Good day, ladies and gentlemen, and welcome to the lululemon athletica's Third Quarter 2015 Results Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Chris Tham, Senior Vice President of Finance. Sir, you may begin.

Thank you, and good morning. Welcome to lululemon's Third Quarter 2015 Earnings Conference Call. Joining me today to talk about our results are Laurent Potdevin, CEO; Stuart Haselden, CFO; along with Miguel Almeida, EVP of Digital, who will be available during the Q&A portion of the call. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting company management's current forecasts of certain aspects of the company's future. These statements are based on current information, which we had assessed, but which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. Factors that could cause these results to differ materially are set forth in the company's filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and accompanying quarterly report on Form 10-Q will be available under the Investor section of our website at www.lululemon.com. Today's call is scheduled for one hour. [Operator Instructions] And now I would like to turn the call over to Laurent.

Thank you, Chris, and good morning, everyone. Today, I will provide an overview of our third quarter performance as well as highlight our progress against various initiatives, which incorporates the recent changes to our organizational structure. Stuart will then walk you through our financial and guidance in more detail. First, from a top line perspective, the third quarter was in line with our expectations. We delivered $480 million in net revenue for the quarter, up 14% over the third quarter of 2014 and up 20% in constant currency. We achieved a 9% global combined comp, the result of strong performance across our channels and regions. Once again in Q3, store comps across all regions were positive and we delivered a global e-commerce comp of 21%. This solid top line performance is a testament to the continued strength of our brand and loyalty of our guests. Our gross margin and inventory position came in within our expectations for the quarter, and we reported EPS of $0.38 per share. In line with macroeconomic trends, the start of Q4 has been mixed. We saw lower traffic in the final weeks of Q3 and into the first couple of weeks of Q4, with steady improvement since Thanksgiving. Given the current environment, we are taking a conservative stance with revenue in Q4, while taking the necessary actions to manage inventory and control expenses. Our work to build a scalable global supply chain is beginning to pay off and we saw an inflection of our product margins beginning in Q4. I would like to start by emphasizing that this year's investments in our product engine and supply chain remain very much on track. We are now seeing sequential improvement in product margin and remain focused and confident in our goals. We continue to strategically invest in…

Thank you, Laurent. I'll begin today by reviewing the details of our third quarter of 2015, and then I'll update you on our outlook for the fourth quarter and the full fiscal year of 2015. For Q3, total net revenue rose 14% to $479.7 million from $419.4 million in the third quarter of 2014. The increase in revenue was driven by total constant dollar comparable sales growth of 9% comprised of a bricks-and-mortar comp store sales increase of 6% and online growth of 21%. Also, square footage growth of 22% versus last year, driven by the addition of 65 new company-operated stores since Q3 of 2014, 33 new stores in the United States, 2 stores in Canada, 1 store in Australia, 5 in Europe, 4 in Asia and 20 ivivva stores. And offset by the foreign exchange impact of a weaker Canadian and Australian dollar, which had the effect of decreasing reported revenues by $24.7 million or 5.2%. During the third quarter, we opened 18 new company-operated stores, 9 in the U.S, 2 in Europe, 1 in Asia and 6 ivivva. We ended the quarter with 354 total stores versus 289 a year ago. There are now 266 stores in our comp base, 42 of those in Canada, 173 in the United States, 30 in Australia and New Zealand, 1 in Europe and 20 ivivva. At the end of Q3, we also had a total of 86 showrooms in operation, 27 lululemon showrooms in North America, 19 internationally and 40 ivivva showrooms. Company-operated stores represented 73.7% of total revenue or $353.4 million versus 73.9% or $310 million in the third quarter of last year. Revenues from our digital channel totaled $89.3 million or 18.6% of total revenue versus $77.2 million or 18.4% of total revenue in the third quarter of…

[Operator Instructions] Our first question is from Paul Lejuez with Citi Research.

Stuart, you mentioned the opportunities on the supply chain. Can you maybe just talk about the different buckets, maybe dig in a little bit to some quantification on where you're furthest along and just the timing on how you see those come through? It sounds like maybe some are happening a little earlier than planned in the fourth quarter, but just wondering how we should think about the total by bucket in F '16.

Yes. Paul, it's Stuart. So as we think about the margin improvement and the order of magnitude, we still see the potential -- we still expect to achieve the area of 300 basis points of product margin improvement versus 2014 pre-FX. But I think what we're seeing now that we're a little farther into 2015 and have more visibility on the first half of '16 that it'll likely take us into the first half of 2017 to fully achieve that level of margin recovery. But as you mentioned, we are seeing the opportunity taking shape in 2016, particularly beginning in the second quarter, and again -- but we will see improvement in margin in the first quarter but a greater inflection accelerating into the second quarter, and so we feel like the overall story is intact. We tried to lay out, in my prepared remarks, some of the primary buckets for how we'll deliver that, and I can give you a little color now on each of those. So as you look at the reductions in air freight, that's a big piece of the equation and one of the more tangible that we've been able to make, probably the most progress on -- in 2015. As I mentioned, we're seeing air freight utilization in the fourth quarter less than half of what it was in 2014. So that's going to translate into an important point of leverage for gross margins in the current quarter, in Q4. We see that extending into 2016. And to quantify it, we're looking at air utilization rates that are under 25%, where in much of the prior year, they were approaching 50%, north of 40% -- usually north of 40%. So that's a critical element that is tangible that we're seeing and meet your current…

And Paul, this is Laurent. What I might want to add quickly is with the structural changes that we've made and -- on the product side, I mean, being design-led certainly doesn't come at the expense of great merchandising, and I've already seen much greater collaboration between design and merchandiser resulting in a much more focused approach to the assortment, which will create better experiences for our guests, but also much more efficient targeted sourcing of our product, resulting in far greater margin. So I mean, I've seen the impacts that it will have both on the guest standpoint, but also the laser focus on a more streamlined supply chain.

Our next question is from Brian Tunick with the Royal Bank of Canada.

One question on the product side, and then one on the expense side. I guess on the product side, bottoms up, I think you said 27%, bras up 18%. Can you maybe talk about what are the biggest opportunities in the women's assortment next year? Where do you think there's the most white space to either relaunch or have a new category? And have you learned anything about your price opportunities given the newer high price point in the compression pants? And Stuart, on the expense side, can you maybe talk about the SG&A dollar growth? Obviously, there was some consulting costs in there. How much they may have been for the third or the fourth quarter, and are there any other management holes besides the supply chain head that we need to think about for 2016 SG&A dollar growth?

Well, this is Laurent. I'll take the first part of the question. I mean, clearly, what we've learned and what we've known all along and where we probably lost our way the past 3 years that when we are bold and when we're innovative, our guests respond really well. And the response to the launch of the pant wall has been fantastic, so both from a fabrication, from an innovation standpoint, and we have actually seen price elasticity that was much greater than what we had originally anticipated, meaning that our guests really responded well to the value that we've provided. So when you look at the success of being bold, innovative and really delivering that kind of value, and when you look at the comp that we've had in pants and bra, it's obvious that the category that we need to be really focused on right now is tanks. And with Lee coming on as Creative Director, I mean, his first area of focus is clearly to deliver the same type of innovation both from a fabric, styling and construction standpoint that we have with the pant. So that is a very substantial opportunity for growth for us as you think about spring, summer 2016 and beyond.

Great. And Brian, it's Stuart. I'll speak to the -- to your SG&A question. So SG&A did come in high for the quarter versus our prior expectations. There were a few factors that explain where we landed, a couple of which we mentioned in the prepared remarks, but these -- there's really 3 things I'll call out. First, we did see about $3.4 million of increase in FX revaluation loss versus Q3 of last year. We also had about $1 million in severance that was not incorporated in our earlier estimates. And finally, consulting fees, which in total were around $2.5 million in the quarter related to our supply chain initiatives, primarily came in above our prior estimates. A portion of that was contemplated in the guidance, but there was some portion that was above what we expected. The combination of those factors accounted for over 100 basis points of deleverage that we saw in the quarter and essentially bridge us back to our original estimates. We're comfortable that these costs are onetime in nature and do not represent a permanent increase in our cost structure and really offer us an opportunity for leverage as we lap these costs into next year. And as you -- as we think about Q4, we do anticipate a meaningful amount of SG&A deleverage in Q4, and that's implied in the guidance that we gave, but to a somewhat lesser degree than what we saw in Q3. You also heard in our prepared remarks some of the factors that we pointed to that will affect SG&A in the fourth quarter, the biggest of these being the $7 million in FX gains in Q4 last year that we are now lapping. That by itself is about 100 basis points of pressure. Otherwise, we are continuing to invest in our supply chain initiatives. That's probably the largest of the factors otherwise. But we also have important investments in website redesign and our digital marketing efforts. As we look into 2016, it's -- we'll give -- we'll certainly give more detailed guidance around 2016 on our Q4 call. We'll continue to make investments to support the supply chain initiatives, which will likely be heavier in the first half of the year as we are -- as we draw closer to completing those key investments in that time frame. So hope that's helpful.

Our next question is from Sharon Zackfia with William Blair.

I was hoping to get an update on the idea of having kind of gross margin parity or merchandise margin parity between seasonal and core. I haven't heard you talk about that in a while, and I'm not sure where you are on that initiative at this point.

It's not a great way, I think, that we would explain what's going on in our gross margin picture. I think we believe our seasonal products and our core products should both offer great margins that should lead to margin expansion from where we currently are. I guess what I would say is, we're 5, 6 weeks now into Q4, and we're excited to see that the efforts that we've been making over the course of the year are starting to get traction from a product margin standpoint. As we mentioned in the opening, we are seeing stabilizing product margins that are happening now in the fourth quarter as we begin to clear some of these port-related issues. As I just mentioned a few minutes ago, air freight is an important source of leverage for us as the utilizations are coming in line with our targets and our supply chain begins to normalize. Occupancy and depreciation will also be a big point -- big part of leverage for our gross margin into -- in Q4, and then even a greater source of sequential improvement into 2016. And just to be clear, there'll still be deleverage in Q4, but just not as much as what we've seen in the earlier parts of the year related to occupancy and depreciation. FX will continue to be a headwind. We will have some increased markdowns in the fourth quarter so that we can stay on top of the inventory movement. We are committed to and aggressive in ensuring that we get our inventories rebalanced. But coming back to your question, Sharon, on sort of core versus seasonal, we are developing a merchandise segmentation strategy that will enable us to balance the product, different elements of our assortments based on the anticipated life of those, the product life of those different parts of the assortment. And that should give us an advantage in how we build supply chains to deliver those and capture margin opportunities. So again, I guess, the punchline here is that we think we should be able to deliver great margins on both seasonal and core products, and that's how we're drawing up our plans.

And Sharon, looking at it from a pure product standpoint. I mean, looking at what's coming in, in spring and summer from a print technique, from a texture or from a construction standpoint. I mean I really -- I've said that all along. I mean, there's no reason why seasonal should deliver less margin than core, especially when you compound that with our scarcity strategy around the seasonal product. So we feel very confident that there shouldn't be any margin discrepancies between seasonal and core, and I actually think that we're not even thinking about seasonal and core that way anymore. And I'd love to take this opportunity to remind all of you that Miguel Almeida, who's leading digital, is on the call with us. And over the next few calls, I'd love to expose all of you to more of the management team. So obviously, digital is a center of excellence that we're building. Miguel has got a massive experience in that area. We're very excited about it and it's obviously a great opportunity for us. So if you've got questions for Miguel, don't make him feel bad for being silent here. Just ask him some questions.

Our next question is from Oliver Chen with Cowen and Company.

On the success of pants and bras and men's, what were the product classifications that had more opportunity this quarter in terms of getting to your overall comp? And Stuart, on the markdown front, what -- which classifications had the markdown? And as you guided to markdowns for the Q4 period, does that mainly have to do with what you've articulated with your warehouse sales or what should we expect in store? And then, Miguel, on your side, buy online, pick up in store and mobile, they're major ideas for integrating bricks and clicks. Just curious on what are the next major hurdles in the flagship? The Flatiron flagship has a lot of interactivity, so wondering what we can see there for the innovation ahead.

So Oliver, I'll take the least amount of time to answer your question. The largest opportunity right now for us is women's tanks. And Lee and Duke on the Brighton community side have actually put a fully dedicated team to just look at that opportunity and quickly bring product to life that we're proud of and that we love. So I'll leave it at that. That's clearly the biggest opportunity, one we're focused on.

And Oliver, it's Stuart. So the -- on the markdown question, there's a couple pieces there. Certainly, we have added activities, namely the physical warehouse sale, the online warehouse sale that we did earlier in the year and the 2 warehouse sales we now have teed up for the fourth quarter. Those certainly serve to increase the amount of markdowns that we have and are part of the guidance that we gave and the results in Q3. And otherwise, we are taking steps with regards to markdowns to make sure that we are staying on track with the clearance goals that we have to move through the inventory we have in an orderly manner. So in October, we did see -- we saw traffic slow in the final weeks of October. And there was some incremental markdown activity there to, again, stay on top of the inventory movement. We -- and the guidance that we have given for Q4 reflects the quarter-to-date activity and the -- as well our expectations at this point for the balance of the quarter in terms of actions we'll need to take to, again, stay on top of that inventory movement.

Yes, and this is Miguel. On the point of buy online and pick up in store, it's one of our critical initiatives to improve the guest experience across channels, something that our guests have been telling us that they really want to see from us. The RFID that we have in North America will enable us now to accelerate the testing, learning of those experiences, and -- but I'm mostly excited about what then the RFID technology, beacon technology, will help us learn about guest behavior as they are buying and browsing products in our stores. So that's -- it's one of the key priorities for us. We will learn significant things about the best way to implement these. The testing and learning on top of the RFID will help us do the right expansion in North America.

Our next question comes from Matt McClintock with Barclays.

Miguel, I will actually take the opportunity to ask you a question because I'm very interested in the upcoming website relaunch. Can you maybe give us a little bit of highlight of some of the functionality that you're adding, maybe content that you plan to add or add over time? And how you plan to improve the overall experience comprehensively online with digital with this new website?

Yes. Thank you for the question, Matt. So we're very excited about the redesign coming in, in Q1. It's an outstanding opportunity for us to bring our brand content and commerce together. The current experience is very decoupled from a commerce and content perspective. The new website will allow us to bring those 2 elements into 1 cohesive experience for our guests, both across web and the mobile experience as well, but then -- and that, the redesign itself will be just step one in terms of our digital experience evolution. What gets me most interested is then the personalization capability that will come over the course of the year. We're investing significantly in building our CRM and analytics capability, and the new website will allow us to really deliver contextually relevant experiences to our guests that bring the storytelling of our product and brands into the digital space. And then we'll connect those guests with -- back with our stores as well through some of the capabilities that we were discussing before. So we're very excited about seeing the new site coming to life in Q1.

Our next question is from Matthew Boss with JPMorgan.

So as we think about the 300 basis points of product margin opportunity, I mean, is basically what you're saying at -- you're expecting aggregate gross margins positive in the first quarter of next year for us to think about a larger inflection in the second quarter? And then just on the phasing, I mean, is it fair to think about 200 of the 300 in 2016 with the remainder in 2017?

Hey, Matt, so let me try to sharpen what we said a little bit there. In Q1, we expect to see sequential improvement in gross margin year-over-year versus the prior quarter, meaning the Q4. So I think we're seeing -- we're going to see a nice sequential improvement in Q4 versus the quarter we just reported, but still will likely be down year-over-year. As we get into Q1 of 2016, we'll see a further sequential improvement in gross margin, again, as our work to improve our supply chain efficiency and all the things we mentioned takes -- gets farther along. I didn't say necessarily that gross margin in Q1 would be up. We'll give more specific guidance in -- on our Q4 call, but I think what we are comfortable committing to is that we will see a sequential improvement in Q1. We see greater opportunity in Q2 and beyond in 2016 to see a greater inflection in our product margin and gross margin opportunities, and that's a combination of, again, just being farther along in the initiatives that we have. The FOB cost improvements in particular are going to be more second half weighted than first half, and there will likely be some actions we'll take that will weigh on margins related to just getting our inventories aligned in the first quarter. So I'm not going to put a number on what that product margin improvement looks like in 2016 today. We'll be able to speak with more precision to that again on the Q4 call. But I guess, conceptually, we're just saying, given what we know now about inventory flows into the first half of 2016, we still feel confident about the order of magnitude of inflection that we can achieve being consistent with that 300 basis points pre-FX product margin back to 2014, but it's likely going to take us a little bit more time into 2017 -- first half of 2017 to fully achieve that.

Great. And then just a follow-up, to circle back on the inventory, what's the best way to think about the content of the excess product? And then just to be clear on that, so are you basically saying that versus your initial plan for the on-hand reduction, you really only stand 10,000 units behind plan, which is about 4% below that game plan to clear 260. Is that kind of the best way to think about where you're at today versus what you had laid out 3 months ago and then just the go-forward content?

That's right. I think our -- what we had laid out was 100,000 units in Q3. We came in around 90,000, so still feel good. Directionally, that keeps us on track, and we'll be able to complete that part of the plan in the fourth quarter as we had described. But again, the biggest change in the inventory outlook for Q4 is really that in-transit, the decisions we made around it, we feel strongly that those are the right calls. We think otherwise it would be shortsighted to not ensure that we're protecting our flows into the first quarter. And otherwise, not take advantage from a margin standpoint of our ability now to shift from air to ocean. The consequence of that unfortunately increases our in-transit at the end of Q4. But nonetheless, again, we feel strongly those are the right decisions. I think what we will plan to do at the end -- as part of our Q4 call, we'll break out and provide some details on our on-hand inventory levels versus the in-transit so that we can demonstrate the degree to which our on-hand inventories are coming in line, and also quantify what the impact on the -- of the in-transit increase will have been.

Okay, great. And then just one housekeeper, are same-store sales quarter-to-date in line with the fourth quarter mid-single-digit guidance?

I'm sorry, can you repeat that?

Are same-store sales so far, quarter-to-date, in line with the fourth quarter guidance for mid-single digits?

Yes. So I think how I would answer that is that the next few weeks of the quarter in December are huge weeks from a volume standpoint. We're also up against a little tougher comparison in these weeks, and our comp assumption is probably just under the mid-single-digit range. So we're a little more conservative over the next few weeks in regards to the comp in that time frame, more conservative than we are for the quarter overall, if that makes sense.

Operator, we've now run out of time for questions. Again, thank you everyone for joining us today. We'll talk again soon. Thank you.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.