Good day, ladies and gentlemen, and thank you for standing by. And welcome to the lululemon athletica First Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It's now my pleasure to turn the floor over to Therese Hayes. Please go ahead.

Good afternoon, everybody, and thank you for joining us on our first quarter 2013 conference call. A copy of today's press release is available in the Investor Relations section of our website at lululemon.com or furnished on Form 8-K with the SEC and available on the commission's website at sec.gov. Shortly after we end this morning -- or this afternoon, a recording of today's call will be available as a replay for 30 days, also available on the website. Hosting our call today is Christine Day, lululemon's CEO; and John Currie, our CFO. 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. We have about one hour for today's call. [Operator Instructions] And with that, I will turn it over to Christine.

Thank you, Therese. Good afternoon, everyone, and thanks for joining us today to talk about our first quarter results. Today, we're joining you from Chicago, where we're holding our AGM and board meeting this week. Before we get into discussing the quarter, I would like to speak to the announcement we made today about my decision to step down from my CEO role here at lululemon. For me, personally, being a part of lululemon over the past 5.5 years has been an incredible journey. I am proud of building a world-class team that has produced one of the best growth, brand and profit stories in retail. The plans have been laid for the next 5 years and a vision for the next 10. I feel that the timing is now right to bring in the next CEO candidate who will drive that 10-year vision. The board has formed a search committee and is executing its CEO succession plan. While I will continue to lead the team until a successor is named, to ensure a smooth transition, in keeping with our efforts to be open and transparent, we are announcing this today so that the board can openly search for the next CEO. And now let's talk about the business. In a way, the past quarter has been one of the most important in our company's history. While we regret that we had a quality issue with our black luon, we are proud of the organization's ability to get luon delivered back into our stores within 90 days of having pulled it from our line, all the while keeping our guests happy and engaged with the brand. While we certainly understood the importance of quality control and running a tight sourcing operation, and we're working on upgrading our infrastructure and controls, the silver lining to this crisis was the big leap forward in our transition to owning our own technical standards and expertise. We are continuing to make key investments in this area. We now have Jennifer Battersby, formally of MAST, working with us on a consulting basis for 5 months to enhance and improve our product processes. And we have had strong round of candidates for our senior supply chain and logistics position. We are also well into the process of interviewing candidates for the EVP Product role. Since the last week in May, we have been delivering luon to our stores that, according to 2 separate sets of tests, one with a third party, demonstrates that our luon performance characteristics shows no significant differences when compared to garments produced from 2007 to 2010. Most importantly, the feedback from our educators and guests has been great, and there is across-the-board excitement about being back in black. Our stores are back to being their cheeky, fun and irreverent selves and are focused at what we are best in the world at, educating our guests. We also achieved some other key milestones in Q1. We continued to expand internationally and have now opened 2 new showrooms in London, Covent Garden and Islington; a showroom in Berlin, Germany; and one in Singapore. We launched our e-Commerce website for our New Zealand guests. Early feedback online from the new communities have been very positive, and we're seeing strong early interest in our product and our complimentary yoga classes and community events. In China, the legal entity is now formed, and we are working towards finalizing our retail license and expect to have 3 showrooms in that market by year end. In North America, we expanded into 7 new communities. And as we always do, each new store location hosted locally inspired community events to celebrate their opening. For example, our meatpacking store's opening party was called "breathe deeply, be lifted." The intention was to inspire our guests through meditation while celebrating the juxtaposition of stillness in a community that's the epicenter of nightlife, fashion and the fast-paced New York City lifestyle. In Brossard, Quebec, our team celebrated with a "back to the roots" themed party, celebrating everything they love about Montréal and the local culture. In Garden City, we held several celebrations. One event included Tata [ph] lounge and the booty bar, which provided graffiti signs where community members could add their own words to celebrate their bodies. And here in Chicago at Deer Park Town Center, they opened their doors to host a book party with a local author, who is creating community by shaking up business as usual. We launched our eGift Cards program on our e-Commerce website on April 24. Our guests love them. And in the 2 weeks leading up to Mother's Day, we saw a significant growth in total gift card sales year-over-year. One of the most exciting community milestones in Q1 was the launch of our new yoga finder app, called Om Finder, which supports our ambassadors and helps guests find a yoga class wherever they are in the world. It launched in April, and in its first month, we surpassed 50% of our annual target for downloads. It has been a huge hit. And most importantly, we are authentically supporting our ambassadors' businesses while helping more people in the world find yoga, new teachers and, hopefully, expanding their practice. There were some very tragic events in the past quarter in countries where we make our product, including the building collapse in Bangladesh and recent strikes in Cambodia. Our sourcing philosophy is to work with a relatively small group of vendor partners, which gives us the opportunity to work very closely with them on all aspects of the business. We have small percentage of our production in Bangladesh, and both vendor partners we work with are in a separate areas of country from Dhaka where the issues with building safety have occurred. The factories we work with are located in Chittagong in an economic zone that pays approximately 30% more in wages and has specific requirements for building safety that reflect international standards. Labor issues can be complex in some of these countries. And recently in Cambodia, there has been a strike outside one of our factories that is being led by a group of workers who organized a minority union that has different views from the current majority union. Our vendor partner, Sabrina, who has been highlighted in the press around this issue, actually raised workers' wages ahead of the government mandate and has better benefits than any other factory in Cambodia. I encourage you to check out our recently launched sustainability microsite, where you can learn more about our sustainability efforts with our stores, ambassadors and vendors. Turning now to product. During the quarter, we regrounded ourselves and why we're best in the world at developing technical athletic apparel that makes our guests look and feel beautiful. Our differentiator is our value proposition. It's all of the amazing elements that benefit our products provide. It's a combination of fit, style, color, performance, compression and of our bottoms. It's our design and product team's ability to hit the optimal amount of each of these elements that keeps us on the leading edge of innovation. It's also important to note that while we're tightening our processes, we'll always push innovative boundaries and we'll continue to disrupt the market. Taking risks means we'll will make a few mistakes along the way. But as part of our DNA, it has been a driving force behind our success to date. We continue to explore new categories once again this year through fewer but expanded capsules to build our future product lines. Here is what we learned: early feedback on our tennis and golf capsule, which is in stores now, has been terrific, particularly our polo top, tennis skirt and club short. In fact, we sold out of the polo online in less than 48 hours. Our hot-hitter tennis dress was more of a traditional tennis outfit and didn't do as well, which reminds us we do our best when we design products that have great crossover appeal. Our continued foray into swim continues to be very promising. We implemented learnings from last year's capsules and have had strong cross-channel rollout of imagery education, and our guests love it. The one learning this year is around timing. Our guests are telling us they would like the selection now in June, so we'll look to adjusting our cadence for swim next year. Our cycling capsule continued to be a great opportunity to test our technical fabrics and construction. However, we didn't perform as well as last year as the prints were more popular than the color black that we had this year. So we'll take that feedback and look at new ideas for next year. And that's what's great about capsules. We can use them to test out ideas and explore new opportunities for the brand, as we continue to create the future. Turning to Men's. It continues to be a key area of focus for our team, as we put the building blocks in place to grow this area of our business. We're well set up for Father's Day next weekend with inventory and selection in polos, shorts and technical tops. We're specifically excited about Men's polos. We took feedback from last year and added more color to our polos and more variety and comfort and performance fabrics. They're being very well received so far. Felix del Toro has completed his immersion and will take the helm of Men's this quarter. The stores that he worked in will miss his merchandise and selling skills. We saw comp increases in the Men's departments in the stores he trained in. He is excited to drive this opportunity to the next level. We also have more depth and colors in Men's shorts as well. And our technical tops, like the Metal Vents and Precise Tee, are available in more colors than ever. In fact, you'll see greater color in all of our Men's styles now and in the coming summer months. With that, I'm going to turn it over to John to go through the numbers.

Thanks, Christine. I'll begin by reviewing the details of our first quarter of 2013, and then I'll update you on our outlook for the second quarter and the full year of fiscal 2013. For the first quarter, total net revenue rose 21% to $345.8 million from $285.7 million in the first quarter of 2012. The increase in revenue was driven by comparable store sales growth of 7% on a constant dollar basis; the addition of 38 net new corporate-owned stores since Q1 of 2012, 29 of those new stores in the United States, 1 store in Canada, 6 in Australia, 1 in New Zealand and 1 ivivva store; direct-to-consumer sales, which increased by 40.4% or $15.5 million. If we included e-Commerce as a store in our comp calculations, our comps would be reported as 12% on a constant dollar basis and offset with a foreign exchange impact of a lower Canadian and Australian dollar, which had the effect of decreasing reported revenues by $2.6 million or 0.7%. The adverse impact on revenue of the luon issue was within the range of what we estimated when we guided last quarter. During the quarter, we opened 6 corporate-owned lululemon stores in the U.S. and 1 in Australia. We ended the quarter with 218 total stores versus 180 a year ago. There are 168 stores in our comp base, 39 of those in Canada, 105 in the United States, 18 in Australia and New Zealand and 6 ivivva stores. We also opened 3 international showrooms during the second quarter, 2 in the U.K. and 1 in Singapore, for a total of 6 in Asia and Europe at the end of Q1. At the end of the quarter, we operated a total of 51 showrooms, including 6 ivivva showrooms. Corporate-owned stores represented 77.9% of total revenue or $269.4 million versus 80.1% or $228.8 million in the first quarter of last year. Revenues from our direct-to-consumer channel totaled $54 million or 15.6% of total revenue versus $38.4 million or 13.5% of total revenue in the first quarter of last year. Other revenue, which includes wholesale, showrooms and outlets, totaled $22.5 million or $6.5 million of revenue in the first quarter versus $18.5 million or $6.4 million of revenue in the first quarter of last year. Gross profit for the first quarter was $170.7 million or 49.4% of net revenue compared to $157.3 million or 55% of net revenue in Q1 of 2012. The factors that contributed to this 560 basis point decrease in gross margin were the $17.5 million write-off of unsellable luons that did not meet our standards, which had a 510 basis point impact on gross margin. The luon write-off consisted of on-hand delivery at our distribution -- sorry, inventory at our distribution center, including store pullbacks and product on order held at our factories, offset with estimated duty recoveries. This was slightly higher than the $17 million estimated at the time we announced the issue, primarily due to higher-than-anticipated percentage completion of some of the work in progress at that time. Product margin decline of 90 basis points due to a lower mix of higher-margin core items, such as luon, and slightly higher markdowns compared to the first quarter of 2012, in part due to winter markdown product allocated to stores during the luon shortage. These were offset with 40 basis points of leverage in product and supply chain team costs. SG&A expenses were $104.8 million or 30.3% of net revenue compared with $84.2 million or 29.4% of net revenue for the same period last year. The 24.5% SG&A dollar increase is due to an increase in store labor and operating expenses associated with new stores, showrooms and outlets, as well as increases at existing locations due to higher sales volumes; increased variable operating costs associated with our e-Commerce business, consistent with the 40% year-over-year revenue growth in this channel; and increases in expenses at our store support center, including salaries, administrative expenses, professional fees, management incentive and stock-based compensation associated with the growth of our business. And finally, these were offset with the weaker Canadian and Australian dollar, which decreased SG&A by $900,000 or 0.8%. As a percentage of revenue, our first quarter SG&A deleveraged 90 basis points, due primarily to the luon shortage, which resulted in lower-than-planned sales, while we continued to invest in our strategic initiatives, including international expansion and key IT systems. As a result, operating income for the first quarter was $65.9 million or 19.1% of net revenue compared with $73.1 million or 25.6% of net revenue in Q1 of 2012. Tax expense for the quarter was $20.1 million at a tax rate of 29.8% compared to $27 million at a tax rate of 36.5% in the first quarter of 2012. The lower effective tax rate reflects the ongoing impact of revised intercompany pricing agreements. Net income for the quarter was $47.3 million or $0.32 per diluted share. This compares with net income of $46.6 million or $0.32 per diluted share for the first quarter of 2012. Our weighted average diluted shares outstanding for the quarter were $145.8 million versus $145.6 million a year ago. Capital expenditures were $21 million for the quarter compared with $12.7 million in the first quarter of last year, with the increase associated with new stores, renovations, IT and head office capital. Turning to our balance sheet highlights. We ended the quarter with $588.4 million in cash and cash equivalents. Inventory at the end of the first quarter was $143.7 million or 33.5% higher than at the end of the first quarter of 2012, slightly higher than our forward sales growth expectations. A portion of this is timing, as we took earlier possession of summer product in April versus May last year due to a change in our buying calendar. But we also had certain spring styles that did not perform to plan, and those will be sold through our outlets and other exit channels through the year. This now leads me to our outlook for the second quarter and full fiscal year 2013. This outlook assumes a Canadian dollar at $0.97 with the U.S. dollar and 11 new store openings: 7 in the U.S., 1 in Canada, 2 in Australia and 1 ivivva. We currently anticipate revenue in the range of $340 million to $345 million. This is based on comparable store sales percentage increase of 5% to 7% on a constant dollar basis compared to the second quarter of 2012. Our guidance for the second quarter reflects that we began to deliver certain black luon styles, such as Groove Pants, Astro Pants and Wunder Unders, beginning late May. And we will continue to for the remainder of the quarter, based on estimated product flow. However, we're getting back into stock gradually as production and delivery of these styles ramps up, and we'll not be fully back in stock until the end of Q2. We expect gross margin to be in the low 50s, down from a year ago. Primarily due to deleverage against fixed costs as sales are impacted by some continued black luon shortages, lower merchandise margins due to a lower mix of higher-margin core product and the impact of foreign exchange due to a weaker Canadian and Australian dollar compared to last year. We're also making incremental investments in the areas of testing and quality assurance protocols; raw material teams; increased factory oversight, along with training and education delivery that will increase expenses, including cost of -- included in cost of goods sold. We expect SG&A deleverage as a percentage of revenue compared to the second quarter of 2012, which is driven primarily from the run rate of key systems investments made last year, strategic investments in 2013 and our continued focus on international expansion. Our SG&A also reflects preopening costs related to the 11 stores planned to open in Q2 and additional stores planned to open in early Q3 of 2013. So assuming a tax rate of 30% and 146 million diluted average shares outstanding, we expect diluted earnings per share in the first quarter to be in the range of $0.33 to $0.35 per share. For the full fiscal year 2013, we're still targeting to open up 43 corporate-owned stores, including our Australia stores and ivivva locations. We are also on pace to open up to 15 international showrooms this year. We expect net revenue for the year to be in the range of $1.645 million (sic) [billion] to $1.665 billion. For the year, we expect gross margin to be below our long-term 55% target, with gross margin in the low 50s in the third quarter and increasing to the mid-50s in the fourth quarter. Temporary suspension of production at our factories and mills, along with chasing noneffected styles to even out product assortment in Q2, did have an adverse impact in fall production, which will result in increased airfreight to be incurred in the back half of the year. As mentioned earlier, our gross margin guidance for the remainder of the year also reflects the impact of a weaker Canadian dollar, along with investments that are being made in quality and product development. We will also begin incurring some expenses associated with the setup of our second U.S. distribution center, which we plan on opening in the second half of 2014. We are now down to choosing between our final East Coast potential locations to complement our existing U.S. DC in Sumner, Washington and anticipate it could manage as much as 65% to 70% of our volume in the next 5 years and play an important role in efficiently flowing product to our stores and guests. We expect some SG&A deleverage as a percent of revenue compared to 2012, due in part to lost sales from the product shortage, along with continuing to progress with our long-term systems and supply chain roadmap and together with international seeding and planning. As a result, we expect our overall operating margin to deleverage from 2012 and our fiscal year diluted earnings per share to be approximately $1.96 to $2.01. This is based on 146.2 million diluted weighted average shares outstanding, and it assumes an effective tax rate of 30%. We expect capital expenditures to be between $95 million and $100 million for fiscal 2013, reflecting new store build-outs, renovation capital for existing stores, IT and other head office capital, including expansion of our existing premises. And with that, I'll open it up for questions.

[Operator Instructions] And our first question will come from the line of Camilo Lyon with Canaccord Genuity.

Christine or John, I was hoping you could talk about what you're seeing over the last couple of weeks with the restocking of the luon back on the shelves. Has there been a release of the pent-up demand? Does the consumer understand that they're back -- that you're back in stock? And what is really the message that you're communicating to them about being in the greater in-stock position over the coming few weeks as the quarter starts to reach its end?

I like -- we're doing a soft launch really of kind of our back in black, as all the stores get fully up to speed. And most importantly, the e-Commerce just really started to release its black stock this week. So you'll see us escalate the messages out and with an email and with some cute online things that will start happening towards the middle of the month.

Our next question will come from the line of Lindsay Drucker Mann with Goldman Sachs.

Christine, I was hoping you could give a little bit more detail on the reason for your departure and also a little bit more color on thoughts of succession plan.

Great. This was a personal decision of mine. And look, it's never a perfect time to leave a company that you love. I've had a great run at lululemon over the past 5.5 years, and I'm really proud of what the team and I have accomplished. And now, as the company embarks really on that next 10-year vision, the timing is right to bring in a new person to lead. And I have complete confidence in the succession planning process. We have also a great leadership team in place. And I really look forward to welcoming the new CEO.

Our next question will come from Sharon Zackfia with William Blair.

I was hoping, if you kind of go back before the luon shortage, there was a lot of discussion about ways to improve inventory flow and product mix, maybe localizing it more for markets in the back half of this year. Can you give us an update on kind of where you are with cross-channel visibility, some of the systems and the processes you're rolling out in the back half of this year that could better optimize sales?

Yes. We -- the first step in that was changing the timing from a 3-season to a 4-season calendar, so we got more of the seasonal lines right. The next step is that we're now designing lines going forward, starting with spring of next year, that optimize hot markets and colder markets, as well as temperate climates. So that we can really address product at the right time and the right place. And so e-Commerce will have a fuller line. And then each store would have seasonally appropriate. And what will that will mean, for instance, is some of the things that we've learned this year, which showed up in the numbers, is if the line drops long pants in February, it's perfect for the colder climates but it's not perfect for Florida and LA. So by next February, what you'll see us doing is there'll be an actually timed release of product that's appropriate for the market. So we'll start lighter colors sooner in the south and hot climates. We'll start the transition to crops sooner in those markets, so we've built the capacity to design the lines for those specific drops and the systems that will allow us to flow and do store-level planning. And then we'll move into more of a localized, even a more localized buy strategy, as we move forward and a much more fuller integration of e-Commerce and stores. Some of the -- one guest experience system that we're putting together will allow a guest to order from the store and ship it to the store or their home. So we are moving to a one-inventory condition. But that will -- that's still a little further out.

Our next question will come from the line of Adrienne Tennant with Janney.

First, Christine, thanks for all your hard work building the company over the past 5 years. Can you talk about the regions of growth outside the U.S. and Canada, specifically Northern Europe and Asia, as well as Australia? And what we should expect as far as sort of prepping the environment in those regions and how long before we were to see lulu move to opening stores?

Okay. Well, we're very excited about very -- saw very strong opening with our Singapore showroom that we recently did and very excited about the licenses that we just received in China, which allows us to move forward with our showroom strategy there. We've seen very strong demand particularly in the Shanghai market for the product, and this allows us to go there. We're not as far along in securing a store site in Hong Kong as I'd like to be. It's proving a little more difficult to get the size and location of store than we had hoped. On the flip side, you're seeing us open more showrooms in London, and we're actively looking for our first sites in that marketplace. We've opened showrooms in Germany as well. So we feel very strongly about how those markets are performing. Our e-Commerce business is growing very nicely in those markets as well. So we're seeing the crossover effect from showrooms and strategic sales building into online sales, which is a key indicator of our ability to grow demand. So I would say that we're on track. And you'll see stores in the London market next year and that we're proceeding with building out as quickly as we can. Hong Kong, that's real estate dependent. But we will definitely be seeding more aggressively in Asia for showrooms.

Our next question will come from Lorraine Hutchinson with Bank of America.

Just wanted to follow up on the gross margin commentaries. It sounds like some of the issues will linger over the next few quarters. And I was hoping that you could quantify how much of this is the spring styles that you'll need to clear and how much is ongoing supply chain costs that we should build into our longer-term targets?

Let's start with the longer-term supply chain costs. As I mentioned, we're investing in the quality teams for testing, both internal headcount and additional third-party testing. And we're building a raw material teams out. And through the balance of this year, that's going to amount to about $4.5 million with a similar run rate beyond that. Other factors, as I said, inventory is a little bit high relative to our desired number of forward weeks, which is similar to where we ended the year. And I talked about that in the last call. So we did some clearance of winter product in the spring season, which -- the timing worked out okay because it gave us an opportunity to put winter markdown product back in the stores and give the guest a reason to keep coming back even with the luon missing. But even with that, as I said, some of the spring styles didn't hit our plan. Some of the buy was to deep in some new styles. And so again, that's reflected in the gross margin guidance for the balance of the year. It's going to result in our product being marked down sort of closer to 15% versus our run rate that's been 10% to 12%. So it's not an enormous difference but it's a little bit chunkier coming into Q2.

Our next question will come from Kimberly Greenberger with Morgan Stanley.

John, I'm wondering if you can help us think about how to forecast inventory through the rest of the year. And as you reflect on the last couple of years at lulu, is this -- you talked about some misses in the spring product and product -- in styles that you'll need to save for the outlets. Is this a reflection of just some issues in execution this spring? Or is this something that you see on a normal seasonal basis?

No, I think it's a reflection on -- in -- some imperfections both in the buy and some of the design for the spring product, which really goes back 9 months earlier when it was placed. We do feel a lot better about the product coming in for the balance of the year.

Yes. And I would just add some color to that. What we really saw was the color blocking. We did it in -- cross too many styles and didn't offer enough basic neutrals that went with that. So we were a little off formula with the buy, particularly in the earlier part of spring.

Our next question will come from Sam Poser with Sterne Agee.

I just have 2 things. Number one, when will the Groove -- the Groove and the Astro Pants are in the stores. When did the crop show back up? And two, where -- what are you looking for in a -- in your successor? And how involved are you going to be in that process?

The Wunder Under crops, we just received some of the very first deliveries into the warehouse and started some QA. We're doing a lot more quality checks in the process. So we're just completing the quality assurance in that, so we do expect to have them start shipping out to the stores in the next week or so. And really, a CEO succession is led by the board. So that is the right place for it to be, and our board is very qualified to manage that process.

Our next question will come from Dana Telsey with Telsey Advisory Group.

Christine, best of luck to you. Want to better understand -- the original expectation for black luon, I believe, was $57 million to $67 million in the sales shortage and $12 million to $17 million first quarter. Was that less in terms of EPS impact? Was it more $0.09 than the $0.11 to $0.13? And are you still looking for an overall $0.25 to $0.27 impact?

Okay. So Q1 -- and again, it's not sort of a GAAP definition but estimate the impact in Q1 was about $0.12 a share. In terms of the overall -- I think this is part of your question, the overall revenue shortfall that we talked about last quarter was at the high end, that's $67 million, with our ability to get some luon product back in earlier. As I said, it's trickling in slowly, but we think that the impact will be about $15 million better than that original estimate, and that will be primarily a Q2 benefit. Again, just extrapolating our own modeling of the impact overall on the year, it's about $0.21 a share.

Our next question will come from the line of Bob Drbul with Barclays.

Christine, I just have one quick question for you, which is, do you know what you want to do next in terms of your game plan in your career?

Well, first of all, I'm here for a while and I will be showing up work on Monday, business as usual. So I'm not distracting myself with anything else at the moment. My focus is really on ensuring a smooth transition and delivering a strong back half of the year for right now.

Our next question will come from Janet Kloppenburg with JJK Research.

Christine, I wanted to thank you for all your leadership and congratulate you on building such a great brand. Just a couple of questions. John, it sounds like the markdowns on the -- some of the markdowns are higher than expected. And my question is, will they all be cleared here in the second quarter? Is that assumed in your guidance? And secondly, Christine, does the search for the -- for a new CEO preclude the appointment of a Chief Merchant? I don't think you call that person a Chief Merchant but as a Chief Product Manager or whatever the title is. Does one -- the CEO position have to be filled before you bring in the product person?

No. So let's start with the second one and then let John go. We are still proceeding and have a very strong list of candidates for what we're -- remember, we split the role into 2, so an SVP kind of Product Operations. We're also adding the SVP of Logistics. And then, we're calling it the Executive Vice President of Design and Merchandising. It's the position that you're referring to, and all 3 searches are proceeding.

And to answer your first question, I mean, I wouldn't say we'd be completely back to our ideal inventory level by the end of Q2. That's a little bit too quick. But by -- certainly by Q3, we'll clear the -- again, this isn't a huge backlog, and we have the outlets to handle it. And I think we'll be back in a balanced inventory position by Q3.

And we really expect to see, especially as we get back into back -- black pants, because there's definitely a ratio between plants and tops. And the more pants we have, the more tops we sell. And so some of this was in that tops inventory, and we do expect that to balance out.

Our next question will come from Christian Buss with Credit Suisse.

Yes. I was wondering if you could provide some perspective on how you're going to engage with your customers now that you have the pants back in stock? And what you're going to do to make sure they understand that these kind of quality issues won't happen again?

I think there is a full back-in-black strategy that we'll be executing. And as I said earlier in the call, there's a soft launch until we are fully back in stock. And then, there is a complete guest education, including new style and fit guides that are online. And there's also a guest feedback forum. There's videos online. There's an online monitor site called Ask For It [ph]. So if you do go to our website, you will actually see already today far more support in education for the customer, and we'll begin more unique lululemon outreach in the middle of July.

Our next question will come from Betty Chen with Wedbush Securities.

I was wondering, John, if you can talk a little bit about SG&A. I know you mentioned that we should expect that to delever in Q2 as well as the back half, partly for some of the investments you're making in supply chain. Is there any way you can help us quantify some of those buckets, so we can figure out how much of that would be ongoing into next year? And then, could you talk about any comp performances between Canada, U.S. and Australia?

Okay. Maybe I'll start with the second one first. And again, it's a strange quarter to read much into comps because of the luon dip. But as we've seen in recent quarters, the U.S. continues to be early in its brand awareness. And so the comp is strong there. The comp in Canada was sort of mid-single-digit negatives, it's trending a little bit better than that, of course, if the luon had been there, and a little bit better than we saw in Q4 of last year. But -- and it was somewhat negative. And then on -- Australia's comping in the teens, again, earlier in the brand awareness and continuing to ramp up towards the higher comp base average. Investments in SG&A, I mean, I talked about the pieces that actually end up in cost of sales, which is where we're investing a lot of the new dollars in terms of testing and quality. Beyond that, it's really the same things we've talked about in the past. We have a very heavy IT roadmap. We've implemented significant systems in 2012, and we have several going live this year. The run rate of operating those 2012 systems, coupled with the spend this year, is probably the biggest, single area. And then as I've said in the past, we continue to not just roll out the showrooms internationally, but we're building the teams to run Asia and to run Europe. We spend significant amount of time onboarding those people. And so those expenditures are happening this year. And, I've said this in the past, it's probably high-single-digit millions invested and just based on the international plan this year. So I mean, those are a couple of the biggest buckets.

Our next question will come from Paul Lejuez with Wells Fargo.

I'm just curious in terms of the comp performance that you saw during the quarter. How much did the luon issue hurt you guys in the U.S. versus Canada? And I guess I'm wondering, was it a conversion issue? Or did you actually see decline in traffic because of the publicity around the luon issue? And then, I guess, second piece of that is why in the second quarter, as you're getting back into these styles, do you forecast a lower comp than you saw in the first quarter?

Okay. And remember, in the first quarter, we had full stock of luon for the first 6 weeks. And so you have to keep that in mind when you're comparing to Q2, where it's slowly trickling in, in the second half. Sorry, I'm trying to think the earlier part of the question.

Traffic. Well, it varied by channel, which was e-Commerce, we saw a lot of traffic, people looking and double-back and checking.

Yes, I think it's curiosity traffic.

Yes. So -- and -- so we saw a lot of unproductive traffic. And then we definitely saw in the stores traffic held relatively whole with a couple of exceptions, and it was really on conversion. And then because we had more markdowns, there was a decrease in AUR as well.

Yes. And a slightly, slightly lower spend per basket, again, perhaps in part because the luon pants were not part of the basket.

Yes. And we definitely see more impact to -- you're also asking about U.S., Canada. We saw more impact to Canada, because they are definitely more of a luon customer. And in the States, because they already had a broader base and tend to like the luxtreme fabric in the running pants, we saw more transition to those bottoms until we ran out of stock than we did in Canada.

Our next question will come from Jennifer Black with Jennifer Black & Associates.

Okay. I wondered if you can talk about jackets as a category. Will you be offering a more diverse offering, including longer length?

We will, and I actually was going to go there. We definitely had too many short jackets and not enough long. We just recently dropped long jackets, and we saw them moving very quickly. So you will see a broader assortment, including long jackets all the time going forward.

And are you going to bring back some of the reversible jackets and your other iconic pieces?

We haven't actually focused on the reversible. But I will bring that back to the team. And yes to the iconic pieces, plus we've had some new designers in. And there's a really great lineup of jackets coming, particularly for the fall that I think you'll be very happy with. And lots of black, Jennifer.

Our next question comes from Omar Saad with ISI Group.

I wanted to ask what, if anything, you were able to kind of learn from your guest, from your customer in the period where you didn't have the iconic black lululemon "yoga pants." That's been such a huge success. In your conversations with your customers, what did you learn about the brand and how they perceive it? And how tied the brand is or isn't to that iconic pant? And then I'd also just wonder if, Christine, you're going to -- you plan to stay on as a member of the board.

No to the second one. I won't stay on, on the board. So what we learned, with a lot of very interesting things, was what they love about luon, what they love about our pants. And I think even for us, frankly, internally, communicating that it was more than just about coverage and it really is about how everything works together from compression, fit, style, that there really is no comparison. And the guests really learned how hard this fabric is to make. And when they tried other pants, we got a lot of feedback that they were not comparable. So I think, even though we maybe saw some substitution occurring, I think the bounce-back in loyalty and comments was really clear. And so we know that our sweet spot is all of those things together and how they make the woman look and feel when she's wearing the pants. And that's what we're committed to delivering with high quality. And I think that we have to keep earning that guest's trust by being very, very stringent about quality. But they also know we stand for it, and we got a lot of positive feedback about hitting our own stop button and not letting quality deteriorate and very positive that we did that. So we absolutely know that quality and fit, as well as feel, compression, function, are absolutely essential to what lululemon stands for. And that's what we plan on continuing to deliver to our guests.

Our next question will come from Howard Tubin with RBC Capital Markets.

Can you maybe, in just very general terms, tell us what the difference is between the kind of the new luon that's coming in now versus the luon you had to pull off the shelves? I know you said it's kind of consistent with the historical luon. But what exactly has changed?

I think there's quite a few things that we learned in this whole process. And I think number one was, if there were 10 technical specs, we were probably controlling 4. And so we had to become our own expert in depth in all of the technical specs, not just relying on our factory partners for some of them. We also, as we grew, had not managed grading, for instance, at every single factory from one master pattern. And with our tolerances, we -- as we really dug deep and did a lot of investigation, found that a size 2 sewn to the edge of a -- large end of the tolerance in one factory was too close to a 4 sewn to the small tolerance in another factory. So we brought in a master pattern grader, and we sent -- every single factory has all the same patterns now. And we also reduced our tolerances from 1 inch to 0.5 inch, which takes more to sew, which is part of the reason why it took us a little longer to get back in stock because the factories had to sew to a new technical level. And that's just some examples. We also added more tests and quality control tests, that John spoke to. We've added a lot more testing to the raw material stage to make sure that we're getting exactly the product. And we now do more weight test and take anything out of pants that would be at the low end and put them more into tops or looser styles. So really reinvented our whole quality control process end to end to make sure that we were delivering a great pant, plus we do a lot more on-site inspections when they arrive here, just to make extra sure.

Our next question will come from John Morris with BMO Capital.

Christine, my thanks for all your contributions as well and wish you the best. John, with respect to the inventory and kind of the planning as you go forward to Q3, did -- have you guys gone ahead and pulled forward product? And I'm just wondering if that had affected some of the planning that we're talking about for Q3. And then my second question is just so we have a sense of timing on progress of the search, when was the search committee formed for the new CEO candidate?

And I'll just quickly answer your first one. Yes, I mean, we have taken efforts to pull product forward, and so that's part of what you're seeing. And it creates some of the airfreight and other stress on the second half of the year.

I notified the board on Friday of my decision. And the search committee was already formed over the weekend, and they're activating the succession plan that we have in place.

Our next question will come from the line of John Zolidis with The Buckingham Research.

Could you give us the Men's comp and tell us how that did in the U.S. and in Canada?

Okay, pretty granular. Men's business is getting some traction. It was still about 12.5% of the overall mix for the quarter. I can't remember the exact comp on Men's and certainly can't remember the split between countries. But in general, Men's was comping higher than the rest of the business.

Particularly in the last few weeks of the quarter and into the...

Yes, at the end of the quarter and coming into this quarter, we're seeing real strength showing up in Men's.

Yes, when we dropped the new color, and we're very excited about the line that's in the store. And Men's has been beating plan for the last few weeks. So we're very excited, and it seems our guest is very excited, which is even more important.

Our next question comes from the line of Liz Dunn with Macquarie.

Let me just add to what everyone else has said. Christine, it's been a real just pleasure to watch you grow and evolve this company. So best of luck. I know you'll be around for a while, but I just wanted to get that out. Can you tell me whether or not the lack of luon sort of exacerbated some of these issues you've had with some of the colors and whether that was part of the problem? And then just as a follow-up to another person's question, do you think that any of this has had any long-term impact on brand perception with your core customer base?

We're definitely not hearing that from our core customer base. I think, actually, it reinforced why they love our pants so much. And we're definitely hearing that there. There is definitely a relationship between bottoms and tops. And so if somebody comes in looking for the bottoms, and we didn't have the black luon -- and there's a definitely relationship between black and color. So we had an awful lot of bright colors, starting earlier this year in January and moving through Q2. So when there's not a neutral color like black to break up the color, it gets color on color, which was a trend for the season, but we were probably overdoing it with having no black. And we had less neutrals in the line. So that meant the colors -- our learning in that was the colors didn't sell through at the same rate. And we've made those adjustments and tweaks for the back half of the year. And we're already definitely seeing a pickup with black being back in the stores. And we've had to take a little bit of black out of tops in order to -- luon, in particular, to move it into bottoms. And that will start to rebalance in Q3.

Our next question will come from the line of Huei Suen Ng with CLSA.

I'm just wondering how happy you are with the product mix right now, fashion versus basics, and also between the yoga versus other styles, run and cycle. And also, just quickly, any color on the productivity for international showrooms versus U.S. would be great.

We're definitely fuller on actually basics. So it's very much a more athletic technical line with lots of color at the moment. So it's actually very low-risk inventory. And what you'll see us shift to in the back half of the year, particularly for the back-to-school and then holiday season, is a little bit more of those specialty jackets that we're known for, a little bit more of the cotton and a broader line with more fashion details in it.

And just on the international showrooms, as we said in the past, the 2 Hong Kong showrooms performed very strong. That's why we're already working hard to find a full store location. We're also really pleased with the early performance of the Singapore showroom. And then, in Europe, where we opened 2 new showrooms in London and actually 1 in Berlin after the end of the quarter, so it's really too new to talk about. Again, consistent with how we've been doing with the earlier showroom in London, in general, better than the U.S. showrooms, even though it's very early in the brand awareness there.

Our next question will come from Mark [indiscernible].

This is Blair Pierson [ph] for Mark [ph]. Real quick on the management transition, Christine, the press release mentioned looking for a CEO to drive the next phase of growth. Could you maybe hit on what you and the board are thinking of as far as the top key competencies that you'd be looking for someone to come in with?

Yes, I think that's really for the board to say. But definitely, somebody who's managed in a high-growth, global and definitely a product background would be some, I think, the key attributes. And, obviously, somebody who will manage well within the lululemon culture and value set that we've established and ready to grow a premium brand.

Our next question comes from Rob Wilson, Tiburon Research.

John, you said there's a $17.5 million charge to inventory. Could you help us break that out between the stores and the direct-to-customer channels?

Well, we really keep one pool of inventory, even though -- yes, I mean, we sort of buy for e-Commerce like one big store. But I think maybe to answer your question, e-Commerce is roughly 16% of our revenue, and the impact on e-Commerce is proportionate to that ratio.

And our final question will come from Faye Landes with Cowen.

I was just trying to figure out -- and first of all, Christine, I'm quite sorry to know that you won't be here -- much longer here at lulu but -- I'm sort of stunned. But I was hoping -- you talked about products that didn't work, did work. I'm trying to figure this out because it's very -- the comments are kind of piecemeal. And I -- are there things that were -- everything you listed was things that worked worse than expected. Were there -- can you talk about things that worked better than expected overall with the whole -- x luon with the whole situation, were results better or worse than expected? Were there standouts in either direction because we heard quite a few things that didn't work, that needed tweaking going forward.

Yes. We did talk about some things that did work, too, Faye. Like the swimsuit capsule was very, very successful. The golf and tennis capsule was very, very successful. So those were the good new things. As well as we saw more conversion to color in bottoms than we really did anticipate in the original projections we gave for luon. And particularly in the U.S., more substitution for the black tuxedo, swift and other fabrics that are in our running bottoms. So that -- and which is mainly the luxtreme. So until we started to run out of that inventory, we definitely saw conversion in switch, which gave us some upside. And we definitely saw strong sell-through of color. We just had a lot of colors and fewer neutrals. So I think we could have done better had we had more neutrals in the tops. And then we put color blocking in too many things. But we saw strong momentum in the basics of the business. Both yoga and the run category, in particular, did very well.

And at this time, that concludes our time for questions. I'd like to turn the call back over to Christine Day for any additional or closing remarks.

Well, thank you, everyone. And I particularly want to say thank you for all of your graciousness in supporting lululemon and me during my journey here as a CEO. It's been a pleasure to work with all of you. Thank you.

Thank you, presenters. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.