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Lululemon Athletica Inc. (NASDAQ:LULU)

F1Q08 Earnings Call

June 2, 2008 4:30 pm ET

Executives

Jean Fontana - ICR

Robert Meers - Chief Executive Officer

Chip Wilson - Chairman

Christine McCormick Day - President, Chief Executive Officer - Designate, Chief Operating Officer

John E. Currie - Chief Financial Officer

Analysts

Paul Lejuez - Credit Suisse

Michelle Tan - Goldman Sachs

Lorraine Maikis - Merrill Lynch

Sharon Zackfia - William Blair

Liz Dunn - Thomas Weisel Partners

Adam Clark - BMO Capital Markets

Howard Tubin - RBC Capital Markets

Vivian Ma - Oppenheimer

Janet Kloppenburg - JJK Research

Rob Wilson - Tiburon Research

Operator

Good day, everyone and welcome to the Lululemon Athletica first quarter earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Jean Fontana of ICR. Please go ahead, Madam.

Jean Fontana

Good afternoon. Thank you for joining Lululemon Athletica’s conference call to discuss first quarter results for fiscal 2008. A copy of today’s press release is available in the investor relations section of the company’s website at www.lululemon.com, or alternatively, is furnished on Form 8-K with the Securities and Exchange Commission and available on the commission’s website at www.sec.gov.

Today’s call is being recorded and will be available for replay for 30 days shortly after the call on the investor relations section of the company’s website. Hosting today’s call is Bob Meers, the company’s Chief Executive Officer; John Currie, the company’s Chief Financial Officer; Christine Day, the company’s President, COO, and CEO-designate.

All participants on today’s call are advised that the discussion may include forward-looking statements reflecting management’s current forecast of certain aspects of the company’s future. In many cases, you can identify forward-looking statements by terms such as will, expects, plans, believes, potential, or the negative of these terms or other comparable terminology. These forward-looking statements are based on management’s current expectations but they involve a number of risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in the forward-looking statements as a result of such risks and uncertainties which include those described in our SEC filings. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements which are qualified in their entirety by the cautionary statement.

And now I would like to turn the call over to Lululemon Athletica’s Chief Executive Officer, Bob Meers.

Robert Meers

Good afternoon. Thank you all for joining us to discuss our first quarter fiscal 2008 results. I am joined today by Chip Wilson, Christine Day, our President and Chief Operating Officer and CEO-designate, John Currie, our Chief Financial Officer, as well as a group of other senior managers in the company.

Following my opening remarks, I will turn the call over to Chip and then Christine to review select strategic initiatives, followed by John who will go over the financial details of the quarter. We will then open it up to questions.

I am extremely pleased with the continued momentum of our business through the first quarter. Revenues increased 75% to $78.2 million and comparable store sales were up 28% and operating income up 71% for the quarter. I am pleased that our comparable stores in both Canada and the United States continue to perform well and our new stores were very strong in the quarter.

As I have said in the past, this type of performance is a testimony to the strength of the Lululemon brand. The growing market for performance in active apparel among our target demographic, our great guest experience and our technical product continues to evolve with the demands of our active minded health conscious guests.

The double-digit comparable store sales increase and strong gross margins are not easy to deliver in today’s current economic environment. However, I do believe that the tide will continue to rise for our market niche and that where we are very well-positioned to continue to gain market share as we expand our store base and eventually migrate into e-commerce.

We opened three new stores during the quarter in can and the United States, and then four additional new stores opening have been completed since the beginning of May, and these new stores including Troy, Michigan; Denver, Colorado; Chino Hills, California; and Halifax, Nova Scotia. And I want to point out that the initial results in Troy, Michigan and Halifax stores were among the best in our company’s history. These are secondary markets and we believe the hunger for our product in these new markets is a great indication of the success we will have as we continue to roll out across North America.

We expect to open 28 stores this year for a total of 35 stores in North America during fiscal 2008.

That brings me to the next phase of our growth. As you know, we plan to continue to open the 35 stores annually for the next three to five years. We also have opportunity in e-commerce and international expansion. As these opportunities grow nearer and the organization grows larger, we need to be sure that we have the right tools to maximize our potential.

I continue to emphasize that the key for us will be the people we have in place and the systems we have to manage our expansion.

The first thing we have done is chosen Christine Day as our next Chief Executive Officer, who I believe is the best person to lead this company through the next phase of our growth and beyond. She is already in the process of making some important hires and identifying other processes and ideas that will allow Lululemon to capitalize on the opportunities in front of us. Christine will provide you with the details of the plan that she has already put in motion and John will run through the details on how and why we are impacting our earnings slightly this year, but I want to point out that these incremental investments we have being made, not only are they there to ensure our current growth plans are smooth and well-executed but also to position this company to play in some additional arenas in the future and thus add incremental positive returns for our business.

For me, it is gratifying to know that a very strong foundation is in place at Lululemon and a talented new CEO will be leading this organization into the future. Christine will officially transition to the role of CEO in June and I will remain in an advisory capacity for the balance of the fiscal year.

So with the company in very good hands, I want to personally thank all of our employees, our shareholders for supporting me and the company over the past few years, and I wish Chip, Christine, John, and the entire organization the best as they continue to grow into one of the premiere retailers and brands in North America, and one day globally.

With that, I would like to turn the call over to Chip.

Chip Wilson

Thanks, Bob. That was really well-said and thank you for everything you’ve done. We, a fast-growing company, new times, and I’d just like to introduce Christine Day again as someone who I think not only has tremendous leadership but fantastic people skills, and so on that I’ll turn it over to Christine.

Christine McCormick Day

Thank you, Chip and good afternoon. I am certainly thrilled to be working with the team and honored to be taking over the reins of CEO of Lululemon Athletica in the midst of its exciting expansion. As I said at our analyst day a couple of months ago, our priority is growing the brand through opening stores while protecting the tremendous culture we have at Lululemon. This is an exciting time as we have so many opportunities in front of us. We are still very under-penetrated in the United States. Our e-commerce business is just beginning to be formed, and the international market is still virtually untapped.

As Bob mentioned, we are making some additional investment in our business to better position Lululemon for future growth. The idea behind these initiatives is to make sure we are maximizing our current potential, as well as putting the right team in place to expand into tomorrow’s new business successfully. Also, while our new stores continue to open with very strong productivity and our current store productivity is at the top of our industry, we still think we have opportunities to execute even better.

We are set to open 35 stores this year and are already working on our 2009 leases. One of my goals is to focus on in-filling our current markets, including New York, Southern California, Texas, D.C., Chicago, and Seattle. We will also to continue to focus on making sure that when our guests enter our stores, especially in new markets, they can see our product advantages and have a great guest experience.

We will continue to focus on our execution and ensuring we are getting the right product in the stores at the right time in order to maximize both the guest experience and our productivity potential.

One of the key lessons I learned while at Starbucks was in a high-growth phase was that investing in people ahead of the curve is critical for longer term success. We’ve got to have those leaders who understand what the future looks like but also stay with those core people who built the company from ground up.

As announced in a separate press release today, I am pleased to announce that we recently hired Sheree Waterson as Executive Vice President of General Merchandise Management and Sourcing. Sheree comes to Lululemon with over 25 years retail experience, including positions such as President of Speedo at Warnaco, Inc., and Vice President Women’s Merchandising at Levi Strauss & Company. She will oversee a team at Lululemon that includes global production, community legacies, visual merchandising, and merchandise management.

Other key hires later this year will include a head of logistics and replacing my former EVP of Operations position, two very critical functions as our store base grows. But we are also making sure that internally, our people continue to receive the development that they need. We’ve been working on development plans for all of our core people who have been working hard to create this culture and this opportunity. We are focusing on some simple changes in our stores. We are increasing the number of assistant managers in our stores and the amount of time they spend in market prior to new store openings. We also have made some changes to our training programs to provide more training for our managers so that we have more seasoned operators opening stores. We have also made changes in making sure that we have showroom locations in new markets a year in advance of new store openings.

Another extremely important initiative for us this year is our e-commerce strategy. Currently in the strategic planning phase, the project is on track for generating revenue in the second half of 2009. We are excited about this next phase of growth for Lululemon but are also cautious that we will not burden our current systems and people before they are ready.

As we look at other initiatives, we continue to see major opportunities to strengthen our supply chain infrastructure. We have made and continue to make significant investments in our new IT systems, which will increase our execution abilities, enabling us to more efficiently get the right product to the right stores on time and ultimately further our long-term growth. Our new merchandise and warehouse management system, which was implemented last quarter, is live and performing well. This month we began the process of installing our new point-of-sale systems, which will be rolled out to all U.S. stores by the end of August and to Canada in 2009. Also, we will be installing Maple Lake in July, a new merchandise planning system which will allow for improved product forecasting. This will be followed by a new JDA advanced allocation system in September.

I’d like to finish by pointing out that our philosophy will continue to be focused on doing the right things for the long-term health of this business. At this point in our growth cycle, in order to support new management we are incorporating these additional expenses equated to a couple of cents earnings per share into our guidance for the year. We want you to be assured that all of these initiatives are designed to pay dividends for many years ahead. We expect to get a return on these in a number of ways and believe this is the right decision for the long-term good of the business.

As I transition to the role of CEO, I would like to thank Bob for all of his hard work over the past two years. He leaves the company in excellent shape and I look forward to continuing to attract new [guests] to our brand, providing innovative new products and building on our distinctive community-based approach to retail. Our sales momentum, our culture, the store experience, and the lifestyle driven brand we offer keep us extremely encouraged about our long-term growth [in the future].

Now I will turn the call over to John.

John E. Currie

Thanks, Christine. As Bob and Christine stated, we are pleased with our first quarter results. We are continuing to run our business with a focus on capitalizing on our significant long-term potential. I’ll address our slight change to our 2008 guidance following my discussion of our first quarter results.

For the first quarter of fiscal 2008, total net revenue increased 74.5% to $78.2 million, as compared to $44.8 million in the first quarter of 2007. Our corporate owned store sales represented 90% of this total at $70.6 million, an increase of 85.7% over the first quarter of 2007. This increase was driven by a combination of 27 new corporate store openings since the first quarter of 2007, coupled with the reported comparable store sales increase of 28%.

The strengthening of the Canadian dollar against the U.S. dollar contributed 13% of this comp store sales growth, meaning that on a constant dollar basis, our comp store sales increased 15%.

We ended the quarter with 85 total stores versus 54 a year ago, including 74 corporate owned stores versus 47 corporate owned a year ago. Our new stores not yet in the comp base also continued to perform at or above our expectations in the quarter.

Franchise and other revenues, which include wholesale, home sales, and showrooms, totaled $7.6 million and represented the other 9.7% of total revenue in the first quarter.

Gross profit for the first quarter increased 83.6% to $41.5 million, with gross margin expanded by 260 basis points to 53.1%. The appreciation of the Canadian dollar against the U.S. dollar last year, coupled with stronger merchandise margins, contributed to the increase. These improvements were partially offset by higher occupancy and depreciation costs associated with the upcoming new store openings. The majority of our new store openings have shifted to earlier in the year, the second and third quarters this year versus the fourth quarter last year.

SG&A expenses were $29.8 million for the quarter, or 38.1% of total revenues, compared to $15.8 million or 35.2% of total revenues in the first quarter of last year. Certain one-time charges relating to management changes, including severance expenses, executive search fees, as well as the accelerated vesting of Bob Meers’ performance based options, in total amounted to $1.9 million during the quarter and caused 240 basis points of the 290 basis point SG&A increase.

As anticipated with the go live of our new merchandise management system on February 4th, depreciation expense in the system capital costs also contributed to the increase this quarter.

Operating income increased 71.1% to $11.7 million, or 15% of sales as compared to $6.8 million, or 15.3% of sales a year ago.

Our tax rate for the quarter was 30.8% versus 49.6% in the same quarter a year ago. As discussed on our previous calls, we worked with legal and accounting advisors to make adjustments to our inter-company transfer pricing rates, which has historically inflated our tax provision. These adjusted rates are reflected in our first quarter tax rate.

Net income rose to $8.5 million versus $3.5 million a year ago, or $0.12 per diluted share versus $0.05 per share a year ago. Our weighted average diluted shares outstanding for the quarter were 71.1 million versus 70.6 million at year-end, [inaudible] to the vesting of Bob Meers’ performance options.

Turning to the key balance sheet highlights, we ended the first quarter with cash and cash equivalents totaling approximately $34.1 million and we continue to have no debt.

Inventory at the end of the quarter was $55 million, or up 113% from the end of the first quarter last year. A major component of this reported increase is in transit inventory of $10 million this year versus $1.5 million in transit a year ago, so excluding the $8.5 million increase inventory in transit, inventory was up approximately 60%, which is in line with our sales growth, especially considering the under-stocked position we were in last year.

Historically, as many of you have noted, our stores have had difficulty keeping up with demand for our products and we have been focused on our supply chain and sourcing in order to bring the right product to our stores on time this year. We believe our current inventory levels will improve our in-stock position going forward, as well as support our aggressive growth plan for the remainder of the year.

Capital expenditures were $8.6 million in the first quarter and these expenditures related to our new store build-out costs and IT capital expenditures.

We’ll now turn to our outlook for the balance of 2008. We continue to anticipate comparable store sales growth of low teens or high-single-digits on a constant dollar basis, and 35 planned new store openings in North America. Due to strong sales at new stores not in the comp base, coupled with an earlier-than-anticipated new store opening calendar for this year, we are raising revenue guidance to between $380 million and $385 million, versus previous guidance of $370 million to $375 million. However, this higher revenue will be offset by certain identifiable SG&A costs that were not in our original budget, primarily resulting from new management hires and the other strategic initiatives that Christine outlined in her remarks.

The company expects an effective tax rate in the low 30s for the full year, and finally we expect to end the year with 71.7 million diluted shares outstanding.

Fiscal 2008 earnings guidance continues to include a charge of approximately $0.03 per share resulting from the company’s planned closure of its four stores currently operating in Japan, which is expected to occur by the end of the second quarter of 2008.

So overall therefore, based on the results in the first three months and our outlook for the balance of the fiscal year, the company is now expecting diluted earnings per share for fiscal 2008 to be in a range of $0.68 to $0.71 per share, down slightly from our original guidance of $0.70 to $0.72.

Our new fiscal 2008 guidance remains above the company’s previously stated long-term growth targets of net revenue growth of approximately 25% and diluted EPS growth in excess of 25%.

For the second quarter of 2008, we expect comparable store sales growth in the low teens on a reported basis or high-single-digits on a constant dollar basis, plus 10 new store openings in North America during the quarter.

We expect diluted earnings per share between $0.12 and $0.13, which compares to $0.07 in the second quarter of fiscal 2007.

So with that, we are ready to turn the call back to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Paul Lejuez with Credit Suisse.

Paul Lejuez - Credit Suisse

A couple of questions; anything that you can tell us on the monthly trend during the quarter, and if you saw any sort of a deceleration in the month of May over that?

John E. Currie

If you are asking was the comp trend starting high and trending lower, the answer is no, there was no real trend month-to-month in the quarter, nor [inaudible].

Paul Lejuez - Credit Suisse

And you said nor in May, correct?

John E. Currie

Yeah. Now, having said that, I’m not -- I’m staying away from monthly comp guidance, so you should anticipate that the quarter is as guided for Q2.

Paul Lejuez - Credit Suisse

And can you talk about any updates to your new store model in the U.S. now that you have a few years under your belt? What has been the average year one productivity and how have comps trended in years two and three, if you can help us understand that a bit better?

John E. Currie

Paul, it’s a valid question but I think it would be overstating to say we have a few years of history and a good base for comparison. You know, we continue to operate with our store model that you’ve seen, which represents the minimum. We are experiencing on average sales higher than that and again, it’s too early to really change our expectations of how the comp trends go. So I would say that we haven’t changed our new store model.

Robert Meers

And I think that the performing above the minimum base is still prudent for us to be planning internally focusing on return on cash and capital investments, and I also believe that we need to make sure that we keep the metrics in place so that we stay lean.

Paul Lejuez - Credit Suisse

And then just last, in terms of regional differences, anything that you are seeing across the U.S.? Particularly interested in California and Texas, because I think Texas is one of the regions where you guys might have been a little bit slower as you open stores in that state. Any color you can provide there?

Christine McCormick Day

We are still very pleased with the overall results and openings of all of the stores and we are seeing some turnaround in the Texas market, based on some of the strategies that we’ve implemented there. And we are excited about the new stores that we will be opening in the market. We think the real estate is stronger than some of the real estate that we’ve opened to date, and I think that will give us the real bell weather for the Texas market.

Robert Meers

And California continues to perform, even though that’s probably our highest built-out area to date in total numbers of stores.

Paul Lejuez - Credit Suisse

Great. Thanks and good luck.

Operator

Thank you. We’ll take our next question from Michelle Tan with Goldman Sachs.

Michelle Tan - Goldman Sachs

I was just curious about why the change or why the new kind of viewpoint on the need to maybe build out some strength at the management level and maybe give us a little more detail on what some of the big competencies are that Sheree brings to the table, you know, areas where you may have been deficient before. Thanks.

Christine McCormick Day

Sheree’s skillset in particular, she has e-commerce in her background, which we did not have anybody on the team that had the retail e-commerce expertise. She also has, which I think is a complement to Chip and Bob, the supply chain experience at a deeper level than anybody that we’ve grown internally on the team, so just making sure that we have that extra bench strength. And she’s also [from the independent] rapidly growing businesses which many of our internal players have not, so it’s really filling back Bob’s skillset as he exits the business. And she’s also very skilled in the performance fabrics which we work with.

Robert Meers

I think also we did not have the systems in place and so we would have frustrated professional talent in their inability to have the data they needed to be able to do their job, and the timing of bringing in a senior management team to surround Christine where they will know the leader that is in place has many years in front of them and they can form their own high productive team, the timing of that is perfect for this, as well as following on the heels of giving them the tools they need to be able to run a professional business.

Michelle Tan - Goldman Sachs

That’s helpful, thank you. And then also, any update on the e-commerce rollout, how things are going so far in terms of building the infrastructure up and any updates on timing?

Christine McCormick Day

Basically the initiatives planned for really the back-half of the year with the expenses, which is part of the other reason you don’t see the leverage in SG&A because the investments we planned fall through the back-half, but we are -- have a presentation with our board this week, laying out the various strategic options and then we will begin to execute the plan sometime towards the back-half of our year, still on target for the launch in ’09.

Michelle Tan - Goldman Sachs

Great. Thank you.

Operator

Thank you. We’ll go next to Lorraine Maikis with Merrill Lynch.

Lorraine Maikis - Merrill Lynch

Thank you. Good afternoon. I just wanted to ask about gross margins and where you think the potential is going forward, and will we continue to see such large gains on that line item? And where do you expect those to come from?

John E. Currie

A year over year analysis of gross margins may be complicated. If you remember back when we were on the IPO roadshow and our gross margin of 51%, we talked about seeing a couple hundred basis points of leverage from that point. Now, we saw that in the latter half of 2007. We are in the 53%-plus gross margin range in Q1 and as I said at various conferences, we do see positive levers helping on the gross margin line but somewhat offset by other levers, such as depreciation and occupancy costs on new stores that initially open up at lower productivity. So lots of pluses and minuses but overall we expect gross margins to be similar to what you’ve seen with some room for leverage but not dramatic.

Lorraine Maikis - Merrill Lynch

And then Christine ran through a number of initiatives, some that we’ve heard about and some that may be incremental. Can you just highlight specifically where the additional SG&A cost pressure is coming from for the rest of this year?

Christine McCormick Day

We’ve already mentioned e-commerce is [back-loaded] in the back half of the year on the SG&A. We’ve increased the number of showrooms and now have that on trend, as well as our assistant managers into the back half of the year, which really poises us well for the openings of new stores. We have met on the real estate side with many of the developers through the ICSC and have come -- refined our two-year multi-year strategy for stores with a lot of the developers, so we’ve now secured [inaudible] sites on a lot farther out time-frame, and so we’ve been refining our store management strategy to make sure that we have managers who have been in the system for six months to a year in advance of all of those store openings.

So really the work we’ve been doing is fine-tuning that strategy so that we open with strong -- continue to open with strong stores, which is what leads to our healthy business.

Lorraine Maikis - Merrill Lynch

Thank you.

Operator

Thank you. We’ll take our next question from Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair

Good afternoon. I guess a couple of questions. On the addition of assistant managers, I think you said, Christine, at all stores an additional assistant manager. Can you give us a breakdown at this point as to what the typical management system is at the store level?

Christine McCormick Day

So we have a store manager and two assistants and then we have key-holders, which basically fill in the hours that the store manager and assistant manager wouldn’t be part of, and the structure is the store manager is obviously the general manager of the store and then we have them focus on -- assistant managers focused on community and on product inside the stores to make sure that we are -- we have the right product in the stores and it’s merchandised well, and then obviously community because we are so community oriented as our marketing.

Sharon Zackfia - William Blair

So is this a stair step increase where in the past month or two every store has had an additional assistant manager or is it something that’s rolling?

Christine McCormick Day

It’s still in the process of rolling completely but we are probably about mid-way through putting the second assistant manager in the stores, and then the plan is that those assistant managers come out and then manage the new stores, and so that’s where the rotation would be, rather than at the store manager level so that we have consistency in the execution of that store.

Sharon Zackfia - William Blair

Okay, and then separately on the showrooms, I guess the increase in showroom time before a market opens, are the showrooms actually losing money initially? Is that why it’s a hindrance to SG&A or --

John E. Currie

No, the showrooms -- consider them to break even, so you are going to see revenue on the revenue line with a low gross margin and SG&A but overall that’s our marketing spend that pays for itself.

Sharon Zackfia - William Blair

Okay, and then I guess lastly, you increased the SG&A by the SG&A spend I guess $1 million to $2 million, or $0.01 to $0.02, so -- I mean, is that enough as you look at the business, Christine, and you’re coming in? Are we going to see some other infrastructure investments that haven’t yet been identified? And then separately, in ’09, 2010, should we expect to start seeing SG&A leverage again?

Christine McCormick Day

We believe that you will. This is really the correct key positions that we feel for building the management team. I think as we refine our e-commerce strategy, we feel that we’ve got the expense side built in for that but I think we are still refining that a little bit. But on the whole, we feel these are the remaining key positions for the senior management team --

John E. Currie

Sharon, I continue to expect to see a 20% operating margin in ’09 and ’08, we will still expect to be somewhere between where we were in ’07 and in that 2009 target.

Sharon Zackfia - William Blair

Okay. Thank you.

Operator

Thank you. We’ll take our next question from Liz Dunn with Thomas Weisel.

Liz Dunn - Thomas Weisel Partners

Good afternoon. I just want to follow-up on Sharon’s question with a little bit heavier hand, if I may. I mean, does the management team and the board really understand the magnitude of the change in perception that results from a guidance reduction at this point in the company’s history? And we really just need to get a sense from you that this guidance is conservative enough, because I think one of the things that many of us really appreciate about your model is there are places that we can point to, new store productivity margin, et cetera, where we felt like the model was conservative. So can you give us any comfort that you won’t be coming back to us three months from now with some added expense categories? Because I do think it’s going to be an overhang for some time unless we get that comfort.

John E. Currie

To answer your first question, yes, we certainly understand the importance of our current guidance and especially a revision, and we do think that revising as we have has been prudent. We did a full re-forecast and tried as best we could to anticipate any further spend. Are we being conservative enough? Yes, we definitely feel we are being conservative enough and furthermore, we will be looking for opportunities to run more efficiently and do better. But we feel that this is conservative and prudent guidance revision.

Liz Dunn - Thomas Weisel Partners

Okay, and then second question is can you just give us a little bit of detail on the inventory flow resulting from your systems evolution as it occurred in the quarter? Are you pleased with the progress that you’ve made and how should we see systems implementations happening through the balance of the year? Are they still on track?

John E. Currie

Well, with the MMS and warehouse management system up and running, we’ve talked about it before, you know, it’s now in place. We’re at the point where we are actually figuring out how to make best use of it, so have you seen improvements yet? No, but clearly the system, you know, we can see where certainly by the end of the year we see a more efficient flow of inventory. The rest of the systems, as Christine outlined in her remarks, were on track. The point-of-sale system is being implemented in U.S. stores as we speak, followed by advanced allocations and planning in the summer and September, so all of those systems are on track and will be in full use for the busy fall/winter season next year.

Liz Dunn - Thomas Weisel Partners

Just actually one more, if I may sneak one in -- any update on the competitive front? We’ve seen some sort of more fashion retailers launching yoga product. Can you just give us your perspective on those types of competitive offerings and the competitive environment overall?

Robert Meers

I still think that the competition is growing the market and obviously they are seeing the growth in activewear and healthy living and athletic participation. To date, the competition that we’ve been looking at both online, in catalog, and at retail we think is healthy for us and we believe that the infrastructure we have in place, and more importantly the location of our stores, the added costs that we put into our fabric, and then the community based marketing is much more critical than just having something that looks fashionable.

And I would say that the competition on the general athletic side, the general large wholesalers are putting an emphasis on technical fabrics that are coming off the competitive playing fields and I believe that that’s helping us in terms of getting a jump start on some long-term research and development that otherwise would be longer to get to market. And particularly as we expand our categories that the opportunity is not yoga -- it is exercise, fitness, and general fitness activities and the success that we’ve seen in our running line, our jackets and outerwear, our soon-to-be-delivered swimwear line, and our men’s business really indicate that competition is still following as opposed to coming up with something truly innovative.

Liz Dunn - Thomas Weisel Partners

Okay, thanks. Good luck.

Operator

Thank you. We’ll take our next question from Adam Clark with BMO Capital Markets.

Adam Clark - BMO Capital Markets

I was wondering if you could give us some sort of -- you mentioned regional differences in sales in the U.S. but if you could talk to your main, or your key market here still up in Canada, if there were much differences up here.

John E. Currie

Sorry, there’s some background noise. Canada continues to be strong. Our comp-store sales in Canada were consistent with the U.S. In fact, if anything, I guess the U.S. was slightly stronger but no, the Canadian store base and sales are -- we’re not seeing any issues.

Adam Clark - BMO Capital Markets

Okay. But west versus east, would west -- is it fair to say that west would have been stronger than east?

John E. Currie

No.

Christine McCormick Day

No.

Adam Clark - BMO Capital Markets

No, about the same? Okay. And then non-mall versus mall locations -- is there much difference?

John E. Currie

As always, we don’t see significant differences between malls and street locations and that hasn’t changed, given the economy we’re in.

Adam Clark - BMO Capital Markets

Okay, and just finally, you mentioned how much currency has an impact on your top line but I was wondering if you could break out for us what it meant to the bottom line for the quarter?

John E. Currie

No, Adam, I don’t have that broken out. I think if you go back to our 10-K, when you look at ’07 there’s -- as an example, it attempts to quantify what a change in currency would be and I think you can extrapolate that to [inaudible].

Adam Clark - BMO Capital Markets

Okay, great. Thank you.

Operator

Thank you. Next we’ll go to Howard Tubin with RBC Capital Markets.

Howard Tubin - RBC Capital Markets

John, can you give us a sense of where you think inventory is going to be at the end of the second quarter?

John E. Currie

You know, I’m not giving inventory guidance at this point but you know, I’ve measured it in terms of forward weeks, et cetera. I expect second quarter will be similar to this quarter.

Robert Meers

Yeah, Howard, I think the key is to look at forward weeks, not inventory turn. And when you take into consideration the number of new stores we have opening, the seasonal flip of the putting in warmer weather product into the stores and then the getting and maintaining size integrity on our core product, we are comfortable where we’ve got a good handle on that inventory and it’s growing in the right shape.

John E. Currie

And I guess the other color on that, in my remarks, I did comment that most of our stores are opening in Q2 and Q3 this year, and of course there’s an inventory build to fill those new stores.

Howard Tubin - RBC Capital Markets

Great, thanks. And just in terms of the comp, would you say that the bulk of your comp is being driven by increases in transactions?

John E. Currie

Yeah, it’s traffic, transaction.

Howard Tubin - RBC Capital Markets

Okay, great. Thanks.

Operator

(Operator Instructions) We’ll go next to Vivian Ma with Oppenheimer.

Vivian Ma - Oppenheimer

Thank you. Good afternoon. I was wondering if all the exit costs related to Japan will go through in the second quarter of this year. Are there any in the first quarter or rolling into the third quarter at all?

John E. Currie

A very small amount in the first quarter. The bulk of it will be the second quarter. There will be some spillover into the third quarter.

Vivian Ma - Oppenheimer

Can you -- is the amount in the first quarter, can you -- how big is that number?

John E. Currie

It’s immaterial.

Vivian Ma - Oppenheimer

Okay. Secondly, I want to ask a question about the New York area, new stores. I’ve noticed there is a slight delay, which is typical to this market. Are you expecting any further delays to the [upper east side] store, or some to the Hansen store at all?

Christine McCormick Day

We’ve just been waiting for the landlord to finish some work there, so -- but I believe that we should -- that date that we now have is a good date. It’s on track and we’ve got I think two other stores that are coming up right after that.

Vivian Ma - Oppenheimer

Okay, great. Thank you very much.

Operator

Thank you. We’ll take our next question from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Good afternoon, everyone. Congratulations. I wanted to ask John first if he could talk a little bit about -- he identified some costs that came to $1.9 million in SG&A spend in the first quarter. Did you point them out -- the executive search, the depreciation of the new stores, et cetera, as one-time or are there parts of those expenses, John, that would be considered one-time in nature?

John E. Currie

Yeah, it is really for the most part one-time, given the changeover. As I said, there’s severance costs, search fees for the new positions that Christine referred to, the acceleration of the vesting of Bob’s options --

Janet Kloppenburg - JJK Research

Can you identify how much that was and if that will occur again in the second quarter?

John E. Currie

No, that won’t occur. I mean, that’s not accelerated. I think it will be end up being publicly separate anyway, so it’s about $800,000 to $900,000 of the total.

Janet Kloppenburg - JJK Research

So close to a penny a share in the earnings today?

John E. Currie

Yes.

Janet Kloppenburg - JJK Research

And that would be considered one-time in nature?

John E. Currie

Yes.

Janet Kloppenburg - JJK Research

Okay, and are there any other components of that $1.9 million that would be considered one-time?

John E. Currie

Well, for example, we’ve outsourced certain functions in our real estate group and as a result, that resulted in some terminations in severance pay. I view that as a one-time.

Janet Kloppenburg - JJK Research

Right, right. Okay, but the executive search and the depreciation of the new stores is an ongoing, wouldn’t you think so?

Christine McCormick Day

The executive searches wouldn’t be.

Janet Kloppenburg - JJK Research

Okay.

John E. Currie

Not at this level, the senior people.

Janet Kloppenburg - JJK Research

Okay, and when you look at the change in guidance on the year, which is a $0.01 to $0.02, is a lot of that coming out of the second quarter guidance or is that spread in Q2 through Q4?

John E. Currie

Sorry, your question was it coming out of Q1 versus the others or --

Janet Kloppenburg - JJK Research

No, Q2. Would it be coming out of Q2 as opposed to being spread across Q2 through Q4?

John E. Currie

I would think it’s quite balanced over the three remaining quarters.

Janet Kloppenburg - JJK Research

Okay, and then on the inventory, you said that we should expect it to be about the same coming out of Q2. Is that including the in-transit level as well, so we should expect it to be up over 100%?

John E. Currie

I mean, the in-transit is always a bit of a wildcard because that’s goods that’s on a ship somewhere. It may not get to us for four weeks, so when I -- I think about what we have on hand in the DCs and in the stores. That’s really what I’m referring to.

Janet Kloppenburg - JJK Research

So you’re referring to the inventory up about 60%?

John E. Currie

Again, I don’t want to get too specific on guidance but yeah, it would be consistent with where we are at the end of Q1. And again, repeating the point I made before, a lot of stores open in Q3, so you will see inventory at the end of Q2 that has to be in place to open those stores.

Janet Kloppenburg - JJK Research

And then on your guidance on sales, you took I think -- correct me if I’m wrong -- you took the total sales number up. I’m not sure you took your comp guidance up. Am I correct on that?

John E. Currie

That’s right. The comp guidance, we were bang-on for guidance for Q1 and we are not changing comp guidance for the balance of the year, so the improvement is coming from better results at new stores that are not in the comp base, as well as some additional store weeks because we are tracking towards earlier openings on some new stores.

Janet Kloppenburg - JJK Research

And was your second -- first quarter benefited by a lower-than-expected tax rate or was that tax rate on expectation?

John E. Currie

That was pretty much on expectation.

Janet Kloppenburg - JJK Research

Right, okay. So there’s really nothing unusual then in the first quarter numbers except for the one-times that you pointed out to us?

John E. Currie

Yeah, exactly.

Janet Kloppenburg - JJK Research

Okay, and then I just wanted to -- Christine, maybe if you could tell us in your first -- I don’t know, maybe 60 days, I don’t know how long you’ve been there. Probably longer than that, I apologize for that, but maybe some observations where the characteristics of the business may be somewhat different than you had expected and what that looks like, please.

Christine McCormick Day

I think actually the business continues to really surprise me in a very positive way. I think it’s just a matter of refining the strategy to make sure that we continue to perform, and so in areas of my -- from my focus has really been the real estate strategy for multi-year and making sure that we really get the quality deals and sites that we should be looking for. The e-commerce strategy, so that we really take advantage of the market opportunities that we have there; the U.S. store people pipeline is another just really critical strategy for us in terms to continue to execute our community-based model the way that we want to, and then supply chain. You know, frankly our number one opportunity is just getting the product in the right size runs to the stores and the demand has outstripped our capability in some cases to execute some of the [side runs] and that’s a real focus, which is also what we’ve been trying to address with the inventory.

Janet Kloppenburg - JJK Research

So you’ll be able to capitalize on those over the next 12 months or so?

Christine McCormick Day

Absolutely.

Janet Kloppenburg - JJK Research

Okay. Hey, lots of luck, you guys.

Operator

Thank you. We’ll take our next question from Rob Wilson with Tiburon Research.

Rob Wilson - Tiburon Research

Thank you. What is your expectation for revenue in Q2? I don’t believe you gave a number there.

John E. Currie

No, I haven’t given specific revenue guidance for Q2.

Rob Wilson - Tiburon Research

Why would you not?

John E. Currie

Comp-store sales are a good indicator of the health of the business. With the number of stores we are opening, to give overall revenue guidance, there’s too much variability based on when the stores actually open, so I’m limiting my guidance to comps.

Rob Wilson - Tiburon Research

Okay. Well, I guess I’m looking at you are going to grow stores by 50% this year, you are expecting high-single-digit same-store sales, and yet the high-end of your revenue guidance implies I guess 41% revenue guidance. So I’m trying to reconcile the 50% store growth and the very healthy same-store sales versus only 41% revenue growth.

John E. Currie

Don’t forget the stores are open, not -- the new stores are not open the full year. Opening stores halfway through the year or later, it’s going to skew that calculation.

Rob Wilson - Tiburon Research

Okay. Also, Christine, in your -- in the press release, you suggest that there were some incremental SG&A expenses. I’m assuming you mean that these were incremental relative to what you told us two months ago. Is that correct?

Christine McCormick Day

At that point, we had not secured all of the final candidates and the offers that we had made, so we have been looking at their [inaudible] -- expense of the stock options for the new hires effective this year for their initial grants, and so some of that is what we’ve been refining.

Rob Wilson - Tiburon Research

So this relates to stock option grants of new hires that you didn’t know about two months ago?

John E. Currie

Yeah, that’s right.

Rob Wilson - Tiburon Research

Okay, and that was really -- essentially the only incremental SG&A that you’ve suggested today versus two months ago?

Christine McCormick Day

Some of it has been refining the strategies for e-commerce and that’s a significant -- that’s back-loaded in the back-half of the year, and that’s in the SG&A number as well.

Rob Wilson - Tiburon Research

But the e-commerce is still $0.5 million to $1 million -- am I correct there?

Christine McCormick Day

Yes, depending on which way we look at the strategy, yes.

John E. Currie

And again, consider it a placeholder. I mean, we haven’t a refined budget on that. It’s still our best estimate but having said that, this was an important initiative and that could be a higher portion of what we’ve indicated today.

Operator

Thank you and at this time, we have time for one final question, and we’ll go to Liz Dunn with Thomas Weisel.

Liz Dunn - Thomas Weisel Partners

I’m sorry to log back in. I guess my question relates to your inventory comments. Do you think that there is still -- sorry, I didn’t realize I was on speaker. Do you think -- is there any way to quantify how much you feel you walked last year by being out of stock? And then I’m sorry, I just have to follow-up on that last comment -- are you saying that the SG&A may come in higher once you refine the plan? That’s what it --

Christine McCormick Day

No, no, no.

John E. Currie

I’m saying the SG&A guidance that was given, that we’ve given includes an estimate of e-commerce. That’s all.

Liz Dunn - Thomas Weisel Partners

Okay, but are you committed to bringing the actual in line with that estimate? Or if you feel like you need to spend more, will you spend more?

John E. Currie

Back to your original question and I will reconfirm, we fully expect that our SG&A guidance is conservative.

Liz Dunn - Thomas Weisel Partners

Okay. And how about how much you felt you walked in terms of sales last year by being under-inventoried -- any guess?

Robert Meers

I don’t -- I wouldn’t know how to do that because it’s all anecdotal and we did, as you remember, really increase the amount of inventory we brought in and got into the stores last year and did air freight throughout the holiday season, both from the factory and then from the warehouse into the store. But even there we couldn’t keep up with the sales. But there’s no way, Liz, to be able to -- for us, with the systems we had in place, to be able to quantify that.

Liz Dunn - Thomas Weisel Partners

I know that right now, because you are running sort of lean and in chase mode, you are not as focused as inventory turn but would it be safe to assume that you will implement that sort of discipline at some point when the inventory catches up with the sales trends?

Robert Meers

Yeah, I think you eventually do shift your focus to inventory turn but in a high-growth business, I think you can get internally focused too soon in your growth curve and then you become a self-fulfilling prophecy.

Liz Dunn - Thomas Weisel Partners

Okay, great. Thank you.

Operator

Thank you, and that is all the time we have for questions. I would like to turn the program back over to today’s speakers for any additional or closing comments.

Christine McCormick Day

I would like to thank everybody for joining us today and we look forward to delivering another great quarter coming up.

Robert Meers

Thank you.

Operator

That does conclude today’s call. You may disconnect.

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