Lululemon Athletica Inc (LULU) — Q4 2016 Earnings Call Transcript

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. Today's call is scheduled for 1 hour.

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 position. When we last spoke, I was on my way to China, where we opened our first 3 stores. Building on the energy of our Unroll China event last summer, I experienced firsthand the energy of our fantastic locations across Shanghai and Beijing. These openings have been a catalyst in boosting our already strong performance across Asia. In addition, our presence on Tmall has shown tremendous growth, led by our performance on Singles Day last quarter. Collectively, this reflects the strong brand affinity and the magnitude of opportunity ahead of us, and I'll speak to that later. In January, we opened our European flagship under London's Regent Street, one of the world's top shopping destinations. Reflecting our commitment and vision for the brand in the U.K. and Europe, this flagship features bespoke designs, concierge services, and digital art installations. I am excited to build on the increased brand awareness since the Regent Street opening and the halo impact it will have across our European business. 2016 was a critical year and marks an exciting milestone for us. Just 3 years ago, we embarked on an ambitious agenda to reaccelerate our top line growth, regain our guests' trust and loyalty, build a digital culture, own our opportunity in men's and ignite our international potential, all while building a scalable supply chain infrastructure and focusing on operational efficiencies. The result of our work returned the company to positive operating earnings growth for the first time since 2013. Some significant highlights reflecting the strength of our strategy include: being design-led, blending fashion and function and building a solid innovation pipeline for both our men's and women's categories; evolving how we come to life in stores, from new formats to connecting with new communities; our curiosity, relentless focus on innovation and discipline fuel our highly profitable physical presence in North America; setting the vision and building our digital ecosystem and culture; igniting international growth through expansion in key cities; rapidly building brand awareness outside of North America; maintaining strong industry-leading gross margin by completing the buildout of our supply chain infrastructure and focusing on operational efficiencies; and last but not least, building a world-class management team, filling key leadership roles across merchandising, digital, store design, and leading our European expansion. Our performance reflects the strength of lululemon and our unique position as the leading brand for an active, mindful lifestyle. Despite a slower start in Q1, 2017 is set up to be one of our most compelling years, with unprecedented product innovation and our sales global brand activations to drive growth towards our long-term vision. Looking specifically at Q1, let me articulate the immediate changes we have made to positively impact momentum this quarter and then share our plans for the future. The slowing sales trend in early Q1 has most acutely impacted e-commerce. We have clearly identified the issues: an assortment lacking depth in color for spring compounded with visual merchandising that did not powerfully translate our design vision. With focused urgency, our teams have been course-correcting the issues, with early indications reflecting an immediate and positive impact on performance. We will see more color in selected styles as early as next week. And from a visual merchandising standpoint, our Loud & Clear Jacket is the perfect example of what happens when we capture both design and function, infused with energy and movement into our e-commerce images. Since delivering these results, the performance of that jacket has significantly increased. Stuart will provide additional details on the first quarter. As we write our next chapter of growth, I'd like to take a few minutes framing our 2017 priorities in the context of our 2020 plan to double revenues to $4 billion and more than double our earnings. Starting with brand, we have an untapped opportunity to tell the world who we are and what lululemon stands for. Beginning in early Q2, we'll launch our first global brand campaign, in partnership with a dynamic creative agency that is also the leading amplifier and distributor of content to millennials across the world. Through this disruptive and innovative campaign, we will strengthen our guest loyalty while also inspiring millions of new guests to join our growing collective. Turning to product. The performance of our core business will be powerfully augmented, with an unprecedented current of innovation between now and the end of the year. In women's, we are on track to build a $3 billion business through our continued leadership in acclimatizing and innovating the fabrics and styles that define our standout performance in bottoms and bras. Leveraging the success of our #1 performing bottom, the Align Pants, we are thrilled to globally launch our new Fast And Free collection, designed with our top-performing Nulux fabric. For the first time, our innovative high-performance Naked Sensation, Nulux, will include tights, crops, and bras. Validated by Nulux' recent ascension as one of our guests' favorite technical fabrics, we know this launch will deliver substantial revenue for 2017 and beyond. Following extensive R&D, and in partnership with our athletes, in early May, we will reveal our newest whitespace innovation with a bold new concept that will disrupt the bra category and redefine women's expectations of active bras. This launch anchors our continued commitment to innovation that makes lululemon the leading destination across our core women's categories. And last but not least, we have focused plans and resources in place to realize our substantial opportunities across outerwear and accessories in the second half of the year. Now turning to men's. This remains one of our largest growth opportunities and is on track to become a $1 billion-plus business by 2020. Our focus and talented cross-functional teams are bringing our men's vision to life. And with a clear design and direction and increasing brand awareness, we expect to see accelerated results beginning to take shape in the second half of the year. I'm excited by our men's performance, particularly within our co-located formats, where, for example, in our Mall Of America store, by doubling our dedicated men's square footage, we saw a 70% lift in the business with no increase in inventory. In 2017, we will open further co-located and local stores while optimizing our men's presence online to capture the significant runway ahead of us. Shifting to digital. With the potential to grow in excess of $1 billion by 2020, we will continue to build our digital ecosystem this year and beyond. We are laser-focused on realizing the power of our CRM platform at scale and continuing the seamless expansion and integration of our omnichannel strategy to empower our guest-centric model for the future. In Asia, to capitalize on the tremendous opportunity and unique digital landscape, we are building the infrastructure and a talented team in Shanghai to increase our reach, engagement, and performance on a localized platform. As shared earlier, we will continue executing the immediate and longer-term strategies in place to accelerate our e-commerce growth, including inspiring our guests through more engaging visual merchandising, optimizing and expanding the online product assortment, improving guest experience to drive conversion, and launching our new mobile app. Turning to North America. We have substantial upside as we continue to ramp up our most established business. Our disciplined store expansion has produced a store fleet among the most productive and profitable in the industry. Our store teams are second to none, and we're continually inspired by their innovations, from new store formats to market optimization strategies. This year, we will target square footage growth of approximately 10%, with up to 28 new stores and 12 optimizations. This will also include additional locals, a strategic evolution of our showroom models, which has been successful in curating unique experiences and building brand awareness in smaller markets. Looking towards our international potential. We are on track to build this into a $1 billion business by 2020. While pleased with our performance across our 3 major regions outside North America, our focus in 2017 will be on China. We will use a market densification strategy centered in Tier 1 cities, including Shanghai, Beijing, Guangzhou, and Chengdu, with digital amplification to reach our guests across the entire region. With China's activewear market valued at $28 billion and growing, the world's largest middle class, and over 450 million millennials living an increasingly active lifestyle, the magnitude of our opportunity in China is unparalleled. And the strong performance we've seen out of our store openings thus far gives us confidence in the market readiness as we accelerate our expansion. Before I pass the call over to Stuart, I want to recognize the passion, commitment, and creativity from our global teams who have all contributed to our success last year. With the goal of our ambitious 2020 plan to double revenue to $4 billion and more than double earnings in sight, we are on track to realize our vision through a constant flow of high-impact initiatives that will fuel our growth this year and beyond. At a time when experiences matter more than ever to consumers around the world, our vertical model puts us firmly in control of our destiny, and that destiny is one I wouldn't trade for any brand in the world. Stuart?

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 and 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 versus 363 a year ago. There are now 346 stores in our comp base, 45 of those in Canada, 221 in the United States, 26 in Australia and New Zealand, 4 in Asia, 7 in Europe and 43 ivivva. At the end of Q4, we also had a total of 51 showrooms in operation, 16 lululemon showrooms in North America, 18 internationally and 17 ivivva. Company-operated stores represented 72.3% of total revenue. Revenues from our digital channel totaled $164.3 million or 20.8% of total revenue, a consistent rate with the fourth quarter of last year. Other revenue, which includes strategic sales, showrooms, pop-up stores, warehouse sales, and outlets, totaled $54.9 million versus $48.9 million in the fourth quarter of last year. Gross profit for the quarter was $427.9 million or 54.2% of net revenue compared to $354.5 million or 50.3% of net revenue in Q4 2015. The factors which contributed to this 390 basis point increase in gross margin were 410 basis points of overall product margin increase primarily due to lower average unit costs and improved AUR, a continuation of the factors you saw driving the margin improvement in the third quarter. Markdowns continued to be well managed, with only a 20 basis points year-over-year impact to product margin for the quarter. We also saw 10 basis points of leverage in product and supply chain overhead costs. These were offset by 20 basis points of deleverage from occupancy and depreciation and 10 basis points of decline due to the foreign exchange impact of a stronger U.S. dollar. SG&A expenses were $231.3 million or 29.3% of net revenue compared with $188.2 million or 26.7% of net revenue for the same period last year. This is 110 basis points above prior guidance of approximately 150 basis points of deleverage in the quarter and was the result of the following. Nearly half of this increase versus guidance is due to FX-related revaluation of U.S. dollar cash balances as we have seen the Canadian dollar strengthen significantly in the final weeks of the quarter. The balance of the increase was opportunistic investments to fuel long-term growth. As we have mentioned previously, when we see outperformance in sales and margin as we did in Q4, we will invest to continue to fuel our long-term growth. As a result, operating income for the quarter was $196.6 million or 24.9% of net revenue compared with $166.3 million or 23.6% of net revenue in Q4 2015 or an increase of 130 basis points in operating margin. The effective tax rate was 31.1% compared to 29.8% a year ago, which includes certain tax and related interest adjustments associated with the finalization of the company's transfer pricing arrangements and associated repatriation of foreign earnings. Excluding these adjustments, the effective tax rate would have been 30.6% compared to 29.6% in the fourth quarter of 2015. Net income for the quarter was $136.1 million or $0.99 per diluted share compared to net income of $117.4 million or $0.85 per diluted share for the fourth quarter of 2015. Excluding the tax and related interest adjustments I just mentioned, EPS for the quarter was $1 per share. In addition, the negative net impact to earnings from foreign currency this quarter was $0.09 per share, $0.02 higher than what we previously estimated for Q4. Our weighted average diluted shares outstanding for the quarter were 137.2 million versus 138.2 million a year ago. There were a minimal amount of shares repurchased during the quarter under our recently approved $100 million authorization. Capital expenditures were $43.3 million for the quarter compared to $35.4 million in the fourth quarter last year. Turning to the highlights for our full fiscal year 2016 performance. Net revenue was $2.344 billion, up 14% on both a reported and constant currency basis, which reflects a 7% constant currency comparable sales growth. E-commerce sales totaled $453.3 million or 19.3% of total sales. Gross profit was $1.2 billion or 51.2% of net revenue compared to $997 million or 48.4% of net revenue in fiscal 2015, reflecting an increase of 280 basis points. Net income for the year was $303.4 million or $2.21 per diluted share compared to $266 million or $1.89 per diluted share for fiscal 2015. This is based on an effective tax rate of 28.2% in 2016 versus 27.8% effective tax rate in 2015. Normalized for transfer pricing and repatriation tax adjustments, our adjusted EPS was $2.14 for fiscal year 2016 compared to $1.86 in 2015. Turning to our balance sheet highlights. We ended the year with $734.8 million in cash and cash equivalents. Inventory at the end of the fourth quarter was $298.4 million or 5.1% higher than at the end of the fourth quarter of 2015, reflecting a 5.7% decrease in inventory per square foot. This was slightly lower than expected due to the timing of in-transit inventory. As we head into 2017, we expect our inventory growth going forward to normalize and be more in line with our forward sales trend. Turning now to the details of our Q1 and fiscal year 2017 outlook. As Laurent mentioned, we've seen a slow start to the first quarter. Soft traffic in stores combined with lower conversion on our e-commerce site have weighed on our trend so far this quarter. Within our stores, we've seen conversion, AUR, and UPT all remained solid, with traffic as the primary headwind. Despite this difficult trend, we are excited to launch a number of guest acquisitions and retention programs beginning this week and ramping into Q2. These programs leverage all parts of our business model and include the following: the launch of our Fast And Free Nulux collection, as Laurent mentioned, this week, leveraging our fast-turn capabilities to deliver color in selected styles to land in our stores next week and the expansion of our successful omnichannel strategies such as the ramping up of our ship-from-store program from 85 to 145 stores by the end of Q2; the addition of our outlet stores to the ship-from-store program beginning in the first quarter; the introduction of a pilot of our buy-online, pick-up-in-store capability beginning in Q2. Within e-commerce, the online conversion trend has also been a particular focus, and we've taken aggressive actions to improve site performance, which I'm sure many of you have noticed. Our initial reads indicate that these efforts are gaining traction. That said, we expect revenues in Q1 to be in the range of $510 million to $515 million. This is based on a comparable sales percentage decrease in the low single digits on a constant dollar basis compared to the first quarter of 2016 and assumes a Canadian dollar at $0.76 to the U.S. dollar and 10% more square footage versus Q1 last year. We are seeing the product margin improvements we achieved in the second half of 2016 extend now into the first quarter of 2017 in a similar order of magnitude. However, these improvements are being offset significantly by deleverage on product and supply chain overhead and occupancy and depreciation expense due to the sales trend in Q1 sitting below our expectations. As a result, we now anticipate gross margin in the first quarter to increase by approximately 50 basis points versus Q1 2016. We expect SG&A in the first quarter to delever approximately 100 to 150 basis points, a function of our negative low single-digit comp assumption for the quarter. Assuming a tax rate of 31.2% and 137.3 million diluted weighted average shares outstanding, we expect diluted earnings per share in the first quarter to be in the range of $0.25 to $0.27 per share versus $0.30 per share a year ago. For the full year 2017, we expect revenue to be in the range of $2.55 billion to $2.60 billion. This is based on a comparable sales percentage increase of low single digits. This full year guidance reflects our view of strengthening trends in both e-commerce and stores as a result of the strategies we mentioned around product assortment improvements, website enhancements, and acceleration of our omnichannel model, and we are starting to see evidence of these strategies now materializing. We expect to open up to 50 company-operated stores, which includes an acceleration in our international store openings to 15. This represents a square footage increase of approximately 12% for the year. We expect gross margin for the year to be flat versus 2016. The benefits from the product margin improvements that we have been seeing will have the most meaningful impact in the first half of the year and then moderate into the second half of 2017. Offsetting this is a modest level of deleverage in product and supply chain SG&A and in occupancy and depreciation, primarily due to the accelerated international store openings, which carry a higher occupancy rate. We also expect full year SG&A rate to be flat versus 2016. We expect deleverage in the first half of the year, with an improved SG&A picture in the second half. As a result, we expect operating margin to be relatively flat with last year at 18%. We expect our fiscal year 2017 diluted earnings per share to be in the range of $2.26 to $2.36 per share. This is based on 137.5 million diluted weighted average shares outstanding, which does not reflect an estimate of shares repurchased after Q4 2016 and also assumes an effective tax rate of 31.2%. We expect capital expenditures to range between $170 million and $175 million for the fiscal year 2017, reflecting new store openings, renovations, relocation capital, and also strategic IT and supply chain capital investments. As we've mentioned on prior calls, operational excellence has been a priority to enable our growth strategies and recover our profitability. As we look forward to 2017, our agenda for operational excellence focuses on 3 areas. First, we will continue to develop our supply chain capabilities, building on the success we have seen over the last 2 years. This focus will not only enable us to maintain and extend our product margin recovery but also help us strengthen our chase capabilities and provide shortened lead times in responding to market trends. An example of this currently includes our ability to accelerate color in key styles into our assortment to impact the first half of this year. Our second operational priority focuses on SG&A and our current plan to deliver leverage on sales growth for 2017 and beyond. Earlier in Q4, we retained BCG to support us in a strategic effort to evaluate our cost structure and identify opportunities for cost efficiencies. We are now in the final stages of this work, which will help us become a leaner business and deliver operating results with fewer resource requirements. This work will enable us to reinvest a portion of these savings to support our growth strategies and also deliver the leverage in expenses for the balance of the year that our guidance contemplates. And lastly, our third operational priority is our IT infrastructure. We are deep into a number of projects that will support key operational capabilities for this year and beyond, in areas including: planning and allocation to build new abilities to flow inventory to better meet demand; e-commerce through enhancements to our website and mobile guest interfaces; and CRM to support our new loyalty programs as well as various elements of our guest engagement strategies. In closing, I'd like to reiterate our confidence in the tenets of our long-range plan as we previously articulated them: revenues of $4 billion by 2020; gross margins in the low 50s; earnings growing faster than sales; EBIT margins in the low 20s. We see the results of 2016 as evidence of our progress against these goals. And we remain bullish for 2017 despite the slow start we've seen early in Q1, especially given that our most important growth drivers for the year are still in front of us and reflect exciting new elements of our business model, including the new product introductions we mentioned with Nulux in Q1; bra innovation in Q2; and jackets and outerwear as well as accessories into the second half; the e-commerce enhancements noted earlier such as the mobile app in Q2, visual merchandising improvements both on our websites and in stores; new guest acquisition strategies with our brand campaign launch in Q2; and our expanded CRM programs in the third quarter; the acceleration of our expansion in China; and finally, our men's initiatives ramping throughout the year. And we will accomplish all of this while building important new cost efficiencies through the strategic SG&A project that I mentioned. We look forward to updating you on our progress on these programs and more over the course of the year.

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 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. And also, there's just the broader macro trends that I think we're seeing across the industry, with consumers and our guests, in particular, shifting their shopping preferences to digital versus brick-and-mortar. So in terms of the store side of the equation, we've taken a sober view on our store outlook given the traffic trends. It's safe to say that our guidance does not reflect the same store comp performance that we saw in 2016. That said, we have a number of strategic sales-driving investments that will ramp over the course of the year that will benefit our stores and our website business in Q1. And in particular, February and March really did not benefit from all the initiatives that we've been talking about.

Thanks, Stuart. Matt, I believe the performance we observed in Q4 was influenced by the neutral and jewel tones that suited the gift-giving season, especially in Q3 and Q4. In Q1, we should have embraced a bolder color assortment, and we didn't effectively bring that to life through visual merchandising. However, we brought in a lot of talent on the merchant side late in 2016, focusing on visual merchandising. We noticed this trend emerging very early in the quarter, and due to a significantly stronger supply chain, we've been able to respond quickly. More color will actually appear next week. We've also added many creative resources in Vancouver and L.A., enhancing our visual merchandising capabilities. If you look at products like the Loud & Clear Jacket or the Cool Racerback in hydrangea blue, when we showcase them effectively, demonstrating fluidity and movement, sales performance has greatly improved. We're disappointed with how Q1 started, but we take responsibility for it. We also understand how to improve things, and we've already seen swift results from our efforts. We know what to do, we are executing it, and it’s showing positive results in terms of traffic and conversion. As Stuart mentioned, I'm more enthusiastic about 2017 than I have been since 2014. We have an unprecedented level of product innovation and global brand activation planned for this year that will surely enhance traffic and conversion. Therefore, 2017 is set to be our best year yet, with earnings expected to grow in line with sales.

Great. I have a follow-up regarding the margin. Stuart, can you share the embedded product merchandise margin for the first quarter and for the year? I'm curious about the comparison needed to leverage the rod.

Yes, as I mentioned in the prepared remarks, we are seeing product margins recovering as expected in the first quarter, with improvements of over 300 basis points. We anticipate this trend will continue into the second quarter. However, the impact of our fixed cost components on gross margin is greater than we anticipated due to the sales trend. Additionally, we added 39 new stores in Q1, which brings occupancy costs that further affect our leverage. We had indicated that we aim to leverage our costs with a mid-teens total revenue growth rate, but we fell short of this in the first quarter. Overall, we are pleased with the product margin results. The strategic cost reductions we have discussed will enhance not only the SG&A line but also impact certain elements within buying costs in gross margin. From a long-term perspective, I still believe we will achieve cost structure leverage at the mid-teens total revenue level and we are likely to perform slightly better in 2017 due to our ongoing expense initiatives.

My question is, Stuart, you mentioned something about the brand campaign. I was wondering if you could elaborate on that investment. Is it global? Also, can you discuss the investment as you expand into multiple continents? What is the infrastructure investment, and what can it support outside of North America?

Adrienne, this is Laurent. From a brand campaign standpoint, I think we excel at grassroots initiatives, building communities, and engaging with them. This success has contributed to our strong physical presence. However, we have not always effectively amplified our voice and communicated what lululemon represents globally. As we continue to expand our brand internationally, this becomes increasingly crucial. We have partnered with a leading creative agency renowned for its expertise in content creation targeted at millennials. While I can't disclose their name today, we are very enthusiastic about this collaboration, which aims to enhance our brand's amplification. This will be a global initiative focused on several key cities around the world, launching in mid-May. It is vital for improving guest retention and increasing brand visibility and guest acquisition in 2017. I am genuinely excited about our potential to reach millions through this campaign, ultimately enhancing our collective growth. This is an exciting project, and I look forward to sharing more details with all of you.

Laurent, is this related to traditional media? Are marketing dollars being reallocated, or is this a new investment in marketing?

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 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 strategy. But yes, it's definitely a big part of our long-term vision and that infrastructure is important to enabling it.

Adrienne, I would like to add one more point about the brand campaign and our additional investment. Given how we plan to distribute that content, we will have the flexibility to invest strategically. We will monitor the reach of our efforts by region, segment, and channel, allowing us to adapt our investments based on what we observe in each region.

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.

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. Regarding our guidance and key performance indicators, we're observing strong results in average unit retail. We anticipated that AURs would stabilize in 2017 as we compare against the strong initiatives from 2016. We see greater opportunities for improving conversion rates as our product strategies and innovations take effect, allowing us to convert better both in stores and online. Additionally, our brand campaign, advancements in digital marketing, and various customer relationship management enhancements planned for the year will drive traffic across both channels. However, our model does not depend on improvements in AUR to influence comparable sales, and we expect AURs to moderate. This reflects our perspective on comparable sales from a KPI viewpoint. On the supply chain front, we're pleased with our progress. Ted Dagnese has effectively built his team and is advancing our agenda. Our collaboration with suppliers is essential for this effort. We are now focusing on extending our supply chain capabilities to reduce lead times, increase agility, and enable quicker product responses to market trends. Many of our suppliers have successfully implemented similar models with other companies, from which we are looking to gather insights. We're excited about these developments and see substantial potential for gaining efficiencies as our segmentation strategy within the supply chain continues to develop. There is significant upside as we consider how supply chain enhancements will support our business moving 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.

Stuart, could you provide us with more details? You mentioned soft traffic in stores and lower online conversion for the quarter to date. Can you clarify what's included in your low single-digit comparable sales guidance for Q1 from both stores and e-commerce? I'm trying to understand if the pressure is coming from both channels equally or if it's skewed more towards one side.

Ike, so I think versus our expectations, the e-comm channel has been softer than stores. The guidance 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.

Just to dig a little bit deeper on the Q1. 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 cover as much as I can. To provide some insight into how Q1 is shaping up, we observed a slowdown in e-commerce conversion that began in the last few weeks of January and has continued into early Q1, specifically February and March. We experienced challenges with store traffic that intensified early in February. I don't see a significant difference between February and the early weeks of March. Regarding the guidance we provided, we're anticipating some gradual improvements in April related to a few initiatives we've discussed. The Nulux program, which launched in stores this week, is receiving a very positive response from guests, along with various promotional activities that will start next week. February and March did not benefit from these initiatives. Looking ahead to the rest of the year, we have several major investments aimed at supporting various segments of the business that we've mentioned. In terms of product categories, we've seen strong performance in bottoms for both men and women, while jackets and outerwear, which were challenging for us in the fourth quarter, have shown continued difficulties into Q1. I'm not sure if Laurent or Celeste would like to add anything regarding the product perspective.

Yes, Paul, it's challenging to measure newness. What I can share is that in 2017, you'll notice more innovations in both design and functionality. For instance, with our new fabric Nulux, the response has been incredible. Our tights have quickly become the top-selling tights since their launch, highlighting how well our new fabrics resonate with our customers. Additionally, from a design perspective, we have a lot planned, especially in the print area. The bra category has been performing well, and we will have a bold launch following extensive R&D and product testing with our athletes. Therefore, 2017 is when we’ll see the innovation pipeline we’ve been discussing in recent years truly deliver value to our customers.

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