lululemon athletica inc. Q1 2009 (Qtr End 05/30/09) Earnings Call Transcript

| About: Lululemon Athletica (LULU)

lululemon athletica inc. (NASDAQ:LULU)

Q1 2009 Earnings Call

June 11, 2009 9:00 am ET


Christine Day – President & CEO

John Currie – CFO

Sheree Waterson – EVP & General Merchandise Manager.

Jean Fontana - ICR


Michelle Tan - Goldman Sachs

Lorraine Hutchinson – Banc of America

Lizabeth Dunn - Thomas Weisel Partners

Laura Champine - Cowen And Company

Howard Tubin - RBC Capital Markets

Paul Lejuez - Credit Suisse

Richard Jaffe - Stifel Nicolaus & Company, Inc.


Good day everyone and welcome to today’s lululemon athletica first quarter 2009 results earnings results conference call. (Operator Instructions) At this time for opening remarks and introductions, I’d like to turn the call over to Jean Fontana of ICR. Please go ahead.

Jean Fontana

Good morning. Thank you for joining lululemon athletica’s conference call to discuss first quarter fiscal 2009 results. A copy of today’s press release is available in the Investor Relations section of the company’s website at or, alternatively, as furnished on Form 8-K with the SEC and available on the Commission’s website at

Today’s call is being recorded and will be available for replay for 30 days shortly after the call on the Investor Relations section of the company’s website. Hosting today’s call is Christine Day, the company’s President and Chief Executive Officer, and John Currie, the company’s Chief Financial Officer.

Before we get started, I would like to remind you of the company’s Safe Harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company’s filings with the SEC.

Now, I would like to turn the call over to Christine Day, lululemon athletica’s Chief Executive Officer.

Christine Day

Thank you Jean and good morning everyone. Thank you for joining us to discuss our first quarter results. With me today are John Currie, our CFO; and Sheree Waterson, EVP General Merchandise Manager. Following my opening remarks, I will turn the call over to John who will go through the financial details of the quarter.

We continue to manage for long-term brand expansion while delivering against our short-term commitments. Given the troubled outlook for the economy at the time we entered 2009, we are pleased to state that we achieved $0.09 of earnings per share for the quarter. We are also pleased with our current pace of our business and with our ability to continue to bring our customers through the doors to make full priced purchases.

For the quarter our constant dollar comp declined 8% remaining at the same level as the fourth quarter of 2008 and slightly ahead of our forecast. We successfully launched our ecommerce site ahead of schedule with our mock launch on April 1st, April’s Fool’s Day, and a live launch on April 14th.

We achieved an operating margin of 12.1% despite the comp store sales decline through effective comp controls and increased efficiencies. We also saw revenue stabilize and even begin to improve over the quarter and are continuing on that trend.

Given our high level of productivity and the strong double-digit same store sales we produced a year ago, we see our Q1 sales trend as a small victory and believe it reflects the resiliency of our brand and validates our position in the marketplace.

While encouraged by these results this will not change the way we operate the business this year or cause us to review the cautionary lens through which we are viewing 2009. Looking at real estate we continue to see attractive real estate opportunities in North America. During the past six months we have also worked hard on our real estate strategy and three key initiatives; reducing our initial store investment and occupancy costs, reducing our store operating expense, and refining our inventory set and flow.

Our new store in Walnut Creek, California, opened in late May reflecting the successful of these initiatives and we are confident that we can grow profitably with our new stores. Looking at our business in retail, sales trends continue to improve and overall consumer response to our brand remains strong with new product in our running category and bright colors driving sales.

In the US, we are on track to open five stores this fiscal year and we are working on one to two additional stores that could fall into this fiscal year if the leases are signed and we receive construction permits on time.

We have closed a temporary [inaudible] in April, and will open a Woodbury Commons outlet in late summer. We will open one new market this year with Phoenix opening in August. In Canada, we have had strong support from our landlord’s in our renewal process and are on track to complete the renewals on favorable terms.

We will open one additional store in Canada in fiscal year 2009. As I mentioned we launched ecommerce in April, which was about six months ahead of schedule. As with our previous April Fool’s Day, this year we launched a mock site on April 1st complete with retro’s 1980’s web design techniques, that delighted our guests and the tech community.

We have gathered a tremendous number of names and email addresses from the [prior] marketing of the April 1st site. Sales in the US have been particularly strong and we’ve had a small but steady international customer base.

We have also reached into our past online version of our Shop Nude campaign to preregistered guests from our stores for this site. We are proud of our execution and launch of our site and extremely pleased with the initial response, even though we opened with a limited assortment to ensure this launch.

Our site gives and enormous opportunity to extend our reach to a much broader market. We now have 80% of our SKUs on the site and we will have 90% by early July. For 2009 we continue to expect the site to have minimal impact on earnings.

Strategically we have focused on [cycling] our execution both in the stores as to our system implementations while also making investments in innovation and responding to the consumers’ concerns.

We see the current market conditions and the opportunities to increase our points of differentiation, solidify a strong manufacturing base, and grow our market share. With this in mind we have made some key decisions to take some actions to compress our gross margin in the short-term but provide long-term growth opportunities.

Let me give you a few examples, first rather then simply pursue cost decreases, we have focused on securing space in the best factories to produce high quality goods at competitive pricing, with priority service to support our quick turn flow of goods.

While we may pay more up front on some items, this will reduce our inventory on hand while allowing us to respond quickly to market demand. Next we are also expanding our organic cotton and natural fabric lines. Our initial purchases were not large enough to achieve our historically strong margin.

We have decided to price the line initially to offer the consumer more choices at the right price point, choosing not to price based on short-term profiting model. We are confident that our sourcing strategy will yield strong margins for these items in 2010.

Another example where we decided to price for market share is in our yoga mat as well as our other yoga accessories. We lowered the price of our best selling yoga mat to $28.00 from $54.00 in order to solidify our positioning as the leading yoga retail and lifestyle destination.

We believe it is working as planned as our sales in accessories are up over 40%. And finally in keeping with our strategy of producing beautiful, functional garments that last a long time, we have increased the quality of the sundries such as [inaudible] on several key items without passing through the added costs.

This will result in better quality and longer life of the garment as well as decreases in defective returns, all of which should continue to enhance our brands. We are confident that no competitor can offer garments of similar quality, function, or design at our price points.

As I said these are strategic decisions we are willing to make for the long-term good of the business. For 2010 we are planning to see leverage in our sourcing and we’ll also have refined some of the fabric and trim we are using in order to work back towards our historical initial merchandise margins.

In summary we feel very good about the continued enhancements we are making to our brand, product, infrastructure, and execution of our retail expansion. Also in today’s marketplace we see two continuing consumer ideals emerging. The first is that quality, functionality, and beauty are the new luxury.

And the second is that health, community, friends, and family are the new wealth. We believe our business model is perfectly positioned to excel in meeting these emerging needs. And with that I’ll turn it over to John.

John Currie

Thanks Christine, I’ll begin by reviewing the details of our first quarter 2009 results and then I’ll provide our outlook for the second quarter.

As a reminder comparable 2008 figures have been restated to reflect the reclassification of our Japan operations, the discontinued operations which happened in Q2 of last year. So for the first quarter of fiscal 2009 total net revenues were $81.7 million, up from revenue of $77 million in the first quarter of 2008.

We opened in our Australia joint venture in April, but no new corporate owned stores were opened during the quarter. The increase in revenue from new stores opened over the past year more then offset the comparable store sales decline of 80% on a constant dollar basis and a weaker Canadian dollar which had the impact of reducing reported revenue by $11.3 million or 12.1%.

At the end of Q1 there were 67 stores in our comp store base, 37 of those in Canada and 30 in the United States. Our corporate owned stores represented 89% of total sales or $72.9 million versus 90% of total sales in the first quarter last year or $69.4 million.

Franchise and other revenues which includes wholesale, phone sales, showrooms, outlets, warehouse sales, and now ecommerce sales, totaled $8.8 million for the remaining 11% of total revenue for the first quarter.

We ended the quarter with 114 total stores versus 85 a year ago, 103 which are corporate owned and 11 which are franchises including the six operating in Australia. Gross profit for the first quarter was $34.9 million or 42.8% of net revenue, as compared to $41.1 million or 53.4% of net revenue for the same period last year.

As we anticipated heading into this quarter the majority of the decline was due to the negative impact on product costs associated with the weakening of the Canadian dollar versus the first quarter of 2008, combined with the deleveraging on occupancy and depreciation expense due to lower productivity on new stores, and lower comparable store sales.

These two factors were outlined in our guidance and together accounted for approximately 760 basis points of the decline. The remainder of the decline resulted from a combination of factors including with the addition since last February of factory outlets in the US store base, we’re realizing a steadier pace of discounting earlier in the year compared to last year, a true up of our shrink reserve to adjust for the result of inventory counts during the quarter, and as mentioned by Christine, the pressure on margins from strategic pricing decisions.

SG&A expenses were $25.1 million or 30.7% of net revenue, compared to $29.2 million or 37.9% of net revenue for the same period last year. As a reminder for the first quarter of 2008 we recorded $1.9 million in certain one-time charges related to management changes including severance expenses, executive search fees, as well as the accelerated investing in performance-based options.

Even excluding these charges SG&A improved by 470 basis points. We attribute the remaining improvement in SG&A to efficiencies in labor management, both in stores and at our store support center, together with reduced discretionary expenses through the continued execution of the company’s overall cost reduction plans implemented in Q4 of 2008, improved distribution in logistics efficiency, and finally the weaker Canadian dollar also reduced reported SG&A costs reducing SG&A by approximately $2.7 million.

Operating income for the first quarter was $9.9 million or 12.1% of net revenue, compared to $11.9 million or 15.5% of net revenue a year ago. Tax expense was $3.4 million for the first quarter or a rate of 34.4% versus 30.7% last [year].

Net income from continuing operations was $6.5 million or $0.09 per diluted share. This compares to net income of $8.5 million or $0.12 per diluted share for the first quarter of 2008. Our weighted average diluted shares outstanding for the quarter were 70.3 million versus 71.7 million for the same period last year.

Turning the key balance sheet highlights, we continue to operate with a healthy cash and working capital position and no debt. We ended the first quarter with cash and cash equivalents totaling $59.3 million. Inventory at the end of the first quarter was $44.6 million, down $7.4 million or 14.3% from the end of our fiscal 2008 and down $10.4 million or 18.9% from the end of Q1 2008.

We were conservative with the timing of our delivery and were therefore under inventoried at the end of the quarter due to better then expected first quarter sales. As a result we were air freighting some product shipments in Q2 in order to catch up.

Capital expenditures were $2.3 million in the first quarter resulting from existing store renovation and IT capital expenditures. Now I want to turn to our outlook for the second quarter of 2009.

This guidance assumes a Canadian dollar at $0.85 US, reflecting the recent strengthening over the $0.80 experienced in Q1. So for the second quarter 2009, we expect comparable store sales will run in the negative mid single-digits range on a constant dollar basis.

We currently remain committed to opening six stores in the year with one in the second quarter, this being the Walnut Creek store opened in late May. We anticipate reported revenue in Q2 to be in the range of $85 million to $90 million.

Overall we expect a similar gross margin profile in Q2 to that of Q1 with some minor differences. Gross margin will again be impacted by deleverage on occupancy and depreciation, foreign exchange, and strategic price initiatives discussed by Christine.

Deleverage from occupancy and depreciation should be slightly less then in Q1 due to the more modest sales decline expected, however in order to meet these higher sales we’ve incurred additional costs to air freight products from our suppliers.

Even though the Canadian dollar has strengthened since the beginning of the quarter, the favorable impact on gross margin will lag on average one or even two quarters until product purchased at the more favorable exchange rates runs through cost of goods sold.

For the second quarter of 2009 we expect SG&A to continue to benefit from our more efficient cost structure and labor management, as well as foreign currency translation. As I mentioned even though there’s a tiny lag in the gross margin benefit from the recent strengthening of the Canadian dollar, the impact on SG&A is immediate and therefore the recent move up from $0.80 US will result in less of a reduction in reported SG&A in Q2 then we saw in Q1.

So overall operating margin will likely be slightly lower then in Q1. As Christine mentioned we view the product margin decline as a strategic decision to forgo margin this year in order to build market share and loyalty in the current economy.

With better then expected same store sales we’re confident the strategy is working even though it exacerbates the margin pressure. As we’ve [sourced in] for 2010 we’re building in higher margin on the same goods that are dragging down our margins this year, primarily through volume discounts and negotiated pricing and in isolated cases, adjusted retail pricing.

Overall we expect earnings per share in the range of $0.08 to $0.09 per share for the quarter. This assumes a tax rate of 34% and 70.5 million diluted weighted average shares outstanding. Based on our current expectations of six new stores, with one or two possible additions, we expect capital expenditures in the mid [teen] millions for the full year, including renovation capital for existing stores, IT, and other head office capital.

With that I’ll turn it back to Christine.

Christine Day

Thank you John, I just want to point out a couple of other things going forward in promotional activity, last year you remember at the end of June we added a cycle of promotional discount sales to clear the summer goods. Because we’ve had the outlet centers clearing, we’ve seen that timing pulled forward, we will not be executing that level of sale at the end of this quarter due to stronger inventory management and the fact that our clearance strategy is working.

And then the [Sawgrass] closure, we cleared the merchandise out of that store at additional discount rather then move or hold the inventory which put a little pressure on the quarter but with the timing of the Woodbury opening in late summer, we feel that we’ve actually addressed in a very healthy way the gross margin and discounting to clear goods during the period.

So as I said we will continue to follow through with our plans for 2009 which will include planning the business with an emphasis on strengthening our competitive differentiation, improving cost efficiencies, and prudently allocating capital to provide us with the strongest possible financial position while executing a multi talent growth strategy now that our ecommerce site has been successfully launched.

So we’ll now take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Michelle Tan - Goldman Sachs

Michelle Tan - Goldman Sachs

I was wondering if you could give us a little more color on the magnitude of impact to gross margin from the pricing initiatives versus the outlet clearance strategy and then just to clarify the fact that you’re seeing more of the discounting evenly throughout the year should that mean something better for gross margin when we get towards the fourth quarter.

Christine Day

To answer the second part of your question first, yes, because what’s happening now is that we are selling more full priced merchandise at our stores, sweeping them to the outlets and having less, we had two end of kind of the quarter clearance periods, one in July, on in January. And we’re not seeing the need to do the July one this year because of the way that we’ve been managing the business through the outlet strategy.

John Currie

On your first question about the strategic pricing, in the gross margin compression, other then foreign currency, occupancy, and depreciation we’re looking at about 300 basis points of impact. And in the pricing decisions were a half or maybe a little over half of that.

Michelle Tan - Goldman Sachs

And then also on the gross margin lag from currency, it seemed as we looked last year at the currency impact to gross margin flowed through relatively quickly with the fourth quarter hit that you took from currency, so is there something that’s changing there in terms of how long it takes the product to flow through, how long you’re ordering it before you sell it, or is it just something that I’m just reading in what happened in fourth quarter of last year.

John Currie

I guess the best way to answer it is number one the currency has moved quickly and it really, the impact is very hard to measure because its, the flow of product coming in compared to the timing of the currency shift, so its very, very difficult to give clarity on exactly the impact.

For example in this quarter, in the month of May, the Canadian dollar rose something like 12%, so its very difficult to measure the impact on this quarter, next quarter, depends how much core that we already had that we’re selling through so again nothing has changed.

What I’m describing is intuitive because the favorable impact in cost of sales until we sell those goods but it would be difficult to give you more precise clarity on what I’m indicating going forward versus exactly what happened at the end of last year.

Michelle Tan - Goldman Sachs

And then just the improvement in sales trend, was it disproportionate at all between Canada and the US.

Christine Day

No, I think that’s the thing we feel the best about is that we’ve seen it in both countries and we’ve particularly seen it in the new stores that we’ve opened last year in the non comps as well so we feel really pleased with how the consumer is responding to our product right now.


Your next question comes from the line of Lorraine Hutchinson – Banc of America

Lorraine Hutchinson – Banc of America

Just wanted to take a little bit of a longer view and talk about what you think the ideal store-opening pace will be once we start to see the real estate market loosen up and the consumer get better.

Christine Day

I think where we’d like to be is at a pace probably around 15 and then maybe up to 25 and that’s strategically what we’re planning right now. We see a lot of opportunity with hitting the market early with the showroom and stimulating demand for ecommerce. And we’ve seen that really working for us right now even in today’s environment as a much surer way.

I think where we want to be strategically is in a demand model for our store where we’re really confident when we put the store in we’ve stimulated the demand. And I think with ecommerce, the showroom, that we actually have [inaudible] as a competitive situation that we would otherwise worry about allowing us to grow each store and place it in the right way.

And we’ve preferred to really work off of our real estate strategy rather then just be opportunistic and very confident in the work that we’ve done identifying the 300 stores and that’s actually put us in a really great position to negotiate with the landlords. We had a very successfully [ICSC] on the May convention which John, Angie, and I attended a few weeks ago and feel very confident in now our growth strategy and relationship we have with landlords.

And our ability to take the market at our pace. We certainly don’t in the short-term see real estate prices going up.

Lorraine Hutchinson – Banc of America

When you got the initial results from the first couple of months of the website were there any surprises about the composition of your customer base, geographically, internationally, what are your early learnings there.

Christine Day

I think the early news for us was that such strong sales out of the US and I think that’s been probably the biggest surprise. We had initially anticipated we’d have a stronger demand in Canada but I think in some parts that was due to the fact that we had more basics on the site and this last few weeks where we’ve had more new products and now 80% of our SKU’s on the website.

We’ve seen a surging Canadian demand but its still not kept pace with where we’re seeing the US. The US is our biggest growth market. We really think that that is a great measure of the success in reach of where the brand is. So we feel that that’s been a very positive result. In terms of items that are selling, not as many accessories, and men’s. Its been a little bit lighter.

So we think that those are just opportunities awareness but really great sell through on any of the technical products and the core basics, which you know of course are our strongest items. So we feel very good about the initial sales trends and the response that we have and think that we have huge opportunity.

We’ll have 90% of the SKUs on by the end of this month going into July and so we expect sales to continue to grow.


Your next question comes from the line of Lizabeth Dunn - Thomas Weisel Partners

Lizabeth Dunn - Thomas Weisel Partners

I guess some questions regarding the ecommerce business, first can you refresh my memory as to what the costs were for sort of pushing the launch up and then as it relates to the sales trends that you’re seeing within the US for ecomm, are you seeing anything geographically within the country that could be interesting for us in lending credence to your, or telling you where your store opportunities may be going forward.

Christine Day

I’ll answer the second part of that first, what we’re really seeing and we were pleased about and gave us the confidence to go forward with the Phoenix market opening is we’ve had a showroom in Phoenix and for the last year and a half, stimulated a market which has done very well and then what we saw when we launched ecommerce was really strong demand in that market.

We saw that it was a real hotspot early on so as you remember, maybe recall the showrooms have a much more limited inventory assortment. So that then gave us the confidence to go ahead with opening the Phoenix market even though from an economic point of view, one of our concerns it was a little bit more hard hit so we weren’t sure if it was the right time to put a store in. So this actually gave us the confidence to go ahead and open that market.

There really was not much cost, we had a little bit of timing on some of our people with headcount and then we did make the decision to do the DC comps ourselves, but then that actually gets charged back to the vendor so we actually had invested most of the money in the end of last year so that’s why you also saw our SG&A not really spike or increase.

So really we feel that we’re at, we’re not at optimal margin yet probably because we’ve got a lot more sales leverage but we feel its been a very smooth launch, costs were in line with what we expected.

Lizabeth Dunn - Thomas Weisel Partners

And may I ask one question on the pricing strategy, so I just want to understand you’re lowering prices on some of the accessories and then on the apparel its not really about lowering prices but maybe adding quality and maintaining prices. Is that the correct way to think about this and is this sort of the first quarter and then it will just be sort of a four-quarter impact or how should we think about the timing of this change.

Christine Day

We’ll give you some examples of that but what we saw was we’ve been able to make as we’ve designing the garments, we’ve been able to make some real improvements in the garments but some of the initial buys were then a little bit compressed as we changed some of the sundries and I’ll have Sheree give a little bit more explanation, but we really chose to price at what our future run rate of costs will be in order to maintain pricing rather then take price up, wait until we reduce costs and then take price back down.

So really that’s kind of what you’re seeing. We didn’t feel today’s environment was a place that we should be taking prices up. I’ll turn it over to Sheree for a few minutes and talk about some of the details and things that we have been changing.

Sheree Waterson

Thanks Christine, I think you got it basically right. The accessories markdown is associated with our yoga market and that’s basically a one-time hit. The great thing about this strategy is we’re offering an opening price point in our best selling mat and accessories to lower the barrier to entry and to basically get more people into yoga which is our core marketplace.

I’m happy to report that its been very effective and that our sales have spiked 3.5 times so as Christine had said, our yoga accessories business is up about 40% which is great news. So that’s that piece. When the market gets tough, the tough get going, and one thing that we know is that product is king so Christine has also said, we are actually investing in our product.

Let me give you an example of that, we have our best selling [scuba] lulu hoodie, which is one of our flagship pieces of apparel. We chose to actually upgrade our zippers from a generic zipper to YKK which costs us about $0.80 to do and we thought that that was a terrific investment because over time obviously that adds to the quality of our garment.

Also as we were looking at some of the trends in the apparel market, Heather Yarns, etc., are extremely important and so investing in Heather Yarns cost us more to do but we’re happy to do it because it increases demand. So there’s an increase in demand and there’s also an uptick in our quality and I think both are great long-term strategies for our brand power.


Your next question comes from the line of Laura Champine - Cowen And Company

Laura Champine - Cowen And Company

Just a follow-up question on the pricing strategy because obviously when you start trying to capture market share with price that’s can be a very long road, can you talk about whether or not you think you were just over earning with gross margins at 50% or better or if you think you can get back there and also talk about your willingness to potentially compete on price on some of your categories that you do have more share in or that are more important to you. For example the $100 basis yoga pant, is that a defensible price structure.

Christine Day

Absolutely and I think, we chose not to price up based on initial buys that we know that we know that we can through our sourcing strategies reduce the cost back in line within a fairly short period of time. So we’re not choosing to lower our prices and compress our margin, we’re choosing strategically to leave our pricing at similar price points while adding quality and accepting a short-term until we get the supply chain, in some cases for instance we’re changing manufacturers.

We’ve placed a quick buy with the great goods that we wanted to [bring] in factories with one buyer for instance on organic but we realized that the best of that manufacturer is in another place we want to place a long-term buy there which takes us a short-term margin to get it to market, but longer-term we know we’ll recover it by the fall.

So there’s decisions like that that are effecting that we wouldn’t take pricing up because its really a [back] price and supply chain transition and we just felt that that’s not something that today’s market to be passed onto the consumer on some of those key items that we’re selling.

So I want to be very careful, other then the mats and there’s a bigger mat strategy behind even just the decision that we just did so we wanted to make sure that in today’s market where we see the consumer giving up gym memberships, looking for more cost effective ways to exercise, that we basically made a very available price point which for us what we’re seeing the savings we’re giving them translate into other products that they buy whether it’s a tank or another accessory.

So its actually even working in the short-term, that the more customers you save the better off we are certainly as a business platform so we feel that’s strategic. That said there’s also an over arching map strategy that we have with a new accessories line that we’ll launch in the fall. And there we’ll have two very best of class mats; one that will be co-branded, one that’s our own.

And those will actually be manufactured at the price points that we’re now talking about so from the long-term then our margins will return. But we wanted to offer the yoga mats in today’s economy sooner. So there’s nothing that we’re doing that actually lowers our price point long-term and creates any compression on the margin.

Laura Champine - Cowen And Company

And just so we can get, its tough to get a sense on your long-term gross margin prospects because you’ve been growing in some areas that I think do have this higher occupancy cost, but is that 50% level, is that a good bogey to think about returning to.

John Currie

We were running at 50% or higher, the other significant factor being the Canadian dollar was at par so again, compared to last year the lower Canadian dollar at $0.80 took about 300 or so basis points out of that margin. So ignoring that variable there’s no reason we shouldn’t be able to get back to the kind of gross margins we were seeing last year.

Christine Day

And in fact and I think when you think about there’s the two parts of gross margin, one is the occupancy and depreciation, any strategy that drives revenue while maintaining the product margin which is our strategy, then increasing the sales in the individual stores ultimately helps gross margin. And that’s really how we look at managing that business strategically.


Your next question comes from the line of Howard Tubin - RBC Capital Markets

Howard Tubin - RBC Capital Markets

Can you comment on maybe some of the performance of some of the newer product lines, like running or swim and how they’re performing versus your expectations.

Christine Day

I’m going to let Sheree talk about our number one running shorts.

Sheree Waterson

Thanks for asking the question, it’s a great entrée to talk about one of our favorite categories which is running. We are performing extremely well in the running category and in fact right now, we’re seeing our bottoms business driven by shorter lengths, shorts being one of the key categories. Within our short category our two running shorts are our two top items and I’m happy to say that we added a longer running short this season and it seems that we have really taken that market by storm.

So the reason that we’re excited about the running category is because we feel that it is a key part of our future. It keeps us technical in terms of fabric, it keeps us technical in terms of construction, and there’s a lot of growth here in both the top and the bottoms category.

So we’re also seeing some great trending with some of our technical tops, our [inaudible], and our seamless which go along with the bottom success that we’ve had so very, very healthy here.

Christine Day

And I think that that’s two of the items that we’ve had to increase our orders in our quick turn in as well as you just recently saw a drop in the stores, neon tanks which was also a quick turn item following a quick turn strategy to add [pop] and colors to the demands and those we see people buying in three’s and four’s so really another popular item that we’re seeing.

As we talked about earlier our strategy on adding more mid priced price points in tops, that has also really worked to stimulate extra sales demands so we really feel with both our overall inventory position driving it down, and the increased sales, and we’ve done a really good job on managing inventory turns and really stimulating the guest to buy.

So we feel very good about where we’re heading for the balance of the year.

Howard Tubin - RBC Capital Markets

And maybe just one other question on square footage growth, have you thought about just next year more specifically, do you think we’ll see more new stores opened in 2010 versus your plan for 2009.

Christine Day

Yes, right now the number that we would plan for is 15.

Howard Tubin - RBC Capital Markets

And in terms of the promotional plans for June, July, you said you’d be less promotional in stores, I think you did a warehouse sale end of July last year. Is that planned to go on or there’s no need to do that one this year.

Christine Day

We have not made a decision and we do have a franchisee in Saskatoon that does one in that time period which we don’t control or make that decision, so I can’t speak for what he will be so don’t confuse that one with what one we would do. So we have not made that decision. Based on our low inventory we don’t see the need to clear other then a very nominal level of a site-by-site specific basis if they have some stragglers at the end of summer.

So we won’t be doing the July sale and at this point in time we don’t have a lot of pressure so I think we’ll make that decision in the moment, closer to when we see where inventory levels are. Right now we’re in a more of a chasing inventory position so we feel we don’t have to plan for it, but if we feel that there’s older items or in something that we see stragglers on, we might do a smaller one this year.


Your next question comes from the line of Paul Lejuez - Credit Suisse

Paul Lejuez - Credit Suisse

I was just wondering if you could talk about how the new classes of stores are performing and if you’re seeing any differences in mall versus off mall just given the extent of the promotional environment in the malls and more competition kind of in general.

Christine Day

I wouldn’t say we’ve actually seen any difference between the malls and our street locations. I think historically in the US the streets have been slightly stronger and that trend continues but nothing that has changed. I think in the malls we actually hold up very well and we did not, as many of you probably saw by walking in our stores, discount our spring line or have sales items, or have a sale.

So I think we feel very proud of the fact that we did not have to result to promotional strategies to drive sales in the stores. So overall we’re not seeing a shift, we’re seeing all categories of stores grow and particularly the non-comp class of stores, growth has been very encouraging for us.


Your next question comes from the line of Richard Jaffe - Stifel Nicolaus & Company, Inc.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

Two questions, one just a follow on on the real estate, with 15 stores, could you give us a sense either regionally how they’ll break out or kind of real estate street locations, or regional malls and then a follow on, on the internet initiative and some thoughts of how that’s playing out, how you’re handling the inventory and assortments on the internet versus stores and the pricing.

Christine Day

Pricing on the internet is the same as you would find in each individual market because we have a pricing toggle based on how you view, where you’re buying, so there’s a US pricing and Canadian pricing online so it would be similar to whatever we have in the marketplace.

So there’s no difference in the pricing strategy and our goal is to have about 90% the same SKUs and that could be either 90% of the existing assortment or at [shoulder] season for instance in jackets which we would plan to, our outerwear which we would sell out of in the stores by November, we might carry online through January. So there’ll be some subtle differences either plus or minus on the ecommerce website but on the whole, it will be very similar to our strategy within the stores.

In terms of the profile for the stores that we’re seeing, we continue to lean more to street and lifestyle centers where we can control our own hours of operation, do our community work, etc. That said there have been some very key targeted malls that we go to which really we choose very carefully in any regional areas and so there will be a small portion of those in the portfolio going forward.

But they’re strategic and not the dominant model that we use.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

Roosevelt Field has come up to your expectations, it sounds like you were a little early on opening some of the Manhattan or metropolitan mall stores and it sounds like they’re now moving to a level where you’re much more comfortable, is that accurate.

Christine Day

Yes, I think that we went in just a little too early. I would have preferred to have had a year with several sites open in New York City before we had gone out to the regional mall on that Roosevelt. That said, we are seeing the demand and the consumer responding in the Long Island market on the whole so I think that as brand awareness has grown and I think ecommerce has even helped that, as well as our social media strategy that we do with a lot of Twitter blogs, community events.

We have seen all of the non comp stores growing which has been very encouraging.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Christine Day

I think that we’ve probably said enough about the sales that we feel very encouraged by the signs we see in the consumer response to our product, very confident in our product and I think that the business that you’ve seen we’ve been able to really control our expenses and our flow through which is driving the business as well.

We’re very proud of the management team and the work that we’ve done for the quarter and feel very well positioned for the balance of the year. Thank you everyone for joining us today.

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