Lululemon Athletica Inc.
Q1 2015 Earnings Call Transcript

Published: 9 Jun 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the lululemon athletica First Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference may be recorded. I will now turn the call over to your host, Chris Tham, Senior Vice President of Finance.

[Chris Tham:]

Thank you and good morning. Welcome to lululemon's first quarter 2015 earnings conference call. Joining me today to talk about our results are Laurent Potdevin, CEO; Stuart Haselden, CFO; along with Tara Poseley, our Chief Product Officer, who 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 forecast of certain aspects of the company'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 the company's business. Factors that could cause these results to differ materially are set forth in the company's 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 undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and the accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I will turn the call over to Laurent.

[Laurent Potdevin:]

Thank you, Chris, and good morning, everyone. Today, I will provide a brief overview of our first quarter performance, as well as give you an update on our progress with the key strategic initiatives planned for 2015. Stuart will then walk you through our financial guidance in more detail. We delivered strong results in our first quarter despite headwinds from weather, port-related delays and foreign exchange impacts. Specifically, we delivered first quarter revenues above the high end of our guidance, generating overall comparable sales growth of 6% driven in part by a 31% increase in our e-commerce channel. Within our North American business, we saw another quarter of positive combined comps and a nice acceleration in our e-commerce business in both the U.S. and Canada. Our women's business once again delivered positive comps in the quarter, driven by our bottoms category. Our guests responded well to our assortment in the quarter despite the impact to our product flows coming out of the port disruption. We have seen an acceleration in our business in the latter part of the quarter as our inventory positions began to improve, validating our new product flow and assortment. Additionally, we saw further ramp in our men's business delivering a 19% comp and finally EBITDA delivered a 29% comp on a combined basis. We achieved this growth across our key categories despite the challenges related to the West Coast port disruption. We look forward to seeing our guests respond in Q2 and through the second half of the year when our product assortments are properly balanced by season and in quantity. We ended the first quarter with elevated inventory level as a result of the port-related delays. However, we are finally reaching better in-stock position and are confident in our plans to work through this inventory with no impact on brand equity and minimal markdown risk. Stuart will provide additional color on these during his remarks. Before getting into further details on the quarter, I would like to pause and offer my sincere gratitude to Delaney Schweitzer, who left lululemon at the end of last month after 13 years with our collective. Under her leadership, Delaney developed incredible leaders and as a result we have a deep bench of talent poised to lead our global retail business. We are empowering these leaders to oversee the Americas, Asia-Pacific and Europe. Collectively, our retail leadership team brings history, experience, passion and a commitment to our culture. Their energy will inspire our people and fuel our growth. Our expansion into international markets continued to be a key growth driver. In Asia, we opened our second store in Singapore at Takashimaya shopping center on May 13 and have already seen fantastic results well ahead of our expectations. Additionally, our initial store in Ion Mall continues to outperform our plan and we are eagerly anticipating the opening of our first Hong Kong store at IFC mall, which we expect to be amongst our most productive stores across our global portfolio. We also have plans to open a second store in Hong Kong in Q3 in Hyacinth Place located in the heart of Causeway Bay. Last but not least, we're on track to open our first store in Dubai in Q3 of this year. On our last call, I outlined both our short and long-term goals as a growth company building a global equity brand across geographies and new categories and we continue to make strategic investments in the key elements of our brand operating model

[Stuart C. Haselden:]

Thank you, Laurent. I'll begin today by reviewing the details of our first quarter in 2015, and then I'll update you on our outlook for the second quarter and the full year of fiscal 2015. For Q1, total revenue rose 10.1% to $423.5 million from $384.6 million in the first quarter of 2014. The increase in revenue was driven by total comparable sales growth on a combined basis including e-commerce of 6% comprised of a bricks and mortar comp store sales decrease of 1% and a 31% growth online, all on a constant dollar basis. Also square footage growth of 21.8% versus last year, driven by the addition of 53 net new company-operated stores since Q1 of 2014, 35 net new stores in the United States, two stores in Canada, one store in New Zealand, one in Europe, one in Asia, and 13 ivivva stores. This was offset by both the impact of the West Coast port disruption as we indicated during our Q4 call and the foreign exchange impact of a weaker Canadian and Australian dollar, the latter of which had the effect of decreasing reported revenues by $15.2 million or 3.6%. During the quarter, we opened 14 net new company-operated stores, six in the U.S., one in Canada, and seven ivivva. We ended the quarter with 316 total stores versus 263 stores a year ago. There are now 240 stores in our comp base, 39 of those in Canada, 158 in the United States, 27 in Australia and New Zealand, one in Europe, and 15 ivivva. At the end of Q1 we also have a total of 86 showrooms in operation, 34 lululemon showrooms in North America, 15 internationally, and 37 ivivva. Company-operated stores represented 74.2% of total revenue or $314.1 million versus 74.9% or $288.1 million in the first quarter of last year. Revenues from our direct-to-consumer channel totaled $83.6 million, or 19.7% of total revenue versus $66 million or 17.2% of total revenue in the first quarter of last year. Other revenue, which includes strategic sales, showrooms, pop-ups, and outlets totaled $25.8 million or 6.1% of revenue for the first quarter versus $30.5 million or 7.9% of revenue in the first quarter of last year. Gross profit for the first quarter was $205.9 million or 48.6% of net revenue compared to $195.7 million or 50.9% of net revenue in Q1 2014. The factors which contributed to this 230-basis-point decline in gross margin were the 100 basis points of deleverage due to higher airfreight costs incurred primarily to mitigate the West Coast port delays. It should be noted that the market for airfreight in Q1 was highly competitive, and rates and surcharges increased significantly towards the end of the quarter. 70 basis points deleverage due to foreign exchange impact of a weaker Canadian and Australian dollar, 30 basis points deleverage from continued strategic investments in our product and supply chain functions, and 130 basis points deleverage from occupancy and depreciation consistent with our guidance from last quarter. This was mostly due to higher lease costs associated with larger store formats, an increase in major renovations and relocations, and our international expansion. These items were offset with 100 basis points of improvement in our product margins over prior year. SG&A expenses were $137.8 million or 32.5% of net revenue compared with $125.9 million or 32.7% of net revenue for the same period last year. This 9.4% SG&A dollar increase is due to the following

[Operator:]

Thank you. Our first question comes from Oliver Chen with Cowen & Company. Your line is open.

[Courtney Willson:]

Hey, guys. This is Courtney in for Oliver today. Could you just update us on what you're seeing in terms of raw materials going forward? And then also just any update on your mobile strategy? Thanks very much.

[Stuart C. Haselden:]

Hey, Courtney. It's Stuart. Sure. On raw materials, we are seeing the benefits from our go-to-market calendar accrue to the costs that we're seeing for raw materials. We're also seeing some of the costs related to raw materials are – continue to be consistent with what we've seen previously. I'm going to invite Tara to add anything to that, if there is anything.

[Tara Ruth Barber Poseley:]

I think you answered that well, Stuart. Thank you.

[Stuart C. Haselden:]

So, I think the bigger point really is just as we continue to make progress on the go-to-market calendar and the strategies related there, we should see benefits in the input costs really more from how we are able to better synchronize our supply chain activities and generate better leverage and how we are able to engage and negotiate with our vendors and that will benefit a number of different areas, raw materials included. On the question on mobile, I'm going to let Laurent speak to that one.

[Laurent Potdevin:]

I thought in mobile, Courtney, I mentioned that in our earlier script we're doing a full global web redesign that's obviously going to be mostly driven by – the development is driven by mobile and will be adapted to all devices. But it's really – I mean we're seeing tremendous momentum with our mobile performance and so it will be an integral part of what we're doing with the web redesign, and we are adding tremendous talent to the digital team. So we're very excited with what we're seeing combined with our new account capture and our CRM efforts we've got a very large collective that's building very quickly. So mobile is a very integral part of what we're doing and how we're not only transacting but also doing our storytelling with our ambassadors.

[Courtney Willson:]

Thanks, guys. Congrats and good luck.

[Stuart C. Haselden:]

Thank you.

[Laurent Potdevin:]

Thank you.

[Operator:]

Our next question comes from Matthew Boss with JPMorgan. Your line is open.

[Matthew Robert Boss:]

Hey. Good morning, guys. Can you just speak to the cadence of the comps as the quarter progressed? I know you spoke to things getting better toward the end, and then just drivers of the positive inflections that you saw in conversion and more so as you think about the positive store comp quarter to date, what's driven that? What should we keep an eye open for in stores today?

[Stuart C. Haselden:]

Hey, Matt. So, yeah, on the comp, in Q1, so we saw it track closely with our inventory positions and obviously that was related – or it was impacted by what happened with the West Coast port issues. What we saw since we last spoke in the March earnings call, we did see our comps improve as our spring and summer product landed in April. It's worth mentioning that when we did give guidance, the expectation was that we would see our spring and summer goods land closer to the beginning of April. They actually landed more into the middle of April. But what we were surprised by was the fact that our winter and holiday goods that we had in the first part of April to a higher mix as a result of the delays in the spring/summer timing, the winter and holiday product performed better than expected from a sell-through standpoint. That product does have a lower product margin inherently and so that weighed on the overall margin outcome and explains part of the miss to the margin guidance that we had given. The other thing that we were surprised by in the last part of the quarter was the airfreight costs came in about 30% to 40% higher than expected and that also weighed on margins in the quarter, and that cost was above what we had originally expected when we gave guidance. But for the comp specifically, we did see a nice acceleration as our in-stock positions improved. That acceleration was more or less a reflection of an increase in conversion. The traffic over the course of the quarter was relatively consistent and we saw – as in-stock positions improved, conversion improved, comps improved, we saw that continue into the first part of the second quarter as we mentioned in our prepared remarks, and it's a similar story. We are seeing some continued acceleration in our Canadian traffic specifically along with the improved conversion. So it's an improving picture, it's very closely connected to the improving in-stock positions that we have.

[Matthew Robert Boss:]

Great. And then just a follow-up on the merchandise margin front, can you just talk about opportunities in the second half? And then more so if you could just help rank the drivers of gross margin expansion as we move into next year? I think that would be really helpful.

[Stuart C. Haselden:]

Sure. I think as we look at the second half of the year, from a margin standpoint, the guidance that we gave around the improved sales really relates to that third of the inventory, the elevated inventory levels that we'll be looking to exit in the balance of the year. We've assumed that those sales will essentially have, from an exit standpoint, the cost to exit those sales will essentially wash with the incremental margin that they'll generate. There may be some upside to that assumption, but we're not ready to call it at this point. So, if I was to try to point to margin opportunities in the second half, it's probably just how effective we can be in moving through that elevated inventory position. And from a gross margin expansion standpoint and I think your question is more getting at the outlook into next year and the benefits of the activities and investments that we're making this year, particularly in Tara's group. I think as we have said previously, we expect the go-to-market calendar to be able to help us reduce our fabric liability costs as we get more efficient in how we actually are able to synchronize the supply chain. We'll have less waste effectively and that will reduce the amount of fabric liability that we will need to have in order to deliver the same amount of product. Additionally, and that's probably the first and foremost part of the gross margin opportunity as we think about that go-to-market calendar strategy. We also have a fair amount of expedited airfreight costs into the production cycle to help us stay on track with our calendar and then we have expedited airfreight costs out of the production cycle with finished goods to help us stay on track with our inventory flow cycles. So, again, as our calendar becomes more synchronized, we'll be able to eliminate and reduce – or at least materially reduce those airfreight costs. So, I'd say those are the top parts of that go-to-market calendar margin opportunity. Certainly, there are other things that we're doing that will benefit just the flow and how we're able to, from a fast turn standpoint, be able to respond to trends that we see in the market. That's a smaller part of the equation today that we're investing in to grow that and make it more meaningful.

[Matthew Robert Boss:]

Great. Nice quarter, guys.

[Stuart C. Haselden:]

Thank you.

[Operator:]

Our next question comes from Ed Yruma with KeyBanc Capital. Your line is open.

[Edward J. Yruma:]

Hi. Thanks for taking our questions. I guess, just first, I know you've been testing a lot of different formats for men's. I guess, as you think about going forward growth, should we expect more separate doors? Is it more of a kind of a sidecar? And then I guess, as a follow-up, I know you talked a little bit about inventory but free cash generation was negative for the first time in some time. How should we think about free cash flow going forward? Thanks.

[Laurent Potdevin:]

On the men's side of the business, we've obviously been very, very excited with playing with different formats whether it's standalone store, whether it's increased square footage in some of our current stores or some expanded formats, the one format that we're most excited right now about is the expanded store where both men's and women's are color coded as our female guests still shops a lot for him. I mean he does – our male guest does have a lot more permission to come into the lululemon collective, but she still shops a lot for him. So the expanded format – color-coded format is one that we're seeing tremendous results with. And we'll continue in the right geographies, in the right cities, we will continue to play with potential standalone stores as we see fit as long as it's in very close proximity to the women's location such as what you can expect in Soho.

[Stuart C. Haselden:]

And, Ed, on your second question on the cash flow, we were more aggressive in the quarter with the share repurchase program, which that tipped us negative, as you pointed out. But we still feel very good about the cash flow generation of this business and feel that we'll be in a good liquidity position going forward. Thanks.

[Edward J. Yruma:]

Thank you.

[Operator:]

Our next question comes from Matt McClintock with Barclays. Your line is open.

[Matthew J. McClintock:]

Hi. Yes. Good morning, everyone. Stuart, on the full year comp guidance for mid-single digits, I was just wondering how to think about that in terms of – you just put up a 6% increase in the first quarter and your guidance for Q2 is high-single digits. So the deceleration embedded in the guidance for the second half, just want to parse that out a bit. Could you talk to that?

[Stuart C. Haselden:]

Hey, Matt, yeah. So the guidance in the second half from a comp sales standpoint, as you look under the covers at the range, we essentially – the forecast that we used for the basis of the guidance showed that the comp results would increase into the top end of that range. So, we're essentially in our model on the cusp of a mid to beginning to close in on a high-single digit. So, it's really just a question of where we fell in that range of mid-single digit comps. Weren't ready yet to call more upside for the second half, so internally, we feel like the data points connect and it doesn't necessarily suggest deceleration. It's just the current view in Q2, we have more clarity given where we are right now, and we're more comfortable calling that. But it's really, I would say, from where we were in the March call, we're just higher into that upper end of that mid-single digit range on the comps.

[Matthew J. McClintock:]

And then if I could follow up. Laurent or Tara, could you speak to some of the new product that you launched in the second quarter? Clearly, there's been strong response but I was wondering if we could talk a little bit in more detail about women's tops and specifically swim now that that's a new category for you.

[Tara Ruth Barber Poseley:]

So, what we – obviously, the spring goods didn't get in until April but we saw really strong positive response by the guests, particularly the bottom trends continue. It bodes well for our pant walls re-launch in Q3. Our efforts against tanks will start seeing a lot of the new styles in the works there to get into the stores towards the end of Q2. So, we'll have more to come on that that we can talk to. It's a little too early yet on that. And we've been very pleased with swim. We have more opportunity to add additional coverage offers – offerings in swim, so we've had some good growth in spring, but the guest response has been really positive and we could see more upside and opportunity as we move into designing next year for 2016.

[Matthew J. McClintock:]

Thank you very much.

[Operator:]

Our next question comes from Adrienne Yih with Janney Capital. Your line is open.

[Adrienne E. Yih-Tennant:]

...and congratulations on the product progress. Well done. Tara, my question is on the two-thirds of the product that is going to kind of live beyond the second quarter. Can you talk about the composition of that product, long top, long bottom or more core? And then how much is men's versus women's? And then on the one-third that is going to be moved through the different channels, do you feel that you have sufficient inventory to run the September – I guess, was it September or July and January warehouse sales? And can you remind us if you ran them last year? Thank you very much.

[Tara Ruth Barber Poseley:]

Okay. Yeah, the composition of the two-thirds product, what the buying teams have done is we've free flowed the spring product into summer and then have looked at the summer product that we could flow into fall. And the teams are really excited actually with the product they want to flow into fall. Felt that the addition of the color in August, which is really still high summer, into our fall merchandise was a good choice. Our fourth quarter product hadn't been placed yet, so it gave us a lot of movement to ship some of the core receipts that we needed to reflow from Q2 to Q3 to Q4. So, I'm feeling really good about composition of that two-thirds. We did have an online warehouse sale last year in October. We're actually going to move that forward into Q2 to clear through the holiday inventory. Stuart did mention that we actually saw good guest response to the holiday inventory that we had to keep up at regular price in our stores in February and March and we'll be using our warehouse sale to go through that but probably that one-third that we're talking about and then we will then make choices through the remainder of the year if we do some additional pop-ups to warehouse or just use our regular outlet to move through that inventory.

[Adrienne E. Yih-Tennant:]

Okay, great. Thank you so much.

[Operator:]

Our next question comes from Paul Alexander with BB&T Capital Markets. Your line is open.

[Paul Stephen Alexander:]

Hi. Thank you. Can you talk about the 31% increase in direct-to-consumer? How sustainable is a growth rate like that and was it inflated in first quarter by people who couldn't get to the store when weather was really bad or by people who couldn't find what they wanted in stores because of the port slowdown? And what kind of impact on the 2Q direct-to-consumer growth rate should we see from the movement of that warehouse sale from October into Q2? Thank you.

[Stuart C. Haselden:]

Hey, Paul. So, yeah, we were very pleased with the e-com sales growth that we saw in Q1. I'd say, there's a couple of factors we'd point to. Certainly, weather was an issue in the early part of Q1 which likely benefited the e-commerce results. I'd also say that we began the quarter in e-commerce with a stronger inventory position and we were able to accelerate or able to flow, I should say, inventory to the e-commerce business faster than we could the stores. There's an additional step in the supply chain for getting the inventory from our distribution centers to our stores, which takes a little bit of time that in e-commerce you don't have that step. So, we're able to have a better inventory position in e-commerce which I think drove the upside. And from – the comp guidance that we gave for Q2 certainly reflects an ongoing strength in our e-commerce business as well as the improvement in the store comps. So, there's nothing that we would look at from a direct standpoint that would suggest that the increases that we saw in the first quarter is not sustainable. We wouldn't necessarily plan it at that level, but there's nothing structural that would prevent us from delivering that type of an outcome go forward.

[Laurent Potdevin:]

And, Paul, especially when you consider all the enhancements from a CRM account and checkout standpoint that we're putting into the global web redesign, and our educators at the store level have done an outstanding job, while we've done a good job training them and they've done an outstanding job using our backroom app, which has really been able to leverage our online inventory when we haven't had inventory in store. So that's really sort of our strategy coming together from that standpoint.

[Paul Stephen Alexander:]

Thank you.

[Stuart C. Haselden:]

Thanks.

[Operator:]

Our next question comes from Brian Tunick with Royal Bank of Canada. Your line is open.

[Brian Jay Tunick:]

Hi. Thanks. Good morning. I'll add my congrats on the progress. I guess two questions

[Laurent Potdevin:]

We've been very focused on Canada as one of – as our first market and it's been really coming across the three key pillars of what we do, right? I mean we focused a lot on educator training, we've very much focused on the buy, how wide the buy is and the depth of the buy and we've seen tremendous results with that. And our brand community groups have really focused on how to have a campaign that was very – I hate the word campaign, but programs that were very much dedicated to Canada and we've seen tremendous impact there. I think another interesting market to look at where we have been challenged is Australia, and I was in Australia a month ago spending time with our team there and we've seen the same type of return to very healthy comps simply by focusing on those markets, the buy, the training and brand and community efforts that are locally relevant, so especially in the context of Australia, really focusing on ambassadors that are relevant to Australia. So let's think about triathletes, surfers that are training in environment that are hotter, more you need – obviously, they have to deal with a lot more sun than we do here in Vancouver, and using this market as a testing ground for our new products. So just really product, buy, brand and community and training focus on those markets has really paid off in a very significant way.

[Brian Jay Tunick:]

And then on the international side?

[Laurent Potdevin:]

And on the international side, sorry, I knew there was a second part to the question. On the international side, we're very much on track. I mean, we're exceeding our expectations, both in Asia and in Europe. As I mentioned, we're on track opening Dubai in September. We're probably seeing – we're exceeding to a greater extent in Asia than in Europe, so that probably suggests the ability to maybe accelerate a little bit our expansion in Europe, and we've just opened a showroom in Seoul that is performing extremely, extremely well. So an opportunity to do more in Asia with an awesome team and in Europe, like keeping the course, but yet still very much exceeding our expectations, so opening a showroom in France. We just opened a showroom in Stockholm. We've relocated a showroom in Germany in Berlin that's now performing at the level that sort of suggests store rollout. So, very, very happy with the pace and the success of the international expansion so far.

[Brian Jay Tunick:]

All right. Thanks very much and good luck.

[Laurent Potdevin:]

You're welcome.

[Operator:]

Our next question comes from Howard Tubin with Guggenheim Securities. Your line is open.

[Howard Brett Tubin:]

Thanks, guys. Maybe just a question for Tara. Can you just update us on where you stand on your chase capabilities and how quickly you can get back into things within season?

[Tara Ruth Barber Poseley:]

I think you said our chase capabilities?

[Howard Brett Tubin:]

Yes.

[Tara Ruth Barber Poseley:]

Oh, I'm sorry, okay. It cut off for a second there. So we have established a fast turn team that can turn goods in about – depending on if we have taken a position on the fabrics or we have viable fabrics, that team can turn product around in roughly 2.5 months. So it's a great mechanism for us to leverage as we see where sales are and be able to chase into core products or as well as the seasonal fashion ideas as well.

[Howard Brett Tubin:]

That's great. Thanks very much.

[Tara Ruth Barber Poseley:]

Great.

[Operator:]

Our next question comes from Jim Duffy with Stifel. Your line is open.

[Jim V. Duffy:]

Thanks. Good morning, everyone. More questions around the international opportunities. Are you yet in a position to talk directionally about store model for international markets, how it may differ between Asia and Europe? And what are some of the key differences in format and economics you expect versus North America?

[Stuart C. Haselden:]

Yeah. Yeah, Jim, so the strategy at this point in the early store openings is focused on capital cities in those geographies, in Western Europe and in Asia. So, these are some of the most productive retail centers or retail areas in the world and so these initial store locations are – they are rivaling some of the best stores in North America from a sales standpoint – from a sales per square foot standpoint and also from a four-wall profit. Obviously, the rent dynamics are different. We're seeing higher rents. We're having to pay key money in certain markets, but these are some of the most productive locations you can imagine. So, we're really – we're picking the cherries, so to speak, in the initial phase to establish the brand. It's important to have a very visible location in these key areas, these key cities and the shopping areas within them, so that you establish the brand in a manner that's consistent with how we want it to be established. So we need to build that presence and that brand recognition with the store footprint that we're – it's not a marketing activity. These stores are very profitable and on a four-wall basis, very attractive. Obviously, you have the cost, the overhead cost of investing in the teams and the marketing and the supply chain to get into those markets. So, it takes you a while to reach the scale to really be able to leverage those investments. And we're in the early days of the strategy but we're very excited by the results that we're seeing both in Asia and Europe, and feel like it's going to be a great part of the overall growth story for years to come.

[Laurent Potdevin:]

And, Jim, all the work that we're doing with multi-store formats in North America, whether it's a smaller store like the one in Vail or whether it's the men's only in Soho or the extended format in Miami, Santa Monica, or Robson, I mean are really sort of informing the type of model that we can roll out in parts of the world where we might have to play with different real estate.

[Jim V. Duffy:]

Got you. And then in some of your earlier international markets like, say, the U.K. or Singapore, when would you expect to move beyond that phase 1 and into phase 2 where you're exploring some of these other formats maybe outside of the capital cities?

[Laurent Potdevin:]

I think in Asia we still have a fair amount of runway, probably a couple years before we start exploring the cities that are not a when but that are an if. In the U.K., we'll probably start exploring a couple of those locations next year and then in the rest of Europe, we'll still be in the capital cities for the mid-term. So, we have tremendous runway ahead of us in leveraging the brand awareness that we've got in the capital city and to Stuart's point, really sort of planting our flag and claiming the market that we created, so a lot of runway in those cities that are a when.

[Jim V. Duffy:]

Great. Thanks for that.

[Laurent Potdevin:]

You're welcome.

[Operator:]

Our final question comes from Janet Kloppenburg with JJK Research. Your line is open.

[Janet J. Kloppenburg:]

Good morning, everyone. Just a couple of questions. Number one, it seems like your buying and occupancy pressure is increasing, Stuart, as you focus more on the international markets. Maybe you could help us with the leverage point on comp there as we model going forward. And secondly, Tara, I was wondering as you broaden your bottoms assortment if there's an opportunity for AUR elevation. Thank you.

[Tara Ruth Barber Poseley:]

Stuart, start with the occupancy?

[Stuart C. Haselden:]

Yeah, sure. Hey, Janet. So buying and occupancy, we're seeing elevated pressure from that into Q1 as we had in Q4. No surprise there. We expect that'll be the story for the balance of the year. We expect that to moderate next year. We really – if you look over the last few years, we haven't seen this level of occupancy pressure. We expect that to normalize into 2016. So, on a year-over-year basis, that should be a benefit. But at this point, I would say it's attributable to just some of the discrete activities that we have ongoing this year from a real estate standpoint, and that's the combination of some of the higher rents for these big international flagships, some of the relocations and expansions that we've done in North America, and just the opening cadence that we have is higher than the company's ever had. And so for every store you open, you have a certain amount of preopening costs that are a drag from an occupancy standpoint, sort of the initial ramp before the store is open. So we've got more of that. That will moderate as well as we go forward. So those are the factors that are part of that story. I think over the long-term, we'd expect to leverage our buying and occupancy in that high single digit to low double-digit range just given the growth profile of the company. We're not quite there right now but that's how we would envision the long-term model.

[Janet J. Kloppenburg:]

Thank you, Stuart.

[Tara Ruth Barber Poseley:]

And then, Janet, your question on the AUR elevation in bottoms...

[Janet J. Kloppenburg:]

Tara, you've never said Nike took their prices up on the bottoms, right? So I'm wondering what you guys are thinking.

[Tara Ruth Barber Poseley:]

What we are really focused on is driving innovation in our bottoms category from fabrics and fit. And we will price accordingly as we continue to drive forward in those innovations. So again, we're always looking forward. We want to be – we are the leaders in driving innovation in the bottoms category and we'll price accordingly.

[Janet J. Kloppenburg:]

Great. Congrats on a good quarter.

[Tara Ruth Barber Poseley:]

Thank you.

[Stuart C. Haselden:]

Thanks, Janet.

[Operator:]

Thank you. That concludes the Q&A session. I will now turn the call back over to Chris Tham for closing remarks.

[Chris Tham:]

Thank you, operator. That concludes our call for today. Thank you, everyone, for joining us. Goodbye.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and, everyone, have a great day.