Operator: Good day, ladies and gentlemen, and welcome to the lululemon athletica Q1 2012 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 is being recorded.
I would now like to introduce your host for today's conference call, (Ms. Teresa). You may begin.
Teresa - IR: Good morning, everybody and thank you for joining us on the first quarter 2012 conference call. A copy of today's press release is available on the Investor Relations section of lululemon's website at www.lululemon.com or furnished on Form 8-K with the SEC and available on the Commission's website at sec.gov.
Shortly after we end this morning, a recording of today's call will be available as a replay for 30 days on the Investor Relations' section of the Company's website.
Hosting our call today is Christine Day, the Company's CEO; and John Currie, the Company's CFO. Sheree Waterson, our Chief Product Officer will also be available during the Q&A portion of the call.
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 may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC. Also for today's call we've got a limit of one hour, so when we get back to the Q&A, please limit yourself to one question at a time to give others the opportunity to also have their questions addressed.
With that, I'll turn it over to Christine.
Christine Day - CEO: Thank you Teresa. Good morning, everyone, and thank you for joining us today to discuss our first quarter results. We have started off the year with another strong quarter. While every call John and I speak to our financial achievements, we are equally aware of our broader goal to create leaders in the world to elevate our ambassadors and the ongoing commitment of the entire team from our factories to our stores to deliver high quality innovative product and an excellent guest experience that makes it all possible. Before going further, I want to recognize everyone at lululemon for once again coming together to achieve these excellent results.
Our investment in increased inventory levels led to strong growth and earnings performance in the first quarter, as our guests responded well to our spring styles. You will recall that in the first quarter of last year, we were very light in inventory as a result of having oversold in the fourth quarter of the prior year. One of our key goals for 2011 was to balance our inventory to meet demand in order to focus our resources on innovation versus chasing product. We announced during our last call that we entered 2012 with a strong inventory position to break the cycle of chase, this translated into a 53% increase in revenue to $285.7 million. We are excited about our new store openings as each of these was unique and special for the individual communities.
In the first quarter, this included the opening of our first store in Salt Lake City, Utah, where they celebrated with a big party including a 150 of the communities top business supporters, ambassadors, friends and family. The second store to open in the first quarter was in the historic district of downtown Milwaukee. The opening weekend festivities included ambassador breakfast on Friday morning, and Yoga demos all week. Over the course of the weekend, guests arrived from all over Wisconsin including a group of women that rented a bus to travel from Green Bay, two hours away to join us for the opening festivities. The team in Tampa held a Roaring 20s themed speakeasy party to celebrate our Hyde Park Village store opening, and we opened Boston's Newbury Street, complete with Acro-yogis performing from an apparatus strung from the exposed beams in the store, and we were thrilled when our ambassadors surprised the team in the morning with breakfast to thank them for a very special night.
We continually strive for the right balance between delivering strong growth and our market leader focus on quality, innovation and execution. An example of this innovation is in the capsules we are introducing throughout 2012. Based on the past success of our capsules, both from the guest response and our learnings, we have increased the cadence from two to three a year to eight for 2012, which is consistent with our objective to plant seeds for our long-term growth. The impact of this innovation, small production runs, new fabric and technologies, the hits and misses are already built into our gross margin model.
Throughout 2012 we are ceding international markets. Our London showroom opened in April and is off to a great start, posting weekly yoga classes with 25 to 30 participants, building relationships in the community and already performing better than the average of our U.S. showrooms. We expect to open the second Hong Kong showroom at the end of the third quarter.
We successfully launched the Australian e-commerce site on May 17, so our Australian guests will have an online assortment in pricing that is specific to them, and most importantly, they receive their order quicker than ever before. This new website allows our stores to be even more connected and accessible to our local community. As announced previously, we also plan to launch country specific web pages in the U.K. and Hong Kong this year.
The behind-the-scenes work on our international expansion in tech and legal structures, logistics, IT systems, local labor laws, onboarding strategies and product compliance assortment and distribution planning continue. We know from our country that the market demand is growing and we are selecting our top priority markets now. To support this growth, we need to continue to invest in people and systems. We have a number of large IT infrastructure programs underway to optimize multiple supply chains, provide cross channel visibility, and ensure that we have the flexibility to make, boost, and sell product globally.
Last quarter, we announced two key hires Laura Klauberg, SVP Brand and Community, previously a top executive at Unilever; and Paul Zaengle, our new SVP of Global Digital Commerce, formerly of Columbia Sportswear and Ralph Lauren. Both of them are completing their onboarding, including visiting our showrooms, completing store shifts, and participating in executive team building. And we look forward to having them here full time in Vancouver, as we expand the business and the brand in new directions.
And a closing note, we host our inaugural half-marathon event, The SeaWheeze on August 11, here in beautiful Vancouver, BC. And we are now only about 200 short of our sellout capacity of 7,500 participants. This will be my first half-marathon, and I would love to have you join me, so register online quickly, if you want to join our party.
And with that I'm going to turn it over to John to go through the numbers.
John E. Currie - CFO: Thanks, Christine. I'll begin by reviewing the details of our first quarter 2012 and then I'll update you on our outlook for the second quarter and the full year of fiscal 2012. So for the first quarter, total net revenue was $285.7 million, an increase of 53% over the first quarter of 2011.
The increase in revenue was driven by comparable store sales growth of 25% on a constant dollar basis. The addition since Q1 of 2011 of 27 net new corporate owned stores in the U.S. plus the four franchise stores that we had reacquired last year, four ivivva stores in Canada, and six stores in Australia and one in New Zealand.
Direct to consumer sales, which increased by $24.7 million or 179% and offsetting this was the impact of foreign exchange which had the effect of decreasing reported revenues by $1.8 million or 0.9%. During the quarter, we opened four lululemon stores in the U.S. and two ivivva stores in Canada. We ended the quarter with 180 total stores versus 142 a year ago, including 19 stores in Australia and New Zealand. There are now 127 stores in our comp base; 41 of those in Canada, including two ivivva; 75 in the United States; and 11 in Australia.
Corporate owned stores represented 80.1% of total revenue, or $228.8 million versus 83.6% or $156.2 million in the first quarter of last year. Revenues from our direct-to-consumer channel totaled $38.4 million or 13.5% of total revenue versus $13.8 million or 7.4% of total revenue in the first quarter of last year. Other revenue, which includes wholesale, showrooms, outlets, and until last year franchise stores, totaled $18.5 million, or 6.4% of revenue for the first quarter versus $16.8 million or 9% of revenue for the first quarter of last year.
Gross profit for the first quarter was $157.3 million or 55% of net revenue compared to $109.7 million or 58.7% of net revenue in Q1 2011. The factors that contributed to this 370 basis point decrease in gross margin were a prior year favorable nonrecurring adjustment of 140 basis points which related to recognizing certain input tax credits, product margin decline of 340 basis points due to increases in labor and raw material costs due to product innovation, function, garment complexity as well as inflation and a more normalized rate of markdowns as a result of more balanced inventory levels. These are partially offset by leverage on occupancy and depreciation, which contributed 110 basis points of improvement.
SG&A expenses were $84.2 million or 29.4% of net revenue, compared to $58 million or 31% of net revenue for the same period last year. The 45.1% SG&A dollar increase was due to an increase in store labor and operating expenses associated with new stores, showrooms and growth at existing locations and increase in store support center cost including salaries, professional fees, management incentive based compensation and stock-based compensation.
We continue to make investments in building our pipeline infrastructure and operational capabilities to drive long-term growth as well as an increase in non-store occupancy and depreciation. As a percentage of revenue, our first quarter SG&A gained 160 basis points of leverage due primarily to our e-commerce business as we significantly lowered operating cost as a percentage of sales by in sourcing our strategy platform.
As a result, operating income for the first quarter was $73.1 million or 25.6% of net revenue compared with $51.7 million or 27.7% of net revenue in 2011. Tax expense for the quarter was $27 million or a tax rate of 36.5% compared to $19.1 million or a tax rate of 36.2% in the first quarter of 2011. Net income for the quarter was $46.6 million or $0.32 per diluted share. This compares with net income of $33.4 million or $0.23 per diluted share for the first quarter of 2011. Our weighted average diluted shares outstanding for the quarter were 145.7 million versus 144.9 million a year ago.
Capital expenditures were $12.7 million for the quarter compared with $74.8 million in the first quarter of 2011, which included the purchase of our store support center for $65.1 million. We ended the quarter with $424.3 million in cash and cash equivalents.
Inventory at the end of the quarter was $107.7 million, 67% higher than at the end of the first quarter of 2011. Excluding the higher product in transit, on hand inventory unit growth of approximately 30% is consistent with our expected forward sales and will support the growth from new stores, higher same store sales, and our e-commerce channel.
This leads me to our outlook for the second quarter of 2012 and the full year. For the remainder of 2012 on a net basis, our guidance remains basically unchanged, so incorporating our stronger Q1 results we've increased our revenue guidance for the year to be in the range of $1.32 billion to $1.34 billion. This guidance assumes a lower Canadian dollar CDN0.97 to the $1 versus par in our previous guidance, with the reduction in revenue on currency translation offset by slightly higher store productivity and e-commerce performance.
We anticipate we'll open a total of up to 35 corporate owned stores, plus two outlets in 2012. Revenue upside opportunity is limited until Q4, as we have focused our product team on innovation for the future in favor of chasing near term revenue dollars. We continue to expect gross margin for the year right around our stated long-term goal of 55%.
As discussed on the last call, we expect to be below 55% through Q3 and above in Q4 due to leverage on the higher holiday volumes. We expect to leverage SG&A slightly for the year, driven by leverage in Q1 during which we still had not cycled the transition to our ATG e-commerce platform which occurred in late Q1 of 2011, and also due to leverage on higher volumes in Q4. As a result, we expect our fiscal 2012 earnings per share to be approximately $1.55 to $1.60. This is based on a tax rate of 36.5% and 146 million weighted average shares outstanding.
Within this full year guidance, we anticipate Q2 revenue to be in the range of $273 million to $278 million. This is based on a comparable store sales percentage increase in the low double-digits on a constant dollar basis, compared with the second quarter of 2011.
Again, our outlook assumes a Canadian dollar at $0.97 to the U.S. dollar, compared to $1.03 in Q2 of 2011. We plan to open seven lululemon stores in the U.S. and one Australia during the second quarter.
As I've just mentioned, we expect gross margin to be below 55% in Q2. We expect some gross margin decline versus the second quarter of 2011, driven primarily by the same reasons experienced in Q1. Higher product costs due to innovation, construction and more normalized markdowns due to balanced inventory levels. Those will be partially offset by leverage on occupancy and depreciation.
During the second quarter we expect to deleverage slightly on SG&A as a percentage of revenue or over the second quarter of 2011. We continue to invest in initiatives that drive capability in our supply chain and infrastructure, leadership, guest experience and growth.
Assuming a tax rate of 36.5% and $145.7 million diluted average shares outstanding, we expect earnings per share in the second quarter to be in the range of $0.28 to $0.30. We expect capital expenditures to be between $80 million and $85 million for fiscal 2012 reflecting new store build outs, renovation capital for existing stores, IT and other head office capital. This amount could potentially increase, if we meet success in an initiative underway to acquire or build our own retail street stores to control our occupancy in key strategic locations.
With that I'll turn it back to Christine.
Christine Day - CEO: Thanks, John. I just want to reiterate that we are exactly where we want to be balancing our long-term growth, innovation and execution and that our business fundamentals remain strong.
With that we're going to open it up to Q&A.
Operator: Sharon Zackfia, William Blair.
Sharon Zackfia - William Blair: So, two questions. I think John, you said something on the order of the expectations that you have for the rest of the year essentially unchanged. Obviously, I think, your second quarter guidance was a little bit below what the street expected. Just curious if you're seeing anything so far in the second quarter that we should maybe be concerned about? And then secondarily, on the capsules, I think, there has been anxiety in the market, as I've seen more of the risk, you have been taking on the product, and if you could help us understand how those capsules evolve over time, how you analyze them into potentially becoming permanent parts of the collection going forward, and how we on the outside can really view those and kind of analyze the instruments as you mentioned, Christine?
John E. Currie - CFO: I mean on the guidance for the balance of the year, as Christine mentioned, we're basically right on plan for the year. The cadence quarter-to-quarter, because I hadn't given guidance on quarterly revenue previously, so our Q2 guidance is really consistent with where we expect it to be, and we feel good about the way the business is running right now.
Christine Day - CEO: On the capsules, we see they're doing exactly what we want them to do and we had planned for the impact of those capsules to appear. The two that have dropped, which are swim and the commuter line; on swim, we learned a lot about the technical manufacturing of swim, and while we think they were some things that were our overall successes and that were really great, we learned a few things about fit and function and fabric as we constructed those swimsuits. So, we had great guest response to them, but we also, I think, learned some things technically, and the beauty of capsules and why we've deployed this strategy is that we don't make big buys in new categories and then have huge markdowns or place big bets. So, these are small controlled bets, one time, where we take the learnings, always looking for that anchor piece that we can take forward. On the commuter capsule, that was very successful, we learned a lot about some great pieces in that commuter capsule but we felt that we made a little bit of an issue with the buy there doing it a little deeper than we should have for the capsule and pull that back. So the learnings that we take from one to the next I think are great, we tried the new fabric, so those are things that will compress our margin in the short-term, but then we also can translate some of those learnings in other product lines. Sheree, do you want to add anything?
Sheree Waterson - EVP, General Merchandise Management & Sourcing: No, thanks.
Christine Day - CEO: So I think we feel that we got some great learnings about the bike and also to be clear that we don't just may be test something once, something like the cycling could repeat and we will come back later in the year with some additional tests. So, we feel that's a very controlled way to manage our long-term growth opportunities and it's the right thing as a market leader to continue to innovate.
Operator: Adrienne Tennant, Janney Capital Markets.
Adrienne Tennant - Janney Capital Markets: Christine, my first question is, can you talk about the macro environment in Canada versus U.S. versus Australia, which of those – as you look into the back half of the year, are you planning for largely those to be similar, worse or better in each of those markets? Then for John, can you talk about low double-digit positive? I am assuming the debt by definition 10% to 12%, it's a deceleration from the first quarter trend, so can you give us any color on how you exited the first quarter and typically I'm assuming, could you give that guidance based on what you are currently seeing if that's the case?
Christine Day - CEO: I think market-by-market, we feel optimistic about each one of those markets, and while we have sometimes day-to-day choppiness, we know it's more related at this point to our product flow and timing of deliveries. We hear a lot of noise in the macro market. I think like other retailers, we're going to control what we can control, we've always been disciplined planners, looking at upside and downside and I feel we are well poised to manage through anything. Anyhow, John and I are professional worriers, so we always will look at that and have our contingency plans, but at this point we don't see anything that as we stated in our guidance that's going to change our outlook for the year.
John E. Currie - CFO: In terms of the Q2 comp, remember Q1, part of our ability to hit a 25 comp in Q1 was because we were so under-inventoried a year ago, so one thing to remember is Q2 and balance of the year is getting to a tougher compare, but beyond that again it's really product flow. We'll – again, in terms of comp, last year was very up and down, and so the comp, month to month, week-to-week, and quarter-to-quarter is a function of what we saw a year ago. But in general the strong comp in Q1, more modest for the mid-part of the year, and as I said in the prepared remarks, we deliberately chose to not have our product team dedicate a lot of time to chasing inventory to catch every last dollar of revenue. They're really much more focused on innovation this year, and so as I said the ability to have higher opportunity in product is really backended to Q4.
Adrienne Tennant - Janney Capital Markets: Okay. Did you see any March April Easter shift impact?
Christine Day - CEO: I think, that would be harder for us to tell because of our delivery cycle and what we're anniversarying, if you remember last year our biggest chase dropped at the end of Q1, beginning at Q2, and we oversold a little bit more than we planned in Q1, so I think, could that have been a little bit of it, yes, but I think separating that from our (indiscernible) product flow for us at this time is just noise, I don't think it was anything significant.
Operator: Omar Saad, ISI Group.
Omar Saad - ISI Group: I wanted to follow up on kind of the strategy around product innovation versus inventory chase. What kind of opportunities are you seeing there on the innovation side in terms of resources and allocating resources both kind of capital and human, and how does that work internally where you are kind of shifting the focus in terms of replenishing and chasing the inventory as opposed to really focusing on developing innovative new products, new areas and new categories? Let me dive into that question a little bit, because it seems like somewhat of a shift from maybe the last couple of quarters.
Christine Day - CEO: I think it's a shift from last year, Omar, and what we learned in last year when we were so heavily in chase, as we stated in prior calls, what we started to get a little concerned about was when you over-order what you can get versus what you know the consumer needs, there's a brand cost to that. And so keeping any dollar might produce something in the short term, but longer term making sure that we have the quality, that we have the right amount of scarcity that we are always innovating what's needed as a market leader from a brand and long-term growth story is the position we'd rather be and rather than if we chase an extra amount of pink when yellow's what's needed, we really just create, in our opinion, future markdowns and destroy the brand. So we are always looking at that. Now, are we doing no chase? Absolutely not. Are we doing as much as we did the year before? No. We believe our buys are solid, we are planning for a great Q4 and Q1, and we've always been committed to quality, because the other thing we don't want to run into is we are doing an innovation, it just isn't capsules and pods, it's new fabric, it's blending fabrics on garments, and that requires more complexity and more construction. So, we want to make sure that quality is always what we are doing well, because those are the long-term financial programs we build upon. So, we're smart about team and balancing that with growth and innovation, and our ability to execute the brand that we know the consumer wants us to be.
Omar Saad - ISI Group: John, does this have an impact on the balance sheet, the inventory levels, should we see those come down as a result of this?
John E. Currie - CFO: No, I mean, the inventory level were at in terms of compared to forward sales is appropriate. So, inventory levels should be in that same balance for the rest of the year, or at least through to Q4.
Operator: Janet Kloppenberg, JJK Research.
Janet Kloppenberg - JJK Research: John, I wanted to flush out this innovation comp comment just a bit more, it sounds like it may constrain comps on the core business, perhaps help you read the acceptance of new product or new technical fabrics or styling, maybe you could talk a little bit about that or Christine? Also I'm wondering about sales metrics in the quarter, change in AUR, change in traffic, conversion levels, et cetera, also the e-commerce business came in much higher than I expected, and I'm wondering, if there is a trade-off there with comps? And lastly, Sheree, can you talk to us about the capsules, I think, you're adding maybe six this year, and when we might see those flow in?
John E. Currie - CFO: That was a lot of questions in one. I'll answer really quick. It makes it hard to remember what the first one is…
Janet Kloppenberg - JJK Research: I'll go, the first one was, the innovation is hurting comps, in the overall comps, because of core product being perhaps below where it has been?
John E. Currie - CFO: Yeah, I wouldn't say innovation is constraining comps from anywhere. Again, we're not scrambling and chasing further upside, but the buy of our core and key styles is appropriate for the level of business we expect in the innovation is just where we're dedicating those additional efforts. Conversion AUR pricing, I guess what we saw in the quarter, most of the comp came from traffic with strong higher conversion and slightly higher average basket.
Christine Day - CEO: Which mainly was driven by more complexity in the garment.
John E. Currie - CFO: Also a slight increase in units per transaction as well. E-commerce, as you say, it's tremendous growth there, 179% over last year, and that channel definitely has tremendous momentum, came in at 13.5% of overall revenue which matched Q4, which is actually a pleasant upside surprise because traditionally seasonally, Q1 and Q2 e-commerce is a lower percent of total. So, e-commerce definitely outperformed. We don't include that in our comp base of course, but it is something to keep in mind when you're looking at overall sales growth.
Janet Kloppenberg - JJK Research: And on the capsules?
Christine Day - CEO: So, June, August and October, we have (indiscernible) respectively, and then also for November, we have a bar capsule coming up, and for December, we are going deeper into one of our warm wear capsules, which was lightweight and mid-weight puffies along with running luon separates for layering and then in January, gym and cross fit, so a training capsule for back to gym.
Operator: Kimberly Greenberger, Morgan Stanley & Co. Inc.
Kimberly Greenberger - Morgan Stanley & Co. Inc.: John, I wanted to know if you could help us with the relative spread in comps between the U.S. and Canada and secondarily, if you look out into the second half of the year, do you have any product cost, any lower product cost opportunities or are you seeing the innovation cycle just continuing to raise your cost of goods sold?
John E. Currie - CFO: We don't specifically breakout comps or performance between countries, but consistent with what we've seen in recent quarters, Canada even though you think it's a mature business, comped in the mid-double-digit and the U.S. was comping in the mid-30s, pretty strong in both regions comparable to the maturity of the business. In terms of lower product cost, later in the year, I think certainly after Q2 any inflation that we started seeing a year or so ago is going to be reflected in our product cost, but I think as you mentioned, I would say continued innovation using new fabrics, new construction is likely to offset any cost relief that we might otherwise see and again, we're maintaining sort of 55% gross margin target for the year and that reflects the impact of the innovation that we're doing.
Christine Day - CEO: I think strategically using our very strong gross margin to continue to create a long-term brand success story is the right thing to do.
Operator: Paul Lejuez, Nomura Securities.
Paul Lejuez - Nomura Securities: I'm just wondering if you could talk about the weather during the quarter, if you think that the warm weather helped you pull sales forward? Also I'm wondering what sort of e-com increases you're assuming for the rest of the year, because it doesn't seem like based on your guidance that you'd be assuming a similar rate of increase in 1Q – as 1Q, so I'm just curious what's baked in? And then last John, maybe you could expand a little bit about one of the last comments you made on your prepared remarks about maybe buying some stores, what are you thinking there?
Christine Day - CEO: I'll do the weather one. We like anybody would be subject to extreme weather patterns like huge floods or closing or whatever, but on a day-to-day basis or overall (indiscernible) basis, we don't seem to be as tied. We're much more tied to our product flow. Now could there have been a little pull forward, as we started hearing other people talk about that we kind of looked at it, we feel our business is still run far more by our product flow, and the guest demand we create then, weather patterns, or other factors. Yoga is done indoors, so we're pretty lucky. John?
John E. Currie - CFO: In terms of e-commerce, the increase in Q1 was in part boosted by the fact that last year we were going through our transition to the ATG platform, which meant we really gradually diminished the inventory that was dedicated to that third-party site, until the transition, so even though the increase was still pretty impressive it will be somewhat more muted for the rest of the year. As I said, it was 13.5% of overall revenue, which is surprised to the upside. We'd expect it to be a little bit lower than that as a percentage of the total through the middle quarters of the year, and then traditionally tends to bump up in Q4 for holiday gift-giving. The comment about buying stores, I just wanted to flag that because it would impact our capital expenditures. As you know, we have a very healthy balance sheet and a good cash position, and it's available to use strategically. One of the areas that we are looking at is, in certain key strategic locations, where we know we are going to want to have a store for the long-term, it's certainly open to us to acquire those locations as opposed to simply leasing, especially if it's a situation where we may find ourselves with negotiating position down the road on renewal with either the landlord in that location or in malls in the immediate vicinity. So for example, we do have under contract the – to purchase the store that we recently opened in Newbury, and you may see some more of that, not a significant amount of capital overall, but I just want to flag that that's an initiative that we are pursuing.
Operator: Liz Dunn, Macquarie.
Liz Dunn - Macquarie: Let me add my congratulations. Just a couple of questions. I guess first, how much inventory should we see dedicated to this sort of innovation in the capsules? Also, for John, I am listening to everything you said on gross margin, it seemed as though the normalized markdowns was sort of around 100 basis points. Did that have to do with some of these – with some of the hit you took on the commuter line or can you help us understand that a bit better? Then just on product, I kind of want to get a better sense of, for like crossfit or bar, how is your current assortment not meeting the needs for those activities, because that when I see people doing those classes, it certainly – they're wearing a lot of Lulu as it currently stands?
John E. Currie - CFO: On the inventory for capsules, it's pretty insignificant, quite frankly. So, I think, capsules are the product what showrooms are to our store base. So, they're not really a profit driver there are testing. So, the sales for any one capsule might be expected to be mid single-digit millions or less, and therefore the inventory related to those capsules is fairly minor. And you're right about the impact of markdowns being about 100 basis points, which was about what we would have expected, and the impact of the commuter line or any other capsules fairly minor within that.
Christine Day - CEO: What I think is important to understand, when we talk about innovation, capsules is one small part of it. There is also innovation in our run garment in terms of new fabrics, new trim, new technology, men's, in jackets. So, it's also innovating in our core lines that we're constantly investing in.
Liz Dunn - Macquarie: And then, as we look at the fourth quarter, potentially a little bit more opportunity for acceleration in the comp. Is that just strategically you think it's important just to focus on driving as many sales high quality as you can in the fourth quarter, and so the innovation will perhaps take a little bit of a backseat during that important sales quarter, is that the right way to think about it?
Christine Day - CEO: I think the right way to think about it is that that's always our biggest opportunity for a buy and consumer demand, there's less risk we're taking on bigger buys for that quarter. So, that's always just part of the psychology about that. There's a lot of different factors. Where we didn't want to be where we were last year, was whenever you chase and you innovate a new line while you chase, you have a choice, right. You're going to chase what you already have and will that sell again and is that the right answer, or are you going to chase something new, and if you chase something new and you have to go all the way back to fabrics like we do, then that takes a lot of your time and you're not been also planning for great success later in the year. So, we're always balancing future success with immediate success and as our garments get a little more complex, which is a cost of creating the market and being a market leader, we always want to make sure we're maintaining quality with all of these new fabrics and innovations that everything from the dyes work on the cloth fabric, that we get all the right trims and then that meet our quality standard, and we don't want to chase a short-term sale and sacrifice the reputation for quality or execution. That's a slippery slope and we really just don't want to be there.
Operator: John Morris, Banc of Montreal.
John Morris - Banc of Montreal: John, we've talked a little bit about it. I'm wondering on the product costs, understanding a lot of that's coming from some of the innovation that you're pursuing as well, but on the other side of it, are you able to do anything to control some of the increases that you're seeing in labor and raw materials and what would those be, and then maybe Christine, if you can talk a little bit about the performance of ivivva, and what your learnings are there so far and what your insights are there for ivivva both Canada and U.S.?
John E. Currie - CFO: In terms of product cost pressure coming from inflation, that's really already baked in and we're just anniversarying y some of those increases that happened up through the first half of last year, so it's not that there's further inflation that's significantly impacting our cost going forward.
John Morris - Banc of Montreal: Is it more labor or raw material, what's kind of the breakdown there John?
John E. Currie - CFO: I think it's primarily raw material.
John Morris - Banc of Montreal: Christine?
Christine Day - CEO: On ivivva, it continues on track. We're pleased with the performance of it. It's not, at this point we're not ready to blow it out. You'll see a couple more stores opening, the business continues to grow because we don't have stores opened in the U.S. we did do a flash sale recently with Zulily to exit some aged product within the U.S. market. We didn't do it in Canada, where we have the stores and you won't see us do that very often, but we don't want to open – we're not ready to open stores in the market and we don't want to discount too much on our website sales. So we're on track, pleased with the story. We feel like we got a great concept there, but right now we want to let it mature, grow at the right pace and we feel it's doing well.
Operator: Jaime Katz, Morning Star.
Jaime Katz - Morning Star: My first question is, if e-commerce kind of stays where it is or grows slightly as a proportion of sales, have you guys thought about what – how that can effectively impact the gross margin and SG&A and maybe what sort of potential you guys can reach on that front, and then also with entry into the U.K. market, is there any estimate on what the potential store base, if you guys decide to move forward with that marketplace?
Christine Day - CEO: I don't think we – we haven't released going forward what we think the store count is internationally, but obviously it's a healthy market for us as we believe a couple of other – of the bigger markets in Europe are. But honestly, we are equally excited by Asia, and the demand that we're seeing there. The yoga market is very strong and growing in Asia as well, so we actually see both markets as attractive, but I really feel in a lot of ways that Asia is even more compelling than Europe.
John E. Currie - CFO: In terms of e-commerce and its impact on margins, I think, in the Q you can see the segmented information, and as to the margins coming from the e-commerce channel are a part where they're stronger than our already pretty high store margins, and so as e-commerce, and we do expect that over time it will continue to grow as a percentage of the total, and so that will have a positive impact on both gross and operating margins in the future.
Operator: Lorraine Hutchinson, Bank of America.
Lorraine Hutchinson - Bank of America Merrill Lynch: Just wanted to dig a little bit into the businesses in Australia and New Zealand, where is the productivity gap between those stores in the U.S. and what opportunities do you have to drive comps in those markets?
John E. Currie - CFO: The way we are kind of looking at it, I'd say the brand recognition in Australia, and I guess now New Zealand now that we've opened our first store is running about three years behind the U.S., and it's comping well. We just opened the e-commerce site down there, and I am optimistic that that will also help drive brand recognition. There was a lot going on back in 2009 when we opened our e-commerce site in North America. That certainly coincided with a real turning point in terms of brand recognition in the U.S., and I am sure part of that was attributable to e-commerce. So, we are optimistic that we'll see the same sort of momentum gained in Australia. I mean Australian and New Zealand are great markets for us. As I said, they are a little bit less mature, but pretty exciting and on track.
Christine Day - CEO: And Sheree just recently got back from a trip to visit the markets last week, and after she looked at how we are handling counter seasonal products, she said, we have a lot of opportunity. And I think that we feel we've constrained ourselves a little bit as we've been learning to deal with that situation because they've had to buy and hold and our product changes so rapidly. Mixing those together, after Sheree saw that, she said, wow, I can do a lot better. So, we think we always have opportunities and I think it's been a great growth story and have profitable markets where your labor costs and store costs are higher. It gives us great confidence in our ability to grow the model internationally and the learnings we've had from supporting that market have been key to our planning for international strategies. So, I think there's been a lot of wind and a lot of potential in that market, and a lot of learning stress.
Operator: Taposh Bari, Jefferies.
Taposh Bari - Jefferies: I wanted to ask you, I guess, Christine, a question going back to the whole point about prioritizing innovation versus chasing product throughout the rest of the year. I mean, aren't those two separate functions design versus planning, just trying to get a better sense of why chasing products would distract the designing process?
Christine Day - CEO: Well, if you think about our model, there is core and replenishment, right. So, let's break out the two conversations. On the core product, which is replenished, of course that flowed, and that is a planning and buy function. But then when we color seasonal items or we do our new kind of innovative or wow items or colors, that's where it's more difficult. So, if you put like Paris Pink for instance, that has to go all the way back, because we're yarn dyed, we're not a (grage dipped), which is what gives us the quality that lasts five years. So, if I want to hold (grage) fabric to chase and dip, I mean I have a different quality level than I currently use. And then, if I over order Paris Pink, and all of a sudden it becomes ordinary, I haven't created something special. So, then I would have to take a designer to design something new, change either the garment or change and create a new fabric. So, what we are doing is investing in our development functions, which allows us to do more of and have a faster response to our labs dips and dyes, I'm getting quite technical here, but you asked, so that we can speed up our ability to have incremental colors and products. Where we don't want to be is just buying in bulk to meet demand, because then we'll lose what makes us special. So, we have to balance that with the demand, and then as it gets more complex as you start to add garments with more functionality and two fabrics together dye holds in one, not in another. So, it's complex, and I think as a growth company, what we always want to make sure we're doing it also balancing quality. We had a couple of dyes that didn't work and we pulled those qualities, those items, because we won't put that product on the floor. So, we're committed to that, we room for that, that's already all forecasted in everything we do, they weren't big mistakes, but we don't want to make those kind of mistakes and put that out in our guests' hands.
Taposh Bari - Jefferies: I guess the question then is, is this a change in philosophy versus in past couple of years, because we're coming off of this multiyear period, 20% plus comps through the Company which in retrospect was greater than where you initially planned most of the times, so obviously there was an area of catch-up of some of the early stores that opened up during the recession? I'm just trying to get a better sense of why that philosophy is changing now versus maybe a year ago. I guess along the lines of that question, like what syndrome lies kind of healthy type of comp run rate for this Company going forward?
Christine Day - CEO: I think that some of the learnings that we had last year when we heavily invested in chase, and then we stopped, and what you saw kind of in Q3, and then really just focus on a forward Q4-Q1 execution which obviously you saw play out really well. So, we take a look at the current sales trends, we're trying not to overreact in the short-term. Look, in this environment and the size we are, strong double-digit comp growth we think is a great story with a healthy margin. So, I really don't feel the need to apologize for that level of performance and grow track record that we have, and then looking at the forward opportunity and making those right investments to create that continued success. That's why we've got the strong and steady, excellence and execution being better than everyone else in the marketplace is what creates a winning strategy for the long-term and balancing short and long-term and impact it has on the organization that's still growing infrastructure. That's our job and we think we do it pretty well.
Operator: John Kernan, Cowen and Company.
John Kernan - Cowen: You talked a lot about higher product cost due to innovation. Are you realizing higher prices on some of the new innovation, and could you – what's the balance between units and AUR in the comp right now?
Christine Day - CEO: We do see some, but in the beginning when we first, like when we introduced run for example, we had a lot of new fabric, and we chose to price at what the right price was for the garment in the marketplace and in the beginning take a little bit of a reduced margin, and then we built that up over time as we extended the line, got into our minimum runs, et cetera. So that's part of the cadence. We always plan in garment for future, that it will live within our product line at the high margins, but in the beginning when we innovate and we're testing fabric, that's built into the way that we build the model and extend the line. So we always are looking for high-value, high-margin garment. That's the business we're in, not quick turn high volume T-shirts.
John E. Currie - CFO: The comp is very largely units probably 85%, 90% just a slight contribution from AUR?
John Kernan - Cowen: I guess as we look into Q2, obviously you're cycling that bringing the direct to consumer business back in-house, there's going to be some SG&A deleverage associated with that, but if your comp trend, I guess comes ahead of plan, do you feel like there's some room to re-leverage SG&A or, are there a lot of SG&A expenses in the quarter?
John E. Currie - CFO: In terms of the SG&A cadence of the year, at the start of the year we budget, we plan, we set what initiatives we can handle for the year, and the headcount associated with it. If anything, it tends to take a little bit of time to hire those people and to get those initiatives started, so as we look at Q2, Q3, what you'll see is, is those initiatives kicking in, and our headcount will grow add, and that's what compresses SG&A in the middle of the year, and then at the end of the year with higher volumes we'll get leverage again.
Operator: Roxanne Meyer, UBS.
Roxanne Meyer - UBS Investment Research: A couple of questions, just wondering if you can share with us how you're thinking about inventory growth as we move throughout the year? Second, just wanted an update on the men's business, just wondering what the penetration looks like as a percentage of sales? I know, from our checks, we've seen a lot of product sellouts. And just last, was the magnitude of the markdowns in light of your increase in inventory greater or less than you expected in the quarter?
John E. Currie - CFO: Okay. Inventory growth throughout the year, again coming into the year and at the end of Q1, I think, our inventory levels pretty balanced with the way we planned the business, and since we're not doing a lot of chase, that's true for the balance of the year. Men's; men's was about 12% in Q1, which again it's typically highest in Q4, between the holiday gift season it was over 14% in Q4, so 12% in Q1 is about in line with the way it goes season to season. I'm sorry, what was your last question?
Roxanne Meyer - UBS Investment Research: Just on the magnitude of the basis point hit from markdowns, was that in line with your expectations a little more or a little less?
John E. Currie - CFO: It was pretty much bang on our expectations.
Roxanne Meyer - UBS Investment Research: Thanks and good luck in 2Q.
Christine Day - CEO: I guess we feel really great about our inventory position, how clean it is. So, we don't feel like there's any risk on the table either.
Operator: Dana Telsey, Telsey Group.
Dana Telsey - Telsey Advisory Group: Can you talk a little bit about the online business in cadence, online versus stores, what did you see there this quarter compared to the stores? And then just as you've expanded into other categories with the men's, any update on men's, how is it doing online and in the stores and margin opportunity?
Christine Day - CEO: Online and stores, we see them march very in sync with each other. Our guests are very in tune.
John E. Currie - CFO: It's all about product flow.
Christine Day - CEO: It's all about product flow. The guests are looking for that new product wherever it's going to land. They shop both, run to the store quickly. So, we don't see a huge difference between the two we earn in the business of really doing a lot of exclusive online. We found that the cadence of the long – that the life of the product is pretty similar in both stores and online. So, we've seen them march pretty lockstep with each other, so there's no real difference. In terms of men's, we definitely see demand for men's growing.
John E. Currie - CFO: But online it's actually – I guess men don't like shopping online as much as women, because the men's penetration online is much lower than stores. So it's an opportunity.
Operator: Blair Mlnarik, Robert W. Baird.
Blair Mlnarik - Robert W. Baird: I just wanted to confirm on ivivva you said waiting to opening to stores while the markets are maturing in the U.S., does that mean that you're no longer planning on opening those five stores in July-August timeframe?
John E. Currie - CFO: We didn't have five stores, maybe those were showrooms, but we're still on plans for showroom – for stores for ivivva this year, which was a modest increase. We opened two in Q1, and within our overall stores count guidance, there might be one or two more in the back part of the year.
Blair Mlnarik - Robert W. Baird: So you are not – you used to talk about California, Washington, Illinois and Massachusetts and New York.
John E. Currie - CFO: Those were showrooms.
Christine Day - CEO: Showrooms, not stores.
Operator: Tal Woolley, RBC Capital Markets.
Tal Woolley - RBC Capital Markets: I just want to talk about the CapEx. If I back out the building purchase last year, your CapEx is sort of $50 million going to $80 million this year. Can you just talk about what are the bigger projects in there?
John E. Currie - CFO: Yeah, of course. New store build out is always there. As our store base grows and matures and we're getting up to lease renewals. We have a growing number of renovations. And when we come up to a lease renewal, we'll typically do a full renovation, which is pretty much the same cost as a new store. In addition, there's a lot of more IT systems spend, and that becomes a much longer conversation, but as we have been talking about IT systems to support the whole supply chain, we are moving forward the new financial system this year. So, that's where lot of the CapEx is.
Tal Woolley - RBC Capital Markets: If you look out sort of the next three to five – sort of three years, are there any other big ticket items that have to come online like I don't know whether you have to look at revamping distribution or sourcing anything along those lines, or do you expect that CapEx (indiscernible) sales?
John E. Currie - CFO: I think there is an ongoing need to implement and upgrade systems especially, but I think as we look forward, I don't see any shockingly large lumps in our CapEx and a lot of it is discretionary in terms of timing to some extent. So, we'll balance our CapEx. So yeah, I don't think of any big surprises.
Tal Woolley - RBC Capital Markets: Just lastly, you had made a comment at the end of your commentary about outlet stores, and was that a discussion of net new openings of outlet stores?
John E. Currie - CFO: I did mention that we're opening two new outlets this year. When you look at – I mean, we've been operating with three outlet stores in the U.S. for a couple of years now. When you look at the volume of our business in the U.S., and now that we're back in inventory, it's pretty simple arithmetic to see that that requires a couple of more outlets just to keep the inventory clean. So, that's part of the plan for the year.
Operator: Jim Duffy, Stifel Nicolaus.
Molly - Stifel Nicolaus: This is Molly on for Jim. Real quick, you had talked about the Hong Kong showroom now opening at the end of 3Q, before I think it was supposed to open in June, just wondering if there's anything going on there. Then lastly, hoping that you could maybe give more specific rollout dates for the U.K. and Hong Kong e-commerce sites?
Christine Day - CEO: I think we've already done the U.K. dates, which we said will be later in the year. We're not ready to be a little more specific about that at this time. In terms of Hong Kong, it was really just negotiating the lease and holding out.
John E. Currie - CFO: As we've got into some of the details, negotiating with the landlord in Hong Kong took a little bit longer than the plan, but we are now moving ahead.
Operator: Christian Buss, Credit Suisse.
Christian Buss - Credit Suisse: I was wondering if you could talk about the level of full priced selling, do think that's now at normalized levels, and then I was also wondering if you could give just a quick update on your systems investments, what kind of progress you've made there?
John E. Currie - CFO: In terms of full priced selling versus discounts, I think, it is more of a normal balance now, still very low relative to retail in general based on maybe high single digits, but that's more of a normal run rate, and so your question on IT investments?
Christine Day - CEO: How they're doing?
John E. Currie - CFO: Oh, boy, there's a whole bunch of questions in there.
Christine Day - CEO: We feel good. We are very focused on our supply chain and the flow building more visibility into our factories, factory capacity, really advanced allocations, so that we have more ability to get the right product to right stores. We've had some real wins, and (indiscernible) teams have delivered in terms of getting data analysis and our business intelligence is in a whole new place, which has really freed up our merchant planning and allocation teams to have more simple answers on the buy, so we've made some really short-term quick wins and I feel really great about the progress that the team is making on the longer term investments. Do you want to add anything, Sheree?
Sheree Waterson - EVP, General Merchandise Management & Sourcing: We laid out our go-to-market roadmap about a year ago and we're making good progress on it. So we are about halfway through our PLM implementation right now, and looking at additional planning tools and so on.
Christian Buss - Credit Suisse: Great. Thank you very much. Good luck.
Christine Day - CEO: Thank you and I apologize that we've had to leave some people in the queue, which we normally don't like to do, but hopefully we'll be able to catch you in follow-up calls. So, thank you everyone for joining us for the quarter.
Operator: Ladies and gentlemen, this concludes today's presentation. You may now disconnect, and have a wonderful day.