Earnings Call: Q4 2014

Mar 27, 2014

Good day, ladies and gentlemen. Welcome to the Lululemon Athletica Q4 2013 results conference call. At this time, all participants are in listen only mode. Later, we will conduct a questioning and answer session. Instructions will follow at that time. If anyone requires operator assistance, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, David Nicks. You may begin. Good morning, everybody. Thank you for joining us on the fourth quarter 2013 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-K with the SEC and available on the commission's website at sec.gov. Shortly after we end this morning, a recording of today's call will be available as a replay for 30 days on the investors section of the website. Hosting our call today is Laurent Potdevin, the company's CEO, John Currie, the company's CFO. Tara Poseley, our Chief Product Officer, will also be available during the Q&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. For today's call, we've got a limit of one hour. Please limit yourself to one question at a time to give others the opportunity to have their questions addressed. With that, I will now turn it over to Laurent. Good morning, everyone. When I spoke to you back in December, at the time of my announcement as CEO, I shared my excitement and enthusiasm about joining and leading such an exceptional brand and group of people. After now a couple of months under my belt, I'm even more inspired as I have started to discover the Lululemon culture, the passion, the energy, and the commitment of its people. I have worked with exceptional individuals and fantastic brands over the past 20 years. The connection and engagement of the team at Lululemon, both in the stores and here in Vancouver, is clearly unique. As we move into 2014, we are reflecting on our learnings with humility and are entirely focused on our future. 2014 is an investment year with an emphasis on strengthening our foundation, reigniting our product engine, and accelerating sustainable and controlled global expansion. Lululemon's magic has been built by creating technical, beautiful products and sharing our distinct culture with our communities. The emotional connection that Lululemon creates is at the very heart of what we stand for, and we are being relentless in our commitment to delivering a distinct and authentic experience for our guests that is unlike any other. Lululemon is an originator brand, and we are refocusing our energy as a relevant disruptor in the space we created. It means being audacious. It means being curious. It means stretching our minds to invent the future and deliver the exceptional product that our guests are expecting from us. I plan to make sure all of our core values that make this business such a success remain in place and are leveraged and amplified as we turn Lululemon into a global brand for both men's and women's. Looking forward, I see significant potential to grow both domestically and internationally as we leverage this company's outstanding business model, and I intend to accelerate our global expansion. We see clear evidence of demand both in Asia and Europe, with several countries ready for stores. We are currently onboarding in Vancouver our general manager of Asia, who is driving new store openings as well as seeding new markets and who will be back in Hong Kong in the next couple of weeks. Additionally, we have opportunities to build partnerships to increase speed to market and accelerate our international expansion in regions that are either too complex or don't have enough scale for us to have a direct presence in. In Europe, we will be opening our first store in London next week. Our team on the ground has been celebrating with the community for several weeks now, including hosting yoga at the Royal Opera House. On Saturday, March ninth, 700 people started queuing up for the event two hours before it started, and once the 350 spots were filled, the guests who didn't get a spot were engaged in additional community activities like Cheeky Yoga, a day of complimentary yoga classes offered throughout the City of London. The enthusiasm from the community has been clearly contagious, and I can't wait to see it live next week. We have plans to open a second store in London by the end of 2014, recognizing it is a tremendous platform to showcase Lululemon not only in Europe but to the rest of the world. As we embark on growing Lululemon beyond our current footprint, we are strengthening our foundation to unlock our full potential. This means having our brand and our world-class product engine both back where they belong. Product has always been paramount to our success and will remain at the very epicenter of all we do. Our product is insane, innovative, technical, and beautiful. Going forward, we are refocusing the organization on being design-led. It's about getting back to our roots of inventing the future, and we are doing that by fostering and promoting the healthy tension between technical innovation, style, function, and beauty. There will be no compromising, and it will bring out the best in us. We are being relentless in building great products and are pushing technical innovation, be it through leveraging our vendors' expertise in raw material development and construction to capitalizing on our in-house capabilities with our new Whitespace Workshop. We are generating excitement at the store level with capsules and collaborations like our Lab Collab offering, and most recently our Engel capsule, which I'm sure you've read about, and which enjoyed instant success in premium athletic styling. The success of the Engel capsule validates our guest appetite for progressive athletic product, beautiful that performs. Tara Poseley, our Chief Product Officer, brings tremendous experience, an enormous amount of passion and vision to the product organization. You will get a broader look into our product vision at the Analyst and Investor Day in April. Her near-term focus is on the balance of our product mix, both core and seasonal, as well as our planning and allocation strategies. As our business matures in North America, we see increased demand and success of our seasonal product that is taking a larger share of our overall product mix. Guests are responding so well to our seasonal product offerings that we're experiencing sales flow at a rate four times faster than anticipated. This brings me to our scarcity model. It's always been a strength, and we'll continue to focus on it. While we don't mind our guests being hungry for our product, we don't want them to starve for it. Tara is working on short-term solutions using our fast turn pod to provide short-term opportunity while bridging the gap with our long-term product vision. Impeccable quality is deeply rooted in our DNA. We are laser-focused on ensuring we have a world-class quality supply chain and sourcing organizations to support our current business and provide the platform for continued global growth. As we continue to build on the great work that has been done, we are seeing constantly increasing level of our product, meeting our very high quality standards. Our ability to get this done over a short period of time is a true testament to the team's efforts, the strength of our vendors, and the partnerships we have with them. This is further enhanced by the Lululemon presence we have built on the ground, both in our mills and our Taiwan and Hong Kong offices. There will be continued focus and investment in this area to ensure we're building a product development platform that will allow us to unlock our full global potential. I would now like to touch on an area that's very close to me, and which I refer to as our treasure chest of amazing stories. In the past two months, there hasn't been a day where I have not discovered an untold story that embodies the values of Lululemon. From our SeaWheeze half-marathon race that sold over 10,000 spots in 56 minutes, with 45% of the guests registering from outside of Canada, to the unconditional support that we provide to more than 100 Olympians through yoga and goal setting, to the countless ambassadors, over 900 of them, that embody the best of who we are in communities across North America. There are so many examples of how we connect with our communities and what we stand for as a brand. We've been voiceless for too long. I'm anxious to have all of us share more broadly who we are, what we stand for with confidence and humility. We have created a category with fantastic products. Our guests and ambassadors have been spreading our message since day one. Up until last year, our grassroots communication strategies delivered exceptional results. Now is the time to amplify our voice, to complement our grassroots approach, and ensure that we claim back our share of the voice in the market we created. Lululemon is an incredibly human brand that makes people cry and laugh. Those of you who saw the No Humbug video that we showed at the ICR conference or who have seen our Made in Sri Lanka video on the website will know what I'm talking about. This past week alone, I attended TED, which made its debut in Vancouver. I was so proud that we provided TED participants with a true Lululemon experience daily, morning and afternoon by creating a well-being program featuring many of our incredible ambassadors, including Ryan Leier, Maria Filippone, and N.Y.C.'s very own Taryn Toomey, founder of The Class. Taryn certainly found a way to kick my butt and inspire me at the same time. For those of you in N.Y., I dare you to attend her class. During the five-day conference, we provided more than 25 classes, including yoga, run, and meditation in both Vancouver and Whistler. This ability to authentically connect with our communities is what makes Lululemon unique. You can expect to hear more of this in the year to come. Another strategic focus that we're activating immediately is how we engage with our guests across all touchpoints, both in stores and online. Our guests are passionate and loyal, as experienced in many stores and seen across our social channels. The minute we add exciting new seasonal products to our assortment, the response we see from guests is astounding. However, unlike a few years ago, we are not the only game in town. While we created this category and continue to lead it, we understand that our guests have choice, and sustaining that loyal relationship is a priority. I believe this will come from ensuring that we really focus on creating a best-in-class guest experience. The strength of our vertical model is having a direct touchpoint with every guest, allowing us to be innovative, distinct, and authentic in our interaction. We are investing in technology that will help us better understand our guests and deliver a seamless, yet personalized experience. Our 10,000 educators, who are 100% committed to delivering an outstanding experience, had to play defense for most of last year. We are now empowering them to drive the business in their local markets with an emphasis on listening and delighting our guests and bringing forward the passion, the caring, and the creativity that has set Lululemon apart. In closing, 2014 is an investment year. We are returning to our design-led roots, strengthening our supply chain and sourcing, providing an exceptional and inclusive guest experience, and finally sharing the stories of who we are and what we stand for with confidence and humility. With that, I will turn it over to John to go through the quarter and provide guidance for 2014. Thank you, Laurent. I'll begin by reviewing the details of our fourth quarter of 2013, then I'll update you on our outlook for the first quarter and the full year of fiscal 2014. For the fourth quarter, total net revenue rose 7.3% to $521 million from $485.5 million in the fourth quarter of 2012. The increase in revenue was driven by the addition of 43 net new corporate-owned stores since Q4 of 2012. Of those, 33 new stores were in the U.S., two stores in Canada, four stores in Australia and New Zealand, and four new Ivivva stores. Direct-to-consumer sales, which increased by 24.9%, or $19.5 million, offset by comparable store sales decline of 2% on a constant dollar basis. On a combined basis, including both physical stores and e-commerce, our total comp increased 4% on a constant dollar basis. A weaker Canadian and Australian dollar, which had the effect of decreasing reported revenues by $13.4 million, or 2.6%. Finally, a reminder that there was an additional 53rd week, which contributed $26.2 million in total sales during the fourth quarter of 2012. During the quarter, we opened four corporate-owned Lululemon stores in the U.S., one in Canada, one in New Zealand, and one Ivivva store. We ended the year with 254 total stores versus 211 a year ago. There are 199 stores in our comp base, 39 of those in Canada, 129 in the United States, 23 in Australia, and eight Ivivva. At the end of the year, we also have 69 showrooms in operation, 17 of them outside of North America, two in Australia, six in Asia, and nine in Europe. Corporate-owned stores represented 75.9% of total revenue, or $395.2 million versus 77.9%, or $378 million in the fourth quarter of last year. Revenues from our direct-to-consumer channel totaled $97.8 million, or 18.8% of total revenue versus $78.3 million or 16.1% of total revenue in the fourth quarter of last year. Other revenue, which includes wholesale, showrooms, and outlets, totaled $28 million or 5.4% of revenue for the fourth quarter versus $29.2 million or 6% of revenue in the fourth quarter last year. Gross profit for the fourth quarter was $278.8 million or 53.5% of net revenue, compared to $274.5 million or 56.5% of net revenue in Q4 2012. The factors which contributed to this 300 basis point decrease in gross margin were a product margin decline of 270 basis points, attributable to a variety of factors, including a shift in product selling mix to seasonal lower margin items, increased air freight usage, higher inventory provisions and foreign exchange due to a weaker Canadian and Australian dollar. Deleveraging of 30 basis points on fixed costs, including occupancy and depreciation, and product and supply chain team costs. SG&A expenses were $124.6 million, or 23.9% of revenue, compared with $121.9 million or 25.1% of net revenue for the same period last year. The higher SG&A dollar spend included an increase in store compensation and operating expenses associated with new stores, showrooms and outlets, increased variable operating costs associated with our e-commerce business consistent with the year-over-year revenue growth, and increases in expenses at our store support center, including salaries, administrative expenses and professional fees. These were offset by a $9.1 million reversal and true-up of management incentive bonuses and stock-based compensation, $11.1 million in foreign exchange gains in our Canadian operating entity, which was offset against overall SG&A, and a weaker Canadian and Australian dollar, which decreased SG&A by $5.1 million. Although we are reporting 120 basis points of leverage of SG&A expenses, this leverage resulted from the non-recurring impact of the incentive compensation true-up and the foreign exchange gain. As a result, operating income for the fourth quarter was $154.1 million, or 29.6% of net revenue, compared with $152.6 million, or 31.4% of net revenue in 2012. Tax expense for the quarter was $46 million, or a tax rate of 29.5%, compared to $44.7 million or a tax rate of 29% for the fourth quarter of 2012. Net income for the quarter was $109.7 million, or $0.75 per diluted share. This compares with net income of $109.4 million, or $0.75 per diluted share for the fourth quarter of 2012. Our weighted average diluted shares outstanding for the quarter were 146 million, versus 145.8 million a year ago. Capital expenditures were $34.5 million for the quarter, compared to $21.2 million in the fourth quarter last year, with the increase associated with new stores, renovations, and IT and head office capital. Turning to highlights for our full fiscal year 2013 performance. Net revenue rose 16.1% to $1.591 billion, from $1.37 billion in fiscal 2012. Our annual store comp was 4% on a constant dollar basis, and including e-commerce, our annual comp was 9%. E-commerce sales totaled $263.1 million, or 16.5% of total sales. Gross profit was $840.1 million, or 52.8% of net revenue, compared to $762.8 million, or 55.7% of net revenue in fiscal 2012. Net income for the year was $279.6 million, or $1.91 per diluted share, compared to $270.6 million, or $1.85 per diluted share for fiscal 2012. Looking at our balance sheet highlights, we ended the year with $698.6 million in cash and cash equivalents, an increase of $108.5 million over fiscal 2012 year-end. Inventory at the end of the fourth quarter was $186.1 million, or 19.9% higher than at the end of the fourth quarter of 2012. This is slightly higher than optimal, however, the composition is weighted more towards core items, which will typically sell throughout the year at full price and balance inventory levels by reducing future orders. This now leads me to our outlook for the first quarter and full year of 2014. As I mentioned on the last earnings call, commencing with 2014, we will begin aligning with standard industry practice in reporting total comparable sales that include both stores and e-commerce. As Laurent discussed earlier, we have seen a demand shift from our guests towards seasonal product, which is becoming a larger proportion of our sales mix. Although this has resulted in strong and fast sell-throughs in numerous styles, we will not have the depth to capture the demand in these categories in the first half of 2014 as the buys were placed six to nine months ago. While we are actively pursuing opportunities to chase and fast turn product, which will help mitigate some of this gap, our ability to buy deeper to rebalance our assortment to this shift in guest demand is weighted towards the back half of the year. With that in mind, for the first quarter of 2014, we expect revenue to be in the range of $377 million-$382 million. Our sales guidance assumes a flat comparable sales % on a constant dollar basis, which, as I stated earlier, includes both stores and e-commerce. For comparison purposes, we have included a table in the press release to show comparable sales results for 2013, including e-commerce. Our outlook assumes a Canadian dollar at $0.90 with the US dollar and nine new store openings, three in the U.S., one in Australia, one in Europe, and four Ivivva. We anticipate our gross margin in the first quarter to be between 50% and 51%. While we will lap the Luon write-off from Q1 last year, the shift in our selling mix from core to seasonal product, which has a higher cost, will negatively impact gross margin this year. In addition, the decline in the Canadian and Australian dollars by over 10% from a year ago will reduce gross margin on our sales in those regions. We expect to be flat as a % of sales in occupancy and depreciation, but we expect deleverage in product and supply chain team costs as we continue to make the necessary investments to enhance these functions. We expect SG&A deleverage as a % of revenue compared with the first quarter of 2013, which is driven primarily from the run rate of key investments and headcount made in 2013, and additional strategic initiatives in 2014. Our SG&A also reflects pre-opening costs related to the nine stores planned to open in Q1 and additional stores planned to open in early Q2 2014. Assuming a tax rate of 30% and 146.2 million diluted average shares outstanding, we expect diluted earnings per share in the first quarter to be in the range of $0.31-$0.33 per share. For the full fiscal year 2014, we're targeting to open up to 42 corporate-owned stores, including Australia and the U.K., and up to 10 new Ivivva stores. We expect our annualized combined comp to be in the low to mid-single digits and therefore project net revenue to be in the range of $1.77 billion-$1.82 billion. For the year, we expect gross margin to be in the low 50s due primarily to a rebalancing of our product assortment to meet guest demands, continued investment in our supply chain and product operations functions to create a product development engine for global business, and also foreign exchange impact from a weaker Canadian dollar. We're opening a second distribution center in Columbus, Ohio, in the second half of 2014 to enhance efficiency and improve service levels to e-commerce and store guests in the eastern U.S. However, the start-up period cost and increased capacity will initially delever our gross margin by 30-40 basis points in 2014. We expect SG&A deleverage as a % of revenue compared to 2013. Keep in mind we incurred foreign exchange gains and reduced management incentive compensation in 2013 that should be considered non-recurring and therefore not assumed in our forward projections. While continuing to invest in our infrastructure, we'll also be rebalancing our investments to focus on key priorities that drive growth in areas such as brand, product innovation, and guest experience. As a result, we expect our overall operating margin to deleverage from 2013 and our fiscal year diluted earnings per share to be approximately $1.80-$1.90. This is based on 146.3 million diluted weighted average shares outstanding, and it assumes our effective tax rate of 30%. We expect capital expenditures to be between $110 million and $115 million for fiscal 2014, reflecting new store build-outs, renovation and relocation capital for existing stores, IT systems, and other head office capital. With that, operator, I think we can open it up for questions. Thank you. Ladies and gentlemen, if you have a question at this time, please press star and then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Anna Andreeva of Oppenheimer. Your line is now open. Great. Good morning. Thank you for taking my question. Welcome to Laurent. Thank you. Good morning. Good morning. I was hoping to understand some of the investments for 2014. Maybe if you could talk about some of the buckets between the sourcing, marketing, and international, I guess how permanent are those in nature? In other words, could we expect SG&A to be more in line with sales in 2015? Then just to follow up on comp guidance for flat for the first quarter, what does that imply for store comp? Is that what you guys are running currently? Do you need trends to accelerate to get there? Thanks so much. Okay, maybe I can take some of the investment bucket dollar items. International in 2013, the net negative was, I think, mid to high single-digit CAD millions. That'll probably be up to CAD 10 million and a little bit more in 2014. Compared to a run rate, I think you'll see brand related investments CAD 10 million-CAD 15 million higher than you'd otherwise see. Then the other area, I'd say, quite a significant increase in the product and supply chain team costs. We built those teams significantly during 2013. You've got the run rate of those new hires and investments in 2014, as well as significant ongoing additions to those teams. I'd say those are the primary buckets. Turning to the comp guidance. In Q1, the breakout of stores is low single-digit CAD million. Or sorry, low single-digit negative %. I think your question was how it progresses throughout the year. We do see store comp gradually improving from where we have it in Q1. Thank you. Our next question comes from the line of Adrienne Tennant of Janney Capital. Your line is now open. Good morning, everybody, and welcome, Laurent. Laurent, my question is on the longer term operating margin structure. Historically, we've thought about the business as a mid 20% margin business. As you've kind of explored and taken a look at the business, do you believe that that is still the longer term margin structure? What's your philosophy on perhaps more aggressive marketing and advertising? Really quickly, for John, can you just talk about the inventory, obviously at the end of the quarter, a little bit higher, the composition of it, and then when we should start to see that inventory kind of come down over the course of the year? Thank you very much. To answer your question, I think that long term, our target is still to hit the mid-20s. Short term, we're going to have to build our infrastructure internationally, which really hasn't been done both in Europe and in Asia. We're going to be investing in brand. I don't expect us to do large marketing investments. It's really a matter of amplifying what we do really well at the grassroot level and amplifying that through PR and through communication, but not going through expensive traditional marketing tools. Great. We're building the product engine. We are reigniting the product engine, both from a design standpoint, but also from a quality and sourcing standpoint. We're investing to grow our international platform, which really has a lot of demand. Long term, we should be going back to those mid-20s numbers. Thank you. Yeah, I think within that, I've always talked about sort of 55% gross, 25% operating margin. There could be some shift between gross and operating as we go forward. As we've been discussing, increasing our seasonal mix will probably mean product margin down a bit, but I think the efficiencies that we're building in that we'll gain long term will bring gross margin back. As Laurent says, there's no reason to change our thinking about a mid-20s operating margin. Adrienne, in terms of your question on inventory composition, as I said, it's a little higher than we'd normally want to be at, but the excess is really in core. It's the product that we order on a continual monthly basis, and it's quite easy to just reduce future orders to bring that down to the right number of inventory turns. In terms of any kind of stragglers, seasonal or aged items, we're actually very Clean because whatever we've had seasonally, the guest's been buying very quickly. We actually feel quite good about where the inventory stands. Great. Thank you very much, and best of luck. Thank you. Our next question comes to the line of Lindsay Drucker Mann of Goldman Sachs. Your line is now open. Hi. Can you guys hear me? Yep. Hi, everyone. Thanks. Laurent, I was just hoping that you could talk a little bit more about the international rollout and how we should think, since you've already been seeding some of these markets, and you probably have a pulse on brand awareness, how you're thinking about that strategy and how you plan to really convey the authentic grassroots Lulu message as you roll that out. Thanks. Yeah. Having done that with a few brands in the past, I think that's what's critical to the international building of a global brand, which is very different from a North American brand selling its product outside of the United States, is to really build deep local knowledge in those markets and having those local talent understand the Lululemon secret magic. What we've done in the past is actually sort of taken some of our key talent and decentralized them in the region, hoping they would learn the regions. We're switching this mindset to really bring great local talent in the regions. Right now, the hiring and onboarding of our general manager in Asia is a great example of hiring the guy that knows the market, that understands how to adapt Lululemon, what's very unique to Lululemon to a market, and ramp it up very quickly. We've got Ken back in Asia looking at locations for us, and we're going through the same process in Europe. In areas of the world where either the market is complex or maybe doesn't have the scale for us to have a direct presence, we'll be looking at partners. The Middle East might be a good example for that. Okay, thanks. Just a follow-up question on the investments you mentioned that you're making to enhance the in-store experience and in-store selling and learning more about your customer to improve selling. Can you give us some of the specifics, technology or otherwise, where you're planning to put money to work? Yeah. I think most of these investments right now are centered around CRM and really sort of creating a seamless experience between online and brick-and-mortar and also sort of understanding our guests at a more micro level so that we can have a more personalized experience with them. Okay. Thank you. You're welcome. Thank you. Our next question comes from Omar Saad of ISI Group. Your line is now open. Oh, thank you. Good morning. Laurent, I wanted to ask you about some of the comments you made in your opening remarks. You mentioned voiceless for too long, taking back share of voice, and you also seemed to imply in one of your answers to another question, sticking with the grassroots strategy, rather than shifting or amplifying with more traditional kind of brand building. Help us understand what you meant by your comments, why you're comfortable with the kind of existing marketing and brand-building strategies, especially given how much the brand has transformed over the last several years. Doesn't the brand building strategy need to transform? Thank you. Well, when you go back a year, Lululemon's made the headlines every other week and has not participated in pretty much any of those discussions. That was one of the largest findings or one of the biggest findings that I discovered spending time here is that Lululemon is an incredibly authentic brand. It's doing very unique, distinct, meaningful work in its communities. We have a set of 900 ambassadors that we support in North America, some outside of North America, we just haven't given these people a voice. I think that our grassroots strategy, our grassroots communication strategies resonated incredibly well with people. We need to amplify that. Actually, we know we don't need to go to traditional marketing strategies, we need to take control of the discussion around Lululemon and really share more proudly and with humility who we are and what we stand for, which really differentiate us from everybody else. Thanks. Thank you. Our next question comes from the line of Brian Tunick of JPMorgan. Your line is now open. Thanks very much, good morning. Two questions. I know it changes season to season, where should the seasonal product that you're talking about, Laurent, as a percentage of the business run optimally, what kind of supply chain and store work do you think the organization will need to quicken the lead times and inventory turns from already some of the industry best? Maybe for John, just on some store performance metrics, can you talk about things that you're seeing from a regional perspective? Can you talk about Canada, the newer versus the older stores? Just trying to understand what's happening with different classes of stores over the last year. Thanks very much. Well, if I can talk briefly about product. It's a movie that I've seen before, either in the luxury industry or in the action sports industry. When a brand becomes really iconic, and it's centered around a staple product, its consumer evolved and so are their needs, and there is stronger and stronger demand for seasonal product. I think we need to really redefine the language that we use around core and seasonal. Our guests are clearly speaking for more freshness and more updated products in our line. Our fast turn pod are allowing us to do that short term, and Tara is building global organization both from a design, but also from a merchandising and planning standpoint that will allow us to address these needs, and address them with short lead time. Tara, you want to add on to that or? No, I think you articulated it well. I think that, again, roughly probably about 50/50 for a seasonal to core product. As Laurent is saying, our guest is really responding well to our seasonal product, and we're excited about that, and we are chasing into what we can for Q2 and making sure that in the back half of the year, we're getting that balance of core and seasonal nicely adjusted and making sure that we are not running out so quickly in our beautiful seasonal products. I think what's been really exciting is that while we don't have the scale to make as much of that product as we'd like to, and while our scarcity is a little too scarce, the response that we're getting for our product really validates the fact that we know how to answer our guests' needs. Your question on store performance. The factors impacting our store performance are impacting the entire market. The product assortment mix is across the board. Any impact of negative PR is across the board, and that's generally what we're seeing. A much smaller impact, I think, is things like weather and the only reference point I have there when I look at the regions where even in Q4, we had double-digit positive comps, L.A., Hawaii, South Texas, Florida, the Deep South region. I think there's a little bit of weather impacting some regions more than others. In terms of new and old, again, and I think this is intuitive, the newer age classes of stores seem to be less impacted than the older ones. I think that makes sense because in new regions the guest is still establishing her core wardrobe. The lack of newness is not as much an impact in these newer stores. Even more so in terms of our new stores that are not in the comp base yet, they're performing actually well above our plan. I think in terms of any way you want to measure new store performance, whether it's percentage of the comp base productivity or just dollars per square foot, the new stores are actually performing quite strong. We've been $1,100-$1,200 a square foot for the last couple of years, and it's actually edging above that. That's a positive sign in these new regions. Thanks so much. See you guys in a couple of weeks. Thank you. Our next question comes from the line of Camilo Lyon of Canaccord. Your line is now open. Thanks. Good morning, everyone. I wanted to understand a little bit more about the expected improvement, the gradual improvement in comps as we should expect them to improve in the back half. How do we gain comfort that the work that's being done on the supply chain will yield those results? As we look to that back half comp trajectory improving, what could go better than expected? Is it more production from these incremental mills that are being added to the mix? Is it a faster shifting towards seasonal product? Help us understand how we could think about that improving incrementally as we go to the back half. Maybe Tara can talk about the product mix part of it, and I can add some more boring numbers after she finishes. Obviously Q1 and Q2 were purchased about eight to nine months ago. Starting in December, January timeframe, seeing the guest response in Q4 to the seasonal products, really began looking at third and fourth quarter with the team, looking at sell-throughs of current product, going back and adjusting the back half, getting the core inventories in line, shifting out receipts, taking a look at all of core for Q3 and Q4, and really understanding where we had opportunity to update, because quite frankly, it shouldn't matter whether it's core or if it's seasonal. I want to have beauty and technical in every single product that touches our floor. That's why you'll see that gradual increase as we go into the back half of the year. As we get that core more in line, we've been chasing into seasonal product in late Q2, getting more prints and textures in our bottoms, which has been trending very well. John, I don't know if there's anything else you want to add. In terms of the quarterly comp trend, remember, it's really starting Q2 where there's a significant impact of Luon shortage last year. We're going to be lapping that, as well as lapping delivery challenges and bad PR in the second half. There's a lot of opportunity for positive comps over a weak second half in 2013. Great. Then just one follow-up for Laurent, if we could. Kind of following up on a question asked earlier. Also mentioned a few times in your script was the word "humility." I was wondering, how do you plan to convey that to your consumers that might have been impacted by the PR issues of the last year? I think it starts with the guest experience. I think it's taking the time. Obviously, we've reflected on last year, we've learned from last year, we've actually done that with humility. I think that Lululemon. You go back to our mission, which is really elevating the world to greatness, I think to do that well, we need to be inclusive. This past year, we've stumbled a couple of times, we had to be defensive, I think we're very proud of what we do. We're going to talk about that with confidence, one of our largest assets is clearly our educators on the floor in our stores. I've visited a lot of them in the past two months. They are the most committed people to the Lululemon brand. It's just empowering them to get back on their feet and speak about the brand, the product, who we are, what we stand for with confidence, humility, really with the mindset of making our guests right, listening to them, being inclusive. Thanks. All the best in 2014. Thank you. Thank you. Thank you. Our next question comes from Kimberly Greenberger of Morgan Stanley. Your line is now open. Great. Thank you. Good morning. Laurent, I'm wondering if you can look out over the next one to three years and just help us understand what a realistic level of acceleration in international store openings that we should be keeping in mind? Then you talked about, in your introductory remarks, some speed or flexibility in the supply chain. Maybe you could just help us understand a little bit better exactly what you have in mind there? If two years from now you're successful in this initiative, how will your sourcing and supply chain be different than it is today? Thanks. Well, I can't really speak beyond 2014 at this point, but what I can tell you is that building the foundational work that we're doing both in Asia and in Europe will allow us to accelerate that footprint. I think we're going to evolve from a strategy of having a sequential approach to countries and regions. Building the foundation in both Europe and Asia will allow us to actually attack different regions and different countries, especially if you think about both in Europe at the same time. I think that's where we're going to be able to see a significant acceleration of building our footprint and really sort of leveraging our showroom strategy, which has been successful in seeding and growing market, but doing that at a faster pace and simultaneously in different countries. Thank you. Our next question comes from Jaime Katz of Morningstar. Your line is now open. Good morning. Thanks for taking my call. I'm curious about what you guys are thinking about the evolution of the e-commerce channel as it becomes a bigger part of sales. Are there changes that you're making to make it easier, more friendly to adapt to new consumers? Well, I think we're looking at that constantly, especially as we sort of grow our product offering, as we grow our men's business, and as we sort of start touching different regions. Our e-commerce environment is really going to be a platform where we can engage the guest in much broader assortment. Tara's actually has got a lot of great ideas in achieving that, right? Right. I think as we grow, our goal is to have an e-commerce site that would have the full breadth of our assortment. Then as we go into countries or regions of the U.S., how we parcel that broader assortment up will be very related to the community and what is the appropriate product in that community. We're very excited about that going forward. As you know, we've tested a lot of different capsules through the years, from tennis to golf. As you think about going into southern markets or into warmer climates or even really amplifying Australia, how we can mix these different capsules within our core and our seasonal product is really quite exciting to me. Thank you. Thank you. Our next question comes from Howard Tubin of RBC Capital Markets. Your line is now open. Oh, hey. Thanks, guys. Maybe just another question, maybe for you, Tara, on kind of the capsules that you have planned for maybe this year, for spring and then into fall, without verging too much. Will you continue to kind of test new and smaller product categories over the next couple of seasons? Absolutely. Obviously, I don't want to play all my cards. Definitely, I am a huge believer and advocate of the capsule. I think it's a great way to test new concepts. At the end of the day, I just want to bring extreme beauty and technical to every sport our guest does. To me, that's exciting. We're going to keep experimenting with that. You can see our &go collection that we launched. Probably saw the press around that in spring. Fantastic guest response there, and you'll continue to see us experiment and grow that piece of the business. Thanks. Maybe, Laurent, you mentioned growing the brand both for men and women. How are you viewing the men's business, and do you still think that in 2016, you'll have a separate standalone men's store? Yeah. Actually, we're looking this year three locations that are going to be fully dedicated to men's. One in Miami, one in Vancouver- Sorry, I should clarify. There are going to be three locations that are going to be much bigger footprint with an expanded men's section within certain- Yes. Correct. In Vancouver, Miami. Santa Monica. Santa Monica. We've done tremendous work on our product. Our product is resonating with the guys incredibly well. I think we have a great opportunity to play with our brand identity and define our brand identity in a way that's going to resonate better with the guys and attach more to their activities and what they want to do, we're working on that right now. Great. Thank you. Thank you. Our next question comes from the line of Jim Duffy of Stifel. Your line is now open. Thank you. Good morning. Can I ask you to speak in more detail around where you are with the evolution of this supply chain? Are you happy with the quality control process where it is right now? Is the product flow now normalized, such that merchandise assortments are cohesive? In more detail, what needs to happen to make the supply chain accommodate this shift to more seasonal product? Okay. I think throughout 2014, you'll continue to see us really build the foundation of our supply chain and shore that up. I really want to stress that we're still continuing to build that muscle within the organization. From a quality standpoint, every soft gap's in place, so there will not be any bad quality getting to our customer, our guest. As you talk about the supply chain, one of the things that I've noticed coming into Lululemon is that we have one go-to-market calendar, which is an eight to nine-month calendar. In past companies, and this is what I'm going to be really focusing on, what I felt is I would have three distinct calendars. You have one that is more for the core, which might be slightly longer. You have one that's more for the seasonal product that is shorter. You have a fast calendar. I think as this year, as we really fine-tune and get our main calendar strong, we will begin, as we move into 2015 and 2016, to continue to shore up these two other tracks of bringing our product to the market. Okay. Tara, are you happy with the product flow that you're seeing now? Clearly, you're light on some of the seasonal items, are things hitting stores at the appropriate times? Yes, definitely improvement over last year. Really right now, it's the result of, it's not from fallout, it's just, again, we bought the product nine months ago, hindsight's 2020. We would have invested more heavily in the product so it wasn't running out so quickly in the seasonal. Other than over the last two weeks, outside of our control, there's been a truckers' strike at the port of Vancouver, all of our Canadian product flow has been somewhat disrupted. I understand that strike ended last night. Okay. Last question, I guess it's for both John and Tara. On the supply chain, given that you're still in the very early innings here, it would seem that perhaps down the road, there's margin opportunity as you evolve the supply chain. Is that an illogical thought process? That's exactly the way I think about it. As I said earlier, I think appropriately, we're adding more newness and seasonality into our line that might deliver a lower product margin. The efficiencies that we'll gain from the steps that Tara and Jennifer and their teams are making, we're going to see tremendous upside, again, longer term in terms of lower air freight, lower cost of cancellations, et cetera. Just a lot of efficiencies. Thank you. Thank you. Our next question comes the line of Matt McClintock of Barclays. Your line is now open. Hi. Yes, good morning, and also welcome, Laurent. Thank you. I was just wondering, you highlighted a little bit, you acknowledged some of the enhanced competition in your prepared remarks, and I was just wondering if you could talk about that perhaps from more of a seasonal category basis and also more of a core category basis, what you're seeing from that perspective. Thank you. Yeah, I think we're certainly not the only game in town anymore. As we get back to our roots of really focusing on innovation, I don't want to spend too much time worrying about our competitors. I certainly want to know what they are doing. The validation of the strength of our market and its global relevance and its growth in every single global market. We're going to get back to what we do best, which is inventing the future and really focusing on the magic that is very unique to Lululemon, which is combining beautiful as well as technical innovation. Certainly something that we are aware of, but something that we're going to look forward rather than over our shoulder. Thank you. Look forward to seeing you in a couple of weeks. Thank you. I do, too. Thank you. Our next question comes from the line of Faye Landes of Cowen and Company. Your line is now open. Hi, this is Faye Landes of Cowen. Hoping you can elaborate a little bit more on the international strategy. Laurent, you said you're going to, in effect, ultimately accelerate the international rollout, which is a bit of a change in the algorithm. Talk to us about milestones that we should be looking for along the way as you do that. Also, can you address the issue of the cost of real estate overseas, the fact that you haven't opened stores in some markets like Hong Kong, where you've had a showroom for a very long time? I think maybe I'll let John speak to that. Before I do that, I think that to go back to the international strategy, we've opened showrooms, and we've worked in a very sequential way. We open a showroom, then we look at stores, and then we look at building the staff. I think, going back to what I said earlier, it really does not have to be a sequential process. The showrooms are a really good way to see the market, but at the time we open the showrooms, we need to get the right staff on the ground, and we need to start looking at locations. I have a very clear timeframe by which we'll be moving forward. Just working in parallel rather than in a serial fashion will allow us to accelerate that in markets where we know we're going to have a presence. In terms of international real estate, as you say, lots of regions, Hong Kong in particular, rent per square foot is extremely high. It's high in London as well. We're setting our pricing, et cetera, to adjust for that. When we look at Hong Kong, I think the reason that we've moved more slowly than we'd like is not simply sticker shock on the rent. I think as we move into different regions, we have to be a little bit flexible in terms of what our store looks like in those regions. I think that's maybe a shift in our mindset. If the 3,000 sq ft on one level isn't really available in Hong Kong, we have to look at what's the best type of store layout for Lululemon in that market. I think that openness will help us accelerate. That, if I might add, that value comes with having the local deep expertise that we mentioned earlier, right? It's not how is Hong Kong going to adapt to Lululemon, but how is Lululemon going to adapt to Hong Kong? That's going to open a lot of doors to accelerate our international growth. Thank you. Our next question comes from the line of Dana Telsey of Telsey Advisory. Your line is now open. I'm sorry. Our next question comes from the line of Oliver Chen of Citigroup. Your line is now open. Hi, everyone. This is Nancy filling in for Oliver Chen. Can you just give us a little more insight in terms of the in-store traffic and just decipher if it's recovered from the negative PR or where we are in that process? If you could talk a little bit about Ivivva and the adjacent businesses like swim and how they are performing. Okay. In terms of store traffic, our overall comp performance is basically traffic-driven, as it has been in the past. The negative has come from lower traffic. I wouldn't say that that's really rebounded, and that's reflected in my first quarter guidance, but we do expect some gradual improvement as the year progresses. In terms of Ivivva, again, it kind of gets lost, but it's a real bright spot. Ivivva comping double digits, end of the year, just under $900 a square foot. As I think I've alluded to in the past, we're really putting our foot on the gas a bit on the rollout of Ivivva stores. We ended the year with 12, and we'll add up to 10 in 2014. Thank you. Our next question comes from the line of Janet Kloppenburg of JJK Research. Your line is now open. Morning, everyone. Welcome, Laurent. I had a couple of questions. First, as far as the infrastructure building for international growth, will that pressure the SG&A line beyond 2014? Overall, the investment spending that you're talking about, will that carry into 2015? Hi, Tara. I was wondering if you could talk about your comfort level with the fashion assortments being aligned by the third quarter and if that would mitigate the need for the air freighting that you're now incurring. John, if you could just talk to us about what your leverage point of SG&A is, that would help. Thank you. Okay. I think that was four questions. We'll try and cover as many of them as we can. Your question about international investment and does that impact, I think you said, does that impact SG&A going into 2015? Yeah. That's absolutely true because, in fact, as we accelerate new store openings in Europe and Asia, initially, that will compress our margins. Of course, the faster we go, the faster we get to a point of leverage in those markets. Right. Certainly through 2015, the international rollout will be a negative in terms of the income and margins as you'd expect. Okay. That's right. Overall SG&A leverage, John? I always struggle with that question when we're in such a growth mode. So much of what we're spending is discretionary. In terms of the delta, low single-digit comps would leverage us normally. Again, there's so much going on beyond just the run rate that I just Right I can't really give you a clear answer on that. Okay. Thank you. Thank you. I'm showing no further questions at this time. I'd like to hand it over back to Laurent for any closing remarks. I want to thank you all for your time this morning, and I really look forward to speaking and meeting with many of you over the course of this year and next month at our analyst day and continuing this discussion on realizing our vision for Lululemon's future growth. Thank you. Ladies and gentlemen, thanks for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.