Q3 2012 Earnings Call Transcript
Transcript Call Date 12/06/2012

Operator: Good day, ladies and gentlemen, and welcome to the lululemon athletica Q3 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 be given at that time.

I'd now like to introduce your host for today's conference call Ms. (Therese Hayes). You may begin ma'am.

Therese Hayes - VP of Communication and Sustainability: Hi, good morning, everybody and thank you for joining us on our third quarter 2012 conference call. A copy of today's press release is available on the Investor Relations section of our website and furnished on Form 8-K with the SEC and available on the Commission's website at

Shortly after we end this morning, a recording of today's call will be available as a replay for 30 days also on the website. Hosting our call today is Christine Day, the Company's CEO; John Currie, the Company's CFO; and 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 might 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. We've got a limit of one hour for today's call, so when we get to the Q&A, please limit yourself to one question at a time to give others the opportunity to also have their questions addressed that would be great.

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

Christine Day - CEO: Thank you, Therese. Good morning, everyone and thank you for joining us today to discuss our stellar third quarter results. I'm very proud of the team for achieving yet another strong quarter and coming in ahead of our expectation. Our robust financial results in the third quarter were largely driven by first rate execution, beautiful product, community engagement and continued strength in our e-commerce business.

During the course of the quarter we celebrated the opening of an ivivva store, three stores in Australia and North American store openings in Omaha, Pittsburg, New York, Memphis, Baltimore, Columbus, Franklin and Bridgewater, New Jersey. I'm continually amazed with the creativity of our teams in enrolling their communities through the store opening events which this quarter included the Gospel of Sweat at New York City's historic upper west side riverside church. Both the name of the event and the location were intentionally created to engage a conversation about spirituality and the mindfulness in New York City yoga studios, gym studios, fitness studios and the laps run around the reservoir.

200 yogis practicing Mandala Yoga style back to back on the roof top of the iconic Peabody Hotel in Memphis to celebrate the opening of that region's third store. For the opening of our second store in Columbus, both stores came together for a huge community class, (Omaha) where 500 yogis practice yoga inside the Ohio state University altogether. When we entered the Columbus market as a showroom three years ago, there was only one yoga studio and today, there are 15 studios. This speaks volumes to the work both teams have done in their community to cultivate yoga and be the resource for all things yoga related.

It is this authentic connection with our guests and our communities that differentiates us from many other retailers. E-commerce continued to be a significant growth driver for the business in the third quarter with year-over-year increases, up 89% in sales, the highest rate of growth in the active wear or vertical retail apparel categories. In addition to our investments in bolstering our social, email, and blog activities to support our e-commerce business, we are also laying the groundwork for future growth. We recently launched our Hong Kong, Singapore, U.K. and EU specific websites which gives us access to 24 markets with local fulfillment, more localized content and the ability to connect more authentically with those communities.

We established third-party logistics and distribution centers in Hong Kong and Rotterdam to better serve the Asian, European and U.K. markets. We have said previously that we have been spending the past several months doing a lot behind the scenes work and our international expansion is now entering a phase of more on the ground development. Based on the success of both Hong Kong showrooms, we are actively looking to secure real estate first store in that market. In London, we will leverage the website and current infrastructure with the Chelsea showroom with an additional showroom penetration in 2013.

Overall, we intend to go deeper in showrooms in Europe and Asia over the next 24 months and we will begin preceding activities in up to 15 countries over the next two years. Based on our experience when we exceeded the U.S. market in 2009 with 50 showrooms, we are confident that this same approach in the international market along with the intelligence that we gained through our country and region specific website will allow us to create the optimum mix of brick-and-mortar and e-com for these markets.

We know that the seeding period in some of these markets maybe up to two years. In the meantime, we are building the international team. Through our store networks and in-country contacts we are actively looking for showroom managers and community connectors for each of the countries that we are targeting.

I'm particularly pleased to announce that we have made a key international senior executive hire. Barbara Le Marrec is joining our team. Barbara brings great international experience in Europe and Japan, and she has a common history with me as she comes to us from her most recent position as the Head of Starbucks operations for Japan. She also held the positions of SVP International Op Solutions at Starbucks and General Manager of Starbucks Japan.

We announced earlier this month the resolution of the infringement action related to our Astro Pant. We cannot comment specifically to the terms of the settlement with Calvin Klein and G3. In general, lululemon protects its designs and maintains the strategy of remaining focused on our market leading positions in innovation and execution. We believe that we have taken the necessary steps to establish and protect our IP.

We experienced the slowest start to the fourth quarter, as we were not immune to the consumer distractions that negatively impacted many retailers for the first half of November. In addition to the November macro issues, we lost some momentum in the beginning of Q4 due to some execution issues with our email product notifications, our grassroots marketing communications that drive sales and traffic. These issues have since then resolved.

This season, we made a strategic shift into technical mid-layers, consistent with our strategy of building a layering system through our run product. The (indiscernible) line items are the pinnacle layering pieces for our run lines. The price points of these items may have created the barrier but like many of our products we know that when these pieces get into our guest hands they will love them. So we have re-priced some of the pieces to make them more accessible. We are excited about the holiday season as we have some of the best products we have ever made available for our guests in our stores and through our extended e-commerce network. We have seen accelerated gift card sales indicating we are on many gift lists this holiday. The most productive weeks of the quarter are still ahead of us and we are excited about the back to gym and back to studio products that will hit the stores in January.

With that recap of the quarter I will now turn it over to John.

John E. Currie - CFO: Thanks, Christine. I will begin by reviewing the details of our third quarter of 2012 and then I will update you on our outlook for the fourth quarter and the full year of fiscal 2012. For the third quarter total net revenue rose 37.5% to $316.5 million from $230.2 million in the third quarter of 2011. The increase in revenue is driven by the addition of 36 net new corporate owned stores since Q3 of 2011, 21 stores in the United States and eight stores in Australia, two in New Zealand and five ivivva stores.

Comparable store sales growth of 18% on a constant dollar basis and direct to consumer sales which increased by 89% or $21.2 million. If we included e-commerce as a store in our comp calculations as many retailers do, our comps would be reported as 26% on a constant dollar basis. During the quarter we opened eight corporate owned lululemon stores in the U.S., three in Australia and one ivivva store in Canada. We ended the quarter with 201 total stores versus 165 a year ago. There are 144 stores in our comp phase, 39 of those in Canada, 89 in the United States, 13 in Australia and three ivivva stores.

Corporate-owned stores represented 79.6% of total revenue or $252 million versus 82.6% or $190 million in the third quarter of last year. Revenues from our direct-to-consumer channel totaled $45.1 million or 14.3% of total revenue versus $23.9 million or 10.4% of total revenue in the third quarter of last year. Other revenue which includes wholesale, showrooms and outlets totaled $19.4 million or 6.1% of revenue for the third quarter versus $16.3 million or 7% of revenue in the third quarter of last year.

Gross profit for the third quarter was $175.3 million or 55.4% of net revenue compared to $128.5 million or 55.8% of net revenue in Q3 2011. The factors which contributed to this 40 basis points decline in gross margin were a product margin decline of 30 basis points. Investment in innovation and function in our product mix coupled with slightly higher markdowns due to a more normalized inventory position impacted product margin versus last year, but was offset with lower air freight usage in rates in 2012. And 60 basis points of deleverage in product and supply chain team costs due to investments in product development, operations and supply chain which is partly offset by a net 50 basis points of leverage on occupancy and depreciation. SG&A expenses were $94.7 million or 29.9% of net revenue compared to $68.8 million or 29.9% of net revenue for the same period last year.

The $37.6 million SG&A increase is due to an increase in store compensation and operating expenses associated with new stores, showrooms, and outlets, as well as increases at existing locations due to higher sales volumes, increased variable operating costs associated with our ecommerce businesses due to the tremendous year-over-year revenue growth, along with continued investment in ecommerce support functions, such as IT development and support, site content and creative assets and increases in expenses at our store support center including salaries, administrative expenses, professional fees, management incentive and stock-based compensation associated with the growth of the business, finally, the higher Canadian and Australian dollar, which increased SG&A by $0.5 million or 0.5%.

As a result, operating income for the third quarter was $80.6 million or 25.5% of net revenue compared with $59.7 million or 25.9% of net revenue in 2011. Tax expense for the quarter was $24.7 million or a tax rate of 30.1% compared to $21.4 million or tax rate of 35.5% in the third quarter of 2011. The lower effective tax rate reflects the ongoing impact of revised intercompany pricing agreements. Net income for the quarter was $57.3 million or $0.39 per diluted share. This compares with net income of $38.8 million or $0.27 per diluted share for the second quarter of 2011. Our weighted-average diluted shares outstanding for the quarter were $145.7 million versus $145.3 million a year ago. Capital expenditures were $33 million for the quarter compared with $13.6 million in the third quarter of last year. In addition to new stores, renovations and IT capital, we also acquired the building housing our (Colonial) store in Canada and additional head office space in Vancouver. We ended the quarter with $439.4 million in cash and cash equivalents. Inventory at the end of the third quarter was a $164.7 million or 27.5% higher than at the end of the third quarter of 2011 and is consistent with our expected forward sales.

This now leads me to our outlook for the fourth quarter of 2012. This outlook assumes the Canadian dollar at par with the U.S. dollar compared to an average exchange rate of $0.98 in Q4 of 2011. We anticipate revenue in the range of $475 million to $480 million. This is based on comparable store sales percentage increase in the high single digits on a constant dollar basis compared to the fourth quarter of 2011. Keep in mind our comp guidance excludes the additional 53rd week in 2012 which contributes approximately $20 million in sales for the quarter.

We plan to open eight lululemon stores in the U.S., one in Canada and one in Australia during the fourth quarter. As Christine mentioned, we experienced a soft start to the quarter and so our sales guidance is roughly $5 million lower than implied in our annual guidance given on the second quarter earnings call. We again expect gross margin for the quarter to be above 55% for Q4 and sequentially above Q3 due to the leverage on sales volumes. We expect SG&A as a percentage of revenue to be roughly 500 basis points below the third quarter level, which is consistent with our normal historical seasonality. We also expect year-over-year leverage relative to Q4 of 2011.

Our SG&A will reflect preopening costs related to the 10 stores planned to open in Q4 and additional stores planned to open in early Q1 2013. Consistent with previous quarters, we continue to invest in our international market planning and seeding efforts, while also investing SG&A in our infrastructure such as planning, scoping and building new systems within our global IT and supply chain functions.

Assuming a tax rate of 29.4% and $145.9 million diluted average shares outstanding, we expect earnings per share in the fourth quarter to be in the range of $0.71 to $0.73 per share. This brings our full year sales to a range of $1.36 billion to $1.365 billion. For the full fiscal year of 2012, we anticipate we will open a total of 37 corporate-owned stores including Australia and ivivva locations. We expect capital expenditures to be between $85 million and $90 million for fiscal 2012, reflecting the purchase of real estate, housing stores and office premises, new store build-outs, renovation capital for existing stores, IT and other head office capital. We now expect 2012 fiscal year earnings per share to be approximately $1.81 to $1.83. This is based on 145.8 million diluted weighted average shares outstanding and it assumes an effective tax rate of 29%. With that, I'll turn it back to Christine.

Christine Day - CEO: Thanks John. I would just like to thank again all of our educators and people at the support center that made this great quarter happen, and again, we are very excited about the balance of the quarter, and wishing you with happy holidays.

With that we will open it up to questions.

Transcript Call Date 12/06/2012

Operator: Erika Maschmeyer, Robert W. Baird.

Erika Maschmeyer - Robert W. Baird: I wanted to ask you about your inventory position, close to 28%, but well below your sales growth and your implied sales guidance for next year, how do you feel with regards to that, do you think you're still on the light side there?

John E. Currie - CFO: No, we're in the solid inventory position for Q4. Remember that the quarter end inventory numbers just a point in time doesn't take into account the flow. We don't see ourselves being constrained by inventory in Q4.

Erika Maschmeyer - Robert W. Baird: Then exciting news about expanding your international, international base, could you talk a little bit more about how you're building capacity on the supply chain side for that, are you kind of expanding your vendor base, you're building on capacity at vendors and also how that could impact your expected SG&A leverage.

Christine Day - CEO: From an operations perspective, we've had the team on the ground. Basically over the last 18 months building our capacity for international supply chain, doing all of the compliance, all the duty rates, so a lot of behind the scenes both modeling information gathering analysis, making sure that we have compliant products going into all of the markets. And so we're well on our way in that work for all of the markets that we're looking to enter, even just through ecommerce or through strategic sales and eventually showrooms in those markets. Initially we will focus on some of the main markets for us, that's the U.K., Hong Kong, we will open some on the ground presence in Singapore and Germany in the short-term and then we will go through more markets till we do the 15. We will be working in both the Asian markets and European markets simultaneously. So a lot of great progress on that operationally and both in the supply chain and building the team that's capable of doing that and building the systems. So it's being very prepared.

John E. Currie - CFO: In terms of SG&A you are already seeing some of the SG&A related to international in the second half of this year. As we go into next year and we haven't been specific yet just in terms of how many showrooms in how many countries we will open. But there will be some drag on SG&A leverage but it won't be significant but I will talk about it more in the next earnings call.

Operator: Adrienne Tennant, Janney Capital Markets.

Adrienne Tennant - Janney Capital Markets: Christine can you talk about – both the (indiscernible) line looks fantastic. I was wondering, if you can just talk about sort of the learnings on launching it both online and in stores, the repricing now that you have done that? Have you seen a tick up in sales cadence and are you happy with where the product is now priced?

Christine Day - CEO: Number one, the response to the product in terms of the technical user runner who purchase it loves it, so it's really well received as a technical product and definitely we see long-term being in the business of this technical mid-layer and layering piece. So it's important for us strategically to drive the business and where we want to be in being a market leader in innovating. What we realized when we put the co-package together and thought on the floor set that the overall store price felt a little high to us and we realized that we really want long term commitment to this product. We made the strategic decision to bring the price point down to a more acceptable level, to really get it in the hands of the people who we wanted to be in and to drive the lines. So that was really what guided our decision was that first and foremost, and then the second was recognizing that overall our price points were a little higher than we'd like to see in the holiday period. So we feel good about where those are at and as John said, we are trending against our expectations and we feel really good about that product in particular.

Adrienne Tennant - Janney Capital Markets: Really quickly, John, the high single digit comp, does that include the anniversary of the warehouse sales that happened in January of last year?

John E. Currie - CFO: No, the warehouse sales aren't included in our comps. We do intend to have a couple of warehouse sales this year, so it is in my revenue guidance.

Adrienne Tennant - Janney Capital Markets: So you will see the anniversary of the – I think, those three events last year, the same one?

John E. Currie - CFO: Yeah, we will do that again this year.

Operator: Omar Saad, ISI Group.

Omar Saad - ISI Group: Christine, could you address a little bit the performance of some of the mid-layer products you talked about. There's some price resistance there. Is there any sort of general take-aways from what you are seeing in the business in terms of what's – some of the innovative fashion newness products versus the core products, are you seeing kind of equal performance across the board there in this pricing issue? Thanks.

Christine Day - CEO: I think one of the things that really surprised us at the end of Q3 and coming into the Q4 with the strength of our basic bottoms business. We ordered an extra heavy amount towards the end of the quarter because those are easily replenished items. And we really drove traffic on the Wunder Unders, the group pant; the bottoms have been an exceptional performer in the core business, which has been really great to see. A strategic decision that we made was to walk away from some of the cottons that we've done in the past because they're not as technical product. Those were high volume sales drivers for us. So transitioning the customer to more technical guest is still always a strategy that we're optimizing. So, as to do it over I would probably not have walked away maybe as much in the holiday season from that because that Scuba Hoodie for young girls is a big gift giver. So, I think we'll look at that again for next year, but on the whole the technical product is great and the core business is great, and it's more a story about what strategically we chose not to do for the holiday season.

Omar Saad - ISI Group: Then just on the mid-layer, were you kind of re-pricing to make it a little bit more accessible, can you just maybe expand on that a little bit?

Christine Day - CEO: I think we, we're obviously a little excited about the premiumness of that product because it truly is. So, we've priced it as a premium product, but then we stood back and really looked at it in the store and our desire to really drive it as a key line piece for long term, we made the decision to bring it back down in margins and in price points. But it's still a very healthy margin product. So, it's not like we're going below our historically margin levels in doing so.

Operator: Betty Chen, Wedbush Securities.

Betty Chen - Wedbush Morgan: I was wondering if you can talk a little bit about the men's versus the women's business in the quarter. Then also any learning's from the innovations the cap fills and how the team maybe thinking about those learnings and planning for 2013?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: Well, the first question was about men, it's Sheree. And there are a lot of earnings about men's for Q3. So one of the things that we did was shift some of our fits to a slimmer, more modern fit and what we learned is that the guest, the male guest is so excited about the modern detailing and the way their cutting and gluing and pockets and so on and so forth. We want to put those fits into more athletic blocks, the blocks so that, we can satisfy more democratic consumer base. So, lots of great things happening and I think you can see the Eastern shifting quite a bit. So the only thing I'd add to that is we really thought attracting a younger male guest because of those changes and I think that's what probably broadened the appeal of the men's line and I think that's one of the leading indicators we're very excited about. The rest – what was the second question?

Betty Chen - Wedbush Morgan: In regard to the capitals this year, any learnings and how we should think about the team planning for capital of next year?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: First of all, we are so excited about what we learned about cap fills. One thing that I continue to talk about is caps gating our learnings into our core line. And so when I look at our commute line when I look at the spin line that we did and so on and so forth, what we're able to get in terms of insights for technologies and then also insights for stylings that we want to bring into the core line has been great. So, caps gating from more wow factor down into the core, I would say is the key learning that we get from capitals. This year we execute eight, next year we're going to go deeper and look at about fix and (staff) exciting. We also you should know have just hired a Head of Innovation. His name is Dr. Tom Waller, and he is also having us or leading us into the future with some new technical maverick innovations and construction innovations, so we are really looking toward him joining the team.

Betty Chen - Wedbush Morgan: Is there any way you can share with us John what where the comps for the men's versus women's business in the third quarter?

John E. Currie - CFO: The comps were very similar. Men's during Q3 continues to run around 12% of the overall sales.

Operator: Dana Telsey, Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group: As you think about the balance of price and margins on basics versus new categories, how are you thinking about pricing and margins and how visible 2013 be different than 2012? Thank you.

Christine Day - CEO: I think the fourth quarter is always a little bit more of an unusual situation, where you've got outerwear and then this year, we led into the technical mid-layer, but our core business margins continue to strengthen. We've been able to leverage some of our supply chain some efficiencies. So even with rising either raw materials or labor, we've been able to really (report) strong margins on our core product. Always in innovation, we are going to accept slightly lower margins to drive the business. Usually those are on higher ticket items, so from a dollars perspective, those are key. I think it's what the strategic choices are about the things that we do in-between because we believe in not just cluttering our store with stuff. And our goal is to always innovate and have a discipline to do what we are driving strategically versus easy sales because as a market leader that's what keeps you disruptive and innovative. So, we're always leaving room in our margins to perform. Overall though hitting the target of the 55% range that John has laid out and that's our goal is to always innovative, while hitting the target that we've laid out.

Operator: Roxanne Meyer, UBS.

Roxanne Meyer - UBS: Can you talk about just really quickly in 3Q what the comp components were. Was the comp driven mostly by traffic or was AUR or other metrics that play as well? Then how do you think about 4Q in terms of the difference of products flow into the stores versus last year, and how are you thinking about markdown rates as you anniversary more normalized markdowns?

John E. Currie - CFO: In Q3 the comp was made up very much entirely by traffic. There is a little bit of up and down in the other elements, but the traffic increase is pretty much equal to the comp growth. What was the second question?

Roxanne Meyer - UBS: The second one is more about 4Q and how you think about both the flow of products and as you anniversary normalized markdown rates how you're thinking about that this year?

John E. Currie - CFO: Again, as I said coming into the quarter, we've got a strong inventory position with additional product coming in. So the flow whereas in the past it has created some ups and down, we don't see that as being a factor this year. In terms of markdowns again as I have been saying the last few quarters probably up a little bit year-over-year but still on a very low overall level of markdowns relative to our history and retail in general.

Operator: Jim Duffy, Stifel Nicolaus.

Jim Duffy - Stifel Nicolaus: John, I was wondering, on the fourth quarter can you quantify the impact that you saw from Sandy early in the quarter? Then with respect to the execution issues you saw early in the quarter did those persist through things given weekend and Cyber Monday?

John E. Currie - CFO: The impact of Sandy I don't want to make it sound like that was material. Maybe a small number of our stores were closed for a few days but that – I thought it was a $1 million that's probably a good estimate. So that's really not a big factor. Yes, the other things that Christine mentioned in terms of product notifications that did carry on through somehow.

Christine Day - CEO: It was about two and half a week where we were down and it did carry through Thanksgiving weekend and through the next week.

Operator: (indiscernible), RBC Capital Markets.

Unidentified Analyst - RBC Capital Markets: I was just wondering, if you can break out the CapEx budget for this year in terms of what was sort of the base capital spending versus what was optional or real estate reacquisitions?

John E. Currie - CFO: Let's see the real estate acquisitions totaled about $17 million to $18 million. The balance I don't have a breakdown in front of me but as I said its new stores, its renovations and significant investment in IT.

Unidentified Analyst - RBC Capital Markets: Has there been any discussion at the Board level about thoughts about deploying the cash by either share buybacks, dividends, what are the thoughts there?

John E. Currie - CFO: It's something we talk about pretty much every quarter, because we do have a healthy cash position. As I've said in the past, my preference at least is, to get to a point where we've got sufficient cash reserves to fund the most aggressive expansion plan in the midst of a deep recession and still be comfortable, and then what I see us doing in the future would be, to get to a point where we could institute a regular recurring dividend as opposed to looking at special dividends or buybacks, but it's an ongoing discussion.

Operator: Lorraine Hutchinson, Bank of America.

Lorraine Hutchinson - Bank of America: Once you restarted the e-mail notifications, did you see the comp return back to maybe last quarter's state or are you still seeing some weakness. I think you mentioned macro come through.

John E. Currie - CFO: Yeah, it's getting pretty granular. I guess, I'd just say, with the product notifications back, we're seeing the traffic in business on trend, that's consistent with my guidance.

Operator: Janet Kloppenburg, JJK Research.

Janet Kloppenburg - JJK Research: Christine, I wondered if you'd talk a little bit about your tests of some of the more casual product in dresses in the quarter and what you're thinking about in terms of layering in fashion versus basics. As we go forward, I also wanted to learn a little bit more about the comps in the Canadian market and how they compare to the U.S. market, and John I just wondered on the gross margin guidance I think you said 55%, above 55% for the fourth quarter. And I'm wondering if you could just highlight whether or not your AUC, or your average unit cost per unit looks lower versus last year in the fourth quarter?

Christine Day - CEO: So, we always do in the summer a few casual layering dresses to go either with the (slim suit pod) or just for fun, they always blow out, they're well received, but that's not what we would consider a major, that's a fun item for us, it's not necessarily what we would call the technical street, so when we talk about moving into technical street, it's always technical first. And so things like what the fluff line to us represent the technical street was beautiful enough to wear your outerwear, but it also has that highly technical element to it. So, you'll see us move more into technical that crosses over and some of the beauty of – like the men's jacket, the commuter jacket that was just out there is so handsome on, but at the same time you can ride a bike and in the rain and show up for work and it's so handsome. So those are the things that we refer to when we talk about pushing the line into technical street. And we'll always do things like the dresses or something for a little bit of summer fun because our guest enjoys it and frankly so do we.

Janet Kloppenburg - JJK Research: Does that mean that the technical street portion of the assortments could become a bigger contribution to the assortments going forward?

Christine Day - CEO: I think that's the plan over time. And obviously we have very high sales per square foot and we have to plan in what the future growth is going to be and do that in a very strategic way and I think that's what you see us doing.

John E. Currie - CFO: In terms of your questions on comps, Canada in spite of its very high productivity, continued in Q3, to deliver a positive low single-digit comp, and in the U.S., again really strong comps in the U.S. We're a little over 30%.

Janet Kloppenburg - JJK Research: If I could squeeze in a question for Sheree. Sheree, I was just wondering if we had a lot to look forward to, in terms of Swim in the spring, will it be a bigger product line or frequent line from last year or how should we be thinking about that category?

Sheree Waterson - EVP, General Merchandise Management & Sourcing: There's always something exciting to look forward to. Yes, next year for 2013, we are doing Swim and so, you'll see Swim show up a couple of time; one for the early buyer and one for the in-season buyer. So for March, we'll be doing a capsule and then for June, we'll also be doing another capsule, and what you're still going to be noticing is that we're exploring this category. So, we're getting better and better at it and as we do, you'll see that growth.

Janet Kloppenburg - JJK Research: John, did you want to comment on the gross margin question?

John E. Currie - CFO: Yeah. Average unit costs in Q4, I think you were saying, like-for-like we're seeing unit costs pretty flat, on a by-unit basis, we are innovating, so there's a slight increase when we're doing something new, but I think your point is really like-for-like, which is as I said pretty flat over last year Q4 was great holiday season.

Operator: Sam Poser, Sterne Agee.

Ben Shamsian - Sterne Agee: Ben Shamsian for Sam. I had a question on the comp. Last few quarters, it was entirely or mostly driven by traffic and conversion given that you are going more towards and technical and sort of moving more towards the men's, will we see any help on the ASP side or do you think sort of ASPs are topped out going forward?

Christine Day - CEO: I think you'll see based on outerwear in Q4 that always does drive it up, but on the same time – which is your average ticket, but at the same time, the volume of the core being sold kind of neutralizes it. So it does depend a little bit quarter-by-quarter, but definitely the comps with the technical line shift and a little bit higher price per piece will add – will start to build that ticket over time.

Operator: Liz Dunn, Macquarie Capital.

Liz Dunn - Macquarie Capital: Most of my questions have been answered, but just on the capsules, so there will be fewer of them, but you will go deeper. Is it just sort of a – are you looking at some of the things that you experienced in 2012 and kind of evolving those or will there be new categories and how should that impact margins? Will there be a little bit of margin pressure, because like we saw this year, there will be some experimentation?

Christine Day - CEO: Let me answer the second part and I'll let Sheree answer the product piece, but the overall effect of the small buy and capsules does not really drive our margin in particular. However, what I will say about that is when we take a fabric or a new innovation from a capsule and drive it into the main line, in the beginning there is usually a small decrease in margin until it becomes a consistent part of the line and we reach efficiencies. So, it's not the capsule per se, it's the translation of innovation into the mainline that would have that effect until we get to a point of efficiency, which is why we always bet investment in innovation and it's so critical for us, but we also know as a the market leader and the disruptor when we're creating – it's what we strategically want to drive and we're constantly reinvesting the gross margins, that's over the 55 into the product to maintain the market leadership. This will make sure that our strategy is really well understood. With that, I'll let Sheree tell you what's exciting about it.

Sheree Waterson - EVP, General Merchandise Management & Sourcing: This goes back to what I said earlier, as we learn from capsules, we learn what the key items are in capsules, so that the capsules actually become more productive. So, one of the things, as an example that we learnt from commute is that is there's room for a stretched technical fixed waistband pant which would go from your bike to work as an example.

Christine Day - CEO: Sheree's been wearing one for three days and if she took it off, I think we'd all steal it.

Sheree Waterson - EVP, General Merchandise Management & Sourcing: Yup, it's a good one. So, we see the same thing with tops. So, for men's as an example, we've done polos and this year for Father's Day, we'll have polos that will be great for golf and cross functional type activities. So, because those have such key item implications, we're learning and it's becoming more productive, not less.

Operator: Sharon Zackfia, William Blair.

Sharon Zackfia - William Blair: Wanted to discuss a little bit more, the international expansion and congratulations for the hire. Obviously, Christine, you come from a Company that's been very successful internationally, but also spent a lot of money to get to that level of success. So, I'm just kind of curious on the ramp in investments as you go deeper into Europe and Asia. When do you really expect that to kind of peak or how do you think about the profitability arc of the international, you now said about Australia business model?

Christine Day - CEO: So, one of the things that I learned tremendously was in working in International at Starbucks and Barbara did as well, it is far better to send your money on the infrastructure and getting ready to build a profitable business model when you go in rather than to build a lot leading market and then cleaning it up afterwards by putting the fixes in place. So, we're being very disciplined about creating a healthy business model, and it's not growth at any cost. We have built the models and are testing them and the beauty of showrooms is it gives us the ability to test with the labor rates, the real estate rates, the duty import rates, so that we can fine tune the model market-by-market. We also can see what's driving the guests behavior. What's the definition of luxury in the market? What's the definition of technical? So all the pre-seeding we work, we're doing now, all those learnings are being taken in and so the same strategy that we did in the U.S., is learned from the showrooms and have highly profitable stores from day one, that's what we're looking to do. So, it's not a first to market, at the same time being an early mover in e-commerce and the showrooms protects our IP and allows us to own the brand and the strategy in all of the markets. So, what you see us doing is laying the groundwork for financial success on the healthy business model, which allows us to continue to be who we are strategically everywhere we go.

Sharon Zackfia - William Blair: Just a follow-up on that. Is the economic model for the showroom is the same then when you're doing it in London as when you started to do it in L.A.?

Christine Day - CEO: It's not. Right, so, I mean real estate in London is a lot more expensive. So our goal is to open a showrooms a few more days and to bring in more of the wow product and the basic product than we did in U.S. so we very much localize to create the business model that's needed, and you'll see us do maybe more trunk shows in combination with our showrooms. You will see us do slightly larger stores in those markets, but fewer of them, because you've got more density in the cities. So we are very strategic about how we adapt, yet create the same outcome in the market. And we have a very successful profitable business in Australia and that, as many people know, when you grow internationally, it's not easy to do.

Operator: John Zolidis, Buckingham Research.

John Zolidis - Buckingham Research: I wanted to ask you a question about your store expansion in the U.S. using the Columbus Avenue store as a kind of example and point of departure. So just curious, with only 100 odd stores in the U.S., why would you choose to open a store only 10 blocks away from an existing location? And so could you just talk about why that store versus some of the white space that you have? And then, could you also comment on the cannibalization that you might be experiencing at the nearby store? And then lastly, I noticed you didn't put the lululemon name out the store, just a symbol, so could you talk about your thinking around that?

Christine Day - CEO: So when we go into a market, we've already looked at all of the penetration of potential stores that we would want to have in the market. Then what we do is we basically create a target real estate list of where we want to be. We open the showrooms, we open stores in sequence of how we want to build the brand. So kind of hip urban, urban affluent, suburban affluent, we don't target necessarily where we think the highest volume sales are being because we're building a brand and that's important over the psychology of a market. So we look at each market in a standalone way, and we then are real estate opportunistic and say if we want to be on this street in interconnection because we've plotted the whole market and great a real estate shows up. When people are doing five and ten year leases, if I don't take it then I am going to let somebody else take it, it would be ten years before I get that cornered. So, we do it in a very knowing mapped out way. When we do cannibalize A store, typically is less 10% is the maximum I think we've seen and it recovers very quickly. So we still have very much growing brand awareness and demand. So, we want the three to five or ten whatever the market will hold best stores on our target, that's our first priority and as I meant that there was a little bit of short term impact to store we'll take it, rather than let competition because what would happen if we had – we don't want to be is in a B store in a market that has the potential with the lot of stores as more competition comes along. So everything we do is very strategic and has the long term decision in mind.

Operator: Edward Yruma, KeyBanc Capital Market.

Edward Yruma - KeyBanc Capital: John on the change on the intercompany pricing agreements, once you cycle that next year, will there still be a continued step change there and I guess as more of your revenues come from a broad, is there incremental opportunity on that front?

John E. Currie - CFO: The adjusted tax rate to 30% or just under 30% is an ongoing tax rate, it will evolve over time based on the countries we go into and where our profit is generated, but the benefit really comes from the fact that a lot of our income is taxed in Canada, where the IP resides et cetera and Canada has a benefit of quite a low tax rate.

Christine Day - CEO: I just want to mention, I did not answer John's second part of the question, which is why we don't put the logo or the name on every store. Sorry, I didn't answer that John. The reason we don't do that is exactly it made you curious. And so the first store, when we're building awareness in the market we always do that, but we find actually in our models less signage more authentically local. We deliberately try to be very community oriented and we don't believe in putting 12 signs on our store. We're very respectful of being part of the community and the street. And we use community to engage and drive traffic, not signage.

Operator: Camilo Lyon, Canaccord Genuity.

Camilo Lyon - Canaccord Genuity: Just going back to the international infrastructure build-out, do you expect to add manufacturers to supplier base or are your current partners expanding their capacity for you?

Christine Day - CEO: We've been working for the last two years to build our capacity with our manufacturers, and so we don't see any barriers from that perspective. We've got strategic plans in place with most of them and doing everything from extra backups from any of the fabrics that we do, alternate choices and flex capacity in demand, working on a nine-month calendar like we do. We don't have the luxury of 24-months lead times to get right orders to factories. So this is something that we have to pay a lot of attention to, to make our flow and model work and I think Linda and her team who run that for us have really done a fantastic job this last year, particularly on base products and on the more complex sowing products that we do.

Camilo Lyon - Canaccord Genuity: Just moving on to the email notification execution issues that you called out. Is there an opportunity to recapture those lost sales in the fourth quarter?

Christine Day - CEO: I think it's always a little more difficult to read a 53 week year in terms of sales bills, but I believe we have great product in the store right now. We have more color than we've had all year. We have more technical pieces and we have great stock in basic. So, we just – we are ready for the consumer.

Operator: Kimberly Greenberger, Morgan Stanley.

Kimberly Greenberger - Morgan Stanley: I just wanted to ask about your long term operating margin targets and the gross margin as I recall target is around 55%. It seemed to have settled in there this year, and I'm wondering if you can just look out over the next several years and comment on whether or not that's the level that you feel like is really achievable? Then separately, you mentioned a 25% EBIT margin that implies I guess 30% SG&A rate to sales. You've nicely beat that target here in 2012 and I just wondered, if you could share with us the way you think about the necessary investments in the business and growing that SG&A at a pace that you think is appropriate and strategically right? But are there some offsets in that thinking in terms of making sure you are also monitoring the deleverage if any that you are expecting in the business?

John E. Currie - CFO: Bunch of questions in there, but as I've said for some time now, our target margin profile is about 55% gross margin and 25% operating margin. Because we are growing, because we are expanding internationally, making IT investments to support a bigger company in the future, that's what keeps the operating margin down to 25%. If we were just staying in North America and simply running out the growth of that existing business that operating margin would leverage and we'd get up into the upper 20s, but we are trying to balance both on the gross margin line and the SG&A level, delivering a strong model as we grow, and I mean that's the point, growing and maintaining that strong margin. So, yes, from time-to-time, our gross margin can get above 55%. As I think Christine or Sheree mentioned, we like to invest that excess back into innovation, but there is leverage inherent there especially as we leverage against occupancy and depreciation which is in cost of sales. Similarly, in terms of SG&A running at about 30%, again it will be up, it will be down, but especially as we go international, both in terms of the infrastructure investment to support that. As we get into stores, the initial stores in new markets will likely initially deliver a lower operating margin, and that will offset the leverage that we see in the corner of the American business.

Christine Day - CEO: I think what's important is that our base operating assumptions. We've seen a lot of leverage in all of the functions except for IT we're making investments, product we're investing in supply chain international quality, and as John said, we're investing in preopening in new market expenses, which would normalize, but I want to assure you that in the core business, we have seen leverage across the SG&A, and now we're reinvesting that leverage to provide growth, which is what our job is.

Operator: Christian Buss, Credit Suisse.

Christian Buss - Credit Suisse: More about the seating of international markets, and if you could give us sort of a prioritized list where you're looking and thinking about, that would be very helpful.

Christine Day - CEO: I think we've already declared that it's Hong Kong and Singapore where we already have a presence with strategic sales and on the ground in both of those markets and we're moving more quickly to stores in Hong Kong. Then London, you'll see us increase our penetration of showrooms this next year and then the next market that you'll see us targeting is Germany.

Christian Buss - Credit Suisse: Then in terms of the pre-investments you've made, could you give us some color on that?

Christine Day - CEO: So, we don't want to give away our secrets, so what I'll just say is that there's on the ground teams that are working in a variety of markets, doing what we do best, which is build community and engagement, so that we are authentically local and that we're driving desire and demand by the time that we reach the market with a physical presence.

John E. Currie - CFO: That's in market and then behind the scenes a lot of work in terms of compliance in various markets, employee relations, matters, legal and tax structuring, all of that working on distribution centers. That's the ground work that we've been laying over the past 18 months.

Operator: John Kernan, Cowen & Company.

John Kernan - Cowen & Company: Just little bit of a follow-up to the previous question. What type of market research have you done into the 15 countries that you plan to enter over the next two years on the product side of things? What type of, I guess research, both on the fashion and the technical side of product, have you done before entering those markets?

Christine Day - CEO: We obviously do a lot of benchmarking and we do a lot of our design meetings where we're in with athletes and asking them what they like to use and do a lot of product testings. So, it was a very active and those are the ones that people know that we do. There's a lot that people don't know that we do that I don't actually want to share. So, rest assured that we – we like the Canadian travel advisory warning, which is, know before you go, and so we're very disciplined about that.

John Kernan - Cowen & Company: One quick follow-up; the men's business continues to gain momentum. Has there been any change in thought about what the long-term potential of that business is as a percentage of your total business?

Christine Day - CEO: So if I was to follow chips direction, it would be huge. So I think everybody is very excited and sees a huge opportunity and we've already got a lot of basic pieces that we'll find, which are very beloved and we see men's buying in bulk, and so we've built a really good basic assortment and as Sheree said, it's now about refining to complete the full architecture in the line, but we've just got some incredibly handsome pieces that are out there right now. The men's Mission Pant is the best pant that we've ever done, extremely well received in the marketplace. Getting a lot of great feedback about that. I've already mentioned the men's Commuter Jacket, which we didn't have relatively small amount and got out there. Now all of sudden with people are seeing guys in it, everybody is coming in trying to get it. So very excited about the response to that kind of new direction for us and as we already discussed, we really added to the bandwidth of guests who is shopping with us. We're seeing a younger male attracted, we've got our existing core and now we're working to really fill in the desire. So we definitely see it as a major growth opportunity for us strategically.

Operator: Andrew Burns, D.A. Davidson.

Andrew Burns - D.A. Davidson: Could you spend just a little more time on outerwear, there seemed to be a bigger presence in the stores this year versus last. Something you can talk about the performance and opportunity for that category and specifically the consumer response to higher price points.

Christine Day - CEO: I think what you saw year-over-year was if you recall last year our factories delayed our outwear, so we cancelled it, so we actually had none last year. And we had a very small drop right around Christmas of the original what the fluff line that we were testing last year. So, this year of course would like more because we actually skip the year of doing any outwear and then you went from outwear into a bigger what the fluff. So I think the overall impact in the store felt a little bit more like technical mid layers and some outwear, but we really didn't do too many more styled in direct outwear than we've done historically. We did skip doing the big, big heavy down jacket that we've done in the past and boy do we hear about that from our Canadian guests, so I think you can expect to see that back. So, it was very well received I was just in the store over the last couple of days and we had a women who would come in and bought a coke at, let's just say another store and she came in and saw ours, bought it and went out the door to return the one she just bought. So, we're pretty excited to see that and have a really great outerwear collection and I think the style that we bring to outwear is exceptional.

Operator: Rob Wilson, Tiburon Research.

Rob Wilson - Tiburon Research Group: John, I'm little surprised about the gross profit margin guidance because if I remember correctly last year you called out specifically the merchandise margin was down 310 basis points last year, so I'm assuming you're guiding to lower than last year gross profit margin, can you help me understand why it be lower than last year? I mean, last year, you called out higher product cost 230 basis points.

John E. Currie - CFO: Right. Those higher product costs that deleveraged gross margin a year ago over the prior year, those have not reversed. So that's simply carrying on. And then, beyond that as we've mentioned, additional innovation et cetera has the product cost up a little bit.

Rob Wilson - Tiburon Research Group: So you've received no benefit from lower sourcing cost?

John E. Currie - CFO: Very little. A lot of retailers are more cotton-centric than we are, so they saw the spike in cotton and then the strong reversal but cotton really isn't a factor for us. For us, it's more things like silver, for example, in our (silver acid) material, so the answer is no.

Rob Wilson - Tiburon Research Group: One more question real quick since I'm last, why would you guys want to own real estate?

John E. Currie - CFO: It's is not a core strategy, but when we have a key location that we see ourselves being in long-term and that can be our head office or it could be a key store such as the Newbury Street store that we acquired. We evaluate acquiring it versus entering into a lease where, of course, we are at – exposed to on renewal and lease rates going up, so just strategically, it can be a better way of securing real estate on a long-term basis.

Operator: I'd like to turn the conference back to our host for closing remarks.

Christine Day - CEO: Thank you. So Sheree and I would like to thank our product team, the design, merch, supply chain for being relentless and pushing boundaries. We believe we have the best product team in the world complemented by the best educators and creating a guest experience in our stores. With that, thank you, and happy holidays to everyone.

Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.