Good day, ladies and gentlemen, and welcome to lululemon athletica Third Quarter 2014 Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Chris Tham, Senior Vice President of Finance. Sir, you may begin.

Good morning, everybody, and thank you for joining us on our third quarter 2014 conference call. A copy of today's press release is available on the Investors section of lululemon's website at www.lululemon.com or furnished on Form 8-K with the SEC and available on the commission's website at sec.gov. Shortly after we conclude today's call, a recording will be available for replay for 30 days on the Investors section of the website. Hosting our call today is Laurent Potdevin, the company's CEO; John Currie, the company's CFO; along with Tara Poseley, our Chief Product Officer, who will 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. Today's call is scheduled for 1 hour. [Operator Instructions] And with that, I will turn it over to Laurent.

Thank you, Chris. Good morning, everyone, and thank you for joining us today to review our third quarter results. John will discuss the numbers in more detail and speak to our updated guidance in a few minutes. Today, I will summarize the areas where I see prevailing momentum building within the company, and provide an update on areas where we continue to strengthen our business foundation. I'm very proud of our team and the solid performance delivered in the third quarter, with a total combined comparable sales growth of 3% that showed improvement over our second quarter, marking a key inflection point with our women's business returning to positive territory. As expected, we delivered better product assortment, which was a key driver of improved performance this fall, compounded with more cohesive brand and product communication in stores, online and through our PR strategy. We were pleased to see sequential improvement in each month of the quarter as it progressed, driven by our product flows and new allocations. Overall, I attribute the success of the third quarter to the ongoing foundational work as we've described in the past, building our talent pool, improving our processes and integrating brand and product. We have turned an important corner, and we'll continue to be relentless about keeping the slide wheel turning and accelerating. Let's take a look -- an early look at Q4. The fourth quarter was kicked off with our annual leadership conference in Vancouver. By gathering up approximately 900 of our key leaders, including staff from our store support center, store and showroom managers and top executives, representing amazing talent from around the globe. Since joining lululemon back in January, I've been anticipating our most important yearly gathering as a team, and whether it was in a small breakout session, on my…

Thanks, Laurent. I'll begin by reviewing the details of our third quarter of 2014, and then I'll update you on our outlook for the fourth quarter and the full year of fiscal 2014. Our Q3 total net revenue rose 10.4% to $419.4 million from $379.9 million in the third quarter of 2013. Increase in revenue was driven by total comparable store sales growth on a combined basis, including e-Commerce of 3%, comprised of 27% growth online and a bricks-and-mortars stores sales decline of 3%, all on a constant dollar basis; the addition of 42 net new corporate-owned stores since Q3 of 2013; 27 net new stores in the United States; 2 stores in Canada; 2 stores in New Zealand; 1 in the U.K.; and 10 ivivva stores; and offset with the foreign exchange impact of a weaker Canadian and Australia dollar, which had the effect of decreasing reported revenues by $7.5 million or 1.8%. This was more than we had anticipated, as these currencies weakened late in the quarter. This impacted our third quarter relative to our expectations and our outlook for the balance of the year. During the quarter, we opened 19 net new corporate-owned stores, 15 in the U.S., 1 in Canada and 3 ivivva. We ended the quarter with 289 total stores versus 247 a year ago. There are now 222 stores in our comp base, 37 of those in Canada, 151 in the United States, 25 in Australia and New Zealand and 9 ivivva. At the end of Q3, we also have a total of 86 showrooms in operation: 34 lululemon in North America, 16 internationally and 36 ivivva. Corporate-owned stores represented 73.9% of total revenue or $310 million versus 76.5% or $290.7 million in the third quarter of last year. Revenues from our direct-to-consumer channel…

[Operator Instructions] Our first question comes from Matt McClintock from Barclays.

Since you talked a little bit about opening stores in Singapore and you're expanding internationally, Laurent, given your comments, your prepared remarks, I was just wondering if you could talk about the showroom performance that you're seeing in the varying region. Is there any variances between showroom performance in Europe or in Asia, anything to call out there specifically? And maybe can you just talk about what you're seeing in some of those regions that gives you some of the confidence that the growth opportunities remain as strong as ever?

Well, I think 2 things to point out about the showrooms. I mean, in Europe, we see showroom performance that is very much in line with what we saw earlier when we opened showroom in the U.S. And in Asia, we see a very strong showroom performance, and it's the result of having been there for longer time, longer period of time. The showroom have been opened in Hong Kong for almost 4 years now. So that explains this outsized performance in Asia compared to Europe, but Europe is on track with what we saw in the early years in the U.S. I mean, as far as the outlook, I mean, I really do have a long-term view on both Europe and Asia as having really large potential, and the rest of the world being -- we see larger than North America. Their economies are fluctuating, and our showroom strategy is a really a very powerful and frugal way to go-to-market. So we're opening markets in region. We're seeing traction where we have showrooms, and that will dictate the rollout. So we're still on target to open 40 stores both in Europe and Asia, 20 in each region by 2017, and that might fluctuate a little bit based on European or Asian performance. But long-term, I mean, I see the potential of both regions as remaining very large for the organization.

And then if I can have follow up to John. Just 150 basis points of supply chain pressure on the margin -- on gross margin this quarter that you felt. How should we think about that over the next several quarters, given that you continue -- you should continue to make supply chain investments in 2015 setting yourself up for 2016? Just the level of pressure that we should expect going -- for the next several quarters?

And you're right. And as we've said throughout the year, 2014 has been a year of investment in shoring up supply chain. I think, in this quarter it was a little bit higher than sort of a run rate based on some additional testing costs that came through in the quarter. But generally speaking, in 2014 -- '15, we'll continue to invest with the run rate of a bigger, more capable team, as you said, to deliver the benefits to product margin and gross margin that we've talked about for 2016.

Our next question comes from Bob Drbul from Nomura.

I just have 2 questions. Can you talk a little bit about the traffic trends in the stores, I guess, throughout the last quarter and then quarter-to-date? And John, can you give us the new store productivity trends that you're seeing?

Yes. Okay. And the good news within the comp both for Q3 and what we're seeing for Q4 is that -- and similar to Q2, traffic continues to build. So the traffic component of the comp in Q3 was stronger than -- even in Q2 when it turned positive. Now that's offset with lower conversion and units per transaction, which is understandable, given where, I think, we're at is definitely improving brand sentiment and the product assortment to match that is still catching up, but better for Q4. New store productivity continues to be running that $1100 to $1200 per square foot area, a little bit higher than more recent openings. So very consistent, strong performance on the new stores.

Our next question comes from Tom Filandro from Susquehanna.

So first, a quick question for John. Could you possibly dig a little deeper into the quarter store op margin? I think you contracted about 700 [ph]. So does that have anything to do with the store opening delays? And how should we think about that contraction if there's similar contraction in the fourth quarter? And then just quickly on the port slowdown, are the goods that are on the water, are they concentrated in any particular categories or classifications?

Okay. Yes. So on the store operating margin, in Q3, there was a little bit more contraction than would be the norm. I think that's natural, given there's a very heavy new store opening cadence in Q3 and more so than the prior year. So that contracted the store operating margin to be a little bit more than you'd expect typically. The port, to be honest, I couldn't tell you exactly if it's concentrated in anyone that product category. I think we have to assume it's across the board. The other thing that's important to note is even though the disruption with the ports is the U.S. ports, it also impacts our Canadian business because a lot of the ships that come from Asia might stop in L.A., Seattle, and then make their way up to Vancouver, where we unload for Canadian shipments.

Our next question comes from Jennifer Black, Jennifer Black & Associates.

Let me add my congratulations and good luck, John, in your new endeavors.

Thanks.

I think this question is for Tara. You've done some magnificent collections, such as the Sparkle and Exquisite collections. And I wondered if you're planning to do a continuous flow of these collections all year long, and are you seeing an increase in units per transactions with the collections based on the coordinated items that lend themselves to outfitting?

Jennifer, I think just to really reframe what we are focused on for third and fourth quarter of 2014 was really getting the balance of the inventory right between our core and our seasonal product. Q3 was really about tackling the pant wall, and really starting to test some new core products, as well as adding print and color and texture. So really, again, I'm going to underscore our continued focus on core. As we moved into holiday, obviously, it's such a big gift-giving time of year, really focuses the design teams on making sure we are -- wherever we could, getting that beauty and functional in our product because we know that's so incredibly core to our DNA of the brand. So naturally, some of these collections, like Sequence and the Exquisite group reinforce that beauty and functional element to our brand, and you'll continue to see those as we move into next year. But the place we're spending a lot of time on is that core, and we'll really know that the pant wall's not where it should be quite yet, and that's going to be a big focus of the design team as we move into Q1 and Q2 of next year.

Our next question comes from Paul Lewis from Wells Fargo.

It's Tracy Kogan, filling in for Paul. You mentioned that product mix hurt your merch margin by 90 bps, and I was just wondering what impact markdowns had on your gross margin this quarter, and then I just wanted to confirm that you said you were less promotional in November. And I was wondering if you were planning to hold that online warehouse sale in fourth quarter.

Okay, yes. In Q3, markdowns were actually a little bit less than the prior year. The only reason I didn't call it out was it was fairly minor, like maybe 10, 15 basis points, but we were less promotional in Q3. Sorry, your question on November.

Markdown less on November.

Which, as you said in your prepared remarks, were less promotional. Oh, and the question of an online warehouse sale for Q4, that really depends on how we come through the holiday season, whether we do an online or a physical warehouse sale, that's yet to be determined...

And the continuity...

[indiscernible] Yes.

Our next question comes from Betty Chen from Mizuho Securities.

It's Alex Pham on for Betty. I was wondering if you could give us a sense of how the seasonal goods and fashion products were trending. And maybe in a mature market like Canada, give us a sense of that penetration versus core and what it currently looks like in the U.S.

Alex, it's Tara. So the seasonal goods, as we delivered -- outside deliveries increased as we got into third quarter. We definitely saw a strong positive guest response to our seasonal goods. As I said a few minutes ago, the core product, both in the pants and in tanks is an area we're going to -- continuing to be focused on as we move into next year, really driving newness in our core product, which we know is so important. And speaking to the Canadian market, driving that newness in the core product is really going to benefit our Canadian guests quite tremendously because they're looking for that evolved core from us. But they're also responding very well to the seasonal.

Our next question comes from Oliver Chen from Cowen and Company.

Regarding the split-out between bricks-and-mortar versus online, do you expect that trend to continue in terms of running slightly negative in the stores? Or are you feeling like traffic may offset some of those dynamics? And then, Tara, as you do continue to focus on the core categories, is the expectation that the materials differ or you may have SKU breadth? How are you thinking about AUR and the innovation in terms of the product side, and what's ahead with the core?

In terms of bricks-and-mortar versus e-Commerce, I mean, as -- we've seen a -- e-Commerce has been strong. Bricks-and-mortar has been gaining traction, as I said, primarily benefited by traffic. And we do expect conversion to stop being the headwind it's been. So my guidance in Q4, actually, we're assuming that stores will be positive, which they have not been for some time.

And then, Oliver, on core, just to remind everybody, development of new fabrics is about an 18 month process. So from the standpoint of seeing materials and fabric evolving, we really won't start seeing that until the back half of next year, and as we get closer to that, we can share that. And from the AUR perspective, I don't see, at this point, AUR going up. But as we're developing new innovation, new silhouettes, building more functional beauty into our product, we'll be looking at those products and making sure our price value equation is appropriately set in the marketplace.

As a quick follow-up, could you comment on men's and how you feel about the positioning now and where it may have opportunity to evolve over time?

I'm feeling really good about men's. Early indications of our men's-only store have been really great, positive guest response. We see, as we are giving men's expanded space both in our Robson store, our stand-alone store, we're able to expand each one of the categories from our sweat category to the no-sweat, which is really the sweatshirts and things you put on after you work out and post-sweat, which is really our Commute Line. We see all 3 of those categories have opportunity to add breadth within those. And as we move into next year, you'll see those categories growing online, which is a great place for us to continue to test and try and learn, as well as expanding what we're doing in our men's-only spaces, where we have that additional square footage.

And to add to -- this is Laurent. To add to what John and Tara said, I mean, with a better product assortment, a better flow and also better predictability, we've been able to work much closely with our brand and community team and community -- and communicating very strong cohesive story, as you saw, during Black Friday, so -- and that's a big part of the confidence that we feel in building traffic and returning to positive store comps.

Our next question comes from Matthew Boss from JPMorgan.

With productivity in, I think, new stores sounds unchanged, any initiative to kickstart some of your more mature stores? Have you thought about a remodel program or can you just talk about performance in some of your stores more than 5 years old?

Do you mind -- I mean, I'm sorry, it's really hard to hear you. Do you mind repeating the question, maybe getting a little bit closer to the phone?

Yes. So productivity in some of your new stores, sounds like unchanged. If we think about some of the mature stores, can you just talk about any initiatives to kind of kickstart performance in your more mature stores, particularly those 5 years or older?

Yes. I mean, in general, especially a high-volume store, we regularly renovate them every 3 years and normal stores, 5 years. In addition, we've got an ongoing program, where older stores that were maybe not in the best location within a mall or on the street or were a little bit too small in terms of square footage, every year, we're doing relocations or expansions. And then in a limited number of cases, as we've talked about, so Robson Street in Vancouver is a good example. We've moved from a very strong 3,400-square-foot store up to more of a flagship store at 4,500 square feet, and that -- flagship's the wrong term because flagships are often characterized as marketing initiatives. But in our -- in this case, it's really a -- it's a much more profitable store. So we're looking for opportunities to make those shifts as well.

And we have an entire group internally very much focused on guest innovation and guest experience, so you've seen Whitespace for product. When you think about that, that group has been the same focus on our guest experience, both online and in-store, so longer term, focus on the innovation, but certainly, something that will have an impact on those more mature stores.

Great. And then just to circle back on the margin front. So it sounds like continued supply chain investments, what kind of a comp next year do you need to lever occupancy and rent? And then if you could just kind of breakdown -- as we think about gross margin, I mean, should we think about gross margin down next year and then the inflection being in 2016?

Yes, in terms of leverage on occupancy and depreciation, I mean, there's a lot of moving pieces. But in general, I'd say a sort of mid-teens comp -- or sorry, mid-single-digits, again, impacted by some of the renovations that we're doing, et cetera, but mid-single-digits is about right. I'm sorry, your second question was what?

Yes, so gross margin overall, in aggregate, should we think about gross margin as down next year, given the supply chain investments? And is that a mid-single digit store comp or all-in comp?

I'm talking store comp. In terms of supply chain investment, gross margin, as I said, I mean, 2014, obviously, a build-the-foundation year, which is continuing into, certainly, the early part of 2015. In addition, we're sort of shifting our focus from simply building foundation investments to investments in supply chain that drive growth. So there'll be that as well, but of course, at this point, we're not guiding to gross margin next year, and in fact, we're still working through the details of new initiatives in terms of our budgeting for next year. So we'll give guidance for next year as we always do when we report Q4.

Our next question comes from Camilo Lyon from Canaccord.

I had a couple of questions. Number one, could you tell us, John, what the impact of the online warehouse sale was to the third quarter? Number two, can you just update us on what you just said right now, the prior question, the shifting to investments in supply chain that will drive growth. What kind of investments are those, and what should -- what will we expect to see from the supply chain side that can lead to better growth? And then finally, on gross margin, are you at a point where the seasonal component can start to be a margin-accretive product category in 2015?

Well, I'll take the online warehouse question. Yes, in October, rather than just have markdowns in our -- we made too much site throughout the quarter, and really sort of concentrating sales into a limited time period, as opposed to more spread out in our outlets, we decided to do an online warehouse sale. It was like 3 days. I think we did $3 million to $4 million. Again, it was expected in our earlier guidance, but that did sort of concentrate that level of sales in online versus what -- what otherwise might have been outlets. Sorry, whenever you ask more than 1 question, I always have to ask what's the second question.

Sure, no problem. So just in response to the prior -- to a prior question, you talked about next year being the year in which you shift some of your supply chain investments to investments that will drive growth, if you could just elaborate on what that means? And then maybe for Tara, the seasonal componentry of your product set, are we at a point that 2015 should have positive gross margin contribution from the seasonal mix?

So if you think about the shifting of the investments, I mean, think about further investments in R&D, in some of what Tara and her group are working on in fabrics and new silhouettes as well as continued seamless, authentic guest experiences, both online and in-stores, as well as our continued international development.

And then for the seasonal component, as we move into next year and all the supply chain work we've done on our go-to-market calendar that we've been talking about, we should start seeing those -- we will start seeing those improvements in seasonal product as we move into the back half of the year.

Our next question comes from Barbara Wyckoff from CLSA.

This question is for Tara. Can you talk about initiatives to stage basic -- excuse me, basic fabric, so you're better able to respond to reorders on seasonal goods and -- quickly? And can you just talk a little bit about the testing mechanism and timing on turnaround time, assuming the fabrics are on hand?

Okay, so I think -- I just want to make sure -- so it's really just taking -- so I'll just talk about what we're working on right now as a team. We've built out a model to really project out our raw materials over a 5-year period, all of the different key raw materials that we use, which is really a stage 1 to make sure that over a 5-year horizon, we're staging the fabrics appropriately. So that's going to continue to help us in our process, really being able to build more speed into our process. And then as for testing, I mean, really, we've -- it was -- Q3 was when we had said we have all of our testing protocols in place upfront in the supply chain stream from raw materials to in our factories, and we hit that, and that's really where I was testing. I wasn't quite sure what your additional question was around testing.

Well, just the timing of the turnaround. Assuming you have the fabric, what -- how long does it take to -- if something checks, how fast can you get back in stock?

Yes. I mean, I'm really not ready to talk about that at this moment in time, but just do know that that's all -- speed is important to us, and we continue to create these improvements in our supply chain in order to take advantage of speed.

Our next question comes from Kimberly Greenberger from Morgan Stanley.

John, I'm wondering if you can just address your long-term gross margin target. I know you've said in the past, you expect to be able to get back to that 55% level, but it looks like the majority of the decline in gross margin that you're experiencing is a structurally higher cost base. So in the absence of mid-single-digit positive store comps, do you think -- what do you think your long-term gross margin should look like?

Yes. And especially -- if we focus on the core North American business as the base layer, we continue to see the roadmap to get back to the sort of mid-50s gross margin that we had been at. All the work that Tara and Jennifer's teams are doing, as we've talked about in the past, we continue to believe those will deliver about 300 basis points in improvement in gross margin, as well, there's a lot of other efficiencies beyond that, that I think, over time, we'll be able to enjoy. I've mentioned it's not built into that 300 basis points, but even being more buttoned down, we'll be able to provide better guidance to our factory partners that will allow them to reduce the contingency that they need to build into our pricing. So there's other potential upside in there that we see -- that roadmap to 55%. Of course, as you layer on the new markets that are really -- Asia and Europe are effectively startups. Initially, they'll be a lower margin profile, but when they reach a relative level of maturity, that [indiscernible].

Okay. And John, just one clarification. On the cash balance, $633 million, how much of that is in the U.S. and available for share repurchases?

I don't think there's a lot of it actually in the U.S. Having said that, we've provided already, I guess, in Q1 for the tax that we'll incur on moving cash up. So I think there's another $300 million that we can move up, where the taxes are already been provided for.

Our next question comes from Janet Kloppenburg from JJK Research.

John, thank you for all the help you've given us over the years and best of luck. Just a couple of quick questions. I was wondering if the supply chain -- I'm sorry, the port strike issues could have a tail end to the first quarter and -- or if you see that problem terminating here in the fourth quarter? And secondly, Tara, if you could just speak to the redesign of the core product. Do you think that's complete in terms of the leggings and the tanks or do you think there's more work to be done there?

Okay. In terms of the port situation, I mean, we're continuing to monitor it basically every day. Of course, if it turned into a strike then...

It's not a strike...

Yes, it's not a strike right now. So that would, of course, change things for everyone, but having said that, we've taken steps with respect to our future shipments. So even by the end of December, shipments will be either -- a lot of them will be rerouted through Vancouver, get down to the states by rail. So that will still likely give rise to 1- to 3-day delay, but it won't be that 7 to 10 days that we've been -- that we're seeing right now. So I think as you get into Q1, even January, the impact, if it's status quo, should be minimal.

Tara?

Okay. I'd like to call it the evolution of the core products. So I look at that -- we launched that work in Q3, but as I said, that work is going to be carried into next year. That was just really the start. And I think we've got still a lot of work to do on the tanks, and you'll see more of that as we move into Q1 and Q2, as well as us continuing to test and try new core styles in the bottoms. But we're progressing, and we are on our way.

Our next question comes from Omar Saad from Evercore.

I wanted to ask a follow-up question on the comment you made about the women's business turning positive. If you think about a year ago, kind of with all the controversy going on and the impact it had on your traffic, and you kind of reflect on the last year, have you seen the female customer evolve or change at all? I know in our annual holiday survey, it really -- lululemon brand really jumped up with the teen customer, maybe you're seeing a younger consumer drive some of those positive comps in the women's business? Or are you seeing that core female consumer, loyal consumer, start to come back and spend more in the brand?

I think we're seeing both. I mean, we're seeing both. We're seeing much greater brand sentiment, and we're seeing, obviously, much greater traffic, I mean, in a lot of the retail that we've seen when Advent came onboard through Ben & McKenzie [sic] [ Baker & McKenzie ]. I mean, we've got a very loyal guest, and she's coming back, and she's coming back more often. So I think it's really a combination of gaining that core loyal customer, and giving her a lot more opportunities to engage with us and buy with us more often and bringing us new guests as well.

Our next question comes from Anna Andreeva from Oppenheimer.

I was hoping to follow-up, not sure if we missed it. What was the comp in Canada and Australia during the quarter? And in Canada, I think you've closed a handful of stores. Maybe talk about the margin profile in the region, and what's the ultimate store footprint that you see in Canada? And just as a follow-up to John. I'm not sure if you commented. Just the quarter-to-date commentary. Did comps continue to sequentially improve along with traffic?

Okay. Yes, Canada. Canada continued to be slightly negative, but again, improving. It was low-single-digit negatives versus the U.S. being low-single-digit positives. Australia is a little bit higher in terms of a comp. I mean, I think there's lots of opportunity there. It comped high single digits in the quarter. Again, I need you to repeat your second question.

Just on the store footprint opportunity in Canada. I think you closed a handful of stores. And just to follow-up on the quarter-to-date trend, are you seeing improvement in comp along with traffic?

Right. Okay, well, we don't -- we haven't closed any stores. What you're probably seeing is that we've taken some out of the comp base as we've moved them, renovated them. Robson, for example, was our second store worldwide, but with the relocation and the increase in size, it's out of the comp base. So other than that, there's no closures in Canada, and the sequential -- sorry, third question. Can you repeat it again? Yes, I mean, the trend into November, I think, was your question, is traffic and other metrics are continuing to trend up better than what we saw in Q3.

And our final question comes from Ed Yruma from KeyBanc Capital.

Best of luck, John. I guess, 2 components, one, given the strong comps and store growth at ivivva, how would you describe the materiality of the business, the overall profitability? And two, on in-store inventory, I guess, how would you characterize it? I know you're obviously going to see an impact from the port delay, but are you sufficiently in stock to meet demand?

Okay. I mean, I think ivivva's got lots of traction, where, I think, this quarter, we crossed the $1,000-a-square-foot productivity point, but it's still very small. I mean, we'll end the year with 20 stores. They're smaller than lululemon stores so it's not a meaningful component at this point. Again, second question?

In-store inventory, in stock to meet demand.

Yes. I mean, in stocking, we're more of a DC-based model. I mean, again, we started the quarter in pretty comfortable inventory positions. And I think through November, deliveries continued to maintain that position. Of course, with the port strike, that's -- or sorry, port disruption, that has caused a gap in this next little while. So we have about 1 million units that are stuck at the ports right now, but there is movement. They're coming through, so it's not optimal, and that's why I reflected that in reduced guidance, but we do see breaking that logjam. And then as I said, we've rerouted subsequent shipments through Vancouver so that the impact won't continue.

All right, thank you very much, everybody. We wish all of you a very happy holiday season, and we'll talk to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.