Jun 10, 2013
Executives
Therese Hayes – Vice President, Corporate Communications Christine Day – Chief Executive Officer John E. Currie – Chief Financial Officer
Analysts
Camilo Lyon – Canaccord Genuity Lindsay Drucker Mann – Goldman Sachs Group Inc Sharon M Zackfia – William Blair & Company, L.L.C Adrienne Tennant – Janney Montgomery Scott LLC Lorraine Hutchinson – Bofa Merrill Lynch Kimberly C Greenberger – Morgan Stanley Sam Poser – Sterne, Agee & Leach Dana Telsey – Telsey Advisory Group Paul Lejuez – Wells Fargo Securities, LLC Bob Drbul – Barclays Capital Janet Kloppenburg – JJK Research Christian Buss – Credit Suisse Betty Chen – Wedbush Securities Inc Jennifer Black – Jennifer Black & Associates, LLC Omar Saad – ISI Group Howard Tubin – RBC Capital Markets John Zolidis - Buckingham Research Liz Dunn – Macquarie Research Faye Landes – Cowen and Company
Operator
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 maybe recorded.
It’s now my pleasure to turn the floor over to Therese Hayes. Please go ahead.
Therese Hayes
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 www.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, the 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, so when we get to the Q&A, if you please limit yourself to one question at a time to give others the opportunity to also have their questions addressed. With that, I will turn it over to Christine.
Christine Day
Thank you, Straus. 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 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 five and a half years has been an incredible journey. I’m 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 five years and a vision for the next ten years. I feel that the timing is now right to bring in the next CEO candidate who will drive that ten year vision.
The Board has formed a search committee and its executing a CEO succession plan. Well 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 quality issues 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 control. The silver lining to this crisis was a 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 formerly of Mast working with us on a consulting basis for five months to enhance and improve our product processes and to get strong round of candidates for a senior supply chain and logistic position.
We’re also well into the process of interviewing candidates for the EVP product role. Since the last week in May, we have been delivering we want to our stores that according to two separate sets of tests, one with the third-party demonstrates at 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 be in there cheeky, fun and rever themselves and are focused at what we’re 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 two 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 Feb, feedback online from the new communities have been very positive and we’re seeing strong early interest in our products and our complimentary yoga classes and community events. In China, the legal entity is now formed and we’re working towards finalizing our retail license and expect to have three showrooms in that market by year-end.
In North America, we expanded into seven new communities and as we always do, each new store location hosted locally inspired community events to celebrate their openings. For example, our meatpacking stores opening party was called, breathe deeply, be lifted.
The intention was to inspire our guests through meditation, while celebrating the juxtaposition stillness in a community that the epicenter of nightlife passion and the fast pace New York City lifestyle. In Brossard Quebec our team celebrated with a back to the route steamed party celebrating everything we love about Montreal, and the local culture.
In Garden City we held several celebrations, one event included [Tata lounge] and the Booty Bar which provided for CD science 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 the local author who is creating community by shaking up business as usual.
We launched our eGift Card’s program on our e-commerce website on April 24, our guest love them and in the two 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 home finder, which supports our ambassadors and helps guests to 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 partner we work with are in a separate area of the country from Dhaka, where the issues with build 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 reflects international standards.
Labour 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 micro site where you can learn more about our sustainability efforts with our stores, ambassadors and vendors. Turning now to products, during the quarter refounded ourselves in why we are best in work a developing technical athletic apparels that makes our guest look and feel beautiful, our differentiator is our value proposition, its all of the amazing elements that benefit our products provide.
It’s the combination 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 are taking our processes, we’ll always push innovative boundaries and we will continue to disrupt the market, taking risk means we’ll make a few mistakes along the way, but its part of our DNA and has been a driving force behind our success to date. We continue to explore new categories once again this year through key works, but expanded capital to build our future product line.
Here is what we learned, early feedback on our tennis golf capital which is in-source now has been terrific, particularly our Polo tops, tennis skirt and club short, in fact, we sold out at the Polo online in less than 48 hours. Our hot hitter tennis dress is more of a traditional tennis outfit and didn’t do as well which reminds we do our best when we design products that have great crossover appeal.
Our continued [full array] into swim continues to be very promising. We implemented learnings from last year’s capitals and have had strong cross channel rollout of inventory, education and our guests love it.
The one learning this year is around timing, our guests are telling us, they would like the reflection now in June, so we’ll looking adjusting our cadence for swim next year. Our cycling capitals continued to be a great opportunity to test our technical fabrics and construction.
However, we didn’t performance 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 is great about capital, we can use them to test our ideas and explore new opportunities for the brand as we continue to create the future. Turning demand, it’s continues to be a key area of focus for our team as we put the building blocks in place to grow this year of our business.
We’re setup for Father’s Day next weekend with inventory and selection polo short and technical top. We’re specifically excited about men polos.
We took feedback from last year and added more color to our polos and more variety and comfort and performance fabric. They’re being very well received so far.
Felix Del Toro has completed his emergent and will take the helm of men’s this quarter. The stores that he worked in will miss its merchandize and selling skills, we saw comp increases in men’s departments in the stores he trained in.
He is excited to drive this opportunity to the next level. We also have more depths and colors in men’s shorts as well and our technical top like the [Medal vent and Precise T] 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 to the numbers.
John E. Currie
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 full-year of fiscal 2013.
For the first quarter total net revenue rose 21% to $345.8 million from the $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, one store in Canada, six stores in Australia, one store in New Zealand and one 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 dollars basis.
And offset with the foreign exchange impact of a lower Canadian and Australian dollar, which have the effective of decreasing reported revenues by $2.6 million or 0.7%. The adverse impacts on revenue of luon issue was within the range of what we estimated when we guided last quarter.
During the quarter, we opened six corporate-owned lululemon stores in the U.S., and one in Australia. We ended the quarter with 218 total stores versus 180 a year ago.
There are 168 stores in our comp base, 39of those in Canada, 105 in the Unite States, 18 in Australia and New Zealand and six Aviva stores. We also opened three international showrooms during the second quarter, two in the UK and one in Singapore for a total of six in Asia in Europe at the end of Q1.
At the end of the quarter we operate at the total of 51 showrooms including six of 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 luon that did not meet our standards, which had a 510 basis points impact on gross margin.
The luon write-off consist of on hand delivery at our distribution, inventory at our distribution center including store pull-backs 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 and 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 products 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 a weaker Canadian and Australian dollars, 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 continue 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. A 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 checked earlier possession of summer product in April verus May last year due to a change in our buying calendar, but we also had certain spring styles that did not perform the plan and those what we’ve 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 2013. This outlook assumes a Canadian dollar at $0.97 with the U.S.
dollar and a 11 new store openings, seven in the U.S., one in Canada, two in Australia and one 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 are getting back into stock gradually as production and delivery of these styles ramps up and will 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 de leverage against fixed costs as sales are impacted by some continued black luon shortages, lower merchandize 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 costs, included in the 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%, 146 million diluted average shares outstanding, we expected 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 of 2013, we’re still targeting to open up 43 corporate owned stores, including our Australian 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 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 and 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 non-affected styles even out product assortment in Q2 did have an adverse impact in fall production, which will result in increased air freight to be incurred in the back half of the years.
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 being incurring some expenses associated with incentive of our second U.S.
distribution center, which we plan on opening in the second half of 2014. We are now down choosing between our final East Coast potential locations to complement our existing USTC in Sumner, Washington, an anticipated manage as much as 65% to 70% of our volume in the next five years and play an important role in efficiently flowing products to our stores and guests.
We expect some SG&A deleverage as a percent of revenue compared to 2012, due in part to loss sales from the product shortage along with continuing to process 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 area diluted earnings per share to be approximately $1.96 to $2.01, this is based on a $142.6 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 a $100 million for fiscal 2013, reflecting new stores build-outs, renovation capital for existing stores, IT and other head office capital including expansion of our existing premises.
And with that I will open it up for questions.
Operator
Sure, thanks sir. (Operator Instructions) And our first question will come from the line of Camilo Lyon with Canaccord Genuity.
Please go ahead, your line is now open.
Camilo Lyon – Canaccord Genuity
Good afternoon everyone. Christine or John, I was hoping you could talk about what you’re seeing over the last couple of weeks with the restocking of luon back on a shelves has there been a release of the pent-up demand, that the consumer understand that they’re back, that you’re back in stock and what is really the message that you are communicating to them about being in the greater in-stock position over the coming few weeks as the quarter starts to reach with that?
Christine Day
I think we’re doing a soft launch really a kind of our back and 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 within e-mail and with some queue online things that will start happening towards the middle of the month.
Operator
Thank you. Our next question will come from the line of Lindsay Drucker Mann with Goldman Sachs.
Please go ahead, your line is open.
Lindsay Drucker Mann – Goldman Sachs Group Inc.
?
Christine Day
Okay, this was the personal decision of mine, and look it never perfect time to leave a company that you love. I’ve had a great run that lululemon over the past five and half years and I’m really proud of what the team and I’ve accomplished.
And now as the company embarks really on that next 10 years 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.
Operator
Thank you. Our next question will come from Sharon Zackfia with William Blair.
Please go ahead your line is open.
Sharon M Zackfia – William Blair & Company, L.L.C.
Hi, good afternoon. 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 more from markets in the back half of this year.
Could you give us update on kind of where you are with cross channel visibility, some of the systems and processes you are rolling out in the back half of this year, that could better optimize sales?
Christine Day
Yeah, we, the first step in that was changing the timing from a three season to a four season calendars, so we got more of the seasonal lines rate, the next step is that we are now designing lines going forward starting with spring of next year that optimize hot markets and colder markets as well as temperate climate, so that we can really address product at the right time in 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 things that we’ve learned this year, which showed up in the numbers is if the line drops long pants in February its perfect for the colder climate, but its not perfect for Florida and LA.
So by next February what you will see us doing is there will be an actually time to release our product that’s appropriate for the market, so we will start lighter colors sooner in the south and hot climate, we’ll start the transition to crop 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 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 systems that we’re putting together, will allow a guests 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.
Operator
Thank you. Our next question will come from the line of Adrienne Tennant with Janney.
Please go ahead, your line is open.
Adrienne Tennant – Janney Montgomery Scott LLC
First Christine thanks for your hard work building the company over the past five 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 pressing the environment in those regions and how long before we were to see lulu we move to opening stores?
Christine Day
Okay. Well we’re very excited about, some 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 strong about how those markets are performing, our e-commerce business is going very nicely in those markets as well, so we are 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 are on track, and you will see stores in the London market next year and that we are proceeding with building out as quickly as we can Hong Kong that’s real estate dependent, but we will definitely be seeing more aggressively in Asia for showrooms.
Operator
Thank you. Our next question will come from Lorraine Hutchinson with Bank of America.
Please go ahead, your line is open.
Lorraine Hutchinson – Bofa Merrill Lynch
Thank you, good afternoon. I just wanted to follow-up on the gross margin commentary, 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 built into our longer term targets?
John E. Currie
I’ll start with the longer term supply chain cost as I mentioned we are investing in the quality teams for testing both the 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 calls.
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 springs styles didn’t hit our plan some of the buy was to deepen in some new styles and so again that’s reflected in the gross margin guidance for the balance of the year, its 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 its not an enormous difference but it’s a little bit chunkier coming into Q2.
Operator
Thank you. Our next question will come from Kimberly Greenberger with Morgan Stanley.
Please go ahead your line is open.
Kimberly C Greenberger – Morgan Stanley
Great, thank you. 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 that lulu, is this, really you talked some misses in the spring product in style, but they will need to stay for the outlets, is this a reflection just some issues in execution in the spring or is this something that you see on the normal seasonal basis?
John E. Currie
No, I think it’s a reflection in some imperfections both in the buy and some of the design for the spring product, which maybe goes back nine months earlier when it was placed, we do feel a lot better about the product coming in for the balance of the year.
Christine Day
Yeah, and I would just add some color to that what we really saw the color blocking, we did it in across too many styles and didn’t offer enough basic neutrals that went with us, we were little off formula with the buy, particularly in the earlier part of spring.
Operator
Thank you. Our next question will come from Mr.
Sam Poser with Sterne, Agee. Please go ahead.
Your line is open.
Sam Poser – Sterne, Agee & Leach
Good afternoon. I just have two thing, number one, when was the Groove, the Groove in the astro that are in the stores, when did the crop show back up, and two where, what are you looking for in your successor and how involved are you going to be in that process?
Christine Day
The Wunder Unders crops we just received some of the very first deliveries into the warehouse and started some QAs, we are 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.
Operator
Thank you. Our next question will come from Dana Telsey, Telsey Advisory Group.
Please go ahead, your line is now open.
Dana Telsey – Telsey Advisory Group
Good afternoon everyone, and Christine, best of luck to you. I want to better understand the original expectation for black Luon, I believe it 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 impacts or is it more $0.09 be a $0.11 to $0.13?
And you’re still looking for an overall $0.25 to $0.27 impact?
John E. Currie
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 as $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 modelling of the impact overall on the year, it’s about $0.21 a share.
Operator
Thank you. Our next question will come from the line of Bob Drbul with Barclays.
Please go ahead, your line is open.
Bob Drbul – Barclays Capital
Hi good afternoon. 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 carrier?
Christine Day
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.
Operator
Thank you. Our next question will come from Janet Kloppenburg with JJK Research.
Please go ahead, your line is open.
Janet Kloppenburg – JJK Research
Hi, everyone. Christine, I want to thank you for your leadership and congratulate you on building such a great plant.
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 a new CEO preclude the appointment of the Chief Merchant, I don’t think you call that person a Chief Merchant but its 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? Thank you.
Christine Day
No, I would start with the second one and let John go. We are still preceding and have a very strong list of candidates for what we remember we split the roll into two, so an…
Janet Kloppenburg – JJK Research
Right.
Christine Day
So an SEP kind of product operations, we’re also adding the SEP of logistic and then we’re calling it the Executive Vice President of Design and Merchandizing it’s the position that you’re referring to?
Janet Kloppenburg – JJK Research
Yes.
Christine Day
And all three searches are proceeding.
John E. Currie
And to answer your first question, I mean I wouldn’t say we would be completely back to our ideal inventory level by the end of Q2 that’s a little bit too quick. But certainly by Q3, we’ll clear that 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.
Christine Day
And we really expect to especially if we get back into that black pant, because there is a definitely a ratio between pants 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’s balance out.
Operator
Thank you. Our next question will come from Christian Buss with Credit Suisse.
Please go ahead, your line is now open.
Christian Buss – Credit Suisse
Yes, I was wondering if you could provide some perspective on how you are 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 kinds of quality issues won’t happen again.
Christine Day
I think there is a four back black strategy that we will be executing and as I said earlier in the call, there is 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 is also a guest feedback forum, there is videos online, there is online monitors site called Ask Brit.
So if you go to our website, you will actually see already today for most to support in education for the customer and we’ll begin more unique lululemon outreach in the middle of July.
Operator
Thank you. Our next question will come from Betty Chen with Wedbush Securities.
Please go ahead, your line is open.
Betty Chen – Wedbush Securities Inc.
Well, thank you good afternoon everyone. 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 the buckets, so we can figure out how much of that will be ongoing into next year? And then, could you talk about any comp performances between Canada, U.S.
and Australia? Thanks.
John E. Currie
Okay. May be 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, straining a little bit better than that of course the luon had been there, a little bit better than we saw in Q4 of last year.
But it was somewhat negative. Then on Australia is comping in the teams again early in the brand awareness and continuing to ramp up towards the higher Company’s 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 is really, the same things we’ve talked about in the past, we have a very heavy IT roadmap, and 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, as probably the biggest single area.
And then as I’ve said in the past, we continue to not just rollout the showrooms internationally, but we are building the teams to run Asia and to run Europe. We’ve spent significant amount of time on boarding those people, and so those expenditures are happening this year, and as I’ve said this in the past its probably high single digit millions invested and just based on the international plan this year, so those are a couple of the biggest buckets.
Operator
Thank you. Our question will come from Paul Lejuez with Wells Fargo.
Please go ahead.
Paul Lejuez – Wells Fargo Securities, LLC
Hey, thanks guys. 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 the styles do you forecast a lower comp than you saw in the first quarter?
Thanks.
John E. Currie
Okay, and remember the first quarter, we had full stock of luon for the first six weeks and see you have to keep that in mind when you’re comparing to Q2, where its what we trickling in the second half. Sorry I’m trying to think the earlier part of the question.
Christine Day
Traffic, well it vary by channel, which was e-commerce we saw a lot of traffic, people looking in double back and checking.
John E. Currie
Curiosity traffic.
Christine Day
Yeah, so we saw a lot of unproductive traffic and then we definitely found that stores traffic held relatively hold 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.
John E. Currie
Yeah and slightly lower spend for basket again perhaps in part because that the luon pants were not part of the basket?
Christine Day
Yeah. And we definitely see more impact to, you’re 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 broad base and tend to like the Luxtreme fabric in the running pant. We saw more transition to those bottoms until we ran out of stock than we did in Canada.
Operator
Thank you. Our next question will come from Jennifer Black with Jennifer Black & Associates.
Please go ahead, your line is now open.
John E. Currie
Christine, you’ve done an amazing job. Can you hear me?
Christine Day
I can Jennifer.
Jennifer Black – Jennifer Black & Associates, LLC.
Okay. I’ve wondered if you can talk about jackets as a category, will you offering a more diverse offering including longer length?
Christine Day
We will, and I exactly was going to go there was, we definitely had too many short jackets they are 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.
Jennifer Black – Jennifer Black & Associates, LLC.
And are you going to bring back some of the reversible jackets and your other iconic pieces?
Christine Day
We hadn’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 is a really great line up of jackets coming particularly for the fall, I think they will be very happy with and last black Jennifer.
Operator
Our next question comes from Omar Saad with ISI Group. Please go ahead, your line is open.
Omar Saad – ISI Group
”,
Christine Day
No to the second one, I want to stay on, on the Board. But what we’ve learned with a lot of very interesting things.
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 they’re really is no comparison. And the guests really learnt 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 may be saw some substitutions 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 women look and feel when she is wearing the pant.
And that’s overcommitted to delivering with high quality, and I think that we have to keep earning that guest trust by being very, very stringent about quality. But we also know we stand for it, and we got a lot of positive feedback about hitting our own stock 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 will be plan on continue to deliver to our guests.
Operator
Thank you. Our next question will come from Howard Tubin with RBC Capital Markets.
Please go ahead, your line is open.
Howard Tubin – RBC Capital Markets
Well hey, thanks guys. Can you maybe in just 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?
Christine Day
I think there is a 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 four and so we had to become our expert in depths 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 that every single factory from one master pattern and with our tolerances, as we really dug deep and did a lot of investigation, found that a size two selling to the edge of a, large into the tolerance in one factory was too close to a four selling to the small tolerance in another factory.
So we bought in a master pattern grader and we’ve sent, every single factory has all the same patterns now and we also reduced our tolerances from a inch to half an inch, which takes more to sell, which is part of the reason why it took us a little longer to get back in stock because the factories had to show to a new technology level. And that’s just some examples, we also added more tests and quality control tests as John spoke to, we’ve added a lot of more testing to the raw material stage to make sure that we’re getting exactly the product and we now do a more weight test and take anything out of pants that would be at the low end and put them more into top or [looser] style.
So really we invented 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 right here, just to make extra sure.
Operator
Thank you. Our next question will come from John Morris with BMO Capital.
Please go ahead. Your line is open.
John D Morris – BMO Capital Markets
Thank you. 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 we go forward to Q3, 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 that we have a sense of timing on progress of the search, when was the search committee formed for the new CEO candidate?
Thanks.
John E. Currie
I’ll just quickly add to your first one. Yes, I mean we have taken efforts to pull product forward and so that’s part of what you are seeing, it creates some of the air freight and other stress on the second half of the year?
Christine Day
I notified the Board on Friday of my decision and the search committee was already formed over the weekend and they are activating the succession plan that we have in place.
Operator
Thank you. Our next question will come from the line of John Zolidis with Buckingham Research.
Please go ahead.
John Zolidis – Buckingham Research
Hi, good afternoon. Could you give us Men’s comp and tell us how that did in the U.S.
and in Canada? Thank you.
John E. Currie
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 compound, then certainly it can’t remember the spilt between countries, but in general, Men’s was comping higher than the rest of the business.
Christine Day
Particularly in the last, few weeks of the quarter and into the…
John E. Currie
The end of the quarter and coming into this quarter, we’re seeing real strength, showing up in Men’s.
Christine Day
Yes, when we drop 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 are very excited and it seems our guest is very excited, which is even more important.
Operator
Thank you. Our next question comes from the line of Liz Dunn with Macquarie.
Please go ahead, your line is open.
Liz Dunn – Macquarie Research
Thank you. Let me just add to what everyone else has said, Christine it’s been real just pleasure to watch you grow and evolve this company.
So best of luck, I know you’ll be around for awhile but I just wanted to get that out. Can you tell me whether or not the lack on luon sort of exacerbated some of these issues you just 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.
Did you think that any of this has had any long-term impact on brand perception with your core customer base? Thanks.
Christine Day
We are definitely not hearing that from our core customer base. I think actually it reinforced why they love our pant 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 is definitely a 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 is not a neutral color like black to break up the color, it gets color on color, which was the trend for the season, but we were publically over doing 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 pick up 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 bottom and that will start to rebalance in Q3.
Operator
Thank you. Our next question will come from the line of (inaudible) with CLSA.
Please go ahead, your line is open.
Unidentified Analyst
Thanks for taking my question. I’m just wondering how happy you are with the product mix right now fashioned with those 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. into great things?
Thanks.
Christine Day
We are definitely fuller on actually basics. So it’s very much more athletic, technical line with lots of color at the moment.
So it’s actually very low risk inventory, and what you’ll see a shift to in the back half of the year particularly for the batch of school and men, holiday season, is a little bit more of those specialty jackets that were known for little bit more of the cotton and a broader line with more fashion details in it.
John E. Currie
Just on the international showrooms, as we’ve said in the past the two Hong Kong showrooms perform 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 two new showrooms in London and actually one 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.
Operator
Thank you. Our next question will come from (inaudible).
Please go-ahead. Pardon me sir your line is open.
Unidentified Analyst
Can you hear me?
John E. Currie
We can now.
Unidentified Analyst
Thanks. This is [Blair Clarkson] from [Mark].
Thank you for taking my question. Real quick on the management transition, Christine in 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 now as far as the top key competency that you would be looking for someone to come in with?
Christine Day
Okay, I think that’s really for the Board to say, but definitely somebody who managed in a high growth global and definitely a product background would be some I think the key attribute. Obviously somebody who will manage well within the lululemon culture and values that that we’ve established and ready to grow a premium brand.
Operator
Thank you. Our next question comes from [Rob Wolfen from Ron Research].
Please go ahead, your line is open.
Unidentified Analyst
Yes, thanks for taking my call. John you said there is $17.5 million charge to inventory.
Could you help us break that out between the stores and the direct to customer channel?
John E. Currie
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 to answer your question, e-commerce is roughly 16% of our revenue, and the impact on e-commerce is proportioned to that ratio.
Christine Day
Operator, we have time for just one more question.
Operator
Understood ma’am. And our final question will come from Faye Landes with Cowen.
Please go ahead, your line is open.
Faye Landes – Cowen and Company
Hi, I was just trying to figure out first of all Christine I’m sorry to know that you wont be here much longer here at Lulu, but sort stun, but I was hoping you talked about product that didn’t work, did work. I’m trying to figure this out because it’s very, the comments are kind of piece meal, are there things that were, everything you listed was things that worked worse than expected, where there, can you talk about things that works better than expected overall, with the whole, ex-luon with the whole situation, were results better or worse than expected, were there stand up, actual because we heard quite a few things that didn’t work that needed tweaking going forward.
Christine Day
Yes, we did talk about some things that it worked to say like the swim to capsule was very, very successful, the golf and tennis capsule was very, very successful. Those all were the good news things.
As well as we saw more conversion to color in bottom 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 bottom, so that’s and which is mainly Luxtreme.
So until we started to run out of that inventory, we definitely saw a conversion in switch which gave us some upside and we definitely saw strong sales throughout color. We just had a lot of colors and few were neutrals, so I think we could have done better had we had more neutrals in the top 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.
Operator
Thank you. 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.
Christine Day
Well, thank you, everyone. And I particularly want to say thank your 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.
Operator
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.