Q3 2011 Earnings Call Transcript
Transcript Call Date 12/01/2011

Operator: Good day, ladies and gentlemen, and welcome to the lululemon athletica Quarter Three 2011 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. As a reminder, this conference call is being recorded.

I would now like to turn your conference over to your host for today Mr. Joe Teklits. Sir, you may begin.

Joseph Teklits - ICR: Okay, thanks, and good morning everybody. Thanks for joining us for the third quarter conference call. A copy of today's press release is available in the Investor Relations section of lululemon's website at or furnished on Form 8-K with the SEC and available on the Commission's website at Also available in the Investor Relations section of the Company's website will be a recording of today's call which is available for 30 days as a replay shortly after we end today.

Hosting our call today is Christine Day, the Company's CEO; and John Currie, the Company's CFO. We would like to remind everyone of course that statements contained on this call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in Company's filings with the SEC. Also, today's call we've got a limit of one hour, so when we get to the Q&A, please limit yourself to one question and one primary question.

With that, I'll turn over to Christine Day.

Christine Day - CEO: Thank you, Joe. Good morning, everyone and thank you for joining us to discuss our third quarter results. Today, we're doing our call from New York City and with me is John Currie, our CFO and Sheree Waterson our Chief Product Officer. Following my opening remarks, I will turn the call over to John Currie to review the financial details for the quarter and our outlook for the fourth quarter.

In the third quarter we achieved 31% revenue growth with 50% year-over-year EPS growth and we set a new record in comparable sales per square foot of $1,880. These strong revenue results were at the top end of our guidance and as anticipated, we also had unmet sales demand throughout the quarter.

Our new stores continued their strong performance, and we also bought back our last remaining franchises in Colorado and Santa Barbara. Our goal for Q4 was to break the inventory cycle we ran all year and we have achieved it.

As you will remember in Q4 of 2010, we were well positioned in inventory to meet demand which drove the 28% comp. This was a great result for 2010, but is left as under inventoried and began the cycle of chase.

In Q4 2011, we have the right mix of new styles and color and a healthy and clean inventory. New product highlights for Q4 include new running (move on), polar fleece, featherweight down layering pieces, a dance capsule and bright colors. To set Q4 and Q1 up for success, our Q3 in-transit inventory includes two modules. We brought forward a portion of the spring deliveries built around back to studio marathon training, cycling, commuter themes along with our black and white capsule.

This will create inventory flexibility as it is appropriate for either quarter. We expect inventory trends and markdowns to appropriately normalize due to our in-stock position. Given our confidence in our inventory levels we had increased our revenue guidance for Q4. One of the highlights of the quarter was the launch of our ivivva Canada and then subsequent November launch of ivivva in the U.S. Even without an ivivva U.S. store presence our U.S. sales are exceeding Canadian e-commerce sales with strong demand coming from Chicago, LA and New York. As we do with our lululemon site, ivivva e-commerce gives us insight into guest demand and potential future store location.

We also completed the seamless migration of our e-commerce servers from a shared to dedicated environment to meet growing demand. In addition, we were excited to see our guests' reaction to our new lululemon site redesign, which launched in early November with new features such as video education and a new front page everyday with feature campaign. We encourage you to check it out if you have not already.

Activities to support international growth in the quarter included third-party logistics agreement to support international e-commerce for Europe and Asia and expansion of our Australian DC to accommodate local e-commerce shipping.

In Q1 2012, we will launch our first localized website in Australia with the U.K., Hong Kong and potentially one other market to follow later in the year, supported by our planned openings of two new showrooms in both Hong Kong and London in early 2012.

We also launched the new business intelligence tools to upgrade our POS and store network systems to speed up our POS transactions and increase reliability. We have selected our design and development system software known as PLM and have commenced implementation. We have made substantial investments in our IT, digital, e-commerce and product organization to increase our capacity and depth to prepare for the increased complexity and growth.

In December, we will begin our initial round of interviews for an SVP of Branding Community and replacing Chris Ladd, our former head of e-commerce, who left for personal reasons.

So as we finished 2011, we are positioned where we want to be. We continue to perform at the top of our sector and remain focused on our four strategic growth priorities driving comp store sales, e-commerce, new stores and preparing for international expansion. As we said before, growth alone is not a strategy. Elevating the brand through innovative technical product and guest experience, excellent in education, investing in our people and communities and producing a strong return on our assets are equally important.

I will now turn the call over to John to go through the financial results.

John E. Currie - CFO: Thanks, Christine. I'll begin by reviewing the details of our third quarter of 2011, and then I'll update you on our outlook for the fourth quarter and for the full year fiscal 2011. Our shareholders approved the two-for-one stock split which took effect in early July. Please keep in mind that all comments with regard to share count and per share amounts in our results and outlook are now on a post-stock split basis.

For the third quarter, our total net revenue rose 31% to $230.2 million from $175.8 million in the third quarter of 2010. Increase in revenue was driven by comparable store sales growth of 16% on a constant dollar basis, the addition of 28 net new corporate-owned stores in North America and three net new corporate-owned stores in Australia since Q3 of 2010. Direct to consumer sales which increased by 71% or $9.9 million and stronger Canadian and U.S. dollars which had the effect of increasing reported revenues by $3.7 million or 1.6%.

During the quarter, we opened 13 corporate-owned lululemon stores in the U.S. and one in Australia. We also re-acquired our four remaining franchise locations which brings to an end our franchise program. We ended the quarter with 165 total stores versus 134 a year ago. There are 118 stores in our comp base, 40 of those in Canada, 68 in the United States, and 10 in Australia.

During the quarter, we had five high volume stores under renovation operating in temporary premises. Corporate-owned stores represented 82.6% of total revenue or $190 million versus 81.5% or $143.2 million in the third quarter of last year. Revenues from our direct to consumer channel totaled $23.9 million or 10.4% of total revenue versus $14 million or 7.9% of total revenue in the third quarter last of year. Other revenue which includes franchise, wholesale, showrooms and outlets totaled $16.3 million or 7% of revenue for the third quarter versus $18.6 million or 10.6% of revenue in the third quarter of last year. This decrease resulted from reduced markdown product available for sale at our outlets and a warehouse sale held in Q3 of the prior year, fewer showrooms as several have transitioned to new stores, and the transition of our franchise store to the corporate-owned store category.

Gross profit for the third quarter was $128.5 million or 55.8% of net revenue compared to $96.8 million or 55.1% of net revenue in Q3 of 2010. The factors which contributed to this 70 basis point increase in gross margin were a product margin decline of 20 basis points, higher product costs due to inflationary pressures on raw materials and labor were partially offset by fewer markdowns and discounts associated with strong product sell-through as well as improvements due to mix shift, lower duty rates and other input cost efficiencies and improvements.

Leverage on occupancy and depreciation of 70 basis points was offset by increased product and supply chain team costs of 60 basis points and foreign exchange improvement of 80 basis points due to stronger Canadian and Australian dollars.

SG&A expenses were $68.8 million or 29.9% of net revenue compared with $54.5 million or 31% of net revenue in the same period last year. The 26.3% SG&A dollar increase is due to an increase in store compensation and operating expenses associated with new stores as well as increases at existing locations; an increase in head office employee costs, including management incentive base compensation, stock-based compensation and other head office costs is a result of the investment and people and systems needed for long-term growth; and finally, the higher Canadian and Australian dollars, which increased SG&A by $1.2 million or 1.7%.

As a percentage of revenue, our third quarter SG&A decreased by 110 basis points due mainly to lower e-commerce operating costs following the transition of our e-commerce platform to an in-house platform as well as some smaller factors partially offset by 80 basis points of deleverage from the increased head office costs.

As a result, operating income for the third quarter was $59.7 million or 25.9% of net revenue compared with $42.4 million or 24.1% of net revenue in 2010. Other income including net interest expense totaled $0.6 million compared to $0.1 million in the third quarter of 2010.

Tax expense for the quarter was $21.4 million at a rate of 35.5% compared to $16.5 million at a rate of 38.9% in the third quarter of 2010.

Net income for the quarter was $38.8 million or $0.27 per diluted share. This compares with net income of $25.7 million or $0.18 per diluted share from the second quarter of 2010. Our weighted average diluted shares outstanding for the quarter were 145.3 million versus a 143.7 million a year ago, which has been adjusted for the two-for-one stock split.

Capital expenditures were $13.5 million in the third quarter relating to new store build-outs, existing store renovations, IT capital expenditures and net assets from reacquired franchises. We ended the quarter with $276.9 million in cash and cash equivalents.

Inventory at the end of the third quarter was $129.2 million or 77% higher than at the end of the third quarter of 2010. Within this total is a significant increase in in-transit inventory at 33 million versus 11 million last year, which as Christine discussed, was largely a spring product pulled forward.

Excluding the in-transit inventory our units of inventory on hand was up approximately 45%, which sets us up well to meet guests' demand for Q4 and early 2012, which leads me to our outlook for the fourth quarter of 2011.

This outlook assumes the Canadian dollar at 0.95 to U.S. dollar compared to an average exchange rate at par in Q4 of 2010. We anticipate revenue in the range of $327 million to $332 million. This is based on comparable store sales percentage increase in the low to mid teens on a constant-dollar basis, compared with the fourth quarter of 2010. We plan to open two lululemon stores in the U.S., five in Australia and two ivivva stores in Canada during the fourth quarter.

We again expect our gross margin to be in the 55% range. Similar to the third quarter, we expect higher product cost from both labor and raw materials that we have not passed on to the guest through hire pricing, combined with more normalized markdown levels associated with more sufficient inventory levels to compress our gross margin from a year ago. We expect SG&A as a percentage of revenue to be roughly 300 basis points below the third quarter level which is consistent with our normal historical seasonality.

During the fourth quarter, we expect to continue to see cost efficiencies as a result of the transition of our e-commerce platform to an in-house model, but at the same time, we're increasing our reinvestment back into the e-commerce business to develop a necessary foundation to achieve the potential growth trajectory in this channel.

Our SG&A will also reflect highest store level compensation designed to attract and retain the best staff, pre-opening costs related to the nine stores planned to open in Q4, an additional stores planned to open in early Q1 2012 as well as additional resources at our head office to continue to drive long-term scalability and growth.

Assuming a tax rate of 36% and 145.3 million diluted average shares outstanding; we expect earnings per share in the fourth quarter to be in the range of $0.40 to $0.42 per share.

This brings our full year sales to a range of $956 million and $961 million. For the full fiscal year 2011, we anticipate we'll open a total 37 corporate-owned stores, including Australia and ivivva location. Since our last update, this includes one additional U.S. store and one additional Australia store. We also now expect 2011 fiscal year earnings per share to be approximately $1.16 to $1.18. This is based on 145.2 million diluted weighted average shares outstanding and it assumes an effective tax rate of 36%.

We expect capital expenditures to be between $116 million and $108 million for fiscal 2011, reflecting the purchase of our Store Support Centre of $65.1 million plus closing cost in the first quarter as well as new store build-outs, renovation capital for existing stores, IT and other head office capital.

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

Christine Day - CEO: Okay. Thank you, John. So, we'll go ahead and go to Q&A and please remember that we only have time today for about an hour question, so we're asking that be limited to one question. Thank you.

Transcript Call Date 12/01/2011

Operator: Lorraine Hutchinson, Bank of America.

Lorraine Maikis Hutchinson - Bank of America Merrill Lynch: Just wanted to talk about the fourth quarter gross margin guidance for a minute, it seems like quite a bit more of a drop versus what you had in the third quarter, and I guess are you seeing product costs escalate further or do you just expect to the fully in-stock inventory position lead to more markdown?

John E. Currie - CFO: It's more of a second. The inflationary pressure as we guided previously in Q3 was give or take 250 basis points, we expect the same in Q4. It's really we're reflecting and assuming that with our inventory position as you'd expect to more normalize markdown level.

Christine Day - CEO: Maybe, I'll just add a little bit of color to that. We did not clear in Q3. We didn't have a warehouse sale, which we had the year before. So, we didn't have enough products to do it frankly, and then because inventory receipts were little later than we would have liked, we didn't do the markdowns until October. So, we've already cleared any product that we would have wanted to clear at the beginning of this quarter, and then looking at January year-over-year, last year we didn't have any product to do the holiday sales we sold through full price merchandise. This year, we anticipate we'll be in a more normal markdown post-holiday mode, so year-over-year I think it's important to recognize that both October and January will be a little different for the fourth quarter.

Operator: Edward Yruma, KeyBanc Capital Markets.

Edward Yruma - KeyBanc Capital Markets: Could you give us some color to the performance of the Canadian stores and have you seen the weakness that some other retailers have exhibited?

John E. Currie - CFO: I guess this is what the third quarter we've had the same kind of discussion about the weakness in Canada that we're reading about. When I look at statistics on mall traffic, et cetera, it does say that Canada is weakening although Canadian economy to me seems pretty strong. Throughout the year, we've been, give or take, 5% comping in Canada, rounding up to 6% or down to 4%, it's been pretty consistent. Given our high level of productivity, and that comp really exceeds what other retailers in Canada are seeing, I think, we're not really concerned about the Canadian market I suppose. If there is weakness there that means that we normally be doing better than the comp that we're doing, but it's a very healthy business and it continues to be.

Christine Day - CEO: The other thing that I would add is that we have seen really strong growth in our e-commerce business there year-over-year as well. So that's in addition to what we are producing in that comp.

Operator: Michelle Tan, Goldman Sachs.

Michelle Tan - Goldman Sachs: I was wondering, if you could give us any sense of what kind of trends you have seen so far in November? Then maybe talk a little bit about the timing of when out of stocks last year really started to materially impact your sales trend, if we look at Q4 and Q1? Then if I could sneak one extra one in, John, any color you can give us on the productivity of the Australian franchises that you have bought in?

Christine Day - CEO: I think sales, obviously we did really well in all of Q4 last year, which we sold through everything that we had brought in early, and we really eroded our base going into Q1. If I look at our – Sherri and I were doing an analysis and we looked at our year-over-year Q1 base of inventory and it was down 40%. Then we sold through strongly in that January finishing off Q4. So, going into Q1, starting in that February, we were 40% lower than we really should have been to support the sales from a Chinese new year, that's really when you thought and March, if you recall, was probably our worst out of stock period. That definitely affected our sales ramp and began that chase cycle and where we really want to be is set up for a strong Q1 and most importantly for us, it's the energy we spent on chase, I'd really rather be spending on innovation. So, the cost is more than just sales. It's about creating the future. Our goal for 2012 is to set ourselves up to have a strong inventory flow throughout the year and that's we have been working on. We feel we are in a great position to accomplish that. So just in summary, very little impact to really Q4 last year, most of the impact into Q1 and this year we'll be really careful watching and frankly capping sales, so we don't impact Q1.

John E. Currie - CFO: Michelle, your question on Australia, again the Australia brand recognitions maybe a year to two behind the U.S. Productivity is strong, comping low 20s and the productivity is just over 1,000 square-foot and rising.

Michelle Tan - Goldman Sachs: Any color on November?

John E. Currie - CFO: Again, we came into November in a great in-stock position, strong Black Friday event without markdowns and the strong Cyber Monday, that's supports our guidance.

Operator: Omar Saad, ISI Group

Omar Saad - ISI Group: Christine, you mentioned something in your prepared remarks about elevating the brand or work to elevate the brand, and we've been hearing a lot of the luxury brands that we cover are seeing price points to move higher, the consumers are looking for higher quality, more premium, more interesting unique product. Are you guys incorporating that theme into your strategy? Are you seeing a mix shift in terms of price points that your consumers are being attracted to? How does the ivivva brand fit into that kind of if you think about the price points came?

Christine Day - CEO: We just what we are. We see that there is not a lot of price pushback and as we've been innovating in the garments, adding more detail and we haven't taken pricing on the basics, but we are pricing the premium about the basics, so like the special editions difference that's in the stores right now is just getting snapped up. So, we definitely see we gave opportunity and that's part of the reason why strategically I'd rather be spending my time chasing that market which we really considered differentiate ourselves. So, Sheree and her team has done a great job. I think when you see the spring product that hits I think it's some of our best stuff we've ever done, so I'm really excited about the work that we've done there.

Sheree Waterson - EVP, General Merchandise Management & Sourcing: Yeah, just to add on to what Christine said. This is Sheree. As we continue to innovate more and more for our technical product, both in our fabrics, our trends and in our make and functionality, the value equation is so much higher in the guest business as Christine said, really snatching that stuff.

Christine Day - CEO: Yeah, for instance like one of the pieces that's in the store right now is the new featherweight running piece that has almost like a down vest built into it, but it's featherweight light and it's just incredible and its exactly that type of technical jacket that you'll see us focus more on.

Omar Saad - ISI Group: Then on the ivivva piece, how does that fit in there?

Christine Day - CEO: What we're seeing is there is a market for premium girl's athletic wear and especially in that dance, gymnastic space and then carrying over into casual. So, it works very much the same way the lululemon does with active wear, casual wear built off of those core scores and both in Canada and as we've said when we opened the U.S. e-commerce site, it was very, very little marketing. The draw has been really incredible and we don't even actually start a lot of our marketing on that until after the holidays. We've done a few things like we have put flyers in all the holiday shipping bags that go out, so that the guest knows we have the ivivva U.S. website, but most of the on-ground work doesn't start till after the year, so we're really encouraged by the reception for that brand in the U.S.

Operator: Howard Tubin, RBC Capital Markets.

Howard Tubin - RBC Capital Markets: Maybe just a question on inventory, what do you think will be at the end of the fourth quarter kind of an increase versus last year basis?

John E. Currie - CFO: I guess, the way to look at it is if you ignore the large increase in-transit that we had at that point in time at the end of Q3 and look at where we are inventory versus forward sales, we would expect to be in a similar position at the end of Q4, because that depends on how Q4 goes, but we're comfortable with the inventory level that we've achieved coming into this quarter. So, hopefully it won't be similar.

Christine Day - CEO: I would love to be above last year, because we know last year wasn't enough to support Q1 right. So, our main goal was starting 2012 off in a really great position so we can put our energies towards design and take some pressure off of our manufacturers and the supply chain and just do healthy chase which is a little bit more on demand base rather than the catch up. For us, I think that the critical issue is also when we're chasing it depends on what fabrics are readily available and what manufacturing space is available, so then we're not in such a planned mode and I think really in Q3 that's what we struggled with the most as we were still leaving with what we could get versus what we ideally wanted and then timing of that and managing the flow of that without bumping into our next season takes a lot of energy. So, that's the cycle we're committed to really ending, and I'd rather be sitting here telling you we're in a great inventory position that's up than be sitting here quarter after quarter talking about being down because then the cost is big to our guests and it's big to our brand long-term. So, we really are excited about where we are for inventory because it's with release we can turn our energies to other things and we know what we have in the mix for Q4 and into Q1 is what the guests wants.

Operator: Erika Maschmeyer, Robert W. Baird.

Erika Maschmeyer - Robert W. Baird: Could you talk a little bit about your e-commerce penetration? It's a strong number helped by having some better inventory backed by the quarter and ivivva? Could you talk a little bit about where your penetration was running at the end of the quarter or how it's trending in November?

Christine Day - CEO: I think the number we are seeing is that U.S. is accelerating for penetration in the U.S. and broadly across the U.S. because I think in the initial build-out we expect primarily the big cities and where we have the big stores. We are starting to see the brand penetrate more generally across the U.S. and we're excited that we are growing that customer base which then also then helps us to grow our store base. So I think that's really the big story, and Canada has healthy growth as well. So, I think you are going to see a little less coming in store comps maybe in the future because we are penetrating more through the convenience of e-commerce. So, I think that's really the big story there. With ivivva as we said, the big penetration spots are really built around those dance studios where we have seen end markets where there's a lot of children in dance or young girls with New York, Chicago, LA have been the initial hot sports for ivivva. Internationally, we are seeing a lot of business coming in lululemon. It continues to be from really the Germany, U.K., France and then shifting over into Asia. It's really Hong Kong and Japan.

Erika Maschmeyer - Robert W. Baird: I know you have talked about a 15% sort of the mid-point goal for e-commerce penetration. I guess, where do you think you could be in Q4?

John E. Currie - CFO: We were 10.4% in Q3. We expect to be higher than that, but the 15% target is still away.

Christine Day - CEO: I don't think we'll get there by year-end, so we had a very strong Black Friday and Cyber Monday on line, so we have some record days, so we're very excited about.

Operator: Adrienne Tennant, Janney Capital Markets

Adrienne Tennant - Janney Capital Markets: My question is, John, can you talk a little bit about sort of the inventory shortage in the first half of the year and how we should think about a more normalized gross margin in the first half of 2012. It still seems like expectations are for maybe a high 50% gross margin and after having guided to sort of the more normalized levels as markdowns plus ongoing, but better cost inflation impact. Should we be thinking about the first half as more normalized in that mid 50% range?

John E. Currie - CFO: Inventory levels as we've been talking about all year in the first half were constrained. You'll recall I guess three earnings call ago, in the first quarter, especially in March, comps really dropped because we're still out of stock and similar shortages in the second quarter. So again, I am not giving guidance for next year, but it is reasonable to assume that being in a better in-stock position should give us a tailwind in the first half of next year. I'm not at a point where I want to be giving guidance on gross margin next year, but again the same themes, the inflationary cost pressures are likely still to be there, and we will be seeing more normalized level of markdowns, and so just those factors alone bring gross margin down from where it had been but still on a very healthy level.

Christine Day - CEO: Great. The third thing I'd add is an addition to not doing any warehouse sales this year at all. Then we also had very low outlet stores sales because we don't manufacture separately for our outlet, and we've really started those all year, and so just this last month was the first time we were able to really give the outlet product –outlet stores any product at all and we had weeks where we down like negative 50 in our outlet stores.

Adrienne Tennant - Janney Capital Markets: Will you be doing a warehouse sale in the fourth quarter or none at all in 2011 and then putting them back in 2012 is a better in-stock position?

Christine Day - CEO: We will be doing one in 2012, yeah.

John E. Currie - CFO: Actually, we're looking at January and February for once and maybe one in Q4.

Operator: Janet Kloppenberg, JJK Research.

Janet Kloppenberg - JJK Research: I wanted to just talk a little bit about the top line in third quarter. It seems that the differential, John, between your comps and your total sales has narrowed and I'm wondering if that has to do with maybe new store openings, some people are worried about productivity per store, and I'm also wondering if there was if you could highlight the loss sales from the warehouse sales or perhaps timing differences either with showroom closings or new store openings that may have affected that. And hello to Sheree, I was wondering if you could talk a little bit about what I am seeing in the stores which is I think how to focus on new fashion not only in color, but in treatment in detail and I'm wondering if that is focus of the brand going forward. Thanks so much?

John E. Currie - CFO: Yeah. The other category especially is coming down as I said in the script and also there are a number of things going on in the revenue line that aren't visible. As you said, the warehouse sale that we had last year we didn't have one in Q3 this year, I can't remember exactly what the revenue was from that it might have been a couple million. I mentioned this in the script, it isn't insignificant, there were five of our pretty much all high productivity stores that were under renovation during good portion of Q3.

Janet Kloppenberg - JJK Research: Are they complete now, John?

John E. Currie - CFO: They are now I think a couple just opened this past weekend.

Janet Kloppenberg - JJK Research: So there are some lost revenue there?

John E. Currie - CFO: Yeah they were operating out of smaller temporary location, so there is – I don't know the exact number but its probably around a million at least of lost revenue there and I mean, it would be very difficult if you're outside the company to model new store timing, we opened a lot of stores in the quarter. Total of 14 and they were really very much weighted towards the end of the quarter.

Janet Kloppenberg - JJK Research: Yeah, only three opened earlier.

John E. Currie - CFO: Yeah, so if you had assumed that they opened on average at the middle of the quarter, you would have expected more store weeks and therefore more revenue. Then the other piece that I'm more aware of that most – shortly after the last earnings call that Canadian and Australian dollars took a dip and so the translation of Canadian and Australian revenue at least for a period was a little bit lower than what would've been expected.

Janet Kloppenberg - JJK Research: That was another couple of million?

John E. Currie - CFO: Yes

Janet Kloppenberg - JJK Research: Then lower outlet store sales as well?

John E. Currie - CFO: Yes. Then again this is the last quarter where we have any franchises, so that revenue is moved into corporate store.

Christine Day - CEO: We did close a few showrooms as those then translate into (business stores here).

Sheree Waterson - EVP, General Merchandise Management & Sourcing: Okay now on to the product. Very observant, Janet, thank you very much. The color that we are introducing for Q4 is phenomenal and the guest is responding. So for Q3, we had some more subtle color palettes and that we know that she really responds to some of the brighter colors. So those are being very well received right now. Then in terms of detailing this is one place where we really know that count for lululemon. So we've looked at fit, function and finishing. In terms of the fit, continuing to focus on body flattering styling as well as for running as an example; fits that feel like nothing is on your body, which is exactly what a runner wants to feel like. The functionality of the fabric again, feeling light as air and in terms of running or seamless and so on and so forth. In terms of yoga, it has been extremely functional. Then our finishing is I'd say one of the things that we are best in the world at. So, whether or not it's the perfect functioning pocket or zipper or ventilation systems or it's a gorgeous ruffle or treatment. It's something that the design team now is really putting their attention to.

Sheree Waterson - EVP, General Merchandise Management & Sourcing: I think in terms of – maybe hitting your question, are we shifting to more fashion, no, it's always fit function and technical product first, adding elements that come from the fashion world to that and that's our magic formula, so we'll always still be athletic technical function wear.

Operator: Claire Gallacher, Auriga Investments

Claire Gallacher - Auriga: I was curious about the trend for your traffic and sell-through rate throughout the quarter if you saw any major fluctuations maybe early in the quarter versus what we saw late in the quarter?

John E. Currie - CFO: No, not any discernible trends, again has been the case in earlier in the year. The ups and down tended to fall more than the product drops as opposed to any kind of trend based on general traffic or economy.

Operator: John Morris, BMO Capital

John Morris - Banc of Montreal: I wanted to know maybe, Christine, a little bit more about the performance of the new dance category. How that's going? Is it very meaningful and are you contemplating other interesting new classifications that are in the works that you've talked about before? In addition to that, I am also kind of separately – maybe John can address this. I am thinking with the inventory up as much as it is and the better positioning you've got on the spring product. Would you anticipate that maybe some of the offset from the cost perspective would be that freight costs could come down and would that be helpful as we move into next year?

Christine Day - CEO: Yeah. So, starting with the new dance category that we did for the – in the stores right now, you'll just be finishing actually because (indiscernible) a dance capsule that we did which was kind of just a kickoff to holiday and kinds of just something interesting and new for the guests that we eased into our more traditional holiday. So, it went very quickly. It was very well received. There were some really great winning pieces in that, and we use those capsules to kind of test our product edge, see what we can corporate into the core line, what needs to be repeated for maybe a quarter, what seasonal and then how we built that into the longer line plan going forward, but we're also very conscious of the fact that we have under 3,000 square-feet in the majority of our stores. So, we use the capsules as a way of creating excitement, testing new lines, but at the same time, really maximizing the space. So, you will see an emphasis on that as part of our comp driving strategy and a way of offering newness to the guest, but without cluttering our stores.

John Morris - Banc of Montreal: It sounds like it's a bit of keeper there. Are there certifications that you're looking at? I mean it was such a new way to create excitement, anything else to anticipate in the coming month?

Christine Day - CEO: You'll see us and I discuss it in there that we're doing a bike commuter line for spring, so you'll see us do that. The real power comes from not just what we do in the stores, but then how we translate that into online, and we can use that to extend shoulder seasons. We can use that to sell longer online with the quick hit in the stores, so it's really an integrated strategy that we're looking at developing what's drive that overall business which is really where we think the retail world is trending.

John E. Currie - CFO: Your question on with inventory up at the end of the year with that implied maybe lower freight costs early next year, yes that is valid. The in-transit that you saw on the balance sheet at the end of October, a lot of it for spring was on the water as opposed to in the air. So, I can't quantify it yet, but that will be a possible benefit in Q1.

Christine Day - CEO: Our air freight really didn't start till late – was really in Q2, sorry into Q1, Q2 of next year because of Chinese New Year and when we could get product, so the air freight catch up happened after March, April. So, just for timing perspective.

Operator: Christian Buss, Credit Suisse.

Christian Buss - Credit Suisse: I was wondering if you could provide some color on the margin rate decline in the corporate-owned stores just kind of running through the numbers from the Q?

John E. Currie - CFO: Are we talking gross margin or what?

Christian Buss - Credit Suisse: The income from corporate-owned stores line, I guess, my math suggest that margin there were down 60 basis points?

John E. Currie - CFO: You have got more details on that than I have in front of me. Again, as we've talked about higher product cost due to inflation and in raw materials and labor that's above 250 basis points. Lower markdowns year-over-year, its 70, 75 basis points, so they are good, and then just a variety of smaller items, it gave us about 160 basis points of improvement in product margin offsetting those amounts. That gave us the net. I am just looking overall as opposed to just corporate stores and that's what came to the net 20 basis point decline in product margin, so yeah and then beyond that it was the leverage in FX.

Christian Buss - Credit Suisse: Then as you're comping Oprah week this week and I'm wondering how things are going as the favorite things episode is being lapped?

Christine Day - CEO: I do understand that we're – it does mention that again, so we got some notice I think from Oprah on that. So, I don't think that there is – it wasn't a really – I think it was great visibility because of run-on fitness pants. I mean we didn't know enough in time last year to have ordered enough pants to have met the demand that was created and it's kind of a dangerous thing to buy a whole bunch of those again this year because it's really what the guests want. So we've always designed what we know she wants versus what historically has sold. So if we don't ever get into a place where we're buying a bunch of stuff, we have to mark down.

Operator: Stacy Pak, Barclays.

Stacy Pak - Barclays Capital: A few follow-ups and then a couple of questions. I guess first did you or would you repeat what you said about the comp and/or sales in Canada, I missed that. Second of all, when you add up pretty much everything you said on the list of why total sales were light? Does that get new store productivity sort of back to the 90%, 100% rang or was there a still a decline because I don't have every single number? What should we look at for SG&A dollar growth in 2012? Should it be similar to '11? I guess the other big question is if inventories are so high and you're guiding to more markdowns, right, more normalized markdown, shouldn't you also be driving a higher comp with those higher inventories and if not why not?

John E. Currie - CFO: Comps are sells in Canada, again the whole year and Q3 was similar where mid-single-digits comps which is better than the overall Canadian retail market seems to be performing. Our productivity in Canada is huge and we're comping at that level, so we're not feeling weakness in Canada if the Canadian economy is suffering then I suppose we would be doing better. Total sale productivity, I think your question was when you do the puts and takes about I went through on – responding to Janet's question what does that mean for new store productivity, new store productivity is not down from what it's been at all. New stores are still opening that are projected annual rate in excess of 1,100 a square-foot and that' been the case throughout the year and it is not declining. SG&A dollar growth 2012, I am not guiding to that yet and with higher inventory, higher markdowns, why not a higher comp. Last year Q4, we're in a pretty good inventory position coming in and we did a 28 comp last year and 29 comp a year before. So, we're just being realistic in terms of what the good level of comp in addition to the last year.

Christine Day - CEO: The dollar value of the comp is huge. If you just do the math, I mean what it takes to drive the dollar comp in Canada, what it takes to drive the dollar comp now in the U.S. it's a huge number. So it takes a lot more unit to drive that comp, so just realistically if you do that math alone. The other point which I said earlier which is this year, we're going to cap our overall growth so that we set ourselves up for next year and I think it's really important that we do that, so that we don't have another year of trying to chase the product. So, there is I think an upper range that we're comfortable with, and I think we've provided – we feel like if the consumer isn't there, we're in great shape. We haven't taken on any more risk, so we manage and protect the overall business and that's always our objective is to manage a well-run business and set ourselves up for success next year, so our resource is go to our strategic objectives versus catch up.

Operator: John Zolidis, Buckingham Research.

John Zolidis - Buckingham Research Group, Inc.: Question on the SG&A, I believe that guidance was for SG&A to slightly de-lever in the quarter and came in with the 110 basis points of leverage and looking at the SG&A dollar growth rate on a per square foot basis in Q3, it decelerated sharply from the first half of the year. So, can you just talk about what was different in SG&A in Q3 relative to the guidance?

John E. Currie - CFO: There are a lot of small things. Let's say the biggest one was we anticipated a quicker ramp up in our spend on our own e-commerce team and digital, marketing around the e-commerce channel having brought it in-house and that spend did not happen as early as I anticipated in the guidance.

Christine Day - CEO: But it has happened now. So I mean, this is one of the points where we have substantially higher and I said it in my script about in the product organization, in the IT organization, to support a lot of the new systems and business process work we're doing for the increased complexity in the business, and the capital projects we have slated for, really that are in process this year that will go in next year, and the digital strategy and the web teams. So it took us a little longer to do the sourcing, but those hires have been made. There was a substantial increase in the back half of the year in our headcount hiring, and that run rate then will continue. So it's more of a step change than a small run rate increase.

Operator: Taposh Bari, Jefferies.

Taposh Bari - Jefferies: I guess first of all, just wanted to congratulate you on the website, I think it's amazing and then I guess the question that I had was I just wanted to dial back into the third quarter performance specifically around your comp. So, 16% obviously at the high-end of your range a great number by any kind of standard, but I think the market is kind of come to expect you guys for better or for worse be even the high-end of your range. So, looking back at the third quarter has anything changed or is it all kind of inventory constraint-related? Has there been any kind of U.S. macro choppiness or is it simply an inventory issue that you should be able to work through into 2012?

John E. Currie - CFO: I think I'd want to answer that by saying we really don't intend to blow away our guidance. We've had pleasant surprises in the past, where I like where we came in relative to guidance. I'd say the only significant change was as I said earlier the Canadian and Australian dollars dropped after I gave guidance and that might have knocked a little bit out, but otherwise this is where we expected and hope to come in.

Christine Day - CEO: Yeah, I think we do feel like we had unmet demand in Q3, but that was reflected in our guidance, we knew we couldn't maybe step up, because we – our mix was still in my mind not optimal, and where we don't want to be is buying either poor quality product, because we're rushing it just to fill a number, and we don't want to buy 10 more pink when it's 10 more yellow that will sell, because that creates markdowns and it creates what the guests doesn't want, which hurts the brand. So as we're chasing, we have to be really careful to create the right balance of what the product is that the guests wants against one and have the discipline not just to put anything in the store and that's really what we were still managing through in Q3, which limits potential upside in that quarter, and then flow of goods was probably a little more challenging in Q3. We got some product later than we wanted. So, you know there are I think some small execution pieces in there that affected that. But as John said and going into Q4, we really want to make sure we manage Q4 to not blow it away, so that we're set up for Q1 up next year and without placing stupid bets that place the company at risk. So, managing well thought out growth and a well executed business to deliver great bottom line results consistently is where we come from.

Operator: Dana Telsey, Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group: As you're thinking about the growth for next year, Christine, how you're thinking about that team? Is there any new people that you need to hire and as you think about online, how are online operating margin this quarter versus what you had and how does that normalize going forward?

Christine Day - CEO: So, going back in hire, as I mentioned we are bringing in time to bring in a new SVP of brand and marketing that has that global experience, so looking to add to the team. We're backfilling Chris Ladd position. So, at the executive level, we're still building out some of our supply chain and sourcing leadership as well. We think that's really the next important area that we invest in, so it's not at the senior, senior level, but some significant executive hires there. I think that's really the areas that we're building out. We're starting to bring in people who have more international and global experience in every position. It's part of that strategy, so that we're rebuilding a team that's capable of running a global operation, so that's one of the qualities we look for in every hire that we do. So, I think we're getting ourselves ready for the things that are critical and important to us and then the IT organization Kathryn Henry has done a fantastic job of attracting top, top, top talent, so there is a new person that's brought into run our store operating POS systems which will help us integrate our online and store systems which is one of our objectives for next year and she is brought on a great person who has supply chain experience, so, two critical hires in that area that we're very excited about to drive those initiatives. I'm sorry, Dana your second question?

John E. Currie - CFO: The online operating margin. We note in the Q, it's in the high 30s which is down a little bit from Q2 because we were starting to spend some of the dollars with the new sites launching et cetera. Q4, again, there is additional SG&A spend, but it's a higher revenue quarter, so probably be similar or may be slightly lower and we'll see for next there is lots of room for leverage on the upside.

Operator: Andrew Burns, D.A. Davidson.

Andrew Burns - D.A. Davidson & Co.: With all the categories that are and will be in stores, expanded run line, cycling small dance capsule, new spring lines, how do you think about the proper store size to adequately merchandise the depth of product that you now have and I think a larger box could be in the future for new stores or opportunity to expand stores in stronger markets here?

Christine Day - CEO: One of the strategy that we have been deploying and that's why we have five of our top stores under renovation was we do look at the older stores base, particularly in Canada where we've added so many more product lines since they were first originated and lot of those stores were in the low 2,000, 2,200, 2,300 square-feet. So, at the point of renewal which is your optimal kind of the business model time to do it, we are taking additional square footage and renovating those stores. If we can take it next to us and if not and some we've relocated in the mall to a new location to do that or if its more of a street front location making sure that we renovate to add room for the capacity by deploying new fixtures. So, we have a whole strategy that surround upgrading some of those older smaller stores that timed around their lease renewal rate and so that strategy is being deployed, and we have in – we've looked at our stores and if it's a neighborhood store, we stayed pretty close to the 2,800 square foot model that we've traditionally been doing, but it's just a store we believe that the future anchor store. We will take it up a little closer to the 3,000 square feet, but we don't have any intention of building 5,000 square foot stores or flagship. Our strategy is much more around the flow of goods and about the integration with online.

Operator: Paul Lejuez, Nomura.

Paul Lejuez - Nomura: I was just wondering if you could talk a little bit about third quarter performance maybe east coast versus west coast in the U.S. Then also on the comp breakdown, if you can talk traffic versus ticket and what your AURs were? Also, just an update on men's, how did they do during the quarter?

Christine Day - CEO: We love the Midwest. I mean that's really – our business is just phenomenally blowing out there, strong performance across all markets. We don't have any soft markets that we're really seeing. So, I think that is definitely the good news the brand is going everywhere. Men's we will share more. Men's has really done well. We've been little late on product on men's as (chipping) our new designer, we're revamping the line we stuck with pretty much basics and you'll just really start to see the new men's stuff in really summer of next year. It's really the kind of the big popping stuff, so it will pretty much be a basic story, but high quality, great colors, great lines between now and then. Then in terms of traffic it's still primarily traffic, John.

John E. Currie - CFO: Yeah the overall comps, the lower half just came from traffic 25% give or take from conversion. There was a little bit that came from AUR about 3% increase in our average transaction value and that just reflects a little bit of a mix shift as opposed to any take in pricing.

Christine Day - CEO: More of a top.

Paul Lejuez - Nomura: What percent does men's represent now?

John E. Currie - CFO: We were still around 12. Men's was just slightly ahead of the overall average.

Operator: Jennifer Black, Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates: Congratulations on a great quarter. I have a follow-up to men's. I was curious to know if you were going to broaden the assortment, and are you still thinking that it could represent 15% to 20% of your business? Then I also wondered about limited edition collection, are you carrying more inventory in this category corresponding with your inventory increase?

Christine Day - CEO: Yeah, that's kind of seasonal, like right now we have a limited edition of hoodie vest in the store and some pants, which we do every holiday season. I think what you are seeing is kind of the premium running jackets and the premium yoga jackets – I mean, there are few more in that premium category but not yet what I'd call special edition.

Sheree Waterson - EVP, General Merchandise Management & Sourcing: We did expand the special edition hoodie categories, and we also have some special edition leggings, and so yes you are seeing that and the guest is responding which is fantastic. Then in terms of men's you asked, are we still bullish on expanding the men's business, and the answer is absolutely yes. With what I just saw that is coming through for next year just post the first half of 2012 looks really good. So, I think there is a tremendous amount of potential there both in-store and then of course Christine has continued to mention leveraging our online sales as well and who knows what the next.

Christine Day - CEO: I really think the work that we've done in the last six months about finding our voice in men's and what's our spot that we're going to go after, that's what I'm most excited about is because I think we've really defined that and that's what you'll start to see us and show up in the second half of 2012.

Operator: Thank you. I would now like to turn your conference back over to Miss. Christine Day for any closing remarks.

Christine Day - CEO: Thanks everyone for joining us today, and as usual, I would just love to thank everybody from our e-commerce team who worked so hard to get really three new websites up and running for us between the two ivivva sites and the new lululemon skin in a very short period of time, and everybody out there in our stores who delivers a great guest experience. So, thank you everyone.

Operator: Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.