Thank you for standing by. This is the conference operator, and welcome to the Lululemon Athletica First Quarter 2017 Conference Call. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations, for lululemon athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's first quarter earnings conference call. Joining me today to talk about our results are: Laurent Potdevin, CEO; Stuart Haselden, COO. Sun Choe, SVP of Global Merchandising, 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 is, by nature, 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 at 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. On our year-end call, we reviewed our longer-term vision and 2020 plan to double our revenue to $4 billion and more than double earnings. Today, I will focus specifically on our first quarter business trends, which were positively impacted by the actions we took to build momentum early in the quarter. I will then touch on Q2 milestones that inspired our guests, from our first global brand amplification to our most innovative and integrated product launch to date. Stuart will review our financials and provide Q2 and full year guidance. We'll then take your questions. Let me kick off the call by sharing our first ever global brand campaign, This Is Yoga. Through recontextualizing how the world sees yoga culture, we articulate the core of our brand and what defines and differentiates lululemon. The internal launch created an unprecedented energy and excitement across our employees, our educators and our ambassadors. And on May 15, we took yoga off the mat and into real life, sharing the power of practice with the world, reconnecting loyal guests with who we are and authentically reaching millions of new guests. We are proud of how powerfully this campaign has resonated with influential audiences around the world, creating 240 million global impressions and over 26 million views of the anthem video in its first 2 weeks. The launch of This Is Yoga is just the beginning of our global brand amplification as we connect with millions of new guests in key markets around the globe. Before sharing our first quarter highlights, I'll update you on our decision to evolve ivivva to an e-commerce focused strategy. This new streamlined model, with 8 stores in key ivivva communities across North America, will enable us to continue serving our young ivivva…

Thank you, Laurent. After a slow start to Q1, we saw business accelerate in the latter part of the quarter and we're pleased to see this trend now extending into Q2, with an even more pronounced improvement in the e-commerce trend that I'll discuss shortly. We also saw strong product margin performance in Q1 that exceeded prior estimates and enabled an earnings outcome well above our guidance. This reflects the ongoing benefits of our supply chain investments. Before reviewing the details of the first quarter, I'd like to offer some commentary on the impact of our decision to close our ivivva stores. I'll then review the details of our first quarter results and provide our updated outlook for the full year 2017 and also the second quarter. As Laurent mentioned, we plan to reposition ivivva as a primarily e-commerce focused business, with a select number of stores continuing to operate in key communities across North America. We plan to close approximately 40 of our 55 ivivva branded stores and expect to convert about half of the remaining locations to lululemon stores. We'll also close our 16 ivivva branded showrooms and other temporary locations, and will streamline its dedicated support infrastructure. The store closures and restructuring will be substantially complete by the end of the third quarter of fiscal 2017. In connection with this restructuring plan, we expect to recognize pretax costs of between $50 million and $60 million in fiscal 2017, of which $17.7 million was recognized in Q1. The costs are composed primarily of asset impairments, accelerated depreciation, lease termination costs and a smaller portion for inventory provisions and severance. Now turning to the details of Q1. Total net revenue rose 5% to $520.3 million, with the increase in revenue resulting from the following: an increase in square footage…

[Operator Instructions] Your first question is from Brian Tunick with Royal Bank of Canada.

This is Kate on for Brian. Congrats on the quarter-to-date improvement. I guess just we were thinking about what actions, specifically, you took in Q1 that you think most directly impacted the comp trend just from a merchandise perspective. And then, I guess, with Sun in the room, I guess, when you're thinking about what changes you're making here in 2Q from a product perspective and into the back half, what do you see as the most meaningful opportunity in order to help continue the improved comp momentum?

Thanks for your question. So the 2 most important actions we took was, one, is getting back with depth in the assortment that we had lacked earlier on in the quarter. And, two, was really, as we had articulated on the last call, really focusing on our digital experience. And I'm sure you've seen and I'm sure you've experienced it, but what we've been able to create in a very short period of time has actually brought to life -- or the brand to life in a way that is really, really powerful. And we've seen the highest engagement from our guests ever actually, whether it was a strap happy or the launch of the Enlite Bra or the campaign that we launched at that time. So I mean, I'll let Sun speak more, specifically to the assortment. But from an assortment and from a digital standpoint, I mean, we were incredibly focused. We articulated what we needed to do. We did it. And actually, the results exceeded our expectations.

And from the merchandising standpoint, I think 2 key things for us that really helped turn some of the trend around. The first thing was, we were quickly able to get back into color and print, so we do see that balance improving. And I think, given that we are a performance and functional brand, the fact that we had really strong launches in our Nulux fabric franchise, as well as the launch in our Enlite Bra, that really helped buoy the trend. And we know that we have a lot more of those innovation platforms and franchises in the pipeline for the future, so we remain optimistic.

Great. And then, I guess, just a follow-up on the Enlite Bra. Can you just speak to any pricing or branding learnings that came as you implemented that launch? Sounds like it's really bringing in some new customers to the brand.

Yes, we're really excited. It's our most expensive bra in our portfolio. We have seen 0 price resistance, so what we're finding is that if we have a technical solve and we're differentiated in the market, she's willing to pay the price.

The next question's from Adrienne Yih with Wolfe Research.

My question is on the digital growth. First, on the gross margin. How should we think about the gross margin in that channel and the op margin, relative to brick-and-mortar? And then, Stuart, can you also talk about the inventory markdown, the $5.4 million? Was it all ivivva? Was it any go forward product? And is there any residual markdown in Q2 that we should expect?

Hey Adrienne, certainly. So on the profit profile of our digital business, and there is certainly disclosure that we provide in our Q. We enjoy a stronger operating margin with our e-commerce business. I mean, specifically, we did not have the rent and the payroll cost that we incur as part of our bricks-and-mortar business, and the product margins are slightly higher as well, as we have a more efficient way to manage our inventory pool online. So that is a benefit to the e-commerce business. And as we continue to have goals, to drive a higher proportion of our business through our e-commerce channels, that should have an accretive impact on our overall company operating margins. In terms of the inventory cost that we called out, and there is a [ wreck ] in the press release that addresses specifically the cost of the inventory provision we took related to the ivivva restructuring decision. That is entirely related to ivivva, and at this point, we do not expect further inventory provisions in the second quarter. We believe that should all fall within the first quarter disclosure.

The next question is from Matthew Boss with JPMorgan.

So just a breakdown, the low to mid-single digit comps that you're seeing here in May, or that you saw in May. I guess how would you rank the sequential improvement by category, if we were to bridge the 400 basis point comp improvement versus the negative one in the first quarter?

Hey Matt, it's Stuart. Yes, I think that we're seeing strength out of the latter part of the first quarter into the second quarter, certainly in both channels. Versus our original expectations for Q1, we saw a really strong trend in stores in particular, in the latter part of Q1. We see that continuing into the first quarter. That's definitely part of the guidance that we gave. But importantly, and probably strategically, the work that we are in, in the digital acceleration effort has produced an important inflection in the trend of that business from the first quarter into the second quarter, which the quarter-to-date trend that we commented on in the prepared remarks reflect the impact that, that effort is having. We are very confident that those trends will continue. And as we mentioned, we see opportunity above the quarter-to-date trends. So that business being about 20% of the total, you can sort of back into how the relative impact on that comp guidance is shaking out, but we're really seeing strength across both channels.

Got it. And then just a follow-up on SG&A, Stuart. Excluding the onetime items you laid out near-term, is it still fair to think about low single-digit comps as the multiyear SG&A hurdle rate? And then, I guess, if you could just touch on the strategic expense assessment, and what you found in Phase I and then just potential opportunities as we think about Phase II, which I think would be more next year opportunity?

So certainly, I think we've been pretty consistent that we expect to be able to leverage our cost structure at a low to mid-teens total revenue growth outcome. So the combination of the comp and the square footage growth are the factors that will help us achieve that. That's unchanged. We see that as the underlying fundamentals of how we have constructed the financial plan for this year and into next year. What's different, as we mentioned, is the onetime cost that we'll incur to recover our digital business. So that -- those fundamentals are not different. In terms of the, I think the second question was regarding the SG&A work that we had begun in the later part of last year. And that work we're benefiting from this year. We'll see, as we had mentioned on the prior call, we'll see that the full benefit of that work in the second half of this year, particularly in the fourth quarter, where we expect it will be in a position to begin leveraging the top line estimates that we've offered.

The next question's from Matt McClintock with Barclays.

Great quarter. I actually wanted to focus a little bit on 2 questions. The first one is just, not to continue to talk about digital, but the digital change, there's been a lot of changes going on there. And I just want a high level, strategically, what specifically are you doing now that's having such a meaningful, immediate impact that you really didn't do before? And how to think about that in terms of one-time cost, Stuart? It would seem like maybe the onetime costs are consulting fees or something like that. How much of that is onetime? How much should we think about that as an ongoing cost, just to grow the business?

Well Matt, if you go back a couple of years, I mean there was really no digital culture, no digital mindset at lululemon. And so we built this Center of Excellence with digital that really allowed us to put the tools, the platform, the foundation in place to really be able to build the global, scalable business that we knew we needed, including CRM, which didn't exist. We've done that over the past 2 years. We've got this outstanding foundation. And the last piece of the puzzle was really to bring the brand to life digitally in a way that's as powerful as in the stores. And when you think about our performance in the stores, it's all about human connections. We refer constantly about the educators being the most important role in the company, and so translating that online is difficult. So the focus over the past few months, now having the foundation in place has really been to bring the brand to life in a powerful way. And I think you can see that in the way the product is being shot, in the way we're talking about technology, and the way we're bringing video to life and maybe most importantly, in how we're linking social PR, our presence on mobile as well as on desktop. So that has had a very significant impact on the business. And it's really -- if you think about that Center of Excellence, we've built it. We've built the foundation. And the transition that we've been driven lately really brings all of the technology under Julie Averill, our new CTO, who will be reporting to Stuart, all the Digital Marketing, guest acquisition, driving traffic in our brand and community, which the timing is perfect with the launch of This Is Yoga. And then all visual merchandising with Sun. And finally, the operating part of running the channel under our leaders in the various regions with Celeste, Ken and Gareth, so that they can truly have a guest-centric vision to servicing our guests that is channel agnostic.

And Matt, just to follow on that and offer some details on the costs. A lot of the costs that we're incurring are related to getting results quickly. So there's a few buckets I would group them into. First is the technical, digital work related to our website. We identified a number of opportunities through the work that we started in the first quarter and are now continuing into the second quarter that were hard-core coding issues that we needed to tackle. And in order to do that quickly, we needed to bring in external resources so that we could have the critical mass, in terms of the expertise to do that in a quick manner. So that's a big part of those costs. Otherwise, you heard us speak about the creative content on the website, photography. We've engaged agencies to help us not only with the development of that creative content, but also in the photography itself. So the agency cost related to the photography and creative content are really the other pieces of the cost that we're incurring. The onetime in nature aspects and the way we've characterized it in that manner is that, again, we've asked these external resources to join us during this task force we've organized to help us drive change rapidly. And so, in order to do this under those time tables, that is what's giving rise to the additional costs that we're incurring outside of our normal business model. As we complete this work over the course of this summer and early part of Q3, we'll be able to transition and build on this work and take it forward as a new part of how we do business from a digital standpoint, and be able to better leverage and more normalize the cost profile.

To add to Stuart's point. I mean, we've been -- we're very confident about doubling down on the investment because week after week, almost day after day, I mean we see the results in the business of the work that we're doing. So there is this real time feedback loop about the quality and the impact of the work that we're doing.

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

We have a question related to capabilities with digital and inventory management. What are your thoughts around how you feel about the bricks and clicks, in terms of the inventory in-store versus online? And Stuart, on the strategic supply chain efforts, could you just update us on what's ahead, in terms of opportunities there as you continue to make progress in both quality and speed? Those were our main questions. Thank you.

Hey Oliver, this is Laurent. Quickly on the omnichannel, I mean, I think I mentioned that in the prepared remarks. We're actually really, really proud about the results of our omnichannel strategy. I mean, from the implementation of RFID to the ability to really maximize the use of inventory and obviously the margins that we deliver. I mean like the -- our mid-channel strategies are working incredibly well in -- both from a financial standpoint but also in servicing our guest. And we've got more of those coming online in the latter part of the year. And I'm spacing on the second part of your question...

Right, on the supply chain and some of the strategic, I guess, goals that we have there. Now that we're -- we've been happy with the results that we've seen in recovering our gross margins, and we believe we've established a more stable and reliable sourcing and supply chain organization. I think our next priorities turn to continuing to support our design teams from an innovation standpoint, so that we can enable the work they're doing from a sourcing standpoint, to bring to life meaningful innovation and designs that will matter to our guests and help us solve problems for athletes. In addition to that, I think importantly, we're continuing to look at ways for us to build flexibility into our supply chain, so that we can position raw materials in a way that we can respond to guest trends more rapidly. We saw some of the first examples of this late in the first quarter, where we were able to actually chase into certain styles where we saw gaps in color, and even introduce certain graphic styles that we hadn't done in a while so -- and with remarkable sell-through. So we're really pleased to see those initial wins, and those are -- that flexibility is something we're looking to expand.

And from an organizational standpoint -- with Sun reporting to me from an organizational standpoint, I mean, we're going to create some healthy tension between merchandising and design, which will really allow us to sort of drive the design vision into profitable growth.

Okay, and the last thing is on the product side. You've really made really great progress with Enlite and Nulux. Just how would you prioritize what are the bigger product opportunities? Or how would you prioritize for the back half between tops and bottoms, and outerwear and accessories could be an opportunity too. Just curious about how we should think about the catalysts relative to each other?

Well you'll -- Oliver, you'll see it when it comes to life. So we're not going to tell you too much, too early. But one thing I can tell you, that we're obviously always focused on function first. And when we do that, it pays off tremendously, whether it's with Nulux or Enlite, I mean, we've got 2 incredible data points right there. So you're going to see a focus on functional when it comes to -- and that's really what makes us who we are.

The next question's from Mark Altschwager with Robert W. Baird.

Just a follow-up on the SG&A leverage discussion, and sorry to harp on it. The guidance for the year, I guess, really doesn't get you to that low to mid-teens revenue growth rate in the back half. Yet Stuart, I think you mentioned expecting meaningful SG&A leverage by Q4. And so I'm just trying to make sure I understand. I mean, as you get to Q4 would you expect to be at a point where you can leverage SG&A consistently on a go-forward basis? Or is the Q4 leverage on, call it a low double-digit revenue growth, more of an exception versus the rule?

Yes, Mark, it's a good question. I would say the way we built the model over the next 5 years and -- should enable us to deliver SG&A leverage in that top line growth range we mentioned, that low to mid-teens. I think in the fourth quarter, there's an opportunity to do better than that based on the work that we've done to improve our cost structure, coming out of the project that we had mentioned in the second half of last year. And we'll take those benefits forward. And the fourth quarter is our largest quarter from a sales standpoint, and a little bit more flexibility to, from a quarterly standpoint, to do -- to have leverage on our cost structure.

The next question is from Dana Telsey with Telsey Advisory Group.

As you think about the ivivva business and the exiting of that business, what long-term margin and return improvements do you think can be expected? And then on another note, the improvement in color, is it where you want it to be yet? Or how should we see the product enhancements, whether it's on the color or whether it's the online conversion that changed in Q1, is there more runway to go?

So Dana, it's Stuart. I'll first respond to your question on ivivva, and then I'll let Sun respond your question on the color and the product, product strategy. In regards to ivivva, it was a very difficult decision in terms of the restructuring plan that we have announced, that came after much deliberation. As we look at the run rate of this business go forward, under the new structure that we have established, we expect the revenues to be a little less than half of what we saw last year. And it should be positioned to generate positive comps that will be accretive to the overall company comps, and it should also be positioned to generate a modest operating profit, where in all prior years we've operated ivivva, it's had a small operating loss. And as we mentioned, the restructuring and the store action should be largely completed by Q3.

And then going into color, I'd say we are happy with the improvement of the balance. We feel good in that we have a lot of white in the stores, which is seasonally, really appropriate, emphasizing light neutrals and some pops of color. I'd say that as we get into the back half of June and going into fall, we'll be even in a more ideal state. And as Stuart mentioned, we've just done a much better job partnering with the supply chain and making sure that we do have flexibility in our sourcing models. So always able to chase back into colors that sell out. And then, again, we feel very well-positioned from a portfolio standpoint, because we have a lot of key innovations in the pipeline for the back half of the year that's really focused on fabric, function and fit.

The next question is from Paul Lejuez with Citigroup.

Stuart, can you talk about the promotional cadence in the business during the quarter? How that trended, how it's been in May to date? And also curious about store traffic, just what you saw, how did that progress during the last several months?

Thanks, Paul. The promotional cadence has been healthy. We executed the warehouse sale, the physical warehouse sale in Dallas earlier this month to great success. It was a record for us that -- or approached, I should say, the record we had achieved previously with our Edmonton warehouse sale. The sales and AUR results from that event exceeded our plans. And I think it really speaks to not only the resilience of our clearance model, but also our full price business, given the level of interest and demand we saw in that warehouse sale. So otherwise, markdowns in stores and online are well managed, and I think our inventory position reflects that as well. So the markdown picture is very healthy and has been for much of Q1, and certainly now into Q2. Store traffic's an interesting story. It still remains a headwind for us. And that was a big part of the weakness that we saw early in Q1 that we spoke about on the last call. We have seen improvements in store traffic. And what's been interesting is, as we have executed on our Enlite launch, the Nulux Fast And Free launch and importantly, the This Is Yoga program or campaign rather, we have seen that these events have been able to move the needle in our store traffic as well as our online traffic. But what we've taken away from that is that it's actually possible for us to effect store traffic positively when we have compelling product and brand stories and events. So we're taking those learnings forward. We believe it creates interesting opportunity for us as we look forward. And as we think about KPIs generally, that improvement, sequential improvement in store traffic, still negative, still a headwind but sequentially better in the latter part of Q1 into the early part of Q2 is also being supported by improvements in conversion and UPTs in our stores, that is supplementing or complementing the continued strength in AURs. Ultimately, we need to see a balanced picture across all of our store KPIs to have a sustainable comp picture. So we've relied heavily on AUR up to this point, we still see strong AUR performance, but it's really important to see conversion, UPT and -- in a better place and also traffic improving. So thanks for your question on store traffic.

The next question's from Omar Saad with Evercore ISI.

I wanted to actually focus on the decision to accelerate the international openings, Asia versus Europe, and is it kind of more a fill-in of the existing kind of trade areas? Are you expanding into new trade areas and markets? And what are you seeing in those markets that's giving you the confidence to do -- to pull that lever and press on the gas at this point? Is it online demand that you're seeing? Or store level demand, or is it the showrooms, what you're learning from those? I think this is probably a pretty important part of the equation for you guys over the next few years.

Thanks, Omar. I think it's all of the above. I mean, we're obviously seeing the opportunity and the scale of the opportunity in Asia, and we're seeing great momentum there. So whether it's our Tmall business doubling in less than 3 quarters, or whether it's store opening in the couple of -- first month at $1,600 a square foot, or the activity that we see on social or with the events that we're rolling out. I mean, that obviously gives us great confidence in our ability to accelerate our store openings in Asia, mostly in China. But it's also, honestly I mean, the ability to secure outstanding locations. So if you think about the store that we're about to open in Tokyo, within Ginza Six, or the locations that we've been able to open in Xintiandi in Shanghai, and in Beijing, I mean that obviously, we're not -- the pace of the openings is in no way jeopardizing the quality of the locations, that's what we think. So we see tremendous momentum in Asia, in Japan, in Hong Kong, in mainland China, as well as Singapore and Korea. And in Europe, we've grown 50% year-over-year, and it actually goes outside of London. I mean, you see the performance of Brown Thomas in Dublin, which really gives us -- which really validates the work that we're doing in Europe, and that fact that the halo effect that it has beyond London.

The next question's Kimberly Greenberger with Morgan Stanley.

Stuart, my question's on digital marketing investments, and can you just give us a little more color on the second quarter investments and why you would characterize them as onetime? Maybe if we understand a little bit better what those expenses are, we could get our heads around the onetime characterization. And then, secondarily, I would imagine that ivivva operates at a lower gross margin. So is there a permanent improvement in gross margin you expect to your business 1 to 2 years from the elimination of most of the ivivva business?

Okay. Okay, Kimberly. On the first question, the digital marketing investments, I would not include that as part of the onetime cost that we're referring to. What I am referring to are the technical design and development costs for the improvements to our website, that's one bucket. The second bucket is photography cost of outsourcing photography to a photography agency. And the third bucket is the brand creative content support that we have from an agency we've also selected to help us with that. And what I would say is, that what's creating much of the onetime nature of this, is the speed at which we're trying to accomplish these improvements and changes that we've identified we need to the website. There will be elements likely of the second and third buckets that we'll take forward, but not to the same order of magnitude that we're seeing right now, given just again, the time frame in which we're trying to accomplish these improvements. So hopefully, that clarifies it. The second question you had on ivivva, gross margin. Gross margins in ivivva are -- have not been as high as in lululemon. I think that's safe to say. By reducing the mix of the ivivva overall, yes, that creates some benefit to the overall weighted average, if you will, gross margin that we'll have. The ivivva business will be a viable business that we're -- we still believe in, albeit on a smaller scale, and we also have specific strategies and plans in place to improve the product margin of the ivivva business as we'll take it forward as primarily an e-commerce business.

This concludes question-and-answer session. I will now turn the conference back over to the presenters for any closing remarks.

All right. Thanks, everybody.

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