Good day, ladies and gentlemen, and welcome to lululemon athletica First Quarter 2016 Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Chris Tham, SVP, Finance. Please go ahead.

Thank you, and good morning. Welcome to lululemon's First Quarter 2016 Earnings Conference Call. Joining me today to talk about our results are Laurent Potdevin, CEO; and Stuart Haselden, CFO; along with Celeste Burgoyne, our SVP of the Americas, who will be available during the Q&A portion of the call. Before we get started today, 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 quarterly report on Form 10-Q are 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 would like to turn the call over to Laurent.

Thank you, Chris, and good morning, everyone. I am pleased to share with you today the results of a successful first quarter. I will start by offering a few highlights of the quarter, and I will then provide insights on our continued progress towards our 5-year plan, including each of the 4 growth strategies that were outlined on our last call. Stuart will then provide details on financials and our updated outlook for the balance of the year. We experienced continued momentum in Q1 that was the result of comp sales increases and gross margin improvements that exceeded our projections. Most relevant, we saw inventory levels get in line with our sales trend while exceeding gross margin expectations. We delivered Q1 revenues of $496 million, gross margin over 48% and adjusted EPS up $0.30, which included $0.06 of net FX pressure, primarily due to significant FX revaluation losses that we incurred as a result of the strengthening Canadian dollar in Q1, which Stuart will expand upon. While we are pleased to see the gross margin recovery in Q1 exceed what we had planned for, the continued recovery we are experiencing into the early weeks of Q2 is a validation of our team's work across our entire supply chain from design to in-store delivery. Our foundational work over the last year is paying off, and the earnings recovery we have planned for 2016 is taking shape. Likewise, with inventories now back in line, we have removed this strain on the business and are positioned to bring our innovation platform and our design vision to life powerfully, both in stores and online. While store traffic comp wasn't as strong in Q1 as in Q4, we delivered a total revenue increase on a constant currency basis of 19%, driven by an 8% combined…

Thank you, Laurent. I'll begin today by reviewing the details of our first quarter results. I'll then review our current outlook for the full year 2016 and also the second quarter. But starting with Q1. We saw a period of continued top line momentum within the context of a challenging retail environment. We delivered accelerated progress in recovering our gross margins and completed our work to rebalance our inventory levels in an orderly and disciplined manner. And when considering the impact of FX on our results in the quarter, we're pleased with the underlying recovery in earnings that Q1 represents, which we now see extending into Q2. Looking more closely at the details of the first quarter, total net revenue rose 17% to $495.5 million, with the increase in revenue driven by several factors. First, a total constant dollar comparable sales growth of 8% comprised of a bricks-and-mortar comp store sales increase of 5% and e-commerce comp of 18%. Secondly, an increase in square footage of 18% versus last year, driven by the addition of 57 net new company-operated stores since Q1 of 2015. 26 net new stores in the United States, 1 store in Canada, 1 in Australia, 5 in Europe, 4 in Asia and 20 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 $7.3 million or 1.5%. During the first quarter, we opened 10 net new company-operated stores, 2 in the U.S., 1 in Asia, 1 in Australia and 6 ivivva. We ended the quarter with 373 total stores versus 316 a year ago. There are now 290 stores in our comp base, 41 of those in Canada, 191 in the United States, 29 in Australia and New Zealand,…

[Operator Instructions] Our first question comes from Paul Lejuez with Citigroup.

It's Tracy filling in for Paul. I have 2 questions. First, on gross margins. So you beat your guidance for the last 2 quarters in a row. And I'm wondering if we should be thinking a little more optimistically about your gross margin goals for 2016 and 2017 relative to what you previously talked about. And then secondly, on SG&A, what changed in your guidance that you're now expecting deleverage in the second half? Maybe that's related to FX, I'm not sure.

Tracy, it's Stuart. Yes. So on the gross margin for the year or just the gross margin in general, I think we were happy with the results that we saw in Q1. Certainly, saw upside in things that we mentioned on the call, the FOB costs, the fabric liability and airfreight, all better than expected. And those were offset by the markdowns that we mentioned. We see that continuing into Q2. And we're pleased with the progress again, that we're making against our plans. At this point, we feel like the guidance that we've given properly reflects the order of magnitude of that recovery. Certainly, there's always potential to do better, but we feel like the guidance where we have positioned it is appropriate, given the risks and opportunities that we see in the supply chain and our margin plans. The other elements of gross margin, occupancy and depreciation. Occupancy and depreciation will remain a headwind, as we mentioned. Certainly, those costs are more fixed. And to the extent we exceed our revenue expectations, we'll deliver more leverage on those fixed cost elements of the gross margin. And certainly, the FX is a wild card at this point. For Q2, as we mentioned, we see it as a relatively nominal effect as we look year-over-year versus last year. But that can change as we saw in the first quarter as well. And then on your second question, with regard to SG&A deleverage in the second half, I think the -- it's really a function of just as we refine our outlook for the second half of the year, we are seeing some modest level of deleverage. And I would say that translates to less than 100 basis points in the second half. And it's really just a function of where we see the current estimates on the FX impact, the translation and revaluation as well as just the investments that we continue to make in our business. So we feel like that connects to a healthy operating margin recovery in the second half of the year. We expect to see earnings up in the second half, double digits. We expect to see a healthy recovery in our operating margins as well, as we're able to flow through the improvements in our gross margin, to a greater degree, in the second half of the year. So I hope that answered your question.

Our next question comes from Oliver Chen with Cowen.

Stuart, the rebalancing of inventory is really impressive. So for second quarter, what should we assume in terms of maybe second quarter and back half in terms of markdowns relative to last year, given that it looked -- it sounds like the inventories are in really super shape. And Laurent, on that topic of women's tops, where are you in that within that innovation? What needs to happen next in terms of what we should look for, whether it be pricing or styling? And are there any changes ahead as you think through the back half in terms of how you're evolving the pant wall, whether it be products or visual merchandising? Because I know there is a lot of innovation focus in that area as a store as well.

Great. Thanks, Oliver. I'll address your first question. So we're very pleased with the inventory position that we're in and the work that the teams have completed, as I mentioned. We expect to see markdowns moderate into Q2 and the balance of the year, and that's reflected in the margin guidance that we've given. And we noted on the call, in the prepared remarks, that as of the end of May, our preliminary inventory results indicate that inventories are up in the high single-digit range in the end of May. And that just reflects the further moderation in that year-over-year inventory growth. And as we mentioned, we expect inventories to be up to a lesser degree versus our revenue increases. So I think, as you look at it on a 2-year basis, the inventory position is still -- it's still full. We have plenty of inventory to drive our revenue projections. We're pleased to see the year-over-year trend come back in line, or actually will be -- sit beneath our forward sales trends. So inventories are healthy. They're clean. They position us in a manner that enables the optimization of our assortments. We're not dealing with the prior inventory overhang and it should translate into a better experience for our guests as well.

And Oliver, from a tops standpoint -- I mean, we're actually really pleased. I mean, I would say that we're slightly ahead of where we thought we would be. And if you've been in our stores, you've seen the assortment shifting in the right direction. I mean, some of that is really the result of the power of our Fast Turn group, which really works on shorter lead times. And you can see different silhouettes. I mean, the Making Move collection with the pleated tags is a great example of bringing something to market really quickly. The Swiftly franchise has done really well. But I would say, I would attribute the current success mostly to the new silhouette, the looser silhouette, the one that you can layer. And that combined with the success of our bras, the Make A Move Bra, the Rack Pack Bra, the Get Down Bra, has really put us in a strong position. So I just looked at the spring '17 product and last week at the winter '16 product, and I'm absolutely thrilled with the progress that we're making. It's very much -- you'll see function and fashion coming together in a way that you haven't seen in quite some time, if not ever. And it's really the result of the product reorg that we've done and a number of talent that we added to the team from a design standpoint. So that combined with the progress that we've made in supply chain and being able to throw the product to bring the design intent to life the way we want to, it feels really powerful and it's actually showing up on the floor right now.

Our next question comes from Sharon Zackfia with William Blair.

I think this is the first quarter in a while where your e-com hasn't kind of grown as a percent of sales. And I know it's chasing a moving target. But just curious as to what you think is going on in that channel, if you expect it to outpace the bricks-and-mortar for the full year. Any thoughts on that would be helpful.

Sharon, it's Stuart. So yes, the e-com growth, still double digits, high teens. We're not going to feel bad about that. It is a little lower than what we've seen last year. We feel like the penetration has the potential to grow well above 20%, easily could reach 25% to 30%. I think we talked about that in our 5-year goals. I would expect, as the digital team is able to ramp up the full impact of our new website, as we're able to bring online, particularly in the second half of the year, the full capabilities of our CRM efforts, we're going to see healthy trends in that e-com sales trend and would expect penetrations to increase over time. And so we're not seeing any red flags per se in the Q1 results.

And remember that we are really focused on building guest-centric and channel-agnostic strategies. So the launch of the new website is actually a great example and a great foundation for what's to come. And we had -- with every website launch, we have anticipated a slight degradation in business as guests get used to the new user experience. And actually what we've seen is better conversion, especially on mobile and a very rapid adoption to the website. So we feel very good that as we launch the full analytics capabilities of our CRM and we tie that to our digital marketing strategy, we've got -- we're actually going to leapfrog from where we've been. So I'm very excited for what's to come there.

Our next question comes from Matthew Boss of JPMorgan.

On SG&A, can you just talk about investments that are embedded this year versus 2017? I guess the question being, does deleverage stabilize or potentially even turn to leverage next year as mid-single-digit comps were to persist? And then just secondly on international. Just the best way to think about the time line for international profitability.

Sure, Matt. It's Stuart. On the SG&A question, yes. I think we're going to get past the major supply chain investments really in Q2. And as we get into the second half of the year, we'll begin to lap those investments in the prior year period. So it will be -- it will create some tailwind from an SG&A standpoint. That's embedded in the guidance that we've given. I think that then we have that in a more pronounced way as we get into '17 and beyond, as the -- we don't have these lumpy supply chain project pressure in the SG&A. So that element of it will certainly moderate even in the second half of the year and certainly into '17. We're always going to have things we're investing in. We're going to -- we're not in a place where we're squeezing SG&A to drive earnings. This is still a growth story. It's about revenue growth. It's about margin expansion. Those are the underpinnings of how we will recover a stronger earnings trajectory. We're going to invest in SG&A where it makes sense. But that said, we expect it will moderate even into the second half.

And from an international standpoint, I mean, we continue to be really pleased with the strategy of entering key cities in key markets. So when you look at our performance in Asia, I mean, we've got all of our stores over $1,500 or $1,600 a square foot, with IFC in Hong Kong topping the list at $5,700 a square foot. So very happy with that. The Tmall penetration that we're seeing there is really putting a lot more eyeballs on the brand where we don't have a physical presence. Europe, in Europe, we're very focused on London. The retail environment in London has been a little tricky lately until they go through the election at the end of June. And what we've seen is in the market where we've got a great community, we're doing really well, including King's Road, Covent Garden and Marylebone. And in a couple of cities where we're probably gotten a little bit ahead of the vibrancy of the community, we're not seeing the same result, and that would be Danburg [ph] and Richmond. So it's actually a great sort of validation that focusing on the key markets and going where we have the community pays off. And I would actually love to add that in our remarks we have hinted at the fact that we're going to find a couple of different ways of going to market in London that will definitely drive brand awareness in a really powerful way, and we're very excited to share that with you probably in the next couple of weeks.

And if I could just sneak one more in. Given some of the larger picture shopping mall trends, what kind of traffic and comp trends have you seen so far in 2Q just versus the first quarter and the mid-single-digit guidance?

So Matt, I'll give you a little color. I might invite Celeste to comment as well. The traffic was softer in the first quarter versus what we saw in Q4. And it was softer late in the quarter as well, and that persisted into the first couple of weeks of May in Q2. We have seen the traffic trends improve in the last couple of weeks. So there's been a mixed trend in the -- in terms of traffic in the first part of Q2. AUR and conversion have offset that to help us deliver the comps that we reported in Q2 -- Q1, we guided to in Q2. But may -- I'll ask Celeste to add some color.

Yes, Stuart. I think you hit it. I mean, basically we did see Q1 traffic not being as strong as we saw in Q4. However, when we look at the highly negative macro trend, we feel really good that we were favorable to that. AUR and conversion gives us really good indication that our new product drops are resonating with our guests as well as our continued focus on a great guest experience, both online and in stores, is continuing to pay off. So as we look into Q2, we continue to see the momentum in AUR and conversion maintained. So it definitely -- it gives us confidence as we shift into Q2.

Our next question comes from Anna Andreeva with Oppenheimer.

I was curious if you could talk about the monthly comp progression in 1Q. Should we think April was the weakest month of the quarter, given the traffic comments that you made? And sorry if we missed this. What were comps by division in 1Q, Canada versus U.S. and Australia? And secondly, I guess to Laurent, just holistically, thinking through the pricing architecture for LULU, I think we are starting to see some of the opening price points in tops specifically. Is that an opportunity to extend the customer reach for the brand? And any tweaks you guys need to make to pricing architecture in bottoms, especially?

Anna, so that was a mouthful. So on the comp question and traffic, the -- we're not going to break out the comps by month. I think, as Celeste said, we saw -- we are very encouraged by the strength in AUR and conversion. Traffic, as I mentioned, was weaker in the second half of Q1, and that persisted into the early weeks of May before becoming stronger in the last few weeks. So that's embedded, again, in the results that we reported in Q1 and then in the guidance. By region, I think we mentioned in the prepared remarks that we saw strength in Canada, in particular. And Canada actually posted a store comp that was slightly higher than the U.S., which, again, we look at that as a strong indicator of the -- just the strength of the brand and how -- in our most mature market, we're driving some of our strongest results. And again, it speaks to our assortments and our in-store execution. So -- and then on the -- on your question regarding pricing...

Think about pricing, Anna, on the bottom side. I mean, we're very happy with the pricing architecture. I mean, as I was mentioning in looking at winter '16, spring '17, we're delivering a lot of innovation. And so we price with the value that we deliver to the guests. I mean, we are very confident that we've got, with the pricing architecture, both across categories within the global standpoint as well. And with tops, I mean, we're like where we need to be. I mean, we see a lot of success, and we see the opportunity to actually bring innovation and continue to be sort of really honing the [indiscernible] of the market the way we always have.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Stuart, I just wanted to ask -- I think you said $0.06 in the quarter due to FX hits. Can you just remind us how many pennies of FX headwind you had planned for in the quarter? And then, Laurent, as we look into the back half of the year and reflect on the very successful pant launch that you guys had in the third quarter last year, can you talk about your product strategies and how you're thinking about driving your business to the next level as we proceed through the year?

Kimberly, it's Stuart. So the EPS impact from FX certainly exceeded our expectations. We did expect deleverage in the quarter. You might recall that we had mentioned that in our guidance back in March. And we had, at that point, even seeing the Canadian dollar strengthen significantly from around $0.70 at the end of Q4 to $0.75 at the time of the call. Safe to say that the actual result exceeded our expectations in terms of the level of pressure that we saw from FX. Canadian dollar, as we mentioned in the prepared remarks, strengthened $0.05 from $0.75 to $0.80 in the last 4 weeks of Q1. We did not expect that. And so I think we had an estimate of around $0.03 in the prior outlook that we had. So where it landed was almost double our expectations. And so the -- it's something that is really part of the exposure that we have from our -- the cash balances that we accumulate in Canada in U.S. dollars. It's not really the translation of the Canadian P&L per se. And I would add that we've taken steps already to -- from an operational standpoint to reduce our exposures in those cash balances. And at this point, our exposure is less than half of what it was in Q1. So we feel like we're going to be able to mitigate this exposure to some degree as we go forward. But certainly, it's something we will continue to be focused on.

And on your product question, Kimberly, I think that the pant launch was successful and was really the very beginning of what we're about to do. I mean, when you see summer land, you'll see a completely different assortment. I mean, that being sort of collapsed the studio and the car deal [ph], pods and making them one group -- I mean, you're going to see a hard wall, you're going to see the ability to put outfits together across the entire assortment. It's going to be a lot more powerful. You're going to see a lot more newness in fabrics, textures and print, but also a very elevated attention to details to trim, construction, raw materials in a way that probably hasn't come to life in the past couple of years. So obviously -- and we'll continue to focus on run where we see a tremendous opportunity both for men's and women's. And you'll see most of the focus if not all of the focus on the sweat category, which we really own and want to continue to lead. So as it is summer -- I mean, you'll see an environment that is elevated, that speaks to function and that looks fantastic.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.