Earnings Call: Q1 2015

Jun 12, 2014

Good day, ladies and gentlemen, and welcome to the Lululemon Athletica First Quarter 2014 Results Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, today's call is being recorded. I would now like to turn the conference over to Terese Hayes. Ma'am, you may begin. Good morning, everybody, and thank you for joining us on our Q1 2014 conference call. A copy of today's press releases are available on the Investor Relations section of our website at lululemon. Com or furnished on Form 8 ks with the SEC and available on the Commission's website. Shortly after we end this morning, a recording of today's call will be available as a replay for 30 days also available on the website. Hosting our call today is Laurent Porvenc, the company's CEO and John Curry, the company's CFO. Our Chief Product Officer, Terrence Potley will also be available during the Q and A. We would like to remind everyone of course, that statements contained on this call, which are not historical facts, may be deemed to constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. We have about an hour for today's call. So when we get to the Q and A, if you please limit yourself to one question at a time, that will give others the opportunity to also have their questions addressed. And with that, I will turn it over to Laurent. Good morning. Thank you for joining us today to discuss our Q1 results. There are obviously a number of things for us to discuss on this call and a couple of them I'm going to leave to John, namely the share buyback and his future Q1 results were in line with our expectations as sales came in slightly above our guidance and we are pleased that overall gross margin and earnings were achieved with lower markdowns than last year. We knew heading into 2014 that driving sales in the first half of the year would be impacted by a suboptimal product assortment combining soft traffic trends. Q2 sales have started us behind plan and comps are more impacted than we had originally anticipated. In response to this, we have launched a number of initiatives to drive sales and increase long term guest loyalty. I would like to spend the majority of my time with you focusing on what I believe are the 3 key priorities that will continue to drive Lululemon as a market leader in the future. 1, we are continuing to build our product engine to relentlessly innovate and consistently to our stores for both men's and women, including having our white space workshop and a world class sourcing organization that are fully integrated with the product development team. 2, we are implementing a branding and communication strategy that will create long term guest loyalty, bring guests back and attract new ones. And 3, we are pursuing our international growth with an aggressive yet sustainable plan. So first on products. On our last call, I spoke to preventing quality issues from getting to our guests. We have made significant progress with the product engine and are seeing results with an increasingly higher pass rate at our factories and a 12% improvement in the past 12 months. As part of our longer term strategy, we are aggressively focused on redesigning our go to market calendar to support our global growth. The first phase of this project relating to site finding and initial assessment is complete. The overall process will be fully redesigned and implemented over the next 18 months and we will see incremental improvement along the way to get back to our long term gross margin goals of mid-fifty percent. For Q3 and Q4 of this year, we are focused on clarifying roles and responsibilities, freeing up a significant portion of our design uptime, so they can focus on what they do best being innovative and creating beautiful technical products. We will implement process and system solutions throughout 2015 to significantly improve the flow of seasonal product to the right stores at the right time and in the right amount. We will start seeing a measurable impact of Newswire in Q2 of 2015 and will continue to gain momentum into the back half of the year. This enhanced predictability will enable us to tell clear brand and product stories in season and across categories. And by Q1 2016, we will have a fully operational world class product engine to support a global omnichannel multibrand business with localized assortment capability. All of these efforts will not only result in amazing products and therefore increased traffic and conversion, but will play a significant role in getting back to our margin goals. We are very pleased with the momentum of our men's business, which experienced a 9% comp in the quarter on track with our expectations. And as mentioned on our last call, we look forward to seeing men's dedicated spaces come to life in Vancouver, Santa Monica and Miami in the next couple of months. And our girls brand EVIVA continues to perform incredibly well and achieved its highest comp year in Q1 twenty fourteen at 39%. EVIVA store and showroom openings are on track for 2014 with 10 20 locations respectively. Next and as it relates to brand, you're about to see actions that focus on driving traffic and sales. Zululemon engages a very digitally savvy guest and I have greenlit substantial investments to flex our digital muscle through a variety of activations that include the implementation of a social platform that allows us to leverage the power of our ambassador community, In store technology has been rolled out to our entire network of stores to provide our guests the ability to shop our online inventory while in store is greatly enhancing their experience by broadening access to products and we're seeing great results already. Additional paid search, affiliate programs and on top of these digital projects, we are opening 14 pop up stores across Canada and the U. S. From April through to September. These stores allow us to target new guests, drive additional sales and showcase the brand in unexpected ways. Last but not least, our international expansion. I'm really excited about the momentum that we continue to build in what we see as a significant opportunity and a long term growth driver. The success of our 1st London store opening, which is on track to do $7,000,000 in its 1st year is a testament to the international demand for our brand. In other parts of the world, we continue to experience increasing traffic and volume in our showrooms. In the past couple of months, we've built a very clear 4 year roadmap to increase our overall footprint in Europe, Asia and other parts of the world. This will provide continued footprint growth as the North American business matures and as we reach our anticipated store count of about 350 in North America. By the end of 2014, we will have a presence in 8 countries outside of North America through stores, strategic sales partners and showrooms. And when adding e commerce, the number of countries our product is reaching is 83. We're on track to open our 2nd store in London by year end and we expect our 1st store in Hong Kong by Q1 of 2015. Throughout 2014 and 2015, we are focused on growing our showroom network with store rollout expected to really ramp up in 2016 and beyond. By the end of 2017, we plan to be present in all major European and Asian regions with more than 20 stores in both Europe and Asia. 2014 is very much a transitional year for Lululemon and we are on track with the improvements we have set to achieve. We are focused on building a scalable foundation to further elevate our North American business and pursue the brand's incredible international potential. I am confident that the work we're doing today will only enhance our premium positioning as we continue to lead the market as a market innovator. And now I will turn the call over to John. Thanks, Laurent. Before I review the details of our Q1 of 2014 and update you on our outlook for the year, I want to begin by talking about the share repurchase program that we announced this morning. The Board has approved a program to buy back up to 450,000,000 of our common shares, that's dollars of course, at prevailing market prices over the next 2 years. To fund this plan, we will repatriate cash from our Canadian subsidiary to our U. S. Parent company, which will trigger a one time tax charge of $30,900,000 taken on earnings from prior years that were previously not subject to U. S. Tax. This non recurring tax expense is recorded in our Q1 results and represents a $0.21 impact on our diluted earnings per share. This now increases our available cash in the U. S, allowing us the flexibility to distribute capital back to our shareholders. We believe in the long term value of the company and this program will serve to create shareholder value as we execute it over time. Now, I'll Q1 results. For Q1, total net revenue rose 11.2% to 384,600,000 dollars from $345,800,000 in the Q1 of 2013. The increase in revenue was driven by total comparable sales growth on a combined basis, including e commerce of 1% on a constant dollar basis, comprised of 25% growth online and a bricks and mortar stores sales decline of 4%, all on a constant dollar basis. The addition of 45 net new corporate owned stores since Q1 of 2013, 30 net new stores in the U. S, 2 stores in Canada, 2 stores in Australia, 2 in New Zealand, 1 in the UK and 8 Aviva stores and offset with the foreign exchange impact of a lower Canadian and Australian dollar, which had the effect of decreasing reported revenues by $10,100,000 or 2.6 percent. During the quarter, we opened 9 corporate owned stores, 3 Lululemon stores in the U. S, 1 in Australia and our first store in the U. K. As well as 4 Aveda stores in the U. S. We ended the quarter with 263 total stores versus 218 a year ago. There are now 202 stores in our comp base, 39 of those in Canada, 131 in the U. S, 24 in Australia and New Zealand and 8 Aviva. We also opened another 2 international showrooms during the quarter, 1 in the UK and 1 in China, for a total of 7 in Asia and 9 in Europe at the end of Q1. We now operate a total of 76 showrooms, which also includes 18 Aviva locations. Corporate owned stores represented 74.9 percent of total revenue or $288,100,000 versus 77.9 percent or $269,400,000 in the Q1 of last year. Revenues from our direct to consumer channel totaled $66,000,000 or 17.2 percent of total revenue versus $54,000,000 or 15.6 percent of total revenue in the Q1 of last year. Other revenue, which includes wholesale, showrooms, warehouse sales and outputs, totaled $30,500,000 or 7.9 percent of revenue for the Q1 versus $22,500,000 or 6.5 percent of revenue in the Q1 of last year. Gross profit for the Q1 was $195,700,000 or 50.9 percent of net revenue compared to 170,700,000 dollars or 49.4 percent of net revenue in Q1 2013. The factors which contributed to this 150 basis point increase in gross margin were a 510 basis point improvement in gross margin due to anniversarying the Loulou sorry, the Luan write off provision from last year, a decrease in markdowns and discounts of 110 basis points compared to the Q1 of fiscal 2013. These were offset with product margin decline of 3 10 basis points due primarily to a higher sales mix of lower margin seasonal items and also in part attributable to higher raw material costs associated with prints and textured garments as well as duty adjustments that were trued up this quarter. 50 basis points deleverage from the foreign exchange impact on product costs due to the weakening of the Canadian dollar, higher air freight costs of 40 basis points and 70 basis points deleverage from continued investment in our products and supply chain functions. SG and A expenses were $125,900,000 or 32.7 percent of net revenue compared with $104,800,000 or 30.3 percent of net revenue in the same period last year. The 20.1% SG and A dollar increase is due to an increase in operating expenses associated with new stores, showrooms and outlets as well as higher wages across our stores to reflect merit increases and base pay market adjustments increased variable operating costs associated with our e commerce business consistent with the year over year revenue growth in this channel increases in expenses at our store support center including salaries, administrative expenses, professional fees and management incentive compensation associated with the growth in our business And in addition, we recognized $1,500,000 in foreign exchange losses, which added to overall SG and A. And these were offset with a weaker Canadian and Australia dollar, which decreased reported SG and A by 5,400,000 dollars or 4.3 percent. As a percent of revenue, our 1st quarter SG and A deleveraged 2 40 basis points due primarily to the run rate of prior year investments and new incremental operating spend needed to drive long term growth. As a result, operating income for the Q1 was $69,800,000 or 18.2 percent of net revenue compared with $65,900,000 or 19.1 percent of net revenue in Q1 2013. Tax expense for the quarter was $52,500,000 This includes the one time adjustment of $30,900,000 related to the repatriation of foreign earnings to fund the share buyback program. Excluding this tax adjustment, the tax rate would have been 30.1 percent compared to 29.8% in the Q1 of 2013. Net income for the quarter was $19,000,000 or $0.13 per diluted share. On a normalized basis, diluted earnings per share would have been $0.34 compared to net income of sorry, dollars 47,300,000 or 0 point 3 $2 per diluted $3.2 per diluted share for the Q1 of 2013. Our weighted average diluted shares outstanding for the quarter were 145,900,000 versus $145,800,000 a year ago. Capital expenditures were $25,400,000 for the quarter compared to $21,000,000 in the Q1 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 $752,000,000 in cash and cash equivalents. Inventory at the end of the year sorry, end of the Q1 was $177,400,000 dollars or 23.4 percent higher than at the end of the Q1 of 2013. Similar to last quarter, this is higher than optimal due primarily to a higher composition of core inventory. We expect to continue to rebalance our inventory levels as we head into the back half of the year and have adjusted our assortment more in line with guest demands for fall and winter. This now leads me to our outlook for the Q2 and full fiscal year 2014. May performance to date has been soft as our comps have declined from the Q1. As a result of our comp trends, we've deployed revenue driving initiatives for both our stores and e commerce site, some of which Laurent addressed earlier. In addition, we've opened pop up locations to capture demand in areas that otherwise would not have a store. While these initiatives are good for the long term, as they primarily encompass full price selling, they do come with increased SG and A costs. We expect these initiatives to mitigate some of the sales miss over the rest of 2014. As a result, we are adjusting our Q2 and full year revenue and SG and A forecast for these changes. We currently anticipate Q2 revenue in the range of $375,000,000 to $380,000,000 This is based on comparable sales percentage decrease in the low to mid single digits on a constant dollar basis compared to the Q2 of 2013. This outlook assumes a CAD 0.91 with the U. S. Dollar and 12 new store openings, 7 in the U. S, 2 in Australia and New Zealand and 3 of EVA. Consistent with Q1, we expect gross margin to be between 50% 51%. This is down from a year ago, primarily due to a higher mix of lower marginal seasonal product, deleverage against product and supply chain expenses within cost of goods sold, store occupancy and depreciation and lastly, the impact of foreign exchange due to a weaker Canadian dollar compared to last year. We expect SG and A to deleverage as a percent of revenue compared to the Q2 of 20 13, which is driven primarily from the run rate of strategic investments made last year and incremental spend in traffic and revenue driving initiatives. While these investments drive the top line, the associated sales carry a reduced flow through percentage. Finally, due to a slightly stronger Canadian dollar relative to the end of Q1, we will incur foreign exchange losses that will increase SG and A. Our SG and A also reflects preopening costs related to the 12 stores planned to open in Q2 and additional stores planned to open in early Q3 of 2014. Assuming a tax rate of 30.2 percent and 146,000,000 diluted average shares outstanding, we expect diluted earnings per share in the Q1 to be in the range of $0.28 to $0.30 per share. For the full fiscal year 2014, we expect net revenue for the year to be in the low to mid of our previous guidance at $1,770,000,000 to $1,800,000,000 We expect to open 45 corporate owned stores, including our Australian stores and the Aviva locations. We're also on pace to operate up to 20 international showrooms by the end of this year. For the year, we expect gross margin of approximately 51%, down from last year due primarily to product mix, continued investment in our supply chain and product operations functions and also foreign exchange impacts from a weaker Canadian dollar. We are on track to open our 2nd U. S. Distribution center in Columbus, Ohio in August, which will go live initially with e commerce with retail fulfillment to begin in Q1 of 2015. As I mentioned before, the start up costs and increased capacity will initially delever our gross margin by 30 to 40 basis points in 2014. We expect SG and A deleverage as a percent of revenue compared to 2013. This primarily includes investment in corporate SG and A in areas such as brand, IT, guest experience and international that were included in our original guidance for the year. The traffic and sales initiatives discussed earlier will result in an incremental investment in the $10,000,000 range. In addition, our SG and A forecast is also setting aside funds for additional strategies currently being developed and evaluated for approval. As a result, we expect our overall operating margin to delever from 2013 and our fiscal year diluted earnings per share to be approximately $1.50 to 1.55 dollars or $1.71 to $1.76 normalized for the tax adjustment. This is based on 146,300,000 diluted weighted average shares outstanding as our guidance does not reflect any estimate of shares repurchased and it assumes an overall effective tax rate of 38.6%, which includes the one time tax adjustment or 30.2% excluding this tax adjustment. We expect capital expenditures to be between $110,000,000 $115,000,000 for fiscal 2014, reflecting new store build outs, renovation capital for existing stores, IT and other head office capital, including expansion of our existing premises. And finally, before we open up the call to questions, I want to take a minute to speak to the announcement today that I will retire at the end of the fiscal year once we transition to my successor. As many of you know, we are a very goal oriented company and it's been long been a part of my goal to expand my involvement serving on corporate and nonprofit boards. And for those of you who know me really well, you know that my long standing goal has been to ski each season the number of days equal to my age. Since I turn 60 next year and these goals are difficult to achieve with a day job, I've decided that this is the time to announce my retirement plans. This will allow the company to initiate a comprehensive search for my replacement and to allow for a smooth transition. So this isn't the time to say goodbye as I'll be around for a number of months and you'll have me to kick around on at least a couple more earnings calls. Until with that, I'll turn it back to the operator for questions. Thank Our first question is from Bob Drbul of Nomura. You may begin. Good morning. John, best of luck and congratulations on the retirement. Laurent, I guess the first question that I have really is with John retiring, should we expect additional management changes now that you've had some further time to sort of assimilate into the organization and create a little bit more of a view? Well, first off, I mean, we're all incredibly sad to see John deciding to go and start his professional skiing career, but we've got a number of months with him before that happens. And with every transition, you do have changes and we have a couple of other changes including one change in brand in our brand and communications department. Okay, great. And then within the new within the updated outlook on the gross margin side and even on the sales side, can you just update us around like the expectations for the seasonal offerings in the fast turn capsules related to both top line and the gross margin? So, I'll speak to fast Turn. John, if you want to build the gross margin questions. But, I think we've talked a lot about 2014 being the year of building our foundation. And we've been doing a lot of work for the back half of the year to rebalance the assortments between the seasonal core really reflecting where the guest appetite is for seasonal core. Also we've used our fast turn group to chase into additional prints and bottoms for the Q3. And then as we move into Q4, we continue to use that team to chase into product as well as we've worked really diligently to make sure more of the beauty and technical is that I've spoken to in prior calls and at the Analyst Day, but making sure we are more consistently showing up with that in our product. Great. Thank you very much. And on your gross margin question, as long as I'm getting it right, I think our gross margin will be pretty consistent with where it was in Q1 through the 1st three quarters. And then of course in the Q4 the higher volumes it will be a couple of basis or a couple of 100 basis points higher. Okay. Thank you. Thank you. Our next question is from Brian Tuncay of JPMorgan. You may begin. Thanks. Good morning, everyone. I was hoping maybe you could just parse out the quarter to date deceleration in the comp trend. How much of that is a traffic issue? And how much of that maybe the product flow issue? And then maybe just some more commentary on the pop up stores? Maybe what's the duration of the leases? And could those potentially become permanent stores as well? Thanks very much. Okay. It's hard to dissect the comp only a few weeks into the quarter, but actually what we're seeing is traffic a little bit stronger, which is very encouraging, but conversion down, which makes sense with a non ideal product assortment. So it means it's telling us that we're maintaining the guests coming in and when the product is right, that should deliver a rebound, but in the back half. And on the pop up stores, I think your question would these be permanent. They're typically leases of less than 6 months and unlikely that any of these would be permanent stores. There might be some locations where we would seek out a permanent store, but not in these existing locations. Thank you. Our next question is from Roxanne Meyer of UBS. You may begin. Hi, good morning. I was wondering if you could talk longer term about the gross margin and your targets to get back to the mid-50s. I guess just thinking about the perspective back when your margins were more healthily, steadily there, your comps were at a much more elevated level. And obviously, your mix shift was a bit your mix was a bit different, more skewed to the higher margin core products. And obviously, that's transitioning and weighing down on your margin now. So what are the factors that you think longer term can get your gross margin back to the mid-50s? Thanks a lot. Thanks. Tara, maybe I'll take it and you can add whatever you'd like. When I look at our longer term gross margin, where I see tremendous opportunity to get back to that mid-50s range comes from all the work that Tara and Jennifer Battersby and their teams are doing to change the go to market process to operate more efficiently and just work with our factory partners in a more organized disciplined way. We see that potentially driving 300 to 500 basis points of improvement over time. That will take a couple of years to get there. But there's a pretty clear roadmap that we're seeing that should deliver that. Tara, anything to add? No, I think it must have additional questions. Great. That's helpful. Thanks a lot. Thank you. Our next question is from Barbara Wyckoff of CLSA. You may begin. Hi, everybody. Congrats to John. I want to talk about ask about gross margin too. You mentioned lower margin on seasonal product. Is that because you're intentionally taking a lower IMU because the costs are higher due to smaller quantities? Are there higher markdowns? Air shipping? And at what point do you think that IMU or that margin comes up? Yes. I'd say, I mean, generally, it is higher cost, whether it's textures and prints or additional features that in our pricing architecture, we haven't taken full pricing. And so they do tend to have a lower margin. I think Tara has commented in the past that potentially over time, we look at that pricing architecture. But for the near term, that's really what's driving the larger or the lower margin on the seasonal items. Okay. Thank you. Thank you. Our next question is from Matt McClintock of Barclays. You may begin. Hi, yes. Good morning. I was wondering if you could focus more on the revenue driving initiatives. I understand the pop up stores, but could you talk about what you're doing specifically for what would impact the comp base? Like what type of revenue driving initiatives would impact either your e commerce business or the stores in the comp base? Thank you. Sure. Yes. I mean, Lululemon engages a very digitally savvy guest and we really haven't flexed our muscle there and we're doing a number of things. I mean, with lean, I spoke on our earlier call on our call from a quarter ago about the incredible value of our ambassadors and the fact that we don't really fully leverage the stories that happen in our communities. And so we're building a social platform that is unique to our ambassadors that will go live in September so that we can gather real time all of the work that's happening in our communities and sort of be able to share that in a much more efficient way. We're also we really install technology so that we can share inventories. When our guests are in store, they can actually shop the online inventory, therefore, sort of enhancing the access to product. And then we've really ramped up paid search media with leveraging sort of standard channels through Google. We're working on click to break and this is a geo based strategy that we're doing in partnership with Google as well. And we are also accelerating our affiliate partnerships with Ambassador Studio, early athletes who promote our content and drive traffic to our site. To add to that, I mean, we've been really successful with our product notification and we're planning to double the notification and we're also going to make them a lot better and a lot more efficient. And finally, as we sort of as we ramp up our CRM effort, I mean, we're starting to do some light segmentation of our e mail to be much more targeted in how we reach our guests. Thank you. Our next question is from Jon Morris of BMO Capital Markets. You may begin. Thanks. My congratulations to you too John and good luck on your retirement Aggie career. 2 part questions here. First of all, I think in the prepared remarks Laurent you talked about ramping up store openings. I think it was in 2016 and beyond. And wondering what does this long term square footage growth look like if you look out 3 to 5 years? Do you have kind of a target for that? And also with respect to the long term operating margin goals, what would those look like given what you've already been talking about with respect to long term gross margin goals? Thanks. So as we think about our international expansion, we're staying very true to our showroom strategy, which is to build awareness in the market and build momentum and so and getting pulled by the community and we expect the store to have a lifespan of 12 to 18 months before we're ready for store rollout. So we're going to be in the next 18 to 24 months, we're going to really accelerate the store internationally and then that's going to trigger store rollout 12 to 18 months following that. So the plan is really to be if you think by 2017 having over 20 stores in Europe, 20 stores in Asia, not including what I mentioned Asia, not including Australia and New Zealand. The plan is further and beyond to be able to open probably about the same number of stores that we're currently opening today in North America around 45 and that will sort of replace the square footage we're opening in the next couple of years in North America as that market matures. So would that be kind of a mid teen or maybe even a target towards 20% long term square footage growth? Just want to kind of get a feel for that. Just have to do the arithmetic. I mean, we tend to think in units. These stores are each Probably just under mid teens, right? Yes. Yes. Okay, good. And John, operating margin? You said highly confident that the gross margin will get back to that mid-50s range. As I said in the past, getting back to mid-20s operating margin, I think we'll get there. Of course, as we are expanding into new countries, new markets, initial productivity will be lower. So that will bring down operating margin temporarily as those stores ramp up. But the core business and as international operations mature, my view hasn't changed on our ability to achieve that mid-20s operating margin. Okay. Thanks. Thank you. Our next question comes from Sharon Zackfia of William Blair. You may begin. Hi, good morning. I was hoping, I think Laurent you mentioned there might be some other changes in management. So could you give us an update on where you're seeking talent? What holes are still out there? Where we might see more turnover? And then maybe a broader comment on just morale within the organization, given kind of the disruption both in management, but also more recently with the Board? Sure. So on the Mall, I mean, I think we're not commenting on the Board. But meeting with the company yesterday, we sort of mentioned that our parents are fighting and it's awkward. But both Chip and the rest of the Board fully support the management team and what we're doing. So we're staying focused and we're not going to let us be distracted. And so I think we're in very good shape there. I mean, when you think about our educators, I mean, they are the face of the brand and they deal with our guests every day. So certainly, we've made their lives more difficult in the past year, but we're very focused on them being engaged, excited and happy. So we haven't seen any increased turnover there. And I don't remember the first part of your question. I think in response to a previous question, you had mentioned there might be some more changes in management. So if you could give us any update on that? I think you said maybe somebody in product or something like that. And then if there are any key holes you're still looking to fill within the management team? Yes. When I came on board, we had a role in HR and we're in the very final stages of that search. So I'm really excited about that. And we're also Laura Klauberg in brand and marketing has decided to move on and we're in the process of interviewing candidates there, but we have a really, really strong team both on the community brand, digital and credit side of the business and we've gotten very engaged with them. And other than that, we're in great shape. Thank you. Thank you. Our next question is from Adrienne Tennant of Janney Capital Markets. You may begin. Good morning. And John, congratulations on the retirement. Thank you. My question actually is on the non comp productivity. It looks weak again. For the Q4 at the Analyst Day, you had delineated several factors that were contributing to Q4 non comp productivity. Could you do the same for the Q1? And then secondarily, Laurel, have you done any brand awareness studies for the Canadian U. S. Market and then the new markets that you're entering? Thank you. Okay. Sorry, I can't remember how I delineated the new store product. You gave me the top 10. We're using the top 10 because we were missing in our non comp calculation. Got you. Yes, you're probably still making most of those mistakes. So bottom, bottom line, again, when we look at new store productivity in Q1, continued to be in that $1100 to $1200 per square foot range similar to what we've seen over the last 18 months. Okay. So no change no meaningful change there? Okay. No, no. Okay. And as far as looking at consumer sentiment, brand strengths, we actually just launched we implemented NPS, Net Promoter Score and we got our 1st benchmark yesterday. So I haven't had a chance to fully dig into them, but I'm really looking forward to using that as a tool to sort of see how well our brand initiatives are, changing the brand sentiment and improving conversion and traffic. Does that study give you brand awareness at the end? Yes, it does. Okay. And will you share that with us on the next call perhaps? Sure. Okay, great. Thank you. Best of luck. Thank you. Thank you. Our next question is from Janet Kloppenburg of JJK Research. Good morning, everyone. John, I want to thank you for the help you provided us and let you know that you'll be sorely missed. Congratulations. I have a couple of questions. I wondered if the La Monte Otero might talk a little bit more specifically about the sales slowdown in May. Has it been in both all categories, men's and women's and across all subcategories of bottoms and tops and what it looks like by channel? And if you could maybe help me understand it a little bit more, Tara. I thought that the fashion component was to become higher here in the Q2 and then that would help drive sales and traffic and conversion in the stores. It seems like things are going in reverse and I'm not sure I really understand why. Has the build to the fashion assortment not been what you expected it to be here in the Q2? Thank you. Hi, Janet, Tara here. Hi. So just I've been pretty consistently saying and knowing when I came into the business and knowing our product life cycle is 9 month calendar, I've been pretty consistent that I was getting that rebalance of core and seasonal corrected for the 3rd quarter, not the second quarter. And then also have been chasing into prints and really continuing to work on the reinvention of core and we'll see 13 more of that in bottoms as we get into Q3. And then Q4, my focus not only was the rebalance, but also making sure working closely with design to really try to affect the beauty technical piece that's so important to our brand and it's really sets the foundation of who Lululemon is. So for the Q2, I mean those assortments were done well over a year ago prior to me getting here. But we've used the fast turn team pretty aggressively to affect 3rd Q4. And to add to Tara's point in one, I mean, I've been incredibly impressed with how quickly the team is reacting on the fly and getting us the absolute best assortment they can in an environment where we don't have we haven't planned for that a year ago. But also if you look at the beginning of Q2 and going back to the point that John made earlier, I mean, we're actually seeing traffic getting stronger, which speaks to the brand sentiment getting better and conversion getting lower. So the initiatives that we've started to do about brand are paying off. Thank you. Our next question is from Jennifer Black of Jennifer Black and Associates. You may begin. And congratulations, Sean, on your retirement. Thanks. I was wondering if you could talk about your efforts to acquire data about your core customer and his or her shopping preferences. Are you able to track how many customers and transactions are tied to purchases? And if not, what systems do you have in place that will be able to give you detailed information? Or is this something that you're working on building? Is this part of a bigger picture down the road building your CRM loyalty program? Thank you. Thank you. We've actually never used a lot of data in the history of Lululemon and we're shifting that as quickly as possible. I mean, we've got a very loyal guest and we should know a lot more about him or her and it is part of our CRM effort. So we are investing heavily both from a talent standpoint and from a technology standpoint to really ramp that up. And it's a little bit of a curse and a blessing. The curse being that we don't have a lot of data right now. The blessing being that we can build a system that will really sort of take us in the future and that's what we're building. So it is part of the plan and we're in the process of building it. Thank you. Our next question is from Dana Telsey of Telsey Advisory. You may begin. Good morning, everyone. As you work to drive traffic and improve the assortments, has anything changing on the pricing side, both with core and with seasonal product? And are you seeing the same trends online as to what you're seeing in the stores? And lastly, any further update on London, how that is doing? And just one more quick thing on the sourcing side, Jennifer and Tara, how are you doing in putting in place the processes that you want? Where are you in getting to the end goal? Thank you. Bye. Okay. I'll start. And just on the process and sourcing side, one of the things as I've been here since November and really on the ground in Vancouver starting in February. One of the things that I have found in really digging into our go to market calendar with Jennifer is we have a go to market calendar that really supports a much smaller company and doesn't necessarily reflect the complexity of where we are today and where we're going in the future. So work that we have done and put underway, we brought in outside consultants, who I've actually worked with in the past to do a deep dive on our go to market calendar. And over the next 6, 12 18 months, we are going to be implementing the findings that we found as we really looked and did a deep dive on the calendar. So I think from a quality standpoint, Laurent has talked about it, all process procedure is in place for quality and now our real focus is on the go to market calendar and creating a really efficient strong calendar that supports an innovative product organization. So as we move into Q3 and Q4, I've talked a great deal about on this year is just really about building our foundation. So we're going to be beginning to shift our process as we move into Q3 and Q4, which will really start seeing the results as we move into Q2 of 2016 and beyond. And then the core versus the seasonal product and pricing structure, one of the things we've initiated is very strategic work around pricing where we sit in the marketplace and our pricing architecture. And as I see opportunities both in the core and in the seasonal to adjust pricing through that very methodical approach, we'll be doing so. So then I'll just turn it over because I think there might have been another question about driving traffic. Exactly. So, I was talking about driving traffic in London, right? So, London, I mentioned that earlier. I mean, London is performing incredibly well. I mean, I think we are in excess of 130% of plan. And we're sort of on track to be a $7,000,000 store in year 1, which we're very pleased with. And in terms of driving traffic, I mean, I'll go back to what I said earlier about flexing our digital muscles and also working on some key initiatives at the store level that we'll be rolling out in the next couple of months. And John best of luck and we look forward to staying in touch over the next few months. Thank you. Thank you. Thank you. Our next question is from Paul Lewis of Wells Fargo. You may begin. Hey, guys. It's Tracy filling in for Paul. A question for John. I was wondering of your $110,000,000 to $115,000,000 of CapEx this year, how much of that is going to IP and infrastructure versus new stores? And then as you look out to future years, do you think the CapEx number continues to tick up? Or do you think it will flatten out at this level? Thanks. Okay. I think all of the various IT systems and initiatives are probably close to $40,000,000 of that number. There's what $10,000,000 $15,000,000 of various head office related capital and the balance is either new store build out or we have a pretty significant renovation program every year. I think you'll see CapEx in a similar range for a couple of years and maybe beyond, certainly on the store side. And with systems, once you get them all implemented, it's time to upgrade them. So probably that sort of level is a good number for several years. And CellOpta doesn't focus on guest facing technology, right, either in store technology that we're starting to play with or our CRM and business or guest intelligence effort. Thank you. Good luck. Thank you. Our next question is from Camilo Lyon of Canaccord Genuity. You may begin. Thanks and all the best to you John in your future endeavors. I wanted to just understand a little bit more. I know you talked about some of these revenue driving initiatives. You talked favorably about what you've seen on the traffic side. But just want me to understand exactly why you should see the level of reacceleration in comp growth in the second half given that there's still some imbalances between seasonal and core and the efficiencies on the supply chain side look more like a longer term sort of benefit and not something to completely see in the back half. If you can just hope reconcile that that would be great. Yes. I think a couple of things give us confidence that you're going to see stronger comps in the second half. First of all, as Tara said, the product assortment won't be ideal in the second half, but it will be improved over what we saw in Q1 and what we're dealing with in Q2. And then secondly, the downturn in traffic and some of the issues started really Q3, Q4 last year. So we're going to be lapping weaker performance in the second half of twenty thirteen versus what we saw at the start of the year. Great. And then just on competition, how are you thinking about competitive environment right now, whether it's from SKU overlap, pricing, dynamics? And then just lastly, if you could just break out the Canadian to U. S. Comps? You want to break down the comps and Yes. Do you have it handy? Sorry, just got to find it. Yes, U. S. Combined comps was 2% and the U. S. Is minus 5% sorry, Canada was minus 5%. And as far as competition, I mean, obviously, it's a crowded field, but it's also a very much of a growing field globally. And we know that we've got the right talent. And when we design the product right as we've done lately, I mean, we win. So we're in this game to win it and maintain our premium positioning in the market that we've created. Our next question is from Oliver Chen of Citi. On your full year comp guidance, what's the implication for Q4? It seems like as you rebalance, you'll potentially see an acceleration. So are you thinking mid to high by Q4 and Q3? Can we assume that that's going to inflect the positive comps? Also if you could just comment on your inventory composition and how you feel about freshness now? It was running ahead and you tapered your guidance down. So I was curious about if there's merchandise margin pressure and if things are over inventoried currently? Thank you. Yes. In the second half, we see Q3 turning to positive combined comps and you're right sort of mid to maybe mid to a little bit above comps in Q4. In terms of inventory composition, similar to last quarter where as I said in the prepared remarks, we're a little heavier than we like to be overall in inventory, but the excess is primarily excess core. And we deal with that just by reducing forward orders, which we have done and that excess of core is actually coming down. So we feel pretty good about the freshness of the balance of the inventory. And in general, we're doing things like opening these pop up stores, so that even with weaker than we'd like to see sales trends, we're able to clear this inventory at full price. Thanks for the details. And just a follow-up on the conversion rates where you it seems like there's an opportunity for a better conversion rate, which classifications between like tops and bottoms do you feel that she may be looking at but not purchasing or has an opportunity for the most improvement? Well, I think that we have been talking about the core that we have an opportunity to evolve our core as we move forward. So, I would say the 1st place that we'll start seeing the results first would be in the bottoms. And then tops and jackets really following in subsequent quarters. Thank you. Did that answer your question, Oliver? I'm not sure. Our next question is from Jim Duffy of Stifel. You may begin. Thank you. John, I like the sound of your plan. Congratulations to you. Yes, a couple of questions, So bear with me on this. The first one, have you implemented any of these initiatives to drive traffic yet? And if so, have you seen a noticeable influence in the results? Then I have a follow-up related to that. Yes. We have we've just launched and it's early to tell what the results will be, but we've done the affiliate program, the paid search and the Google click to break. And the one initiative that we can speak to is the in store technology that gives our guests access to our online inventory while in stores and we've seen tremendous results with that with the app already generating 1% of our retail sales and 8% of our e com sales and 4% I'm sorry, 4% of our e com sales. That was a lot of timitically challenging. Does that get credited to the e commerce business or to the retail stores? It gets credited to the e commerce business, but the store managers get compensated for the sale. Very good. So my next question is the traffic is getting better you feel. You have these initiatives which you expect to drive more traffic. You expect better product in the stores for 3Q and it sounds like even better yet for 4Q. Can you be more specific about the things you are seeing that gives you a reason to be more conservative on the revenue outlook for the full year? I mean, even though we're seeing more comfortable with traffic, I mean, we still are seeing a deceleration in comps coming into Q2. That's reflected in my guidance. And so as we extrapolate out, we are taking into account the positives in terms of product assortment etcetera. But I think it's still prudent to be conservative and expect that the underlying trend continues for the time being. Thank you. Our next question is from Howard Toobin of RBC Capital Markets. You may begin. Hey, guys. Tara, maybe you could just comment a little bit on the men's business. I think you said it was up 9% in the quarter. So what's so exciting about that? What's driving the men's business? So we're really pleased with the men's business. Q1, our big focus was on really landing our men's fit, which we are pleased to have done as well as really focused on the face of our sweat assortment. So been pleased with the results there. So I think the men's team, this is their Q1 of our newly formed men's team with CLS del Toro and we're excited about that I'm continuing to see in the product that's going forward in Q2 and Q3 and moving into Q4. I don't like giving specifics on exactly what is doing well in assortment because that's just nice information that would just be handing out to competition. But we're very pleased with the results and where we see that business going. As well as we talked about the AVEVA business and I think the product there looks tremendous and very excited for the team and also the momentum they're gaining in their business as well. And if you look at on the digital side what we've done with the men's business, I mean they just launched a very specific social platform. They've got a different sort of shopping environment. So we've done some really great work and you can really sort of experience that firsthand on our website. Got it. Thanks. Can you just remind us what percentage of the overall business is meant? So 13% in the quarter, a little over 13%. Got it. Thanks. Operator, we have time for just one more question. Our next question is from Kimberly Greenberger of Morgan Stanley. You may begin. Thank you so much. John, I wanted to check the cash balance on the balance sheet, dollars 750,000,000 How much of that is in the U. S? A little over $100,000,000 Most of it's in Canada. Okay. This $31,000,000 one time tax adjustment, how much will that charge how much of the cash that's domiciled outside of the United States will that charge allow you to repatriate? 500,000,000 dollars 500,000,000. Okay. Yes. That's how we did the calculation. Okay, great. And then my question for Tara is, is there and I apologize for asking such a basic question, but is there a simple way to help us understand what you think is wrong with the assortment currently? I'm not I've been listening through the Q and A and trying to understand this a little better, but I'm not sure I get it. That's okay. So what we've been and we talked about it on the last call is we have a core product assortment that has not been evolved as quickly as it should have been. And we're diligently working away at that. We didn't have enough depth in our seasonal product in Q1. We're very our balance is more heavily weighted towards core and less on the seasonal. So we're getting that REIT balance back in line. And it will be running more where it was running in 2012 by the time we get back into Q3 and Q4. I think there's been a real lack of cohesive merchandising stories in our store, really telling those product stories in a really clear and concise way. So lots of opportunity there, especially as we move into 2016. And then again, I talked about the go to market calendar. We have a lot of opportunity to evolve that process to really express for AI as a more complex North American brand and moving forward as a global brand. So a lot of work being done there that will bring a lot more consistency as we move into 2016 in our product storytelling and our beautiful technical product landing in stores on time, right time as we talked about. Great. Thank you. That's helpful. All right. So thank you very much. It was good speaking to you all and we look forward to seeing you speaking with you next quarter. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.