Good day, ladies and gentlemen, and welcome to the lululemon athletica Fourth Quarter 2015 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Chris Tham, SVP of Finance. You may begin.

Thank you, and good morning. Welcome to lululemon's Fourth Quarter 2015 Earnings Conference Call. Joining me today to talk about our results are Laurent Potdevin, CEO; Stuart Haselden, CFO; and Lee Holman, EVP, Creative Director, who will also 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 management's current forecasts of certain aspects of the company's future. These statements are based on current information, which we have 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 annual report on Form 10-K will be available under the Investors section of our website at www.lululemon.com. Today's call is scheduled for 1 hour. [Operator Instructions] And now I will turn the call over to Laurent.

Thank you, Chris, and good morning, everyone. It is my pleasure today to share the results of a very solid fourth quarter. I will speak to some highlights of 2015 as well as our priorities into 2016 and beyond. Stuart will then walk you through our financial and guidance in more detail. 2015 was a transformative year for lululemon, one where we successfully reached key milestones that are positioning us for continued growth and improved profitability over the next 5 years. The strength that lululemon demonstrated in the fourth quarter exceeded our expectations as a result of continued top line momentum, focus on growth margin and inventory levels. While we have room to improve, we are well positioned to deliver solid earnings growth in 2016. From a top line perspective, the fourth quarter delivered 22% constant currency revenue growth, including exceptional full-price sell-through during the key holiday weeks. We delivered an 11% global combined comp, the result of accelerating performance across our channels and regions. Our e-commerce revenues continued to outpace our overall growth, posting a 33% increase in the quarter. While inventory levels are still elevated, they are significantly lower than our prior estimates. This reduction happened while delivering growth margins above the high end of our guidance. In looking more closely at the results in the quarter, we see exciting momentum by category, channel and geography. Our women's category continued its strong performance in Q4, with bottoms delivering double-digit comps, reflecting the continued strength of our product assortment. The successful launch of Engineered Sensation with new technical fabrics and innovative construction techniques drove the business, led by the new Align Pant, designed to minimize distraction and maximize comfort. We also saw a sequential improvement in women's tops, where comps turned positive in the quarter, led by the success…

Thank you, Laurent. I'll begin today by reviewing the details of our fourth quarter of 2015 and highlights from the year. I'll then provide details for our outlook for 2016 and the first quarter. I will also provide further details of our growth plans for the next 5 years, as Laurent has described. The fourth quarter was an important period for us as we posted accelerating double-digit comps against our highest prior period comparisons of the year. We also made improvements in our product margins and solid progress in realigning our inventories, which helps set the stage for the recovery and profitability in 2016 that we had been building towards this past year. Turning to the details. Q4 total net revenues rose 16.9% to $704.3 million, with the increase in revenue driven by several factors that include: a total constant dollar comparable sales growth of 11%, comprised of a bricks-and-mortar comp store sales increase of 5% and an e-commerce comp of 33%; and also an increase in square footage of 20% versus last year, driven by the addition of 61 net new company-operated stores since Q4 of 2014, 30 net new stores in the United States, 2 stores in Canada, 5 in Europe, 3 in Asia and 21 ivivva stores. And finally, these factors were offset by the foreign exchange impact of a stronger U.S. dollar, which had the effect of decreasing reported revenues by $28.3 million or 4.7%. During the fourth quarter, we opened 9 net new company-operated stores, 6 in the U.S., 1 in Europe and 2 ivivva. We ended the quarter with 363 total stores versus 302 a year ago. There are now 284 stores in our comp base, 41 of those in Canada, 188 in the United States, 31 in Australia and New Zealand, 1 in…

[Operator Instructions] Our first question comes from the line of Oliver Chen of Cowen and Company.

Regarding the unification of men's and women's, what do you think we should expect in terms of what may happen to men's just because the momentum has been so strong there? And also, as we look forward, you did mention that your inventories are a little bit more than you would have liked. Which products is that related to? And Laurent, if you could highlight anything we should expect with the women's tops momentum and innovation there, that would be helpful for as we think about modeling the back half.

I think that was 4 questions in a row. So I'll pick up the men's question. I want to remind everybody that we've got Lee in the room with us. But really, the unification of men's and women's under one overarching vision is really just strengthening the brand. So when you think about telling global stories of functional raw materials or construction, I mean, now we have a platform that really is much larger than it was before. And I always talk about Ocean and Duke, our muses, being able to share a walk-in closet, and we are one brand. So I'm very, very excited about the power, the unification and truly being design-led, as Lee build his organization. So Lee, I'll let you chime in on that. But it's really the first time that, as an organization, we are design-led across men's and women's, both from a functional and from a design standpoint.

Yes. I'm just really excited about 2016 and beyond. And it already starts from moving from a house of brands to a branded house. And what I mean is just aligning under one creative vision, having a pipeline of innovation that taps into men's and women's, think of the Engineered Sensation, how you can take that platform and build it from a men's and women's point of view. So I'm just really excited about driving the men's and women's business forward and a constant stream of like innovative product that we can bring to our guests.

And Oliver, it's Stuart. So on your question regarding inventory, and I think you're asking any specific categories we would call out in terms of the current inventory balance. First, I'll say, we're pleased with the improvement that we saw in the quarter. I would offer that the inventory balances are very current, and we're not seeing any deterioration and aging. There's not a specific category, I'd say, we're particularly heavy. And I think we're -- as we look forward for the year, we expect to see inventories, by Q1, come in line with our forward sales trend. Inventories over the course of the year may even begin to look lean, I think, on a 2-year basis versus our sales trend that will look appropriate. But we're pleased with the progress that we made on the inventory balances, as I said, and no particular categories I'd call out.

And Lee, do you want to touch real quick on the question around tops?

Yes. I think on the women's tops business, and we can look at the men's as well. It's really having a real heightened focus and obsession around how do we bring balanced assortment of newness, and also how do we make it easier to outfit within stores and on digital with our bottoms business. So really offsetting around how color and print work together, how different textures -- one of the biggest callout that we're hearing from our ambassadors and our athletes is technical in the bottom and natural on top. And we're really covering that with our new assortment.

Our next question comes from the line of Adrienne Yih of Wolfe Research.

Lee, the question is for you. Can you talk about -- before you got there, there was this kind of push and pull and a balancing between core basics and the seasonal product. And I'm wondering how that strategic direction has changed under your vision. And then for Stuart, if you can talk about merch margin recovery over this long-range plan that you've laid out for us. Where can the merch margins return back to, say, over time?

I think coming in a year ago in October, I think it's really around how do we heighten up those functional, seasonal stories with newness and new silhouettes that we are hearing from our ambassadors and our athletes, but also with a balanced offensive classification excellence. And I'm really proud of every product that we constantly put out. Core is constantly evolving. We always look at our fits. We look at how things are shifting really to more of a high rise rather than a low rise. I mean, that's something we're hearing from our guests. And I think what's very unique about coming here in lululemon is just the constant feedback we're getting from our regional managers, our store managers and our ambassadors that we can really react to shifts in trends. And also what's really exciting is just about how people are working out very differently. Shifting to more of these hybrid classes that are combining high-sweat activities and low-sweat kind of activities like yoga is moving and we're moving with yoga, which is really exciting, and then tap it into training and run, that Laurent talked about earlier, with new innovative product. Just so excited about, as we get through this year and beyond, with the new innovative experiences that myself and Tom will bring in.

And Stuart?

Great. Yes, Adrienne, so on merchandise margins, as you suggested, as we're looking forward in terms of the recovery, what I would say is we see in the second half of the year, the anticipated recovery in product margins or merchandise margin taking shape consistent with our product expectations. We see this extending into the first half of next year as planned and beyond. And we think we can achieve the level of recovery that we had targeted previously and communicated with investors. That said, I would like to shift the focus here to gross margin in our discussions, where we can provide more transparent guidance to investors. And I think that's likely what you intended with your question anyway. We'll certainly provide details on the components of gross margin as we go forward, but ultimately, that's the metric we have to improve in order to drive recovery in our operating profit. And so specifically on your question of where we think we can get back to, I think we still feel like the low 50s in aggregate for gross margin is where we can recover our gross margins. That will be the primary impetus for a recovery in our operating margins to the low 20s. We don't see that changing. We think over the next 5 years, we should be able to get back to that level of performance. And we'll continue to provide update as we go through the year.

Our next question comes from the line of Paul Lejuez of Citi.

Can you talk about traffic versus ticket on that plus 5 store comp? And what assumptions are built in to your comp guidance for '16 at the store level versus e-com? And then, within that store assumption, again, traffic versus ticket. And just bigger picture, can you talk about pricing power you think you might have?

Yes. Paul, so to make sure I hit this right, so we'll -- I'll give you some color on what we saw in traffic, Q4 and into Q1, and then just talk about how it connects to our comp outlook. So we have seen positive store traffic in the first quarter, both in stores and online for sure. And that's really against the backdrop of a pretty challenging retail environment. That said, the traffic has not been as strong in the first quarter as we had experienced in the fourth quarter. And then thinking about how that connects to our comp guidance, we planned comps for the year and for the first quarter at mid-single digit. That's how we're bought. And certainly, if the guest votes above this, we can do better. But at this point, we feel like that guidance for our comps is appropriate, and that's certainly reflective of the traffic trends that we're seeing in the first quarter. As we think about looking back at Q4, with the really strong traffic, the other factor that buoyed our comp results in the fourth quarter was just a very strong AUR outcome. And that connects, I think, to your ticket question. So certainly, traffic and AUR were the drivers of the comp performance in the fourth quarter. I would say that's largely extended into the first quarter, although, as I just mentioned, we're -- it's tempered by some moderation in the traffic trends in the first couple of months in the quarter.

As far as your question, I mean, just to chime in real quick on pricing power. I mean, I think first of all, pricing power is dangerous because it's chipping at the equity of the brand, where we think we have tremendous power in innovation. And when we deliver innovation and value for our guests, we actually do have pricing power. And that was very clearly validated when we relaunched our pant wall and also with our men's business. So as long as we're focused on innovation and as long as we deliver innovation across categories and across gender, I mean, we have tremendous pricing power.

Our next question comes from the line of Ike Boruchow of Wells Fargo.

I guess, Stuart, I want to focus on the international side. So 11 openings this year from, I think, 9 last year. And then in the prepared remarks, you mentioned by 2020, getting to about 20% or 25% of sales, which is a pretty big jump from today. So I guess my question is, can you help us understand how you get there in terms of new door growth versus productivity? And then can you talk about the ramp in profitability there from what, I guess, is losses today to breakeven next year to what kind of contribution you'd expect by 2020?

Yes. Thanks, Ike. So to be clear, that 20% to 25% does include our Australia business, which we have about 30 stores today in Australia and New Zealand. But certainly, the bigger part of the story is with the acceleration of our growth in Asia and Europe. And so certainly, we're building a pipeline of showrooms in each of those geographies that we believe will support an acceleration in store openings in the coming years. And then as we think about just those 2 geographies, we're particularly excited about the results that we're seeing in Asia. We've seen strong results or strong performance in the new stores we've opened in Singapore and Hong Kong. We're targeting other capital cities in the region, Seoul, Tokyo, Shanghai and Beijing, in the near future for new stores that we're just -- we think will be particularly successful both in terms of profit and the total volume that the stores will generate. We're also pleased with the traction that we're getting in London. We've had some important openings in London. We've got 3 or 4 more teed up for this year, really focusing on building our brand awareness in this pretty critical capital city for that region to help drive the brand awareness. And that's -- the strategy is such that we're balancing, executing our proven showroom strategy that helps us derisk these new store openings, seed brand awareness, seed demand in those markets with developing a stronger brand awareness regionally through opening these high-profile stores in these capital cities. So certainly, as you think about the profitability, we think we'll reach a point by the end of next year, where we'll have a critical scale, particularly in Asia and Europe, where we believe we can begin to leverage our overhead. And that should accelerate beyond '17, as we achieve greater and greater scale. I wouldn't look at the number of openings that we've had in '15 and '16 as a straight line. We will expect that we'll be able to increase the store opening cadence as we get deeper into the 5-year plan that we've outlined.

And remember that we've got a very focused strategy. I seek capital cities to raise brand awareness. So later this year, we'll be actually announcing a couple of different go-to-market strategy to really increase that. So we're being very innovative and curious in how we can accelerate, how quickly we run brand awareness in those capital cities.

Our next question comes from the line of Matthew Boss of JPMorgan.

So as we think about same-store sales by category, can you talk about comp performance, those tops versus bottoms in the fourth quarter, specific initiatives just to expect this year in tops and really the best way to think about bottoms in the back half just lapping the pant wall? And then finally, on the first quarter, what have you seen in February and March versus the mid-single-digit comp guide? I think any color would be really helpful.

Okay, Matt, it's Stuart. Maybe I'll speak to your latter question on the Q1 trends, which really is sort of along the same lines of what Paul asked a few minutes ago. And I'll turn it over to Lee to kind of talk about the plans we have and the trends that we've seen in women's tops and bottoms. So in Q1, as we mentioned, we've set the comp guidance at mid-single digit. We have seen traffic, while positive in the first quarter, not quite as strong as it had been in Q4. So we feel like the mid-single-digit guidance is appropriate. That said, as I mentioned, if our guests vote above this, there's potential to do better than that. But at this point, we feel like this is -- that guidance is appropriate. And really, as we think about the KPIs that underline that comp guidance, it's really the same story from the fourth quarter where we're seeing improvements in AUR and modest positive traffic in the first quarter that get us to that comp outlook. So hopefully that answers your question regarding Q1. And Lee, can you speak to...

Yes. I think, on our tops business, we're really excited at how we're getting to the back end of the quarters around bringing newness into our tops business, if it's from a natural point of view, from a fabrication and more technical soul and really looking about how we layer in a system of dress, which is really around back about harmonies and tops. So how is your first layer, your second layer work for your outerwear, so that when you go into storytelling in the stores or when the guests come in, it's really easy to outfit. And then what I'm really excited about the bottoms business, it's really extended to Engineered Sensation platforms that we did in Q4, and then adding new fabrications that really heighten out those sensations. So you're going to see a lot more new fabrication, a new execution on printing techniques within our pant wall as well and more obsession around craftsmanship as well, really driving this notion around engineering rather than veneering. That's really engineering the fabric, really getting back to those design principles around fit, fabrication, silhouette and finish, and really going back about how lululemon's really started with the fabrication around luon, the unique properties around that. And also it made you look amazing, so how do we get back into that and driving innovation from all the product that we're driving? And I'm really excited about how we're bringing these innovation products for the next year and beyond.

And our next question comes from the line of Brian Tunick of Royal Bank of Canada.

I guess one question, just maybe give us an update...

Brian, we can barely hear you.

Is that better?

Not really. Go ahead.

Just on the supply chain and your design calendar and lead times, just maybe give us an idea of what's happened over the last year or 2? How long does it take to get product in the store? What kind of testing are you doing? Just an overall view point there. And then the second question is on omni-channel, your new DTC launch. Can you maybe talk about timing? Where are you on some of the projects there?

Brian, it's Stuart. So on your first question, in terms of the supply chain and the product calendar, fundamentally, the timetable for how we bring products to market is unchanged. And we're really operating on essentially a 9-month seasonal calendar, where we're making financial commitments probably 4 to 5 months out. And the balance of that 9 months is related to design and development. So I mean, that's largely unchanged. Certainly, we're always looking for ways to improve that timing and create flexibility. Our fast-turn strategy is really the most prominent way we've tried to do that in terms of leveraging fabric that we own into trends that we see emerging in stores on a shorter lead time. And that's, I think, a well-understood strategy we've had. We're always looking to try to grow that where it makes sense to, again, create a greater degree of flexibility to respond closer to market. So I hope that answers your question there. On the omni-channel and direct-to-consumer, as we mentioned in our prepared remarks, a lot going on. Miguel is rapidly building an impressive team. We're making a lot of important technological investments. We had mentioned, I think, previously that we are building towards a new launch for our website. That is definitely still the case. That website is now live internally, and we're testing and looking at a launch externally to our guests in early Q2. So plans there are on track as we had previously described. I mean, additionally, from an omni-channel standpoint, it's important to mention the work that we're doing at CRM. So we're building new customer analytic capabilities that the company has never had. And that will enable us to better tailor, better craft our communication with guests in a sophisticated way that we just have never done. It will give us better understanding of our customer segments, how they're performing, how they're trending, what's working, what's not, so that we can just become a stronger, more customer-centric business. And then connecting that with the technological improvements in RFID, how we're connecting our pools of inventory across channels so that we can meet our guests, as Laurent described, in a channel-agnostic manner so that we're able to connect those experiences between stores and online more seamlessly. So that's a big part of the growth strategies over the next 4 years. It was one of the 4 that Laurent had mentioned, and it's certainly something we're investing aggressively behind.

Our next question comes from the line of Paul Alexander of BB&T.

Any learnings from the New York Flatiron stores so far? And then just a broader question about flagship stores. It sounds like the international strategy will rely heavily on capital cities. Will North America get any more kind of flagship stores?

I think we -- this is Laurent. I think we talked about that on the last call. I want to be really clear when we talk about flagship store. And what we've got is that we've got a very proven, powerful formula with our 3,000 square-foot stores, and we're experiencing with more formats. So whether it's a larger format or a smaller format in a resort, beach mountain location, but it's not a flagship -- we don't build flagship from a branding standpoint that are losing money. So we look for the same profitability. We just build larger format when we want to show a broader assortment of the product where we've got much better or much stronger traffic. So it's not so much a flagship. It's a question of really having the right assortment where we need it and provide the global assortment with digital air cover. So you'll see larger format where it makes sense, but you won't see us build flagship as marketing or branding exercises.

Thank you, everyone, for joining us today. We'll talk again soon.

Thanks.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.