Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Third Quarter 2018 Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica inc. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's Third Quarter Earnings Conference Call. Joining me today to talk about our results are Calvin McDonald, CEO; Stuart Haselden, COO; PJ Guido, CFO; Sun Choe, our Chief Product Officer, is also with us and will be available during the Q&A portion of the call. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecasts of certain aspects of lululemon's future. These statements are based on current information, which we have assessed but which, by its nature, is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our Investors site where you'll find a summary of our key financial operating statistics for the third quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour. [Operator Instructions] And now, I'd like to turn the call over to Calvin.

Thank you, Howard, and welcome, everyone, to our quarter 3 earnings call. I'm excited to kick off this quarter's call, especially since it represents my first quarter as CEO of lululemon. And I have to tell you that with everyday in this position, I'm more enthusiastic than ever about the brand, our people and the opportunities ahead. Over the past 3 months, it's been fantastic to see lululemon from all angles, from the educators in our stores to new guests in China, to the creative team imagining our next product categories and to the many teams at our Store Support Centres across our markets. The strong momentum in our business continued during the quarter, and we see many opportunities to build upon this success in the near and long term. On today's call, I'll first share with you some insights and highlights before handing it off to Stuart for a more in-depth discussion on our quarter 3 results. PJ will finish up our prepared remarks with a detailed quarter 3 financial review and our guidance outlook. Then we'll be happy to take your questions. Looking at our quarter 3 results, all of us on the senior leadership team first want to thank our teams around the world for their hard work, enthusiasm and commitment to delighting our guests every day. All of these efforts have contributed to our robust performance this quarter. What's so exciting to me about our business is the broad-based strength we're continuing to see across our channels, categories and geographies, fueled by our innovative products and our unique community-based brand-building initiatives. Before speaking to some of our key product initiatives, I'd like to share with you my distinct pleasure in recognizing a proven leader at lululemon. Sun Choe, with her well-deserved promotion to our Chief Product Officer, which I announced earlier this quarter, has been heading up the entire product organization since February. Her leadership and creativity are evident in the examples you're going to hear about this afternoon. It's important to all of us that lululemon remain a product-led organization, and Sun's experience and strengths will allow us to live into this vision. We have the brand permission to move into so many new categories, determining which ones and at what pace is the exciting work we're currently in. Sun and her team are working on these future innovations to help ensure our pipeline remains robust, and I'm excited to be part of this work and thrilled with what we will continue to be bringing to market. As an example of this dynamic innovation, this fall, you saw the early results of our strategic decision to focus on outerwear in a bigger way, and guest response to the assortment has been fantastic. Bras are another important opportunity. The launch of Like Nothing, our first bra design to be worn all day, has performed very well in the quarter. And our collaboration with Francesca Hayward and the Royal Opera House in London is another example of how we successfully leverage our relationships with cultural influencers relevant to our collective. Sun is with us on the call today and will be available for any questions you may have around our product. Switching gears, I'd like to highlight 2 important strategies that we moved forward in North America this quarter, both which leverage our strengths in brick-and-mortar. They are buy online, pick up in-store and our seasonal store rollout. The [ build-this ] pilot is now live in 35 stores across 4 markets. It's proceeding well and helps us leverage our capabilities across channels. Our seasonal store strategy is now in full swing for the holiday season, with 43 open at the end of quarter 3 and 6 more planned for quarter 4. Not only do these stores increase convenience for our existing guests during this hectic time of year, but they also attract a significant number of new guests to our brand. Based on last year's performance, we expect to see approximately 40% of guests in these stores new to lululemon. While growth outside of North America holds great potential for us, the opportunity within the U.S. and Canada remains our largest and most important in the near term. Our agile store formats, including colocated, local standard, seasonal and experiential, combined with our exciting omni-experience initiatives, will allow us to keep expanding our square footage while creating a very flexible and unique store network. This potential was clear during my market visits this quarter, spending time with our store teams in New York, Chicago, San Francisco, Seattle, L.A. and, of course, Vancouver. In all of these visits, we shared ideas that we will be bringing to life in the future, including new and innovative ways to connect with our local communities, experiential retail and ways to better leverage our online and off-line ecosystems. The creativity within our store teams was both contagious and inspiring. I've also been spending a great deal of time with the talented people in our brand and community teams and sharing with them some of the insights I've gained over the years. In quarter 3, we continue to engage with our guests as only lululemon can through our SeaWheeze Half Marathon in Sunset Festival in Vancouver and our Ghost Race virtual runs across 12 cities in the U.S. and Canada. During SeaWheeze, over 10,000 runners descended on Vancouver to take part in the race and attend the festival, which included yoga and, of course, an entertaining dance party. With this year's Ghost Race, we partnered with Strava again and remained the #1 run community on their app. We had 35,000 guests registered for the race, of which nearly half were men and 20% were new to lululemon. Outside of North America, our activations were equally robust, included our third annual Unroll China event across 8 cities and our first-ever Sweatlife Festival in Berlin. I'm also proud of how we brought our 20th birthday to life. During this event, which was truly a global activation, we updated our iconic manifesto, launched a capsule product collection and held celebrations in key markets around the globe. The passion our guests and educators have for our brand is clear, but we believe that, over time, we can make our brand expression even stronger and more consistent across channels and touch points. Our brand has so many exciting messages to communicate, determining how, where, when and to whom we tell is the exciting work we are in now. Becoming better storytellers is a key focus for us, driving our brand awareness and acquiring even more guests into our brand. Building on our ability to acquire new guests, I'd like to share with you some details of an exciting test we began during the quarter, our first-ever loyalty program. lululemon has always had a strong connection with our guests, thanks to the great work of our educators, community teams and ambassadors. However, it's clear that we can take these relationships to the next level with a loyalty program. I'm excited to be working with the teams to create an offering that is unique, disruptive and perfect for lululemon. Our current test is taking place in Edmonton. For an annual fee, members receive several benefits, including either a pants or pair of shorts designed exclusively for the program, access to sweat classes, attendance at curated events, personal development and free expedited shipping on e-commerce orders. Initial reads are strong as our Edmonton guests love the program. We'll have more to share with you subsequently as we continue to pilot and roll out to more markets next year. And finally, one of our largest opportunities is expansion outside of North America. As you know, this is one of our strategic growth pillars, and we continue to execute on our plans to build out key markets within the Asia and Europe. It was exciting to visit China and see the enthusiasm for lululemon firsthand. This is such a dynamic market with fast and emerging trends. What's happening in China is truly special. There are over 400 million millennials who are digitally engaged, beginning to invest in health and fitness and looking for brands that bring both great product solutions and experiences. On my trip, I visited all of our stores in Hong Kong, Shanghai and Beijing, and spent time with our local educators, store managers and Store Support Centre teams. I'm thrilled to be working with them to refine and elevate our long-term growth plan. The opportunities are considerable, beginning with our digital and retail experiences our brand and community expressions and, of course, our product. We will aim to strike the right balance between leveraging our global strength while acting locally where it matters most to keep winning. I'm so excited with what we're seeing thus far in China and in Asia overall, and I'm personally committed to making our success in this region a priority. In Europe, where I am visiting next week, we held our first Sweatlife Festival in Berlin, where we connected our guests with local studios and teachers to celebrate the expanding fitness landscape. And in Paris, building on the strength of our showrooms, we opened a shop-in-shop in Le Bon Marché, the iconic Parisian department store. Our business in Europe continues to perform well. We're happy with our progress and remain very positive about our future opportunities in the region. I look forward to working with the local leadership team to continue our plans to win in Europe, which will include balancing our approach to focus on cities versus countries and continuing to drive our brand awareness. Before handing it over to Stuart, I'd like to conclude my prepared remarks by saying it is a distinct honor to work with such an extremely talented group of leaders, employees and educators. It is their passion and dedication and enthusiasm that fuels our strong performance and brings our brand to life each and every day. Stuart?

Thanks, Calvin. Let me also add my congratulations to our teams around the world for the exceptional results that continue to keep us on course to achieve and even exceed our goal of $4 billion in revenue by 2020. In the third quarter, our teams delivered another outstanding performance, posting strong increases across guest engagement, traffic and conversion. And importantly, we also posted product margin expansion well above expectations, which has enabled us to accelerate opportunistic SG&A investments in the quarter aimed at supporting our growth into next year and beyond. I believe we will look back on 2018 as a milestone year for lululemon, where the culmination of our multiyear investments in supply chain, technology and innovation, broadly, have delivered an inflection in our business that has set us on a new trajectory. We are committed to building a durable growth story and believe we are just getting started. This is what we want our investors to hear today. In the coming months, we look forward to sharing details of how this story will take shape beyond 2020, but today, we're excited to relay details of Q3. Specifically, in the third quarter, we saw continued strength, with total revenue up 21%, combined comps of 18% on top of a 7% increase last year and a 34% increase in EPS. These strong comp trends continue to be driven by traffic and conversion increases across both stores and e-commerce. The strength of our merchandise assortments and guest engagement efforts across multiple touch points are helping fuel these increases. I'd also note that our improving capabilities in personalization within digital marketing are allowing us to speak to our guests in more informed and efficient ways and enabling further increases in traffic and conversion. Guest acquisition increased 41% in Q3, while our e-mail list grew 90%. These efforts collectively contributed to a store traffic increase in the quarter in the high single digits and an increase in traffic to our e-commerce site of over 35%. And it's exciting to see the momentum from Q3 extending now into Q4, evidenced by our exceptionally strong results over the Thanksgiving weekend. Thanksgiving was the biggest day ever in our e-com business, only to be surpassed by the results we saw the next day on Black Friday. What's interesting to note is that both days, individually, were larger volume days than Cyber Monday, as our guests shopped earlier and wanted to get a jump-start on the holiday season. And over this weekend, we saw a strong response to our Align, Wunder Under and Speed Up pants, while on the men's side, joggers were a favorite, including the ABC, Surge and Intent styles. Turning now to the highlights within our other growth pillars. Product innovation continued to be a key part of the growth story in Q3. We posted strong comps in the quarter that increased in the double digits in all major categories. Newness and technical innovation within our assortments are resonating with our guests, while we're also seeing success as we leverage our core franchises. As Calvin mentioned, outerwear was particularly strong for us on both the men's and women's side, with comps increasing over 150% and 40%, respectively. We've expanded the assortment relative to last year by offering more puffer and water-resistant styles, including the Cloudscape Jacket for women and the Outpour Parka for men. We're still in the early stages with outerwear, and we're excited of the potential we see here. And men's continues to be an exciting growth story for us, posting some of our highest overall category increases. As we've mentioned previously, we are effectively ahead of schedule to reach our $1 billion sales goal for men's in 2020. In Q3, we launched an exclusive capsule with MR PORTER, a leading online men's style destination. Our collection consists of 18 styles and is available in select lululemon stores internationally and online globally at mrporter.com. So far, guest response has been strong, and we're excited to test new partnerships such as this to continue to drive awareness for our men's business. Shifting gears to digital. We continue to benefit from the digital acceleration work we completed last year. In Q3, digital represented just over 1/4 of our business, putting us ahead of schedule to reach our goal of 25% full year penetration in 2020. As I mentioned, traffic to our site grew over 35% in Q3, while conversion increased in the high single digits. Our expanded capabilities in digital marketing and data analytics are enabling these important traffic and conversion increases that we've been seeing all year. We've made important steps to strengthen our capabilities within digital marketing. This includes using data science to inform our marketing efforts, which is driving higher levels of guest engagement reflected in our new guest acquisition levels. And we continue to hear positive feedback from guests visiting our website regarding ongoing improvements within checkout, segmentation, search and browse. Examples include improved speed and processing during checkout, personalized versions of the website and automating the browse experience based on merchandise performance data. These enhancements and others are driving higher conversion rates, and we expect to see gains in these areas continue into 2019. And finally, building on Calvin's commentary regarding our international business, I'd offer some additional highlights. In Q3, the strength continued with total market growth in Asia and Europe increasing more than 50% in each region. In China, we continue to see strength within our digital business. Our e-commerce business grew 76%, with a 2-year increase of over 200%. I'd also highlight Singles' Day last month, when we saw an increase of over 150% in our Tmall business. Outside of China, we launched our local market e-commerce site in Korea. And at the end of October, we opened our very first store in Osaka, Japan. All good signs of what the future holds for us across Asia. Before handing it over to PJ, there are a couple of additional things I'd like to highlight. For the full year 2018, we are on track to deliver an annualized increase in product margin of over 700 basis points since 2015. Our strategic supply chain programs, amplified by favorable product mix and strong full price selling, have driven these increases. And investors should note that we are making important new investments across our distribution network that should enable us to capture additional gains and product margin over the next couple of years. We are well ahead of our goals that we had previously set for 2020 in both gross margin and operating profit margin. Importantly, this has enabled us to accelerate a number of key infrastructure investments to sustain our top line growth as we did in this quarter. I'm so proud of the teams who have delivered these results and who continue to identify new strategies to extend these gains. And with that, I'll now turn it over to PJ.

Thanks, Stuart. Q3 marked another quarter of strong financial performance, and we are on track to finish what is shaping up to be one of our best years on record. Before I offer some highlights on Q3 and provide guidance for Q4 and full year 2018, we will refer you to the financial supplement posted on our Investors site for additional details. For Q3, total revenue rose 21% to $748 million, driven by solid execution across all parts of the business. In our store channel, we delivered a 7% constant dollar comp store sales increase on top of a 1% increase in Q3 of last year. Square footage increased 14% versus last year, driven by the addition of 38 net new lululemon stores since Q3 of 2017. During the quarter, we opened 11 net new stores and completed 9 colocated remodels. In our digital channel, we saw strong traffic and higher conversion that resulted in a 46% comp increase. For the quarter, e-com contributed $189 million of top line, reaching 25% of total revenue. And I would add that the impact of foreign exchange decreased revenues by $9.3 million in the quarter. Gross profit for the third quarter was $407 million or 54.4% of net revenue compared to an adjusted 52.2% of net revenue in Q3 2017. The gross profit rate in Q3 increased 220 basis points versus adjusted gross margin last year. This exceeded our expectations for the quarter and was driven primarily by the following: a 280 basis point increase in overall product margin resulting from lower product costs, favorability in product mix and lower markdowns. We are particularly pleased that this increase comes on top of a 70 basis point improvement in product margin last year. Overall gross margin expansion was partially offset by 30 basis points of reinvestment in product innovation and distribution center upgrades and 30 basis points from the unfavorable impact of foreign exchange rates. Moving down the P&L. SG&A expenses were $271 million or 36.2% of net revenue compared to 34.8% of net revenue for the same period last year. As we mentioned on prior calls, we have used our strong performance year-to-date to fuel further investments in long-term growth. These investments contributed to the 140 basis points of deleverage experienced in the quarter and included technology enhancements, advancements in data and analytics, funding for new test initiatives such as loyalty and Selfcare and a ramp-up of seasonal store openings. In addition, foreign exchange revaluation and translation contributed 30 basis points of deleverage. Operating income for the quarter was approximately $136 million or 18.2% of net revenue compared to an adjusted 17.4% of net revenue in Q3 2017. Tax expense for the quarter was $43.5 million or 31.6% of pretax earnings compared to an effective tax rate of 32% a year ago. As a result of finalizing our prior year federal tax returns and interpreting ongoing guidance, we incurred an incremental tax expense of $5.2 million related to the onetime transition tax that was enacted as part of U.S. tax reform. Excluding this charge, the adjusted effective tax rate for Q3 2018 was 27.8% compared to an adjusted effective tax rate of 30.8% in Q3 2017. During the quarter, we reduced our estimated effective tax rate for the year and, subsequently, the quarter after adjusting for additional tax credits for research and development, favorable mix of profit by jurisdiction and other adjustments associated with filing our U.S. tax returns. Net income for the quarter was approximately $94 million or $0.71 per diluted share compared to earnings per share of $0.43 for the third quarter of 2017. Excluding charges related to U.S. tax reform in Q3 2018 and the ivivva restructuring in Q3 2017, adjusted EPS in Q3 2018 was $0.75 versus adjusted EPS of $0.56 in Q3 2017. Capital expenditures were approximately $73 million for the quarter compared to approximately $57 million in the third quarter last year. The increase relates primarily to IT investment and supply chain, data and analytics and store capital for both new locations and renovations. Turning to our balance sheet highlights. We ended the quarter with $704 million in cash and cash equivalents. Inventory grew 25%, relatively in line with sales, and was $496 million at the end of Q3. We repurchased 64,729 shares during the quarter at an average price of $124.95, and we had approximately $185 million remaining under the current authorized share repurchase program at the end of Q3. Turning now to our outlook. Given the ongoing strength of our business, we are taking up our guidance for the year. And as a reminder, 2018 is a 53-week year for us. For Q4, we expect revenues to be in the range of $1.115 billion to $1.125 billion. This is based on a comparable sales percentage increase in the high single to low double digits on a constant dollar basis compared to the fourth quarter of 2017. This also assumes 14 new store openings in the quarter. We expect gross margin to increase by approximately 50 to 100 basis points versus Q4 of last year. Although we are anniversarying strong increases in product margin, we are still focused on further gross margin expansion through incremental reduction in average unit cost, driven by ongoing supply chain initiatives and scale efficiencies. We expect SG&A rate in Q4 to be flat to up 50 basis points as select opportunistic investments continue in the quarter. Assuming a tax rate of 30% and approximately 133 million diluted weighted average shares outstanding, we expect diluted earnings per share in the fourth quarter to be in the range of $1.64 to $1.67 versus adjusted EPS of $1.33 a year ago. For the full year 2018, we now expect revenue to be in the range of $3.235 billion to $3.245 billion. This is based on a comparable sales percentage increase in the mid-teens on a constant dollar basis. We expect to open approximately 36 company-operated stores in 2018. This includes 20 to 25 stores in our international markets and represents a square footage increase in the low double digits. We now expect gross margin for the year to expand 150 to 200 basis points in 2018, primarily driven by continued product margin improvement and leverage on occupancy and other fixed costs. Consistent with our 2020 plan, we are still expecting SG&A for the full year to leverage modestly. We now expect our fiscal year 2018 diluted earnings per share to be in the range of $3.65 to $3.68. Our EPS guidance is based on 134 million diluted weighted average shares outstanding for the year. We expect our adjusted effective tax rate to be approximately 29.5% in 2018. We are continuing to analyze the impact of U.S. tax reform and its overall implications for capital deployment globally. We assume the Canadian dollar at $0.765 to the U.S. dollar for 2018 as well as Q4. We now expect capital expenditures to be approximately $235 million to $245 million for fiscal year 2018. The reduction relative to our prior guidance predominantly reflects select new store opening being shifted into next year. The increase versus 2017 reflects a ramp-up of our store renovation and relocation program, new store openings, technology investments and other general corporate infrastructure projects. In closing, while we still have the bulk of the quarter ahead of us, we're happy with our start to the holiday season and are looking forward to finishing the year strong and carrying our momentum into next year. And with that, let's open the call for questions. Operator?

[Operator Instructions] Our first question comes from Adrienne Yih with Wolfe Research. Adrienne Yih-Tennant: Great. Congratulations on a wonderful quarter. My question is on inventory. I was wondering if you could talk about the end-of-quarter inventory and then plans for the end of the year. Are you seeing any port congestion? Or have you brought in any inventory early in advance of potential tariff impact?

Adrienne, this is PJ. We are really happy with our inventory levels at the end of Q3 and going into Q4 into the holiday season. The inventory is in great shape by quality and makeup. We did not change our inventory cadence because of any tariff issues or anything to that effect. So generally, we are in -- if you like, we're in great shape from an inventory perspective. Adrienne Yih-Tennant: And then just as a follow-up, are you seeing any freight increases for 2019?

We are not seeing any freight pressure so far. No.

Our next question comes from Omar Saad with Evercore ISA -- ISI.

Calvin and Stuart, if you could, it sounds like you're going to get to, I don't know, 1/4 of your business through e-commerce this year, which I think is your 2020 goal 2 years early. It's been a really huge source of upside, especially when you think where you were a year or so ago. What can you point to are the key drivers of that upside, getting such a higher penetration of your e-commerce business much earlier than you had anticipated? And how long can this kind of accelerated pace of growth with that digital side of your business continue?

Yes. Thanks, Omar. Great question. We're seeing really strong traffic and conversion in our e-commerce business. These are trends that we had called out earlier in the year. On the traffic side, it's -- we really see this as a function of the enhanced digital marketing strategy that we've been able to put into the market. And specifically, part of that has been new data analytics capabilities. We've been able to automate much of our e-mail marketing strategies as well as bring personalization into sharpening how we're able to send those e-mails and digital engagement with our guests in a more specific and informed manner versus our guests. So that's been a big part of the traffic story. On the conversion side, it continues to be the improvements that we've made to the website, and we continue to define opportunities to enhance the experience for our guests online. So we've been pleased with that performance as well. And finally, I'd say the -- there are no structural constraints for us to drive the penetration of our e-commerce business well above 25%. And I would also point to the fact that we enjoy a much higher contribution margin for our digital business that is certainly accretive to our company overall operating profit margin. So we are very bullish on the outlook for our e-com business. We have a great team and a number of enhancements that are in the works for next year. So very excited at the future we see in that part of the business.

That's helpful. And one clarification. Did you guys say you're doing a test loyalty and charging the loyalty members and it's working really well? Is that what I heard?

Yes. We did a membership test in Edmonton, and the fee was $128, which we wanted to test. And for that, guests were able to choose between either a pant or a pair of shorts. In addition to that, they had access to monthly curated sweat classes that we worked with the local community and our ambassadors to highlight and showcase. They have some shipment benefits on e-commerce, and we'll be able to gain early access into our Sweatlife Festivals and other events that we're planning to continue to bring. So -- and the response was very strong, exceeded our expectations. And we're going to continue through the first half of next year testing and piloting that. We have a few additional markets that we are going to be launching it in and very excited as we look forward to the ability to have a membership-based program where it's driving loyalty, but guests are seeing value in this curation of services and content beyond just our product and in buying into the program and driving value through the loyalty. So early days but very excited about the work and what we have planned for the program moving forward.

Our next question comes from Alexandra Walvis with Goldman Sachs.

One follow-up there on the loyalty program. If you test the program in different markets, will it be the same structure with the membership fee and the same types of benefits? Or will you be testing different types of loyalty program there?

Great question. We are in test phase. What I would tell you is we were very excited with the way in which the guests responded to the initial launch and pilot. The intent moving forward is to have a fee attached. We are going to test and play with the $128. In fact, we think there's opportunity to price above that based on the engagement and response we saw from the guests. So we actually feel we can increase the price to the value of the program and the additional services they offer. So most of first half of 2019 is going to be tinkering, playing with the program, getting the curation of services right. But we are super excited and we'll continue to lean in and test and learn around the notion of a membership paid for and the curation of services that we offer.

Great. That's really interesting. And then a second question from me. You called out in your prepared remarks success in the everyday bra category, which is a new place; and outerwear, you're expanding to a broader range of wear-to-work categories. I'm just thinking, I'm just wondering how this has changed how you're thinking about your addressable market and your super long-term sales opportunity and whether success in these fringe categories is giving you confidence of the ability to play in more areas.

Alex, this is Sun. To your question, we really don't know how high is high. I mean, right now, we see both bras and outerwear as big category expansions for us. They definitely represent a significant amount of opportunity. And given our position of the intersection of feel, fashion and function, we feel like there is whitespace beyond the categories that we're known for today.

Our next question comes from Matthew Boss with JPMorgan.

Congrats on another great quarter, guys.

Thanks, Matt.

So on gross margin, maybe could you just help break down the product margin opportunity in the fourth quarter? And just how would you rank the gross margin drivers as we exit this year and then going forward?

Yes, Matt, this is PJ. So, yes, we've seen a big benefit in gross margin throughout the year and in Q3, and it's come from mix, lower markdown and higher comp above what we planned. We expect all these metrics to remain strong, but we've planned into a more -- a little bit more of a moderate benefit. But should we see higher demand materialize, we have the flex in the business to meet it. We do see continued opportunity on the sourcing and supply chain side, which has been a great story and will continue to be. And although we may not see step function gains as we have in the past, there's still meaningful gains to be had there.

Yes. And, Matt, it's Stuart. I'll add to that. There still is opportunity for us to further expand our supply chain segmentation strategy that we've talked about to drive more of our assortment into the lower cost part of the supply chain. And also, as I alluded to my prepared remarks, there is -- there are new investments we're making in our distribution networks that will provide benefits to our product margins into next year and beyond. So those are things that we feel are structural, programmatic that we will be able to bring to bear and benefit our product margins as we go forward.

Great. And then just a follow-up along those lines. On the expense front, I guess, on some of these investments that you're talking about that took place in the third quarter, should we think about these continuing into the fourth? And as we think beyond this year, is there any change to SG&A leverage at low to mid-teens revenue growth that I think you've identified in the past?

Yes. So we do expect the investment to continue into Q4. What I'll say about SG&A is -- so the majority of the deleverage in Q3 came from both planned and incremental investment in long-term growth, right? So we invested in IT to enhance our data and analytics and digital marketing capability. We invested in the guest experience and guest engagement by testing the loyalty program. We invested in testing new product categories, Selfcare. We also invested in more seasonal stores, which -- to gauge new markets, reach new guests and build brand awareness. So I would say these will continue into Q4. And we do -- we have guided to modest deleverage, but for the full year, we still expect to leverage SG&A.

Our next question comes from Matt McClintock with Barclays.

Great result, love to see the acceleration here. I guess, my first major question is just new customer acquisition, you have a lot of initiatives here that seem to be working out pretty well. And what actually is working the most? Like where are you finding the best results in terms of getting new guests to shop lululemon? Is that just the seasonal stores? Is it the product itself is why new guests are shopping? What's really driving this today?

Yes, Matt, it's Stuart. So there's a number of things that we see as providing a big tailwind for us in terms of guest acquisition. First thing, we should start with is the product assortment. So that lifts the overall business, as you would imagine, and drives both traffic and conversion. The other areas we've talked about, we've mentioned briefly, even today and, certainly, on the prior calls, we're seeing the digital marketing strategies providing a much more successful level of engagement with our guests that is, in turn, helping drive traffic into our stores, where we were able to convert that traffic and engage more successfully with new technology we deployed at the end of last year [ at express ]. So I would point to those things, multichannel strategies store and online, leveraging new capabilities within data analytics, they're helping us drive those increases. And we continue to see opportunities to drive those levels even higher.

And then if I could ask Calvin a question. Related to your trip to Asia, clearly, that's been a strong part of the company now for a little while. Was there anything that actually caught you off by surprise in the sense of the opportunity there or challenges, something that you just didn't expect when you went there? And then what are you looking for when you go to Europe next week?

Thanks, Matt. In terms of in China, I would tell you that everything was very positive. If I just look at the cities that I visited and the market and the evolution of how customers are embracing the notion of the sweat life through the growth that was happening in studios in and around these cities, all the basis of what drove our business in North America is happening and accelerating. So culturally, you really -- I really sensed and witnessed this energy behind the ingredients that we know helped to drive our brand and where the brand -- our brand does so well. And then how we were fitting into that, there was nothing but opportunity. So building upon the great work that the team there has done, what was so exciting in the visit was not just seeing this energy that's happening, where we don't need to create it, we just need to be part of it. But then look at how we are showing up in the opportunities around our brand and community initiatives, how we express and communicate who lululemon is and the opportunity behind living the sweat life, the role that events can play, our ambassador program and thinking about it differently in this dynamic market that's growing. And then, obviously, product, we've done some local product with our Asian fit, and it's responded so well. It's the discussions of how do we continue to do more of that, recognizing the uniqueness and opportunity that we have in this market. So I would tell you, I walked away incredibly energized and excited about our potential. And I think our results are indicating the opportunity, but there's even more we can continue to do and will do. And I'm excited to be in that work with the team to drive that. And I think, for me, in Europe, working with Gareth and the team, it is really going to be understanding similar dynamics. Where do we see sweat evolving within Europe? What are the opportunities of where we're playing to keep building the brand, getting the awareness, accumulating, acquiring guests and making sure that our growth is both in -- concentrated in cities where we see opportunities and getting that balance between going deeper in cities or broader into countries and having that dialogue and discussion with them?

Our next question comes from Brian Tunick with RBC Capital Markets.

I'll add my congrats to the team. Maybe one for Sun, first. Maybe you can talk about how you think your calendar of newness looking into 2019. Obviously, a lot of great work on the supply chain. But just curious, you'll obviously have to lap some very strong product and new fabric launches. And just curious about how your calendar and then pipeline looks heading into 2019.

Great. I actually am really excited about what our pipeline looks for 2019. Our -- what we have in terms of innovation is very rich. And I would say, as I mentioned earlier, bras and outerwear as a category represents a big opportunity for us. In terms of innovation, we have some great things lined up, and one that I like to highlight is specifically some innovations that we are introducing in run across men's and women's. So in men's, we have some things that really solve for high humidity, high heat solutions. We also are introducing cooling yarn for the guests across men's and women's. And then in terms of high support bras, we launched the Enlite a couple of years ago. We are going to be extending upon that franchise. So we introduced the front zip this year. Next year, we have a hydration vest based off of the Enlite as well as just other evolutions of Enlite. And we do know that part of the huge success of 2018 has been through franchise extensions. They do work for us. And so that's a lot of what's in store for next year.

And then if I could just ask anyone to comment about the Selfcare launch. Any learnings so far? And maybe what kind of guard rails do you guys think the company has to sell more things to let the guests live their best life?

I'll take the question on Selfcare. So as you know, we tested it in the quarter in a handful of markets, be it Chicago, Orange County and Toronto. And the lineup currently consists of 5 products in a variety of sets and a variety of sizes. And I think it is a -- it's a great example of the work the team has been doing and is doing to identify whitespace in areas where we feel we not only have permission from our guests to help solve an opportunity, but also, we can do it in a very authentic way. And in this and with Selfcare, it is that notion of how can we solve the needs of the athlete when they're on the go, in studios, as it relates to this category that others are not fulfilling. And very happy with the results of the pilot. We'll continue and expand that into 2019. And obviously, it's a category that I know well. And I feel there's a lot of opportunity. As we think of Selfcare, we think of the sweat life, the ability to continue to bring product that delivers on that objective of how do we solve the needs of the athletes as it relates to this product category. So early results are very good, further expansion in 2019, and we're working as well on that product expansion and see opportunity in this category. It's very exciting.

Our next question comes from Brian (sic) [ Mark ] Altschwager with Baird.

Mark Altschwager from Baird. The product stories have been really impressive in the back half, and I'm just wondering if you can discuss a bit more about your learnings on the outerwear front. The assortment looks bigger year-over-year. And in some cases, you have some really premium price points out there. So where are you finding your sweet spot from a pricing perspective? Any pushback from the customer at the $500-plus levels? And just overall, how meaningful a comp driver do you expect that to be over the holiday period?

We see outerwear being a material comp driver for the quarter both across men's and women's. And I would say, you're right on in terms of the assortment assessment. We have definitely broadened the range as well as broadened the solve and really focusing behind solves around rain, insulation and activity. And the more innovation we put into a product, we do believe that there's a value add for the guest. And so far, we really have not seen price resistance where we've introduced the 3-in-1 or waterproof down and priced it at a premium. So we believe that continuing to innovate on solutions for our guests, and if there's value there, we can continue to push prices up. And at the same time, when we have things that are more like [ shelved ], everyday [ shelf ] that a guest can work out in or run in, that could be something that's a bit more of an opening price point for us. So we actually see a pretty broad price elasticity in this category across men's and women's.

That's really helpful. And, Sun, maybe just a follow-up. Can you talk about the gifting strategy in the fourth quarter and what the biggest changes are year-over-year?

I would say, in gifting, we probably went a little deeper into accessories. We always have huge opportunity in our franchise products because those are items that our guests knows and loves, so franchises like Align, Wunder Under, Speed Up that Stuart had alluded to; in men's, our Metal Vent and ABC franchises. And probably new for us is the breadth of giftables that we introduced in accessories across cold weather as well as what we call, small lulu goods.

Our next question comes from Jay Sole with UBS.

Just want to ask a couple of questions about some expense buckets that have been sort of topical within the industry. Just on the wages, how is the company addressing that issue with wages kind of going up across retail? And secondly, on rent, as you look into next year, your stores are performing very well, but probably, a lot of stores in retail are not. Are you seeing any opportunities on rent as you move forward into 2019?

Yes. Jay, it's PJ. So on the retail wages, so within our stores, we target the top 25th percentile. So we feel like we're very competitive on that front. So not seeing pressure there, but we continue to evaluate that. On rent, I think we're not seeing any meaningful opportunities outside the ordinary, so I wouldn't say there's anything there.

Yes. Obviously, from the occupancy line, our real estate strategy in international markets as well as we stepped into bigger boxes in North America will reflect those changes in the strategy. But we feel really good that there's opportunity to have a good outcome in terms of occupancy into the future.

Got it. And then if I can just ask one more. As your e-commerce business has grown so well, you've made a lot of investments in the supply chain. How has that affected the amount of returns that you see? And how has that sort of impacted the profitability given how much expansion you see in the margin?

It's interesting. We see a very similar level of returns in our e-commerce business as we do in stores. And I know that's different from a lot of businesses, even a lot of vertical retailers that are in categories that see higher levels of return online. And we're just fortunate that our business performed similarly across channels.

Our next question comes from Paul Lejuez with Citigroup.

I'm just curious about how you're thinking about the e-com ultimately by geography in terms of what penetration can you achieve by geography. And maybe if you can share where you are now in Canada versus the United States. Those are obviously your 2 more mature markets. So just curious where e-com penetration is there. And then just second, I mean, anything you'd share on the buy online, pick up in-store stores? What's happening in terms of customer behavior, attach [ sales in the stores ]?

Paul, it's Stuart. So the -- as you look at digital by geography and the e-commerce penetration, the North American business still is, by far, the lion's share of that business. So it essentially reflects the penetration of the North American business. We're really excited about the trends that we're seeing in Asia and in Europe. There are infrastructure investments we need to make and are making, and you've heard us talk about that to a degree in these international markets to fully unlock the potential. So those are things that we have planned into '19 and beyond to continue to fuel really exciting increases in our e-commerce business in those geographies. And we're likewise really excited about the potential, and we spoke about it earlier on the call, that we see for e-commerce [indiscernible]. So hope that addresses your question. And your second question on buy online, pick up in-store, still early innings on [ that. ] We're seeing some really encouraging results. We're excited to expand it to additional stores. And we'll be able to share more details with you on that into the future.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Stuart, I was really intrigued by some of the supply chain and distribution investments that you talked about ultimately driving your product margin higher over time. I wasn't sure if you had any details you wanted to add, but my question is, does this allow you to sort of think about different gross margin and, ultimately, operating margin targets longer term that would be above some of those targets you've laid out in the past?

Yes. Kimberly, it's Stuart. So we're certainly exceeding some of the original goals that we had set back at the beginning of 2015 -- 2016, rather, for the 5-year time horizon. And we are reevaluating and recalibrating how high is high in each part of the business, certainly, each element of the operating profit story. And that's something we'll be able to share more details on with you when we report Q4 and something we've alluded to in terms of the outlook we see in the business beyond 2020 as we really do see opportunity to exceed the goals that we've set for that period. One of the things I did just want to highlight while we still have a few minutes left on the call. We're really pleased with the comp momentum that we saw from Q2 into Q3. And we see essentially the continuation of that same trajectory that we saw in the first half of the year into the second half of the year. And I did just want to reiterate that we are not seeing this trend slow now into the early weeks of Q4. And just to clarify, while we did give slightly different top line comp guidance in the fourth quarter versus the guidance that we offered in Q3, there are a couple of reasons for that, and I just wanted to mention and make sure that investors are aware of this. The first is that we really have the majority of the quarter in front of us. There's some really big volume weeks as we approach Christmas. There is essentially less of the quarter under our belt at this point than when we were at a similar point guiding to Q3. So that's the first element. The second one is we're just lapping stronger comparisons in the fourth quarter of last year. So those 2 factors really came into bear as we laid what the appropriate comp guidance was for us to offer. But I did just want to reiterate that we're seeing the same strong trends from the third quarter now into the early part of the fourth quarter.

Our next question is Brian Nagel with Oppenheimer.

Very nice quarter. Actually, your comments there just -- really just answered the key question I have with regard to the guidance. So shifting to another question. With regard to spend -- just the investment spend in the third quarter, to understand, you stepped up investments, but the rate of, I guess, SG&A margin was still higher in Q3 than it was in the prior 2 quarters. So was that all reflective of higher investment spending?

Brian, the vast majority of it was investment, about 2/3 of it. But then we did have some FX headwinds that impacted our SG&A by about 30 basis points. But it was predominantly investment.

Yes. And this is Stuart. So I'll just offer, the SG&A outcome in the third quarter was not a surprise. We planned this, and we saw opportunity to lean in farther in certain areas as we saw the strong top line and, in particular, the beat on the gross margin materializing. So investors should view this as the management team leaning into where we see opportunity to fuel growth into the future. And I would say, stepping back from that, we're really pleased with where we're going to land the year and achieve SG&A leverage for a 12-month period for the first time in several years. So this is, I think, evidence of the management team managing the business dynamically while still delivering on the strategic goals that we set out. And you should expect us to be able to deliver SG&A leverage each year as we march towards 2020 and beyond.

If I could just ask 1 bigger picture follow-up question. Clearly, your entire enterprise is still in the very early stages of growth, and it's a dynamic model. But as we're watching e-commerce now really track very, very well, and I think that someone else pointed out in prior question, well ahead of even the goals you had laid out recently, how -- does that at all cause you to rethink or to think differently about the store model or the store layout?

No. I think the -- what you've seen us do over the last several years in terms of adapting new store formats is really building a more agile model to be able to execute a retail a brick-and-mortar strategy tailored to each market in the most effective manner. And what we're seeing on these colocated and experiential stores is more a next chapter in our retail journey where we're going to be able to create exciting space for us to introduce new product categories powerfully as well as create new in-store experiences for our guests that we see shaping more exciting experiences and higher levels of engagement broadly.

This concludes the time allocated for the question-and-answer session. I would now like to turn the conference back over to Howard Tubin for any closing remarks.

Thanks for joining us today, everyone. Happy holidays. And we look forward to speaking to you in a few months when we report our fourth quarter results. Thanks.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.