Lululemon Athletica Inc (LULU) — Q1 2015 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the lululemon athletica First Quarter 2015 Results Conference Call. As a reminder, this conference may be recorded. I would now turn the call over to your host, Chris Tham, Senior Vice President of Finance. Thank you, and good morning. Welcome to lululemon's First 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 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. And now I will turn the call over to Laurent.

Thank you, Chris, and good morning, everyone. Today, I will provide a brief overview of our first quarter performance as well as give you an update on our progress with the key strategic initiatives planned for 2015. Stuart will then walk you through our financials and guidance in more detail. We delivered strong results in our first quarter despite headwinds from weather, port-related delays, and foreign exchange impact. Specifically, we delivered first quarter revenues above the high end of our guidance, generating overall comparable sales growth of 6%, driven in part by a 31% increase in our e-commerce channel. Within our North American business, we saw another quarter of positive combined comps and a nice acceleration in our e-commerce business in both the U.S. and Canada. Our women's business once again delivered positive comps in the quarter, driven by our bottoms category. Our guests responded well to our assortment in the quarter, despite the impact of product flows coming out of the port disruption. We have seen an acceleration in our business in the latter part of the quarter as our inventory positions began to improve, validating our new product flow and assortment. Additionally, we saw further ramp in our men's business, delivering a 19% comp, and finally, ivivva delivered a 29% comp on a combined basis. We achieved this growth across our key categories despite the challenges related to the West Coast port disruptions. We look forward to seeing how our guests respond in Q2 and through the second half of the year when our product assortments are properly balanced by season and in quantity. We ended the first quarter with elevated inventory level as a result of the port-related delays. However, we are finally reaching better in-stock positions and are confident in our plans to work through this inventory with no impact on brand equity and minimal markdown risk. Stuart will provide additional color on this during his remarks. Before getting into further details on the quarter, I would like to pause and offer my sincere gratitude to Delaney Schweitzer, who left lululemon at the end of last month after 13 years with our collective. Under her leadership, Delaney developed incredible leaders, and as a result, we have a deep bench of talent poised to lead our global retail business. We are empowering these leaders to oversee the Americas, Asia Pacific, and Europe. Collectively, our retail leadership team brings history, experience, passion, and commitment to our culture. Their energy will inspire our people and fuel our growth. Our expansion into international markets continues to be a key growth driver. In Asia, we opened our second store in Singapore at Takashimaya shopping center on May 13 and have already seen fantastic results well ahead of our expectations. Additionally, our initial store in Ion mall continues to outperform our plan, and we are eagerly anticipating the opening of our first Hong Kong store at ifc mall, which we expect to be amongst our most productive stores across our global portfolio. We also have plans to open a second store in Hong Kong in Q3 in Hysan Place located in the heart of Causeway Bay. Last but not least, we are on track to open our first store in Dubai in Q3 of this year. On our last call, I outlined both our short- and long-term goals as a growth company, building a global iconic brand across geographies and new categories, and we continue to make strategic investments in the key elements of our brand operating model: one, our product; two, our guest experience; and three, our brand and community. Beginning with product, we continue to see the benefits of the ongoing work on our product engine connected within Tara's group. Our design ecosystem is leveraging our culture of innovation, and we are achieving this by expanding our design organization and through our relentless focus on functional innovation. A key component of this process is the deep relationship and feedback loop we have built with our ambassador community. Our ambassadors are real-life inspirational leaders in their communities who live the sweat life to its full extent, 365 days a year. They are an integral part of the product development process. Our ambassadors sweat in our product then give us valuable feedback to assist our whitespace R&D group. They truly love being a part of our early product design cycle, and we are always looking at new ways to deepen this aspect of our relationship with them. Turning to some specific product highlights from the last quarter, we saw continued momentum in our women's pants business. Our earlier work to reinvigorate this key category continues to pay off. As an example, our wunder under franchise is performing extremely well, especially with the addition of new styles over last year. These strong positive signals bode very well for the relaunch of our pant wall expected in Q3. Our tank line is evolving as well with the introduction of higher-support construction, more diverse coverage options, and a wider selection of fits. This initial new offering is hitting our stores in late Q2 and into Q3, and we look forward to creating the same level of excitement and energy with our tanks as we did with our bottoms. These efforts will continue to inform the full relaunch of the tank wall in the first half of 2016. We are thrilled to see the accelerated momentum in the men's business as evidenced by its 19% comp, and we have expanded options within popular categories, including our Metal Vent tech T-shirts, which further reinforced the strong growth of our foundational sweat business. We are also experimenting with different store formats and shopping experiences aimed at our male guests. The Joinery, currently found in our men's SoHo store in New York and Robson store in Vancouver, allows a personalized experience where guys can customize the function of their shorts on the spot. The concept of The Joinery is firmly rooted in a function-first approach, letting men craft their own workout gear. Creating an authentic best-in-class guest experience is the second key area of investment. We continued to strengthen our omni-channel capabilities with projects targeting improvement both in-store and online. For example, our website is undergoing a full global redesign to ensure we have a scalable transactional platform that will allow us to showcase a broader assortment of products online, better enable product storytelling, and deepen our product education capabilities. Some key features will include enhancement to the checkout process and targeted recommendations, while ensuring the site is optimized across any device. Phase 1 will launch in the latter part of this year and prior to the holidays. The final key area of investment for this year is within our brand community efforts. We continue to see the highest engagement with our guests when we powerfully tell our product stories in a way that is locally relevant for them. As I mentioned earlier, we recognize and embrace the power of our ambassador community, and this past quarter, we hosted 130 of them from around the world at our annual ambassador summit in Whistler, British Columbia. Our goal for this year's summit was to intentionally deepen the integration between our local educators, our support center team, whitespace and our global ambassador community. And just last week, just last Friday actually, in Vancouver, we kicked off a 16-city global tour, where we will connect with many facets of our collective, including our educators, store support teams, and ambassadors. Our educators absolutely never cease to amaze me. They are the best at what they do and hold the most important job within the company. They create authentic connections with our guests by listening to their passions, understanding their needs and how they like to sweat, and most importantly, encouraging them in studying, pursuing, and celebrating their goals. This, too, is one way to express our gratitude and connect with thousands of our educators and ambassadors around the globe. Our brand lives within our people, and during the tour, we will reaffirm our mission and create our future together. In conclusion, lululemon is a powerful and unique brand, and our core values will continue to guide our future. Our business model gives us full control of the experiences we are creating, and we are relentless in our pursuit of innovation in everything that we do, resulting in unparalleled guest loyalty. We have made the shift from playing defense to playing offense, and we have set a course of sustainable and profitable growth both within North America and in our global market. Before turning the call over to Stuart, I would like to express my gratitude to the entire lululemon collective who makes up our iconic brand. It is our combined passion and commitment that will allow us to capitalize on the many opportunities that lie ahead. I'll now turn things over to Stuart for a more thorough review of our financial results and guidance.

Thank you, Laurent. I'll begin today by reviewing the details of our first quarter in 2015, and then I'll update you on our outlook for the second quarter and the full year of fiscal 2015. For Q1, total revenue rose 10.1% to $423.5 million from $384.6 million in the first quarter of 2014. The increase in revenue was driven by total comparable sales growth on a combined basis, including e-commerce of 6%, comprised of a bricks-and-mortar comp store sales decrease of 1% and a 31% growth online, all on a constant-dollar basis; also, square footage growth of 21.8% versus last year, driven by the addition of 53 net new company-operated stores since Q1 of 2014, 35 net new stores in the United States, 2 stores in Canada, 1 store in New Zealand, 1 in Europe, 1 in Asia, and 13 ivivva stores. This was offset by both the impact of the West Coast port disruption, as we indicated during our Q4 call, and the foreign exchange impact of a weaker Canadian and Australian dollar, the latter of which had the effect of decreasing reported revenues by $15.2 million or 3.6%. During the quarter, we opened 14 net new company-operated stores, 6 in the U.S., 1 in Canada, and 7 ivivva. We entered the quarter with 316 total stores versus 263 a year ago. There are now 240 stores in our comp base, 39 of those in Canada, 158 in the United States, 27 in Australia and New Zealand, 1 in Europe, and 15 ivivva. At the end of Q1, we also have a total of 86 showrooms in operation, 34 of lululemon showrooms in North America, 15 internationally, and 37 ivivva. Company-operated stores represented 74.2% of total revenue or $314.1 million versus 74.9% or $288.1 million in the first quarter of last year. Revenues from our direct-to-consumer channel totaled $83.6 million or 19.7% of total revenue versus $66 million or 17.3% of total revenue in the first quarter of last year. Other revenue, which includes strategic sales, showrooms, pop-ups, and outlets, totaled $25.8 million or 6.1% of revenue for the first quarter versus $30.5 million or 7.9% of revenue in the first quarter of last year. Gross profit for the first quarter was $205.9 million or 48.6% of net revenue compared to $195.7 million or 50.9% of net revenue in Q1 2014. The factors which contributed to this 230 basis point decline in gross margin were: a 100 basis point of deleverage due to higher airfreight costs incurred primarily to mitigate the West Coast port delays. It should be noted that the market for airfreight in Q1 was highly competitive and rates and surcharges increased significantly toward the end of the quarter; 70 basis points deleverage due to foreign exchange impact of a weaker Canadian and Australian dollar; 30 basis points deleverage from continued strategic investments in our product and supply chain functions; and 130 basis points deleverage from occupancy and depreciation, consistent with our guidance from last quarter. This was mostly due to higher lease costs associated with larger store formats and increase in major renovations and relocations and our international expansion. These items were offset with 100 basis points of improvement in our product margins over prior year. SG&A expenses were $137.8 million or 32.5% of net revenue compared with $125.9 million or 32.7% of net revenue for the same period last year. This 9.4% SG&A dollar increase is due to the following: an increase in operating expenses associated with new and existing stores, showrooms, and outlets, including costs related to our international expansion; increased variable operating costs associated with the growth in our e-commerce business; and higher foreign exchange losses from the revaluation of monetary assets in our foreign subsidiaries. These increases were offset with a weaker Canadian and Australian dollar, which, on translation, also decreased reported SG&A by $8.4 million or 6%. As a result, operating income for the quarter was $68 million or 16.1% of net revenue compared with $69.8 million or 18.2% of net revenue in Q1 of 2014. Tax expense for the quarter was $20.8 million or a tax rate of 30.3% compared to $52.5 million or a tax rate of 73.4% in the first quarter of 2014. As a reminder, last year's tax expense in the first quarter included the impact of the decision to repatriate cash from our Canadian subsidiary to our U.S. parent company to fund the share repurchase program, which triggered a tax charge of $30.9 million in Q1 of 2014. Net income for the quarter was $47.8 million or $0.34 per diluted share compared to net income of $19 million or $0.13 per diluted share for the first quarter of 2014. This includes the year-over-year negative net impact from foreign currency of $0.03 per share versus our expectations of $0.01 per share impact. Our weighted average diluted shares outstanding for the quarter were 142.3 million versus 145.9 million a year ago, which takes into account the weighted impact of 300,000 shares repurchased during the quarter at an average price of $66.51 per share. Capital expenditures were $27.9 million for the quarter compared to $25.4 million in the first quarter of last year. Turning to our balance sheet highlights. We ended the quarter with $655.9 million in cash and cash equivalents. Inventory at the end of the first quarter was $236.5 million or 31% higher than at the end of the first quarter of 2014. Late product deliveries as a result of the West Coast port issues elevated our inventory levels on hand and in transit at the end of the quarter. These late Q1 deliveries will combine with on-time deliveries in Q2 as our supply chain cadence normalizes, and as a result, our inventories will remain elevated for the next couple of quarters. Compounding the year-over-year comparison for Q2 is the fact that we were significantly under-inventoried for Q2 of last year, with essentially a 0 build in stock levels from Q1. All that being said, we are glad to now be in a strong in-stock position and have identified a number of strategies to work through these elevated product levels that will minimize markdown risk. Specifically, this is great product, and we have identified opportunities to reflow approximately 2/3 of this late-arriving inventory into our second half assortments at full price, with little incremental markdown risk. The remaining 1/3 of these late arrivals will be sold down through our normal exit channels, which include our outlet stores, online warehouse sales, and physical warehouse sales. This now leads me to our outlook for the second quarter and full fiscal year of 2015. As Laurent mentioned, it has been good to see our comps accelerate at the end of Q1 and into the first 5 weeks of Q2 as our inventory position improved. In particular, we have seen a strong guest response through our new spring and summer products. And with continuing momentum, our Canadian stores are now seeing a positive comp sales trend in Q2, driven in part by higher conversion. Likewise, our U.S. stores are also posting a strong comp store sales trend in the initial weeks of the quarter. As a result, we are now expecting Q2 revenue to be in the range of $440 million to $445 million. This is based on a comparable sales percentage increase in the high single digits on a constant-dollar basis compared to the second quarter of 2014 and assumes a Canadian dollar at $0.80 to the U.S. dollar and 18 new store openings: 13 lululemon stores and 5 ivivva. We anticipate our gross margin in the second quarter to be in the range of 48% to 49%. As we had discussed last quarter, we continue to expect to see merchandise margin stabilize and strengthen relative to last year, with offsets in foreign exchange, deleverage from continued investments in our product and supply chain functions, and store occupancy and depreciation. Airfreight costs will remain a headwind in Q2 before abating in the second half of the year. We expect SG&A in the second quarter to deleverage slightly from Q2 of 2014. Assuming a tax rate of 30.2% and a 142.3 million diluted weighted average shares outstanding, we expect diluted earnings per share in the second quarter to be in the range of $0.31 to $0.33 per share. For the full year 2015, we now expect revenue to be in the range of $2 billion to $2.05 billion. We remain on plan to open 60 company-operated stores, which includes up to 8 new stores in Asia and Europe and also 20 ivivva stores. We expect gross margin for the year to deleverage from 2014, with merchandise margin stabilizing, but more than offset by the factors we mentioned earlier. We expect some deleverage in full-year SG&A versus 2014, driven by continued strategic investments in guest experience, our website, brand and our IT systems. We now expect a net impact to earnings from foreign exchange for the year to increase from approximately $0.04 to $0.06 per share when compared to fiscal year 2014. As a result, we expect operating margin to deleverage from 2014 and our fiscal year 2015 diluted earnings per share to be in the range of $1.86 to $1.91 per share. This is based off of 142.4 million diluted weighted average shares outstanding, which does not reflect an estimate of shares repurchased after Q1 of 2015 and also assumes an effective tax rate of 30.2%. We expect capital expenditures to range between $130 million to $135 million for the fiscal year 2015, reflecting new store openings, renovations, relocation capital, and also strategic IT and supply chain investments. With that, I will open up the call for questions.

This is Courtney in for Oliver today. Could you just update us on what you're seeing in terms of raw materials going forward? And then also just any update on your mobile strategy.

Courtney, it's Stuart. Sure. On raw materials, we are seeing the benefits from our go-to-market calendar accrued to the cost that we're seeing for raw materials. We're also seeing some of the costs related to raw materials are continuing to be consistent with what we've seen previously. I'm going to invite Tara to add anything to that, if there is anything.

No, I think you answered that well, Stuart. Thank you.

The larger point is that as we make progress on our go-to-market calendar and related strategies, we should see improvements in input costs. This will come from better synchronization of our supply chain activities and improved leverage in our negotiations with vendors, which will positively impact various areas, including raw materials. Regarding your question on mobile, I'll let Laurent address that.

On mobile, we are undergoing a complete global web redesign that is primarily driven by mobile and will be adjusted for various devices. We are experiencing significant momentum with our mobile performance, making it a key aspect of our growth alongside the web redesign. We are also bringing in exceptional talent to our digital team, which is very encouraging. Along with our new account capture and CRM initiatives, we are rapidly building a strong collective. Mobile is an essential component of our strategy, influencing not only our transactions but also how we communicate our story with our ambassadors.

Can you just speak to the cadence of the comps as the quarter progressed? I know you spoke to things getting better toward the end. And then just drivers of the positive inflection that you saw in conversion. And more so, as you think about the positive store comp quarter to date, what's driven that? What should we keep an eye open for in stores today?

In Q1, we observed that our comparable store sales closely followed our inventory levels, which were affected by the West Coast port issues. Since our last update in the March earnings call, we noticed an improvement in our comps as our spring and summer products arrived in April. It's important to note that we initially expected these products to arrive at the beginning of April, but they actually came in more towards the middle of the month. However, we were pleasantly surprised by the performance of our winter and holiday products, which we had in the first part of April. Due to the delays in spring and summer products, we had a higher mix of winter and holiday goods, and they performed better than anticipated in terms of sell-through. Although these products typically have a lower margin, which affected our overall margin outcome, they contributed to the miss on the margin guidance we provided. Furthermore, we encountered an unexpected increase in airfreight costs, roughly 30% to 40% higher than we had forecasted, which also impacted margins during the quarter. Specifically regarding comps, we saw a solid acceleration as our inventory levels improved, leading to an increase in conversion rates. Customer traffic remained steady throughout the quarter, and as our in-stock positions got better, we experienced improved conversion and comps. This positive trend continued into the beginning of the second quarter, aligning with what we shared in our prepared remarks. We are also observing continued growth in our Canadian traffic, along with improved conversion rates, indicating an overall positive trajectory tied closely to our enhanced inventory levels.

Great. And then just a follow-up. On the merchandise margin front, can you just talk about opportunities in the second half? And then more so, if you could just help rank the drivers of gross margin expansions as we move into next year, I think that would be really helpful.

As we consider the second half of the year regarding margins, our guidance related to improved sales is tied to the elevated inventory levels we aim to reduce. We anticipate that the costs associated with exiting these sales will balance out with the additional margin generated. While there could be some positive surprise beyond this assumption, it's too early to confirm. If I had to highlight margin opportunities for the second half, it would depend on our effectiveness in managing the elevated inventory. Regarding gross margin expansion, your question seems to focus on next year and the advantages of our current activities and investments, especially within Tara's team. We previously mentioned that our go-to-market calendar should assist in lowering our fabric liability costs by improving supply chain efficiency, leading to less waste. This efficiency will decrease the fabric liability required to deliver the same quantity of products. The go-to-market strategy is the primary source of gross margin opportunity. Additionally, we're also addressing high expedited airfreight costs, which we incur during the production cycle to adhere to our schedule, as well as for finished goods to maintain our inventory flow. As our calendar aligns better, we should be able to cut down on these airfreight expenses. These are the main elements contributing to the margin opportunity from the go-to-market calendar. There are also other initiatives underway aimed at enhancing our ability to quickly adapt to market trends, though this aspect is currently less significant but is an area of investment for future growth.

I guess just first, I know you've been testing a lot of different formats for men's. I guess as you think about going-forward growth, should we expect more separate doors? Is it more kind of a sidecar? And then I guess, as a follow-up, I know you talked a lot about inventory, but free cash generation was negative for the first time in some time. How should we think about free cash flow going forward?

On the men's side of the business, I mean, we've obviously been very, very excited with playing with different formats, whether it's stand-alone store, whether it's increased square footage in some of our current stores or some expanded format. I mean the one format that we are most excited right now about is expanded store where both men's and women's are co-located as our female guest still shops a lot for him. Our male guest does have a lot more permission to come into the lululemon collective, but she still shops a lot for him. So the expanded format, co-located format is one that we're seeing tremendous results with. And we'll continue in the right geographies, the right cities, we'll continue to play with potential stand-alone stores as we see fit, as long as it's in very close proximity to the women's location, such as what you can experience in SoHo.

And Ed, on your second question on the cash flow, we were more aggressive in the quarter with the share repurchase program, which that tipped us negative, as you pointed out. But we still feel very good about the cash flow generation in this business and feel that we'll be in a good liquidity position going forward.

Stuart, regarding the full year guidance for mid-single digits, I'm curious about how to interpret that considering you just achieved a 6% increase in the first quarter and your guidance for the second quarter was high single digits. I want to understand the expected deceleration reflected in the guidance for the second half. Could you elaborate on that?

The guidance for the second half, in terms of comparable sales, suggests that we expect the results to trend toward the higher end of our range. We're projecting that we will achieve mid to high single-digit growth. At this point, we aren't prepared to anticipate any additional upside for the second half. We believe the data currently supports this outlook, and it does not indicate any slowdown. As we assess the situation in Q2, we feel more confident in our predictions. Compared to what we shared during the March call, we now see ourselves positioned closer to the upper end of the mid-single-digit growth range for comparable sales.

And then if I could follow up. Laurent or Tara, could you speak to some of the new product that you launched in second quarter? Clearly, there's been strong response. But I was wondering if we could talk a little bit in more detail about when women's tops and specifically, swim, now that that's a new category for you.

So we saw a really strong positive response from our guests when the spring goods arrived in April. The trend for bottoms continues to be favorable, which is promising for our pant wall relaunch in Q3. We're also starting to see new styles for tanks entering stores towards the end of Q2, and we'll have more information on that as it develops. We're very pleased with swim as well, with more opportunities to expand our coverage offers. The feedback has been quite positive in spring, and we see additional potential as we plan for swim designs in 2016.

Congratulations on the progress with the product. Tara, I have a question regarding the two-thirds of the product that will extend beyond the second quarter. Can you describe the composition of that product, such as whether it leans more towards long tops, long bottoms, or core items? Additionally, how does the breakdown look between men's and women's? Regarding the one-third that will be distributed through various channels, do you believe you have enough inventory for the September, or was it July, and January warehouse sales? Also, could you remind us if those sales took place last year?

The buying teams have adjusted the spring product for summer and are also looking at how the summer product can transition into fall. The teams are enthusiastic about the fall products. Additionally, adding color in August, which is still considered high summer, to our fall merchandise was a positive decision. Our fourth-quarter product has not been finalized yet, providing us with flexibility to shift some core inventory from Q2 to Q3 and then to Q4. I'm optimistic about the composition of that product. Last year, we held an online warehouse sale in October, but we plan to move that to Q2 to help clear the holiday inventory. Stuart mentioned that we received a good response from guests regarding the holiday inventory we maintained at regular prices in our stores in February and March. We will likely use our warehouse sales to clear about one-third of that inventory and will make further decisions throughout the year about additional pop-up sales or using our regular outlets to manage that inventory.

Can you talk about the 31% increase in direct-to-consumer? How sustainable is a growth rate like that? And was it inflated in the first quarter by people who couldn't get to the store when weather was really bad or by people who couldn't find what they wanted in stores because of the port slowdown? And what kind of impact on the 2Q direct-to-consumer growth rate should we see from the movement of that warehouse sale from October into Q2?

We're very pleased with the e-commerce sales growth we experienced in Q1. There are a couple of factors that contributed to this. Weather was a challenge in the early part of Q1, which likely had a positive impact on our e-commerce results. Additionally, we started the quarter with a stronger inventory position for e-commerce, allowing us to deliver inventory to our online business more quickly than to our physical stores. The supply chain involves an extra step for moving inventory from our distribution centers to the stores, which takes longer, but e-commerce does not have this delay. This better inventory situation in e-commerce contributed to the positive results. The comp guidance we provided for Q2 reflects continued strength in our e-commerce business, along with improved store performance. Therefore, we don't see any direct reasons to believe that the growth we observed in the first quarter is not sustainable. While we wouldn't necessarily plan to maintain that growth rate, there are no significant structural issues that would inhibit us from achieving similar results moving forward.

And Paul, especially when you consider all the enhancements from a CRM account and checkout standpoint that we're putting into the global web redesign, and our educators at the store level have done an outstanding job, but we've done a good job training them, and they've done an outstanding job using our backroom app, which has really been able to leverage our online inventory when we haven't had inventory in stores. So that's really sort of our strategy coming together from that standpoint.

I guess, 2 questions, one on Canada. I'm very glad to hear about the positive comps there. I think it's been a while. I know it's your most mature productive stores. Can you maybe give us more color on what you're doing in Canada as far as remodels, men's, product? What's taking hold there? And then on the international stores, maybe some comments on where are you on building your team out? What kind of lead times are you seeing for store leases, learnings from early stores on pricing? Anything that could just help us give more comfort on the international store rollout and what you've seen so far?

Yes, we have been very focused on Canada as one of our initial markets, and it has really aligned with our three key pillars. We emphasize educator training, the breadth and depth of our product offerings, and we are seeing great results from these efforts. Our community groups are dedicated to developing programs specifically for Canada, and we are seeing a significant impact there. Another market that presents some challenges is Australia. I was there a month ago and spent time with our team. We have observed similar positive returns by concentrating on the local buy, training, and brand community initiatives relevant to Australia. We are focusing on ambassadors who resonate with the market, such as triathletes and surfers who train in hotter, more humid conditions and face greater sun exposure compared to Vancouver. We view this market as a testing ground for new products. Overall, our emphasis on product, buy, brand, and community training in these markets has yielded notable results.

And then on the international side?

On the international front, we are performing exceptionally well and are ahead of our expectations in both Asia and Europe. We are set to open in Dubai in September. Our growth in Asia is particularly strong, which may allow us to accelerate our expansion plans in Europe. We have recently launched a showroom in Seoul that is doing remarkably well. There is significant potential for further growth in Asia with our talented team. In Europe, we are maintaining our course while still surpassing our expectations. We have just opened a showroom in France, launched another in Stockholm, and relocated our Berlin showroom, which is now achieving results that indicate a potential store rollout. Overall, I am very pleased with the progress and success of our international expansion thus far.

Maybe just a question for Tara. Can you just update us on where you stand on your chase capabilities and how quickly you can get back into things within season?

I think you said our chase capabilities?

Yes.

We have established a fast-turn team that can produce goods in about 2.5 months, depending on whether we have taken a position on the fabric or if we are using existing fabric. This team allows us to respond quickly to sales trends, enabling us to adjust our focus towards core products or seasonal fashion ideas.

More questions around the international opportunities. Are you yet in a position to talk directionally about store models for international markets, how it may differ between Asia and Europe? And what are some of the key differences in format and economics you expect versus North America?

Yes, Jim. Our current strategy for the early store openings is concentrated in capital cities across Western Europe and Asia. These locations represent some of the most productive retail areas globally, and our initial stores are competing with the leading stores in North America in terms of sales volume, sales per square foot, and overall profitability. The rental conditions differ, and we are encountering higher rents and key money in specific markets. However, these locations are among the most productive you can find. We are selecting the best options in this first phase to build our brand. It's crucial to have prominent locations in these key shopping areas to establish the brand effectively. We aim to enhance our presence and brand recognition through our store footprint. This is not merely a marketing initiative; these stores are highly profitable and attractive on a per-store basis. Of course, we have overhead costs related to investing in teams, marketing, and supply chain activities to enter these markets, which means it takes time to achieve the scale necessary to maximize those investments. We are still in the early stages of this strategy, but we are very encouraged by the results we are observing in both Asia and Europe, and we believe this will be a significant part of our growth story for many years ahead.

And Jim, all the work that we're doing with multi-store format in North America, whether it's a smaller store like the one in Vail, or whether it's a men's-only in SoHo or the expanded format in Miami, Santa Monica, or Robson, are really sort of informing the type of model that we can roll out in parts of the world where we might have to play with different real estates.

Got you. And then in some of your earlier international markets like, say, the U.K. or Singapore, when would you expect to move beyond that Phase 1 and into Phase 2, where you're exploring some of these other formats maybe outside of the capital cities?

I think in Asia, we still have a fair amount of runway, probably a couple of years, before we start exploring the cities that are not a 'when' but that are an 'if.' In the U.K., we'll probably start exploring a couple of those locations next year, and then in the rest of Europe, we'll still be in the capital cities for the midterm. So we have tremendous runway ahead of us in leveraging the brand awareness that we've got in those capital cities, and to Stuart's point, really sort of planting our flag and claiming the market as we create it. So a lot of runway in those cities that are a 'when.'

Just a couple of questions. Number one, it seems like your buying and occupancy pressure is increasing, Stuart, as you focus more on the international markets. Maybe you could help us with the leverage point on comp there as we model going forward. And secondly, Tara, I was wondering as you broaden your bottoms assortment, if there is an opportunity for AUR elevation?

You want to start with that?

Yes, Janet. We're experiencing increased pressure on buying and occupancy, continuing from Q4 into Q1, which does not come as a surprise. We anticipate this trend will persist throughout the year but expect it to ease next year. Over the past few years, we haven't faced this level of occupancy pressure, so we forecast normalization by 2016, which should provide a year-over-year benefit. Currently, this situation relates to various ongoing real estate activities, including higher rents for major international brands, relocations, and expansions in North America. Additionally, our opening cadence is at an all-time high, leading to increased preopening costs that impact occupancy, especially regarding initial rents before store openings. As these factors stabilize, we envision leveraging our buying and occupancy in the high single-digit to low double-digit range given our growth trajectory. While we aren't there yet, that is how we see our long-term model developing.

And then, Janet, your question on the AUR elevation in bottoms...

Tara, you've noticed that Nike took their prices up on the bottoms, right? So I'm wondering what you guys are thinking.

We are primarily focused on driving innovation in our bottoms category through improvements in fabrics and fit, and we will adjust our pricing as we continue to make these advancements. We are committed to being leaders in innovation within the bottoms category and will set our prices accordingly.

Thank you, operator. That concludes our call for today. Thank you, everyone, for joining us. Goodbye.