Earnings Call: Q4 2017

Mar 29, 2017

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Q4 and Year End Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I'd now like to turn the conference over to Howard Tubin, Vice President of Investor Relations. Please go ahead. Thank you and good afternoon. Welcome to Lululemon's 4th quarter fiscal 2016 earnings conference call. Joining me today to talk about our results are Laurent Pleudevin, CEO Stuart Hazeland, CFO Celeste Brvoin, EVP, Retail Americas, who will also be available during the Q and A portion of the call. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward looking statements reflecting management's current forecast of certain aspects of the company's future. These statements are based on current information, which we have assessed, but which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with the company's business. Factors that could cause these results to differ materially are set forth in the company's filings with the SEC, including our Annual Report on Form 10 ks and our quarterly reports on Form 10 Q. Any forward looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our annual report on Form 10 ks and in today's earnings press release. The press release and accompanying annual report on Form 10 ks are available under the Investors section of our website, www.mululemon.com. Today's call is scheduled for 1 hour, so please limit yourself to 1 question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Laurent. Thank you, Howard, and good afternoon, everyone. Today, I am pleased to share with you our strong Q4 2016 full year results. I will discuss current business trends and the initiatives in place to build momentum in the quarters ahead. Stuart will review our financials, provide 2017 guidance and we'll then take your questions. Let me start with our Q4 highlights. We delivered a very strong holiday season and quarter with operating income growth of 18%, driven by a healthy 7% constant dollar comp and gross margin improvement of 3.90 basis points, which exceeded our expectations. I am proud and very grateful for the performance our teams delivered against a challenging macro environment. Our relentless focus on product and exceptional guest experiences allowed us to outperform during peak weeks with strong full price sell through and merchandise margin. Taking a closer look at product, we continue to own our position as the leading brand for women's bottoms, comping 14% on top of a very strong Q4 last year. This was driven by the depth of our assortment in key franchises such as Align and Wander Under and complemented by special editions such as Tech Mesh. In our bra category, the breadth of assortment drove a 10 comp reflecting Lululemon's strengthening position as a destination for active bras. We are excited to see continuing strong momentum in our men's business, delivering a 20 comp this past quarter. From athletes and as some of you may have seen their coaches to our growing male collective, our guest loyalty is driven by the core styles we're known for. With new additions such as metal vamped, tech wall and the license to train capsule both performing very well. Q4 also marked some significant milestones as we strengthen and amplify our global brand position. When we last spoke, I was on my way to China, where we opened our first three stores. Building on the energy of our unrolled China events last summer, I experienced firsthand the energy of our fantastic locations across Shanghai and Beijing. These openings have been a catalyst in boosting our already strong performance across Asia. In addition, our presence on Tmall has shown tremendous growth led by our performance on Singles Day last quarter. Collectively, this reflects the strong brand affinity and magnitude of opportunity ahead of us and I'll speak to that later. In January, we opened our European flagship on London's Regent Street, one of the world's top shopping destination. Reflecting our commitment and vision for the brand in the UK and Europe, this flagship features bespoke designs, concierge services and digital art installations. I'm excited to build on the increased brand awareness since the Regent Street opening and the halo impact it will have across our European business. 2016 was a critical year and marks an exciting milestone for us. Just 3 years ago, we set on an ambitious agenda to reaccelerate our top line growth, regain our guests' trust and loyalty, build a digital culture, own our opportunity in men's and ignite our international potential, all while building a scalable supply chain infrastructure and focusing on operational efficiencies. The results of our work return the company to positive operating earnings growth for the first time since 2013. Some significant highlights reflecting the strength of our strategy include being design led, blending function and fashion and building a solid innovation pipeline for both our men's and women's categories, Evolving how we come to life in stores from new formats to connecting with new communities, our curiosity, relentless focus on innovation and discipline fuel our highly profitable physical presence in North America. Setting the vision and building our digital ecosystem and culture, igniting international growth through expansion in key cities, rapidly building brand awareness outside of North America, maintaining strong industry leading gross margin through completing the build out of our supply chain infrastructure and focusing on operational efficiencies, And last but not least, building a world class management team, filling key leadership roles across merchandising, digital, store design and leading our European expansion. Our performance reflects the strength of Lululemon and our unique position as the leading brand for an active mindful lifestyle. Despite a slower start in Q1, 2017 is set up to be one of our most compelling years with unprecedented product innovation and our 3rd global brand activations to drive growth towards our long term vision. Looking specifically at Q1, let me articulate the immediate changes we've made to positively impact momentum this quarter and then share our plans for the future. The slowing sales trend in early Q1 has most acutely impacted e commerce. We have clearly identified the issues, an assortment lacking depth in color for spring compounded with visual merchandising that did not powerfully translate our design vision. With focused urgency, our teams have been course correcting the issues with early indications reflecting an immediate and positive impact on performance. We will see more color in selected style as early as next week. And from a visual merchandising standpoint, our loud and clear jacket is the perfect example of what happens when we capture both design and function infused with energy and movement into our e comm images. Since delivering these results, the performance of that jacket has significantly increased. Stuart will provide additional details on the Q1. As we write our next chapter of growth, I'd like to take a few minutes framing our 2017 priorities in the context of our 2020 plan to double revenues to $4,000,000,000 and more than double our earnings. Starting with brand, we have an untapped opportunity to tell the world who we are and what Lululemon stands for. Beginning in early Q2, we'll launch our 1st global brand campaign in partnership with a dynamic creative agency that is also the leading amplifier and distributor of content to millennials across the world. Through this disruptive and innovative campaign, we will strengthen our guest loyalty while also inspiring millions of new guests to join our growing collective. Turning to product, the performance of our core business will be powerfully augmented with an unprecedented cadence of innovation between now and the end of the year. In women's, we are on track to build a $3,000,000,000 business through our continued leadership in agonizing and innovating the fabrics and styles that define our standout performance in bottoms and bras. Leveraging the success of our number one performing bottom, the Align pants, we are thrilled to globally launch our new fast and free collection, designed with our top performing Nudox fabric. For the first time, our innovative high performance Naked Sensation New Looks will include a tight, crop and bra. Validated by New Looks recent extension as one of our guest favorite technical fabrics, we know this launch will deliver substantial revenue for 2017 and beyond. Following extensive R and D and in partnership with our athletes, in early May, we will reveal our newest white space innovation with a bold new concept that will disrupt the bra category and redefine women's expectations of active bras. This launch anchors our continued commitment to innovation that make Lululemon the leading destination across our core women's categories. And last but not least, we have focused plans and resources in place to realize our substantial opportunities across outerwear and accessories in the second half of the year. Now turning to men's. This remains one of our largest growth opportunities and is on track to become a $1,000,000,000 plus business by 2020. Our focused and talented cross functional team are bringing our men's vision to life. And with a clear design direction and increasing brand awareness, we expect to see accelerated results beginning to take shape in the second half of the year. I'm excited by our men's performance particularly within our co located format Where for example, in our Mall of America store by doubling our dedicated men's square footage, we saw a 70% lift in the business with no increase in inventory. In 2017, we will open further co located and local stores while optimizing our men's experience online to capture the significant runway ahead of us. Shifting to digital, with the potential to grow in excess of $1,000,000,000 by 2020, we will continue to build our digital ecosystem this year and beyond. We're laser focused on realizing the power of our CRM platform at scale and continuing the seamless expansion and integration of our omnichannel strategy to empower a guest centric model for the future. In Asia, to capitalize on the tremendous opportunity and unique digital landscape, we are building the infrastructure and a talented team in Shanghai to increase our reach, engagement and performance on localized platforms. As shared earlier, we will continue executing the immediate and longer term strategies in place to accelerate our e commerce growth, including inspiring our guests through more engaging visual merchandising, optimizing and expanding the online product assortment, improving guest experience to drive conversion and launching our new mobile app. Turning to North America, we have substantial upside as we continue to ramp up our most established business. Our disciplined store expansion has produced a store fleet among the most productive and profitable in the industry. Our store teams are second to none and we're continually inspired by their innovation from new store format to market optimization strategy. This year, we will target square footage growth of approximately 10% with up to 28 new stores and 12 optimizations. This will also include additional locals, a strategic evolution of our showroom models, which has been successful in curating unique experiences and building brand awareness in smaller markets. Looking towards our international potential, we are on track to build this into a $1,000,000,000 business by 2020. While pleased with our performance across our 3 major regions outside North America, our focus in 2017 will be on China. We will use a market densification strategy centered in Tier 1 cities, including Shanghai, Beijing, Guangzhou and Chengdu with digital amplification to reach our guests across the entire region. With China's activewear market value at $28,000,000,000 and growing, the world's largest middle class and over 415,000,000 millennials living an increasingly active lifestyle, the magnitude of our opportunity in China is unparalleled. And the strong performance we've seen out of our store openings thus far gives us confidence in the market readiness as we accelerate our expansion. Before I pass the call over to Stuart, I want to recognize the passion, commitment and creativity from our global teams who've all contributed to our success last year. With the goal of our ambitious 2020 plan to double revenue to $4,000,000,000 and more than double earnings insight, we are on track to realize our vision through a constant flow of high impact initiatives that will fuel our growth this year and beyond. At a time where experiences matter more than ever to consumers around the world, our vertical model puts us firmly in control of our destiny and that destiny is one I wouldn't trade for any brand in the world. Stewart? Thanks, Laurent. I'll begin today by reviewing the details of our Q4 2016 and highlights on the year. I'll then introduce our outlook for the Q1 and full year 2017 and spend some time offering additional color on the initiatives we have in place to deliver on our 2017 guidance and how this connects to our long term growth plans. The Q4 capped an important year for us that marked several milestones, including our successful efforts to recover our product margins as well as important progress against our strategic growth initiatives. In the quarter, we drove positive comps in both our store and direct channels, continued to extend significant gross margin improvements and ended the year in a healthy inventory position. This resulted in 18% operating profit growth versus last year and 130 basis points of operating margin expansion for the quarter. Turning to the details for Q4. Total net revenue rose 12.2 percent to $789,900,000 with the increase in revenue driven by a total constant dollar comparable sales growth of 7% comprised of a bricks and mortar comp store sales increase of 6% and an e commerce comp of 12%, and also an increase in square footage of 11% versus last year driven by the addition of 43 net new company operated stores since Q4 2015. 16 net new stores in the United States, 3 stores in Canada, 1 in Australia and New Zealand, 7 in Asia, 4 in Europe and 12 AVEVA stores. Foreign exchange had an effect of increasing reported revenue in Q4 by $2,800,000 or 0.4%. During the Q4, we opened 17 net new company operated stores, 9 in North America, 4 in Asia, 2 in Australia and New Zealand, 1 in Europe and 1 at Veeva. We ended the quarter with 406 total stores versus 363 a year ago. There are now 346 stores in our comp base, 45 of those in Canada, 221 in the United States, 26 in Australia and New Zealand, 4 in Asia, 7 in Europe and 43 Aviva. At the end of Q4, we also had a total of 51 showrooms in operation, 16 Lululemon showrooms in North America, 18 internationally and 17 Aviva. Company operated stores represented 72.3 percent of total revenue. Revenues from our digital channel totaled $164,300,000 or 20.8 percent of total revenue, a consistent rate with the Q4 of last year. Other revenue, which includes strategic sales, showrooms, pop up stores, warehouse sales and outlets totaled $54,900,000 versus $48,900,000 in the Q4 of last year. Gross profit for the quarter was $427,900,000 or 54.2 percent of net revenue compared to $354,500,000 or 50.3 percent of net revenue in Q4 2015. The factors which contributed to this 390 basis point increase in gross margin were 410 basis points of overall product margin increase primarily due to lower average unit costs and improved AUR, a continuation of the factors you saw driving the margin improvement in the 3rd quarter. Markdowns continued to be well managed with only 20 basis points year over year impact to product margin for the quarter. We also saw 10 basis points of leverage in product and supply chain overhead costs. These were offset by 20 basis points of deleverage from occupancy and depreciation and 10 basis points of decline due to the foreign exchange impact of a stronger U. S. Dollar. SG and A expenses were $231,300,000 or 29.3 percent of net revenue compared with $188,200,000 or 26.7 percent of net revenue for the same period last year. This is 110 basis points above prior guidance of approximately 150 basis points of deleverage in the quarter and was the result of the following. Nearly half of this increase versus guidance is due to FX related revaluation of U. S. Dollar cash balances as we have seen the Canadian dollar strengthen significantly in the final weeks of the quarter. The balance of the increase was opportunistic investments to fuel long term growth. As we have mentioned previously, when we see outperformance in sales and margin as we did in Q4, we will invest to continue to fuel our long term growth. As a result, operating income for the quarter was $196,600,000 or 24.9 percent of net revenue compared with $166,300,000 or 23.6 percent of net revenue in Q4 2015 or an increase of 130 basis points in operating margin. The effective tax rate was 31.1% compared to 29.8 percent a year ago, which includes certain tax and related interest adjustments associated with the finalization of the company's transfer pricing arrangements and associated repatriation of foreign earnings. Excluding these adjustments, the effective tax rate would have been 30.6% compared to 29.6% in the Q4 of 2015. Net income for the quarter was $136,100,000 or $0.99 per diluted share compared to net income of $117,400,000 or $0.85 per diluted share for the Q4 of 2015. Excluding the tax and related interest adjustments I just mentioned, EPS for the quarter was $1 per share. In addition, the negative net impact to earnings from foreign currency this quarter was $0.09 per share, dollars 0.02 higher than what we previously estimated for Q4. Our weighted average diluted shares outstanding for the quarter were 137,200,000 versus 138,200,000 a year ago. There were a minimal amount of shares repurchased during the quarter under our recently approved $100,000,000 authorization. Capital expenditures were $43,300,000 for the quarter compared to $35,400,000 in the Q4 of last year. Turning to the highlights for our full fiscal year 2016 performance. Net revenue was $2,344,000,000 up 14% on both a reported and constant currency basis, which reflects a 7% constant currency comparable sales growth. E commerce sales totaled $453,300,000 or 19.3 percent of total sales. Gross profit was $1,200,000,000 or 51.2 percent of net revenue compared to $997,000,000 or 48.4 percent of net revenue in fiscal 2015, reflecting an increase of 280 basis points. Net income for the year was $303,400,000 or $2.21 per diluted share compared to $266,000,000 or $1.89 per diluted share for fiscal 2015. This is based on an effective tax rate of 28.2% in 2016 versus 27.8% effective tax rate in 2015. Normalized for transfer pricing and repatriation tax adjustments, our adjusted EPS was $2.14 for fiscal year 2016 compared to $1.86 in 2015. Turning to our balance sheet highlights. We ended the year with $734,800,000 in cash and cash equivalents. Inventory at the end of the Q4 was $298,400,000 or 5.1 percent higher than at the end of the Q4 of 2015, reflecting a 5.7% decrease in inventory per square foot. This was slightly lower than expected due to the timing of in transit inventory. As we head into 2017, we expect our inventory growth going forward to normalize and be more in line with our forward sales trend. Turning now to the details of our Q1 fiscal year 2017 outlook. As Laurent mentioned, we've seen a slow start to the Q1. Soft traffic in stores combined with lower conversion on our e commerce site have weighed on our trends so far this quarter. Within our stores, we've seen conversion, AUR and UPT all remain solid with traffic the primary headwind. Despite this difficult trend, we are excited to launch a number of guest acquisition and retention programs beginning this week and ramping into Q2. These programs leverage all parts of our business model and include the following: the launch of our fast and free NuLuX collection, as Laurent mentioned this week leveraging our fast turn capabilities to deliver color and selected styles to land in our stores next week and the expansion of our successful omni channel strategies such as the ramping of our ship from store program from 85 to 145 stores by the end of Q2, the addition of our outlet stores to the ship from store program beginning in the Q1, the introduction of a pilot of our buy online, pick up in store capability beginning in Q2. Within e commerce, the online conversion trend has also been a particular focus and we've taken aggressive actions to improve site performance, which I'm sure many of you have noticed. Our initial reads indicate these efforts are gaining traction. That said, we expect revenues in Q1 to be in the range of $510,000,000 to $515,000,000 This is based on a comparable sales percentage decrease in the low single digits on a constant dollar basis compared to the Q1 of 2016 and assumes a Canadian dollar at $0.76 to the U. S. Dollar and 10% more square footage versus Q1 last year. We are seeing the product margin improvements we achieved in the second half of twenty sixteen extend now into the Q1 of 2017 in a similar order of magnitude. However, these improvements are being offset significantly by deleverage on product and supply chain overhead and occupancy and depreciation expense due to the sales trend in Q1 sitting below our expectations. As a result, we now anticipate gross margin in the Q1 to increase by approximately 50 basis points versus Q1 2016. We expect SG and A in the Q1 to delever approximately 100 to 150 basis points, a function of our negative low single digit comp assumptions for the quarter. Assuming a tax rate of 31.2 percent 137,300,000 diluted weighted average shares outstanding, we expect diluted earnings per share in the Q1 to be in the range of $0.25 to $0.27 per share versus $0.30 per share a year ago. For the full year 2017, we expect revenue to be in the range of $2,550,000,000 to $2,60,000,000 This is based on a comparable sales percentage increase of low single digits. This full year guidance reflects our view of strengthening trends in both e commerce and stores as a result of the strategies we've mentioned around product assortment improvements, website enhancements and acceleration of our omnichannel model, and we are starting to see evidence of these strategies now materializing. We expect to open up to 50 company operated stores, which includes an acceleration in our international store openings to 15. This represents a square footage increase of approximately 12% for the year. We expect gross margin for the year to be flat versus 2016. The benefits from the product margin improvements that we have been seeing will have the most meaningful impact in the first half of the year and then moderate into the second half of twenty seventeen. Offsetting this is a modest level of deleverage in product and supply chain SG and A and in occupancy and depreciation primarily due to the accelerated international store openings which carry a higher occupancy rate. We also expect full year SG and A rate to be flat versus 2016. We expect deleverage in the first half of the year with an improved SG and A picture in the second half. As a result, we expect operating margin to be relatively flat with last year at 18%. We expect our fiscal year 2017 diluted earnings per share to be in the range of $2.26 to $2.36 per share. This is based on 137,500,000 diluted weighted average shares outstanding, which does not reflect an estimate of shares repurchased after Q4 2016 and also assumes an effective tax rate of 31.2%. We expect capital expenditures to range between $170,000,000 $175,000,000 for the fiscal year 2017, reflecting new store openings, renovations, relocation supply chain capital investments. As we've mentioned on prior calls, operational excellence has been a priority to enable our growth strategies and recover our profitability. As we look forward to 2017, our agenda for operational excellence focuses on 3 areas. First, we will continue to develop our supply chain capabilities, building on the success we've seen over the last 2 years. This focus will not only enable us to maintain and extend our product margin recovery, but also help us strengthen our chase capabilities and provide shortened lead times in responding to market trends. An example of this currently includes our ability to accelerate color in key styles into our assortment to impact the first half of this year. Our second operational priority focuses on SG and A and our current plan to deliver leverage on sales growth for 2017 and beyond. Earlier in Q4, we retained BCG to support us in a strategic effort to evaluate our cost structure and identify opportunities for cost efficiencies. We are now in the final stages of this work, which will help us become a leaner business and deliver operating results with less resource requirements. This work will enable us to reinvest a portion of these savings to support our growth strategies and also deliver the leverage in expenses for the balance of the year that our guidance contemplates. And lastly, our 3rd operational priority is our IT infrastructure. We are deep into a number of projects that will support key operational capabilities for this year and beyond in areas including planning and allocation to build new abilities to flow inventory to better meet demand, e commerce through enhancements to our website and mobile guest interfaces and CRM to support our new loyalty programs as well as various elements of our guest engagement strategies. In closing, I'd like to reiterate our confidence in the tenets of our long range plan as we previously articulated them. Revenues of $4,000,000,000 by 2020, gross margins in the low 50s, earnings growing faster than sales, EBIT margins in the low 20s. We see the results of 2016 as evidence of our progress against these goals. And we remain bullish for 2017 despite the slow start we've seen early in Q1, especially given that our most important growth drivers for the year are still in front of us and reflect exciting new elements of our business model, including the new product introductions we mentioned with Nu Luxe in Q1, bra innovation in Q2 and jackets and outerwear as well as accessories into the second half. The e commerce enhancements noted earlier such as the mobile app in Q2, visual merchandising improvements both on our websites and in stores, new guest acquisition strategies with our brand campaign launch in Q2 and our expanded CRM programs into the 3rd quarter, launch in Q2 and our expanded CRM programs in the Q3, the acceleration of our expansion in China, and finally, our men's initiatives ramping throughout the year. And we will accomplish all of this while building important new cost efficiencies through the strategic SG and A project that I mentioned. We look forward to updating you on our progress on these programs and more over the course of the year. With that, I will open up the call for questions. Operator? Thank The first question comes from Matthew Boss of JPMorgan. Please go ahead. Thanks. So on same store sales, I guess what have you seen from traffic and AUR so far in the Q1 versus what you saw in the Q4? And I guess just how best should we think about comps you're expecting in the 2nd quarter versus the second half? Just trying to gauge the improvement that you're embedding as we move out of the Q1 and your confidence level in that taking place. Hey, Matt, it's Stuart. So on the comps in the Q1, basically, as we were into the second into the final stages of the Q4, we began to see conversion on our website soften. That trend has extended into the Q1. We also saw store traffic soften in the early part of February. The other KPIs, particularly in the stores, remain solid. And in particular, AURs in stores remain strong. And so the headwinds that we're seeing in traffic really account for the softness in the store comp trends. And online, it's really related to conversion. So as Laurent mentioned, we're focused on addressing in particular the e commerce softness through the assortment, through the color gaps that we saw in the assortment as well as how the visual merchandising on the site had opportunities for improvement. So we've been in aggressive actions on those points and we're pleased to see positive results in the early days since we've made those changes. Beyond that, I think as we think about the Q1 comp, the guidance reflects just the quarter to date results and a measured outlook for April. We see more upside as you think about the balance of the year. And really the guidance that we issued for the full year contemplates a degree of improvement across stores and e commerce. That said, the improvement is more weighted to e commerce. Many of the initiatives that we mentioned will benefit e commerce disproportionately, specifically the site merchandising that I mentioned, also the mobile app launch in the second quarter, the omnichannel strategy as well, specifically ship from store, which has been a very successful initiative for us in 2016. We're expanding that, as I mentioned, significantly, and we'll have that expansion ramping through Q2 and benefit from that for the balance of the year. And also there's just a broader macro trend that I think we're seeing across the industry with consumers and our guests in particular shifting their shopping preferences to digital versus bricks and mortar. So in terms of the store side of the equation, we've taken a sober view on our store outlook given the traffic trends. It's safe to say that our guidance does not reflect the same store comp performance that we saw in 2016. That said, we have a number of strategic sales driving investments that will ramp over the course of the year that will benefit our stores and our website business. In Q1 and in particular February March really did not benefit from all the initiatives that we've been talking about. And what we're and specifically, and we enumerated most of these in the prepared remarks, the product introductions are very important. The Nu Luxe styles that landed this week have now risen to be our top sellers in both women's pants and crops. So we're excited to see the traction with NuLuxe. The bra innovation that we'll introduce in the Q2, we believe, is also incredibly exciting and we can move our business. Jackets and outerwear are big businesses for us in the second half. We've had teams working to develop exciting new styles for that form of business for the second half. And then also as Ron described the brand campaign in the second quarter, we've never done had a strategy like that. So we're really excited to see how that can move our business as well. CRM in the Q3 and the expansion of our co located strategies, which has proven exceptionally successful. We're ramping that into the Q2. We see upside potentially for those for that strategy into the second half of the year as well and the acceleration of China. So exciting comp trends in China. We're excited to see that the number of stores opening there increasing with more potential beyond that. So let me pause and see if Laurent would add anything. Well, Matt, I think that no, thanks, Georg. Matt, I think what the performance that we've seen in Q4 was driven by the neutral and the jewel tones that were perfect for the gift giving season and especially Q3, Q4. I mean in Q1, we should have been bolder with the color assortment and from a visual merchandising, we didn't bring that power fully to life. Now with that said, we added a lot of talent on the merchant side later in 2016 with a real focus on visual merchandising. So we actually saw this trend happening very early on in the quarter and with a much stronger supply chain we've been able to react very quickly. So you're going to see more color showing up this next week actually. And we've actually added a lot of creative resources both in Vancouver and in LA now ability to bring visual merchandising to life in a much more powerful way. So if you look at some of our products, which I'm sure some of you guys may have seen, whether it's a loud and clear jacket or whether it's the cool racer back in Hydrangea Blue, when we've actually brought that to life in a way that we're proud of, showing fluidity and movement, the performance in sales has drastically increased. So disappointed with the beginning of Q1. And with that said, we own it. And by owning it, we also mean that we know how to fix it. And we've seen very quick results in how we've been fixing it. So we know what to do. We're doing it. It's actually paying off. It's being validated in both traffic and conversion. And as to what I said, I mean, I'm more excited about 2017 than I've been since being around in 2014. I mean, we've got an unprecedented amount of product innovation and global brand activation that's ahead of us for 2017 that will definitely drive traffic and conversion. So we're going to continue 2017 will be our best year ever with earnings continuing to grow in line with sales. Great. And then just one follow-up on the margin front. On gross margin, what's Stuart, what's the embedded product merchandise margin for in the Q1 and for the year? And I'm just curious, what comp do you need to leverage the rod? Yes. Matt, as I had indicated in the prepared remarks, we're seeing product margins recovering as expected in the Q1. And to put a number to it, we're seeing product margins improving over 300 basis points in the Q1 and would expect a similar trend into the Q2. Unfortunately, the deleverage on our fixed cost components of gross margin is offsetting that to a greater degree than we expected as a result of the sales trend. Notably, we have 39 net new stores in Q1, which we didn't have last year and the occupancy costs related to that is also weighing on that leverage point. So what we've said is that we will leverage our costs in the mid teens total revenue growth rate. We're obviously falling short of that in the Q1. We're happy with the product margin results overall. And I think the strategic cost reduction improvements that we mentioned will benefit not only the SG and A line, but also there are certain elements within the buying cost and gross margin that it will also benefit. So from a long term basis, still see us leveraging the cost structure at the mid teens total revenue level, we'll probably do a little better than that in 2017 as a result of the expense initiatives we have underway. Great. Best of luck. The next question comes from Adrienne Yih of Wolfe Research. Please go ahead. Good afternoon. Nice job on the holiday quarter. Thank you. My question you're welcome. Stuart, you mentioned something about the brand campaign. So I was wondering if you could talk more about that, the investment in that, is that global? And then can you also talk about the investments as you build in multiple continents, what's the infrastructure investment and what can it support outside of North America? Thank you very much. Hey, Adrienne, this is Laurent. From a brand campaign statement, you've heard us. I mean, I think we're best in the world at Grassroot Initiative, building communities and being pulled in those communities. And that's why we've been so successful with our physical footprint. Where we haven't always been as strong is really amplifying our voice, who we are as a brand, what Lululemon stands for in the world. And as we grow as a global brand, I mean, it's becoming increasingly important. So we've actually partnered with an amazing creative agency that's one of the world's leader in editing and building content for millennials and I'm not going to share today who it is, but we're very excited about the partnership to actually add the level of amplification that we need to really sort of share our voice. So it is a global launch. It will be focused on a number of key cities. It will be more focused on a couple of key cities around the world and it will come to life mid May, but it will be a very important moment in not only increasing our guest retention, but when you think about 2017 really being a year of putting more eyeballs on the brand and guest acquisition, I'm actually really excited about our ability in a really relevant nimble way to put millions of eyeballs on the brand and therefore increase our collective. So it's a really exciting project and I can't wait to share it with all of you. Laurent, is it traditional media and can you give a is it marketing dollars that are being reallocated? Or is it new investment in marketing dollars? It is there is some element of incremental, and I wouldn't want you to think about it in terms of traditional. I mean, think about distributing that content in a really powerful way, but in a way that millennials are best at absorbing that content. Fantastic. We'll be looking for it. And then the infrastructure? Sure. Adrian, it's Stuart. So the infrastructure priorities that we have globally are certainly to enable the expansion in Europe and Asia. We're seeing the fastest growth right now in Asia and particularly in China. There's a lot of energy right now in building out the team and the infrastructure in China to enable the store opening pace that we'd like to see. I was in Hong Kong a few weeks ago with the team evaluating how we can accelerate our market entry plans from on a cross functional basis. So we're aggressively recruiting the team to lead those efforts in region and we're excited at the momentum that we're seeing in China specifically. The team in Europe is being built out as well. We have a new GM, Gareth Pope, in Europe, who's helping us set the vision. So I'm sure there'll be more to talk about in the future as Gareth develops that strategy. But yes, it's definitely a big part of our long term vision and that infrastructure is important to enabling it. Adrian, maybe one more point on the Adrian, maybe one more point on the brand campaign and the incremental investment. I mean, given the nature of how we're going to be distributing that content, we're going to have the ability to be very flexible in how we invest. So we'll see the return of what we're doing by region, by segment, by channel, and so it's not it will be very nimble in how we invest based on the return that we're seeing. So will you give us a heads up on when that's being launched? Yes, we will. We're going to talk to you soon. Thank you very much. Best of luck. Thank you. Thank you. The next question comes from Brian Tunic of RBC Capital Markets. Please go ahead. Thanks. Good afternoon, guys. I guess on the 2017 comp guidance, maybe first, can you maybe give us some sense of how much an increase in ticket or AUR you're assuming in the business, particularly on the bottom side? Are you assuming that bottoms have a similar year to 2016? And then maybe Stuart on the supply chain and calendar work, what inning are you in now relative to making some of these product changes that sounds like Laurent's unhappy with what's in the stores right now on the color side and Lee's work as well? Sure, Brian. On the guidance, as we think about the KPIs, we're seeing strong results in AUR. And our expectations were that AURs would moderate into 2017 as we begin to lap some of the really strong IMUs that we saw in 2016. I think we see more opportunity on the conversion side as the product strategies and the product innovation lands, we'll be able to convert at an improved level, both in stores and online. And I would say there's important traffic drivers as well between the brand campaign that Laurent just mentioned, improvements in our digital marketing strategies, the various CRM engagement enhancements that we have planned for the year. Those will all drive traffic across both channels. But we're not relying on at least in how we've modeled the year improvements in AUR to drive the comp. In fact, we expect to see AURs moderate. So I think that's how we're thinking about the comp from a KPI standpoint. And the on the supply chain work, we're really pleased with how that's proceeding. Ted Dagnazzi, our Head of Supply Chain has done a nice job of building out the team and continuing to take that agenda forward. And the partnership that we have with our suppliers is critical to that. We are continuing to now build on the success as we mentioned on in 2016. The margin architecture that we landed is certainly a part of how we will manage the business and take it forward. We're turning our attention now to how to extend our supply chain capabilities to shorten lead times to make us more agile to identify how we can expedite product to market more quickly in response to market trends. And a number of our suppliers have had success with a number of other companies as well with that model that we're looking to learn from. So excited on the developments, see even more potential even to gain efficiencies as our segmentation strategy within our supply chain continues to ramp. So a lot of upside as we think about supply chain and how it supports the business going forward. And Brian, to be clear, I mean, I'm not disappointed with product by any mean. I think that our stores look better than they ever have and I think that our vision for product is right on point where it should be. I mean what we should have done in Q1 is be bolder with our color assortment which would have been driving traffic and conversion and which would have lifted actually the entire range of products including the more neutral tones. So just want to clarify that I'm really, really proud about where we are, where we're headed, especially when you think about innovation and categories. And that's actually being translated really strongly in our anchor categories for both men's and women's with bottoms and bras and with our technical product on the men's side. Great. Thanks. Good luck. Thank you. The next question comes from Ike Boruchow of Wells Fargo. Please go ahead. Hey, good afternoon. Thanks for taking my question. Stuart, I was wondering if you could maybe give us a little bit more detail. So you mentioned for the quarter to date soft traffic in stores as well as softer conversion online. Can you maybe just help us out in terms of what's embedded in your down low single digit comp guide for Q1 from both the stores channel and the e com channel? I'm just trying to understand where is pressure coming on both channels equally or is it more one side or the other? Hey, Ike. So I think versus our expectations, the e com channel has been softer than stores. And I think as the guidance or I know the guidance that we have given reflects a stronger recovery and trend in e commerce versus stores. And it's related to all the things that we described earlier that are sort of disproportionately expected to benefit our e commerce business. The store business has been tougher, but not to the same degree as we've seen e commerce. And maybe I'll invite Celeste to offer some commentary there. Yes. Thanks, Stuart. Yes, I mean, we've definitely seen a bit of traffic deceleration in Q1 from Q4. But overall, I'm definitely still happy with where we are. Regionally, we're seeing more impact in Canada versus the U. S. And in Canada, more impact in Alberta due to the resource sector. Overall, AUR, UPT and conversion are all holding strong in the store opportunity and really what we're focused on from a store perspective and really an omnichannel perspective is focusing on acquisition and retention and really being able to be agile and move to where the traffic is versus sitting still and waiting for traffic to come to us. So as we've spoken about with our real estate strategy, co located and locals, both continue to be something that we see as really exciting opportunities from 2016 and into 2017 and areas we're focusing really hard on. And they both allow us to really capture traffic in the most relevant ways for those communities. Co located expanding our square footage, for example, Mall of America and Somerset, 2 key U. S. Co located stores from 2016. We've driven more traffic in those locations and have grown the men's business in particular from 50% to 70% through more dedicated square footage. And then locals has also allowed us to go into smaller communities in a really locally relevant way. And the results have been something we're really proud of. Bend, Oregon and Fort Collins also, for example, have been 2 of the 4 that we're really excited about and we'll continue to really push into that strategy into 2017. Just as a follow-up, I was just trying to find out are you guiding both channels to be down or is one channel up versus the other? That's the specific question I'm trying to get at. Yes. We didn't break it out, But I think it's safe to say the e commerce channel is still up, just not to the degree that we expected it would be. And we're seeing more pressure on the comp in stores in terms of the absolute number. The next question comes from Paul Lewis of Citigroup. Please go ahead. Just to dig a little bit deeper in the 1Q. Stuart, can you maybe talk about February specifically versus March? Not sure if you can get into that detail, but it might help understand just the progression of what you've seen so far. Also is the issue just as much in the men's assortment as women's? And then just separately, any way to quantify the level of newness you expect in F 2017 versus 2016? I'm not sure if you can break out what percentage of sales is driven by new product introductions in '16? What do you expect that to be in 'seventeen? Okay, Paul. I'll try to cover as much of that as I can. I think to offer some color on how Q1 has been shaping up. As I mentioned, we saw a deceleration in e commerce related to conversion that began in the last couple of weeks of January that's persisted into the early part of Q1, February March. We saw on the store side traffic headwinds become tougher early in February. So wouldn't draw a distinction between February and the early weeks of March. I think what we're as we think about the guidance that we gave, the distinction we are drawing is we're expecting some measured improvements into April related to some of the things we've talked about, the new Luxe program that's landed in stores this week that's having a very strong guest response as well as the some of the chase activities that we mentioned that will begin to land next week. So February March have not had the benefit of those particular activities or efforts. And then beyond April into the balance of the year, there's just a number of things that we're focused on with major investments behind them that will help drive the different parts of the business that we've already talked about. From a product category standpoint, we've seen strength in bottoms across men's and women's. We've seen jackets and outerwear that had been a challenging category for us in the Q4 and we've seen that continue into Q1. I don't know if Lebron or Celeste would add anything from a product standpoint. Yes. Well, I mean, it's difficult to quantify newness. What I can tell is that in 2017, you'll see more newness both from a design standpoint and from a function standpoint. So when you think about launching new fabric like new looks, I mean like the response has been tremendous. I mean I think our tights are already the number one selling tights since the launch. So I mean it really speaks for how well our new fabrics resonates with our guests, but also from a design standpoint with colors and prints, I mean we've got a lot coming up. And when you think about the broad category that's already been performing strongly, we're going to have this really bold launch after years of R and D and product testing with our athletes. So 2017, the pipeline, I mean we've been talking about for the past 3 years about sort of filling up the pipeline of innovation and 2017 is really the year where both from a design and from a functional standpoint, we're going to see this pipeline really delivering the value to our guests that we've been waiting for. Thanks guys. Good luck. Thanks Paul. This concludes time allocated for questions on today's call. I'd now like to turn the conference back over to management for any closing remarks.