Good day, ladies and gentlemen, and welcome to the lululemon athletica Q2 2012 Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Ms. Therese Hayes, VP of Communication and Sustainability. Please go ahead.

Thank you. Good morning, everybody, and thank you for joining us this morning. A copy of today's press release is available on the Investor Relations section of lululemon's website at lululemon.com or furnished on Form 8-K with the SEC and available on the commission's website at sec.gov. Shortly after we end this morning, a recording of today's call will be available as a replay for 30 days in the Investors section of the company's website. Hosting our call today is Christine Day, the company's CEO; and John Currie, the company's CFO. Sheree Waterson, our Chief Product Officer, will also be available during the Q&A portion of the call. We would like to remind everyone, of course, that statements contained on this call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results 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. [Operator Instructions] And with that, I'll turn it over to Christine Day.

Thank you, Therese. Good morning, everyone, and welcome to today's call to discuss our second quarter results. Labor Day seemed to sneak up on us faster than ever this year, likely because we were even busier than usual this summer. We enjoyed another strong quarter, coming in ahead of our expectations. John will go through the specifics on the numbers a little later in the call, so I will touch on the key events of the quarter and subsequent weeks. I signed off last call with an invitation to all of you to join us at our inaugural SeaWheeze Half Marathon. And thanks to the wonderful team who worked so hard to put all of this together and to our many communities who participated, it was a tremendous success. As I drove to the event that sunny morning in Vancouver, it was raining colored luon as the runners headed to the check-in station. Over 7,000 people joined us for a weekend of fun, including pre-run sunrise yoga, the 13-mile tour of our wonderful hometown city, complete with Cheer Stations at every community we ran through from dragons in Chinatown, tai chi at David Lam Park and the world's largest Cheer Station at lululemon's very first store on 4th Avenue. We viewed The Street girl dancers, one of my favorites, and the drag queens in the West End. The day ended with a 1,000-person sunset yoga class on the beach, hosted by our ambassador, Mara, who many of you will remember from the morning yoga class that you participated in during our Analyst Day. It was my first half marathon, but won't be my last. We've already announced that we will host it again next year, and I'm telling you right now that you better get your spot early as it's even likely to be more popular next year. It is remarkable to think that a couple of back page ads in Runner's World, we could attract a sellout crowd to our first-ever run event. It is a reflection of our ongoing commitment to our communities, to the grassroots authentic relationships we have developed over time and to the deep connection and partnership that we enjoy with our guests. Our #1 priority is meeting our guests where they are at, and it was wonderful to see that they were equally willing to be excited and come celebrate with us here in Vancouver. To show how much the participants and the community enjoyed the event, for 2 hours that day, we were the top 5 of the top 10 trending topics in Vancouver, and this is while the Olympics were on. We followed the SeaWheeze weekend with our leadership conference, which is a gathering of our store managers and some of our top educators from our North American stores. Vancouver must have thought there was a lululemon invasion as we hosted approximately 700 of our best and brightest for 3 days of learning, development and sharing. A couple of weeks later, we continued our community-building efforts and our support of the full ecosystem of yoga by collaborating with our friends at Wanderlust to bring this well-known yoga festival to Canada for the very first time. During the 4-day festival, Whistler was host to over 12,000 yogis celebrating music and all aspects of the practice, from chanting with Janet Stone to the Baptiste yoga, a deep cleanse practice with Seane Corn, and to some very modern twist on the practice, including hula-hoop yoga, slackline yoga and stand-up paddle board yoga. More than 20 lululemon ambassadors were teachers at the 4-day event, representing over half the teachers, and we understand that it was the very first year ticket sales for Wanderlust ever. Not only were we able to support our friends at Wanderlust by encouraging participation in our communities, it was with also a great opportunity for us to reconnect with each other on the mats. The first Canadian Wanderlust was a tremendous success, and it was wonderful to see such strong interest and support for yoga right here in our own backyard. Being in relationship with our ambassadors and our guests gives us the opportunity to host and support these events and is a testament to the meaningful relationships that we have built over time. It is precisely because of the strength of those relationships that we take -- we took a clear stand, with a letter from Sheree on our Facebook site, regarding quality issues. We strive to exceed the performance needs of our guests, and we usually succeed. However, we were hearing that this was not the case with color integrity on some of our products this spring. And when guests felt like we were not owning up to the issue, we reacted appropriately in our stores to ensure that our guests were heard and their concerns were addressed, and shared this with our loyal guests on Facebook. As you have seen the results of this quarter, it was not a material event from a pure financial perspective, and engaging in an honest discussion with our guests is always the right thing to do. We have always made feedback from our stores and our communities a core practice that we use to evolve our products as we grow. Our products are created using the highest quality suppliers and factories, many of whom have been with us since the start and have grown alongside us. And while it is a product made by humans and therefore not always perfect, we will do what it takes to make it right when we fall short. In the end, quality is our key differentiating factor. It is what we stand for and what we will always stand behind. Looking ahead, we are excited about the opportunity to bring lululemon to other communities around the globe and are continuing our steady foray into the international markets. The London showroom is open and thriving. We had fun hosting athletes and their families at our athlete house in London during the Summer Olympics, and you may have caught our support of the U.S. men's beach volleyball team. The second Hong Kong showroom is expected to open in one month. As mentioned in the last call, much of the work that is reflected in our costs is behind the scenes to make sure that we have the right structure, support and systems in place to bolster our expansion into these international markets. It is our intention to manage this expansion primarily through direct control and ownership where it makes sense. John will speak to our recent purchase of the remaining interest in our Australian business. Just before I pass the call over to John to review the numbers, I want to take a moment to address a question that we've been getting a lot lately regarding others' attempts to copy lululemon. In some respects, this is a tremendous compliment, as the saying goes, "Imitation is the sincerest form of flattery." However, while others may try to mimic parts of our business, it is impossible to copy a personality. We have built the #1 retail apparel business model of any publicly traded company, and we continually strive for the right balance between delivering strong growth and our market leader focus on innovation and execution. We are also in the fortunate position to have protected our IP, having built up a portfolio of classic styles. And when we see attempts to mirror our product, we will take the necessary steps to protect our assets, as we did recently by filing a patent infringement action related to our Astro Pants. Most of all, we will support our people and our communities to reach new heights, as they did across the board this past quarter. We remain confident in our ability to lead the market in our segment, with our growth plans unaffected by changing market dynamics. Our focus continues to be on our own internal capabilities, innovation and investment in our future. Our primary focus for innovation is evolving our product incrementally as we have been doing through fit, function, fabric and fashion detailing. The base business is incredibly healthy. It is a tremendous proven growth lever, and we have a long runway ahead of us. And with that recap of the quarter, I will now turn it over to John to go through the financial results.

Thanks, Christine. I'll begin by reviewing the details of our second quarter of 2012, and then I'll update you on our outlook for the third quarter and the full year of fiscal 2012. For the second quarter, total net revenue is $282.6 million, an increase of 33% over the second quarter of 2011. The increase in revenue was driven by comparable store sales growth of 15% on a constant-dollar basis; the addition since Q2 of 2011 of 26 net new corporate-owned stores in the U.S. plus 4 reacquired franchise stores, 6 stores in Australia, 2 in New Zealand and 4 ivivva stores; and direct-to-consumer sales, which increased by $16.8 million or 91%. As a reminder, our reported comps did not include our e-commerce channel. If we included e-commerce as a store in our comp calculations, as many other retailers do, our comps would be reported as 23% on a constant-dollar basis. Slightly weaker Canadian and Australian currency against the U.S. dollar had the effect of decreasing reported revenues by $5.9 million or 3%. During the quarter, we opened 7 lululemon stores in the U.S., 1 in Australia and 1 in New Zealand. We ended the quarter with 189 total stores versus 151, including franchises, a year ago, including 21 stores in Australia and New Zealand. There are now 136 stores in our comp base, 41 of those in Canada, including 3 ivivva; 83 in the United States and 12 in Australia. Corporate-owned stores represented 81.9% of total revenue or $231.3 million versus 83.9% or $178.1 million in the second quarter of last year. Revenues from our direct-to-consumer channel totaled $35.4 million or 12.5% of total revenue versus $18.6 million or 8.8% of total revenue in the second quarter of last year. Other revenue, which includes wholesale; showrooms; outlets; and until last year, franchised stores, totaled $15.9 million or 5.6% of revenue for the second quarter versus $15.6 million or 7.3% of revenue in the second quarter of last year. Gross profit for the second quarter was $155.8 million or 55.1% of net revenue compared to $122.1 million or 57.5% of net revenue in Q2 2011. The factors which contributed to this 240-basis-point decrease in gross margin were higher costs associated with inflation in input cost, as well as increased innovation and function in our product line, and a more normalized rate of markdowns versus last year's low level due to a better, more balanced inventory position. These factors were partially offset by lower use of air freight due to reduced inventory chase efforts. SG&A expenses were $85.6 million or 30.3% of net revenue compared with $62.6 million or 29.5% of net revenue for the same period last year. The 36.7% SG&A dollar increase is due to an increase in store labor and variable operating costs associated with new stores, showrooms and growth at existing locations; increased cost to support the growth of our e-commerce channel, primarily in our in-house development and creative production capability; and an increase in expenses at our Store Support Centre, including salaries, professional fees, management's incentive and stock-based comp, and depreciation associated with the expansion of our business. As we have discussed in previous quarters, we continue to make investments for the future in areas such as IT, as we continue to build our network, infrastructure and operating platforms for a global business; in people, through our commitment to leadership training and development; and in international, as we continue our market planning, legal and tax structuring, and seeding efforts. As a result of these investments just outlined, our second quarter SG&A deleveraged by 80 points as a percent of revenue. Operating income for the second quarter was $70.2 million or 24.8% of net revenue, slightly better than expected, compared to $59.5 million or 28% of net revenue in Q2 of 2011. Tax expense decreased $7.8 million to $13.7 million or a tax rate of 19.1% in the second quarter of 2012 from $21.5 million or a tax rate of 37.5% in the second quarter of fiscal 2011. Let me take a minute and carefully walk you through this area. So in the fourth quarter of 2011, we revised the structure of our internal intercompany transfer pricing agreements. A detailed review of the tax impact of these revised agreements was completed just recently, with the result being a reduction in our effective tax rate from roughly 36.5% to approximately 29.5%, effective as of the date of the agreements. As a result, we booked an adjustment of $7.2 million this quarter to reverse taxes provided for in Q4 of fiscal 2011 through Q1 of 2012. Normalized for this adjustment, the tax rate for the second quarter of 2012 was 29.2%. Going forward, we expect a tax rate of approximately 29.5% in Q3 and Q4 of this year, reflecting the ongoing favorable impact of the revised intercompany transfer pricing agreements. Net income for the quarter was $57.2 million or $0.39 per diluted share compared with net income of $38.4 million or $0.26 per diluted share for the second quarter of 2011. Second quarter diluted earnings per share normalized for the tax adjustment was $0.34 and would have been $0.31 at our previously estimated effective tax rate of 36.5%. Our weighted average diluted shares outstanding for the quarter were 145.7 million versus 145.2 million a year ago. Capital expenditures were $26.4 million for the quarter compared with -- to $12.5 million in the second quarter last year. In addition to new stores, renovations and IT capital, we also acquired the building housing our Newbury Street store in Boston. We ended the quarter with $444.3 million in cash and cash equivalents. Inventory at the end of the second quarter was $125.4 million, 41% higher than at the end of the second quarter of 2012 -- or 2011. Our inventory growth is consistent with our expected forward sales and will support the anticipated growth for new stores, higher same-store sales and our e-commerce business. Subsequent to the end of the second quarter in August 2012, we acquired the remaining 19.7% noncontrolling interest in lululemon Australia. Therefore, post closing of this transaction, there will no longer be a noncontrolling interest in the net income of this business. The impact on our financial results for 2012 is expected to be immaterial. This leads me to our outlook for the third quarter of 2012. This guidance assumes a Canadian dollar at par with the U.S. dollar, which is consistent with the exchange rate in Q3 of 2011. So for the third quarter of 2012, we anticipate revenue in the range of $300 million to $305 million. This is based on comparable store sales percentage increase in the low to mid-teens on a constant dollar basis. We plan to open 8 lululemon stores in the U.S., 3 in Australia and 1 ivivva store. We expect gross margin to be slightly below 55% through Q3, which represents some deleverage against Q3 2011, due to lower product margins, primarily for the same reasons discussed earlier with respect to Q2. In terms of SG&A, we expect to deleverage slightly as a percentage of revenue over the third quarter of 2011. Similar to the investments we made in Q2, we will continue to incur costs to support the rapid growth of our e-commerce business, including costs associated with our new international sites, our IT network and infrastructure, and the design and deployment of new operating systems. Assuming a tax rate of 29.5% and 145.8 million diluted weighted average shares outstanding, we expect our Q3 2012 earnings per share to be approximately $0.34 to $0.36. For the full fiscal year 2012, we anticipate we will open a total of 35 corporate-owned stores, plus 2 outlets. We expect net revenue to be in the range of $1.345 billion to $1.36 billion, representing revenue growth of approximately 36% over 2011. We expect -- we continue to expect gross margin for the year right around our stated long-term target of 55%. We expect slight leverage on SG&A for the full year, deleveraging in Q3 and then leveraging in Q4 due to the much higher volumes. As a result, we expect operating margin to deleverage slightly from the peak levels seen in 2011. We expect capital expenditures to be between $85 million and $90 million for fiscal 2012, reflecting new store build-outs, renovations on our existing stores, real estate, IT and other head office capital. We project 2012 fiscal year earnings per share to be approximately $1.76 to $1.81. This is based on 145.8 million diluted weighted average shares outstanding, and it assumes an effective tax rate of 28.9%. For greater clarity, the impact of the reduction in our effective tax rate added $0.19 to our projected earnings for 2012. And so without this benefit, our guidance would have been $1.57 to $1.62, up from our previous guidance of $1.55 to $1.60 per share. With that, I'll turn it back to Christine.

Thank you, John. As always, we have deep appreciation to our educators and people in our stores, our guests and the team here at the Support Centre that make all of this possible. We feel very fortunate to be in a position to reinvest our leverage into future growth opportunities, creating great value for our shareholders. With that, we'll open it up for questions.

[Operator Instructions] Our first question comes from Sharon Zackfia, William Blair.

Just one kind of combined question. I don't think inventory flow came up in the prepared comments, so if you could talk about inventory flow within the quarter and how that impacted your sales. And then as we look at the third quarter, are we going to see similar kind of inventory flow constraints?

Inventory flow continues to be what seems to drive our sales. At the start of the quarter, it was a bit choppy, in early May, ticked up and ebbed and flowed through the quarter. In the quarter, July was our strongest month because inventory flow was stronger. And that will always continue to be a very short-term factor within each quarter.

Our next question comes from Adrienne Tennant of lululemon (sic) [Janney Montgomery Scott].

Christine, can you talk about sort of the fashion versus basic, the transition to that, where you are now and sort of where you think -- at what point you think that kind of -- that balance of products will start to be where you want it to be go forward for the longer term? And just really quickly, clarification, John, you said that the 29.5% would be through the end of the year, but then you had made a comment that it was through Q1. Should we also use 29.5% for Q1 and then go back to 36.5% for Q2, 3 and 4 of '13?

No, I'm sorry, I should clarify. This adjustment is ongoing long term. So yes, and I'd only quantify it by saying there's other factors that cause minor fluctuations in our tax rate. Next year -- not that I'm giving next year guidance yet, but income will shift a little bit more towards the U.S., so that 29.5% next year is likely to be more like 30%. But the benefit that we're seeing is ongoing.

Great. I think to answer your other question, I want to be really, really clear that our first thing that we always do is put the beautiful details into our core basics and technical athletic apparel, and it's that ability to then cross over into the active wear, casual wear and out that we're always looking to do. It's transformable clothing. So I want to be really clear that we aren't shifting the brand to fashion. We -- it's always technical apparel first, and what we believe we do better than anyone in the world is create such beautiful athletic products that it can be used for multipurpose. And it's always that transformability, whether we're doing it in cycling or we're doing it commuting or anything else. What we're always exploring is the way that you make function with beautiful detailing become fashion.

Our next question comes from Omar Saad of the ISI Group.

I wanted to follow up on some of the comments from last quarter, and there's a little bit of a shift that we heard on the call last quarter around inventory flow, the supply chain kind of maybe constraining the comps, and shifting the focus of the supply chain and the inventory from chase to innovation. Can you expand on that, 90 days later, how you're thinking about your supply chain and inventory flow, your capabilities around that? And are you still kind of keeping away from that chase model and really looking forward to new technical innovative products? Just kind of give us a broader update on those issues, would be really helpful.

Great. Thanks, Omar. Our focus on -- has been primarily on consistent great inventory flow. And when we talk about innovation, I want to be really clear that the first innovation that we focus on is in the existing product. And then we do, do other innovation that we're testing, but that's for us, for future growth and concepts, and it's not our primary growth lever. It's even innovation in core and basic product, and it's also the ability to innovate, which we've really been focusing on this last year. And part of the reason we made the decision with chase, not to do as much chase, was we moved from a 10-month calendar to a 9-month calendar, which allows us to time perfectly, bringing the fashion detailing and elements that we see on the runway and the new trends into our stores on a very quick cycle that we believe is a competitive advantage. So that focus and getting that right is part of what we mean when we talk about the word "innovation," used in the general term. So we don't feel like we need to invent new aspects of our business to continue our growth. I want to be really clear about that. What we do and spending our time doing it best in the world is our biggest growth lever. So that and flowing that great product faster and more effectively into our stores has been our #1 focus. So rather than reacting and trying to just get more stuff to meet sales demand, which we believe would be a short-term strategy, that would not position us where strategically we want to be for a brand, long term. There's a cost when you have more stuff, and if you get -- buy the wrong stuff or too much stuff and you tire out the guests where you have to mark it down, that's the cycle we always want to be in a position of avoiding by focusing on reinventing our core product and putting the best product out in the market every season. And that's the difference between what we were doing before, which was a little bit of just chasing stuff, which we could do. But I think long term, that's not the right strategy.

And do you have -- do you feel you have the supply chain in place to kind of meet these goals?

Yes. And our factories because -- I also just want to be clear: We have not opened any new mills. Our current mills are growing with us. And that means they do have new lines and new equipment, and so there's investments that they're making, and they have new employees. And so we want -- we've always been very careful about where their investments are to keep pace with us. And that partnership is really important, and we always forecast, and the numbers that we give are based on their capability and our capability, delivering quality at every step of the way.

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

Can you maybe just give us an update on ivivva, and what your kind of maybe store growth plans would be for that brand, both in Canada and the U.S.?

Well, you saw us recently open 5 showrooms in the U.S., and pleased to say they're all doing very well. Very excited about the prospects of ivivva. We're seeing very strong sales per square foot in the concept. But for us, it's still let it perk and grow it. We're not quite ready to pull the trigger because we have some other things that we want to focus on first to grow it, but very, very pleased with where it's coming along. And guest demand is growing, e-commerce sales are growing. So everything is where it should be, and we feel great. The product is really great for fall, by the way, too.

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

I've heard that there's demand for larger sizes. I know you go up to a 12. And I know you phased out the Still Pant, which appeased some customers due to the looser fit. And I wondered what your thoughts were on extending your size ranges for both smaller and larger sizes.

It was such a mistake to ease out the Still Pant; we've heard that loud and clear. So the Still Pant will be coming back. And reinvented Still Pant will be coming back, Sheree is saying to me. So I think our guests can rest assured we've heard their feedback, and that will be back in the lineup. We are not planning on introducing larger sizes. If you took all of our colors and styles in our size of store and added additional sizes, we just physically cannot put the product in the size stores that we have today. And so that's, for us, the primary reason because there are so many other categories and things that we can focus on with our core guests, that, that's going to continue to be our focus.

Our next question comes from Kimberly Greenberger of Morgan Stanley.

Christine, I'm wondering if you can talk a little bit more about your core women's yoga business. It sounds like that -- those businesses are still very much positive comp-ing. And then if you could comment on U.S. versus Canadian comps and any transaction metrics you care to share, that would be great.

Boy, I'll tell you, we are just continuing to be so pleased at the response to that just basic core yoga business, and it also includes, obviously, the gym fitness studio. From a guest perspective and a consumer perspective, those markets are still growing. And we've been able to grow with them or even drive the growth of those segments based on the product. And we still see, particularly in the States, it is a very technical athletic guest that is purchasing the product. In Canada, because we have a more mature market state, you probably see a little bit more mix with that. There's -- we're still performing very well in both markets, but I'll let John give you the breakdown.

Yes. As we've seen through most of 2011, Canada is solidly comp-ing mid-single digits, which is good for a mature business; the U.S., comp-ing in the mid-20s; Australia actually coming along a little higher than that, about 30%. In terms of transaction metrics, I mean, our comp came pretty much entirely from transactions, a combination of mostly traffic and higher conversion.

What I think is important, too, is it's not just the comps. The dollar in average sales per square foot increase year-over-year in a store is very huge, which -- and it's driven by transactions, which is more purchases. So guest demand is growing in a very real way. And that's our continued focus is to really drive our core lines of yoga and run with that consumer because that's where the demand is.

Our next question comes from Dana Telsey of the Telsey Advisory Group.

Can you talk a little bit about the capsule collection? How is it going? And what do you see is the attributes of success of the capsule collection? And also, just any further updates on the investments in technology and the benefits to margin and inventory flow.

Hi, this is Sheree. Capsules continue to teach us so much about, as we've said before, new fabrics that we've developed, new types of construction, as we solve problems for athletes in different sports and in different activities. We actually see tremendous benefits that cross over into our yoga and run lines, and that also crosses gender between men and women. So it's been fantastic as a laboratory for our guests and for us to learn. And the other question was?

Technology cost for John.

Yes, I mean, technology investments, we have one of the busiest IT departments of anyone, probably [ph]. And a lot of the investments we're making are behind the scenes, new data center. We're implementing a new financial system, et cetera. E-commerce sites going live, so very broad-based IT investments. As well, we are investing heavily in supply chain systems. We're in the process of implementing our PLM system, et cetera. But you won't see any near-term impact on gross margin. That's a longer-term benefit that you'll see by 2014.

Our next question comes from John Kernan of Cowen.

I wonder if you could provide us an update with the progress of some of the grassroots marketing in Hong Kong and the U.K. Are you feeling any different about your eventual store ramp there? And what type of reads are you getting from the international consumer on your e-commerce platform? And where are you getting the best reads from?

So we're doing -- maybe I'll start with the second question. We definitely see a strong correlation to our grassroots marketing in driving e-commerce sales. And Australia, where we turned the website on live last quarter, localized to the market to match localized assortment, pricing, has been growing -- matches the same growth rate we saw early on in our U.S. conversion to the website. So very pleased with the results there and how we really were able to sync local pricing, local product with great consumer response in the market. The same thing will be occurring in Hong Kong. We're timing the opening of the second showroom to match the launch of the localized website, so that all of our pricing and offering can match as well. So very excited about that, seeing great demand. We're ready for a store in Hong Kong, to be honest. It's about getting the team ready with the second showroom so that we have enough staff so that we can open. And we'll -- we anticipate being able to talk about that for next year. So great progress in Hong Kong. London, we had both the showroom and we had an athlete's house during the Olympics. We had a lot of activity going on there. We do anticipate planning additional showrooms in the London market. So seeing great response and great crossover to the e-commerce sites. The other things, we are seeding additional markets, which I won't name right now. But we do have activity going on with ambassadors, with yoga events, Yoga Journal conferences in far more markets than that, where we're building our relationships in advance of going in with showrooms. So we feel very confident about our international future and creating desire in these markets. We've had great response from guests, and we do see some classic favorites starting to emerge even in the international markets. So I believe that the product translates beautifully internationally. And we've had to make far fewer adjustments even in Hong Kong to size and other layering systems or fabrics. We seem to be able to do it beautifully with the product that we have.

Our next question comes from Janet Kloppenburg of JJK Research.

Christine, if you could just elaborate a little bit more on the process issues or constraints you're having in the first quarter, and if resolution to those issues are largely behind you, and if the innovation level was actually higher than you thought it might be in the second quarter. And, John, if you could talk about the DTC channel representing a lower percentage of the revenue mix than it has in the past, and how we should be thinking about that going forward, and if there were any constraints to that channel's business in the second quarter. And lastly, for Sheree, I've noticed that the accessory and headwear and underwear components of the assortments seem to be increasing. I'm wondering how the -- how your success has been in these categories, and what we should be thinking about in terms of those categories growing going forward.

So when you say process constraints, you mean because we oversold when we were catching up in the quarter...

Well, I think you were -- yes, you talked about maybe some overbought areas and underbought areas, and you weren't able to get back into color the way you wanted to for the quarter. It seemed to me that there was a lot of color in the store and that the color increased as the quarter unfolded.

Yes. I think what you're seeing is a much more -- so I think the focus was really for the back half of the year in terms of getting back to really investing in product. The first half of the year, you saw us do more color, but probably not as much detailing and style innovation as we would really have liked to have done in the line. And you'll see that really coming out in the fall and winter drops that are just coming up. So it takes a while for that to get to the markets, so just to talk about those expectations. So yes, you did see more color coming through throughout the first half of the year and particularly into fall. We've got some great color in the store right now. So what you also saw was better flow of product and less airfreight, so we are being able to, on a more normalized basis, drop the product to our desired cadence. We're still not all the way to where want to be. We still believe that we can optimize that and continue to improve it, but we've made a lot of progress in the stores, in smoothing deliveries with using things like late-night drops and early morning. So we're getting more flexibility from our supply chains, that the stores can get the product to the floor faster, which has been a focus of ours, getting ourselves ready for the holiday season and for next year. So we've learned a lot this year about how to do it within normal kind of daily process. So I think we've made good process -- progress. Some of the systems implementations we've done have also helped to make the work of our merchants and allocators easier, and we'll continue to do work in that space as well. So I think I've answered your first 2. I'll let John do direct to consumer and Sheree do accessories.

Yes. And in terms of direct to consumer, as I said, it's about 12.5% of revenue in Q2, which was right in line with our expectations. Q2 and, to some extent, Q3 tend to be the lowest penetration. It's difficult comparing to last year because remember, the end of Q1 last year, we did the transition away from a third-party site, so looking at year-over-year trends is very difficult to find meaningful. So going forward, Q4 will be the strongest in terms of e-commerce penetration. And we're still looking at e-commerce rising from -- last year overall for the year, we were about 11%. We expect it to be between 14% and 15% of overall revenue this year.

Okay. And now to accessories, the fun part. Accessories is a focus and our focus here is to create the most beautiful, functional products in this area. So I'm going to start with underwear first because underwear is an important part of the functional layering system. And we're looking at better construction technologies to have invisible undergarments that are completely non-chafing, wicking and so on and so forth. So that business is actually -- we're focusing on that in terms of technologies. And that's in both men's and women's, by the way. Headwear, we noted that there is an opportunity for share in caps and so on, and we continued to see women's headwear just outperform our plans. So there's a lot of demand there for things that are functional and beautiful again. And in terms of bags, I don't know if you've seen our women's bags on the floor right now, but I think they're the best that we've ever done there. The details...

Yes, and the prices are terrific.

Isn't it great?

Yes, it's great.

Yes, it blows me away. I owe -- I own all 3 of the women's bags on the floor right now. But in terms of what we're doing with that category going forward, we're innovating in terms of construction -- some fantastic construction that you're going to see going forward that's no-sew. And we're also innovating in men's bags. So we have a new head of our men's creative who has -- who's an athlete himself with a fantastic taste level. So one thing that you're going to be looking at is men's bags that women want, too. Great crossover. So real vibrant in terms of our innovation and our focus on accessories.

And scarves, [indiscernible] enough of our Vinyasa Scarves and other scarves in stock.

Right. And then the final note here is in terms of the ultimate piece of equipment for yoga, which is our mat. Our mat architecture, we're continuing to innovate. And it will be fully expressed by Q1 of 2013. There's a couple of new mats that we're going to be introducing that are killer.

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

You guys have discussed pulling back on chase in the second and third quarters and then some potential opportunity for revenue upside in the fourth quarter. John, can you just talk about how you're thinking about inventory flows going into the fourth quarter, and if you'll be there yet in terms of having enough product to meet demand.

Yes, and we do feel like we'll have the right amount of product, whatever that is. There's never the perfect answer. As we've said, we're not chasing even into Q4, so we should have lower airfreight. And we're trying to strike the right balance between ending up with not enough inventory, which is not a good answer, versus what a lot of retailers do is go big and end up with too much and then there's markdowns, et cetera. So we may be leaving some demand on the table through this year, but we'd rather do that than end up being over-inventoried going into next year.

And as usual, we've also worked very strongly to make sure we have a strong entry point into Q1, which gives us a little bit of flexibility. But we're very cautious not to oversell Q4 and set up Q1 for a disappointment. So it's that right cadence that we can execute consistently that we're looking to deliver.

Our next question comes from Betty Chen of Wedbush.

I was wondering, Christine, if you can talk a little bit more about that calendar you mentioned earlier, on how the team has sort of shortened it to 9 versus 10 months. Is this the optimal level that you would like to see it? Or would you like to further narrow the calendar? And then secondarily, I was wondering if you can talk a little bit about the men's business. I know you mentioned earlier, Sheree, that you're very pleased with the men's bags. How did you feel about the apparel business overall, as well?

I'll answer the last one first because it's the one I can remember. The men's business is great. In fact, the growth is slightly outpacing women's. It's on a much smaller base, however. Right now, with the men's team that we have, you'll notice that the ethos of the line is changing to be more modern, and there's a greater variety of fit in the bottoms. And you will continue to see more innovation in technical tops that don't look technical. So we're very bullish and looking forward to a great men's business that we're growing. The 9-month calendar, is it the optimal? It's part of the optimal answer. So we went from 10.5 months to 9 months, and the reason that we did that is so that we can completely hindsight a season before we begin the next. And obviously, common sense would tell you that the wisdom that we gain by hindsight-ing a quarter greatly gives us an advantage as we design into the following year. But true success is really predicated by multiple supply chains, and it's our ability to be able to service our core business, which is something that we'll be carrying locker stock on with our vendors overseas, so that we are always prepared to deliver in a couple weeks' notice to a quick response model. That is something that we will be planning certain base clause [ph] that we can respond to, and our 9.5-month calendar. So it's really the aggregate of several supply chains that gives us a competitive advantage.

Our next question comes from Roxanne Meyer of UBS.

First, I just wanted to ask about your comp guidance, low to mid-teens for third quarter. So a little bit higher, I think, than it had been prior. And I'm just wondering if you're able to give us some commentary on how the quarter is starting out, and what the trends have looked like versus July. And then secondly, just wondering if you could point out any mix shifts that are occurring year-over-year, new categories that you're investing in more deeply into the back half than you did last year.

Okay, so let me take the first part of that. As I said, we ended Q2 strongly. July was our strongest month in the quarter. Once again, we're looking at the flow within the quarter. To be honest, not that I give monthly comps, but August started off quite strong, but we know we're going to be a little bit lighter than we'd like to be in October. So those are the factors coming into our guidance. Sorry, what was the second question?

Mix shift and new categories. Sheree can take that.

For Q4, what we'll be seeing is we're capitalizing on some of the success that we had last year. So we'll be going into a category that's lightweight tuffies [ph], which we called "what the fluff?" And for men, it will be "fluff off [ph]." And yes, just thought I'd give you that little preview there. And we're also capitalizing on some of the warm wear business that we have with running luon and our tech fleece and so on and so forth. So those categories will be, you'll see, will be very strong.

They're gorgeous.

They are gorgeous.

We just were looking at the prototypes yesterday. So be prepared to shop in January. That's all I can say...

Absolutely.

Our next question comes from Christian Buss of Crédit Suisse.

I guess -- I would love for you to explain a little bit more detail, sort of where the incremental SG&A spending is going. It looks like you're on track to spend about $100 million incrementally this year. If you could help us bucket that, I would really appreciate it.

Okay. I mean, I don't have a detailed breakdown of the year in front of me. But just looking at Q2, the increase, as I said -- it was about $8 million to $10 million -- is simply store-based labor and operating cost based on new stores, higher volumes, et cetera. Investments in our e-commerce platform -- again, we brought the platform in-house last year. We've actually hired -- we've got our own ATG development office that we've opened down in the San Francisco area. So we're internally doing the work to upgrade that system to go live with new international sites, et cetera. The investment, even during Q2, was between $4 million and $5 million in that area. And then the rest, I mean, there's a lot of -- as I mentioned earlier, there's numerous IT initiatives going on, everything from a new data center to various systems going live, et cetera.

New POS systems.

POS upgrade, et cetera. And that's the biggest part of that -- the bucket of increased spend in the Store Support Centre. And then a lot of -- probably spend a couple million in -- just in terms of the background work in preparing for international expansion, whether it's setting up our legal structure, distribution networks, making sure we're compliant, et cetera. A lot of stuff going on in the background there. And that will continue.

Our next question comes from Pamela Quintiliano of Oppenheimer.

So just in the prepared comments, you quickly touched on that one product that bled. Can you talk about what actually happened there, how you were able to quickly adjust it, and why you view it as an isolated incident?

Primarily for us, it was the bright neons, which are very difficult to put on fabric, and we pushed the color limits pretty intently. So we did have bleeding with Paris Pink and a couple of small isolated issues, which were very hard for us to track down, in a couple of other colors that were also bright neons that came in the second quarter. So because we want to strategically continue to push the envelope with bright colors, we did bring in a color expert who's done an amazing job, and we've learned a lot of great new tricks from him, so we're actually very excited about even new capabilities. So the silver lining in having an issue with Paris Pink was that it created actually more opportunity for us. And so by changing some simple rinse agents and a couple of other things that we've worked on with the manufacturers and the mills, we feel very comfortable now with the product and being able to do our strategic intent, which is push colors and maintain quality.

Our next question comes from John Morris of BMO Capital Markets.

Christine, we've talked a little bit about fourth quarter, the approach, what you're looking at. I'm thinking -- I want to ask the question really from the perspective of holiday, the opportunities that you see with respect to that timing of the year, in holiday. Are you going to be doing anything differently this year from a marketing perspective to capture the customers at that point? And where do you see the opportunities, in particular, for holiday? And then maybe for John also, just touch on any regional performance patterns or reads that you've seen coming out of the quarter in terms of geographic performance. But I'm also thinking about size of market, your performance in some of the secondary areas compared to the overall core in averages.

I think our focus is -- we don't do gift-giving and we don't do, like, special promotions, discounts, whatever. That's not our MO, and we don't do big advertising. What we need to do better than any anyone else in the world is get our product into our stores. And what I'm so excited about in looking at the protos of the line that's coming in for holiday and beyond is we have some incredible outerwear layering system crossover pieces that will be really delivered for the holiday season, so these great running pants that can also be used for cross-country skiing. These -- Sheree mentioned the names, but if you saw the style and detailing behind the "what the fluff?" jackets and how they can be used for running, outerwear, things like cross-country skiing or active outerwear, just being out and about. These -- they're beautiful. They're incredible. The amount of transformability, which is what we always focus on, it's the best I've seen. Chip said this was the best line he's ever seen us do. So we are very excited about the product that we have dropping and our effort to innovate and bring beautiful style into function. And that's our holiday plan.

And in terms of regional performance, in terms of comps, I mean, I'm looking at a breakdown throughout the regions in the U.S., and the numbers are all strong. I'd say the only standouts are some of the newer markets, the Tennessees, the Southeast, where we are newer to the market, and the comps there are, as you'd expect, even higher than the overall average. But again, U.S., we comp-ed about 25%. Canada, fairly consistent, the standout there being Eastern Canada, where again we're a little bit newer to that market than the rest of the country. But generally, comps across the board, pretty strong without any real regional differences.

Our next question comes from Paul Lejuez of Nomura.

A couple of quick ones, just mall versus street locations. Also curious about average ticket online versus in-store. And then just bigger picture, John, starting to build -- or, Christine, just starting to build a nice healthy cash balance in the balance sheet, just wondering if it's time to start thinking about doing something with that, that might be considered shareholder friendly.

Okay. Street versus mall, I assume you're -- I don't know if you're talking about existing stores' performance or new stores.

I'll take both.

Okay. Two-part.

Number two.

Yes, again, there's not really a difference in terms of trend and comp in street versus mall. And as we look at new stores, again, I don't have the exact breakdown, but we're going into a lot of new markets and a lot of them are more street-based markets. So there's...

And lifestyle.

Yes, there's a bit of a shift towards more street and lifestyle versus mall. But that's just the evolution of how we build out markets. In terms of average order value online versus stores, actually the average order value is a little higher online. It's somewhere close to about 130 this quarter, whereas in the stores it's low 100s. And I think your last question was cash. And it's true. We do -- with a strong business model, we're -- we continue to accumulate cash. We have been selectively, as I've mentioned, investing. And we bought the head office building last year, which was a great thing because it gives us certainty in terms of where we're going to live for a while. Opportunistically, we will buy store locations where it's a great location, where we know we want to be forever. So as I said, we bought the Newbury Street store, and there's a couple of other possibles coming up. But that really doesn't address your question because we still are accumulating cash. And as I've said before, we're a high-growth company. There's still lots of opportunity to be using that cash to fuel our ongoing growth, especially as we go international, in addition to making sure that we always have a strong cushion in the event of any economic downturn. But longer term, there's certainly no aversion to returning cash to shareholders at the right time.

And I just want to supplement one thing in the mall versus street from a strategy perspective. We have focused on only being in very strong malls. We've had a real estate strategy of not bundling or taking weaker malls, and we go to life centers or streets, which allow us to really drive our business through community. So I think compared to other retailers, we don't see the variability when you have either low occupancy or vacancies in malls or lower traffic drops in B malls. Because we're only in those stronger malls, we tend to perform very consistently there, and we can do a lot more in our own street and community business to drive traffic in local communities. So the strength of our real estate strategy drives the strength of our business.

Our next question comes from Jim Duffy of Stifel, Nicolaus.

Couple of questions, John. The tax rate, is that reflective of a cash tax rate? Or is that for reporting purposes only? And then I was wondering if you could share some perspective on new store productivity metrics.

Okay. Yes, that is both reported and cash tax. I mean, there's always some minor variations, but this adjustment and the ongoing impact is both cash and reported. In terms of new store performance, as I've been saying the last few quarters, we're opening a lot of new stores in new markets and thrilled that we're opening them, over the last year, at about 1,100 a square foot. I think this quarter, as we looked at stores open less than a year, tracked them against the comp base, they're tracking the equivalent of about 1,150 a square foot. So new stores continue to perform very strong and then comp up strongly after that.

Christine, can you speak to the progress you're making with regionalized merchandising initiatives?

Definitely as we become more sophisticated in our planning and allocation, getting the right product to the right store is always a focus, particularly seasonally. And I think that, really, you'll see our efforts in that really kick in for next year, making sure that we use our advanced allocation system that will help us get right product at the right time, plus time the drops and adjust for weather a little better than we have in the current year and years past.

The final question comes from Erika Maschmeyer of Robert W. Baird.

I just want to -- I just wanted to follow up on ivivva, if you could talk about some of the recent learnings you've had and kind of what you're looking for before a further rollout, and if that could be in the cards for next year. And then how you feel about your inventory levels for the lululemon e-commerce business. It seems like the assortment is somewhat limited versus where you might want to be in the stores. Is that the right read? And if so, how much money do you think you might still be leaving on the table there?

Well, I'm just answering the second one first is, I don't know that I believe -- our e-comm levels of inventory are great. We definitely see, as we've had more color, they're intended to drop for a week only. So if you don't -- or like 3 weeks only. If you don't buy pretty quickly, then you're not going to get them, and that's actually by design. So that's not an inventory level issue. That's a strategy, as part of our scarcity, so that we aren't putting everybody in the same outfit, that there is a limited availability of certain styles and colors. And that's our model. So those aren't inventory challenges. That's the model at work and working beautifully to sell the majority of our products at full price. And that's how our model works. So I wouldn't want to be -- I wouldn't call those inventory problems. That's brand strategy. And your second one for ivivva, what are we looking for? It's really about building the team. We just had the leader of the team go on leave. And so we've had Paul Zaengle, our head of e-commerce, take over the team, and he's doing a great job. He's rolled out the showrooms and brought even, I think, a better leadership and business discipline to the business. So really pleased with how that transition has gone. And we just need to give him some time to get the brand and the business and know it, so that he can lead it into the future expansion. So it's really just the timing for us. From an economics perspective, we're very pleased from a growing brand desire. But it's always our desire to grow organically and be pulled into the market rather than do things that would push. And so it's the more authentic, true belonging that we're looking for with our consumer, even our young woman that purchases at ivivva. We're seeing great product loyalty, and we're going to continue to work on getting those great pieces. And we've seen some feedback over the line people want us to bring back. We got very dance-focused, which has been great. But we've had a lot of people come and ask us for the product that was more broader in use, and so you'll see us bring a little bit more of that back in into the next few seasons because the demand is really there.

Our final question comes from the line of Edward Yruma of KeyBanc.

John, this intercompany purchase agreement change, does it just relate to tax? Or are there other implications across the P&L?

There are no other implications across the P&L because it really is just internal. It's the way we transfer inventory from one of our subsidiaries to others. So it's really just a tax impact from an income statement point of view.

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

I want to thank everyone for joining us and hope you have a great fall. And we'll talk to you soon. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have wonderful day.