Earnings Call: Q3 2015

Dec 11, 2014

Good day, ladies and gentlemen, and welcome to Lululemon's Athletica Third Quarter 2014 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. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Christan, Senior Vice President of Finance. Sir, you may begin. Good morning, everybody, and thank you for joining us on our Q3 2014 conference call. A copy of today's press release is available on the Investors section of Lululemon's website at www.lululemon.com or furnished on Form 8 ks with the SEC and available on the Commission's website at sec.gov. Shortly after we conclude today's call, a recording will be available for replay for 30 days on the Investors section of the website. Hosting our call today is Laurent Podavan, the company's CEO John Curry, the company's CFO along with Tara Posely, our Chief Product Officer, who will be available during the Q and A portion of the call. We would like to remind everybody that statements contained on this call, which are not historical facts, may be deemed to constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. Today's call is scheduled for 1 hour, so please limit yourself to one question at a time to give others opportunity to have their questions addressed. And with that, I will turn it over to Laurent. Thank you, Chris. Good morning, everyone, and thank you for joining us today to review our Q3 results. John will discuss the numbers in more detail and speak to our updated guidance in a few minutes. Today, I will summarize the areas where I see positive momentum building within the company and provide an update on areas where we continue to strengthen our business foundation. I'm very proud of our team and the solid performance delivered in the Q3, with a total combined comparable sales growth of 3% that showed improvement over our 2nd quarter, marking a key inflection point with our women's business returning to positive territory. As expected, we delivered a better product assortment, which was a key driver of improved performance this fall, compounded with more cohesive brand and product communication in stores, online and through our PR strategies. We were pleased to see sequential improvements in each month of the quarter as it progressed, driven by our product flows and new allocations. Overall, I attribute the success of the Q3 to the ongoing foundational work that we've described in the past, building our talent pool, improving our processes and integrating brand and product. We have turned an important corner and will continue to be relentless about keeping the flywheel turning and accelerating. Let's take a look an early look at Q4. The Q4 was kicked off with our annual leadership conference in Vancouver. A gathering of approximately 900 of our key leaders, including staff from our store support center, store and show managers and top educators representing amazing talent from around the globe. Since joining L'UZ L'Orealmant back in January, I've been anticipating our most important yearly gathering as a team. And whether it was in a small breakout session or on my math side by side with 900 colleagues doing yoga together, it was absolutely amazing to witness the passion and the commitment to Lululemon and our long term purpose. For the tremendous confirmation that our people are second to none and will continue to be a unique competitive advantage as they engage with our guests every day around the world. The whole team left our conference inspired, energized and ready to deliver on our goals. We are pleased with our November performance as we sustained October's momentum and delivered on our sales plan with fewer markdowns than November of last year. Black Friday performance was very strong, led by the special capsule of sequent digital print, which drove guest excitement and traffic to our store. Looking ahead to the remainder of the quarter, our team continues to monitor and assess the situation at the West Coast Port. Our business is sensitive to this disruption since we scheduled a constant replenishment of our inventory with fluid product drops at our store. With the slowdown at the West Coast ports and units still on the water, we are actively implementing a number of strategies to mitigate delivery issues. We have been experiencing delays of 7 to 10 days. And on that basis, we estimate that this could impact our 4th quarter and year end revenue guidance by approximately $10,000,000 We are continuously assessing the situation and our entire team is focused on supporting the upcoming key holiday selling weeks and maintaining positive trajectory into January. Turning to our product, which continues to lead the premium athletic apparel category. The strategic rebalance of our women's product assortment is paying off. Our increased focus on the pant wall, which is an anchor of the Lululemon brand resulted in positive comps. We were also the 4th destination for our women's running gear and our cold weather layering program resonated exceptionally well with our guests. In the men's category, we expanded both in store and online assortment, expanding our breadth of style, resulting in a strong performance with an 11% comp this past quarter. For our younger guests, EVVA brought its outerwear selection and created excitement with the launch of additional prints and textures in its seamless assortment, delivering a positive comp of 37%. We are on track to open 10 EVVA stores by the end of 2014. Innovation will drive the future of our product success. We continue to invest in R and D dollars in new fabrics, innovative construction and the expansion of our offering across new categories. And I'm very inspired with the pace at which we're making progress and look forward to sharing more details with you as we move into next year. Next year, we will finish the foundation work in our product engine, go to market process and supply chain, so we can see the tangible payoff in 2016 that we have outlined in prior calls. And we will begin to shift our investment strategy towards future growth and innovation. The guest experience that we are known for continues to be a key area of focus and we continuously strive to improve our online guest experience. Mobile commerce is trending to be approximately 1 quarter of our total e commerce activity. This past quarter alone, we launched our 1st mobile shopping app, which was downloaded 274,000 times and represents approximately 8% of online sales. Additionally, we launched a redesign of the My Account feature on our website, resulting in a 27% increase in new accounts being captured this past quarter alone. With the opening of our new distribution center in Columbus, Ohio, we have seen our average transit times for online orders reduced by 46%, now averaging just under 2 days throughout the entire United States. The recent openings of our flagship stores represent a fantastic avenue to building brand awareness both with our local and international guests. This past quarter, our Canadian flagship store opened on Robson Street in Vancouver and almost immediately became one of top performing stores across our entire portfolio. We now expect Robson's volume to be 50% higher than its original location and trending to be a $15,000,000 store. This month, we opened a flagship store in Santa Monica that exceeded all opening sales targets and traffic goals. Its design aesthetics it is it is the largest Lululemon retail store to date. The space dedicated to men's is second only to our new standalone store in SoHo, which just opened on Black Friday. Our flagship stores have generated brand excitement and will be key assets in our future growth. Moving now to our international activities. We are proactively building on the pent up demand for Lululemon outside of North America. On our last call, I outlined our goal to have a total of 40 new stores in Europe and Asia by 2017. Our 2015 international real estate pipeline is very robust and we are on track to open our 1st store in the Middle East in the second half of twenty fifteen. Our Covent Garden store in London continues to perform well and our 2nd store in Chelsea is expected to open next month. Our Singapore store is set to open in a few hours and we had almost 3,000 people join us at the recent Singapore Yoga Beat event on Orchard Road and we're excited to further connect with our guests in Singapore. Speaking more specifically to our brand and community efforts, last year, our No Hamburger social media campaign was a tremendous success. This year, we launched our gift presents campaign for the holiday season, which has been getting instant traction from guests to all social channels. Our gift presents video generated over 1,200,000 views within the 1st week of launch and has now reached 3,500,000 views. And we continue to attract incredible talent to our team. I'm really proud to welcome Duke Stomp as our new Executive Vice President of Brand and Community. I was inspired by Duke from the minute we met. He shared our vision of creating transformational experiences for people and his extensive background within the athletic apparel industry combined with leadership and in socially conscious brands make him a superb fit. I'm confident that under Duke's leadership, we will continue to build a bold, audacious, innovative global brand. We have also built upon our product team with experienced leaders and technical experts. We have hired Lee Horman as Senior Vice President of our Women's Design division and Mark Daxendale as Senior Vice President of Planning and Allocation. Both bring tremendous strategic and global retail experience. And last but not least, we are in the final stages of our CFO search and I'm confident that we will have a smooth transition. Before turning this over, I recognize that this is our last earnings call with John by my side. On behalf of all of us at Lululemon, I want to thank John for his enormous contribution since joining the company in 2,007. John's influence and leadership helped Peglouloumen public and has continued to shape our success today. As John embarks on his next phase in his life, I want to personally thank him for his support and wish him much, much happiness in retirement. With incredible power of this during his ski days and sunshine on his bowling days. With that, I will turn the call over to John, who will review the financial details of Q3 and our 2014 guidance. John? Thanks, Laurent. I'll begin by reviewing the details of our Q3 of 2014 and then I'll update you on our outlook for the Q4 and the full year of fiscal 2014. Our Q3 total net revenue rose 10.4 percent to $419,400,000 from $379,900,000 in the Q3 of 2013. The increase in revenue was driven by total comparable store sales growth on a combined basis including e commerce of 3% comprised of 27% growth online and a bricks and mortar store sales decline of 3%, all on a constant dollar basis. The addition of 42 net new corporate owned stores since Q3 of 2013, 27 net new stores in the United States, 2 stores in Canada, 2 stores in New Zealand, 1 in the U. K. And 10 Aviva stores and offset with a foreign exchange impact of a weaker Canadian and Australia dollar, which had the effect of decreasing reported revenues by 7,500,000 or 1.8%. This was more than we had anticipated as these currencies weakened late in the quarter. This impacted our Q3 relative to our expectations and our outlook for the balance of the year. During the quarter, we opened 19 net new corporate owned stores, 15 in the U. S, 1 in Canada and 3 of EVA. We ended the quarter with 289 total stores versus two forty seven a year ago. There are now 2 22 stores in our comp base, 37 of those in Canada, 151 in the United States, 25 in Australia and New Zealand and 9 AVEVA. At the end of Q3, we also have a total of 86 showrooms in operation: 34 Lululemon in North America, 16 internationally and 36 Aviva. Corporate owned stores represented 73.9% of total revenue or $310,000,000 versus 76.5 percent or $290,700,000 in the Q3 of last year. Revenues from our direct to consumer channel totaled $77,200,000 or 18.4 percent of total revenue versus $62,000,000 or 16.3 percent of total revenue in the Q3 of last year. Other revenue, which includes strategic sales, showrooms, pop ups and outlets, totaled $32,200,000 or 7.7 percent of total revenue for the 3rd quarter versus $27,300,000 or 7.2 percent of revenue in the Q3 of last year. Gross profit for the Q3 was $211,100,000 or 50.3 percent of net revenue compared to $204,600,000 or 53.9 percent of net revenue in Q3 2013. The factors which contributed to this 360 basis point decline in gross margin where product margin decline of 90 basis points due primarily to a combination of sales mix and input costs 80 basis points of deleverage from occupancy and depreciation, 150 basis points deleverage from continued investment in our product engine and supply chain functions and 40 basis points deleverage from the foreign exchange impact on product costs due to the weakening of the Canadian and Australian dollar. SG and A expenses were $129,900,000 or 30.9 percent of net revenue compared to $112,300,000 or 29.6 percent of net revenue for the same period last year. The 15.7 percent SG and A dollar increase is due to an increase in operating expenses associated with new stores, showrooms and outlets increased variable operating costs associated with the year over year growth in our e commerce business and increases in expenses at our store support center including salaries, administrative expenses and professional fees, partially offset by a $3,500,000 reduction in management incentive and stock based compensation accruals. Lastly, the weaker Canadian and Australian dollar, which on translation also decreased reported SG and A by $3,400,000 or 2.6 percent. As a result, operating income for the Q1 was $81,200,000 or 19.4 percent of net revenue compared with $92,300,000 or 24,300,000 dollars or percent, sorry, of net revenue in Q3 of 2013. Tax expense for the quarter was $22,500,000 or a tax rate of 27.1 percent compared to $27,700,000 or a tax rate of 29.5 percent in the Q3 of 2013. The lower tax rate was a result of truing up our tax expense based on finalized prior year tax filings. Absent this true up, our tax rate would have been 30.3%. Net income for the quarter was $60,500,000 or $0.42 per diluted share compared to net income of 60 $6,100,000 or $0.45 per diluted share for the Q3 of 2013. Our weighted average diluted shares outstanding for the quarter were 143,400,000 dollars versus $146,000,000 a year ago. This takes into account the weighted impact of 1,800,000 shares repurchased during this quarter at an average price of 40 $0.49 per share. The impact of the share buyback on diluted EPS for the quarter compared to our guidance was nominal due to the timing of when these shares were repurchased. Capital expenditures were $37,300,000 for the quarter compared to $27,900,000 for the Q3 last year, with the increase associated with new stores, renovations, IT and head office capital. Turning to our balance sheet highlights. We ended the quarter with $633,600,000 in cash and cash equivalents. Inventory at the end of the Q3 was 229,900,000 dollars or 11% higher than at the end of the Q3 of 2013, which is consistent with our expected revenue growth. This now leads me to our outlook for the Q4 and full fiscal year 2014. We anticipate Q4 revenue in the range of $570,000,000 to $585,000,000 This is based on a comparable sales percentage increase in the low single digits on a constant dollar basis compared to the Q4 of 2013. It assumes a Canadian dollar at $0.88 to the U. S. Dollar and 13 new store openings, 9 in the U. S, 1 in Singapore, 1 in the U. K, 1 in Australia and 1 in Aviva. Now please note that the revenue range for Q4 implied in the guidance I gave last quarter was $585,000,000 to $600,000,000 or $15,000,000 higher. In the 1st 5 weeks of this quarter to date, we've been trending consistent with the high end of this range. However, as Laurent mentioned earlier, we estimate the impact of the West Coast port delays will be approximately $10,000,000 over the balance of the quarter. The remaining reduction in our revenue expectations comes from two factors: the lower Canadian and Australian dollar and delayed store openings, notably our 2nd store in London on Kings Road in Chelsea, which due to construction delays will miss the holiday season and will open in late January. We expect gross margin to be between 51% 52%. This is down from a year ago, primarily due to product sales mix, deleverage against product and supply chain expenses within cost of goods sold and store occupancy and depreciation and lastly, the impact of foreign exchange to a weaker Canadian and Australian dollar compared to last year. We expect SG and A to leverage by 400 basis points as a percentage of revenue compared to the Q4 of 2013. As a reminder, we are annualizing $11,000,000 in foreign exchange gains and $9,100,000 in bonus reversals incurred in Q4 2013, which contributes to 3.40 basis points of the deleverage to the Q4 this year. The remainder is driven primarily from the run rate of investments made last year and some timing of spend that shifted to Q4. Our SG and A outlook also reflects preopening costs related to the 13 stores planned to open in Q4 and additional stores planned to open in early Q1 of 2015. Assuming a tax rate of 30.2 percent and 142,600,000 diluted average shares outstanding, we expect diluted earnings per share in the 4th quarter to be in the range of $0.65 to $0.69 per share. For the full fiscal year, we expect net revenue for the year to be in the range of $1,765,000,000 to 1,780,000,000 We expect to open 48 corporate owned stores, which as Laurent mentioned earlier, now includes our 1st store in Asia in Singapore and our 2nd store in London as well as our 1st men's only store in SoHo, New York. For the year, we expect gross margin of approximately 51%, down from last year due to the same factors we've discussed earlier. We expect SG and A to deleverage as a percent of revenue compared to 2013. This is primarily due to continued strategic investment in areas such as IT, international expansion, brand and again lapping both the $17,000,000 in foreign exchange gains incurred throughout last year and reduced management incentive compensation. As a result, we expect our overall operating margin to deleverage from 2013 and our fiscal year diluted earnings per share to be approximately $1.53 to $1.57 or $1.74 to $1.78 when normalized for the non recurring tax adjustment we incurred in the Q1 this year. This is based on 144,300,000 diluted weighted average shares outstanding. Our guidance does not reflect an estimate of shares repurchased after Q3 and it assumes an effective overall tax rate of 37.9 percent, which includes the one time tax adjustment or 29.4% excluding this tax adjustment. We expect capital expenditures to range between $115,000,000 $120,000,000 for the fiscal year, reflecting new store build outs, renovation capital for existing stores, IT and other head office capital including expansion of our existing premises. With that, I'll turn it over for questions. Thank Our first question comes from Matt McClintock from Barclays. Your line is open. Please go ahead. Yes. Hi. Good morning, everyone, and congrats on an excellent quarter. Thank you. Thank you, Matt. Since you talked a little bit about opening stores in Singapore and you're expanding internationally, Laurent, given your comments, your prepared remarks, I was just wondering if you could talk about the showroom performance that you're seeing in the varying region. Is there any variances between showroom performance in Europe or in Asia? Anything to call out there specifically? And maybe can you just talk about what you're seeing in some of those regions that gives you some of the confidence that the growth opportunities remain as strong as ever? Sure. Well, I mean, two things to point out about the showrooms. I mean, in Europe, we see showroom performance that is very much in line with what we saw earlier when we opened showroom in the U. S. And in Asia, we see a very strong showroom performance and it's the result of having been there for a longer time, longer period of time. The show might have been open in Hong Kong for almost 4 years now. So that explains this outside performance in Asia compared to Europe. But Europe is on track with what we saw in the early years in the U. S. I mean, as far as the outlook, I mean, I really do have a long term view on both Europe and Asia as having really large potential and the rest of the world being obviously larger than North America. The economies are fluctuating and our showroom strategy is really a very powerful and frugal way to go to market. So we're opening markets in region. We're seeing traction where we have showrooms and that will dictate store rollouts. So we're still on target to open 40 stores both in Europe and Asia, 20 in each region by 2017 and that little bit based on European or Asian performance. But long term, I mean, I see the potential of both regions as remaining very large for the organization. And then if I could have a follow-up to John, just 150 basis points of supply chain pressure on the margin on gross margin this quarter that you felt. How should we think about that over the next several quarters given that you continue you should continue to make supply chain investments in 2015 setting yourself up for 2016? Just the level of pressure that we should expect going for the next several quarters? Thanks. Yes. And you're right. And as we've said throughout the year, 2014 has been a year of investment in shoring up supply chain. I think in this quarter it's a little bit higher than sort of a run rate based on some additional testing costs that came through in the quarter. But generally speaking in 2014 2015 we'll continue to invest in a with a run rate of a bigger more capable team as you said to deliver the benefits to product margin and gross margin that we've talked about for 2016. Thank you very much. Thank you. Our next question comes from Bob Drbul from Nomura. Your line is open. Please go ahead. Hi, good morning. Just have two questions. Can you talk little bit about the traffic trends in the stores, I guess, throughout the last quarter and then quarter to date? And John, can you give us the new store productivity trends that you're seeing? Yes. Okay. And the good news within the comp both for Q3 and what we're seeing for Q4 is that and similar to Q2 traffic continues to build. So the traffic component of the comp in Q3 was stronger than even in Q2 and it turned positive. Now that's offset with lower conversion and units per transaction, which is understandable given where I think we are at is definitely improving brand sentiment and the product assortment to match that is still catching up, but better for Q4. New store productivity continues to be running that 1100 to 1200 per square foot area, a little bit higher than more recent openings. So very consistent strong performance on the new stores. Great. Thank you very much. Thank you. Our next question comes from Tom Landry from Susquehanna. Your line is open. Please go ahead. Hi. Thanks and congratulations on the continued strong execution. So first, quick question for John. Could you possibly dig a little deeper into the quarter store op margin? I think you've contracted about $700,000,000 Sort of, is that have anything to do with the store opening delays? And how should we think about that contraction if there's similar contraction in the Q4? And then just quickly on the port slowdown, are the goods that are on the water, are they concentrated in any particular categories or classifications? Thank you. Okay. Yes. So on the store operating margin in Q3, it's a little bit more contraction than would be the norm. I think that's natural given there's a very heavy new store opening cadence in Q3 and more so than the prior year. So that contracted the store operating margin to be a little bit more than you'd expect typically. The port, to be honest, I couldn't tell you exactly if it's concentrated in any one product category. I think we have to assume it's across the board. The other thing that it's important to note, even though the disruption with the ports is the U. S. Ports, it also impacts our Canadian business because a lot of the ships that come from Asia might stop in LA, Seattle and then make the way up to Vancouver where we unload for Canadian shipments. Okay. Thank you. Best of luck. Thanks. Thank you. Our next question comes from Jennifer Black, Jennifer Black and Associates. Your line is open. Please go ahead. Let me add my congratulations and good luck John in your new endeavors. Hi. I think this question is for Terra. You've done some magnificent collections such as the Sparkle and Exquisite collections. And I wondered if you're planning to do a continuous flow of these collections all year long. And are you seeing an increase in units per transactions with the collections based on the coordinated items that lend themselves to outfitting? Thanks so much. Hi, Jennifer. Hi, Kara. So I think just to really reframe what we were focused on for 3rd Q4 of 2014 was really getting the balance of the inventory right between our core and our seasonal product. Q3 was really about tackling the pant wall and really starting to test some new core products as well as adding print and color and texture. So really, again, I'm going to underscore our continued focus on core. As we moved into holiday, obviously, it's such a big gift giving time of year, really focused with the design teams on making sure we are wherever we could getting that beauty and functional in our product because we know that's so incredibly core to our DNA of the brand. So naturally, some of these collections like and the Exquisite Group reinforce that beauty and functional element to our brand. And you'll continue to see those as we move into next year. But the place we're spending a lot of time on is that core and we'll really know that the tank wall is not where it should be quite yet and that's going to be a big focus to the design team as we move into Q1 and Q2 of next year. Great. Thank you very much. Good luck. Thanks. Thank you. Our next question comes from Paul Lewis from Wells Fargo. Your line is open. Please go ahead. Hey, thanks. This is Tracy Kogan filling in for Paul. You mentioned that product mix hurt your merch margin by 90 bps. And I was just wondering what impact markdowns had on your gross margin this quarter. And then I just wanted to confirm that you said you were less promotional in November. And I was wondering if you were planning to hold that online warehouse sale in Q4? Thanks. Okay. Yes. In Q3, markdowns were actually a little bit less than the prior year. The only reason I didn't call it out was it was fairly minor like maybe 10 basis points, 15 basis points. But we were less promotional in Q3. Sorry, your question on November? Markdown, right less than November. Yes, which as you said in your prepared remarks were less promotional. And the question of an online warehouse sale for Q4, that really depends on how we come through the holiday season, Whether we do an online or a physical warehouse sale, that's yet to be determined. And to continue to More later than the 4th, yes. Great. Thanks, guys. Thank you. Our next question comes from Betty Chan from Mizuho wondering if you could give us a sense of how the seasonal goods and fashion products were trending? And maybe in a mature market like Canada, give us a sense of that penetration versus core and what it currently looks like in the U. S? Thanks. Hi, Alex. It's Tara. So the seasonal goods, as we delivered as our deliveries increased as we got into Q3, we definitely saw a strong positive guest response to our seasonal goods. As I said a few minutes ago, the core product both in the pants and in tanks is an area we're going to continuing to be focused on as we move into next year, really driving newness in our core product, which we know is so important. And speaking to the Canadian market, driving that newness in the core product is really going to benefit our Canadian guests quite tremendously because they're looking for that evolved core from us. But they're also responding very well to the seasonal. Thank you. Our next question comes from Oliver Chen from Cowen and Company. Hi, congrats on all the progress. Regarding the split up between bricks and mortar versus online, do you expect that trend to continue in terms of running slightly negative in the stores? Or do you are you feeling like traffic may offset some of those dynamics? And then, Tara, as you do continue to focus on the core I think AUR and the innovation in terms of the product side and what's ahead with the core? Thanks. In terms of bricks and mortar versus e commerce, I mean, as we've seen e commerce has been strong, bricks and mortar has been gaining traction as I said primarily benefited by traffic and we do expect conversion to stop being the headwind it's been. So my guidance in Q4 actually we're assuming that stores will be positive, which they have not been for some time. And then Oliver on core, just to remind everybody development of new fabrics is about an 18 months process. So from the standpoint of seeing materials and fabric evolving, we really want to start seeing that to the back half of next year. And as we get closer to that, we can share that. And from the AUR perspective, I don't see at this point AUR going up. But as we're developing new innovations, new silhouettes, building more functional beauty into our product, we'll be looking at those products and making sure our price value equation is appropriately set in the marketplace. Okay. Thanks. And as a quick follow-up, could you comment on Men's and how you feel about the positioning now and where it may have opportunity to evolve over time? I'm feeling really good about men's. Early indications of our men's only store have been really great positive guest response. We see as we are giving men's expanded space both in our Robson store, our standalone store, we're able to expand each one of the categories from our sweat category to the no sweat, which is really the sweatshirts and things you put on after your workout and post sweatshirt, which is really our commute line. We see all three of those categories have opportunity to add breadth within those. And as we move into next year, you'll see those categories growing online, which is a great place for us to continue to test and try and learn as well as expanding what we're doing in our men's only spaces where we have that additional square footage. And to add to this is Laurent. To add to what John and Tara said, I mean, with a better product assortment, a better flow and also better predictability, we've been able to work much more closely with our brand and community team and communicating very strong cohesive story as you saw during Black Friday. So and that's a big part of the confidence that we feel in building traffic and returning to positive store comps. Thanks. Congrats on all the excitement. Best regards for the holidays. Thanks, Oliver. Thank you. Our next question comes from Matthew Boss from JPMorgan. Your line is open. Please go ahead. Hey, good morning and nice quarter. With productivity and digital stores, terms unchanged, any initiatives that kick start some of your more mature stores that thought about a remodel program? Or can you just talk about performance in some of your stores more than 5 years old? Do you mind I mean, I'm sorry, it's really hard to hear you. Do you mind repeating the question, maybe getting a little bit closer to the phone? Yes. So productivity in some of your in your new stores sounds like unchanged. As we think about some of the more mature stores, can you just talk about any initiatives to kind of kick start performance in your more mature stores, particularly those 5 years or older? Yes. I mean, in general, especially a high volume store, we regularly renovate them every 3 years and normal stores, 5 years. In addition, we've got an ongoing program where older stores that were maybe not in the best location within a mall or on the street or were a little bit too small in terms of square footage. Every year we're doing relocations or expansions. And then in a limited number of cases as we've talked about, so Robson Street in Vancouver is a good example. We've moved from a very strong 3,400 Square Foot Store up to more of a flagship store at 4,500 Square Feet. And that flagship is the wrong term because flagships are often characterized as marketing initiatives. But in this case, it's really a it's much more profitable store. So we're looking for opportunities to make those shifts as well. And we have an entire group internally very much focused on guest innovation and guest experience. So you've seen white space for product. I mean, think about that, that group as being the same focus on our guest experience both online and in store. So a longer term focus on the innovation, but certainly something that will have an impact on those more mature stores. Great. And then just to circle back on the margin front. So it sounds like you continued supply chain investments. What kind of a comp next year do you need to lever occupancy occupancy and rent? And then if you could just kind of break down, if we think about gross margin, I mean, should we think about gross margin down next year and then inflection being in 2016? Yes. In terms of leverage on occupancy and depreciation, I mean, there's a lot of moving pieces. But in general, I'd say sort of mid teens comp sorry, mid single digits. Again, impacted by some of the renovations that we're doing, etcetera. But mid single digits is about right. I'm sorry, your second question was what? Yes. So gross margin overall in aggregate, should we think about gross margin as down next year given the supply chain investments? And is that a mid single digit store comp or all in comp? I'm talking store comp. In terms of supply chain investment, In terms of supply chain investment gross margin, as I said, I mean 2014, obviously, a build the foundation year, which is continuing into certainly the early part of 2015. In addition, we're sort of shifting our focus from simply building foundation investments to investments in supply chain that drive growth. So it will be that as well. But of course, at this point, we're not guiding to gross margin next year. And in fact, we're still working through the details of new initiatives in terms of our budgeting for next year. So we'll give guidance for next year as we always do when we report to Q4. Okay, great. Thanks. Best of luck. Thank you. Our next question comes from Camilo Lyon from Canaccord. Your line is open. Please go ahead. Thanks. Good morning, guys. I had a couple of questions. Number 1, could you tell us, John, what the impact of the Online Warehouse sale was to the Q3? Number 2, can you just update us on what you just said right now in the prior question, the shifting to investments in supply chain that will drive growth. What kind of investments are those? And what should what will we expect to see from the supply chain side that can lead to better growth? And then finally on gross margin, are you at a point where the seasonal component can start to be a margin accretive product category in 2015? Okay. Well, I'll take the online warehouse question. Yes, it was in October rather than just have markdowns in our we made too much site throughout the quarter and really sort of concentrating sales into a limited time period as opposed to more spread out in our outlets, we decided to do an online warehouse sale. It was like 3 days. I think we did $3,000,000 to $4,000,000 Again, it was as expected in our earlier guidance, But that did sort of concentrate that level of sales in online versus what otherwise might have been outlets. Sorry, whenever you ask more than one question, I always have to ask that. That's the second question. Sure. No problem. So just in response to the prior question, you talked about next year being the year in which you shift some of your supply chain investments to investments that will drive growth. If you could just elaborate on what that means? And then maybe for Tara, the seasonal component entry of your products that we had a point that 2015 should have positive gross margin contribution from the seasonal mix? So if you think about the shifting of the investments, I mean, think about further investments in R and D in some of what Sarah and her group are working on in fabrics and new silhouettes as well as continued seamless authentic guest experiences both online and installed as well as our continued international development. And then for the seasonal component, as we move into next year and all the supply chain work we've done on our go to market calendar that we've been talking about, we should start seeing those we will start seeing those improvements in seasonal product as we move into the back half of the year. Got it. Best of luck for the holiday. Thank you. Thank you. Thank you. Our next question comes from Barbara Wykoff from CLFSA. Your line is open. Please go ahead. Hey, everybody. Good job. This question is for Tarek. Can you talk about initiatives to Sage basic fabrics so you're better able to respond to reorders on seasonal goods quickly? And can you just talk a little bit about the testing mechanism and timing on turnaround time assuming the fabrics are on hand? Okay. So I think I just want to make sure, so it's really just taking so I'll just talk about what we're working on right now as a team. We've built out a model to really project out our raw materials over a 5 year period, all of the different key raw materials that we use, which is really a stage one to make sure that over a 5 year horizon, we're staging the fabrics appropriately. So that's going to continue to help us in our process, really being able to build more speed into our process. And then as for testing, I mean really we've it was Q3 was when we had said we'd have all of our testing protocols in place upfront in the supply chain stream from raw materials to in our factories and we hit that. And that's really where we are with testing. I wasn't quite sure what your additional question was around testing. But just the timing of the turnaround, assuming you have the fabric, what how long does it take to something checks how fast can you get it back in stock? Yes. I mean, I'm really not ready to talk about that at this moment in time, but just do know that that's all speed is important to us and we continue to create these improvements in our supply chain in order to take advantage of speed. Great. Thanks. Thank you. Our next question comes from Kimberly Greenberger from Morgan Stanley. Your line is open. Please go ahead. Great. Thanks. John, I'm wondering if you can just address your long term gross margin target. I know you've said in the past you expect to be able to get back to that 55% level, but it looks like the majority of the decline in gross margin that you're experiencing is a structurally higher cost base. So in the absence of mid single digit positive store comps, do you think what do you think your long term gross margin should look like? Yes. And especially if we focus on the core North American business as the base layer, we continue to see the road map to get back to that sort of mid-50s gross margin that we had been at. All the work that Tara and Jennifer's teams are doing as we've talked about in the past, we continue to believe those will deliver about 300 basis points in improvement in gross margin. As well there's a lot of other efficiencies beyond that, that I think over time we'll be able to enjoy. I've mentioned that's not built into that 300 basis points. But even being more buttoned down, we'll be able to provide better guidance to our factory partners that will allow them to reduce the contingency that they need to build into our pricing. So there's other potential upside in there that we see that roadmap to 55. Of course, as you layer on the new markets that are really Asia and Europe are effectively start ups. Initially, there'll be a lower margin profile, but when they reach a relative level of maturity that drags. Okay. And John, just one clarification. On the cash balance, dollars 633,000,000 how much of that is in the U. S. And available for share repurchases? I don't think there's a lot of it actually in the U. S. Having said that, we've provided already, I guess, in Q1 for the tax that we'll incur on moving cash up. So I think there's another $300,000,000 that we can move up where the tax has already been provided for. Thanks so much. Thank you. And our next question comes from Janet Kloppenburg from JJK Research. Your line is open. Please go ahead. Good morning, everyone, and congratulations on the progress. And John, thank you for all the help you've given us over the years and best of luck. Just a couple of quick questions. I was wondering if the supply chain I'm sorry, the port strike issues could have a tail into the Q1 and or if you see that problem terminating here in the 4th quarter? And secondly, Tara, if you could just speak to the redesign of the core product. Do you think that's complete in terms of the leggings and the tanks? Or do you think there's more work to be done there? Thanks so much. Okay. In terms of the port situation, I mean, we're continuing to monitor it basically every day. Of course, if it turned into a strike then it It's not a strike right now. Yes, it's not a strike right now. So that would, of course, change things for everyone. But having said that, we've taken steps with respect to our future shipments. So even by the end of December shipments will be either a lot of them will be rerouted through Vancouver, get down to the states by rail. So that will still likely give rise to 1 to 3 day delay, but it won't be the 7 to 10 days that we've been that we're seeing right now. So I think as you get into Q1, even January, the impact, if it's status quo should be minimal. Thank you. Tara? Okay, Jen. How are you? Good. How are you? I'd like to call it the evolution of the core product. So I look at that we launched that work in Q3. But as I said, that work is going to be carried into next year. That was just really the start. And I think we've got still a lot of work to do on the tanks. And you'll see more of that as we move into Q1 and Q2 as well as us continuing to test and try new core styles in the bottom. But we're progressing and we are on our way. Okay. Have a great holiday. Thank you. Thank you. Thank you. Our next question comes from Omar Saad from Evercore. Your line is open. Please go ahead. Thank you. I wanted to ask a follow-up question on the comment you made about the women's business turning positive. If you think about a year ago, kind of all the controversy going on and the impact it had on your traffic and you kind of reflect on the last year, have you seen the female customer evolve or change at all? I know in our annual holiday survey, it really Lululemon brand really jumped up with a teen customer. Maybe you're seeing a younger consumer drive some of those positive comps in the women's business. Or are you seeing that core female consumer loyal consumer start to come back and spend more in the brand? Thanks. I think we're seeing both. I mean, we're seeing both. We're seeing much greater brand sentiment and we're seeing obviously much greater traffic. I mean, in much greater traffic. I mean in a lot of the research that we've seen when Advent came on board through Ben and McKinsey, I mean we've got a very loyal guest and she's coming back and she's coming back more often. So I think it's really a combination of gaining that core loyal customer and giving her a lot more opportunities to engage with us and buy with us more often and bringing up new guests as well. Appreciate it. Thanks, John. John, thanks for all your help over the years. Thanks, Omar. Thank you. Our next question comes from Anna Andreeva from Oppenheimer. Your line is open. Please go ahead. Great. Thanks so much. Good morning, guys, and congratulations on seeing stability in the business. Thank you. I was hoping to follow-up, not sure if we missed it. What was the comp in Canada and Australia during the quarter? And in Canada, I think you've closed a handful of stores. Maybe talk about the margin profile in the region and what's the ultimate store footprint that you see in Canada? And just as a follow-up to John, I'm not sure if you commented just the quarter to date commentary, did comps continue to sequentially improve along with traffic? Thanks so much. Okay. Yes, Canada continued to be slightly negative, but again improving. It was low single digit negatives versus the U. S. Being low single digit positives. Australia is a little bit higher in terms of a comp. I mean, I think there's lots of opportunity there. It comps high single digits in the quarter. Again, I need you to repeat your second question. Just on the store footprint opportunity in Canada, I think you closed a handful of stores. And just a follow-up on the quarter to date trend. Are you seeing improvements in comp along with traffic? Right. Okay. Well, we don't we haven't closed any stores. What you're probably seeing is that we've taken some out of the comp base as we've moved them, renovated them. Robson, for example, was our 2nd store worldwide. But with the relocation and the increase in size, it's out of the comp base. So other than that, there's no closures in Canada. And the sequential sorry, third question, get you to repeat it again. Yes, I mean, the trend into November, I think, was your question is traffic and other metrics are continuing to trend up better than what we saw in Q3. Terrific. Thanks so much, guys. Best of luck. Thank you. Thank you. And our final question comes from Ed Yruma from KeyBanc Capital. Your line is open. Please go ahead. Hi. Thanks for taking my question and best of luck John. I guess 2 components. 1, given the strong comps and store growth at IVA, how would you describe the materiality of the business to overall profitability? And 2, on in store inventory, I guess, how would you characterize it? I know you're obviously going to see an impact from the port delay, but are you sufficiently in stock to meet demand? Thank you. Okay. I mean, I think, AVEVA has got lots of traction. We're I think this quarter, we crossed the $1,000 a square foot productivity point, but it's still very small. I mean, we'll end the year with 20 stores and they're smaller than Lululemon stores. So it's not a meaningful component at this point. Again second question? In store inventory? Yes. I mean in stocking, I mean we're more of a DC based model. I mean again we started the quarter in pretty comfortable inventory positions. And I think through November deliveries continued to maintain that position. Of course, with the port strike that's sorry, port disruption, that has caused a gap in this next little while. So we have about 1,000,000 units that are stuck at the ports right now. But there is movement, they're coming through. So it's not optimal. And that's why I reflected that in reduced guidance. But we do see breaking that log jam. And then as I said, we've rerouted subsequent shipments through Vancouver, so that the impact won't continue. Great. Thanks so much. All right. Thank you very much everybody. We wish all of you a very happy holiday season and we'll talk to you next quarter. Ladies and gentlemen, thank you for participating in today's conference.