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lululemon athletica inc. (NASDAQ:LULU)

Q4 2009 Earnings Call

March 25, 2010 9:00 am ET

Executives

Jean Fontana – ICR

Christine Day – President & CEO

Chip Wilson - Chairman

John Currie – CFO

Sheree Waterson – EVP General Merchandise Manager

Analysts

Lorraine Hutchinson – Banc of America

Michelle Tan - Goldman Sachs

Janet Kloppenburg – JJK Research

Liz Dunn - Thomas Weisel

Paul Lejuez - Credit Suisse

Chi Lee – Morgan Stanley

Sharon Zackfia – William Blair

Jennifer Black – Jennifer Black & Associates

Edward Yruma – KeyBanc

Rob Simone – Cowen and Company

[Christine Cober] – JPMorgan

Dana Telsey – Telsey Advisory Group

Howard Tubin - RBC Capital Markets

Claire Gallacher – Capstone Investments

Operator

Good day ladies and gentlemen and welcome to the lululemon athletica Q4 2009 results conference call. (Operator Instructions) I would like to introduce Jean Fontana from ICR.

Jean Fontana

Good morning. Thank you for joining lululemon athletica’s conference call to discuss fourth quarter and full year fiscal 2009 results. A copy of today’s press release is available on the Investor Relations section of the company’s website at www.lululemon.com or alternatively as furnished on Form 8-K with the SEC and available on the Commission’s website at www.sec.gov. 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, good morning everyone and thank you for joining us to discuss our fourth quarter results. With me today are Chip Wilson, our Chairman, John Currie, our CFO, and Sheree Waterson, our EVP General Merchandise Manager. Following my opening remarks I’ll turn the call over to John who will go through the financial details of the quarter.

We are very pleased with our fourth quarter results and a strong finish to fiscal year 2009 as well as the momentum in the business as we start 2010. Our constant dollar comparable store sales swung from down 8% in the first quarter of 2009 to up to 29% in the fourth quarter and earnings per share did a similar turnaround with a 25% drop in Q1 and 150% increase in Q4 compared to the same quarter in 2008.

We deployed several strategies during the year that drove the rebound in our business. We reacted quickly to the macro environment at the end of 2008 which put us solidly in the position to focus on the opportunities in 2009.

We have already discussed our decision to add more value to our products such as our technical functionality and other key features as well as new fabrics in order to offer additional value to our guests without increasing prices.

This along with the great success of our running line helped to turn our sales momentum positive and an improving economy shifted the headwinds to tailwinds and added strength in the back half of the year. We also turned up our community-oriented efforts such as supporting marathons and launching and Ambassador program for our running line in every store to match our yoga program.

There were other drivers as well including the launch of our e-commerce site in April which added incremental revenue and even more importantly created heightened brand awareness. We were also able to leverage our systems that were implemented to improve our supply chain capacity and inventory control.

And finally our team throughout the organization really came together and stepped up to capitalize on our opportunities. And now as we move into 2010 our e-commerce site, exposure from the Olympics, community and our showroom expansion strategies are all coming together to give our brand awareness around North America another meaningful incremental boost.

This not only drives our comparable store sales but will also benefit our new store productivity going forward. Our Canadian growth continues to deliver strong sales and our US business has reached the point where we are seeing a strong lift across all markets and age classes, as well as strong openings in the 2009 class stores.

Our Q1 comparable store sales are now running above the 20% comp range in both the US and Canada with our class of 2008 which opened in a soft economy leading the way. The growth trajectory of our US stores is now well on track to achieve our long-term objective of being in line with the company average productivity.

Obviously we are very pleased with the management team we have in place at the store and district manager level and here at the support center giving us the capacity to expand as well as to flow through incremental sales to the bottom line.

Looking ahead into 2010 we plan on capitalizing on our unique showroom strategy. We have opened one so far in 2010 and will have 25 more opening before the end of June. These showrooms are located in our top potential markets and trade areas from our 300 target store list and include cities such as Malibu, California, Boca Raton, Florida, and Fort Worth, Texas.

We now also have a plan to open a minimum of an additional 20 showrooms in August. This important investment will dramatically impact the future store openings by seeding new markets and further stimulating existing markets while allowing us to still deliver earnings in 2010 that are in line with our long-term goals of at least 25%.

Our goal is to be able to report this level of earnings growth consistently for many years to come and investing back any potential upside to this target will aid our ability to deliver over the long-term. Finally many of you have noticed that we’ve been out of stock on our e-commerce site and in our stores especially in key sizes.

As you can imagine with comps we are running we are continuing to execute our rapid inventory replenishment programs. We will be chasing right through the summer and are now placing orders for winter 2010. And on the product front our goal for 2010 is to sell more of the same merchandise that worked in the second half of 2010.

Being in stock in sizes two, four, and six, continues to be our biggest productivity expansion opportunity, along with the growth in the yoga and running categories and our new e-commerce channel.

While we won’t focus on launching new lines, the product in the stores has never looked better and guest demand is growing for our current lines. So in summary we put a multi faceted plan in motion and it is already paying dividends and we expect to turn the same efforts up a notch in 2010 while investing for the future to keep our current momentum strong.

So it is now my pleasure to turn the call over to John to go through the details of our financial results and to give you our outlook for 2010.

John Currie

Thanks Christine, I’ll begin by reviewing the details of our fourth quarter 2009 results and then I’ll provide our outlook for fiscal 2010.

So for the fourth quarter of fiscal 2009 total net revenue was $160.6 million, up 54.5% from net revenue of $103.9 million in the fourth quarter of 2008. The increase in revenue was driven by comparable store sales growth of 29% on a constant dollar basis, the addition of seven net new corporate owned stores opened since Q4 of 2008, the addition of e-commerce operations which contributed revenues of $9.3 million, and a stronger Canadian dollar which had the effect of increasing reported revenues by $13.7 million or 13%.

During the quarter we opened one corporate owned lululemon store and one store in our Australia joint venture and three ivivva stores, two of those conversions of our old Ococo concept stores. We ended the quarter with 124 total stores versus 113 a year ago, 110 which are corporate owned and 14 which are franchises including the nine now operating in Australia.

There are now [inaudible] stores in our comp space, 38 of those in Canada and 59 in the United States. Our corporate owned stores represented 86% of total revenues or $137.4 million versus 87% or $90.3 million in the fourth quarter of last year. Franchise and other revenues which includes wholesale, showrooms, outlets, warehouse sales and now e-commerce sales totaled $23.2 million or the remaining 14% of revenue for the fourth quarter.

Gross profit for the fourth quarter was $86.6 million or 53.9% of net revenue compared to $51.6 million or 49.7% of net revenue in Q4 2008. The primary factors contributing to this 420 basis point increase in gross margin were merchandise margin improvement of 180 basis points which was driven by improved product costing on our winter merchandise and reduced store discounts and markdowns.

These cost reductions were partially offset by airfreight costs incurred throughout the quarter to keep pace with stronger than expected sales demand. Leverage on non-merchandise costs such as occupancy, depreciation, and product and supply chain costs contributed 160 basis points of improvement and foreign exchange improvement of 80 basis points due to a stronger Canadian dollar.

SG&A expenses were $44.9 million or 28% of net revenue compared with $31.2 million or 30% of net revenue for the same period last year. The higher SG&A was due to a natural increase in store labor and operating expenses associated with new stores, and net revenue growth at existing stores, an increase in administrative costs and service provider fees associated with our new e-commerce website in 2009, higher professional fees and legal fees primarily associated with ongoing litigation,

an increase in IT and other corporate head office costs as we began reinvesting into our support functions in response to increasing demand, higher management incentive based compensation that was annualized against bonus reversals in Q4 last year, and finally, the higher Canadian dollar which increased SG&A by $2.5 million.

Nonetheless we were able to achieve a 200 basis point reduction in SG&A as a percentage of revenue partially due to efficiencies in store labor, prudent expense management, and leverage associated with improved store productivity.

As a result operating income for the fourth quarter was $41.4 million or 25.8% of net revenue compared with $16 million or 15.4% of net revenue a year ago. Tax expense was $13 million for the fourth quarter or a rate of 31.4% versus 32.7% last year.

Net income was $28.5 million or $0.40 per diluted share. This compares with net income of $10.9 million or $0.16 per diluted share for the fourth quarter of 2008. Keep in mind the fourth quarter 2008 results included a $4.4 million or $0.04 per share asset impairment charge. Our weighted average diluted shares outstanding for the quarter were 71.3 million versus 68.5 million a year ago.

Turning to the key balance sheet highlights, again this quarter we generated strong positive cash flow and ended the quarter with cash and cash equivalents totaling $159.6 million. We continue to have a healthy working capital position and no debt.

Inventory at the end of the fourth quarter was $41.4 million, $8 million or 15% lower than at the end of the fourth quarter in 2008. Now you remember that on our last earnings call we actually forecasted a 20% to 25% increase in inventory levels. Much of the variance was due to the receipt of spring merchandise initially expected to be in transit at year end which did not actually hand over from the factories until early in fiscal 2010.

This lower inventory balance also resulted from our efforts throughout the year to moved aged and obsolete inventory, higher than expected demand and sell through in the fourth quarter, and generally lower product costs due to improved sourcing.

Capital expenditures were $6.5 million in the fourth quarter resulting from new store build outs, existing store renovations, and IT capital expenditures. Turning to highlights for our full fiscal year performance, for fiscal year 2009 total net revenue increased by 28.1% to $452.9 million from $353.5 million in fiscal 2008.

The increase was driven by a combination of adding seven net new stores to our store base, annualizing revenues from 2008 store openings, constant dollar comparable store sales increase of 9%, and the addition of our e-commerce channel.

Gross margin was $223.1 million or 49.3% of net revenue compared to $179.1 million or 50.7% of revenue for fiscal 2008. Operating income for the year was $86.5 million or 19.1% of net revenue compared with fiscal 2008 at $56.6 million or 16%.

We finished the year with diluted earnings per share of $0.82 compared with diluted earnings per share of $0.55 in fiscal 2008. Again prior year numbers included a $4.4 million or $0.04 per share asset impairment charge. For the year capital expenditures came in at $15.5 million.

Now I’ll turn to our outlook for the first quarter of 2010, this outlook assumes a Canadian dollar at $0.95 US compared to an average exchange rate of $0.80 in Q1 of 2009. For the first quarter of 2010 we anticipate net revenue to be in the range of $125 to $130 million. We expect comparable store sales percentage increase in the upper 20’s on a constant dollar basis compared to the first quarter of 2009.

This comparable store sales momentum is particularly strong in the 2008 age class US stores. Many of these stores opened in new markets and in the worst part of the financial crisis and recession and have reached a tipping point and are now comping well above our overall average as we gain brand recognition and traction in all regions.

We’ll open four stores in the first quarter and we’ve already opened one, that one in Wayne, Pennsylvania. We expect gross margin as a percentage of sales to improve over Q1 2009 due to improved product costing, a favorable impact from foreign exchange, and leverage on occupancy and depreciation.

For the first quarter of 2010 we expect SG&A as a percent of sales to increase above Q1 2009 due largely to the stronger Canadian dollar which will increase reported Canadian SG&A costs as compared to first quarter 2009.

In addition due to the expansion of our showroom strategy and many new showroom openings in the latter part of the quarter we expect to incur pre-opening costs including salary, training cost, and rent. First quarter 2010 results will also include administrative costs and service provider fees associated with our e-commerce channel which opened in the latter part of the first quarter of 2009.

Assuming a tax rate of 35% and 71.1 million diluted weighted average shares outstanding we expect earnings per share in the range of $0.18 to $0.20 per share for the quarter. For the full fiscal 2010 we have 12 new stores confirmed and may open up to 15 if we’re able to secure the right locations.

We expect comparable store sales growth in the first part of the year to remain strong as we annualize against periods where we were impacted by the economic downturn in 2009. However in the latter half of 2010 as we’re annualizing against periods where store productivity began to rebound and sales demand was strong in 2009 we expect much more modest comparable store sales growth rate.

For the fiscal year 2010 we expect net revenue to be in the range of $570 to $585 million. For gross margin, we expect gross margin to be favorably impacted by a stronger Canadian dollar and leverage on occupancy and depreciation through higher store productivity. We expect to increase SG&A spending in 2010 given the current strength and momentum of the business.

We will reinvest in certain support functions that we cut back in 2009 and will increase our investment in other key areas to build our platform to support our long-term growth trajectory. As Christine mentioned we’ll be opening a large number of showrooms in 2010. Typically these showrooms on average will generate revenue of $350,000 to $400,000. Since these showrooms are primarily aimed at driving brand awareness and seeding new markets they are expected to break even or produce at most a small profit.

We therefore carry a high SG&A component relative to sales. We expect capital expenditures to be between $27 and $30 million for fiscal 2010 reflecting new store build outs, renovation capital for existing stores, IT, and other head office capital.

Although we expect 2010 fiscal year earnings per share to be approximately $1.00 to $1.05 representing approximately 25% growth over 2009, and therefore consistent with our long-term growth targets. This is based on 72.5 million diluted weighted averages shares outstanding and it assumes our effective tax rate continues at 35%.

Having said that we’re currently reviewing our long-term tax rate assumption. A strong operating performance is resulting in the continued accumulation of significant undistributed earnings [inaudible] subsidiary. Tax accounting rules require that where excess undistributed earnings are accumulating in a subsidiary, beyond the reasonable requirement for that subsidiary, an additional tax expense needs to be accrued to account for the future tax that would be incurred if and when the excess funds are repatriated through the parent company by way of dividends.

We’re currently analyzing this complex area including expected future funding requirements by tax jurisdiction, and we believe that we have [finance] strategies that could defer, reduce, or fully eliminate the impact. Depending on the final outcome of this review the potential exists that an additional tax charge would need to be recorded on any existing excess and distributed earnings and going forward our effective reported tax rate could increase above 35% to as high as approximately 40%, including for the 2010 fiscal year.

We’ll provide updates during the year as we finalize this research. With that I’ll turn it back to Christine.

Christine Day

Chip wanted to make a few closing remarks, so I’ll turn it over to him.

Chip Wilson

I’d just like to thank our team for their personal growth and their business maturity. I think their ability to work as a cross functioning team is second to none. And I’d like to thank our investors and our team for [inaudible] elevating the growth [inaudible]. Thank you so much.

Christine Day

Thanks Chip, so with that we’re ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Lorraine Hutchinson – Banc of America

Lorraine Hutchinson – Banc of America

Could you give us a little more color or help to quantify some of the elements in the SG&A growth for 2010 between e-com and the showrooms or in perhaps currency, and is there anything of note to call out for the sequential growth over the quarters in SG&A, will it drop off at the end of the year because there will be fewer showrooms opening.

John Currie

Again as I said the showrooms, I gave you an indication of the average revenue for those showrooms. They have a very high growth margin because we don’t do markdowns, etc. in these showrooms, so again they’re really designed to do a little bit better than break even and so you’re going to have a high SG&A relative to revenue in those showrooms.

And I think you can extrapolate from that based on the number of showrooms we’re opening. E-commerce, the margin profile is somewhat different than our store based channel because we have no bricks and mortar so we don’t have occupancy and depreciation costs which are up in [gross] margin so the e-commerce channel has a very high gross margin but because the fee we pay to the third party providers is in SG&A.

We tend to have a very high SG&A roughly speaking our gross margin on the e-commerce channel is probably in the upper 60’s and SG&A is in the upper 30%. So again that’s skewed to the overall margin profile. And then again all of our SG&A other than store based SG&A is here in Vancouver, its in Canadian dollars and therefore if the Canadian dollar is higher then that translates back into US dollars at a higher amount.

Regarding your question on sequential SG&A levels, I think in the first part of the year there is the impact of these showroom openings against the scheme of things that’s not a huge amount. I see our SG&A increases higher in the second half of the year as we implement some of the additional foundation initiatives that we’re talking about.

Operator

Your next question comes from the line of Michelle Tan - Goldman Sachs

Michelle Tan - Goldman Sachs

I was wondering if you could talk a little bit more about the inventory side of things, I know you made a lot of progress last year in terms of replenishment, I was wondering if there was further opportunity in really taking up that safety stock in basic items where you don’t carry a lot of markdown risk and whether you could quantify at all the missed sales opportunity this year from being out of those two, fours, and sixes.

Christine Day

I’m going to let Sheree answer and make some comments on the rest of this question because her team did the work, I think we have for fall, we have been upping our inventory buys but given that we’re on an eight month cycle, we’ve been placing buys to what we think is more aggressive and safety stock but have then seen the sales even surpass that demand and I think if anybody had told us we’d be planning for in the neighborhood with safety stock of a 30% comp growth, we would have told you you’re crazy.

So, that puts us in a little bit of a chase mode and so our focus has really been on a high execution of that with the factories and then I’ll let Sheree make any additional comments.

Sheree Waterson

Christine did a great job, I think we are clearly reexamining our core and quick response strategies and in core you’re absolutely right, there is little or no risk in taking up our weekly supplies so we are in the process of doing that right now with our vendors. We’re also looking at taking on more raw materials, both locally and overseas, so that again we can respond to any unplanned demand in both sizes and/or styling in our core.

So what we’re doing is further leveraging the speed to market modules that the production team and planning teams did such a great job of putting together for 2009.

Michelle Tan - Goldman Sachs

Just on the showrooms, I was wondering if there’s any color you can give us on how significant this strategy is for the productivity of your upcoming class of stores relative to how the stores opened in 2008, any kind of additional qualitative or quantitative color you could give there.

Christine Day

We think that they’re critically important, as we really started re-implementing the showroom strategy and getting it ahead of our real estate strategy which was originally [inaudible] that that sales to be executed in the 2008 class. For 2009 every store we opened had an incredibly strong opening because we deployed the showroom strategy against those markets.

So we know this is a winning formula and it takes the risk out of the real estate strategy because by harvesting the best of the showrooms into our stores and having the patience to do that, and make sure that we have the right people, we built the community awareness, we can capture and monitor the sales on e-commerce through our wholesale partners in the marketplace and the showroom itself.

So we know the market is ready and it improves the ROI on the new stores dramatically. So as we’ve done the deep work of mapping on the real estate we know where we want to be. Now we’re adding that development with the showrooms and having the patience to do that so that every store opens well.

The one thing I really want to say is that what we’ve learned about the guests is that how she discovers the brand creates an emotional attachment and loyalty. And what we’ve been able to do with the showrooms is we create that special sense of discovery and attachment for every new guest. And we also think that has a lot to do with being that beloved brand and resonating with that women on [guest] shopper.

But I also think, we also have to [inaudible] our head of operations with us today and that team has done an incredible job hiring for these showrooms, training them, and delivering the results that we have this year.

Operator

Your next question comes from the line of Janet Kloppenburg – JJK Research

Janet Kloppenburg – JJK Research

I was wondering if you could spend a few minutes on the internet business which I believe has blossomed into a larger volume business than you had originally projected, perhaps you could talk about the purchasing metrics versus what you’re seeing in the stores and if you could talk a little bit about what I would expect to be a change in your projections for the size of this business. And I was also wondering if you could talk about your strategies for international store growth, perhaps into newer markets in Asia or in, I believe there’s some growth going on in Australia and if you could let us know if you’re thinking that square footage growth in fiscal 2011 could increase given the success that you’re experiencing currently.

Christine Day

So yes we have seen our e-commerce business really take off. I think we’ve seen it slow a little bit because of product availability over the last few weeks and that’s been something that we’ve really been working on and driving the units to that because we don’t want to obviously frustrate our guests there.

We do see a pretty similar pattern. We do know that the guests shop between the channels so about 40% of the guests are unique to the site and new guests coming in and about 60% are loyal guests. And the purchasing patterns are fairly similar to the retail stores with the exception of the men’s business which is still stronger in the stores than online.

For international we’re really right now doing the due diligence of the business model and the market strategy etc., and while we do have the showroom in Hong Kong, that’s really just a [path] to our liaison office there for the factories. And at this point in time we don’t have any plans to expand in 2010. I think we have to get the model built and understand our strategy before we commit to anything for 2011.

Operator

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

Liz Dunn - Thomas Weisel

Congratulations on a great quarter, our question relates to the outlets, during some of our recent outlet store checks we noticed a lot of product that is currently in your retail stores and being sold at full prices, so can you discuss your outlet pricing strategy and how you see that evolving over time.

Christine Day

We only put excess inventory in there except for we had guests absolutely screaming that that’s the only place they shop and they couldn’t buy the Groove Pant and the Hoodies, our most popular items. So most of the outlet centers we don’t have a retail store near so in response to that guest demand we did put the full priced items so that they could get those items because they were the most popular.

We don’t send regular assortments to them other than those two key items.

Operator

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

Paul Lejuez - Credit Suisse

With all the showrooms opening this year just wondering as you look to 2011 is that 12 to 15 store openings per year the right number or do you anticipate going above and beyond that as a result of all these showroom openings. And also just wondering what the assumption is for the Canadian dollar that you incorporate into your full year guidance.

John Currie

My guidance assumes the Canadian dollar stays at about a $0.95 level, its running a little bit higher than that today. Regarding your question on the showrooms and a large part of the showroom strategy is in fact to feed new markets to give us better clarity on when to move ahead on new stores so I guess I’d say clearly with the expansion of the showroom strategy it puts us in a position to accelerate that store growth well above the number that we’re posting in 2010.

Operator

Your next question comes from the line of Chi Lee – Morgan Stanley

Chi Lee – Morgan Stanley

Just a follow-up question on inventory, are you finding it more challenging to book additional capacity out there with your factories just given that we’ve seen just a strengthening demand environment and just in terms of your revenue guidance, how much of the factory capacity have you already booked to achieve that sales level.

Christine Day

I’ll go back to planning, our production team has done a phenomenal job of not only planning out for the next several years so we have a strategic plan for our growth but also has outstanding relationships with our current factory partners so the additional demand that we’re seeing is we are easily able to meet based on both of those things, both planning and relationships.

Operator

Your next question comes from the line of Sharon Zackfia – William Blair

Sharon Zackfia – William Blair

Could you give us a refresher on the economics of the showrooms once they are open and how long are you willing to keep a showroom open, I think it used to be about a year before you opened the market with the real stores, is that still the case.

John Currie

In my prepared comments I gave an outline of the showroom economics as I said, full year on average they’re about $350,000 to $400,000 to revenue. But again they’re not designed, they’re not a distribution channel so there’s very little operating margin contribution from them.

Operator

Your next question comes from the line of Jennifer Black – Jennifer Black & Associates

Jennifer Black – Jennifer Black & Associates

Congratulations on great numbers, I wanted to know what percentage of your business in the quarter came from new guests versus returning guests and this is in your stores, and how many times you believe your average returning guest frequents the store.

Christine Day

Looking at the numbers it says about 40%. So we don’t know that number specifically, we only know it through our design feedback sessions, and talking to regular guests and so we don’t have yet the customer intelligence systems to track that level of transactional details. So the reality is we know that there’s a tremendous amount of loyalty based on our feedback sessions where our guest shops our store frequently and we hear that and see that on the online blogs and the social media that we do monitor.

So we do know that we have a very frequent guest that shops us often but we also know we’re attracting through the e-commerce numbers where I can see it, a high number of new and first time and unique guests where there is where I said it was about 40%.

Operator

Your next question comes from the line of Edward Yruma – KeyBanc

Edward Yruma – KeyBanc

Congratulations on a great quarter can you give us some update on some of the new product introductions that you did in 2009 and the performance specifically running and second you introduced a lower cost yoga mat and some other lower price point items in 2009, will you continue those through 2010.

Christine Day

Yes, in regard to the running line, which was our largest introduction in 2009, we’ve had fantastic results and as we have said in our past call, we’ve more than doubled the penetration of the running line from prior years and quarters. And we’re seeing the sell throughs on the core parts of running very similar to the core that we have in yoga so there’s a great foundation there.

And then we also see additional high sell throughs on some of the more seasonal categories. So all in all the running business is quite healthy and we’re very pleased with this performance. And then in terms of the yoga mats, the $28 mats, we are so pleased because clearly we are introducing more and more people to yoga which was the entire intention of creating that opening price point so we have seen an acceleration in the mat business, over 30% to prior year, year to date.

And I think that that bodes well for the strategy.

Operator

Your next question comes from the line of Rob Simone – Cowen and Company

Rob Simone – Cowen and Company

I was wondering if you could just quantify or give us some additional color on how the Vancouver Olympics effected or benefited sales in Q4.

Christine Day

Well we had a lot of fun. I think the nice thing for us was that there was a tremendous number of obviously international guests in the city during that period and we’re very fortunate to have two stores that are very well placed, one up at Whistler, which was a new location for us to be relocated to the [inaudible] part of the Village and I think if you were watching coverage you probably saw us right behind the majority of the coverage because we were right behind the CTV booth.

And then right down on Robson Street, which is the heart of the shopping district downtown which was the closed street that led to many of the venues. So in those two stores you certainly got a sales lift and the halo effect. I don’t think it was, its not certainly material in terms of the, going to change the sales results for the quarter but I do think what happened for us was tremendous brand exposure first time guests experience and a lot of people being introduced to them for the first time internationally which will certainly help the future plans we have.

And I think the buzz around the brand was also something we were very pleased with.

Operator

Your next question comes from the line of [Christine Cober] – JPMorgan

[Christine Cober] – JPMorgan

Can you talk about the ivivva brand and what you’re seeing out of the gate and any tweaks to the model or strategy you may be thinking at this point.

Christine Day

We opened the three, we really consider them a learning lab. We’re testing different store design in each one of them, we’re testing product mix, and really just taking our time to get it to the optimum model to get it right and we’ve learned a lot of things and I think we’re really pretty confident this is a mall space concept so it was good to have the Calgary store.

We’ve had great guest response in the young girls, but we really want to grow this well and be right so we’re not in a hurry and we really are working on the community model right now, making sure we know exactly what that looks like but we are operating as a team and making some small investments in G&A, so that we can expand the concept in the future.

But right now we want to keep it to the point where we really can still test a few things to make sure we’ve got the model 100% right before we roll out.

Operator

Your next question comes from the line of Dana Telsey – Telsey Advisory Group

Dana Telsey – Telsey Advisory Group

Congratulations, as you think about your comps and the comps this quarter and as you plan go forward, what are you seeing in the complexion, average unit retail, conversion, and also averaging cost trends. Is there more merchandise margin opportunity and where does it come from.

Christine Day

We’re seeing healthy growth in transactions is really where we’re seeing it for the most part and then the buying profile is staying about the same. It does adjust seasonally based on whether its outerwear in the fall or running might be a few more pieces as people are buying their full outfits. But other than that it stayed pretty consistent with transactions being the leading indicator.

Operator

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

Howard Tubin - RBC Capital Markets

Great quarter, I just want to make sure I heard you right, you’re going to open 25 showrooms by June and then you’ll open an additional 20 in August, that’s question number one. And number two is just what are your plans or how are you thinking about the warehouse sales going forward, are they a thing of the past or are you going to revisit them in July and maybe next winter as well.

Christine Day

Showrooms, yes you heard us correctly those were the right numbers and on warehouse sales we actually didn’t have one in January because we had no product to put in it. So I think we still view there is benefit, particularly in the Canadian market as really a guest branding event for the loyal customers, so I don’t see them ever going away.

But we certainly don’t view them as a necessity right now or something that we have to do. We want to keep them special and do a good job when we do do them. So at this point in time we’ll call it every two but our inventory is probably the cleanest its ever been from a aged inventory perspective and certainly we also have the e-commerce channel where we’re putting up an occasional what we call [loop] page, almost doing our own private sale model when we’re ready but not having it all the time and that’s also worked very well for us.

And just the value of our sell throughs right now are very strong. So we view it as just like we do the outlet stores, we don’t have a strategy to have a lot of those, just the ones, and if they’re barebones and we aren’t getting a lot of sales out of them we’re okay with that. So we don’t intend to create either a discounting strategy or building that [inaudible].

Other than that, I think just the only sale that we’ve had has been the call it post holiday traditional one that we do and that was very short, in and out this year.

Operator

Your next question comes from the line of Claire Gallacher – Capstone Investments

Claire Gallacher – Capstone Investments

Could you talk about your men’s business, what’s working there and where do you see additional opportunity to grow that side of the business.

Christine Day

Our men’s business has seen really consistent growth over prior year so we’ve made strides in our technical top business as well as some of our bottoms business and we are currently doing additional foundational work for fit and so I think once we get that done and nail that, that we’ll continue to see additional penetration in the sales for the men’s business.

Operator

Your next question is a follow-up from the line of Janet Kloppenburg – JJK Research

Janet Kloppenburg – JJK Research

I just didn’t get an answer to that one question about square footage expansion in the out years, could you be considering accelerating that rate from the level here in fiscal 2010.

Christine Day

Right now, we’ll stay at around that 25 store mark, but that’s certainly something we’re looking at and we’ll look at it with the showroom strategy. The biggest thing I always make sure we’re ready, is the community and the people. Because opening a store without the right guest experience and a premium brand situation is not where you want to be.

So it takes a lot more to clean something up than it does to get it right in the beginning and that’s what we’re really making sure building, is that people capacity and having the patience to wait for the right site is really what we’re working on.

Janet Kloppenburg – JJK Research

So you’ll open, what 15 this year and 25 next.

Christine Day

Twelve for sure, we’re working on a few more but I’m waiting for the right location for a couple of them and so I’m not eager to hit a number called 15, its 15 right ones and the right deal terms and so we’re staying very firm in what we think great is and if we’re only going to have the 350 highly productive stores, they’re going to be the best 350 productive stores.

And that’s what we’re committed to.

Janet Kloppenburg – JJK Research

Can you comment on the success of the girl’s concept up in Canada.

Christine Day

We’ve seen a very strong guest response. I think what we’re doing right now is really playing with that target age group and making sure we’ve got that absolutely right that it resonates from the community and just really refining the model. If you come to the analyst day we will be doing a tour of that store along with the original [inaudible] store so that you can see the concept.

Janet Kloppenburg – JJK Research

Are there any thoughts of expanding that concept further, accelerating openings in Canada or perhaps entering the United States.

Christine Day

[inaudible] the United States but we’re looking at a couple of stores maybe for the back half of the year but I really want to do a couple more tests on some product runs and we’ll make that decision as we get later into the year.

Operator

Your final question is a follow-up from the line of Jennifer Black – Jennifer Black & Associates

Jennifer Black – Jennifer Black & Associates

This year you did a great job offering an elevated element of fashion that’s very, very versatile yet athletic, will we see more of that during the course of this next year.

Sheree Waterson

Yes, we are very pleased with our formula of foundational core basics, like our Groove Pants, our Defined jacket, our Stride Jacket, and so on and so forth and as we said before our biggest challenge there is our sizes which Christine already addressed and we’re addressing that further with our speed to market response as well as further leveraging our [JDA] size scaling and so on.

And then in terms of the seasonal piece of it, we’ve got some of the most talented designers in the world and I am pleased to say that what you’ll be seeing going forward looks just as great if not greater than what you’ve seen in 2009.

Jennifer Black – Jennifer Black & Associates

Its pretty fantastic and did you have a great response like one of the best responses to the Splatter that you just launched.

Sheree Waterson

Yes, you called it, absolutely right. The Splatter has been a real hit. We found that there’s a formula or a recipe of prints, textures, and solids that’s been very successful for us.

Christine Day

Thank you everyone for joining us today and for your participation and support and coverage of us over this last year. We’re looking forward to a great 2010. Thank you.

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Source: lululemon athletica inc. Q4 2009 Earnings Call Transcript
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