it, we will apply the right value (proposition) for it, but there won't be any price (indiscernible) on any of our core items or key items.

Janet Kloppenburg - JJK Research: Have you seen good acceptance of some of your higher price points outerwear and other fashion items?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: Outstanding in outerwear.

Janet Kloppenburg - JJK Research: Have you been able to find any?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: Yeah. I've got three. I think that speaks for itself. I think, the Oz situation, We just looked at that the other days as a matter of fact and they are very on track with the trends that we saw early on in the U.S. growth because they are a few years behind, and actually growing at a faster pace, so we feel very comfortable with the business there, and David Lawn and his team have done an excellent job of growing that small market and as we said earlier, he is from that market from New Zealand originally, ran Rip Curl. So, he really knows the market, knows the real estate, knows how to make money in that challenging market counter-seasonally and he has been a greater partner that's taught us a lot about that. So we're very excited and optimistic about the Australian business.

Janet Kloppenburg - JJK Research: I think I have one more on the e-commerce business, really do you see that being a bigger percentages, I mean 10% to 15% of the business?

Christine Day - CEO: Without addressing a timeline to that, absolutely. I think our biggest challenge has really been to – we buy for it separately and since it's been a new channel and we do primarily grassroots, we don't buy names, we don't buy (links or lists), and we really maintain it in the same brand strategy we do everything else. So what is that right sales (strategy)? We have inventory constrained and it's very clear. Every time we up it, no matter how much we up it, we take it running at a very light number of weeks per sale. So our big focus in this fall quarter has been to increase it to see how high it is. I'd just like to remind anybody new to the story that our inventory is different than a fashion retailers because its athletic technical wear, and we don't have the same issues in holding inventory for a little long as long as it's in that primarily core merchandise. We also follow the strategy of pulling forward our line from spring and putting those in. So even taking inventory up a little bit to play into sales is a very safe bet for us. John went through in his numbers, we're not even catching up to a sales trend with (inventories down).

Janet Kloppenburg - JJK Research: And the margins there?

Christine Day - CEO: Margins, I don't know we've broken out that number…

John E. Currie - CFO: We haven't broken it out, but it's true. Margins on e-commerce tend to be up at the high end of our most productive stores.

Janet Kloppenburg - JJK Research: Any comment on the girls business? How that's doing?

Christine Day - CEO: Back to school was a blow out. It's been really great. I think we look at our factory base, our organizational structure, and while we're really pleased with how the concept's going, we're just not ready to commit to another major rollout at this period in time. We're just giving it that time to grow its local community, stay grassroots and do it the same way we did lululemon and be disciplined about that. But from a key focus from the Company, I don't want to get ahead of our skates on that and make sure that we're really focused on lululemon and just continue to let this business marinate and grow at the right level and that's where we are with it. We're very pleased with the fall product, the response to that, and the performance of the stores.

Operator: Lorraine Hutchinson, Bank of America.

Lorraine Hutchinson - Bank of America: In the 10-Q you mentioned an increase in discounts adversely affecting the gross margin this quarter. I was just hoping to get some thoughts on the promotional environment and what we should be expecting for fall and holiday?

John E. Currie - CFO: The reference there, remember the last two or three quarters we've been under inventory resulting in us incurring airfreight cost and other expenses to chase, but the benefit had been that with the strong sell-through there are very few markdowns. As we came into Q2, we did get into a better inventory position. As a result, we're back to the more normal pace of markdowns that is typical to clear inventory. So the pace of markdowns in Q2 was more typical with what we've seen in the past and expect to see in the future.

Lorraine Hutchinson - Bank of America: Can you share any learnings that you've found from opening so many showrooms recently and I guess maybe a little bit of color on how the real estate deals are shaping up, if you're getting good terms for some of the newer stores?

Christine Day - CEO: That's part of the reason why you'll only see us open 12, is we hold pretty darn firm to the deals that we want and we'll wait out the situation rather than do a bad one or move to a street location. The toughest deals to do are obviously with your malls, but that's a good news for our portfolio where we really emphasize on the lifestyle centers and the street locations. So there's plenty of great real estate out there. We just never want to get to the place where we are growing outside of our human capital or the grassroots strategy that we do and that's why showrooms are so important for us because they give us that time to really do that and test out our managers. The other good news for us is we have our management in place for next year. So, I think we're really set to go. One of the things that we look at is where do we see the e-commerce sales growing, the sales at the showroom, the local community, event. We see yoga studio start to open around our showroom so we get some critical mass and then we'll move forward. So there's a lot of great learnings. Even in some places that aren't ready for us, then we just keep the showroom open for two years and why is that market not ready and then we have the opportunity through some of our strategies to help ready that market through rotation and we'll wait it out until the market we see it really ready for us. The beauty with doing so many is we have a lot of choice.

Operator: Edward Yruma, KeyBanc.

Jessica Schmidt - KeyBanc: This is Jessica Schmidt for Ed. Just a quick follow-up question on the markdown level. You had originally said that the additional markdowns from the higher inventory would probably outweigh the savings from cost related to the chasing inventory. Do you expect that to continue? I am sorry, do you expect that us to see that because we didn't see it this quarter?

John E. Currie - CFO: I think in normal rate of markdowns compared to the airfreights that we had been incurring, we might see compression of 50 basis points net.

Operator: Erika Maschmeyer, Robert W. Baird

Erika Maschmeyer - Robert W. Baird: Could you give us sense of how much of your SG&A shifted from Q2 to Q3, in terms of new hirings?

John E. Currie - CFO: I would say something in the neighborhood of $1 million.

Erika Maschmeyer - Robert W. Baird: Then in terms of the productivity of your U.S. stores where are you at in relation to your goal of being in line with the Company average?

John E. Currie - CFO: I would say as we look at the – looking at our comp position 31% in the U.S. stores in particular the ones opens two to three years ago are well above that average. What's happening is during the recession the U.S. stores that opened in such a tough environment were lagging behind, they now seem to be catching up and back on or ahead of the trajectory that we expected and that we years ago saw as we expanded throughout Canada.

Erika Maschmeyer - Robert W. Baird: Your new bags look great, could you talk about what you're seeing on the accessory side and your efforts there?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: This is Sheree Waterson. Our bag assortment is like our outerwear assortment, it's evaporating, and this is due to actually the great materials that we're using, the great hardware, premium hardware that we are using and then the style and functionality that are going into each bag. We've also upped our inventories in stocks and underwear and other staple categories as well as our running accessories and other yields of accessories. So, we are on track with all of those. I think the primary reason for that is not only its function and styling but the fact that it all goes back to the deliveries that we are seeing in the functional apparel piece of the business. So, everything is quite synchronized right now and it's paying off.

Christine Day - CEO: And mat sales are also up substantially.

Operator: Claire Gallacher, Capstone Investments.

Claire Gallacher - Capstone Investments: I had question about the men side of your business, could you talk about the performance of Men's segment relative to the Women's segment and what you are doing there to generate any kind of incremental interest or any kind of incremental sales in that category?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: The men's business is tracking at or above increases over last year of the women's in accessories business. So, we've seen significant improvements in that section, primarily because we have leaned into the right core and key items and we are really improving the assortments and the functionality of our technical tops business. So, we've seen some terrific gains there because of those two things. Does that answer your question?

Claire Gallacher - Capstone Investments: It does. Do you have the same kind of mix between running and the yoga on the men's side? Does it mirror kind of the women's breakdown?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: I would have to say, yes, it manifest a little bit differently because our men's technical apparel is more crossover sports apparel. So, one of our top yoga shorts can also be used as a run short in men's.

Operator: Taposh Bari, Jefferies & Company.

Taposh Bari - Jefferies & Company: I wanted to get a better sense of your longer term financial targets. I know, Christine you mentioned next year you're looking to maintain a high level of, I guess, operating margins. So, maybe give us an update if you can on, how to think about longer term operating margins and gross margins for the overall company?

John E. Currie - CFO: I mean, of course, we're not going to give guidance for 2011. But having said that, obviously there is lots of plusses and minuses in our margin profile, and to some extent it's discretionary. As Christine mentioned, we're investing SG&A dollars to fund growth and the way we manage the company is, as we see strong revenue growth we'll take items or initiatives of a buy-list and invest in SG&A. So, with that in mind, we continue to see gross margins typically in the low 50s, and we'll work to manage our operating margin to a level similar to what we expect to see for this year or slightly higher gaining leverage over time.

Taposh Bari - Jefferies & Company: Then just a quick follow-up. It sounds like you're obviously air freighting less at this point in the year, given your healthier inventory positions. So, can you just give us a sense if you can on what percentage of your goods are in fact air freighted now versus say last year and then maybe kind of what a normalized historical rate was?

John E. Currie - CFO: I don't have a good breakdown on that, we're obviously back in stock and air freighting very little if any right now. I don't have a good comparable number for last year to quote.

Taposh Bari - Jefferies & Company: Fair enough. Then just one quick follow-up on just the inventory number. So, I understand that a lot of that is been driven by an increased investment in core merchandise. Is there any way you can kind of break out how much of an impact that core reinvestment has on that year-over-year growth number or even the dollar number, if possible?

Christine Day - CEO: It's very significant. I think, there's two factors that you want to look at there, one is that, and which is a very safe inventory position for us to be in, and really it's about even guest loyalty, frustrating people on the core items isn't something we want to do; frustrating them on that special jacket in terms of scarcity, I'm willing to do. Then the second is really shipping inventory into our e-commerce channel, which has been significantly constrained. So, even with our rate of growth combined between the retail and the e-commerce channel as well as funding these showrooms, planning for the openings of next year stores. So you'll see our inventory lift, but even with that on – looking at it on the sales basis, we still – our inventory growth is less than our sales growth. So continued discipline is where we always play, and a little less reliance on (chase) which as we've talked about before reduces our cost of getting the product here. As we said in inventory calls or in our calls in the past, when we faced really very uncertain sales markets, we chose to chase into that, but we also see the demand for our core business is so strong. There is very little inventory risk in those core and basic items particularly since they're season-less.

Operator: Laura Champine, Cowen.

Laura Champine - Cowen: Obviously, you guys are showing great growth. The one area where we came in a little weaker than what we expected was new store productivity. Can you talk about that and where do you think new store productivity should be in coming quarters?

John E. Currie - CFO: When I look at our new stores in the U.S., there undoubtedly from a knocking it out of the park compared to what you or I would have expected, I think what you're seeing is this quarter for the first time we have all of the Australia stores and Australia is an earlier part and it's a earlier place in its evolution. So you're seeing 10 stores that are closer to a new store in a new market level of productivity, and I think that may be why your new store calculation is different than what you had expected.

Laura Champine - Cowen: I know it's a small part of the business, but how large a change does that need to be to turn profitable, and then does it – at what point does it show EBIT margin that's similar to your overall?

John E. Currie - CFO: Actually, the wonders of accounting make it look like Australia is losing money. In fact, the Australia operation was still incurring startup losses last year before we acquired it. This quarter, Australia actually made money in the range of $0.5 million, but because of the accounting for acquisition you also have amortization of the amount we've spent to buy back franchise rights. There is an adjustment to their inventory up to fair market value, so you're not seeing what's really their margin coming through in our statement, and that will work its way through probably in one more quarter. So, I mean, bottom-line is that is a profitable operation already, and it's at that turning point that we saw in the U.S. a year or two ago.

Operator: Richard Jaffe, Stifel Nicolaus.

Richard Jaffe - Stifel Nicolaus: Just follow-up question on the showroom opportunity and given its success in building the market for you guys. I wondered if we could anticipate an acceleration in showrooms as a sort of a forerunner of an acceleration in square foot expansion that would be for 2011, 2012. Could you just comment on the opportunity showrooms presents?

Delaney Schweitzer - EVP, Retail Operations North America: We actually planned our 2011 showrooms at 15 showrooms. So we're loving basically how we're going to showrooms today. We don't see an increase in square footage. We feel that the showrooms are doing exactly what we wanted them to do in terms of pre-branding for our stores and we are watching them closely. So today we're happy where they are.

Operator: Howard Tubin, RBC Capital Markets.

Howard Tubin - RBC Capital Markets: Just one more question on inventory. Will the growth rate in inventory at the end of 3Q be consistent to what it was at the end of 2Q or will that growth rate start to moderate?

John E. Currie - CFO: I think at the end of Q3, you'd see inventory grow over Q2 in line with sales expectations, Q4 versus Q3.

Christine Day - CEO: Because they're our biggest sales quarters, but it still (likes a) flatter growth rate than what this leap from Q1 to Q2 would be.

John E. Currie - CFO: But absolute dollars probably up a little bit over the Q2 level.

Howard Tubin - RBC Capital Markets: Then maybe just one follow-up on outerwear. This has been a great category for you guys for the last couple of fall seasons. Is the assortment – has it been extended for the fall relative to last year at all?

Christine Day - CEO: It is not.

Sheree Waterson - EVP, General Merchandise Management & Sourcing: No, it hasn't been extended. So essentially, we have four styles out there right now, which are all performing beautifully.

Operator: (Claire Vondreau, Jennifer Black & Associates).

Claire Vondreau - Jennifer Black & Associates: I have a couple questions on women's pants. I noticed that you recently added the higher waist Tadasana pant and I was wondering if this was something the customers have been asking for and if you plan on expanding this? Then also I know you do hemming, but I wondered if you've started offering a short leg, because sometimes hemming seems as the leg shape?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: This is Sheree again. I think you're referring to the Tadasana pants, which is performing nicely. I think the real answer to your question, Claire, is that, we provide a fit logic that accounts for not only what's happening with the silhouettes and pants or any other article of clothing, but also that provides a range so that different body types and so on can wear our product. So far we have zeroed in on that logic, and we're happy with it. The Tadasana is probably one of the highest rises that we've had in some time and we've gotten some nice performance on it.

Operator: I am showing no further questions at this time.

Christine Day - CEO: With that, we'll thank everyone for participating with us today, and we're really looking forward to the balance of the year and very excited about that. So thank you everyone and have a great day.

Operator: Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.