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Executives

John Currie - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Sheree Waterson - Executive Vice President of General Merchandise Management, Supply Chain and Logistics

Christine Day - Chief Executive Officer, President and Director

Melissa McKay - Investor Relations

Analysts

Dana Telsey - Telsey Advisory Group

Sharon Zackfia - William Blair & Company L.L.C.

Stacy Pak - Prudential

Taposh Bari - Jefferies & Company, Inc.

Claire Gallacher - Capstone Investments

Lizabeth Dunn - FBR Capital Markets & Co.

Michelle Tan - Goldman Sachs Group Inc.

Paul Alexander - BofA Merrill Lynch

Christian Buss - ThinkEquity LLC

Tracy Kogan - Credit Suisse

Howard Tubin - RBC Capital Markets, LLC

Rob Wilson - Tiburon Research

John Zolidis - Buckingham Research Group, Inc.

Erika Maschmeyer - Robert W. Baird & Co. Incorporated

Laura Champine - Cowen and Company, LLC

Edward Yruma - KeyBanc Capital Markets Inc.

Janet Kloppenburg - JJK Research

Lululemon Athletica (LULU) Q4 2010 Earnings Call March 17, 2011 9:00 AM ET

Operator

Good day, ladies and gentlemen. And welcome to the lululemon athletica Fourth Quarter 2010 Results Call. [Operator Instructions] And now, I'll turn the call over to Melissa McKay of ICR. Please begin.

Melissa McKay

Thank you. Good morning. Thank you for joining lululemon athletica's conference call to discuss fourth quarter and full year 2010 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 furnished on Form 8-K with the SEC available on the Commission's website at www.sec.gov. Today's call is being recorded and will be available for 30 days as a replay shortly after the call in the Investor Relations section of the company's website.

Hosting today's call is Christine Day, the company's 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. 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 [ph] 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.

I'd now like to turn the call over to Christine Day, lululemon athletica's Chief Executive Officer. Christine?

Christine Day

Thank you, Melissa. Good morning, everyone. The fourth quarter was a fitting finish to 2010, giving us four solid and consistent quarters of growth for the year. Our fourth quarter revenues increased approximately 53%, and for the year, sales were up 57%.

Looking back, we were able to increase our inventory position throughout the year, which allowed us to continue our momentum against more challenging comparisons in the third and fourth quarters while also fueling our E-commerce business in the fourth quarter. And even though we achieved a strong Q4 comp increase, we still believe there was unmet demand across all product lines in our stores and E-commerce channel.

In E-commerce, we achieved our goal of 10% of total sales in the fourth quarter. And even though we will have a short-term disruption to this business as we re-launch our site at the end of the first quarter, we project staying at 10% in 2011, just our second full year in the E-commerce business. And we have set a new midterm target of 15% of sales.

Given we are still learning a lot about E-commerce and have been perpetually under inventoried on our site, we know that we are still at the early stages and see a tremendous opportunity to grow this channel. Also adding to our total sales growth for the fourth quarter were 12 stores we opened in the U.S. during 2010, which were performing close to the average of all our U.S. stores. We believe our expanded showroom strategy was a major driver of this success [ph].

Looking at our profitability, we achieved a record gross margin of 55.5% for the year and 58.5% for the fourth quarter, both benefiting from strong sell-through and an unusually low level of markdown. This pushed our operating margin to 25.3% for the year and over 29% for the fourth quarter. While it is unlikely that we will be able to improve on these margin levels in the near term due to rising sourcing costs, we continue investments on our infrastructure and growth initiatives. We do believe we have a best-of-class business model that will enable us to continue to enjoy very strong profitability in 2011 and beyond.

So to summarize 2010, the year was characterized by strong guest demand for our product, limited markdowns, multifaceted top line growth and leveraging costs while still making important investments, all netting to record profitability. We added capability to our senior management team with the addition of a very seasoned CIO, with experience in the vertically integrated apparel business, and a new VP of Human Resources. Both are proving to be very valuable to the organization. Another major investment was our new distribution center in the U.S., which will provide us with cost savings in 2011 and beyond.

We believe that our overall strategy heading into 2011 is more dynamic than ever. It includes driving organic revenue growth, increase supply chain capacity and capability, continued focus on our in-store guest experience, continued innovation in yoga and run, grassroot community and a digital strategy to expand our online community presence, strategically placed showrooms converting to stores, resulting in the opening of up to 30 new stores, and the launching of our new E-commerce platform.

Moving into the first quarter of 2011, I want to highlight our inventory position and our E-commerce transition. First, the exceptionally strong sell-through of our Q4 product left us under inventoried to service our Q1 demand. In addition, as each new delivery arrives, it has been selling much faster than planned. Our new product deliveries are now weighted towards April, beginning the replenishment of our inventory position.

Next, as previewed last year, we are transferring our E-commerce platform from our current third-party vendor to our in-house ATG platform. This is a complex project that requires significant IT infrastructure changes and integration of multiple service vendors to a new site. It also requires a physical move of inventory from the third-party supplier to our own U.S. DC. The date of the official transfer is April 15th. To facilitate the cutover from our vendor systems to ours, the entire site will be down for a few hours so we can test new site integration. This will occur during the evening hours of April 14 to early morning of the 15th.

After launch, we will be introducing our new summer product line. The plan is to slowly bring the spring inventory down in the outsourced facility to minimize the amount that needs to be counted, packed and shipped, and ensures we will have a full inventory to support the new site. We have a guest communication strategy in place so the move is transparent, and our guests are supported during the transition. While we will see a temporary sales decline in the new E-commerce channel in Q1, we anticipate a full sales recovery in Q2 with the launch of the new site where we will achieve a higher margin.

I am also very pleased to announce that we've hired Chris Ladd to head up our global E-commerce initiative. Chris brings over 15 years of industry experience, most recently at Crocs and Titleist, with a great background in marketing, technology and E-commerce. Chris is completing his immersion training program and will be ready to take the reins in April.

In the end, we are excited about bringing E-commerce in-house. The benefits, longer-term, will be the ability to move inventory between channels to meet demand, a strong platform for growth and integration of our digital strategy, improved operating margin and operating efficiencies, ability to expand with country-specific catalogs for international, improved guest experience with one-page checkout and simplified product management. The entire team here is very excited about our E-commerce re-launch and the year we just finished in 2010. We are all together again in our new headquarters in Vancouver, and are as excited and motivated as ever about capturing the many opportunities we see ahead for our business. And now, over to John.

John Currie

Thanks, Christine. I'll begin by reviewing the details of our fourth quarter and full year 2010 results, and then I'll update you on our outlook for the first quarter and full year fiscal 2011.

For the fourth quarter of fiscal 2010, total net revenue rose 52.8% to $245.4 million from $160.6 million in the fourth quarter of 2009. The increase in revenue was driven by comparable store sales growth of 28% on a constant dollar basis, bringing our average store productivity up to a record $1,726 per square foot for fiscal 2010.

The addition of 12 net new corporate-owned stores in North America since Q4 of 2009; the consolidation of Australian operations, which now includes four showrooms and 11 stores, at which there have been two net new openings since Q4 of 2009; the addition of 35 net new showrooms opened in the U.S. since Q4 of 2009; E-commerce sales, which increased by $15 million; and a stronger Canadian dollar, which had the effect of increasing reported revenues by $6 million, or 2.5%.

During the quarter, we opened four corporate-owned lululemon stores in the U.S. and one in Australia. We closed our Victoria ivivva location, and in Brisbane, Australia, we closed our store for relocation due to a mall redevelopment project. We ended the quarter with 137 total stores versus 124 a year ago, 133 which are corporate-owned, including the 11 in Australia, and 4 franchised stores, all in the U.S. There are now 106 stores in our comp base, 41 of those in Canada and 65 in the United States. Corporate-owned stores represented 82.6% of total revenue, or $202.8 million, versus 85.5% or $137.4 million in the fourth quarter of last year.

Revenues from our direct-to-consumer channel, which includes E-commerce and phone sales, totaled $24.6 million, achieving a level of 10% of total revenue versus $9.8 million, or 6.1% of total revenues, in the fourth quarter of last year. Other revenue, which includes franchise, wholesale, showrooms, warehouse sales and outlets totaled $18 million, or the remaining 7.4% of revenue for the fourth quarter.

Gross profit for the fourth quarter was $143.5 million, or 58.5% of net revenue, compared to $86.6 million, or 53.9% of net revenue, in Q4 of 2009. The factors which contributed to this 460 basis point increase in gross margin were merchandise margin improvement of 90 basis points. Although we did incur higher product costs due to inflationary pressures, this was more than offset by reduced markdowns, lower shrink, defective goods and obsolescence provisions, and a shift towards our higher-margin E-commerce channel. Leverage on non-merchandise costs, such as occupancy and depreciation, and product and supply chain team costs, which contributed 290 basis points of improvement, and foreign exchange improvement of 80 basis points due to a stronger Canadian dollar.

SG&A expenses were $72.2 million, or 29.4% of net revenue, compared to $45.1 million, or 28.1% of net revenue for the same period last year. The 59.9% SG&A dollar increase is due to: A natural increase in store compensation and operating expenses associated with new stores, show rooms, outlets and growth at existing locations; an increase in administrative costs and variable service provider fees associated with the higher sales volumes from our E-commerce channel; SG&A and head office costs from our Australian operation, which we began accounting for on a consolidated basis commencing from the date of our ownership increase during Q2 2010; an increase in head office employee costs, including management incentive-based compensation and options expense; and other head office costs as a result of the expansion of our business; and finally, the higher Canadian dollar, which increased SG&A by $1.4 million, or 2%.

As a percentage of revenue, our fourth quarter SG&A increased 130 basis points due to growth in our E-commerce, Australia, ivivva and showroom channels, which carry a higher SG&A component than our corporate stores. As a result, operating income for the fourth quarter was $71.3 million, or 29.1% of net revenue, compared to $41.4 million, or 25.8% of net revenue in 2009.

Tax expense for the quarter was $16.9 million after being reduced by an $8.9 million adjustment to reverse additional taxes accrued during the first three quarters of 2010. As discussed on our earnings call earlier this year, we increased our expected tax rate from 35% to 40%, commencing in Q1 of this fiscal year, to take into account the additional future taxes, which would be incurred if and when excess funds are repatriated from our Canadian operating subsidiary to the parent company by way of dividends.

As also discussed at that time, this was the conservative position as we continued to investigate planning opportunities and estimates of required uses for these excess funds within the subsidiary. As a result of successful progress in these efforts, we are now comfortable that this additional future tax accrual is not required, which has resulted in the $8.9 million adjustment, as well as the return to a lower tax rate applied to Q4 and future taxable income. Normalized for this adjustment, the tax rate for Q4 would have been 35.9%.

Net income for the quarter was $54.8 million, or $0.76 per diluted share. Although earnings-neutral for the full fiscal 2010, the tax adjustment had the impact of increasing Q4 earnings by $0.12 per diluted share. Normalizing for this tax adjustment, net income for the quarter would have been $0.64 per diluted share. I'll point out again that the $0.64 reflects a 35.9% tax rate versus the 40% tax rate anticipated when we gave guidance for the quarter.

This compares with net income of $28.5 million, or $0.40 per diluted share, for the fourth quarter of 2009. Our weighted average diluted shares outstanding for the quarter were $72.7 million versus $71.3 million a year ago.

Capital expenditures were $8.4 million in the fourth quarter resulting from new store build outs, existing store renovations and IT capital expenditures. Turning to the highlights for our full fiscal year 2010 performance, net revenue rose 57.1% to $711.7 million from $452.9 million in fiscal 2009. Gross profit was $394.9 million, or 55.5% of net revenue, compared to $223.1 million, or 49.3% of net revenue, in fiscal 2009. Operating income was $180.4 million, or 25.2% of net revenue, versus $86.5 million, or 19.1% of net revenue, in fiscal 2009. Net income for the year was $121.8 million, or $1.69 per diluted share, compared to $58.3 million, or $0.82 per diluted share, for fiscal 2009. This year's results were based on 71.9 million weighted average diluted shares outstanding and a tax rate of 33.3%.

Looking at our balance sheet highlights, we ended the year with cash and cash equivalents totaling $316.3 million, an increase of $156.7 million, or almost double our cash position at the end of fiscal 2009. Inventory at the end of the year was $57.5 million, or 30% higher than at the end of 2009. Even though this point-in-time snapshot may seem reasonable compared to last year, in fact, we came into 2011 under inventory to meet Q4 demand.

Which leads me to our outlook for the first quarter of 2011. Before I talk about specifics, I'd like to expand on the very near-term inventory challenges we're facing. Our exceptional performance in the fourth quarter of 2010 was achieved in part by accelerating some deliveries planned for Q1. And even with this additional product, we experienced higher-than-expected sell-through. With late deliveries during the first part of Q1 and no opportunity to accelerate product deliveries until April, our sales in Q1 will be limited to a level of growth below the demand that we have seen and, when in-stock, continue to see from our guests. We therefore anticipate revenue in the range of $175 million to $180 million. This is based on a comparable store sales percentage increase in the low double-digits on a constant dollar basis compared to the first quarter of 2010.

We plan to open five lululemon stores in the U.S., one lululemon store in Australia and one ivivva store in Canada during the first quarter. As Christine discussed, we are transitioning away from our third-party model for E-commerce. To facilitate a smooth transition, we're gradually reducing inventory allocated to the third-party fulfillment provider so that inventory to be transferred is minimized at the mid-April go-live date. We will then gradually increase assortment on our new platform as it is stabilized. Therefore, although E-commerce has been running at approximately 10% of overall revenue, we expect for Q1 that it will be closer to 8% of revenue.

We expect slight gross margin expansion versus the first quarter of 2010 driven by leveraged unfixed costs, such as occupancy and depreciation, partially offset by higher product costs from sourcing pressures in both labor and raw materials. We also expect to deleverage on SG&A as a percentage of revenue versus the first quarter of 2010 due to growth in our E-commerce, Australia, ivivva and showroom channels, which carry a higher SG&A component than our corporate stores. These margin expectations also reflect some compression from preopening costs incurred in Q1 relating to the 10 stores that we currently have under construction for opening late in Q1 or in Q2.

Assuming a tax rate of 36%, which is higher than the 2010 tax rate, as our income mix shifts more towards the higher tax U.S. operations, and $72.4 million diluted average shares outstanding, we expect earnings per share in the first quarter to be in the range of $0.36 to $0.38 per share.

For the full fiscal year 2011, we anticipate we'll open a total of up to 30 corporate-owned stores, including up to three Australia and two ivivva locations. We expect net revenue to be in the range of $885 million to $900 million for the fiscal year, representing revenue growth of approximately 25% over 2010. For the year, we expect gross margin to decline from 2010. Sourcing pressures are expected to be higher in the second half compared to the first half of 2011, partially offset by leverage on occupancy and depreciation gains due to higher store productivity and distribution efficiencies. However, we do expect to leverage on overall SG&A as we gain cost efficiencies from the transition of our E-commerce platform to our in-house model and leverage on our SSC costs in place, offset by higher store compensation designed to attract and retain the best staff and investments to continue to drive long-term scalability and growth. As a result, we expect our overall operating margin to be relatively flat with 2010.

We expect 2011 fiscal year earnings per share to be approximately $1.90 to $2 per share. This is based on $72.6 million diluted weighted average shares outstanding, and it assumes an effective tax rate of 36% for the year. We expect capital expenditures to be between $45 million and $50 million for fiscal 2011, reflecting new store build outs, renovation capital for existing stores, IT and other head office capital and distribution center CapEx.

In addition, as recently announced, on March 1, we purchased our Store Support Center in the Kitsilano area of Vancouver near our original store for $65 million plus closing costs. The purchase of the office is expected to be roughly earnings-neutral for 2011. With that, I'll turn it back to Christine.

Christine Day

Thanks, John. And we are very excited to be in our new office, so we apologize for being a bit late on the call today, because you had executives trying to figure out how to turn on the lights in the new building, which wasn't easy for us.

I'd also like to thank everyone for joining us today, and in closing, I want to state how devastated we are, as a leadership team and a company, over the events that happened in our Bethesda store over the weekend. And the senior team flew to the market and took care of our people, the families, and we made sure that we did everything that we could to ensure that the police could cooperate with them to have effective investigation. And I'm very proud of the way our company responded to the event though horrified [indiscernible] had to. So with that, we'll turn it over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Michelle Tan of Goldman Sachs.

Michelle Tan - Goldman Sachs Group Inc.

I was wondering if you could touch a little bit more on the inventory constraints that you're experiencing. Is there any way to quantify how much that's holding back sales? And then also help us understand, in the second half, how you're adjusting your inventory plan? And is there an opportunity to take a much bigger position in safety stock for basic items?

John Currie

Let me start, and then maybe Sheree can kick in. To put it into perspective, as I said, our inventory is up 30% year-over-year. But if you go back two years, last year was actually down 15% from the prior year. So we're coming into this year only 15% higher in inventory than we were two years ago. We have a cleaner inventory position, so our inventory turns are stronger, but we're still significantly under-inventoried on a historical basis. In terms of getting back in stock, our ability, as I said, there's some ability to accelerate deliveries into April. To a large extent, that's taken from Q2. So we'll continue to be inventory-constrained through the first half of the year. We've placed deeper buys into Q3, and we still have an opportunity to place a deeper buy again into Q4, which we will.

Christine Day

Just -- before we turn to Sheree, just want to note that we sold through so strongly in Q4. It eroded a fair amount of the base of inventory we carry, and we had slightly lighter deliveries coming in April. And with Chase and even accelerating our orders with Chinese New Year, being quite a longer period in there, it just takes a little while to build in Q1. The other factor is the deliberate move to decrease the inventory available on our E-commerce site, which will then also push sales to the latter half of the quarter. So Sheree, do you want to talk about the rebuild of inventory?

Sheree Waterson

Sure. We are taking measures, and have been, to increase our safety stock overseas and to create a cushion that's even more significant than we have in the past. We're doing this by going deeper with our current manufacturing partners, as well as adding new ones with more flexible capacity that will allow us to sell different types of goods, knits, wovens and some very complex designs that we produce.

Michelle Tan - Goldman Sachs Group Inc.

Any other color you can give us also on the comp composition? Just traffic ticket, conversion, just kind of...

John Currie

Yes. We do traffic counts in about -- a little under 1/3 of the stores. So it's fairly representative. About 3/4 of the comp increase came from traffic, about 20% from conversion, and the balance by slightly higher average dollar per transaction.

Operator

Our next question is from Lorraine Hutchinson of Bank of America.

Paul Alexander - BofA Merrill Lynch

It's Paul Alexander for Lorraine. Could you give us a little bit more information on the sourcing pressure you're seeing? It seems that you are experiencing pressure maybe a little bit earlier than some of the other retailers in the group. Maybe you could talk about how that's related to your exposure to cotton versus oil?

John Currie

Overall, and going back to the comments we've made on calls before, for the first half of the year, we see about 150 basis points of gross margin compression coming from inflationary costs, like labor in China, et cetera, and in cotton as well as nylon and other. We expect that to be somewhat higher for the third quarter where we placed the buy. It's probably closer to 200 to 225 basis points of gross margin compression. We're not quite there on Q4, but I'd expect something similar for Q4.

Christine Day

And that's unmitigated.

John Currie

Right.

Paul Alexander - BofA Merrill Lynch

And then maybe for Sheree. Could you talk a little bit about your opportunities to raise prices to mitigate?

Sheree Waterson

Obviously, we always look at our price architecture. But our bias is to actually hold on all of our core items and all of our key items. When we design a line, there is so much newness created, and with that, many times complexity and technical details, and so on and so forth. And we have always had a philosophy of pricing for the value of the garment, and we will continue to do so.

Christine Day

So we can take pricing on things like our special edition hoodies, and so we have deployed a strategy of doing that while keeping the core basics in line. And it's something that we'll always take a look at, but right now, we want to make sure that we have the discipline as an organization of really being efficient and effective at what we do.

Operator

Our next question is from Janet Kloppenburg of JJK Research.

Janet Kloppenburg - JJK Research

A couple of questions. Last time I saw you, Christine, you talked a little bit about needing to build the infrastructure to support the growth, which has been, I think, stronger than expected. I'm wondering if you could talk about some of those investments, and if any of those were made in the fourth quarter? And, Sheree, on the yoga and run investment for fiscal '11, I wondered if you could embellish on that a bit? Perhaps tell us about newness there or exactly how the investment will be characterized, whether that will be novelty or basic, et cetera. I'd like to learn more about that. And John, on the new store openings, I was wondering if you could give us an idea of how they'll look by quarter and what kind of pressure that would bring to pre-opening expense versus last year by quarter?

Christine Day

So, on the architecture, you did see some costs come through in the fourth quarter for the new E-commerce launch, as we're getting to the final stages of that project. We had people running around the office yesterday wearing the product, they had received from all the test shipping. So we are in the soft launch stage. We feel really good about where we are for that launch. You'll also see soft mix investments in our people and store labor, and mainly in pay rates for our educators and staff team so that we'll continue to attract the best. And we are heavily focused on our supply chain systems. Now with Kathryn Henry on board, everybody here at the office is eagerly awaiting her time to get their project up next. But our main focus is on the whole supply chain end-to-end and allocations to the stores, and really getting those systems to be best-of-class. So those are the primary areas that you'll continue to see us make our investments. And then Sheree? Newness...

Sheree Waterson

Sure. We're going to continue to focus on diversifying yoga. So you will see our focus on hot yoga as well as other forms of flow and so forth. We also have a little capsule of yoga surf coming up, and we will continue to explore capsules, to look at different technologies and different technical design features and garments. In terms of our run line, we are introducing a new run short, which we are really excited about, as well as, again, focusing on UV as we did last year. And those are our big ones.

John Currie

Well, as I said, in total, it's five lululemon stores in North America plus one ivivva in Q1. The number for Q2 will be similar, possibly one or two more, with the weighting and the openings primarily Q3. So there's obviously some shift between -- quarter-to-quarter, but that's our target for the first couple of quarters.

Janet Kloppenburg - JJK Research

Okay. And then just one last question on inventory. It's just -- when do you all think that inventory will be back to the level that you'll be able to fully exploit demand levels?

Christine Day

We're rebuilding, starting Q2, as the really more significant deliveries come in, and then we'll keep building. I mean, Janet, I'm ready to sell my personal closet. I mean, you can't get enough.

Operator

Our next question is from Liz Dunn of FBR Capital Markets.

Lizabeth Dunn - FBR Capital Markets & Co.

I guess my first question is just a follow-up on the SG&A. So can you give us a sense of the magnitude of de-levers that we'll see in the back half? And would we start to see leverage in Q2, or is it mostly Q3 and Q4? And then on gross margin. In total, for the year, are you anticipating that gross margin compression will be similar to what you said previously, which is about 150 basis points, or was that 150 basis points unmitigated, and then it should be better than that in total? And then I have a couple of questions on product.

John Currie

Starting with SG&A. I see the leverage coming more in the second half. As I said, some of it comes from the shift in the model from E-commerce, which happens the end of Q1, that will really ramp up, again, in the second half, and then more leverage as our volumes increase from new stores and comp sales increases in the second half. Sorry, your question on gross margin, probably it was 150 basis points that we're seeing right now. Looking at -- that's the unmitigated.

Lizabeth Dunn - FBR Capital Markets & Co.

For the full year? So it'll be, in total, inclusive of leverage on buying and occupancy, it'll be better than that, or that's your current outlook? Better than 150 unmitigated for the year?

John Currie

The pluses and minuses -- 150 basis points of sourcing pressure in the first half, as I said, maybe more like 225 basis points in the second half -- occupancy and depreciation and some efficiency partially offsetting that.

Lizabeth Dunn - FBR Capital Markets & Co.

Okay, great. And then I was wondering if you had a goal for the year or for the next couple of years in terms of how much your E-commerce can be as a percentage of sales? And then on product, I was wondering if there's an opportunity to take some of the technology in sort of running tees into tanks? It's a very personal question.

Christine Day

With that said, I think you will really like the line that we were just previewing yesterday. So, yes, we do see us actually introduce a lot more fabrics in the tanks that come from our other technology lines. And there's a beautiful collection of yoga tanks that Sheree and her team have designed, which were based off of the running tanks. So yes, we will be doing that. And E-Commerce percentages, I mentioned in my script, we see a midterm target of 15% as being very achievable. I will call out that we did purchase a significant amount more for the E-Commerce channel starting in Q2. And we're trying to transition the product down in a very lululemon way, so there's a very fun campaign around that. And then we'll bring it back up a little bit slowly just to make sure we don't overwhelm the site. But we have purchased more significantly for that channel starting a little earlier in the year.

Operator

Our next question is from Edward Yruma of KeyBanc Capital Markets.

Edward Yruma - KeyBanc Capital Markets Inc.

You guys ended the year with over $1,700 of square foot in sales. Can you talk a little bit about the performance of your older stores? Are you starting to see some level of maturation? And kind of your most productive stores, how productive are they?

John Currie

Yes. As you would expect, the older stores aren't comping at that average, but they're still comping in the teens or high teens. And the newer stores, especially in some of the newer markets in the U.S., are comping well above that average. Sorry, what was the next part of your question?

Christine Day

But it was sales per square foot. And you were asking comp.

John Currie

Sorry, what was the balance of your question, though, Ed?

Edward Yruma - KeyBanc Capital Markets Inc.

Well, I was just trying to understand -- for some of your best performing stores, can you provide some color as to how far above the chain average they're performing?

John Currie

The half dozen most productive stores are well over $4,000 a foot.

Operator

Our next question is from Claire Gallacher of Capstone Investments.

Claire Gallacher - Capstone Investments

I'm wondering if you could talk about your marketing and advertising strategy for 2011? I believe you mentioned moving more digital going forward. So if you could discuss that, that would be great.

Christine Day

So one of the strategies that we're working on as a company with the new E-commerce launch, and that will be the first half of the year is really just getting the platform up, making sure it's stable, introducing international, just some additional features on that, and then working on some integration and -- some, basically, just so you can keep it on the site. And then in the back half of the year, you'll see us do a lot more with an integrated digital strategy. So we'll be working on things like mobile apps and a lot more integrated guest experience. And I don't want to say anymore than that, because it's kind of fun at this time, and we want to have a little confidentiality about what we're doing. But you'll see us take a lot more of our -- community strategy online will be the basic premise of our mobile and digital strategy. And let's see, what else are we doing? The other things that we are doing, we are starting to heat up our international ad placement strategy. It's the only thing, as you know, we do is in the back of Runner's World and Yoga Journal. You will see us expand that to a more global footprint to drive those E-commerce sales as well.

Claire Gallacher - Capstone Investments

As a percent of sales, are you increasing the amount that you're spending, or is it just commensurate with your sales growth?

Christine Day

It's not an increase overall. It probably doesn't even run total with sales growth. But, just naturally, as a percentage of sales, you've got more money in that bucket, even though it's a lower, probably, overall percentage of the sales growth rate.

Claire Gallacher - Capstone Investments

And then last question. From an ivivva standpoint, is there any plans for E-commerce, or is it just too young in the cycle for review?

Christine Day

No. We feel very good about where ivivva is. As you know, the one store that's addressing that specifically, that we closed, was one of the test stores we took over from oqoqo in Victoria. And we built it there as we were closing out that store and using the remainder of the lease period. We knew it wasn't an ideal market for the concept, but we wanted the site close by so we could work with it. And we're now relocating that store to Eastern Canada, and you'll see us open two this coming year. And we're very pleased with the sales per square foot we're seeing out of that concept now. We've really refined it into a dance, ice skating and gymnastics line, plus active wear for young women. And the response has just been incredible. So we do see, in the back half of the year, introducing E-commerce potentially for that site. Our timing will really depend on the progress we make on our main lululemon site, and we don't want to disrupt that. And if we can't make it by the back-to-school on ivivva, we would push that to the next year.

Operator

Our next question is from Howard Tubin of RBC Capital Markets.

Howard Tubin - RBC Capital Markets, LLC

Can you just talk a little bit about the Men's business and kind of big picture, as you view the lululemon brand as the number one leading athletic apparel brand for women, where does Men's fit into the picture, long term?

Christine Day

Is that a personal question?

Howard Tubin - RBC Capital Markets, LLC

Partially.

Sheree Waterson

This is Sheree. Our Men's business was introduced to lululemon to create an amazing atmosphere for our guests. And currently, Men's hovers around 12% to 15% of the business. We are nurturing the Men's business and fine-tuning the assortments. And as we're doing that, we can see the demand increasing. The future of Men's is -- since we always are thinking in the possibility there, there are things that we could do. But currently, Men's is part of who we are at lululemon.

Christine Day

I would say you will really like the new short line for men's shorts that we have that's coming out for summer. I mean, we've got some really great new shorts, yes. And so I think it's just a continued focus on the basics and getting the profiles of the basics right. And we've seen a really strong response already to the men's short line that we dropped for spring. And so we'll just continue to focus on basics.

Operator

Our next question is from Sharon Zackfia of William Blair.

Sharon Zackfia - William Blair & Company L.L.C.

I was curious, Christine. I think you mentioned, or it was John, that you didn't see the opportunity to really expand upon 2010's margins in the near term. But I guess -- and that kind of begs the question. Your margins are so good. I mean, where do you think longer-term operating margin potential is?

John Currie

Well, remember when our goal was 20%?

Sharon Zackfia - William Blair & Company L.L.C.

I do, John.

John Currie

Yes. We came in a little over 25% this year. We like to, as I said, we're looking at staying relatively flat with that this year. And I think, with our business model, we should be able to continue to invest in growth and deliver an operating margin somewhere in that range. It might be a little bit lumpy up and down, but that's a great new target, I think.

Sharon Zackfia - William Blair & Company L.L.C.

But I guess, longer term, as you grow E-commerce more quickly -- I mean, is this potentially an operating margin where you could get up to 30% longer term, or are there headwinds to achieving that?

Christine Day

I think it's a pretty unsettled sourcing climate, so I think that's one thing that keeps us cautious from saying that. But as we go back to what our growth strategy is, it's very high volume, fewer stores and then reach with E-commerce, both of which giving you high-margin businesses. I think competition is the other thing that could potentially disrupt that model if we go a little bit deeper maybe in stores to make sure that we protect our reach to guests. And then as you expand into international, typically you have a little bit lower margin profile because of higher occupancy costs than labor costs. So I think overtime, as we utilize different growth strategies, you might see some different operating margin pressures from those. But we do believe that this can be a best-of-class operating margin business.

Operator

Our next question is from Taposh Bari of Jefferies.

Taposh Bari - Jefferies & Company, Inc.

John, I just wanted to clarify. I don't know if I caught this in your prepared remarks, did you give comp guidance for the year?

John Currie

No. I mean, there's a lot of moving pieces in the revenue for the year, so I just gave revenue guidance.

Taposh Bari - Jefferies & Company, Inc.

Okay. So I was looking at your 25% sales growth. It looks like kind of an in-line, low double-digit type guidance based on what you're guiding for square footage. So I'm just trying to -- I guess, as follow-up on the operating margin question, you guys are alluding to a flattish type margin for the year. So I'm just looking at the moving parts, obviously several there. You can have a higher E-comm penetration, you're going to take your E-comm to an owned model, presumably some fixed cost leverage or favorable Canadian dollar. Obviously, the sourcing cost environment remains kind of dynamic, to say the least. So sourcing cost about 200 basis points for the year as a headwind, unmitigated. I'm just trying to understand why a down gross margin guide? So if you can just provide some color there? Maybe I'm missing something there.

John Currie

Again, there's lots of offsetting pluses and minuses, and our crystal ball for the full year is still kind of foggy. Part of it is additional air freight will be incurred this year to get back into stock. So our air freight expense will be higher than it was in 2010. And, again, the main driver offsetting those pressures is efficiency coming from our new DC and leverage on occupancy and depreciation.

Christine Day

I'd say we still have to place our Q4 buy, and we're still trying to make sure that we have the right target and amount to anniversary that strong comp we did in Q4 of this year. So the overall number was obviously expected by the base -- the strong base that we just occurred. So that's our planning work that we're doing right now to make sure that we make sure we have enough for Q4 this year and enough going into Q1 of next year. So that's a really important short-term decision that we're making. And so we'll be able to, I think, next quarter give a little more guidance on that.

Taposh Bari - Jefferies & Company, Inc.

Okay, that's helpful. And it's a follow-up on -- if you could talk about how your stores are re-forming in some of the new markets in the States. I noticed that you opened a new store in states like Ohio, Tennessee and Georgia. Seriously, can you just maybe give some color on how those stores are performing versus some of your -- stores that you would typically open up along the coast, which are presumably more productive?

Christine Day

We were actually looking at that yesterday, and we kind of had to laugh, because they were so strong. And the smaller markets like the Tennessees just decided -- they've opened up at some of the best levels that we saw. We're really, really pleased with the 2010 store openings and the average sales that they opened. Our showroom strategy is working without exception, and every store was just a stellar opening. So Delaney and her team just did a fantastic job.

Operator

Our next question is from Jennifer Black of Jennifer Black & Associates.

Jennifer Black

I wondered, as your web business grows, what are your learnings, especially with international? Are you seeing a more diverse group of international buyers? And are there any new countries that you would call out? And then I have a follow-up.

Christine Day

We definitely see our product beginning to penetrate. We just recently had somebody from the team who was in Paris and was absolutely surprised at the amount of lululemon they saw on the street. So we know that our reach is expanding internationally and the demand is really growing, which is why it's one of our first priorities on the website to convert, to have the ease of shipping internationally, including the duty tax, et cetera. So that'll be the first priority that we do, as well as in beginning local pages, in strategically following the markets that we've planned out. So right now, I can't remember the exact total off of E-commerce as a percentage of sales, but it is growing international shipments.

Jennifer Black

And then I wondered also, can you quantify how much you need to increase your web inventory? And I know it sounds like you won't do this until you make the changeover to meet the current demand while keeping that customer hungry. And then my last question was as you gain information about your guests, are you doing anything to reward your special guests besides what you've already been doing?

Christine Day

Our strategy is much more -- is kind of an in-the-know strategy as opposed to anything that's discounting. So our really loyal guests, whether it's on the social media -- that we will give them heads up for -- and since we had a special edition hoodie online, that we invited certain guests to know. We thought that product would last, what, a couple of weeks, Sheree? And it lasted a day and a half. So things are selling out very quickly online, and we know that, that's our job to bring the products in. We're a little bit short-term constrained because of the transition. We made the decision not to ship in the summer product line and bring that down so that we had it ready to go here, and with the new DC, as opposed to trying to transition all of that product. So we've learned a lot about what the guest wants online. And we've really fine-tuned the product assortment. You'll actually see us doing some broader and special online-only categories. And we see it as a real tool in the future to bring back things like classics that the guests have been asking for that we maybe don't have room in our stores. Something like the Deep V or the athletic tanks that we had. We have a lot of demand for that, but we would bring something like that back online.

Jennifer Black

Great. And any quantification on inventory as far as how much you think you would need to increase it, after you make the changeover online?

Christine Day

We have substantially bought -- I don't have the number off the tip of my fingers, but we're planning for significant growth in the E-commerce channel this year. And as I've said, our midterm target is to that 15%. And we believe it's only an inventory constraint together.

Operator

Our next question is from Paul Lejuez of Nomura Securities.

Tracy Kogan - Credit Suisse

It's Tracy Kogan filling in for Paul. I had a couple of questions. My first is, I was wondering -- as you look at some of your newer stores and the sales increases there, do you have a sense if that's driven more by new customers or repeat customers, or is it pretty equal? And then, secondly, I think you said in your K that 12 to 15 of your openings this year will be in markets seeded by showrooms. And I was just wondering how you locate the other stores that aren't seeded by showrooms? Are those just fill-in stores in markets you're already in?

Christine Day

Well, mainly, the new stores, the base of new customers, particularly if it's a market that we've just had a showroom that you're really tracking. Now they might be familiar with the brand from shopping in either online or in other cities in close proximity when they travel. So that's mainly a new guest that we would be attracting in those locations. And for the stores that we don't do a showroom, it's typically part of an expanded market strategy. So it could be the opening, the fourth or fifth store, maybe, in a city. So we wouldn't do a one-for-one with the showrooms, because those guests are already familiar. And it's through the design meetings we do and our E-commerce sales. It's rather an -- we have an integrated market strategy that we look at, that we then know that we have a lot of guest demand in a certain trade area, and so then we'll open a store as soon as we have the management team ready. So we have a very deep working list of locations for the build out that we've stated of the over 300 stores. So it's always just, for us, a proofing-out that those are the right locations. And that's the process that we follow.

Tracy Kogan - Credit Suisse

Got it. Thanks. Just a follow-up, though. Do you have any sense of what the repeat customer is looking like at some of your newer stores? I mean do you track that data?

Christine Day

We don't really track that data. We only have overall transactions. But just anecdotally, we know that we have a very loyal guest following that stops into the store two or three days a week. They know exactly when a product notification goes out. They know exactly when the key shipments of new products come in. It's a very interactive guest. And then we have another guest that shops in the stores but looks online and checks everything out. So we actually have put together a Facebook catalog where people can click in, that will go, as part of our digital strategy during the launch transition, to make it really easy for that guest to identify what she wants and get it at the location that she wants.

Operator

Our next question is from Erika Maschmeyer of Robert Baird.

Erika Maschmeyer - Robert W. Baird & Co. Incorporated

Just a follow-up on your inventory. I know you said it was constrained across all product lines. Was it more constrained in some areas than others? And also did you see any regional differences in your comp?

Christine Day

No and no. So it was pretty much -- we see it across -- we're actually fairly in-stock in Grooves and Astro Pants and the basics. So it's more did we order enough of the new? And that's a little more complicated to chase than the basics. So that's why it's taking us a little bit more time to get back in-stock than it would if it was just the basics that we were chasing. And then as far as regional performance, no. I mean, we've seen some areas just really taking off, such as DC and Texas in particular, and really loyal guests building in those markets. So those would be outstanding. But there wasn't any market that didn't benefit from guest demand.

Erika Maschmeyer - Robert W. Baird & Co. Incorporated

That's great. And could you talk about your efforts to move productions out of China? I think you were targeting around 62% at the end of 2010. Where did that come in, and where do you expect to be at by the year end of this year?

Christine Day

Yes. We were closer to 60%. And with the strategies that Sheree's putting in place right now, we did just hire a tremendous new individual to join our sourcing team that brings us a lot of experience from the Adidas organization. And we also hired our General Merchandise Manager, our GMM candidate, Ruth Rosenthal [ph], who comes to us with a lot of experience from Nike. So very pleased to have those two joining our team, which will specifically target right product to right stores and increasing our manufacturing capacity.

Operator

Our next question is from Dana Telsey of Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

The merchandise margin was up around 90 basis points in the quarter. That's an acceleration from the third quarter, I believe, up around 60 basis points. What's driving that? Is it different categories, is it different materials you're using? And then also on the warehouse showrooms, how many do you foresee this year? And how are the real estate negotiations going in terms of occupancy costs, given the acceleration in the number of new store openings?

Christine Day

Well, maybe I'll deal with the last one first, because we really look at our target list, and our goal is to have a pipeline that's 150% of the target of stores that we actually want to open. That gives us a position to only do the sites that are on the terms that we want to be on. And it's a very -- real estate costs are one of the core costs of your business model. So we take a great care. If we're only going to have 300 stores or 400 stores, they've got to be the right place, the right deal and the right terms for the long term. And we hold very firm with that, and we believe that we're a very attractive tenant that brings in a lot of traffic to the centers that we're a part of. And the landlords recognize that, so we feel very good about the deals that we've been able to cut on very favorable terms. That allowed us to have a lot of security for the long term in the business model. So on the margin, John would take that.

John Currie

Yes, let me take that. I mean, on the margin, a couple of things. Q4 is always a little bit lower because there's higher outerwear component that carries a lower margin. But in general, and as I said, even in Q4, we were starting to be impacted by the inflationary pressures on sourcing. The things that offset that and put us into the positive are more some efficiencies, and because of our strong sell-through. So markdowns, for example, were very low. We started the quarter in a better inventory position than compared to a year ago, so even air freight was lower in Q4. And then because we sold-through so strongly, being left with low inventory positions -- reserves for things like obsolescence didn't need to be as high as they have been in the past. So it's those types of efficiencies in the supply chain that drove the higher margin.

Christine Day

So I think there were some other follow-on effects. We had a very, very limited January holiday sale because there was no product to markdown, so that's another thing that kind of affects Q1 revenue numbers, though obviously then, margins will be stronger. We don't have enough product for a warehouse sale, so we won't be doing one of those in the near future. And showrooms are slightly different. The run rate of those, Chris, is, what, for this year right now? 47%, 48%? And those are an ongoing concern. We'll open a few -- transition a few over the year, but pretty close to that run rate of about [indiscernible].

Operator

Our next question is from Stacy Pak of Barclays Capital.

Stacy Pak - Prudential

I don't know if I missed it, I just stepped away, but did you address what your experience has been in some of the lower-tier, if you will, U.S. markets? What you're seeing from the customer and what you're seeing on a sales productivity level? Could you comment if you're in line with the low double-digit comp guidance now? And then, also, could you tell us where you expect to end inventories at the end of Q2?

Christine Day

We aren't really in any secondary or tertiary markets. Our strategy is to only be in kind of the primary.

Stacy Pak - Prudential

Yes, but let's say Ohio, Christine.

Christine Day

One of our best store openings of the year.

Stacy Pak - Prudential

Really?

Christine Day

Yes. So we're very strong demand there. Tennessee, Cleveland -- and because we operate on a little bit of a scarcity model, and we're going into the best real estate centers and real estate in those markets, there still really is a strong consumer demand at the tier of the market. If we were penetrating into BNT locations with a high density, I think we would, maybe potentially, be affected, but with our low store penetration, there's certainly enough guests in our income and demographic to support those stores.

Stacy Pak - Prudential

So are you saying that sales per square foot in those Tennessees and Clevelands are better than you've seen?

Christine Day

They are coming in. Those stores are opening at the U.S. average in sales per square foot.

Stacy Pak - Prudential

And the other question?

John Currie

The other question on inventory, I think you meant at the end of Q1 going into Q2?

Stacy Pak - Prudential

No. I wanted to know where -- because you said you're still going to still to be low in the first half, so I wanted to know at the end of Q2. You can answer end of Q1 too, but...

John Currie

I'm not sure I can answer either.

Christine Day

Yes. We've got a lot of chased product and additional incremental that's coming in. So it's definitely building.

Sheree Waterson

All the way through.

Christine Day

Yes. I don't have the exact numbers, so maybe we'll have to follow up with that one with you.

Stacy Pak - Prudential

Okay. And then just the comp now. Could you comment on that?

John Currie

I will, because it's a tough one this year. February, we still had a reasonable short-term inventory position, so the demand continued until we were basically selling fumes. And so March, we've really had the shortness in inventory. And then we're hoping that April gets back to the trend that we were seeing back in February. So it started strong. March has been weak, understandably, and we're expecting some rebound when inventory comes in.

Operator

Our next question is from John Zolidis of Buckingham Group.

John Zolidis - Buckingham Research Group, Inc.

Two quick questions. One, can you quantify what you think the light inventory position is holding you back in terms of the comps? So i.e., you gave guidance for low double-digit. Would it be 20% if you had all the inventory that you wish you had? And then the second question is on the E-commerce profitability. You mentioned that SG&A growing faster than sales had somewhat to do with the shift to revenues in the E-commerce category. What's the op margin on E-commerce? Is that higher or lower than the store op margin?

John Currie

Boy, what would our comp be if we had inventory? That's a dangerous question to try to answer. But I think your suggestion of 20% would be realistic. Then again, I don't give monthly guidance, but that's what we were seeing in February. Regarding E-commerce, under the present platform, which is outsourced and therefore there's a variable fee based on revenue, that entire fee goes through SG&A, and there's no leverage on it. So as volumes increase, we get a big hit coming through SG&A. That will change with the transition in the middle of April. Overall, E-commerce is a stronger operating margin than the rest of the business by up to 10%.

Operator

Our next question is from Laura Champine of Cowen and Company.

Laura Champine - Cowen and Company, LLC

Just a follow-on to the inventory availability question. So I'm going through your K and seeing you still have one manufacturer making luon, your top four makes 55% of the product. Is the issue all in forecasting, or are your suppliers not able to keep up with demand, and you need to develop new suppliers?

Christine Day

It's a little combination of both. When you don't forecast a really huge demand, you can't book the factory space. So a little bit of that was we're catching up and truing up on the forecasting. The other critical part is forecasting your fabric. On the luon, we're fine, and we actually now have brought on a second manufacturer of the luon. It's more the specialty fabrics like the Silverescent. We now have -- what is it, Sheree, 47 key fabrics instead of the original seven. So making sure we have enough fabric to bring it in. And then it's more, honestly, a short-term issue of the number of factories that shut down for what used to be a two-week -- and now, between the ramp-down and the ramp back up, you're seeing -- it almost would be a four-week impact. So it's a little bit of timing. We had a lot of product on the water and not in the air for the spring launch post-holiday. So even though we're air freighting some of the product in, it just takes a little bit longer to catch up. So we see this as a pretty short-term issue, not a longer-term, and not a manufacturing past issue. We've been on boarding new factories. They're just starting to come into play and increasing theirs. And certainly with -- the new person that we just hired is experienced. She's already brought a tremendous number of new factories that we've already begun production with.

Operator

Our next question is from Christian Buss of ThinkEquity.

Christian Buss - ThinkEquity LLC

I wanted to ask about headcount and your ability to accelerate investments. You guys have a pretty big cash cushion here. And can you talk a little bit more about how you think about deploying that capital at a faster rate?

John Currie

Yes. We're in the fortunate position of not really being constrained by capital. I think our constraint is just how many initiatives can a management team and the rest of our staff really handle effectively at any point in time? I don't know how best to answer that other than that.

Christine Day

But I think you will see us put effort on opening an increased number of stores over time, especially if we see them performing. And there, we always want to make sure we get it right with engagement in the local community and our people. And that's the first priority. And when we have a really great management team ready to go, you'll see us accelerating the stores.

Christian Buss - ThinkEquity LLC

Can you give us, as a follow-up, an update on some of the systems investments you have underway?

Christine Day

Obviously, the biggest one in the short term is this E-commerce transition, which -- the first phase of cold launch will happen on April 15. And then there's a phase of stabilization, and then we'll be adding new capability and technology, including our digital strategy, to that platform. Our next biggest focus is the end-to-end supply chain. We've been undergoing a business process project with KSA, which is not only identified current state but future state of our supply chain, and the end-to-end systems that we need to really manage and be best-in-class in supply chain. And so that will be a significant portion of our investment and time. We've been working on a PLM, which is a product life cycle management system. And so that will be one of the first priorities that go in, as well as the planning and forecasting and the allocation down to the stores. Systems are things that we're continually refining. When the original systems were put in place almost three years ago now, the vision of the company, prior to my arrival, was that it would be a North American-only retail company. We're obviously now multi-channel, multi-concept, multi-geography. So there will be increased investment in just even our core and basic financial systems to go into multi-currency. So that would be probably the next set, as well as things like business intelligence, data warehouse management, just the things that you need as you get to be a bigger company. And I forgot, we have our new HRS system going live in April. So our new HR system, which gives us complete online management. Up to now, we've basically had a payroll system, and now we will have a complete people management system effective April.

Operator

Our final question is from Rob Wilson of Tiburon Research.

Rob Wilson - Tiburon Research

Christine, you mentioned, I believe, at the ICR conference that you weren't going to try to increase prices. And we've all listened to a lot of conference calls over the last couple of months where, basically, every company says they're increasing prices. So I'm just curious, philosophically, how do I reconcile that?

Christine Day

I think we're obviously going to be smart about the decisions that we make. And if cotton continues to have poor crops, then it's a constant demand issue, we're obviously, in a longer-term situation, going to have to address what we think that is. Right now, what I want to be really careful of is that we don't build a culture of relying on pricing to solve issues. And obviously, when you have tremendous raw materials and labor costs, we're going to have to do something at some point. But right now, we still have a lot of room for efficiency, effectiveness. We have a lot small inefficiencies across the company. So keeping a discipline of working on those issues first, and then being smart in pricing, as Sheree said, to the value of the garment. And we also -- we do look at what happens in our competitors, and what are they pricing garments at, what qualities that they're pricing at, and we have a lot of people trying to come into this space. And the one thing that I'm very, very confident of is the quality of garment and construction design and value to the guest at the price we offer is exceptional. And by just continuing to take price increases, we leave a lot of room for competition. So we look at it from a very holistic perspective. And we also can distort the line, as I said earlier, by doing special edition hoodies, and, as Sheree said, increasing the value and construction of some garments. We will higher-price those, but keep our basic quality goods at a price that's very attractive.

Rob Wilson - Tiburon Research

Okay, fair enough. Then one last question. John, did you mention that the direct-to-customer channel had a higher operating margin than the retail channel?

John Currie

Yes, it does.

Unidentified Analyst

I mean, I hate to be nitpicky, but I'm looking at your 10-K and it says quite the opposite.

Christine Day

Because that was last year's.

John Currie

Well, no. Even that, I'm not sure how it's broken out. I mean, there's a very high gross margin, in part because, obviously, there's no occupancy and depreciation. Then down on SG&A. As I said, we have the key to the third-party provider, but we avoid store-based compensation, et cetera. So I think it's a matter of walking you through the details in the 10-K, and we can do that on a follow-up call.

Operator

I'm showing no further questions at this time. I would like to turn the call over to Ms. Christine Day for any closing remarks.

Christine Day

Again, just thank you, everyone, for joining us for the quarter. And we're looking forward to a great 2011. So thank you, everyone.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. And have a wonderful day.

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