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Lululemon Athletica Inc. (NASDAQ:LULU)

Q1 2014 Earnings Conference Call

June 12, 2014 08:30 AM ET

Executives

Therese Hayes - VP, Communications

Laurent Potdevin - CEO

John Currie - CFO

Tara Poseley - Chief Product Officer

Analyst

Bob Drbul - Nomura

Brian Tunick - JPMorgan

Roxanne Meyer - UBS

Barbara Wyckoff - CLSA

Mat McClintock - Barclays

John Morris - BMO Capital Markets

Sharon Zackfia - William Blair

Adrienne Tennant - Janney Capital Markets

Janet Kloppenburg - JJK Research

Dana Telsey - Telsey Advisory

Camilo Lyon - Canaccord Genuity

Oliver Chen - Citigroup

Jim Duffy - Stifel Nicolaus

Howard Tubin - RBC Capital Markets

Kimberley Greenberger - Morgan Stanley

Operator

Good day, ladies and gentlemen and welcome to the lululemon athletica First Quarter 2014 results call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder today's call is being recorded. I will now like to turn the conference over to Therese Hayes. Ma’am you may begin.

Therese Hayes

Good morning everybody, and thank you for joining us on our first quarter 2014 conference call. A copy of today's press releases are available on the Investor Relations section of our website at lululemon.com or furnished on Form 8-K with the SEC and available on the commission's website. Shortly after we end this morning, a recording of today's call will be available as a replay for 30 days, also available on the website.

Hosting our call today is Laurent Potdevin, the Company’s CEO and John Currie, the Company’s CFO. Our Chief Product Officer, Tara Poseley will also be available during the Q&A.

We would like to remind everyone of course the statements contained on this 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 results may 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.

We have about an one hour for today’s call. So when we get to the Q&A if you please limit yourself to one question at a time, that will give others the opportunity to also have their questions addressed. And with that, I will turn it over to Laurent.

Laurent Potdevin

Good morning. Thank you for joining us today to discuss our first quarter results. There are obviously a number of things for us to discuss on this call and a couple of them I'm going to leave to John, namely the share buyback and future plans.

Q1 results were in line with our expectations as sales come in slightly above our guidance and we are pleased that overall gross margin and earnings were achieved with lower markdowns than last year. We knew heading into 2014, that driving sales in the first half of the year would be impact by a sub optimal product assortment combining (with) [ph] traffic plan.

Q2 sales have started off behind plan and comps are more impacted than we had originally anticipated. In response to this, we have launched a number of initiatives to drive sales and increase long term debt loyalty.

I would like to spend the majority of my time with you, focusing on what I believe is three key priorities that will continue to drive lululemon as a market leader in the future.

One, we are continuing to build our product engine to relentlessly innovate and consistently for new product and exciting product to outsource for both men and women. Including having our Whitespace workshop and a world class sourcing organization that are fully integrated with the product development team.

Two, we are implementing a branding and communication strategy that will create long-term guest loyalty, bring guests back and attract new one.

And three, we are pursuing our international growth with an aggressive yet, sustainable plan.

So first on product. On our last call I spoke to preventing quality issues from getting to our guests. We have made significant progress with the product engine and are seeing results with an increasingly higher pass rate at our factories and a 12% improvement in the past 12 months. As part of our longer term strategy we are aggressively focused on redesigning our go-to-market calendar to support our global growth. The first phase of this project relating to fact finding and initial assessment is complete.

The process will be fully redesigned and implemented over the next 18 months and we will see incremental improvement along the way to get back to our long term growth margin goals of mid 60s.

For Q3 and Q4 of this year we are focused on clarifying roles and responsibilities, freeing up a significant portion of our designer's time, so they can focus on what they do best, being innovative and creating beautiful technical products.

We will implement process and system solutions throughout 2015, to significantly improve the floors seasonal product to the right store at the right time and in the right amount.

We will start seeing a measurable impact of this work in Q2 of 2015 and we’ll continue to gain momentum into the back half of the year. This enhanced productability will enable us to sell clear brand and product stories in season and across categories.

And by Q1 2016 we’ll have a fully operational world class product engine to support a global omni-channel, multi-brand business with localized assortment capability. All of these efforts will not only result in amazing products and therefore increased traffic and conversion, but will play a significant role in getting back to our margin goal.

We are very pleased with the momentum of our men's business which experienced a 9% comp in the quarter on track with our expectation. And as mentioned on our last call we look forward to seeing men's dedicated spaces come to life in Vancouver, Santa Monica and Miami in the next couple of months. And our girls' brand ivivva continues to perform incredibly well and achieve its highest comp yet in Q1 '14 at 39%. Ivivva store and show room operatings are on track for 2014 with 10 and 20 locations respectively.

Next and as it relates to brand you’re about to see actions that focus on driving traffic and sale. Lululemon gets a very detailed guest and have great substantial investment to flex our digital muscle through a variety of activation that include.

The implementation of a social platform that allows us to leverage the power of our investor community, in store technology has been rolled out to our entire network of stores to provide our guest, the ability to shop our online inventory in store, which is greatly enhancing their experience by broadening access to product and listing great results already.

Additional pay search, affiliate programs and on top of these digital projects we operate in 14 pop-up stores across Canada and the U.S. from April through to September. These stores allow us to target new guests, drive additional sales and showcase the brand in unexpected place.

Last, but not least, our international expansion, I am really excited about the momentum that we continue to build in what we see as a significant opportunity and a long-term growth driver. The success of our first London store opening which is on track to do 7 million in its first year is a testament to the international demand for our brand. In other parts of the world we continue to experience increasing traffic and volume in our showroom.

In the past couple of months we’ve build a very clear four-year roadmap to increase our overall foot print in Europe, Asia and other parts of the world. This will promote continued footprint growth at the North American business materials and as we reach our anticipated store count of about 350 in North America.

By the end of 2014 we will have a presence in eight countries outside of North America through stores, strategic sales partners and showrooms, and when adding e-Commerce, the number of countries our product is reaching is 83. We’re on track to open our second store in London by year-end and we expect our first store in Hong Kong by Q1 of 2015.

Throughout 2014 and 2015, we are focused on growing our showroom network with store rollout expected to really ramp up in 2016 and beyond. By the end of 2017 we plan to be present in all major European and Asian regions with more than 20 stores in both Europe and Asia. 2014 is very much a traditional year for lululemon and we are on track with the improvements we have set to achieve.

We are focused on building a scalable foundation to further elevate our North American business and first see the brands incredible international potential. I am confident that the work we’re doing today will only enhance our premium positioning as we continue to lead the market as the market innovator.

And now I will turn the call over to John.

John Currie

Thanks Laurent. Before I review the details of our first quarter of 2014, and update you on our outlook for the year, I want to begin by talking about the share repurchase program that we have announced this morning.

The Board has approved a program to buy back up to 450 million of our common shares, that's dollars of course, at prevailing market prices over the next two years. To fund this plan we will repatriate cash from our Canadian subsidiary to our U.S. parent company which will trigger a one-time tax charge of $30.9 million, taken on learning from prior years that were previously not subject to U.S. tax.

This non-recurring tax expense is recorded in our first quarter results and represents a $0.21 impact on our diluted earnings per share. This now increases our available cash in the U.S. allowing us the flexibility to distribute capital back to our shareholders. We believe in the long-term value of the company and this program will serve to create shareholder value as we execute it over time.

Now on to our first quarter results. For Q1, total net revenue rose 11.2%, to $384.6 million, from $345.8 million in the first quarter of 2013. The increase in revenue was driven by total comparable sales growth on a combined basis including e-commerce of 1% on a constant dollar basis comprised of 25% growth online and a bricks and mortar stores sales decline of 4%, all on a constant dollar basis.

The addition of 45 net new corporate owned stores since Q1 of 2013, 30 net new stores in the U.S., two stores in Canada, two stores in Australia, two in New Zealand, one in the UK and eight ivivva stores. And offset with the foreign exchange impact of a lower Canadian and Australian dollar which had the effect of decreasing reported revenues by 10.1 million or 2.6%.

During the quarter, we opened nine corporate owned stores; three lululemon stores in the U.S., one in Australia, and our first store in the UK, as well as four ivivva stores in the U.S. We ended the quarter with 263 total stores versus 218 a year ago. There are now 202 stores in our comp base, 39 of those in Canada, 131 in the U.S., 24 in Australia and New Zealand, and 8 ivivva. We also opened another two international showrooms during the quarter, one in the UK and one in China; for a total of seven in Asia and nine in Europe at the end of Q1. We now operate a total of 76 showrooms which also includes 18 ivivva locations.

Corporate owned stores represented 74.9% of total revenue or 288.1 million versus 77.9% or 269.4 million in the first quarter of last year. Revenues from our direct-to-consumer channel totaled $66 million or 17.2% of total revenue versus $54 million or 15.6% of total revenue in the first quarter of last year. Other revenue, which includes wholesale, showrooms, warehouse sales and outlets totaled $30.5 million or 7.9% of revenue for the first quarter versus $22.5 million or 6.5% of revenue in the first quarter of last year.

Gross profit for the first quarter was $195.7 million or 50.9% of net revenue, compared to a 170.7 million or 49.4% of net revenue in Q1 2013. The factors which contributed to this 150 basis point increase in gross margin were the 510 basis point improvement in gross margin due to anniversarying the Luon write-off provision from last year.

A decrease in markdowns and discounts of 110 basis points compared to the first quarter of fiscal 2013, these were offset with product margin decline of 310 basis points due primarily to a higher sales mix of lower margin seasonal items and also in part attributable to higher raw material cost associated with prints and textured garments as well as duty adjustments that were queued up this quarter.

50 basis points deleveraged from the foreign exchange impact on product costs due to the weakening of the Canadian dollar. Higher airfreight cost of 40 basis points, and 70 basis points deleverage from continued investment in our product and supply chain functions.

SG&A expenses were 125.9 million or 32.7% of net revenue, compared with a 104.8 million or 30.3% of net revenue in the same period last year. The 20.1% SG&A dollar increase is due to an increase in operating expenses associated with new stores, showrooms and outlets as well as higher wages across our stores to reflect myriad increases in base pay market adjustments, increased variable operating costs associated with our e-commerce business consistent with the year over year revenue growth in this channel, increases in expenses at our store support center, including salaries, administrative expenses, professional fees and management incentive compensation associated with the growth in our business and in addition we recognize 1.5 million in foreign exchange losses which added to overall SG&A. And these were offset with the weaker Canadian and Australia dollar which decreased reported SG&A by 5.4 million or 4.3%.

As a percent of revenue our first quarter SG&A deleveraged 240 basis points due primarily to the run rate of prior year investments and new incremental operating expense needed to drive long term growth. As a result operating income for the first quarter was 69.8 million or 18.2% of net revenue compared with 65.9 million or 19.1% of net revenue in Q1 2013.

Tax expense for the quarter was 52.5 million. This includes the onetime adjustment of 30.9 million related to the repatriation of foreign earnings to fund the share buyback program. Excluding this tax adjustment the tax rate would have been 30.1% compared to 29.8% in the first quarter of 2013. Net income for the quarter was 19 million or $0.13 per diluted share. On a normalized basis diluted earnings per share would have been $0.34 compared to net income of 47.3 million or $0.32 per diluted share for the first quarter of 2013.

Our weighted average diluted shares outstanding for the quarter were 145.9 million versus a 145.8 million a year ago. Capital expenditures were 25.4 million for the quarter, compared to 21 million in the first quarter last year with the increase associated with new stores, renovations, IT and head office capital.

Turning to our balance sheet highlights, we ended the quarter with 752 million in cash and cash equivalence. Inventory at the end of the first quarter was a 177.4 million or 23.4% higher than at the end of the first quarter of 2013. Similar to last quarter this is higher than optimal due primarily to a higher composition of core inventory.

We expect to continue to rebalance our inventory levels as we head into the back half of the year, and have adjusted our assortment more in line with guest demands for fall and winter.

This now leads me to our outlook for the second quarter and full fiscal year 2014. May performance to date has been soft, as a constant decline from the first quarter. As a result of our comp trends we’ve deployed revenue driving initiatives for both our stores and e-commerce site some of which Luon addressed earlier.

In addition we’ve opened pop-up locations to capture demand in areas that otherwise would not have a store. While these initiatives are good for the long term, as it primarily encompassed full price selling, the income was increased SG&A costs. We expect these initiatives to mitigate some of the sales miss over the rest of 2014. As a result we are adjusting our Q2 and full year revenue and SG&A forecast for these changes. We currently anticipate Q2 revenue in the range of 375 to 380 million. This is based on comparable sales percentage decrease in the low to mid-single digits on a constant dollar basis compared to the second quarter of 2013.

This outlook assumes a Canadian dollar at $0.91 with the US dollar and 12 new store openings, seven in the US, two in Australia and New Zealand and three ivivva. Consistent with Q1 we expect gross margin to be between 50% and 51%, this is down from a year ago primarily due to a higher mix of lower marginal seasonal product. Deleverage against product and supply chain expenses within cost of goods sold, store occupancy and depreciation and lastly the impact of foreign exchange due to a weaker Canadian dollar compared to last year.

We expect SG&A deleverage as a percent of revenue compared to the second quarter of 2013, which is driven primarily from the run rate of strategic investments made last year and incremental spend in traffic and revenue driving initiatives. While these investments drive the top line the associated sales carrier reduced flow through percentage. Finally due to a slightly stronger Canadian dollar relative to the end of Q1 we will incur foreign exchange losses that will increase SG&A.

Our SG&A also reflects pre-opening costs related to the 12 stores planned to open in Q2 and additional stores planned to open in early Q3 of 2014. Assuming a tax rate of 30.2% and 146 million diluted average shares outstanding we expect diluted earnings per share in the first quarter to be in the range of $0.28 to $0.30 per share. From the full fiscal year 2014 we expect net revenue for the year to be in the low to mid of our previous guidance at $1.77 billion to $1.8 billion. We expect to open 45 corporate owned stores including our Australian stores and ivivva locations.

We’re also on pace to operate up to 20 international showrooms by the end of this year. For the year we expect gross margin of approximately 51%, down from last year due primarily to product mix, continued investment in our supply chain and product operations functions and also foreign exchange impacts from a weaker Canadian dollar. We are on track to open our second U.S. distribution center in Columbus, Ohio in August which will go live initially with e-commerce with retail fulfillment to begin in Q1 of 2015. As I mentioned before, the start-up costs and increased capacity will initially de-lever our gross margin by 30 basis point to 40 basis points in 2014. We expect SG&A deleverage as a percent of revenue compared to 2013. This primarily includes investment in corporate SG&A in areas such as brand, IT, guest experience and international that were included in our original guidance for the year.

The traffic and sales initiatives discussed earlier will result in an incremental investment in the $10 million range. In addition our SG&A forecast is also setting aside funds for additional strategies currently being developed and evaluated for approval.

As a result we expect our overall operating margin to de-lever from 2013 and our fiscal year diluted earnings per share to be approximately $1.50 to $1.55 or a dollar $1.71 to $1.76 normalized for the tax adjustment. This is based on a 146.3 million diluted weighted average shares outstanding as our guidance does not reflect any estimate of shares we purchased. And it assumes an overall effect of tax rate of 38.6% which includes the one-time tax adjustment or 30.2% excluding this tax adjustment.

We expect capital expenditures to be between 110 million and 115 million for fiscal 2014, reflecting new store build outs, renovation capital for existing stores, IT and other head office capital including expansion of our existing premises.

And finally before we open up the call to questions, I want to take a minute to speak to the announcement today that I will retire at the end of the fiscal year once we transition to my successor. As many of you know we’re a very goal oriented company, it’s been long been a part of my goal to expand my involvement serving on corporate and non-profit boards. And for those of you who know me really well, you know that my long standing goal has been to ski each season the number of days equal to my age. Since I turn 60 next year and these goals are difficult to achieve with a day job, I've decided that this is the time to announce my retirement plans.

This will allow the company to initiate a comprehensive search for my replacement and to allow for a smooth transition. So this isn’t a time to say good bye as I will be around for a number of months and you'll have me to kick around on at least a couple more earnings calls.

And so with that I’ll turn it back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Bob Drbul of Nomura. You may begin.

Bob Drbul - Nomura

John best of luck and congratulations on the retirement. Well, I guess the first question that I have really is with John retiring, should we expect additional management changes now that you had some further time to sort of assimilate into the organization and create a little bit more of a view?

Laurent Potdevin

First of I mean we’re all incredibly sad to be see John deciding to go and starting professional skiing career but we’ve got a number of months with him before that happens and with every transition you do have changes and we have a couple of other changes including one change in brand -- in our brand and communications department.

Bob Drbul - Nomura

Okay, great. And then within the new -- within the updated outlook on the gross margin side anyone in the sales side can you just update us around like the expectations for the seasonal offerings in the fast turn capsules related to both top line and the gross margin?

Tara Poseley

So I’ll speak to fast turn John if you want to get the gross margin question. But I think we’ve talked a lot about 2014 being the year of building our foundation and we’ve doing a lot of work for the back half of the year to rebalance the assortment between the season and quarter really reflecting with guest appetite is for a seasonal core. Also we’ve used our fast turn group to chase into additional prints and bottoms for the third quarter.

And then as we move into fourth quarter we continued to use that change to chase into products as well as we’ve worked really diligently to make sure more of the BD and technical is that I’ve spoken to in prior calls and then the analyst day but making sure we are more consistently showing up with that in our product.

Bob Drbul - Nomura

Great, thank you very much.

John Currie

And on your gross margin question as far as I am getting it right I think our gross margin will be pretty consistent with where it was in Q1 through the first three quarters and then of course in the fourth quarter the higher volumes it will be couple of 100 basis points higher.

Bob Drbul - Nomura

Great, thank you.

Operator

Thank you. Our next question is from Brian Tunick of JPMorgan. You may begin.

Brian Tunick - JPMorgan

Thanks. Good morning everyone. Was hoping maybe you could just parse out the quarter to date deceleration in the comp trend. How much of that is a traffic issue and how much of that maybe the product flow issue? And then maybe just some more commentary on the popup stores maybe what’s the duration of the leases and could those potentially become permanent stores as well? Thanks very much.

John Currie

Okay. It’s hard to dissect the comp only a few weeks into the quarter. But actually what we’re seeing is traffic a little bit stronger which is very encouraging but conversion down which makes sense with a non-ideal product assortment so means it’s telling us that we’re maintaining the guest coming in and when the product is right that should deliver a rebound but in the back half. And on the popup stores I think your question would be permanently typically leases of less than six months and unlikely that any of these would be permanent stores. There may be some locations where we would seek out a permanent store but not in these existing locations.

Operator

Thank you. Our next question is from Roxanne Meyer of UBS. You may begin.

Roxanne Meyer - UBS

Great. Good morning. I was wondering if you could talk longer term about the gross margin and your targets to get back to the mid-50s. I guess just thinking about the perspective back when your margins were healthily steadily there your comps were at a much more elevated level and obviously your mix was a bit different more skewed to the higher margin core product and obviously that’s transitioning and weighing down on your margin now. So what are the factors that you think longer term can get your gross margin back to the mid-50s? Thanks a lot.

John Currie

Tara maybe I’ll take it and you can add whatever you’d like. When I look at our longer term gross margin where I see tremendous opportunity to get back to that mid-50s range comes from all the work that Tara and Jennifer and their teams are doing to change the go to market process to operate more efficiently and just work with our factory partners in a more organized disciplined way. We see that potentially driving through 500 basis points of improvement over time that will take a couple of years to get there. But there is a pretty clear roadmap that we’re seeing that should deliver that.

Tara anything to add?

Tara Poseley

No, I think there's lots of additional questions.

Roxanne Meyer - UBS

Great, and that’s helpful. Thanks a lot.

Operator

Thank you. Our next question is from Barbara Wyckoff of CLSA. You may begin.

Barbara Wyckoff - CLSA

Hi everybody. Congrats to John. I want to talk about ask about gross margin too, you mentioned lower margin on seasonal product, is that because you're intentionally taking a lower IMU because the costs are higher due to smaller quantities, are there higher markdowns air shipping and at what point do you think that IMU or that margin comes up?

John Currie

Yes, I’d say I mean generally it is higher cost whether its textures and prints or additional features that in our pricing architecture we haven’t taken full pricing and so they do tend to have a lower margin. I think Tara has commented in the past that potentially overtime we look at that pricing architecture, but for the near-term that’s really what’s driving the larger or the lower margin on the seasonal items.

Barbara Wyckoff - CLSA

Okay. Thank you.

Operator

Thank you. Our next question is from Mat McClintock of Barclays. You may begin.

Mat McClintock - Barclays

Hi, yes good morning. I was wondering if you could focus more on the revenue driving initiatives. I understand the pop-up stores but could you talk about what you’re doing specifically for what would impact the comp if like what, what type of revenue driving initiatives would impact either your e-Commerce business or the stores in the comp base? Thank you.

Laurent Potdevin

Sure, I mean lululemon engages a very digitally savvy guest and we really haven’t flexed our muscle there and we’re doing a number of things. I mean we are doing I spoke on our earlier call on our call on a quarter ago about the incredible value of our ambassadors and the fact that we don’t really fully leverage the stories that happened in our communities, and so we’re building a social platform that is unique to ambassadors that will go live in September so that we can gather a real time, all of the work that’s happening in our communities, and sort of be able to share that in a much more efficient way. We really installed technologies so that we can share inventories when our guests are in store they can actually shop the online inventory, therefore sort of enhancing the access to product.

And then we’ve really ramped up pace of media. We’re leveraging sort of center channel through Google. We are working on click-to-brick and this is a geo-based strategy that we’re doing in partnership with Google as well. And we’re also accelerating our affiliate partnership with ambassador studio, elite athletes who promote our content and drive traffic to our site.

To add to that, I mean we’ve been really successful with our product notification, and we’re planning to double the base of guest that we see those product notification, and also we’re going to make them a lot better and a lot more efficient.

And finally, as we start up, as we ramp up our CRM efforts I mean we’re planning to do some live segmentation of our email to be much more targeted in how we reach our guest.

Operator

Thank you. Our next question is from John Morris of BMO Capital Markets. You may begin.

John Morris - BMO Capital Markets

Two part questions here. First of all I think in the prepared remarks Laurent you’ve talked about ramping up store openings. I think it was in 2016 and beyond and wondering what does this long-term square footage growth look like if you look out three to five years. Do you have kind of a target for that?

And also with respect to the long-term operating margin goals what would those look like given what you’ve already been talking about with respect to long-term gross margin goals? Thanks.

Laurent Potdevin

So as we think about our international expansion, we’re staying very true to our showroom strategy which is to build awareness in the market and build momentum and so and getting pulled by the community and we expect the showroom to have a lifespan of 12 to 18 months before we're ready for store rollout. So we’re going to be in the next 18 to 24 months we’re going to really accelerate the showrooms internationally and then that’s going to trigger store rollout 12 to 18 months following that. So the plan is really to be now if you think by 2017 having all those 20 stores in Europe 20 stores in Asia not including when I mentioned Asia, not including Australia and New Zealand, the plan is further and beyond to be able to apply probably about the same numbers of stores that we're currently opening today in North America around 45 and that will replace the square footage opening in the next couple of years in North America as that market matures.

John Morris - BMO Capital Markets

Will that be kind of a mid-teen or maybe even a target towards 20% long-term square footage growth? Just want to kind of get a feel for that.

John Currie

Just have to do the arithmetic I mean we tend to think in units. We start to reach…

Laurent Potdevin

Probably just under mid-teens, right?

John Currie

Yes.

John Morris - BMO Capital Markets

Okay good. And John, operating margin?

John Currie

We said, highly confident that the gross margin will get back to that mid-50s range. As I said in the past, getting back to mid-20s operating margin I think we’ll get there of course as we are expanding into new countries, new markets, initial productivity will be lower, so that will bring down operating margin temporarily as those stores ramp up, but the core business and as international operations mature my view hasn’t changed on ability to achieve that mid-20s operating margin.

John Morris - BMO Capital Markets

Okay, thanks.

Operator

Thank you. Our next question comes from Sharon Zackfia of William Blair. You may begin.

Sharon Zackfia - William Blair

Hi, good morning. I was hoping I think Laurent, you mentioned there might be some other changes in management, so could you give us an update on where you're seeking talent, what holes are still out there, where we might see more turnover?

And then maybe a broader comment on just morale within the organization, given kind of the disruption both in management but also more recently with the Board.

Laurent Potdevin

Sure. On the mall, I think you know we’re not commenting on the Board, but you know meeting with the company yesterday we sort of mentioned that our parents are fighting and it's awkward. But both Chief and the rest of the Board fully support the management team and what we're doing, so we are staying focused and we are not going to let us be distracted and so I think we are in very good shape there. I mean when we think about how you look at us, I mean they are the face of the brand and they deal with our guests every day, so it certainly we've made their life more difficult in the past year, but we are very focused on them being engaged, excited and happy. So we haven’t seen any increased turnover there. And I don’t remember the first part of your question.

Sharon Zackfia - William Blair

I think in response to a previous question you had mentioned there might be more changes in management, so could you give us any update on that? I think you said maybe somebody in product or something like that. And then if there are any key holes you're still looking to fill within the management team.

Laurent Potdevin

Yes. When I came on board we had a hole in HR and went to very final stages of that search, so I am really excited about that. And also, Laura Klauberg in brand marketing has decided to move on and we’re in the process of interviewing candidates there, but we have a really-really strong team both on the community brand, digital and credit side of the business and we've gotten very engaged with them. And other than that we’re in great shape.

Operator

Our next question is from Adrienne Tennant of Janney Capital Markets; you may begin.

Adrienne Tennant - Janney Capital Markets

Good morning, and John, congratulations on the retirement. My question actually is on the non-comp productivity. It looks weak again, for the fourth quarter, the Analyst Day you had delineated several factors that were contributing the fourth quarter, non-comp productivity; could you do the same for the first quarter?

And then secondarily, Laurent have you done any brand awareness studies for the Canadian-U.S. market and then the new markets that you are entering?

John Currie

Okay, sorry, I can’t remember how I delineated the new store productivity.

Adrienne Tennant - Janney Capital Markets

You gave us the top 10 reasons, the top 10 things we were missing in our non-comp calculation.

John Currie

Got you. Yes, you’re probably still making most of those mistakes. It’s a bottom-bottom-line, again when we look at new store productivity in Q1 continue to be in that $1,100 to $1,200 per square foot range, similar to what we've seen over the last 18 months.

Adrienne Tennant - Janney Capital Markets

Okay, so no meaningful change there, okay.

John Currie

No.

Laurent Potdevin

And as far as looking at consumer sentiment brands strengths, we actually just launched -- we implemented NPS, Net Promoter Score, and we got our first benchmark yesterday. So I haven’t had a chance to fully dig into them. But I am really looking forward to using that as a tool to sort of see where our brand initiatives are, changing the brand sentiments and improving conversion and traffic.

Adrienne Tennant - Janney Capital Markets

Does that study give you brand awareness at the end?

Laurent Potdevin

Yes, it does.

Adrienne Tennant - Janney Capital Markets

Okay, and will you share that with us on the next call perhaps?

Laurent Potdevin

Sure.

Operator

Our next question is from Janet Kloppenburg of JJK Research; you may begin.

Janet Kloppenburg - JJK Research

Good morning, everyone. John, I want to thank you for all of the help you've provided and let you know that you'll be sorely missed, congratulations.

I have a couple of questions. I wondered if Laurent or Tara might talk a little bit more specifically about the sales slowdown in May. Has it been in all categories, men's and women's, and across all sub categories of bottoms and tops, and what it looks like by channel? And if you could maybe help me understand it a little bit more, Tara, I thought that the fashion component was to become higher here in the second quarter and then that would help drive sales and traffic conversion in the stores. It seems like things are going in reverse and I'm not sure I really understand why. Has the build to the fashion assortment not been what you expected it to be here in the second quarter? Thank you.

Tara Poseley

Hi Janet, Tara here. So just I’ve been pretty consistent with brand in nine, when I came into the business, and knowing of our product lifecycle, its nine months calendar. I've been pretty consistent that I was getting that re-balance of core and seasonal, corrected for the third quarter, not the second quarter. And then also have been chasing into trends and really continuing to work on the re-invention of core and we'll see 13 more of that in bottom as we get into Q3.

And then Q4 of my focus, not only with the re-balance but also making sure working closely with design to really try to affect the beauty technical piece. So it's important to our brand and it really sets the foundation of who lululemon is.

So for second quarter, I mean those assortments were done well over a year ago prior to me getting here. But would use the fast turn game pretty aggressively to affect third and fourth quarter

Laurent Potdevin

And to add to Tara's point, one, I mean I've been incredibly impressed with how quickly the team is reacting on the fly and getting us the absolute best assortment they can in, in an environment where we don’t have -- we haven’t planned for that a year ago, but also if you look at the beginning of Q2 and going back to the point that John made earlier, as we’ve seen traffic getting stronger which speaks through brand sentiment getting better and conversion getting lower. So the initiative that we started to do about brand are paying off.

Operator

Thank you. Our next question is from Jennifer Black of Jennifer Black & Associates. You may begin.

Jennifer Black - Jennifer Black & Associates

I was wondering if you could talk about your efforts to acquire data about your core customer and his or her shopping preferences, are you able to track how many customers and transactions are tied to purchases? And if not, what systems do you have in place that will be able to give you detailed information? Or is this something that you're working on building; is this part of a bigger picture down the road building your CRM loyalty program? Thank you.

Laurent Potdevin

Thank you. We’ve actually never used a lot of data in the history of lululemon and we are shifting that as quickly as possible, I mean we’ve got a very loyal guest and we should know a lot more about him or her, and it is part of our CRM effort. So, we are investing heavily both from a talent standpoint and from a technology standpoint to really ramp that up. And it’s a little bit of a curse and blessing, the curse being that we don’t have a lot of data right now, the blessing being that we can build a system that will really sort of take us in the future and that’s what we’re building. So it is part of the plan and we’re in the process of building it.

Operator

Thank you. Our next question is from Dana Telsey of Telsey Advisory. You may begin.

Dana Telsey - Telsey Advisory

Good morning, everyone. As you work to drive traffic and improve the assortments, is anything changing on the pricing side both with core and with seasonal product? And are you seeing same trends online as to what you're seeing in the stores?

And lastly, any further update on London, how that is doing?

And just one more quick thing, on the sourcing side, Jennifer and Tara, how are you doing in putting in place the processes that you want, where are you in getting to the end goal? Thank you. Bye.

Tara Poseley

Okay. I’ll start. And just on the process and sourcing side, one of the things as I've been here since November and really on the ground in Vancouver starting in February. One of the things that I have found in really digging into our go-to-market calendar with Jennifer is, we have a go-to-market calendar that really supports a much smaller company, it doesn’t necessarily reflect the complexity of where we are today and where we’re going in the future. So work that we have done and put underway, we brought in outside consultants who have actually worked with in the past to do a deep dive on our go-to-market calendar. And over the next six, 12 and 18 months, we are going to be implementing the findings that we found as really looked into the deep dive on the calendar.

So I think from a quality standpoint Laurent has talked about it all the process procedure is in place for quality and now our real focus is on the go to market calendar. And creating a really efficient strong calendar that supports an innovative product organization. So as we move into Q3 and Q4 I have talked a great deal about on this years' that's really about building our foundation, that we’re going to be beginning to shift our process as we move into Q3 and Q4, which will really start seeing the results as we move into Q2 of 2016 and beyond.

And then the core versus the seasonal product and pricing structure, one of things we have initiated is very strategic work around pricing where we sit in the marketplace and our pricing architecture. And as I see opportunities both in the core and in the seasonal, few adjust pricing to that very methodical approach, we'll be doing so.

So, then I'll just -- I'll turn it over because I think there might have been another question about driving traffic.

Dana Telsey - Telsey Advisory

Exactly.

Laurent Potdevin

There was a question about driving traffic in London, right, so London I mentioned that earlier, I mean London is performing incredibly well; I mean I think we are in excess of 130% of plan. And we’re, sort of on track to be $7 million still in year one, which we’re very pleased with. And in terms of driving traffic, I’ll go back to what I said earlier about flexing our digital muscles and also working on some key initiatives at the store level that we'll be rolling out in the next couple of months.

Dana Telsey - Telsey Advisory

And John, best of luck and we look forward to staying in touch over the next few months. Thank you.

John Currie

Thank you.

Operator

Thank you. Our next question is from Paul Lewis of Wells Fargo. You may begin.

Unidentified Analyst

Hi guys, its Tracy filling in for Paul. Question for John. I was wondering of your $110 million to $115 million of CapEx this year, how much of that is going to IT and infrastructure versus new stores? And then as you look out to future years, do you think the CapEx number continues to pick up or do you think it will flatten out at this level? Thanks.

John Currie

I think all of the various IT systems and initiatives are probably close to 40 million of that number, there is 10, 15 various head office related capital, balances with the new store build out or we have a pretty significant renovation program every year. I think you’ll see CapEx in a similar range for a couple of years and may be beyond, certainly on the store side and with systems once you get them all implemented it’s time to upgrade them. So probably that sort of level is a good number for several years.

Laurent Potdevin

And so that doesn’t focus on guest safety technology, the in store technology that we're starting to play with or our CRM and business of guest intelligence.

Operator

Thank you. Our next question is from Camilo Lyon of Canaccord Genuity. You may begin.

Camilo Lyon - Canaccord Genuity

Thanks and all the best to you, John in your future endeavors. I wanted to just understand a little bit more, I know you talked about some of these revenue-driving initiatives; you talked favorably about what you're seeing on the traffic side. But just help me understand exactly why you should see the level of reacceleration in comp growth in the second half given that there's still some imbalances between seasonal and core and the efficiencies on the supply chain side look more like a longer-term sort of benefit and not something completely seen in the back half, so if you could just help reconcile that, that would be great.

John Currie

Yes, I think a couple of things give us confidence that you’re going to see stronger comps in the second half, first of all as Tara said, the product assortment won’t be ideal in the second half but it will be improved over what we saw in Q1 and what we’re doing within Q2. And then secondly the downturn in traffic and some of the issues started really Q3, Q4 last year. So we’re going to be laughing weaker performance in the second half of 2013 versus what we saw at the start of the year.

Camilo Lyon - Canaccord Genuity

Great. And then just on competition, how are you thinking about the competitive environment right now, whether it's from SKU overlap, pricing dynamics? And then just lastly if you could just break out the Canadian to US comps.

John Currie

Yes, U.S. combined comps was 2% and the U.S. is minus 5%, sorry Canada was minus 5.

Laurent Potdevin

And as far as competition I mean obviously it’s a crowded field but it’s also a very much of a growing field globally and we know that we got the right talent and when we design the products right as we’ve done lately, I mean we win, so we're in this game to win it and maintain our premium position in the market that we created.

Operator

Thank you. Our next question is from Oliver Chen of Citi. You may begin.

Oliver Chen - Citigroup

Thank you. On your full year comp guidance, what's the implication for fourth quarter? It seems like as you rebalance you'll potentially see an acceleration, so are you thinking mid to high by fourth quarter and third quarter; can we assume that that's going to inflect the positive comps? Also if you could just comment on your inventory composition and how you feel about freshness now, it was running ahead and you tapered your guidance down, so I was curious about if there's merchandise margin pressure and if things are over-inventoried currently, thank you.

John Currie

Yes in the second half we see Q3 turning to positive combined comps and you’re right, sort of mid to -- maybe mid to little bit above comps in Q4. In terms of inventory composition similar to last quarter where as I said in the prepared remarks, we’re a little heavier than we like to be overall in inventory but the access is primarily access core. And we deal with that just by reducing forward orders which we have done in that excess of course, actually coming down. So we feel pretty good about the freshness of the balance of the inventory.

And in general we’re doing things like opening these pop up stores, so that even with weaker than we’d like to see sales trends, we're able to clear these inventory at full price.

Oliver Chen - Citigroup

Thanks for the details. And a follow-up on the conversion rates where it seems like there's an opportunity for a better conversion rate, which classifications between the tops and bottoms do you feel that she may be looking at but not purchasing or has an opportunity for the most improvement?

Tara Poseley

Well I think that we have been talking about the core that we have the opportunity to evolve our core as we move forward. So I would say the first place that we’ll start seeing the results first would be in the bottom. And then tops and jackets really following in, in subsequent quarters.

That answer your question, Oliver? I am not sure.

Operator

Our next question is from Jim Duffy of Stifel, you may begin.

Jim Duffy - Stifel Nicolaus

Thank you. John, I like the sound of your plan. Congratulations to you. A couple questions. So bear with me on this. The first one, have you implemented any of these initiatives to drive traffic yet, and if so have you seen a noticeable influence in the results? And then I have a follow-up related to that.

John Currie

Yes, we have. We just launched and it’s early to tell what the results will be, but we’ve done to bricks and the one initiative that we can speak to is the in-store technology that gives our guest access to our online inventory while in store and we’ve seen tremendous results with that, with the app already generating 1% of our retail sales and 8% of our e-com sales, I’m sorry 4% of our e-com sales.

Jim Duffy - Stifel Nicolaus

Does that get credited to the e-commerce business or to the retail stores?

John Currie

It gets credited to the e-commerce business but the store managers get compensated for the sale.

Jim Duffy - Stifel Nicolaus

Very good. So my next question is the traffic is getting better you feel, you have these initiatives which you expect to drive more traffic, you expect better product in the stores for 3Q, and it sounds like even better yet for 4Q. Can you be more specific about the things you are seeing that gives you reason to be more conservative on the revenue outlook for the full year?

John Currie

Even though we’re seeing, more comfortable with traffic, we still are seeing a deceleration in comps coming into Q2 that’s reflected in my guidance and so as we extrapolate out, we are taking into account you know the positives in terms of product assortment et cetera. But I think it’s still prudent to be conservative and expect that the underlying trend continues for the time being.

Operator

Thank you, our next question is from Howard Tubin of RBC Capital Markets, you may begin.

Howard Tubin - RBC Capital Markets

Tara, maybe you could just comment a little bit on the men's business. I think you said it was up 9% in the quarter so what's so exciting about that, what's driving the men's business?

Tara Poseley

So, we’re really pleased with the men’s business. Q1 our big focus was on nearly landing our men’s set which we are pleased to have done as well as really focused on the base of our sweat assortment. So been pleased with the results there. So I think the men’s team, this is their first quarter of our newly formed men’s team was felix del toro and we’re excited about the momentum that I’m continuing to see in the product that’s going forward in Q2 and Q3 and moving into Q4. I don’t like giving specifics on exactly what is going wrong with men’s because that’s just information I would just be handing out to competition, but we’re pleased with the results and where we see that business going. As well as when we talk about the ivivva’s business and I think the product there looks tremendous and very excited for the team and also the momentum they’re gaining in their business as well.

Laurent Potdevin

And if you look at you know on the digital side, what we’ve done with the men’s business I mean they just launched a very specific social platform. They’ve got a different sort of shopping environment, so we’ve done some really great work and you can really sort of experience that first hand on our website.

Howard Tubin - RBC Capital Markets

Got it, thanks. Could you just remind us what percentage of the overall business is men's?

John Currie

13% in the quarter, a little over 13%.

Howard Tubin - RBC Capital Markets

Got it, thanks.

Tara Poseley

Operator, we’ve time for just one more question.

Operator

Our next question is from Kimberley Greenberger of Morgan Stanley, you may begin.

Kimberley Greenberger - Morgan Stanley

Thank you so much. John, I wanted to check the cash balance on the balance sheet $750 million, how much of that is in the US?

John Currie

A little over a $100 million, most of its in Canada.

Kimberley Greenberger - Morgan Stanley

Okay. This $31 million one-time tax adjustment, how much will that charge, how much of the cash that's outside of the United States will that charge allow you to repatriate?

John Currie

$500 million.

Kimberley Greenberger - Morgan Stanley

$500 million, okay, fantastic. And then my question for Tara is, is there, and I apologize for asking such a basic question, but is there a simple way to help us understand what you think is wrong with the assortment currently? I'm not, I've been listening through the Q&A and trying to understand this a little better but I'm not sure I get it.

Tara Poseley

That’s okay, so, what we’ve been and we talked about it on the last call is we have a core product assortment that has not been evolved as quickly as it should have been and we’re diligently working away at that. We didn’t have enough depth on our seasonal product in Q1, our balances were heavily weighted towards core and less on the seasonal, so we’re getting that rebalanced, back in line and it’ll be running more where it was running in 2012 by the time we get back into Q3 and Q4, I think there’s been a real lack of cohesive merchandizing stories and our store really telling those products stories in a really clear and concise way to lots of opportunity there specifically as we move into ’16.

And then again I talk about the go-to-market calendar, we have a lot of opportunities to evolve that process to really express where we are as a more complex North American brand and moving forward as a global brand, so a lot of work been done there that will bring a lot more consistency as we move into ’16 in our product storytelling and our beautiful technical product landing in stores on time in the right place at the right time as we talked about.

Laurent Potdevin

All right, so thank you very much. It was good speaking to you all and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation and have a wonderful day.

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