John Currie - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer Joseph Teklits - Senior Managing Director Sheree Waterson - Executive Vice President of General Merchandise Management, Supply Chain and Logistics Christine Day - Chief Executive Officer, President and Director Chris Ladd - Senior Vice President of Global Ecommerce

Stacy Pak - Barclays Capital Sharon Zackfia - William Blair & Company L.L.C. Dana Telsey - Telsey Advisory Group Taposh Bari - Jefferies & Company, Inc. Paul Lejuez - Nomura Securities Co. Ltd. Michelle Tan - Goldman Sachs Group Inc. Christian Buss - Thomas Weisel Paul Alexander - BofA Merrill Lynch Pamela Quintiliano - Oppenheimer & Co. Inc. John Morris - BMO Capital Markets U.S. Omar Saad - ISI Group Inc. Howard Tubin - RBC Capital Markets, LLC 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

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the lululemon athletica Second Quarter 2011 Results Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now introduce our host for today, Mr. Joe Teklits with ICR. Sir, please go ahead.

Okay, good morning. Thanks for joining us today for lululemon's second quarter 2011 results conference call. 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 and available on the commission's website at www.sec.gov. Also available in the Investor Relations section of the company's website will be a recording of today's call, which will be available for 30 days as a replay shortly after we end. Hosting the call today is Christine Day, the company's CEO; and John Currie, the company's CFO. We'd like to remind everyone, of course, that 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 results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. And with that, I will turn the call over to Christine Day.

Thank you, Joe. Good morning, everyone, and thank you for joining us to discuss our second quarter results. With me today is John Currie, our CFO. Following my opening remarks, I will turn the call over to John to review the financial details for the quarter and outlook for the third quarter and full year. Our business remained very healthy through the second quarter, and in the first half of 2011, we have achieved milestones for our company in sales productivity and operating margin while growing pretax income by more than 60%. And more importantly, our success continues to be based on running a healthy brand-focused business that consistently delivers product quality and innovation, along with a great guest experience, attributes that we are passionate about that have enabled us to build a brand recognition and win the loyalty of our existing customers. So not only are we growing nicely, including revenue growth of almost 40% in the second quarter, we also continue to invest in a strong foundation for building long-term success, and we believe that we are well positioned to continue our growth initiatives despite any potential recessionary retail environment and product inflation headwinds. Adding to a major initiative earlier this year, which was transitioning our e-Commerce platform in-house, we also continue to advance on a number of fronts. First, we took the next step with ivivva with the launch of our new ivivva e-Commerce site in Canada with the U.S. to follow late fall. ivivva is all about dance, movement and fun, and we are excited to bring this to life for Canadian girls nationwide with our new online store that captures the vibrant colors and technical features of the product assortment, as well as other cool features on the new site. Also for ivivva, we are developing a new line in partnership with Disney Consumer Products for spring 2012 providing girls with dance-inspired athletic wear that fits their active lifestyle and ties back to the Disney Channel dance comedy series, Shake It Up! Next we are rolling out Australian stores at a more rapid pace this year than originally planned, now 7 stores versus an original plan of 2. We are very confident in our ability to continue to grow the Australian business, given the strong guest response to brand and business results and the great team that we have in place there. We also continue to make new hires and investments and to spend on building our infrastructure for e-Commerce, international and other expansion plans in order to prepare for the future. Beginning next year, you will see us add additional country sites to our e-Commerce, along with other grassroot strategies to seize the market while remaining focused on the large opportunity we continue to have in the U.S. Another major initiative for us has been improving our inventory flow. We have achieved one of our objectives, which is to be inventoried in our core and key items. Our inventory position on new and seasonal items is still a little lighter than we would like it to be for Q3, and we will continue to build levels in those categories throughout the quarter. Our focus going forward will be on-time deliveries and the flow of new styles for the optimal mix of colors, seasonal items and innovation. This matches our new product initiatives, which are focused on technical product, new fabrication, as well as new features within our basics such as a new seaming technology. Better flow of this merchandise is an opportunity for us in the remainder of 2011 and 2012, especially in Canada where our customer gravitates towards anything new that we introduce. Looking at the second half of the year, we believe we can grow pretax income by close to 30% on top of strong growth a year ago despite product cost pressures. We have worked hard to develop a winning formula. We're going to stick with it and continue to make it even more potent as we develop new areas for growth. As we said on our last call, we are confident that we are strategically positioned to manage through the current economic environment. We see many opportunities ahead, and we are in a position to pursue them in a sensible way. We've strived to balance the expansion of our brand with the integrity of our brand and with the end result being long-term shareholder value creation. Now over to John.

Thanks, Christine. I'll begin by reviewing the details of our second quarter 2011, and then I'll update you on our outlook for the third quarter and the full year fiscal 2011. On June 8, our shareholders approved our proposed 2-for-1 stock split, which took effect in early July. But please keep in mind that all comments with regard to share count and per share amounts in our results and outlook are now on a post stock split basis. The second quarter total net revenue rose 39.5% to $212.3 million from $152.2 million in the second quarter of 2010. The increase in revenue was driven by comparable store sales growth of 20% on a constant-dollar basis; the addition of 18 net new corporate-owned stores in North America and 3 stores in Australia since Q2 of 2010; direct-to-consumer sales, which increased by $8.9 million driven by increased traffic and conversion; and a stronger Canadian and Australian dollar, which had the effect of increasing reported revenues by $8.3 million or 4.1%. During the quarter, we opened 8 corporate-owned lululemon stores in the U.S. and one in Australia. We ended the quarter with 151 total stores versus 130 a year ago, 147, of which are corporate-owned and 4 franchise stores all in the U.S. There are now 117 stores in our comp base, 40 of those in Canada, 68 in the United States and 9 in Australia. Corporate-owned stores represented 83.9% of total revenue or $178.2 million versus 85.1% or $129.4 million in the second quarter of last year. Revenues from our direct-to-consumer channel totaled $18.6 million or 8.8% of total revenue versus $9.6 million or 6.3% of total revenue in the second quarter of last year. Other revenue, which includes franchise, wholesale, showrooms and outlets totaled $15.5 million or 7.3% of revenue for the second quarter versus $13.1 million or 8.6% of revenue in the second quarter last year. Gross profit for the second quarter was $122.1 million or 57.5% of net revenue, compared to $80.3 million or 52.8% of net revenue in Q2 2010. The factors which contributed to this 470-basis point increase in gross margin were as follows: product margin improvement of 210 basis points; higher product cost due to inflationary pressures from raw material and labor, along with higher airfreight to accelerate product deliveries were more than offset by fewer markdowns and discounts associated with strong product sell-through and improvements in duty rates and other input costs. Leverage on non-merchandise cost such as occupancy, depreciation and product and supply chain team costs, including efficiencies from our new U.S. distribution center contributed 160 basis points of improvement and foreign exchange improvement of 100 basis points due to stronger Canadian and Australian dollars. SG&A expenses were $62.6 million or 29.5% of net revenue compared with $46.1 million or 30.3% of net revenue for the same period last year. The 35.9% SG&A dollar increase is due to an increase in store compensation and operating expenses associated with new stores and showrooms and growth at existing locations, an increase in head office employee cost, including management incentive-based compensation, stock-based compensation and other head office costs as a result of the investment in people and systems needed for long-term growth. And finally, the higher Canadian and Australian dollars, which increased the SG&A by $2.5 million or 4.1%. These increases were partially offset by cost efficiencies gained as a result of transitioning our e-Commerce platform to our in-house model. As a percent of revenue, our second quarter SG&A decreased by 80 basis points due mainly to the e-Commerce operating cost improvement following this transition. As a result, operating income for the second quarter was $59.5 million or 28% of net revenue, compared with $34.2 million or 22.5% of net revenue in 2010. Other income including net interest expense totaled $0.6 million compared to $2.1 million in the second quarter of 2010. The decrease was primarily a result of an accounting gain recorded in fiscal 2010 relating to our acquisition of a controlling interest in the Australia business during the 2010 quarter. Tax expense for the quarter was $21.5 million or a tax rate of 35.7%, compared to $14.6 million or a tax rate of 43% in the second quarter of 2010. Net income for the quarter was $38.4 million or $0.26 per diluted share. This compares with net income of $21.8 million or $0.15 per diluted share for the second quarter of 2010. Our weighted average shares -- weighted average diluted shares outstanding for the quarter were 145.2 million versus 143.5 million a year ago, which has been adjusted for the 2-for-1 stock split. Capital expenditures were $12.5 million in the second quarter relating to new store buildouts, existing store renovations and IT capital expenditures. We ended the quarter with $264.7 million in cash and cash equivalents. With respect to our inventory position, as Christine mentioned, throughout the second quarter, we continued to improve our product flow in stock position. Inventory at the end of the second quarter was $88.9 million or 34% higher than at the end of the second quarter of 2010. Having said that, a portion of this inventory increase comes from higher product cost as opposed to higher quantities on hand. So the actual units available for sale coming into the third quarter are up by a lesser amount over the prior year. Our inventory quantities have and will continue to improve with stronger inventory inflow as the third quarter progresses. So this now leads me to our outlook for the third quarter of 2011. Let's assume the Canadian dollar at par with the U.S. dollar compared with an average exchange rate of $0.97 in Q3 of 2010. We anticipate revenue in the range of $225 million to $230 million. This is based on comparable store sales percentage increase in the low to mid-teens on a constant-dollar basis compared to the third quarter of 2010. We plan to open 11 lululemon stores in the U.S. and 3 in Australia during the third quarter. On September 2, we closed on the acquisition of the 3 Colorado franchise stores. So going forward, these stores will be accounted for as corporate stores. We expect slight gross margin compression versus the third quarter of 2010 driven by higher product cost from sourcing pressures in both labor and raw materials as we previously discussed. We've made the strategic decision not to pass on higher product cost to the guests through higher pricing. Sequentially from Q2 2011, we expect gross margin to decline as we seasonally move towards our fall merchandise, which carries a lower merchandise margin, along with a return to more normalized markdown levels associated with more sufficient inventory levels. During the third quarter, we expect to continue to see cost efficiencies as a result of the transition of our e-Commerce platform to an in-house model, but at the same time, we will be increasing our reinvestment back into the e-Commerce business to develop the necessary foundation to achieve the potential growth trajectory of this channel. Our SG&A will also reflect higher store level compensation designed to attract and retain the best staff. Preopening cost related to the 14 stores planned to open in Q3 and additional stores planned to open in early Q4 and additional resources at our head office to continue to drive longer-term scalability and growth. As a result, we expect SG&A as a percentage of revenue to slightly deleverage against the third quarter 2010. Assuming a tax rate of 36% and 145.5 million diluted average shares outstanding, we expect earnings per share in the third quarter to be in the range of $0.22 to $0.24 per share. For the full fiscal year 2011, we anticipate we will open a total of up to 35 corporate-owned stores, including Australia and ivivva locations. As Christine mentioned, the increase over our previous target of 30 stores for this year comes from 5 additional openings planned for Australia as a result of the strong momentum of the business there. We expect net revenue to be in the range of $930 million to $950 million for the fiscal year, representing revenue growth of approximately 30% over 2010. For the year, we expect gross margin to increase slightly from fiscal year 2010 due mainly to leverage gained in the first half of 2011. As we've discussed on previous earnings calls, sourcing pressures are expected to be greater in the second half compared to the first half of 2011, and we expect will account for approximately 225 to 250 basis points of gross margin compression relative to the back half of 2010. We also expect to see more normalized markdowns with inventory levels at more appropriate levels. This will be offset by leverage on fixed costs such as occupancy and depreciation, more so in Q4 than Q3 due to seasonality of sales volumes. Keep in mind also when we transition into fall and winter, there's a seasonal mix shift in our product assortment that will result in lower merchandise margins compared to the first half of 2011. Adding this all up, we expect our second half gross margin to be in line with our historical targets in the low to mid-50s range. We do expect, however, to enjoy 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 longer-term scalability and growth. So as a result, overall, we expect our operating margin to leverage slightly over 2010. We expect 2011 fiscal year earnings per share to be approximately $1.10 to $1.14, up from our previous guidance of $1.05 to $1.08 on a split-adjusted basis. This reflects the beat of $0.04 in Q2 and an additional $0.02 from improved expectations for the second half of the year. This is based on 145.4 million diluted weighted average shares outstanding, and it assumes an effective tax rate of 36%. We expect capital expenditures to be between $113 million and $108 million for fiscal 2011, reflecting the purchase of our store support center of $65.1 million plus closing costs in the first quarter, as well as new store buildouts, renovation capital for existing stores, IT and other head office CapEx. With that, I'll turn it back to Christine.

Thank you, John. And as always, I'd like to thank all of our educators and managers for making these results possible, as well as a big shout-out to our e-Commerce team for all of the work they did with the transition and how happy we are with the transition with the e-Commerce launch and excited about some of the initiatives that we have happening for Q3. So with that, we'll open it up for questions.

[Operator Instructions] And our first question comes from the line of Michelle Tan from Goldman Sachs. Michelle Tan - Goldman Sachs Group Inc.: So Christine, I was wondering you mentioned some of the new innovations that you've rolled out, some of the lighter weight, seaming and things like that. I was wondering if you could just give us a little more color on the kind of things you've added in over the last couple of months and what the response has been. And then just an update on what you're seeing out of some of the newer markets that you've opened up in the U.S. over the last 6 months.

Great. Let me start with the third one. In the U.S., the business has just been phenomenal, and the new markets that we're opening in, including and particularly the Midwest area, the guests have just been phenomenally responsive, so we're very happy with the productivity of our new stores. And just in general, very happy coast to coast with where the U.S. businesses and the growth that we're seeing there. In terms of new product innovation, first, we're just happy to have really great products in the stores. I think us and our guests are very relieved to see the level of products that we have. And in the Men's business right now, particularly we've got some great products in the outerwear that we're very excited about. It's the best Men's presentation we've had all year, and with that, I'm going to turn it over to Sheree to talk about some of the other new products such as we have the bike pod and some other things in the quarter.

Great. As Christine just mentioned, we had a cycling capsules that did very well, and we continue to leverage our learnings from this capsules and put those into both our yoga and our run technologies. On the technical front, we have more no sew technology than we've ever had before, which is laser cutting and gluing, laser cut venting and mesh technology, along with more seamless technology and something that we're calling, Light As Air, which is ultra light jackets, ultra light run skirts and ultra light run tops. So those have all been really very well-received.

The only issue is more of those items.

That's right. Michelle Tan - Goldman Sachs Group Inc.: Great. And then John, can you put any color around the comment on the Midwest just in terms of level of initial volumes relative to the U.S. or some kind of metrics so we can understand the performance there?

Yes, as I said last quarter, we're opening new stores. I mean, it's hard to extrapolate when the store's only been opened for a few weeks. But we're opening stores in the U.S. in the Midwest and thousands, 1,100 or higher per square foot trajectory. The U.S. average is now up well over 1,300 a foot. So it's as you'd expect, it's 75%, 80% of the more mature U.S. store base, which is a great place to start and will contribute to the high comps going forward.

And our next question comes from the line of Janet Kloppenburg from JJK Research. Janet Kloppenburg - JJK Research: I did have a couple of questions. It seemed to me that the merchandise margin improvement in the second quarter was higher or greater than it was in the first quarter, and I was wondering if you could talk a little bit about what drove that even though you've had airfreight. And I think your product cost pressure was greater in the second quarter than it was in the first quarter, and so I'd like to learn a little bit more about that. Also, on the new product that's coming in, and I'm wondering about the cycling category and if that will be developed into a full-scale business category as we move forward for both men and women. And I was also wondering, Christine, if you could talk about the success of the Hong Kong showroom, and if that could lead to some other international showroom development this year.

Okay. So maybe I'll start on the gross margin question. Actually, the inflationary pressure on our gross margin was similar in Q2 to what it was in Q1. Q2, I think the -- a pleasant result, better than we had expected was we continue to see very little, if any, markdown, and that made a huge contribution to the product margin in Q2. And in addition, I mean, there's a number of smaller items. We've been working on the efficiency of our duties. There's efficiencies through shifting to other countries and the way we characterize our buys from our suppliers, we can reduce duties. And that's starting to benefit our gross margin. Janet Kloppenburg - JJK Research: And that's something that could continue to benefit the gross margin, John, and help to offset some cost pressures?

Yes, for the most part, that should continue. Janet Kloppenburg - JJK Research: Okay. Sheree, on cycling and...?

I have to say we love cycling. We absolutely do there's -- because of the fact that it's a multi-pronged type of business. It's commuting, it's road-biking, it's spins. It's all of that. And the capitals have been successful. We have a strategy to leverage e-Commerce for this as well, so that we can show our cycling capital for a longer period of time. Right now for the next couple of quarters, we're just going to be leveraging the capital strategy that we have, which is infusing our current assortment with drops quarterly or twice quarterly and stay tuned, stay tuned. Janet Kloppenburg - JJK Research: Okay. And Christine, on Hong Kong?

On Hong Kong, we did move the showroom because we moved our office to a bigger location. So we're no longer on the 14th floor of a dental building. We are in a main office area, which did take it a little bit out of the retail traffic area. So we are looking at that from -- to put a second one in that's maybe closer back to the business trade area. That said, we want to make sure that we're really ready from a systems and an operating perspective to support the volume that we know that would do. So our constraint isn't market opportunity. It's just making sure we don't do things that distract from building the operating capability. Kathryn Henry, our new CIO, is working very hard to deliver a tremendous amount of capability in our supply chain and operating systems, and we don't want to distract from that effort by adding too early things that would not allow us to be as successful. Janet Kloppenburg - JJK Research: So this will be it for international showrooms this year?

This year. Janet Kloppenburg - JJK Research: Okay. And what about product costing, Sheree? We're hearing that cotton has come down quite substantially for the first half of next year, and I'm wondering what you're seeing and how much that could benefit your sourcing cost next year.

Sure. Cotton is coming down, but as I mentioned in the last call, we are not a cotton house, we're a technical house. So the benefits of that might be seen more elsewhere than at lululemon, but we are obviously, seeing those benefits. But additionally, we continue to invest in technology. So one thing that you'll see is more innovation in terms of our run line, our cycling line and so on and so forth. So you'll see some of that gain offset by additional investment in technical products. Janet Kloppenburg - JJK Research: Well, has there been any relief on the technical fabric costs that you've been investing in?

Some, some.

And our next question comes from the line of Lorraine Hutchinson from Bank of America Merrill Lynch. Paul Alexander - BofA Merrill Lynch: This is Paul Alexander for Lorraine. Could you guys give us a little bit more color around the third quarter comp guidance? Its acceleration from the first half, and I think that makes sense given the difficult comparisons, but what else goes into that? What else are you contemplating? Are you seeing anything in the macro environment or in the competitive environment? And then can you remind us what the inventory position was like last third quarter, fourth quarter? Were you overly lean back then as well?

Okay. So, I mean, going into the comp guidance, a number of things. And first of all, the stronger performance last Q3 that we're lapping, and that's the same for Q4. In terms of our inventory position, as we mentioned, maybe a little bit lighter than we like to have been at the start of the quarter but definitely improving through this quarter and through the rest of the year. As always, our guidance, our outlook is influenced by what's going on in the macroeconomy. We all read the headlines. Having said that, we're not saying that we're seeing that in our business. But we're just being cautious of what's going on in the world. From a competitive point of view, as always, we're watching the competition. We're aware of them. We are not seeing any measurable impact from new competition. Paul Alexander - BofA Merrill Lynch: Great. Did you see anything in your business in early August with the height of market volatility?

No, what we saw in early August was light inventory coming into the quarter. And when inventory came in, our sales reflected that fact.

And our next question comes from the line of Dana Telsey from Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Can you talk a little bit about speed to market, what you're seeing now, what further opportunities there are and how it may help gross margin and inventory? And you mentioned ivivva. Any update there whether it's cost or what you're seeing. And just lastly, shops, the operating margins by store and direct showing terrific improvement. Where do you see the opportunity go forward?

Maybe I'll start with the ivivva question. Where we've reached some scale in that business has really helped the operating margin of the business, and we have built out a team to successfully drive that business. So especially with going online, we're now exceeding the minimum. So our general manager of that business, Bree, has done a fantastic job building just the brand strategy that's really resonated with the guest, really firmed up the product line. So we're very excited about where we are with that concept and the opportunity. So we feel very positive about the business model, the brand model and how the guest is responding to that. So we're looking forward to expanding that concept. So your next question, Dana, was on... Dana Telsey - Telsey Advisory Group: Speed to market. Dana Telsey - Telsey Advisory Group: It's definitely our -- if you look at our strategic plan, it's probably number -- opportunity #1 and #2 and #3 and #4. Working on flow and being really good at flowing our business. As you know, we have less inventory risk in carrying products because we're not a fashion house. That said, it still has some long lead time, especially with the new technologies that we're developing. So what we're focused on is putting teams here that are planning and developing that much farther in advance so that it smooths out our ability to deliver that on time and have technical innovation. So when we say more seasonal items for us they're really technical innovations and designs. It's not about fashion, and it's about the ability to deliver those complex items on time and quickly. And we're very excited about not only the systems that we've been putting in place, the teams that we've been putting in place to do this. And I think you'll see us really make great strides in that in the balance of this year and into next year, being able to deliver a constant flow of new technical items to the market very quickly.

Your question on operating margins, as you say, we are showing improvement both in stores and direct with the comp store sales increases and even new stores with pretty good leases we're signing, we're getting good leverage on occupancy and depreciation. So that's what's driving that and in particular, we worked hard over the past couple of years to put caps in on our percentage rent. So there's a lot of stores now that were hitting that cap and therefore, the leverage on higher volumes drops to the operating margin. On the direct side, I think what you saw this quarter was being the first quarter on our own platform, you're seeing the kind of flow-through that we can achieve in that business, which, of course, excites me, until Chris Ladd says he actually has to spend some money to achieve the tremendous growth I think we can see in revenue in that channel. So you'll probably see over the next few quarters, as I've mentioned, some investments to continue to improve the website and then even into next year as we add country-specific sites for other countries. There'll be an investment that will moderate the operating margin in that channel. But as you can see, it's very strong.

And our next question comes from the line of Taposh Bari from Jefferies & Company. Taposh Bari - Jefferies & Company, Inc.: I had a question I guess I just wanted to follow up on inventories. Can you just, I guess, clarify for us what the difference is between I guess some of the constraints you're seeing or you saw in the second quarter of this year versus the first quarter? I guess the basis of my question is going back to I guess it was April in your fourth quarter call it, my sense is that your inventory issues would have been resolved by the third quarter. So has anything changed between then and now? And then I guess just finalizing the question, at what point do you expect your inventories to be kind of fully balanced with the strong level of demand that you guys are seeing?

I think with where we were in Q2 was getting back in stock. To meet the sales plan level that basically in our core and what we call key items, which are like mainly our colored tanks and your colored core. And then we were still chasing a little bit into Q3 some of the more seasonal and some of the technical new getting that in enough volume to support the growth opportunity. So that's probably where the timing in the beginning of Q3, we were still a little lighter than we would have wanted to be. We feel very good by the end of Q3, which we're hitting right now that we're there. And so we feel for Q4 we'll be in a very good inventory position not only in volume, but in mix. And then you'll see that really be in a good position for Q1. We don't want a repeat of last year, so we feel very good that we're in a good position for Q4 and Q1. Taposh Bari - Jefferies & Company, Inc.: Okay. That's helpful. So is there a way to quantify, I know it's tough, is there a way to help us quantify what the impact was from the inventory issues in the second quarter versus what you saw in the first quarter? Were they comparable or was the magnitude lower in the second quarter versus the first?

I think it was a little. It was lower in Q1.

In Q1, as you recall, it's very distinct because it was, as I said back then, we started Q1 at a 20% comp. When we ran low, it dropped to low double digits. It wasn't so defined in Q2. So we're better. It's a bit lumpy though. Taposh Bari - Jefferies & Company, Inc.: Do you have some kind of outlook you could provide us with where you expect inventories to be either at the end of 3Q or at the end of 4Q?

I'd rather not because it's a point in time, and that means we have to be precise on the timing of the flow. We've got lots of inventory coming in adequate to meet our targets for Q3 and Q4. But I don't want to pin to a number. Taposh Bari - Jefferies & Company, Inc.: That's fair. And then I just wanted to follow up with a second question just geographic performance. So I think it's interesting that you guys are seeing Australia outperform considering that the retail environment there has been really challenging and a lot of other companies U.S.-based that are operating there are seeing weakness in Australia. So can you just maybe talk about Canada, Australia and the U.S. and how these geographies are performing for you?

Sure. I mean Canada, as you know, we've been here for 11 years now, tremendous productivity. And a lot of other retailers are calling out Canada as being a problem in the first half of the year. We're continuing to see positive comps in Canada in spite of some level of maturity here. And our business here gets even stronger when we have that new product, that innovative product come in. So we're solid single-digit comps in Canada. In the U.S. and Australia, you're seeing similar levels of comp store increases each year, and it's somewhat masked by the overall. Both the U.S. and Australia are comping well into the 30s. So if you just isolate those 2 countries, that's tremendous growth in a tough environment as you say. And yes, we continue to see that in spite of the macro environment.

And our next question comes from the line of Paul Lejuez from Nomura Securities. Paul Lejuez - Nomura Securities Co. Ltd.: Two questions. One, just wondering and sorry if these were asked and I missed it. But if there's been any impact from the Athleta stores opening nearby your stores? And then second, John, I'm just wondering at what point you would actually pass through higher cost to customers, higher sourcing costs that is.

Well, on the Athleta question, I mean, I keep asking the same question whether it's Athleta or other and the answer is consistently there's no measurable impact. So yes, that's what we're seeing there. Sorry, what was your second question? Paul Lejuez - Nomura Securities Co. Ltd.: At what point would you pass through some of the higher costs that you're seeing to customers? How high would it have to get?

I think we're comfortable with the current level of anticipated costs, and we have enough efficiency in the system and leverage that we feel that the best value for the long-term brand is to stay kind of put. That said, what we look at is as we design a more technical garment that we do take the pricing on those. So I think you'll see the pricing kind of expand in the new garments with where we have that technical value that demonstrates for the guest and then keeping some of the core basic at the current level of pricing unless we do a specialty item for the season. So for instance, a specialty hoodie or defined jackets or something that has something unique in it, but keeping the basics priced well, and then taking pricing in the new technical garment and probably ending up with a more kind of blended approach.

And our next question comes from the line of Sharon Zackfia from William Blair. Sharon Zackfia - William Blair & Company L.L.C.: Just a quick question on direct-to-consumer. I think on the last conference call, you had indicated you were hoping that would be about 10% of sales for the full year. I just wanted to see how you are tracking towards that goal, is that something you think is beatable when all is said and done this year.

Yes, because of the transition as you recall, it was something lower I think it was about 7.4% in Q1, 8.8% in Q2, which was lower at the start of the quarter and ended the quarter at something close to that 10% level. So with us being a little bit behind that 10% target, we still feel that we'll very close to that for the year, but not likely to be above that for this fiscal year. Sharon Zackfia - William Blair & Company L.L.C.: And then on the ivivva-Disney partnership, could you explain that a little bit more? Is that product only going to be sold at ivivva? Is it going to be sold through any Disney channels or any kind of color on that would be good.

We won't sell it through any of the Disney Channels, but we are working with them on unique opportunities, which would be either more pop up or trunk show-type things in the U.S. to increase our pressure -- our presence there. It will be sold to a select number of items that it will have a tag that will indicate them as Shake It Up! items, and those will be available online and in our stores.

And our next question comes from the line of Jennifer Black from Jennifer Black & Associates.

You've done a great job with your jackets as far as the diversity, and it looks like there's a lot more detail in your outerwear, which I just noticed you raised your price point on the new raincoat. And I wondered if you could give a little bit more color on these categories as far as will you do more outerwear? I know it's been a small percent, and then I have a follow-up question.

Sheree?

Yes, outerwear is a category that's on fire for us right now. And I guess the question that you'd ask is are we going to be doing more outerwear. I think we're going to be doing more variety in outerwear. Our guest is really, really responding to not only the function, but the beauty and the novelty I think of some of the offerings. So we're looking at that. There's also other types of outerwear that are coming up on our radar like lightweight puffy's so on and so forth that are excellent as part of the layering system for run or upper yoga. So, yes.

Well, and my follow-up I have actually 2 follow-up questions. You've done a great job as far as the improvements on your website, and I wondered if you -- there were additional improvements coming, and will you have the ability at some point, I don't know if you have the systems to pull inventory from the web or from other stores. Will the sales associates be able to do that? And then I have one more question.

Jennifer, it's Chris. I think what you saw in Q2 was us really settling into the platform and really understanding how the team works with it. And I think where you're seeing us focus now and to give you a preview of what's coming, yes, look for some expanded improvements heading into holiday for the site itself. And then I think longer term, we are looking at what are those right cross-channel opportunities specifically around the inventory availability to allow our guests to find the products that they're looking for and how can we help them. So I think that's more of a broader-term strategy for us, but I think you will see us focused in the short term on improving the overall experience on lululemon.com. And we've been really excited to do that in the short term.

Chris, you maybe want to speak to our mobile app?

Yes. And, Jennifer, I don't know if you saw, we did launch our mobile site in the quarter, and that product is already exceeding our expectations. We know that our guest is a pretty active mobile user. She has her particular iPhone with her during the day, and she's actually transacting pretty regularly on it, and so we're really pleased with the progress we've made to-date so far there.

Great, and as far as being able to pull inventory?

Yes, I think that's a longer-term strategy for us and one that we're looking at right now. I think initially just getting the right level of product availability in the inventory in our DCs to serve our current e-Commerce business has been our primary focus. And then once we sharpen the pencil there and get better at that, I think you'll see us expand our strategies beyond that.

Okay. Great. Well, my last question has to do with what your strategies are for holiday and accessories. Will we see accessories and any comments about holiday would be great.

This is Sheree. I think we continue to add newness in our bags and we also -- our guests loves it when we have technical run accessories that go with the run technical lines that we have. So we're looking forward to doing more of that. And one thing that I think that we're going to capitalize on this year in addition to more variety in some of the bags and as I said, the technical is just more better outfitting that we have, which is a huge gift item is our luon outfits tops and so on and so forth have been great gift-giving items so.

And just being really in stock in bags, in socks and those items is just holiday season for us.

And our next question comes from the line of Erika Maschmeyer from Robert W. Baird. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: Could you share your thoughts on how the U.K. is doing with your current distribution and thoughts around how you might expand that next year?

We've only had a one strategic sales partner in the market that's gone back fully over 4 or 5 years now. And it's in the King's Road area and has done very, very well and continues to have as the brand grows tremendous demand. And we've expanded now to several other strategic wholesale accounts and what we do in the U.S. so that we have a presence there primarily for the Summer Olympics in 2012. And you'll see us do some activity around that, but we're not ready to a commit to opening that market until we really get our supply chain systems in place so that we can handle the complexity that we know that, that takes to execute. And we're really trying not to do a lot of ancillary things that detract from our ability to really get the infrastructure right, right now. So even though we see tremendous opportunity in those markets and great demand coming through on e-Commerce, we're trying to stay disciplined and not add any more complexity to the work that the team is doing right now. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: And then just a follow-up on your international e-Commerce. Have you seen the penetration there jump now that you don't have to call customers back to confirm their credit card information?

Yes, and happier customers. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: That's definitely better. And then in terms of you mentioned additional resources at the head office, could you just talk about where you're prioritizing the growth now and adding the most of the team and where do you feel you have the most pressing hires?

We're definitely working in that digital space and building out Chris' team, and we had tremendous opportunity in things like content in our editorial voice in the brand area and sharing our story, which we think is really, really critical for us. So a lot of the web infrastructure, everything from that content side, certainly the e-Commerce platform and that breaks us into Catherine's team, the IT team building our debt. So we're able to be self-sufficient in our systems, not as dependent on outside contractors and consultants. So Catherine's done a very nice job of building a team since she's got here. And then still in the design group, we still see many opportunities to be innovative, and we have so many product ideas bringing in the talent to develop those and continuing to deepen our bench in the designers, which we view as a critical area. And then as we're growing as a company making sure that we have enough in our plan for succession planning and that we're at the executive and then developing the next layers is what we're really working on for you to see some general staffing increases at the mid-management level, but primarily areas are the digital IT, brand and products and supply chain and product. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: So everywhere?

Yes. I'll tell you. We've been a little spin-around here.

And our next question comes from the line of Edward Yruma of KeyBanc Capital Markets. Edward Yruma - KeyBanc Capital Markets Inc.: Can you talk a little bit about sustainability of your markdowns? I know that you benefited clearly from having some really strong demand but as inventory picks up and comes more aligned with your existing sales trends, do you expect markdowns to increase in pressure gross margins?

Yes, absolutely. I mean, our -- and that's been the last 2 quarters and the last -- end of last year, I think I've said every call that our gross margins come through higher than even we anticipated because of the real lack of markdowns. But the balance is if we want a better inventory position to meet demand by definition, there will be more cleanup, more markdowns. And so that can be a couple of hundred basis points of difference in the gross margin, and we do expect that.

And our next question comes from the line of Howard Tubin from RBC Capital Markets. Howard Tubin - RBC Capital Markets, LLC: Can you talk a little bit about your thoughts on new store openings, you kind of back up to that 35 number. And as you look forward, is that kind of number you're comfortable with or could it go even higher over the next couple of years per year?

I mean, of course, we're not guiding on next year's store count yet. But as you know, with all the showrooms and all of the work we're doing to see market and make sure that we're prepared in every way to open new stores. We do have the ability to open more stores in this year. I'd say likely next year, it'll be more stores than this year. But we're not at a point to be more specific yet. But the capability is there to open at or above this level.

I think the only thing I'd add, John, is the one thing I think is very different for us from like 2009 when the recession hit and we cut back to preserve capital to kind of re-transcend, build on solid growth, we feel we're not in that position at all anymore. So one thing we want to be really clear on is we would not see ourselves slowing down. The growth of new stores in a moderate recession, it would have to be something pretty catastrophic before we would make a decision to pull new stores.

And our next question comes from the line of John Zolidis from Buckingham Research. John Zolidis - Buckingham Research Group, Inc.: A couple of questions. First, one just housekeeping. What do you estimate the foreign currency benefited bottom line in the second quarter? And then second small question is just on the Men's, can you give us an update on how that's performing relative to the Women's products? And then lastly, a more strategic question. I was in one of your stores yesterday, and the product looks great, and the store looks fantastic. And clearly, the U.S. opportunity is very robust. So I'm a little bit confused as to why you're opening up a second concept of ivivva and pursuing growth in countries like Australia. One could argue it's fairly early point in the growth curve for the U.S. So just -- so if you could comment on the strategic approach from the timing of those initiatives.

Let me just quickly deal with the currency one. I think last year, Q2 the Canadian dollar was about $0.97. It's about $100 a dollar for this year. It translated to somewhere in the neighborhood of $0.01 a share.

I think just addressing Australia, maybe you're not familiar with the story there but Chip prior to going public had opened a franchise there with a partner, and then he sold it to David Lawn at the time we went public and who is the former CEO of Rip Curl. And so David Lawn and some partners started to expand the concept there, and we bought it into that last year to the 80% mark. So David's developed a very profitable business model in Australia, and for us, there is tremendous learnings there about supporting an international market. And the learnings we also get from high labor costs and the high occupancy costs, how the model will translate globally has definitely been a benefit to us for future growth. And as we said in the call, our focus is North America. But in Canada, you've got a business that's 11 years old. It's very high productivity. We believe in a more scarcity model with stores with very high volume per store, and we've also teamed with this guest in Canada. We own a tremendous amount of her activewear wardrobe, and there's been tremendous demand to create that for a younger group of girls. And what we saw happening for the brand in Canada was as the customer got younger and younger, our target avatar is that 32-year-old, and she doesn't want to wear what 11-year-olds are wearing. So we felt strategically if we did not address product for that younger girl, there would be brand erosion in the Canadian market for our core lululemon. And so we've got a very successful concept in ivivva that we believe has great legs, but we are not in any way distracted from the North American opportunity for lululemon, which is why we're not -- even though we see tremendous global opportunity right now, pursuing that and staying focused on building the infrastructure to support the North American, particularly the U.S. expansion. John Zolidis - Buckingham Research Group, Inc.: Could you comment on the sales productivity and returns in the ivivva stores in Australia relative to the U.S.?

Australia, I'd say, is running sort of a year or 2 behind the U.S. in terms of the brand recognition. So we're seeing about $1,000 a square foot in Australia and a very high comp in the 30s. ivivva is still pretty young, and it's 700 to 800 a square foot at this point, but again comping very well.

And our next question comes from the line of Stacy Pak from Barclays. Stacy Pak - Barclays Capital: A couple of things. I guess one, can you specifically comment on the comp in Canada? I just wanted to confirm you did not see a slow down from -- I heard what you said that you didn't see any slow down sequentially? Second of all, can you comment specifically on yoga pants where I've seen an explosion in competition, albeit not what you guys do. And then third, on the Men's business, I guess I'm in California, and I'm seeing a lot more of it just being worn around, and I'm wondering can you comment on the growth in that business and what you're seeing there and your confidence in your ability to take share in that market rather than people taking share from you and Women's?

Okay, really quickly on Canada. As I said, the Canadian business is comping somewhere in the single digits. Q2 is actually slightly stronger comp than we saw in Q1. So it's not trending down. It's slightly the opposite.

Okay, on the yoga pant competition, we certainly see a proliferation in the marketplace of copy cat product that comes from sometimes the technical players, meaning the athletic wear players and -- but a lot from what I'd call the other softline casual wear, activewear-type players, with the performance and quality level is not really comparable. And I think that's our huge competitive advantage is the technical detailing of the pants, the longevity of it, the fit of the garment. So we're not really seeing anybody come up with something that as directly comparable, and the different channels that they're sold to. I think our guest experience in the store is also what brings that guest back. So even though there's a lot of proliferation, it's really coming at that lower -- it's on price in general and there are quality issues at that price for the guest. So we're not currently seeing any erosion or substitutions from our core guest who seems to be very loyal. In Men's, we've been very light on product as we've kind of re-shifted the line. We really felt in the past we weren't -- we had a lot of casual wear pieces and we weren't technical. So we stripped those out, stripped the inventory down and have worked on building a lot more technical line for Men's. And the response has been terrific. We have some items that the men are just incredibly loyal to such as the technical shirts and the shorts. And we're just now building on that targeted line. We have a fantastic new Men's designer. We're very excited about the product that he's putting out, and we think the Men's product we have in the store right now is some of the best that we've had. And I think you'll continue see that grow at a pace faster than Women's, but still staying still below that 15% in the store in the short term.

And our next question comes from the line of Omar Saad from ISI Group. Omar Saad - ISI Group Inc.: ISI Group. Christine and John, I guess you guys deserve a shout-out too for the great execution this quarter. Christine, could you talk about kind of the way the brand has transformed? I know you haven't been there from the beginning, but I know you also have a great feel for what's -- how the company has transformed over time. Can you talk about the brand and the perceptions of the brand and perceptions of the product and how that's changed as the company has grown and moved into new markets whether it's the Midwest or the growth that you're seeing in Australia, maybe some of the stuff you have in Hong Kong or new categories, Men's. How are people, how are consumers -- you've done research around how consumers are viewing this brand and how it's changed?

We don't believe in a lot of formal research, but we believe in being present and being out there a lot. And so what I'm seeing and the team is seeing is a deep, deep affection and love of the brand for everything that we stand for, not only that product quality but the guest experience inside the stores, on the education, how we participate in the community that authentic giving, our relationship with ambassadors and the work that we do to support their businesses and in a very genuine way. I think what we're seeing is a very deep brand loyalty, which we're very proud of. And I think importantly, the people know that the product stands for something more than just the quality of the product. Really the brand association is with living a great and healthy life that you love, and that's really what we're focused on, and people know that the brand is more than just a product. And that they come to us for whether it's the goal-setting sessions that we do at our stores, as well as the free yoga classes that we do. People come in to feel good, and they feel good about the association with the brand, and that's critical part of our strategy is to continue on that. Omar Saad - ISI Group Inc.: Would you say you're seeing the same thing on the Men's side due that same sort of relationship and that emotional connection?

I think most men would deny that, but we see I think there are a lot of technical products. And I think certainly, we see more men coming in to yoga, and we are that technical product for them. And I think we are seeing from like the underwear, the running shorts, the technical tops. Once we see the guys put on a piece of those and I was just a trail race with my husband and we saw a lot more men in the product, and we were really pleased with the penetration that we're seeing there and talking to some of the men that are in the garments like those are their favorite shorts that fit. So they want 12 of them, and they come in, they buy 12 at once. We're really seeing great response from them.

And our next question comes from the line of John Morris from Bank of Montreal. John Morris - BMO Capital Markets U.S.: Well, a lot of the questions have been asked but John, as you look out a little bit ahead on the product cost pressures, I hear you on -- and you guys have done a very good job in making everybody aware in communicating some of the product cost pressures out there into the back half as far as gross margin is concerned. The spring season's way out there, but would you expect to continue to see philosophically some of the product cost pressures continue into the spring season or would we begin to see some of that abate by then? And I'm asking really kind of from I guess a philosophical structural basis, and then I got 1 or 2 small follow-ups.

Okay, well, some of the inflation that we've already seen will continue. I mean as Sheree mentioned, cotton prices are down, and so to the extent that we have cotton in our mix, there's some improvement going back to product cost that we saw more like a year ago. But other elements of inflation in our cost structure haven't reversed. For example, labor rates in a lot countries where manufacturing is taking place, that's not reversing. They continue. It's hard to have much of a crystal ball. So yes, I don't think you'll see much of a reversal, but I don't think the increase will be as significant as what we saw this year.

But I think there's more opportunity for leverage in that. If you think about the fact that we've been basically rushing product to market for about 6 months or 7 months, there are certain inefficiencies in that process that as we get some our flow control of next year that will also offset and give us some room. John Morris - BMO Capital Markets U.S.: Yes, Christine, I would also imagine as you pointed out earlier in the call that part of the potential offset would be some of the pricing that you might be able to get in the product that warrants that with respect to higher specifications, more technical aspects to it. That piece, which I think is intriguing and obviously well-received by your customer, can you give us some rough feel in terms of what piece of the mix that might be now and what it could grow to, that is...

That's definitely our focus and where we believe we have the opportunity to differentiate. What we've seen happen in the past recessions is people strip quality and details out of product to lower price point, yet the guest that we serve really wants those, and that's given us tremendous opportunity to take market share. And our guests respond to that, and that's what differentiates continuing her to make that purchase. So technical is our emphasis, and we add beauty to garments, but we want to make sure that people recognize this isn't about adding fashion. This is about adding technical function, and the detailing that's functional that she's looking for but we do it in a beautiful way. So that you will continue to see us penetrate more and more of the line, but yet keep a very strong basic key and core so that we have, so which is highly technical and quality product but differentiating ourselves even more with that technical product but at the upper end. So right now, the key and core is something close to about 65% of the business plus or minus on a regular basis so that might lower a few percentage points as we penetrate with even more technical product. John Morris - BMO Capital Markets U.S.: Very helpful. And then just finally, on the e-Commerce expansion into new international arenas next year that you referred to, what regions would we see or countries, if you can be as specific?

Well, the first one up will be Australia because we want to make sure that we address market pricing because of the strong Australian dollar and the duty situation there where you can bring a package in under $100,000 without duties. So we want to make sure that we set that market up for long-term success and have pricing parity in the market and a great product available for the guests, so that will be our first, and then we do have a strategic list of markets that follow that, which I'm not ready to disclose yet.

And our next question comes from the line of Pamela Quintiliano with Oppenheimer. Pamela Quintiliano - Oppenheimer & Co. Inc.: So just a few things. With Australia, is there any change to your longer-term outlook now in terms of how many stores you think you can open there?

I think we've been pretty consistent in the 20 to 30 range. Each one has been very successful. We are expanding or exceeding the New Zealand market now, which we also see as part of that. Pamela Quintiliano - Oppenheimer & Co. Inc.: Okay. And then in terms of the emphasis on the technical garments that's obviously proven to be very successful thus far. The manufacturing facilities that you've been relying on, will there be any change or any new facilities that you're going to look into as the technical component increases? And also on the flip side with labor rates being so high, would you potentially look at other countries to go into obviously, if they have the quality controls in place that you would need?

I think for us, the most important is a relationship with the quality manufacturer that meets all of our sustainability guidelines and that [indiscernible] we operate at the high end of the manufacturing spectrum so we need the quality sewer. So we're not as concerned about the labor, which is built into our model as we are about expanding in a way that gives us the best duty rates into the U.S. and in other future markets that we want to expand into. We have few manufacturers that we work with that we work with them on a very deep relationships. They've been building factories for us over the 2 years that have been coming online. And I just got back from a recent trip visiting 5 new factories, and really, really pleased with the partnerships that we have and the capacity that we continue to develop for the product level. Pamela Quintiliano - Oppenheimer & Co. Inc.: So near term, you think you have the capacity in place to support the growth?

I think long term.

Our next question comes from the line of Laura Champine from Cowen and Company. Laura Champine - Cowen and Company, LLC: Just wanted to clarify the SG&A expense guidance. If I run through the numbers that you mentioned, John, it looks like after a little bit of de-leveraging rate in Q3, you would see significant SG&A expense rate improvement in Q4. Am I reading that right? And what's driving that?

Well, that's pretty typical if you're talking about sequential quarters. Because of the high volume in Q4, we do get leverage on SG&A. So that's what you'd be seeing. Laura Champine - Cowen and Company, LLC: Okay, but on a year-over-year basis it looks like you go from a little bit of deleverage to significant leverage, and I just wanted to make sure that, that is correct. And I also wanted to just follow up by asking for a little more information about you mentioned in the Q and in your comments that you guys raised wages at the store level. If you could maybe quantify that or talk about what the thinking is behind that.

We believe we have the best educators in the world that's critical to our guest strategy, and what we're very conscious of is with a lot of knockoffs coming into the marketplace, if you hire a few lululemon people, you've got really a trained program. So we haven't seen that, but we want to make sure that our educators know that they're valued for the work that they do. And with having fewer stores with really great flow-through, part of our key strategy is making sure that our store manager and our educators are paid very well and comparatively in the marketplace because that's what gives us that community constancy, which is critical to the brand. Laura Champine - Cowen and Company, LLC: And, Christine, was there a change in the way that they're paid? Meaning did the commission structure change or their incentive structure change in any way? Or was it just an increase, a general increase?

We gave an hourly increase, and we have changed some of the upside in terms of their daily and other commission structures. So that as they deliver the upside, there's more that goes in for them.

And our final question comes from the line of Christian Buss from Credit Suisse. Christian Buss - Thomas Weisel: I was wondering if you could take, provide some perspective on new stores and their productivity, and how we should think about store productivity as you open in some secondary markets.

Okay.

Can you say what secondary markets?

Yes, they're proving to be primary markets. As I've said, our new store productivity, stores that we've opened really since we went deep in the showroom strategy a year, 1.5 years ago, so the stores we opened in 2010 and early days the stores were opening in 2011 are opening again, I mean, there's a range but on average, somewhere around that 1,100 per square foot level, which again is much higher than what we've seen previously, lower than the more mature market average. But that's to be expected. So we continue to be very pleased with the way things go. Christian Buss - Thomas Weisel: That's helpful. And could I also ask about your gross margins. About how much of your cost of goods is, relatively speaking, fixed?

Maybe going under 1/4.

And I have no further questions. So I'd like to turn the conference back to lululemon for any final remarks.

I'd like to thank everybody for joining us today, and we look forward to continuing great momentum through the back half of the year. Thank you, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.