Good day, ladies and gentlemen, and welcome to the lululemon athletica Q2 2015 Results Conference Call. [Operator Instructions] I would now like to introduce your host for this conference call, Mr. Chris Tham. You may begin.

Thank you, and good morning. Welcome to lululemon's second quarter 2015 earnings conference call. Joining me today to talk about our results are Laurent Potdevin, CEO; Stuart Haselden, CFO; along with Tara Poseley, our Chief Product Officer, 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 management's current forecast of certain aspects of the company's future. These statements are based on current information, which we've 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 Investors section of our website at www.lululemon.com. Today's call is scheduled for 1 hour. [Operator Instructions] And now, I would like turn the call over to Laurent.

Thank you, Chris, and good morning, everyone. Today, I will provide an overview of our second quarter performance as well as give you an update on our progress surrounding our key strategic initiatives planned for the remainder of the year. Stuart will then walk you through our financials and guidance in more detail. As we enter the second half of the year, our team has made significant progress to grow our global collective by relentlessly innovating our products and continuing to create transformational experiences for our guests. We have many exciting milestones to cover today: the redesign of our women's pant wall launched last week, our fourth annual SeaWheeze marathon was another exceptional success here in Vancouver, and we supported new market seeding by hosting locally relevant events in our vibrant communities around the world, including in South Korea, Scotland and Germany. On the people front, we recently welcomed Miguel Almeida to lead our global digital transformation. Miguel is a global citizen with a great background, and as an avid endurance runner, is a superb fit for our culture. Miguel is a passionate champion of using the digital platform to deepen our connection with our guests through personalized experiences while also extending and amplifying brand resonance globally. I am thrilled to welcome Miguel to lululemon and truly start to leverage our digital opportunity. From a business standpoint, our momentum continues to build and our fundamentals are strong. As you will recall, we entered Q2 with a robust in-stock position, and we are confident that our guests would respond favorably to our product performance. This translated into a positive impact on our top line results with $453 million in net revenue for the quarter, up 16% over the second quarter of 2014 and up 21% in constant currency. We delivered an…

Thank you, Laurent. I'll begin today by reviewing the details of our second quarter in 2015, and then I'll update you on our outlook for the third quarter and the full fiscal year 2015. For Q2, total net revenue rose 16% to $453 million from $390.7 million in the second quarter of 2014. The increase in revenue was driven by total constant-dollar comparable sales growth of 11%, comprised of a bricks-and-mortar comp store sales increase of 6% and a 35% growth online; also, square footage growth of 24% versus last year, driven by the addition of 66 net new company-operated stores since Q2 of 2014: 39 net new stores in the United States, 3 stores in Canada, 1 store in Australia, 3 in Europe, 3 in Asia and 17 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 $20.3 million or 4.5%. During the second quarter, we opened 20 net new company-operated stores: 9 in the U.S., 1 in Canada, 2 in Europe, 2 in Asia and 6 ivivva. We ended the quarter with 336 total stores versus 270 a year ago. There are now 250 stores in our comp base: 40 of those in Canada, 163 in the United States, 28 in Australia and New Zealand, 1 in Europe and 18 ivivva. At the end of Q2, we also have a total of 82 showrooms in operation: 28 lululemon showrooms in North America, 17 internationally and 37 ivivva. Company-operated stores represented 75% of total revenue or $339.8 million versus 75.3% or $294 million in the second quarter of last year. Revenues from our direct-to-consumer channel totaled $82.2 million or 18.2% of total revenue versus $63.5 million or 16.2% of total revenue in the…

[Operator Instructions] Our first question comes from Brian Tunick with Royal Bank of Canada.

I guess, two questions. I guess, Stuart first. Just looking at your current gross margin guidance now for 2015, has your view changed on the opportunity? I think we've talked about 300 basis points, I think, of merchandise margin recovery for next year. Or what buckets maybe that's going to come from? So just curious there on has your view changed for next year's opportunity. And then on the comments that all regions are comping positive, so just think about your most mature stores in Canada, what would you point to as being the biggest changes you have made there in restimulating that oldest class of stores?

Brian, this is Laurent. Before I let Stuart dig into the gross margin question, I think that what you're seeing in Canada is really the result of the work that we've done across product innovation, guest experience and brand and community and the quality of the assortments. So we are very, very pleased about, after 12 quarters of declining comps in Canada, we're actually seeing positive comps and we are seeing the same results in Australia. So I think it's really -- we've been speaking for quite some time now about the triangle of guest experience, brand and community and product coming together, and when you think about the recent launch of our new pant wall, I mean, that was a prime example of the power of our teams collaborating and coming together and really delivering what we are known for. So -- and it's certainly paying off in our most mature market, being Canada. And before we get into the details of gross margin, I mean, I think it's -- and I'm sure we'll have a lot of questions on gross margin. I mean, it's really, really important for everybody to understand that the short-term gross margin pressure that we are experiencing is not the result of higher markdowns or quality issues. We're building a very scalable, complex platform at a time when we're growing internationally. And we've added resources to the team, and we've validated that not only we will see the margin expansion that we've committed to, but we'll see it in 2016 and beyond, as we have stated before.

And Brian, we remain confident in the product margin opportunities that we have identified for 2016. We continue to build out the details of our implementation plans this year. As a reminder, that opportunity we identified was a 300 basis point improvement in product margins in 2016 versus 2014. The full year amounts for those annual comparisons, that's on a pre-FX basis. And it's the same things that we've been talking about. We'll capture this through primarily the improvements in our go-to-market calendar process, improvements that will deliver lower airfreight, improved raw material management and better costing. And additionally, as you look at gross margin, the other buckets that -- and there are other things weighing heavily on gross margins this year. We'll begin to leverage our infrastructure investments that we've been making this year, but we should also see markdowns normalize. And occupancy and depreciation costs should moderate into next year. We expect it'll still be a headwind, but not to the same degree as it has been this year. It'll be more in line with what our historical experience has been. As you then think about that -- those goals and connecting that to the results we just announced for Q2, the guidance for Q3 and Q4, I think the issues that are weighing on product margins this quarter and in Q -- and that we see extending into Q3 are not structural, that we'll be able to clear the port-related items that we've seen weighing on our margins and the other factors that I just mentioned as we get into next year. In Q4 specifically, we'll clear those port-related issues. That will not be -- that will not weigh on our margins. We'll see some modest product margin recovery in Q4. That will combine with better leverage on our fixed costs in the fourth quarter just from the higher sales levels in the fourth quarter. So hopefully, that's addressing your question.

Our next question comes from Paul Alexander with BB&T Capital Markets.

Just a little clarification on current trends in the comp guidance. There has been some comments that sales trends continue to build and accelerate sequentially, but the comp guidance for third quarter of high single digits, while only a small moderation, does imply a moderation from 2Q. So is there something we should be thinking about? Or did you maybe see a deceleration in August related to the Labor Day -- later Labor Day or something else that we should be thinking about?

So on the comps, we continue to see strong trends in traffic and conversion, sequential improvements in both of those, and that's across all our regions. So I would not want you to take away anything from the guidance that our comp momentum is slowing down in any way.

Our next question comes from Jim Duffy with Stifel.

Can you talk to the -- can you please speak to the tactical strategies to bring inventory more in line with expectations? And then related to that, from our checks, the response to the new pants offering has been exceptional, but we have seen some instances of out-of-stocks. Is the product flow for the new pants offering in line with your expectations?

Yes, so I'll tackle the inventory clearance question first. So we're on track to what we had talked about last quarter. So we had described, and I think we've reiterated in our prepared remarks, that we had about 1/3 of the excess identified to be pushed through our normal exit channels and about 2/3 will be the reflow into our assortments in the second half. We had a successful online warehouse sale in the second quarter that enabled us to clear a little less than half of the excess overhang that we had from Q1. We have 2 physical warehouse sales planned for the balance of the year: one in Q3, one in Q4. And we're -- we also are opening 8 additional factory outlet stores this year. So the combination of those factors gives us the bandwidth or the capability to easily work through that excess, on plan with what we had previously outlined.

And then this is Tara and I can answer about out-of-stock. We've had really good initial reads on the pant wall, but we absolutely have inventory that we are in the process of allocating to stores. So those out-of-stocks that you may have perhaps seen, we did a big push of inventory prior to Labor Day weekend and you should see those level out as we get into the coming weeks.

Our next question comes from Matt McClintock with Barclays.

Laurent, first question, bigger picture. I have seen the new pant wall, looks great. As we think about you reintroducing product, launching new innovation, new product going forward, how are you thinking about pricing? Can you just talk higher level your thoughts on updating pricing strategies overall?

Well, I mean, I think I'll go back to our products used always to be at the top end of the pyramid of the market that we've created. And as we look at new categories or at innovation of our current categories, I mean, we are very much pushing our teams both from a design standpoint and from a functional standpoint with white space and in collaboration with our ambassadors to really create products that are going to drive function and design at the top end. So I mean, we're not seeing ourselves being limited by pricing at all, as long as we deliver the value for our guests both from a function and from a design standpoint.

And Stuart, if I -- just a housekeeping question. The relaunch of the website, now that that's, I believe, in the first quarter of next year, is that having any impact at all on your comp guidance for the full year?

Matt, not really. I think it was more a decision to allow a little more runway to get the website exactly where we wanted it. We also had the benefit now of having Miguel on the team, and his leadership is critical in that area. And it helps the team remain focused on optimizing business in the critical fourth quarter as well, versus trying to manage also a major website implementation. So just felt like the right decision given those circumstances, and it really isn't -- it's not weighing on the comp guidance in any way.

Our next question comes from Dana Telsey with Telsey Advisory Group.

You've had acceleration in the men's business, wondering any more detail there. On the pant wall, I believe you're introducing the tank wall in the second -- in the fourth quarter. Pricing on the tank wall versus pricing of tanks now and how do you expect that to be different than the introduction of the pant wall? And just lastly, you mentioned a bit about occupancy. How is renegotiating of existing leases changing your overall occupancy costs?

Dana, it's Tara. So we're really pleased with the men's business, as you heard from Laurent's prepared remarks, a 31% comp in the men's business, and we're really seeing acceleration across all categories within men's. But a real highlight that we're excited about is the sweat category and continue to see strength in that area, which is really the foundation of our men's athletic business. And we've been introducing new fabrics this year that are reinforcing our sweat platform. We had a new fabric, Intrinsic [ph], in Q1. We have Pima tech [ph] coming in Q3, very pleased with that. As for the tank wall, just to remind everybody, we had focused on the tank wall for Q2. Due to the port strike slowdown, we didn't get our tanks styled in until the very end of Q2. We saw nice response and comp trend change when we finally got our full range of support and tanks out in the stores. You'll continue to see new styles throughout Q3 and Q4 being added to the tank wall. And we're taking all of the great learnings that we're getting right now and incorporating that into our assortment for next year in 2016. And as for pricing, as Laurent said, where it warrants, where we're adding innovation, where we feel that we have that balance of really driving something new and different to our guests, we'll be pricing it appropriately within our tank pricing structure.

And Dana, on your question on occupancy. I think the remodels -- or the renewals are an element of the pressure we've seen. We have great landlords, great relationships and are driving, I think, good terms there. As you look at the pressure, particularly in Q2, the new store opening cadence is really a bigger factor. We opened 20 stores in the second quarter compared to 7 last year. So just the year-over-year increase in new store openings is a bigger factor. Also the international stores we're opening, we've mentioned this before, come at a little higher occupancy costs and oftentimes include key money, which gets factored into that occupancy amortization. So those are probably bigger factors for us. We've also -- we're excited about the major renovations and relocations that we've also been pursuing and that also weighs into it, but it's smaller than just the new store opening cadence.

Our next question comes from Bob Drbul with Nomura Securities.

I'd just like to ask about the international expansion a little bit. I think you're pretty happy with some of the stores that you're seeing, Asia exceeding initial plans. Can you talk a little bit about the profitability ramp that you see? And do you believe we'll be able to get to current or peak prior operating margins? And how the store opening expenses are trending from that perspective?

Bob, on international, some very exciting new store openings. I think Laurent mentioned the ifc Centre in Hong Kong. That store is contending for the highest sales per square foot in our company. And on a four-wall basis, very attractive operating four-wall profit. And so in general, we're happy with the new stores we're opening internationally. Pleased with the results in Europe. Asia has been really off the charts, that's on a four-wall basis. We are making significant investments in terms of the management teams to drive these regional businesses, marketing to support the store openings and building the supply chain to support these businesses. So it'll take us a while to get a critical mass to be able to leverage those investments. I think what we've said earlier in the year in regards to just the operating profit profile, we believe international will weigh on the company's operating margins, at least in the near to medium term. We're expecting to, over the next few years, to return to that low to mid-20s EBIT margin range, with the North American business being more in the mid-range of that -- of the 20%, 20% to 25% range, and international averaging it down, if that makes sense. So it'll continue to weigh on it. We're excited in terms of just the four-wall profit. We're excited about that as a long-term growth strategy for the company, and we're confident that we'll be able to drive operating profit improvements into the near term.

And Bob, maybe to add to that a little bit. I mean, we're very -- when it comes to our international strategy, I mean, we're very, very focused on capital cities, where we know we've got a lot of demand and we're generating a lot of traffic and transactions. And as we deal with the same topics that we're on [ph] with digital and Miguel, we're coming up with some very exciting and nimble ways to really build brand resonance and brand awareness beyond those major cities, without necessarily spreading stores very rapidly throughout many countries. So I think we've been very strategic in focusing on the major cities and leveraging digital to grow brand resonance and awareness beyond those cities.

Our next question comes from Dorothy Lakner with Topeka Capital.

Just a question on the store renovations and relocations. Just wondered how many -- just remind us how many you're doing this year, how many you might do next year and how those -- the new formats are performing. Santa Monica looks great, by the way.

Yes. So we're going to do 10 of those major renovations, remodels this year. That's on top of the 3 from last year that we had mentioned. Some of the 10 that we'll do this year include the expansion of our Park Royal store here in Vancouver, the opening -- the relocation of our Union Square store in New York to a location on Fifth Avenue in the Flatiron area, expansion of our Chinook Center, and expansion of our West Edmonton stores. So those are all major remodels, expansions, where the square footage is growing by at least 50% or in that range or higher, in some cases. And the majority of those are still teed up for the second half of the year, so I can't really give a good indication on how those particular projects are performing. But I will say the ones that we've mentioned from last year, Robson, Santa Monica, Lincoln Road, all continue to exceed expectations. In fact, Robson Street is on track to become the highest grossing sales-producing store in the chain at over $20 million this year. And I might remind you that before we relocated that store, it was an $11 million store. So a pretty strong outcome in that relocation that gives us a lot of enthusiasm to continue to look for opportunities similar to that throughout the chain. We think this will be an important part of the square footage growth story of the company in a very profitable manner in the years to come, but we're excited for that. We'll be able to speak with more details around how the openings this year and the projects this year are performing on our next call.

Our next question comes from Thomas Filandro with Susquehanna.

Two questions. One is on the direct-to-consumer front, nice growth again. You got expansion in the margins there. I'd be curious if you can give us some insight on what drove the acceleration in expansion. And with the OPM and DTC now at 40% plus, is that a sustainable rate? And then a question, I think, for Tara. I believe there's been some pricing adjustments on pants, some up and some down, if that's correct. Can you just give us an understanding of what's happening, frame for us the adjustments and how should we think about averaging of retail in the second half of the year?

Thomas, I'll tackle your direct question first. So we continue to see strength in traffic and conversion in our e-commerce business. It's really the continuation of the story that we saw from Q1. And we think a big piece of this is simply the improved inventory position that we're now in. We're able to better meet demands, and I think in the second quarter, we had some interesting product flows that supported just the conversion. As we talked about, we have a major website remodel or relaunch, I should say, teed up for next year. So we feel good about where our website is today. We think we can be better. So we're very excited to see the continued momentum in the direct business and we, by no means, think we've topped out there. We believe there's still opportunity to be had as we continue to enhance and improve not only the website capabilities, but just how we engage with our customers via digital marketing and otherwise.

And then this is Tara and I'll take on the pricing. With -- we had an opportunity recently to just really clean up our pricing architecture within the pant classification. So you are right, there are some prices that came down and some prices that came up as we really just cleaned up the architecture to make it easier for our educators to educate against our different styles. And then obviously, you could see the innovation that we launched in the pant wall and we're very excited about that and very excited our guest response and continues to reinforce as we deliver innovation to our guest. She's excited about it and sees the value in it. As for the average unit retail for the remainder of the year, probably slight increase, but really that was not the reason for this. It was really just cleaning up our pricing architecture and really continuing to make way for us to bring in more innovation into all of our assortments.

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

Stuart, in terms of the supply chain and the next chapters here, could you just brief us on catalysts as you think about the sourcing partners, the go-to-market timing and when that may be, which classifications or timing may that be implemented? And then as you think about omni-channel in your supply chain, I was just curious. And Tara and Laurent, I was just curious about the pant wall and the men's. As a percentage of mix, do you expect those classifications to change over time? And then Tara, on core versus basics, were there any thoughts about how you're feeling about that mix at the moment and going forward?

Oliver, so yes, on the supply chain catalysts, it's the things we've been talking about in terms of how the go-to-market calendar will synchronize. Our design and sourcing activities enable us to be a better partner to our vendors, more predictable demand management and a better synchronized process, where we can ring [ph] efficiencies and reduce waste in fabric and expedited shipping costs. So those all remain the focus. Our planning continues to ramp this year and the team's -- and the capabilities to support that are the investments that we're making this year. The timing remains the 300 basis points, as I had described it earlier, over the course of 2016 in comparison to 2014.

Oliver, so the pant wall as a percent to the mix, I don't see that changing dramatically over time. Pant wall is our first place that we really tackled and launch with new innovation, but you'll continue to see that in other categories within both men's and women's. So I'm expecting our mix to relatively stay the same between tops and bottoms and jackets, et cetera. And then the balance of, I think, you said core versus basic. Really, the balance, how we think about it is seasonal and core. I think we've struck a very nice balance that we have in the stores right now. We know with seasonal how important newness is to our guests, how important delivering new products every week and the excitement that, that drives both online and guests coming into the store. So we feel really confident that we've got a nice balance as we go forward.

And Oliver, to Tara's point, I mean, I think that we started with -- we focused initially on the pant category and that's really the anchor of our women's business. That's what drives traffic and what ultimately drives sort of multiple purchases in the stores. So I mean, that's why we really don't see the mix changing, but actually driving higher sales in all of our categories.

Our last question comes from Matthew Boss with JPMorgan.

So as we think about SG&A, beyond this year, what's the best way to think about the total expense dollar growth in relation to sales growth? Just any color around remaining investments. And do we need to consider the timing of the website shift into next year as maybe an additional build?

Matt, so yes, I think as we look at the near to medium term, we expect to be able to see modest SG&A leverage into next year. I'm going to balance that with just the ongoing strategic investments that we're going to continue to make in the business. It will have priority to enable us to continue to drive our growth initiatives. So that -- we'll balance those two objectives for sure. But ensuring we have the resources and the capabilities to deliver on our growth goals is the primary factor to consider there. In looking at Q2 and Q3, the leverage that we saw in Q2 was affected by the FX translation. For the P&L overall, FX was neutral, as we mentioned, but there was a benefit in the second quarter there. In Q3, the slight deleverage that we're calling out is related to, again, those strategic investments. And specifically, in the third quarter, we are anniversary-ing that comp -- that incentive comp reversal from last year. So that creates some comparative pressure this year. But again, I think we'll remain focused on making the investments we need and -- as well as working to deliver modest SG&A improvements.

Thank you. This includes the question-and-answer portion of today's conference. I'd like to turn the call back over to Chris for closing remarks.

Thank you, everyone, for joining us today. We'll talk to you again in the quarter. Goodbye.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.