Lululemon’s first quarter as a public company exceeded internal
projections and analysts’ expectations as corporate-owned retail sales
were up 98% for the second quarter of 2007 to $53.1 million, or 90.5%
of overall sales.  This top-line increase was driven by a 43%
increase in the number of LULU stores and an impressive 30% comp-store
sales increase. With Canada representing well over three-quarters of
LULU’s sales, the strengthening Canadian dollar impacted sales
positively by 5%.  On a constant-dollar basis, comps grew 25%.

Showrooms and franchise sales represented 9.5% of total sales, or $5.6
million. This share of sales is an 18% decline compared to last year,
primarily due to the company’s buy-back of their Calgary franchise in
April of this year.

By category, women’s apparel sales were the largest during the quarter,
representing over 75% of total sales. Men’s sales were between 10% and
12% as were accessories. LULU management said that they are
merchandising their stores with the goal of growing men’s to roughly
20% in mind. While the men’s category is growing, it is remaining
constant as a percentage of sales due to the equally rapid growth in
women’s. The accessory category is expected to hit 15% of overall store
sales.

Lululemon is making a small push into some casual attire, but the
company does not want to make it a bigger part of their overall
business. According to LULU CEO Bob Meers, “We actually don't want
[casual wear] to be a big part. We're a technical clothing company and
we know if we get into the casual wear then we become a fashion company
and then the possibility of becoming a fad occurs. We just don't think
technical function ever goes out of style.”

LULU management also said that consumers have been “very enthusiastic”
about the running collection. Coming out of the summer, sales of pants
have historically had a significant uptrend. Management is unsure of
how some new lighter-weight fabrics will perform coming into the colder
months, but they are expecting strong results from their “very
extensive” jacket and outerwear line.

Geographically, Canada was 82.5% of sales in the quarter, the U.S. was
16.2% and the balance, 1.3%, was Australia and Japan. Management said
that, in general, the U.S. consumer is quicker to accept the Lululemon
brand, predominantly with men. There is also a more frequent and higher
purchase cycle in the U.S. The main difference is that in Canada,
people are already recognizing Lululemon and buying it for street-wear
as well as for athletic activities, which the company has not
experienced in the U.S. yet.

The only major issue the company is having is on the inventory side.
During the company’s quarterly conference call, one financial analyst
brought LULU to task, because every store she visited in NY and Chicago
was sold out of size four, six and eight. Management said that the
inventory issues were not due to factory and production capacity
shortages; rather it is simply a matter of forecasting sales more
accurately. Inventories were “depleted” because LULU was forecasting
comps to be in the mid-teens and the 30% gain surprised them.

Gross profit for the second quarter increased, because higher revenues
allowed leveraging of LULU’s design, production, occupancy and
depreciation costs. Historically, gross margins have been in the 51%
range and the company is expecting to see 100 to 200 basis points of
leverage going forward due to the rapid sales expansion. However,
management does not see gross margin exceeding the low-50s.

SG&A expenses were likewise driven by leveraging administrative
costs, which included one-time consulting fees in the prior year.
SG&A in Q2 was also lower than expected as short-term delays in the
timing of new store openings shifted anticipated new store pre-opening
expenses from Q2 into Q3.

A major part of Lululemon’s strategy is to cluster stores in key
strategic markets. The company will continue to focus on growing its
store base in North America, primarily in the United States. The store
growth model focuses on strengthening existing markets and entering
strategic new markets, as well. During the quarter, LULU opened six
stores in North America for a total of eight so far this fiscal year.
The company plans on opening 25 new stores this year in North America,
and remains on track to achieve this goal, as well as opening 30 to 35
stores in fiscal 2008.

Operating margin improved to 16.6% from 10% last year. This growth brought earning up 168% for the quarter.

In Q3, LULU expects “mid- to high-teens” comparable store sales growth.
Operating margins should be in the 14% to 15% range, and diluted EPS in
the range of five to six cents per share. For fiscal 2007, Lululemon
management expects net revenue to be in the range of $240 million to
$246 million on a “mid- to high-teens” comparable store sales increase
and 25 new store openings in North America. A 16% to 17.5% operating
margin will bring diluted earnings per share between 30 cents and 33
cents.