Welcome to the lululemon athletica inc. Q4 and Year-End Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's fourth quarter and fiscal 2016 earnings conference call. Joining me today to talk about our results are Laurent Potdevin, CEO; Stuart Haselden, CFO. Celeste Burgoyne, EVP, Retail Americas, 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 our annual report on Form 10-K and in today's earnings press release. The press release and accompanying annual report on Form 10-K are available under the Investors section of our website, www.lululemon.com. Today's call is scheduled for 1 hour. [Operator Instructions] And now I'd like to turn the call over to Laurent.

Thank you, Howard, and good afternoon, everyone. Today, I am pleased to share with you our strong fourth quarter and 2016 full year results. I will discuss current business trends and the initiatives in place to build momentum in the quarters ahead. Stuart will review our financials, provide 2017 guidance, and we'll then take your questions. Let me start with our fourth quarter highlights. We delivered a very strong holiday season in the quarter, with operating income growth of 18%, driven by a healthy 7% constant dollar comp and gross margin improvement, up 390 basis points, which exceeded our expectations. I am proud and very grateful for the performance our teams delivered against the challenging macro environment. Our relentless focus on product and exceptional guest experiences allowed us to outperform during peak weeks, with strong full-price sell-through and merchandise margin. Taking a closer look at product. We continue to own our position as the leading brand for women's bottoms, comping 14% on top of a very strong Q4 last year. This was driven by the depth of our assortment in key franchises such as Align and wunder under and complemented by special editions such as tech mesh. In our bra category, the breadth of assortment drove a 10 comp, reflecting lululemon's strengthening position as the destination for active bras. We are excited to see continuing strong momentum in our men's business, delivering a 20 comp this past quarter. From athletes, and as some of you may have seen, their coaches, to our growing male collective, our guest loyalty is driven by the core styles we're known for, with new editions such as Metal Vent Tech Wool and the License to Train capsule both performing very well. Q4 also marked some significant milestones as we strengthened and amplified our global brand…

Thanks, Laurent. I'll begin today by reviewing the details of our fourth quarter 2016 and highlights on the year. I'll then introduce our outlook for the first quarter and full year 2017 and spend some time offering additional color on the initiatives we have in place to deliver on our 2017 guidance and how this connects to our long-term growth plans. The fourth quarter capped an important year for us that marked several milestones, including our successful efforts to recover our product margins as well as [ supporting ] progress against our strategic growth initiatives. In the quarter, we drove positive comps in both our store and direct channels, continued to extend significant gross margin improvements and ended the year in a healthy inventory position. This resulted in 18% operating profit growth versus last year and 130 basis points of operating margin expansion for the quarter. Turning to the details for Q4. Total net revenue rose 12.2% to $789.9 million, with the increase in revenue driven by a total constant dollar comparable sales growth of 7%, comprised of a bricks-and-mortar comp store sales increase of 6% and an e-commerce comp of 12%, and also an increase in square footage of 11% versus last year driven by the addition of 43 net new company-operated stores since Q4 of 2015: 16 net new stores in the United States; 3 stores in Canada; 1 in Australia and New Zealand; 7 in Asia; 4 in Europe; and 12 ivivva stores. Foreign exchange had an effect of increasing reported revenue in Q4 by $2.8 million or 0.4%. During the fourth quarter, we opened 17 net new company-operated stores: 9 in North America; 4 in Asia; 2 in Australia and New Zealand; 1 in Europe; and 1 ivivva. We ended the quarter with 406 total stores…

[Operator Instructions] The first question comes from Matthew Boss of JPMorgan.

So on same-store sales, I guess what have you seen from traffic and AUR so far in the first quarter versus what you saw in the fourth quarter? And I guess just how best should we think about comps you're expecting in the second quarter versus the second half? I'm just trying to gauge the improvement that you are embedding as we move out of the first quarter and your confidence level in that taking place.

Matt, it's Stuart. So on the comps in the first quarter, basically, as we were into the second -- into the final stages of the fourth quarter, we began to see conversion on our website soften. That trend has extended into the first quarter. We also saw store traffic soften in the early part of February. The other KPIs, particularly in the stores, remain solid. And in particular, AURs in stores remain strong. And so the headwinds that we're seeing in traffic really account for the softness in the store comp trends, and online, it's really related to conversion. So as Laurent mentioned, we're focused on addressing, in particular, the e-commerce softness through the assortment, through the color gaps that we saw on the assortment as well as how the visual merchandising on the site had opportunities for improvement. So we've been in aggressive actions on those points, and we're pleased to see positive results in the early days since we've made those changes. Beyond that, I think as we think about the Q1 comp, the guidance reflects just the quarter-to-date results and a measured outlook for April. We see more upside as we think about the balance of the year. And really, the guidance that we issued for the full year contemplates a degree of improvement across stores and e-commerce. That said, the improvement is more weighted to e-commerce. Many of the initiatives that we mentioned will benefit e-commerce disproportionately, specifically the site merchandising that I mentioned, also the mobile app launch in the second quarter, the omnichannel strategy as well, specifically ship-from-store, which has been a very successful initiative for us in 2016. We're expanding that, as I mentioned, significantly. And we'll have that expansion ramping through Q2 and benefit from that for the balance of the year.…

Well, Matt, I think that -- thanks, Stuart. Matt, I think what the performance that we've seen in Q4 was driven by the neutral and the jewel tones that were perfect for the gift-giving season and especially Q3, Q4. I mean, in Q1, we should have been bolder with the color assortment. And from a visual merchandising, we didn't bring that powerfully to life. Now with that said, we added a lot of talent on the merchant side later in 2016, with a real focus on visual merchandising. So we actually saw this trend happening very early on in the quarter, and with the much stronger supply chain, we've been able to react very quickly. So you're going to see more color showing up this next week actually. And we've actually added a lot of creative resources, both in Vancouver and in L.A., our ability to bring visual merchandising to life in a much more powerful way. So if you look at some of our products, which I'm sure some of you guys may have seen, whether it's the Loud & Clear Jacket or whether it's the Cool Racerback in hydrangea blue. When we've actually brought that to life in a way that we're proud of, showing fluidity and movement, the performance in sales has drastically increased. So disappointed with the beginning of Q1, and with that said, we own it. And by owning it, we also mean that we know how to fix it. And we've have seen very quick results in how we've been fixing it. So we know what to do. We're doing it. It's actually paying off. It's being validated in both traffic and conversion. And as Stuart said, I mean, I am more excited about 2017 than I've been since being around in 2014. I mean, we've got an unprecedented amount of product innovation and global brand activation that's ahead of us for '17 that will definitely drive traffic and conversion. So we're going to continue -- 2017 will be our best year ever, with earnings continuing to grow in line with sales.

Great. And there's just one follow-up on the margin front. On gross margin, what's -- Stuart, what's the embedded product merchandise margin for -- in the first quarter and for the year? I'm just curious, what comp do you need to leverage the rod?

Yes, Matt, as I had indicated on the -- in the prepared remarks, we're seeing product margins recovering as expected in the first quarter. And to put a number to it, we're seeing product margins improving over 300 basis points in the first quarter, and we'd expect a similar trend into the second quarter. Unfortunately, the deleverage on our fixed cost components of gross margin is offsetting that to a greater degree than we expected as a result of the sales trend. And notably, we have 39 net new stores in Q1, which we didn't have last year, and the occupancy costs related to that is also weighing on that leverage point. So what we've said is that we will leverage our cost in the mid-teens total revenue growth rate. We're obviously falling short of that in the first quarter. We're happy with the product margin results overall. And I think the strategic cost reduction improvements that we've mentioned will benefit not only the SG&A line, but also the -- there's certain elements within the buying cost in gross margin that it will also benefit. So from a long-term basis, I still see us leveraging the cost structure at the mid-teens total revenue level. We'll probably do a little better than that in 2017 as a result of the expense initiatives we have underway.

The next question comes from Adrienne Yih of Wolfe Research.

My question is -- Stuart, you mentioned something about the brand campaign. So I was wondering if you could talk more about that, the investment in that. Is that global? And then can you also talk about the investment as you build in multiple continents? What's the infrastructure investment? And what can it support outside of North America?

Adrienne, this is Laurent. From a brand campaign standpoint, you've heard us, I mean, I think we're best in the world at grassroot initiatives, building communities and being [ pulled ] in those communities. And that's why we've been so successful with our physical footprint. Where we haven't always been as strong is really amplifying our voice, who we are as a brand, what lululemon stands for in the world. And as we grow the global brand, I mean, it's becoming increasingly important. So we've actually partnered with an amazing creative agency that's one of the world's leaders in editing and building content for millennials, and I'm not going to share today who it is, but we're very excited about the partnership to actually add the level of amplification that we need to really sort of share our voice. So it is a global launch. It will be focused on a number of key cities. It will be more focused on a couple of key cities around the world, and it will come to life mid-May. But it will be a very important moment in not only increasing our guest retention, but when you think about 2017 really being a year of bringing more eyeballs on the brand, guest acquisitions, I'm getting really excited about our ability in a really relevant, nimble way to put millions of eyeballs on the brand and therefore increase our collective. So it is a really exciting project, and I can't wait for -- I can't wait to share it with all of you.

Laurent, is it traditional media? And can you give a -- is it marketing dollars that are being reallocated? Or is it new investment in marketing dollars?

It is. There is some element of incremental, and I wouldn't want you to think about it in terms of traditional. I mean, think about distributing that content in a really powerful way, but in a way that millennials are best at absorbing that content.

Fantastic. We'll be looking forward. And then the infrastructure?

Sure, Adrienne. It's Stuart. So the infrastructure priorities that we have globally are certainly to enable the expansion in Europe and Asia. We're seeing the fastest growth right now in Asia, and particularly in China. There is a lot of energy right now in building out the team and the infrastructure in China to enable the store opening pace that we'd like to see. I was in Hong Kong a few weeks ago with the team, evaluating how we can accelerate our market entry plans from a -- on a cross-functional basis. So we're aggressively recruiting the team to lead those efforts in the region, and we're excited with the momentum that we're seeing in China specifically. The team in Europe is being built out as well. We have a new GM, Gareth Pope, in Europe, who's helping us set the vision. So I'm sure there will be more to talk about in the future as Gareth develops that's strategy. But yes, it's definitely a big part of the -- of our long-term vision and that infrastructure is important to enabling it.

Adrienne, maybe one more point on the brand campaign and the incremental investment. I mean, given the nature of how we're going to be distributing that content, we're going to have the ability to be very flexible in how we invest. So we'll see the reach of what we're doing by region, by segment, by channel, and so it's not -- we'll be very nimble in how we invest based on the region that we're seeing.

So will you give us a heads-up on when that's being launched?

Yes, we will. We're going to talk to you soon.

The next question comes from Brian Tunick of RBC Capital Markets.

I guess on the 2017 comp guidance, maybe first, can you maybe give us some sense of how much an increase in ticket or AUR you're assuming in the business? Particularly on the bottoms side, are you assuming that bottoms have a similar year to 2016? And then maybe, Stuart, on the supply chain and calendar work, what inning are you in now relative to making some of these product changes. That sounds like Laurent's unhappy with what's in the stores right now on the color side and Lee's work as well?

Sure, Brian. On the guidance, as we think about the KPIs, we're seeing strong results in AUR. And our expectations were that AURs would moderate into 2017 as we begin to lap some of the really strong I&Es that we saw in 2016. I think we see more opportunity on the conversion side. As the product strategies and the product innovation lands, we'd be able to convert at an improved level both in stores and online. And I would say there's important traffic drivers as well between the brand campaign that Laurent just mentioned, improvements in our digital marketing strategies, the various CRM engagement enhancements that we have planned for the year, those will all drive traffic across both channels. But we're not relying on at least in how we've modeled the year, improvements in AUR to drive the comp. In fact, we expect to see AURs moderate. So I think that's how we're thinking about the comp from a KPI standpoint. And the -- on the supply chain work, we're really pleased with how that's proceeding. Ted Dagnese, our head of supply chain, has done a nice job of building out the team and continuing to take that agenda forward. And the partnership that we have with our suppliers is critical to that. We are continuing to now build on the success, as we mentioned, on -- in '16. The margin architecture that we landed is certainly a part of how we will manage the business and take it forward. We're turning our attention now to how to extend our supply chain capabilities to shorten lead times, to make us more agile, to identify how we can expedite product to market more quickly in response to market trends. And a number of our suppliers have had success with a number of other companies as well with that model that we're looking to learn from. So excited on the developments, see even more potential, even to gain efficiencies as our segmentation strategy within our supply chain continues to ramp. So a lot of upside as we think about supply chain and how it supports the business going forward.

And Brian, to be clear, I mean, I'm not disappointed with product by any means. I think that our stores look better than they ever have, and I think that our vision for product is right on point where it should be. I mean, what we should have done in Q1 is be bolder with our color assortments, which would have been driving traffic and conversion and which would have lifted actually the entire range of product, including the more neutral tones. So I just wanted to clarify that. I'm really, really proud about where we are, where we're headed, especially when you think about innovation in categories. And that's actually being translated really strongly in our anchor categories for both men's and women's, with bottoms and bras, and with our technical products on the men's side.

The next question comes from Ike Boruchow of Wells Fargo.

Stuart, I was wondering if you could maybe give us a little bit more detail. So you mentioned the quarter-to-date soft traffic in stores as well as softer conversion online. Can you maybe just help us out in terms of what's embedded in your down low single-digit comp guide for Q1 from both the stores channel and the e-comm channel? I'm just trying to understand where -- is pressure coming on both channels equally, or is it more one side of the other?

Ike, so I think versus our expectations, the e-comm channel has been softer than stores. The -- and I think as the guidance -- I know the guidance that we have given reflects a stronger recovery in trend in e-commerce versus stores, and it's related to all of the things that we described earlier that are sort of disproportionately expected to benefit our e-commerce business. The store business has been tougher, but not to the same degree as we've seen e-commerce. And maybe I'll invite Celeste to offer some commentary there.

Yes, thanks, Stuart. Yes, I mean, we've definitely seen a bit of traffic deceleration in Q1 from Q4, but overall, I'm definitely still happy with where we are. Regionally, we're seeing more impact in Canada versus the U.S. And in Canada, more impact in Alberta due to the resource sector. Overall, AUR, UPT and conversion are all holding strong in the store opportunity. And really, what we're focused on from a store perspective and really an omnichannel perspective is focusing on acquisition and retention and really being able to be agile and move to where the traffic is versus sitting still and waiting for traffic to come to us. So as we've spoken about with our real estate strategy, co-located and local both continue to be something that we see as really exciting opportunities from 2016 and into 2017 in areas we're focusing really hard on. And they both allow us to really capture traffic in the most relevant ways for those communities, co-located, expanding our square footage, for example, Mall Of America and Somerset, 2 key West co-located stores in 2016. We've driven more traffic in those locations and have grown the men's business, in particular, from 50% to 70% through more dedicated square footage. And then locals has also allowed us to go into smaller communities in a really locally relevant way. And the results have been something we're really proud of. Bend, Oregon and Fort Collins also, for example, have been 2 of the 4 that we're really excited about, and we'll continue to really push into that strategy into 2017.

Just as a follow-up, I was just trying to find out, are you guiding both channels to be down? Or is one channel up versus the other? That's the specific question I'm trying to get at.

Yes, we didn't break it out. But I think it's safe to say the e-commerce channel is still up, just not to the degree that we expect it would be. And we're seeing more pressure on the comp in stores in terms of an absolute number.

The next question comes from Paul Lejuez of Citigroup.

Just to dig a little bit deeper on the 1Q. Stuart, can you maybe talk about February specifically versus March? I'm not sure if you could get into that detail, but it might help understand just the progression of what you've seen so far. Also, is the issue just as much in the men's assortment as women's? And then just separately, any way to quantify the level of newness you expect in F'17 versus '16? Not sure if you can break out what percentage of sales was driven by new product introductions in '16. What do you expect that to be in '17?

Okay, Paul. I'll try to cover as much of that as I can. I think to offer some of color on how Q1 has been shaping up, as I've mentioned, we saw a deceleration in e-commerce related to conversion that began in the last couple of weeks of January that's persisted into the early part of Q1, February and March. We saw it on the store side. Traffic headwinds become tougher early in February. So I wouldn't draw a distinction between February and the early weeks of March. I think what we're -- as we think about the guidance that we gave, the distinction we are drawing is we're expecting some measured improvements into April related to some of the things we've talked about. The Nulux program that's landed in stores this week, it's having a very strong guest response as well as the -- some of the chase activities that we mentioned that will begin to land next week. So February and March have not had the benefit of those particular activities or efforts. And then beyond April, into the balance of the year, there's just a number of things that we're focused on with major investments behind them that will help drive the different parts of the business that we've already talked about. From a product category standpoint, we've seen strength in bottoms across men's and women's. We've seen jackets and outerwear that had been a challenging category for us in the fourth quarter, and we've seen that continue into Q1. I don't know if Laurent or Celeste would add anything from a product standpoint.

Yes, Paul, it's difficult to quantify newness. What I can say is that in '17, you'll see more newness both from a design standpoint and from a function standpoint. So when you think about launching a new fabric like Nulux, I mean, like the response has been tremendous. I mean, I think our tights' already #1 selling tights since the launch. So I mean, it really speaks for how well our new fabrics resonant with our guests. But also from a design standpoint, we've caught on in print. I mean, we've got a lot coming up. And when you think about the bra category that's already been performing strongly, we're going to have this really bold launch after a field of R&D and product testing with our athletes. So 2017 is -- the pipeline, and we've been talking about for the past years about sort of filling up the pipeline of innovation, and 2017 is really the year where both from a design and from a functional standpoint, we're going to see this pipeline really delivering the values to our guests that we have been waiting for.

This concludes the time allocated for questions on today's call. I'd now like to turn the conference back over to management for any closing remarks.

Okay. Thanks so much, everyone, for dialing in. We'll speak to you next quarter.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.